It's that time of year. Results for Summer 2017 Tn. Bar Exam will be released this week. Bar Applicants sit for the Tennessee Bar Exam twice a year. Some applicants receive a notice welcoming them to the bar, and others receive show cause orders from the Board of Law Examiners most commonly after successfully passing the written bar. The reasons vary from drug and alcohol issues, acts of dishonesty, financial issues, and issues with their bar application or the written testing procedure, but the result is the same, a show cause order. The Abraham Lincoln quote sums it up best, "He who represents himself has a fool for a client." Show the BLE good judgment, hire a competent lawyer to represent your interests. After 3 years of law school and the bar exam, it's not worth risking it alone. I have represented clients before the BLE for over ten years. I enjoy the work. It's high stakes as I personally know what is at risk, but it's very rewarding to help an applicant get over the last hurdle. Good luck with the exam results.
Recent legislation went into effect on April 28, 2017 to change the requirement for an Audited and Reviewed financial statements prepared by a CPA. Prior to this change, an “Audited” financial statement was required to obtain a license limit more than $1,500,000. However, a “Reviewed” financial statement may now be provided for those contractors requesting a monetary limit up to $3,000,000. In addition, the small commercial threshold has changed from $750,000 and now allows a contractor with a BC-b(sm) classification to go up to $1,500,000 (with a Reviewed financial statement) without taking the full commercial BC-B trade exam. S
Constructive Notice is sufficient to trigger the running of the statute of limitations because there is a statute that provides the means for a plaintiff to have discovered their alleged injury.
Tennessee Code Annotated § 62-6-513 specifically provides a means for a person in Tennessee to discover the status of a licenses issued by the board of licensing contractors. Id. Thus, constructive notice is sufficient to trigger the running of the statute of limitations for a plaintiff's TCPA claims based on unlicensed contracting, because a plaintiff would havea constructive notice of what type of license a defendant may or may not have had, and the monetary limits of the same.
As stated by the Tennessee Court of Appeals, information contained in public records that relate to an alleged injury sustained by a plaintiff impute constructive notice of that injury onto the plaintiff. Frinks v. Horvath, No. E2016-00944-COA-R3-CV, 2017 WL 782720, at *13 (Tenn. Ct. App. Feb. 28, 2017) (holding that constructive notice of the information contained in a document was imputed on a plaintiff when that document was a matter of public record). Further, the Tennessee Court of Appeals affirmed a trial court’s ruling when the trial court found, in part, that the statute of limitations for a TCPA claim started to run, and stated that knowledge of information contained in a public records was sufficient to trigger the running of the statute of limitations. Wise Const., LLC v. Boyd, No. E2009-01899-COA-R3-CV, 2011 WL 864388, at *3 (Tenn. Ct. App. Aug. 24, 2011) (“As admitted, the Boyds could have checked the public records of Tennessee to determine the holder of the contractor’s license for the contractor’s number set forth on the parties’ agreement. . . The Boyds could also have checked the records to determine at any time if Mr. Wise individually was a licensed contractor.”).
Records regarding the status of licensure of individuals and/or legal entities which are regularly maintained by the [board of licensing contractors] are public records . . .” Therefore, the statute of limitations started running at the moment a Plaintiff enters into the contract with a contractor who is not properly licensed, whose licensure status is publically available.
Because the information contained in public record related to an alleged injury imputes constructive notice onto the plaintiff claims filed beyond one year under the TCPA regarding licensure are subject to dismissal.
The TCPA provides protection and various forms of relief for persons that have suffered “an ascertainable loss of money or property, . . . as a result of the use or employment by another person of an unfair or deceptive act or practice described in [Tenn. Code Ann.] § 47-18-104(b) . . .” Tenn. Code Ann. § 47-18-109. Thus, to recover under the TCPA a Plaintiff must establish both (1) that Defendant engaged in an unfair or deceptive act that is unlawful under the TCPA, and (2) that Defendant's unfair or deceptive act caused the ascertainable loss of money or property. Tucker v. Sierra Bldrs., 180 S.W.3d 109, 115 (Tenn. Ct. App. 2005) (citing Tenn. Code Ann. § 47-18-109(a)(1)).
