                 IN THE COURT OF APPEALS OF TENNESSEE
                              AT JACKSON
                                   April 22, 2004 Session

           KARL P. BIRKHOLZ, ET UX. v. DAVIS N. HARDY, ET UX.

                 A Direct Appeal from the Circuit Court for Shelby County
             No. CT-005522-01     The Honorable John R. McCarroll,Jr., Judge



                   No. W2003-01539-COA-R3-CV - Filed August 11, 2004


        Appellants/buyers appeal from judgment entered for Appellees/sellers on promissory note
given for purchase of real estate. The note contained a condition precedent wherein the principal
would not be due until Appellants/buyers sold commercial property they owned. The trial court
imposed five years as a reasonable time for performance of the contract and awarded prejudgment
interest. Appellants/buyers appeal. We affirm in part, reverse in part, and remand.


Tenn. R. App. P. 3;Appeal as of Right; Judgment of the Affirmed in Part, Reversed in Part
                                     and Remanded

W. FRANK CRAWFORD , P.J., W.S., delivered the opinion of the court, in which ALAN E. HIGHERS,
J. and DAVID R. FARMER , J., joined.

William Ernest Norcross of Cordova; Minton P. Mayer of Memphis For Appellants, The Estate of
Davis N. Hardy and Clarise B. Hardy

Glen Reid, Jr. of Memphis For Appellees, Karl P. Birkholz and Molly B. Birkholz

                                           OPINION

        In November1998, Karl P. Birkholz and Molly B. Birkholz (the “Birkholzes,” “Plaintiffs,”
or “Appellees”) owned residential property at 9375 Forest Wind Drive in Germantown, Tennessee
(the “Forest Wind Property”). The Birkholzes had financed construction of a house at that location.
The Forest Wind Property was put on the market sometime in 1997, with a listing price of
$543,000.00.

         Davis N. Hardy and Clarise B. Hardy (the “Hardys,” “Defendants,” or “Appellants”) owned
a tract of land at 668 Goodman Road, Southaven, Desoto County, Mississippi (the “Goodman Road
Property”).1 This property was zoned commercial and had been on the market for sale for over one
(1) year by the summer of 1998.

        The Birkholzes and the Hardys entered into an agreement wherein the Hardys would
purchase the Forest Wind Property for $520,000.00. The Hardys agreed to pay $1,000.00 down,
with the remaining debt evidenced by a “promissory note” signed by the Hardys and the Birkholzes.
The Note reads as follows:

                  This Note of $519,000.00 (five Hundred Nineteen thousand and
                  No/100 Dollars), now from this day 11/24/98 being owed to Karl P.
                  & Milly B. Birkholz, from Davis N. And Clarise B. Hardy, in
                  exchange for relese of property known as 9375 forest Wind Drive,
                  Lot 31 - 8th addition, final plat, Forest Hill Irene Est. P. 148-153,
                  URP1-355A - Lot 28, given by Karl P. And Molly b. Birkholz giving
                  clear and free of debt, a warranty deed to Davis N. And Clarise B.
                  Hardy to have and to hold with no attachment against property known
                  as 9375 Forest Wind Drive, Collierville, Tennessee.

                  During the life of this Note being held as apart [sic] of 668 Goodman
                  Road, Southaven, MS full ownership being held by Davis N. and
                  Clarise B. Hardy in full control of said property. They will keep
                  marketing property along with other brokers for a sale and closing.
                  At such time this Note will be paid in full with no other amount
                  added to the $519,000.00 during the life of said Note.

                  This Note will not be sold to another without the written consent of
                  Davis N. and Clarise B. Hardy and may never be increased from the
                  original price of $519,000.00. The closing attorney of 668 Goodman
                  Road at that time will withhold Note and write a check to Karl P. and
                  Molly B. Birkholz in the amount of $519,000.00.

                  This Note of $519,000.00 will be filed along with the deed and legal
                  description of the property known as 668 goodman Road, Southaven,
                  Mississippi in the Hernando Court House till such property named
                  above is sold and note cleared.




