Tennessee Evidence Law: A Few Basic Rules Helpful to Clients

April 24, 2014,

Whether you are involved with a breach of contract case, will dispute case, real estate case or any type of commercial litigation case in a Tennessee court, you can help yourself by knowing a little about the basic rules of evidence that apply in Tennessee state court cases. In my experience, many clients assume that some piece of evidence will be admissible at trial when it will not be admissible.

The Tennessee Rules of Evidence act like a filter. While there may be all kinds of statements and documents related to a dispute, the odds are that some, even many of those statements and documents, will not be admissible at trial. They get "filtered" from the courtroom by the Tennessee Rules of Evidence. Here are a few basic rules of evidence in Tennessee of which it would behoove any party to have at least passing knowledge.

FIRST-HAND KNOWLEDGE: In order to be allowed to testify about a matter, a witness must have first-hand knowledge of the matter. Let's assume there is a breach of contract case in Tennessee in which Defendant contracted to provide computer programmers to Plaintiff for work on a project which was the subject of a separate contract between Plaintiff and its client ("Client"). The programmers worked on-site with Client and directly under Client's supervision. The programmers, according to Client, did not have adequate experience or skills and performed inadequately. Because of that, Client cancelled the contract between it and Plaintiff which resulted in Plaintiff losing substantial profits.

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Valuing the Shares of Dissenting Shareholders in Tennessee

April 6, 2014,

Shareholders of Tennessee corporations, under certain circumstances set forth in Tenn. Code Ann. §48-23-102, have the right to "dissent" and to require the corporation to pay them for the "fair value" of their shares. How do Tennessee courts determine the "fair value" of a dissenter's shares? For Tennessee lawyers who handle shareholder disputes, the three Tennessee cases discussed below provide a valuable road map in dissenters cases.

The Supreme Court of Tennessee, in the 1983 case Blasingame v. America Materials, Inc., held that the "Delaware Block Method" should be used in Tennessee to determine the fair value of a dissenting shareholder's shares. The Delaware Block Method requires that the court consider three different methods used to value shares: (1) the market value method; (2) the asset value method; and (3) the earnings value method. Once the court determines the value of a share of the dissenter' stock according to each method, the court must assign a weight, expressed as a percentage of 100%, to the stock value as determined by each method.

The market value method looks at the price for which a share of the corporation's stock could be sold if there were a willing buyer. The asset value method values a share of the corporation's stock according to its pro rata value as to the net assets of the corporation. The earnings value method values a share of the corporation's stock based on its earnings potential which, in turn, will be based on historical earnings.

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Defending a Breach of Contract Case in Tennessee on the Grounds of Unilateral Mistake

March 31, 2014,

In Tennessee breach of contract cases, the defense of unilateral mistake falls in the category of legal defenses (and claims) that are fairly often asserted, but rarely successful. Nevertheless, for lawyers who handle breach of contract cases in Tennessee, this is a defense that, in some cases, can be outcome determinative.

Tennessee contract law recognizes two categories of mistakes as defenses to breach of contract claims: (1) Mutual mistakes; and (2) unilateral mistakes. The defense of mutual mistake applies when both parties are mistaken as to a fact material to the contract. The unilateral mistake defense applies when only the party invoking the defense was mistaken.

Both defenses, mutual mistake and unilateral mistake, apply only to mistakes about facts that existed at the time the parties' contract was formed. In situations where facts arise after the formation of the contract that a party believes may excuse it from performance of its obligations, that party should look to the doctrines of impracticability and frustration of purpose, but not to mistake.

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Tennessee Breach of Contract Cases: When Does the Statute of Limitations Begin to Run?

March 24, 2014,

For most breach of contract cases in Tennessee, the six year statute of limitations at Tenn. Code Ann. §28-3-109(3) will apply. That statute provides that the statute of limitations begins to run when the cause of "accrues" (by requiring a breach of contract lawsuit to be filed "within six (6) years after the cause of action accrued").

When does a cause of action for breach of contract accrue? In Tennessee, it accrues, or begins to run, on: (1) the date of the breach; or, (2) the date that the breaching party commits what is called an "anticipatory breach" or "anticipatory repudiation" (words or conduct that make it clear that the party will not perform its obligations or considers the contract terminated).

