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When sales representatives, brokers, agencies, or other businesses are owed commissions, but are not paid, sometimes they have to retain an attorney to file a lawsuit to recover the unpaid commissions.  Our firm, over the years, has represented many commissioned sales representatives in such lawsuits.  Many times, not only have we had to prove that the defendant was contractually liable for unpaid commissions, but also, we have had to establish and to prove the amount of the commissions owed.

Defendants which owe commissions often deny that they owe the amount of commissions which they, in fact, owe.  Furthermore, they also often do not reveal, at least until they must, the full amount of revenue received or all of the sales on which the commissions are to be based.  By doing this, they attempt to reduce the amount of their liability.

Before a lawsuit is filed, which is when discovery procedures can be used to compel parties to produce information on pain of being sanctioned, parties who owe commissions may refuse to produce information to former sales representatives or agents which is needed to determine the exact amount of commissions owed.  Once a lawsuit is filed in a Tennessee state or federal court, however, a plaintiff can use the discovery procedures in the Tennessee Rules of Civil Procedure or the Federal Rules of Civil Procedure, as the case may be, to compel a defendant to produce information about sales, revenues, customer accounts, or claimed charge backs or refunds. For all practical purposes for this blog, the federal discovery rules and Tennessee discovery rules are the same. This blog gives an overview of the particular discovery rules that can be employed to determine the amount of commissions owed to a sales representative.

RULE 33:  INTERROGATORIES

Rule 33 allows a party to send interrogatories, or questions, to another party.  Unless an interrogatory is objectionable, a party must answer it and must do so under oath.  Interrogatories are a helpful method of obtaining information about sales, dates of sales, amounts of sales, and the status of customer accounts. They are also helpful in forcing a business to identify the persons with the most knowledge about matters that bear directly on the amount of commissions owed so that those persons may be deposed. Continue reading →

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A partnership can be created under Tennessee law without the partners ever having a written partnership agreement.  Even where parties have not expressly agreed, verbally, to operate a partnership, an implied partnership can be formed under Tennessee law where the parties involved intended the acts that give rise to a partnership.  The consequences, good and bad, of being in an implied partnership can be financially significant.

If you are in an implied partnership, that may be a good thing to establish in a Tennessee court as it may allow you successfully to recover money, property or profits another partner owes you or is withholding.  Being a partner in an implied partnership, however, can also result in your personal liability, not just to other partners, but to third parties. To boot, it can result in your being liable to a third party based on an act or omission of the person or persons with whom you are determined to be in an implied partnership.

This blog discusses two general topics about implied partnerships in Tennessee: (1) How Tennessee courts determine whether an implied partnership exists; and (2) the resulting advantages and disadvantages to partners in implied partnerships.

DOES AN IMPLIED PARTNERSHIP EXIST?

Under the Tennessee Revised Uniform Partnership Act (“TRUPA”), a partnership is formed “by the association of two or more persons to carry on as co-owners of a business for profit … whether or not the persons intend to form a partnership.” Under TRUPA, a “person” includes business entities such as limited liability companies and corporations. Significantly, TRUPA provides that owning property together, in and of itself, even where profits from it are shared, does not establish a partnership.

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The contemporaneous exchange for new value defense, 11 U.S.C. §547(c)(1), is one of several defenses in the Bankruptcy Code that a creditor may be able to use successfully to defeat the claim of a bankruptcy trustee, or other plaintiff, that the creditor should have to repay money paid to it by the now bankrupt debtor before that debtor filed for bankruptcy.  This defense is applicable to all actions filed in bankruptcy courts located in Nashville or other cities in Tennessee.

This defense allows a creditor, which supplied goods or services, at or near the same time that the debtor paid for those services, to avoid liability for what would otherwise be a preferential payment. The purpose of the contemporaneous exchange for new value defense is to encourage a creditor to keep doing business with a customer which is having financial issues.

Although it is not a case decided by the federal circuit in which bankruptcy courts in Nashville and other parts of Tennessee are located (the 6th Circuit), the case of Payless Cashways, Inc. (8th Cir. 2004) provides a helpful analysis of the defense, and one that any Tennessee bankruptcy court would be expected to apply.

