Earlier this week, a lawsuit was filed in Davidson County Chancery Court by a landlord to collect $130,697.44 in unpaid rent from a Romano’s Macaroni Grill located in Rutherford County. There was no allegation that any of the facts of the case occurred in Davidson County or that the parties contractually agreed that the venue for any disputes would be in Nashville.
Should this lawsuit be dismissed for improper venue, where the business, all operations, and the leased premises were all in Rutherford County?
Not necessarily. Here’s why: All of the Defendants use corporate registered agents whose offices are based in Davidson County, and that subjects them to venue in Davidson County.
When analyzing venue for causes of action under Tenn. Code Ann. § 20-4-101(a), a defendant can be “found” in “any county wherein it has an office for the furtherance of its business activities.”
Tennessee courts have said that a registered agent’s address is an office for the furtherance of the defendant’s business activities, and it doesn’t matter that the defendant doesn’t actually operate a business out of that address or doesn’t otherwise have any other connection to that county. See Fed. Exp. v. The Am. Bicycle Grp., LLC, No. E200701483COAR9CV, 2008 WL 565687, at *3 (Tenn. Ct. App. Mar. 4, 2008).
Maybe this isn’t a big deal–most of these corporate agents are located in Davidson County, and Nashville uniformly has very strong courts and judges.
But, Tennessee is a very, very long state. It’s definitely something to keep in mind when you’re a company in Greenville or Memphis, and you’re selecting a registered agent.
But, despite being in payment default, The Palm went on the offensive and premptively filed the first lawsuit, arguing that the landlord’s (i.e. the Nashville Hilton) own shut-down in response to COVID was a breach that excused The Palm’s payment of its rent.
At the time, I marveled at the audacity of the tenant in making the first move. Today, however, I’ve discovered that this dispute has gone absolutely bonkers, and it’s has been (or is being) litigated in nearly every trial court in Davidson County.
First, there was the Chancery Court lawsuit filed by The Palm on July 9, 2020.
Then, after the Hilton declared The Palm to be in breach on July 13, 2020, the Hilton filed a Davidson County General Sessions evictions lawsuit on July 14, 2020.
In response, The Palm filed a Notice of Removal of the detainer action to the District Court for the Middle District of Tennessee on August 7, 2020. This prompted the Hilton to file a notice of voluntary dismissal on August 10, 2020.
Then, the Hilton filed a second detainer action in General Sessions Court on August 13, 2020. On August 26, 2020, The Palm filed an Application for Removal of the matter to Davidson County Circuit Court, which was granted.
So, what courts did they miss? Criminal Court? Bankruptcy? Environmental Court?
This dispute involves two mega-law firms, so it’s fun to see big-time lawyers fighting over eviction issues in small claims court.
Still, though, I have to wonder if the Hilton could have opposed The Palm’s request to remove the matter to Circuit Court, which was–possibly–an attempt to get the matter moved to the slower-paced Circuit Court, but without having to post the detainer possessory bond pursuant to Tenn. Code Ann. § 29-18-130(b)(2), which requires a tenant that loses in sessions court to post one year’s worth of rent in order to remain in possession of the property.
Sessions Judges don’t like to waste valuable docket time on complex commercial matters, so they are generally happy to allow complicated, discovery-heavy trials to be removed to Circuit Court pursuant to Tenn. Code Ann. § 16-15-732.
But, at the same time, it’s a move that Sessions judges see all the time, and the Judges will sometimes ask tenant’s counsel “Is the rent paid current?” and, depending on the answer, grant a judgment for possession, and tell the tenant’s counsel to appeal and sort it out in Circuit Court.
I don’t want to ruin the developing story, so I will remain quiet about the Landlord’s options in Circuit Court to force payment of rent. But they have a few.
Whatever direction this goes, in the age of COVID, this qualifies as entertainment (for law nerds).
