Tennessee Business Litigation Lawyers Blog

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.”

What Damages May a Tenant of Commercial Space Recover in Tennessee?

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

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.

Commercial Lease Case Analyzes Statute of Frauds and Parol Evidence Rule

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

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

Important Recent Tennessee Case on Contract Interpretation and the Parol Evidence Rule

Published on: March 8, 2021 | by J. Ross Pepper

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.

The Tennessee Uniform Trade Secrets Act: Proving that the Information is Not Available Through Other Means

Published on: February 8, 2021 | by J. Ross Pepper

Under the Tennessee Uniform Trade Secrets Act (“TUTSA”), a party alleging a violation of that Act must first prove that the information at issue is a trade secret. To prove that information is a trade secret under TUTSA, a plaintiff must prove, among other things, that the information is not “readily ascertainable by proper means by other persons [besides the defendant].” Sometimes, courts describe this as an obligation of the plaintiff to prove that the information is not “publicly available.” (This requirement is closely related to the requirement that a plaintiff must prove that it took reasonable efforts under the circumstances to maintain the secrecy of the information.)

Anecdotally, plaintiffs frequently file lawsuits alleging that their trade secrets were misappropriated, but courts determine that what the plaintiffs claimed were trade secrets were not because, either the information was publicly available or the plaintiff, itself, disclosed the information to the defendant or others without requiring that the defendant or others maintain the confidentiality of the information and not use it.

Here are summaries of a few select cases where courts have decided that information does not qualify as a trade secret because it was available through other means.

Care Services Mgmt., LLC v. Premier Mobile Dentistry of Va. (M.D. Tenn. 2020): The plaintiff provided to healthcare providers assistance with payment of claims and reimbursement. The defendant had been employed by plaintiff as a bill collector and later as a supervisor of bill collectors. The plaintiff claimed that forms, or templates, for documents that related to providing and receiving dental treatment were trade secrets which the defendant had misappropriated. Those documents included transmittal letters, emails, spreadsheets, invoices, dental progress notes, memos and the like. The court disagreed finding that the documents were regularly shared with patients, nursing homes, state agencies and others.
Wright Medical Tech., Inc. v. Grisoni (Tenn. Ct. App. 2001): In this case, the defendant was a highly educated and experienced chemical engineer who, while employed by the plaintiff, had worked on developing a calcium sulfate bone void filler medical product. After his employment was terminated, he began working on a similar product. In finding that the defendant former employee had not violated TUTSA, the court relied on the fact that the former employee was able to point it to public sources which contained information about calcium sulfate bone void fillers and that the plaintiff, his former employer, had published brochures and user guides describing the product it was developing.
Ecimos, LLC v. Carrier Corp. (6^th Cir. 2020): In this case, the court stated that, in determining whether information is a trade secret, the “most important” factor “is whether the information has been publicly disclosed or is easily acquired or duplicated by others.” The court ruled in this case that the plaintiff’s assembled hardware did not constitute a trade secret because the plaintiff had put the product on the market and sold it to third parties.

Buyers’ Remedies When the Acreage Purchased is Less than Represented

Published on: January 3, 2021 | by J. Ross Pepper

In Tennessee, it is not highly unusual for a buyer to discover, after buying a piece of property, that it contains less acreage than was represented in the deed. For example, a buyer’s deed might state the property contains 22 acres “more or less” or 22 acres “approximately” after giving a legal description of the land in question. After buying the property, our hypothetical buyer might have a survey done which reveals that the property described consisted of only 18 acres.

Under Tennessee law, what are the chances that our hypothetical buyer can recover part of the purchase price or rescind the contract altogether and recover the entire purchase price? In most cases, based on my experience and familiarity with Tennessee real estate cases, the answer is that the chances are not very good. This is certainly not to say that a buyer cannot be successful in receiving a partial refund or rescission. As well, that pessimistic opinion applies only to real estate transactions in which the sales of property were “in gross” and not by the acre.

