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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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A recent Court of Appeals decision involving a claim for breach of contract related to a flat fee promotion agreement illustrates how Tennessee courts are not permitted, except in limited situations involving non-compete agreements, to re-write contracts or to add terms to contracts.  Here are the basic facts:

  • Gregg wanted to pursue a career in country music
  • Cupit was a producer with a studio
  • Gregg and Cupit entered into a “Production Agreement”
  • The Production Agreement provided that Gregg would pay Cupit a “flat fee” of $100,000 per single for three singles which Cupit would “nationally promote”
  • The Production Agreement provided that the $300,000 would be used at the “sole discretion” of Cupit
  • The Production Agreement provided that Cupit made no guarantees of success because the music business was a “speculative business”
  • Cupit undertook to promote Gregg in various ways, including having its principal give him singing lessons; incurring expenses for Gregg’s appearance on a television show; producing a music video; arranging various performances at country music events; employing a publicist; and having a Cupit employee devote time to communicating with radio stations to promote each song Gregg recorded
  • Gregg never had any success with his career

Gregg sued Cupit for breach of contract. He claimed that, because Cupit could only prove that it had expended an amount on promotion which was far less than the money Gregg had paid it, it had breached the contract.

The trial court held for Gregg. In doing so, it invoked the implied duty of good faith and fair dealing that is, by law, part of every Tennessee contract. It held that Gregg was entitled to an award of the difference between what he had paid Cupit and the amount which Cupit could prove it spent on promotion for Gregg. The amount awarded by the trial court was $223,069.

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Many Tennessee Limited Liability Companies (“LLCs”) are set up, for whatever reason, so that their operating agreements do not provide for the buying out or expulsion of a member, whether pursuant to a mandatory buy-sell clause or pursuant to a clause that sets forth conduct which is grounds for expulsion. In fact, quite a few Tennessee LLC’s have members who have never executed an operating agreement.

If there is no mandatory buy-sell provision in an operating agreement for an LLC pursuant to which a member can be forced to sell his or her interest (or to buy out someone else’s), members looking to get rid of another member must look to the provisions of the Tennessee Revised Limited Liability Company Act (the “Act”). The Act, T.C.A. §48-249-503(6), provides the limited circumstances which permit a court to expel involuntarily an LLC member.  They are:

  • Where the member has engaged in wrongful conduct that has adversely and materially affected the LLC’s business
  • Where the member has willfully and persistently committed a material breach of the LLC documents
  • Where the member has willfully and persistently committed a material breach of the duties owed by the member to the LLC or to the other members, as set forth in T.C.A. §48-249-403
  • Where the member has engaged in conduct relating to the LLC’s business that makes it not reasonably practicable to carry on business with the member

As of this blog, there is no opinion from any Tennessee appellate court which applies, or further explains, the above statute. Some conduct would obviously warrant expulsion under the above statute, e.g. stealing from other members, a criminal conviction for a felony involving dishonest conduct, or repeated and intentional usurpation of opportunities available to the LLC.  There is, however, quite a bit of gray area when it comes to what a Tennessee court could determine amounts to circumstances justifying an expulsion under the above statute.  The case law from other states which interprets the above statute (which has been adopted uniformly by many other states) is also rather limited.

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When a Tennessee company attempts to enforce a non-compete or non-solicitation agreement against a former employee or independent contractor who served in a sales or marketing capacity, it is almost certain that the company will allege that the former representative had become the “face of the company” to that company’s customers. If the company can prove that argument, it is highly likely that its non-compete or non-solicitation agreement will be upheld.

Not all non-competition and non-solicitation agreements are enforceable in Tennessee, and many have been held to be unenforceable. In order to be able to enforce such agreements, a company must be able to show that it has a “protectable interest.”  To have a protectable interest, a company must show that the former employee’s or contractor’s relationship and work with the company puts the person in the position to do more than just engage in ordinary competition against the company.  The company for whom the former salesperson worked must prove that the relationship put the former salesperson in a position that gives that person an unfair competitive advantage over the company.

Under Tennessee law, a court must look to several factors to determine whether the former employer has a protectable interest such that a non-compete or non-solicitation agreement is enforceable. One of those factors is whether the former employee, by virtue of the goodwill of the former employer, had developed “special relationships” with the former employer’s customers such that the former salesperson was so closely associated with the former employer that he or she had become the “face of the company” to those customers.

