FILED

Sept. 13, 1995

Cecil Crowson, Jr.

Appellate Court Clerk

FIRST AMERICAN NATIONAL BANK, )

)

Plaintiff/Appellee, )

) Appeal No.

) 01-A-01-9503-CH-00109

V. )

)

J.M.D. BRANSFORD, ) Davidson Chancery

) No. 91-2790-III

Defendant/Appellant. )

COURT OF APPEALS OF TENNESSEE

MIDDLE SECTION AT NASHVILLE

APPEAL FROM THE CHANCERY COURT FOR DAVIDSON COUNTY

AT NASHVILLE, TENNESSEE

THE HONORABLE ROBERT S. BRANDT, CHANCELLOR

B. ANTHONY SAUNDERS

721 First American Center

Nashville, TN 37237-0721

GEORGE H. CATE, III

Neal & Harwell

2000 First Union Tower

150 Fourth Avenue North

Nashville, TN 37219

ATTORNEYS FOR PLAINTIFF/APPELLEE

ROBERT L. DeLANEY

323 Union Street

Nashville, TN 37201

ATTORNEYS FOR DEFENDANT/APPELLANT

REVERSED AND REMANDED

SAMUEL L. LEWIS, JUDGE
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O P I N I O N

This is an appeal by defendant, J.M.D. Bransford, from the

trial court's granting of the motion for summary judgment of

plaintiff, First American National Bank (Bank), and resulting

judgment in the bank's favor on a promissory note made by defendant

Bransford as a co-maker.

This case commenced when the bank, as lender, brought suit

against defendant Bransford as a co-maker of a note. The sole

issue on appeal is whether the trial court erred in granting

summary judgment as to each of the defendant's defenses and

entering judgment against defendant Bransford as co-maker on a

note.

Mr. Bransford was co-maker with Mr. James W. Stewart on a

note for two hundred thousand dollars. Mr. Stewart was the owner

and president of TennLite, Inc. and other related businesses.

TennLite manufactured permanent briquettes for gas grills and

refracting bricks used to line wood-burning stoves. Mr. Stewart's

financial condition had continually deteriorated over the course of

a long relationship with the bank. Mr. Bransford's defense to the

bank's action to collect on the note is that, fully aware of Mr.

Stewart's precarious financial situation at the time the loan was

made, the bank misrepresented the degree of the risk it entailed to

Mr. Bransford.

The loan in question was only the latest of many dealings

Mr. Stewart had had with the bank in financing his business

ventures. Mr. Stewart began doing business with the bank in 1965.

He was regarded by some of the officers of the bank, during the

period 1988-89, as being an effective, well-known business person

and a "friend of FANB," and as a philanthropist because of his
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donations to Vanderbilt University.

In 1987, Mr. Stewart approached the officers at the bank

about paying off one of his several existing lines of credit. One

of his businesses, TennLite, Inc., had a line of credit of

approximately $235,000.00, and Mr. Stewart wanted to increase the

line to one million dollars.

Mr. Stewart was starting up a new business, SoniClean, Inc.,

which was to use a sonic wave process to extract usable material

from coal slurry. He needed additional cash to fund the various

startup costs associated with Soniclean, Inc.

Becaue Soniclean, Inc. had no credit history and very few

assets, it was not the type of business to which the bank was free

to extend substantial credit. Mr. Stewart proposed therefore that

the line of credit of TennLite, Inc. be extended and the proceeds

be used in large part to fund startup costs of Soniclean, Inc.

The bank agreed to this proposal with one minor

modification, made in order to "add the needed protection to First

American and at the same time preserve the Subchapter 'S' status of

Soniclean," according to Wallace Carter, III, the bank official who

eventually handled Mr. Stewart's loans. It was agreed TennLite,

Inc. was to draw down the line of credit to make loans to Mr.

Stewart, the principal shareholder. Mr. Stewart invested most of

the one million dollar loan in Soniclean, Inc. 

Soniclean, Inc. never became even a marginally successful

business. As of 31 December 1988, SoniClean had little funding

outide of shareholder investment. In 1989, SoniClean was able to

meet some coal contracts, but its ability to generate income from

coal sales remained inconsistent, despite Mr. Stewart's sanguine
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assurances to the bank. 

Economic distress created by SoniClean, Inc.'s unprofitable

circumstances compounded other economic problems Mr. Stewart and

his related business entities were having during this period.

