A legal dispute arose concerning payment for leased construction equipment used on sewer projects for the City of Gallatin. After a subcontractor and sub-subcontractor defaulted, the general contractor took over the work and sought payment from both the equipment leasing company and the bonding company. The leasing company filed claims against them, but the general contractor refused to pay, initiating a breach of contract lawsuit against the subcontractor and seeking a declaratory judgment regarding contractual rights involved.
Following a two-day bench trial, the court awarded the leasing company $38,399 against the bonding company and sub-subcontractor, and $29,232 against the subcontractor. However, the court denied the leasing company's request for pre-judgment interest due to intentional falsification of documents during the claims process. The bonding company appealed, and the appellate court found that the trial court erred by not dismissing all claims against the payment bond, given the finding of fraud. Consequently, the appellate court reversed the judgment against the contractor’s surety while affirming other parts of the Circuit Court’s decision.
The opinion noted Ralph M. Webster's long-standing involvement in construction, detailing contracts awarded to him and the subcontracting to Murrell Construction, which began in 1994. The initial contract for $532,853 was awarded for sewer line installation, with a subsequent contract for additional work at a lower amount, with all work subcontracted to Murrell Construction.
Mr. Webster's profit from the Gallatin Industrial Center project was calculated at $38,377 before expenses, with a completion deadline of January 3, 1997. Murrell Construction engaged Ted Murrell, Randy Murrell's brother, to assist with the Lock Four Road project, where Ted leased a Samsung SE210 excavator and a Fiat-Allis FR140 rubber wheel loader for earth moving. This enabled simultaneous work on the site. However, in mid-August 1996, the Hitachi excavator was transported to the Gallatin Industrial Center to commence work on that project, remaining there for four to five weeks before returning to Lock Four Road.
By October 1996, the Lock Four Road project faced significant challenges, with a November 8 deadline approaching and Murrell Construction struggling financially due to escalating costs associated with both projects. Despite receiving over $265,000 in progress payments from Mr. Webster between July and September 1996, Murrell Construction and Ted Murrell failed to meet lease payments for all three heavy equipment pieces rented from Nashville Ford Tractor.
Ted Murrell operated under various business names, and it was acknowledged that the Hitachi excavator was frequently moved between projects, although the exact duration of its usage remained unclear. Randy Murrell claimed Mr. Webster handled all transportation of the Hitachi excavator, a statement contradicted by Ted Murrell. Mr. Webster asserted his transport activities were accurately recorded in his billing, but discrepancies existed between these records and Randy Murrell's testimony.
The lease rates for the equipment included $4,276 for the Hitachi and Fiat-Allis wheel loaders and $5,071 for the Samsung. In late October or early November 1996, Mr. Webster informed James Steven Denny of Nashville Ford Tractor about Murrell Construction’s overdue accounts, suggesting they seek payment from the Murrells following an anticipated large draw. However, when a $49,158.50 payment was received on December 13, 1996, the Murrells did not allocate these funds to settle their debts with Nashville Ford Tractor, claiming the payment was less than expected. Subsequently, Nashville Ford Tractor reclaimed the Fiat-Allis wheel loader but permitted the continued use of the Hitachi and Samsung excavators due to the ongoing nature of the City projects.
Murrell Construction assured Mr. Denny that two projects were nearing completion and that final payments from Mr. Webster would cover outstanding equipment lease balances. However, the projects were not completed, preventing Murrell from receiving those payments. By late November 1996 and January 1997, most installation work was done, but soil erosion from rain hindered the restoration of surface areas to pre-construction conditions, which was a contractual requirement. As a result, Murrell Construction could not obtain necessary releases from adjoining landowners, leading the City to reject the projects' completion. Consequently, Murrell Construction abandoned the job sites in March 1997 and coordinated with Nashville Ford Tractor to reclaim excavators due to an inability to pay laborers or lease payments.
Following the abandonment, Nashville Ford Tractor pursued collection of $72,607.50 in unpaid lease payments from the City and others. A letter dated March 22, 1997, threatened to file a lien if the debts were not settled and included altered lease agreement copies that falsely indicated the equipment was used for the Lock Four Road project. On April 10, 1997, Nashville Ford Tractor’s attorney sent another letter requesting $68,331.50, inaccurately claiming that all leased equipment was used under a contract for the City. This letter also included altered lease agreements, similar to the previous correspondence, with unauthorized modifications indicating 'Lock Four Road' as the location of use.