To understand how Tennessee courts analyze the “face of the company” factor, it is helpful to look at a few Tennessee non-compete cases.

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The Court of Appeals of Tennessee, in a recently decided will contest case, In re Estate of Ida Lucille Land, made what appears to be some new law on what circumstances can establish a confidential relationship between the person who made the Will and the person or persons alleged to have procured the Will through undue influence.  Here are the basic facts of the case:

  • Ida Land (“Mrs. Land”) died at age 99 in August of 2015
  • At the time of her death, Mrs. Land had no surviving spouse or children, but did have a surviving niece
  • The surviving niece’s name was Ms. Allen
  • In about 1986, Mrs. Land married a Mr. Land, who did have children by a different marriage (“Mr. Land’s Children”)
  • Mr. Land had a sister named Pauline Hill
  • Pauline Hill was married to Kenneth Hill
  • Mr. Land’s Children where, therefore, the Hills’ nieces and nephews
  • Prior to her death, Mrs. Land had expressed to her niece, Ms. Allen, that she did not want Mr. Land’s Children to receive any of her assets
  • There was compelling proof that not only did Mrs. Land and Ms. Allen have a long-standing and loving relationship for many years, but also, that, before Mr. Land’s Children intervened, Ms. Allen, for many years, spent substantial amounts of time caring for Mrs. Land on a regular and unselfish basis
  • Around 2011, Mr. Land’s Children began intervening in the relationship between Ms. Allen and Mrs. Land and were able to keep Ms. Allen away from Mrs. Land for much of the time
  • In May of 2011, Mrs. Land executed the Will which was challenged
  • It was undisputed that the Will was done by a lawyer who had a prior relationship with one of Mr. Land’s Children
  • It was undisputed that Mrs. Hill and Mr. Land’s Children took Mrs. Land to the lawyer who prepared the Will
  • Kenneth Hill was named as Executor of the Will
  • The Will left Mrs. Land’s entire estate to Mr. Land’s Children

 

At the conclusion of the proof, the trial court instructed the jury to answer three questions:

“1.         Did Judy Allen, by a preponderance of the evidence, prove that there was undue influence arising   from a confidential relationship between Kenneth Hill and Pauline Hill and Mrs. Land?

  1. Did Judy Allen, by a preponderance of the evidence, prove that Kenneth Hill and Pauline Hill unduly profited from the Will?
  2. Did Kenneth Hill and Pauline Hill, by clear and convincing evidence, prove that the transaction was fair?”

 

The jury answered “yes” to the first two questions and “no” to the third.

On appeal, the Executor argued that the trial court erred by holding that the fact that he was named as Executor created a confidential relationship between himself and Mrs. Land. Under Tennessee law, the finding of a confidential relationship is critical, and, in my experience, frequently outcome determinative.  That is so because, where there is a confidential relationship followed by a transaction which benefits the one standing in a confidential relationship to the one who gave the benefit, the one who is benefitted must then prove, by clear and convincing evidence, that the transaction was fair.  While Tennessee courts speak of a “transaction,” keep in mind that the execution of a Will, and its terms, fall in the category of a “transaction.”

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Sales representatives, whether they are employees or independent contractors, are too frequently faced with situations where the businesses which owe them commissions refuse to pay them or refuse to pay them the full amounts owed. While, unfortunately, sales representatives do sometimes get beaten out of commissions which they are rightfully owed, sales representatives should take a hard look at their situations before giving up on receiving payment for sales commissions.

Here are some legal points for sales reps to consider when faced with a refusal to pay:

A VERBAL CONTRACT TO PAY COMMISSIONS IS ENFORCEABLE

We have had several cases over the years where a sales representative was not paid and where the refusal to pay was on the basis that there was no written agreement to pay or to pay the percentage which was claimed to be owed. In such cases, sales reps should bear in mind that an agreement to pay commissions does not have to be in writing. Under Tennessee law, oral or verbal agreements to pay commissions are just as enforceable as written ones.  The problem with oral contracts is that people lie or, to be more euphemistic, they remember things differently.

The problem of the party who owes the commission remembering the parties’ agreement differently can sometimes be overcome by evidence of the parties’ course of conduct. For example, we had a case where a manufacturer claimed that it did not have a written agreement to pay its manufacturer’s representative commissions on pre-fabricated metal building materials. The manufacturer’s defense fell apart because our client had information on the total value of each sale he had made and he had copies of checks from the manufacturer which showed that, for over two years, he had been paid the percentage he claimed he was owed on all of the projects he sold. While most defenses don’t fall apart that easily, that case demonstrates how a course of conduct can make it difficult for a manufacturer, employer or other business to renege on the payment of sales commissions.

