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With some frequency, we see the first material breach defense raised in cases where a sales representative is owed commissions. After placing the account, the party with whom it was placed desires to keep the revenue, but resents continuing to pay the agreed commissions. So, it alleges that it should not have to pay any more commissions because the party who generated the account and revenue somehow breached the terms of the contract.

A recent Tennessee commissions case illustrates how such an argument as above can fail, as it should. Here are the pertinent facts of the case:

  • Plaintiff was an insurance agent who had built what appears to have been a pretty substantial book of business which was renewing consistently
  • Plaintiff, apparently anticipating health problems, entered into a written contract with an insurance agency (“Defendant Agency”)
  • Pursuant to the terms of the contract, for a four- year period, Plaintiff was to receive 50% of the commissions from her accounts
  • Pursuant to the terms of the contract, after the four- year period, the accounts would be owned by the Defendant Agency, and it would owe no more commissions to Plaintiff
  • Pursuant to the terms of the contract, during the four-year term, Plaintiff was to assist in helping the Defendant Agency retain and produce business
  • The contract expressly contemplated that the Plaintiff might die within the four-year period as it provided that, if she did, any monies owed to her under the contract would be paid to her estate
  • About a year and a half into the four- year period, the Plaintiff died
  • The Defendant Agency continued to pay the Plaintiff’s commissions to her estate until about three months after her death

The Defendant Agency claimed that it was not required to pay any further commissions because, shortly after the contract was signed, the Plaintiff stopped coming into the office and assisting with the accounts; stopped returning phone calls of clients; failed to invite clients to the office of the Defendant Agency to meet its principals; and failed to learn how to use the Defendant Agency’s systems. In the lawsuit filed by the Plaintiff’s estate, the Defendant Agency asserted that it was not required to pay any further commissions due during the agreed four- year term because the Plaintiff had committed a first material breach by the above actions and inactions.

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With some frequency, subcontractors incur extra expense, or lose other opportunities to make money, because another subcontractor did not complete its work within the time by which it was represented it would be completed. There are situations in which it is possible that the general contractor might be responsible for money damages to a subcontractor which incurred a loss because of a delay by another subcontractor.

The starting point to analyze whether, given the facts of the case, the general contractor could be liable for the delay of one subcontractor to another is the written contract. Generally speaking, regardless of what the outcome of a case would be if there was no written contract, the terms of a valid written contract might change the outcome that would otherwise occur under Tennessee common law. That is why a thorough analysis of the terms of the written construction contract, out the outset, is a critical part of any construction case.

If the terms of the written contract do not speak to the issue of the responsibility of the general contractor to a subcontractor for money damages resulting to that subcontractor because of the delay of another subcontractor, the Tennessee case of Foster & Creighton v. Wilson Contracting Company, Inc. (Tenn. Ct. App. 1978) might come into play to assist the subcontractor. Here are the basic facts of that case:

  • The general contractor (the “General Contractor”) contracted for a project which required the resurfacing and repaving of airport runways
  • The General Contractor contracted with a subcontractor to perform earth moving and grading (the “Grading Subcontractor”)
  • The General Contractor also contracted with Foster & Creighton to perform all of the paving, which included: (1) Resurfacing existing runways; and, (2) paving new runways
  • It was possible for Foster & Creighton to perform the resurfacing work without the Grading Subcontractor having finished its work, but it was not possible for Foster & Creighton to pave new runways until the Grading Subcontractor’s work was finished
  • The provisions of subcontract between the Grading Subcontractor and the General Contractor and the provisions of the subcontract between Foster & Creighton and the General Contractor required work to be completed by the same date
  • Foster & Creighton’s work required it to set up, on site, a large concrete mixing plant, which would take three weeks to erect
  • In discussions about when Foster & Creighton should begin its work, the General Contractor expressed that it wanted Foster & Creighton to begin its work significantly sooner than Foster & Creighton wanted to begin based on Foster & Creighton’s opinion that the Grading Subcontractor was moving so slowly that it would not complete its work in time for Foster & Creighton to begin its paving work without having to have its crew and equipment remain idle on the project site
  • In the discussions, a representative of the General Contractor assured Foster & Creighton that, if it set up its plant and started on the resurfacing, by the time it finished the resurfacing, the Grading Subcontractor would have completed its work such that Foster & Creighton could “proceed” with its work
  • Foster & Creighton complied with the requests of the General Contractor, but the Grading Subcontractor’s work was delayed such that Foster & Creighton incurred significant expense while waiting in excess of two extra months for the Grading Subcontractor to finish its work to the point that Foster & Creighton could begin its paving work

Foster & Creighton filed a lawsuit against the General Contractor for its damages. The trial court awarded it $26,000.  On appeal, the Court of Appeals of Tennessee upheld the decision of the trial court that the General Contractor was liable to Foster & Creighton.

