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Lascassas Land Company, LLC v. Allen

Court of Appeals of Tennessee, Nashville

April 10, 2018

LASCASSAS LAND COMPANY, LLC
v.
JIMMY E. ALLEN, ET AL.

          Session March 28, 2018

          Appeal from the Chancery Court for Rutherford County No. 15CV-1008 Hamilton V. Gayden, Jr., Judge.

         This appeal involves a dispute between two limited liability companies (and an individual with an interest in both companies) over four lots in a residential subdivision. After a two-day bench trial, the trial court awarded the plaintiff-company $116, 151.87 in proceeds from the sale of lots that were originally owned by the plaintiff. However, the trial court ruled that the defendant-company was entitled to recover $512, 795.07 for the amount it expended constructing homes on those lots. The plaintiff-company has appealed, challenging numerous rulings made by the trial court. For the following reasons, we affirm in part, reverse in part, and remand for further proceedings.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed in part, Reversed in part and Remanded

          Matthew Robert Zenner and Malcolm Leonard McCune, Brentwood, Tennessee, for the appellant, Lascassas Land Company, LLC.

          Terry A. Fann, Murfreesboro, Tennessee, for the appellee, A & R. Land Investments, LLC.

          Gilbert Wayne McCarter, II, Murfreesboro, Tennessee, for the appellee, Jimmy E. Allen.

          Brandon O. Gibson, J., delivered the opinion of the court, in which Arnold B. Goldin, and Kenny Armstrong, JJ., joined.

          OPINION

          BRANDON O. GIBSON, JUDGE.

         I. Facts & Procedural History

         Lascassas Land Company, LLC, was formed in 2000 to own and develop real estate lots in Farmington Subdivision in Murfreesboro, Tennessee. The subdivision was originally platted for 183 lots. By 2015, Lascassas had only four of those subdivision lots remaining for sale, and Lascassas also owned one 14-acre parcel of property. Lascassas had only one debt - a promissory note to a local bank with a remaining balance of approximately $23, 600. The three members of the LLC, at this time, were Percy Dempsey, Joseph Boone, and Jimmy Allen. The relationship among the three members had deteriorated to the point that they were involved in several lawsuits regarding other matters and business entities.

         Percy Dempsey served as the chief manager or managing member of Lascassas, and he was the only member with general authorization to execute deeds and other instruments pertaining to the business of the LLC. Dempsey and his administrative assistant handled the accounting work for Lascassas. In June 2014, the aforementioned promissory note matured, and Lascassas stopped receiving monthly statements from the local bank regarding the promissory note. Dempsey contacted the bank to inquire about the status of the note and learned that Jimmy Allen had purchased the note from the bank for roughly $23, 800.[1] However, Allen never contacted Dempsey or Boone to inform them that he had purchased the note or to discuss payment terms.

         In mid-May 2015, Dempsey arranged for someone to mow the grass on the four vacant subdivision lots owned by Lascassas. Shortly thereafter, the individual contacted Dempsey and informed him that houses were being constructed on two of the four lots. Dempsey contacted the attorney who Lascassas used for real estate closings, and upon investigation, he discovered that the four lots had recently been conveyed by quitclaim deed, on April 16, 2015. The quitclaim deed purportedly conveyed the four lots from Lascassas to A&R Land Investments, LLC. Allen had signed the quitclaim deed on behalf of the grantor, Lascassas. Allen was also one-half owner of the grantee, A&R Land Investments, LLC.

         Lascassas instituted the present litigation on July 10, 2015, with the filing of a complaint against Allen and A&R. The complaint alleged that Allen had conveyed the four lots to A&R without the knowledge or authorization of Lascassas. The complaint alleged that Allen breached his fiduciary duties to Lascassas and converted the lots to the detriment of Lascassas. It asked the trial court to declare the quitclaim deed null and void, or in the alternative, to grant Lascassas a judgment for the value of the lots. Lascassas also sought an award of punitive damages. In addition, Lascassas filed notice of a lien lis pendens claiming rightful ownership of the four lots.[2]

         When the complaint was filed on July 10, 2015, the two homes being constructed by A&R were nearly sixty percent complete. A&R proceeded with construction despite the filing of the complaint and the lien lis pendens. A&R filed a motion to release the lien lis pendens in order to enable it to place the homes on the market for sale unencumbered. Lascassas opposed the motion and also filed an amended complaint seeking the imposition of a constructive trust over the properties and any profits derived from them.

         While the litigation was pending, the parties agreed to obtain an appraisal of the four lots. Lots 99 and 100, which remained vacant and needed significant site work, were valued at $25, 000 each. Lots 109 and 110 were valued at $48, 000 each.

