Notable Trial Court Opinions
Editors’ Note: We owe a note of gratitude to Chancellor Lyle, who is retiring from her service on the bench this month.
This newsletter wouldn’t exist without the support of Chancellor Lyle. Every month, like clockwork, Phyllis Hobson, in Part III, sends the editors an e-mail with every opinion issued that month. For me, it’s been a revelation to see how many opinions Chancellor Lyle writes each month and to see the obvious care she gives to every decision, no matter how big or small.
In this month’s edition, you’ll see a recap in which, faced with an “unopposed” order that didn’t quite have the proper statutory basis, Chancellor Lyle wrote her own Order and separate Memorandum that achieved the same outcome (but with the correct authority). Many judges would have stopped at “unopposed” and saved themselves the trouble. After a year of reading her opinions, it’s obvious that Chancellor Lyle’s main concern is getting her decisions right.
The bar has been lucky to have her dedicated service for so many years. In honor of her work, we dedicate this edition to Chancellor Lyle and have included recaps only of opinions from Part III, Davidson County Chancery Court.
- David Anthony
Have you noticed the affidavit on every Davidson County General Sessions Civil Warrant form, which requires the plaintiff (or its counsel) to swear that “after investigation of Defendant's employment, I hereby make affidavit that the Defendant is/is not a member of a military service”? It’s on the back page, so there’s a good chance that you’ve never noticed or even filled it out.
This text is drawn from the Servicemembers Civil Relief, 50 U.S.C. § 3901, et. seq., which offers affirmative protections under the law to active duty servicemembers in litigation and against default judgments.
In this Davidson County Chancery Court debt collection action, the original pleadings filed by Plaintiff did not raise the issue at all, but, while the case was pending, the pro se Defendant sent a letter to the Clerk explaining his mail was delayed because “the military had reassigned [him] to a new military post…”
Albeit unintentionally, this statement raised the issue of whether the Act applied to stay the case.
In response (and to avoid a stay), the Plaintiff’s counsel quickly filed a Motion to Appoint an Attorney, pursuant to 50 U.S.C. § 3931(b)(2) providing that, if “the defendant is in military service, the court may not enter a judgment until after the court appoints an attorney to represent the defendant.”
In the end, the Chancery Court found that the Defendant’s letter was an affirmative appearance by the Defendant and rendered the Act inapplicable, since the
Act “applies to any civil action or proceeding…in which the defendant does not make an appearance.” 50 U.S.C.A. § 3931(a)(emphasis added).
The opinion isn’t notable for its in-depth analysis of the Act; instead, it’s notable because it’s a reminder that the Act exists and applies to all civil proceedings.
By its clear text, the Act appears to require an affidavit of whether the Act applies (or not) in any default proceeding.
You can learn more about the Act here: https://www.justice.gov/servicemembers/servicemembers-civil-relief-act-scra
Practice Note: No plaintiff wants to discover, months after the fact, that a default judgment is subject to challenge or, worse, that counsel’s conduct may open the door to an alleged violation of the Act. In short, if you are not already including this text in your default judgment affidavits, you should start. In pursuing claims against individuals (both in litigation and non-judicial foreclosures), counsel should always search the database for active duty service members, which can be found here: https://scra.dmdc.osd.mil/scra/#/home
- David Anthony
Divorcing couples always divvy up their real property in the text of their Final Decree and Marital Dissolution Agreement. Once signed by the Judge, some parties will then simply record a copy of the MDA, although the better practice is to record a separate quitclaim deed evidencing the transfer.
But what about the parties who never record anything with the Register of Deeds?
Ask any Bankruptcy Trustee, and they will say that a property transfer in a divorce order isn’t worth the paper it’s written on—unless (or until) it’s recorded. That’s because, under the Bankruptcy Code’s “Trustee strong-arm” powers (11 U.S.C. § 544), a bankruptcy trustee can avoid certain transactions that are “unperfected” as to third parties.
Outside of Bankruptcy Court, you’ll see this argument frequently made by judgment lien creditors, and it’s generally been a winner.
This opinion presents a possible counter-argument.
In this case, the real property was transferred to Wife in the MDA, which was signed by the Davidson County Circuit Court in September 2017. Later, the Judgment Creditor recorded its Judgment against Husband (only) in October 2018. Wife didn’t record the MDA with the Register of Deeds until August 2020.
Wife sued the Judgment Creditor, demanding a release of the Judgment Lien. Citing Tenn. Code Ann. § 66-26-101, Judgment Creditor argued that, without recording, the MDA bound only the parties to the MDA, not third parties. Until the MDA was recorded, Judgment Creditor argued, the transfer was not effective as to third parties and the Judgment Lien attached.
The Court found, however, that the “first to file rule” doesn’t apply because “it was a court-ordered decree…that divested the ex-husband of the Property.” Citing a court’s powers under Tennessee divorce statutes, the Final Decree was “sufficient to convey an interest in property.” The judgment lien did not attach to the Property because a “judgment lien can attach only to whatever interest in the debtor has in the property, and if the debtor has no interest in the property, then no lien can attach.” As of the entry of the Final Decree, Husband “had no further interest in the Property that he could transfer or pledge.”
Faced with what it called “an intersection of divorce law and judgment lien rules,” the Court deemed the transfer of the interest to have occurred in the Final Decree, which pre-dated the recording of the judgment lien. As an alternative basis (under Tenn. Code Ann. § 66-26-105), the Court noted that the crafty judgment creditor had actual knowledge of the divorce proceedings, including the MDA’s property transfer, prior to the recorded judgment lien
Practice Note: This opinion was initially appealed, but the appeal was voluntarily dismissed this summer. My “creditors rights” bar card may get revoked for even mentioning this opinion, but it’s too notable to not include.
- David Anthony
Mechanic’s Lien lawsuits are governed by a highly technical set of statutes and, often, the claim can fail based on decisions a party makes long before the lawsuit is filed (and often while a party is rushing to satisfy fairly short deadlines). This opinion provides a good overview of these types of issues (and the ripple effects of each issue) facing a lien claimant.