Here are the basic facts of the case:

  • The debtor which had filed bankruptcy (“Debtor”) was a business which sold home improvement products at retail
  • The creditor which was sued by the trustee for the recovery of preference payments (“Creditor”) was a lumber supplier
  • Creditor had supplied lumber to Debtor before it filed its first bankruptcy
  • After Debtor filed its first bankruptcy, Creditor required Debtor to pay for lumber on a cash-in-advance basis by Electronic Fund Transfer (“EFT”)
  • After a while, Creditor somewhat loosened its payment policy
  • Debtor filed a second bankruptcy
  • At the time of the preferential payments at issue, Creditor had agreed to ship all lumber via destination contracts, F.O.B. the Debtor’s facilities. The lumber was shipped via truck or rail, and Creditor’s invoice dates were always the date of shipment.
  • At the time of the preference payments at issue, the Creditor and Debtor had agreed to attempt to match the date the lumber shipments would arrive at Debtor’s facilities with its obligation to pay, and had agreed that all payments would be by EFT.
  • Payment terms were based on whether the lumber would be shipped by truck or rail. Lumber shipped by rail generally took 12-14 days, while lumber shipped by truck generally took 3-5 days.
  • During the relevant period, Debtor paid Creditor for rail shipments within 10.9 days after the date of the invoice, on average, and within 3.2 days, on average, for rail shipments
  • For all shipments, with minor exceptions, Debtor paid Creditor for specific shipments before, or at, the time they arrived at Debtor’s facilities
  • Neither Creditor nor Debtor kept regular records of when shipments arrived at Debtor’s facilities
  • The trustee brought a preference action seeking to recover four transfers made by Debtor

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If you, or your company, is facing a claim in a bankruptcy court in Tennessee, or facing a demand letter from a bankruptcy trustee, or other party, for the return of payments made to you by a company or individual now in bankruptcy, you might be able to use what is referred to as the “subsequent new value” defense. This defense, just one defense in the Bankruptcy Code available to a creditor which is the subject of a preferential payment lawsuit, is particularly useful for creditors which maintained open accounts for now bankrupt debtors.

In concept, the defense is fairly easy to understand. In many cases, its successful application will require complex and tedious analysis of the statutory elements in light of the particular facts of the case.  Assuming that the trustee, or other party which has filed the adversary proceeding, meets his or her burden of proof that the payments to the creditor by the debtor were preferential payments under 11 U.S.C.A. §547(b), a creditor which can prove the elements of the subsequent new value defense (11 U.S.C.A § 547(c)(4)) can avoid repaying the preference payments, or some portion thereof.

To succeed under the subsequent new value defense, a creditor must, to paraphrase the statute, prove three elements: (1) That it gave new value to the creditor after a preferential transfer (a transfer with respect to which the trustee has proven all of the elements of §547(b));  (2) that the new value given was not secured by a security interest which the trustee cannot avoid; and (3) that the debtor did not repay the debt for the new value with a transfer that the trustee cannot avoid.

Like all statutes and laws, understanding the reason for it is helpful in the analysis of particular factual scenarios.  First, it is intended to promote creditors’ willingness to continue to do business with financially troubled accounts, which, ideally, will prevent bankruptcies. Second, when a creditor provides new value to a debtor, the same increases the value of the bankruptcy estate of the debtor, which increases the amount of assets available for distribution to other creditors. Thus, the defense recognizes that it is fair to allow that creditor to offset the value of the new value provided against the amount of the preferential transfers to it.

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If you are the subject of demand by a trustee or other party, whether in a pre-suit demand letter or in a filed adversary proceeding, for the return of money paid to you by an individual or business which is now in bankruptcy, you may be able to keep the money if you can prove that the payments at issue fall within the ordinary course of business exception for preference payments. This is one of the most, if not the most, widely used defense in preference cases, and defendants are successful with it with some frequency. (There are other defenses to preference actions in the Bankruptcy Code, which are not discussed in this post).

Unless the payments at issue are to an “insider,” as defined by the Bankruptcy Code, only payments made within the 90-day period before a debtor files bankruptcy can be attacked as preferences.  In addition to proving that the payments were made within the 90-day period, the trustee, or other party making the claim, has the burden of proving a few other elements in order to establish that the payments at issue were preferences.  Once that burden is met, the creditor who received the payments can avoid having to disgorge the money at issue if it carries its burden of proof that the payments, though preferences, fall within the ordinary course of business exception in the Bankruptcy Code (11 U.S.C.A. §547(c)(2)).

