1 Ha rdwo od P allets, Inc., is no t a party to this app eal. 

### 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 B urton, entered into an agreement withthe defe

ndant, Ha rdwood Pa

llets, Inc., 1 to sell the Burtons’ pallet manufacturing business. As partial c onsidera

tion for th

e sale, H ardwood

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 HardwoodPallets defaulted on th e bank loan, AmSo uth s old t he col later al at a priva te sal e. Litiga tion ensued. In addition to suing Hardwoo d Pa llets and its shareholders, the Burtons sued AmSouth, alleging procurement

of breach of

contract and civil conspiracy to defraud. AmSouth fil ed a countercla im, alleging that the Burtons breached the subordination agreement. I

t also filed a motion for summary judgmen t, asserting that it acted

within its rights under the subordination agreement. The trial court entere d a judg ment in fa

vor of AmS outh pursu ant to Ten n. R. Civ. P. 5 4.02. We a ffirm. Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court

Affirmed; Case Remanded
C HARLES D. S USANO , J R ., J., delivered the opinion of the court, in which H ERSCHEL P. F RANKS and D. M ICHAEL S WINEY , JJ., joined.
Michael A. Ander so n, Cha ttanooga, Tennessee, for the appe llants, Blake Burton and Michael Burton. Donald J. Aho, Chattanooga, Tennessee, for the appellee , AmSouth Bank.
OPINION2 The subor dinat ion a greeme nt r efer s t o the Burton s as the “Jun ior Creditor” and the debt owed to them as the “Jun ior Debt”; AmSo uth is r eferred to as the “Senior Creditor ” and the debt

owed to it

as the “Seni or Debt. ” Hardwood Palle ts is referred to as the “De btor .” -2- I. Background

In 1997, the Burtons and Hardwood Pallets entered i nto neg otiati ons for the sale of the Burtons ’ pallet manufacturing business. The asset purcha se agreement executed by the Burtons and Hardwood

Pallets provides for a total purchase price of $2,498,920, compri sed of the following elements : $800,000 to be paid incash; a $1,000,000 unsecured promissory note payable

over 96 months; 72 e qual month ly p ayments of $ 9,012.77 in exchang e for the Burtons ’ covena

nt not to compete; and $50,0 00 to be pa id imme diate ly after t he clo sing. To finance the purchase, Hardwood Pallets sought a loan from AmSouth Bank, pledging its assets as collateral. AmSout h agreed to make the loan, conditional upon it recei ving a f irst secu rity interest in the collateral and the execution by the Burtons of

a subord ination a

greem ent in fa vor of AmS outh. Prior

to closing , AmSouth transmitted copies of all closing documents, including the proposed subordination agree ment, to the Burtons ’ counse

l.
At the closing on December 12, 1997, the Burtons executed

the subor dination a greem ent in AmSouth’s f

avor. The subordination ag reemen t provide s, in pert

inent par t, as follo ws:
2. Subordination of Debt . Subject to the provisions of paragraph 5 hereof, Junior Creditor 2 hereby postpone s and subordinates all of the loans, advances, indebtedness, liabilities and ot her obligations of Debtor owing to Junior Creditor (or any of them), whether direct or indirec t, absolute or

conting ent, due o

r to beco me due, now existing
or he reaf ter aris ing incl

uding, without limita

tion, the indebtedne ss, liabilities and obligation s owi ng unde r the ass et purch ase agree ment...to the full a nd final p ayment and d

ischarg e of all lo ans, advanc es, indebtedness and other obligations of Debtor o wi ng to Senior Creditor....

* * *
4. Negat ive Coven ants . For so lo ng as thi s Agre ement i s i n effect...Junior

Creditor shall not d

emand, c ollect, sue for, accele rate the mat urity of or ac cept from Debtor or any other person an y pay ment (o ther than a pay ment permitted by para

graph 5 hereof) or any propert y (including the Collateral) on account of the Junior Debt
or a ny part the

reof or realize u pon or en force a ny l ien on or interest in any propert y (including the Collateral) securing the Junior Debt....-3- 5. Permitted

Payments . Provided

no event o f default occur s or exists under any instrument or ag

reement now or hereafter e videncing or securing the whole

or a ny part of the Senior D ebt...and no event exists which with notice or lapse of time wo uld constitute any such event of default, Debtor may

pay and Junior Creditor may accept and retain any reg ularly scheduled pay ments due and owing to Junior Creditor from Debtor under the

Junior Docu

ments in accord ance with the pay ment term s thereof, but without prepay ment or payment upon acceleration. From and after the occurre nc e o f any such e

vent of default...or

any eve nt which wit h notice or lapse of time may constitute such an e vent of de fault, Debtor shall not make, and Junior Creditor shall not r

equest, d emand, a ccept, co llect, or sue for any payment on account of the Junior Debt except to the extent expressly authorized by Senior Creditor.

