1

Hardwood Pallets, Inc., is not a party to this appeal.

IN THE COURT OF APPEALS OF TENNESSEE

AT KNOXVILLE

August 28, 2001 Session

BLAKE BURTON, ET AL. v. HARDWOOD PALLETS, INC., ET AL.

Appeal from the Circuit Court for Hamilton County

No. 98C1394 Samuel H. Payne, Judge

FILED DECEMBER 13, 2001

No. E2001-00547-COA-R3-CV 

This appeal involves a dispute between the sellers of a business and the bank that financed a portion

of the purchase price. The plaintiffs, Blake Burton and Michael Burton, entered into an agreement

with the defendant, Hardwood Pallets, Inc.,1

 to sell the Burtons’ pallet manufacturing business. As

partial consideration for the sale, Hardwood Pallets executed an unsecured promissory note to the

Burtons in the amount of $1,000,000. Additional consideration for the sale was obtained by way of

an $800,000 loan from the defendant, AmSouth Bank, to Hardwood Pallets; as a part of the bank

transaction, Hardwood Pallets pledged its assets as collateral. As a condition to the making of the

loan, AmSouth required the Burtons to execute a subordination agreement. When Hardwood Pallets

defaulted on the bank loan, AmSouth sold the collateral at a private sale. Litigation ensued. In

addition to suing Hardwood Pallets and its shareholders, the Burtons sued AmSouth, alleging

procurement of breach of contract and civil conspiracy to defraud. AmSouth filed a counterclaim,

alleging that the Burtons breached the subordination agreement. It also filed a motion for summary

judgment, asserting that it acted within its rights under the subordination agreement. The trial court

entered a judgment in favor of AmSouth pursuant to Tenn. R. Civ. P. 54.02. We affirm.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court

Affirmed; Case Remanded

CHARLES D. SUSANO,JR.,J., delivered the opinion of the court, in which HERSCHEL P. FRANKS and

D. MICHAEL SWINEY, JJ., joined.

Michael A. Anderson, Chattanooga, Tennessee, for the appellants, Blake Burton and Michael

Burton.

Donald J. Aho, Chattanooga, Tennessee, for the appellee, AmSouth Bank.

OPINION
2

The subordination agreement refers to the Burtons as the “Junior Creditor” and the debt owed to them as the

“Junior Debt”; AmSouth is referred to as the “Senior Creditor” and the debt owed to it as the “Senior Debt.” Hardwood

Pallets is referred to as the “Debtor.”

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I. Background 

In 1997, the Burtons and Hardwood Pallets entered into negotiations for the sale of the

Burtons’ pallet manufacturing business. The asset purchase agreement executed by the Burtons and

Hardwood Pallets provides for a total purchase price of $2,498,920, comprised of the following

elements: $800,000 to be paid in cash; a $1,000,000 unsecured promissory note payable over 96

months; 72 equal monthly payments of $9,012.77 in exchange for the Burtons’ covenant not to

compete; and $50,000 to be paid immediately after the closing. To finance the purchase, Hardwood

Pallets sought a loan from AmSouth Bank, pledging its assets as collateral. AmSouth agreed to

make the loan, conditional upon it receiving a first security interest in the collateral and the execution

by the Burtons of a subordination agreement in favor of AmSouth. Prior to closing, AmSouth

transmitted copies of all closing documents, including the proposed subordination agreement, to the

Burtons’ counsel.

At the closing on December 12, 1997, the Burtons executed the subordination agreement in

AmSouth’s favor. The subordination agreement provides, in pertinent part, as follows: 

2. Subordination of Debt. Subject to the provisions of paragraph 5

hereof, Junior Creditor2

 hereby postpones and subordinates all of the

loans, advances, indebtedness, liabilities and other obligations of

Debtor owing to Junior Creditor (or any of them), whether direct or

indirect, absolute or contingent, due or to become due, now existing

or hereafter arising including, without limitation, the indebtedness,

liabilities and obligations owing under the asset purchase

agreement...to the full and final payment and discharge of all loans,

advances, indebtedness and other obligations of Debtor owing to

Senior Creditor....

