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In re Estate of McRedmond

Court of Appeals of Tennessee, Nashville

November 14, 2014

IN RE: ESTATE OF EDWARD STEPHEN McREDMOND

Session Date September 16, 2014

Direct Appeal from the Chancery Court for Davidson County No. 06-3004-IV Russell T. Perkins, Chancellor

Roger Alan Maness, Clarksville, Tennessee and Jere Robert Lee, Nashville, Tennessee, for the appellant, Louis A. McRedmond.

Richard K. Smith and Matthew A. Moushon, Nashville, Tennessee, and John P. Branhan and C. David Briley, Nashville, Tennessee for the appellees, Estate of Edward Stephen McRedmond and Anita Sheridan and Linda Orsagh.

Brandon O. Gibson, J., delivered the opinion of the Court, in which J. Steven Stafford, P.J., W.S., and John W. McClarty, J., joined.

OPINION

BRANDON O. GIBSON, JUDGE

I. Facts & Procedural History

This litigation began nearly eight years ago when seven siblings sued their other three siblings over a dispute involving the family business, McRedmond Brothers, Incorporated ("MBI"). MBI was engaged in the business of buying grease, testing and blending it to certain specifications, and reselling it to customers such as manufacturers of animal food. The parties' father and uncle started the business in 1932, and it was incorporated in 1957. When the parties' father died, his shares of the corporation passed to his ten children. MBI purchased all of the shares owned by the uncle's family, so by the time of these proceedings, the ten siblings were the only shareholders of the company.

MBI's "grease plant" was located on the family farm in Davidson County. Louis McRedmond and Stephen McRedmond (the only male siblings) lived in separate homes also located on the family farm. Louis, Stephen, and their sister Anita[1] were on the board of directors and also served as the officers for MBI. However, Louis and Stephen were authorized to jointly direct how all of the other shareholders voted their shares pursuant to a shareholders agreement signed in 1996. Louis and six of his sisters instituted these proceedings in 2006, seeking to have the voting restriction in the shareholders agreement terminated due to an alleged deadlock between Louis and Stephen. Stephen and the two remaining sisters, Anita and Linda, were named as defendants.

In 2007, MBI filed a separate complaint for declaratory judgment, naming the ten siblings as defendants and seeking a judicial declaration of its rights and obligations due to the dispute over control of the company. Among other things, MBI sought to be declared "an interested party to the issues raised" in the lawsuit between the two groups of siblings in the event that the two cases were consolidated. Eventually, the chancery court entered an order in the original lawsuit consolidating the two cases. However, the order provided that the proceedings would be "bifurcated, " with the court first considering the original issue of whether the voting restriction in the shareholders agreement should be terminated.

The chancery court heard proof regarding the shareholders agreement over the course of two days in December 2007. At the close of the plaintiffs' proof, the defendants jointly[2]moved for involuntary dismissal pursuant to Tennessee Rule of Civil Procedure 41.02. After a separate hearing on the motion, the trial court entered an order granting the motion in part and denying the motion in part. The trial court found that the shareholders were in fact deadlocked as to the resolution of certain issues, but the court concluded that such deadlock was not a sufficient basis for terminating the shareholders agreement. The court scheduled a status conference to address further proceedings.

On April 2, 2008, an agreed order was entered in which all ten shareholders agreed that MBI should be dissolved pursuant to Tennessee Code Annotated section 48-24-301 et seq., due to the deadlock.[3] The order authorized the parties to submit proposed plans for dissolution of MBI.

Louis and the other plaintiff siblings jointly submitted a proposed plan of dissolution that identified several key "issues" that, in their view, made it unlikely that a third party would submit a significant bid for the company. As the "first and most critical" issue, they noted the fact that MBI did not have a written lease for the property where the grease plant was located and from where it had historically operated. The real property had been jointly owned by Louis and Stephen as tenants in common, but it was subject to a pending partition action, filed by Louis against Stephen, and Stephen had recently conveyed his interest in the property to his co-defendant sister Linda.[4] The plaintiffs' proposal also discussed the absence of protection from post-sale competition by any of the existing owners, in addition to the fact that MBI did not have long-term contracts with third parties to ensure continued business success. Due to these and other issues, Louis and the other plaintiffs proposed a private auction between the two existing groups of shareholders. The three defendant siblings also filed a proposed plan of dissolution, which suggested that the shareholders be given an opportunity to purchase the assets via a bidding process.