1. Accrual of Action
An affirmative defense predicated on the running of the statute of limitations “triggers the consideration of three components — the length of the limitations period, the accrual of the cause of action, and the applicability of any relevant tolling doctrines.” Redwing v. Catholic Bishop for Diocese of Memphis, 363 S.W.3d 436, 457 (Tenn. 2012).
The length of the limitations period for TCPA claims is one year. Tenn. Code Ann. § 47-18-110. A cause of action under the TCPA accrues when the person who has suffered the ascertainable loss as a result of an unfair or deceptive practice has notice of the TCPA violation. Eldrige v. Savage, No. M2012-00973-COA-R3-CV, 2012 WL 6757941, at *4 (Tenn. Ct. App. Dec. 28, 2012) (citing Redwing, 363 S.W.3d at 459). Thus, a party must bring a TCPA claim within one year from the date that they knew, “or in the reasonable exercise of reasonable case and diligence, [should have known] that an injury was sustained.” Fortune v. Unum Life Ins. Co. of Am., 360 S.W.3d 390, 402 (Tenn. Ct. App. 2010) (quoting Schmank v. Sonic Automotive, Inc., No. E2007-01857-COA-R3-CV, 2008 WL 2078076, *2-3 (Tenn. Ct. App. May 16, 2008)).
The Tennessee discovery rule does allow a plaintiff to delay the filing of a suit until they know the full extent of their damages. Redwing, 363 S.W.3d at 459.
2. Notice of Alleged Injury More than One Year Before Initiating Action
There are two general forms of notice sufficient to trigger the running of the statute of limitations in Tennessee, actual and constructive. Blevins v. Johnson Cnty., 746 S.W.2d 678, 682-83 (Tenn. 1998). “Constructive notice encourages diligence in protecting one’s rights and prevents fraud.” Blevins, 746 S.W.2d at 683. Constructive notice imputes notice and knowledge of an injury or a wrong on a person when there is a statute that provides a means for that person to discover the injury or wrong. Id. When there is no statute that provides a means for constructive notice, through which a person could discover the injury, the statute of limitations will begin to run only when a plaintiff has actual notice of the injury. See id.; Tucker v. Am. Aviation & Gen. Ins. Co., 278 S.W.2d 677, 680 (Tenn. 1955).
Actual notice does not necessarily mean what its name might indicate, rather actual notice is when a plaintiff knows, or, with the exercise of reasonable care and diligence should have known, that they suffered an injury. Blevins, 746 S.W.2d at 683 (“The words ‘actual notice’ do not always mean in law what in metaphysical strictness they import; they more often mean knowledge of facts and circumstances sufficiently pertinent in character to enable reasonably cautious and prudent persons to investigate and ascertain as to the ultimate facts.’”) (quoting Texas Co. v. Aycock, 277 S.W.2d 41, 46 (Tenn. 1950) (internal quotation marks omitted). In Tennessee, actual notice also includes what is known as “inquiry notice.” Blevins, 746 S.W.2d at 683 (“Some authorities classify inquiry notice as a type of constructive notice, but in Tennessee, it has come to be considered as a variant of actual notice.”).