For many, if not most, breach of contract cases which confront Tennessee breach of contract lawyers, the date of the breach, and thus, the date the statute of limitations began running, is pretty easy to determine. For example, if Party A agreed to deliver goods to Party B on or before the close of business on March 1, 2014, but failed to do so, the statute of limitations began to run on March 1, 2014.

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Proving Intentional Interference With Contract In Tennessee

March 16, 2014,

Tennessee recognizes both a statutory and a common law cause of action for intentional interference with contract, also sometimes called procurement of breach of contract or tortious interference with contract. The statutory cause of action is found at Tenn. Code Ann. §47-50-109.

To say that the public policy of Tennessee frowns on parties who interfere with the contracts of others is probably putting it mildly. A party who wins an intentional interference with contract case is entitled to the pretty rare remedy of treble damages (three times the damages which it would receive just for its breach of contract case). Tennessee business owners should have more than a passing knowledge of this tort as, in the heat of competition, what might seem like just a savvy move to obtain new business or a new employee might cause a lawsuit.

A useful way to consider how to try and stay out of the crosshairs of an intentional interference with contract case is to consider what a plaintiff must prove to win a lawsuit for intentional interference with contract in Tennessee:

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Brick Salesman Held to Non-Compete Agreement by Court of Appeals of Tennessee

March 5, 2014,

A recent case involving a non-competition agreement signed by a brick salesman proves the conclusion that, in many Tennessee non-competition agreement cases, the determination of whether or not a former employee should be bound by his or her non-compete agreement turns on very subjective considerations. In point of fact, in that case, the trial court determined that the non-competition agreement was unenforceable: The Court of Appeals of Tennessee then determined that it was enforceable.

For breach of contract lawyers who handle non-compete cases, the case also highlights the importance of whether or not the former employee had access to pricing information, pricing strategies and profit margin information about his or her former employer. One of the two pivotal factors which caused the Court of Appeals to reverse the trial court was that the former employee / brick salesman ("Employee") had fairly extensive knowledge of his former employer's pricing structure, margin targets and bidding strategies for brick sales. Notably, Employee even admitted that having such knowledge would give someone a competitive advantage over the former employer ("Employer") when bidding and quoting brick.

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Will Contests in Tennessee: Who Pays Attorneys' Fees?

February 27, 2014,

If you hire a will contest lawyer in Tennessee to defend a will which has been offered for probate and which is being challenged as invalid, or if you hire a lawyer to try to invalidate a will which has been offered for probate, will the attorneys' fees of your attorney be your individual responsibility? Or can they be paid, or reimbursed to you, from the assets of the deceased (from the estate)? If you successfully defend a will contest, is the non-prevailing party who challenged the will required to reimburse you or the estate for the fees incurred to defend the will?

The answer to the later question is straightforward: One who is unsuccessful in a will contest action cannot, except in limited and unlikely circumstances, be required to pay the prevailing party's attorneys' fees. The answers to the former two questions are a little less straightforward.

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Breach of Contract Cases in Tennessee State and Federal Courts: What to Expect From Filing to Trial

February 20, 2014,

Clients in breach of contract cases, as well as other cases involving business disputes, are often new to the litigation process and have questions about it. Common questions I receive at the outset of a case from clients are: How long will the case take? What happens after the complaint is filed? When will the trial take place?

So, how long does it take for a breach of contract case to be finished? What I tell clients for cases filed in Tennessee state courts is that, if the case has to go all the way to trial, don't expect the trial to take place any sooner than a year to a year and a half from the date the case was filed. If you have a trial date within one year of the date suit was filed in a case in Tennessee state court, you are doing well in terms of time.

For breach of contract cases filed in the federal court for Nashville and Middle Tennessee, the trial date will almost certainly, in my experience, be set on a date that is at least one year from the date the complaint was filed. In federal court in the Middle District of Tennessee, the court will automatically assign your case a trial date within, usually, a few weeks after the case was filed.

