Business Litigation

Personal Guaranties: Supreme Court of Tennessee Issues Significant New Opinion

Published on: October 28, 2016 | by J. Ross Pepper

Given the prevalence of form contracts and the reality of the lack of attention sometimes paid to contracts and agreements on the front end by business people, disputes often arise in Tennessee commercial litigation cases about whether someone is personally liable on a contract in addition to their company being liable. In breach of contract cases for failure to pay, whether the owner of the business (or some other party) is also individually liable is very frequently critical. Any Tennessee business litigation lawyer who has handled even a modicum of cases has run into a situation where, if his or her client cannot collect from an individual guarantor, their client will collect nothing because the company is broke.

The Supreme Court of Tennessee has issued a new opinion which clarifies the liability of individuals in situations where it is alleged that they personally guaranteed the debts of a company. In MLG Enterprises v. Johnson, the plaintiff sued the defendants, a company and its CEO, for breach of contract of a commercial lease. The commercial lease contained a paragraph which specifically and unequivocally stated that the CEO agreed to be personally liable for all of the obligations of the company under the commercial lease. Because of the manner in which the lease was signed, there turned out to be a doubt, at least until the case made it to the Supreme Court of Tennessee, about whether that unambiguous language was effective.

The CEO had signed the commercial lease twice. He signed it once on behalf of his company, the “Tenant.” Directly below the signature line for the Tenant signature, the words “President/CEO” were typewritten. As well, beside the “Tenant” signature line was written the name of the CEO’s company, which was an LLC.

There was another signature line on the lease for the CEO which contained his name and not the company’s. When the CEO signed in that location, right after he signed his name, he wrote the words “for Mobile Master Mfg., LLC,” the company of which he was CEO.

Total Trust Does Not Equal Undue Influence

Published on: October 20, 2016 | by J. Ross Pepper

A recent Tennessee undue influence case proves that establishing undue influence requires more than proving that the person who was allegedly unduly influenced totally trusted the defendant. The case also illustrates how the outcome of fraud cases and undue influence cases depends so critically on the facts of each individual case. Lastly, it also proves how differently a Tennessee trial court and the Court of Appeals of Tennessee might view the facts of an undue influence case.

The case is Eledge v. Eledge and here is a summary of the relevant facts:

Father owned land
Father had a son (“Son”) and a daughter (“Daughter”)
Father became concerned that his land might be subject to the claims of creditors
Father sought advice from Son about how to preserve his land from debts
Son retained a lawyer who prepared a quitclaim deed for Father to sign
The quitclaim deed transferred half of the land to Son and half to Daughter
The quitclaim deed reserved a life estate in the land for Father
It was undisputed that Father totally trusted Son and relied on him for financial advice
Father was in good health, mentally and physically
Father lived alone and independently
While Son handled many business matters for Father and advised him, Father still handled a number of business matters competently and without Son’s help
Father did not read the quitclaim deed before he signed it
Two years after signing the quitclaim deed, Father became aware that he had only a life estate
At the request of Father, Daughter conveyed her interest in the land back to Father
Son refused to convey his interest in the land back to Father

Father filed an undue influence and fraud case against Son. Father alleged that Son owed him a duty to tell him that, if he signed the quitclaim deed, he was only retaining a life estate which would prohibit him from transferring the land if he wanted to do so. Father alleged that the failure of Son to disclose and explain was fraud because Son and he had a confidential relationship.

The trial court found that a confidential relationship existed between Father and Son. Therefore, it concluded, Son’s failure to disclose the ramifications of the quitclaim deed to Father was fraud.

Temporary Restraining Orders and Temporary Injunctions in Tennessee Business and Employment Litigation

Published on: October 10, 2016 | by J. Ross Pepper

Tennessee courts, if they follow the law, which they usually do, are very disinclined to make a party do something or to make a party refrain from doing something until the usual legal processes which occur after a lawsuit has been filed have taken place. The usual processes, which typically take many months, are an initial round of pleadings and motions, an opportunity for each party to engage in discovery, and the occurrence of a trial (if one of the parties has not shown that it has a strong enough case that it is entitled to a summary judgment or dismissal).

There are situations in which Tennessee courts are authorized to, and will, grant what is referred to as “extraordinary relief” or “injunctive relief” on an emergency or semi-emergency basis. Such relief comes in the form of temporary restraining orders (“TROs”) and temporary injunctions, sometimes also called emergency injunctions. Temporary restraining orders and temporary injunctions are almost always granted at the outset of litigation in order to prevent irreparable harm to a party. (Permanent injunctions are granted after a trial or dispositive motion and are not discussed in this blog.)

The notion behind TROs and temporary injunctions is that, in some situations, if a party has to wait on the usual legal processes to occur, even if it wins, it will suffer damages or harm that cannot be remedied even by an award of money damages.

