Tennessee Business Litigation Lawyers Blog

Employee Claiming Stock Ownership Not Barred by Statute of Limitations

Published on: September 3, 2017 | by J. Ross Pepper

In a recent breach of contract case involving a former employee who was promised 2.5% of the stock of the company which had employed him for twenty-six years, the Court of Appeals of Tennessee made some significant new law on the six year statute of limitations applicable to breach of contract actions.

The case is Powers v. A & W Supply, Inc., and here are the important facts:

In 1988, Mr. Powers became employed by A & W
In 1993, Mr. Powers and A & W signed an agreement whereby A & W promised Mr. Powers 2.5 % of the total number of issued and outstanding shares of A & W if he remained employed and in good standing with A & W until December 31, 2001
The agreement provided that A & W would execute and deliver the promised shares to Mr. Powers when they vested
Mr. Powers was still employed and in good standing with A & W as of December 31, 2001
No shares were issued to Mr. Powers on December 31, 2001, or ever
Mr. Powers was terminated from employment in October 2014
After being terminated, Mr. Powers asked about his shares and was told by A & W that it had never made him a shareholder and that the statute of limitations had expired on any breach of contract claim he had against A & W

The breach of contract statute of limitations which was applicable to Mr. Power’s claim was the six year statute. Under Tennessee law, the six year period begins to run when a party’s cause of action accrues. A & W’s position was that Mr. Powers cause of action accrued on December 31, 2001, the date when his shares vested and on which he was supposed to receive the shares. If A & W’s position was correct, then the six year statute did bar Mr. Power’s breach of contract claim.

The trial court held that Mr. Power’s breach of contract claim was not barred and the Court of Appeals affirmed. The Court of Appeals reasoned that a principle of equity was applicable: “Equity regards that as done which in good conscience ought to be done.” A corollary of this equitable maxim is: “No one can take advantage of his own wrong.” The Court of Appeals, to reach the result which it reached, also recognized that Tennessee law does not require someone to have actual shares in order to have ownership in a corporation, and that a transfer of stock does not have to be memorialized in writing.

Understanding How Tennessee Courts Analyze Non-Compete Agreements

Published on: August 9, 2017 | by J. Ross Pepper

For a former employee or contractor who has signed a non-competition agreement, the threshold question is quite often this: Is the non-compete agreement enforceable or not?

How Tennessee courts treat non-compete agreements varies by court and by the unique facts of each case. In my experience, there is quite a bit of subjectivity involved when a court undertakes to determine if a non-competition agreement is enforceable and, if so, to what extent.

Despite the reality that each non-compete case turns on its own facts and on the particular court making the ruling, there are some guidelines that any court must apply when ruling on a non-compete agreement. For employers and employees who want to understand those guidelines, a very good case to read is Vantage Technology, LLC v. Cross, a 1999 decision of the Court of Appeals of Tennessee.

Here is a summary of the facts of the case:

Cross (“Employee”) went to work for Vantage (“Employer”) in 1994
Employer was in the business of providing equipment and support to doctors who performed cataract surgeries in rural hospitals
Employee’s title was “technician” and his duties included transporting materials and instruments to doctors performing cataract surgeries and assisting them during surgery
An important part of Employee’s job was building relationships with doctors and learning about their surgical preferences
Employer also provided machines to doctors who performed cataract surgeries in rural hospitals, which machines were crucial for the surgeries
Employer provided Employee about 241 hours of training during his first month of employment
By the time Employee resigned, about two years after he started, he had built a strong relationship with a doctor who performed a substantial number of surgeries with the help of Employer
Employee resigned and immediately formed a business relationship with that physician whereby they started a company which competed with Employer
Employer filed suit against the Employee alleging that he had breached the non-compete agreement

Understanding the Effects of the Tennessee Uniform Simultaneous Death Act

Published on: August 4, 2017 | by J. Ross Pepper

Spouses, children and parents, or other persons, who may be heirs of each other, sometimes die because of common accidents or disasters. As well, even in the absence of a common disaster or accident, sometimes spouses die within a short time of each other. When those tragic events or nearly contemporaneous deaths occur, the Tennessee Uniform Simultaneous Death Act may be applicable.

Under the Act, the operative time period is 120 hours, or 5 days. If a spouse dies within 120 hours of his or her wife or husband, then, that spouse is deemed to have predeceased the other spouse for purposes of receiving homestead allowance, year’s support allowance, exempt property, and elective share. The presumption also applies, importantly, for purposes of determining who the heirs are when the spouse who died first died without a will (when someone dies without a will, his or her property is distributed according to the laws of intestate succession).