         1
          Davis N. Hardy died on September 14, 2003. An estate was opened on November 16, 2003 in the Probate
Court of Shelby County. Clarise B. Hardy was appointed the Executrix of the Last W ill and Testament of Davis N.
Hardy. On November 19, 2003, Mrs. Davis filed a “Notice of the Opening of the Estate of Davis Hardy,” with the trial
court. By Order of October 14, 2002, the Estate of Davis N. Hardy was substituted as an Appellant for Davis N. Hardy.

                                                        -2-
               Legal Description: 668 goodman road, Southaven, MS. SE Quarter,
               Section 30 Township 1, Range 7, North Side of Goodman Road,
               Desoto County, Southaven, Mississippi.

       On November 24, 1998, the Birkholzes transferred titled to the Forest Wind Property to the
Hardys, and the Hardys signed and delivered the above-described note. Thereafter, the Hardys took
possession of the Forest Wind Property. On or about December 24, 1998, the Hardys borrowed
$340,000.00 from Bancorp South Bank and secured the loan with the Forest Wind Property.

        The Goodman Road Property did not sell and the Hardys made no payment on the Forest
Wind Property. On September 6, 2001, the Birkholzes filed a Complaint against the Hardys,
claiming that the Hardys had failed to “pay the balance due on the Primissory Note,” and had “failed
or refused to perform [the] obligations imposed on them by the Promissory Note in good faith.” The
Hardys filed their “Answer and Countercomplaint” on December 4, 2001, which reads, in pertinent
part, as follows:

               9. Defendants deny that they have refused to pay the balance due on
               the Promissory Note and deny that they have failed and refused to
               perform the obligations imposed on them by the Promissory Note in
               good faith, and would show this Honorable Court that said
               Promissory Note is not due and owing and will not be due and owing
               until the Defendants have sold the property at 668 Goodman Road,
               Southaven, Mississippi as provided in said Promissory Note.

               *                                   *                            *

               11. The Defendants admit that they have had the use and benefit of
               the residential property since November, 1998 and would show to the
               Court that they had the absolute right to do so under the terms of the
               agreement entered into by the parties. The Defendants further admit
               that they have not made any payment to the Plaintiffs for the use of
               the residential property and the Defendants would show unto this
               Honorable Court that they are not required or obligated to make any
               payment to the Plaintiffs until the Defendants’ property at 668
               Goodman Road, Southaven, Mississippi is sold pursuant to the
               Promissory Note.

The Counterclaim portion was amended on March 6, 2003 and reads, in relevant part, as
follows:

                                   COUNTERCOMPLAINT




                                                -3-
                     COME NOW the Counter-Plaintiffs, Davis N. Hardy and
              Clarise B. Hardy and...would show unto this Honorable Court as
              follows:

              *                                      *                         *

              3. That on or about September 9, 1998, the Counter-Defendants
              entered into an agreement to sell the real property known as and
              located at 9375 Forest Wind Drive, Collierville, Tennessee to the
              Counter-Plaintiffs. That said agreement styled Offer to Purchase Real
              Estate and its two page attachment provided for the Counter-
              Defendants to complete construction of the home and to make certain
              improvements and construction work thereon as set out in the Offer
              to Purchase Real Estate and its two page attachment....

              4. That in consideration for said agreement and the work to be
              performed by the Counter-Defendants, the Counter-Plaintiffs agreed
              to purchase the said residential property and executed a Promissory
              Note for the purchase of same on November 24, 1998....

              5. That the said Counter-Defendants breached the said agreement...by
              refusing and failing to carry out and perform the work, labor and
              services....

              6. That as a result of the Counter-Defendants’ breach of said
              agreement, the Counter-Plaintiffs have been forced to employ other
              builders and contractors and will be forced to employ additional
              builders and other contractors to complete the work on said
              residential property thereby incurring expenses and damages due to
              the Counter-Defendants’ breach....

                      WHEREFORE, PREMISES CONSIDERED, the Counter-
              Plaintiffs pray for a money judgment against the Counter-Defendants
              in the amount of $150,000.00 and costs of the cause.

