Piercing the Corporate Veil in Tennessee – When Can a Judgment Against a Corporation be the Personal Responsibility of the Shareholders?

The Tennessee Court of Appeals recently decided a case (F&M Marketing Services, Inc. v. Christenberry Trucking and Farm, Inc., E2016-00205-COA-R3-CV, 2017 WL 417223_(Tenn. Ct. App. 2017)) involving a request to pierce the corporate veil of a Defendant after the Plaintiff got a substantial judgment against that Defendant for breach of contract.  The total judgment in this case was $375,524.29.  After the initial judgment was entered, the Plaintiff learned that the Defendant had no assets to satisfy the judgment.  As a result, the Plaintiff petitioned the trial to hold the primary shareholder of the Defendant personally liable for the judgment against the Defendant corporation.  The Tennessee Court of Appeals did a good job discussing the circumstances when an individual shareholder can be found personally responsible for a judgment against a corporation in Tennessee. 

The Court noted that the most important case outlining when it is appropriate to pierce the corporate veil in Tennessee is the FDIC v. Allen, 584 F. Supp. 386 (E.D. Tenn. 1984) decision.  The Court noted that numerous Tennessee Court of Appeals and the Tennessee Supreme Court have nearly uniformly considered the “Allen factors” that were outlined in this case many years ago.  The factors to be considered when determining whether to allow a judgment to be against individual shareholders and simply disregarding the corporate veil include the following:

Factors to be considered in determining whether to disregard the corporate veil include not only whether the entity has been used to work a fraud or injustice in contravention of public policy, but also: (1) whether there was a failure to collect paid in capital; (2) whether the corporation was grossly undercapitalized; (3) the nonissuance of stock certificates; (4) the sole ownership of stock by one individual; (5) the use of the same office or business location; (6) the employment of the same employees or attorneys; (7) the use of the corporation as an instrumentality or business conduit for an individual or another corporation; (8) the diversion of corporate assets by or to a stockholder or other entity to the detriment of creditors, or the manipulation of assets and liabilities in another; (9) the use of the corporation as a subterfuge in illegal transactions; (10) the formation and use of the corporation to transfer to it the existing liability of another person or entity; and (11) the failure to maintain arms length relationships among related entities.

F&M Marketing at 3 (quoting Rogers v. Louisville Land Company, 367 S....

Legitimate Business Interest Needed to Enforce Tennessee Non-Compete Agreements

The Tennessee Court of Appeals in John Jason Davis v. Johnstone Group Inc. v. Appraisal Services Group, Inc., No. W2015-01884-COA-R3-CV, 2016 WL 908902 (Tenn. Ct. App. 2016) discussed the enforceability of a non-compete agreement and a request for injunctive relief.  The key issues in this case was whether there was a legitimate business protectable business interest that would justify the enforcement of this non-competition agreement.  This case provides a very good overview of Tennessee law on the enforcement of non-competition agreements. 

The Court noted that non-compete agreements are disfavored in Tennessee because they restrain trade (citing Hasty v. Rent-A-Driver, Inc., 671 S.W.2d 471 (Tenn. 1984)).  However, the Court found that Tennessee Courts will still uphold agreements if the restrictions are reasonable.  Additionally, the time and territorial of limits of the agreement must be no greater than is necessary to protect the business interests of the employer (citing Matthews v. Barnes, 293 S.W. 1993 (Tenn. 1927)). 

The Court noted that the Tennessee Supreme Court’s analysis in the Hasty opinion is the key case law on the issue of whether a legitimate business interest justifies the enforcement of the non-competition clause.  Specifically, the Tennessee Supreme Court in the Hasty case said as follows:

Of course, any competition by a former employee may well injure the business of the employer. An employer, however, cannot by contract restrain ordinary competition. In order for an employer to be entitled to protection, there must be special facts present over and above ordinary competition. These special facts must be such that without the covenant not to compete the employee would gain an unfair advantage in future competition with the employer.

Hasty, 671 S.W.2d at 473.  As a result, the employer trying to enforce the agreement must show special facts “beyond protection from ordinary competition that would give” the employee...

Can the Sale of Real Property Be Enforced When Title to Property Was Not Held By Seller at Time of Transaction, but is Later Acquired?

