                 IN THE COURT OF APPEALS OF TENNESSEE
                             AT NASHVILLE
                                    April 16, 2004 Session


         NASHVILLE FORD TRACTOR, INC. v. GREAT AMERICAN
                      INSURANCE COMPANY

                      Appeal from the Circuit Court for Sumner County
                             No. 17235-C     C.L. Rogers, Judge


                  No. M2003-00575-COA-R3-CV - Filed December 29, 2005



This appeal involves a dispute over the payment for leased construction equipment used on two
sewer projects for the City of Gallatin. The general contractor was required to take over and
complete the work after a subcontractor and sub-subcontractor defaulted. Thereafter, the company
that had leased three pieces of construction equipment to the subcontractor and sub-subcontractor
submitted claims for payment to the general contractor and the contractor’s bonding company. The
general contractor declined to pay for the equipment and filed suit for breach of contract against the
subcontractor in the Circuit Court for Sumner County. The contractor also sought a declaratory
judgment regarding its rights, as well as those of its bonding company, the subcontractor, and the
City, under the construction contract, the subcontracts, and the payment bond. Following a two-day
bench trial, the trial court awarded the equipment leasing company a $38,399 judgment against the
bonding company and the sub-subcontractor and a $29,232 judgment against the subcontractor. The
court also denied the equipment leasing company’s request for pre-judgment interest because it had
intentionally falsified documents during the collection process. The bonding company appealed.
We have determined that the trial court erred by failing to dismiss all of the equipment leasing
company’s claims against the payment bond after expressly finding that the leasing company had
committed fraud during the claims process. Accordingly, we reverse the judgment against the
contractor’s surety.


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

WILLIAM C. KOCH , JR., P.J., M.S., delivered the opinion of the court, in which WILLIAM B. CAIN and
FRANK G. CLEMENT , JR., JJ., joined.

Arthur E. McClellan and Jade A. Rogers, Gallatin, Tennessee, for the appellant, Great American
Insurance Co.

John R. Reynolds, Nashville, Tennessee, for the appellee, Nashville Ford Tractor, Inc.
                                                          OPINION

                                                                I.

        Ralph M. Webster has been in the construction industry in Gallatin and Sumner County since
       1
1954. Beginning in 1994, Mr. Webster subcontracted the underground utility work on his
construction projects to Murrell Construction.2 On May 8, 1996, the City of Gallatin awarded Mr.
Webster a $532,853 contract to install approximately 14,000 linear feet of sewer lines and
appurtenant structures in the area of Lock Four Road. Mr. Webster’s bid for the project was based
on cost estimates provided by Murrell Construction, and Mr. Webster entered into a $433,490
subcontract with Murrell Construction to perform all the work required by the prime contract. The
difference between the amount of the prime contract and the subcontract represented the value added
by Mr. Webster in providing oversight, administrative support, and the performance and payment
bonds required by statute and the prime contract.3 The deadline for completion of the Lock Four
Road project was November 8, 1996.

        Work began in earnest at the Lock Four Road site on June 1, 1996. On that day, Mr.
Webster, at Murrell Construction’s request, transported to the construction site a Fiat-Allis Hitachi
FX210 excavator (Hitachi excavator) that Murrell Construction had been leasing from Nashville
Ford Tractor, Inc. (Nashville Ford Tractor) for approximately one year.4 Murrell Construction used
the Hitachi excavator to dig the trenches for the installation of sewer lines and other underground

           1
               Mr. W ebster does business under the name “W ebster Excavating Co.”

           2
           Randy Murrell and his father, Jimmy Murrell, incorporated “Murrell Construction, Inc.” as a for-profit Chapter
S Corporation on July 19, 1994. Cf. Tenn. Code Ann. § 48-14-101(a)(1) (2002) (“A corporate name . . . [m]ust contain
the word ‘corporation,’ ‘incorporated,’ ‘company,’ or the abbreviation ‘corp.,’ ‘inc.,’ ‘co.,’ or words or abbreviations
of like import in another language . . . .”). Randy Murrell was president of the corporation, and Jimmy Murrell was vice
president. Jimmy Murrell prepared the bids and estimates on the projects while Randy Murrell oversaw and participated
in the actual construction. There were never any board of directors meetings, shareholder meetings, or company
meetings, and on April 20, 1998, the Tennessee Secretary of State administratively dissolved Murrell Construction, Inc.
for failure to file the required corporation annual report. During the time it was in existence, Murrell Construction, Inc.
was referred to by the Murrells and their customers alike as “M urrell Construction, Inc.,” “M urrell Construction Co.,”
and “Murrell Construction Co., Inc.”

           3
            Tenn. Code Ann. § 12-4-201(a) (Supp. 2005) provides as follows:
           No contract shall be let for any public work in this state, by any city, . . . until the contractor shall have
           first executed a good and solvent bond to the effect that the contractor will pay for all the labor and
           materials used by the contractor, or any immediate or remote subcontractor under the contractor, in
           such contract . . . .