Here is an example of how the Act would apply in a situation where the spouse who died first died without a will: Husband and Wife were married late in life and each has a child by another marriage who is not the child of the other spouse. Wife has an investment account worth $300,000 which she, alone, owns. As well, Wife has made no payable on death or survivorship designation on the account. Neither Husband nor Wife has a will.

Husband and Wife are in an accident. Wife dies at the scene of the accident and Husband dies two days later. If not for the Act, Husband’s child would inherit one-half of Wife’s account, or $150,000. This is so because, under Tennessee intestate succession law, Husband would be entitled to one-half of the $300,000, and Wife’s child would be entitled to the other one-half.

Figuring Fair Market Value in Tennessee Condemnation Cases: Expert Witnesses Cannot Use Highest and Best Use Approach to Valuation

Published on: June 3, 2017 | by J. Ross Pepper

In condemnation cases, it is understandable that a landowner would want a jury to be able to consider the value of the landowner’s property based on its highest and best use. For example, if the landowner’s property is uniquely situated such that a party wanting to construct a hotel on it would likely pay significantly more for it than any other buyer, the landowner would probably do better at trial if an expert appraiser was able to base his or her valuation on the amount that a buyer wanting to construct a hotel on it would pay for the property. While such an approach to valuation would certainly favor a landowner in many cases, under Tennessee condemnation law, such an approach is not allowed. That has long been the rule in Tennessee eminent domain cases.

To see how this rule can play out to the detriment of a landowner, consider the recent case of Ocoee Utility District of Bradley and Polk Counties v. The Wildwood Company, Inc. (Sept. 2016). Here are the key facts:

The Landowners owned land with springs which could provide a water source for the condemning authority, the Utility District
The Utility District’s appraiser had appraised the property being taken at $21,500
The Utility District offered to buy the property for $35,000
The Landowners retained, as an expert witness, a commercial appraiser who valued the property at $417,000
To arrive at the $417,000 figure, the appraiser testified, in his deposition, that the highest and best use of the property was for the sale of water and that his valuation involved an analysis of the income which could be generated from the sale of water from the property
The expert appraiser testified that he based his valuation of fair market value on the rental income that the Landowners could generate by leasing the water rights and acknowledged that his “rental rate is based on water.”
The appraiser also testified that his value was based on what rate the Utility District was willing to pay for the water rights
The jury returned a verdict for the Landowners in the amount of $417,000

The Court of Appeals of Tennessee set aside the jury verdict. It held that the testimony of the Landowners’ appraiser should have been excluded at trial.

Understanding the Bad Faith Failure to Pay Penalty in Tennessee Insurance Cases

Published on: May 22, 2017 | by J. Ross Pepper

Under Tennessee law, if an insurance company denies a claim, it can be subject to a bad faith failure to pay penalty. The maximum amount of the penalty is 25% of the claim amount which the insurance company should have paid. Moreover, the penalty does not apply unless the refusal of the insurance company to pay the claim was not in good faith, or, in other words, in bad faith.

In bad faith failure to pay cases, whether or not there was bad faith is a jury question so long as there is any evidence of bad faith. Even though it is the province of the jury to decide whether the insurance company has acted in bad faith, and, consequently, whether the insurance company should have to pay the bad faith penalty, it is not uncommon for the Court of Appeals of Tennessee to set aside a jury’s finding that an insurance company acted in bad faith. Discussed below are three bad faith failure to pay cases where a judge’s or jury’s award of bad faith damages was upheld on appeal and one case where a jury’s finding of bad faith was reversed.

Palatine Ins. Co. v. E. K. Hardison Seed Co., (Tenn. Ct. App. 1957): In this case, the court of appeals upheld the jury’s determination that the insurance company had acted in bad faith for failing to pay a claim for the theft of a truck. The insurance company denied the claim on the grounds that the policy was not a fixed value policy, but an actual cash value policy which required an appraisal. Several months after the loss, and after the plaintiff had reported it, the plaintiff wrote the insurance company asking for payment. Several weeks after that, the insurance company wrote the plaintiff demanding an appraisal and stating that it could not accept the plaintiff’s proof of loss because of Plaintiff’s failure to provide minor details related to the claim and of which the insurance company should have been aware. The court of appeals upheld the jury’s imposition of the bad faith penalty finding that the policy was a fixed value policy and because there “was substantial evidence” on which a jury could find bad faith.

Minton v. Tenn. Farmers Mut. Ins. Co., (Tenn. Ct. App. 1992): In this bad faith failure to pay case, the court of appeals upheld the trial court’s finding of bad faith where a diamond ring was lost in the mail when its owner, the plaintiff, mailed it to be repaired. The insurance company denied the claim based on an exclusion in the policy for losses resulting from neglect of the insured. The plaintiff admitted that she did not mail the ring by certified mail or purchase postal insurance. The trial court found bad faith because the policy did not contain any prohibition against mailing the ring as the plaintiff had done.