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Our firm undertook representation of a local interstate trucking company, Dark Horse Express, LLC (“Dark Horse”) in a cargo insurance claim case in which Lancer Insurance Company (“Lancer”) issued the cargo insurance coverage which was at issue. At the district court level, Lancer argued that it was entitled to summary judgment because Dark Horse’s customer, which owned the lost cargo, had never obtained a judgment against Dark Horse for the cargo loss at issue. Lancer won a summary judgment from the District Court. We appealed to the Court of Appeals for the Sixth Circuit which reversed the District Court.

Here is a summary of the basic facts:

  • Dark Horse was hauling about $250,000 worth of steaks for its customer, PFG, from Dallas to Lebanon
  • Dark Horse’s driver stopped just outside of Dallas after picking up the load
  • While stopped, someone broke the seal of the truck and stole about $35,000 worth of the steaks
  • PFG refused to take the remainder of the steaks because of the broken seal and possible contamination
  • Under the contract between Dark Horse and PFG, which was titled “Transportation Agreement,” Dark Horse had agreed to be liable for the full value of the load in the event the seal of the truck was broken
  • Dark Horse paid PFG for the value of the load, less the salvage that was obtained by PFG
  • Dark Horse then made a claim under its cargo insurance coverage with Lancer for the amount it paid its customer, PFG, for the loss of the load
  • Lancer refused to pay for various reasons, including that no court judgment had been entered against Dark Horse in favor of PFG for the loss of the load
  • Dark Horse filed suit in Sumner County, Tennessee Circuit Court and Lancer removed the case to the United States District Court for the Middle District of Tennessee
  • Lancer moved for summary judgment on several grounds

One of Lancer’s summary judgment arguments was that the insurance policy at issue contained a provision which, Lancer asserted, conditioned Lancer’s duty to pay on a judgment being entered against Dark Horse by a court. The specific provision upon which Lancer relied required Lancer to pay sums Dark Horse “legally must pay as a motor carrier for ‘loss’ to Cargo ….”

The District Court held that the language in question did require a judgment to be entered by a court of competent jurisdiction against Dark Horse and in favor of PFG before Lancer had any obligation to pay the claim. It based its decision, in substantial part, on a 1971 decision of the Supreme Court of Tennessee, but noted that there was contrary authority decided under at least one other state’s contract law.

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Anecdotally, the defense of novation to a breach of contract claim under Tennessee law seems to do about as well as the multitude of other defenses which are often pled, but much less frequently successful. In a nutshell, a novation occurs when a prior contract between the same parties is replaced and extinguished by a new contract. The defense is often used by defendants who claim that, because of a novation, they were let off the hook and are no longer responsible for the obligations to which they agreed.

In a recent breach of contract case before the Court of Appeals of Tennessee, Premier Imaging/Medical Systems, Inc. v. Coffey Family Medical Clinic, P.C., that court affirmed the decision of the trial court that the defendant had failed to prove the defense of novation.  Here are the key facts:

  • The defendant, CFMC, was a medical practice
  • CFMC entered into a contract (the “Contract”) with Premier whereby Premier was to service a medical scanner used by CFMC
  • The Contract had a five-year term and required CFMC to pay about $4,500 per month
  • The effective date of the Contract was January 1, 2011
  • In 2013, the principal of CFMC, Dr. Coffey, entered into a separate contract with a company called Pioneer (the “Pioneer Contract”)
  • Under the Pioneer Contract, Pioneer assumed contractual obligations of CFMC including CFMC’s contractual obligations to Premier under the Contract
  • Premier was not a party to the Pioneer Contract and did not agree that CFMC was no longer obligated pursuant to the Contract
  • CFMC requested that Premier begin sending its monthly invoices to Pioneer
  • Premier, thereafter, did send the monthly invoices to Pioneer
  • Pioneer made monthly payments to Premier for only four months after which its relationship with Dr. Coffey and CFMC deteriorated

Since the Court of Appeals affirmed the decision and reasoning of the trial court, the appellate court’s reasoning will be discussed here. The court started its analysis by laying out the four elements that have to be proven for a novation: (1) a prior valid obligation; (2) an agreement supported by evidence of intention; (3) the extinguishment of the old contract; and (4) a valid new contract. It also noted a couple of other key points about the defense of novation. First, the party asserting it has the burden of proving it. Second, while a novation may be implied and does not have to be established by evidence that it was expressed, it is never presumed and must be established by a clear and definite intention.

