       IN THE COURT OF APPEALS OF TENNESSEE
                   AT NASHVILLE
                                                FILED
ADVANTAGE FUNDING CORP.,           )             January 27, 2000
                                   )
      Plaintiff/Appellant,         )            Cecil Crowson, Jr.
                                   )          Appellate Court Clerk
                                       Montgomery Circuit
VS.                                )   No. C10-442
                                   )
MID-TENNESSEE MANUFACTURING        )   Appeal No.
CO., INC. and JAMES T. HALL,       )   M1997-00133-COA-R3-CV
                                   )
      Defendants/Appellee.         )




   APPEAL FROM THE CIRCUIT COURT FOR MONTGOMERY COUNTY
                 AT CLARKSVILLE, TENNESSEE

               THE HONORABLE JAMES E. WALTON, JUDGE




For Plaintiff/Appellant:               For Defendants/Appellee:

Steven R. Sharp                        Not represented on appeal
BUFFALOE & SHARP
Nashville, Tennessee




         AFFIRMED IN PART; REVERSED IN PART
                   AND REMANDED



                                   WILLIAM C. KOCH, JR., JUDGE
                                      OPINION

        This appeal involves a dispute arising out of a factoring agreement and a related
personal guarantee . After the de btor decline d to pay the receivable, th e factor filed su it in
the Circuit Court for Mon tgomery County against the company from which it purchased the
receivable and the company’s president alleging that the c ompan y had bre ached its
warranties in the factoring agreement and that the company’s president had refused to honor
his personal guarantee. The trial court, sitting without a jury, awarded the factor a judgment
against the company that sold the receivable but dismissed the factor’s claims against the
seller’s president. T he factor ass erts on this ap peal that the tria l court erred by dismissing
its claim against the seller’s president based on his personal guaranty. We agree and,
therefore, reverse the portion of the order dismissing the claims ag ainst the seller’s p resident.


                                                I.


        Mid-Tennessee Manufacturing Company, Inc. is a small business located in
Clarksville, Tennessee. Its president was James Ted Hall, and its vice president and chief
financial officer was Darrell M. Ray.          Like many small businesses, Mid-Tennessee
Manufacturing had acco unts receiva ble from its c ustomers which it w as required to actively
manage to ensure a d ependab le cash flow . This case a rises out of the compa ny’s efforts to
manage some of its accounts receivable.


        In Decemb er 1993, Mid- T ennessee M anufacturing sold United Circuits, Inc.
approxim ately $27,000 worth of microprocessors. The terms of the sale required United
Circuits to pay for th e goods w ithin sixty days. In order to raise cash before United
Circuits’s paym ent wa s due, M r. Ray, w ith Mr. H all’s agre emen t, contacted Advantage
Funding Corporation about buying the United Circuits receivable. Advantage Funding sent
Mid-Tennessee Manufacturing its standard contract documents with instructions to complete
them and to return them along with United Circuits’s credit information. A s reflected in
these documents, the factoring agreement co ntained the following material term s: (1) the sale
of the accounts receivable w ould be without reco urse; (2) Mid-Tennessee Manufacturing
would warrant that the amount of the receivable was not and would not be in dispute and that
the account was not and would not be subject to defenses, set-offs, or counterclaims, and (3)
Mr. Hall wo uld provide his individual guarantee securing these warranties . The doc uments
gave Advantage Funding a claim against both Mid-Tennessee Manu facturing an d Mr. H all
if any warranties concerning the receivable were breached.


        Mr. Ray com pleted the documents, obtained Mr. Hall’s signature where required,1 and
returned the com pleted doc uments to Advantage Funding. In mid-January 1994, Advantage
Funding informed Mr. Ray that it had decided not to purchase the United Circuits receivable.

    1
     Mr. Hall testified that Mr. Ray was responsible for completing the paperwork to sell the
receivable and that he “signed these blank forms [on January 6, 1994] for Mr. Ray so that he could
overnight this information down to Advantage Funding to do this deal.” He explained that he signed
several blank forms of each document in case Mr. Ray made a mistake.