        On October 23, 2002, the Birkholzes filed a Motion for Summary Judgment, along with
the Affidavit of Karl P. Birkholz in support thereof. On March 13, 2003, the Birkholzes filed a
“Reply to Amended Counter Complaint.”

      A non-jury trial was held on April 29, 2003 and the trial court entered its Judgment on
May 20, 2003. The Judgment reads, in relevant part, as follows:




                                               -4-
                 1. Plaintiffs, Karl P. Birkholz and Molly B. Birkholz, are granted
                 judgment against the Defendants, Davis N. Hardy and Clarise B.
                 Hardy, in the principal amount of $513,361.00, effective November
                 24, 2003, representing the principal amount of the Promissory Note,
                 less credit and offset for Defendants’ counterclaims;2

                 2. Plaintiffs, Karl P. Birkholz and Molly B. Birkholz, are granted
                 pre-judgment interest against Defendants, in the amount of
                 $88,474.50, continuing at the daily rate of $55.89 until the judgment
                 in the principal amount is paid, or November 24, 2003 when the
                 judgment in the principal amount becomes effective.

                 3. An equitable lien and/or constructive trust is imposed upon the
                 real property of Defendants, Davis N. Hardy and Clarise B. Hardy, on
                 Goodman Road in DeSoto County, Mississippi, 668 Goodman Road,
                 for the benefit of Plaintiffs, Karl P. Birkholz and Molly B. Birkholz,
                 until the judgment for principal and pre-judgment interest set forth in
                 paragraphs 1 and 2 above shall be paid in full, provided that,
                 Plaintiffs shall not execute on the equitable lien and/or constructive
                 trust until on or after November 24, 2003.

The trial court’s findings from the bench were incorporated by reference into the Judgment and
read, in pertinent part, as follows:

                          The real hard question is–for me [the trial court] what is a
                 reasonable period of time that should be given to the Hardys to pay
                 the note. I think–and my legal premise on which I’m going to base
                 this decision is that when I’m faced with a contract like this that has
                 an open ended situation, a condition precedent, I think I do have to
                 imply some reasonable period of time in which it’s going to be paid.
                 It can’t go on forever.

                 *                                        *                               *

                 ...Five years is a long time to be sitting in a house and not paying any
                 kind of money to the folks that sold it to you. But the market, you
                 know, may be up and down in real estate.... But I think five years is
                 the outside limit that I could impose.




        2
          Specifically, the trial court allowed an offset against the $519,000.00 principal amount for carpeting and
landscaping and/or appliances ($5,500) plus $139.00 for a garbage disposal.

                                                        -5-
        The Hardys appeal from the Judgment and raise eight (8) issues for review as stated in
their brief:

               1. Whether the Trial Court erred in failing to enforce the November
               24, 1998 promissory note and contracts as written when the terms
               thereof were plain and unambiguous and provided that the $519,000
               principal amount thereof was due and payable upon the sale of a
               commercial tract of land owned by the Hardys and located on
               Goodman Road, Southaven, Desoto County, Mississippi (the
               “Mississippi Property”)?

               2. Whether the Trial Court erred when it found that Clarise B. Hardy
               and the late Davis N. Hardy (the “Hardys”) acted in good faith in their
               efforts to sell the Mississippi Property, but the Court, nevertheless,
               granted, by a judgment filed on May 20, 2003 with an effective date
               as of November 24, 2003, a judgment against the Hardys for
               $513,361.00 (the “$513,361 November 24, 2003 Judgment), which
               represented the principal amount of $519,000.00 owed pursuant to the
               terms of the November 24, 1998 Promissory Note less the offsets
               allowed by the Trial Court, although there was no requirement that
               the Mississippi Property be sold on or before November 24, 2003?

               3. Whether the Trial Court erred in concluding that a five year period
               was a reasonable period in which the Hardys had to sell the
               Mississippi Property when there was no proof presented by Karl P.
               Birkholz and Molly B. Birkholz (the “Birkholzes”) as to what was a
               reasonable time period in which to sell commercial property in
               Southaven, Desoto County, Mississippi?