The April 10, 1997 letter from Nashville Ford Tractor referenced the payment bond for the Lock Four Road project but did not mention the Gallatin Industrial Center project, despite Nashville Ford Tractor's awareness that the equipment in question was not used solely on the Lock Four Road project during the lease period. Nashville Ford Tractor recognized this because it performed routine maintenance on the equipment while it was deployed. According to Tennessee Code Annotated § 12-4-205, a furnisher of labor or materials must provide written notice within ninety days after project completion to recover under a statutory payment bond. This notice must include an itemized account of materials or labor provided and a description of the improved property. Nashville Ford Tractor's attorney sent a similar letter on May 19, 1997, reiterating an amount due of $68,331.50 for unpaid leases on three pieces of equipment, claiming that all equipment was used for the Lock Four Road project, while again failing to acknowledge its use on other projects. The May 19 letter included a statement indicating it served as notice under the relevant statute and threatened legal action if payment was not made within thirty days.
On May 28, 1997, James Scotty Chambliss, secretary-treasurer of Nashville Ford Tractor, completed a sworn payment bond affidavit of claim referencing the Lock Four Road payment bond and asserting a debt of $68,331.50 based on the same altered lease agreements. Chambliss indicated that the last date of service was March 3, 1997, with notice of nonpayment sent on March 25, 1997. This affidavit was intended to prompt Great American Insurance Companies, the surety, to make payment. Mr. Webster did not pay within the specified timeframe, and instead, on June 25, 1997, his attorney informed Randy Murrell of the termination of subcontracts for both the Lock Four Road and Gallatin Industrial Center projects, stating that Mr. Webster would complete the projects and seek indemnification from Murrell Construction for any resulting damages. By August 1997, Nashville Ford Tractor had not initiated legal action to recover the unpaid leases, while Mr. Webster filed a breach of contract and indemnification complaint against Murrell Construction in the Sumner County Circuit Court on August 5, 1997.
Mr. Webster sought a declaratory judgment to clarify the rights and obligations of Great American, the City, Murrell Construction, and himself concerning subcontracts and payment bonds for two projects. He claimed that Murrell Construction breached the subcontracts for the Lock Four Road and Gallatin Industrial Center by failing to complete the projects, resulting in $100,000 in additional costs for him. Webster demanded indemnification for these expenses and a $100,000 judgment against Murrell Construction. He also alleged that Nashville Ford Tractor fraudulently altered unpaid lease agreements by adding "Lock Four Road" after they were signed, and sought a declaratory judgment to establish he was not liable for any unpaid leases to Nashville Ford Tractor.
Murrell Construction filed for bankruptcy on August 22, 1997, followed by Randy Murrell and his wife. The City accepted the projects as complete on September 2, 1997, authorizing a final payment of $71,017.17 to Webster, which included a change order for $20,282.93. The trial court dismissed the City from the lawsuit on October 28, 1997. Nashville Ford Tractor responded to Webster’s complaint on November 18, 1997, denying any knowledge of a second contract and asserting it had not altered lease agreements. Nashville Ford Tractor filed a counterclaim against Webster and a cross-claim against Murrell Construction and Great American, seeking $70,791.55 plus additional charges.
Over five years leading to the trial, Nashville Ford Tractor relied on the altered lease agreements to pursue its claims. Eventually, the company acknowledged that the original lease agreements had indeed been modified and sought to amend its pleadings to correct previous denials regarding Murrell Construction's involvement with the Gallatin Industrial Center project.
In December 2000, Mr. Webster obtained a $100,000 default judgment against Murrell Construction for breach of contract. The trial court permitted Mr. Webster to amend his complaint to include Jimmy Murrell, asserting that Murrell Construction was a sham corporation, thus holding Jimmy Murrell individually liable for costs incurred on two projects. Prior to the trial in September 2002, the court denied Jimmy Murrell’s summary judgment motion. The parties aligned into two groups: Mr. Webster and Great American on one side, and Nashville Ford Tractor and the Murrells on the other. In court, Mr. Webster’s attorney repeatedly stated that Mr. Webster indemnified Great American against Nashville Ford Tractor's claims, while Ted Murrell confirmed an agreement to help Nashville Ford Tractor pursue claims against Mr. Webster and Great American, contingent on Nashville Ford Tractor not collecting from him.
The two-day bench trial featured testimony from various parties, with Mr. Webster’s deposition included due to his cancer. Following the trial, Great American sought to amend its pleadings to add a fraud defense, which the court granted despite objections from Nashville Ford Tractor. On November 27, 2002, the trial court issued findings of fact, establishing Mr. Webster as the general contractor, Murrell Construction as a subcontractor, and Ted Murrell as a subcontractor for both public projects. The court found that Great American had issued payment bonds for the projects and received a claim notice for the Lock Four Road project but not for the Gallatin Industrial Center project. Consequently, the court held Murrell Construction, Ted Murrell, and Great American liable to Nashville Ford Tractor for unpaid leases, but not Mr. Webster or Jimmy Murrell.
