Tennessee Business Litigation Lawyers Blog

In a recent Tennessee limited liability company case, a twenty-nine percent (29%) member was awarded nearly $900,000 against the other two members of the LLCs at issue for those members’ conduct in wrongfully terminating his membership and shutting him out of the operation of the LLCs. The opinion is instructive on what is an acceptable method of valuing the financial interest of a wrongfully terminated LLC member.

Here are the key facts:

• The Plaintiff and the two Defendants were attorneys who had started several LLCs (one of which was a law firm), and all of which derived revenue from a Social Security disability practice.
• The Plaintiff owned twenty-nine percent (29%) of the LLCs; one Defendant owned thirty-nine percent (39%); and the other Defendant owned twenty-nine percent (29%).
• The opinion leaves no doubt that the Plaintiff was the member who caused the LLCs to achieve substantial profitability.
• The Defendants apparently began romantic involvement at some point after the LLCs began operating (and, after shutting the Plaintiff out, one obtained a divorce and they both announced to employees that they were a couple).
• The Defendants, before shutting out the Plaintiff, arranged meetings with key employees, told them Plaintiff would soon not be involved with the LLCs, and offered them substantial raises if they would continue to work at the LLCs.
• On April 2, 2019, the Defendants had a letter delivered to the Plaintiff notifying him that his access to all LLC bank accounts and to the LLCs computer systems had been removed, and that the police would be called if he attempted to come to work.
• After April 2, 2019, the Defendants made guaranteed payments and equity distributions to themselves,  but not to Plaintiff, and made some distributions based on their having acquired some of Plaintiff’s ownership interest in the LLCs.
• The opinion indicates that the operation of the LLCs, which were owned jointly by the Plaintiff and Defendants, were not governed by operating agreements, but by several “Partnership Agreements” between the parties.

Plaintiff filed suit under causes of action for, among others, breach of fiduciary duty, breach of contract, and conversion. The trial court entered a default judgment against the Defendants on the issue of liability for discovery abuses.

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In a recent breach of contract case involving a construction subcontract, the Court of Appeals of Tennessee held that the contract at issue was enforceable even though the parties never signed a written agreement. This case is a reminder that a legally enforceable contract may, in some cases, be created just by the conduct of the parties.

In Tennessee, some contracts must be in writing and must at least be signed by the party against whom the contract is sought to be enforced. The relative number of those types of contracts is pretty limited. (The largest share of those types of contracts are ones for the transfer of an interest in real estate, which, under Tennessee law (the Statute of Frauds), must be in writing and signed.)

Here are the key facts of the case:

• The Plaintiff was a general contractor (the “Plaintiff GC”)
• The Plaintiff GC desired to bid on a public project
• The Plaintiff GC solicited a bid for the masonry work on the project from the Defendant, a subcontractor (“Subcontractor”)
• The Plaintiff GC’s invitation to bid to the Subcontractor included the plans and specifications for the project
• Subcontractor submitted its bid to the Plaintiff GC for $174,154
• Plaintiff GC notified Subcontractor that it was the low bidder, but wanted to confirm with Subcontractor that its bid was accurate and complete before submitting its bid on the project
• Subcontractor confirmed that its bid was complete and accurate
• Plaintiff GC bid on the project and was awarded the bid
• Plaintiff GC notified Subcontractor that it had been awarded the bid and Subcontractor responded by thanking it for the update
• Since Subcontractor’s initial bid of $174,154 had been off because it inadvertently included sales tax, omitted its bond costs, and omitted some materials needed, the parties agreed to amend Subcontractor’s bid upward to $185,028
• Plaintiff GC sent a purchase order/agreement to Subcontractor which reflected the adjusted bid of $185,028
• Although Subcontractor never signed and returned the purchase order/agreement and the parties never signed a contract, Subcontractor submitted sample materials to Plaintiff GC
• Subcontractor thereafter informed Plaintiff GC that it did not intend to perform the work

Plaintiff GC sued Subcontractor for breach of contract. Plaintiff GC claimed its damages were $64,971 —- the difference between the contract price for which Subcontractor had agreed to do the work and the amount it had to pay the subcontractor it contracted with to perform the masonry work that Subcontractor had bid, but never performed. The trial court found for the Plaintiff GC and awarded it the requested $64,971. The Court of Appeals affirmed the trial court.