                                               -2-
Mr. Ray, in turn, informed Mr. Hall of Advantage F unding’s decision. W ith this news, Mr.
Hall assumed that he was no longer exposed on his personal guarantee.2


          Mid-Tennessee Manufacturing’s need for short-term operating c ash did no t evaporate
after Advantage Funding rejected the United Circuits receivable. In February 1994, Mr. Ray
decided to offer Advantage Funding another receivable stemming from a $17,995 transaction
with John Farmer & Associates, Inc. To comp lete the transaction, he used the pap ers
remaining from the U nited Circu its transaction, in cluding Mr. Hall’s executed personal
guarantee, and forwarded them to Advantage Funding without Mr. Hall’s knowledge.


          Advantage Funding found this receivable attractive and forwarded a copy of the
completed account invoice to Farmer containing an acknowledgment that the work had been
comple ted and accepted, that the amount of the invoice was correct and was now due and
owing, and that the amount due was not subject to any offsets, deductions, or defenses.3
Farmer executed the ackno wledgm ent and retu rned it to Ad vantage F unding. W ith the
acknowledgment in hand, Advantage Funding ex ecuted the f actoring do cumen ts and paid
Mid-Tennessee Manufacturing $12,596.50 for the Farmer receivable.




          Farmer ultimately declined to pay for the goods because som e or all of the items were
defective. When its deman ds on Farm er for paym ent were to no ava il, Advantage Funding
informed Mid-Tennessee Manufacturing that Farmer had refused to pay the assigned account
because it was unhappy with the goods . Advantage Funding reminded Mid-Tennessee
Manufacturing that any dispute between Mid-Tennessee and Farmer over the account
constituted a breach of the warranties in the factoring agreement. It also reminded Mid -
Tennessee Manufacturing that the dispute also triggered Mr. Hall’s personal guarantee.


          It was at this point that Mr. Hall first learned of his company’s factoring agreement
with Advantage Funding for the Farmer receivable.                Mid-Tennessee Manufacturing
attempted unsuccessfully to satisfy Farmer, and Farmer continued to decline to pay the


   2
     Mr. Hall testified at trial that he was “going along fat, dumb, and happy thinking . . . [that]
Advantage Funding had said no [on the United Circuits receivable]; and I’m off doing bigger and
better things.”
   3
       The exact terms of the acknowledgment were as follows:

          The undesigned hereby acknowledges that this payment is not dependent on any
          contingencies or further work to be performed. That the work has been completed
          and accepted, that the invoice amount is correct and is now due and owing, and not
          subject to any offsets, deductions, or defenses known or unknown, whether now
          existing or arising in the future. We acknowledge that you are relying on these
          representations in paying over money to your assignor and we [illegible] that we
          shall make payment in full as set forth above to you, ADVANTAGE FUNDING
          CORP., as lawful assignee.


                                                 -3-
factored account. After its attempts to collect from Farmer failed, Advantage Funding made
demand on Mid-Tennessee Manufacturing on the ground that Mid-Tennessee Manu facturing
had violate d its warran ties in the factor ing agreem ent.


            Advantage Funding filed suit again st Mid-T ennessee Manu facturing an d Mr. H all in
the Circuit Court for Montgom ery County for bre ach of the factoring agreem ent and Mr.
Hall’s personal g uarantee.         M id-Tenne ssee Ma nufacturing did not contest the suit.
Following a bench trial, the trial court awarded Advantage Funding a $21,377.87 judgment
against Mid-Tennessee Manufacturing for the contract amount, pre-judgment interest, and
attorney’s fees. However, the trial court dismissed Adv antage Funding ’s claim against M r.
Hall on two groun ds. First, the trial court found that neither Mid-Tennessee Manufacturing
nor Mr. Hall had breached the warran ties in the factoring agreem ent. Second, the trial court
found that M r. Hall had been unaware of the factoring of the Farmer receivable and never
intended to personally guarantee the warranties regarding the Farmer receivable. Advantage
Funding now ap peals the trial co urt’s dismiss al of its claims against M r. Hall.


