                 IN THE COURT OF APPEALS OF TENNESSEE
                             AT NASHVILLE
                                    August 7, 2002 Session

TEXTRON FINANCIAL CORPORATION v. ELAINE E. POWELL, ET AL.

                  Direct Appeal from the Circuit Court for Davidson County
                           No. 98C-2652    Walter C. Kurtz, Judge



                    No. M2001-02588-COA-R3-CV - Filed October 8, 2002


This dispute arises out of a personal guaranty executed by the defendants securing a loan. Following
a trial by jury, the court below awarded the plaintiff $68,330 in damages plus attorney’s fees and
costs. On appeal, the defendants contend that the court below erred in applying the parol evidence
rule to evidence which would show mistake and in not permitting the defendants to amend their
answer. We reverse the judgment entered below and remand for a new trial.

   Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Reversed; and
                                       Remanded

DAVID R. FARMER , J., delivered the opinion of the court, in which W. FRANK CRAWFORD , P.J., W.S.,
and HOLLY K. LILLARD, J., joined.

Stephen C. Knight, Nashville, Tennessee, for the appellants, Elaine E. Powell and John E. Powell.

Melissa Blackburn, Nashville, Tennessee, for the appellee, Textron Financial Corporation.

                                             OPINION

        In 1995, Textron Financial Corp. (Textron), entered into an agreement with SBT, Inc. (SBT),
to consolidate financing of several pieces of trucking equipment. The equipment was in the
possession of Royal Transport (Royal), which began making the loan payments to Textron. In 1997,
Trailer Lease purchased the equipment from Royal, and Textron and Trailer Lease (Elaine Powell,
president) entered into a security agreement with Textron securing a $183,993.73 installment note.
Collateral securing the note included several vehicles, a tractor and several trailers. John and Elaine
Powell (the Powells) executed personal guarantees on the note. The 1997 transaction included a
disbursement by Textron to itself of $156,427.54 of the $183,993.73 note. The additional $27,993
represents interest on the 1997 note collected in advance. The Powells paid $104,000 on the note
and stopped making payments after June of 1998. In September of 1998, Textron filed a complaint
against the Powells to enforce the guarantee agreement, alleging Trailer Lease had defaulted on the
1997 note. Textron prayed for damages of $72,854,40.
        The Powells contend that the note had been paid in full. They submit that the 1997
agreement with Textron was to refinance the equipment for the amount due on the 1995 note, and
that Textron represented that the amount outstanding on the 1995 note was $156,427.54. They
further contend that the distribution of this amount from proceeds of the 1997 note by Textron to
itself was intended to pay off the 1995 note. The Powells allege that Textron mistakenly represented
the amount due on the 1995 note, and that the actual amount due was $80,000. They accordingly
argue that because the outstanding amount on the1995 note was only $80,000, the remaining sums
paid by Trailer Lease should have been applied against the principal under the terms of the loan
agreement. The disbursement sheet, which was signed by the Powells, does not indicate the amount
due on the 1995 note or for what purpose the $156,427.54 disbursement was made. Textron does
not dispute that proceeds from the 1997 note included amounts to “close out” the 1995 note, but
submits that the disbursement sheet is silent as to how the sums were to be disbursed.

        The trial court refused to admit evidence of how much was due on the 1995 note or of how
Textron disbursed the $156,427.54 to itself. The court concluded that the written agreement between
Textron and the Powells was unambiguous on its face, and that the parol evidence rule therefore
operated to exclude extrinsic evidence to vary the contract. Regarding the possibility of mistake, the
court stated,

       [o]f course plaintiff contends that there was no mistake. Therefore, evidence
       showing that the refinanced amount was ‘wrong’ was not admissible to impeach the
       signed documents, despite Mr. and Ms. Powell[s’] insistence. . . . There is no proof
       here that the plaintiff or its agents entered into the contract based upon any mistake.

The court also declined to grant Powells’ oral motion, made on the morning of trial, to amend their
answer to include the affirmative defenses of misrepresentation and fraudulent inducement.