* * *
8. Waivers . D ebto r and Junior Creditor each hereby waives any defense based on the adequacy

of a remedy

at law whic h might be asserted as a bar to the re

medy of speci f

ic perform ance of

this Agreement

in any action broug

ht therefor by

Senior Creditor. To the fullest extent permitted by law, Debtor a nd Junior Creditor each hereby further waives: presentment, demand, protest, notice of protest, notice of default or dishonor, notice o f pay ment or nonpayment

and any and all ot

her notic es and de

mands o f any

kind in connection with a ll 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 rig

htto requir

e Senior Creditor t

o marshall any propert y (including, without

limitation, any Collateral); the right to requireSenior Creditor to enforce any

security intere st or lien Senior Creditor may now or he

reafte r have in any

propert y securing the Senior

Debt, or to pursue any claim it ma

y ha ve aga inst Junior Creditor, any g

uarantor of the Senior Debt, or any other person
or entity , as a condition to Se nior Cred itor’s en titlement t

o re ceive any payment on ac count of the Junior Debt or exercising any other rights under this Agreement; notice of the acc eptan ce of thi s Agreement

by Senior Creditor; notice of any loans made, extensions granted or other actionta ken in reliance hereon; and all other d emands and notic es of eve ry kind in con

nection wit h thi s Agree me nt, the Senior Debt or the Junior Debt. Junior Creditor
ass ents to any relea se, renewal, extension, modification, c ompromise , or postponement of the time of payme n t of the Senior Debt, to any substitution, exchange or release of Collatera l therefor, to the addit

ion3 The Burtons al so sued the shareholders of Hardwoo d Pallets, Robert McK enzie and Edwin Reeves, alleging

procurement of b rea ch of cont rac t, and f

rau d/n egl ig ent

mis repr ese nt ati on. Those cl aim s are n ot bef ore us on this app eal.
4 Hardwood Acq uisitions, L LC, w hich late r chan ged its name to Pa llet Reso urces , LLC , w as also added as a defen dan t; howe ver, that e ntity is not a p arty to this ap pea l. -4- or release of any

person primarily or

secondarily liable

thereon, and to the extension of all Senior Debt whether now or hereafter exis ting.

* * *
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 eviden cing 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 pay able without presentment, demand, protest, or notice of any kind.... At any time Junior C red itor fails to comply with any provision of th is Agreement that is applicable to Junior Creditor, Senior Creditor

ma y dema nd specif

ic perf ormance of this Agreement,...and

may exercise a

ny other re

medy available

at law or eq ui ty. Without limiting the generality of the for egoing, if Junior Creditor, in violation of

this Agr eement, shall institute or pa rticipat e in any action, suit or proceeding against Debtor, Debt or may interpos e as a defense or dilatory

plea this Agreement and Senior Creditor i s irrevoc ably

authorized to interve

ne and to interpose such defense or plea in D ebt or’ s na me. If Ju ni or Creditor attempts to enforce or real ize upon any Collateral in violation of this Ag reement, Debtor or Senior Creditor.. .mayby virtue of this Ag reement restrain such realization or enforcement.... Approximat

ely six mont hs aft er the c losi ng, Hardwood Pallets defaulted on its pay

ments to the Burtons . The Bu

rtons subs equently

brough t this acti on aga

inst Hard wood Palle

ts, alleging breach of contract and defa ult on the promissory note. 3
On Februa

ry 11, 1999, A

mSouth cond

ucted a p rivate foreclosure sale and

sold the collateral to Hard wood Acq

uisition, L

LC, a n entity in which H ardwood

Pallets’ f ormer sh arehold

ers held a minority interest. The Bur tons 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. F ollowing the sale , the Bur

tons amen ded their

complain

t to add AmSo

uth as a defen d ant, 4 alleging that AmSouth (1) procured the bre ach of the asset purchase ag reement and pro missory

note between the Burtons and Hardwood Pallets and ( 2) conspired to defrau d th e Burtons. AmSouth responded and asserted a counterclaim, alleging that the Burtons breached the subordina tion agr eement b y in stituting

the instan

t action a gainst it and Har

dwood Pall ets.-5-

AmSouth subsequently filed

a motion for summary judgment and requested that any furthe

r discovery be stay ed pending resol

ution of itsmotion. The reafte r, the B urtons fil ed a motio n to amendtheir co mplaint to

allege that the defendants, including A mSouth, had cons pired to c ommit
a fraudulent convey ance. The tri al cour t stayed any further discovery

and consideration of the Burtons ’ motion to am

end pend ing res o lution of

the summary judg ment motion. On January 31, 2001, the trial

court g ranted A mSouth summa

ry judgmen t. The tri al court

also deni ed the B urtons’ motion to amend, noting that the amendment would befutile in light of its finding “that AmSo

uth was statu torily and contr

actually allowed t o liquidate the [c]ollateral in the manner in which it d id and that the Pla

intiffs’ fraudul ent conve

ya nce cla im is simp ly anot

her atte mpt by the Plainti ffs to challenge the sale when they have no legal right to do so.” This appea l followed.
II