Which parties can be sued? A materialman may deal with two or three of “bosses” on a site, but, when things go wrong, which party do you sue? In this case, there was a factual question as to who the Plaintiff actually contracted with—the property owner or another contractor. This was important because—as the opinion discusses in detail—Tennessee law does not allow a principal and agent to both be liable for a breach of contract claim. Instead, if there’s ambiguity (or a principal is involved but not disclosed until later), the creditor must choose one or the other, but can’t pursue a breach of contract claim against both.
Can this election impact the timing of the lien? Under the lien statutes, this election is critical, because different deadlines apply when a claimant contracts with an owner of a property versus a general contractor. In this case, the Court found that Plaintiff initially identified the general contractor as the contracting party in its recorded instruments and the Verified Complaint. Once deemed a “remote contractor” (as defined at Tenn. Code Ann. § 66-11-101(14), Plaintiff’s claim was subject to additional notice requirements to assert a lien and shorter time periods, which the Court found the Plaintiff to have not satisfied in filing and pursuing its lien.
What damages result from the defective lien? In defending against the lien, the property owner made a counterclaim for damages under Tenn. Code Ann. §§ 66-11-135 (for failure to release a lien) and 66-11-139 (for exaggeration of lien claims). There is hardly any caselaw on these types of claims, offering fertile ground for bluffing by both lien claimants and property owners. In this case, the Court did not impose any damages against Plaintiff for the defective lien claims, because: its duties to release under § 66-11-135 were not activated until this Court’s Order adjudicating the validity of the lien claim; and the actions of Plaintiff in asserting a defective lien did not, factually, “rise to the level of willful and gross as is required for liability under § 66-11-139.”
Practice Note: Lawyers are often presented with last-minute requests to file mechanic’s liens, and those early (and sometimes quick) decisions will influence the rest of the case. Proceed carefully.
As a practitioner in this area, I am reminded that there is no effective recourse for a property owner against bad lien claims. Owners, frankly, just have to deal with them (i.e. pay them) or file a lawsuit, and there should be no mystery as to which option an owner with a pending closing will select. In 2018, the Tennessee Legislature enacted Tenn. Code Ann. § 66-21-108, which provided surprisingly strong protection against invalid lien claims, but that statute proved to be too effective (and too strong) and was repealed within a year. Instead, property owners are left with the very high standards of § 66-11-135, which aren’t easily satisfied and allow for all sorts of liens and recorded instruments to cloud title and frustrate real estate transactions. (End Rant).
- David Anthony
Do you know the difference between a “statute of limitation” and a “statute of repose”? If not, this opinion is for you.
Here, the Plaintiff purchased a property from Contractor on August 6, 2016 and discovered water intrusion in March 2017. Plaintiff filed a lawsuit against
Contractor on January 29, 2020. On June 18, 2021, Contractor filed a third-party complaint against the Subcontractor who performed that work.
There was no question Plaintiff’s original lawsuit was timely (barely) under the three-year statute of limitations for injuries to real property (Tenn. Code Ann. § 28-3-105), but what about the third party complaint by Contractor against Subcontractor, which was filed beyond the three year statute of limitations?
Contractor alleged that, pursuant to Tenn. Code Ann. § 28-1-114(a), a “counterclaim or third party complaint or cross-claim is not barred by the applicable statute of limitations or any statutory limitation of time, however characterized, if it was not barred at the time the claims asserted in the complaint were interposed.” Easy, right?
In response, Subcontractor cited the applicable statue of repose, Tenn. Code Ann. § 28-3-202, which states that actions for defective improvements to real estate “must be brought...within four (4) years after substantial completion of an improvement.” Calculating 4 years from the August 6, 2016 sale date, Subcontractor moved to dismiss.
Citing the logic of Calaway ex rel. Calaway v. Schucker, 193 S.W.3d 509, 515 (Tenn. 2005), including that “[s]tatute of limitations are procedural and extinguish only the remedy…[w]hereas the statute of repose is substantive, extinguishing both the right and the remedy,” the Chancery Court found that statutes of repose impose an absolute time limit within which an action must be brought. When there is any interplay between the two concepts, a statute of repose will prevail. The Court concluded “[u]pon application of a statute of repose, the injured party ‘literally has no cause of action.’”
Practice Note: A statute of repose is intended to provide a party finality in its dealings, but the practical operation can be unfair, since the expiration date can be entirely unrelated to the accrual of a cause of action, and, in practical terms, may extinguish a valid cause of action before the plaintiff has even discovered the wrong or injury.
- David Anthony
This judgment collection case took a unique path. It all started in General Sessions, where the judgment creditor, ultimately, obtained a final judgment against garnishee “Saks Fifth Avenue LLC” for failure to respond to a wage garnishment. To collect, creditor then issued a levy for “all cash on hand” against Saks Fifth Avenue LLC, but to the address of “SAKS.COM LLC,” resulting in a Sheriff’s deputy going to the warehouse and distribution center of SAKS.COM LLC. This Sheriff visit got SAKS.COM LLC into quick action to stop the process.
This case is not notable for its substantive collections discussion, but, instead, as a reminder about the procedural basis of the Chancery Court to hear a dispute related to a General Sessions garnishment. Citing Tanner v. Harris, 150 S.W.3d 161, 165 (Tenn. Ct. App. 2003), the Court expressly found that a General Sessions Court judgment can be collaterally attacked in chancery court under equity jurisdiction where there is no adequate remedy other than an independent action in chancery court. The Plaintiff pled in Chancery Court that it was unable to timely respond to (or take action to stop) the garnishment in Sessions, the Court found that Plaintiff did not have any adequate remedy in Sessions and granted a temporary injunction related to further proceedings on the garnishment.
Practice Note: In collections, the garnishment process is directed, largely, at the discretion of court clerks and sheriffs. It can be hard to get some matters back in front of a judge. This decision provides a unique basis.
- David Anthony
Yes, this is the Trial Court Opinion newsletter, but this July 28, 2022 Tennessee Court of Appeals opinion is relevant because it affirms a Davidson County Chancery Court Order (Part III) from December 2020 that was previously featured in this newsletter.
As you may recall, this case considered whether a contract’s terms can be modified by the course of dealing between the parties. The Chancery Court found that an unambiguous course of conduct that accepted the other party’s modified performance can operate as a modification to an at will contract. In short, if the other party’s tendered performance is regularly deficient, you must object in order to avoid modification of the contract. Assent will not be implied “when the record demonstrates that the disputed payments were accepted under protest,” Judge Neal McBrayer wrote, in affirming Chancellor Lyle’s decision.
