The Importance of Reading Contracts and Minutes

By Keith C. Dennen

In Tennessee, parties to a contract generally are free to agree to any provisions in a contract. Frequently, employment agreements contain provisions that are employer-friendly. Tennessee courts enforce these agreements unless the provision is illegal or violates public policy. Every once in a while, Tennessee courts are asked by the employer to invalidate an employment agreement. The case of Hensley v. Cocke Farmer’s Cooperative, No. E2014-01775-COA-R3-CV (Tenn. Ct. App. Aug. 31, 2015), involved that situation.

In Hensley, the employer and its general manager entered into a severance agreement. That agreement provided that the employer would pay the employee a severance payment if the employer terminated the employee for reasons other than death, merger with a third party, disability or conviction of a crime. The agreement specified that the employee remained an “at will” employee, and his employment could be terminated at any time without cause. Significantly, the employer’s board of directors approved the agreement. Within six (6) months of execution, the employer’s board of directors voted to terminate the employee “without cause”.

The employer asserted that the agreement was unenforceable because it was “vague, ambiguous and indefinite.” In response, the court of appeals held that it was clear and concise.

Next, the employer asserted that there was not consideration for the agreement. This is a claim often asserted by employees attempting to avoid non-competition agreements. In response, the court of appeals held that the continuation of employment, even “at will” employment, represented consideration by the employee.

Third, the employer asserted that the severance amount was a “penalty”. To this argument, the court stated that “severance payments” are amounts paid when an employee is dismissed through no fault of the employee. These payments are designed to offset the damages to the employee. To determine whether an amount is a severance payment or a penalty, Tennessee courts look at the language of the contract. Since the express language of the contract called the amounts “severance payments”, the court refused to reclassify the payments as a penalty.

Fourth, the court of appeals held that an employee “at will” has no obligation to mitigate damages upon termination because the termination is not a breach of contract.

One additional defense was raised by the employer. The employer asserted that the minutes of its board of directors were wrong. Even though the minutes showed that the board approved the agreement and that it fired the employee “without cause”, in actuality the board fired the employee for cause and the board did not approve the agreement. To this position, the court of appeals noted the Tennessee Supreme Court’s decision in a companion case:

In Tennessee, a corporation speaks through the minutes of its board, and the “unofficial declarations” of members of the board cannot disprove the contents of the minutes.

Therefore, the court held that the minutes of the employer’s board conclusively establish the facts, and the employer cannot contradict its minutes with other proof.

This decision illustrates two principles of Tennessee law:

• Tennessee courts will enforce severance agreements using the same rules that apply to other contracts.
• A corporation is bound by its minutes even if those minutes are inaccurate.

Finally, a Victory for Employers – Prospective Employees Do Not Have a Right to Sue for Retaliatory Failure to Hire

By Keith C. Dennen

In Yardley v. Hospital Housekeeping Systems, LLC, the Tennessee Supreme Court decided that job applicants cannot sue a prospective employer for refusing to hire the applicant solely because the applicant filed a worker’s compensation claim against a previous employer.

What makes Yardley exciting for employers is that the Court specifically states that in Tennessee, “there is no statutory or common law cause of action for retaliatory failure to hire.” So, employers can find some comfort in that statement.

Why is Yardley unusual? The employee was a housekeeping aide for a hospital. She injured herself in the course of her employment and received worker’s compensation benefits.

While she was on “light duty,” the hospital entered into a contract to outsource its housekeeping to a third party. The company agreed to interview the current housekeeping employees; however, the company was not obligated to hire those employees. The company did not hire the employee because of her prior worker’s compensation claim because “bringing her on board would seem to be a Workers’ Comp. claim waiting to happen.” Thus, there was no question that the refusal to hire this person was directly the result of the filing of her prior Worker’s Compensation Claim.

The Court acknowledged its prior decisions that employees could not be fired for filing a Worker’s Compensation claim; however, the Court stated that protection did not apply to “prospective” employees stating “employers should have freedom to make their own business judgments without interference with the courts.”

For employers, this decision is a major victory. After years of decisions granting employees the right to sue their employers for a variety of alleged wrongs, the Tennessee Supreme Court took a stand in favor of the “at will” employer.

Yardley v. Hospital Housekeeping Systems, LLC, No. M2014-01723-SC-R23-CV (Tenn. Aug. 21, 2015).

The Right to Trial by Jury and the Tennessee Public Protection Act – Governmental Entities Lose a Big One!

By Keith C. Dennen

On August 26, 2015, the Tennessee Supreme Court held that there is a right to trial by jury in cases brought by an employee against his governmental entity employer under the Tennessee Public Protection Act. For governmental entities, this holding represents a huge loss.

The Governmental Tort Liability Act removes the immunity of governmental entities for the actions of their employees. Although the GTLA is broad, the GTLA does not remove liability for all actions of governmental employees. For instance, the GTLA does not apply to intentional actions of employees. Thus, governmental entities cannot be sued for libel, slander, interference with contract rights, infliction of mental anguish, invasion of privacy, trespass, malicious prosecution or false imprisonment. Moreover, the GTLA imposes limits upon plaintiffs – the statute of limitations is one (1) year; damages are capped at $300,000. More importantly, the GTLA expressly states that there is no trial by jury in a GTLA action.