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Recovering Under the Theory of Quantum Meruit In Tennessee

February 12, 2014,

To recover in a breach of contract case in Tennessee, a party must prove that there was an enforceable contract. In Tennessee, an agreement must meet several requirements before it can be considered a legal contract. For example, there must have been a "meeting of the minds" between the parties and the terms of their agreement must be definite enough to be enforceable in order for a contract to be formed. Believe it or not, more often than you might think, two parties conduct some type of business together without having an agreement that amounts to what a court would consider a contract.

So what happens when an aggrieved party cannot prove that there was a contract? Is that party then totally without any legal recourse whatsoever? Not necessarily. Tennessee, as do most, if not all other states, recognizes the legal doctrine of quantum meruit - - -also called unjust enrichment or quasi-contract.

Quantum meruit allows a court to award money to a party who has provided goods or services to someone else even though those parties never had a contract. In fact, a court can use quantum meruit to provide relief only when no legal contract is found to exist between the parties.

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Limited Liability Company Dissolution in Tennessee: To What Are Members Entitled? How Are Capital Contributions Treated?

February 7, 2014,

Frequently in Tennessee, LLC members have to part ways. When that happens, it also may happen that one of the members will file a court action to have the limited liability company dissolved. Assuming that the LLC has assets, an issue that a Tennessee court is likely to have to decide in an LLC judicial dissolution action is how the assets should be divided between or among the LLC's members. Of course, in dissolution proceedings, LLC members often disagree about the amount to which other members are entitled.

The first place a Tennessee court will (or should ) look to determine how the assets of an LLC which is being dissolved should be distributed is T.C.A. §48-249-620, which is part of the Tennessee Revised Limited Liability Company Act. To summarize, here is the pecking order for the distribution of an LLC's assets upon dissolution:

First: Creditors of the LLC, which can include members who have made loans (as distinguished from contributions to the LLC).

Second:To members for certain distributions owed, but not made. What kind of distributions? A: Distributions provided for in the "LLC documents" or agreed to by a majority of the members, managers, or directors depending on the organization of the LLC. See, T.C.A. §48-249-305. (Under Tennessee law, no member is entitled to a distribution before dissolution unless the LLC documents permit it or upon the majority vote mentioned above.)

Third:To members for their contributions. (Sometimes referred to in case law and LLC documents as "capital contributions").

Fourth:If any assets are left to distribute at this point, they are to be distributed to members according to the percentage of their ownership (financial rights).

Note that a member who has made a loan to the LLC is entitled to be repaid for the loan before another member is paid for his or her capital contribution. When one member claims a loan, another member may argue that it was not a loan, but a contribution. If the member has no promissory note, credible evidence of an oral agreement, or some proof of acknowledgment that the money was loaned, or some other document reflecting the loan, that member is likely to have an uphill battle proving the money was loaned.

Whether a member has made a contribution and the amount at which to value that contribution may well be a contested issue in an LLC dissolution. Under Tennessee law, a contribution may consist of money, services, tangible or intangible property, or "other benefit." See, T.C.A. 48-249-301(a). Importantly, a contribution cannot be considered a contribution until it is "accepted" by the members and "the amount and value" are recorded in LLC documents. In practice, the acceptance and recordation requirements may be pretty loosely construed. (See, Owen v. Hutten (Ct. App. Tenn. 2013) where depositing funds into LLC bank account and tax documents of member showed contributions, requirements satisfied).

If a member intends for his or her services to amount to a contribution, he or she should have something written, whether in an operating agreement or otherwise, which states that his or her services are to be considered a contribution and which states the specific value assigned to the contribution. In the absence of a written agreement, a member could try to prove the other member or members orally accepted his or her services as a contribution. Where a member contributes significant services for a substantial period of time without any remuneration from the LLC, such a factor would be likely to influence the court that a contribution was made.

Regardless of the statute which sets forth how distributions should be made in an LLC dissolution, a Tennessee court always has the equitable power to order relief which might not fall in line with the pecking order of that statute. A provision in the Tennessee Revised Limited Liability Company Act, T.C.A. §48-249-616, grants a Tennessee court power to grant any equitable relief it considers "just and reasonable under the circumstances." Lastly, and notably, a Tennessee trial court which employs the aforementioned statute will not be reversed on appeal unless it is found by the appellate court to have abused its discretion. For a litigant trying to have the decision of a trial court reversed, the abuse of discretion standard is a "tough row to hoe" so to speak.