           4
           Randy Murrell and Nashville Ford Tractor’s representative executed the first lease agreement for the Hitachi
excavator on June 27, 1995. The term of the lease agreement was four weeks, and the agreement expressly provided that
any amendment to the lease must be in writing and signed by both parties. Thus, under the plain language of the lease
agreement, Murrell Construction and Nashville Ford Tractor were required to sign a new lease agreement each month
to continue the rental of the Hitachi excavator. However, M urrell Construction and Nashville Ford Tractor did not follow
this practice. Instead, at the end of each month, Nashville Ford Tractor’s representative would simply prepare and sign
a new lease agreement for the following month and send a carbon copy to Murrell Construction. Thus, only the first lease
agreement contains the signatures of both parties. The same procedure was followed with all of the lease agreements
at issue in this case.

                                                                -2-
structures on its subcontracts with Mr. Webster. According to Randy Murrell, the Hitachi excavator
was at the Lock Four Road site throughout June and July 1996.

        On July 8, 1996, the City of Gallatin awarded Mr. Webster a second contract to install
approximately 4,000 linear feet of sewer lines and appurtenant structures at the Gallatin Industrial
Center. Mr. Webster subcontracted all of the work under the prime contract to Murrell Construction.
The City agreed to pay Mr. Webster $256,999 for the work, and Mr. Webster agreed to pay Murrell
Construction $218,622. Thus, Mr. Webster’s profit on the Gallatin Industrial Center project would
have been $38,377 minus expenses. The deadline for completion of the Gallatin Industrial Center
project was January 3, 1997.

        Murrell Construction subcontracted with Randy Murrell’s brother, Ted Murrell, to assist on
the Lock Four Road project.5 On July 9, 1996, Ted Murrell leased a Samsung SE210 excavator
(Samsung excavator) from Nashville Ford Tractor, and on August 20, 1996, he leased a Fiat-Allis
FR140 rubber wheel loader (Fiat-Allis wheel loader) for earth moving. With two excavators on the
Lock Four Road site, Randy Murrell could continue work in one direction with his crew while Ted
Murrell set off in the opposite direction with a second crew. However, in mid-August 1996, Murrell
Construction had Mr. Webster transport the Hitachi excavator to the Gallatin Industrial Center site
so that work could begin on the second project. According to Randy Murrell, the Hitachi excavator
remained at the Gallatin Industrial Center for four to five weeks before being moved back to the
Lock Four Road site.6

        By October 1996, the Lock Four Road project was in serious trouble. The November 8, 1996
deadline was fast approaching, and Murrell Construction was not on target to meet it. In addition,
the cost of labor, materials, and equipment for the two large City projects had pushed Murrell
Construction’s financial resources to the breaking point. Although Murrell Construction received
checks totaling more than $265,000 from Mr. Webster in July, August, and September 1996 as
progress payments on the two projects, Murrell Construction and Ted Murrell were unable to make
the August 1996 lease payments to Nashville Ford Tractor on the Hitachi excavator and the Fiat-
Allis wheel loader. In September and October 1996, they were unable to make the lease payments
on all three pieces of heavy equipment they were leasing from Nashville Ford Tractor.7




         5
             Ted Murrell did business under the names “Samson Construction” and “Ted Murrell Construction Co.”

         6
           It is undisputed that Murrell Construction moved the Hitachi excavator back and forth between the two City
projects and used it on at least one other project during this time. As the trial court recognized, what is unclear from the
record is the amount of time the Hitachi excavator was actually used on the various projects. In his deposition, which
was admitted at trial, Randy Murrell testified that Mr. W ebster provided all of the transportation for the twenty-ton
Hitachi excavator during the course of the two City projects; however, Ted Murrell contradicted his brother’s testimony.
In addition, Mr. W ebster testified that all equipment moves he performed for Murrell Construction would be accurately
reflected in his billing statements to Murrell Construction, but the move dates reflected in these statements do not
correspond with Randy Murrell’s testimony.

         7
         The lease rates, including taxes, were $4,276 each for the Hitachi excavator and the Fiat-Allis wheel loader
and $5,071 for the Samsung excavator.

                                                            -3-
        In late October or early November 1996, James Steven Denny, one of the owners of
Nashville Ford Tractor, spoke with Mr. Webster about the delinquency on the Murrell Construction
and Ted Murrell accounts.8 Mr. Webster informed him that Murrell Construction was about to
receive a large draw on the two projects and advised him that Nashville Ford Tractor should attempt
to get its money from the Murrells then.9 However, when Murrell Construction received the
December 13, 1996 progress payment of $49,158.50 from Mr. Webster, the Murrells did not use
these funds to pay the outstanding balances on their accounts with Nashville Ford Tractor. They
explained to Nashville Ford Tractor that the December progress payment was not as large as they
had been expecting.

        In December 1996, Nashville Ford Tractor retrieved the Fiat-Allis wheel loader from the
Lock Four Road site but allowed the Murrells to continue using the Hitachi and Samsung excavators
for the next few months because the two City projects could not be completed without them.
Throughout this time, the Murrells repeatedly assured Mr. Denny that both projects were nearing
completion, that the final payments on the subcontracts from Mr. Webster would be sufficient to
cover the outstanding balance on the equipment leases, and that they would bring their accounts with
Nashville Ford Tractor current when they received the final subcontract payments.

