Tennessee Business Litigation Lawyers Blog

New (and Significant) Tennessee Case on the Economic Loss Doctrine

Published on: January 15, 2025 | by J. Ross Pepper

Recently, the Court of Appeals of Tennessee issued an opinion in the case of Vidafuel, Inc. v. Kerry, Inc., which gives Tennessee commercial litigators further guidance on the contours of the economic loss doctrine in Tennessee. To review, in the seminal 2021 case of Milan Supply Chain Solutions, Inc. v. Navistar, Inc., the Supreme Court of Tennessee held that, where two sophisticated businesses have a contract, the aggrieved party cannot assert a fraudulent inducement claim against the other party if the alleged misrepresentations concerned the quality or character of the goods involved. In such cases, the aggrieved party may only assert contractual, non-tort claims.

The reasoning for the economic loss doctrine is amply laid out in Milan Express. Boiled down, the policy behind the doctrine is to prevent contract law from being lost in a sea of tort law. Also, a policy behind the doctrine is that sophisticated businesses with the ability to negotiate contract terms should not have their contractual expectations undermined by the ability of a party to do an end run around negotiated terms by lobbing in tort claims.

After Milan Express, in the case of Commercial Painting Company, Inc. v. Weitz, the Supreme Court of Tennessee limited the application of the doctrine to products liability cases. I have noticed a misconception by some that “products liability” means cases in which someone or something is injured by a defective product. That is not the meaning of “products liability cases” as used by the Commercial Painting Court. The Commercial Painting case held that the economic loss doctrine does not apply to services cases. The doctrine does apply to defective products cases involving no injury to persons or property. For example, the doctrine applies where the defendant sells defective or non-conforming products to the plaintiff and the plaintiff is damaged by the mere fact that it did not receive what it paid for. The doctrine would not apply if the plaintiff’s warehouse burned down or one of its employees was injured because the defendant sold it a defective product that combusted and started a fire.

Here are the salient facts of the Vidafuel case:

Vidafuel was a distributor of wellness/protein drinks.
Kerry was a manufacturer.
Vidafuel and Kerry engaged in extensive discussions and the production and evaluation of test products.
Ultimately, Vidafuel and Kerry entered a written “Manufacturing and Supply Agreement” (the “Agreement”)
Kerry warranted, in the Agreement, that it would manufacture the goods using good manufacturing practices, and that the goods it sold to Vidafuel would conform to the specifications in the Agreement.
There were numerous issues with Kerry producing and delivering non-conforming products after the Agreement was signed.
About ten months after the Agreement was signed, Kerry gave notice that it was terminating it.
Vidafuel filed a suit against Kerry asserting claims for misrepresentation and fraudulent inducement.
Vidafuel asserted no claims for breach of contract, breach of warranty, or claims based on the Uniform Commercial Code (“UCC”).
The factual basis asserted for Vidafuel’s tort claims was that Kerry had knowingly made misrepresentations about its ability to supply the products, and had misrepresented that it could resolve the manufacturing issues that arose in the course of the parties’ pre-contract test runs and discussions.

Court Awards Substantial Judgment to LLC Member Shut Out by Other Members

Published on: October 3, 2024 | by J. Ross Pepper

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.

Using the Independent Tort Doctrine to Recover Attorney’s Fees

Published on: August 5, 2024 | by J. Ross Pepper

Under Tennessee law, the prevailing party in a lawsuit, with some exceptions, cannot recover a judgment from the opposing party in the case for the attorney’s fees the prevailing party incurred in prosecuting or defending the case. By far, the two most prevalent exceptions to that rule are: (1) When the parties have a contract by which they have agreed that the prevailing party is entitled to an award of attorney’s fees; and (2) when a statute authorizes the recovery of attorney’s fees. Many contracts have terms which permit the prevailing party to recover attorney’s fees. Several statutes, such as the Tennessee Consumer Protection Act, the Tennessee Uniform Trade Secrets Act, and the Tennessee Residential Property Disclosure Act, authorize an award of attorney’s fees to a prevailing party.

Apart from the above two exceptions, there is an exception which is less likely to be applicable in most cases, but, nevertheless, can be quite useful. Also, that exception does not usually come into play in the original lawsuit, but comes into play in a subsequent lawsuit. That exception is embodied in the independent tort doctrine. The doctrine was first adopted by the Supreme Court of Tennessee in the 1985 case of Pullman Standard, Inc. v. Abex Corporation. The independent tort doctrine is sometimes now referred to as the “Pullman Rule” or the “Pullman Exception.”