To help readers better understand this exception, this blog discusses two cases — one in which the defense was successful, and the other in which it was not. Before discussing those cases, it is helpful to understand some basic rules about this exception. Here they are:

  1. The exception can be met by a creditor (who received a preferential payment) proving either the subjective component of the exception or the objective component of the exception.
  2. The subjective component of the exception considers whether the transfer, and the debt for which it was transferred, were made in the ordinary course of business of the debtor and creditor. Like the American Camshaft case discussed below, in many cases, there will be no dispute that the debt incurred by the debtor was incurred in the ordinary course of business, but there will be a dispute about whether the payment for that debt was in the ordinary course of business of the debtor and creditor.
  3. The objective component of the exception considers whether the debt was incurred in the ordinary course of the business of the debtor and creditor and whether the transfer that was the payment for the debt was made “according to ordinary business terms,” meaning ordinary business terms in the industry of the debtor and creditor.
  4. The Bankruptcy Code does not define “ordinary course of business” or “ordinary business terms” and the Sixth Circuit (which is the Circuit in which Tennessee bankruptcy courts are located) has said that there is no “precise legal test” to apply to determine whether either term has been satisfied. Instead, each preference case in which the ordinary course of business defense is raised turns on its own, unique facts.
  5. For the subjective component of the exception, in many cases, the most important factor that a Tennessee bankruptcy court will look at is the timing of the payments made by the debtor to the creditor that occurred within the 90-day preference period compared to the timing of the payments that occurred more than 90 days before the debtor filed bankruptcy.
  6. Under the subjective component of the exception, a creditor’s chances of success will be diminished, if not foreclosed, if it engaged in collection activity during the 90-day preference window that it did not engage in prior to 90 days before the debtor filed for bankruptcy.

In American Camshaft Specialties, Inc. (Bankr. E.D. Mich. 2011), the creditor (“Creditor”) was able to avoid repayment of preferential payments under both the subjective and objective components of the ordinary course of business defense.  In that case, the Creditor supplied steel to the debtor (“Debtor”). The trustee for the Debtor filed suit against Creditor to recover a number of payments which had been made to the Creditor during the 90-day preference window.  The payments had been made for steel supplied to the Debtor by Creditor.  There was no dispute that the debt for the steel was incurred in the ordinary course of the business of the Debtor and Creditor.

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It happens sometimes that someone, or some company, which owes a debt will transfer assets that could have been used to pay the debt in order to avoid paying it. Such transfers are often to family members, related or successor businesses, or preferred creditors, and often, when the asset transferred is not cash, are made so that the debtor/transferor receives well below the value of the asset transferred.

Fraudulent transfers can come in an endless variety of forms. Some are obvious and easy to spot. (One of the first ones I ran into involved a defendant which had transferred a piece of real estate to another entity just after my client obtained a judgment against it.) Often, however, they cannot be spotted absent access to the transferor’s financial records, and perhaps even, a deposition or two or a review of financial records by a forensic accountant.

Tennessee has adopted the Uniform Fraudulent Transfer Act (the “Act”) to allow creditors to set aside fraudulent conveyances. If the debtor/transferor transferred the asset to a bona-fide purchaser who paid a value reasonably equivalent to the asset, a court may not set aside the transfer, but, in such a situation, it may well be possible to obtain a judgment against the entities or individuals responsible for the transfer, if they are different from the transferor.

Under the Act, it is important to remember that you do not have to have obtained a court judgment for the amount owed to you before a transfer can be considered fraudulent and set aside. A transfer can be fraudulent as to any creditor who has a “claim” against the transferor. Under the Act, “claim” has a broad definition, and odds are, if you were owed money by the transferor, you can avail yourself of the Act.  Moreover, the definition of “claim” includes unliquidated debts, meaning debts the exact amount of which are not known, but which, at some point, can be reduced to a dollar value.