In late July, I noticed the television ads by the Nashville Catholic Schools during the morning news, confidently advertising that their schools would be open for in-person classes the 2020-21 school year.
The first few times, I wondered if it was a coincidence that the ads were being rolled out while public schools were struggling with the decision of whether to re-open for in-person classes during the COVID pandemic.
Then, the weekend after public schools started their online-only reopening, the private schools’ messaging got a lot less subtle:
Gone were the images of sweet kids in their school uniforms.
These new ads featured a frustrated mom, dealing with a pesky kid with a tablet in her little hands, bothering the mom for help with school work while the mom tried to work from home. But, as the ad showed, once the mom signed her kid up and sent her off to in-person school at the private school, however, all was good.
At the end of the day, a private school is a business, right? This is a marketing technique called “FUD,” which means “fear, uncertainty and doubt” and is evoked intentionally in order to put a competitor at a disadvantage. In short, the private schools knew that public school parents were terrified about the start of the new school year, had no idea what to do, and the ads were deployed the weekend after Metro re-opened to provide some answers.
The campaign has worked in my neighborhood. My local school’s Parent-Teacher Organization has been decimated by defections. Seriously, I might be the new PTO president by default and not even realize it. We’ve had so many kids and their parents opt out of our (awesome) school.
As a collections lawyer, I have to wonder if parents, who were enticed by the promise of in-person learning, will be unhappy with their decision (and the exorbitant monthly tuition costs) if in-person classes are suspended. Will this unhappiness result in defaults in tuition payments?
I was reminded of this [difficulty] when I read this [then recent] Tennessean article about lawsuits filed by Nashville private schools to collect on unpaid tuition. I was doubly reminded about the “hassle” part when I scanned the comments, with the schools’ dirty laundry getting aired for the world to see.
The school is perfectly within its rights to seek payment of past due amounts, but collections can bring out the worst in people, especially in this economy.
In 2009 and 2010, I issued a number of demand letters to parents for unpaid tuition, and, wowza, the responses I got were not pretty. The parents complained about everything imaginable. I sent probably 50 letters, but I talked the school out of filing any lawsuits. Life was too short to have to have to deal with those sorts of fights in small claims court.
So, if the promises of in-person schooling end up not coming true during the global pandemic, will parents pull their kids out? Maybe. Does the standard annual contract have a provision that keeps the parents obligated to repay the full tuition? Probably.
Should the school sue? See my 2011 post about that.
This will be a developing issue in 2021. This is the first time that many of those parents are incurring the $2,000 to $4,000 a month fees, and they may not have anticipated the huge budget impact it will have. If the pandemic takes a harder turn–whether it results in online only classes or even a parent’s job loss–will those parents be willing (or able) to stay enrolled and current on tuition?
That’s because he lost his rights and ownership to the film to a business partner, in an unpaid debt lawsuit. Poe says that he couldn’t afford a lawyer and, in the end, “skipped the court date.” At trial, the Judge found the debt to be about $6,500 (but with $43,000 in legal fees).
During the collections process, the judgment creditor was able to sell the copyright (to itself) via an execution sale, including ownership of Poe’s four films (which sold for $10 each).
Per the New York Times, Debbie Harry commented “What a farce that anyone else should claim his inspirational film.”
Here, there are a number of take-aways.
First, what the judgment creditor did here was valid and allowed under collection law. A judgment creditor can seize all sorts of assets of the judgment debtor, including these intellectual property rights (which are treated as personal property under many states’ laws, including Tennessee).
Plus, the ultimate sales price was only a small fraction of the value of the property being sold, most likely because no bidders appeared at any asset sale–and the creditor got ownership for its very low opening bid.
Second, there were so many things Poe could have done to protect his assets. File a list of exemptions. Sell the IP rights himself. Go to court on his court date (which I called one of the worst mistakes a debtor can make).
It’s a sad story, but it happens every day for debtors all across the country.