Practice Note: The reasoning is instructive for a party faced with non-conforming performance from a counter-party under a contract. To avoid a finding of assent and course of dealing, that party must object or the contract may be later deemed to be modified.
- David Anthony
An HOA filed this judicial foreclosure action to enforce unpaid HOA assessments. While Tennessee is a “non-judicial” foreclosure state, many HOA Master Deeds are antiquated and don’t provide all of the necessary powers to conduct an effective non-judicial sale. In those circumstances, the association must proceed with a judicial sale, within the chancery court’s powers pursuant to Tenn. Code Ann. § 21-1-803.
Of all the deficiencies, the most frequent one you’ll find is that the Master Deed is silent about the owner’s right of redemption. That’s important because a foreclosure buyer will not pay top dollar for a property it may lose later via redemption.
In this case, Chancellor Lyle took issue with the Plaintiff’s submitted Order Granting Default Judgment, so she prepared her own Order, along with a separate Memorandum discussing the relevant issues of law. This opinion is a great recap of how rights of redemption can be extinguished in both judicial and non-judicial foreclosure sales and, notably, the specific statutory basis, required text, and sale process that must be followed to extinguish those rights in a judicial sale under Tenn. Code Ann. § 21-1-803.
Practice Note: Plaintiff’s counsel must have been surprised to see a court put this much effort into an issue of law, especially when the question was unopposed.
In front of Chancellor Lyle, however, this shouldn’t have been surprising. In fact, one of this newsletter’s earliest recaps (Joyce B. Martin v. Devon Lawrence, et. al., 20-1091-III) involved a situation where the Chancellor entered her own order unwinding a default judgment, when her post-hearing review of the record suggested that service of process was legally deficient.
Here, I’d have been thankful to receive this refresher because, in the end, the goal is to conduct a legally valid sale and convey good title. This Memorandum is great road-map on how to deal with redemption rights in foreclosure sales.
- David Anthony
In April 2020, lawyers resigned themselves to learning how to use remote technology, but most thought that this was a short-term fix for a temporary problem. In light of the ongoing impact of COVID-19, some courts have recognized that these innovations are here to stay and must be incorporated into trial planning—even after the pandemic ends.
This opinion considers the scope of Tenn. R. Civ. P. 43.01 and some best practices in accepting remote testimony.
In general, Rule 43.01 allows for presentation of testimony in open court by contemporaneous audio-visual means if three conditions exist: (1) good cause; (2) compelling circumstances; and (3) adequate safeguards. See Tenn. R. Civ. P. 43.01 Advisory Comm. Cmt.
The Chancery Court notes that, in Kelly v. Kelly, 445 S.W.3d 685, 694 (Tenn. 2014), the Tennessee Supreme Court discussed why live testimony is more valuable than remote testimony, citing the following factors: “(1) [it] assists the trier of fact in evaluating the witness’s credibility by allowing his or her demeanor to be observed first-hand; (2) helps establish the identity of the witness; (3) impresses upon the witness the seriousness of the occasion; (4) assures that the witness is not being coached or influenced during testimony; (5) assures that the witness is not referring to documents improperly; and (6) in cases where required, provides for the right of confrontation of witness.”
The trial court’s goal is, then, to implement a process that considers and satisfies these goals. In this case, the Court’s Order set several conditions on the testimony. They were:
- The remote witness “will not be provided electronic viewing of the trial;”
- The remote witness’s “[p]articipation in the trial shall be limited to testifying electronically when he is called to testify by another party;”
- “[A]fter being called to testify by another party and the party completing its examination, [the remote witness] will be provided an opportunity for [c]ounsel to question him to provide a responsive examination limited to the subject matter of the direct examination as permitted under Rule 611 of the Tennessee Rules of Evidence.”
- “[A]fter the Plaintiff rests its proof, if [the remote witness/party-defendant] elects to present [a] defense of the case with his testimony he will be allowed to testify electronically in response to questions from [c]ounsel.”
With respect to providing additional safeguards, the Court required the following:
- The Court will require the remote witness “at the beginning of his testimony to verify his identification by displaying on the screen a photographic official identification such as a driver’s license [and] to turn off his cell phone…;” and
- The remote witness will be administered the following oath, “Do you solemnly swear or affirm that the testimony you are about to give in this case is the truth, the whole truth and nothing but the truth so help you God. Do you solemnly swear or affirm that you are not consulting any outside sources or information such as cell phone, smartphone, computer, the internet, any text or instant messaging service, e-mail, any chat room, blog, or website such as Facebook, Myspace, LinkedIn, YouTube, or Twitter to communicate with anyone or to obtain any information or consultation in conjunction with your testimony.”
Here, in advance of the trial, the remote witness (a resident of California) filed a motion to participate electronically, supported by a declaration under Tenn. R. Civ. P. 72, which alleged that he lacked the financial means to attend the 3-4 week trial in Nashville. The trial court did not find that lack of funds, by itself, was a sufficient basis to support a request under Rule 43.01, but, when that basis was coupled with the appropriate safeguards and the proposal to present testimony using both audio and visual technology, the Court granted the Motion.
Practice Note: The past 18 months have shown that remote testimony is a viable option for presenting testimony, provided that the parties anticipate these issues and sufficient safeguards are implemented. What is notable about this opinion is that the witness’s Rule 43.01 motion didn’t expressly allege COVID concerns, citing only his financial issues. This opinion shows that relief under Rule 43.01 doesn’t have to be “COVID-specific,” but could be granted in other appropriate circumstances. In short, we may look back someday and see that COVID was the disruption the profession needed to break the tradition of rarely allowing remote testimony.
Granted, this opinion is from a Chancellor who embraced remote technology early in the pandemic—before most of us had heard of Zoom—but the opinion provides a useful blue-print for other courts’ approval of remote testimony under Rule 43.01, both during and after the pandemic passes.
- David Anthony, Anthony Legal PLLC
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Litigators sometimes disagree with the boilerplate terms that transactional lawyers include in their contracts. The true “test” of a contract occurs when a party sues to enforce it, and that’s frequently when those types of disagreements arise.