        Unfortunately, Murrell Construction did not complete the two City projects and thus never
received the expected final payments. Substantially all of the pipe and appurtenant structures had
been installed at the Gallatin Industrial Center site by the end of November 1996, and the same was
true of the Lock Four Road project by the end of January 1997. However, the rain that had fallen
during the construction had caused a great deal of soil erosion, and by March 1997, Murrell
Construction had not yet fully restored the surface areas to their pre-construction condition as
required by the contracts. As a result, Murrell Construction could not obtain releases from all of the
adjoining landowners, and the City would not accept the projects as complete without the releases.
Unable to pay their laborers or make further lease payments, Murrell Construction and Ted Murrell
abandoned the job sites in early or mid-March 1997 and arranged with Nashville Ford Tractor to
reclaim the two excavators.10

       Shortly after Murrell Construction abandoned the two job sites in March 1997, Nashville
Ford Tractor began attempting to collect on the Murrells’ delinquent lease accounts from the City,
Mr. Webster, and Great American Insurance Company (Great American), the company that issued
the performance and payment bonds for both projects.11 On March 22, 1997, Nashville Ford


         8
         Mr. Denny owns 20% of Nashville Ford Tractor. He was in charge of Nashville Ford Tractor’s accounts with
Murrell Construction and Ted Murrell.

         9
         Murrell Construction’s vice president, Jimmy M urrell, told Mr. W ebster later that the issues with Nashville
Ford Tractor had been resolved.

         10
           The Hitachi excavator was recovered at the Gallatin Industrial Center site, and the Samsung excavator was
recovered at the Lock Four Road site.

         11
         The payment bonds for the two projects were substantially identical. Under each bond, Mr. W ebster and
Great American obligated themselves to the City in an amount equal to the contract price of the prime contract. Each
                                                                                                       (continued...)

                                                         -4-
Tractor’s collections manager wrote to the City requesting assistance in collecting $72,607.50 in
unpaid lease payments for the three pieces of equipment it claimed Murrell Construction had used
on the Lock Four Road project under subcontract with Mr. Webster.12 Nashville Ford Tractor
threatened to file a lien against the Lock Four Road project if the leases remained unpaid.

         Attached to Nashville Ford Tractor’s letter to the City were documents purporting to be
copies of the original lease agreements for the Hitachi excavator for the months of August 1996
through March 1997 and for the Samsung excavator for the months of September 1996 through
January 1997. Copies of the lease agreements for the Fiat-Allis wheel loader were not attached to
the letter, and the leases attached to the letter did not add up to $72,607.50. Of even greater concern,
the copies of the lease agreements attached to the letter showed that Nashville Ford Tractor had
altered the original agreements after they had been signed by or sent to Murrell Construction and Ted
Murrell. On the originals, the space indicating where the equipment was to be used had been left
blank. The copies attached to the March 22, 1997 letter all had some variant of “Lock Four Road”
written in in this space.

           On April 10, 1997, Nashville Ford Tractor’s attorney wrote another letter to the City
requesting payment of the unpaid lease agreements. In this letter, Nashville Ford Tractor sought
payment of only $68,331.50. The letter erroneously claimed that the Hitachi excavator, the Samsung
excavator, and the Fiat-Allis wheel loader had all been leased from Nashville Ford Tractor by
Murrell Construction. In addition, after listing the lease numbers and amounts due on each piece of
equipment, the letter made the following representation: “Nashville Ford Tractor states that Murrell
Construction used this equipment under contract as a subcontractor for Ralph Webster Excavating
. . . in the performance of the Sewer System Additions Contract S-1 for the City of Gallatin [i.e., the
Lock Four Road prime contract].”

         Unlike the March 22, 1997 letter, the April 10, 1997 letter had copies of lease agreements
for all three pieces of equipment attached. All but one had been altered after the fact by the insertion
of “Lock Four Road” or similar language in the space indicating where the equipment was to be
used.13 Moreover, the April 10, 1997 letter expressly referred to the payment bond for the Lock Four
Road project but not to the payment bond for the Gallatin Industrial Center project. In fact, the letter
contained no reference at all to the Gallatin Industrial Center project or any other project even though
Nashville Ford Tractor knew at the time that the equipment for which it was seeking payment had
not been used exclusively on the Lock Four Road project during the period covered by the attached




         11
           (...continued)
bond expressly provided that this obligation would be void if Mr. W ebster promptly paid for all labor and materials,
including equipment, consumed or used in connection with the bonded projects.

         12
           The letter acknowledged that one piece of equipment had been picked up from the Gallatin Industrial Center
site and had also been used on a sewer construction project there.

         13
          Inexplicably, Nashville Ford Tractor attached an unaltered version of one of the lease agreements for the
Hitachi excavator to the April 10, 1997 letter even though it had already attached an altered version of the same
agreement to its March 22, 1997 letter to the City.

                                                        -5-
leases.14 Nashville Ford Tractor’s attorney also sent a copy of the April 10, 1997 letter to Great
American.

