Articles Posted in Real Estate Litigation

In Tennessee real estate litigation, frequently, a plaintiff will obtain a liens lis pendens at the time the complaint initiating the action is filed.  Once recorded with the register of deeds in the county where the subject property is located, a lien lis pendens can effectively prevent the transfer of the property, its lease, or its use as collateral to secure a loan. Such liens may, in some cases, prevent the refinancing of a loan on the subject property.   (For more on the basics of liens lis pendens, see my blog of January 21, 2018.)

Our firm has, over the years, had many clients against whose real estate liens lis pendens were obtained at the outset of litigation and against which those liens remained through the conclusion of our clients’ cases (months or years later).  A defendant/property owner can move the court, before a decision on the merits of the case, to have a lien lis pendens dissolved and removed.  Motions to dissolve liens lis pendens, when they are filed before decisions on the merits, are most often filed soon after the liens were obtained.

To succeed on a motion to dissolve a lien lis pendens, the defendant/property owner must prove that the plaintiff’s claims, as set forth in its complaint, are unrelated to any claim to an interest in the real estate. (In my previous blog on the subject, I gave some examples of cases where the claims did not relate to any interest in the real estate at issue and where courts found the lien lis pendens improper).

Even where a defendant, like some we have represented, is ultimately successful on the merits in real estate litigation and the lien lis pendens placed on its property is dissolved and becomes ineffectual, it can suffer a monetary loss.  How can such a defendant/property owner seek financial compensation for such a loss?  Is it possible to recover via a lawsuit for libel of title? The short answer is almost certainly “no.” A lien lis pendens is protected by an absolute privilege.

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I have written at least a couple of blogs about the first material breach rule and how it works (and doesn’t work) in Tennessee.  Nevertheless, here is another blog on that subject which discusses a very recent breach of contract case handed down by the Court of Appeals of Tennessee.  Since the first material breach rule is very often applicable in commercial litigation, it is hard to give it too much attention, analysis, review and thought.  Also, the case which is the subject of this blog is unique in that it is one in which the defense was used successfully.

The first material breach rule, to review, holds that a party cannot recover damages for a breach of contract if it committed the first material breach of the contract. Once a party to a contract materially breaches it, the other party to it is relived from rendering further performance and cannot be held liable for damages flowing from any breach by it which occurred after the other party’s prior material breach.

The case involved an asset purchase agreement whereby the Seller agreed to sell the assets of a meal preparation business to the Buyer, which was also in the same business. The purchase price was $310,000. The asset purchase agreement (the “Agreement”) required that the Buyer pay $150,000 within two days of the closing, and, thereafter, that it pay monthly installments of $11,333 before the last day of each month.

The Agreement also required the Seller to tender to the Buyer its recipes for meals and snacks. Moreover, in the Agreement, the Seller made promises not to compete with Buyer and not to solicit customers of Buyer.

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Promissory estoppel may be used offensively as a cause of action to recover damages, unlike equitable estoppel, which may only be used to defend. It is a useful cause of action in those situations in which a promise was made to the plaintiff, but the promise does not rise to the level of an enforceable contract.

To prove a promissory estoppel claim, a plaintiff must prove that (1) the defendant made a promise; (2) the promise was definite enough and unambiguous enough to be enforced; and (3) that the plaintiff reasonably relied on the promise.  A plaintiff does not have to prove that there was an express contract between it and the defendant to prove a promissory estoppel case.

A review of Tennessee cases wherein courts have adjudicated promissory estoppel claims reveals a couple of important points. First, plaintiffs who assert it are not often successful with it. That is not a surprise since our courts have stated it is only appropriate to allow recovery for promissory estoppel in “exceptional cases.” Second, it is a cause of action that will be won or will be lost based on the unique equities of each case.

There are many Tennessee cases discussing why the courts in those cases found that plaintiffs were not entitled to recover under a promissory estoppel cause of action. What is more helpful, in my opinion, than looking at one of those many cases is to consider one of the “exceptional cases” in which a plaintiff recovered on a promissory estoppel claim. One such case is Engenius Entertainment, Inc. v. W.W. Herenton, 971 S.W.2d 12 (Tenn. Ct. App. 1997). The facts of that case are extensive, but necessary to discuss as they established equities strongly favoring the plaintiff and resulting in the plaintiff’s success. Here are the key facts: Continue reading

A “foreign” corporation or “foreign” limited liability company (“LLC”) is one that is organized under the laws of a state other than Tennessee.  A foreign corporation or foreign LLC does not have to obtain a certificate of authority from the Tennessee Secretary of State (i.e., register to do business) to engage in certain types of business activities within Tennessee: For other types of business activities, a foreign corporation or foreign LLC must obtain a certificate of authority.