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Tennessee has a statute, T.C.A. §28-2-110, which can come into play in a lawsuit about the ownership of real estate where the party initiating the lawsuit (the “Plaintiff”) is alleged not to have paid property taxes on the property at issue for more than twenty (20) years. To paraphrase the statute, it prevents anyone making a claim to real estate, or rents or profits from it, from bringing a lawsuit where that party, and those through whom that party claims her interest, have failed to pay any state or county taxes owing on the property for more than twenty (20) years.

In my estimation, the critical thing to understand about the statute is that it is a statute of limitations and does not, and cannot, divest a party of title to property or prevent a party from defending its claim to property when it is challenged by another party who initiates a lawsuit.  Furthermore, the statute cannot prevent a party who has initiated a lawsuit from defending its claim to the property when the defendant goes beyond invoking §28-2-110 and simply denying the plaintiff’s claim.  Where the defendant, through a counterclaim or otherwise, requests that the court adjudicate it to be the owner of the disputed tract, the court cannot use the statute to bar the plaintiff’s claim of ownership.

Maybe, the best way to understand the statute beyond the abstract, is to review how it has affected real parties in lawsuits. So, the following three case summaries are provided to help with that understanding.

Kinder v. Bryant (Tenn. Ct. App. 2018):  I selected this case because it seems to be a somewhat common and fairly easy to understand fact scenario in which the statute was employed as a defense. The property at issue was a forty (40) acre tract which the plaintiffs claimed to have purchased in 1980. The plaintiffs had a deed.  The plaintiffs did not record their deed until 1995. The defendants’ predecessors in interest purchased the same property in 1994. They received a deed and recorded it before 1995.  The plaintiffs filed a lawsuit to have themselves declared the owners of the property. Obviously, since there was no indication that the defendants were not bona fide purchasers without notice of the plaintiffs’ deed, and since the defendants had recorded their deed first, the plaintiffs had no chance of being declared the owners of the property based on the superiority of their title.  So, the plaintiffs claimed that they owned the property by adverse possession. Since it was undisputed that the plaintiffs had not paid any of the county taxes due on the property for over twenty (20) years, the court dismissed their case under §28-2-110. This case is an example of the statute barring a claim based on adverse possession.

Alexander v. Patrick (Tenn. Ct. App. 1983):  In this case, the plaintiff and defendant claimed ownership of the same fifty (50) acre tract of land.  Plaintiff’s claim was based on a deed as was defendant’s, but plaintiff’s deed was prior in time to defendant’s deed. The opinion does not state if, or when, the relevant deeds were filed with the register of deeds.  The proof established that defendant, and her predecessors, had paid the property taxes for more than twenty (20) years and that plaintiff, and her predecessors, had not. The court held that the plaintiff’s claim was barred by §28-2-110 and dismissed the plaintiff’s complaint. This case is an example of the statute barring a claim based on title. Continue reading →

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The “Sales” chapter of the Uniform Commercial Code (referred to as “Article 2 of the UCC”), which was adopted by Tennessee in 1963, was designed to bring uniformity and efficiency to transactions involving the sales of goods.  Article 2 is thorough, to say the least. In any breach of contract case, breach of warranty case or any other case involving goods sold, it should be reviewed carefully as it has provisions that touch on every aspect of transactions involving the sales of goods, including, contract formation, price, terms, delivery, remedies, warranties, and rejection of non-conforming goods.

There is no way, in the space for a blog such as this, to cover all of the potentially important aspects of Article 2, but the following are some observations about it that are helpful to practitioners and litigants.

The UCC – Sales Only Applies to Sales of “Goods”

Article 2 only applies to transactions involving the sales of goods. If your case involves an investment, a real estate dispute, a shareholder divorce, or some type of service, you need to look to Tennessee common law or to some other statute.  With some frequency, transactions will involve both the sales of goods and services. For example, the purchase and installation of computer software and hardware by a business will entail both the provision of goods and services (which the UCC refers to as “non-goods”).  In such cases, the UCC will apply if the predominate assets transferred were goods.  One of the leading Tennessee cases on this topic is Hudson v. Town & Country True Value Hardware, Inc., which was decided by the Supreme Court of Tennessee in 1984.