* * *

4. Negative Covenants. For so long as this Agreement is in

effect...Junior Creditor shall not demand, collect, sue for, accelerate

the maturity of or accept from Debtor or any other person any

payment (other than a payment permitted by paragraph 5 hereof) or

any property (including the Collateral) on account of the Junior Debt

or any part thereof or realize upon or enforce any lien on or interest

in any property (including the Collateral) securing the Junior Debt....
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5. Permitted Payments. Provided no event of default occurs or exists

under any instrument or agreement now or hereafter evidencing or

securing the whole or any part of the Senior Debt...and no event

exists which with notice or lapse of time would constitute any such

event of default, Debtor may pay and Junior Creditor may accept and

retain any regularly scheduled payments due and owing to Junior

Creditor from Debtor under the Junior Documents in accordance with

the payment terms thereof, but without prepayment or payment upon

acceleration. From and after the occurrence of any such event of

default...or any event which with notice or lapse of time may

constitute such an event of default, Debtor shall not make, and Junior

Creditor shall not request, demand, accept, collect, or sue for any

payment on account of the Junior Debt except to the extent expressly

authorized by Senior Creditor.

* * *

8. Waivers. Debtor and Junior Creditor each hereby waives any

defense based on the adequacy of a remedy at law which might be

asserted as a bar to the remedy of specific performance of this

Agreement in any action brought therefor by Senior Creditor. To the

fullest extent permitted by law, Debtor and Junior Creditor each

hereby further waives: presentment, demand, protest, notice of

protest, notice of default or dishonor, notice of payment or

nonpayment and any and all other notices and demands of any kind

in connection with all negotiable instruments evidencing all or any

portion of the Senior Debt or the Junior Debt to which Debtor or

Junior Creditor may be a party; the right to require Senior Creditor to

marshall any property (including, without limitation, any Collateral);

the right to require Senior Creditor to enforce any security interest or

lien Senior Creditor may now or hereafter have in any property

securing the Senior Debt, or to pursue any claim it may have against

Junior Creditor, any guarantor of the Senior Debt, or any other person

or entity, as a condition to Senior Creditor’s entitlement to receive

any payment on account of the Junior Debt or exercising any other

rights under this Agreement; notice of the acceptance of this

Agreement by Senior Creditor; notice of any loans made, extensions

granted or other action taken in reliance hereon; and all other

demands and notices of every kind in connection with this

Agreement, the Senior Debt or the Junior Debt. Junior Creditor

assents to any release, renewal, extension, modification, compromise,

or postponement of the time of payment of the Senior Debt, to any

substitution, exchange or release of Collateral therefor, to the addition
3

The Burtons also sued the shareholders of Hardwood Pallets, Robert McKenzie and Edwin Reeves, alleging

procurement of breach of contract, and fraud/negligent misrepresentation. Those claims are not before us on this appeal.

4

Hardwood Acquisitions, LLC, which later changed its name to Pallet Resources, LLC, was also added as a

defendant; however, that entity is not a party to this appeal.

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or release of any person primarily or secondarily liable thereon, and

to the extension of all Senior Debt whether now or hereafter existing.

