Tennessee Courts Will Enforce Anti-Assignment Provisions in Leases

Commercial and residential leases frequently have an anti-assignment provision, which is a provision that prohibits the tenant from assigning or transferring the tenancy to a third party. A property owner should have final say, the reasoning goes, as to who can possess the owner’s property, and the tenant shouldn’t be able to transfer those rights to a stranger without the landlord’s consent. (Except in Bankruptcy Court.)

A new opinion posted by the Tennessee Court of Appeals emphasizes how strongly courts in Tennessee will enforce these provisions.

In Simmons Bank v. Vastland Development Partnership, No. M2018-00347-COA-R3-CV (June 27, 2019), the tenant assign the lease to a stranger or a literal third party; instead, the original tenant (First State Bank) merged into and was acquired by Simmons Bank. “Simmons Bank was the surviving entity, and First State Bank no longer existed separately. See Tenn. Code Ann. § 48-21-108(a)(1).”

A few months after the merger, Simmons Bank attempted to exercise its option to renew the Lease, and the landlord objected, saying that lease expressly states that any renewal requires that “Tenant is the Tenant originally named herein.” Here, Simmons Bank was not the tenant “originally named herein.” First State Bank was named in the Lease.

The Chancery Court agreed with Simmons Bank, but the Court of Appeals reversed, citing  the maxim that contracts are interpreted strictly according to their terms.  As a result, reading the text in its clear and strict meaning, the appellate court wrote: “the parties agreed to restrict the right to renew the Lease to one entity, First State Bank, ‘the Tenant originally named’ in the Lease. As a consequence, Simmons Bank does not have the right to exercise the renewal option.”

This is an interesting case because, as Simmons Bank argued, a merger of two entities really doesn’t introduce a new “stranger” into the tenancy, but, instead, pursuant to pursuant to Tenn. Code Ann. § 48-21-108(a)(2), a merger transfers all rights of the merged entity into the new one.

My guess is that the business, the employees, the phone numbers–most everything except the sign out front–remained the same. My concern is that the focus on the “name” of the entity creates an opportunity for a landlord to create a “technical” default.

To throw out an absurd example, what if a woman gets married and takes her husband’s name? Would she no longer be the “Tenant originally named herein”?

Under this new opinion, she wouldn’t.

Nevertheless, they don’t ask me to write the judicial opinions. But, they do pay me to help clients draft and negotiate lease provisions. An easy fix to a situation like this would be a provision that allowed for a new named tenant in the event of a merger or sale of all tenant’s assets.

 

Courts will enforce deeds on their express text and will not reform deeds lightly

A funny thing sometimes happens when I’m really close to taking a judgment against somebody.

At some point after the initial demand letter goes out and usually before I take my judgment, they start transferring all their assets out of their name.

We’ve talked about this before. Tennessee has a 4 year statute of limitations for fraudulent conveyances, and so a creditor has the ability to “undo” these “eve of judgment” transactions.

But, nevertheless, when finances get bad and creditors are knocking at the door, debtors still transfer property out of their names.

The Tennessee Court of Appeals recently looked at a matter like this in Scott Trent, et. al. v. Mountain Commerce Bank, et. al., E201801874COAR3CV, 2019 WL 2575010 (Tenn. App. June 24, 2019).

In that case, two individuals owned a piece of real property and, in 2010, one of them quitclaimed all interest over to a third-party limited partnership. In 2012, creditors started taking judgments against the individuals and, in 2013, a judgment lien was recorded.

After another sale to some innocent third party buyers, the issue came to light: When only one of the individuals signed the 2010 quitclaim, was all the ownership interest transferred, i.e. did the 2013 judgment lien attach to that remaining interest?

The non-creditor parties argued that the clear intent of the 2010 quitclaim was to transfer all interests to the new owner. They even recorded a Deed of Correction to fix the omission of the other individual’s signature.

The argument was based on the concept of reformation of deeds.

“Reformation is an equitable doctrine by which courts may correct a
mistake in a writing ‘so that it fully and accurately reflects the agreement of the parties.’” Lane v. Spriggs, 71 S.W.3d 286, 289 (Tenn. Ct. App. 2001).

“A court of chancery in Tennessee has the power to reform and correct errors in deeds produced by fraud or mistake. To be the subject of reformation, a mistake in a deed must have been mutual or there must have been a unilateral mistake coupled with fraud by the other party, such that the deed does not embody the actual intention of the parties.” Wallace v. Chase, No. W1999-01987-COA-R3-CV, 2001 WL 394872, at *3 (Tenn. Ct. App. Apr. 17, 2001) (internal citations omitted).