        On May 19, 1997, Nashville Ford Tractor’s attorney sent a letter similar to the April 10, 1997
letter to the City, Great American, Mr. Webster, and the Murrells. The letter reiterated the
$68,331.50 amount due for the unpaid leases on all three pieces of equipment, as well as Nashville
Ford Tractor’s representation that all the equipment had been used by Murrell Construction to
perform work under the prime contract for the Lock Four Road project. It had the same altered
versions of the lease agreements attached and referred to the payment bond for the Lock Four Road
project but did not acknowledge in any way that the equipment had been used on other projects
during the time period covered by the attached leases. The May 19, 1997 letter also contained an
addendum stating that the letter constituted notice under Tenn. Code Ann. § 12-4-205 (Supp. 2005)
and that if the attached leases were not paid within thirty days, Nashville Ford Tractor would file suit
under the statutory payment bond for the Lock Four Road project to collect the outstanding balance.15

        On May 28, 1997, James Scotty Chambliss, secretary-treasurer of Nashville Ford Tractor,
executed a sworn payment bond affidavit of claim reciting the bond number of the Lock Four Road
payment bond and naming Mr. Webster as the principal on the bond. Mr. Chambliss swore that
Murrell Construction was justly and truly indebted to Nashville Ford Tractor for $68,331.50 on the
basis of the same altered lease agreements that had been attached to the April 10, 1997 and May 19,
1997 letters. Mr. Chambliss asserted that March 3, 1997 was the last date on which Nashville Ford
Tractor furnished labor and materials to the Lock Four Road project and that notice of nonpayment
had been mailed to Mr. Webster on March 25, 1997. Mr. Chambliss expressly stated that Nashville
Ford Tractor was making this affidavit “in proof of and in support of said claim, and as an
inducement to Great American Insurance Companies, as Surety upon said contract and project, to
make payment of said indebtedness under its bond.”

        Mr. Webster did not pay Nashville Ford Tractor the balance due on the equipment leases
within thirty days as demanded in the May 19, 1997 letter. Instead, on June 25, 1997, Mr. Webster’s
attorney wrote a letter to Randy Murrell formally terminating the subcontracts for the Lock Four
Road and Gallatin Industrial Center projects. The letter advised Mr. Murrell that Mr. Webster would
be taking over the completion of both projects and would look to Murrell Construction for
indemnification for any damages resulting from Murrell Construction’s failure to perform under the
subcontracts.

        By August 1997, Nashville Ford Tractor had still not filed suit to collect on the unpaid leases.
On August 5, 1997, Mr. Webster filed a complaint in the Sumner County Circuit Court for breach
of contract and indemnification against Murrell Construction. He also sought a declaratory judgment

         14
          Nashville Ford Tractor knew the equipment had not been on the Lock Four Road project the entire time
because, among other things, it performed routine maintenance on the equipment while it was in the field.

         15
            Tenn. Code Ann. § 12-4-205 provides that in order to recover under a statutory payment bond, a furnisher
of labor or material must, within ninety days after the completion of the project, “give written notice . . . either to the
contractor who executed the bond, or to the public official who had charge of the letting or awarding of the contract.”
The written notice must “set forth the nature, an itemized account of the material furnished or labor done, and the balance
due therefor; and a description of the property improved.” Tenn. Code Ann. § 12-4-205.

                                                           -6-
regarding the respective rights and obligations of Great American, the City, Murrell Construction,
and himself under the subcontracts and payment bonds for both projects. Mr. Webster alleged that
Murrell Construction had breached the Lock Four Road and Gallatin Industrial Center subcontracts
by failing to complete the projects, that it had cost him $100,000 more than what was due to Murrell
Construction under the subcontracts to complete the two projects, and that he was entitled to
indemnification for these expenses and a $100,000 judgment against Murrell Construction.

        Mr. Webster also alleged that Nashville Ford Tractor had altered the originals of the unpaid
lease agreements by adding “Lock Four Road” or similar words after they were signed or sent to
Murrell Construction or Ted Murrell. He claimed that Nashville Ford Tractor’s attempt in its May
19, 1997 letter to collect $68,331.50 under the payment bond for the Lock Four Road project on the
basis of altered lease agreements was fraudulent. Thus, Mr. Webster also sought a declaratory
judgment that he was not liable to Nashville Ford Tractor for payment of any unpaid leases.

        Murrell Construction filed for bankruptcy protection on August 22, 1997. Randy Murrell and
his wife later filed for bankruptcy protection in their individual capacities. On September 2, 1997,
the City finally accepted the two projects as complete and authorized a $71,017.17 final payment to
Mr. Webster. The final payment included a $20,282.93 change order on the Lock Four Road project
requested by the City. The trial court entered an order dismissing the City from the lawsuit on
October 28, 1997.

        Nashville Ford Tractor filed its answer to Mr. Webster’s complaint on November 18, 1997.
In this answer, it denied any knowledge “of the so-called second contract by and between [Mr.
Webster] and [Murrell Construction] to perform certain work on a second project at the Gallatin
Industrial Park,” and it denied altering the lease agreements to facilitate its collection of the balance
on the lease agreements from Mr. Webster. Nashville Ford Tractor affirmatively stated that “to its
knowledge . . . [,] all charges upon which [Nashville Ford Tractor] bases its claims herein represent
the use of its equipment during the course, conduct[,] and performance of the subcontract with [Mr.
Webster] on Lock Four Road.” Mr. Denny, in his capacity as director and vice president, swore on
behalf of Nashville Ford Tractor that the statements contained in the answer were true.