* * *

14. Default and Enforcement. ...[I]n the event of a breach by either

the Debtor or Junior Creditor in the performance of any of the terms

of this Agreement or any instrument or agreement evidencing or

securing the Senior Debt or the Junior Debt,...all of the Senior Debt

shall, at the option of Senior Creditor, become immediately due and

payable without presentment, demand, protest, or notice of any

kind.... At any time Junior Creditor fails to comply with any

provision of this Agreement that is applicable to Junior Creditor,

Senior Creditor may demand specific performance of this

Agreement,...and may exercise any other remedy available at law or

equity. Without limiting the generality of the foregoing, if Junior

Creditor, in violation of this Agreement, shall institute or participate

in any action, suit or proceeding against Debtor, Debtor may interpose

as a defense or dilatory plea this Agreement and Senior Creditor is

irrevocably authorized to intervene and to interpose such defense or

plea in Debtor’s name. If Junior Creditor attempts to enforce or

realize upon any Collateral in violation of this Agreement, Debtor or

Senior Creditor...may by virtue of this Agreement restrain such

realization or enforcement....

Approximately six months after the closing, Hardwood Pallets defaulted on its payments to

the Burtons. The Burtons subsequently brought this action against Hardwood Pallets, alleging

breach of contract and default on the promissory note.3

On February 11, 1999, AmSouth conducted a private foreclosure sale and sold the collateral

to Hardwood Acquisition, LLC, an entity in which Hardwood Pallets’ former shareholders held a

minority interest. The Burtons were not given notice of the sale, and they received no funds from

it. AmSouth lost $60,689.34 on the sale of the collateral not counting interest, attorney’s fees, and

selling expenses. Following the sale, the Burtons amended their complaint to add AmSouth as a

defendant,4 alleging that AmSouth (1) procured the breach of the asset purchase agreement and

promissory note between the Burtons and Hardwood Pallets and (2) conspired to defraud the

Burtons. AmSouth responded and asserted a counterclaim, alleging that the Burtons breached the

subordination agreement by instituting the instant action against it and Hardwood Pallets.
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AmSouth subsequently filed a motion for summary judgment and requested that any further

discovery be stayed pending resolution of its motion. Thereafter, the Burtons filed a motion to

amend their complaint to allege that the defendants, including AmSouth, had conspired to commit

a fraudulent conveyance. The trial court stayed any further discovery and consideration of the

Burtons’ motion to amend pending resolution of the summary judgment motion. On January 31,

2001, the trial court granted AmSouth summary judgment. The trial court also denied the Burtons’

motion to amend, noting that the amendment would be futile in light of its finding “that AmSouth

was statutorily and contractually allowed to liquidate the [c]ollateral in the manner in which it did

and that the Plaintiffs’ fraudulent conveyance claim is simply another attempt by the Plaintiffs to

challenge the sale when they have no legal right to do so.” This appeal followed.

II. Standard of Review

Our standard of review of a grant of summary judgment is well-settled. Our inquiry involves

only a question of law, with no presumption of correctness as to the trial court’s decision. Robinson

v. Omer, 952 S.W.2d 423, 426 (Tenn. 1997); Byrd v. Hall, 847 S.W.2d 208, 210 (Tenn. 1993). The

moving party – in this case, AmSouth – has the initial burden of producing competent, material

evidence reflecting that there are no genuine issues of material fact and that it is entitled to summary

judgment as a matter of law. See Byrd, 847 S.W.2d at 211. In evaluating the evidence in the

summary judgment context, we must view the evidence in the light most favorable to the nonmoving

party, and we must draw all reasonable inferences in favor of that party. Id. at 210. Summary

judgment is appropriate only when there are no genuine issues of material fact and when the

undisputed material facts entitle the moving party to a judgment as a matter of law. Tenn. R. Civ.

P. 56.04; Byrd, 847 S.W.2d at 211.

III. Grant of Summary Judgment to AmSouth

AmSouth argues that the grant of summary judgment was proper because, in selling the

collateral, it acted at all times within its statutory rights as a secured creditor and its contractual rights

under the subordination agreement. Furthermore, it argues that the subordination agreement

precludes the Burtons from bringing this action. The Burtons, while not disputing AmSouth’s status

as a secured creditor or the validity of the subordination agreement, insist that the grant of summary

judgment to AmSouth was not appropriate because, so the argument goes, (1) AmSouth breached

its duty of good faith under the subordination agreement; (2) AmSouth conspired with the other

defendants to defraud the Burtons; and (3) AmSouth induced Hardwood Pallets’ breach of contract.

