Tennessee courts will not save a party from its own contract: Liquidated Damages provisions will usually be upheld

When a tenant under a long term lease defaults, you’ll remember that the landlord can’t automatically sue for the entire balance due over the remaining contract. Instead, the landlord has to mitigate its damages, generally by trying to find a replacement tenant to take over the empty space.

But, what about other types of long-term service contracts? Is the service-provider entitled to compensation for both past-due amounts and future contract payments coming due, regardless of whether they can find a “replacement” customer?

This exact issue is presented in three new lawsuits that were filed in mid-December in Davidson County. In the lawsuits, a commercial linen company (i.e. napkins, aprons, bar towels, mats, etc.) sued three Nashville restaurants for breach of the linen rental agreement. In all, the actual past due amount wasn’t that much–instead, the lions share of the requested judgment was for damages for the remaining months of the contract, which this particular agreement. Under this agreement, the provider could recover “60% of the weekly service charge for the unexpired term” as its future damages.

For instance, in the lawsuit against Woolworths on 5th, the restaurant had an actual overdue balance of just $1,430.11. But, after applying the damages clause, the rental company is asking for a total of $77,440.60, which includes 60% of the not-yet-due amounts owed over the 60 month service agreement.

This seems a bit unfair, right?

These types of damages are known as “liquidated damages.” When the actual amount of damages under a contract are uncertain and difficult to calculate, these provisions are agreed to by the parties at the time the contract is signed to provide certainty and establish a method for calculating those damages.

With real estate, it’s really easy to calculate damages —how long was the property vacant after the breach? With longer-term service contracts, it’s more difficult–what expenses and costs did the service provider not incur by not having to provide the linen?

In Tennessee, a liquidated damages clause will be generally be allowed unless the challenging party proves that the provision is really just a penalty and/or designed to punish the breaching party. Tennessee law does not favor penalties, and, if it’s a close call, Tennessee Courts will be inclined to disallow the penalty. Testerman v. Home Beneficial Life Insurance Co., 524 S.W.2d 664 (Tenn.App.1974). In short, a liquidated damages provision should be somewhat reasonable in relation to the possible injury suffered and not unconscionable or excessive.

More recent Tennessee cases tend to favor allowing parties to a contract the freedom to agree to whatever business deal they want, even it’s an awful deal with a fairly onerous damages provision. See Guiliano v. Cleo, Inc., 995 S.W.2d 88, 101 (Tenn.,1999). “‘The bargain may be an unfortunate one for the delinquent party, [but] it is not the duty of courts of common law to relieve parties from the consequences of their own improvidence.’” Id.

This will be interesting to watch. Sure, damages at 60% of the remaining term sounds really high, but maybe that’s representative of the expected profits in the linen rental industry. If it’s close, a Tennessee court will allow this.

Tennessee law doesn’t require judgment creditors to collect in any particular order. Seriously.

Is a judgment creditor required to exhaust its collection efforts against personal property before executing on real property?

If you asked 100 lawyers over the age of 60 this question, 80 of them would get the answer wrong. And every single one of them would be absolutely positive that they were right.

I’d guess that I have a argument with opposing counsel on this legal issue at least once a month, and it usually ends with them being absolutely certain that I am wrong.

What’s crazy is the answer is simple:

Execution against personalty need not precede execution against realty.

Tenn. R. Civ. P. 69.02

So, there you have it.

If you’re wondering, however, whether you should ever start the collection process with efforts to sell real property…well, that’s another blog post entirely.

Tennessee Court of Appeals shows analysis on “reasonable” attorney fees.

The Tennessee Court of Appeals issued an opinion yesterday in a collection case, which has some really useful analysis on the reasonableness of attorney’s fees. This is an issue near and dear to my heart.

A full copy of the opinion, Tennessee Farmers Cooperative v. Ted Rains,  M201801097COAR3CV, 2019 WL 3229686 (Tenn. App. July 18, 2019), can be found here.