When Checks or Payments are Designated “Paid in Full”: Accord and Satisfaction Law in Tennessee

Published on: April 17, 2017 | by J. Ross Pepper

It happens with some frequency in Tennessee that a check is written and notated “paid in full” or “payment in full.” Sometimes, if a check is not written “paid in full,” the business which owes the debt may send an accompanying letter stating that the payment is for the full amount of the account or debt. Sometimes, when the debtor is very prudent, it so notates the check and also sends such a letter with the check.

Under Tennessee common law, as well as under a Tennessee statute, T.C.A. §47-3-311, if a person or business owed money (a creditor), cashes a check marked “paid in full” or with similar language, or cashes a check sent with a letter stating that the payment is in full satisfaction of the debt, that creditor may well be barred from collecting any additional money.

In Tennessee breach of contract cases, a party who proves an accord and satisfaction is relieved of further liability to the creditor. To prove successfully an accord and satisfaction, the debtor must prove that the amount it owed the creditor was disputed; it sent a check conspicuously marked “paid in full,” or with other language establishing that the payment was in full satisfaction of the debt, or sent the check with a letter indicating that the payment was in full satisfaction of the alleged debt; and, that the creditor cashed the check.

For an example of a breach of contract case where an accord and satisfaction defense was successful, take a look at Pendergrass v. Ingram (Tenn. Ct. App. 2016). Here are the basic facts of that case:

Plaintiffs agreed to do certain grading and other work on Defendant’s property
The parties orally agreed that Plaintiffs would be paid $2,500
Plaintiffs were paid $1,000 up front
After the Plaintiffs began working, the Plaintiffs performed additional work beyond the work to which the parties had agreed
The parties never discussed what Plaintiffs would be paid for the additional work
After the work was finished, the Plaintiffs sent Defendant a bill for $9,073
Defendant let the Plaintiffs know that he did not believe he owed more than $1,500
The Defendant then sent Plaintiffs a check for $1,500 with the notation “pd. in full”
The Plaintiffs marked through the “pd. in full” notation on the check and cashed it

Basic Rules in Tennessee Regarding Auction Sales of Real Estate

Published on: April 9, 2017 | by J. Ross Pepper

When real estate is sold at auction in Tennessee, what rights do the seller and highest bidder have after the hammer falls? Can the seller back out of the sale? What are the chances that the highest bidder can win a case for specific performance if the seller tries to back out of the sale?

An excellent case to read to gain a basic understanding of real estate auction law in Tennessee is Cunningham v. Lester (Tenn. Ct. App. 2003). Here are the basic facts of that case:

The Lester’s were a husband and wife who owned some real estate jointly
the Lester’s signed a contract with an auction company to sell their property at auction
the brochures prepared by the auction company to advertise the auction sale did not state that the sale was being made with reserve
prior to the commencement of the auction sale, the auctioneer announced that the land offered was “with reserve” and that the Lester’s had to confirm any bids
Mr. Cunningham was the highest bidder for tracts 4 and 5
Mr. Neal was the highest bidder for tract 3
After the fall of the hammer, a written contract for the sale of tracts 4 and 5 to Mr. Cunningham was signed by Mr. Lester, the auctioneer, and Mr. Cunningham, but not by Mrs. Lester
Mr. Cunningham agreed to take over Mr. Neal’s bid for tract 3
a contract for the sale of tract 3 was signed by Mr. Cunningham, and Mr. Lester, but not by Mrs. Lester or the auctioneer
Mr. Cunningham paid the required earnest money for all three tracts
Prior to the closing, the auctioneer told Mr. Cunningham that the Lester’s would not close on any of the tracts
Mr. Cunningham filed a lawsuit for specific performance requesting that the court order the Lester’s to convey all three tracts under the terms in the written contracts

The trial court, which was affirmed in all respects by the Court of Appeals of Tennessee, held that the Lester’s were required to convey tracts 4 and 5 to Mr. Cunningham, but that they were not required to convey tract 3.

The first point of law to know in order to understand the court’s decision in the case is that an auctioneer with whom a seller has signed a contract basically becomes an agent of the seller. The court in the Cunningham case held that the Lester’s did have the right, which they had reserved, to refuse a bid. However, when the auctioneer signed the contract for tracts 4 and 5, since he was the agent of the Lester’s, the Lester’s were bound by his signature. It did not matter that Mrs. Lester never signed that contract.