We will address each of these arguments in turn.

A. Breach of Duty of Good Faith

Tennessee common law imposes a duty of good faith in the performance of every contract.

Wallace v. National Bank of Commerce, 938 S.W.2d 684, 686 (Tenn. 1996); TSC Indus., Inc. v.

Tomlin, 743 S.W.2d 169, 173 (Tenn. Ct. App. 1987). While acknowledging that AmSouth had the

right to sell the collateral following Hardwood Pallets’ default, the Burtons argue that AmSouth
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nevertheless breached its implied duty of good faith by “concealing” the sale from them and by

knowingly using “its superior position to assist Hardwood Pallets in eliminating the debt owed to

the Burtons.” The Burtons contend that the duty of good faith obligated AmSouth to “at least...

notify the Burtons about the proposed sale and permit them to bid on the assets, or it should have

refrained from selling the assets to an entity connected with Hardwood Pallets.” 

We do not agree with the Burtons that AmSouth’s failure to give notice of the sale

constituted a breach of the duty of good faith implied in the subordination agreement. Upon

Hardwood Pallet’s default, AmSouth, as a secured creditor, was entitled to dispose of the collateral

by public or private sale in order to satisfy the indebtedness owed it, see T.C.A. § 47-9-610 (2001),

and the Burtons, as unsecured creditors, were not entitled to notice of the sale. See T.C.A. § 47-9-

611(c) (2001). Moreover, the Burtons expressly waived any right to notice in the subordination

agreement. Because AmSouth acted in accordance with its statutory and contractual rights, it cannot

be said that its actions were in bad faith. See, e.g., Wallace, 938 S.W.2d at 687.

We also do not agree that AmSouth’s sale of the collateral to Hardwood Acquisition, LLC,

constituted a breach of the duty of good faith. The subordination agreement did not give the Burtons

any more rights in the collateral than they had by statute or common law. As unsecured creditors,

they have no interest in the collateral. As such, they were not entitled to notice of the sale, see id.,

and they have no standing to challenge the manner in which it was sold. See T.C.A. § 47-9-625(c)

(2001). Therefore, we find the plaintiffs’ argument to be without merit. 

B. Conspiracy to Defraud

The Burtons argue that the defendants had a common purpose to defraud them and that

AmSouth “assisted in the parties’ plan.” They further argue that the subordination agreement does

not shield AmSouth from liability for its fraudulent conduct. 

The tort of conspiracy to defraud is defined as a “combination between two or more persons

to accomplish by concert an unlawful purpose, or to accomplish a purpose not in itself unlawful by

unlawful means.” Chenault v. Walker, 36 S.W.3d 45, 52 (Tenn. 2001) (quoting Dale v. Thomas

H. Temple Co., 186 Tenn. 69, 90, 208 S.W.2d 344, 353 (1948)). To be liable, “[e]ach conspirator

must have the intent to accomplish this common purpose, and each must know of the other’s intent.”

Brown v. Birman Managed Care, Inc., 42 S.W.3d 62, 67 (Tenn. 2001).

In opposition to AmSouth’s motion for summary judgment, the Burtons submitted the

affidavit of Blake Burton and bank records to establish the following facts, which, they assert,

establish AmSouth’s fraudulent conduct:

1. AmSouth was involved in the transaction from the beginning and

insisted on certain terms being included in the parties’ asset purchase

agreement.
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2. No one informed the Burtons that their debt would not be

collateralized.

3. During the closing, Reeves, a shareholder of Hardwood Pallets,

and a bank representative left the closing and unspecified changes

were made to the closing documents.

4. After five months, AmSouth instructed Hardwood Pallets not to

make any more payments to the Burtons.