Continue reading “Tennessee Court of Appeals shows analysis on “reasonable” attorney fees.”

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.

Collect Your Invoices Faster: Include a Due Date

You’d be surprised at how many invoices don’t have specific due dates. Instead, the invoices might say “due upon receipt” or “due within ___ days.”

Why leave the math to your customers? The better practice is to include a clearly labeled “due date” with a date certain by which the payment must be made.

If you really want to get their attention, you could also include a date on which you’ll take the next, clearly defined step.

This may be giving the account debtor a deadline to pay of July 18, and, then, in the next time, telling them that, if that amount isn’t paid, then you’ve been instructed to file a lawsuit on July 19.

Granted, some debtors simply don’t have the money to pay, and no deadline is going to put that money in their account.

But, for those debtors who have the funds to possibly pay but don’t have your debt prioritized, a clear and unmistakable deadline–with a specific threat of the next action–could do the trick.

To Recover Attorney’s Fees in Tennessee, You Have to Be Express and Exact in Your Contract

We’ve talked about this before: Tennessee is a great, creditor-friendly state, but, if you want to recover your attorney’s fees in Tennessee, you’d better have some very specific language in your contract.

The Tennessee Court of Appeals filed an opinion last week as a reminder, at Nyrstar Tennessee Mines-Strawberry Plains, LLC v. Claiborne Hauing, LLC, Tenn. Ct. Apps, No. E2017-00155-COA-R3-CV.

Here is the contract provision the Court considered:

The Customer must pay Nyrstar all costs and expenses incurred by Nyrstar in connection with enforcing its rights against the Customer under an Agreement including legal expenses and other costs incurred in recovering monies owed by the Customer to Nyrstar.

By my read, “all costs and expenses,” along with “including legal expenses,” should be good enough.

The Nystar Court disagreed. That text does not say “including reasonable attorney’s fees.”

As a result, “The provision at issue does not specifically or expressly create a right to ‘fees,’ ‘attorney’s fees,’ or ‘reasonable attorney’s fees.'” Further, ““the term ‘expenses,’ without more, . . . does not include an award of attorney fees.”

As a result, “[t]he language in the contract before us is not sufficient for Nyrstar to be  entitled to recover its attorney’s fees. The provision at issue does not expressly or  specifically create a right for Nyrstar to recover its attorney’s fees.”

So, if you want to recover attorney’s fees in Tennessee, you’d better say exactly that in your contract–that the prevailing party shall be entitled to recover its attorney’s fees.

Tennessee Post-Judgment Rate is at (New) All Time High

More than four years ago, I complained about the (then) new post-judgment interest rates in Tennessee. Long story short, the interest rate on judgments in Tennessee used to be a clean, easy 10%. Under the new version of Tenn. Code Ann. § 47-14-121, judgments accrue interest at a variable rate, that could change every 6 months.

One of my complaints was that it’s so difficult to figure out what the rate is at any time, but, luckily, the statute requires the administrative office of the courts to publish the applicable rate.

So, today’s post is to notify you of this: As of July 1, 2017, the rate is as high as it’s ever been, at a whopping 6.25%.

Attorney Liens: Because Every Lawyer Should Get Paid

I talk a lot about liens as a good way for a creditor to get paid. In state courts and bankruptcy courts, there often are two lines formed: one for those with liens; and the other for those without liens. And you can guess which one leads to the money.

Under Tennessee statutes, there are liens for all kinds of people: mechanics, artisans; dentists; jewelers; shoe repairers; cotton ginners; lithographers; baggage claim folks…just to name a few.

But let’s talk about attorney liens today.

Under Tenn. Code Ann. § 23-2-102, an attorney who files a lawsuit “shall have a lien upon the plaintiff’s or complainant’s right of action from the date of the filing of the suit.” (Or, per Tenn. Code Ann.  § 23-2-103, the attorney has a lien from the date that the attorney starts work on the case.)