Inquiry notice occurs and triggers the running of the statute of limitations when a person has knowledge of facts, or possesses information or facts, that would be sufficient to put a person on notice that they may have suffered an injury. Redwing, 363 S.W.3d at 459; Frinks v. Horvath, No. E2016-00944-COA-R3-CV, 2017 WL 782720, at *12 (Tenn. Ct. App. Feb. 28, 2017) (holding that inquiry notice is implicated when a person simply possesses “information or facts sufficient to cause a reasonable person to make further inquiry . . .”). Also stated, inquiry notice is when a person has facts that would or should lead them to inquire as to whether or not they have been injured. Blevins, 746 S.W.2d at 683 (citing City Fin. Co. v. Perry, 257 S.W.2d 1, 2 (Tenn. 1953)). When inquiry notice is implicated it “charges a plaintiff with knowledge of those facts that a reasonable investigation would have disclosed.” Redwing, 363 S.W.3d at 459 (quoting Sherrill v. Souder, 325 S.W.3d 584, 593 n.7 (Tenn. 2010)); Holiday Hospitality Franchising v. States Resources Inc., 232 S.W.3d 41, 49 (Tenn. Ct. App. 2006). Importantly, inquiry notice is triggered when a person is in possession of the information or facts that would be sufficient to cause a reasonable person to make inquiry.
The scope of actual notice, including inquiry notice, is consistent with the Tennessee discovery rule as well as other holdings regarding knowledge of injury, accrual of the cause of action, and the running of the statute of limitations for TCPA claims. See e.g., Fortune v. Unum Life Ins. Co. of Am., 360 S.W.3d 390, 401-03 (Tenn. Ct. App. 2010) (Noting that the Tennessee discovery rule states that causes of action accrue “and the statute of limitations begins to run when the inquiry occurs or is discovered, or when in the exercise of reasonable care and diligence it should have been discovered.”) (quoting Potts v. Celotex Corp., 796 S.W.2d 678, 680 (Tenn. 1990).
Role of Directors
The role of a director in a corporation is that of a manager of the corporation. See Tenn. Code Ann. § 48-18-101. Subject to the provisions of the charter and/or bylaws, directors of a corporation have the sole authority to exercise the corporate powers and to manage the business affairs of a corporation. Lewis on Behalf of Citizens Sav. Bank & Trust, Co. v. Boyd, 838 S.W.2d 215, 220 (Tenn. Ct. App. 1992) (citations omitted). In executing these responsibilities, directors owe the corporation and its shareholders the fiduciary duties of care and loyalty. Keller v. Estate of McRedmond, 495 S.W.852, 880 (Tenn. 2016) (citing Sanford v. Waugh & Co., 328 S.W.3d 836, 843-44 (Tenn. 2010); Neese v. Brown, 405 S.W.2d 577, 584 (Ten. 1964); Summers v. Cherokee Children & Family Servs., Inc., 112 S.W.3d 486, 503 (Tenn. Ct. App. 2002) (citing Knox—Tenn Rental Co. v. Jenkins Ins., Inc., 755 S.W.2d33, 36 (Tenn. 1988); Hayes v. Schweikart’s Upholstering Co., 402 S.W.2d 472, 483 (Tenn. 1965)) (“Directors and officers of corporations are bound to the exercise of the utmost good faith, loyalty, and honesty toward the corporation.”); Hall v. Tenn. Dressed Beef Co., No. 01-A-01-9510-CH-00430, 1996 WL 355074, at *6-7 (Tenn. Ct. App. June 28, 1996) (corporate directors owe to the corporation “the duty of loyalty and the duty of care”) (citations omitted). A fiduciary is a person that holds the interests of the corporation like that of a trustee, who has the requirement to act primarily for the benefit of others, the shareholders. See McRedmond v. Estate of Marianelli, 46 S.W.3d 730, 738 (Tenn. Ct. App. 2000).
Duty of Care
The duty of care requires that directors act in good faith, and in the best interest of the corporation with “the care an ordinarily prudent person in a like position would exercise under similar circumstances. Hall 1996 WL 355074, at *6 (quoting Tenn. Code Ann. § 48-18-301) (citing Neese, 405 S.W.2d at 580-81). The duty of care is normally implicated in cases that allege “negligence, mismanagement, or intentional decisions to commit unlawful acts” by corporate directors or officers. Id., at *6.
