Articles Posted in Real Estate Litigation

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In condemnation cases, it is understandable that a landowner would want a jury to be able to consider the value of the landowner’s property based on its highest and best use. For example, if the landowner’s property is uniquely situated such that a party wanting to construct a hotel on it would likely pay significantly more for it than any other buyer, the landowner would probably do better at trial if an expert appraiser was able to base his or her valuation on the amount that a buyer wanting to construct a hotel on it would pay for the property.  While such an approach to valuation would certainly favor a landowner in many cases, under Tennessee condemnation law, such an approach is not allowed. That has long been the rule in Tennessee eminent domain cases.

To see how this rule can play out to the detriment of a landowner, consider the recent case of Ocoee Utility District of Bradley and Polk Counties v. The Wildwood Company, Inc. (Sept. 2016).  Here are the key facts:

  • The Landowners owned land with springs which could provide a water source for the condemning authority, the Utility District
  • The Utility District’s appraiser had appraised the property being taken at $21,500
  • The Utility District offered to buy the property for $35,000
  • The Landowners retained, as an expert witness, a commercial appraiser who valued the property at $417,000
  • To arrive at the $417,000 figure, the appraiser testified, in his deposition, that the highest and best use of the property was for the sale of water and that his valuation involved an analysis of the income which could be generated from the sale of water from the property
  • The expert appraiser testified that he based his valuation of fair market value on the rental income that the Landowners could generate by leasing the water rights and acknowledged that his “rental rate is based on water.”
  • The appraiser also testified that his value was based on what rate the Utility District was willing to pay for the water rights
  • The jury returned a verdict for the Landowners in the amount of $417,000

The Court of Appeals of Tennessee set aside the jury verdict. It held that the testimony of the Landowners’ appraiser should have been excluded at trial.

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Last week’s blog dealt with the role of the Statute of Frauds in Tennessee real estate litigation.  The statute of frauds requires that contracts for the sale of real estate be memorialized by a writing or by a combination of writings which the court determines sufficiently describe the property conveyed.

Here are some cases, and a brief summary of their facts, where Tennessee courts have held that the writing(s) at issue was insufficient to comply with the statute of frauds:

Gorbics v. Close, 722 S.W.2d 672 (Tenn. Ct. App. 1986): A writing which described the property to be conveyed as follows: “a one acre tract of land on the northwest corner of my land. . . .”

Baliles v. Cities Service Co., 578 S.W.2d 621 (Tenn. 1979): A writing which described the property as “lots 99 and 100 in Cherokee Hills” was insufficient.

Massey v. Hardcastle, 753 S.W.2d 127 (Tenn. Ct. App. 1988): Seller had paper with address of the property to be sold at the top of the paper which purported to memorialize agreement for sale of real estate. At the bottom, the paper stated that “seller will transfer its tenantcy [sic] to the buyer,” but did not further identify the tenancy to be transferred.

Here are some cases, and a brief summary of their facts, where Tennessee courts have held that the writing(s) at issue was sufficient to comply with the statute of frauds:

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In Tennessee, most contracts are just as legally effective and valid if they are verbal as opposed to written. However, many real estate contracts and agreements, under Tennessee law, may be held invalid if not memorialized by a written document or documents which the court determines sufficiently set forth the essential terms of the agreement.  Moreover, such real estate contracts may be held invalid if the documents memorializing them are not signed by the parties against whom enforcement is sought.

The Tennessee the statute of frauds, Tenn. Code Ann. §29-2-101(a)(4), can potentially invalidate any real estate contract that is not adequately memorialized and signed by the party against whom enforcement is sought. The Tennessee statute of frauds does not automatically void real estate agreements which fail to meet its requirements: It makes such transactions voidable.

The statute of frauds covers real estate option contracts as well as garden variety real estate sales contracts. It does not cover agreements about boundary line disputes; real estate agents’ agreements to list and sell real estate; or real estate brokerage agreements.

The statute of frauds does not apply to some agreements which are collateral to the transfer of real estate. For example, in one Tennessee case, in addition to transferring a lot, the seller agreed to build a certain type of home. The parties’ in that case had no written contract about the specifications for the home or the quality or type of materials to be used in building the home.  The seller argued that the contract to build the home was unenforceable under the statute of frauds, but the Court of Appeals of Tennessee disagreed.

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In a recent construction law case decided by the Court of Appeals of Tennessee, Beacon4, LLC v. I & L Investments, LLC, the project Owner was ordered to pay, not only the withheld retainage owed to the Contractor, but also, the Contractor’s attorney’s fees, as well as pre-judgment interest.  The case is a good example of the Tennessee Prompt Pay Act achieving its intended purpose — requiring owners to pick up a contractor’s tab for attorney’s fees when they withhold retainage in bad faith and for no legitimate reason other than to pressure the contractor to take less than it is owed or to release lien rights it has for work or materials.