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General contractors typically have commercial general liability policies (“CGLs”). (CGL policies are not the same as performance bonds, which might also be in place for a particular construction job.)  In my experience, the key provisions of most CGL policies are identical or are substantially similar. In fact, one task of a consortium of insurance companies known as the Insurance Services Offices is to develop standardized CGL policy forms.

CGL policies are meant to cover damages for personal injuries and property damage caused by the general contractor or by its subcontractors. For example, if a worker drops a hammer on a passerby and causes personal injuries, a CGL policy will typically provide coverage. Similarly, if a wall collapses during construction and causes property damage to a third party, a CGL policy will typically provide coverage.

CGL policies do not provide coverage for the repair or replacement of defective work. For example, if a project owner sues a general contractor because the owner has had to incur the cost associated with repairing defective work of the contractor, a CGL policy will not provide coverage to the contractor. If, however, the defective work has caused damages other than the damages to repair or to replace the work, it is very likely that the contractor’s CGL policy might provide coverage to the contractor for those damages.

In 2007, the Supreme Court of Tennessee decided an important case involving defective construction work and a commercial general liability policy. Although the case involved a claim by the contractor that the insurance company which issued the CGL should have to provide a legal defense to it, the holdings in the case are still very much applicable to an insurance company’s obligation, not only to provide a defense, but also, to pay a claim.

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A recent opinion of the Court of Appeals of Tennessee provides a good roadmap of the law for joint owners of land involved in partition cases where there are claims that the proceeds from the sale of the property should not be divided equally because of rental value received by a joint owner and because of repair and maintenance paid by a joint owner.

Here are the basic facts:

  • Four siblings inherited a home (“Home”)
  • One sibling, Janella, lived at the Home with the parents before they passed and before the four children became joint tenants
  • After the parents died, Janella continued to reside at the Home
  • The siblings agreed that Janella would continue to reside at the Home, would maintain it, and have repairs made in preparation for its sale
  • Email correspondence established that all agreed that each sibling would contribute to the repairs and maintenance
  • All four siblings had some personal items at the Home
  • Janella informed her siblings that the necessary repairs would cost $48,000, but refused the requests of her siblings to provide more detailed information about the quotes and estimates
  • Janella began setting deadlines for her siblings to remove their personal property from the Home before she discarded the same
  • Janella stopped communicating with her siblings
  • One sibling went to the Home to remove her items and had to call the police to gain entry because Janella refused to allow her to enter the Home

The siblings filed a partition action. The trial court found that there had been an ouster. It held that Janella owed, to her siblings, three fourths of the rental value of the Home during the time she resided there. It also held that the siblings owed Janella $60,000 for repairs, maintenance and taxes which she had paid towards the Home.

Janella appealed the trial court’s decision that she owed her siblings rent. Her siblings appealed the trial court’s decision that they owed Janella the $60,000. The Court of Appeals of Tennessee affirmed the trial court’s decision on both rulings.

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In a recent opinion in a breach of contract case brought against a Bank by a joint account owner, the Supreme Court of Tennessee overruled two lower courts which had decided in favor of the Bank. For owners of joint bank accounts, often referred to as “joint tenants,” the Court’s opinion lays out some important and basic rules of law related to the rights of joint bank account owners.