        The cause was heard by a jury in June of 2001. The jury awarded Textron damages of
$68,330, reducing the amount demanded by Textron based upon proof that Textron had failed to
entirely mitigate its damages. Textron was also awarded $22,000 in attorney’s fees and costs. The
Powells’ motion for a new trial, and Textron’s motion for judgment in accordance with its motion
for directed verdict or, in the alternative, an additur, were denied. Appeal to this Court ensued.

                                               Issues

       The issues raised by the Powells for our review, as we perceive them are:

       I.       Whether the trial court erred in its application of the parol evidence rule
       when it excluded evidence regarding the amount due on the 1995 note and
       evidence of how Textron disbursed $156,427.54 of proceeds from the 1997 note
       to itself.




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       II.    Whether the trial court erred in denying Powells’ request to amend their
       answer to include the defense of fraudulent inducement.

       Textron raises the additional issue of whether the trial court erred in denying its amended
motion for judgment in accordance with a motion for a directed verdict or, in the alternative, for
an additur.

                                       Standard of Review

        The issues presented for our review in this case are issues of law. Our review of the trial
court’s conclusions of law in a jury trial is de novo upon the record, with no presumption of
correctness. Tenn. R. App. P. 13(d); Campbell v. Florida Steel Corp., 919 S.W.2d 26, 28 (Tenn.
1996).

                    Denial of the Powells’ Motion to Amend Their Answer

       We first address the issue of whether the trial court erred when it refused the Powells’
motion to amend their answer to include a defense of fraudulent inducement. The Tennessee
Rules of Civil Procedure provide:

              A party may amend the party’s pleadings once as a matter of course at any
       time before a responsive pleading is served or, if the pleading is one to which no
       responsive pleading is permitted and the action has not been set for trial, the party
       may so amend it at any time within 15 days after it is served. Otherwise a party
       may amend the party’s pleadings only by written consent of the adverse party or
       by leave of the court; and leave shall be freely given when justice so requires.

Tenn. R. Civ. P. 15.01

         This rule mandates that motions to amend shall be liberally granted unless the
amendment would result in an injustice to the opposing party or is irrelevant to any claim or
defense. Walden v. Wylie, 645 S.W.2d 247, 250 (Tenn. Ct. App. 1982). Factors which would
justify a refusal by the trial court to permit an amendment include bad faith; an undue delay in
filing; lack of notice or undue prejudice to the opposing party; repeated failure to cure
deficiencies by previous amendments; futility of the amendment. Id. Rule 15.01 is premised on
the fact that pleadings function primarily as a notice mechanism. Id. Accordingly, if leave to
amend is granted close to the trial date, the court must grant a continuance in order to allow the
opposing party sufficient time to address the new issue. Id.

       In the present case, the Powells sought leave to amend their answer to include a defense
of mistake, misrepresentation or fraudulent inducement on the morning of trial. The trial court
granted the motion regarding mistake, but denied leave to amend to include fraud or



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misrepresentation.1 The court observed that if leave were granted to add fraud and
misrepresentation, the lawsuit would be so broadened as to necessitate a trial continuance.
Counsel for the Powells stated, “I don’t think anybody wants a continuance. We want to get on
with this thing. . . . If [your Honor is] telling me that you would only grant [the motion to
amend] along with a continuance of this trial, then I will withdraw it.”

         We agree with the court below that had leave to amend been granted on the morning of
trial to permit the Powells to add a defense of fraudulent inducement or misrepresentation, justice
would have required a continuance of the trial. The record reflects that the Powells withdrew
their motion to amend to include misrepresentation or fraudulent inducement in order to avoid a
continuance. The Powells’ assignment of error on this issue is therefore without merit. We
accordingly affirm on this issue.