Duty of Loyalty
The duty of loyalty for for-profit corporations requires that directors not participate in transactions in which they have a direct or indirect interest — economic or otherwise — and that are not substantively fair to the corporation. Summers, 112 S.W.3d at 504 (quoting Hall 1996 WL 355074, at *6). The Tennessee legislature codified this concept of the duty of loyalty by enacting Tenn. Code Ann. § 48-18-302 (1995) “Conflict of Interest Transactions,” which is now Tenn. Code Ann. §§ 48-18-701 through -704. Id.; 2012 Tenn. Pub. Acts 1051 (H.B. 3459) (“SECTION 35. Tennessee Code Annotated, Section 48–18–601, is amended by deleting the language “§ 48–18–302” and by substituting instead the language ‘part 7 of this chapter.’”). If a director violates the provisions contained within the “Conflicting Interest Transactions” statutes codified in Tenn. Code Ann. §§ 48-18-701 through -704 they have breached the duty of loyalty. See Hall, 1996 WL 355074, at *6. Such a determination is based upon all surrounding facts and circumstances of the transaction. Id. (citing 3 Fletcher § 837.60 (citing Fitch v. Midland Bank & Trust Co., 737 S.W.2d 785, 788 (Tenn. Ct. App. 1987)); Neese, 405 S.W.2d at 581).
Enhanced Duties Owed in Closely Held Corporations
Closely held corporations are those that have a limited amount of stock that is not publicly traded, have shareholders who are small in number, but are familiar with each other; live in the area; are active in the business itself and may even be involved in the management and operations of the corporation, and; are often family members. Cochran v. L.V.R. & R.C., Inc., No. M2004-01382-COA-R3-CV, 2005 WL 2217067, at *3 (Tenn. Ct. App. Sept. 12, 2005). Due to the unique relationships that arise out of closely-held corporations, the directors of closely-held corporations have enhanced fiduciary duties and are required “to act in the utmost good faith and . . . to give the [corporation] the benefit of their care and best judgment and to exercise the powers conferred [to them as directors] solely in the interest of the corporation . . . and not for their own personal interests.” Sanford v. Waugh & Co., 328 S.W.3d 836, 844 (Tenn. 2010) (quoting McRedmond, 46 S.W.3d at 738) (emphasis added). These enhanced duties apply to the provisions of Tenn. Code Ann. § 48-18-301. See id.
Conduct and Procedures for Indemnification Under Tenn. Code Ann. § 48-18-502
Tenn. Code Ann. § 48-18-502 defines the requisite conduct of directors in three distinct situations: (1) conduct made in their official capacity as a director, (2) conduct not made in their official capacity as a director, and (3) conduct with respect to an employee benefit plan. See Tenn. Code Ann. § 48-18-502.
i. Director Action/Official Capacity
When acting in their official capacity as a director — but not in respect to an employee benefit plan — a director has complied with the requirements of Tenn. Code Ann. § 48-18-504(a)(1) if they execute a written affirmation stating that:
(1) Their conduct was made in good faith, and;
(2) They reasonably believed that their conduct was in the best interests of the corporation. Tenn. Code Ann. §§ 48-18-502(a)(1)-(2)(A).
ii. Director Action/Not in Official Capacity
A director whose actions were not made in their official capacity — but not in respect to an employee benefit plan — has satisfied the requirements of Tenn. Code Ann. § 48-18-504(a)(1) if they execute a written affirmation stating that:
(1) Their conduct was made in good faith, and;
(2) They reasonably believed that their conduct was at least not opposed to the corporation’s best interests. Tenn. Code Ann. §§ 48-18-502(a)(1), (2)(B).
iii. Director Action with Respect to Employee Benefit Plan
Tennessee law remains clear regarding director actions with respect to employee benefit plans. A director only satisfies the requirement of Tenn. Code Ann. § 48-18-504(a)(1) if they execute a writing affirming that (1) Their action was made in good faith, and; (2) They reasonably believed that their conduct was “in the interest of the participants in and beneficiaries of the [employee benefit] plan.” Tenn. Code Ann. §§ 48-18-502(a)(1), (b).