The court determined the amounts due for various equipment, but found insufficient evidence to ascertain the Hitachi excavator's usage at the Lock Four Road site. It also concluded that Nashville Ford Tractor’s agents had falsified business invoices. As a result, the court dismissed claims against Mr. Webster and Jimmy Murrell, awarded Nashville Ford Tractor $38,399 against Great American and Ted Murrell for two pieces of equipment, and $29,232 against Murrell Construction for the Hitachi excavator. The request for prejudgment interest was denied due to Nashville Ford Tractor's document falsification. On February 24, 2003, the court denied motions to alter or amend the judgment, and Great American filed a timely appeal.
Nashville Ford Tractor filed a motion to dismiss an appeal, arguing that the trial court did not issue a final order regarding its bond claims against Mr. Webster and Great American. The court denied this motion after oral arguments. The appeal is reviewed under Tenn. R. App. P. 13(d), which distinguishes between factual and legal issues. For factual findings, the appellate court conducts a de novo review, presuming the trial court's findings are correct unless the evidence suggests otherwise. Significant weight is given to credibility determinations made by the trial court. If there are no specific factual findings, the appellate court assesses the evidence without a correctness presumption. The prevailing party is determined by which side has a greater evidentiary weight. The presumption of correctness applies only to factual findings; legal conclusions are reviewed independently by appellate courts.
A finding of fact based on undisputed evidence that supports only one conclusion is reviewed on appeal without the presumption of correctness under Tenn. R. App. P. 13(d). Great American challenges the trial court's judgment favoring Nashville Ford Tractor regarding unpaid lease agreements for a Samsung excavator and Fiat-Allis wheel loader, arguing: (1) a surety cannot be liable if the principal is not liable, citing Mr. Webster's lack of individual liability; (2) insufficient evidence to prove exclusive use of the equipment on the Lock Four Road project; and (3) the trial court’s finding of falsification by Nashville Ford Tractor constitutes fraud, barring recovery. Conversely, Nashville Ford Tractor contests the trial court's rulings, including the amendment of Great American’s answer to include fraud, the finding of Mr. Webster's non-liability, and the denial of prejudgment interest due to perceived intentional falsification of documents.
The central issues involve the evidentiary basis for the trial court's conclusion that Nashville Ford Tractor intentionally altered lease agreements to collect under the payment bond and the legal implications thereof. Upon thorough review, it is determined that Nashville Ford Tractor did indeed alter the lease agreements, adding references to 'Lock Four Road' to enhance its claim, despite knowing the equipment was not exclusively used for that project. This alteration was not an inadvertent mistake, but rather a deliberate action aimed at improving its chances of recovering the unpaid lease balances under the payment bond.
Nashville Ford Tractor pursued a claim against Great American and Mr. Webster under the statutory payment bond for the Lock Four Road project, despite the bond being contract-specific and intended only for labor or materials used in connection with that contract. The company attempted to retroactively link equipment used at the Gallatin Industrial Center to the Lock Four Road project, which could strengthen their claim. However, evidence indicated that Nashville Ford Tractor was aware, as early as August 5, 1997, that it faced allegations of altering lease agreements fraudulently to support its claim. Although the company had retained three copies of each lease agreement, they continued to use the altered versions in their filings rather than providing unaltered originals. Throughout the litigation, Nashville Ford Tractor failed to offer an innocent explanation for the alterations and displayed little interest in identifying those responsible for the changes, even when questioned during depositions and trial.
Mr. Denny, when questioned by the trial court about his efforts to identify who altered the lease agreements by adding "Lock Four Road," admitted to a lack of sufficient effort, indicating that his responsibilities in sales made it challenging to investigate. He noted that the originals of each lease were distributed within Nashville Ford Tractor to various departments, including the front office and service manager, with one copy sent to the customer. Upon being recalled to the stand, Mr. Denny confirmed he had not made any further inquiries into the falsification of the documents. The court inferred that the company’s lack of diligence in uncovering the alterations suggested intentional fraud rather than mere mistakes. Consequently, the trial court concluded that Nashville Ford Tractor should not recover on the payment bond due to the intentional falsification of documents in seeking to collect unpaid balances. The document cites Tennessee legal precedent, emphasizing that fraud invalidates transactions and prohibits recovery of rights arising from fraudulent activities. This principle extends to construction liens, where falsifying documents precludes enforcement of rights, reinforcing that the same rule applies in this case regarding the payment bond.
Nashville Ford Tractor intentionally altered unpaid lease agreements to improperly collect under the payment bond for the Lock Four Road project. The trial court's finding of this fraud is strongly supported by the evidence, making any contrary finding unsustainable. Consequently, Nashville Ford Tractor is barred from recovering under the payment bond, and the trial court erred in ruling in its favor against Great American. This determination negates the need to consider other arguments presented by the parties. Additionally, Murrell Construction and Ted Murrell did not contest the judgments against them, and Great American's objection concerning the dismissal of claims against Jimmy Murrell is now irrelevant. The judgment of the trial court is partially affirmed and partially reversed, with the case remanded for further proceedings as necessary, and costs of the appeal are assigned to Nashville Ford Tractor, Inc.
