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....

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.

Misrepresentation of Licensed Contractor Status in Tennessee Can Cause Significant Liability

Tennessee law is clear that any person, firm or corporation who misrepresents that they are a licensed contractor is subject to significant penalties.  It is also against Tennessee law to act in the capacity of a “contractor” in Tennessee when one is not properly licensed.  Specifically, T.C.A. § 62-6-136 discusses this issue in subsection (A) as follows:

(a) It is unlawful for any person, firm or corporation to represent itself as a licensed contractor or to act in the capacity of a “contractor” as defined in §§ 62-6-102, or 62-37-103, and related rules and regulations of this state, or any similar statutes, rules and regulations of another state, while not licensed, unless such person, firm or corporation has been duly licensed under § 62-6-103 or § 62-37-104.

A licensed contractor is specifically defined in this statute.  This is a rather lengthy statute, but the key part is the provision that licensure is required for projects beyond $25,000.00.  The complete definition is found in T.C.A. § 62-6-102 which defines a contractor as follows:

(4)(A)(i) “Contractor” means any person or entity that undertakes to, attempts to or submits a price or bid or offers to construct, supervise, superintend, oversee, schedule, direct or in any manner assume charge of the construction, alteration, repair, improvement, movement, demolition, putting up, tearing down or furnishing labor to install material or equipment for any building, highway, road, railroad, sewer, grading, excavation, pipeline, public utility structure, project development, housing, housing development, improvement or any other construction undertaking for which the total cost is twenty-five thousand dollars ($25,000) or more; provided, however, with respect to a licensed masonry contractor, such term means and includes the masonry portion of the construction project, the total cost of which exceeds one hundred thousand dollars ($100,000), materials and labor;

(ii) “Contractor” includes, but is not limited to, a prime contractor, electrical contractor, electrical subcontractor, mechanical contractor, mechanical subcontractor, plumbing contractor and plumbing subcontractor, masonry contractor, and roofing subcontractor where the total cost of the roofing portion of the construction project is twenty-five thousand dollars ($25,000) or more;

(iii...

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...

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...

Is President or Managing Officer of Corporation Entitled to Lien Under T.C.A. § 66-13-101 as an “Employee” for Money Earned for Work Performed?

The “employee lien” statute is found in T.C.A. § 66-13-101 and it provides for a statutory lien against the corporation’s property for sums due to employees for their labor and services performed for the corporation.  The question therefore is whether this statute also applies to benefit a corporation’s president and managing officers.  The Tennessee Court of Appeals discussed this issue in Paul J. Frankenberg, III v. River City Resort, Inc., No. E2012-01106-COA-R3-CV, 2013 WL 3877617 (Tenn. Ct. App. 2013). 

This statue basically provides employees with a super lien against a corporation and the corporation’s property for labor and services performed on behalf of the corporation.  The only other liens that have priority above this lien are vendor’s liens and a lien of a mortgage or deed of trust to secure purchase money.  Specifically, T.C.A. § 66-13-101 provides as follows:

All employees and laborers of any corporation, or firm, carrying on any corporate or partnership business shall have a lien upon the corporate or firm property of every character and description, for any sums due them for labor and service performed for the corporation or firm, and such lien shall prevail over all other liens, except the vendor's lien or the lien of a mortgage, or deed of trust to secure purchase money.

This Frankenberg case involved a situation where the president/chief operating officer of a corporation was owed a significant sum of money by the corporation.  As a result, he filed a “notice of lien” with the Register of Deeds office asserting a statutory lien against the corporation’s property under T.C.A. § 66-13-101.  The question before the Tennessee Court of Appeals was whether this lien was appropriate in this circumstance because Mr. Frankenberg was the president and chief operating officer of the corporation. 

Tennessee Legislature Adds New Cause of Action to Fight Individuals who Illegitimately Threaten Patent Litigation

Tennessee recently established new statutory protections for individuals and companies that are illegitimately threatened with patent infringement claims.  This has been a growing problem across America including in Tennessee.  The 2014 Tennessee Legislature passed Public Chapter No. 879 which created a new series of statutes found in T.C.A. § 29-40-101 – § 29-40-104 (effective on May 18, 2014) in order to try to combat this problem.  The stated purpose of these new statutes is to prevent small and medium sized companies from alleged patent infringement claims from third parties that are unsubstantiated and meritless.  Patent litigation can be extremely expensive and the Tennessee Legislature was concerned about the abuse of patent litigation in Tennessee.  As a result, this new statute provides a new cause of action with enhanced damages to use against those who improperly threaten unsubstantiated patent litigation.  This cause of action allows for the recovery of attorney’s fees, costs, actual damages and punitive damages in an amount equal to three times the actual damages. 

New Key Statutory Language (T.C.A. § 29-40-102(a)):

The main provision in the new statute is found in T.C.A. § 29-40-102(a).  This part of the statute identifies the key acts that violate the statute.  It is hard to find this statutory language online currently so I will post this entire section for your convenience (although you can see it officially in the link to Public Chapter No. 879).  This portion of the statute provides as follows:

(a) It is a violation of this chapter for a person, in connection with the assertion of a United States patent, to send, or cause any person to send, any written or electronic communication that states that the intended recipient or any...

