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In a recent shareholder dispute case, Athlon Sports Communications, Inc. v. Duggan, the Court of Appeals of Tennessee affirmed a decision from the Chancery Court of Davidson County, Tennessee valuing the stock of minority, dissenting shareholders at an amount substantially below the value sought by the minority shareholders.  The case is significant because the Court of Appeals declined to depart from the Delaware Block Method as the method for valuing dissenting shareholders’ shares as the Defendants persuasively, but unsuccessfully, argued that it should.

Here is summary of the key facts:

  • The dissenting shareholders were the Defendants
  • The Defendants owned stock in a company (“Company”) engaged in the sports media and publishing business
  • One of the Defendants had invested in the Company and become its President because he, and the other shareholders, believed that he could turn the Company around
  • The Company was not turned around and the majority entered into a merger which forced the minority shareholders out
  • The Defendants and the Company could not agree on a fair price for the shares of the Defendants: The Company was willing to pay $.10 per share and the Defendants demanded $6.18 per share
  • The Company filed an action for a judicial appraisal
  • The Company’s expert assigned the following weight and values to the three valuation approaches dictated by the Delaware Block Method:
  • Cost of Asset Approach: 80%, value $0
  • Income Approach: 20%, value $0
  • Market Approach: 0%, value $0
  • The Defendants’ expert assigned the following weight and values to the three valuation approaches dictated by the Delaware Block Method:
  • Net Asset Value: 33%, value $6.20 per share
  • Market Value: 33%, value $6.09 per share
  • Earnings Value: 33%, value $7.16 per share

The trial court adopted the valuation of the Company’s expert, but held that the stock had a value of $.10 per share based on the fact that the Company’s trade name had existed for 44 years and had value.  The trial court rejected the valuation of the Defendants’ experts for several reasons, including that it was based on projections of future earnings.

On appeal, the Defendants made several compelling points as to why the strict application of the Delaware Block Method did not fairly value their stock.  They argued that the Delaware Block Method is based on past performance and that was unfair where a business, like the Company, was about to embark on new ventures which were anticipated to be profitable.  Prior to the merger, the Company, to lure investors and capital, had relied on forecasts that showed that the Company’s profitability would increase.

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For shareholders of Tennessee corporations and members of Tennessee LLCs, the statutes of limitation which apply to breach of fiduciary duty claims are short — very short. The statute of limitation for breach of fiduciary duty lawsuits related to corporations and the statute of limitation for breach of fiduciary duty lawsuits related to LLCs are nearly identical.  Both require that a breach of fiduciary duty claim be filed within one year of the breach.

Both the corporate statute and the LLC statute are extended if the “breach is not discovered nor reasonably should have been discovered” within one year. If that is the case, both statutes of limitation provide that the lawsuit must be filed within one year of when the breach was discovered or reasonably should have been discovered. In any event, to extend either statute of limitation beyond three years, the shareholder or member must prove that the defendant fraudulently concealed the conduct giving rise to the breach of fiduciary duty claim.

Where an LLC member or shareholder of a corporation attempts to prove that he or she should not have been required to file within one year because he or she did not discover, and could not have reasonably discovered, the breach of fiduciary duty, that member or shareholder must prove that his or her lawsuit was filed within one year of the date he or she discovered “facts that would put a reasonable person on notice that injury has been suffered as a result of wrongful conduct.” Keep in mind that the one year period begins to run then, and not when the member or shareholder has been told by an attorney or other advisor that he or she has grounds for a breach of fiduciary duty lawsuit.

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Assuming that one party proves that the other party has breached a valid and enforceable contract, what amount of money can the non-breaching party recover from the breaching party? When explaining how a Tennessee court will approach the question of what amount of money to award someone for a breach of contract, it is helpful to think of two broad categories of damages under Tennessee law that come into play in breach of contract cases.

What are those categories? The first is the category of expectation damages. The second is the category of reliance damages.  An astute client, who has lost money because of a breach of contract, might ask the following questions (all of which I will attempt to answer):

What damages are expectation damages and what damages are reliance damages?

  • What is the difference between the two categories?
  • How does a Tennessee court decide which category of damages to award?
  • Which category of damages is better for an injured party?

Expectation damages are designed to put the non-breaching party in the same position that he or she would have been in had the contract not been breached. Expectation damages, in my experience, are the most common category of damages awarded in breach of contract cases in Tennessee.

In Tennessee, generally, if the court can award expectation damages for breach of contract, it will. Also, generally, if the court determines that the injured party is not entitled to expectation damages, but only to reliance damages, the injured party will get a monetary award that is less than the amount for which it had hoped (and, very possibly, an award less than the money it might have actually made but for the breach of contract).

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

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

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

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

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

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

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

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

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

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

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

Here are the key facts:

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

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

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

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

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

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

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

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

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In a recent will contest case, both the trial court and the Court of Appeals of Tennessee let it be known that the current state of the law in Tennessee regarding who has standing to bring a will contest case can result in a major injustice. Both courts also invited the Supreme Court of Tennessee to change the law.

