SPIRIT BROADBAND, LLC, ET AL.
JOSEPH ANTHONY ARMES, ET AL.
Session January 28, 2016.
from the Chancery Court for Davidson County No. 121023II
Carol L. McCoy, Chancellor
case arises from the sale of the assets of a small cable
television system. DirecTV program channels constituted the
majority of the system's programming. Three years after
the sale, DirecTV stopped providing its programming signal to
the cable system, claiming the signal had been obtained
illegally. The buyer of the cable system filed suit against
DirecTV for breach of contract and defamation. After reaching
a settlement with DirecTV, the buyer filed this action
against the seller of the cable system, seeking damages for
breach of contract and fraud and a declaratory judgment that
the promissory note the buyer had executed as part of the
purchase was not yet due and payable. The seller filed a
counterclaim, seeking payment of the promissory note. After a
bench trial, the trial court dismissed the buyer's claims
against the seller. The court also dismissed the seller's
counterclaim under the doctrine of unclean hands. After a
review of the record, we conclude that the chancery court did
not abuse its discretion in determining that the doctrine of
unclean hands barred the seller's counterclaim.
Accordingly, we affirm.
R. App. P. 3 Appeal as of Right; Judgment of the Chancery
William T. Alt, Chattanooga, Tennessee, for the appellants,
Joseph Anthony Armes and Cumberland County Cable, Inc.
J. Mendes and R. Mark Donnell, Jr., Nashville, Tennessee, for
the appellee, Spirit Broadband, LLC.
R. Wingo and Nicholas R. Barry, Nashville, Tennessee, for the
appellee, U.S. Bank, N.A.
Neal McBrayer, J., delivered the opinion of the court, in
which Andy D. Bennett and Richard H. Dinkins, JJ., joined.
NEAL McBRAYER, JUDGE.
Factual and Procedural Background
Purchase of the Cumberland County Cable System
principal players in this dispute, Joseph Armes and Vincent
King, have been involved in the cable television industry for
over thirty years. Both are experienced businessmen, familiar
with the process of buying or selling a cable
Armes owned Cumberland County Cable TV, Inc.
("CCC"), a cable system that served mostly rural
subscribers in Cumberland County, Tennessee. The system was
small, consisting of one "headend" and approximately
one hundred miles of transmission cables or
"plant." The system offered its subscribers
approximately 60 basic channels and 70 digital channels, the
majority of which were DirecTV, Inc. channels.
29, 2006, Mr. King offered to purchase the assets of CCC for
five million dollars. Mr. King made the offer subject to a
number of conditions, including a reasonable due diligence
investigation. The offer resulted in an asset purchase
agreement, executed on January 28, 2007. In the agreement,
CCC made a series of representations and warranties about the
cable system and its assets. The sale was conditioned upon,
among other things, the purchaser "be[ing] fully
satisfied, in its sole and absolute discretion, with its due
diligence investigation" of CCC and its assets.
several months of due diligence, the sale closed on June 6,
2007. CCC sold to Spirit Broadband, LLC ("Spirit"),
a company formed by Mr. King, all of CCC's "right,
title and interest, legal or equitable, in and to the
assets." The assets included, among other items,
"[a]ny and all rights of [CCC] under the . . .
programming agreements, contracts, agreements and permits
necessary to operate the Systems (the "Operating
Contracts")." The bill of sale delivered by CCC and
Mr. Armes expressly incorporated the terms of the asset
purchase agreement and provided that the representations and
warranties contained in the asset purchase agreement would
survive the closing.
closing, Spirit paid a net purchase price of $4.8
million. Spirit delivered a promissory note made
payable to CCC in the principle amount of $1.5 million,
secured by the system's assets and equipment. Spirit paid
the balance, after holdbacks and prorations, to CCC in cash.
financed the cash consideration through a loan from U.S.
Bank. Contemporaneously with the sale, Spirit signed a
promissory note payable to U.S. Bank in the amount of $2.5
million, which was also secured by a security interest in the
system's equipment. As a condition of the loan, U.S. Bank
required Spirit and CCC to execute a subordination agreement,
subordinating CCC's right to payment under its promissory
note and security interest to the rights of U.S. Bank.
Specifically, among other things, the subordination agreement
provided that no payments were due to CCC "until the
U.S. Bank Note has been paid in full or until one (1) year
past the maturity date of the U.S. Bank Note, whichever first
the closing, Spirit continued to transmit DirecTV programming
to subscribers in the same manner as CCC had done before the
sale. Over time, however, Spirit replaced a number of the
DirecTV channels CCC had provided with programming from other
initially filed suit against CCC and Mr. Armes in 2010,
alleging breach of contract, fraudulent misrepresentation,
fraudulent inducement, unfair and deceptive trade practices,
and unjust enrichment. After Spirit and CCC agreed to settle
the 2010 action but before a written settlement agreement was
executed, DirecTV shut off its signal to Spirit's
subscribers and told the subscribers who complained that they
were receiving the channels illegally. In light of these
developments, in the written settlement agreement, Spirit
expressly reserved any claims related to its issues with
its settlement with CCC and Mr. Armes, Spirit filed suit
against DirecTV and others seeking damages for defamation,
tortious interference, and violation of the Tennessee
Consumer Protection Act, among other claims. DirecTV filed a
counterclaim, alleging that Spirit was broadcasting its
signal illegally. After discovery revealed that the
system's use of DirecTV program channels was illegal,
Spirit paid DirecTV $250, 000 in settlement of all claims and
agreed to the entry of a permanent injunction prohibiting
Spirit from retransmitting DirecTV program channels or
operating DirecTV satellite receiving equipment without
authorization from DirecTV.
borrowed the funds for the settlement from U.S. Bank. During
this time period, Spirit also refinanced its earlier loan
from U.S. Bank. The new borrowing for the DirecTV settlement
and the refinancing of the earlier loan that funded the
purchase of CCC's assets were reflected in a single,
amended promissory note in favor of U.S. Bank.
13, 2012, Spirit filed this action in the Chancery Court for
Davidson County, Tennessee, against Mr. Armes and CCC. The
suit sought a declaratory judgment that the promissory note
held by CCC was not yet due and payable and requested damages
for breach of contract, fraudulent misrepresentation,
fraudulent inducement, unfair and deceptive trade practices,
and unjust enrichment. Spirit alleged that CCC breached the
asset purchase agreement because one asset, the DirecTV
programming agreement, was not as represented.
regard to fraudulent misrepresentation and fraudulent
inducement, Spirit alleged that Mr. Armes and CCC made
misrepresentations knowing Spirit would rely on those
misrepresentations in deciding whether to purchase the
assets. Spirit claimed these same misrepresentations violated
the Tennessee Consumer Protection Act and entitled Spirit to
treble damages. See Tenn. Code Ann. §§
47-18-101 to -130 (2013).
Armes and CCC denied Spirit's allegations, and CCC filed
a counterclaim seeking payment under the amended promissory
note. According to CCC, when Spirit refinanced
the U.S. Bank note, the note was paid in full, thereby
fulfilling the terms of the subordination agreement. In its
answer to the counterclaim, Spirit asserted the subordination
agreement remained in effect and raised several equitable
defenses, including the doctrine of unclean hands. In ...