The Tennessee Court of Appeals’ case of Gary Atchley v. Tennessee Credit, LLC, No. M2013-00234-COA-R3-CV, 2014 WL 4629042 (Tenn. Ct. App. 2014), discussed the doctrine of “after-acquired-title” under Tennessee law.  This case is relatively straight forward.  On September 22, 2009, the plaintiff purchased from Tennessee Credit, LLC a piece of real property for $18,000.00.  At that time he signed and presented the $18,000.00 check to Tennessee Credit, LLC.  The problem was, Tennessee Credit, LLC did not actually own the property at the time of the sale.  Tennessee Credit, LLC did have the right to foreclose on the property at the time of the sale but they had not done this yet, so they did not actually own the property.  It was not until December 4, 2009 that Tennessee Credit, LLC actually owned the property.

After Tennessee Credit, LLC obtained title, the purchaser desired to rescind the transaction and demanded a refund of the $18,000.00 paid to Tennessee Credit, LLC.  This Tennessee Court of Appeals’ decision ultimately agreed that this contract could be rescinded and the $18,000.00 should be refunded to the purchaser.  The Trial Court said it best, “you can’t sell property you don’t own . . .”.  Atchley at 2.  The Appellate Court reviewed some very old Tennessee decisions from the early 1900’s and 1800’s in order to decide this case.  There has not been case law on the “after-acquired-title” doctrine at issue in this case in the last 80 years.  Tennessee Credit, LLC attempted to argue the principal of “after-acquired-title” which would allow them to enforce the transaction because they acquired the title after the transaction.  The Tennessee Court of Appeals rejected this argument and stated as follows: 

When Mr. Dunn advertised Ms. Roller's property for sale and attempted to sell the property to Mr. Atchley, he knew Tennessee Credit did not have title to the property. Like the executor in Woods, Mr. Dunn's representation that he had a right to sell Ms. Roller's property was a “species of fraud.” Therefore, in keeping with the principles announced in Woods, we do not believe Mr. Atchley should be compelled to take the after-acquired-title from Tennessee C...

Attorney’s Fees Cannot Be Awarded as Punitive Damages Under Tennessee Law When Not Provided For in Contract or Statute

A new Tennessee Court of Appeals decision, Samuel Bridgefourth, Jr. v. Santander Consumer USA, Inc., No. W2013-02468-COA-R3-CV, 2014 WL 3563470 (Tenn. Ct. App. 2014), dealt with a situation involving repossession of the plaintiff’s car by a finance company.  The plaintiff then paid the balance due on the loan.  He then received the title in the mail but never received the vehicle back.  As a result, the plaintiff sued the defendant Santander Consumer USA, Inc. alleging breach of contract, conversion, trespass to chattels, fraud, misrepresentations and violation of the Tennessee Consumer Protection Act. 

Ultimately, the case went to trial.  The trial court awarded Mr. Bridgefourth $6,000.00 in compensatory damages for conversion of the car and “special damages in the amount of $13,348.00 for attorney’s fees necessary to compensate Plaintiff for his losses as a result of Defendant’s actions.”  The plaintiff then asked the court to clarify its order and the trial court changed the $13,348.00 award from “special damages” to “punitive damages”.  As a result, the defendant Santander appealed, arguing that it was not appropriate to award attorneys’ fees in this case.

The Tennessee Court of Appeals noted the rule in Tennessee is that “litigants must pay their own attorney’s fees unless there is a statute or contractual provision providing otherwise.”  Bridgefourth at 2 (citing State v. Brown & Williamson Tobacco Corp., 18 S.W.3.d 186, 194 (Tenn. 2000)).  The Tennessee Court of Appeals next addressed whether the trial court could award attorney’s fees as “punitive damages” as was done in this case.  The Court noted:

The purpose of punitive damages is not to compensate the plaintiff but to punish the wrongdoer and to deter others from committing similar wrongs in the future. Attorney's fees are not punitive in nature. 

Is One-Sided Contract Requiring Arbitration by One Party, but Not the Other, Enforceable in Tennessee?

Analysis:  A recent Tennessee Court of Appeals decision discussed the viability of a contract that had a one-sided arbitration provision.  The Tennessee Court of Appeals decision of Richard A. Berent v. CMH Homes, Inc., 2014 WL 813874 (Tenn. Ct. App. 2014) dealt with an arbitration agreement that required the purchaser of a manufactured mobile home to submit virtually all of the buyer’s potential claims to arbitration.  On the other hand, the same contract provided certain exceptions to the “mandatory” arbitration that exclusively benefited the mobile home manufacturer.  The effective result was that the purchaser of the mobile home had to submit virtually all of his claims to arbitration whereas the seller of the manufactured mobile home could pursue judicial relief for many claims.