This lien extends to two types of property. The first is a “retaining lien,” which gives the attorney the right to retain a client’s books, papers, or money coming into his possession during the matter until the client pays. The second is a “charging lien,” which is a lien for payment of fees against the judgment or recovery obtained in a case. For a good review of this, see Starks v. Browning, 20 S.W.3d 645, 650 (Tenn. Ct. App. 1999).

There’s some old caselaw out there that suggests that the attorney must have the lien noted in the Judgment to be valid. The Starks case above (involving the venerable Nashville lawyer, Bart Durham) says that requirement is not in the statute and is just an odd creation from old caselaw.

 

But, I say that it’s a good practice to note the attorney lien any– and every-where (in judgments, in notices filed with the Court, notices recorded in the Register’s Office), but it’s not legally required.

The statutes above don’t cover all situations where an attorney might have a lien; in fact, other specific statutes, like worker’s compensation matters, may have their own special rules. Additionally, nothing would stop a collection minded lawyer from obtaining a consensual lien as part of his or her client engagement documents, particularly where client resources may eventually be scarce.

 

Long story short, the attorney lien statutes are probably narrower than you thought they were, granting a lien generally only the lawsuit filed by the attorney. Any other, broader liens to secure repayment must be granted or taken under other statutes (judgment liens, consensual liens).

Want to Avoid Garnishment of Your Wages? Find a Job Where You are Paid in Cash Tips

Judgment debtors with non-traditional employment are always a headache to collect from. This includes self-employed people, independent contractors, and people who work for tips.

Here, I’m talking about waiters, valets, and anybody else who may earn a nominal hourly rate, but the bulk of their income comes from tips or gratuities. How do you garnish $5 in cash handed to a valet?

In Tennessee, you can’t. The Tennessee Court of Appeals recently considered the issue of whether tips reported by the Garnishee’s employees are to be included in the calculation of disposable earnings for the purposes of garnishment in determining the withholding under the garnishment statute, Tenn.Code Ann. § 26–2–106.

This case was Erlanger Med. Ctr. v. Strong, 382 S.W.3d 349, 351 (Tenn. Ct. App. 2012). In that case, the judgment debtor was a server at Shoney’s.  In deciding whether tips could be garnished, the Court looked at how “wages” was defined in Tenn.Code Ann. § 26–2–102 (which suggested that tips are included), but the Court went on to note that federal law excludes tips from garnishment because tips “do  not pass to the employer.”

This makes sense, because how can an employer withhold 25% of funds that it never has control over?

As a result, a judgment debtor whose primary income comes from tips and gratuities (that do not pass through the employer’s hands) may be able to escape garnishment.

But, where the tips are paid via the employer, there’s still a chance that those funds can be captured. Since at least 75% of restaurant transactions are paid via credit card (including payment of tips), there’s a strong argument that such tips could be garnished if the employer disbursed those tips in the form of a paycheck.

Resources to Learn More About For Profit Student Loan Forgiveness

Student loans are a big problem for folks in the Middle Tennessee area. After I gave an interview on the “for profit” student loan forgiveness story last week, my phone started ringing off the hook.

One of the statements I made (which didn’t make the interview) was that a borrower who wants to make a forgiveness request may not need to hire a lawyer to help them with this process.

I mean, I love taking client money as much as the next lawyer, but there are resources online that you should review before talking to a lawyer.

I think the official Federal Student Aid website was a great resource. The site is written in good, clear text and contains a a link at the bottom, under the “How to Repay Your Loans” tab. The specific link is “Forgiveness, Cancellation, and Discharge.” This section contains a comprehensive “Frequently Asked Questions” section, as well links to the application to utilize the forgiveness process.

Lawyers are great and can be a benefit in any process like this. But, before you hire one, I’d suggest that you read the website and get an understanding of the issues first. Then, you know, bring in the big guns.