I represent a lot of landlords all over Tennessee. I also represent a lot of Tennessee small businesses who are, invariably, tenants.
Since COVID-19 hit, I’ve probably read 60 different leases. Sometimes, I’m looking at force majeure provisions or for ambiguities that would provide an argument against payment of rent. Other times, I am reading those same provisions (different leases) hoping for the opposite outcome.
Over the last 4 months, when scheduling my client calls, I’ve joked that “I do all my calls with my tenants in the morning, and I do all the landlord calls in the afternoon. I need to remember which argument to make.”
Even by lawyer standards, it’s rare to see such a equal distribution of misery on both sides of an issue.
[T]here’s no blueprint for how small-business owners should deal with their landlords during an economy-toppling pandemic.
Here’s one option: ignore your landlord and plan on resuming rent payments when sales hopefully improve, and try to not get evicted in the meantime. Another option? Stay current on rent and pray that the economy recovers before you run out of cash.
Neither one of these options are really good, but the tenant doesn’t have any better options. Making matters worse, the Bankruptcy Code isn’t much help, unless the lease assumption statute gets changed, to provide relief to tenants:
One possible solution is that Congress temporarily change bankruptcy law so that small businesses can be allowed to pay their landlords more reasonable amounts until the pandemic is behind us.
Some quick background: Under the Bankruptcy Code, a Chapter 11 debtor can generally stop paying its creditors during the time the case is pending and, even after a plan of reorganization is confirmed, that plan may provide drastically modified (reduced) payments to its creditors.
That’s not the case with landlords, though: Under 11 U.S.C. Section 363 of the Bankruptcy Code, landlords are entitled to demand their full monthly rent due the entire time, and, in order for a lease to be included in a bankruptcy plan, the landlord must be paid current. Long story short, a tenant’s bankruptcy filing is a temporary speed bump for landlords, but the path to payment in full for a landlord is pretty direct.
As a result, many landlords have been aggressive during the pandemic, emboldened by state and federal law. The article mentions that many landlords are starting to see the writing on the wall (and that, maybe, there aren’t any replacement tenants) and are considering “pay what you can” agreements.
States have offered limited help to tenants, in the form of moratoriums on evictions (though such efforts are not reducing or stopping the financial payment obligations for the accruing rent). Plus, deep-pocketed large retailers are cooking up some innovative legal arguments (the article cites Valentino and Victoria’s Secret, but it could have also cited the Nashville lawsuit filed by The Palm Restuarant against the Nashville Hilton).
To the landlord’s defense, the article notes that landlords, themselves, may be small entrepreneurs with mortgages of their own and who depend on the rental income stream. The article advocates for tax cuts for commercial lessors.
Again, the article presents a fairly even-handed consideration of a “no win” situation. If the landlords win, then thousands of small businesses go under in the next 6 months.
The Bar Exam has been canceled (sort of). July is usually bar exam time in Tennessee (as well as all over the country). Like nearly everything else about our lives, the bar exam is going to be drastically different in Tennessee in 2020.
As a result of this Order, Tennessee bar applicants now–for the first time ever–have the option of taking a private, online exam. As you can see from the responses to the Tennessee Supreme Court Justice’s tweet (really, people?), no decision is going to please everybody.
It’s either too much of a departure from tradition (for the older crowd) or too little of a change to the status quo (for the progressives).
Twitter can be pretty awful.
Speaking of how it’s impossible to make everybody happy. As law firms are trying new models as they pivot into the new world, this tweet spoke to me on a DNA level:
This is absolutely true. A law firm is generally full of highly critical (in a good way), smart, risk-adverse know-it-alls (in a bad way). I’ve seen hotly contested arguments about what soda to stock in the law firm kitchen. Good luck with your nimble pivots, managing partners.
Diversity Matters. The past few months have provided eye-opening lessons about privilege and opportunity for so many of us. Especially those in leadership positions at law firms.