Tennessee Jury Stings Insurance Company in Bad Faith Failure to Pay and Breach of Contract Case

January 31, 2014,

A jury in Bradley County, Tennessee handed down substantial punitive damages award and compensatory damages award against Erie Insurance Exchange ("Erie") in a case involving its failure to pay a claim for losses arising from vandalism and theft at apartment units which it insured. The case is a must read for lawyers who handle insurance policy cases and bad faith failure to pay cases. Why? First, the case is highly unusual because the jury in the case awarded punitive damages on a breach of contract claim.

In my experience, punitive damages are rarely, if ever, awarded by Tennessee juries merely for a party's breach of a contract. In fact, for better or for worse, they are awarded much less often, even in cases involving fraud and intentional torts, than most lay people would expect.

The case is also important because it is sound authority for the position that an insured can receive more in compensatory damages for an insurance company's failure to pay a claim than just the amount of the amount of the claim made by the insured, but not paid, plus the statutory 25% percent penalty for bad faith failure to pay.

Here are the pertinent facts of the case:

• Plaintiff owned three apartment buildings ("Apartments") which he rented
• On June 8, 2009, Plaintiff sold the Apartments to the Perrys
• Plaintiff financed the sale to the Perry's and remained liable on the note he had signed to buy the Apartments
• By October of 2009, the Perrys had given up running the Apartments and filed bankruptcy
• In November of 2009, Plaintiff discovered significant damage and appliance theft at the Apartments
• In December of 2009, Plaintiff submitted a claim for loss to Erie, which insured the Apartments
• The amount necessary to repair the damage and replace the stolen appliances was $92,600 - - - this was the claim amount
• Erie never denied the claim or paid it so Plaintiff filed suit in August of 2011
• At trial, the adjustor for Erie testified that the policy in question covered losses for theft and vandalism, but that Erie would not pay the claim because he was unable to determine when the damage and theft occurred (Erie was not responsible, under the policy at issue, for any vandalism or theft which did not occur within the policy period)

The jury found that Erie was liable for compensatory damages in the amount of $343,430 -- more than a quarter of a million dollars more than the amount it would take to repair the damage and replace the stolen appliances (the claim amount). It also found Erie liable for $1,500,000 in punitive damages.

On appeal, Erie did not challenge the jury's verdict, but requested a new trial on the basis of numerous evidentiary errors it alleged that the trial court made. The Court of Appeals of Tennessee affirmed the trial court's verdict and denied Erie a new trial.

This case is rich with lessons for those involved in insurance policy litigation or cases where an insurance company has failed to pay a claim. Under the insurance policy at issue, Plaintiff was only entitled to receive compensation for the amount of his loss, $92,600 (the claim amount). If the jury determined that Erie was liable under the bad faith statute, which it did, then Erie was on the hook for an additional 25% of the loss, in this case $23,150 (25% of $92,600). So, how is it that Erie could be held liable for $343,430 in compensatory damages alone? That happened because the Plaintiff put on proof at trial that, in addition to the losses covered by the policy for damage repair and appliance replacement, he lost profits. How did he lose profits? He lost profits because, during the time that the losses which were covered by the policy were not paid (damage repair and appliance replacement), he could not rent the units.

On appeal, Erie also argued that Plaintiff's losses should have been limited to his claimed loss, $92,600, plus an additional 25% of that amount (the bad faith penalty). Erie claimed that the language of the Tennessee bad faith failure to pay statute supported this limitation. The Court of Appeals disagreed, holding that Plaintiff was entitled to recover any damages which were recoverable under Tennessee law for breach of contract.

What Happens When the Language of a Will Is Not Clear? Court of Appeals of Tennessee Reviews Guidelines

December 23, 2013,

In probate litigation in Tennessee, disputes sometimes center on what the person who made the will (the "testator" or "testatrix") meant in the will. Such litigation can fairly easily be avoided by careful will drafting. Nevertheless, wills are sometimes not sufficiently precise or are susceptible to different interpretations--particularly wills drafted by non-lawyers.