                        Exclusion of Evidence Based on the Parol Evidence Rule

        We next turn to the issue of whether the trial court erred in refusing to admit evidence of
the amount due on the 1995 note and the disbursement of $156,427.54 of the 1997 note from
Textron to itself. The Powells contend that the 1997 note was intended in essence to be a
transfer of indebtedness for the same equipment previously owned by SBT. Thus $156,427.54
was disbursed from Textron to itself in order to pay off the 1995 note. The Powells contend that
the parties were mistaken, however, regarding the balance due on the 1995 note. They allege
Textron had indicated that they would review the records regarding payment of the 1995 note and
make an adjustment if necessary. The Powells further submit that during the course of discovery
Textron refused to provide information regarding the principal amount due from SBT, and that it
was only after examining the records of Royal Transportation, which had gone into bankruptcy,
that they discovered that the balance due was in fact $80,000. The Powells contend that the
indebtedness for the equipment had therefore already been paid, and that the $156,427.54 transfer
from Textron to itself to close out the 1995 note resulted in an overpayment of the amount due.
The Powells’ argument on appeal, as we perceive it, is that it was error for the trial court to
exclude evidence of the amount due on the 1995 note and the disbursement of $156,427.54
because such evidence proves a mistake regarding the amount of indebtedness actually due on
the equipment.

       Textron contends that the Powells waived the defense of mutual mistake because the
defense does not appear in the Powells’ answer to the Second Amended Complaint. The
Tennessee Rules of Civil Procedure require


         1
            Pow ells’ oral motion to amend made at the beginning of trial requested leave to add the defenses of mutual
mistake, misrepresentation, and fraudulent inducement. In denying the motion, the trial court stated, “I think you already
– if I recall, your answer, you already alleged mutual mistake.” Counsel for Powells responded, “Okay. But also I think
fraud or misrepresentation need to be added to that just out of precaution.” The answer did not include a defe nse of
mistake however, although the court initially operated under the belief that it did. Any error which might have resulted
from this belief was avoided , however, as the co urt subsequently specifically granted leave to amend to include the
defense of mistake. The court stated, “Well, I think I’ll allow you to amend to include it [mutual mistake].”

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       [i]n all averments of fraud or mistake, the circumstances constituting fraud or
       mistake shall be stated with particularity. Malice, intent, knowledge, and other
       condition of mind of a person may be averred generally.

Tenn. R. Civ. P. 9.02. We note, however, that the Powells’ oral motion to amend their answer
included the defense of mistake, and that they averred that the mistake pertained to the amount
due on the 1995 loan to SBT which was, in essence, transferred to Trailer Lease. The trial court
declined to grant the motion as to misrepresentation and fraudulent inducement without a
continuance of the trial, and the Powells withdrew the motion pertaining to these defenses rather
than accept a continuance. As noted above, however, the trial court granted the Powells’ motion
to amend to include the defense of mistake. The defense accordingly is not waived.

        Textron further argues that the lawsuit pertains only to the 1997 note, and that the 1995
note is a completely distinct transaction between separate parties. It argues that the 1997 note
and guarantee are unambiguous on their face and that extrinsic evidence of the 1995 note or of
how Textron disbursed the $156,427.54 to itself are therefore inadmissible. Textron does
concede, however, that proceeds of the 1997 note were used to “close out” the 1995 note, and
that the $156,427.54 was disbursed for that purpose.

        The essence of Textron’s argument, as we perceive it, is that evidence of the amount due
on the 1995 note is extrinsic to the 1997 agreement, and that the 1997 agreement must be
enforced as written because its terms are clear and unambiguous. Powells’ argument, as
perceived by this Court, is that while the terms of the 1997 note are unambiguous, the purpose of
the 1997 note was to transfer a pre-existing debt of SBT to Powells, and that proof of the amount
due on the 1995 note is admissible to show a mistake regarding the amount actually due Textron
for the equipment. The trial court excluded evidence of the 1995 note and how the $156,427.54
was disbursed from Textron to itself based on the parol evidence rule. After examining Powells’
offer of proof, the court stated found no evidence that Textron made a mistake regarding the
amount due.

         A guaranty in a commercial transaction will be construed as strongly against the
guarantor “as the sense will admit.” Farmers-Peoples Bank v. Clemmer, 519 S.W.2d 801, 805
(Tenn. 1975). Upon examination of the 1997 note, security agreement, and guarantee by the
Powells, we find their terms unambiguous, and extrinsic evidence is not admissible to explain or
vary those terms. Id. at 804. However, in the present action, the Powells seek not to explain or
modify the unambiguous terms of the written agreement with Textron. They do not submit that
the agreed upon terms or obligations under the contract were other than those which appear on
the face of the documents. Rather, Powells argue that the distribution of $156,427.54 by Textron
to itself was intended to pay off the 1995 note, and that this amount reflects a mistake regarding
the amount actually due on the 1995 note.

       The parol evidence rule serves to secure the integrity of contracts and to guard against
fraud by a party who agrees to the unambiguous terms of a written agreement and then seeks to


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disavow those terms through extrinsic evidence. 32A C.J.S. Evidence § 1132, § 1159 (1996);
see Tidwell v. Morgan Bldg. Sys., Inc., 840 S.W.2d 373, 376 (Tenn. Ct. App. 1992).
Accordingly, the courts have refused to permit alteration of unambiguous contractual terms
through the use of extrinsic or parol (oral) evidence. Id. The rule encompasses contracts of
guaranty. 32A C.J.S. Evidence § 1165 (1996). However, application of the parol evidence rule
includes many exceptions. Id. at § 1194; see Huffine v. Riadon, 541 S.W.2d 414 (Tenn. 1976).
Once such exception to the parol evidence rule is that extrinsic evidence is admissible to show
fraud or mistake. See id. In order to be admissible to show mistake, the mistake must be shown
to be clerical or mutual, or, if unilateral, to have resulted from fraud or other inequitable conduct.
32A C.J.S. Evidence § 1234. A mutual mistake is one where both parties are operating under the
same misconception. Id. The contract as written, therefore, is not an expression of the parties’
actual intent. Id. When parol evidence is offered not to vary or disavow the terms of the
contract, but to show an alleged fraud or mistake, this Court is hesitant to exclude the evidence.
See Maxwell v. Land Dev., Inc., 485 S.W.2d 869, 877 (Tenn. Ct. App. 1972); Rentenbach
Eng’g Co. v. General Realty, Ltd., 707 S.W.2d 524, 527 (Tenn. Ct. App. 1985); Decatur
County Bank v. Duck, 926 S.W.2d 393, 397 (Tenn. Ct. App. 1997). Thus the rule has been
considerably relaxed by the courts “in order that fraud may be thwarted, mistakes corrected,
accidents relieved against, trusts set up and enforced, and usury exposed and eliminated.”
Gibson’s Suits in Chancery, § 189 (William H. Inman ed., 6th ed. 1982).

        In this case, the disbursement sheet is silent as to how Textron disbursed over $156,000
of proceeds to itself. Textron acknowledges, however, that the purpose of the disbursement was
to “close out” the 1995 note. Thus the essence of the agreement was that Trailer Lease would
borrow funds from Textron, which Textron would then disburse to itself, in order to pay off the
1995 note. The additional sums represent interest collected in advance. It is undisputed that the
1997 note did not serve to finance additional equipment other than that transferred from Royal
Transport. Proof introduced to show that the amount due on the 1995 note was in fact $80,000
would serve not to vary the contract, but to show mistake regarding the amount of indebtedness
remaining on the equipment. Accordingly, we hold that evidence of the amount due on the 1995
note and of how Textron disbursed the $156,427.54 to itself is not barred by the parol evidence
rule. Judgment of the trial court on this issue is therefore reversed. We remand for a new trial.

                                            Conclusion

        We affirm the decision of the trial court denying the Powells leave to amend their answer
on the morning of trial to include the affirmative defenses of misrepresentation or fraudulent
inducement. Judgment of the trial court excluding evidence of the 1995 note executed by
Textron and SBT and evidence of how $156,427.54 in proceeds from the 1997 note were
disbursed by Textron to itself is reversed. This cause is remanded for a new trial consistent with
this opinion. In light of the foregoing, Textron’s assignment of error regarding the trial court’s




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denial of a judgment in accordance with its motion for directed verdict or, in the alternative, an
additur, is pretermitted. Costs of this appeal are taxed to the appellee, Textron Financial Corp.




                                                      ___________________________________
                                                      DAVID R. FARMER, JUDGE




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