Significantly, foreign corporations and foreign LLCs which were required to register to do business in Tennessee, but did not, cannot use Tennessee courts until they have registered.  See, T.C.A §48-25-102 and T.C.A §48-246-601. Federal courts in Tennessee have held that the same statutes apply to lawsuits in Tennessee federal courts.  The rule in these statutes applies only when an unregistered foreign corporation or LLC asserts a claim in a Tennessee court. It does not apply to prevent another party from bringing a lawsuit against an unregistered foreign corporation or LLC in a state or federal court located in Tennessee.

Any time a lawsuit is filed in a Tennessee court by a foreign corporation or LLC, at the outset, the lawyer for the defendant, or defendants, should check to determine if the foreign entity obtained a certificate of authority from the Tennessee Secretary of State. This can be done on-line via the Tennessee Secretary of State’s website and takes just a few minutes. If the foreign entity was required to obtain a certificate of authority, but did not, defense counsel should file a motion to dismiss or to stay the action.  In my experience, courts always elect to stay the proceedings to give the foreign entity a chance to register.  (In one case our firm had in federal court, the action was stayed for several months while the plaintiff foreign LLC went through the steps to obtain its certificate of authority.)

Sometimes, a motion to stay a proceeding because the foreign entity did not register in Tennessee will end the proceeding because of the expense of obtaining a certificate of authority.  Under Tennessee law, the penalties for doing business in Tennessee without registering are steep. When a foreign corporation has transacted business in Tennessee without a certificate of authority, to obtain a certificate of authority, it must pay triple the amount of fees, penalties, and taxes and interest on the same, for all the years it transacted business in Tennessee without being registered. See, T.C.A. §48-25-102. A foreign LLC which was required to register to do business in Tennessee, but did not, “shall be fined and shall pay the secretary of state three (3) times the otherwise required filing fee for each year or part thereof” during which it transacted business in Tennessee.

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In a recent case, the Court of Appeals of Tennessee concluded that an option agreement for the purchase of 12 acres of land in the Wedgewood-Houston area of Nashville (“Property”) was nothing more than an unenforceable “agreement to agree” since the parties did not agree to a price for the Property, but only agreed to negotiate about price after the optionee exercised its option. (As a matter of full disclosure, Pepper Law represented the prevailing party, the defendant, Freeman Investment, LLC (“Freeman”)).

The plaintiff in the case, LVH, LLC (“LVH”), and Freeman signed an Option Agreement. The Option Agreement gave LVH a period of time to conduct due diligence to determine if the Property was suitable for development. The Option Agreement contained some language, which, standing alone and without reference to any of the other language in it, could be used to calculate a definite purchase price. The most critical paragraph in the Option Agreement with respect to the issues in the case was paragraph 2 which provided:

  1. Option Price. To be mutually agreed upon by Buyer and Seller within thirty (30) days following the expiration of the Option Period, at a price of $20,000 per residential unit (upon project completion) that can reasonably be developed on the property ….

Another paragraph provided that the earnest money paid by LVH “shall either be refunded to [LVH] in the event [LVH] terminates this agreement or [LVH] and [Freeman] cannot agree to an Option Price or partnership terms.”

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A couple of Tennessee cases lay out pretty well the kinds of damages a tenant of commercial space may be able to recover in the event the tenant’s landlord breaches the lease agreement by not making repairs or evicts the tenant without grounds.  Keep in mind that an eviction can be constructive. A constructive eviction occurs when the premises become untenantable.  With some frequency, commercial buildings become untenantable because landlords neglect to make repairs or make inadequate repairs.  (A tenant of a commercial building should be very careful about concluding, at least without the input of experienced legal counsel, that a failure of its landlord to make a repair rises to the level of a constructive eviction which would permit it to terminate the lease lawfully.)

In the recent case of Pryority Partnership v. AMT Properties, LLC (Tenn. Ct. App. 2020), the landlord of a commercial building failed to repair a leaky roof on the warehouse it rented to the plaintiff tenant. The tenant was very patient and gave the landlord several months to make the repairs, which repairs the landlord promised from the beginning of the lease it would make.  While the tenant was waiting on the landlord to make the repairs, it could not install several machines that weighed several tons each.