Conduct and Procedures for Indemnification Under Tenn. Code Ann. § 48-18-504(2)
In addition to the written affirmation stating that their conduct has met the standards of Tenn. Code Ann. § 48-18-502, to qualify for indemnification a director must furnish a written undertaking. Tenn. Code Ann. § 48-18-502(a)(2). This undertaking must be an unlimited general obligation that promises to repay the corporation any funds advanced on their behalf if the court determines that they are not entitled to indemnification for whatever reason. Tenn. Code Ann. §§ 48-18-502(a)(2), (b).
Determination that Director is not Precluded from Indemnification
Even if a director satisfies the written requirements of Tenn. Code Ann. § 48-18-504(a)(1) and (a)(2), before a director may be indemnified there must be a determination made that the director is not precluded from indemnification under Tenn. Code Ann. §§ 48-18-501 through -509. Tenn. Code Ann. § 48-18-504(3) (A determination is made that the director would not be precluded from being indemnified “under this part.”). The determination of whether a director is precluded from indemnification under the provisions of Tenn. Code Ann. §§ 48-18-501 through -509 are made in the manner specified in Tenn. Code Ann. § 48-18-506. Tenn. Code Ann. § 48-18-504(c).
A corporation cannot indemnify a director unless it is specifically authorized to do so after a determination is made that are not precluded from being indemnified. Tenn. Code Ann. § 48-18-504(a)(3) (“Determinations and authorizations of payments [for indemnification] . . . shall be made in the manner specified in § 48-18-506.” (Tenn. Code Ann. § 48-18-506 requires that a corporation cannot indemnify a director until after a determination is made.)). A determination of whether a corporation can indemnify a director can be made in several ways, depending on the circumstances and involvement of the board of directors in the proceeding for which the indemnification is sought. Tenn. Code Ann. § 48-18-506(b).
i. Determination by Directors
The directors themselves can make the determination that indemnification is permissible under only two sets of circumstances. The first is by a “majority vote of a quorum consisting of directors [who are] not at the time [of the determination] parties to the proceeding.” Tenn. Code Ann. § 48-18-506(b)(1). If the directors cannot form a quorum under Tenn. Code Ann. § 48-18-506(b)(1), then the determination can be made by a committee of 2 or more directors who are not parties to the proceeding. Tenn. Code Ann. § 48-18-506(b)(2). If, however, quorum cannot be met under (b)(1) and a committee cannot be formed under (b)(2), then determination can only be made either by independent special legal counsel or by the shareholders of the corporation. Tenn. Code Ann. §§ 48-18-506(3), (4).
ii. Determination by Special Legal Counsel
Independent special legal counsel (“ISLC”) can determine whether a director is precluded from indemnification, but before they can make such a determination they must first be selected for the task. Tenn. Code Ann. § 48-18-506(3). ISLC can be selected by the directors themselves by a majority vote, so long as they have a quorum of directors who are not parties to the action. Id. If a quorum of directors who are not parties to the action cannot be established, the board of directors may designate a committee to select the ISLC made up of 2 or more directors who are not parties to the action for which indemnification is sought. Id. If a committee cannot be designated because there are not 2 or more directors who are themselves not parties to the action, then, and only then, may the full board of directors vote — regardless of whether they are parties to the action. Id.
Irrespective of the method by which the ISLC is selected, they must be selected as ISLC for the task of determining whether indemnification is precluded. See id. Once selected, the ISLC can then make the determination of whether indemnification is precluded. Id. Only after a determination is made by the ISLC that the director is not precluded from indemnification, can a corporation indemnify that director. Tenn. Code Ann. § 48-18-506(a) (“A corporation may not indemnify a director . . . unless authorized in the specific case after a determination has been made . . .” (emphasis added)). This process must be completed for each director in a proceeding who is seeking indemnification, whether by advancement or repayment. See Id.; Tenn. Code Ann. § 48-18-504 (“A corporation may pay for or reimburse the reasonable expenses incurred by a director . . . the director furnishes the corporation a written affirmation of the director’s . . . that the director has met the standard of conduct . . .” (emphasis added)).
iii. Determination by Shareholders
The shareholders of a corporation may vote to determine whether a director is precluded from indemnification, but, during this vote the directors who are parties to the proceeding may not vote their shares. Tenn. Code Ann. § 48-18-506.