                                                    II.


            This appeal involves only legal issues because the facts, althou gh not com pletely
developed,4 are not in dispute . Advantage Funding contends that the trial court erred by
concluding that Mr. Hall’s execution of the blank personal guarantee form did not create an
enforceab le personal obligation. It also contends that the trial court erred by concluding that
Mr. Hall’s liability under his personal guarantee was never triggered because there was no
breach of the warranties in the factoring agreem ent. Becau se these con tentions invo lve only
questions of law, o ur review of the trial cou rt’s decision w ill be de nov o withou t a
presumption of corre ctness. See In re Estate of Hume, 984 S.W.2d 602, 604 (Tenn. 1999);
Quarles v. Shoemaker, 978 S.W.2d 551, 552 (Tenn. Ct. App. 1998). We first take up the
question of the enforceability of Mr. Hall’s personal guarantee. If Mr. Hall did not
personally guarantee the factoring agreement, the issue involving the breach of the warranties
in the agreement is moot


                                                    A.
                                 M R. H ALL’S P ERSONAL G UARANTEE


            While the trial court described Mr. Hall as “negligent” for executing the blank
personal guarantee forms, it dec lined to enfo rce the term s of the gua rantee bec ause it
concluded that Mr. H all did not “intend” to personally guarantee the factoring agreement
covering the Farmer receivable.5 The trial court also concluded that Advantage Funding


  4
   For example, the only evidence that the goods involved in the Farmer transaction were defective
or non-conforming is hearsay. In addition, because neither party called Mr. Ray as a witness, the
only evidence we have of his actions, other than his signature on some documents, comes from
inferences and second-hand accounts.
      5
          The trial court specifically stated: “I do not believe Mr. Hall ever knew of the sale of the
                                                                                      (continued...)
                                                   -4-
could not enforce Mr. Hall’s personal guarantee because it failed to confirm his intent to
personally guarantee the warra nties in th e factor ing agr eeme nt. By placing this burden on
the party who innocently accepts an apparen tly valid, signed docum ent, the trial court
focused too myopically on Mr. Hall’s intent and ignored the larger considerations of the need
for reliability and predictability in the area of commercial account financing.


       Mr. Hall is not the first person, nor will he be the last, to exec ute a form document that
has not been completely filled out and then relinquish possession or control of the document
to others. That scenario has recurred so frequently that a body of law has grown up around
it. The cases on this subject divide into two bra nches: those whe re only two parties are
involved and those involving the rights of innocent third parties.


       One of the most basic rules of contract formation is that a person who signs a written
docum ent emb odying an agreem ent with an other party is bound by the terms of the signed
agreem ent. This is true even if the person signing the document did not read what he or she
signed. See Giles v. Allstate Ins. Co., 871 S.W.2d 154, 156 (Tenn . Ct. App. 1993). If,
however, the document does not embody an enforceable agreement because material terms
have been omitted, the courts must decide whether the missing terms can be supplied by
operation of law or whether the parties simply never made a binding agreem ent. At this
point, the focus of the inquiry devolves upon who supplies the additional terms, whether the
additional terms are e xpressly or impliedly authorized, and, if applicable, whether enforcing
the agreement as construed will affect the rights of third parties.


       For example, a person rightfully possessing a signed document containing blanks has
the implied authority to fill in these blanks in such a way “as was anticipated by [the signer].”
Holman v. Higgins, 134 Tenn. 387, 394, 183 S.W. 1008, 1010 (19 16); see also First Nat’l
Bank v. Hull, 204 N.W.2 d 90, 94 (N eb. 1973). B y filing in the b lanks in a do cumen t in this
way, the person deemed acting for the person who signed the document merely causes the
completed document “to speak in accord with its intended purpose and use.” Holman v.
Higgins, 134 Tenn. at 391, 183 S.W. at 10 09. In this circu mstance , filling in the blanks after
the document was signed completes a contract that the law will enforce.