TennLite, Inc. was losing money. By 1987, sale of the brickets

accounted for almost all of TennLite's revenue. The sale of all

other products of TennLite were in decline as they had been in both

percentage and dollar terms since 1985. By 1988, the cost of

manufacturing the briquettes increased while sales diminished.

TennLite's income statement during the year ending 30 June 1989

showed a net operating loss of $183,000.00 and a cash loss of

$135,000.00.

The income TennLite, Inc. earned during the year ending 30

June 1989 was generated primarily from the sale of real estate it

owned and not from the sale of TennLite products. Its economic

difficulties were further exacerbated by the necessity of servicing

the huge debt it incurred for SoniClean. By March 1989, TennLite

had four lines of credit with the bank, the "A term" in the amount

of one million dollars, the "B term" in the amount of four hundred

thousand dollars, the "C line" in the amount of two hundred

thousand dollars, and the "D open-end market" in the amount of

twenty-five thousand dollars. Each of these lines of credit were

fully funded by the bank.

In March 1989, the bank increased the "C line" from two

hundred to four hundred thousand dollars. The bank was willing to

extend the "C line" primarily because of a personal guarantee given

by Wright Brothers Construction Company covering the entire two

hundred thousand dollar "C line" increase.

Soniclean, Inc. also had a letter of credit in the amount
 This debt was ultimately satisfied by the obligation being 1

sold to third parties at full value.

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of $62,675.00 through the bank during this same period. This

letter of credit was originally approved for New Acton Coal Mining

Company, Inc. but was transferred to SoniClean Coal of Alabama,

Inc., a subsidiary of SoniClean, Inc., in November 1987.

Mr. Stewart had other business activities funded through

loans from the bank which were also troubled. Specifically, Mr.

Stewart and TennLite, Inc. owned, through a joint venture known as

Stewart & Warren Bohnsack/Russell, Worley & Company, oil and gas

rights in the Indian Creek Venture located in Morgan County,

Tennessee. Because the other partners in this venture suffered

great losses in the 1987 stock market crash, Mr. Stewart had in

1987 assumed payment, by himself, of interest on the approximately

nine hundred thousand dollars in debt to the bank associated with

this investment.

Mr. Stewart also had personal debt to the plaintiff bank in

the amount of at least $300,000.00 as well as a home loan during

this same period. He had personally guaranteed each of these

debts. 

Mr. Stewart had substantial debt to other banks in Nashville

personally and in connection with his various businesses during the

period 1988-89. He also owed Third National Bank $2,500,000.00 and

had a large line of credit at First Tennessee Bank. Plaintiff bank

was aware of these loans.

In 1987 Mr. Stewart, personally and in connection with

business ventures, had debt financed through Commerce Union

Bank/Nations Bank in the total amount of $300,000.00. Mr. Stewart

never paid this debt. By 1987 or early 1988, Mr. Stewart and his 1
 Mr. Carter had more experience than Julie Brown, the 2

officer who had been managing Mr. Stewart's loans.

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related businesses were in serious economic distress, and the

record shows that the plaintiff bank knew or should have known of

these facts.

In 1988, the bank changed the officer responsible for

managing its relationship with Mr. Stewart and his related

businesses. The bank gave Wallace Carter, III the direct

responsibility for managing Mr. Stewart's and his related

businesses' relationships with the bank. Mr. Carter had moved 2

into the service industries division of the bank, where Mr.

Stewart's loans were handled, in September or October of 1987. Mr.

Carter commenced closer review of these relationships.

At some point in 1988, the bank reclassified the Stewart and

related business loans, changing their credit status from "2" to

"4." Under the bank's policies in effect at that time, such a

reclassification indicated that, in the bank's assessment, the

creditworthiness of Mr. Stewart's loans had diminished. 

Credit status 4 was not a "non-performing loan" but was at

least one or two levels above non-performing. However, starting in

1988 Mr. Stewart and his related businesses were paying interest

only on their obligation to the bank.

In March 1989, the bank moved at least one of TennLite's

credit lines to the loan servicing division so it could have closer

monitoring. This loan was to be managed as a "Level IV" loan, as

all of Mr. Stewart's other business and personal loans ultimately

were managed. In March 1989, the bank informed Mr. Stewart that it

would no longer provide new funding for SoniClean unless outside

equity, rather than the assets of TennLite, Inc., was provided as
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collateral. It was for this reason that the four hundred thousand

dollar "C line" which the bank provided TennLite in March 1989 was

guaranteed to the extent of two hundred thousand dollars by Wright

Brothers Construction Company.