The Court of Appeals of Tennessee recently issued an opinion in a case involving a holographic (handwritten) will which was phrased such that it was unclear who the testator meant to make the beneficiaries of his will. The case provides a helpful summary of the basic Tennessee law that applies when a court is confronted with a will which can be interpreted in more than one way.

A husband ("Husband") drafted his own will. In the will, he stated that all of his property was to be left to his wife's daughter "to be divided as she sees fit among kids. . . ." The wife's daughter had several children. Husband passed away and his handwritten will was admitted to probate.

The dispute in the case arose when the daughter of the deceased Husband ("Daughter"), stepped forward and filed a declaratory judgment action in which she sought to have the will determined to be invalid. What was her basis for claiming that the will was invalid? She argued that the phrase "among kids" was too vague and unclear to be interpreted. This argument had merit because, just from the language of the will, it was impossible to tell whether Husband meant his wife's daughter's kids; his kids (which would include "Daughter"); or both.

Under Tennessee law, if a will is so vague and/or ambiguous that a court cannot determine the testator's intentions, the court must refuse to enforce that will, or at least the part of it that is too vague or unclear. In Tennessee, if a person dies without a valid will, his or her assets are distributed according to some statues that direct which relatives receive what when a person dies without a will. In this case, Daughter stood to inherit money if Husband's (her father's) assets were distributed according to the laws of intestate succession. On the other hand, if the will was held to be valid and "kids" was held to mean Husband's wife's daughter's kids, Daughter would receive nothing.

The Court of Appeals began its analysis by reviewing some basic rules applicable to construing wills in Tennessee:
(1) The construction of a will is a matter for the court----not the jury;
(2) If a testator's intentions are clear, it is not for the court to second guess the testator and the court may never rewrite a will;
(3) If someone makes a will, a court must presume that the person intended to die with a will and the court must seek to construe the will so as to distribute all of the testator's assets;
(4) Evidence other than the words used in the will (referred to as "extrinsic evidence") may not be used in trying to determine the intent of the testator unless the will contains a latent ambiguity as opposed to a patent ambiguity; and
(5) If the ambiguity in the will is patent, as opposed to latent, extrinsic evidence cannot be considered in determining the intentions of the testator.

The Court of Appeals determined that the ambiguity caused by the Husband's use of the phrase "among kids" was a latent ambiguity. Therefore, it held that the case should be sent back to the trial court so that both sides could present extrinsic evidence about what Husband meant by the word "kids."

The court provided a well written and pretty thorough analysis (with examples) of the difference between a latent ambiguity and a patent ambiguity. Here is a summary: A latent ambiguity exits where the words of the will are plain and intelligible, but capable of different meanings because of facts extraneous to the will. A patent ambiguity, on the other hand, cannot be made clear even by looking to outside facts (facts other than the words used in the will).

The Resulting Trust Theory of No Help to Mother Who Paid for Construction Costs of Home

December 5, 2013,

There are many situations in which Tennessee courts have been able to impose resulting trusts to recover property for aggrieved parties when no other legal avenue was available to help. The law of resulting trusts, to boil it down to the point of over generalization, allows a court "to follow the money" of the party taken advantage of to property purchased with that money, and then to place a resulting trust on the property. Once a resulting trust is imposed on property, a court can provide relief to the injured party by divesting title to the property out of the titled owner and/or vesting it in the aggrieved party.

In an opinion involving a decision of the Davidson County Probate Court, the Court of Appeals of Tennessee declined to allow a resulting trust to be imposed to undo a son's ownership of an expensive home for which his mother paid almost the entire cost of construction. The opinion provides a helpful analysis of the limitations on a court's ability to impose a resulting trust to assist a wronged party.

A mother ("Mother") sold her house in Nashville for a net gain of $395,719. Her son ("Son") owned a farm in Pegram, Tennessee. Mother moved to the farm and lived with Son in a farmhouse. At the time of Mother's move, and at all times thereafter, Son was the only owner listed on the deed to the farm. After moving to Son's farm, Son and Mother signed a construction contract to have a new home constructed on the farm. Both signed the construction contract as owners.

Mother paid $433,064 towards the construction of the new home, while Son paid only about $15,000. When Son re-married and brought his new wife to live in the home, the relationship between Mother and Son began to sour. A lawsuit was brought on behalf of Mother against Son by Mother's daughter ("Daughter") using a power of attorney. Mother died during the pendency of the lawsuit and her estate was substituted as the party.