       A slightly different rule applies when the party filling in the blanks is the other
contracting party. The fact that the document contains blanks do es not, by itself, in validate
the agre emen t, see Sidwell Oil & Gas Co. v. Loyd, 630 P.2d 1107, 1113 (Kan. 1981), even
if the agreement is a guarantee agreem ent. See, e.g., No rth Carolin a Nat’l Ba nk v. Corb ett,
156 S.E.2d 83 5, 837 (N .C. 1967). H oweve r, if the party fills in the blanks in an unauthorized
manner, the person who signed the document containing the blanks may avoid the
agreem ent. See Sidwell Oil & Gas v. Loyd, 630 P.2d at 1113. These insertions will not bind
the signer if the instrument, as completed, does not reflect the parties’ true agreem ent. See



(...continued)
accounts receivable of John Farmer and Associates. I do not believe he ever intended to be
personally liable . . ..”

                                              -5-
Strother v. Sh ain, 78 N.E.2 d 495, 49 6 (Mass . 1948); Kidder v. Greshman, 187 N.E. 42, 46
(Mass. 19 33); First Nat'l Bank v. Walker, 544 S.W.2d 7 78, 784 (Tex. A pp. 1976).


       Yet another set of principles come into p lay when a third pe rson's rights are involved.
When a person sig ns a contrac t containing blanks an d delivers it to a nother pers on with
express or implied authority to fill in the blanks, the courts will enforce the agreement as
completed when the rights of an innocent holder for value would be prejudiced if the
completed agreement w ere not enf orced. This principle applies even when the blanks have
not been completed in acco rdance with th e intentio ns or ins truction s of the s igner. See Greer
v. Parks, 2 N.W.2d 476, 478 (Mich. 19 42); Fanning v. C.I.T. Corp., 192 So. 41, 44 (Miss.
1939); J.R. Watkins Co. v. Keeney, 201 N.W. 833, 836 (N.D. 1924). 6 The cou rts invoke th is
principle when (1) the signer intended to execute a contract of so me sort, see First Nat'l Bank
v. Zeims, 61 N.W. 483, 484 (Iowa 1894), and (2) the signer gave the instrument to someone
other than the other contra cting party with either e xpress or im plied autho rity to com plete it.
See Farmers' & Merchants' Nat'l Bank v. Novich, 34 S.W. 914, 91 5 (Tex. 1896).


        This case calls for the application of the principles intended to protect the interests of
third parties. Mr. H all intended to contract w ith Advantage Funding to personally guarantee
his company’s factoring agreement. To that end, he executed his personal guarantee form
in blank and entrusted it to Mr. Ray, the com pany’s ch ief financial off icer, to complete and
transmit to Advantage Funding along with the other necessary paperwork.                      Mr. Ray
completed the docum ent and forw arded it to A dvantage Funding . Upon re ceipt of the
paperwork, Advantage Funding disbursed funds to Mid-Tennessee Manufacturing having no
basis to suspect that the factoring documents, including Mr. Hall’s persona l guarantee, were
not authorized or authentic.


        The record shows that Messrs. Hall and Ray agreed that factoring would be a part of
Mid-Tennessee Man ufactur ing’s m anage ment o f its acco unts rec eivable s. The record also
shows that Mr. H all explicitly agreed to personally guarantee the United Circuits receivable.
It does not show , however, that M r. Hall ever e ffectively lim ited his willing ness to personally
guarantee factoring agreements to the United Circuits receivable. Thus, although Mr. Ray
filled in the blank s with the name o f a custom er that Mr. H all did not ha ve in min d, Mr. H all
became legally bound on his personal guarantee once the signed document was tendered to
Advantage Funding and Advantage Funding disbursed funds relying on the authen ticity of
the signed documents. Any remedy M r. Hall may have lies against Mr. R ay. See generally
Walker v. Skipwith , 19 Tenn. (Meigs) 502, 508 (1838) (indicating that although the principal
is bound by the agent's act, the agent is bound to indemnify the principal for the loss
sustaine d).



  6
   This rule is an example of the maxim “ melior est conditio possidentis”or “whenever one of two
innocent parties must suffer by the acts of a third, the party who enabled the third person to occasion
the loss must bear it.” See Holman v. Higgins, 134 Tenn. at 394; 183 S.W. at 1010; Union Bank &
Trust Co. v. Fred W. Wolf Co., 114 Tenn. 255, 266, 86 S.W. 310, 312 (1905); see also Rose v.
Douglass, 34 P.1046, 1047 (Kan. 1893); Henry R. Gibson, Gibson's Suits in Chancery § 28 (William
H. Inman ed., 6th ed. 1982); R.H. Kersley, Broom's Legal Maxims 488 (10th ed. 1939).

                                                 -6-
                                                B.
          T HE B REACH OF THE W ARRANTIES IN THE F ACTORING A GREEMENT


       Advantage Fundin g also takes issue with the trial co urt’s conclu sion that M r. Hall
would still not be liable on his personal guarantee, even if it were enforceable against him,
because of the lack of evidence that the warranties in the factoring agreement were breached.
It asserts that these warranties were breached when Farmer declined to pay for the goods
because they were defective. We agree.


       A warra nty like the o ne involve d in this case is contra ctual. See Au v. Au, 626 P.2d
173, 180 (Haw. 1 981); Flaherty v. Weinberg, 492 A.2d 61 8, 627 (Md. 19 85); Boudreau v.
Baughman, 368 S.E.2d 849, 854 (N.C. 1988). It is an assurance by one party to a contract
of the existence of a fact upo n which the other co ntracting pa rty may rely . It is intended to
relieve the promissee of any duty to ascertain a fac t for itself, and it amo unts to a pro mise to
indemnify the promissee for any los s if the w arrante d fact pr oves u ntrue. See Lilly Indus.,
Inc. v. Health-Chem. Corp., 974 F. Supp. 702 , 711 (S.D. Ind. 1997 ); Walter Dawgie Ski
Corp. v. United States, 30 Fed. C l. 115, 126 (F ed. Cl. 199 3); Hoov er v. Nielson, 510 P.2d
760, 763 (Ariz. Ct. A pp. 1973 ); Sterling Capital Advisors, Inc. v. Herzog, 575 N.W.2d 121,
127 (Minn. C t. App. 1998).


       A contrac tual wa rranty m ay be e xpress or imp lied. See Ramage v. Forbes Int’l, Inc.,
987 F. Sup p. 810, 81 6 (C.D . Cal. 1997 ); Camino Real Mobile Home Park Partnership v.
Wolfe, 891 P.2d 1190, 11 96 (N.M . 1995); Lucas v. Canadian Valley Area Vocational
Technical Sch., 824 P.2d 1140, 1141 (O kla. Ct. App. 1992). It need not be stated in any
particular or technical langua ge. See Tara tus v. Smith , 263 S.E.2d 145, 14 6 (Ga. 1980);
County of Somerset v. Durling, 415 A.2d 371, 374 (N.J. Super. Ch. Div. 1980). A breach of
warranty occurs when the warranted fact or co ndition is in reality not as re presen ted. See
generally Dailey v. Holiday Distrib. Corp., 151 N.W.2d 477, 482 (Iowa 1967). A person
seeking to prove a breach of warranty has the dual burden of proving the pertinent terms of
the warra nty and the fact th at those terms w ere brea ched. See C ollier v. R ice, 356 S.E.2d
845, 84 7 (Va. 1 987).


       A nonrecourse factor, like Advantage Funding, takes the risk for collecting the
assigned receivable with no right back against the assignor as long as the assignor, if the
seller of the goods, has delivered the goods and the buyer has accepted them without dispute.
See Takisada Co. v. Ambassador Factors Corp., 556 N.Y.S.2d 788, 789 (N.Y . Sup. Ct.
1989). The facto ring agreem ent in this case reflects this arrangem ent in that it provides that
if Farmer did not pay the assigned accou nt, Mid-Tennessee Manufacturing would not be
obligated to repay Advantage Funding. Thus, the assignment of the account to Advantage
Funding generally shifted the risk of co llection from Mid-T ennessee Manu facturing to
Advantage Funding.