         The parties attended mediation and reached a partial settlement agreement. An agreed order was entered on May 13, 2016. It provided that A&R would convey the two vacant lots, Lots 99 and 100, back to Lascassas. The agreed order further provided:

Lots 109 and 110 have been improved by the construction of homes. There are contracts for the sale of these homes, which are to close at the end of May 2016 if [Lascassas] will release their Lien Lis Pendens. Therefore, [Lascassas] agree[s] to release the Lien Lis Pendens upon being presented with a Good Faith Estimate of Closing Cost, which they approve, on the condition that all proceeds that exceed the approved Good Faith Estimate are paid by the closing agent into this court.
. . . .
[] The parties will then have the right to litigate all issues that are a subject to [sic] this lawsuit and these proceeds at a later time.

         After the filing of this agreed order, A&R tendered the proceeds from the sales of the homes to the clerk of the court. Lot 109 sold for $331, 000, and Lot 110 sold for $357, 900. The net proceeds from the sale of Lot 109 totaled $312, 949.56, and the net proceeds from the sale of Lot 110 totaled $339, 667.95. Thus, a total of $652, 617.51 was deposited with the clerk.

         A&R then filed a motion for payment of its construction expenses. According to A&R, the only amounts deducted from the sale proceeds prior to the tender to the clerk were for real estate commissions and closing costs. A&R asserted that it spent $242, 816.52 constructing the house on Lot 109 and $269, 978.55 constructing the house on Lot 110. Accordingly, A&R sought an order directing the clerk to pay A&R a total of $512, 795.07 for its construction costs from the sale proceeds.

         Lascassas filed a response to the motion for payment of construction costs asserting that it was the rightful owner of the lots on which the homes were constructed and the sale proceeds. Lascassas noted that A&R had not asserted any type of legal claim as the basis for its motion for reimbursement of its construction costs. Lascassas argued that A&R's only conceivable claim would be one for an equitable remedy such as unjust enrichment, and Lascassas argued that A&R would be barred from such an equitable remedy in light of its unclean hands.

         A&R then filed a motion to amend its answer and to assert a counterclaim for unjust enrichment. The motion was granted, and A&R filed a counterclaim asserting that Lascassas would be unjustly enriched if it was permitted to retain all of the proceeds from the sales of the homes without paying A&R for the costs of construction. A&R sought a judgment against Lascassas for the costs of construction. Lascassas filed an answer to the counterclaim, maintaining that the unauthorized quitclaim deed to A&R was void and that A&R constructed the homes at its own peril, with full knowledge that it was not the rightful owner of the lots and in the position of a trespasser. Lascassas asserted that A&R was barred from the equitable remedy of unjust enrichment under the doctrine of unclean hands.

         The trial court held a two-day bench trial in February 2017. The only three witnesses to testify at trial were Percy Dempsey and Joseph Boone, as members of Lascassas, and Ryan Church, the other one-half owner of A&R. The deposition of Jimmy Allen was entered as an exhibit. During his deposition, Allen testified that when he purchased the promissory note for the debt Lascassas owed to the local bank, "in [his] mind, " that entitled him to "ownership" of the four lots owned by Lascassas.[3] Allen's attorney had prepared the quitclaim deed conveying the lots to A&R in accordance with Allen's representation to his attorney that he had authority to convey the lots for or on behalf of Lascassas. Allen acknowledged that no money changed hands when he executed the quitclaim deed conveying the four lots from Lascassas to A&R. However, Allen and the other owner of A&R, Ryan Church, had discussed a price for the four lots and agreed that A&R would pay $105, 000 to Allen. Allen testified that this sum was "owed to me" by A&R because he was the one who contributed the lots. Allen testified that the intent was for A&R to "keep the profits." When asked what Lascassas got out of the deal, Allen responded, "They didn't take anything because I bought the note, and that's what - - that's what produced the quitclaim." Allen later suggested that Lascassas did benefit from the transaction in the sense that it was no longer obligated to the bank for the amount of the promissory note. Counsel for Lascassas asked Allen to clarify whether he took ownership of lots that he himself valued at $105, 000 in exchange for purchasing a promissory note valued at much less, to which Allen responded, "if they would have asked me, I would have been glad to pay them the difference between the value and the note."

