Banking and Financial Services Update, Vol. 12, Spring 2012


In this issue:

  • A Business Friendly Decision from the Tennessee Supreme Court
  • Tips for Directors of Troubled Institutions
  • Is an Unsigned Will Ever Validly Executed?

A Business Friendly Decision from the Tennessee Supreme Court

By:  Woody Woodruff and Becca Brinkley

In a recent opinion, the Tennessee Supreme Court ruled that a lender that extends credit to a business may, under the right circumstances, also enforce a personal guarantee against the business owner, even if the owner does not sign in his personal capacity. This opinion makes it clear that it is not necessary for an individual to sign an application two times in order to bind a company and to bind himself personally. One signature is enough.

The facts of the case are straightforward. Allstates Building Systems, LLC ("Allstates") applied for a credit account with 84 Lumber Company ("84 Lumber").  Allstates' application identified Bryan Smith ("Smith") as its president. Above the signature line, the application provided, in all capital letters, that Smith was agreeing to personally guarantee the account.

The application also provided that if the account was "placed for collection," Allstates and Smith agreed to pay 84 Lumber's reasonable attorney's fees and costs. Smith signed the application as "R. Bryan Smith, President." 84 Lumber accepted the application and extended credit to Allstates. 84 Lumber later sued Allstates and Smith for an unpaid balance.

Four courts heard the case. The general sessions court dismissed the case. On appeal, the circuit court ruled in favor of 84 Lumber, holding that Smith had agreed to be personally liable for Allstates' account balance, plus that Smith and Allstates were liable for 84 Lumber's reasonable attorney's fees. On appeal to the Tennessee Court of Appeals, the court ruled in favor of Smith, holding that Smith had only signed the credit application as Allstates' representative and was not personally liable for the amount owed. On the last appeal to the Tennessee Supreme Court, the court ruled in favor of 84 Lumber, reinstating the judgment of the circuit court, and holding that even though he signed as Allstates' president, Smith had agreed to be personally liable for the debt of Allstates, including 84 Lumber's reasonable attorney's fees.

The Tennessee Supreme Court reaffirmed that in most cases, an officer or agent who signs a contract on behalf of an entity is not personally bound to the contract. However, the court emphasized that if the clear intent of the contract is to legally bind the representative personally, then the representative will be bound regardless of the fact that the representative only signed in an official capacity. The court emphasized that the credit application unambiguously provided for Smith's personal guarantee of amounts due, and by signing it, even once, Smith intended to obligate himself personally.

This opinion is good for business. Broadly, it stands for the bedrock proposition that parties to a written contract are accountable for their obligations set out in the four corners of the agreement. The case further underscores that failure to read a contract does not excuse performance. Specifically, the case makes new Tennessee law so that a personal guarantee may be enforced against an individual who signs an agreement only in a representative capacity, if the contract clearly provides for such a guarantee. To have affirmed the Tennessee Court of Appeals' decision would have been a very business unfriendly ruling resulting in more excuses and loopholes to the enforcement of clearly written agreements.

This ruling by the Tennessee Supreme Court gives parties that extend credit, such as financial institutions, the benefit of their bargain with borrowers, and does not allow a business owner to avoid a clear obligation to guarantee the debts of his business by hiding behind the assertion that his signature was only binding against the company.

The key point for lenders, however, is to make certain that a personal guarantee contained in a loan agreement is clearly and unambiguously set forth in the agreement.

Tips for Directors of Troubled Institutions

By:  Marlee Mitchell and Chris Siderys

The January 2012 failures of Tennessee Commerce Bank and BankEast, the first bank failures in the state in a decade, demonstrate that banks in Tennessee are not immune to the conditions that have caused the failure of over 420 banks in the United States since 2008. These failures act as a strong reminder for directors of banks, and particularly those serving troubled institutions, of actions they can take to limit their personal liability if their bank fails.

The directors of banks, like their counterparts in any corporation, can best defend against most claims by diligently fulfilling their obligations to the corporation and its shareholders. Much has been written of a director's fiduciary obligations – the duties of care and loyalty – and further discussion of these duties is beyond the scope of this article. However, by being actively engaged as a board member (reviewing materials distributed, regularly attending board meetings); actively participating in board discussions; and making informed decisions, a director can limit his or her liability from potential claims.

It is also important that board minutes accurately memorialize the board meetings (see the Banking and Financial Services Update, Vol. 11, Winter 2011). As Mike Krimminger (the FDIC's General Counsel) has said, if it is not in the minutes, the FDIC does not consider it as having happened. Accurate board minutes are a director's proof that he or she has fulfilled his or her duties to the bank. Process is key, but to evidence adequate process, you must have an adequate corporate record.