Different Rules in Article 2 May Apply If the Sale Involves a “Merchant”

A party considered a “merchant” under Article 2, in many important situations, may find that it is subject to different rules and standards under that Article.  To generalize, under Article 2, you are a “merchant” if you are a professional in a business involving the type of goods involved with the transaction. (See T.C.A. § 47-2-104 for the precise definition of “merchant”). Keep in mind that, to be considered a merchant with respect to a transaction in goods, you have to be a professional with respect to the type of goods involved. If a lighting manufacturer buys a forklift, it will not be considered a merchant with respect to that transaction. If it buys filament for the bulbs it manufactures, it will be.

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In Thompson v. Davis, an LLC dispute case, the Court of Appeals of Tennessee issued an opinion that is informative on two different fronts: (1) An LLC member’s obligation to contribute his pro rata share to repay loans taken for the benefit of the LLC, but for which all members are personally liable; and, (2)  under what circumstances a member can reduce the amount of his pro rata obligation based on alleged distributions received by the other members, but not by that member.

Before diving into the facts of, and result in, that case, it is helpful to review a couple of provisions of the Tennessee Revised Uniform Limited Liability Company Act (the “Act”) which come into play with some frequency, as well as the Tennessee statute requiring contribution by a party who is liable on a debt. First, under the Act, when an LLC is not successful, and is dissolved and liquidated, its assets must be distributed first to creditors.  (Creditors, critically, includes members who have made loans to the LLC.) If there are any assets left to distribute after creditors are fully paid, which is infrequent in my experience, they must then be distributed to members who did not receive distributions to which they were entitled. If there are assets left over after those distributions are made, they must be distributed to members first for the return of contributions, and second, for their membership interests in the LLC.  The statute that controls distributions upon liquidation is T.C.A. §48-249-620.

The Act also has its own fraudulent transfer provision embedded in it at T.C.A. §48-249-306. That statute provides that members may be liable for distributions which left the LLC unable to pay its debts as they became due in the ordinary course of business or which left it in the red, so to speak. (The preceding is a generalization, so review the statute for the details).

Apart from the Act, and also at issue in the Thompson v. Davis case, was the Tennessee contribution statute related to instruments, T.C.A. §47-3-116.  That statute provides that a party who pays an obligation on an instrument, such as a bank note, is entitled to seek contribution from others who were also liable for the payment of the note. The statute provides that those others must contribute their pro rata share. For example, if A, B, and C borrow $750,000, interest free, and agree to be jointly and severally liable to the lender for the obligation, and A pays off the obligation, A is entitled to file suit against B and C and collect $250,000 apiece from B and C. A does not have to sue both for contribution, but A cannot collect more than $250,000 from either.

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In a recent case involving a challenge to an amendment to a revocable trust, the Court of Appeals of Tennessee upheld the trial court’s grant of a directed verdict to the defendants and against the two sons who had challenged the amendment.  The case is significant because it demonstrates that basing a challenge to a will or trust exclusively on the argument that the deceased was of advanced age, and, therefore, must have had reduced mental capacity and increased dependence on others, will not carry the day (as it should not).  Although the case was not technically a will contest, the principles and law applied were the same as those applied in will contest cases.

Based on the facts set forth in the opinion in the case, the sons who challenged the trust amendment on the grounds of undue influence and lack of mental capacity must have pretty much expected to prove both just by proving that their father was older and that one of their sisters lived with him. They had no medical proof that would support either that their father was lacking mental capacity, or that he was so physically infirm that he was susceptible to his live-in daughter establishing a dominant relationship over him.

Summary judgments and directed verdicts, both of which were granted by the trial court in this case, are pretty rare in will contest cases where undue influence or lack of testamentary capacity are at issue. That they are makes this case worth analyzing and understanding.

Here are the key facts of the case:

  • Father had six children comprised of three sons and three daughters
  • The opinion, remarkably, does not provide Father’s age, though it is clear he was elderly
  • In 2008, Father executed a will and revocable trust
  • Father appointed one of his daughters as his personal representative
  • In 2010, Father executed an amendment to the trust
  • Although the opinion does not state how Father’s assets were to be distributed under the 2010 amendment, it is clear from the opinion that, under that amendment, two sons were bequeathed less than what was bequeathed to some, or all, of the other siblings
  • After Father died in 2011, the above two sons (the “Plaintiff Sons”) filed a lawsuit challenging the 2010 amendment on the grounds that Father was unduly influenced to make the amendment and lacked the testamentary capacity to understand the consequences of the amendment

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