As a result, the question before the Court was whether this arbitration requirement was unconscionable and therefore unenforceable under Tennessee law.  Previously in Taylor v. Butler, 142 S.W.3d 277 (Tenn. 2004) the Tennessee Supreme Court held that an arbitration agreement was unconscionable when it reserves the “right to a judicial forum for the defendants while requiring the plaintiff to submit all claims to arbitration.”  Taylor at 280.  In the Berent case the Tennessee Court of Appeals applied the Taylor reasoning and found that this arbitration agreement was unconscionable.  As a result, this Tennessee Court of Appeals decision reaffirmed the applicability of the Taylor decision finding that it is improper in Tennessee for any arbitration agreement to selectively decide that one party has access to a judicial remedy while the other party only has access to an arbitration remedy. 

Interestingly, the defendants in this case attacked the viability of the Supreme Court’s holding in Taylor from 2004.  The defendants asserted in this case that Taylor is no longer in the legal majority across the country and that this decision should be overruled (in fact they assert this holding is only accepted in a “small minority” of jurisdictions).  Obviously, the Tennessee Court of Appeals declined to overrule a Tennessee Supreme Court decision and specifically stated that such an issue must be directed to...

In Tennessee How Long Does a Settlement Offer Remain Open When No Expiration Time Period is Provided?

Analysis:  The Tennessee Court of Appeals recently decided an interesting case that discussed how long a settlement offer stays open when the settlement offer does not have a specific expiration date or any reference to how long the offer will remain open.  In the Tennessee Court of Appeals decision of Tonita Reeves v. Pederson-Kronseder, LLC d/b/a Pederson’s Natural Farms, Inc., No. M2013-01651-COA-R3-CV, 2014 WL 1285702 (Tenn. Ct. App. 2014) the employee and employer were preparing to arbitrate an age discrimination case.  Prior to the time of the arbitration the parties entered into settlement negotiations.

On June 29, 2012, a specific settlement proposal was made by defense counsel to the plaintiff after multiple prior emails discussing the concept of settlement (this proposal did not have any expiration date).  Defense counsel followed up with additional emails inquiring about the status of settlement but plaintiff’s counsel provided no specific response.  In the following month the parties engaged in additional written discovery and took additional depositions.  The arbitration was set for August 15, 2012.  Without any further offer being made, the plaintiff emailed defense counsel August 12, 2012, three days before the arbitration, and accepted the June 29, 2012 offer of settlement.  Defense counsel responded by stating that the June 29, 2012 offer of settlement was no longer viable due to the passage of time and the expenses that had been incurred since it was made.

Ultimately, the arbitration went forward and the plaintiff did not receive a favorable outcome at the arbitration.  As a result, the plaintiff filed a lawsuit in Chancery Court alleging breach of contract for the settlement proposal that was “accepted” prior to the mediation.  The trial court found there was no enforceable settlement agreement in this circumstance.  This was appealed to the Tennessee Court of Appeals.

The Tennessee Court of Appeals considered whether there was a legitimate settlement.  The Court basically found that settlement offers only remain open for a reasonable period of time even when there is no expiration date.  Reeves at 4, 5.  The court cited the rule in the Tullahoma Concrete case where the Court stated:

In a Tennessee Breach of Contract Action Does a Voluntary Dismissal Make the Defendant the “Prevailing Party” for Contractual Attorney’s Fees?

Analysis:  In a Tennessee breach of contract case if the defendant has a counterclaim pending to recover attorney’s fees under the contract and the plaintiff voluntary dismisses the case, the defendant can recover attorney fees if not timely refiled.  This is governed by a Tennessee statute, T.C.A. § 20-6-306 that provides as follows:

(a) If a plaintiff voluntarily dismisses an action while a counterclaim is pending for contractual attorney fees, and if the plaintiff does not timely recommence the action, the court, upon proper showing, may order that the counterclaimant is the prevailing party for the purpose of recovering contractual attorney fees.

(b) This section shall only apply if the contract clause providing for attorney fees applies equally to all parties to the contract.

As a result, the counterclaiming party is essentially considered the prevailing party for the purpose of determining if contractual attorney’s fees must be paid (this is the usual terminology in contracts that discuss when attorney’s fees are due).  However, this only occurs after the plaintiff does not recommence the action in a timely manner (usually this will be within one year from the dismissal).  Even though a voluntary dismissal under Tennessee Rule of Civil Procedure 41.01 is not a determination on the merits, under this statute, it does have the impact of essentially finding the defendant is the prevailing party under a contractual term for attorney’s fees. 