The proof at trial was conflicting as to what interest Mother and Son had agreed that Mother was supposed to have in the home that her funds were used to construct. Some witnesses testified that Mother had expressed that she thought that she did own the home. A witness even testified that Son had expressed that it was his intention to put his Mother on the deed to the farm. Son denied this. Other witnesses testified that Mother intended to make a gift of the home to Son.

The trial judge, Judge Randy Kennedy, found that the proof demonstrated that Mother believed that she was an owner of the home which was to be constructed with her money. The trial judge held that a resulting trust should be imposed on the home and that Son's right to use the home was divested out of him. The trial judge further held that Mother's estate be vested with an easement allowing it to use and to occupy the home as well as to have ingress and egress over the farm to the home.

The Court of Appeals acknowledged, though impliedly, that the trial judge had reached a fair result. Nevertheless, it reversed the decision of the trial court. Its rationale? Under Tennessee law, a resulting trust cannot be based on improvements to real estate. (A home is considered an improvement to real estate. Real estate with a structure on it, like a home, is often referred to as "improved real estate").

The crucial distinction between this case, and other cases in which a resulting trust has been successfully used to provide relief, is that, in this case, Mother's money was used for an improvement, a home, made after the real estate, the farm, was purchased. If the same amount of Mother's money had been used to buy real estate with a home already on it, then, under the same facts, the trial judge's decision would have almost certainly been affirmed.

Tennessee Court Finds Fraudulent Conveyance Between Husband and Wife

November 25, 2013,

Collecting a judgment or debt owed from either a husband or wife, but not owed by them jointly, can be difficult, if not impossible. Why so? Jointly owned property, in many circumstances, is not subject to a creditor's claim against just one of the spouses. Some spouses try to avoid paying debts by transferring property they own individually to the other spouse so that both spouses own the property jointly. When this occurs, it is possible, depending on the facts, that a Tennessee court might declare the transfer to be a fraudulent conveyance (also referred to as a "fraudulent transfer").

If a transfer is found to be a fraudulent conveyance, a Tennessee court has a range of options to assist a wronged creditor. It might negate the transfer so that the property reverts to the spouse with the debt so that his or her creditors can collect against it. Or, it might order the property sold to satisfy the claim of a creditor. In some circumstances, a court might even enter a money judgment in favor of a creditor and against the spouse which received the fraudulent conveyance.

In a recent fraudulent conveyance case, the Court of Appeals of Tennessee ruled that the transfer of a 27 acre farm by one spouse to the other was a fraudulent conveyance. Here are the facts:
• Fred Hobbs obtained powers of attorney for uncles who had substantial assets
• Fred Hobbs used the powers of attorney to transfer farmland of one uncle worth over $1 million dollars to himself and to misuse funds of his other uncle
• Using his ill- gotten gains, Fred Hobbs purchased a 27 acre farm in March of 2005
• The deed to the 27 acre farm was in the name of Fred Hobbs only
• Thereafter, in late 2005 and early 2006, two separate lawsuits were filed against Fred Hobbs by the parties acting on behalf of the uncles he had bilked
• In January of 2007, before a judgment in either lawsuit against him had been entered, Fred Hobbs conveyed the 27 acre farm to himself and his wife, Sherry Hobbs, as tenants by the entireties (the surviving spouse would, therefore, be the sole owner of the property)
• Judgments were entered against Fred Hobbs in both cases in late 2009 and early 2010
• In June of 2010, Fred Hobbs died

In determining that the transfer of the 27 acre farm was a fraudulent conveyance, both the trial court and appellate court applied Tennessee Code Annotated §66-3-305 (part of the Uniform Fraudulent Conveyance Act as enacted in Tennessee). Under that section of the Act, a transfer can be declared fraudulent for either of two different reasons: (1) If the transfer was made with the actual intent to hinder, delay or defraud any creditor; or, (2) if the transfer was made without the transferor (Fred Hobbs) receiving a reasonably equivalent exchange and where the transferor, because of the transfer, was left unable to pay his debts (to summarize broadly the very technical language of that section of the Act).