Here is a summary of the facts:

  • Mother had three children: Daniel, Paul and Shelby
  • Mother and her Husband owned two accounts at the Bank as joint tenants with rights of survivorship
  • After Husband passed, Mother and Daniel went to the Bank and signed new signature cards for each account
  • The signature cards made Mother and Daniel joint tenants with rights of survivorship as to both accounts
  • After Daniel ceded care of Mother to his two siblings, and without his knowledge or consent, his siblings managed to have a series of new signature cards executed which effectively removed him from ownership of the accounts and from any right to receive the funds in the accounts upon the death of his mother
  • It was undisputed that Daniel did not consent to the signature cards and the resulting removal of him as a co-owner of the accounts
  • As a result of the change of the ownership of the accounts, after Mother passed, the Bank paid the funds in the accounts to Shelby and Paul

Daniel brought suit against the Bank for breach of contract for allowing him to be removed as an owner of the accounts. Both the trial court and the Court of Appeals of Tennessee found in favor of the Bank. Those courts reasoned that, since a joint owner, Mother, during her lifetime, had the right to remove all of the funds from the accounts without the consent of Daniel, the Bank had no liability.

The Supreme Court of Tennessee reversed the appellate court. It did so by applying basic contract law principles. First, the Court pointed out that the Bank had stepped into a contractual relationship with both Mother and Daniel when it allowed them to create accounts as joint tenants with survivorship rights. As it noted, when banks permit parties to open depository accounts, a contractual relationship arises between the banks and account owners.

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Pepper Law, PLC was recently successful in having the Business Court, located in Davidson County, pierce the veil of a limited partnership to hold the limited partner personally liable for a judgment rendered years earlier against the limited partnership. No Tennessee appellate court has yet addressed whether or not the veil of a limited partnership can be pierced, and the decision of the Business Court is believed to be the first time a Tennessee court has ruled on the issue.

Tennessee has long-recognized that the corporate veil of a corporation may be pierced such that an individual may be held liable for the debts of the corporation. As well, in a 2012 opinion, the Court of Appeals of Tennessee ruled that the veil of a limited liability company could be pierced in the case of Edmunds v. Delta Partners, L.L.C., 403 S.W.3d 812.

In arguing that the piercing of the veil of a limited partnership to hold a limited partner individually liable was warranted, we relied upon several non-Tennessee cases. Of particular weight in the Business Court’s decision was the opinion of the bankruptcy court for the Southern District of New York in In re Adelphia Commc’ns Corp., 376 B.R. 87 (2007).  In the case before the Business Court, the limited partnership against whom we had earlier obtained a judgment, and for which we sought to pierce the veil to hold its limited partner liable, was a Delaware limited partnership.  In the Adelphia case, the limited partnership at issue was also a Delaware limited partnership.

In the Adelphia case, the court pointed out that there was nothing in the Delaware Limited Partnership Act which prohibited the piercing of the veil of a limited partnership.  The Business Court approved of the reasoning in the Adelphia case, noting that Tennessee appellate decisions had approved of Tennessee courts looking to Delaware courts for guidance on corporate law. In addition to the bankruptcy court in the Adelphia case, appellate courts in New Jersey and Virginia have ruled that the veil of a limited partnership may be pierced to hold a limited partner liable.

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Often, in trade secrets cases, a pivotal issue is whether or not what the plaintiff claims is a trade secret is, in fact, a trade secret under the Tennessee Uniform Trade Secrets Act (“TUTSA”). TUTSA’s definition of “trade secrets” includes “information” which is “technical, nontechnical, or financial data, a formula, pattern, compilation, program, device, method, technique, process or plan” that has independent economic value because it is not generally known or readily accessible.  To qualify as a trade secret, the plaintiff must also prove that there were “reasonable efforts” taken to keep the information secret.

Here are some basic rules and guidelines used in Tennessee trade secrets cases for determining whether information constitutes a trade secret:

  • Just because a party calls certain information a trade secret does not mean that it will qualify as a trade secret after the court reviews other facts and applies the TUTSA
  • A former employee’s goodwill with customers or the fact that the former employee was the face of the company are not trade secrets because they are not information (an employer may protect against a former employee’s use of goodwill developed while the employee was employed by a non-competition/non-solicitation agreement)
  • Just because a product or process can be reverse engineered does not necessarily mean that it will not qualify as a trade secret. If the plaintiff can prove that reverse engineering would be time-consuming or very expensive, the product or process may still be entitled to trade secret protection
  • A former employee’s remembered information about customers, pricing, vendors and the like is not a trade secret
  • The degree of the egregiousness of the former employee’s or new employer’s conduct always has some effect on the court’s decision. For example, if a former employee took information improperly and passed it on to her new employer, it is more difficult to argue that the information taken was not a trade secret. After all, if it was not valuable and secret, why take it?
  • The extent that the information is known to the public will affect the decision as to whether the information is a trade secret
  • Whether the owner of the information has taken steps to keep it secret will affect the decision as to whether it is a trade secret
  • The economic value of the information will affect the decision as to whether the information is a trade secret
  • Even if components of the information, standing alone, may not be trade secrets, the aggregation, compilation or formatting of information may be
  • Whether information is, or is not, a trade secret is a question of fact