In early June, I started to receive all the Black Lives Matters marketing e-blasts, so I know that many law firms recognize the PR benefit of supporting this movement.
But, I also know these law firms and judge them on their actions (as well as their words).
Law firms, what are you doing about diversity? And not just the 2020 associate class. I’m talking about the future years’ classes too. What support are you providing to nurture and provide opportunities to current law students? What about college students from non-privileged backgrounds who want to be lawyers? What about your staff (both present and future)? What educational or institutional policies are you introducing to your practices in response? What are you doing to support the movement in your community?
Separately, am I–personally–doing everything that I can? Are you?
Late Thursday, the Palm Restaurant sued the Nashville Hilton, arguing it should not have to pay full rent during the pandemic and especially not for time periods when the Hilton hotel itself wasn’t open.
It’s an interesting argument, about issues that will be litigated throughout the country over the next few years.
Generally, in Nashville (and everywhere else), closures related to COVID-19 haven’t given tenants much factual or legal basis for avoid rent payments. That’s because most commercial leases–more than anything–make payment of rent such a supreme duty under the lease that anything short of total physical destruction of the premises doesn’t excuse payment.
The Palm’s Lease at the Hilton is no different.
The Complaint alleges that “[t]he Lease provides for a rent abatement in the event that the Premises is damaged as a result of casualty,” citing Section 23.1 of the Lease. Specifically, that provision requires that the Property “be damaged by fire or other casualty” and has the typical murky text that you’d expect in a landlord-drafted lease that assumes the premises were physically damaged.
(Side note: The Lease also has a “Force Majeure” provision that is so iron-clad that The Palm doesn’t even cite it in the Complaint.)
As in so many of these cases, the million dollar question is: Does the COVID-19 virus cause “physical damage”?
The Palm takes a novel approach, in part, arguing that the Hilton’s voluntary shut-down caused the losses at the restaurant, since The Palms’ decision to initially lease the space was so heavily dependent on the existence of a thriving Hilton hotel.
“Pursuant to the Lease, the Hilton was and is required to operate a first-class business hotel…[and] provide the Palm with access to Common Areas…” As part of the Lease, the Palm’s dependence on the Hilton is evidenced by the facts that: Palm allowed Hilton guests to charge meals to their rooms; the Hilton heavily advertised the Palm in the hotel and in the rooms; and the Palm agreed to identify the Hilton in its own marketing.
Then, COVID hit. On March 12, the SEC tournament was shut down. On March 20, Metro shut down in-person dining. On March 22, the State of Tennessee took similar action. In response, on March 22, the Palm closed to in-house dining.
But, the lawsuit alleges, “[a]t no point in time since March 1, 2020 has the Hilton been forced to cease operations due to a state or local governmental order. … Despite the fact that it was under no obligation to do so, the Hilton shut down on March 24, 2020. …Upon information and belief, despite its management company having cash on hand necessary to support ongoing operations, the Hilton remained closed during April, May, and part of June.”
The Palm re-opened to 50% capacity on May 11 (as allowed by local and state law), but the Hilton didn’t re-open until June 8, 2020. The Palm argues that it was denied the benefit of foot traffic from the Hilton, marketing and promotional benefits, and access to Common Areas.
When the lawsuit was filed, the Palm had not paid rent for April, May, June, or July 2020 (including CAM charges for space at the Hilton). The Hilton has refused to discount any of that rent, despite the Palm’s requests for a discount.
This lawsuit asks the Davidson Chancery County Chancery Court to provide “declaratory relief” and declare that The Palm is not in default and is not required to pay April, May, June, and July 2020 rent (as well as get back some of the rent paid in March).
This case raises nearly all of the issues the commercial landlord-tenant bar will be fighting in the near future. Plus, this one has the added awkwardness of two inter-dependent, adjacent businesses being involved in direct litigation.