During the 1988-89 period, Mr. Stewart and his related

businesses were proposing to Mr. Carter and other officers of the

bank the sale of various assets, primarily real estate, to cure Mr.

Stewart's financial problems. The proposed sales never occurred

with one exception. Because of costs associated with grading the

property, this lone sale netted substantially less than expected.

Mr. Carter reviewed the financial affairs of Mr. Stewart

during part of 1988 through April 1990. He monitored the progress

of the sale of assets. He reviewed the books and records of Mr.

Stewart and his businesses. He interviewed various individuals

doing business with Mr. Stewart and had parcels of real estate and

other assets belonging to Mr. Stewart appraised. Mr. Carter's

monitoring included regular visits to Mr. Stewart's offices to

review business records and other matters provided by Mr. Stewart

and his businesses. Mr. Stewart continued to provide Mr. Carter

with optimistic accounts of his business financial circumstances;

however, the financial information belied those representations.

By 30 June 1988, internal records generated by the bank

indicated that TennLite, Inc.'s financial status was equivalent to

bankruptcy. However, the bank continued to extend Mr. Stewart and

his related businesses credit.

The bank apparently relied on Mr. Stewart's record and

reputation and the strength of his personal financial statement,

which showed that he had assets of nine million dollars and

liabilities of four and a half million during the period 1988-89.
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However, liquidation of Mr. Stewart's personal and business assets,

pledged as collateral for his debt, has only netted a small

fraction of his alleged personal and business net worth.

In late November 1989, Mr. Stewart approached defendant

J.M.D. Bransford about co-signing a note for SoniClean, Inc. Mr.

Bransford, Mr. Stewart, and others had an office-sharing

arrangement in a Nashville office. Mr. Bransford's primary

business interest during the period of May-June 1988 through 1990

was a business called August, Inc., a mining operation using

chemicals to extract precious metals from spent copper mine

tailings. 

Officers, directors, and investors in August, Inc., but not

Mr. Bransford, hired Mr. Stewart to run August, Inc. for a

$10,000.00 monthly fee and a percentage of stock in August, Inc.

Mr. Bransford became involved with Mr. Stewart in August, Inc. only

after others brought Mr. Stewart into the company.

Despite the physical proximity, Mr. Bransford had no

knowledge of any of Mr. Stewart's other businesses, including

TennLite, Inc. and SoniClean, Inc. Mr. Bransford testified, "at

the time I was not privy to any of the information regarding what

James' various interests were. I was not particularly interested

in what those businesses were." 

When Mr. Stewart approached Mr. Bransford to "sign a note,"

i.e. a two hundred thousand dollar note as co-maker, Mr. Bransford

said, "Jim, I know nothing about the coal business," to which Mr.

Stewart responded, "this note will be paid back and the royalties

of the production of coal will pay it." Mr. Bransford signed the

note as co-maker about one week later.
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Mr. Bransford did not make a due diligence investigation of

the status of SoniClean, Inc. before he agreed to co-make the note,

but he did talk to Mr. Carter at the bank. Mr. Bransford had come

to know Mr. Carter through Mr. Stewart. Mr. Carter had breakfast

with Mr. Bransford "to discuss the possibility of his [Mr.

Bransford's] moving his trust accounts to the bank."

Mr. Bransford testified by deposition as follows:

Well, I'll tell you why I didn't do it before.

There were two reasons; I wanted to help Jim

Stewart, one. I knew that Buz [Wallace} Carter was

out there two or three times a week in the late

afternoon in James' office for significant periods

of time. I knew he was staying very close to what

was going on and when I relied upon Buz Carter,

when I asked the question of Buz, Buz is there

anything more risky about signing this note or this

investment than a normal business investment,

knowing full well that he was involved up to his

neck on a weekly daily basis, he replied no.

According to Mr. Carter, Mr. Stewart "handled most of the

loan transaction." Mr. Carter further testified, "I think he [Mr.

Stewart] was the one who requested it. He was the one who told us

that Mr. Bransford was willing to make the transaction, and I don't

remember specifically telling Mr. Bransford what the proceeds would

be."

Mr. Bransford did not receive any proceeds from the two

hundred thousand dollar loan. While there was some discussion of

Mr. Bransford's receiving stock in SoniClean, Inc. for co-making

the note, this never materialized.

One hundred fifty thousand dollars of the proceeds of the

note was distributed the day following the loan as follows:

$30,000.00 to SoniClean of Alabama, $20,000.00 to James W. Stewart,

and $100,000.00 to TennLite, Inc. Mr. Carter was aware that the

proceeds of the two hundred thousand dollar loan would be disbursed
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to pay the SoniClean debt.

Defendant insists that the trial court erred in granting

summary judgment since there were genuine issues of material fact

existing between the parties.

In Bellamy v. Federal Express Corp., 749 S.W.2d 31 (Tenn.

1988), our Supreme Court stated:

[I]t has been repeatedly stated by this Court that

the purpose of a summary judgment proceeding is not

the finding of facts, the resolution of disputed

factual issues, or the determination of conflicting inferences reasonably to be drawn from

facts. The purpose is to resolve controlling

issues of law, and that alone.

Id. at 33.

In determining whether or not a genuine issue of fact exists

in a summary judgment case, we must look at all the evidence, take

the strongest legitimate view of it in favor of the party opposing

the motion, allow all reasonable inferences from it in its favor

and discard all countervailing evidence. If there is then any

dispute as to any material determinative evidence or any doubt as

to the conclusion to be drawn from the whole evidence, we must deny

the motion. Berry v. Whitworth, 576 S.W.2d 351, 352-53 (Tenn.

1978); see also Tenn. R. Civ. P. 56.03.

No presumption of correctness attaches to decisions granting

summary judgment, because they involve only questions of law.

Thus, on appeal, we must make a fresh determination concerning

whether or not the requirements of Tennessee Rule of Civil

Procedure 56 have been met. Hill v. City of Chattanooga, 533

S.W.2d 311, 312 (Tenn. App. 1975). In doing so, we must consider

the pleadings and the evidentiary materials in the light most
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favorable to the movants opponent and must draw all reasonable

inferences in the opponent's favor. Blocker v. Regional Medical

Center at Memphis, 722 S.W.2d 660 (Tenn. 1987).

We therefore review this record to determine whether a

genuine issue of material fact exists regarding a valid affirmative

defense asserted by the defendant as to his liability for sums due

under the note which he co-made. Rule 56 contains two requirements

that must be met before granting summary judgment. First, there

must be no genuine issue with regard to material facts relevant to

the claim or defense embodied in the motion. Byrd v. Hall, 847

S.W.2d 208, 211 (Tenn. 1993). Second, the moving party must be

entitled to a judgment as a matter of law based on the undisputed

facts. Anderson v. Standard Register Co., 857 S.W.2d 555, 559

(Tenn. 1993).

In this instance, the burden is upon the bank to persuade

the court that no genuine and material factual issue exists. Byrd,

847 S.W.2d at 211. The court must view the evidence before it in

favor of the non-moving party, in this instance, Mr. Bransford, and

allow all reasonable inferences in his favor and discard all

countervailing evidence. Id. at 210.

In determining whether a genuine issue of material fact

exists, the court is not allowed to weigh the evidence. If it

appears from the record that issues of witness credibility and

testimonial conflicts concerning material factual matters exist

which affect the determination of defenses asserted by the

defendant, then the trial court must be reversed. Id. at 211.

Issues of credibility must be resolved by the trier of fact and

cannot be determined by summary judgment. Id. at 212.
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Defendant insists that a genuine issue exists in the instant

case regarding an affirmative defense that the bank concealed or

failed to disclose the financial circumstances of SoniClean prior

to defendant's execution of the two hundred thousand dollar note as

co-maker.

Defendant, by deposition, testified about asking Mr. Wallace

Carter, the bank's representative, concerning the advisability of

signing the SoniClean note as a co-maker.

The record shows, and Mr. Carter admits, that he was aware

of SoniClean, Inc.'s financial circumstances and those of Mr.

Stewart and TennLite, Inc., all of which were closely related. Mr.

Carter denies, however, that he characterized the two hundred

thousand dollar loan "as being of average risk to the bank, because

that was never my view of the loan ...."

This fact is disputed. The question remains whether this

disputed fact is material and directly related to Mr. Bransford's

affirmative defense, both as a practical and legal matter.

Defendant Bransford takes the position that he would not have cosigned the note had he known the true facts of SoniClean, Inc.'s

financial circumstances.

The record is clear that defendant Bransford received

nothing of value for co-making the note, no stock in the company or

proceeds of the loan.

Mr. Bransford testified that he relied upon the

representation of Mr. Carter, the bank's representative, and was

induced to act as a co-maker on the two hundred thousand dollar

note relying upon only those representations.
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The evidence is that Mr. Bransford had not made a decision

to become a co-maker on the note until he had his conversation with

Mr. Carter, and that he only signed the note following the

conversation with Mr. Carter.

A fair inference can be drawn from the record that Mr.

Bransford did not trust Mr. Stewart to report the financial

circumstances of SoniClean, Inc. accurately, and that he was aware

that Mr. Carter had closely reviewed the financial circumstances of

Soniclean, Inc. for the bank.

We therefore think that under this record it was reasonable

for defendant Bransford to expect an honest and candid response

from Mr. Carter when he posed the question of Soniclean, Inc.'s

financial circumstances. The bank had a duty to tell the truth and

not to mislead or not to answer at all.

The bank disputes most of the facts; however, for the

purpose of reviewing the trial court's decision in granting summary

judgment, this court must take the strongest legitimate view of

defendant Bransford's evidence, allow all reasonable inferences in

his favor, and discard all countervailing evidence. Byrd, 847

S.W.2d at 211.

In Macon County Livestock Market, Inc. v. Kentucky State

Bank, Inc., 724 S.W.2d 343 (Tenn. App. 1986), this court stated:

[The bank] has no special duty to counsel the

customer and inform him of every material fact

relating to the transaction - including the bank's

motive, if material, for participating in the

transaction - unless special circumstances exist,

such as where the bank knows or has reason to know

that the customer is placing his trust and

confidence in the bank and is relying upon the bank

so to counsel and inform him.

Id. at 350 (emphasis added).
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The court further held that concealment or failure to

disclose becomes fraudulent when "it is the duty of a party having

knowledge of the facts to disclose them to the other party." There

are three such circumstances under which a lender has such a duty.

1. Where there is a previous definite fiduciary

relation between the parties.

2. Where it appears one or each of the parties to

the contract expressly reposes a trust and

confidence in the other.

3. Where the contract or transaction is 

intrinsically fiduciary and calls for perfect good

faith. The contract of insurance is an example

of this last class.

Macon County Livestock Market, 724 S.W.2d at 349.

Here, the bank and defendant Bransford were parties to the

loan agreement. Based on the testimony of Mr. Bransford, it is

clear that he reposed his trust and confidence in the bank. 

Defendant Bransford further contends that the transaction

involving him and the bank was "intrinsically fiduciary," calling

for "perfect good faith." He insists that the bank knew that it

was woefully under-collateralized and that Soniclean, Inc. was or

probably was insolvent. The bank, therefore, was looking for

additional collateral and had an obligation to be perfectly candid

with Mr. Bransford in statements it made inducing him to provide

the additional collateral.

We are of the opinion the bank had a duty to disclose and

that it therefore follows that disputed facts about whether Mr.

Bransford asked and was not told or was erroneously told by the

bank are matters which materially and directly relate to this

affirmative defense. The existence of a dispute about such factual

matters or doubt as to the conclusion to be drawn from these facts

leads us to conclude that summary judgment was erroneously granted

by the trial court. See Byrd, 847 S.W.2d at 211.
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Title 47 of the Tennessee Code deals with Commercial

Instruments and Transactions. Section 47-1-203 provides:

Every contract or duty within chapters 1 through 9

of this title imposes an obligation of good faith

in its performance or enforcement. Tenn. Code Ann.

§ 47-1-203 (1994).

"Good faith" means honesty and fact in the conduct or

transaction concerned. Tenn. Code Ann. § 47-1-201 (1994).

In Lane v. John Deer Co., 767 S.W.2d 138 (Tenn. 1989), our Supreme

Court stated that:

Good faith imposes an honest intention to abstain

from taking any unconscientious advantage of

another, even through the forms and technicalities

of the law. 

Id. at 140.

We are of the opinion that the record before this court

shows that the bank's failure to disclose the true financial

circumstances of SoniClean, Inc. to the defendant Bransford is the

proximate cause of Mr. Bransford's loss. See Boling v. Tennessee

State Bank, 890 S.W.2d 32, 36 (Tenn. 1994).

From the record before us, we can infer that the bank's

conduct was the substantial factor in inducing defendant Bransford

to sign the note as a co-maker and thereby incur the resulting

loss.

Because there is a disputed issue of material fact, we are

of the opinion the trial court erred in granting summary judgment.

It therefore results that the judgment is reversed and the cause is

remanded to the trial court for further necessary proceedings.

Costs on appeal are taxed to plaintiff, First American National

Bank.

_____________________________

SAMUEL L. LEWIS, JUDGE
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CONCUR:

___________________________________

HENRY F. TODD, PRESIDING JUDGE,M.S.

CONCURS IN SEPARATE OPINION:

WILLIAM C. KOCH, JR., JUDGE