Articles Posted in Real Estate Litigation

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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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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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Sometimes in a breach of contract case, or other commercial litigation matter, a party will be met with the defense that it is not entitled to recover because a condition precedent to the parties’ contract was not fulfilled. Under Tennessee law, a party is not required to perform under a contract unless and until a condition precedent agreed upon by both parties has been satisfied.  However, and very importantly, to rely successfully on the defense that a condition precedent was not satisfied, a party must first prove that there was a condition precedent.

Because conditions precedent have a tendency to result in harsh and unfair outcomes, Tennessee courts disfavor finding the existence of conditions precedent. Sometimes, even when they do find a condition precedent which was indisputably not satisfied, nevertheless, they do not allow that fact to permit a party to avoid performance.

A leading case on conditions precedent in Tennessee was decided by the Supreme Court of Tennessee in 1996. In that case, Koch v. Construction Technology, Inc., a subcontractor filed a breach of contract case alleging that the general contractor had failed to pay it for the entire amount due for work done on a project owned by the Memphis Housing Authority (“MHA”).  In defense, the general contractor claimed that it was not required to pay the entire balance it owed to the subcontractor because a condition precedent to its performance had not been fulfilled.

The written contract between the contractor and subcontractor in the Koch case contained a provision referred to as a “pay when paid” clause.  It stated: “Partial payments subject to all applicable provisions of the Contract shall be made when and as payments are received by the Contractor.”  The general contractor argued that the only amount for which it had not paid the subcontractor was the amount MHA had not paid it.  It also argued that the above language created a condition precedent.

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There are two categories of Tennessee partition cases. A partition in kind occurs when a court divides property owned by joint tenants between or among them. A partition by sale occurs when the court orders the sale of the property so that the proceeds can be divided between or among the joint owners.

In Tennessee, the law has long been that a partition in kind is preferred and that a partition by sale will only be granted under two conditions: (1) Where the property cannot be divided (for example, a property, some parts of which would not have public access if divided, or a property that cannot be divided into smaller tracts because of a restrictive covenant); or (2) where the property would bring more money sold as a whole than the joints owners’ shares would bring if sold individually.

In reality, very many jointly owned properties cannot be partitioned in kind, especially properties in more developed and regulated areas as opposed those in rural areas. Even if all of the property cannot be partitioned in kind, under Tennessee partition law, a court can make a partial partition in kind.  In other words, it can exclude some property from a partition by sale and vest it in one or more joint owners.

In Breen v. Sharp (Tenn. Ct. App. 2017), two nephews and their aunt owned, as tenants in common, three non-contiguous tracts of undeveloped rural land. Aunt owned fifty percent (50%) and her nephews owned twenty-five percent (25%) each.  The nephews wanted to partition all of the land by sale.  Aunt wanted a partition in kind because, on the western side of one of the tracts (“Tract 2”), was the location of land that had sentimental value as it had been the location of a schoolhouse where her family members had taught and attended.

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In a recent opinion of the Court of Appeals of Tennessee in the case of Stokely v. Stokely, it upheld the trial court’s decision in a Tennessee partition case in which the trial court had dismissed the claims of the joint owners who sought to partition the land in question.  The case is notable for a couple of points.

First, it is authority that establishes that, in Tennessee, real estate cannot be partitioned when one joint owner has a life estate (at least as long as that joint owner is alive). This is an exception to the general rule that any joint owner is entitled to a partition whenever that owner so desires one. Second, it reiterates the rule that, when you sign legal documents, you cannot avoid the consequences by claiming that you did not fully understand what you signed.

Here are the basic facts of the case:

  • Mother owned a house and land (“Property”) in which she lived with one of her children, Anna
  • Including Anna, there were seven siblings (“Siblings”)
  • Mother died without a will in 2003
  • Because Mother died without a will, all of her children, Siblings, inherited an equal interest in the Property
  • After Mother’s death, Siblings signed a Quitclaim Deed granting Anna a life estate in the Property
  • Some of the Siblings signed the Quitclaim Deed themselves, but the signature of four of them was effectuated by the use of a Power of Attorney they gave to a brother, who was one of the Siblings
  • The Power of Attorney expressly referenced that it was given so that the brother could sign a Quitclaim Deed reserving a life estate to Anna

Disagreements arose between the Siblings. In 2015, four of the Siblings filed a partition case in order to have the Property partitioned.  The trial court dismissed the partition case on two separate grounds. First, it found that a partition could not occur due to the life estate held by Anna. Second, it held that the cause of action to reform the Quitclaim Deed to rescind the life estate given to Anna, which was asserted by the Siblings who had filed the case, was barred by the statute of limitations.

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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

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A lien lis pendens can be a very effective tool not only to preserve a claim against real estate, but also, to create leverage in litigation. Tennessee’s lien lis pendens statute is about as clear as mud, even to those of us accustomed to deciphering statutes drafted in the early twentieth century. To boot, Tennessee courts have given as little guidance to practitioners on the matter of liens lis pendens than on about any other legal topic of comparable significance of which I am aware.

What is a Lien Lis Pendens and What Does It Do? 

Before the enactment of the Tennessee lien lis pendens statute in 1932, under Tennessee common law, whenever a lawsuit was filed which asserted a claim in, or against, a specific piece of land, a lien was created against the land from the date of the filing of the suit. That lien was effective against all persons who might acquire an interest in the land after the lawsuit was filed.

The purpose of the lien lis pendens was to enable the court hearing the lawsuit to retain jurisdiction over the land pending the conclusion of the lawsuit. Without the lien lis pendens tool, a defendant sued over an interest in land might easily avoid justice by selling the land after the filing of the lawsuit. (If the defendant sold it to a bona fide purchaser, it would not be a fraudulent transfer which could be set aside.)  Court’s don’t like their judgments frustrated, and the lien lis pendens was created to prevent that.

Before the enactment of the lien lis pendens statute, the mere filing of the lawsuit created the lien lis pendens. That is not the case anymore (as discussed below).

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A recent opinion of the Court of Appeals of Tennessee in a fraudulent transfer case provides an excellent summary and roadmap of what it takes to prove a fraudulent transfer under Tennessee law. The Uniform Fraudulent Transfer Act, which has been adopted in Tennessee, can be a bit much to get one’s head around, at least without a good bit of review and study.  The recent opinion is useful because the facts of it are tailor-made to demonstrate how the provisions of the Act are applied and the result.

Here are the key facts of the case:

  • Father owned an LLC, the business of which was installing drywall
  • Father owed a Drywall Supplier about $350,000
  • In October of 2007, Father signed a note to the Drywall Supplier for the amount he owed
  • In March of 2009, Father sold the LLC to his Son for $12,000
  • Drywall Supplier filed a lawsuit to set aside the transfer of the LLC to Son, alleging it was a fraudulent transfer

In its fraudulent transfer case, Drywall Supplier alleged that the transfer of the LLC to Son was a fraudulent transfer under the actual fraud statute and, also, under the constructive fraud statute, both of which are part of the Uniform Fraudulent Transfer Act. The trial court found that the transfer was not fraudulent under either provision of the Act. The Court of Appeals affirmed the trial court in all respects.

Under the actual fraud statute, a plaintiff must prove that the transfer was made “with actual intent to hinder, delay, or defraud” a creditor. Since proving fraudulent intent almost always requires circumstantial evidence, the statute lists eleven (11) factors that are to be considered in determining whether there was intent to defraud.  If a plaintiff is able to prove the existence of one or more of those factors (often called “badges of fraud”), a presumption of fraud arises.  Once that presumption has arisen, the burden shifts to the defendant to prove that there was no fraudulent intent.

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