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Many, if not most, legal claims of an LLC must be filed directly by the LLC itself and cannot be filed by someone acting on its behalf.  The Tennessee Revised Limited Liability Company Act, however, permits a member of an LLC, in certain circumstances, to bring a derivative action on behalf of the LLC.  Very generally speaking, derivative actions are permitted when the LLC has a valid cause of action, but is not likely to pursue it itself because its current management will not do so.

Before a member or holder of financial rights of a limited liability company may bring a derivative action in Tennessee, the member or financial rights holder must establish that a demand has been made on the LLC’s management to take the necessary action to address the conduct at issue, and that the demand was denied.  In some cases, a member bringing a derivative action may be excused from having made a demand on the LLC’s management before filing the derivative action.  In so-called “demand excused” cases, a plaintiff bringing a derivative action on behalf of the LLC may be excused from having made a demand on management if the plaintiff ‘s complaint alleges, “with particularity,” facts that establish that a demand would have been futile.

A derivative action may be dismissed if the complaint filed by the plaintiff does not establish either, that a demand was made and denied, or that it should be excused because it would have been futile. Therefore, ensuring that there are adequate grounds to support a claim of demand futility is important where the plaintiff has proceeded with filing a derivative case without making demand on the LLC’s management.

A recent LLC derivative case is illustrative of what type of allegations in a derivative action complaint are insufficient to prove demand futility. Here are the key facts of the case:

• Gary Miller was a member of an LLC (the “LLC”)
• There were six members of the LLC
• The opinion does not state whether the LLC was member-managed or director- managed, but it was apparently member-managed
• Barbara Miller was another member of the LLC
• Gary Miller alleged that Barbara Miller sold and leased real properties owned by the LLC and kept the proceeds
• In his Complaint against Barbara Miller, the only allegations Gary Miller made to support a position that demand on the LLC’s management would have been futile were that: (1) He and Barbara Miller had been engaged in other legal disputes and were not on speaking terms; and, (2) that he was involved in other legal disputes with other members of the LLC.

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Under Tennessee law, many claims arising from business disputes are barred if they are not filed with a court within four years (claims related to the sale of goods under the UCC) or six years (breach of contract claims not governed by the UCC).  Those time periods begin to run, in almost all cases, not when the contract or agreement at issue was made, but when the plaintiff’s cause of action “accrued.” When a cause of action accrues varies. For most breach of contract cases not governed by the UCC, a cause of action accrues when the defendant materially breaches the contract by failing to render some performance it was supposed to render.

Even when a plaintiff files its lawsuit later than four or six years from when its cause of action accrued, nevertheless, its claims may survive the bar of the statute of limitations based on conduct or statements of the defendant. A relatively recent Tennessee breach of contract case proves that point. Here are the key facts of that case:

• Defendant owned a business
• Defendant signed an account application with the Plaintiff for the Plaintiff to supply products to the Defendant’s business
• Defendant personally guaranteed the obligations of his company to the Plaintiff
• Defendant’s company when out of business owing money to the Plaintiff
• The Plaintiff’s claim for breach of contract against the Defendant was governed by a four-year statute of limitations
• It was undisputed by the parties that the Plaintiff’s claims accrued by October 5, 2012, or, no later than October 15, 2012
• The Defendant argued, and both the Trial Court and Court of Appeals of Tennessee assumed for the sake of argument, that Plaintiff did not file its lawsuit until February of 2017 —- more than four years after Plaintiff’s claims had accrued
• A representative of the law firm which represented the Plaintiff testified that, in July of 2013, the Defendant had communicated with it at which time he acknowledged the debt and promised to pay it from the proceeds he expected to receive in the future from a real estate transaction
• On August 13, 2013, the same law firm’s records reflected that Defendant had told it that he had no money to pay the debt
• The law firm’s records reflected that, on July 24, 2014, Defendant told it that he would not pay the debt

The Plaintiff argued that the Defendant’s statements in July of 2013 prevented the statute of limitations from barring its claim. The Defendant argued that his statements did not have that effect and that, if they did toll or otherwise affect the statute of limitations, the statute began running again in August of 2013 when he told the Plaintiff’s law firm that he had no money to pay the debt.

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In a very recent breach of contract case, a former employee of the defendant was held not to have been constructively discharged from employment, and, therefore, was not entitled to a bonus provided for in his employment agreement.  The Court of Appeals of Tennessee determined that the former employee voluntarily terminated his employment based on the totality of the facts.

