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Posted by: Lynn Pointer on Apr 15, 2013
NOVEMBER, 2012 - JANUARY, 2013

 

Mini summary

Contracts

• Where contract is silent, implied covenant of good faith and fair dealing applies to decision about consenting to lease assignment. Dick Broadcasting Co. v. Oak Ridge FM, No. E2010-01685, 2013 WL 175491 (Tenn. Jan. 17, 2013). 

• Intent to hold corporate officer personally liable as contract guarantor must be in clear and unambiguous language to bind individual signer. Creekside Partners v. Scott, No. M2012-00623, 2013 WL 139573 (Tenn. App. Jan. 10, 2013).

Employment

• Teacher’s alleged failure to request additional leave did not amount to constructive resignation or tenure forfeiture; thus, school board’s termination violated teacher’s rights under Tennessee Tenure Act and due process clause. Thompson v. Memphis City Sch. Bd, No. W2010-02631, 2012 WL 6643905 (Tenn. Dec. 21, 2012).

Construction

• Profit in arms-length contract is not “unjust enrichment” and mistake of law is culpable negligence which likewise precludes application of equitable subrogation. Charles Blalock & Sons v. Fairtenn, LLC, No. E2011-02594, 2012 WL 6727426 (Tenn. App. Dec. 27, 2012).

Medical malpractice

• Certificate of good faith requirement is not violated because expert is wrong or because expert does not review materials outside of medical record (such as photos) in reaching conclusions. Kerby v. Haws, No. M2011-01943, 2012 WL 6675097 (Tenn. App. Dec. 20, 2012). 

Civil Procedure

• Billing generated and work performed in Tennessee (including customer service) for an out of state defendant is insufficient to permit Tennessee courts to assert personal jurisdiction.  Covista Communication v. Oorah, Inc., No. E2012-00720-COA-R3CV, 2012 WL 5504123 (Tenn. App. Nov. 14, 2012). 

• Setoff doctrine required dismissal of claim purchased from bankruptcy trustee where claim was not obtained “free and clear” of creditors and Defendant’s claim in bankruptcy was greater than claim purchased against him. Huggins v. McKee, No. E2012-00080, 2012 WL 5944591 (Tenn. App. Nov. 28, 2012). 

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Contracts

Dick Broadcasting Co. v. Oak Ridge FM, Inc., No. E2010-01685, 2013 WL 175491 (Tenn. Jan. 17, 2013).  In an issue of first impression, our supreme court held that implied covenant of good faith and fair dealing applied to contract that was silent on standard of conduct.  The court held that where the parties have contracted to allow assignment of an agreement with the consent of the non-assigning party, and the agreement is silent regarding the anticipated standard of conduct in withholding consent, an implied covenant of good faith and fair dealing applies and requires the non-assigning party to act with good faith and in a commercially reasonable manner in deciding whether to consent to the assignment.

The contract contained an anti-assignment provision which stated:  “No party may assign its rights, interests or obligations hereunder without the prior written consent of the other party.”  The contract was silent regarding standard of consent—does non-assigning party have unfettered discretion, or may it only withhold consent if it acts in good faith and in a commercially reasonable manner?  The court held that common law duty of good faith in performance of contracts requires good faith and commercial reasonableness. 

This decision could be applicable to landlord/tenant cases.  The court recognizes and approves decisions holding that lease provisions providing that tenant may not sublease property without landlord’s consent require landlord to act in good faith and in commercially reasonable manner, absent contractual language to contrary.  In applying the good faith standard, the non-consenting party may not present a defense that it relied on the advice of counsel.  “It would be inadvisable to allow a trial court to consider a contracting party's argument that ‘my lawyer told me it would be okay’ as a defense to a breach of contract action where the written agreement clearly and unambiguously supports the contrary conclusion.” 

Writing separately to address the scope of the implied duty of good faith and fair dealing in arms length commercial transactions, Justice Koch concurred, but indicated his preference to limit such a duty.  Under his approach, the duty would only be violated if the non-consenting party acted in “bad faith,” which requires “a dishonest purpose.”  Under Justice Koch’s formulation, “[p]ursuing one's self-interest in a commercial transaction is not a breach of the implied duty of good faith and fair dealing.  In order for a commercial actor's conduct to amount to such a breach, there must be evidence that it falls outside of the boundaries of acceptable commercial practice or it was motivated by a dishonest purpose, fraudulent intent, or ill will.” Justice Lee’s opinion for the Court would apparently not define the duty in such a limited way.  Instead, she held that good faith is a question of fact, without providing much additional guidance on the content of the standard.

Creekside Partners v. Scott, No. M2012-00623, 2013 WL 139573 (Tenn. App. Jan. 10, 2013). Following up on the decision in the 84 Lumber Co. v. Smith, 356 S.W.3d 380 (2011), this court of appeals opinion applies and distinguishes 84 Lumber on the circumstances in which a president of a company, signing a contract, is individually liable. 