A. Requirements for Obtaining a TRO or Temporary Injunction

To obtain a TRO, a party must prove to the court that, absent a TRO, the opposing party’s actions will cause it immediate damage which will be irreparable. TROs are frequently issued in cases where ex-employees or independent contractors are violating valid non-compete agreements and/or have confidential information, which information gives them a competitive and unfair advantage over their prior employer or the party with whom they had the independent contractor relationship.

Breach of Contract Cases: When Does Tennessee Law Apply?

Published on: August 19, 2016 | by J. Ross Pepper

As much as any other area of the law, the common law related to contractual rights and to breach of contract cases seems to be generally pretty consistent from state to state, but there can be differences. Sometimes, those differences might make a critical difference in a breach of contract case.

So, when might Tennessee substantive law not apply to a breach of contract case filed in a Tennessee court? There are two scenarios under which Tennessee substantive law will always apply in breach of contract cases. Those scenarios are pretty common. The first is where the parties have an enforceable written contract which states that Tennessee law applies. The second is where everything about the contract involves Tennessee and no other state. For example, where two parties who are both residents of Tennessee enter into a contract which is to be performed only in Tennessee, Tennessee substantive law will apply.

In some situations, whether Tennessee law will apply is not so clear. For example, in situations where a Tennessee party has a contract with a New York resident and some of the contract performance occurs outside of Tennessee, Tennessee substantive contract law might not necessarily apply. This is so even where the Tennessee resident can properly file its breach of contract claim in a Tennessee court.

Supreme Court of Tennessee Adopts New Standard for Determining Whether a Claim is Direct or Derivative

Published on: July 23, 2016 | by J. Ross Pepper

Generally speaking, a shareholder of a corporation or a member of an LLC has no individual right against a third party for an injury done to the corporation or LLC. While injuries done to corporations and LLCs most always have a direct monetary impact on owners, still, such claims belong to the corporation or LLC. Thus, they must be filed on behalf of the corporation or LLC. As well, any recovery must be paid to the corporation or LLC.

In Tennessee, claims filed on behalf of a corporation or LLC are called “derivative lawsuits,” “derivative claims” or “shareholder derivative lawsuits.” “Direct claims” belong directly to shareholders (or LLC members), and can be filed in the name of the injured shareholders or LLC members. Any recovery or relief in a direct claim will go to the shareholder or LLC member who brought the claim.

A shareholder who brings a lawsuit in his or her own name had better be careful. That is because, if the claim brought by the shareholder should have been brought on behalf of the corporation as a derivative claim, it will be dismissed on the basis that the shareholder does not have standing. (The same analysis applies to claims brought by LLC members.)

For many cases, distinguishing between a claim that must be filed as a derivative claim versus a claim that may be filed by a shareholder or member in his, her or its own name and right is pretty easy. For example, if an officer or owner of a corporation or LLC breaches his or her fiduciary duties by misappropriating monies or business opportunities of the corporation or LLC, a shareholder or member would have to sue that officer or owner in a derivative lawsuit.

“As Is” Contracts and the Mutual Mistake Defense

Published on: July 16, 2016 | by J. Ross Pepper

Tennessee breach of contract cases can sometimes be defended successfully by asserting the defense of mutual mistake. Here is a hypothetical example of a case in which the defense of mutual mistake would squarely apply: Seller sells a residential lot to Buyer. At the time Buyer and Seller sign their contract, unbeknownst to both, the property is in a flood plane and is unsuitable for a home.

Under the above hypothetical facts, both Buyer and Seller made a mutual mistake as to a material matter at the time they made their contract. Under Tennessee law, if the Buyer found out after the parties made their contract that the lot was unsuitable for a home; Buyer refused to pay; and, Seller sued buyer for breach of contract, then, Buyer could successfully defend those claims by pleading mutual mistake.

It is probably unlikely that the same facts as the above hypothetical will ever occur in a Tennessee case because of the prevalence of real estate contracts which have “as is” clauses in them. Such “as is” clauses in real estate contracts have taken away the defense of mutual mistake for more than one buyer of real estate in Tennessee.

Under Tennessee law, even where both parties entered into a contract under a mutual mistake about a material fact, if the contract allocated the risk of that mutual mistake to one party, that party cannot use the doctrine of mutual mistake. How does the risk of a mutual mistake become allocated to one of the parties? The answer is that “as is” and similar clauses do just that.

Using the Doctrine of Equitable Estoppel to Defeat a Statute of Limitations Defense

Published on: June 25, 2016 | by J. Ross Pepper

In Tennessee breach of contract cases, the defense of the statute of limitations is raised with some frequency. Most of the time that it is asserted as an affirmative defense, it will not defeat the plaintiff’s claim. It is one of the affirmative defenses which lawyers insert reflexively into their answer to cover their client just in case the facts, as they develop, might support such a defense.