In determining whether there was actual intent to hinder, delay or defraud a creditor, Tennessee courts have long recognized that no one who has engaged in an intentional fraudulent transfer is likely to admit it, and that such intent must be proven by circumstantial evidence. To that end, T.C.A. §66-3-305 provides eleven factors, sometimes referred to as "badges of fraud," for a court to weigh in determining whether there was the requisite intent.

In the case at hand, the court found that nine of the eleven badges of fraud were present with respect to the transfer of the farm from Fred Hobbs to his wife, Sherry Hobbs. One of those was that Sherry Hobbs paid nothing to receive her interest in the 27 acre farm. In defending the fraudulent conveyance lawsuit, Sherry Hobbs argued that Fred Hobbs did receive adequate consideration for transferring to her an interest in the farm---her love and affection. The Court of Appeals rejected Mrs. Hobb's argument. Under the Uniform Fraudulent Conveyance Act, it noted, consideration must have "utility" from a "creditor's viewpoint" in order to be considered legitimate.

Commercial General Liability Insurance Policies v. Errors and Omissions Policies

November 18, 2013,

The Court of Appeals of Tennessee, in a case involving the litigation of a commercial general liability policy ("CGL policy"), issued an opinion that is helpful for those trying to understand the coverage parameters of commercial general liability policies. Commercial general liability policies are perhaps the most prevalent and common type of policies carried by businesses, but they provide markedly different coverage and protection than do errors and omissions policies ("E & O" policies).

The case involved a financial advisor who had advised some clients to invest in promissory notes. The promissory notes became worthless. The investors sued the estate of the financial advisor (who had passed away by the time the lawsuit was filed). The investment advisor's business had been covered by a commercial general liability policy issued by Nationwide.

The personal representative of the estate of the investment advisor made a claim against the Nationwide CGL policy. As frequently happens in insurance policy litigation, Nationwide filed a declaratory judgment action in Chancery Court. Nationwide argued that it had no duty to defend the estate of the investment advisor or to provide any coverage for the claimed losses.

The Chancery Court held that Nationwide had no obligations under the CGL policy it issued because the losses claimed by the investors were not "property damage" as that term was defined in the Nationwide CGL policy. The Nationwide commercial general liability policy at issue, which was a typical CGL policy, defined "property damage" to include "loss of use of tangible property that is not physically injured." ("Property damage" also included "physical injury" to tangible property).

The Chancery Court held for Nationwide. It found that the losses incurred by the investors were not property damage under the CGL policy's definition of that term. The estate of the investment advisor appealed to the Court of Appeals of Tennessee.

On appeal, the estate argued that the investors had suffered property damage because they had lost the use of the promissory notes. Because the notes were worthless, the estate argued, the investors could not use them.

The Court of Appeals affirmed the decision of the Chancery Court that the loss suffered by the investors was not "loss of use" as defined by the Nationwide policy. It concluded that there was a difference between loss of use and loss of value. The investors had lost value, but, technically, not the use of the promissory notes, said the Court. (Technicalities matter in the interpretation of insurance policies).

The estate of the investment advisor argued that another Tennessee case supported the argument that the investors had suffered a loss of use. As pointed out by the Court of Appeals, that case was factually distinguishable, but it is worth discussing to understand more about the parameters of "loss of use" which will be equated to "property damage" under a commercial general liability policy. In that case, the party who was claiming a loss had lost the ability and right to use boat racks, a dry storage building and floating docks. Unlike the investors in the case at hand, who could actually hold and possess their worthless promissory notes, the party in the former case could not use the racks, building and docks.

The trial court in the case at hand pointed out, correctly, that the personal representative of the investment advisor's estate was seeking coverage under a commercial general liability policy for the type of loss which would be covered, not by a CGL policy, but by an Errors & Omissions policy. If your claim or loss arises from someone's rendering or failing to render professional advice, do not expect that a CGL policy will cover your losses.

Generally, you can expect CGL policies to cover, for example, personal injuries which take place on the premises of the insured business, or which are caused by an employee of the business or physical damage to vehicles or equipment located on the premises of the insured business. When doing any significant business with a purported professional, it is prudent to ensure that they have adequate E & O coverage or other professional liability coverage in place.