In 84 Lumber, a company president was held individually liable on a credit application.  The contracting party was the company, but just above the signature (signed by the President) was all caps language indicating that by signing below, the president was personally guaranteeing the contract.  On the same page (and immediately below the guarantee provision), in the space provided for “Applicant,” the president signed, “R. Bryan Smith, President.”

The primary distinction from 84 Lumber was that the president’s signature was in a different form.  The signature form showed the name of the corporation “BY” its President.  The court thought this made clear that the contract was signed only in a representative capacity.  Moreover, while the guaranty language was in all caps and just above the signature in 84 Lumber, the guaranty language in this case was several pages before and in normal font.  Moreover, the guaranty language was confusing because it purported to not only make the president a guarantor, but also a “co-tenant” even though the president was never otherwise identified or treated as a co-tenant.  On balance, there was no clear intent to hold the president individually liable.

Employment

Thompson v. Memphis City Sch. Bd, No. W2010-02631, 2012 WL 6643905 (Tenn. Dec. 21, 2012).  A tenured teacher, Plaintiff requested and received sick leave to expire on January 2, 2007.  Plaintiff did not return to work on January 2, 2007 and the parties disputed whether Plaintiff requested additional sick leave.  In April 2007, Defendant School Board terminated her employment, effective January 2, 2007.  Defendant did not comply with the termination provisions of the Tennessee Tenure Act, which require, inter alia, pre-hearing notice and a hearing prior to termination.  The trial court granted Plaintiff summary judgment.  The court of appeals reversed, finding that the factual dispute as to whether Plaintiff requested more sick leave mattered, because if she had not requested more sick leave, that could have been a constructive resignation and forfeiture of her tenure.

The Tennessee Supreme Court reversed, holding that the factual dispute—whether Plaintiff requested more sick leave—was irrelevant because, even if Plaintiff had failed to request more sick leave, that could not have constituted a constructive resignation and forfeiture of tenure.  The court ruled that if Plaintiff failed to request more sick leave, Defendant could have sought her dismissal, but only in accordance with the procedural protections of the Tenure Act.  Defendant was not authorized to deem a failure to return from sick leave a constructive resignation, without providing Plaintiff the pre-termination protections of the Act. 

The court determined that the remedy was Plaintiff’s full salary, without any offset, for the entire period during which she was improperly terminated.  The court also concluded that Defendant deprived Plaintiff of her constitutional rights to procedural due process.  The remedy for the constitutional violation included attorneys fees under § 1983.

Construction

Charles Blalock & Sons v. Fairtenn, LLC, No. E2011-02594, 2012 WL 6727426 (Tenn. App. Dec. 27, 2012).  In a Pigeon Forge real estate development:

Bank # 1 provided initial loan, secured by deed of trust, in 2005.

Contractor (Blalock) began work in 2006.

Bank # 2 provided additional financing in 2007.  Proceeds from loan # 2 were used to payoff Bank #1, and to payoff Contractor for work through closing of Loan # 2. 

Bank # 2 asked Contractor for subordination agreement prior to closing of Loan # 2, but Contractor did not execute.  Bank # 2 proceeded with closing despite not getting subordination agreement executed—Bank says this was a mistake.

After closing of loan # 2, Contractor continued to perform work.  Some of post-closing work is not paid for.  Contractor’s mechanic lien related back to visible commencement of work, which was before Bank # 2’s deed of trust was recorded.  So Bank # 2 argued equitable subrogation—it should be entitled to Bank # 1’s priority position because it paid off Bank # 1’s loan.

The trial court granted summary judgment to Contractor and Bank # 2 appealed.  Court of Appeals affirms, holding that equitable subrogation does not apply.

First, equitable subrogation requires unjust enrichment by Defendant, and the profit negotiated under an arms-length contract does not count as unjust enrichment.  Here the Contractor performed additional work after Loan # 2, for which it was not paid in full.  Bank # 2 argued that all the unpaid amount is profit under the contract—Contractor had already been paid its costs and expenses.  Even if true, that doesn’t count as unjust enrichment—Contractor didn’t try to charge some amount over the contract.

Second, equitable subrogation requires that Plaintiff not to have committed “culpable negligence.”  Here, Bank # 2, if it made a mistake at all, made a mistake of law, not of fact.  And a mistake of law is culpable negligence.  Bank # 2 knew the fact that Contractor had commenced work, would be performing additional work, and did not execute the subrogation agreement.  Any mistake as to the legal effect of those facts is culpable negligence.