        Nashville Ford Tractor filed a counterclaim against Mr. Webster and a cross-claim against
Murrell Construction and Great American. The claims against Mr. Webster and Great American
were based on the statutory payment bond for the Lock Four Road project, and the claim against
Murrell Construction was based on its breach of the lease agreements by failing to pay the amounts
due. Nashville Ford Tractor requested that the trial court enter a judgment in its favor against Mr.
Webster, Great American, and Murrell Construction for $70,791.55 plus interest, late penalties, and
prejudgment interest. With the trial court’s permission, Nashville Ford Tractor later filed a third-
party complaint against Ted Murrell.

        For a variety of reasons, it took more than five years from the filing of the original complaint
to bring the case to trial. In the interim, Nashville Ford Tractor repeatedly relied on the altered lease
agreements in various court filings in its attempt to recover the unpaid balance on the lease
agreements against Mr. Webster and Great American. Nashville Ford Tractor eventually admitted
that the original lease agreements appeared to have been altered after the fact by the insertion of
“Lock Four Road” in the space indicating where the equipment was to be used. It even requested

                                                  -7-
permission to amend its pleadings to remove its implausible prior denials of any knowledge that
Murrell Construction was working on the Gallatin Industrial Center project for Mr. Webster.16

        In December 2000, the trial court granted Mr. Webster a $100,000 default judgment against
Murrell Construction for breach of contract. The trial court also allowed Mr. Webster to amend his
complaint to add Jimmy Murrell as a defendant on the theory that Murrell Construction was a sham
corporation and that Jimmy Murrell should therefore be held individually liable to Mr. Webster for
the costs he incurred in completing the two projects. The trial court denied Jimmy Murrell’s motion
for summary judgment a few months before the case went to trial in September 2002.

        By the time the case finally proceeded to trial, the various parties had arranged themselves
into two distinct camps. Mr. Webster and Great American were on the one side, and Nashville Ford
Tractor and the Murrells were on the other. Mr. Webster’s attorney stated several times in open
court that Mr. Webster had agreed to indemnify Great American from any liability for the claims of
Nashville Ford Tractor, and Ted Murrell testified that he had struck a deal to assist Nashville Ford
Tractor in pursuing its claim for the unpaid lease amounts against Mr. Webster and Great American
on the condition that Nashville Ford Tractor would forego attempting to collect the outstanding sums
from him.

        The bench trial lasted two days. Messrs. Denny and Chambliss testified for Nashville Ford
Tractor. Jimmy Murrell and Ted Murrell testified, but Randy Murrell was unable to do so because
he had moved to Alaska. The trial court admitted his deposition into the record in lieu of live
testimony. Mr. Webster’s wife and bookkeeper, Sandra Kay Webster, testified for Mr. Webster.
Because Mr. Webster himself was battling cancer, the trial court also permitted Mr. Webster’s
deposition to be introduced into evidence. A few weeks after the trial, Great American filed a
motion to amend its pleadings to conform to the evidence at trial by adding an affirmative defense
of fraud. On October 30, 2002, the trial court granted the motion over Nashville Ford Tractor’s
objection.17

        On November 27, 2002, the trial court entered an order and separate findings of fact. The
trial court found that Mr. Webster was the general contractor on two separate public projects, that
Murrell Construction was a subcontractor for Mr. Webster on both projects, and that Ted Murrell
was a subcontractor for Murrell Construction on both projects. The trial court found that Great
American issued payment bonds for both projects and received a proper notice of claim under the
payment bond for the Lock Four Road project but received no notice of claim on the Gallatin
Industrial Center project. Therefore, the trial court concluded that Murrell Construction, Ted
Murrell, and Great American were liable to Nashville Ford Tractor for portions of the unpaid leases.



         16
          The trial court also allowed Nashville Ford Tractor to amend its pleadings to add claims against Mr. W ebster
and Great American under a common law bond theory for both the Lock Four Road and the Gallatin Industrial Center
projects.

         17
            From the record on appeal, it appears that Great American’s motion to amend the pleadings to conform to
the evidence presented at trial and the trial court’s resulting order were unnecessary. Great American had already
asserted the affirmative defense of fraud in its answer to Nashville Ford Tractor’s amended cross-complaint.

                                                         -8-
However, the trial court also concluded that the evidence did not support liability on the part of Mr.
Webster or Jimmy Murrell.

        The trial court found that the balances due on the leases for the Hitachi excavator, the
Samsung excavator, and the Fiat-Allis wheel loader were $29,232, $25,355, and $13,044,
respectively. However, the trial court concluded that the evidence was insufficient to prove what
proportion of the time the Hitachi excavator had been at the Lock Four Road site. The trial court
specifically found that “Nashville Ford Tractor, Inc.’s agents or employees were shown to have
intentionally altered and falsified business invoices” i.e., the lease agreements. Based on these
findings, the trial court (1) dismissed all claims against Mr. Webster and Jimmy Murrell, (2) granted
Nashville Ford Tractor a judgment against Great American and Ted Murrell for $38,399 for the
Samsung excavator and the Fiat-Allis wheel loader, and (3) granted a judgment in favor of Nashville
Ford Tractor against Murrell Construction alone for $29,232 for the Hitachi excavator. The trial
court denied Nashville Ford Tractor’s request for prejudgment interest based on its finding that
Nashville Ford Tractor had “intentionally falsified documents in an attempt to collect [its] claim.”

        On February 24, 2003, the trial court entered an order denying Great American’s and
Nashville Ford Tractor’s motions to alter or amend the judgment. Great American filed a timely
notice of appeal. Nashville Ford Tractor filed a motion to dismiss the appeal for lack of a final order
based on its conclusion that the trial court failed to rule on its common law bond claims against Mr.
Webster and Great American. Following oral argument in this case, we entered an order denying
Nashville Ford Tractor’s motion to dismiss the appeal.

                                                  II.
                                    THE STANDARD OF REVIEW

        We turn first to the proper standard of review for the issues presented in this appeal. Because
this is an appeal from a decision made by the trial court itself following a bench trial, the now
familiar standard in Tenn. R. App. P. 13(d) governs our review. This rule contains different
standards for reviewing a trial court’s decisions regarding factual questions and legal questions.

        With regard to a trial court’s findings of fact, we will review the record de novo and will
presume that the findings of fact are correct “unless the preponderance of the evidence is otherwise.”
We will also give great weight to a trial court’s factual findings that rest on determinations of
credibility. In re Estate of Walton, 950 S.W.2d 956, 959 (Tenn. 1997); B & G Constr., Inc. v. Polk,
37 S.W.3d 462, 465 (Tenn. Ct. App. 2000). However, if the trial judge has not made a specific
finding of fact on a particular matter, we review the record to determine where the preponderance
of the evidence lies without employing a presumption of correctness. Ganzevoort v. Russell, 949
S.W.2d 293, 296 (Tenn. 1997).

        Reviewing findings of fact under Tenn. R. App. P. 13(d) requires an appellate court to weigh
the evidence to determine in which party’s favor the weight of the aggregated evidence falls. Coles
v. Wrecker, 2 Tenn. Cas. (Shannon) 341, 342 (1877); Hohenberg Bros. Co. v. Missouri Pac. R.R.,
586 S.W.2d 117, 119 (Tenn. Ct. App. 1979). There is a “reasonable probability” that a proposition
is true when there is more evidence in its favor than there is against it. Chapman v. McAdams, 69
Tenn. 500, 506 (1878); 2 McCormick on Evidence § 339, at 439 (John W. Strong ed., 4th

                                                 -9-
Practitioner’s ed. 1992) (stating that “the existence of a contested fact is more probable than its
nonexistence”). Thus, the prevailing party is the one in whose favor the evidentiary scale tips, no
matter how slightly. Bryan v. Aetna Life Ins. Co., 174 Tenn. 602, 611, 130 S.W.2d 85, 88 (1939);
McBee v. Bowman, 89 Tenn. 132, 140, 14 S.W. 481, 483 (1890); Chapman v. McAdams, 69 Tenn.
at 503; Realty Shop, Inc. v. RR Westminster Holding, Inc., 7 S.W.3d 581, 596 (Tenn. Ct. App. 1999).

         Tenn. R. App. P. 13(d)’s presumption of correctness requires appellate courts to defer to a
trial court’s findings of fact. Fell v. Rambo, 36 S.W.3d 837, 846 (Tenn. Ct. App. 2000); Taylor v.
Trans Aero Corp., 924 S.W.2d 109, 112 (Tenn. Ct. App. 1995). Because of the presumption, an
appellate court is bound to leave a trial court’s finding of fact undisturbed unless it determines that
the aggregate weight of the evidence demonstrates that a finding of fact other than the one found by
the trial court is more probably true. Estate of Haynes v. Braden, 835 S.W.2d 19, 20 (Tenn. Ct. App.
1992) (holding that an appellate court is bound to respect a trial court’s findings if it cannot
determine that the evidence preponderates otherwise). Thus, for the evidence to preponderate against
a trial court’s finding of fact, it must support another finding of fact with greater convincing effect.

        The presumption of correctness in Tenn. R. App. P. 13(d) applies only to findings of fact, not
to conclusions of law. Accordingly, appellate courts review a trial court’s resolution of legal issues
without a presumption of correctness and reach their own independent conclusions regarding these
issues. Johnson v. Johnson, 37 S.W.3d 892, 894 (Tenn. 2001); Nutt v. Champion Int’l Corp., 980
S.W.2d 365, 367 (Tenn. 1998); Hicks v. Cox, 978 S.W.2d 544, 547 (Tenn. Ct. App. 1998);
McCormick v. Aabakus, Inc., 101 S.W.3d 60, 62 (Tenn. Sp. Workers Comp. Panel 2000).

       Appellate courts review a trial court’s finding of fact as a legal matter in one circumstance.
When a finding of fact is based on undisputed evidence that can reasonably support only one
conclusion, we will review that finding on appeal without Tenn. R. App. P. 13(d)’s presumption of
correctness. Realty Shop, Inc. v. RR Westminster Holding, Inc., 7 S.W.3d at 596; Hamblen County
Educ. Ass’n v. Hamblen County Bd. of Educ., 892 S.W.2d 428, 431 (Tenn. Ct. App. 1994);
Tennessee Farmers Mut. Ins. Co. v. American Mut. Liab. Ins. Co., 840 S.W.2d 933, 936 (Tenn. Ct.
App. 1992).

                                       III.
            THE ALTERATIONS ON NASHVILLE FORD TRACTOR ’S LEASE RECORDS

        Great American raises three challenges to the trial court’s judgment in favor of Nashville
Ford Tractor for the unpaid balance on the lease agreements for the Samsung excavator and the Fiat-
Allis wheel loader. First, Great American argues that a surety cannot be liable under a bond if the
principal is not also liable and, therefore, that the trial court erred by imposing liability on Great
American after finding that Mr. Webster had no individual liability. Second, Great American argues
that the evidence at trial was insufficient to show that the Samsung excavator and Fiat-Allis wheel
loader were used exclusively on the Lock Four Road project. Third, Great American argues that the
trial court’s finding that Nashville Ford Tractor falsified documents in order to collect under the
payment bond against Great American constitutes fraud barring any recovery by Nashville Ford
Tractor.




                                                 -10-
         In addition to disputing Great American’s arguments, Nashville Ford Tractor takes issue with
the trial court’s judgment. It asserts that the trial court erred by (1) granting Great American’s post-
trial motion to amend its answer to allege fraud, (2) failing to hold that Mr. Webster was personally
liable for the unpaid invoices, (3) failing to hold Great American liable for the unpaid balance on the
Hitachi excavator, (4) refusing to grant it a judgment against both Mr. Webster and Great American
on its common-law bond theory, and (5) denying its request for prejudgment interest based on the
erroneous conclusion that it had intentionally falsified documents relating to its claim under Great
American’s payment bond.

          We have determined that the dispositive issues in this case involve the evidentiary support
for the trial court’s conclusion that Nashville Ford Tractor intentionally falsified documents to
collect under Great American’s payment bond and the legal effect of this conclusion. According to
Great American, the trial court’s finding of fraud on the part of Nashville Ford Tractor precludes any
recovery under the payment bond. Therefore, we must first determine whether the evidence supports
the trial court’s finding that Nashville Ford Tractor intentionally altered the lease agreements in an
attempt to collect the unpaid balance under the Lock Four Road payment bond. If it does, then we
must determine the legal effect of this fraud on Nashville Ford Tractor’s claims against Great
American.

        After reviewing the evidence in minute detail, we have no difficulty concluding that the trial
court correctly determined that Nashville Ford Tractor deliberately altered the lease agreements in
a fraudulent attempt to collect the unpaid lease balances under the Lock Four Road payment bond.
Although Nashville Ford Tractor initially denied altering these lease agreements, the evidence shows
indisputably that someone at Nashville Ford Tractor added “Lock Four Road” or words to that effect
to the originals of virtually all of the unpaid lease agreements submitted to Great American and Mr.
Webster on May 19, 1997 as part of the claim under the Lock Four Road payment bond. It is also
indisputable that at the time Nashville Ford Tractor submitted its claim under the Lock Four Road
payment bond, it had actual knowledge that the equipment had not been used exclusively on that
project for the entire period covered by the doctored lease agreements.18 Nashville Ford Tractor’s
alteration of the lease agreements was designed to bolster its chance of success in its claim for
payment of the unpaid leases under the Lock Four Road payment bond.

        Nashville Ford Tractor’s reliance on the altered lease agreements in making its claim cannot
be dismissed as a mere inadvertent mistake. For whatever reason, when Nashville Ford Tractor
made its claim against Great American and Mr. Webster for the balance due on the equipment leases,
it decided to pursue the claim solely under the statutory payment bond for the Lock Four Road
project. However, payment bonds are contract specific, and a payment bond guarantees payment for
labor or materials only when they are used in connection with the contract covered by the payment
bond. Adding the location of the project covered by the payment bond to a contract for labor or
materials after the fact to make it appear that the parties contemplated that the labor or materials


         18
            The Hitachi excavator was at the Gallatin Industrial Center site for weeks at a time, and Nashville Ford
Tractor performed routine maintenance on the equipment while it was in the field. In addition, two months before
Nashville Ford Tractor made its formal claim under the Lock Four Road payment bond, its collections manager had
written a letter to the City stating that one piece of equipment had been recovered from the Gallatin Industrial Center job
site and not from Lock Four Road.

                                                          -11-
would be used on the covered project from the outset would obviously and significantly strengthen
the laborer or supplier’s chance of recovering under the payment bond.

        Even if we were to assume that Nashville Ford Tractor’s May 19, 1997 submission of altered
agreements to support its claim under the Lock Four Road payment bond was simply an innocent
mistake, the same cannot be said of Nashville Ford Tractor’s numerous later submissions and filings
that relied on the same falsified documents. At the very latest, Nashville Ford Tractor knew on
August 5, 1997 when Mr. Webster filed his complaint that it was being charged with having
deliberately altered lease agreements in a fraudulent attempt to collect under the Lock Four Road
payment bond. Each lease agreement was executed in quadruplicate, and three of the four copies
of each agreement remained at Nashville Ford Tractor.19 Thus, assuming Nashville Ford Tractor did
not alter all three retained originals of each lease agreement, it would have been a simple matter for
Nashville Ford Tractor to find the unaltered originals of the unpaid leases and rely solely on those
documents in all later filings and correspondence in this case. Yet to this day, Nashville Ford
Tractor has chosen to continue relying on the altered lease agreements rather than attempting to
provide the unaltered versions to the courts and the other parties.