A common example is a mandatory venue provision, which may not reasonably fit the needs of the litigants (and witnesses) or make sense for the dispute. Another example is a mandatory arbitration provision, which may require an out-of-court process, when the plaintiff would rather go straight to litigation.
This case presents a dispute over the purchase of one of Nashville’s best known car dealerships and the potential re-development of the coveted land that the dealerships currently operate on. The lawsuit isn’t specifically over the sale of the car dealerships; instead, the buyer alleges that, as part of the dealership “asset” sale, the seller granted buyer a right of first refusal to buy the underlying land. Years later, when the seller agreed to sell the real property to a third party, the original buyer filed a lawsuit under the original Asset Purchase Agreement, asserting its own rights. The seller—now a defendant—moved for arbitration instead of litigation, citing a mandatory arbitration requirement in the APA.
The Court’s legal analysis begins with a recognition that, “[a]s a general proposition, arbitration is favored under federal and state law.” Presented with a request for arbitration, “courts determine (1) whether the parties entered a valid arbitration contract; and (2) whether the claims fall with the scope of the arbitration agreement.” In determining whether the specific controversy is subject to the arbitration provision, the court will first look to the “parties’ written contracts [to] express the intention of the parties…,” including whether the provision applies to “any disputes” between the parties related to the subject contract. In that regard, under the Federal Arbitration Act, a court will enforce arbitration provisions that are “broadly worded” with “a presumption of arbitrability in the sense that an order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.”
The Court granted the motion and referred the dispute to arbitration, with the lawsuit proceedings stayed pending completion of the arbitration.
Practice Note: This case serves as a useful reminder to lawyers at all stages of the process that a court will enforce contracts as they are written, so a detailed review of a contract’s secondary provisions is critical. Here, in light of a possible sale to a third-party, it’s clear why the plaintiff filed immediate suit—the ability to assert its competing rights to the real property and obtain the issuance of a lien lis pendens. As a final point, it is notable that the Court only stayed the action while the arbitration process takes place—suggesting that the failure to comply with an arbitration provision may not justify dismissal.
- David Anthony, Anthony Legal PLLC
When a party to a contract fails to fully perform, the counter-party may be faced with a difficult question: If a default isn’t declared, then will the defaulting party claim that the breach was waived or, worse, that the contract was modified by the course of dealing?
The Chancery Court recently considered this issue and found that an unambiguous course of conduct that accepted the other party’s performance can operate as a modification to an at will contract.
In this case, an artist manager (plaintiff) sued a country music performer (defendant), alleging shortages in payments of management fees over a 17 month period. This relationship began in 2013, when the parties entered into “a hand-shake management agreement” that was terminable at will. In early 2017, the defendant requested a modification to the terms that would, among other things, reduce the percentage fee paid to plaintiff. Although plaintiff never expressly agreed to those new terms, from March 2017 on, defendant paid plaintiff according to the new reduced fee schedule proposed by defendant. In summarizing the facts, the Court’s opinion ominously notes that “[a]fter a meeting in April 2017, Plaintiff … never spoke to the Defendants about the 2017 changed terms, and the Plaintiff accepted the payments continuously until his termination in 2018.”
The Court considered this dispute on cross-motions for summary judgment, in which plaintiff alleged that there was no explicit acceptance of the modified terms and any reduced payments were simply ineffective unilateral modifications to the original contract, for which there was no meeting of the minds. The defendants alleged that, by accepting the reduced payments without objection, the plaintiff is thereby bound by the new terms under the legal doctrines of “acquiescence, assent established through course of dealing/performance, contract implied in fact, implied consent, estoppel.” In short, a party’s “unambiguous course of dealing and conduct, such as repeatedly accepting contract payments” provides sufficient basis for a court to decide that a contract is modified.
The Chancery Court agreed with the defendant. The Court noted that, under established Tennessee case law, a terminable at will contact can be modified in three ways: (1) through facts establishing mutual assent; (2) through facts establishing that an accord and satisfaction was reached; or (3) through facts establishing the basis for an estoppel. Balderacchi v. Ruth, 256 S.W.2d 390, 391 (Tenn. Ct. App. 1952).
Applying Balderacchi to the present facts, the Court relied heavily on the fact that the plaintiff accepted 17 months of payments at the lower rate and the record lacked evidence of objections to the reduced compensation terms paid by defendant. The Court cited a number of cases in which at will contracts were not deemed modified, where the counter-party protested any performance that wasn’t in conformity with the original terms. Although plaintiff argued that silence can be interpreted in “multiple ways,” the Chancellor found that accepting the reduced payments for 17 months “was not silence, it was assertive conduct, and that there is no ambiguity.”
Practice Note: This case presents the perfect storm of facts, including a rare “at will” long term contract, but the basic reasoning is instructive for any lawyer faced with non-conforming performance from a counter-party under a contract. When performance is consistently defective under a long-term contract, faced with a number of difficult paths (including declaring default and possibly blowing the entire deal up), the worst response may be silence.
- David Anthony, Anthony Legal PLLC
Chief Judge Crenshaw granted-in-part and denied-in-part the plaintiff’s motions for sanctions due to spoliation of evidence, holding that at least some evidentiary sanction was warranted based on the defendant’s failure to preserve potentially relevant evidence.
The plaintiff slipped and fell inside the defendant’s store, injuring her arm and back. Discovery revealed that the defendant’s store had video surveillance, the defendant was on notice of the plaintiff’s incident, the defendant had a policy of preserving tapes of video surveillance two hours before and two hours after a known incident, but the defendant failed to preserve the video of the incident and the video was automatically deleted. The plaintiff filed a motion pursuant to Rule 37 of the Federal Rules of Evidence arguing that because of the spoliation, the Court should enter a default judgment against the defendant or, alternatively, order that a negative inference instruction be given to the jury.
Spoliation occurs when a party destroys or fails to preserve evidence that is relevant to pending or reasonably foreseeable litigation. Under Rule 37, upon a finding of spoliation, the court may instruct the jury to presume that the evidence would have been unfavorable to the party or either dismiss the action or enter a default judgment. However, courts have broad discretion in crafting the appropriate sanction based on a continuum of fault, ranging from innocence, negligence, to intentionality. In order to establish good cause for the most serve sanction of a dismissal or entry of a default judgment, the moving party must prove that the opposing party destroyed relevant evidence with a culpable state of mind.