               4. Whether the Trial Court erred in awarding the Birkholzes
               prejudgment interest at the rate of six (6%) percent per annum on
               $340,000 from December 24, 1998 until November 24, 2003
               (“Prejudgment Interest”), the effective date of the $513,361
               November 24, 2003 Judgment, although the Court ruled that the
               Birkholzes were not entitled to a judgment and the Hardys owed no
               payments on the Promissory Note, pursuant to the Trial Court’s
               rulings, until November 24, 2003, and the Hardys legally were
               entitled to all the benefits of fee simple ownership of the 9375 Forest
               Wind Drive, Collierville, Tennessee house and lot (the “Forest Wind
               Property”), including the right to live in and mortgage the Forest
               Wind Property, from November 24, 1998?




                                                -6-
       5. Whether the Trial Court erred in awarding Prejudgment Interest
       when the November 24, 1998 Promissory Note bore no interest on the
       $519,000 principal due thereunder and specifically provided that the
       note would be payable upon the sale of the Mississippi Property “with
       no other amount added to the $519,000 during the life of the said
       note” and the Court found that the November 24, 1998 Promissory
       Note was not due until November 24, 2003.

       6. Whether the Court erred in awarding Prejudgment Interest on the
       grounds that the Hardys acted in bad faith when the Hardys placed,
       on December 24, 1998, the $340,000 mortgage on the Forest Wind
       Property (the “340,000 Mortgage”) when the Birkholzes had not
       alleged in the Complaint that the Hardys acted in bad faith by placing
       the $340,000 Mortgage and the matter had not been brought before
       the Court by pleadings or other means and the Hardys afforded the
       opportunity to defend the issue at trial?

       7. Whether the Trial Court erred in awarding Prejudgment Interest
       because the Hardys place the $340,000 Mortgage on the Forest Wind
       Property when the Hardys were under no legal duty on December 24,
       1998 to pay any portion of the $519,000 November 24, 1998
       Promissory Note and when the Birkholzes did not allege that the
       Hardys breached, on December 24, 1998, any legal duties owed by
       the Hardys to the Birkholzes?

       8. Whether the Trial Court erred in failing to grant the Hardys a
       Judgment pursuant to the Hardys amended countercomplaint but
       instead offset against the $519,000 owed, pursuant to the terms of the
       November 24, 1998 Promissory Note, certain amounts the Trial Court
       found were owed the Hardys?

The issues are rephrased as follows:

       1. Whether the obligation of the Hardys to sell the Goodman Road
       Property was governed by a reasonable time standard.

       2. Whether the trial court erred in finding, as a matter of fact, that
       five years is a reasonable time to accomplish the sale of the Goodman
       Road Property.

       3. Whether the trial court erred in awarding prejudgment interest.




                                        -7-
               4. Whether the trial court erred in its award to the Hardys on the
               counter-claim.

       We will consider the first two issues together:

       Tennessee recognizes an implied duty of good faith and fair dealing in the performance
and enforcement of every contract, ACG, Inc. v. Southeast Elevator, Inc., 912 S.W.2d 163
(Tenn. Ct. App. 1995). A conditional contract is one where the obligation to perform is
dependent upon the happening of some contingency or condition (often referred to as a condition
precedent), which is expressly stated in the contract. Stovall v. Dattel, 619 S.W.2d 125 (Tenn.
Ct. App. 1981).