The below summary of five different trade secret cases is helpful in understanding what might, and what might not, qualify as a trade secret under the Tennessee Uniform Trade Secrets Act.

Eagle Vision, Inc. v. Odyssey Medical, Inc. (Tenn. Ct. App. 2002): The Plaintiff developed and marketed punctul plugs for eyes. For a number of years, it had a contractual relationship with the Defendant, which manufactured the plugs for it. The Plaintiff shared design specifications with the Defendant as well as prototype punctal plugs. The design specifications were marked “confidential.” The relationship between Plaintiff and Defendant ended and Defendant began making and selling punctal plugs. Defendant offered evidence that it could easily reverse engineer the punctal plugs with a certain device it possessed. Plaintiff claimed that it was impossible to reverse engineer the punctal plugs. The court held that the question of whether or not the information which Defendant had allegedly misappropriated was a trade secret was a question of fact for the jury. Continue reading →

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Zoning laws and zoning maps are not caste in stone. They are subject to change for any number of reasons including recognition by a legislative body of a change in the character of an adjacent area. In Middle Tennessee these days, it is not at all fantastical for a land owner to expect a change in the current zoning of his or her property, which rezoning would allow new uses and development parameters.

In many cases, land owners’ real estate increases in value when a zoning change is enacted. For example, the value of a piece of property might dramatically increase when its zoning is changed from some form of residential to some form of commercial or industrial use. Can a possible change in zoning that would increase the value of a piece of property that is the subject of a condemnation case be considered by a jury?  In Tennessee, the answer is “yes.”

A couple of Tennessee eminent domain cases are excellent authority for the position that a potential change in zoning may be considered by a jury. In Shelby County v. Mid-South Title Company, Inc. (Tenn. Ct. App. 1980), the property owner’s property was zoned R-1 (single family residential).  The condemning authority, Shelby County, appealed a jury verdict on the grounds that the trial judge should not have permitted the property owner’s experts to testify as to the value of the land being taken based on appraisals wherein they considered comparable sales of commercially zoned properties.

At trial in the Shelby County case, the proof was that the county was taking 1.842 acres of the property owned by the defendant land owner. All three of the land owner’s expert witnesses testified that the property at issue had immediate and imminent commercial value that would be taken into account by any potential buyer. These opinions were based on their opinions that the property would be rezoned for commercial use in the near future. Consistent with the aforementioned opinions, each expert based his opinion of the value of the land being taken on appraisals based on comparable commercial sales.  The three experts for the county based their appraisals strictly on comparable residential sales because they believed that any commercial potential for the subject property was far-off.

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In a recent case decided by the Court of Appeals of Tennessee in which an insurance agency was sued for failure to procure an adequate commercial general liability insurance policy, the court reversed some of the trial court’s rulings on expert testimony, which resulted in the summary judgment in favor of the defendant insurance agency also being reversed. Since, in almost all cases against insurance agents and agencies, a plaintiff must have expert testimony to establish the standard of care and a breach of it by the agent or broker, the court’s analysis and rulings related to the qualifications and areas of testimony of the plaintiff’s insurance expert are very helpful.