The Court found that the video surveillance existed, that the defendant was on notice that litigation was likely and that the video surveillance was relevant, but failed to preserve the video. Namely, the defendant’s store manager asked the defendant’s loss prevention employee to review whether relevant video footage of the incident existed. The loss prevention employee reviewed some, but not all of the footage two hours before and two hours after the incident, and the unsaved video was deleted pursuant to the defendant’s standard protocol.
However, under these circumstances, the Court found that there was insufficient evidence to establish that the defendant’s failure to preserve the video was the result of anything but simple negligence or perhaps gross negligence. Thus, absent evidence of a specific intent, the Court concluded that the most severe sanction of entry of a default judgment was not appropriate. However, the Court held that the defendant’s failure to preserve the evidence warranted at least some evidentiary sanction, the nature of which the Court reserved for a later time.
Practice Note: The Court’s decision highlights the need for parties to take timely and diligent steps to preserve evidence that may be relevant to pending or reasonably foreseeable litigation since the failure to do so, even if through negligence, may warrant the imposition of sanctions.
- Michael R. O’Neill, Sims|Funk, PLC
Chief Judge Crenshaw granted Health Care Indemnity, Inc.’s (“HCI”) Motion to Dismiss and Compel Arbitration, holding that HCI had not waived its right to arbitrate and ordered the parties to arbitrate their dispute in accordance with their agreement.
HCI, a medical liability insurance company, retained the Curry Law Firm (“Curry”) in 1996 to handle the defense of certain medical malpractice complaints and other lawsuits filed against its insured providers and facilities. Along with its engagement agreement with Curry, HCI issued “Litigation Guidelines,” which included an arbitration clause. The arbitration clause mandated arbitration but failed to specify the administrative body that would handle any claims between the parties. This dispute arose from HCI’s failure to pay over 90 outstanding invoices after HCI terminated its relationship with Curry. Curry attempted to work with HCI regarding payment of the outstanding invoices, and inquired regarding HCI’s position on arbitration, beginning in March 2021. When HCI did not respond in (what Curry deemed) a timely manner, Curry filed its complaint for breach of contract, unjust enrichment, and quantum meruit in the Middle District of Tennessee.
In its Motion to Dismiss and Compel Arbitration, HCI argued that the arbitration provision in its Litigation Guidelines governed. In its opposition, Curry did not argue that the arbitration provision was invalid. Instead, Curry claimed that HCI had waived its right to arbitrate for two reasons: (1) HCI ignored Curry’s attempts to discuss arbitration for two months, and in so doing, had left Curry with no other option in light of the pending statutes of limitations but to file suit; and (2) Curry had suffered prejudice because it had incurred filing fees.
Before engaging in a discussion of waiver, the Court noted that federal courts have a strong presumption in favor of arbitration. In that context, the Court held that Curry had not met either of the required elements to show that HCI had waived the arbitration provision. Waiver of an agreement to arbitrate requires a showing of two courses of conduct: (1) taking actions completely inconsistent with any reliance on the arbitration agreement; and (2) delaying its assertion of the applicability of an arbitration provision to a degree that causes actual prejudice to the opposing party. The party arguing waiver must show both inconsistent actions and actual prejudice.
The Court’s analysis began with the second element. The Court rejected Curry’s argument that forcing Curry to file its case first in the Middle District of Tennessee constituted prejudice, noting that all Curry had done was enforce its bargained-for agreement. Enforcement of contractual rights, even when doing so required Curry to litigate in more than one forum, did not constitute prejudice. Further, the Court recognized that the claims were clearly subject to arbitration – even if the applicable administrative body was unclear – so filing the suit before HCI invoked arbitration was insufficient to establish prejudice. The Court emphasized that prejudice only arises after significant time, money, or other resources are spent litigating the case prior to the invocation of arbitration. Payment of filing fees alone was not sufficient.
The Court also found that Curry exaggerated HCI’s alleged inconsistent conduct, because HCI’s two-month delay in invoking arbitration was not inconsistent with its later reliance on the arbitration agreement. The Court noted that HCI’s conduct was dissimilar from that in other waiver cases, where the party had engaged in significant litigation conduct including filing pleadings, exchanging significant pretrial discovery, and participating in motion practice prior to invoking arbitration.
Concluding that Curry failed to establish either element of waiver (where both were necessary), the Court granted HCI’s Motion to Dismiss and Compel Arbitration, ordering the parties to arbitrate their dispute in accordance with the Litigation Guidelines.
Practice Note: The Court’s decision highlights the strength of the preference favoring arbitration, especially in the context of waiver. Both elements required to establish waiver – inconsistent conduct and prejudice – require an actual and substantial showing. Mere inconvenience to the party seeking to avoid arbitration is not sufficient to establish waiver and avoid an arbitration requirement.
- Grace A. Fox, Sims|Funk, PLC
Chief Judge Crenshaw ruled that the defendant waived its res judicata defense by failing to assert the defense in its answer.
The plaintiff is an artist who creates illustrations of various dog breeds. In July 2011, the plaintiff entered into a license agreement with Geoffrey and Cathy Roebuck which permitted the Roebucks to manufacture various goods, including “wagging tail wall clocks,” containing the illustrations. In August 2011, the plaintiff registered the images with the U.S. Copyright Office. In 2014, the plaintiff terminated the license agreement with the Roebucks for non-payment, and in 2016, she sued the Roebucks and obtained a default judgment.
In 2019, the plaintiff filed a second lawsuit, this time against MiniBear Gems and Gifts, Inc. MiniBear had accepted some of the wagging tail wall clocks from the Roebucks on consignment. The Roebucks had assured MiniBear that the clocks were legal to sell, but MiniBear never asked where the artwork came from or asked the Roebucks to present a valid license. MiniBear later acquired more of the clocks from another source, and then sold all the clocks. The plaintiff sued MiniBear for copyright infringement.