But, the GTLA does not apply to every cause of action involving a governmental entity. In Sneed v. Red Bank, the Tennessee Supreme Court held that the GTLA did not apply to lawsuits brought under the Tennessee Human Rights Act. In Young v. City of LaFollette, No. E2013-00441-SC-R11-CV (Aug. 26, 2015), the Tennessee Supreme Court held that the GTLA did not apply to claims brought by public employees against their employers under the Tennessee Public Protection Act, also known as the “retaliatory discharge” act.

In No. E2013-00441-SC-R11-CV (Aug. 26, 2015), the Tennessee Supreme Court held that the GTLA did not apply to claims brought by public employees against their employers under the Tennessee Public Protection Act, also known as the “retaliatory discharge” act.

In Young, the Tennessee Supreme Court held that the GTLA did not preempt claims brought by governmental employees under the Tennessee Public Protection Act. That Act protects employees from termination “solely” for refusing to participate in, or for refusing to remain silent about, illegal activities. The General Assembly expressly included governmental entities in the definition of “employer”. For that reason, the court concluded the GTLA procedures did not apply.

Next, the Tennessee Supreme Court examined whether a “right to trial by jury” existed for TPPA claims. Contrary to popular belief, the right to a trial by jury in Tennessee is not absolute. A statute grants litigants the right to trial by jury in cases brought in chancery court, but that statute does not apply to cases brought in circuit court. The Tennessee Constitution grants a right to trial by jury but only in cases in which a jury trial was allowed in 1796 – when Tennessee became a state.

In Young, the case was filed in circuit court – therefore, the statute was inapplicable. Because there was not a cause of action for retaliatory discharge in 1796, the Supreme Court held that there was not a right to a trial by jury for TPPA cases brought in circuit court.

So, the TPPA is not preempted by the GTLA. Conversely, in cases filed in circuit court, there is no right to jury trial. If the case had been brought in a chancery court (which the Supreme Court noted would have been appropriate), there would have been a statutory right to trial by jury.

For attorneys, this case emphasizes the importance of the decision of whether to file a case in circuit court or chancery court. For governmental entities, this case emphasizes that the GTLA procedures do not apply to every case.

Foreclosure Sales and Deficiency Judgments in Tennessee

By Keith C. Dennen

When a lender forecloses on a parcel of property, it is not unusual for the property to sell for an amount that is less than the amount owed. In that instance, the lender often seeks a judgment for the difference or the deficiency. In Tennessee, a statute directs that the deficiency judgment shall be the total amount of the debt less the fair market value of the property at the time of the sale. (Tenn. Code Ann. Section 35-5-118.)

The sale price at the foreclosure is presumed to be the fair market value absent fraud or irregularity in the sale process. But, the debtor can overcome that presumption by showing that the sale price is “materially less” than the fair market value of the property.

In Cutshaw v. Hensley, No. E2014-01561-COA-R3-CV (Tenn. Ct. App. July 29, 2015), the court of appeals held that a price at the foreclosure sale that was 78% less than the fair market value of the property was “materially less.” That conclusion is not surprising. The court of appeals found that the fair market value was the price that the lender (who purchased the property at the foreclosure sale) sold the property 49 days later.

Generally, Tennessee courts have held that the purchase price received after the foreclosure sale is not determinative of fair market value on the date of sale. In this case, however, the court noted: (a) the absence of an appraisal, (b) the short period of time that elapsed, and (c) the lender’s admission that no significant changes to the property were made during the interim period. These factors made the subsequent sale price relevant and determinative.

So, when conducting a foreclosure sale, a lender should obtain an appraisal of the property contemporaneously with the sale if the lender wishes to obtain a deficiency judgment.

When Can a Witness Demand Payment?

By Keith C. Dennen

Expert witnesses are hired guns. Therefore, they can and do demand payment for their time spent preparing and attending their deposition. But, can a fact witness be paid? In Cremeens v. Cremeens, the Tennessee Court of Appeals said: Yes!

Cremeens is a post-divorce custody case. The issue was whether a witness, who had been paid by the husband, was an expert witness or a fact witness. If the witness was a fact witness, his deposition testimony could be used as proof at the trial because he lived in another state; therefore, the witness was “unavailable.” If the witness was an expert witness, the deposition testimony could not be used as proof at the trial. In support of wife’s position that the witness was an expert witness, wife asserted that her attorney paid the witness for attending his deposition.

The court of appeals noted that payment of a fee to a witness does not necessarily make the witness an expert witness. Instead, the court stated that the trial court properly considered the subject matter of the witness’ testimony to determine that the witness was a fact witness or an expert witness. The court of appeals agreed that in this case the witness was a fact witness.

On the issue of paying fact witnesses, the court stated that it is not improper to pay a fact witness at his or her professional rate for lost time. The court noted that federal courts generally hold that a fact witness may be reimbursed for expenses incurred and compensation lost because of the litigation. Further, the court acknowledged that American Bar Association Ethics Opinion No. 96-402 states that it is proper for parties to pay fact witnesses for their loss of hourly wages or professional fees. Thus, the court of appeals concluded that it is not improper to pay fact witnesses in the State of Tennessee.

Based upon this opinion, fact witnesses in state court litigation can, and should, request reimbursement for their lost wages and expenses they incur preparing for and attending depositions. For more information see Cremeens v. Cremeens, No. M2014-001186-COA-R3-CV (Tenn. Ct. App., July 24, 2015).