        Finally, Nashville Ford Tractor has had numerous opportunities throughout the lengthy
course of this litigation to provide an innocent explanation, if one exists, for its submission of altered
lease agreements in support of its May 19, 1997 claim under the Lock Four Road payment bond.
To date, Nashville Ford Tractor has not done so. At trial, Messrs. Chambliss and Denny, both
officers and part owners of Nashville Ford Tractor, displayed remarkably little interest in discovering
who in their company had been altering original lease agreements that were threatening to cost them
tens of thousands of dollars in unpaid lease payments in a single case. Despite being asked about
the alterations in his 1998 deposition, Mr. Denny still could not explain why the alterations had been
made or who had made them when he testified during the September 2002 trial. When the trial court
questioned him directly regarding whether he had made an effort to find out who wrote in “Lock
Four Road” on the lease agreements, Mr. Denny responded as follows: “Probably – maybe not
enough effort. I could – there’s so much that goes on, it’s hard. When you’re involved in sales and
taking care of all this, too, maybe I didn’t make enough effort to find out.”20 The lack of interest on


         19
            According to Mr. Denny, the three originals of each lease kept by Nashville Ford Tractor went to different
places at the company after they were prepared: one to the front office for posting, one to the customer’s rental file, and
the third to the service manager. The fourth original was sent to the customer.

         20
              W hen Mr. Denny was recalled to the stand the next day, the following exchange occurred:

         Q.         I am curious, Mr. Denny, after Judge Rogers asked you yesterday what investigations you
                    had done to find out who altered these contracts and inserted Lock 4 Road [,] . . . when you
                    got in last night, did you make any additional inquiry to find out who falsified these
                    documents?

         A.         No.

         Q.         Do you intend on finding out who falsified these documents?

         A.         I believe the ones that were past – that had already been paid, that there wasn’t anything
                                                                                                          (continued...)

                                                          -12-
the part of owners and officers of the company in finding out who is making such mistakes strongly
suggests that the alteration of the lease agreements was not a mistake at all.

         Having concluded that the record on appeal fully supports the trial court’s finding of fraud
in the claims process, we must now determine whether the trial court properly limited the impact of
this finding to the prejudgment interest issue. Although we have been unable to find Tennessee
authority directly on point, it is clear that the trial court should not have allowed Nashville Ford
Tractor to recover anything on the payment bond after finding that it intentionally falsified
documents in an attempt to collect the unpaid balances on the equipment leases under the Lock Four
Road payment bond. It has long been the policy of this state that fraud will vitiate any type of
transaction. New York Life Ins. Co. v. Nashville Trust Co., 200 Tenn. 513, 523, 292 S.W.2d 749,
754 (1956); Stubblefield v. Patterson, 4 Tenn. (3 Hawy.) 128, 129 (1816); Anderson v. Mezvinsky,
No. E1998-00795-COA-R3-CV, 2001 WL 984908, at * 7 (Tenn. Ct. App. Aug. 28, 2001), perm.
app. denied (Tenn. Dec. 27, 2001); Fox v. Fox, No. 85-275, 1993 WL 328789, at *5 (Tenn. Ct. App.
Aug. 25, 1993), perm. app. denied (Tenn. Feb. 7, 1994).

        The courts will not aid individuals in enforcing their legal rights where those rights arise from
a transaction that is tainted by fraud. Thus, in the analogous context of mechanic’s and material
supplier’s liens, both the Tennessee Supreme Court and this court have squarely held that falsifying
accounts will preclude a party from enforcing a construction lien. Hayes Pipe Supply, Inc. v.
McKendree Manor, Inc., 695 S.W.2d 174, 178 (Tenn. 1985); Alside Supply Ctr. v. Vinson, 802
S.W.2d 632, 633, 634 (Tenn. Ct. App. 1990). We have concluded that the same rule should apply
where, as here, a supplier of labor or materials submits altered documents in an attempt to collect
on the payment bond for the project. C.C. Marvel, Annotation, False Receipts or the Like as
Estopping Materialmen or Laborers from Recovering on Public Work Bond, 39 A.L.R.2D 1104,
1104-05 (1955); 17 AM . JUR. 2D Contractors’ Bonds § 128, at 848 (1990).

        The record on appeal fully supports the trial court’s specific factual finding that Nashville
Ford Tractor deliberately altered the unpaid lease agreements in its attempt to collect under the
payment bond for the Lock Four Road project. Indeed, a contrary factual finding by the trial court
would have been difficult to sustain under even the most deferential standards of review in light of
the evidence contained in this record. Nashville Ford Tractor’s fraud in the claims process bars it
from recovering anything under the payment bond, and the trial court therefore erred in entering a
judgment in favor of Nashville Ford Tractor against Great American. Our resolution of this issue
obviates the need to address the other arguments raised by the parties.21




         20
              (...continued)
                      changed on them, I think.

         Q.          W ell, I don’t think so, sir, but that is for the Court to find out.

         21
           Murrell Construction and Ted Murrell have not challenged the judgments entered against them by the trial
court, and Great American’s objection to the trial court’s dismissal of the claims against Jimmy Murrell is now moot.

                                                               -13-
                                                 IV.

         The judgment of the trial court is affirmed in part and reversed in part and the case is
remanded for any further proceedings consistent with this opinion that may be necessary. The costs
of this appeal are taxed to Nashville Ford Tractor, Inc. for which execution, if necessary, may issue.



                                                       ______________________________
                                                       WILLIAM C. KOCH, JR., P.J., M.S.




                                                -14-