MiniBear arguably had a res judicata defense based on the plaintiff’s first lawsuit against the Roebucks. Res judicata bars not only all matters that were litigated in an earlier proceeding, but also all issues that could have been litigated in that proceeding. MiniBear did not assert a res judicata defense in its answer. Instead, MiniBear waited until one week before trial when it put this defense in its pre-trial brief, arguing that the plaintiff could have but failed to assert her claims against MiniBear in the first lawsuit. However, Judge Crenshaw ruled that MiniBear’s res judicata defense was waived. Judge Crenshaw found important that the plaintiff had put MiniBear on notice of the potential defense by attaching a copy of the default judgment from the first lawsuit to her Complaint against MiniBear. MiniBear did not explain its delay in asserting the res judicata defense until its pre-trial brief. Rule 8(c)(1) specifically mentions res judicata as an affirmative defense. Accordingly, the defense was deemed waived.
Practice Note: Rule 8(c)(1) of the Federal Rules of Civil Procedure, and Rule 8.03 of the Tennessee Rules of Civil Procedure, contain a list of affirmative defenses that must be pled in an answer or waiver is risked. However, those lists are not comprehensive. The Tennessee Rule provide that “any other matter constituting an affirmative defense” must be pled in the Answer, and the Federal Rule provide that the affirmative defenses that must be pled “include” the listed defenses. Still, at a minimum, if a defense is listed in the federal or state rules, it must be pled in the answer.
In state court, Rule 8.03 requires that the “facts relied upon to constitute” the affirmative defense must be pled in “short and plain terms.” Thus, it is not enough just to list the affirmative defense. That too can result in waiver. See, e.g., Pratcher v. Methodist Healthcare Memphis Hospitals, 407 S.W.3d 727, 736 (Tenn.2013). FRCP 8(b)(1)(A) has the same requirement. Moreover, if the affirmative defense is subject to Rule 9’s particularity requirement, it must meet that heightened standard. See, e.g., Malibu Media, LLC v. Pontello, No. 13-12197, 2013 WL 12180709, at *1–2 (E.D. Mich. Nov. 19, 2013).
Capitani stands as a reminder of the importance of having a checklist for potential affirmative defenses and considering whether they might apply in the case before filing an answer.
- Mike Abelow, Sherrard Roe Voigt & Harbison
They say only two things in life are certain: Death and Taxes. This case involves both of them, in considering whether the State of Tennessee can collect past due taxes owed by a defunct business against a successor entity.
Specifically, this case involves taxes owed by long-time Printer’s Alley bar “Bourbon Street Blues and Boogie Bar,” which changed owners in the summer of 2015. It wasn’t a sale, the new operator argues, because it stepped in after the prior owner “ran out of money and simply left” in June 2015. At that point, the new operator essentially “started from scratch,” by creating a new operating business entity, obtaining its own liquor license, obtaining its own liquor inventory and point-of-sale business systems, and, most notably, didn’t pay anything to the predecessor. Accordingly, the new operator testified that it was not a continuation or a successor to the prior operator, and it also wasn’t a purchaser, since they didn’t pay any sort of “purchase money.”
In general, § 67-6-513 requires that, in any sale of a Tennessee business, the seller must make a final tax return and payment within 15 days of “quitting the business.” Under the statute, the “successor” has an affirmative obligation to withhold sufficient amounts from the “purchase money to cover the amount of such taxes”; if the successor doesn’t, then it “shall be personally liable for the payment of the taxes, interest and penalties accruing and unpaid on account of the operation of the business by any former owner, owners or assigns.” Tenn. Code Ann. § 67-6-513(b)(1).
Tenn. Code Ann. § 67-6-513 has received limited substantive attention, with two Tennessee Supreme Court cases evaluating what type of transfer will be sufficient to trigger liability by the successor owner. See, generally, Bank of Com. v. Woods, 585 S.W.2d 577, 579 (Tenn. 1979) and A. Copeland Enterprises, Inc. v. Commr. of Revenue, 703 S.W.2d 624, 625 (Tenn. 1986).
In both of those cases, the Supreme Court considered whether a successor’s liability depended on an actual exchange of purchase funds or, specifically, whether a voluntary transfer of assets by a financially distressed entity to a third party (such as a secured lender), in exchange for either a release or reduction of debt, could result in liability. In each case, because the transfer was voluntary and negotiated, the transferee entity assumed successor liability, notwithstanding the fact that no actual money exchanged hands.
In the Woods case, when considering the lender’s acceptance of a consensual bill of sale from debtor in exchange for cancellation of debt, the Supreme Court found “the substance of the transaction in this case was not an enforcement of the lender’s rights under the security agreement,” but, instead, that the debtor “sold [its] equity in satisfaction of the debt and quit the business…[and t]he Bank as buyer became [debtor’s] successor and liable for the sales tax.” Bank of Com. v. Woods, 585 at 582.
Citing both of those cases, the Chancery Court expressly found that liability for the taxes can attach “to the successor even where no explicit ‘purchase money’…is exchanged in the routine sense…[and that] the ‘purchase money’ element of the statute is satisfied even if the purchase money goes to a third party as an intermediary, or if the purchase is not in the form of cash or tangible property or is in the guise/form of a foreclosure.” The Court noted that “the duty imposed on the successor is broad and not constrained to the words ‘purchase money’ in the statute.”
In considering the argument of the new operator, the Court looked at several facts related to the new operations, including areas in which the successor overlapped its business with the predecessor and evidence of the new operator’s pre-transfer plans to take over and continue the business prior to the former owner’s departure, such as is May 2015 liquor license application. The Court took note of actual instances where operations overlapped, including use of existing bank accounts. In the end, despite there being no actual purchase funds paid and no actual “transfer” from the prior operator, the Court found that the obligations contained in the express text of Tenn. Code Ann. § 67-6-513 applied to the new op
Practice Note: This opinion shows a trend toward broadly construing statues imposing successor liability, both by the courts and by the Tennessee Department of Revenue. This opinion should provide a specific warning to purchasers of businesses about their obligations under Tenn. Code Ann. § 67-6-513. Similarly, this decision should provide a general warning to other parties dealing with business assets of a defunct or distressed business, such as secured lenders contemplating a foreclosure or UCC Sale. The awareness that both the Department of Revenue and the courts will closely scrutinize transfers—even when such transfers are involuntary and for no affirmative purchase money to the distressed entity—may influence (and impair) a lender’s actions related to certain types of business collateral.