        The Note at issue in this case undisputedly contains a condition precedent, to wit: the
Hardys’ obligation to pay the $519,000.00 is conditioned upon their selling the Goodman Road
Property. What the Note lacks, however, is a time period in which the condition precedent must
be performed. The general rule in Tennessee is that, “where no provision is made in the contract
for performance, a reasonable time is implied.” Minor v. Minor, 863 S.W.2d 51, 55 (Tenn. Ct.
App. 1993. However, the question of whether this general reasonable time standard applies to
contracts, such as the one at issue here, which contain conditional restrictions is not absolutely
clear in Tennessee. As addressed by Appellant, there are three lines of thought on this issue: (1)
in cases where the performance contingency is wholly or partially within the control of the
obligor, the obligor either must bring about the event or perform or pay within a reasonable time.
See C.J. Hogan, Inc. v. Atlantic Corp., 332 Mass. 322, 124 N.E.2d 905 (1955); Louise B.
Taylor’s Guardian v. Taylor, 117 Vt. 399, 93 A.2d 102 (1952); Duncan Box & Lumber Co. v.
Sargeant, 126 W. Va. 1, 27 S.E.2d 68 (W.Va. 1943); (2) when performance is conditional, and
the contingency does not happen, payment must be made within a reasonable time. See Hamlin
v. Steward, 622 N.E.2d 535 (Ind.App. 1993); and (3) if the specified performance contingency is
within the obligor or promisor’s control, the obligor or promisor has an implied obligation to
exercise reasonable diligence to bring about the contingency; in the absence of the exercise of
reasonable diligence, the obligor or promisor will be required to perform the promise or
obligation if the specified contingency has not occurred. See Reid v. Pyle, 51 P.3d 1060 (Colo.
App. 2002).

        Appellants urge this Court to follow the latter line of reasoning and to find that, since the
trial court found that the Hardys had exercised reasonable diligence in trying to sell the Goodman
Road Property, the reasonable time standard should not be imposed. We decline.

       Tennessee courts have long imposed the reasonable time standard in all types of
contracts. For example, in Murdock v. Mayor and Aldermen of Memphis, 47 Tenn. 483 (1870),
our Supreme Court held that the conveyance of land to the City of Memphis for a naval yard
imposed a condition for vesting which was satisfied when the property was accepted and the
naval yard was established thereon. The opinion states: “No time being limited for the
performance of this condition, it must be performed within a reasonable time. 1 Washb. Real


                                                 -8-
Prop., 449.”     In Union Stockyards Co. v Nashville Packing Co., 140 F. 701 (C.C.A. 6th 1905),
a Davidson County Chancery Court case removed to federal court and decided by the Sixth
Circuit Court of Appeals, plaintiff conveyed land to defendant for construction of a packing
house which was built but later abandoned. The appellate court held that the condition was a
condition precedent for the vesting of title, but not a condition subsequent for which a reversion
might be claimed, and was a covenant for breach of which damages might be claimed in a
separate, subsequent suit. The opinion contains the following discussion on the validity of
restrictions without time limit:
                ... Another feature of the transaction which seems to us of much
                significance is that no time was fixed during which the obligation to
                maintain and operate the packing house should endure. It seems to be
                hardly reasonable to suppose that the parties could have understood
                that this covenant should continue to operate perpetually. Indeed, one
                can hardly withstand the conviction that the covenant was expected
                by the parties to have some limitation in respect of time, and, if so, it
                might be a question whether any other limitation is more natural or
                probable than that it should abide such contingencies of the business
                as could not in the natural course of things be avoided, as, for
                instance, could not, with prudent management, be carried on without
                loss. Of course, we are not now undertaking to lay down a particular
                definition of the contingencies which might terminate the obligation.
                It is enough for the present purpose of construing the covenant to say
                that it seems unreasonable to think that the parties intended it to be
                interminable in its operation....

               ... A similar question with respect to the duration of the covenant,
               when there was no limitation in respect of time, has been presented
               in several reported cases, and the view which has been generally
               taken is that, when the time is not limited by the language employed,
               it should be implied that some limitation was intended and that it was
               such as the nature of the case would indicate as reasonable. Among
               other cases are Jones v. Newport News & M. V. Co., 65 Fed. 736, 13
               C.C.A. 95, 31 U.S.App. 92, decided by this court; Mead v. Ballard,
               7 Wall. 290, 74 U.S. 290, 19 L.Ed. 190; Texas & Pacific Ry. Co. v.
               Marshall, 136 U.S. 393, 10 Sup.Ct. 846, 34 L.Ed. 385; Willson v.
               Winchester & P.R. Co., 99 Fed. 642, 41 C.C.A. 215; Murdock v.
               Mayor, etc., of Memphis, 7 Cold. (Tenn.) 483. In this latter case the
               court expressed the opinion that the question was to be resolved upon
               the analogy of the general rule that, where no time is fixed,
               reasonable time is implied.