As a bank becomes troubled and slips closer to receivership, there are numerous steps that a bank director can take to best position himself or herself for a successful defense against FDIC litigation. As a bank's condition deteriorates, it is important that the bank's directors know what is in the bank's D&O insurance policy to fully understand what is and is not covered by the policy, including:

  • Definition of "loss"
  • Key exclusions (i.e., whether there is a regulatory exclusion)
  • Reporting requirements
  • Amount of coverage provided under the policy.

Directors also need to understand "Side A" and "Side B" coverage and ask whether the policy contains independent director liability coverage. Additionally, each director must decide whether to engage individual counsel. While single counsel for the board of directors as a whole is cost effective and often appropriate, there may be occasions where there are conflicting interests among directors causing individual counsel to be appropriate.

Directors of faltering banks should also take other actions to properly situate themselves in case the FDIC makes demands on them. Directors should retain copies of key documents that they have utilized in performing their duties. Following the failure of a bank, it can be difficult to obtain all of the documentation a director or his or her counsel may want during the preparation of a defense strategy. This can be made much easier if the director is able to provide much of this information from retained copies, noting that it remains the duty of the director to keep this information confidential, and recognizing that all original copies of information must remain at the bank. The FDIC generally has a three-year statute of limitations following the failure of a bank to bring tort claims against directors, officers, and others that it perceives were liable for the failure of the institution. Because of this extended time period before claims are actually brought, it may help a director of a failed bank to construct a written record of meetings and significant decisions as a point of reference.

While the failure of a bank is an unpleasant experience for any member of the bank's board, properly performing one's job on the board, and preparing for the failure can help limit ongoing potential liability following FDIC receivership. Further, engaging counsel early in the process can allow the director and counsel to work together to review the D&O liability insurance contract as well as identify early on any potential claims against the director.

Is an Unsigned Will Ever Validly Executed?

By:  Ames Davis

It depends on what you mean by "Will."

According to the Tennessee Court of Appeals, even if the Deceased does not sign

a. following the usual incantation at the end of a Will ("IN WITNESS WHEREOF, I declare this to be my Last Will and Testament …"); or
b. at the bottom of the last numbered page of the Will; or
c. above the signatures of the attesting witnesses at the bottom of that page; or
d. anywhere else on the document purporting to be the Will,

the Will is still validly executed if the Deceased does sign the accompanying TCA § 32-2-110 witness affidavit. In re Estate of Thomas Grady Chastain, No. E2011-01442-COA-R9, filed December 28, 2011.

As the Opinion by Judge Susano points out, the recitations in the Affidavit executed by the Decedent and the witnesses purported to establish all the statutory formalities imposed by TCA § 32-1-104, reciting that the decedent had signed and declared to the witnesses that the document to which the affidavit was attached was his last will and testament, and that that the witnesses had signed in the presence of the testator and in each other's presence. Thus, the Opinion appears to stand for the proposition that it really doesn't matter where the Will is signed, and also for the proposition that a signature on a separate page, or even a separate document, may be sufficient, if the formalities of TCA § 32-2-110 are otherwise observed.

Apparently, once the Court of Appeals was satisfied that the Decedent had intended to execute the Will, it felt constrained to "protect the right of testamentary disposition of property." Doubtless this was a just decision, given the formalities which were observed, even if those were not precisely the formalities prescribed by statute. After all, while the Court cites the Affidavit as establishing observance of the necessary formalities, that same Affidavit contained a demonstrably false recitation,

that the testator willingly and voluntarily declared, signed and executed the will in the presence of the witnesses…

That is exactly what the testator did not do. Another court might well have reached a different result, on the grounds that the Affidavit was not trustworthy.

The only obvious lesson to be learned is that the formalities prescribed by TCA § 32-2-110 for non-holographic wills should be scrupulously and methodically followed. Lest we forget: The testator and at least two witnesses must sign the will in this fashion: the testator must signify to the witnesses that the instrument is his or her will, and then, in all of the witnesses' presence, either (a) sign the will; (b) acknowledge his or her signature already made on the will; or (c) direct a third person to sign, who must do so in the testator's (and all the witnesses' presence). Then, the attesting witnesses must sign (a) in the presence of the testator and (b) in the presence of each other. An Affidavit pursuant to TCA § 32-2-110, such as the one signed by the Decedent in Chastain, is not even necessary; but it does make it possible to probate the will without the witnesses having to attend the hearing.

Corporate and Commercial Transactions:

Marlee Mitchell (615 850 8943), David Wilson (615 850 8586)

Finance and Restructuring:

Rob Harris (615 850 8467), David E. Lemke (615 850 8655)

Financial Services Litigation:

Joseph A. Woodruff (615 850 8485), Larry B. Childs (205 214 6380)

Regulatory Issues:

Marlee Mitchell (615 850 8943), Chris Siderys (615 850 8176)

Please provide suggestions for future topics or feedback to:

Miranda K. Kelley, Editor
Phone: 615 850 8674