Tennessee Business Litigation Lawyers Blog

The Rights of LLC Members, Managers, Directors and Officers to Receive Reimbursement and Advances for Attorney’s Fees and Indemnification for Liability

Published on: June 5, 2022 | by J. Ross Pepper

When can a member, manager, director, or officer of a Tennessee limited liability company (“LLC”) expect the LLC to pay attorney’s fees when the member, manager, director, or officer becomes a defendant in a lawsuit or arbitration proceeding? If the individual is ultimately held individually liable in the lawsuit or arbitration proceeding, under what circumstances can he or she expect the LLC to provide indemnity for any judgment? The answers to those questions can be found in at least one place — §48-249-115 of the Tennessee Revised Limited Liability Company Act (the “Act”). If the LLC has an operating agreement, the answers might also be found in its provisions.

If an LLC has no operating agreement, then a member, manager, director, or officer must look exclusively to §48-249-115 to determine his or her rights to be advanced and reimbursed money for attorney’s fees and to indemnification for liability. If the LLC has an operating agreement that provides terms and conditions for indemnification and for the advancement and reimbursement of attorney’s fees, then those terms will supplant the provisions of the Act. The LLC’s operating agreement might provide terms and conditions that cover some situations, but not others, in which event the terms of the Act might apply along with the terms of the operating agreement.

While LLC members have the absolute right to provide, in an operating agreement, for terms and conditions related to the payment for attorney’s fees and to indemnification for liability which differ from the terms of the Act, the Act provides that an operating agreement can never waive certain provisions of the Act. The provisions that cannot be waived, T.C.A. §48-249-115(i)(1)(A)(B) and (C), prohibit an LLC from indemnifying a “responsible person” for a judgment which establishes that the responsible person breached a duty of loyalty to the LLC or its members; for a judgment for “acts or omissions not in good faith, or that involve intentional misconduct or a knowing violation of the law;” or for a judgment for an unlawful distribution under T.C.A §48-249-307. “Responsible person” includes a director of a director-managed LLC, a manager of a manager-managed LLC or a member of a member-managed LLC. That term does not include an officer of an LLC. (Officers’ rights, as distinguished from the rights of members, managers and directors, are discussed below).

The non-waivability of T.C.A. §48-249-115(i)(1)(A)(B) and (C) prevents, among other situations, a majority member who has been found liable in an LLC derivative action from using LLC assets to pay the judgment against him or her. Obviously, the non-waivability of those provisions is a critical protection for minority members.

Establishing Irreparable Harm in Non-Compete Cases

Published on: May 1, 2022 | by J. Ross Pepper

When an employer seeks a temporary restraining order (“TRO”) or temporary injunction in a Tennessee federal court against a former employee, or other person or entity with whom it had a non-compete agreement, to succeed, it must show irreparable harm will result to it if the TRO or injunction is not granted. (For purposes of this post, a non-compete agreement refers to an agreement that prohibits competition, use of confidential information, or solicitation of customers).

To obtain a TRO or temporary injunction, a federal district court in Tennessee must consider four factors: (1) The plaintiff’s likelihood of success as to the merits; (2) whether the plaintiff will suffer irreparable harm or injury if the relief is not granted; (3) whether substantial harm will be caused if the relief is granted; and (4) the effect of the injunctive relief on the interests of the public. The irreparable harm factor is indispensable. While a district court may grant a TRO or temporary injunction even where the plaintiff has not shown that it is substantially probable that the plaintiff will ultimately win the case on the merits, to grant either a TRO or a temporary injunction, a Tennessee federal district court must make specific findings that the plaintiff will suffer irreparable injury.

What is considered irreparable injury by Tennessee federal courts? An injury is irreparable if it cannot be compensated by money damages. In non-compete cases, a former employer or business cannot be compensated for lost revenues: From customers and contracts it can never prove it lost; from confidential information that was used by others to gain customers, sales or otherwise to increase profitability; or from lost customer goodwill. When someone breaches a non-compete agreement, the injured party will not be able to quantify its damages in many, if not most, cases. If it cannot quantify them, it cannot prove them and recover them. Thus, without injunctive relief, the injured plaintiff will suffer irreparable injury.

As a general rule, Tennessee federal courts recognize that irreparable harm occurs when a non-competition agreement is violated. In fact, they have recognized that, when a non-compete agreement is breached, in most cases, irreparable injury will result. The below are summaries of two instructive cases where former employees had signed non-compete agreements with their former employers. Continue reading

The Non-Existence of Liability for Libel of Title for Filing a Lien Lis Pendens

Published on: April 7, 2022 | by J. Ross Pepper

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.

First Material Breach by Seller Causes it to Lose Breach of Contract Case

Published on: March 13, 2022 | by J. Ross Pepper

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.

Using Promissory Estoppel to Recover Damages in Tennessee

Published on: January 8, 2022 | by J. Ross Pepper

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

Promissory Fraud in Tennessee

Published on: December 19, 2021 | by J. Ross Pepper

Having handled several promissory fraud cases over the years, I would characterize it as a tough tort to prove, but, under the right facts, certainly not impossible. Promissory fraud was not recognized as a cause of action in Tennessee until relatively recently, and, therefore, there is not nearly the amount of case law discussing promissory fraud in Tennessee as there is discussing other fraud causes of action.