Medical Malpractice

Kerby v. Haws, No. M2011-01943, 2012 WL 6675097 (Tenn. App. Dec. 20, 2012).  Plaintiff underwent abdominal surgery by Defendant in 2003.  Immediately after, Plaintiff began experiencing infections, requiring multiple surgeries.  In the last surgery, in 2009, five surgical clips were placed to control bleeding, and she was discharged to a nursing home.  During the nursing home admission, a long metallic object was removed.  The medical records from the nursing home admission describe the object as the tip of a scissors-like instrument.  Plaintiff believed this was from her surgery in 2003 and the source of her infections.

Plaintiff’s attorney contacted an expert and described the case—including that a broken piece of surgical equipment was found in the body.  Plaintiff’s attorney sent the expert the medical records, including those from the nursing home admission.  Expert gave Plaintiff’s attorney written opinion that Defendant was negligent by failing to remove a piece of surgical equipment. After suit was filed, Defendant moved for summary judgment, showing that the object was not a broken piece of surgical equipment from 2003 surgery, but a clip from the 2009 surgery.  Defendant relied on photographs of the object as well as CT scans post-2003 and pre-2009 that did not show the object.

Plaintiff did not oppose motion for summary judgment, which was granted.  Defendant, however, then moved for sanctions, including attorneys’ fees, under the certificate of good faith requirements of T.C.A. § 29-26-122.  The trial court granted such motion, but the Tennessee Court of Appeals reversed.  The court found that Plaintiff had complied with the statutory requirements.  Just because Plaintiff’s expert is wrong or mistaken is no basis for imposing sanctions on Plaintiff’s attorney.  Plaintiff’s attorney telling Plaintiff’s expert that a broken piece of surgical equipment had been found is irrelevant because the nursing home records were consistent with that statement.  The court found that Plaintiff’s attorney had no duty to send the expert a picture of the object—the picture was not in the records and nothing in the statute required the expert to review anything more than the records.  Expert could, but was not required to, have gone outside the medical record.  Fact that nurses, rather than physicians, made the observation in the medical records that the object was a surgical instrument is irrelevant.  Nurses make notations in medical records all the time and a reviewing expert is entitled to rely on contents of the medical record.

Civil Procedure

Covista Communications, Inc. v. Oorah, Inc., No. E2012-00720-COA-R3CV, 2012 WL 5504123 (Tenn. App. Nov. 14, 2012).  Plaintiff, a Tennessee corporation, provided telecommunications services to Defendant, a New Jersey corporation.  On motion to dismiss for lack of personal jurisdiction, Plaintiff argued that it performed all the services in Tennessee, the bills originated from Tennessee, customer service was in Tennessee, and payment was received in Tennessee.  The trial court found, and court of appeals agreed, that these contacts were insufficient.  The court found that Plaintiff’s voluntary decision to provide services from Tennessee was insufficient—there was no act by Defendant by which it “purposefully avail[ed] itself of the privilege of conducting activities within” our state.

Huggins v. McKee, No. E2012-00080, 2012 WL 5944591 (Tenn. App. Nov. 28, 2012).  Huggins and McKee were in business together, and got crossways over control. Huggins sued McKee for an alleged freeze-out.  Huggins then filed for personal bankruptcy in which a third party—Konvalinka—purchased Huggins’ lawsuit from the bankruptcy trustee.  At the time of the purchase in bankruptcy, McKee had not asserted a defense of setoff.

McKee then sought and obtained leave to amend his Answer (over Konvalinka’s objection) to add a setoff defense.  The defense was based on a claim that had been allowed in McKee’s bankruptcy (again over Konvalinika’s objection, with the Bankruptcy Court denying Konvalinka standing to object).  That bankruptcy claim exceeded the amount sought in state court.  The bankruptcy court had denied Konvalinka standing to object because it thought the trial court would not give res judicata effect to the amount of the claim determined by the bankruptcy court.  The trial court allowed the setoff defense and dismissed the lawsuit, since the amount of the setoff had already been determined by the bankruptcy court and exceeded the amount sought by Huggins.

In affirming, the Tennessee Court of Appeals discussed the doctrine of setoff as applied to a claim purchased in bankruptcy.  Although the claim was purchased from a bankruptcy trustee, the court found that the purchaser had simply stepped into the bankruptcy debtor/original plaintiff’s shoes.  Both it and the trial court distinguished cases where an asset is sold pursuant to a provision of the Bankruptcy Code (§ 363) by which the asset is sold “free and clear” of liens and claims.  In that circumstance, no setoff may exist.  But that provision was apparently not used here, so the lawsuit purchase did not alter the setoff defense. 

On the res judicata issue, the court of appeals disagreed with the bankruptcy court.  The bankruptcy court thought there would be no res judicata, and denied Konvalinka standing to object to the allowance of McKee’s claim.  The court of appeals disagreed, finding that the allowance of a claim against Huggins’ estate in bankruptcy was sufficient, because Konvalinka simply stands in Huggins’ shoes. 

 

Editor:  Mike Abelow, Sherrard & Roe (Nashville)
mabelow@sherrardroe.com