. Standard of Review
Our standard of review of a gr ant 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 42 3, 426 (Te nn. 1997) ; Byrd v. Ha ll, 847 S.W.2d 208, 210 (Tenn. 1993). The moving party – in this case, AmSouth – has the initial burden of producing compe tent , 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 evaluat ing the ev idence in the summary judgment context, we must view the evidence in the lig ht most favorable to the nonmoving pa rt y, and we must draw all reasonable infer ences in favo r of that party. Id. at 210. Summary judgment is appropriate only whe n there a re no genui ne issues of material fact and when the undispute d materia

l 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.

II I. Grant of Summary Ju

dgment to AmSouth
AmSouth argues that the gran

t of summary judgment was proper because, in selling the collater al, it acted a

t all times withinits statutoryrights a s a secur ed cred itor and it s contra

ctual rig hts under the subordination agreement. Furthermor e, it argues that the subordi nati on agreement precludes the Burtons from bringing this actio n. The B urtons, while not disputing AmSouth’s status
as a secured creditor or the validity of the subordina

tion agr eement, insist

that the grant of summary judgment to AmSouth was not appropriate because, so the argument goes, (1) AmSouth brea ched its duty of good f

aith under the subordination agreement; (2) AmSouth conspired with the other defenda nts to defraud

the Bur tons; and (3) A

mSouth induc ed Hard

wood Palle

ts’ brea ch of con tract. We will address each of these argume nts in turn.
A. Brea ch of Dut y of Good Fa ith
Tennessee common law imposes a duty of good faith in the perf ormance of ever y c ontract

. Wallace v. National Bank of Commerce, 938 S.W.2d 684, 686 ( Tenn. 199 6); TSC Indus., Inc. v. Tomlin, 743 S.W.2d 16 9, 173 (Te nn. Ct. App. 1987). While acknowledging that AmSouth had the right to s ell the c ollatera

l followin g Hard

wood Palle

ts’ defa ult, the B urtons ar

gue tha t AmSouth-6-

neverth eless breached its implied duty of g ood faith by “conc ealing” the sale from the m and by knowing ly

using “its superior position to assist Hardw ood Pallets in e liminating

the debt o wed to th e Burtons .” The B urtons co ntend tha t the duty of good faith obli gated A

mSouth to “a

t le ast..

. notify the Bur tons about

the propo sed sale

and perm

it them to bi d on the as sets, or it s hould have refrained from selling the assets to an entity connected with Hardwood Pallets.”
We do not ag

ree with the Bur tons t hat AmSou th’s fail

ure to g ive notic e of the s ale
cons titut ed 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 or der to sa tisfy the indeb tedness owed it, see T.C.A. § 47-9-610 (2001), and the Burtons, as unsecured creditors, wer e not entitled to notice of the sale. See T.C.A. § 47-9- 611(c) (2001). Moreover, t he Burton s expressly waived any right to notice in the subordination agree ment. Becau se AmSouth acted in ac cordanc e with its statutory and contra ctual 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 collatera l to HardwoodAcquisiti on, LL C, constituted a breach of

the duty of g ood faith. The subordination agreement did not give the B urtons any more rig hts in the collateral than they had by statute or common la

w. As unse cured c

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

to challenge the manner

in which it was sold. See T.C.A. § 47-9-625(c) (2001). Therefore, we find the plaintiffs’ a rgument to be without merit. B. Conspiracy

to Defraud
The Burtons argue that the defenda nts had a common purpose to defra ud th em and that AmSouth “assisted in the parties’ plan.” They further argue that the subordination ag reement 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 accompl

ish by concer t an unlaw ful purpo se, or to a ccomplish

a purpose

notin itself unlawful by unlawful means.” Chenault v. Walker, 36 S. W.3d 45, 52 (Tenn . 2001 ) (quo ting 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 op position to AmSouth’s motion for summary judgment, the Burtons submitted th e affida vit of Blak e Burto n and b ank rec ords t o esta blis h the f ollo wing facts, w hich, the y a ssert, establish AmSouth’s f

raudule nt conduc t:
1. AmSouth

was involved in the transaction from the beginning a nd insisted on certain terms being included in the par ties’ ass et purch ase agree ment.-7- 2. No one inf

ormed the

Burtons th at their debt would not be collateralized.
3. During

the closin

g, Reev es, a sha

reholde r of Har dwood Pall ets, and a bank representative left the closing a nd unspecifi ed c hanges
were ma de to the closing do cuments.
4. After f ive months , AmSouth in structe d Hardwo od Pallets not to make any more pay ments to the

