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.

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).