Not all written opinions tackle legal issues of first impression, but those orders can nevertheless be useful to practitioners. Chancellor Lyle’s Memorandum and Order entered on March 30, 2021 is such an opinion.
In that case, in preparation for a hearing to set monetary damages after the entry of a judgment by default, the Court’s review of the record revealed possible irregularities in the manner of service and concern that the Defendants had not been properly served under Tenn. R. Civ. P. 4.04.
It was undisputed in the record that the Defendants had been evading service of process, and, in response, the Plaintiff’s process server tried to effect service on the evading defendant pursuant to Rule 4.04(1) by “plac[ing] the summons and complaint into a clear plastic sleeve and tap[ing] it to the glass front door before leaving the [Defendant’s house].”
Pursuant to an Affidavit of Summons, when the process tried to serve him, the individual defendant had lied about his identity, his ownership of the corporate defendant, and refused to open his door to accept the paperwork, but, after confirming the individual’s identity by talking to a neighbor of the defendant with first hand knowledge, the process server returned to the defendant’s home to attach the process to the door.
Rule 4.04(1) does, in fact, provide a mechanism to deal with an evading defendant. The Rule provides that if a defendant “evades or attempts to evade service,” then the process server may perfect service of process “by leaving copies thereof at the individual's dwelling house or usual place of abode with some person of suitable age and discretion then residing therein, whose name shall appear on the proof of service, or by delivering the copies to an agent authorized by appointment or by law to receive service on behalf of the individual served.” Tenn. R. Civ. P. 4.04(1).
Citing this Rule’s plain language—which expressly imposes a requirement that the summons be left “with some person of suitable age and discretion then residing therein”—the Court found that merely taping the summons to the outside of a home does not meet the statutory requirements, even under these circumstances. The Court cited several other cases considering this issue, including Toler v. City of Cookeville, 952 S.W.2d 831, 833–34 (Tenn. Ct. App. 1997)(service attempted by taping summons to defendant’s house, after defendant ran from his house to avoid service).
Practice Note: Service of process on an uncooperative defendant can be a source of great delay and frustration to a plaintiff. As unusual as it may sound, leaving the summons taped to the house, wedged into the door-jam, or stuck under a windshield wiper is a common tactic for the process server who knows that they’ve located the evading defendant at her house. This opinion is a reminder that, no matter how recalcitrant a defendant may be, Tennessee courts will require that service of process strictly comply with Rule 4.
This opinion from Chancellor Moskal answers a lingering question of procedure: If a litigant asks for relief that is not timely, but the opposing party doesn’t object as required under the Local Rules and Tennessee Rules of Civil Procedure, can the court nevertheless grant the relief?
In this case, the judgment creditor filed a Motion to Extend Judgment pursuant to Tenn. R. Civ. P. 69.04, but fourteen years after the original judgment was entered. Rule 69.04 provides that, “[w]ithin ten years from the entry of a judgment, the creditor whose judgment remains unsatisfied may file a motion to extend the judgment for another ten years.” There was no response or opposition to the Motion, and the creditor submitted an order for entry.
The Court denied the Motion “[b]ecause Plaintiff’s motion was filed after the expiration of the mandatory ten-year time period within which to extend a judgment.” Citing Town & Country Jewelers, Inc. v. Trotter, 538 S.W.3d 508, 515 (Tenn. Ct. App. 2017), the Court wrote “[t]o allow a judgment creditor to file its motion beyond this ten-year period would essentially render this time limitation meaningless.”
Practice Note: There can be situations in which a request for relief may be untimely, but the party may elect to proceed with the request. The movant’s reasoning is often that the burden of establishing a defense to the relief is on the respondent, and that defense must be presented in accordance with the applicable rules of procedure. This Order shows that a Court, on its own, may take action in response to a party’s untimely request.
Judge Richardson denied the plaintiff’s motions for a temporary restraining order and preliminary injunction seeking to prevent a contract between the State of Tennessee and a third party from going into effect, holding that the plaintiff’s request was barred by the doctrine of laches.
The state contracts with private companies to provide inmate behavioral health care services at the state prisons. In early 2020, five companies submitted responses to the Tennessee Department of Corrections’ Request for Proposals for such behavioral health services. The state deemed the response submitted by the plaintiff, Corizon, LLC, to be noncompliant and did not consider that response. On July 24, 2020, the state announced that it was awarding the contract to Centurion of Tennessee, LLC. Corizon did not protest the award. Instead, Centurion waited until October 19, 2020 to file suit against certain state officials and Centurion alleging violations of the Sherman Antitrust Act. Centurion also filed a motion for temporary and preliminary relief, seeking to enjoin the State from moving forward on the contract that was set to go into effect on November 1, 2020.
The Court held that, because Corizon sought only equitable relief, the doctrine of laches was potentially applicable. A court has discretion to apply the doctrine of laches and deny a request for temporary and preliminary injunctive relief upon a finding of (1) a lack of diligence by the claimant and (2) prejudice to the party asserting laches.
On the first element, the Court held that the record demonstrated a lack of diligence. The Court found that Corizon knew of its claim no later than July 24, 2020. Moreover, Corizon chose not to protest the award through the state’s administrative process, even though doing so would have prevented the contract from going into effect. The Court concluded that the three-month delay in filing suit was unreasonable in light of the circumstances.
On the second element, the Court held that the defendants would be prejudiced by preliminary relief, finding that halting implementation of the contract on the eve of its effective date would undermine months of transition efforts by state officials and Centurion, as well as prejudice the inmates who rely on the behavioral health services. The Court also noted that significant costs and challenges could have been avoided had Corizon sought the TRO without delay.
Concluding that the two elements were satisfied, the Court exercised its discretion and denied the plaintiff’s motion for a TRO under the doctrine of laches. In a separate order, the Court later denied the plaintiff’s motion for a preliminary injunction.
Practice Note: The Court’s decision highlights the need for parties to file suit and related motions for preliminary injunctive relief without delay since any delay may result in the court exercising its discretion to bar the motion based on a lack of diligence.
Chief Judge Crenshaw granted the plaintiff’s motion to remand the case to Sumner County Circuit Court, holding that the Public Readiness and Emergency Preparedness Act (“PREP Act”) does not completely preempt state law claims against nursing homes for negligence in responding to the COVID-19 pandemic.
