# FILED February

21, 1997 Cecil W. Crowson Ap pellate Cou rt Clerk LOVELL & MALONE, INC., ) ) Plaintiff/Appellee, ) ) Appeal No. ) 01-A-01-9607- CH-00299 VS. ) ) Davidson Chancery ) No. 93-2525-II (III) COMMONWE ALTH LIFE INSURANCE ) COMPANY and CAPITAL HOLDING ) CORPORATION, ) ) Defendants/Ap pellants. )

COURT OF APPE ALS OF TENNESSEE MIDDLE SEC TION AT NASHVILLE
APPEALE D FRO M THE C HANC ERY C OURT O F DAVI DSON COUN TY AT NASHVILLE, TENN ESSEE THE HONORABLE ROBERT S. BRA NDT, CHANC ELLOR

FRED E. COW DEN, JR. 211 Third Avenu e North P. O. Box 1982 88 Nashvil le, Tennessee 37219 Attorney for Plaintiff/Appellee W ILLIAM R. O’BRYAN, JR. MARY ELLEN MORRIS TRABUE , STUR DIVAN T & DEWITT 511 Union Street 2500 Nashvi lle City

Center Nashvil le, Tennessee 37219- 1738 Attorneys for Defendants/Appella nts

AFFIRMED AND REMAN DED

BEN H. CAN TRELL, JUDGE CONCUR: TODD, P.J. LEW IS, J.- 2 - 

## O P I N I O N

The Chancery

Court entered a judgment for th e plaintif f mort gage loan correspondent, finding that th e d ef endant insurance company had brea ched the c orrespondent

agreement by

refusing to pay the req uired terminat ion fee a fte r terminating the contract w ithout cause. The insurance company argueson app eal that it was not obligated to pay the fee, because valid grounds ex isted for the termination. We affirm the trial court.

I.

On October 1, 1962, Lovell & Malone, Inc., exe cuted a mortgage correspondent

agreement w ith Common wealt h Life Insurance Comp any, a wholly owned subsidiaryof Capital Hol ding Corporation (hereafter Capi tal). In the contract, Lovell & Malone ag reed as correspondent to orig inate and serv ice resident ial and commercial loans for Capital. Article VI of the contract specif ied the manner in which the parties could terminate the con tract, and their r ight s and obligations follow ing termination.

Each party had the righ t to terminate the a greement w ith or w ithout cause by sendinga writ ten notice of the termination to the other party by reg istered mail at least ninety days before the schedu led termination date. If it terminated the agreementwithout cause, Capital was obli gated to pay Lovell & Malone one percent (1%) of the outstanding principal amount being ser viced for i t by the c orresp ondent at the time of terminat ion. If the termination was for caus e, then no money w ould be due. Circumsta nces con stitutin g ca use were l isted in the s ame section, and w ill be discussed later in this

opinion.- 3 - In 1985, C apital submitted a new correspondent co ntract to Lovell & Malone for review . The termination clause in the new contrac t eliminated the fee for termination without cause. William C. Boyer s, then presi dent of Lo vell & M alone, objected by letter

to the change, but stated that he w ould be w illi ng to accept i t for future loans, as lon g as the 1% prov ision remained in place for loans acqui red under the old contrac

t.

In a letter dated December 12, 1985, Paul Edberg, Capital’s Director of AssetManagement, ag reed tha t the 1962 contract would remain in f orce for all exist ing loans, and that t he new contr act would only cover future loan pr oduction, beginning on January 1, 1986.

II.

I n the spring of 1991, a holding company ow ned by the w ife of J
. Thomas Holland purchased the stock of Lovell & Malone , and Mr. Ho lland took over as preside nt of t he mort gage correspondent. In September of that year, M r. Holland travell ed to Capital’ s headquarter s in Louisv ille tointroduce hi mself to that company’s management, and to see if he coul d obtain their agreement to or iginate residential loans on their

behalf.
Capital had ceased to acc ept residenti al loans sometime i n the 1960's, but had resumed resi dential lendin g in 1987, con centrating on so-call ed “jumbo” nonconforming loans. Lovell & Malonehad voluntar ily take n itself out of res idential lending in th e early 198 0's to concentr ate on commercial lending, but was now interested in returning to the Nashv ille resi dential market.- 4 - Capital’s residential loan production off icer, Mr. Craig A tchley, adv ised Mr. Holland that unless he could originate mo rtgage loans in the Nashville area in the amount of twenty- five to thir ty milli on dollars per

year, Lovell & Malonewould not b e permitted to make residen tial loans on Capital’s behalf. Mr. H olland felt that his company

might be able to orig inate ten mill ion dollars in residenti al loans each year or two, but i n view

of th e si ze of the lendin g market and t he number of competing firms in the area, he could not g uarantee the hig her volume demand ed by Capit al.

During this same visi t, Mr. Holl and spoke to Mr . Ray Brewer, w ho was apparently Mr. Atchl ey’s count erpart on Capi tal’s commerc ial loan si de. Mr. Hol land advised Mr. Brewer aboutthe pos sibility of Lovell & Malo ne origina ting a loan of about ten million dol lars on a bui lding ow ned and occupied by Sou thwest ern Publishi ng Company

in Nashville, but Mr. Brewer said his company was not i nterested in mak ing that loan, becauseof the high valuation placed on the property
.
III.

In September of 1992, C apital’s director of resid ential serv icing, Kenn eth K. Hodge, cal led Mr. Ho lland, and told him that the holdi ng company ha d decided to terminate its contracts w ith its smal ler correspondents, including Lovell & Malone. Mr. Ho lland la ter testified t hat no cause for ter mination was discussed, ot her than Capital’s desire to deal with a s maller number of l oan producers, and no fee for ter mination was mentioned. However, in a letter dated Septemb er 22, 1992, Mr
. Hodge wr

ote: “This letter confir ms our agreement to transfer

the servic ing of the loans ser

viced by Lovell & Malone under the subject agreementto our offices in L ou isvill e. As we d iscussed, no cancellation and/or transfer fees will be due to L ovell & Malone for the transf er of the servicing.”- 5 - Mr. Holland res ponded with a letter dated Sept ember 25, 1992, and enclosed with it

copies of the 1962 and 1985 contr acts and the Dec ember 12, 1985 letter from Mr. Edberg . In his ow n letter, Mr . Holland st ate d that he and M r. Hodge had never dis cussed the termination fee, and that Lovell & Malone was determined to collect the fee for the remaining balance on the loans it or iginated pr ior to 1986, a fee amounting to $136,881

.

Mr. Hodge subseq uently shi fted his ground w ith a letter dated October 1, 1992. That letter

stated that no ter mination fee was due because terminat ion was forcause under Ar

ticle 6.02(e) of the corresponden t agreement, w hich a llow s immediate terminat ion for the follow ing reason:

6.02(e) Inability of Correspondent to perf orm satisfactorily its duties and o bli gat ions , in clu dingthe p rodu cin g of a reasonable and satisfactory volume of mortg age loansfor the Company’s account from the area served by Correspondent over a two year per iod.

It is undisputed that Lovel l & Malone had not or iginated any new resid e ntial mortgage l oans for Capital after it resumed residential lending, and had originated only one co mmercial loan for them after January

1, 1986, a loan on a Florida retail center which had a remaining bal ance of $5,100,000.

On August 30, 1993, Lovell & Malone filed sui t in Chan cery Cour t to compe l Capit al to p ay th e termi nation fee. Ca pital filed a motion for sum m ar y judgment, asserting that the plaint iff’s failure tooriginate new loans constituted such cause as would enable it to av oid payment of the t ermination fee under the contract. The trial cour

t granted the motion for summary judgment.

On appeal, this court reverse d the trial court (Appeal No. 01-A-01- 9503- CH-00119, Filed September 6, 1995). We found that there was a question ofmaterial- 6 -

fact as to whether Lovell & Malone was actual ly un able to produc e a suffi cient

volu me of mortgage l oans, or w hether the condit ions imposed by Capital made it impossible forthe corre sponde nt to pe rform its obligat ions und er the co ntract. Speakin g through Judge Lewi s, the court w rote:

“Defendants contend they were enti tled to set t heir own loan underwri ting criteria f or the m aking of mortgage loans or to change the criter ia from time to ti me. The plaintiff agrees and so d o we. Defendants could decli ne to make loans, e ithe r residential or com merc ial, and d efe nda nts d id ha ve a right t o reject loans from the plai ntiff based upon the defendants’ new loan criteri a. However, we are of the o pinion that the defendants cannot relyo n this rig ht as a defense to the plaintiff’s claim for a ter mination fee. To a llow this defense would permit defendants tore-wr ite the contract b etween the parties.”