After waiting several months for the repairs to be made to no avail, the tenant terminated the lease. The trial court, which was affirmed in all respects by the Court of Appeals of Tennessee, found that the tenant had been constructively evicted and that the defendant landlord had breached the lease by not repairing the leaking roof.

The trial court awarded the tenant almost $200,000 in damages. Those damages consisted of rent paid by the tenant to the defendant landlord, expenses the tenant incurred to renovate the building, as well as expenses it incurred in relocating to another building.  The court of appeals affirmed this award. The court of appeals noted that a tenant may recover all damages it sustains because of its landlord’s breach which the tenant can prove with reasonable accuracy. Although the tenant in the Pryority case did not request lost profits, the court of appeals pointed out that it could have and that lost profits may be recovered by a tenant in a breach of commercial lease case.

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A Tennessee case, Smith v. Hi-Speed, Inc. (Tenn. Ct. App. 2016), which involved a commercial lease, sets forth a very useful analysis of the parol evidence rule and the statute of frauds. The facts and legal arguments, as well as the analysis of the Court of Appeals of Tennessee, align in a way that make the opinion in the case one that can be helpful to practitioners and litigants in many real estate cases where the parol evidence rule and the statute of frauds are in play.

Here are the salient facts:

  • Mother owned two commercial buildings, one in Tennessee and one in Arkansas
  • Mother’s son (“Son”) owned an interest in Hi-Speed (the opinion does not discuss whether Son owned all or some of Hi-Speed)
  • Mother agreed to spend significant money to build out the Arkansas building for Hi-Speed
  • Mother and Hi-Speed entered into a written lease agreement for the Arkansas building (the “Lease”)
  • The Lease provided that it was for 20 years with base rent of $14,000 per month
  • The Lease also provided that Hi-Speed would pay additional rent of $4,000 per month so long as the Mothers’ Tennessee building was pledged as collateral for the loan Mother obtained to build out the Arkansas building
  • Hi-Speed made the $4,000 additional monthly rent payments while the Tennessee building was pledged as collateral which was through 2008
  • Even after 2008, Hi-Speed continued to make the additional rent payments to Mother, and in even greater amounts than $4,000 per month
  • In 2009, Mother’s son died
  • In 2011, new management at Hi-Speed notified Mother that the additional rent payments each month would cease

Mother filed suit against Hi-Speed. She claimed that the Lease did not contain the entire agreement of the parties and that they also verbally agreed that the additional rent payments would continue as long as Mother was obligated on the loan she obtained to build out the Arkansas building.  (The term of Mother’s obligation on the loan went well beyond the time period that Mother’s Tennessee building secured the loan). The trial court held that the parol evidence rule barred Mother from offering evidence of the verbal agreement.

PAROL EVIDENCE RULE ANALYSIS

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In early 2019, the Supreme Court of Tennessee issued an opinion that, without exaggeration, can be said to be one of the most important Tennessee cases, if not the most important Tennessee case, to contemporary commercial litigation lawyers on the subjects of contract interpretation and the parol evidence rule. The opinion was in the case of Individual Healthcare Specialists, Inc. v. BlueCross BlueShield of Tennessee, Inc.

In the case, the Court undertook the arduous task of analyzing, discussing and reconciling over a hundred years of Tennessee case law on the subjects at issue, much of which case law is inconsistent on critical points.  While the opinion, to a large extent, struck a middle ground which still leaves open the ability of parties with contravening positions to pull something from it which supports the position of each, it provides much more clarity than the case law that came before it.  It also anchored Tennessee law in a place that is closer to the middle, and not at the extreme, of the two theories of contract interpretation with which it dealt — the contextual approach and the textual approach.

As explained in the Individual Healthcare Specialists case, under the contextual approach to contract interpretation, a court may look beyond the four corners of the written contract to determine the parties’ intent, even when the language in the parties’ contract is unambiguous. The Court juxtaposed that approach to contract interpretation applying the textual approach which prohibits a court from considering evidence other than the parties’ written agreement in many circumstances and certainly in a circumstance where the parties’ writing is unambiguous.

