Tennessee Supreme Court Once Again Addresses Personal Responsibility/Guaranty for Commercial Leases

The Tennessee Supreme Court has one again addressed a key issue that comes up often in commercial leases.  The question in this case, decided September 2, 2016, was whether an individual who signed the lease (in a peculiar way) was personally responsible for the terms of the commercial lease.  This case is MLG Enterprises, LLC v. Richard L. Johnson, 2016 WL 4582174 (Tenn. 2016).  In this case, the individual Defendant, Richard Johnson, signed a lease on behalf of the tenant as well as individually.  The key issue in this case was where Mr. Johnson signed the lease individually in such a way that made him personally obligated as a guarantor for the lease terms.  The Tennessee Supreme Court identified the key signature line as follows:

The third signature space, located on the right side of the Lease and below the second signature space, provides a signature line beneath which appears the typed text “Richard L. Johnson.” On this line is the handwritten signature “Richard L. Johnson” followed by the handwritten words “for Mobile Master Mfg. LLC.” To the left of this signature appears the typed text “EXECUTED BY Richard L. Johnson, THIS ___ DAY OF OCTOBER, 2007.”

As you can see, Mr. Johnson signed the lease individually but then added the words “for Mobile Master Mfg. LLC”.  The implication was that he was not signing on his own behalf but instead he was signing for the entity.  The Tennessee Supreme Court found that this modification of the signature was ineffective because it was contrary to the clear language in the lease.

The Court found that Mr. Johnson was liable under the lease because of the clear intent of the lease to hold him personally liable.  That is due to the fact that the preceding paragraph prior to the signatures contained the following personal guaranty language:

37. PERSONAL LIABILITY:

In consideration of Landlord entering into this Lease with Tenant, Richard L. Johnson hereby agrees that he shall be personally liable for all of Tenant's obligations under this Lease and executes this Lease for this purpose.

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...

Mutual Mistake Doctrine in Tennessee Not Applicable when Contract Allocates Risk of Mistake to Party Seeking Rescission of Contract

A recent Tennessee Court of Appeals decision, Gibbs v. Gilleland, 2016 WL 792418 (Tenn. Ct. App. 2016) dealt with a situation where both the buyer and seller were not aware that the lot sold in the real estate transaction was not appropriate for the construction of a house.  The Tennessee Court of Appeals found that a mutual mistake existed because both parties to the contract were unaware that the fundamental reason for the purchase, to build a house, was faulty.  A “mistake” in the contract exists under Tennessee law when “a person acting on erroneous conviction of law or fact, executes an instrument he or she would not have executed but for the erroneous conviction” citing Pugh’s Lawn Landscape Co. Inc. v. Jaycon, Dev. Corp., 320 S.W.3d 252, 261 (Tenn. 2010).  The Court noted that in order for relief to be granted on the basis of a mutual mistake, the mistake must have been: (1) mutual or fraudulent; (2) material to the transaction; (3) not due to the complainant’s negligence; and (4) the complainant must show injury.” citing Robinson v. Brooks, 577 S.W.2d 207, 209 (Tenn. Ct. App. 1978). 

In this Gibbs case at issue, the court found there was a mutual mistake that met the requirements for relief to be granted under Tennessee law.  However, the key issue in this case is whether the mutual mistake is enforceable when the contract actually provides an allocation of risk for mistake.  This is basically a provision in the contract that shifts the risk to one party for any mistakes.  The Court found that “rescission of a contract on the basis of mutual mistake is not available when the contract at issue allocates that risk of mistakes the party seeking rescission.” citing Atkins v. Kirkpatrick, 823 S.W.2d 547, 553 (Tenn. Ct. App. 1991).  Within the contract in this case under subsection 7 it provided that “Closing of this sale constitutes acceptance of Property in its condition as of the time of closing, unless otherwise noted in writing.”  The Court of Appeals found that this specific language “unambiguously shifts the risk of fault concerning the condition of the property to Buyers at closing.” Gibbs at 9.  As a result, the Court found that the buyers were not entitled to rescind the contract under the mutual mistake theory. 