Mandatory Notice Requirement to Shareholders of Director Indemnification
Regardless of the method chosen, once a corporation indemnifies or advances expenses to a director pursuant to §§ 48-18-502, -503, -504, or -505, the corporation has a duty to, and must report the indemnification or advance in writing to the shareholders of the corporation either with, or before, the notice of the next shareholders’ meeting. Tenn. Code Ann. § 48-26-202.
Tennessee law recognizes two types of director indemnification, discretionary and mandatory. See Tenn. Code Ann. § 48-18-502 “Circumstances where indemnification is appropriate”; Tenn. Code Ann. § 48-18-503 “Required Indemnification.” For each, indemnification is only proper if the director was a party to a lawsuit specifically because they are a director of the corporation. See Tenn. Code Ann. §§ 48-18-502 and -503.
A corporation is required to indemnify a director only if that director was “wholly successful, on the merits or otherwise, in the defense of any proceeding to which the director was a party . . .” Tenn. Code Ann. § 48-18-503. A director is “wholly successful” in defending the proceeding only if the entirety of the claims alleged against the director in the suit are disposed of without a finding that the director is liable to the company on any of the claims alleged in the suit. Sherman v. Am. Water Heater Co., 50 S.W.3d 455, 461 (Tenn. 2001) (“[Tenn. Code Ann. § 48-18-503] was patterned after the indemnification section of the Revised Model Business Corporation Act. . . . The Official Comment to the Model Act gives light to the meaning of those words. ‘A defendant is “wholly successful” only if the entire proceeding is disposed of on a basis which does not involve a finding of liability. . .’” (quoting the Rev. Model Bus. Corp. Act § 8.52, cmt. (1984) (internal quotation marks added) (emphasis added))). Thus, if a director is adjudged liable for one claim out of several brought in a derivative suit, they have not been “wholly successful” and indemnification of their expenses is not mandatory. See id.
Discretionary Indemnification — Advancement of Costs
Under Tenn. Code Ann. § 48-18-504, a corporation may, but does not have to, advance or reimburse “the reasonable expenses incurred by a director” if, and only if, certain requirements are met. Id. First, the director must furnish the corporation with a written affirmation that they have met the conduct prescribed in Tenn. Code Ann. § 48-18-502 for discretionary indemnification. Tenn. Code Ann. § 48-18-504(a)(1). Second, the director must furnish the corporation with a written undertaking to repay any advances if they are ultimately adjudged to not be entitled to indemnification. Tenn. Code Ann. § 48-18-504(a)(2). Finally, there must me a determination that the director is not precluded from receiving an advancement pursuant to Tenn. Code Ann. § 48-18-506. Tenn. Code Ann. § 48-18-504(a)(3).
But, even if all of this conduct is satisfied (which it is not in this case), the corporation is not compelled to indemnify a director. Tenn. Code Ann. § 48-18-504(a) (“A corporation may pay for or reimburse . . .” (emphasis added)). Regardless of whether the provisions allowing for indemnification are satisfied, indemnification is prohibited in derivative actions if, in the proceedings brought against them, the director is found liable to the corporation for their actions, or if they have received an improper personal benefit, which includes the unauthorized use of corporate assets. Tenn. Code Ann. § 48-18-502(d); Rev. Model Bus. Corp. Act § 8.31, cmt. (2007) (noting that under § 8.61(b)(3), which sets forth the directors’ exculpation from liability for a conflicting interest transaction if they can establish that the transaction was fair to the corporation, an improper financial benefit includes unauthorized use of corporate assets, facilities, or proprietary information).