After a trial on the merits, the Chancellor entered a judgmen t in favor of the plaintiff in the amount of $136,438 .21 plu s pre-judg ment interest, for a total judgment of $177,369.67. The present appeal followed.

IV.
Appellantargues on a ppea l that its t ermination of the co rrespondent agreementshould be consi dered to be for cause, becausethe correspondent violated two of the terms of the ag reement by v irtue ofits inability to produce a reasonable and satisfactory volume of mortg age loans, and its transfer of the controlli ng interest in the correspondent

in 1991 wi thout the prior w ritten approv al of Capital. We will examine the first of these as sertions in this secti on.

The appellee argues that Capital termina ted the contract in September of 1992 solely for its own convenience, and that the rea sons it later alleged were post hocrationalizations, advanced solely for the purpose of enabling it to avoid pa ying a termination fee. The ev idence clearl y favors the appellee’s interpretati on of the- 7 -

reasons for termination. The testimony of Mr. Hodge and of his supervisor Mr. Nelis indicatesthat the contra ct wit h Lovell & Malone was terminated as par

t of a larger program to red uce t he nu mbe r of c orre spon den ts it h ad to deal wi t h to a f ew large companies, for the sake of the effici encies and the economies of scale that such a reorganization would produce for Capital.

Lovell & Malone rec eived the same form letter of termination as did the other correspondents whose contracts were ended at this time. It was only after Mr. Holland insisted that his company’s 19 62 contract enti tled it to a termination fee, th at Mr. Hodge inv

oked Section 6.02( e) of that contract and Lov ell & Malone ’s lack of loa n production as t he reasons for ter mination.

W hile it is tr ue that Lovell & Ma lone produced onl y one new loan for Capital after 1986, it managed to ori ginate loans for other lender

s during this period, including several million dollars worth of “jumbo” loans in the Nashville area each year. It does not appear to

us that the failure of Lovell & Malone to produce loans for Capi tal over a per iod o f mo re th an two ye ars wa s due to the cor respondent’s i nability to perfor m, but rather to the heightene d requirement s that Capital imposed on its corresponde nts befo re it woul d accep t any

new l oan ori ginat ions fr om them.

At the conclusion of thetrial, the trial cour t stated that the defendant had failed to prove the plaintiff’s inability to produce loans, and thus the termination of the contract could not be cons idered to be for caus e. The appellant arg ues on appeal that the trial court’s sta tement indicated t hat it had impro perly shi fted the burden of proof. Capital cont ends that as plai ntiff, Lovell & Malone was required to affirmatively prove all the elementsof its claim, including the allegat ion that the ter mination of its contract was w ithout cause. The appellee arg ues to the contrary that all it

had to prove was the exist ence and vali dity of the contract, and its termination by Capital, in order to shift the burde n of proof to the defendant, because thedefendant’s assert ion- 8 -

that it had cause to

terminate the contract constitu ted a n avoi dan ce or aff irma tive defense that had to be spe cifically pled. See Rul e 8.03 Tenn. R. Ci v. P.

We do not believe, however, that we are required to settle thi s fine point of procedure, because the plainti ff did present sufficient evidence o f its ability to originateboth commercial and residenti al loans, in the form of uncontradic ted testimony

that it had placed a numb er of such loans w ith o ther companies after the defen dant

decl ared itsunw ill ing ness to accept

suc h lo ans f rom t he pl aint iff.

V.

C api tal’s second argument on appeal pertai ns to the 1991 transfer of Lovell & Malone’s stock. The appellant poi nts out that the 196 2 contract in cluded the following as a cause for ter mination:

6.02 (g). I f Correspondent is a corpor

ation, the transfer of the controllingin teres t in Corre spondent or, w hether or not Correspondent is a corporation, a substantial chan ge in managementpersonnel of Correspondent, without t he prior written approval of the Company.

It is undis puted that the pri or wri tten approval of Capital was not obtained when Mr . Hol land ’s w ife acquired the stock of Lovell & Malone. It is also undispu ted t hat Capital became aware that its correspondent had come under new managementin 1991, when Mr. Holland travelled to Louisville to introduce hi mself to Capital’s loan officers.