In its simplest terms, a sale in gross occurs when the purchase price is not determined by an amount per acre, but by a lump sum for land, the location and boundaries of which are described. In my experience, sales in gross account for most all real estate transactions.

Where a sale is in gross, a seller is not liable for any deficiency in the quantity of land unless the buyer can show facts establishing that the seller acted fraudulently or that the seller made such a substantial mistake that fraud should be inferred. The rationale for this rule is that, where the seller has described the boundaries of the property, the buyer is free to have his or her own survey done to verify the accuracy of the seller’s representations as to the acreage contained within those boundaries.

Damages for Construction Defects in Tennessee

Published on: December 21, 2020 | by J. Ross Pepper

What damages can a plaintiff recover under Tennessee law for construction defects? The answer is that a plaintiff can recover either the amount it will take to remedy or repair the defects or the difference in value between the structure had the work been done correctly and its value considering the defective work. The later method of damages is sometimes referred to as “diminution in value” or “diminution” damages.

Construction defect cases almost always are breach of contract cases where a project owner or homeowner has sued a contractor with which it had a written or verbal contract. Thus, although there are some unique considerations in construction defect cases, basic principles of Tennessee contract law apply to them. The purpose of breach of contract damages is, first and foremost, to attempt to put the plaintiff, as near as possible, in the same position in which he or she would have been had the defendant not breached. The plaintiff should not receive a windfall nor should the plaintiff receive less than what it will take to be made whole.

A plaintiff in a breach of contract case with a contractor must be mindful that, under Tennessee law, the plaintiff bears the burden of proving damages. Practically speaking, lawyers representing plaintiffs in construction defect cases must be strategic and proactive from the very beginning of the case about the proof needed to ensure that their client receives a recovery. More than a few construction defects cases have foundered at the damages stage after a plaintiff has proven liability.

Who determines, in a construction defect case, which of the above two methods of calculating damages applies? In Tennessee, the judge does. How does the judge decide which method to apply? Probably, the seminal and most informative Tennessee case addressing that question is GSB Contractors, Inc. v. Hess (Tenn. Ct. App. 2005).

Valuing the Membership Interest of an LLC Member Under Tennessee Law

Published on: November 30, 2020 | by J. Ross Pepper

A member of a Tennessee Limited Liability Company (“LLC”) may, at some point, lose his or her membership interest, either voluntarily or involuntarily. An Operating Agreement of an LLC may have provisions which address the conditions under which a member’s interest may be terminated. If the LLC does not have an Operating Agreement, or the Operating Agreement which it does have does not contain provisions dealing with the termination of a member’s interest, then, the provisions of Tennessee Revised Limited Liability Company (the “Act”) will apply by default. (The Act’s provisions always apply, by default, where an LLC does not have an Operating Agreement). Frequently, Operating Agreements contain provisions related to the voluntary and involuntary termination of a member’s interest in the LLC.

Under the Act, an LLC member may voluntarily terminate his or her interest in the LLC. (If the member does so in contravention of the terms of the LLC’s Operating Agreement, the member may be held liable for any damages caused by such voluntary termination). As well, under the Act, a member’s interest may be terminated involuntarily by a Tennessee court under certain circumstances set forth in the Act at T.C.A § 48-249-503.

What does a member of an LLC receive under Tennessee law when his or her membership interest has been terminated, whether voluntarily or involuntarily? If the Operating Agreement provides how the valuation and payment is to be made, then its terms will control. If the Operating Agreement does not provide for how a terminated member’s interest is to be valued, then the provisions of the Act, specifically T.C.A §48-249-505, will apply.

Under §505, a member is entitled to be paid “fair value” for his or her membership interest. That term, as explained by the Court of Appeals of Tennessee in a recent decision, is not the same as “market value.” In Raley v. Brinkman (Tenn. Ct. App. 2020), two members, Raley and Brinkman, owned 50% of the membership interests of the LLC at issue. Among several rulings arising from the dispute between the two, the trial court ruled that Raley’s interest should be involuntarily terminated because of his conduct.