Session Date: October 19, 2016
from the Chancery Court for Hamilton County No. 15-0436
Pamela A Fleenor, Chancellor
contractor sued an owner for violations of the Prompt Pay
Act, Tenn. Code Ann. §§ 66-34-101 et seq.,
and notified the owner of its violations by Federal Express
and email. The owner moved for summary judgment on the ground
that the contractor failed to strictly comply with the notice
provision requiring notice be sent by registered or certified
mail, return receipt requested. The trial court found strict
compliance was required and dismissed the contractor's
claims under the Act. The contractor appealed, and we reverse
the trial court's judgment, holding substantial
compliance is sufficient under the facts of this case.
R. App. P. 3 Appeal as of Right; Judgment of the Chancery
K. Taylor and Bridget Brodbeck Parkes, Nashville, Tennessee,
for the appellant, Aarene Contracting, LLC.
Christopher D. Owens, Johnson City, Tennessee, for the
appellee, Krispy Kreme Doughnut Corporation.
D. Bennett, J., delivered the opinion of the court, in which
D. Michael Swiney, C.J., and John W. McClarty, J., joined.
D. BENNETT, JUDGE
Factual and Procedural Background
a construction case in which Aarene Contracting, LLC
("ACL") agreed to renovate a store for Krispy Kreme
Doughnut Corporation ("KKD") in Chattanooga, and
KKD agreed to pay ACL $524, 027 for the work. The contract
was executed in November 2013 and provided for progress
payments. Paragraph 3.4 of the contract provided that KKD
would pay ACL 90% of the amount owing for the work
"completed and accepted by [KKD], " and the
remaining 10% was to be withheld as "retainage."
ACL submitted two applications for payment, less retainage,
in February and March 2018, which KKD approved and paid. The
total retainage withheld by KKD was $49, 283.16.
about September 30, 2014, counsel for ACL sent a letter by
way of Federal Express and e-mail to counsel for KKD
regarding disagreements that had arisen between the parties
up to that point, including claims ACL had against KKD under
the Tennessee Prompt Pay Act of 1991, Tenn. Code Ann.
§§ 66-34-101 et seq. ("Prompt Pay
Act" or "the Act"). ACL's letter informed
KKD of the following, inter alia:
As you are aware, the Tennessee Prompt Pay Act of 1991
applies to all private contracts for construction performed
in Tennessee. Additionally, the law applies to contracts
where the base contract price exceeds $500, 000, and it
prohibited Krispy Kreme from withholding more than 5% in
retainage. Tenn. Code Ann. § 66-34-103(a). Krispy Kreme
was also required to create a separate escrow account with a
third party for retained amounts. Tenn. Code Ann. §
66-34-104(a). At no time during the performance of this
contract did Krispy Kreme comply with Tennessee law. The
General Contract was in the original principal amount of
$524, 027.00, and Krispy Kreme has unlawfully withheld
amounts in excess of 5%. Additionally, it does not appear
that Krispy Kreme utilized a third party escrow account as
necessary. Further, under Tennessee law, Krispy Kreme was
required to pay the retained amounts within ninety (90) days
after substantial completion of the work. In our case, the
work was substantially completed in May 2014 as Krispy Kreme
has had full use of the improvements since that time.
Therefore, the retainage is long past due.
The statute also provides that there is a $400.00 penalty per
day for each and every day that the retained funds are not
deposited into a third-party escrow account. As the first
payment [was] received by my client for which funds were
retained on March 31, 2014, . . . this penalty accrues from
March 31, 2014. Through the date of this letter Krispy Kreme
currently owes the sum of $73, 200.00 in additional
penalties, plus interest.
As you know, Krispy Kreme has had use of the premises since
the work was completed in May 2014. It has now been over one
hundred twenty (120) days since the work was substantially
completed. Unless the sum of $262, 024.63 is paid immediately
and no later than ten (10) days of the date hereof, then
Aarene shall proceed with all of its legal and equitable
remedies, and will also seek to recover interest on all sums
due, and its attorney's fees and all court costs and
responded to ACL by letter dated October 8, 2014, and
addressed each of the issues ACL raised in its letter. With
respect to ACL's claim under the Prompt Pay Act, KKD
disagreed with ACL's interpretation and application of
the statute. Then, by letter dated October 13, 2014, ACL
replied to KKD's response. With regard to its complaint
under the Prompt Pay Act, ACL wrote: "Keep in mind that
the retainage penalty is accumulating every single day of the
Owner's violation of Tennessee law."
Trial Court Proceedings
August 4, 2015, ACL filed a sworn complaint against KKD in
Hamilton County Chancery Court. In addition to breach of
contract and mechanic's lien claims, ACL asserted claims
under the Prompt Pay Act: it claimed KKD had violated the
retainage laws by (1) withholding 10% as retainage rather
than the 5% permitted under Tennessee law and (2) failing to
create or fund an interest-bearing escrow account to hold the
retainage as required by the Act. KKD answered the complaint,
and in response to the retainage claims, KKD asserted that
ACL had failed to comply with the statutory notice
requirements because ACL did not notify KKD of its Prompt Pay
Act claims by registered or certified mail, return receipt
filed a motion for summary judgment in August 2015 in which
it argued ACL's claims under the Act were barred and
should be dismissed because ACL failed to comply with the
notice requirements of the statute. ACL responded to
KKD's motion and filed its own motion for summary
judgment in October 2015. The trial court heard oral argument
and issued an order in January 2016 granting KKD's motion
and denying ACL's motion. The trial court wrote:
The Court finds that the Plaintiff has not given notice of
its intent to seek relief under the Prompt Pay Act by
registered or certified mail return receipt requested, but
instead gave notice to the Defendant by Federal Express and
. . . .
As to the legal analysis, Plaintiff filed this action,
inter alia, for a violation of the Prompt Pay Act.
Defendant argues that Plaintiff failed to comply with the
notice provisions of the statute, and as such, is precluded
from seeking remedies under the Act.
The Court finds that Tennessee Code Annotated §
66-34-602(a)(1) provides that a contractor who has not
received payment from an owner or a subcontractor,
materialman, or furnisher who has not received payment from a
contractor or other subcontractor, materialman, or furnisher
in accordance with this chapter, shall notify the party
failing to make payment of the provisions of this chapter and
of the notifying party's intent to seek relief provided
for within this chapter.
Then, in subsection 2: The notification shall be made by
registered or certified mail return receipt requested. It is
undisputed that Plaintiff failed to send the notification by
registered or certified mail return receipt requested.