This may be the first notable COVID-related landlord tenant lawsuit filed in Nashville, and it’ll be one to watch over the next few weeks, months, and, gulp, year.
TL;DR: The lawsuit asks whether the Hilton’s decision to shut its own operations down creates a factual or legal defense to some or all of the amounts due from The Palm under the Lease.
As you’d expect, COVID-19 and the related travel restrictions have had a catastrophic impact on the travel and hospitality industry. In Nashville, rental income for once wildly-lucrative Airbnb properties evaporated in an instant.
In Nashville (and in Memphis), Stay Alfred had a number of buildings where it controlled nearly all the units, such as the shiny 505 Tower in downtown Nashville, as well as other prime locations in both cities. By April, Stay Alfred had left those buildings entirely.
Now, it appears that Sonder USA, Inc. may be headed toward a similar fate. Sonder manages over 12,000 rental units in 28 cities, generally for short and medium term rentals. In its most recent efforts to obtain private equity, Sonder provided a valuation of $1.3 billion.
Yesterday, in Davidson County Chancery Court, a Georgia developer filed a breach of contract lawsuit against Sonder over its failure to take possession of 101 units in a residential building in Nashville’s Hillsboro Village, located at 1620 21st Avenue South.
In this deal, the Plaintiff-developer agreed to purchase the 101 units in December 2019, many of which were already rented out to long term tenants. As those existing tenants either left or were forced out, the developer would then lease those units to Sonder, which Sonder would then manage as short term rentals. Under the Lease, Sonder would pay the developer annual rent of “$2,641,387.32.”
What could go wrong in Nashville real estate in 2020, right?
Per the Complaint, in April 2020, when Sonder was scheduled to take possession of the first batch of units, Sonder immediately went into default. Sonder claimed defenses of force majeure and impossibility of performance and frustration of purpose.
When Sonder failed to take possession or pay, Plaintiff filed this action, seeking $2 million in current and future rents. This is going to be an interesting case, since the parties seemed to go into this venture, jointly, in December. If so, then why does all of the risk shift to the lessor-defendant? Does the nature of the business relationship mean that Plaintiff and Defendant both should bear the risks?
I live in Hillsboro Village, so this one is a bit personal for me. This is my neighborhood, which is a bustling area of families, Vanderbilt workers (school and hospital), and college kids. It’s a residential community, not a vacation or party destination.
Housing is scarce. And getting more and more expensive.
As somebody who has lived in this neighborhood for over ten years, it’s irritating that these out-of-town companies created a business model to convert limited, scarce housing assets into STR properties by forcing residents out of their leases and out of the building.
Think about if you’re a grad student or doctor at Vandy, and you love your apartment. It’s right there next to your school/work, next to Luke Bryan’s steakhouse (which really is delightful), and next to Dragon Park. Sounds great, right? But, when you get to month 10-11 of your lease, you get a notice from the new owner that they want you out; the entire building is converting to vacation rentals.
I’m sure the developer would say that the “market dictates the highest and best use of property.” Let’s hope our new economy sends its own message to these opportunistic developers who want to convert our residential space into a hotel / vacation rentals. One that our local government is clearly afraid to send.
Maybe an empty building where all the long term tenants were forced out will send that message.
Things are looking bad for the economy, and there doesn’t appear to be any end in sight. As we enter Month Two of the COVID pandemic, banks and others creditors are bracing themselves for a very long winter.
I’m telling my creditor clients to be patient. While this good news doesn’t put money into hands today, here are some things I said the last time around, i.e. in 2010, that any creditor should bear in mind while we wait to see what the economy does.
There’s time to be patient. In Tennessee, the statute of limitations for collection on an unpaid debt is six (6) years, pursuant to Tenn. Code Ann. § 28-3-109. Then, once you sue and obtain a judgment (within six years from the date of the default), your judgment is valid for ten years, pursuant to Tenn. Code Ann. § 28-3-110. Plus, if your judgment remains unpaid at the end of the ten years, Tennessee judgments can be renewed pursuant to § 28-3-110 for another ten year period.
