Banking Law Alert – April 2016 Issue

COURT REJECTS GUARANTORS DEFENSE
BASED ON VIOLATIONOF
THE TENNESSEE CONSUMER PROTECTION ACT

The Tennessee Court of Appeals in the case of SecurAmerica Business Credit v. Southland Transportation Company, LLC, in its ruling from January, 2016, has rejected the defense of the guarantors of a business line of credit based upon the lender’s alleged violation of the Tennessee Consumer Protection Act (“TCPA”).

The structure of the underlying transaction was not uncommon. Southland Transportation Company, LLC (“Southland”) was a trucking company. SecurAmerica’s claims arose from a default by Southland under a Secured Revolving Credit Agreement.  The Credit Agreement was for the purpose of providing working capital for Southland based upon the value of the company’s accounts receivable.  Southland would submit daily “borrowing base certificates” to SecurAmerica which identified the amount of eligible accounts receivable and SecurAmerica would advance monies based upon these certificates.  Additionally, Southland maintained a designated bank account into which it directed its customers to send invoices.  Finally, SecurAmerica required Southland’s principals to guarantee payment under the Credit Agreement.

The Guarantors sold Southland to its employees. SecurAmerica left the Credit Agreement in place and did not release the guarantors.  Subsequently, Southland, under new ownership, began falsifying the borrowing base certificates to maximize its borrowing base and directed customers to make remittances on invoices to an account other than SecurAmerica’s designated account.

In the action by SecurAmerica against Southland Transportation and the guarantors, the guarantors asserted that SecurAmerica, through the actions of its president, violated the TCPA which resulted in the guarantors’ suffering an ascertainable loss of money or property. The proof at trial was uncontroverted that for some period of time SecurAmerica’s president was aware that the borrowing base certificates had been falsified and those remittances were being diverted to another account.

The trial court found that SecurAmerica’s actions were “intentional and deceptive,” and based on those findings released the guarantors from the Guarantees.  On appeal, the Tennessee Court of Appeals reviewed the TCPA with regard to its application to the transaction at issue.  While the Court found that the TCPA, as a remedial statute, should be liberally construed in order to protect the consumer from those who engage in “unfair or deceptive acts or practices in the conduct of any trade or commerce,” it went on to note that “trade or commerce” is specifically defined as “the advertising, offering for sale, lease, rental or distribution of any goods, services or property.”  The Court of Appeals determined that the actions of SecurAmerica, even if considered to be unfair or deceptive, did not affect the “advertising, offering for sale, lease or rental, or distribution of any goods, services or property. . .” without substantially expanding the statute’s intended meaning and application.  Because the Court determined that SecurAmerica’s acts did not affect trade or commerce within the meaning of the TCPA, the guarantors’ defense, based upon violation of this Act, necessarily failed.

OUR RECOMMENDATION: The SecurAmerica case reflects the lengths to which borrowers or guarantors may go, including the invocation of seemingly inapplicable statutes, to avoid liability. In this case, despite actual knowledge of fraud on the part of SecurAmerica’s president, the Court found the Tennessee Consumer Protection Act action inapplicable as a defense to the guaranties. However, creative borrowers will continue to employ similar means to avoid liability. Thus, attention to details in lending practices and intolerance of any inappropriate actions on behalf of the borrower or the lender’s agent is the best way to ensure that these efforts to avoid liability fail.

For a pdf version of the newsletter, click here:  Banking Law Alert – April 2016