Under Tennessee law (T.C.A. §48-25-102), a foreign business entity which is transacting, or has transacted, business in Tennessee without obtaining a certificate of authority from the Secretary of State of Tennessee cannot maintain an action in a Tennessee court. This rule applies to lawsuits filed in Tennessee state courts, as well as to those filed in federal district courts located in Tennessee. See, e.g., In Re Meyer & Judd, 1 F. 2d 513, 526 (W.D. Tenn. 1924); G.M.L., Inc. v. Mayhew, 188 F. Supp. 2d 891, 893-94 (M.D. Tenn. 2002).
The process of obtaining a certificate of authority is also referred to as registering to do business in Tennessee. When a business entity registers to do business in Tennessee, it may be referred to as having been “domesticated” in Tennessee.
Any action filed in a Tennessee state court or a federal court located in Tennessee by a business entity transacting business in Tennessee without registering to do business in the state is subject to dismissal. Importantly, it is never too late to register to do business in Tennessee, and Tennessee law expressly allows an entity to register to do business and, thereafter, to continue its lawsuit. However, registering, after having failed to register for a number of years, can become expensive.
What does it mean to “transact business” in Tennessee such that a business must register to do business in Tennessee? The general rule is that a foreign business entity is transacting business in Tennessee when it transacts some substantial part of its ordinary business in Tennessee and its operations in Tennessee do not consist of mere casual or occasional transactions. There is a Tennessee statute (T.C.A. §48-25-101) which delineates a number of things that do not constitute the transaction of business in Tennessee. Perhaps a few of the most relevant are:
- Holding meetings related to internal governance
- Owning real estate
- Maintaining bank accounts
- Selling through independent contractors
- Soliciting orders by mail which require acceptance outside of Tennessee
- Creating or acquiring loans, security interests and deeds of trust
- Conducting isolated transactions that are completed in one month
- Transacting business in interstate commerce
The statute states that the above list is not meant to be exhaustive.
Below are summaries of three cases which give a pretty good overview of how Tennessee courts analyze and decide whether a foreign business entity has transacted business in Tennessee.
Alison Group, Inc. v. Ericson (Tenn. Ct. App. 2005): The out-of-state entity, Alison Group, Inc. (“Alison”), never registered to do business in Tennessee. It contracted with an Ericson to solicit orders for its products in Tennessee. Ericson did solicit orders from Tennessee customers and Alison sold products to Tennessee customers. Ericson, who was paid on a commission basis, was never an employee of Alison and represented other manufacturers besides Alison. The court held that Alison was not required to register to do business because of the independent contractor exception in the statute.
Shoenterprise Corp. v. Butler (Tenn. Ct. App. 1959): The court held that the plaintiff was not transacting business in Tennessee by lending money to retail shoe operations in Tennessee. The plaintiff’s principal place of business was in Missouri, its loans were payable in that state, and it had no offices or employees located in Tennessee.
United Artists Corp. v. Bd. of Censors of City of Memphis (Tenn. 1949): This is an excellent case to help you understand the interstate business exception in the statute. In this case, the Supreme Court of Tennessee held that the plaintiffs were required to have registered to do business in Tennessee, and that they could not rely on the interstate business exception. The plaintiffs owned and distributed films. They would ship films to Memphis where they would be shown. Plaintiffs would receive a share of the profits from whomever they contracted with to show the film. After a film was shown, it would be shipped back out of Tennessee and into the possession of the plaintiffs. In addressing the plaintiffs’ argument that the interstate business exception applied, the court held: “Where the property has reached its final destination, and held for local business purposes, the consignor and consignee sharing in the profits of the business, it loses its interstate character and must be adjudged to be intrastate business.”
For Tennessee commercial litigation lawyers, analyzing whether a plaintiff, which is a foreign business entity, has transacted business in Tennessee such that it should have registered to do business in this state, is one of the first steps that should be taken.
This post was written by attorney J. Ross Pepper.