Here are the basic facts related to the procedural history of the case:

  • Merit Construction was sued for damages by JAG arising out of its work on a project
  • Merit agreed to settle the suit for over three million dollars
  • The insurance company which had insured Merit under a commercial general liability policy was placed in a receivership (meaning it could not pay claims of its insureds, like Merit)
  • Merit assigned its rights against its insurance agent (“Agent”) which had procured the policy at issue to JAG
  • JAG sued the Agent on the basis that it had been negligent with respect to obtaining coverage for Merit
  • To make its case, JAG employed an expert in the insurance industry named Bahr
  • The trial court made a ruling which excluded several of the opinions of Bahr which were necessary for JAG’s professional negligence claims against the Agent to survive
  • Without the expert testimony which supported that the Agent had breached the applicable standard of care for insurance brokers and insurance agents and which the trial court excluded, JAG was unable to defend a motion for summary judgment which the trial court granted

Here are the basic facts related to the alleged negligence of the Agent:

  • Merit asked the Agent to obtain a commercial general liability policy from a company with a rating from A.M. Best Company of at least “A”
  • A.M. Best Company is widely recognized as providing reliable ratings as to the financial stability of insurance companies
  • The Agent presented Merit with three policy options, one of which was from a company, Highlands Insurance, which had an A.M. Best Company rating of “B++”
  • The Agent represented to Merit that the coverage through Highlands would be “A” rated if a “cut-through” endorsement was obtained to go with it
  • A “cut-through” endorsement is essentially reinsurance
  • Merit understood that, with the cut-through endorsement, Highland’s rating would be raised to “A”
  • After Merit purchased the policy, Highland’s rating was downgraded to a “B” from “B++”
  • The Agent did not inform Merit of the downgrade or offer to move its coverage to another company with a higher rating
  • Highlands went into receivership

 

Bahr, the expert for JAG, offered three opinions which the trial court ruled he was not qualified to make, thereby effectively excluding them:

  1. That the Agent breached the standard of care when it offered a less than “A” rated policy and informed Merit that the cut-through endorsement raised the rating to “A”
  2. That the Agent breached the standard of care when it failed to explain thoroughly the cut-through endorsement, how it worked, and by not obtaining a signed letter from Merit that it understood the same
  3. That the Agent breached the standard of care when it failed to notify Merit that Highland’s rating had fallen by two grades (from “B++” to “B”)

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It is not unusual for construction litigation between owners, contractors and subcontractors to involve defenses and claims based on alleged untimely completion. The basics of the law in Tennessee related to project completion is a topic about which it is worthwhile for owners, contractors and subcontractors to have some practical knowledge.  A good place to start to gain that knowledge is an opinion in a construction case involving claims of breach of contract, a mechanics’ and materialmen’s’ lien, and the Tennessee Prompt Pay Act.  That case is Madden Phillips Construction, Inc. v. GGAT Development Corporation, and here are the basic facts of that case:

  • Madden Phillips (“Contractor”) and GGAT (“Owner”) entered into a construction contract for the construction of a residential subdivision
  • In the written construction contract, Contractor agreed to perform several scopes of work including earthwork and construction of infrastructure for utilities and roads
  • The written contract contained neither a date for completion nor a “time is of the essence” clause
  • Contractor began work in May of 2004, but suspended its work in July of 2004 based on Owner’s failure to perform work necessary for Contractor to perform its work
  • After forty-five days, Contractor resumed construction, but continued to have problems completing its work because of the failure of Owner to complete its work
  • After Contractor had performed about ninety five percent (95%) of its work, Owner terminated the contract and refused to pay

As a defense to Contractor’s claims, Owner argued that Contractor had materially breached the construction contract by failing to complete the work in eight months. The trial court rejected this defense based on three findings of fact. First, it found that the parties’ contract did not contain a term that the work had to be completed in eight months. Second, it found that the parties had not agreed to a “time is of the essence” term for completion. Third, any right Owner might have had to terminate Contractor for failing to perform its work on a timely basis was waived by Owner’s actions and inactions, including, failing to provide fill which had to be in place before Contractor could perform its work.

The court of appeals affirmed the aforementioned ruling of the trial court, and, in doing so, it expounded on Tennessee legal principles that are applicable in cases where timeliness of completion is at issue. First, it pointed out that contract clauses which state that “time is of the essence” and contract clauses which set forth a date by which the parties agree that the work will be completed have different legal effects. Here is how:  If a construction contract contains a date by which the work will be completed, but does not contain a “time is of the essence” provision, then a failure to complete the work by the agreed date will not rise to a material breach. A non-material breach does not allow the non-breaching party to terminate a contract and refuse to pay, which is what Owner did.

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