Lovell & Malone conten ds th at its failure to obtain the prior w ritten approval of Capital for the acquisition of its stock is not properly before this cour

t, because the issue was not raised during the course of trial proceedings . The appellee points out that it i s not found in the pl eadings or in the defendant’s M otion for Summary Judgmentor in its pre-trial brief, nor was it mentioned in the def endant’s- 9 -

opening statem ent or clo sing argu ment. In the alternati ve, appelleeargues that Capital waived this

contract pr

ovision by

not raisingit earlier

in the proceedi ngs.
Appellantasserts that

the issue was raised at the trial level because its answer declared the t erminati on to be for cause (even though that cause was not specified), and because the op erative facts about Lovell & Malone’s change of ownership were eli cite d fro m Mr. Holl and during c ross-examination. Appell ant attempts to turn appell ee’s argument into a reductio ad abs urdum by statin g in its brief: “What Plaintiff actuall y seeks i s for this Co urt to rule, as a matter of la w, that every

factual and leg al point not menti oned in pretrial briefs, opening statementand oral arg ument at trial is waived on appeal. Such a rule would make for extremely lengthy briefs and opening and closing statements.”
However, we do not believe that Lovell & Malone is attempting to place such an unrealistic burden on the pa rties or on the court. W e believe to the contrary that the appellee is

merely obj ecting to C apital’s att empt to assert apreviously unargued theor

y on appeal after

its initi al theory was rej ected by the t rial court
.
Review by this court of the proceedings below is d e n ovo upon the record, and thus t his court in its discretion may even consider arguments that were not made on appeal, if supported by facts in the record, “in order to prevent n eedless ligitati on, to prevent injury to the interests of thepublic, or to prevent prejudice to

the judicial process.” Tenn. R. App. P. Rule 13(b ).

Howeve r we may a lso decline to consider ar guments on appeal that were not raised bel ow. Our function as an appell ate court is to exam ine the r ecord to determine if the court below committ ed reversib le error. We are not obligated to grantrelief to a party “responsible for error, or who failed to take whateve r ac tion is reasonably availabl e to prevent or nullify the harmful effect of an error.”Tenn. R. App.- 10 -

P. Rule 36(a). Thus, i f the trial cour t erred in not ruli ng for Capital on the questi on of Lovell & Malone’s change of owner ship, this court could de cline to rectify that error since the appell ant failed to bri ng that iss ue to the trial court’s att ention.

We believe, however, that the appellan t would not be entitled to prevail, even if it had made the s ame argu ment in the trial court that it makes o n appeal. Appellantbas es its arg ument upon a line of cas es, startingwith College Point Boat Corporation

v. U.S. , 267 U.S. 12, 16, 45 S. Ct. 199, 2 0 0-201, 69 L .Ed 490, 493 (1925), which hol ds thata party may terminat e a contract i f legal just ification ex ists for t hat action, even if the party was unaware of that justi fication at the ti me o f termination.

None of the cases cited are quite on poin t, because the contract in the presentcase indicat es that the appell ant had an absolute right to termin ate the contract for any

reason whatsoever, or for no reason at al l. The only question before the court inv

olved the co ntractual financi al obligat ion followi ng such a ter mination.

It appears to us that the obligations u nder t he contra ct arise from t he actual reasons for Cap ital’s deci sion to te rmin ate i t, no t the reas ons t hat m ight h ave or could have been asserted. Even if we assume, arguendo that Capital did not assert its rig hts under secti on 6.02(g) of the contract becau se it was not aware of the change of ownershipuntil the tak ing of Mr. H olland’s depos ition on N ovember 30, 1993, there are no i ndications i n the record t hat it objected to ei ther t he new management or the ne w ownership until well after itdiscovered that its other theory would not ent itle it to p revail in the trial court.

VI.- 11 - The j udgment of the trial court is af firmed. Remand th is cause to th e ChanceryCourt of Dav idson County for further proce edings consi stent wit h thi s opinion. Tax the costs on appeal to the appellant.

_____________________________ BEN H. CAN TRELL, JUDGE

CONCUR:

_______________________________ HENRY F . TODD, PRESID ING JUDGE MIDDLE SEC TION

_______________________________ SAMUEL L. LEWIS, JUDGE