Tennessee Passes “Employee Online Privacy Act of 2014” Preventing Employers from Obtaining Access to Personal Internet Accounts Like Facebook

The Tennessee Legislature recently passed the Employee Online Privacy Act of 2014.  This is found in 2014 Public Chapter 826.  This new statute will be found at T.C.A. § 50-1-1001 et seq. and takes effect on January 1, 2015.  This new statute basically prevents an employer from taking any adverse employment action against an employee for failure to provide access to a “personal internet account” (which basically includes any type of internet account).  “Personal internet account” is defined as follows:

(5) "Personal Internet account":

(A) Means an online account that is used by an employee or applicant exclusively for personal communications unrelated to any business purpose of the employer; and includes any electronic medium or service where users may create, share or view content, including, emails, messages, instant messages, text messages, blogs, podcasts, photographs, videos or user-created profiles; and

(B) Does not include an account created, maintained, used, or accessed by an employee or applicant for business-related communications or for a business purpose of the employer.

Upon review of the definition of personal internet account would certainly include Email, Facebook and Twitter accounts.  The most common of the “personal internet account’s” that falls within this statute is likely Facebook so it would certainly apply to anyone who has a Facebook account with private settings (yet another reason to make sure that your Facebook account is set to “private” and not “public”)  Under this statute Tennessee employers are specifically prevented from the following:

When is a National Organization Responsible for the Sexual Abuse of a Minor that Occurs at a Local Chapter in Tennessee?

Analysis:  A very interesting Tennessee Court of Appeals decision was recently decided on an issue that often comes up in sexual abuse cases.  The question is whether a national organization or entity can be held responsible for actions that occurred by the local organization or their members or volunteers.  The Tennessee Court of Appeals decision of Ms. B., individually and on behalf of minor child, John Doe, “N” v. Boys and Girls Club of Middle Tennessee, et al, No. M-2013-00812-COA-R3-CV, 2014 WL 890892 (Tenn. Ct. App. 2014) involved a lawsuit that was filed for the alleged sexual abuse of a minor child by a volunteer associated with the local Boys and Girls Club of Middle Tennessee.  The national entity, Boys and Girls Club of America, was also sued in this case.  The trial court granted the national entity’s motion for summary judgment and that ruling was appealed to the Tennessee Court of Appeals. 

The question before the Tennessee Court of Appeals was whether the national Boys and Girls Club of America had a legal responsibility to the minor child in this context.  The court noted that it is well settled in Tennessee that “there is no duty to protect others against risks of harm by third parties.”  Ms. B. at 4.  However, the court went on to state that, “an exception arises, however, when a special relationship exists between the defendant and either the person at risk or the actor who is the source of the risk or danger.”  Ms. B. at 4.  Further, “[i]f an individual stands in a special relationship to another individual who is the source of the danger or who is foreseeably at risk from the danger, then the individual assumes an affirmative duty to exercise reasonable care to either control the danger or protect the vulnerable.”  Ms. B. at 4. 

The Tennessee Court of Appeals in this case framed the specific issue in dispute as follows:

The question of whether a duty should be imposed on BBBSA to take reasonable measures to prevent sexual abuse of children participating in programs offered b...

Workers’ Compensation – In Tennessee when is a Business Considered a “Statutory Employer” and Entitled to Immunity from a Tort Claim Under the Exclusive Remedy Doctrine?

Analysis:  The Tennessee Court of Appeals recently decided an interesting case that discussed the exclusive remedy provision under Tennessee law in detail.  The Fayette Janitorial Services and Technology Ins. Co. v. Kellogg USA, Inc., No. W2011-01759-COA-R3-CV, 2013 WL 428647 (Tenn.Ct.App. 2013) decision specifically considered whether the defendant, Kellogg USA, Inc., was a statutory employer within the meaning of T.C.A. § 50-6-113 and therefore whether it was immune from the tort claim filed on behalf of the injured worker to recoup workers compensation payments. 

The worker worked for an entity hired by Kellogg USA, Inc. to perform cleaning and sanitation work at the Kellogg manufacturing plant in Memphis, Tennessee.  Kellogg operates on a 28 day cleaning cycle and shuts down the plant for approximately 16 to 24 hours every 28 days.  During this shut down, the cleaning and maintenance cycle is completed by Fayette Janitorial Services (the direct employer of the injured employee).  On September 27, 2008, one of Fayette’s employees was severally burned by chemicals while cleaning one of the corn cookers at the Kellogg plant therefore resulting in a significant payment of workers’ compensation benefits.  As a result of this payment the direct employer and insurance company who paid workers’ compensation benefits sued Kellogg USA, Inc. asserting a tort claim for negligence and other causes of action for the injuries to the worker. 

Kellogg filed a motion for summary judgment asserting it was a “statutory employer” of the employee pursuant to T.C.A. § 50-6-113 and therefore it was immune from suit due to the exclusive remedy doctrine found in Tennessee Workers Compensation Law.  The trial court granted Kellogg’s motion for summary judgment because it found Kellogg qualified as a statutory employer.

On appeal, the Tennessee Court of Appeals agreed with the trial court and found Kellogg was a statutory employer under T.C.A. § 50-6...