Articles Posted in Real Estate Litigation

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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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In Tennessee partition cases, a court has wide latitude in determining (and ordering) the sale of property. It can order an auction sale or that the property be listed and sold through an agent. What a Tennessee court cannot do is what one did in a recent case decided by the Court of Appeals of Tennessee.

In the case of In Re Estate of Donald Carl Battle, the party who filed the partition action requested that the property be sold and that the proceeds be distributed. In that case, the partitioning party and the other party with an ownership interest agreed that the property could not be partitioned in kind, that the partitioning party had a 25% ownership interest in the property and that the other party owned a 75% interest.

The trial court ordered an appraisal. The appraisal valued the property at $340,000. The trial court then ordered that the 75% owner could pay 25% of the appraised value to the partitioning party and buy out its interest.  The partitioning party objected and appealed.

The Court of Appeals reversed the trial court. It did so based on long-standing Tennessee law which prohibits a Tennessee court, in a partition case, from divesting property out of one co-owner and placing it in another. In Tennessee, as the Court of Appeals pointed out, if a co-owner wants the property sold, it is entitled to a sale.

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In many Tennessee cases involving written contracts, the contracts will contain provisions whereby the parties agreed that the substantive law of a state other than Tennessee would apply in any litigation between them. (In the absence of such a provision, Tennessee follows the rule of lex loci contractus whereby it is presumed that the law of the state where the contract was signed applies).  Since there is substantial similarity between the laws of the States, especially the common law of breach of contract, which State’s law applies may not make a big difference in most cases. It can, however, make a big difference in some cases.

Where the parties have agreed that the law of a particular state will govern any litigation, a Tennessee court will enforce that agreement unless the jurisdiction whose law is chosen does not bear a material connection to the transaction or unless the law of the jurisdiction chosen is contrary to the fundamental policies of Tennessee. This blog focuses on the issue of when a Tennessee court might not enforce a choice of law provision because the law of the state chosen by the parties does not bear a material connection to the transaction.

There is scant published Tennessee case law that addresses this issue. In a 1931 opinion, Manufacturers Finance Co. v. B. L. Johnson & Co., 15 Tenn. App. 236, the Court of Appeals of Tennessee refused to apply the law of Delaware, which the parties had agreed would govern any dispute between them. In that case, the plaintiff was a finance company organized under Delaware law, but which had a principal place of business in Maryland.  The defendant was a Tennessee corporation with a principal place of business in Knoxville.  No part of the disputed transaction touched Delaware.  The court held that it would not apply Delaware law under those circumstances.

In a 2012 breach of contract case, the Tennessee Court of Appeals enforced a contractual provision whereby the law of Kentucky was to govern any litigation between the parties. In that case, the prospective buyer claimed that it was entitled to a refund of an earnest money deposit it had made to purchase land located in Kentucky from the seller. In that case, the buyer was from Tennessee, but the sellers were from Kentucky and the land being sold was in Kentucky.  Under those facts, the court held that there was a material connection between Kentucky and the transaction being litigated.

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In a recent Tennessee real estate case involving the sale of a lot, the plaintiffs/buyers alleged that the defendants/sellers made misrepresentations that the lot would have the ability to connect to the sewer. Not only did the court order that the real estate contract be set aside and that the buyers be refunded the full purchase price, but also, it awarded the buyers their attorney’s fees under the Tennessee Consumer Protection Act (“TCPA”).

Here are the key facts:

  • The buyers (a husband and wife) were interested in buying a lot, for investment purposes, in a development called the Preserve at English Mountain
  • An agent for the real estate agency which had the exclusive listing for the Preserve showed the husband buyer the lot in early June of 2006
  • Husband buyer testified that the agent who showed him the lot represented that the lot would be able to connect to the sewer
  • The agent disputed that she had told the husband buyer this
  • It was undisputed that, when husband buyer visited the lot, there was a sewer manhole cover adjacent to the property
  • It was also undisputed that, at the time the husband buyer viewed the lot, the MLS listing clearly stated that the lot had sewer and that the website set up for the Preserve stated that each lot had city sewer
  • On June 8, 2006, unbeknownst to the buyers until three years later, the county health department had issued a certification for the lot, but only for a septic system serving a maximum of two bedrooms
  • On June 16, 2006, the buyers signed a contract for $124,000 to buy the lot
  • The sale was closed on June 30, 2006
  • At the closing, the buyers signed a disclosure statement indicating that the lot did not have public sewer
  • Three years after closing, the buyers discovered that any house to be built on the property was limited to two bedrooms

The buyers filed a misrepresentation lawsuit. They alleged that they would never have purchased the lot had they known that any house to be built on it had to be limited to two bedrooms. The buyers sought to have the real estate contract rescinded and for their purchase money to be returned.

