Real Estate Litigation

Tennessee Construction Cases: Claims and Defenses Based on Untimely Completion

Published on: January 8, 2019 | by J. Ross Pepper

It is not unusual for construction litigation between owners, contractors and subcontractors to involve defenses and claims based on alleged untimely completion. The basics of the law in Tennessee related to project completion is a topic about which it is worthwhile for owners, contractors and subcontractors to have some practical knowledge. A good place to start to gain that knowledge is an opinion in a construction case involving claims of breach of contract, a mechanics’ and materialmen’s’ lien, and the Tennessee Prompt Pay Act. That case is Madden Phillips Construction, Inc. v. GGAT Development Corporation, and here are the basic facts of that case:

Madden Phillips (“Contractor”) and GGAT (“Owner”) entered into a construction contract for the construction of a residential subdivision
In the written construction contract, Contractor agreed to perform several scopes of work including earthwork and construction of infrastructure for utilities and roads
The written contract contained neither a date for completion nor a “time is of the essence” clause
Contractor began work in May of 2004, but suspended its work in July of 2004 based on Owner’s failure to perform work necessary for Contractor to perform its work
After forty-five days, Contractor resumed construction, but continued to have problems completing its work because of the failure of Owner to complete its work
After Contractor had performed about ninety five percent (95%) of its work, Owner terminated the contract and refused to pay

As a defense to Contractor’s claims, Owner argued that Contractor had materially breached the construction contract by failing to complete the work in eight months. The trial court rejected this defense based on three findings of fact. First, it found that the parties’ contract did not contain a term that the work had to be completed in eight months. Second, it found that the parties had not agreed to a “time is of the essence” term for completion. Third, any right Owner might have had to terminate Contractor for failing to perform its work on a timely basis was waived by Owner’s actions and inactions, including, failing to provide fill which had to be in place before Contractor could perform its work.

The court of appeals affirmed the aforementioned ruling of the trial court, and, in doing so, it expounded on Tennessee legal principles that are applicable in cases where timeliness of completion is at issue. First, it pointed out that contract clauses which state that “time is of the essence” and contract clauses which set forth a date by which the parties agree that the work will be completed have different legal effects. Here is how: If a construction contract contains a date by which the work will be completed, but does not contain a “time is of the essence” provision, then a failure to complete the work by the agreed date will not rise to a material breach. A non-material breach does not allow the non-breaching party to terminate a contract and refuse to pay, which is what Owner did.

Tennessee Trial Court Reversed for Re-Writing Contract

Published on: December 18, 2018 | by J. Ross Pepper

A recent Court of Appeals decision involving a claim for breach of contract related to a flat fee promotion agreement illustrates how Tennessee courts are not permitted, except in limited situations involving non-compete agreements, to re-write contracts or to add terms to contracts. Here are the basic facts:

Gregg wanted to pursue a career in country music
Cupit was a producer with a studio
Gregg and Cupit entered into a “Production Agreement”
The Production Agreement provided that Gregg would pay Cupit a “flat fee” of $100,000 per single for three singles which Cupit would “nationally promote”
The Production Agreement provided that the $300,000 would be used at the “sole discretion” of Cupit
The Production Agreement provided that Cupit made no guarantees of success because the music business was a “speculative business”
Cupit undertook to promote Gregg in various ways, including having its principal give him singing lessons; incurring expenses for Gregg’s appearance on a television show; producing a music video; arranging various performances at country music events; employing a publicist; and having a Cupit employee devote time to communicating with radio stations to promote each song Gregg recorded
Gregg never had any success with his career

Gregg sued Cupit for breach of contract. He claimed that, because Cupit could only prove that it had expended an amount on promotion which was far less than the money Gregg had paid it, it had breached the contract.

The trial court held for Gregg. In doing so, it invoked the implied duty of good faith and fair dealing that is, by law, part of every Tennessee contract. It held that Gregg was entitled to an award of the difference between what he had paid Cupit and the amount which Cupit could prove it spent on promotion for Gregg. The amount awarded by the trial court was $223,069.

Sales Commissions Cases in Tennessee

Published on: August 18, 2018 | by J. Ross Pepper

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.

Novation as a Defense to a Breach of Contract Claim

Published on: July 25, 2018 | by J. Ross Pepper

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.

Important New Case on the Rights of Home Owners in HOAs

Published on: July 13, 2018 | by J. Ross Pepper

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

When May a Landlord Withhold Consent to Assign a Commercial Lease under Tennessee Law?

Published on: June 29, 2018 | by J. Ross Pepper

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.

The Reluctance of Tennessee Courts to Allow Defenses Based on the Non-Occurrence of a Condition Precedent to Succeed

Published on: April 23, 2018 | by J. Ross Pepper

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.

When a “Partial” Partition in Kind Might be Ordered by a Tennessee Court

Published on: April 13, 2018 | by J. Ross Pepper

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.

Partition Case Dismissed Because Joint Owners Had Given One Owner a Life Estate

Published on: March 27, 2018 | by J. Ross Pepper

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.

When Can a Case Filed in Tennessee Be Dismissed Because the Plaintiff Failed to Register to Do Business in Tennessee?

Published on: March 11, 2018 | by J. Ross Pepper

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