Before her death from COVID-19 in March of 2020, Ruth Summers resided at the Gallatin Center for Rehabilitation and Healing (“Nursing Home”), a skilled nursing facility in Sumner County, Tennessee. Plaintiff Debbie Ann Bolton, Ms. Sumner’s daughter, brought suit against the Nursing Home in the Sumner County Circuit Court for gross negligence and recklessness in its failure to take proper precautions to prevent or mitigate the spread of COVID-19 among its residents, which Bolton alleged ultimately caused Ms. Summer’s death.
The Nursing Home filed notice of removal to the Middle District, arguing that Bolton’s state law claims necessarily raised a federal issue (namely, whether the PREP Act immunized the Nursing Home from suit) and, moreover, were completely preempted by the PREP Act. In response, Bolton filed a motion to remand back to the state court.
Under the PREP Act, when the Secretary of the Department of Health and Human Services (“HHS”) deems an event a “public health emergency” and recommends appropriate countermeasures, the Act immunizes nursing homes and other “covered persons” from suit and liability arising from the implementation of those countermeasures. The PREP Act contains a narrow preemption clause for state laws that conflict with the Act’s requirements regarding “covered countermeasure[s].”
Addressing the Nursing Home’s first argument for removal, the Court held that Bolton’s state law claims did not inevitably raise a federal issue because the Court could ignore the PREP Act and still analyze whether Bolton made out a prima facie case of state law negligence. The Nursing Home’s argument conflicted with unequivocal Supreme Court guidance on removal, which states that defendants cannot unseat a plaintiff as master of his or her own complaint by “merely injecting a federal question” into a state law claim as an affirmative defense.
Addressing the Nursing Home’s second argument, the Court first distinguished “ordinary” preemption—which applies to federal statutes that supplant state law without creating a right of removal—with “complete” preemption—which applies to federal statutes intended to “occupy the regulatory field” and therefore create a right of removal for any civil complaint raising claims in a germane area of the law. Analyzing the statute, the Court held that the PREP Act does not create the exclusive cause of action for claims falling within its scope and is therefore “not a complete preemption statute.” From this finding, it followed that the Nursing Home’s preemption argument failed, as the PREP Act “does not provide removal jurisdiction.”
Finally, the Court dismissed the Nursing Home’s argument for removal under the artful pleading doctrine, finding the doctrine inapplicable “for the same reasons that the PREP Act is not a complete preemption statute…and Bolton's claims do not necessarily depend on the issue of PREP Act immunity.” In other words, removal was not required because Bolton could easily articulate state law claims without any “artful” pleading around federal causes of action.
Practice Note: The Court’s decision, which identified only three statutes for which the Supreme Court has recognized complete preemption, outlines the limited circumstances in which the preemption doctrine applies to claims in which only state law claims are pled.
Judge Trauger granted the defendant’s motion to dismiss, holding that the defendant insurer’s grounds for denying the plaintiff restaurant’s claim were sound under the terms of the disputed insurance policy.
In response to the COVID-19 pandemic, the Metropolitan Nashville and Davidson County (“Metro”) Public Health Department issued a string of public health orders between March and July of 2020 that restricted operations at “non-essential” businesses, including restaurants. These closure orders limited restaurant operations at various junctures to benchmarks between complete closure and 100% in-house capacity.
Plaintiff 1210 McGavock Street Hospitality Partners, LLC, d/b/a Adele’s Restaurant (the “Restaurant”) suffered significant losses as a result of these orders and subsequently filed a claim with its insurer, defendant Admiral Indemnity Company (the “Insurer”), to recover what the Restaurant believed were covered losses under its “all risk” business interruption policy. When the Insurer denied its claim, the Restaurant brought suit in Davidson County Chancery Court to contest the denial of coverage. After removal to the Middle District, the Insurer filed a motion to dismiss for failure to state a claim.
The Insurer made three arguments in support of its motion to dismiss, all of which the Court accepted.
First, the disputed policy contained a “Virus Exclusion Clause” that the Insurer argued and the Court held excluded coverage for losses caused by or resulting from any virus or microorganism, even if those losses would otherwise be covered under the terms of the policy. The Court rejected the Restaurant’s argument that the closure orders, not the virus itself, were the true cause of its losses. The Court cited four other district court decisions that reached the same conclusion.
The Court also rejected the Restaurant’s position that the doctrine of regulatory estoppel barred enforcement of the Virus Exclusion Clause. While the Restaurant argued that the insurance industry deceived state regulators as to the meaning of virus exclusion clauses, the Court noted that Tennessee courts have not adopted the doctrine of regulatory estoppel and, moreover, have “long held…that extrinsic evidence may not be introduced to modify the terms of an unambiguous contract.”
Acknowledging that the Virus Exclusion Clause was sufficient to dispose of case, the Court went on to examine and ultimately accept the Insurer’s second argument, holding that the Restaurant’s claim fell outside of the explicit terms of the policy’s “Business Income Clause.” Though the policy required a showing of “direct physical loss of or damage to…[p]roperty,” the Restaurant argued that those terms could be interpreted to include “loss of access, loss of use, and loss of functionality” stemming from the virus. The Court rejected this argument, holding that absent a “distinct, demonstrable, physical alteration of the property” the Restaurant could not rely on its “pure[ly] economic losses” and mere speculation that the virus may have been present to avail itself of the policy’s Business Income Clause.
Finally, the Court examined the policy’s “Civil Authority Clause,” which the Restaurant maintained provided a basis for coverage where the Metro Health Department’s closure orders rendered the Restaurant “unusable for its intended purpose.” Adopting the Insurer’s contrary contention, the Court found the clause inapplicable given its requirement that a civil authority “prohibit[]” access to the covered property as a result of “damage to property other than [the insured]’s property.” Neither of those two prerequisites were met, the Court held, because (1) at no time was the Restaurant physically sequestered or inaccessible and (2) no nearby properties were ever damaged.
Having accepted all three of the Insurer’s alternative arguments for dismissal, the Court granted the defendant’s motion and dismissed the case with prejudice.
Practice Note: The Court’s decision highlights the hurdles many businesses will face in attempting to seek coverage for COVID-19-related losses under certain business interruption policies.
