Third Appeal’s the Charm…

The recent Tennessee Court of Appeals case of Bancorpsouth Bank v. 51 Concrete, LLC provides a good analysis of the principles for an award of prejudgment interest but an even better argument for reasonable settlement of claims…

Background

This was the third appeal in a conversion action arising from the sale of construction equipment, which served as collateral on a loan, to third parties by a debtor. Following the debtor’s default, the lendor, Bancorpsouth (“the Bank”), filed suit against the purchasers, 51 Concrete, LLC, and Thompson Machinery Commerce Corporation (“the Purchasers”), seeking to recover the proceeds from the sale of the collateral. The first appeal was from the trial court’s ruling that it lacked subject matter jurisdiction, which was reversed on appeal. On remand, the trial court awarded a judgment in favor of the Bank in the amount of the original default judgment against the Debtor, plus post-judgment interest. The judgment was apportioned between the Purchasers based upon the amount of the proceeds each received from the sale of the collateral. The Bank appealed from the judgment arguing that the trial court erred in awarding damages based upon the amount of its default judgment.  The Bank also argued that damages should have been measured from the full amount of the proceeds from the sale of the collateral, and that the trial court erred in its failure to award pre-judgment interest.

In BancorpSouth II, the Court of Appeals held that the Bank was entitled to damages based on the fair market value of the secured property at the time of the conversion and that the sales price at the time of the sale of the collateral was indicative of fair market value. The Court did not address pre-judgment interest.

Following the opinion in BancorpSouth II, the Bank filed a Rule 11 application for permission to appeal to the Supreme Court. The Supreme Court issued an order granting the application for the narrow purpose of remanding the case to the Court of Appeals for full consideration of the Bank’s claim for pre-judgment interest.

Ruling

The sole issue before the Court of Appeals was whether the trial court erred in failing to award pre-judgment interest. The Court began by noting that the trial court’s order was ambiguous on whether pre-judgment interest had been awarded. The Court held that upon further examination of what the court was referring to as “post-judgment interest”, which was the interest accruing between the Bank’s default judgment against the debtor and the judgment in this action, was actually an award of pre-judgment interest. Thus, the Court determined that the issue was whether the trial court abused its discretion in awarding prejudgment interest at a rate of 8.35% from the date of the Bank’s default judgment against the debtor.

Ultimately, the Court held the Bank was entitled to pre-judgment interest, but modified the amount of the award. In Tennessee, trial courts may award pre-judgment interest pursuant to Tennessee Code Annotated § 47-14-123, which provides that it may be awarded in accordance with the principles of equity. The Court then looked to the principles that have been articulated by the Tennessee Supreme Court to guide trial courts in exercising their discretion on whether to award prejudgment interest. First and foremost, whether to award interest is determined by whether it is “fair, given the particular circumstances of the case.” Two additional principles are 1.) when the amount of the obligation is certain, or can be ascertained by a proper accounting, and the amount is not disputed on reasonable grounds and 2.) interest is allowed when the existence of the obligation itself is not disputed on reasonable grounds.

Using those principles, the Court looked to the facts of the action. The Court found significant the fact that Purchasers chose not to perform a search of the UCC records, which would have revealed Bank’s interest in the collateral. The Court found those went to the reasonableness of Purchasers’ position disputing the existence of their obligation to Bank. Equally significant was the fact that Purchasers, not the Bank, had the full use of the disputed funds during the pendency of this lawsuit. The Court held that based on these factors, it could not conclude that the trial court abused its discretion.

As to the amount awarded in prejudgment interest, the Court held that neither the judgment amount on which the interest would run nor the interest rate applied were in dispute, only the period for which prejudgment interest should be paid. The trial court held that it should run from the date of the default judgment against the debtor. Purchasers argued that the date should run from the dates of the conversion because the Debtor continued to make payments on his loan following the sale of the collateral. The Court held that the prejudgment interest should run from the dates of demand from the third party, not the date of conversion.

Commentary

            This case is not only a good example of analysis for prejudgment interest purposes, but a case of defendants who may have wished they settled this action rather than litigate through three appeals.  The judgments $61,000 and $23,000 ultimately became a judgment for $85,141.79, and one for $31,150.29.

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