The trial court held for the buyers. It also held that the buyers were entitled to attorney’s fees under the TCPA because the agent who signed as agent for the buyers failed to disclose that he had an ownership interest in the LLC which sold the lot to buyers.

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In 1977, the Tennessee Consumer Protection Act was enacted. In 2011, the legislature of Tennessee modified it significantly. Here are some basic points to remember with respect to potential Tennessee Consumer Protection Act lawsuits:

  1. Since 2011, a party cannot bring a private cause of action for acts and practices which fall under the catch-all provision of T.C.A. §47-18-104(27).  The TCPA contains a laundry list of fairly specific acts or practices which are per se unfair and deceptive.  It also contains a catch-all subdivision which declares that “any other act or practice which is deceptive” is actionable.  In many cases, in my experience, it is difficult to shoe horn the conduct at issue into one of the defined unfair acts and practices.  In such cases, the catch-all provision may be the only avenue for a client to achieve the relief provided by the TCPA.  In 2011, however, the TCPA was revised to prohibit a private cause of action under the catch-all provision.  There are still other provisions for which a private cause of action is available, which are somewhat broad and which may fit a client’s case, particularly, T.C.A. §47-18-104(5)(7) and (19).
  2. The statute of limitations for lawsuits under the Tennessee Consumer Protection Act is one year. The one year period begins running from “a person’s discovery of the unlawful act or practice.”  Beware that a defendant can argue that the statute began running when a person had constructive knowledge of the act or practice. A plaintiff has constructive knowledge when the plaintiff is aware of facts which would put a reasonable person on notice that the plaintiff has suffered an injury because of the wrongful conduct and knows the identity of the entity or person who engaged in that conduct.  When a plaintiff had constructive knowledge is a question of fact to be decided by the jury, if a jury has been demanded.  There is an absolute outer limit, or statute of repose, for the filing of TCPA claims of 5 years after the date of the transaction which is the basis of the lawsuit.
  3. To recover under the Tennessee Consumer Act, a plaintiff has to show more than just an unfair or deceptive act or practice: A plaintiff must show that he or she suffered an ascertainable loss as the result of the act or practice. In other words, consistent with the common law tort claims for fraud and negligent misrepresentation, a plaintiff in a consumer protection lawsuit must show that the conduct at issue caused him or her damages.  The question of whether or not there has been an ascertainable loss, and the amount thereof, is a question of fact for the jury where a jury has been demanded.
  4. The Tennessee Consumer Protection Act can no longer be used as a cause of action against an insurance company.  In 2011, T.C.A. §56-8-113 became effective and it prohibits the use of the TCPA against insurance companies.
  5. A plaintiff cannot recover both treble damages under the TCPA and punitive damages for a common law claim which relates to the same conduct. Plaintiffs typically combine a TCPA cause of action with a common law cause of action like fraud.  Punitive damages are not available under the TCPA, but a court may treble the amount of any damages awarded by the jury under the TCPA.  If a plaintiff recovers punitive damages under a common law claim and treble damages under the TCPA, the plaintiff must then elect which award to take (which is a no brainer decision).
  6. The TCPA cannot be used against someone who has been engaged in the isolated sale of real estate. If you buy a home or other real estate from someone who you believe made a misrepresentation or who failed to disclose a material defect, and that person is not in the real estate business and does not frequently sell real estate, you may have common law causes of action and other statutory causes of action against that person, but it is unlikely you have a viable TCPA claim against them.  (The same cannot be said for real estate agents and agencies.)
  7. The TCPA applies to acts or practices in connection with the marketing or sale of securities.
  8. Under the TCPA, a court may award a successful plaintiff attorney’s fees.  

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