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In a case brought by two home owners against their home owners association (“HOA”), against the HOA directors, and against a bank that stacked the HOA board with directors which were its employees, the Court of Appeals of Tennessee recently issued an important and insightful opinion in the case of Urbanavage et. al. v. Capital Bank, et. al. Home owners frequently face an uphill battle when trying to assert their rights or when pursued by an HOA.  This opinion gives home owners some ammunition. It also reiterates how difficult it can be for a home owner to prevail on claims against directors of an HOA.

A crucial dichotomy in the case was that the Home Owner Plaintiffs brought claims not only against the HOA and its directors, but also, against a Bank which had stepped into the shoes of the Developer when the Developer went belly up.

Here are the key facts:

  • Developer developed a residential subdivision called Carothers Crossing
  • Developer defaulted on its loans with the Bank which financed the project
  • As the result of an agreement between the Bank and Developer, Bank was assigned all of Developer’s rights under the Master Deed Restrictions and Declaration (‘Master Deed”)
  • As with most master deeds and declarations governing residential developments, the one in this case gave the Developer the right to appoint all members of the board of directors of the HOA until a very substantial portion of the planned units had been constructed and sold
  • The Master Deed, as most, if not all, do, required the HOA to maintain the common areas (sometimes called “common elements”) and to enforce the provisions in the Master Deed
  • The Bank requested that the Directors relieve it of its obligations under the Master Deed (although the opinion does not specify what those obligations were, the trial court record establishes that the Bank, having stepped into the shoes of the Developer, was obligated to expend funds for common area maintenance)
  • The Directors refused the Bank’s request
  • The Bank then replaced all of the Directors of the HOA Board with persons who were its employees
  • The Plaintiff Home Owners alleged that, once installed as the new Directors, the Bank employees prevented the HOA from fulfilling its obligations to maintain the common areas
  • Before they filed suit, the Plaintiff Home Owners stopped paying their HOA dues

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It is pretty typical for commercial leases in Tennessee, and in other states, to allow a tenant (otherwise known as a “lessee”) to assign its rights and obligations under a commercial lease. It is also pretty typical that such provisions provide that the landlord (otherwise known as the “lessor”) cannot “unreasonably” withhold consent to such an assignment.

An instructive case on what Tennessee courts would consider to be unreasonably withholding consent to an assignment of a lease by a landlord is 1963 Jackson, Inc. v. De Vos (Tenn. Ct. App. 2013). Here are the basic facts:

  • In 1967, a commercial lease (“Lease”) was entered into between the parties’ predecessors
  • The commercial lease was a “ground lease” pursuant to which the Lessee was obligated to construct and maintain a hotel
  • In 2005, the Lessor became a trust benefitting descendants of the original owner
  • A Mr. De Vos was the trustee of that trust and acted as the Lessor
  • By 2009, through a series of events, the Lessee became a company named “1963 Jackson”
  • 1963 Jackson requested that De Vos allow it to assign the Lease to a company called the “Morgan Group”
  • 1963 Jackson notified De Vos of its intent to assign the Lease to the Morgan Group and requested that he let it know what he needed in order to consider approving such an assignment
  • De Vos requested financial information of the shareholders of the Morgan Group
  • The two shareholders had net worth’s of $27 million dollars and $800,000, respectively, as established by financial statements provided to De Vos
  • One of the shareholders had $1.3 million in liquid net assets
  • That information was not enough for De Vos and he requested that the two shareholders of the Morgan Group agree to guarantee, personally, the obligations of the Lessee under the Lease
  • He also asked for information about the shareholders’ experience in hotel management
  • The shareholders agreed to provide personal guarantees for the Lease and supplied De Vos with an extensive outline of their experience in the hotel industry
  • De Vos refused to consent to the assignment (and, in fact, terminated the Lease based on what he considered to be breaches)

The trial court determined that De Vos had unreasonably withheld his consent to the assignment and found in favor of the tenant, 1963 Jackson. That decision was affirmed by the Court of Appeals of Tennessee.

The court started its analysis by observing that, under Tennessee commercial lease law, the “primary factor” in determining whether a landlord has unreasonably withheld consent to an assignment is the “financial responsibility” of the proposed assignee.

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