Here is what happened in the case, In re Estate of J. Don Brock:

  • Don Brock had five adopted children (“Contestants”)
  • Mr. Brock also had a wife
  • Mr. Brock executed a will in 2013
  • The 2013 Will disinherited the Contestants, and left the assets of the estate (“Estate”) to Mr. Brock’s wife
  • Mr. Brock died
  • The 2013 Will was submitted to probate
  • The Contestants filed a notice of will contest based on undue influence, fraud, lack of testamentary capacity, and improper execution
  • The Chancery Court entered an agreed order that the Contestants had standing to challenge the 2013 Will and transferred the case to the Circuit Court for the will contest trial
  • The Estate filed a motion to transfer the case back to Chancery Court on the basis that the Contestants did not have standing to challenge the 2013 Will
  • The grounds for the Estate’s position was that there was a newly discovered 2012 Will which also disinherited each of the Contestants
  • The Circuit Court granted the motion of the Estate. It determined that the Contestants did not have standing because, even if the 2013 Will was set aside, the Contestants would still receive nothing because of the 2012 Will
  • The Contestants then filed a motion to amend their notice to contest, not only the 2013 Will, but also, the 2012 Will (as well as some wills before 2012)
  • Under the wills executed before the 2012 Will, some of the Contestants would be entitled to recover if both the 2013 Will and the 2012 Will were found to be invalid. If all of the wills before the 2012 Will were held to be invalid, all of the Contestants would recover
  • Applying existing Tennessee law, the Chancery Court determined that the Contestants did not have standing to bring a will contest case

So, what Tennessee law compelled the ruling of the Chancery Court which slammed shut the courthouse doors to the Contestants? How could the ruling be fair given the possibility that the Contestants might be able to prove that both the 2012 Will and the 2013 Will were invalid, in which event, it was undisputed that they would be entitled to assets of their father’s estate?  The first question is easy to answer. I do not have an answer to the second question (just like the trial court and appellate court did not).

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Given the prevalence of form contracts and the reality of the lack of attention sometimes paid to contracts and agreements on the front end by business people, disputes often arise in Tennessee commercial litigation cases about whether someone is personally liable on a contract in addition to their company being liable. In breach of contract cases for failure to pay, whether the owner of the business (or some other party) is also individually liable is very frequently critical.  Any Tennessee business litigation lawyer who has handled even a modicum of cases has run into a situation where, if his or her client cannot collect from an individual guarantor, their client will collect nothing because the company is broke.

The Supreme Court of Tennessee has issued a new opinion which clarifies the liability of individuals in situations where it is alleged that they personally guaranteed the debts of a company. In MLG Enterprises v. Johnson, the plaintiff sued the defendants, a company and its CEO, for breach of contract of a commercial lease.  The commercial lease contained a paragraph which specifically and unequivocally stated that the CEO agreed to be personally liable for all of the obligations of the company under the commercial lease.  Because of the manner in which the lease was signed, there turned out to be a doubt, at least until the case made it to the Supreme Court of Tennessee, about whether that unambiguous language was effective.

The CEO had signed the commercial lease twice. He signed it once on behalf of his company, the “Tenant.”  Directly below the signature line for the Tenant signature, the words “President/CEO” were typewritten. As well, beside the “Tenant” signature line was written the name of the CEO’s company, which was an LLC.

There was another signature line on the lease for the CEO which contained his name and not the company’s. When the CEO signed in that location, right after he signed his name, he wrote the words “for Mobile Master Mfg., LLC,” the company of which he was CEO.

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A recent Tennessee undue influence case proves that establishing undue influence requires more than proving that the person who was allegedly unduly influenced totally trusted the defendant. The case also illustrates how the outcome of fraud cases and undue influence cases depends so critically on the facts of each individual case. Lastly, it also proves how differently a Tennessee trial court and the Court of Appeals of Tennessee might view the facts of an undue influence case.

The case is Eledge v. Eledge and here is a summary of the relevant facts:

  • Father owned land
  • Father had a son (“Son”) and a daughter (“Daughter”)
  • Father became concerned that his land might be subject to the claims of creditors
  • Father sought advice from Son about how to preserve his land from debts
  • Son retained a lawyer who prepared a quitclaim deed for Father to sign
  • The quitclaim deed transferred half of the land to Son and half to Daughter
  • The quitclaim deed reserved a life estate in the land for Father
  • It was undisputed that Father totally trusted Son and relied on him for financial advice
  • Father was in good health, mentally and physically
  • Father lived alone and independently
  • While Son handled many business matters for Father and advised him, Father still handled a number of business matters competently and without Son’s help
  • Father did not read the quitclaim deed before he signed it
  • Two years after signing the quitclaim deed, Father became aware that he had only a life estate
  • At the request of Father, Daughter conveyed her interest in the land back to Father
  • Son refused to convey his interest in the land back to Father

Father filed an undue influence and fraud case against Son. Father alleged that Son owed him a duty to tell him that, if he signed the quitclaim deed, he was only retaining a life estate which would prohibit him from transferring the land if he wanted to do so. Father alleged that the failure of Son to disclose and explain was fraud because Son and he had a confidential relationship.

The trial court found that a confidential relationship existed between Father and Son. Therefore, it concluded, Son’s failure to disclose the ramifications of the quitclaim deed to Father was fraud.

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