“Still, we have also held that reformation on the basis of mistake is only appropriate where the intent of both parties is clear and is the same.” Hunt v. Twisdale, No. M2006-01870-COA-R3-CV, 2007 WL 2827051, at *8 (Tenn. Ct. App. Sept. 28, 2007). “And, mistake must be shown by “clear, cogent, convincing evidence.” Lane, 71 S.W.3d 289-90 (quoting Dixon v. Manier, 545 S.W.2d 948, 950 (Tenn. Ct. App. 1976)); see also Sikora v. Vanderploeg, 212 S.W.3d 277, 287 (Tenn. Ct. App. 2006) (“Because the law strongly favors the validity of written instruments, a person seeking to reform a written contract must do more than prove a mistake by a preponderance of the evidence. Instead, the evidence of mistake must be clear and convincing.”). Sipes v. Sipes, No. W2015-01329-COA-R3-CV, 2017 WL 417222, at *3-4 (Tenn. Ct. App. Jan. 31, 2017).

The present opinion turned on the fact that the second owner didn’t sign the 2010 quitclaim. ” Tennessee law allows reformation of a deed when the instrument does not “reflect the true intent of the parties.” Holiday Hosp. Franchising, Inc. v. States Res., Inc., 232 S.W.3d 41, 51 (Tenn. Ct. App. 2006). Because only one owner signed the 2010 quitclaim, the text of the deed was clear, and a party not listed or referenced on the deed can’t assert a mistake or be added.

I’d guess that the parties absolutely intended that 100% ownership was to transfer in that 2010 quitclaim, and it’s not as easy as a decision as the Court makes it seem to be. In the end, the Court may have balanced the equities here.

 

 

 

Tennessee Courts are Very Generous in Computing Six year Statute of Limitations

I sue borrowers on unpaid debts all the time. I generally calculate the six year statute of limitations in Tennessee on unpaid debts by working backwards from the date of default.

In doing that, I generally look for the first date of default, add 6 years to that date, and there’s your deadline to file the lawsuit.

A recent opinion from the Tennessee Court of Appeals suggests that there’s a more creditor-friendly way to do this.

The case is Deutsche Bank National Trust Company v. Stacy Lee, et. al., M201801479COAR3CV, 2019 WL 2482423 (Tenn. App. June 13, 2019).

In that case, the debtors had not made a payment on the debt for eight and a half years. The creditor, nevertheless, filed a collections lawsuit, but the creditor only sued for those installment payments that came due in the 6 years prior to the lawsuit (which included a final, fully matured balloon payment). Needless to say, this lawsuit was, essentially, for the entire amount owed (minus, of course, about 12 months of installment/interest payments).

The Court found that each installment missed was an independent cause of action, prompting a new, later statute of limitations deadline for each installment with each passing month. Specifically, the Court wrote:

“As it pertains to an installment note, the law is well settled that the cause of action accrues on each installment when it becomes due, and that the statutory period begins to run from that moment on that installment.” Consumer Credit Union v. Hite, 801 S.W.2d 822, 824 (Tenn. Ct. App. 1990). Here, Deutsche Bank sought missed monthly payments going back six years from the date of the filing of the complaint, which was January 20, 2017. Because a cause of action accrues with respect to each missed installment payment in an installment note, monthly payments that became due and owing since January 20, 2011 are not barred by the statute of limitations.

This is somewhat counter-intuitive, since you’d think a six year old, long defaulted debt would have expired, well, six years from the default. But, it’s not the case. In fact, the only debts that would have expired are the specific installments that came due beyond that six year period.

I’m as pro-creditor as anybody, but this seems like an unfair outcome.

A “conscience shocking, inadequate price” will not void an otherwise valid tennessee foreclosure

As long time readers know, Tennessee has a nearly ten year old foreclosure deficiency statute that closely scrutinizes real property foreclosure sale prices. The law is found at Tenn. Code Ann. §  35-5-118, and I argued the first opinion discussing the statute.

Long story short, a foreclosing creditor may be prohibited from pursuing its deficiency balance where the foreclosed property sells “for an amount materially less than the fair market value of property at the time of the foreclosure sale.”

Well, what about situations where there’s no deficiency balance owed? Does the foreclosure sale price have any impact on the validity of the sale?

The quick answer is “no,” says the Tennessee Court of Appeals in McKenzie v. Brandywine Homeowners’ Association (W2018-01859-COA-R3-CV, Tenn. Ct. Apps., June 12, 2019).

In that case, the HOA foreclosed on an otherwise lien-free piece of real property pursuant to its $4,445.90 HOA lien. Presumably, with no other liens and no other bidders, the HOA had no reason to outbid itself, and the HOA purchased the property for $4,445.90. After the owner challenged the validity of the sale (due to the low price), the trial court wrote:

The foreclosure sale price shocks the Court’s conscience; however, pursuant to Brooks v. Rivertown on the Island Homeowner Association, Inc., No. W2011-00326-COA-R3- CV, 2011 WL 6034781 (Tenn. Ct. App. Dec. 6, 2011), applying Holt v. Citizens Central Bank, 688 S.W.2d 414 (Tenn. 1984), a conscience-shocking foreclosure sale price standing alone, absent some irregularity in the foreclosure sale, is not sufficient grounds for setting aside a lawful foreclosure sale.