On September 22, 2008, the parties entered into an agreed order appointing Samuel K. Crocker as receiver for MBI. The order provided, in pertinent part:

The Receiver shall immediately take control of all assets, records and business of the Company, with the understanding that the Company shall continue to conduct its ordinary course of operations, subject to oversight by the Receiver. . . .
Immediately upon appointment, the Receiver shall take such steps as he deems appropriate to insure the ongoing operation of the Grease Business in an efficient manner so as to protect its value. Until the Receiver notifies them in writing to the contrary, current employees of the Company shall continue to conduct the Grease Business in the ordinary course of business, reporting directly to the Receiver. . . .
Except as expressly provided above, or as authorized by the Receiver, all Parties and those acting in concert with them are hereby enjoined from taking any actions as to the business or assets of the Company, including, without limitation, entering into any contract or obligation on behalf of the Company, taking possession of any asset of the Company, or expending any funds of the Company. . . .

The order also required the receiver to propose a plan for dissolution of the company.

An "Initial Report of Receiver and Agreed Order" was entered on January 26, 2009. This report set forth the receiver's conclusions that MBI's assets were "worth more to certain of the Parties than they would be worth to anyone else" and that "the value of the Grease Business in its present operating posture appears to exceed any value that could be derived from its sale to a third party." This order incorporated a plan for liquidation of the assets providing that MBI's assets would be divided into two groups – one consisting of the grease business assets, and the other consisting of certain real estate owned by MBI that is not at issue on appeal. Under the order, the shareholders would have an opportunity to submit "offers to purchase" either or both classes of assets, and the assets would be sold to the highest bidder. The sale would "be 'as is, where is' with no guarantees and/or warranties of any sort whatsoever." After the resolution of creditors' claims, the receiver would distribute the sale proceeds to the shareholders pro rata.

On February 23, 2009, Louis placed a bid for the grease business assets of $360, 000 plus an amount equal to the cash in the company on a dollar-for-dollar basis.[5] Louis had been primarily responsible for running the grease business for many years. The three defendant siblings, Stephen, Anita, and Linda, placed a bid of $758, 000 for the grease business assets. Thereafter, Louis decided not to place a second bid. Instead, he decided to open his own grease business. On March 5, 2009, a charter of incorporation was filed for L.A. McRedmond, Incorporated ("LAMI"). Louis opened a bank account for his new business on March 24. Also in March, Louis began buying equipment such as semi tanker trailers (with personal funds), and he had them delivered to the MBI grease plant, where they were parked on the property. He discussed his plans for his new business with two MBI employees and asked them to work for his new company.

Meanwhile, on March 29, 2009, the receiver notified Stephen, Anita, and Linda that they were the successful bidders for the grease business assets. On April 1, 2009, the trial court entered an order approving the receiver's sale of the assets with an attached "Asset Purchase Agreement." The order authorized the receiver to close the sale of the company assets pursuant to the asset purchase agreement. Relevant to this appeal, the order further provided:

Prior to sale, the current officers and directors of the Grease Business Assets being sold shall comply with the following requirements.
1. Conduct the Business only in the usual, regular and ordinary course, preserve the organizational structure of the Business, and preserve intact for the Buyer the goodwill of the Business and the present relationship between the Business and the employees, suppliers, clients, customers and others having business relations with the Seller;
4. Take all action and to do all things necessary, proper or advisable in order to consummate and make effective the transactions contemplated by the agreement of the Buyer to purchase the Business; . . . .

The attached "Asset Purchase Agreement" referred to the receiver as the "Seller" and referred to Stephen, Anita, and Linda as the "Buyers." It stated that "[t]he Receiver has accepted the offer of the Buyers, under the terms of the Plan of Liquidation, for the purchase of both Asset Groups." The agreement further provided that the "Buyers or their designee(s)" agreed to purchase from the receiver, and the receiver likewise agreed "to sell, transfer, convey, and deliver to Buyers or their Designee(s), " all of the receiver's right, title and interest in the grease business assets. The asset purchase agreement scheduled the closing of the sale for April 8, 2009.

Prior to the sale closing, the three purchasing siblings, Stephen, Anita, and Linda, formed a new corporation called McRedmond Feed Company, Incorporated. On the date of the closing, April 8, 2009, Stephen, Anita, and Linda executed a document entitled "Designation, " which stated, in relevant part:

The undersigned, as the Buyers under that certain Asset Purchase Agreement dated March 25, 2009 ("Agreement"), between the Buyers and Samuel K. Crocker, Receiver, as seller, hereby assign the right to and designate the following entities to purchase the assets described in the Agreement:
McRedmond Feed Company, Inc., a Tennessee corporation, is named the Buyers' designee for purposes of purchasing the assets identified in the Agreement as the Grease Business.

This Designation is executed and effective on April 8th, 2009.

That same date, the receiver executed a "Bill of Sale and Assignment" that contained the following relevant provisions:

THIS BILL OF SALE AND ASSIGNMENT ("Bill of Sale") is executed as of April 8th 2009, by Samuel K. Crocker, Receiver for McRedmond Brothers, Incorporated, by Order of the Chancery Court of Davidson County . . . pursuant to the Asset Purchase Agreement [("the] Agreement") among the Assignor, and Edward Stephen McRedmond, Anita Sheridan, and Linda Orsagh, or their designee (the "Purchasers"), and is subject to all of the terms and conditions thereof. The Purchasers have assigned all of their rights and responsibilities under the Agreement with regard to the purchase of the Grease Business Assets to McRedmond Feed Company, Inc., a Tennessee corporation (the "Assignee"). . . .
Assignor does hereby assign, transfer, and convey to the above named Assignee, its successors and assigns forever, all of the Receiver's right, title and interest in the property to be purchased by the Assignee pursuant to the Agreement, identified therein as the Grease Business, exclusive of any interest in real property which is being transferred by a separate document, and including without limitation, the name of "McRedmond Brothers, Inc., " or any close derivation thereof. Assignor hereby represents and warrants that Assignor has good right and lawful authority to bargain and sell the Grease Business Assets, but makes no other representation or warranty, with respect to the state of the title of the property transferred hereunder. All such assets are transferred "AS IS, WHERE IS."
This Bill of Sale shall be binding upon and inure to the benefit of Assignor and Assignee and their successors and assigns.

Another document entitled "Acknowledgment of Receipt of Transferred Assets" provided, "Assignee hereby acknowledges receipt of the above described assets, all as of this date." It was signed by Stephen on behalf of McRedmond Feed Company, Inc. At some point shortly thereafter, the dissolved MBI changed its corporate name from McRedmond Brothers, Incorporated to McRedmond Dissolution Corporation so that the newly formed McRedmond Feed Company, Inc. could change its name to McRedmond Brothers, Incorporated and do business using that name.

On the afternoon of April 8, 2009, after the sale closed, Louis sent notice to the receiver of his resignation as an employee, officer, and director of MBI. His new corporation, LAMI, held its first organizational meeting later that afternoon. Louis and his six co-plaintiff sisters were the shareholders of LAMI, and two of those sisters were elected to serve with him on the board of directors. By April 9, LAMI was actively operating a grease business in direct competition with MBI, targeting the same vendors that sold grease to MBI and also the customers that bought grease from MBI. Louis and LAMI's other employees began using the grease plant historically used by MBI. They parked LAMI's semi trailers at the docks customarily used by MBI and used the inside of the facility as well.

On April 23, 2009, Stephen, Anita, and Linda, acting jointly but in their individual capacities, filed a motion for temporary injunction and request for an expedited hearing. They asked the trial court to enjoin Louis from operating a competing business "on or about" the grease plant facility, and they requested an order requiring his "business" to vacate the facility occupied by MBI. They also sought an order prohibiting Louis from contacting MBI employees or otherwise interfering with MBI's business operations. According to the motion, Louis's attorney had confirmed that he was "the 'President, director and majority shareholder' of the competing business activities subject of this Motion, " but his attorney would not confirm whether any other plaintiffs were "involved in the ownership, direction, and operation of the offending business." Accordingly, the motion sought such relief against Louis "and any such other and further of Plaintiffs . . . acting in concert therewith[.]" However, LAMI was not made a party to the proceeding.

In response, Louis argued that the motion for temporary injunction should be denied because the movants could not demonstrate that their rights were being violated within the meaning of Tennessee Rule of Civil Procedure 65.04. Louis noted that he was a joint owner of the real property, that MBI had no lease on the property, and that the asset sale did not include a non-compete agreement. As such, he claimed that the movants had no legal right to exclude him or his company from the property that he owned as tenant in common.

Both sides filed affidavits in support of their respective positions. After a non-evidentiary hearing, the trial court entered an order granting the motion for temporary injunction on May 14, 2009. The injunction prohibited Louis "and any entity or individual that he controls, or any entity or any individual that is cooperating with him, " from operating a grease business at the grease plant facility or interfering in any way with the operations of MBI on the premises. The order provided:

The Court finds that prior to April 8, 2009 [the date of closing], [MBI] was free to operate the grease business with no competition or interference on the premises. The purpose of this Order is to preserve the status quo as it existed on April 8, 2009, and give the Defendants the benefit of their bargain. The Court further finds that, given the small number of customers and the small number of vendors of [MBI], the Court's intervention is needed to prevent irreparable harm.
Nothing in this order, however, shall be construed to prevent Louis A. McRedmond, from operating a grease business at some ...

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