Here are the key facts:

• The former executive employee (“Executive”) signed a two- year contract (“Employment Agreement”) with the Defendant, a real estate business, to be an executive vice-president
• In addition to his salary of $275,000 per year, the Employment Agreement provided that Executive would receive a “minimum annual bonus” of $275,000 per year
• As the Employment Agreement was interpreted by the court, the annual bonus was payable even if Executive was unable to work, for any period (even one longer than thirty days), so long as he did not voluntarily terminate his employment
• As the Employment Agreement was interpreted by the court, if the Executive became sick and unable to work, he was only entitled to receive his base salary for thirty days, e., he only had thirty days of paid sick leave
• Executive began work in late February of 2017
• Within weeks of beginning work, Executive suffered a heart attack and had to stop working
• On April 27, 2017, Executive entered a twelve-week cardiac rehabilitation program
• Executive was paid his full salary through May 18, 2017 (well beyond the thirty-day sick leave period provided for in the Employment Agreement)
• After May of 2017, Executive and Defendant engaged in discussions about his continued employment, his entitlement to a bonus, and the amount thereof
• In the above discussions, there was disagreement between Executive and Defendant
• After June of 2017, Executive did not respond to Defendant
• On July 28, 2017, Executive filed a beach of contract suit against Defendant requesting that the court award him, among other items, the $275,000 bonus

On appeal, one of the determinative issues was whether or not the Executive had terminated his employment with Defendant voluntarily or whether, on the other hand, he had been constructively discharged from employment, as he alleged. If it was determined that he was constructively discharged, he was entitled to the $275,000 bonus.

Constructive discharge, under Tennessee law, occurs when an employer engages in conduct which is intended to cause an employee to quit. The constructive discharge theory recognizes that some voluntary terminations of employment are, in fact, involuntary terminations.  Tennessee law requires a court to consider the “totality of facts” related to the termination of an employee’s employment in deciding whether there was a constructive discharge.

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A former employer’s claims against a former employee and the former employee’s new employer for breach of a non-compete agreement and violating the Tennessee Uniform Trade Secrets Act (“Trade Secrets Act”) were dismissed in a case which is instructive on a couple of fronts. Mainly, the case illustrates the futility of a former employer attempting to claim that information the former employee acquired during his or her employment amounts to “trade secrets” under the Trade Secrets Act when the former employer allowed third parties to have access to the same information.

Here are the key facts:

• Daniel was employed by one of the two Plaintiffs in the case (Plaintiff One)
• Daniel’s position, at the time of his termination of employment with Plaintiff One, was supervisor of Plaintiff One’s billing department
• Prior to being supervisor of Plaintiff One’s billing department, Daniel’s position at Plaintiff One was as a bill collector
• Plaintiff One was in the business of collecting for amounts owed to Plaintiff Two
• Plaintiff Two provided services to healthcare providers for which it was entitled to a percentage of those healthcare providers’ claims each month
• Daniel went to work for a company called Premier Mobile (“Premier”) after his employment with Plaintiff One ended
• Premier had a prior business relationship with both Plaintiffs
• During that relationship, Premier engaged in the same business the Plaintiffs engaged in, but only in the State of Virginia
• About two weeks before Premier hired Daniel, its relationship with the Plaintiffs ended
• Premier hired Daniel in the position of “scheduler”
• Daniel performed work in Virginia at Premier’s headquarters after Premier hired him
• Daniel’s non-compete agreement with Plaintiff One prohibited him from competing against it in any state having customers of Plaintiff One from whom Plaintiff One received more than 2% of its annual revenue

After Daniel went to work for Premier, Plaintiff One sued Daniel for breaching his non-compete agreement by working for Premier and Plaintiffs One and Two sued Daniel and Premier for violating the Trade Secrets Act.

TRADE SECRETS ACT CLAIM

The Plaintiffs claimed that a number of documents which comprised trade secrets under the Trade Secrets Act were taken by Daniel and used by Daniel and his new employer, Premier. The documents which Plaintiffs claimed amounted to trade secrets included documents regarding how to provide dental treatment and to receive payment for it; “transmittal letters;” emails; spreadsheets; invoices; dental progress notes; memos; orders; and similar documents. To qualify as trade secrets under the Trade Secrets Act, not only must information meet the definition of trade secrets, but also, the party claiming the information is trade secrets must show that it took reasonable efforts, under the circumstances, to maintain its secrecy.  As well, if a third party can “readily” obtain the information which is claimed to be trade secrets “through proper means,” the information cannot qualify as trade secrets.

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