                                               -7-
       We use the term “generally” with regard to shifting the risk of collection because the
agreement also contains provisions designed to protect Advantage Funding in the event of
a disputed a ccount. Th ese protectio ns are in the fo rm of exp ress warra nties stating tha t
               Seller [Mid-Tennessee Manu facturing] rep resents and wa rrants
               that:
                       ....
               (c)     The Accou nt is currently due and owing to Seller and the
                       amount thereof is not and will not be in dispute or subject
                       to any defenses, and the payment of the Account is not
                       and will not be contingent upon the fulfillment of any
                       past, existing or future contract(s).

               (d)     There are no set-offs or counterclaims against the
                       Acco unt . . ..

Mr. Hall perso nally guara nteed these warranties . The perso nal guaran tee he signed states
that "[t]he undersigned here by personally guaran tee(s) and shall be jointly an d severally
liable fo r the wa rranties, r eprese ntations and co venan ts mad e by M id-Ten nessee . . .."


       The trial court appears to have based its conclusion that the warranties in the factoring
agreement were not breached on the invoice acknowledgment that Farmer executed, at
Advantage Funding’s request, on February 2, 1994. Farmer stated in the acknowledgment
that Mid-Tennessee Manufacturing’s work had been completed and accepted and that the
accompanying invoice was not subject to any defenses. Advantage Funding had the right to
rely on Farm er’s representations when they were made but was not bound by these
representations when Farmer later changed its mind.


       Based on this meager record, we can only conclude that at some point after Feb ruary
2, 1994, Farmer changed its position about accepting the goods and disputed its obligation
to pay the account. No matter how Farmer’ s claim is characterize d, once Fa rmer beg an to
dispute the account, Mid-Tennessee Manufacturing was in breach of its warranty that the
account “is not and will not be in dispute.” Once a dispute over the account arose, whether
meritorious or not, the warranty in the factoring agreement was breached, and the factor had
the right to seek d amage s from the assignor o f the acc ount. See Exportos Apparel Group,
Ltd. v. Chemical Bank, 593 F. Supp. 1253, 1255-56 (S.D.N.Y . 1984); Takisada Co. Ltd. v.
Ambassador Factors Corp., 556 N.Y.S.2d at 789-90.


       When we construe the factoring agreem ent and Mr. H all’s guarantee together, as we
must, see Oman Constr. Co. v. Tennessee Cent. Ry. Co., 212 Tenn. 556, 573, 370 S.W.2d
563, 570 (196 3); Hardeman County Bank v. Stallings, 917 S.W.2d 695, 698 (Tenn. Ct. App.
1995), the legal conclusion becomes inescapable. Mid-Tennessee Manufacturing's breach
of the "no-dispute" warranties as to the Farmer acc ount brought into play M r. Hall’s
guarantee of those warranties. Becau se those w arranties had been brea ched, M r. Hall
became personally liable, jointly and severally with Mid-Tennessee Manufacturing, under
the guarantee 's terms.     Accordingly, the trial court improperly dismissed Advantage
Funding's case against Mr. Hall personally.


                                                III.

                                                -8-
       We affirm the judgement against Mid-Tennessee Manufacturing and reverse the
dismissal of Advantage Fund ing’s cla ims ag ainst M r. Hall p ersona lly. The case is remanded
to the trial court with directions to enter a judgment for A dvantage Fun ding and against M r.
Hall personally for $21,37 7.87. Interest shall ru n from the date of the e ntry of this jud gment.
The costs are taxed against James T. Hall for which execution, if necessary, may issue.


                                             ____________________________
                                             WILLIAM C. KOCH, JR., JUDGE


CONCUR:


_________________________________
HENRY F. TODD, P.J., M.S.


_________________________________
BEN H. CANTRELL, JUDGE




                                               -9-