         Ryan Church, the other member of A&R, similarly testified at trial that there were "no payments made whatsoever" as a result of the quitclaim deed transferring the four lots from Lascassas to A&R. Church testified that after the execution of the quitclaim deed, he made a notation "on the books" of A&R that $105, 000 was due to Allen. Church testified that A&R had been involved with constructing homes on three other lots in Farmington subdivision, and in each of the three previous instances, A&R paid Allen for the value of the lots after the homes were constructed and sold.[4] Church testified that when Allen approached him about developing the lots at issue in this litigation, he followed the same process, at least from his perspective. Allen told him that he "had lots available" for development, and they agreed to begin construction on two of them. Church entered on the books a payable to Allen for each of the lots. He testified that he and Allen agreed on a price of $35, 000 for each of the two lots they decided to develop and $17, 500 for each of the lots that remained vacant. Church confirmed that once the two houses were sold, "$70, 000 would go in the pocket of Jimmy Allen to repay him for the lots[.]" In other words, Church said that A&R intended to pay for the lots, but the person it intended to pay was Allen. Any profit remaining after the sale would be split between Church and Allen.

         Church testified that he did not look at the deeds or attend the closings. When he learned about the lawsuit filed by Lascassas, he discussed the situation with Allen, and Allen told him that he was entitled to do what he did with the lots because he "bought a note" from the local bank and was owed money. Church accepted Allen's explanation and did not attempt to verify whether he was authorized to convey the lots on behalf of Lascassas. Church said he had no communication with Lascassas and did not obtain permission to continue building the houses after receiving notice of the lawsuit.

         Dempsey and Boone testified about their roles with Lascassas and their dealings with Allen. They acknowledged the litigation and financial problems surrounding other business entities of which the three men were members. However, Dempsey, the managing member of Lascassas, testified that Lascassas was well capitalized and had more than sufficient assets to satisfy its only remaining debt of approximately $23, 600. Dempsey discussed various provisions of the operating agreement of Lascassas to demonstrate that Allen was not authorized to convey the lots owned by Lascassas. Dempsey conceded that Lascassas suffered no damages as a result of the conveyance of Lots 99 and 100 because those lots were reconveyed to Lascassas. As for Lots 109 and 110, however, Dempsey said, "We believe that we're entitled to the proceeds from the sale of our property, period."

         The trial court entered its final order on June 23, 2017. The court made numerous factual findings at the outset. The trial court found that Allen quitclaimed the four Farmington subdivision lots from Lascassas to A&R, signing the deed purportedly as a representative of the grantor, Lascassas. The trial court found that no vote was conducted by the members of Lascassas and that "Allen had no authority to sign the Quitclaim deed on behalf of Lascassas." The trial court further found that Allen understood, at the time he executed the quitclaim deed, that only the chief manager, Dempsey, had authority to execute deeds on behalf of Lascassas. The court found that Allen did not give Dempsey or Boone notice that he intended to transfer the lots and that the deed purporting to convey the four lots "was made without the knowledge of Lascassas or its other members." At the same time, however, the trial court found that "[d]ue to pre[viou]s dealings be[t]ween the entities, it was understood [b]etween Lascassas and A&R that paym[e]nt for the lots would be made [wh]en construc[tion] was completed and [the] homes sold." The trial court found that the transaction "was recorded as a $105, 000 payable to Allen on A&R's books." (Emphasis added.) The court found that "[t]he intent of the transaction was that A&R would build on the lots and Church and Allen, as the members of A&R, would split the profits."

         In the section of the order entitled "Conclusions of Law, " the trial court first found that the quitclaim deed executed by Allen "was a valid transfer of title to A&R."[5] As such, the court concluded that the titles to Lots 109 and 110 were validly transferred to the new owners of the properties, and Lots 99 and 100 were transferred back to Lascassas.

         Next, the trial court found that "Allen breached no fiduciary duty because no meaningful fiduciary relationship existed between the members of Lascassas at the time of the transfer." The trial court quoted Tennessee Code Annotated section 48-240-102(a)-(b), which states:

(a) Fiduciary Duty of Members of Member-Managed LLC. Except as provided in the articles or operating agreement, every member of a member-managed LLC must account to the LLC for any benefit, and hold as trustee for it any profits derived by the member without the consent of the other members from any transaction connected with the formation, conduct, or liquidation of the LLC or from any use by the member of its property including, but not limited to, confidential or proprietary information of the LLC or other matters entrusted to the member as a result of such person's status as a member.
(b) Standard of Conduct. A member of a member-managed LLC shall discharge such member's duties as a member, including all duties as a member of a committee:
(1) In good faith;
(2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
(3) In a manner the member reasonably believes to be in the best interest of the LLC.

         With regard to this statute, the trial court found that "Allen's actions were in good faith, were done with the care of an ordinarily prudent person in similar circumstances, and were in the best interest of the LLC and in line with previous actions of the LLCs involved." As a result, the court concluded that Allen breached no fiduciary duty to Lascassas. Again, however, the court added that "the members' fiduciary duty to one another - if there was ...


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