Business Litigation

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.”

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.

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.

Personal Liability of LLC Members and Managers under Tennessee Law

Published on: July 19, 2020 | by J. Ross Pepper

In evaluating the potential for personal liability of members or managers of limited liability companies under Tennessee law, it is first helpful to determine into which of two broad categories the conduct at issue falls. The first category is conduct of a member or manager that has harmed members of the LLC or the LLC, but not third parties. The second category is conduct of a member or manager that has harmed a third party who is not a member of the LLC.

Conduct Affecting the LLC or LLC Members

If the manager’s or member’s conduct affected members of the LLC or the LLC, the liability of that manager or member will be determined by §48-249-403 of the Tennessee Revised Limited Liability Company Act (the “Act”) (this assumes the LLC in question was formed after January 1, 2006 and is, thus, governed by that Act). §48-249-403 limits the liability of managers and members by expressly limiting their duties to the LLC and to other members to the duties of care and loyalty.

Duty of Care

The duty of care set forth in §48-249-403 incorporates the “Business Judgment Rule.” The Business Judgment Rule allows managers and members of LLCs to make decisions about the operation of the business without having to face liability if the decisions turn out to be bad. That Rule, as reflected in §48-249-403, provides that managers and members are not liable for their conduct in operating the business except where it amounts to “grossly negligent or reckless conduct, intentional misconduct or knowing violation of law.” If a manager or member makes a risky investment that turns out poorly, but had some possibility of an upside, he or she will probably not be liable. On the other hand, if he or she wired all of the LLCs’ funds to an alleged Nigerian prince or paid a bribe to a government official, he or she will probably face liability.

Duty of Loyalty

Broadly speaking, the duty of loyalty prohibits a member or manager from competing with the LLC or usurping an opportunity of the LLC. It also prohibits a manager or member from using LLC assets for his or her own benefit and from otherwise misappropriating LLC funds or assets. Continue reading

Claims for Fraudulent Concealment or Failure to Disclose in Tennessee

Published on: June 10, 2020 | by J. Ross Pepper

Under Tennessee law, when a defendant has affirmatively made an untrue statement of material fact, a plaintiff may well be able to recover for intentional misrepresentation (also called “fraud”) or for negligent misrepresentation. What if, instead of making an untrue statement of fact, the defendant failed to disclose an important fact or facts? In Tennessee, in proper cases, a plaintiff can recover for the defendant’s failure to disclose a material fact (sometimes called “fraudulent concealment”).

When considering a cause of action because a party has failed to disclose important facts, a good place to start your analysis is to recognize that, under Tennessee law, in most all transactions, a party does not have a duty to disclose material facts to the other party. For that reason, among others, this cause of action is not at all easy to prove. However, in some cases, it can be successful.

There are four categories of exceptions to the rule that a party to a transaction generally does not have a duty to disclose facts to the other party to the transaction. The first exception exists where a “previous definite” fiduciary relationship existed between the parties. Examples of definitive fiduciary relationships are attorneys and clients, and trustees and beneficiaries.

The second exception exists “where it appears one or each of the parties to the contract expressly reposes trust and confidence in the other.” I have not been able to find an example, in Tennessee case law, where this exception has been found to apply. This exception would necessarily be very difficult to prove and would require something more than is present in almost all transactions, in my opinion. It might apply to a situation where, by the express language of the contract, one party acknowledged that it was in a superior position of knowledge and recognized that the other party was relying upon it and trusting it to fully disclose all relevant facts.

Recovering All Commissions Owed Through Discovery Procedures in Tennessee State and Federal Courts

Published on: May 12, 2020 | by J. Ross Pepper

When sales representatives, brokers, agencies, or other businesses are owed commissions, but are not paid, sometimes they have to retain an attorney to file a lawsuit to recover the unpaid commissions. Our firm, over the years, has represented many commissioned sales representatives in such lawsuits. Many times, not only have we had to prove that the defendant was contractually liable for unpaid commissions, but also, we have had to establish and to prove the amount of the commissions owed.

Defendants which owe commissions often deny that they owe the amount of commissions which they, in fact, owe. Furthermore, they also often do not reveal, at least until they must, the full amount of revenue received or all of the sales on which the commissions are to be based. By doing this, they attempt to reduce the amount of their liability.

Before a lawsuit is filed, which is when discovery procedures can be used to compel parties to produce information on pain of being sanctioned, parties who owe commissions may refuse to produce information to former sales representatives or agents which is needed to determine the exact amount of commissions owed. Once a lawsuit is filed in a Tennessee state or federal court, however, a plaintiff can use the discovery procedures in the Tennessee Rules of Civil Procedure or the Federal Rules of Civil Procedure, as the case may be, to compel a defendant to produce information about sales, revenues, customer accounts, or claimed charge backs or refunds. For all practical purposes for this blog, the federal discovery rules and Tennessee discovery rules are the same. This blog gives an overview of the particular discovery rules that can be employed to determine the amount of commissions owed to a sales representative.

RULE 33: INTERROGATORIES

Rule 33 allows a party to send interrogatories, or questions, to another party. Unless an interrogatory is objectionable, a party must answer it and must do so under oath. Interrogatories are a helpful method of obtaining information about sales, dates of sales, amounts of sales, and the status of customer accounts. They are also helpful in forcing a business to identify the persons with the most knowledge about matters that bear directly on the amount of commissions owed so that those persons may be deposed. Continue reading

Implied General Partnerships in Tennessee: Positives and Negatives

Published on: May 3, 2020 | by J. Ross Pepper

A partnership can be created under Tennessee law without the partners ever having a written partnership agreement. Even where parties have not expressly agreed, verbally, to operate a partnership, an implied partnership can be formed under Tennessee law where the parties involved intended the acts that give rise to a partnership. The consequences, good and bad, of being in an implied partnership can be financially significant.

If you are in an implied partnership, that may be a good thing to establish in a Tennessee court as it may allow you successfully to recover money, property or profits another partner owes you or is withholding. Being a partner in an implied partnership, however, can also result in your personal liability, not just to other partners, but to third parties. To boot, it can result in your being liable to a third party based on an act or omission of the person or persons with whom you are determined to be in an implied partnership.

This blog discusses two general topics about implied partnerships in Tennessee: (1) How Tennessee courts determine whether an implied partnership exists; and (2) the resulting advantages and disadvantages to partners in implied partnerships.

DOES AN IMPLIED PARTNERSHIP EXIST?

Under the Tennessee Revised Uniform Partnership Act (“TRUPA”), a partnership is formed “by the association of two or more persons to carry on as co-owners of a business for profit … whether or not the persons intend to form a partnership.” Under TRUPA, a “person” includes business entities such as limited liability companies and corporations. Significantly, TRUPA provides that owning property together, in and of itself, even where profits from it are shared, does not establish a partnership.