To prove promissory fraud, a plaintiff must prove three of the same elements that must be proven for a fraud claim (fraud is now to be referred to in Tennessee as “intentional misrepresentation”). First, the plaintiff must prove that the defendant made an intentional misrepresentation of a material fact. Second, the plaintiff must prove that the defendant knew that the fact was false when he stated the fact. Third, the plaintiff must have suffered a loss based on the plaintiff’s reasonable reliance on the material fact at issue. Where the causes of action of intentional misrepresentation and promissory fraud differ are in the fourth element of each tort.

The fourth element of the tort of intentional misrepresentation requires that the plaintiff prove that the misrepresentation related to an existing fact, e.g., that the defendant represented the value of her assets were $2 million on a financial statement presented to the plaintiff when, in fact, they were $1 million. The fourth element of the tort of promissory fraud requires that the plaintiff prove that the defendant made a promise of future action, but at the time he made it, he had no intention to perform it. For example, let’s assume that the defendant represented to the plaintiff that “if you will sign this royalty contract and allow me to sell your product, I will not terminate it as long as your product is selling.” If the defendant, years later, terminated the contract even though the plaintiff’s product was still selling, a promissory fraud claim might be successful provided that the plaintiff could also provide the type of proof discussed below.

In my estimation, by far, the most critical point to understand about the tort of promissory fraud is that you cannot prove it by relying just on the fact that the defendant subsequently did not keep his promise. See, Farmers & Merchants Bank v. Petty, 664 S.W.2d 77, 80-81 (Tenn. Ct. App. 1983) If the only proof you can muster is that the defendant subsequently did not do what he said he would do, you will likely be on the losing end of a motion for summary judgment, or maybe even a motion to dismiss or a motion for judgment on the pleadings. The plaintiff in Farmers & Merchants Bank alleged that a bank officer had stated that the plaintiff would never have to repay a loan the bank had made to the plaintiff. The court in that case held that, as a matter of law, such a statement, standing alone, was insufficient to support a claim for promissory fraud since there was “no evidence, circumstantial or otherwise that the representation was false when made.”

Recovering Attorneys’ Fees for the Misuse of a Power of Attorney

Published on: October 25, 2021 | by J. Ross Pepper

Tennessee courts have long followed the “American Rule” when it comes to deciding whether attorneys’ fees should be awarded to the prevailing party in a lawsuit. Under the American Rule, a prevailing party is entitled to an award of attorneys’ fees only under three circumstances. Those are: (1) Where the parties have a contract which contains a term providing for the award of attorneys’ fees; (2) where a statute provides for the award of attorneys’ fees; or (3) where there is some recognized exception to the American Rule which has been established by Tennessee courts.

There are very few recognized exceptions which fall into category three (3) above. Very few. One of those exceptions is where someone has deliberately used a power of attorney to benefit himself or herself. That exception to the American Rule was recently employed by the Court of Appeals of Tennessee in the case of Ellis v. Duggan (2021).

In the Ellis case, a niece had used a power of attorney granted to her by her aunt to pay about $175,000 for a house which was titled in the niece’s name. The large majority of the funds for the purchase were taken from an annuity, the beneficiaries of which were three grandsons of the aunt. The niece was not a beneficiary of the annuity.

The heirs who sued the niece for breach of fiduciary duty for misusing the power of attorney prevailed at trial, but the trial court did not grant their request that they be awarded the attorneys’ fees they had incurred. The trial court refused to make an award of attorneys’ fees, reasoning that such an award was not permissible under the American Rule because there was no “basis in case law” for such an award.

Determining Whether Someone Is, or Is Not, an LLC Member Under Tennessee Law

Published on: September 22, 2021 | by J. Ross Pepper

In most cases, members of Tennessee limited liability companies will ensure, at the time of the formation of the LLC, that there is properly signed documentation which establishes which persons are members and their respective membership interest percentages. Most often, this is done in an operating agreement. It is not unusual, however, given the pace of many business deals, that the LLC members, or those purporting to be members, fail to clarify, in writing, who are members and/or the percentage interest of each of the members.

The Tennessee Revised Limited Liability Company Act (the “LLC Act”) provides the framework and procedures for the formation of a Tennessee LLC. It also provides key provisions that are applicable, by default, where the members have failed to agree on certain terms regarding the LLC’s governance or their rights as members. (For example, the LLC Act provides for the voting rights of members, sets forth the fiduciary duties of members, provides for members to have the right to review LLC records, and provides for the percentage of profits to which members are entitled). The LLC Act, however, gives no guidance whatsoever as to how to determine which persons are members of an LLC or how to determine their ownership percentages where those matters have not been agreed to in a writing, such as an operating agreement.

Given that the LLC Act is not helpful in sorting out who an LLC’s members are in situations where the identity of the members has not been agreed to in a writing, Tennessee case law provides the only authoritative guidance. (Case law from other states could well be persuasive). In Tennessee, as of this post, there are only two cases in which Tennessee courts have addressed this issue.

In the first of those cases, Parigin v. Mills (Tenn. Ct. App. 2017), the court determined that the party at issue was not a member. In the second case, Heatherly v. Off the Wagon Tours, LLC (Tenn. Ct. App. 2021), the court determined that the party at issue was a member. Here are the facts of the two cases.

Parigin v.Mills: Continue reading

Foreign Corporations and LLCs: Registering to do Business and Use of Tennessee Courts

Published on: June 15, 2021 | by J. Ross Pepper

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.

Agreement to Agree on Price in the Future Makes Agreement Unenforceable

Published on: May 19, 2021 | by J. Ross Pepper

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:

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.”