In some cases, however, a defendant can prove fairly easily that the plaintiff filed his or her breach of contract case outside of the statute of limitations. In such cases, all may not be lost if the plaintiff can prove that the defendant should be equitably estopped from relying upon the statute of limitations. So, what does it take under Tennessee law to prove that the defendant should be equitably estopped from asserting the statute of limitations as a defense?

Once the defendant makes out a prima facie statute of limitations defense, the plaintiff has the burden to prove “the defendant induced him or her to put off filing suit by identifying specific promises, inducements, suggestions, representations, assurances or other similar conduct by the defendant that the defendant knew, or reasonably should have known would induce the plaintiff to delay filing suit.” Redwing v. Catholic Bishop for Diocese of Memphis (Tenn. 2012) A defendant makes out a prima facie case by presenting facts which show that the plaintiff’s claim was filed after the statute of limitations had expired.

Under Tennessee law, a plaintiff cannot bar the defendant from relying upon the statute of limitations defense by introducing vague statements made by the defendant or statements that are ambiguous. The plaintiff, however, does not have to prove that the defendant was so specific that he or she expressly stated that he or she would not assert the statute of limitations as a defense. Likewise, the plaintiff does not have to prove that the defendant specifically said that he or she would delay filing a lawsuit.

Using Quantum Meruit to Recover in Tennessee

Published on: May 22, 2016 | by J. Ross Pepper

In many, if not just about every, breach of contract case filed in Tennessee, the plaintiff will include a quantum meruit claim with his, her or its breach of contract cause of action. Why is that done? What is a quantum meruit claim?

Quantum meruit is a legal cause of action which allows a court to award damages to the plaintiff even where there is no enforceable contract between the plaintiff and defendant. When a court uses quantum meruit, essentially, it implies a contract between the plaintiff and defendant pursuant to which the defendant must pay the plaintiff for whatever the plaintiff provided. Quantum meruit can be used by a plaintiff to recover for goods, services, or both.

Quantum meruit claims accompany breach of contract claims so often because they provide a way for the court to award money to the plaintiff even when the plaintiff cannot prove that there was an enforceable contract. In fact, a court cannot even award damages pursuant to a quantum meruit claim if there was an enforceable contract between the parties. A quantum meruit claim can be an invaluable claim for a plaintiff because contracts, even written ones, may fail for various reasons: the statute of frauds; indefiniteness; mutual mistake; etc.

A fairly recent case from the Court of Appeals for the Sixth Circuit, in which the court applied Tennessee quantum meruit law, is illustrative of how important a quantum meruit claim can turn out to be. It also sheds light on how courts calculate damages for quantum meruit.

Litigating Contracts with “No Oral Modification” Clauses

Published on: May 7, 2016 | by J. Ross Pepper

Many breach of contract cases in Tennessee involve written contracts which contain what I refer to as “no oral modification clauses.” Although the language of these types of clauses differs, they usually say something like this: “This Agreement may not be amended, modified, changed or extended except by a written instrument signed by both parties.”

There is also a statute in Tennessee, T.C.A. §47-50-112(c), which directs that, if a contract contains “a provision to the effect that no waiver of any terms or provisions thereof shall be valid unless such waiver is in writing, no court shall give effect to such waiver unless it is in writing.”

Especially given the above statute, if two parties in a breach of contract case are litigating a case with a written contract which contains a clause disallowing oral modifications or changes, it would be impossible for one of the parties to prove that the contract had, in fact, been orally modified, right? Wrong. In fact, it happens all of the time.

Here is a summary of cases not upholding and upholding no oral modification clauses:

CASES HOLDING WAIVERS, AMENDMENTS AND MODIFICATIONS EFFECTIVE EVEN THOUGH CONTRACT CONTAINED CLAUSE REQUIRING CHANGES TO BE IN WRITING Continue reading

Business Court Ruling Expands Fiduciary Duties of LLC Members

Published on: April 14, 2016 | by J. Ross Pepper

A recent ruling from the Davidson County, Tennessee Business Court in a breach of fiduciary duty case has expanded the scope of fiduciary duties owed by LLC members to other LLC members. Under Tennessee law, it is, and has been for many years, well-established that shareholders in corporations and partners in partnerships owe fiduciary duties to each other, and not just to the corporation or partnership.

Whether LLC members even owe other members fiduciary duties, and, if so, what fiduciary duties LLC members owe to one another have been unclear. The Business Court’s recent opinion has helped to clarify the matter of the duties owed by LLC members to other LLC members.

Limited liability companies, a form of business entity which is, relatively speaking, fairly new, are designed to incorporate the best features of corporations and partnerships. Tennessee has a comprehensive set of laws regarding LLCs which are found in the Tennessee Revised Limited Liability Company Act (the “Act”), T.C.A. §48-249-101.

Section 48-249-403 of the Act deals with the fiduciary duties of LLC members and managers, and limits the fiduciary duties of LLC members and managers. Moreover, some Tennessee case law, which was decided before the enactment of the Revised Tennessee LLC Act, held that LLC members did not owe each other fiduciary duties. Continue reading