Articles Posted in Business Litigation

In a breach of contract case recently decided by the Supreme Court of Tennessee, Dick Broadcasting v. Oak Ridge FM, Inc., the Court held that the implied duty of good faith and fair dealing applied to a contract provision which allowed a party to assign it rights under the contract at issue to another party. The plaintiff (“Plaintiff”) and defendant (“Defendant”) entered into an agreement giving the Plaintiff a right of first refusal to purchase certain assets of the Defendant.

The Right-of-First Refusal Agreement (“Agreement”) provided that the Plaintiff could assign it rights under the Agreement, but that it had to have the prior written consent of the Defendant to do so. Unlike many other contracts that are entered into in Tennessee and in other jurisdictions, the Agreement did not provide any explanation of the conditions under which the Defendant could withhold consent. For example, many agreements with assignment clauses provide that the contract cannot be assigned without the written consent of the non-assigning party, but provide that the non-assigning party’s consent “shall not be unreasonably withheld.”

The Defendant refused to give Plaintiff permission to assign the Agreement. The Plaintiff filed suit in a Tennessee Chancery Court for breach of contract. The Plaintiff’s theory was that the implied duty of good faith and fair dealing, which has been consistently held by Tennessee courts to apply to all contracts governed by Tennessee law, applied to the assignment clause in that case. The Defendant argued that the consent clause, which was silent as to the conditions under which it could withhold consent, allowed it unfettered discretion in deciding whether to give consent.

In a case involving a breach of a construction contract for a development in Gallatin, Tennessee, a contractor was allowed to recover money for work done, which work substantially exceeded the monetary limit of the contractor’s license. This decision is very significant, and favorable for Tennessee contractors and subcontractors.

The contractor (“Contractor”) submitted a bid to the owner (“Owner”) for over three million dollars. The bid was accepted. Contractor was licensed, but its license had a monetary limit of $750,000.00. At the point Contractor ceased work on the project, it had been paid in excess of $650,000.00. Contractor filed a lien in excess of $625,000.00 for work which it had done, but for which it had not been paid.

Contractor filed suit to enforce its lien and for breach of contract, and violations of the Tennessee Prompt Pay Act. The Contractor’s dispute was not with the Owner, but with a bank (“Bank”) that claimed its deed of trust had priority over Contractor’s lien. The trial court, the Circuit Court for Sumner County, Tennessee, dealt a blow to Contractor by dismissing its lawsuit against the Bank on a summary judgment motion. The trial court held that, since the Contractor had done work exceeding the monetary limit of its contractor’s license, it was “not licensed for the project from its inception.”

In a recent lost profits case decided by the Court of Appeals of Tennessee, DBK Trucking Co., LLC v. JNJ Express, Inc., that court held that the owner of a 1998 Kenworth tractor could recover the profits it was not able to earn because of the damage to the tractor caused by the defendant in that case. The Kenworth tractor which was damaged was a “wet line” tractor which was able to haul hazardous waste.

At trial, the owner of the Kenworth testified that it took three months to obtain all of the necessary government permits and licenses to put a wet line tractor, like the Kenworth which was damaged, into service. He also testified that the “average revenue” earned by the Kenworth had been approximately $3,700.00 per week. The jury in the case awarded the owner of the Kenworth $44,000.00 in lost profits.

The trial judge in the case set aside the verdict of the jury on the grounds that the owner of the Kenworth was only permitted to recover the fair market value of the tractor at the time it was damaged. The Court of Appeals of Tennessee reversed the decision of the trial judge, and reinstated the jury verdict for lost profits.

In Tennessee, there are two types of statutes that might bar an otherwise meritorious claim: (1) statutes of limitation; and (2) statutes of repose. A construction defect case may be filed within the statute of limitation, but, nevertheless, be barred by the statute of repose which establishes an outer limit for the filing of construction defect cases.

In a recent Tennessee construction defect and warranty case, The Counts Company v. Praters, Inc., which was decided by the Court of Appeals of Tennessee, a contractor’s lawsuit against a subcontractor, which installed the wood flooring on the project, was dismissed based on the statute of repose.

The Tennessee statute of repose which applies to claims arising from the construction of an improvement bars any lawsuit to recover damages for a construction defect which is not brought within four years of substantial completion of the improvement. If a defendant purposefully engages in conduct intended to conceal the plaintiff’s injury, often referred to as “fraudulent concealment,” then the statute of repose is tolled (meaning its length is extended).

This blog addresses Tennessee law regarding the liability of members of Tennessee limited liability companies to other members and/or to the LLC itself. In 1994, the “Tennessee Limited Liability Company Act” became law in Tennessee. In 2005, the “Tennessee Revised Limited Liability Company Act” became law. The Revised Act added statutes regarding the conduct of LLC members which would subject them to personal liability to other LLC members, the LLC, and to holders of financial rights.

Tennessee recognizes three types of LLCs: (1) member-managed LLCs; (2) manager-managed LLCs; and (3) director-managed LLCs. This blog focuses only on member-managed LLCs, though much of the law discussed herein is equally applicable to the two other types of LLCs.

The starting point for understanding the potential liabilities of members of Tennessee member-managed LLCs to other members and/or to the LLC is Tennessee Code Annotated §48-249-403. Even though that statute has been in effect for about seven years, there is no Tennessee case law interpreting that statute or discussing its application. In fact, a Westlaw search for all Tennessee cases in which the statute is mentioned turns up no cases.