5. After Hardwood Pallets’ default, AmSouth arranged the private

foreclosure sale of the debtors’ assets to an entity in which Reeves

and McKenzie, another shareholder of Hardwood Pallets, had a 20%

ownership interest. Other owners of the company were customers of

the Bank, and AmSouth entered into a new loan with the company.

6. Internal bank records state and acknowledge that the private sale

would deprive Hardwood Pallets of its ability to pay its unsecured

debt to the Burtons. Nevertheless, AmSouth gave them no notice of

the sale.

These facts, when viewed in a light most favorable to the Burtons, do not create a genuine

issue of material fact as to the Burtons’ conspiracy claim against AmSouth. The stated facts do not

establish, directly or inferentially, that AmSouth had an intent to defraud the Burtons or that it knew

of any fraudulent intent on the part of the other defendants. Most of the Burtons’ allegations relate

to actions that AmSouth was lawfully entitled to take by virtue of its status as lender and first priority

secured creditor. At best, these facts establish that AmSouth knew that by selling Hardwood Pallets’

assets to satisfy its secured debt, the Burtons’ unsecured debt would go unsatisfied. This, however,

does not amount to fraudulent conduct. 

By way of a separate issue, the Burtons argue that the trial court erred in not allowing the

Burtons to amend their complaint to additionally allege that AmSouth conspired to commit a

fraudulent transfer of the collateral. The factual basis of this additional claim is essentially the same

as the facts relied upon by the Burtons to support their conspiracy to defraud claim. The trial court

found that the proposed amendment would be futile in light of its grant of summary judgment on the

conspiracy to defraud claim. We agree that the amendment would be futile. “The futility of an

amendment is clear when granting it would prolong the litigation, but almost certainly not lead to

a different ultimate result.” Welch v. Thuan, 882 S.W.2d 792, 794 (Tenn. Ct. App. 1994). We

therefore affirm the trial court as to this issue.
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C. Inducement of Breach of Contract

Next, the Burtons argue that AmSouth is not entitled to summary judgment as to their claim

that AmSouth induced a breach of the contract between the Burtons and Hardwood Pallets. They

assert that AmSouth induced a breach of the contract by directing Hardwood Pallets not to make

further payments to the Burtons.

The subordination agreement provides AmSouth with the right in the event of a default to

demand that Hardwood Pallets make no further payments to the Burtons on the unsecured debt and

that the Burtons “shall not request, demand, accept, collect, or sue for any payment” without

AmSouth’s express consent. Clearly, AmSouth was operating within its rights under the

subordination agreementwhen it directed Hardwood Pallets to terminate its payments to the Burtons.

The Burtons contend, however, that even if AmSouth had the contractual right to direct the

termination of payments, it did so in bad faith. We disagree. “Performance of a contract according

to its terms cannot be characterized as bad faith.” Wallace, 938 S.W.2d at 687. The trial court

properly granted AmSouth summary judgment as to this claim. 

IV. Staying of Discovery

The Burtons’ final issue relates to the trial court’s decision to stay discovery pending the

resolution of AmSouth’s motion for summary judgment. We find no reversible error in the staying

of discovery pending that motion. We agree with AmSouth’s position that no amount of discovery

would have changed the subordination agreement and the other relevant facts implicated by the

Burtons’ claims, none of which facts are really in dispute. Simply stated, the plaintiffs’ theory of

recovery is not made out by these undisputed facts; however, these facts do clearly establish

AmSouth’s right to a judgment in summary fashion. The trial court did not err in staying discovery.

See Leatherwood v. United Parcel Serv., 708 S.W.2d 396, 402 (Tenn. Ct. App. 1985).

V. Conclusion

The judgment of the trial court is affirmed. This case is remanded for collection of costs

assessed below, pursuant to applicable law. Costs on appeal are taxed to the appellants, Blake

Burton and Michael Burton.

_______________________________ 

CHARLES D. SUSANO, JR., JUDGE