Don’t wait to act. In some instances, it may make sense to take no action on unpaid debt. Maybe the customer is a company that has gone out of business and has no remaining assets, or maybe they’ve filed a liquidation bankruptcy. This is where you make the “don’t throw good money after bad” decision and possibly decide to write this debt off.
But, remember, the first creditor to obtain a judgment is the first in line to seize assets. Granted, you could be the first in line and discover there are no assets, but you should nevertheless record your judgment as lien in the real property records. For less than $25 in filing fees, a creditor can record a certified copy of its judgment in any and all Tennessee counties where the debtor owns real property, and that judgment becomes a lien on any real property owned by the debtor.
Even if they don’t have any equity in their property today, the situation could well be different in ten years (judgment liens remain valid as long as the underlying judgment is valid). What’s more, your lien’s reach will capture any real property they obtain during the life of the lien. In the end, sooner or later, your debtor will have to deal with you, whether it be as part of a purchase of new property, a sale, or a refinance.
Bend, don’t break. Sometimes, it’s important to recognize when a debtor truly lacks any assets to pay toward your debt. When this is the case, aggressive collections—whether it be seizing a work truck or all funds out of a bank account—may put that debtor out of business and, possibly, into a bankruptcy filing. A judgment creditor can take depositions and request financials from their debtor, and this information may assist you in determining whether they aren’t paying anybody…or just aren’t paying you.
Bankruptcy doesn’t mean the process is over. If your debtor does file a bankruptcy case, there’s still a chance of monetary recovery. In addition to the benefits to the debtor, the secondary point of the bankruptcy process is to maximize return for creditors prior to granting the debtor a discharge of his or her debts. But, in most instances, a creditor in bankruptcy only receives pennies on the dollar in the process.
Keep in mind, however, the success rate in Chapter 13 bankruptcy cases (where debtors repay a percentage of their debts over 3 to 5 years) can be as low as 20%, meaning that most of those cases end with a dismissal. A dismissal is good for a creditor, because there is no discharge of the debt. Instead, the full amount remains due and owing. Debts are eliminated only when debtors receive a “discharge.” That’s an important distinction to know.
Finally, remember that a bankruptcy discharge only discharges “debts”—not “lien” rights. So, if you’ve already obtained a judgment and recorded it as a lien, then your lien on the debtor’s property survives the bankruptcy discharge. As a result, even though you can’t collect your debt, you can enforce your lien in the event of an attempted sale or refinance.
In the end, collection is a process that rewards the patient, especially in a struggling economy. But, a successful creditor must be prepared, and being prepared means having a valid judgment in place and exhausting all enforcement remedies before giving up. It may be a long road to recovery, but, if a creditor is smart and strategic now, the steps you take today will help make sure you’re paid in the future.
Rent is Due Tomorrow, and It’s Going to be Bad. Tomorrow is going to be a terrifying day for lots of people across the country. That’s because it’s the first of the month, and rent and mortgage payments will be due for millions of families, and a good number of those people are out of work.
Clients in all types of industries are scared. They’re scared for their business. For their employees. For their personal finances.
Some businesses are taking aggressive action to preserve/conserve cash, but that’s a bold move and beyond what most small businesses or individuals can envision. Who on earth imagined a future where “I’m not paying my mortgage next month” is a valid financial planning option?
It’s important that we, as lawyers, figure out how to help. This article in the Wall Street Journal, Bankruptcy Law Needs a Boost for Coronavirus, suggests that our financial and restructuring bar is thinner than it should be.
This is a real concern that I’ve heard from bankruptcy lawyers for about a year, even before people had any idea that a global pandemic was possible. There aren’t many bankruptcy lawyers under the age of 40. It’s because, basically, in the last 10 years, the economy has been strong enough that there hasn’t been growth in new practitioners.