Here are the key facts:

  • Contractor entered into a contract for the construction of a building with Owner
  • Owner retained Butler, a principal in an architectural firm, to act as construction manager for the Project
  • On May 17, 2011 a certificate of occupancy was issued for the building
  • On November 11, 2011, counsel for Contractor sent Owner a letter demanding Owner pay the $48,442.77 it was holding in retainage as well as another $120,000 for change order work
  • Although Butler responded that the retainage was being withheld because of unresolved deficiencies in site work, he admitted at trial that he never placed any monetary value on any corrective work
  • On April 12, 2012, Owner sent a letter to Contractor advising it that it had a “final check” in the amount of $62,297 which was available provided that Contractor (and a subcontractor) executed an “appropriate lien release”
  • Contractor filed a lawsuit alleging that it was owed the retainage and that it was entitled to attorney’s fees under the Prompt Pay Act because the retainage had been withheld in bad faith (it also alleged breach of contract for the change order work)
  • The trial court found that Contractor was owed the retainage; that Owner had violated the Prompt Pay Act by withholding the retainage in bad faith; that Contractor was entitled to an award of attorney’s fees under the Prompt Pay Act for Owner’s bad faith; and that Owner was responsible for pre-judgment interest at 6% APR

The Court of Appeals (“Court”) affirmed the decision of the trial court that Contractor was entitled to the retainage, that Owner had acted in bad faith under the Prompt Pay Act in withholding payment, and that Owner was liable for attorney’s fees.

The Court observed that, under §66-34-204 of the Tennessee Prompt Pay Act, the retainage had to be paid within 90 days of the issuance of the certificate of occupancy, and that Owner had failed to do that. Owner argued that the 90 period of that statute did not apply because the General Conditions of the contract allowed it to hold the retainage beyond 90 days. The provision of the General Conditions relied upon by Owner allowed it to withhold the retainage until the occurrence of a number of conditions, including Contractor’s execution of documents necessary for “waivers of liens.”

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Can you recover punitive damages in Tennessee for breach of contract? It is difficult, but not impossible.  Moreover, there is little published case law on the subject, and, as discussed below, there is one major question about punitive damages in breach of contract cases which has yet to be fully explored and answered by Tennessee courts.

A good place to start is a summary of some Tennessee cases where punitive damages were requested for breach of contract.

Riad v. Erie Insurance Exchange (Tenn. Ct. App. 2013):  In this case, the plaintiff alleged the defendant insurance company was liable for breach of contract, bad faith failure to pay and for violating the Tennessee Consumer Protection Act.  After a trial, the jury assessed punitive damages against the defendant of $1.5 million dollars.  (It assessed compensatory damages of $343,430).

While regurgitating the same phrase used in previous Tennessee cases that punitive damages are “generally not available in breach of contract cases,” the court upheld the award of punitive damages. It did so by pointing to the seminal punitive damages case in Tennessee, Hodges v. S.C. Toof & Co. (Tenn. 1992).  In Hodges, the Supreme Court of Tennessee held that, to recover punitive damages, the defendant must have acted intentionally, fraudulently, maliciously, or recklessly.  Notably, Hodges was not a breach of contract case.

Dog House Investments, LLC v. Teal Properties, Inc. (Tenn. Ct. App. 2014): In this case, the plaintiff alleged breach of contract and promissory fraud.  (A defendant is liable for promissory fraud if it can be proven that, at the time the defendant made a promise, it had no present intent to fulfill that promise.)  The Court of Appeals of Tennessee held that the breach of contract in this case did not rise to a level of egregiousness warranting an award of punitive damages.  I think most people would agree that the conduct of the defendant in this case was every bit as egregious as the conduct of the defendant in the Riad case.  In the Dog House case, the court seemed to say that, in order to receive punitive damages for breach of contract, there must be some fraud in addition to a breach of contract. Notably, in this case, the court allowed the punitive damages verdict to stand because the trial judge had found that the defendant not only breached the contract, but also, committed promissory fraud. Continue reading →

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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.

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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.

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Tennessee law permits, under certain circumstances, a buyer of real estate to rescind a real estate contract and to recover any monies paid towards the real estate. If a Tennessee court allows rescission, the buyer will receive, at least, the amount he or she paid for the property. Moreover, a buyer may be entitled to receive compensation for permanent improvements made to the property in some situations, in addition to receiving a refund of the purchase price.

Rescission is an equitable remedy. Equitable remedies are left to the discretion of the trial court.  For that reason, there is no legal formula to apply to each case in order to know, in advance of a ruling by the court, whether rescission will or will not be granted.  In many cases,  an experienced Tennessee real estate contract lawyer will probably be able to give you some general estimation of your chances of obtaining a rescission.

Tennessee courts do not take rescission lightly: Under Tennessee law, the remedy of rescission will be allowed only in circumstances where fairness demands it. It is most likely to be allowed in cases where a seller has committed fraud. In fact, fraud by a seller of real estate in Tennessee renders the real estate contract voidable.  However, even where the seller has committed fraud and the real estate contract is voidable; it is possible that a Tennessee court will make an award of damages instead of rescinding the contract and refunding the purchase price.

While rescission is requested in many real estate contract cases in Tennessee involving fraud, it can also be granted even when the seller did not commit fraud, but where the seller and buyer both made a mutual mistake. For rescission to be granted in a case of mutual mistake, the mistake with respect to the parties’ contract must have been mutual; the mistake must have been as to a material term of the contract; and the buyer must not have been negligent in failing to realize the mistake.

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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.

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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.

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