Articles Posted in Real Estate Litigation

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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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When sales representatives, brokers, agencies, or other businesses are owed commissions, but are not paid, sometimes they have to retain an attorney to file a lawsuit to recover the unpaid commissions.  Our firm, over the years, has represented many commissioned sales representatives in such lawsuits.  Many times, not only have we had to prove that the defendant was contractually liable for unpaid commissions, but also, we have had to establish and to prove the amount of the commissions owed.

Defendants which owe commissions often deny that they owe the amount of commissions which they, in fact, owe.  Furthermore, they also often do not reveal, at least until they must, the full amount of revenue received or all of the sales on which the commissions are to be based.  By doing this, they attempt to reduce the amount of their liability.

Before a lawsuit is filed, which is when discovery procedures can be used to compel parties to produce information on pain of being sanctioned, parties who owe commissions may refuse to produce information to former sales representatives or agents which is needed to determine the exact amount of commissions owed.  Once a lawsuit is filed in a Tennessee state or federal court, however, a plaintiff can use the discovery procedures in the Tennessee Rules of Civil Procedure or the Federal Rules of Civil Procedure, as the case may be, to compel a defendant to produce information about sales, revenues, customer accounts, or claimed charge backs or refunds. For all practical purposes for this blog, the federal discovery rules and Tennessee discovery rules are the same. This blog gives an overview of the particular discovery rules that can be employed to determine the amount of commissions owed to a sales representative.

RULE 33:  INTERROGATORIES

Rule 33 allows a party to send interrogatories, or questions, to another party.  Unless an interrogatory is objectionable, a party must answer it and must do so under oath.  Interrogatories are a helpful method of obtaining information about sales, dates of sales, amounts of sales, and the status of customer accounts. They are also helpful in forcing a business to identify the persons with the most knowledge about matters that bear directly on the amount of commissions owed so that those persons may be deposed. Continue reading →

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A partnership can be created under Tennessee law without the partners ever having a written partnership agreement.  Even where parties have not expressly agreed, verbally, to operate a partnership, an implied partnership can be formed under Tennessee law where the parties involved intended the acts that give rise to a partnership.  The consequences, good and bad, of being in an implied partnership can be financially significant.

If you are in an implied partnership, that may be a good thing to establish in a Tennessee court as it may allow you successfully to recover money, property or profits another partner owes you or is withholding.  Being a partner in an implied partnership, however, can also result in your personal liability, not just to other partners, but to third parties. To boot, it can result in your being liable to a third party based on an act or omission of the person or persons with whom you are determined to be in an implied partnership.

This blog discusses two general topics about implied partnerships in Tennessee: (1) How Tennessee courts determine whether an implied partnership exists; and (2) the resulting advantages and disadvantages to partners in implied partnerships.

DOES AN IMPLIED PARTNERSHIP EXIST?

Under the Tennessee Revised Uniform Partnership Act (“TRUPA”), a partnership is formed “by the association of two or more persons to carry on as co-owners of a business for profit … whether or not the persons intend to form a partnership.” Under TRUPA, a “person” includes business entities such as limited liability companies and corporations. Significantly, TRUPA provides that owning property together, in and of itself, even where profits from it are shared, does not establish a partnership.

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It happens sometimes that someone, or some company, which owes a debt will transfer assets that could have been used to pay the debt in order to avoid paying it. Such transfers are often to family members, related or successor businesses, or preferred creditors, and often, when the asset transferred is not cash, are made so that the debtor/transferor receives well below the value of the asset transferred.

Fraudulent transfers can come in an endless variety of forms. Some are obvious and easy to spot. (One of the first ones I ran into involved a defendant which had transferred a piece of real estate to another entity just after my client obtained a judgment against it.) Often, however, they cannot be spotted absent access to the transferor’s financial records, and perhaps even, a deposition or two or a review of financial records by a forensic accountant.

Tennessee has adopted the Uniform Fraudulent Transfer Act (the “Act”) to allow creditors to set aside fraudulent conveyances. If the debtor/transferor transferred the asset to a bona-fide purchaser who paid a value reasonably equivalent to the asset, a court may not set aside the transfer, but, in such a situation, it may well be possible to obtain a judgment against the entities or individuals responsible for the transfer, if they are different from the transferor.

Under the Act, it is important to remember that you do not have to have obtained a court judgment for the amount owed to you before a transfer can be considered fraudulent and set aside. A transfer can be fraudulent as to any creditor who has a “claim” against the transferor. Under the Act, “claim” has a broad definition, and odds are, if you were owed money by the transferor, you can avail yourself of the Act.  Moreover, the definition of “claim” includes unliquidated debts, meaning debts the exact amount of which are not known, but which, at some point, can be reduced to a dollar value.

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Tennessee has a statute, T.C.A. §28-2-110, which can come into play in a lawsuit about the ownership of real estate where the party initiating the lawsuit (the “Plaintiff”) is alleged not to have paid property taxes on the property at issue for more than twenty (20) years. To paraphrase the statute, it prevents anyone making a claim to real estate, or rents or profits from it, from bringing a lawsuit where that party, and those through whom that party claims her interest, have failed to pay any state or county taxes owing on the property for more than twenty (20) years.

In my estimation, the critical thing to understand about the statute is that it is a statute of limitations and does not, and cannot, divest a party of title to property or prevent a party from defending its claim to property when it is challenged by another party who initiates a lawsuit.  Furthermore, the statute cannot prevent a party who has initiated a lawsuit from defending its claim to the property when the defendant goes beyond invoking §28-2-110 and simply denying the plaintiff’s claim.  Where the defendant, through a counterclaim or otherwise, requests that the court adjudicate it to be the owner of the disputed tract, the court cannot use the statute to bar the plaintiff’s claim of ownership.

Maybe, the best way to understand the statute beyond the abstract, is to review how it has affected real parties in lawsuits. So, the following three case summaries are provided to help with that understanding.

Kinder v. Bryant (Tenn. Ct. App. 2018):  I selected this case because it seems to be a somewhat common and fairly easy to understand fact scenario in which the statute was employed as a defense. The property at issue was a forty (40) acre tract which the plaintiffs claimed to have purchased in 1980. The plaintiffs had a deed.  The plaintiffs did not record their deed until 1995. The defendants’ predecessors in interest purchased the same property in 1994. They received a deed and recorded it before 1995.  The plaintiffs filed a lawsuit to have themselves declared the owners of the property. Obviously, since there was no indication that the defendants were not bona fide purchasers without notice of the plaintiffs’ deed, and since the defendants had recorded their deed first, the plaintiffs had no chance of being declared the owners of the property based on the superiority of their title.  So, the plaintiffs claimed that they owned the property by adverse possession. Since it was undisputed that the plaintiffs had not paid any of the county taxes due on the property for over twenty (20) years, the court dismissed their case under §28-2-110. This case is an example of the statute barring a claim based on adverse possession.

Alexander v. Patrick (Tenn. Ct. App. 1983):  In this case, the plaintiff and defendant claimed ownership of the same fifty (50) acre tract of land.  Plaintiff’s claim was based on a deed as was defendant’s, but plaintiff’s deed was prior in time to defendant’s deed. The opinion does not state if, or when, the relevant deeds were filed with the register of deeds.  The proof established that defendant, and her predecessors, had paid the property taxes for more than twenty (20) years and that plaintiff, and her predecessors, had not. The court held that the plaintiff’s claim was barred by §28-2-110 and dismissed the plaintiff’s complaint. This case is an example of the statute barring a claim based on title. Continue reading →

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