This statute was adopted and put in effect on July 1, 2004.  A search on Westlaw shows this statute has not been substantively addressed by the Court of Appeals or the Tennessee Supreme Court.  I am not sure how well known this statute is but it is certainly something to consider in the context of a counterclaim in a bre...

Employment Law – Can an Employer be Liable for Intentional Interference with its own Employee's Employment Contract?

Brief Summary:  The Tennessee Court of Appeals court determined that an employer cannot be held liable for intentional interference with its own employment contract with an employee.

Analysis:  The Tennessee Court of Appeals decision of Keith A. Davis v. Shaw Industries Group, Inc., 2013 WL 1577642, No. M2012-01688-COA-R3-CV (Tenn. Ct. App. 2013) involved a situation where an employee was terminated from his employment in Tennessee.  The employee was terminated for violating company policy for allegedly lying during an investigation into whether he was involved in a romantic relationship with the human resource manager.  Part of plaintiff’s case was an assertion that the employer intentionally interfered with his employment contract with the employer.  This claim was dismissed by the trial court on a motion for summary judgment and this issue was appealed to the Tennessee Court of Appeals.

The Tennessee Court of Appeals noted that in order to prove a claim of intentional interference with an at will employment contract the plaintiff must establish:

the defendant intentionally and without justification procured the discharge of the employee in question.  The claim contemplate [s] a three-party relationship—the plaintiff as employee, the corporation as employer, and the defendants as procurers or inducers.

Davis at 3.  The Appellate Court therefore found the trial court correctly determined the employer could not be held liable for intentional interference with its own employment contract with the plaintiff employee.  The court found that Tennessee law is very clear on this issue when it stated:

Contracts – Beware of signing a lease agreement on behalf of a company in your own name in Tennessee.

Analysis: The recent Tennessee Court of Appeals decision of Reginald M. Mudd v. Rexford Goostree, Jr. and Liberty Cabinets and Millwork, Inc., 2013 WL 1402157 (Tenn. Ct. App. 2013) provided a good example of the great danger in signing a lease agreement in an individual’s own name when it is intended to be signed on behalf of a company.  In this case, the lease agreement listed the landlord as “Mudd Properties”. Mudd at 1.  The tenant was listed as “Liberty Cabinets & Millworks, Inc.” Mudd at 1. However, in the signature box at the end of the lease Rexford Goostree Jr., the owner of Liberty Cabinet & Millworks, Inc., signed the lease as follows:

TENANT:

REX GOOSTREE, JR.

By Rex Goostree, Jr.

(bold portions were handwritten) Mudd at 1.  He did not state that he was signing on behalf of the company as a representative.  The lease terms were breached by the Tenant and therefore the plaintiff sued Rex Goostree Jr. personally for breach of contract. Mudd at 1.  Rex Goostree Jr. asserted in response that he should not be held personally liable under the commercial lease because “Liberty Cabinets & Millworks, Inc.” was na...

Construction Law - Under Tennessee law what damages can be recovered for breach of a construction contract?

Analysis:  The recent Tennessee Court of Appeals decision of Brooke Buttrey v. Holloway's, Inc., No. M2011-01335-COA-R3-CV, 2012 WL 6451802 (Tenn. Ct. App. December 12, 2012) considered a case where the defendant failed to construct the home in a workmanlike manner.  The trial court concluded the defendant breached its contract based on the deficiencies in the construction of the home.  The next question was, what are the appropriate damages for the deficient work?  The trial court found the defendant was required to pay back the total amount the plaintiff paid to build her house, $143,272.00. Buttrey at 4.

It is clear under Tennessee law that in a breach of contract action, “damages resulting from the breach are a necessary element of the claim and, therefore, the claimant has the burden of proving damages at trial.”  Buttrey at 7.  Under Tennessee law the purpose of assessing damages in a breach of contact case is to "make the non-breaching party whole, to place the non-breaching party in the same position he would have been in had the contract been performed."  Buttrey at 7. (citing Hiller v. Hailey, 915 S.W.2d 800, 805 (Tenn. Ct. App. 1995)).  As a result, the “damages awarded by the trial court should have been designed to place Ms. Buttrey in the position she would have been in had the contract been performed as contemplated."  Buttrey at 7.