In the end, the Court of Appeals followed this reasoning from Holt: “If a foreclosure sale is legally held, conducted and consummated, there must be some evidence of irregularity, misconduct, fraud, or unfairness on the part of the trustee or the mortgagee that caused or contributed to an inadequate price, for a court of equity to set aside the sale. ”

The take-away is this: The “materially less than fair market” analysis under Tenn. Code Ann. §  35-5-118 only applies to attacks on deficiency judgments, not the validity of underlying sales. If the sale is valid in every other way (notice, timing, the publication, etc.), there is no express or implied requirement under the law that the foreclosure sale generate any minimum price.

This makes sense. If the HOA were required to artificially bid up the property (when no other party, including the owner, appeared), then the HOA would be simply paying that equity over to the owner. If the foreclosure is otherwise effective, the Tennessee statutes places the burden of protecting that equity on the property owner. There are a number of places under the Tennessee statutory schemes where actual protections like this are imposed, such as sheriff’s sales (which must generate 50% of fair market value). There are no such protections in the foreclosure statutes.

As this opinion acknowledges this: “If the rule is to be altered, it must be done by the High Court, not this Court.”

Divorce Cases are Great Places to Find Evidence Analysis

On March 7, 2019, I had two oral arguments at the Tennessee Court of Appeals. When these were first scheduled, I was really excited to tell everybody what an important litigator I am, having two monumentally important legal issues on appellate review on the same day.

Then, on or about March 1, I realized I was in for an absolutely awful week. (It was.)

Nevertheless, I got through it, was proud of the presentations, and was also very glad to be done with them. Now, I’m just waiting on the opinions, which will be issued any day now.

Part of this process is watching the appellate opinions that are issued daily by the Tennessee Court of Appeals on the Tennessee State Courts website, by clicking the “Opinions” tab.

I check every morning when I get to the office, and I check for opinions every afternoon before I leave. I’m still waiting.

By doing this, I’m also reading many of the latest opinions. Because of my practice area, I’m definitely reading any big case on commercial litigation, foreclosures, and similar creditor’s topics. And, if it’s a slow day, I’ll read the divorce opinions too.

I do this, mainly, because the facts are so interesting. And, before you accuse me of schadenfreude, I’ll say this: divorce cases have some really useful analysis of the laws of evidence.

Take the Pearson v. Pearson opinion from yesterday (W2018-01188-COA-R3-CV, Tenn. Ct. App. June 6, 2019), where the Court of Appeals does a deep dive on hearsay and the business records exception. It’s a great refresher. Here are some citable quotes:

What is the relevant definition of “hearsay”?

“Hearsay” is defined as “a statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted.” Tenn. R. Evid. 801; Toms v. Toms, 98 S.W.3d 140, 144 (Tenn. 2003). To be admissible, evidence must conform to the Tennessee Rules of Evidence. However, if a hearsay statement fits under one of the exceptions, the trial court may not use the hearsay rule to suppress the statement. Kendrick v. State, 454 S.W.3d 450, 479 (Tenn. 2015). The trial court has wide discretion in admitting or excluding evidence and will be reversed on appeal only upon on showing of abuse of discretion. See Otis v. Cambridge Mut. Fire Ins. Co., 850 S.W.2d 439, 442 (Tenn.1992).

What is the Business Records exception to “hearsay”?

Although generally inadmissible, hearsay is admissible as provided by the Tennessee Rules of Evidence or otherwise by law. Tenn. R. Evid. 802; see also Holder v. Westgate Resorts Ltd., 356 S.W.3d 373, 378 (Tenn. 2011). Tennessee Rule of Evidence 803(6) is the “exception” to the hearsay rule commonly known as the business records exception.

There are five criteria to establish this exception (citing Alexander v. Inman, 903 S.W. 2d 686, 700 (Tenn. Ct. App. 1995)):

  • The document must be made at or near the time of the event recorded;
  • The person providing the information in the document must have firsthand knowledge of the recorded events or facts;
  • The person providing the information in the document must be under a business duty to record or transmit the information;
  • The business involved must have a regular practice of making such documents; and
  • The manner in which the information was provided or the document was prepared must not indicate that the document lacks trustworthiness.

This analysis was provided in the context of a husband trying to prove that his pay was going to be cut (and, thus, his future alimony obligation should be lower), but it’s equally relevant to introducing testimony about payment histories in a bank lawsuit.

And, yes, many of these opinions are not going to be published and may not be cited in your future briefs. But, on the other hand, these are very up-to-date citations that the judicial law clerks and appellate judges are relying on as “The Law.”

So, even when my very important and monumental cases are decided, I’ll keep the Tennessee Courts website bookmarked.