140 F. at 705-706.



                                                -9-
       Likewise, in option contracts, our Supreme Court has found that the reasonable time
standard applies, to wit:

               Appellants present for review the issue of whether the optionee
               complied fully with the terms of the option, a condition precedent to
               the granting of specific performance, and insist that because the
               option was required to be exercised "within the prescribed time" the
               Chancellor erred in finding that a reasonable time would be allowed.
               We agree with the reasoned findings of the Chancellor that the
               contract failed to specify the time within which the notice of exercise
               was to be given, in which event the settled law implies a reasonable
               time. Gulf Refining Company v. Belz, 315 SW2d 403 (Tenn.1958).

        There is nothing to indicate that the general reasonable time standard should not be
applied to all contracts. In Minor v. Minor, 863 S.W.2d 51, 55 (Tenn. Ct. App. 1993), this Court
stated that principle as follows:

               Where no provision is made in the contract for performance, a
               reasonable time is implied. Completion of a contract within a
               reasonable time is sufficient if no time is stipulated. Where the parties
               have not clearly expressed the duration of the contract, or where the
               duration of the contract is indefinite, the courts will imply that they
               intended performance to continue for a reasonable time. 17A
               Am.Jur.2d Contracts § 479 (1991).

Based upon the foregoing, we find, as a matter of law, that the general reasonable time standard
is applicable to those contracts containing conditions precedent, regardless of whether the
performance contingency is wholly or partially within the control of the obligor.

       Concerning what constitutes a “reasonable time,” the Minor Court went on to explain:

               What constitutes a reasonable time within which an act is to be
               performed where a contract is silent upon the subject depends on the
               subject matter of the contract, the situation of the parties, their
               intention in what they contemplated at the time the contract was
               made, and the circumstances attending the performance.

Id. (quoting from 17A Am.Jur.2d Contracts §479 (1991)).

       In short, the determination of what constitutes a reasonable time for the performance of a
contract falls to the finder of fact. Since this case was tried by the court sitting without a jury, we
review the case de novo upon the record with a presumption of correctness of the findings of fact



                                                 -10-
by the trial court. Unless the evidence preponderates against the findings, we must affirm, absent
error of law. See Tenn. R. App. P. 13(d).

        In Johnson v. Welch, No. M2002-00790-COA-R3-CV, 2004 WL 239756 (Tenn. Ct.
App. November 9, 2004), the Middle Section of this Court considered the alleged breach of three
contracts. The Court noted that the court would not make a new contract for the parties, see
Petty v. Sloan, 197 Tenn. 630, 640, 277 S.W.2d 355, 359 (1955), but said:

               However, courts may and will incorporate a reasonableness
               requirement into any contract. Moore v. Moore, 603 S.W.2d 736,
               739 (Tenn.Ct.App.1980) (holding that "a qualifying word which
               may be read into every contract is the word 'reasonable,' or its
               equivalent 'reasonably.' "); see also Hurley v. Tenn. Farmers Mut.
               Ins. Co., 922 S.W.2d 887, 892 (Tenn.Ct.App.1995) (holding that
               insurance company's demand for production of financial records
               and assertion that insured's failure to produce was a breach of the
               cooperation clause of the insurance contract could be considered
               unreasonable). In fact, this court has stated that the qualifying word
               "reasonable" must be read into every contract. Minor v. Minor,
               863 S.W.2d 51, 54 (Tenn.Ct.App.1993); see also Hathaway v.
               Hathaway, 98 S.W.3d 675, 679 (Tenn.Ct.App.2002)
               (reasonableness must be read into agreement). In Minor, because
               the contract did not include a time for performance, a reasonable
               time was implied, based upon Moore and upon the well-settled rule
               that missing contract terms may be implied. Id. In McClain v.
               Kimbrough Constr. Co., 806 S.W.2d 194, 198
               (Tenn.Ct.App.1991), this court held that "the extent of contractual
               obligations should be tempered by a 'reasonableness' standard,"
               citing Moore.

               Further, in construing contracts, courts must look at the language
               and the parties' intent and impose a construction that is fair and
               reasonable. ACG, Inc. v. Southeast Elevator, Inc. 912 S.W.2d 163
               (Tenn.Ct.App.1995). Reasonableness must be viewed in light of
               the parties' situation at the time of the making of the agreement as
               well as at the time performance becomes due. Hathaway, 98
               S.W.3d at 680-81. The language of a contract should be construed
               with reference to the situation of the parties, the business to which
               the contract relates, the subject matter of the agreement, the
               circumstances surrounding the transaction, and the construction
               placed on the contract by the parties in carrying out its terms.
               Penske Truck Leasing Co., L.P. v. Huddleston, 795 S.W.2d 669,
               671 (Tenn.1990); International Flight Center v. City of


                                               -11-
               Murfreesboro, 45 S.W.3d 565, 570 (Tenn.Ct.App.2001).
               Similarly, when a court is called upon to supply a missing term
               with a reasonable one, it must consider the subject matter of the
               contract, the situation of the parties, their intention in what they
               contemplated at the time the contract was made, and the
               circumstances attending the performance. Minor, 863 S.W.2d at
               54. The course of conduct of the parties is strong evidence of the
               parties' original intent. Pinson & Associates v. Kreal, 800 S.W .2d
               486, 487 (Tenn.Ct.App.1990).

Id. at *7-8.

        In the instant case, the record reflects that the Birkholzes transferred their property, worth
approximately one-half million dollars, to the Hardys by payment of a promissory note without
any security. The Birkholzes testified that they were informed by the Hardys that the sale of the
Goodman Road Property was imminent and they operated under that assumption. The trial court
had before it the evidence concerning the circumstance and nature of the transaction between the
parties and, taking all of those facts into consideration quite generously for the Hardys,
determined that five years was a reasonable time for the performance of their obligation to sell
the Goodman Road Property. The evidence does not preponderate against this finding by the
trial court.

       We will now consider Issue Number Four: Whether the trial court erred in its award to
the Hardys on the counter-claim.

        In terms of the amount of the Judgment, we find that the evidence does not preponderate
against the trial court’s finding that the $519,000.00 principal amount should be offset by
$5,639.00, which represents a carpet allowance, a landscaping and/or appliance allowance, and a
garbage disposal. In his testimony, Mr. Birkholz admitted that this amount was due the Hardys.
However, the Hardys urge that they are entitled to a judgment for the full $150,000.00 claimed in
their Counter-Complaint. We have reviewed the entire record, and we find that the evidence
does not support the Hardys’ claim. Consequently, we find that the trial court did not err in
denying the full $150,000.00 claim since the evidence only supports an offset of $5,639.00.

       Finally, we will consider Issue Number Three: Whether the trial court erred in awarding
prejudgment interest.

        Prejudgment interest is authorized by T.C.A. § 47-14-123 (2001) and is discretionary
with the court. B.F. Myers & Son of Goodlettsville, Inc. v. Evans, 612 S.W.2d 912 (Tenn. Ct.
App.1980). In Myint v. Allstate Ins. Co., 970 S.W.2d 920 (Tenn.1998), our Supreme Court
stated:




                                                 -12-
               An award of prejudgment interest is within the sound discretion of
               the trial court and the decision will not be disturbed by an appellate
               court unless the record reveals a manifest and palpable abuse of
               discretion. Spencer v. A-1 Crane Service, Inc., 880 S.W.2d 938,
               944 (Tenn.1994); Otis v. Cambridge Mut. Fire Ins. Co., 850
               S.W.2d 439, 446 (Tenn.1992). This standard of review clearly
               vests the trial court with considerable deference in the prejudgment
               interest decision. Generally stated, the abuse of discretion standard
               does not authorize an appellate court to merely substitute its
               judgment for that of the trial court. Thus, in cases where the
               evidence supports the trial court's decision, no abuse of discretion
               is found. See State v. Grear, 568 S.W.2d 285, 286 (Tenn.1978)
               (applying abuse of discretion standard to trial court's decision to
               deny request for suspended sentence), cert. denied, 439 U.S. 1077,
               99 S.Ct. 854, 59 L.Ed.2d 45 (1979).

                       Several principles guide trial courts in exercising their
               discretion to award or deny prejudgment interest. Foremost are the
               principles of equity. T.C.A. § 47-14-123. Simply stated, the court
               must decide whether the award of prejudgment interest is fair,
               given the particular circumstances of the case. In reaching an
               equitable decision, a court must keep in mind that the purpose of
               awarding the interest is to fully compensate a plaintiff for the loss
               of the use of funds to which he or she was legally entitled, not to
               penalize a defendant for wrongdoing. Mitchell v. Mitchell,
               876S.W.2d 830, 832 (Tenn.1994); Otis, 850 S.W.2d at 446.

Id. at 927.

         The Supreme Court also noted that, in addition to the principles of equity, two other
criteria have emerged from Tennessee common law. The first criterion provides that prejudgment
interest is allowed when the amount of the obligation is certain, or can be ascertained by a proper
accounting, and the amount is not disputed on reasonable grounds. Mitchell v. Mitchell, 876
S.W.2d 830, 832 (Tenn. 1994). The second provides that interest is allowed when the existence
of the obligation itself is not disputed on reasonable grounds. Id. (citing Textile Workers Union
v. Brookside Mills, Inc., 205 Tenn. 394, 402, 326 S.W.2d 671, 675 (1959)).

       In the instant case, the trial court awarded the Birkholzes prejudgment interest on
$340,000.00 (the amount of the mortgage taken out by the Hardys on or about December 24,
1998). Prejudgment interest was assessed at six percent (6%) from December 24, 1998.
Concerning its decision to grant prejudgment interest on the $340,000, the trial court made the
following, relevant, statements:



                                               -13-
                       I [the trial court] think taking out the mortgage against the
               property a short period of time afterwards is clearly an act of bad
               faith. You’ve got a house that you say you’re going to pay something
               for and you get the benefit of 340,000, I just– I can’t accept that.

               *                                    *                          *

               ...I think there’s $340,000 that never should have been taken out of
               the property....

      The purpose of prejudgment interest is not to punish a party. In Alexander v. Inman, 974
S.W.2d 689 (Tenn. 1998), our Supreme Court stated:

               Pursuant to Tenn. Code Ann. §47-14-123, prejudgment interest may
               be awarded in accordance with the principles of equity. In reaching
               an equitable decision, a court must keep in mind that the purpose of
               prejudgment interest is to fully compensate a plaintiff for the loss
               of the use of funds, not to penalize a defendant....

Id. (footnotes omitted) (emphasis added).

        From our review of the trial court’s comments, it appears that the decision to award
prejudgment interest on the $340,000.00 could be punishment against the Hardys for their “bad
faith” in taking out the mortgage on the Forest Wind Property. That being said, we do not find
that prejudgment interest is not warranted in this case. Based upon the authority outlined supra,
we find that the Birkholzes are entitled to prejudgment interest on the $513,361.00 judgment, at a
rate of six percent (6%), to run from the September 6, 2001 date of the filing of this suit. We
remand for calculation of the prejudgment interest amount.

        For the foregoing reasons, we affirm the Order of the trial court to the extent that it grants
the Birkholzes a $513,361.00 judgment against the Hardys, effective November 24, 2003. We
reverse the Order to the extent that it grants prejudgment interest of $88,474.50 on the
$340,000.00 mortgage. We find that the Birkholzes are entitled to prejudgment interest on the
$513,361.00 judgment, at a rate of six percent (6%), to run from the September 6, 2001 date of
filing suit to the effective date of the judgment. We remand for calculation of prejudgment
interest pursuant to this opinion. Costs of this appeal are assessed against the Appellants, Clarise
B. Hardy and the Estate of Davis N. Hardy, and their sureties.




                                       __________________________________________
                                       W. FRANK CRAWFORD, PRESIDING JUDGE, W.S.


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