To understand the applicability and contours of the independent tort doctrine, it helps to understand the facts in Pullman which were:

Pullman was a manufacturer
Pullman manufactured the superstructure of a railroad car
Pullman purchased the wheels for the car from Abex
in 1978, a tragic railroad car derailment occurred in Waverly, Tennessee
After the derailment, the National Transportation Safety Board and the Federal Railroad Administration concluded that the derailment was caused by the Abex manufactured wheel which was defective
As a result of the derailment, Pullman was sued and incurred attorney’s fees defending itself
Pullman filed suit against Abex for the attorney’s fees and expenses it had incurred in defending itself

Court Rules that Enforceable Contract Existed Even Without Signed Contract

Published on: July 9, 2024 | by J. Ross Pepper

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.

Answers to Two Important Questions about Liens Lis Pendens in Tennessee

Published on: May 5, 2024 | by J. Ross Pepper

Liens lis pendens are, often, a critical tool in real estate and commercial litigation in Tennessee. There are two important questions about liens lis pendens that are completely unanswered by the Tennessee lien lis pendens statute. (In fact, a plain reading of that statute would give a lawyer the wrong answer to one of those questions.) Here are the questions:

Can a lien lis pendens be placed on property that is not located in the same county where the plaintiff’s lawsuit is filed?
If the plaintiff loses his or her case at the trial court level, can the plaintiff maintain the lien lis pendens until the appeal is decided, if the plaintiff appeals?

The answer to both questions is “yes.”

The lien lis pendens statute, if construed literally, would prohibit the filing of the lien lis pendens other than against real property “situated in the county of suit.” In my experience, in many cases, the real estate which is the subject of the lien lis pendens is located in the same county where the suit is filed. In some cases, given Tennessee venue statutes which dictate in which county a defendant may be sued, the plaintiff has no option other than to file suit in the county in which the real property is located. However, that is not always the case. For example, when a plaintiff wants to bring suit for specific performance to require a defendant to convey the subject real estate to the plaintiff, if the defendant resides in a county other than the one in which the subject property is located, the plaintiff can bring suit in the county of the defendant’s residence, and, for strategic reasons, may want to do so.

If a plaintiff decides to bring suit in a county other than the one in which the real property against which the plaintiff wants the lien lis pendens is located, that plaintiff can rest assured that the lien lis pendens issued by the court in the county in which the plaintiff filed suit can be recorded in the county in which the real estate is located and that it will be effective. In Figlio v. Shelley Ford, Inc. (Tenn. Ct. App. 1988), the Court of Appeals of Tennessee examined the lien lis pendens statute and held, unequivocally, that a lien lis pendens issued by a county court, other than the court of the county in which the real property is located, can be filed against real estate in the county of its location.

Establishing Demand Futility in LLC Derivative Cases

Published on: April 8, 2024 | by J. Ross Pepper

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.

Tennessee Will Contests: Do I Have a Good Case?

Published on: January 29, 2024 | by J. Ross Pepper

In every initial meeting or phone conference which I have had with a potential client about a will contest case, I inevitably am asked whether the potential client has a good case to set aside the will at issue, or, the other hand, to uphold it in the face of a will contest. Of course, there is never a definitive answer to those questions. However, in some cases, I can tell clients that they have identified facts which seem promising in terms of obtaining a favorable verdict. In other cases, I cannot tell them that.

I always tell potential clients that, even if they have identified facts which would seem to support a verdict to set aside a will, there is no way ever to predict what the verdict in a will contest will be. Nevertheless, even though the outcome of a will contest case in Tennessee is unpredictable, it is always wise to evaluate some critical facts at the outset.

This blog is an informal compendium of a few insights I have had over the years in trying to help clients make as good of an evaluation as circumstances will allow of succeeding in a will contest case. The advice and insights here also apply to cases that are not will contests, but which involve someone obtaining the funds of someone else before that person has passed away. (In many cases, bad actors not only use undue influence, misrepresentations, or other improper means to have a will changed, but also, they use the same tactics to achieve ownership of bank accounts, real estate or to become beneficiaries of life insurance policies or financial accounts.)

Many of the factors that will influence a jury in a will contest are matters of common sense. One question I always ask potential clients is how close a relationship did they have with the deceased? Juries will always pay attention to this factor. Years ago, a man called me because his only sibling, his sister, had been left everything in his father’s will, and he had been excluded. In questioning him, he did not have a bad relationship with his father, and they had had no discernible falling out, but he had not even visited his father in many years. On the other hand, his sister had maintained very steady personal contact with their father. All things being equal, that circumstance, in my estimation, hurt his chances of success in a will contest.

Avoiding the Bar of the Statute of Limitations Using the Debtor’s Actions or Statements Against It

Published on: January 2, 2024 | by J. Ross Pepper

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.

Recent Tennessee Breach of Employment Agreement and Constructive Discharge Case

Published on: March 14, 2023 | by J. Ross Pepper

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.

Non-Compete and Trade Secrets Case Brought by Former Employer Dismissed

Published on: February 12, 2023 | by J. Ross Pepper

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.