Tennessee Court of Appeals Confirms that Forum Selection Clauses are Enforceable in Tennessee Contracts.

The Tennessee Court of Appeals recently discussed forum selection clauses found in contracts.  These are clauses that select the jurisdiction and court that will handle any disputes involving the contract.  The case of The Cohn Law Firm v. YP Southeast Advertising & Publishing, LLC, 2015 WL 3883242 (Tenn. Ct. App. 2015) involved a dispute between a plaintiff attorney law firm and an advertising company.  The plaintiff’s attorney sued the advertising company in Shelby County Chancery Court over the dispute.  The defendant advertising company filed a Motion to Dismiss alleging that this jurisdiction was inappropriate due to a forum selection clause in the contract.  The contract between the plaintiff’s attorney law firm and the defendant provided that any lawsuit pertaining to the agreement should only be filed in the United States District Court for the Northern District of Georgia or the Superior Court of Dekalb County, Georgia. (The Cohn Law Firm at 2).  This contract was signed by the plaintiff attorney.

The Tennessee Court of Appeals found that generally forum selection clauses are “enforceable and binding on the parties entering the contract.”  (The Cohn Law Firm at 4).  Further, “a forum selection clause will be upheld if it is fair and reasonable in light of all the circumstances surrounding its origin and application.  A party seeking to invalidate a forum selection clause must prove that the clause resulted from misrepresentation, duress, abuse of economic power, or other unconscionable means.”  (The Cohn Law Firm at 4).  Tennessee law is also clear that “the party challenging the enforcement of the forum selection clause should bear a heavy burden of proof.”  (The Cohn Law Firm at 4). 

The forum selection clause that was present in this case was as follows:

18. Miscellaneous; Exclusive Venue. This Agreement and all claims and disputes arising under or relating to this Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without giving effect to its conflicts of laws principles. Any action or proceeding arising under or relating to this Agreement shall be filed only in the United States District Court for the Northern District of Georgia or the Superior Court of DeKalb County, Georgia. Advertiser hereby consents and submits to the exclusive jurisdiction and venue of those courts and waives any objection based on the convenience of these exclusive venues.... If any provision...

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...

Is a Contract Enforceable When Person Who Does Not Understand English Signs a Written Contract in Tennessee?

The recent Tennessee Court of Appeals’ decision of Advantage Windows, Inc. v. Oscar Zacarias, No. E2014-00122-COA-R3-CV, 2014 WL 4403106 (Tenn. Ct. App. 2014) discussed the validity of a signed contract when the individual who signed the contract does not understand English.  In the Zacarias case, an agreement was signed between a homeowner and the plaintiff construction company to perform certain work on the residence.  The homeowner never paid for the work.  Therefore, the construction company sued the homeowner for breach of contract.  The homeowner filed a counter-claim asserting he only had a limited understanding of English and that the alleged contract was actually explained to him as an “estimate”.  The Trial Court found that because the preponderance of “evidence established that Mr. Zacarias did not know or understand the English language, [t]here was no meeting of the minds and no way for Mr. Zacarias to form a binding contract with Advantage Windows.”  Advantage Windows at 2.  This case was appealed to the Tennessee Court of Appeals.

The Tennessee Court of Appeals found that in order to have a binding contract, the “contract must result from a meeting of the minds of the parties in mutual assent to the terms, must be based upon a sufficient consideration, free from fraud or undue influence, not against public policy and sufficiently definite to be enforced.”  Advantage Windows at 3.  The Court then noted that T.C.A. § 47-50-112(a) provides a statutory presumption that a signed written agreement contains the intentions of the parties and that the individual who signed the agreement agreed to be bound by those terms.  T.C.A. § 47-50-112(a) provides in pertinent part as follows: 

(a) All contracts, including, but not limited to, notes, security agreements, deeds of trust, and installment sales contracts, in writing and...

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: