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Smith v. Music City Homes, LLC

United States District Court, M.D. Tennessee, Nashville Division

February 23, 2015

CHARLES L. SMITH, Plaintiff,
v.
MUSIC CITY HOMES, LLC GLEN WHITFIELD, and BOB DAHMS, Defendants.

MEMORANDUM

WILLIAM J. HAYNES, Jr., Senior District Judge.

Plaintiff, Charles L. Smith, a Tennessee citizen, filed this action under 28 U.S.C. 1332, the federal diversity statute, against the Defendants: Music City Homes, LLC ("Music City"), a Washington corporation, and Glen Whitfield and Bob Dahms, citizens from the state of Washington and the sole shareholders of Music City. Plaintiff asserts Tennessee law claims for breach of contract, unjust enrichment, conversion/embezzlement, and piercing the corporate veil. Plaintiff alleges, in essence, that Defendants materially breached their obligations under a deed of trust and note by failing to maintain insurance on properties named in the deed of trust and by failing to make payments of principal and insurance under the note. Plaintiff also alleges that Defendants Whitfield and Dahms are personally liable to Plaintiff as the sole shareholders of Music City.

Defendants assert counter-claims for fraud, intentional interference with a business contract, and anticipatory repudiation. Defendants allege that they suffered losses because Plaintiff failed to provide adequate property management, including: (1) entering into unauthorized agreements with tenants to extend their leases at below-market monthly rental rates for prolonged lease periods extending from twelve to twenty-four months; (2) failing to ensure that properties were kept clean to prevent city code violations; (3) failing to enforce fees due from tenants for insufficient checks forcing Music City to incur banking charges without reimbursement; (4) failing to collect rents timely; (5) failing to deposit paid rents timely; (6) failing to enforce tenant leases; (7) permitting felons to be tenants against Music City policy; (8) failing to inspect properties to ensure against damages caused by tenants; (9) failing to promptly evict non-paying tenants so that properties could be leased to provide adequate flow of income from the investment properties; and (10) causing Defendants to incur unnecessary and excessive legal fees and costs as a result. (Docket Entry No. 52 at 9-10). Defendants also allege that the warranty deed contains errors in the street addresses of two of the properties conveyed and this constitutes fraud and renders the contract unenforceable.

In earlier proceedings, the Court denied Whitfield and Dahms' motion to dismiss for failure to state viable claims, concluding that Plaintiffs complaint and attachments thereto presented actionable claims for breach of contract, unjust enrichment, embezzlement, and piercing the corporate veil. (Docket Entry No. 23). The Court also denied Defendants' motion for summary judgment. (Docket Entry No. 43).

Before the Court is the Plaintiff's motion for partial summary judgment (Docket Entry No. 44) against Music City and Whitfield on Plaintiff's breach of contract claim and on all three Defendants' counter-claims for fraud, intentional interference with a business contract, and anticipatory repudiation. Plaintiff contends that the undisputed facts show that the parties entered into a contract and Defendants Whitfield and Music City failed to pay the entire agreed purchase price and that Defendants owe Plaintiff $851, 000 on the remaining principal. As to the three Defendants' counter claims, Plaintiff contends that Defendants' fraud claim fails as Defendants neither allege nor show any material misrepresentation made by Plaintiff; that Defendants neither allege nor show that Plaintiff induced any breach in a business relationship between Defendants and any third-party; that the claims for fraud and intentional interference with a business contract are barred by the statute of limitations; and that Defendants neither allege nor show that Plaintiff made a total and unqualified refusal to perform the contract.

In response (Docket Entry No. 52), Defendants contend that the contract was unenforceable and/or Plaintiff committed the first material breach, citing the warranty deed containing errors as to the correct street addresses for two of the 27 properties conveyed and that Plaintiff did not suffer any damages as Plaintiff profited from his dealings with Defendants. As to their counter-claims, Defendants contend that Plaintiff misrepresented that he was acting in conformity with the Defendants' best interests as their agent when Plaintiff made rental agreements without the Defendants' approval and against their rental policies; that Plaintiff's violations of Defendants' rental policies interfered with Defendants' business relationships with their tenants; that Defendants could not have reasonably discovered the extent of their injuries until after Music City's insolvency; and that Plaintiff committed anticipatory repudiation by taking actions contrary to the Defendants' best financial interests that affected Defendants' ability to render payment in full.

For the reasons stated below, the Court concludes that Plaintiff's motion for partial summary judgment on his breach of contract claim against Defendants Music City and Whitfield should be granted because the undisputed facts show that these Defendants failed to pay the purchase price under the terms of the agreement. The Court also concludes that Plaintiff's motion for partial summary judgment should be granted as to all of the counterclaims asserted by Defendants Music City, Whitfield and Dahms because these Defendants failed to present any evidence establishing the elements of their claims for fraud, intentional interference with a business contract, and anticipatory repudiation. The Court also concludes that Defendants' claims for fraud and intentional interference with a business contract are barred by Tennessee's three-year statute of limitations period, Tenn. Code Ann. § 28-3-105.

A. FINDINGS OF FACT[1]

Plaintiff owned twenty-seven properties in Davidson County, Tennessee. (Docket Entry No. 1, Complaint at ¶ 7). On November 7, 2006, Plaintiff and Whitfield entered into a purchase and sale agreement whereby Plaintiff agreed to sell to Whitfield the twenty-seven properties for $2, 430, 000. (Docket Entry No. 49, Defendants' Response to Plaintiff's Statement of Undisputed Facts, at ¶ 1). Under the terms of the purchase contract, Whitfield agreed to make a down payment of $430, 000 and to finance the remaining balance under a deed of trust note. Id. at ¶ 3; Docket Entry No. 1-1, Purchase Contract. On or around December 4, 2006, Whitfield formed Music City. Id. at ¶ 4.

On January 16, 2007, Music City executed a Deed of Trust Note (the "Note") in favor of Plaintiff for the outstanding balance on the properties. Id. at ¶ 5; Docket Entry No. 1-2, Deed of Trust Note. Under the terms of the Note, Music City agreed to pay Plaintiff the principal sum of $2, 000, 000 with interest over 24 consecutive months. The entire principal was to be paid on February 1, 2009. (Docket Entry No. 1-2). Repayment of the Note was secured by the Deed of Trust that also required Music City to make the payments of principal and interest and to maintain insurance on the properties. (Docket Entry No. 49, at ¶ 6; Docket Entry No. 1-3, Deed of Trust).

Two of the properties' addresses on the warranty deed were incorrectly listed as 624 Benzing Road, Antioch, Tennessee 37013 and 100 Lane Wood Court, Nashville, Tennessee 37211, instead of 516 BenZing Rd. and 4312 Hopewood Dr., Nashville, Tennessee, respectively. (Docket Entry No. 50-3 at 1, 5; Docket Entry No. 56, Smith Declaration at ¶ 4). Yet, the legal descriptions, including the lot numbers, map and parcel identification numbers, book and page number of prior conveyances, and plat references, correctly described 516 Benzing Rd. and 4312 Hopewood Dr., Nashville, Tennessee. (Docket Entry No. 56, Smith Declaration at ¶ 5, Exhibit 1 at 6-7). Defendants received and accepted rent for these two properties for the duration of their ownership. Id. at ¶ 7.

Under the Agreement, Plaintiff agreed to manage the properties for at least one year after the closing date. (Docket Entry No. 49, at ¶ 16). After the contractual one year period expired, Defendants acknowledged in writing that Plaintiff had "given [Defendants] more help than [Plaintiff was] obligated to" and requested that Plaintiff continue to collect rents into December 2008 until Defendants installed a new property management company in January 2009. Id. at ¶ 17; Docket Entry No. 44-6 at 2.

