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Aarene Contracting, LLC v. Krispy Kreme Doughnut Corp.

Court of Appeals of Tennessee, Knoxville

December 20, 2016

AARENE CONTRACTING, LLC
v.
KRISPY KREME DOUGHNUT CORPORATION

          Session Date: October 19, 2016

         Appeal from the Chancery Court for Hamilton County No. 15-0436 Pamela A Fleenor, Chancellor

         A 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.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court

         Reversed and Remanded

          David 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.

          Andy D. Bennett, J., delivered the opinion of the court, in which D. Michael Swiney, C.J., and John W. McClarty, J., joined.

          OPINION

          ANDY D. BENNETT, JUDGE

         I. Factual and Procedural Background

         This is 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.

         On or 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 litigation expenses.

         KKD 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."

         II. Trial Court Proceedings

         On 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 requested.

         KKD 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 by e-mail.
. . . .
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. Instead, ...

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