All of the facts and rulings related to the subjects of this post, contract interpretation and the parol evidence rule, do not have to be discussed to understand the outcome and implications of the Individual Healthcare Specialists case. In the case, the plaintiff, an insurance agency which sold BlueCross BlueShield (“BCBS”) policies for a commission, sued BCBS alleging that it had been underpaid. The language of the main agreement between the Plaintiff and BCBS, which was entered into in 1999, unambiguously permitted BCBS the right to change, unilaterally, the commission rates to be paid to the Plaintiff.

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Under well-established Tennessee law regarding the partition of jointly owned real estate, there is a presumption that the proceeds of the sale of the property should be divided equally between the co-tenants (co-owners).  However, that is only a presumption and, quite often, the proceeds are not ultimately divided evenly because one or more owners have contributed more towards the down payment, loan payments, property taxes, or maintenance.

In some partition cases, there is another wrinkle, so to speak, besides the usual matter of how the proceeds should be divided.  In some cases, a co-owner may take the position that, regardless of the fact that the other owner may have contributed more towards the property, nevertheless, the proceeds should be divided equally because the other owner intended to gift half of the property to the co-owner who contributed less. In some cases, that position can be successful like it was in a recent case from the Court of Appeals of Tennessee, Dicus, et. al. v. Smith (2020).   

Here are the key facts from that case:

  • Randy Dicus (‘Randy”) was diagnosed with a terminal disease
  • Randy was not married, but had a son, Jacob
  • Randy was very close with Jacob and his family
  • Randy asked an old high school girlfriend, Lisa, with whom he had maintained contact over the years, to take care of him
  • According to Lisa, Randy told her that, if she would take care of him, he would buy her a house where they could live together while she took care of him
  • Randy told Lisa to look for a house in the $250,000-300,000 range
  • Both Randy and Lisa signed the agency agreement with the realtor who Lisa located to assist in finding a house
  • The realtor testified that Randy had stated, that, as long as Lisa was happy with the house, he would buy it
  • Randy paid the down payment of $5,000 on the house Lisa had selected and he had approved
  • The purchase price of the house was $274,000
  • The deed to the house was put in the names of Lisa and Randy
  • The deed did not contain any right of survivorship provision
  • Randy financed the balance of the purchase price of the house with a balloon note that required him to make one payment, after one year, of $280,439
  • The balloon note was secured by a savings account owned by Randy
  • Two months after buying the house, Randy made a will whereby he left all of his assets to his son, Jacob
  • In his will, Randy directed his executor to pay all of his debts (which would have included the balloon note)
  • Lisa and Randy lived in the home for about three months before Randy passed, during which time, Lisa took care of him
  • After his father’s death, Jacob, as the executor of his estate, paid off the balloon note for the house

After Randy passed, Jacob filed a partition action and requested that the proceeds from the sale of the home be applied first towards repaying Randy’s estate for the down payment and balloon payment.  Lisa admitted that she had made no monetary contribution towards the property, but asserted that she was entitled to one-half of the proceeds of the sale because Randy had made a gift to her of one half of the house.

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Under Tennessee law, when a defendant has affirmatively made an untrue statement of material fact, a plaintiff may well be able to recover for intentional misrepresentation (also called “fraud”) or for negligent misrepresentation.  What if, instead of making an untrue statement of fact, the defendant failed to disclose an important fact or facts? In Tennessee, in proper cases, a plaintiff can recover for the defendant’s failure to disclose a material fact (sometimes called “fraudulent concealment”).

When considering a cause of action because a party has failed to disclose important facts, a good place to start your analysis is to recognize that, under Tennessee law, in most all transactions, a party does not have a duty to disclose material facts to the other party.  For that reason, among others, this cause of action is not at all easy to prove. However, in some cases, it can be successful.

There are four categories of exceptions to the rule that a party to a transaction generally does not have a duty to disclose facts to the other party to the transaction. The first exception exists where a “previous definite” fiduciary relationship existed between the parties.  Examples of definitive fiduciary relationships are attorneys and clients, and trustees and beneficiaries.

The second exception exists “where it appears one or each of the parties to the contract expressly reposes trust and confidence in the other.” I have not been able to find an example, in Tennessee case law, where this exception has been found to apply.  This exception would necessarily be very difficult to prove and would require something more than is present in almost all transactions, in my opinion. It might apply to a situation where, by the express language of the contract, one party acknowledged that it was in a superior position of knowledge and recognized that the other party was relying upon it and trusting it to fully disclose all relevant facts.

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