In their affidavits, Whitfield and Dahms state that "[o]n or about January 2009, Music City Homes discovered that rents being paid by tenants were below the average rents for similar properties in the same or similar areas, and that [Plaintiff] had agreed to permit certain tenants to continue to pay below-average rents for extended lease periods." (Docket Entry No. 52-9, Whitfield Affidavit at ¶ 9; Docket Entry No. 52-10, Dahms Affidavit at ¶ 9). Whitfield and Dahms also state that, following Plaintiff's resignation as property manager, Music City Homes discovered "[Plaintiff] had entered into agreements with numerous tenants providing tenants with guaranteed extended leases and/or monthly rents for extended periods of time to last from one (1) to five (5) years." (Docket Entry No. 52-9, Whitfield Affidavit at ¶ 8; Docket Entry No. 52-10, Dahms Affidavit at ¶ 8). Defendants do not submit documents to support these assertions. In a letter dated January 26, 2009, to Plaintiff, Whitfield states:

I wanted to write and say thanks from myself and Bob Dahms for meeting with us and for agreeing to modify the terms of our payment to you. I also want to express our thanks and appreciation for all the diligence and effort to manage these houses and save us money while maintaining the properties. I don't know how we could have done it without you. Hopefully the new managers will be up to the task. Please let us know if you see any problems in that area. I hope we can maintain our friendship with you over the coming months and years.

(Docket Entry No. 44-8).

A week later, on February 2, 2009, Whitfield sent another letter to Plaintiff referring to Plaintiff's modification of the loan and Plaintiff's extended time as property manager:

Thank you for the offer of modification of our loan. We are obligated to you and we will agree to accept this extension....
We did overrun on your management contract time. And again I made some unspoken guesses about how things were. When the houses didn't sell, I thought I would need to find a replacement for you. The first people I talked to weren't acceptable. I thought you were comfortable remaining involved and I hated to spend money on management that would not be as good as you. You made it clear in November [2008] that this had to end and we have now found a manager I feel good about....

(Docket Entry No. 44-9). In another letter dated February 10, 2011, sent to Plaintiff, Whitfield stated, "Bob [Dahms] and I do appreciate that you have been a man of your word and we want to continue with the business relationship...." (Docket Entry No. 44-10).

Upon Defendants' request, Plaintiff granted multiple extensions of the Note, making the Note due and payable on or about July 1, 2011. (Docket Entry No. 44-4, Smith Declaration at ¶ 7). As of May 2011, Defendants had only paid $779, 000 (the $430, 000 down payment plus $349, 000 from the sale of five properties) towards the principal balance, thus, owing $1, 651, 000 towards the principal. (Docket Entry No. 49 at ¶¶ 9, 12; Docket Entry No. 44-4 at ¶¶ 4-5; Docket Entry No. 56, Smith Declaration at ¶ 3). Defendants did not make any payments after June 2011. (Docket Entry No. 44-4, Smith Declaration at ¶ 6). In a letter to Plaintiff dated June 21, 2011, Whitfield stated, "We do appreciate your patience and help with the effort to make these properties a fruitful, long term investment." (Docket Entry No. 44-11).

On October 14, 2011, after giving Defendants proper notice of default and foreclosure and publishing notice of sale, the Trustee conducted a foreclosure sale of the properties. (Docket Entry No. 49 at ¶ 10). Plaintiff was the only bidder present at the foreclosure sale and purchased the properties for $800, 000. Id. at ¶ 11. The remaining principal amount owed by Defendants is $851, 000. (Docket Entry No. 44-4, Smith Declaration at ¶ 9).

B. CONCLUSIONS OF LAW

"The very mission of the summary judgment procedure is to pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial." Advisory Committee Notes on Rule 56, Federal Civil Judicial Procedure and Rules (West Ed. 1989). Moreover, "district courts are widely acknowledged to possess the power to enter summary judgment sua sponte, so long as the opposing party was on notice that [he] had to come forward with all of [his] evidence." Celotex Corp. v. Catrett, 477 U.S. 317, 326 (1986); accord, Routman v. Automatic Data Processing, Inc., 873 F.2d 970, 971 (6th Cir. 1989).

In Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986), the United States Supreme Court explained the nature of a motion for summary judgment:

Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.
As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual ...

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