Burtons

. 5. A fter Ha

rdwood Pa

llets’ default, Am South arr anged the priva te for eclosure sale of th

e debtor s’ assetsto an entity in which Re eve s and McKenzie, another shareholder of Hardwood Pallets, had a 20% ownersh ip interest. Other owners of the company were customers of th e B an k, an d A mS ou th en te re d i nt o a ne w l oa n w it h t he co mp an y.
6. Internal bank

records state an d acknow ledge t hat the pr ivate sa le would depr ive Hardwood Pallets of its ability to pay its unsecured debt to the Bu rtons. Nevertheless, AmSouth gave them no notice of the sale. These facts, when viewed in a light most favora ble 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 infe

rentially, that AmSouth had an intentto defraud the Burtons or that it knew of any fra udulent intent on the part of th e other d efenda nts. Most of the B urtons’ a

llegat ions rela te to actions th at AmSouth w as lawfully e ntitled to t ake by virtue of its status a s lender

and firs t priority secured credito r. At best , these facts establish that AmSouth knew that by selling Hardwoo d Pallets’ assets to satisfy

its secur ed debt, t he Burt ons’ unse cured de

bt would go unsatisfied. This, however, does not amount to fraudulent conduct. By way of a separate issue, the Burtons arg ue that the trial court erred in not allowing the Bu rtons to a mend thei

r compla int to addit

ionally allege that AmSout

h conspir ed to comm

it a fraudulent

transfer of the collateral. The factua l basis of t his additio nal claim

is essenti ally

the same
as the facts relied upon

by the Bur

tons to support their conspiracy to de fraud claim. The trial court found that the proposed

amendme

nt would be

futile in l ight of its grant of summary judgment on the conspirac y to defraud cl aim. We agree that the amendment would be futile. “The futility of an amendment

is clear when gr anting it would pro long the litigati on, but alm

ost certa inly not lead t

o a different ultimate result.” Welch v. T huan, 882 S.W.2d 792, 794 (Tenn. Ct. Ap p. 1994). W e therefore affirm the trial court as to this issue.-8- C. Inducement of Bre ach of Contract
Next, the Burtons argue that AmSouth is not entitled to summary judgment as to their c laim t hat AmSouth ind

uced a breach o f the con

tract be tween the Burtons and Har

dwood Pall e ts. The y assert that AmSouth induced a breach of the contract by directing Hardwood

Pallet s not to make further pay ments to the

Burtons

. The subo rdi nation ag

reemen t provide s AmSouth wi

th the rig ht in the event of a

default to demandthat Har

dwood Pallets make no further pay ments to the Burtons on the unsecured debt and that the Burtons “shall not req ues t, demand, accept, collect, or sue for any payment” without AmSouth’s express consent. Clearly, AmSouth was oper ating within its r igh ts under the subordination agre ement when it directe d Hardwo od Pallets to termina te its pay ments to the

Burtons

. The Burton s contend, however, that even if AmSouth had the contractual rig ht to direct the termination of pay

ments, it did so in bad faith. We disagree. “Performa nce of a contract according to its terms cannot be characterized as bad faith.” Wallace, 938 S.W.2d at 687. The trial court properly g

ranted AmSouth summary judgment as to this claim.
IV. Staying of

Discove ry
The Burtons’ final issue relates to the trial cou rt’ s decision to stay discovery pending the resolution of AmSouth’s motion for summary judgment. We findno reversible error in the stay ing of discovery pe

nding that motion. We agree with AmSouth’s position that no amount of discovery would have ch anged

the subor

dination a

greem ent and th

e other r elevant facts i mplicate d by the Burtons ’ cl ai ms , n on e o f w hi ch fa ct s a re re al ly i n d is pu te . S im pl y s tated, the plaintiffs’ theory of recovery is not made out by these undisp uted facts; howeve r, these facts do clearly establish AmSouth’s right to a

judgment in summary fa shion. The trial court di d n ot er r i n s ta yin g d is co ve ry. See Leatherwood v. United Parcel Serv., 708 S.W.2d 396, 402 (Tenn. Ct. App. 1985).
V. Conclusion
The judgmen t of the tri al court is affir med. This c ase is re

manded f or colle ction of c osts assessedbel ow, pursu ant t o applicable law. Costs on appeal are taxed to the appellants, Blake Burton and Michael Burton.

_______________________________ CHARLES D. SUSANO, JR., JUDGE