Rights of “Children” Who are Not Formally Adopted to Probate and Non-Probate Assets in Tennessee

Published on: March 30, 2017 | by J. Ross Pepper

It happens that marriages occur, but children of one of the marrying spouses are not adopted by the other spouse. It also happens that these children are treated by the non-adopting spouse just like his or her own children despite never being formally adopted. So, what are the rights of children in such situations to the assets of the man or woman who, for all practical purposes, became their mother or father, when that man or woman who was not their natural parent and who never officially adopted them passes away?

The answer to the above question depends on, at least, several factors. If the deceased non-natural parent died without a will and did not leave any assets via a joint account, payable on death or other account beneficiary designation (non-probate assets), then the never-adopted child is out of luck. Under Tennessee probate law, when a person dies without a will, the only children who may inherit are natural children and adopted children. That’s it. No exceptions.

If, however, the non-natural parent who died left assets payable on death (non-probate assets) to his or her “children,” it is quite possible that a person the deceased considered and treated like a child, even though that person was never formally adopted, might share in those assets. In the case of In re Estate of Elrod (Tenn. Ct. App. 2015), that very outcome occurred.

Sixth Circuit Issues Notably Flawed Opinion in Sales Commission Case

Published on: March 17, 2017 | by J. Ross Pepper

For salesmen and manufacturers representatives who are owed commissions, a recent decision of the Court of Appeals for the Sixth Circuit in a breach of contract case for commissions owed is not encouraging. The analysis and application of Tennessee breach of contract law to the facts of the case by the majority of the three judge panel was D to D- work (to the losing plaintiff, I am sure it was F work) . The dissenting judge’s opinion, which was justifiably quite sharp, is the only bright spot for those seeking unpaid commissions (and for lawyers who like to see the law applied correctly).

In the case, Maverick Group Marketing, Inc. v. Worx Environmental Products, Ltd., the plaintiff sales company worked for years on behalf of the defendant to have Wal-Mart buy the defendant’s product. Then, the defendant terminated its contract with plaintiff. The defendant then received its first order from Wal-Mart three weeks after terminating its contract with the plaintiff.

Before terminating the plaintiff’s contract, the defendant had supplied Wal-Mart a supplier agreement, Wal-Mart had tested the product, and Wal-Mart and the defendant had agreed on the price for the product. The only thing that had not happened was that Wal-Mart had not placed an order.

The contract between the plaintiff and the defendant provided that, if the agreement between them was terminated, then the plaintiff would still receive commissions on “orders solicited prior to the effective date of termination.” The two judge majority reasoned that, because Wal-Mart had not placed an order, no orders had been solicited and, therefore, the plaintiff was not entitled to any sales commissions.

Business Divorces Between 50/50 Owners in Tennessee

Published on: March 9, 2017 | by J. Ross Pepper

In Tennessee, quite a few corporations and LLCs are owned equally by two parties. Frequently, the relationship between the owners sours, or worse. At some point, a “business divorce” may become necessary. If you want to keep the business, but need your co-owner out of the business, how do you proceed?

The first thing you should do is to check the by-laws (for corporations) or operating agreement (for LLCs), if they exist, which they may not. If there was good pre-formation planning, you may be fortunate enough to have an agreement already in place about how one owner may buy out the other. Some by-laws and operating agreements contain provisions which allow one owner to make an offer to the other owner for his or her membership interests or shares. Those provisions then require the owner to whom the offer is made either to accept the offer or to buy out the owner who made the offer for the same amount that was offered to him or her. If the other owner may also want to keep the business, considerable caution and thought need to go into an offer since the non-offering owner may decide to buy out the offering owner if he or she determines that the price offered makes it attractive to keep the business.

If the by-laws or operating agreement do not provide for a process whereby one owner can force an end to the joint ownership, you should consider approaching the other owner to try and reach an agreement about a price the other owner is willing to take for his or her interest in the corporation or LLC. If you reach a suitable agreement, be sure to memorialize it in a document. It is highly advisable that you have an experienced Tennessee business divorce lawyer ensure that the agreement covers you.

If no agreement can be reached, you may have to dissolve the LLC or corporation. In my experience, it will probably not come to a dissolution because, in most cases, a co-owner would be foolish to force a dissolution as opposed to taking a buy-out. In a dissolution, the going concern value of the company will be lost which means that your co-owner is likely to receive substantially less in a dissolution than he or she would receive pursuant to an offer made on the fair value of his or her interest in the business as a going concern. If you are forced to dissolve the company, you will most likely be able to buy assets of the company, and you can start a new competing business just as soon as the dissolution process begins, if not before.