Opinion

Lascassas Land Company, LLC v. Jimmy E. Allen

Court: Court of Appeals of Tennessee
Filed: Apr 10, 2018
Status: Published
On the bench: Judge Brandon O. Gibson
Cited by: 0 cases
Authority: More cited than 4.3%

“[A] complainant, who has been guilty of unconscientious conduct or bad faith, or has committed any wrong, in reference to a particular transaction, cannot have the aid of a Court of Equity in enforcing any alleged rights growing out of such transaction.”

How later courts described this case

“[A] complainant, who has been guilty of unconscientious conduct or bad faith, or has committed any wrong, in reference to a particular transaction, cannot have the aid of a Court of Equity in enforcing any alleged rights growing out of such transaction.”
explaining that mere introduction of evidence regarding dates did not amount to trial of a statute of limitations defense by implied consent when the evidence was used to establish another issue at trial

Written by the judges who cited it.

The opinion

04/10/2018

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

March 28, 2018 Session

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

Appeal from the Chancery Court for Rutherford County

No. 15CV-1008 Hamilton V. Gayden, Jr., Judge

No. M2017-01400-COA-R3-CV

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

BRANDON O. GIBSON, J., delivered the opinion of the court, in which ARNOLD B.

GOLDIN, and KENNY ARMSTRONG, JJ., joined.

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.

OPINION

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

During his deposition, Allen testified that he had to satisfy the promissory note in order to remain a

board member at the bank due to an impending merger. He said, “One of the criteria was that had to be

satisfied before I could be approved.”

“An abstract of lien lis pendens (‘suit pending’) is a notice filed in the register’s office in the county of

suit to warn all persons that the title to the property is at issue in the litigation.” Neal v. Barone, No.

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.

E2009-02598-COA-R9-CV, 2010 WL 4024973, at *1 n.2 (Tenn. Ct. App. Oct. 13, 2010).

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

The original promissory note owed to the bank was entered as an exhibit at trial, and it described the

collateral as “real property known as Lots 92, 110, 112 and 119 Farmington.” The four lots at issue in

this litigation were Lots 99, 100, 109, and 110.

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

Only one of the three lots previously developed by A&R was conveyed by a deed directly from

Lascassas to A&R. That deed was signed by Dempsey on behalf of Lascassas as its managing member.

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,

The trial court also found that the last four lots owned by Lascassas “secured the one remaining debt of

Lascassas, the note payable to Jimmy Allen.” This finding is not consistent with the description of the

collateral on the promissory note itself. But in any event, the trial court concluded that “[t]itle was

foreclosed outside of the deed of trust and did not pass by way of foreclosure.”

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 one at some time – had been effectively destroyed by their failure

to act in the best interest of the LLC.”

The trial court also considered but rejected the request by Lascassas for a

constructive trust. The trial court found no basis for imposing a constructive trust

because “Allen’s actions were not done with the intent to defraud, but were rather in the

best interest of Lascassas,” and did not breach any fiduciary duty owed to Lascassas. The

trial court dismissed the claim for punitive damages, concluding that the actions of Allen

and A&R did not rise to the level necessary for the imposition of punitive damages or

“shock the conscience.”

In summary, the trial court explained its ultimate decision and award of damages

as follows:

16. Upon consideration of the proof, the Court finds that this is a de jure

derivative action brought by Percy Dempsey on behalf of Lascassas Land

Company, LLC.

17. The Court finds that the Plaintiff's request for a total amount of

$652,617.51 is untenable and inequitable in this case. However, Lascassas

is entitled to damages based upon the efforts of Percy Dempsey as

Managing Director of Lascassas in filing this action.

18. The Court finds the following damages to be proper and equitable

considering the proof:

> A&R will be awarded its constructions costs of the single-family homes

built upon Lots 109 and 110 in the amount of $512,795.07, payable to A&R

....

> Lascassas has suffered no damages to the transfer of Lots 99 and 100 to

A&R and the subsequent transfer back to L[a]scassas f[ol]lowing

mediation.

> Jimmy Allen is awarded $23,670.57, which represents the amount he paid

for the promissory note held by [the] Bank.

> Lascassas is awarded the balance held by the Clerk of $116,151.87.

Lascassas timely filed a notice of appeal to this Court.

II. ISSUES PRESENTED

On appeal, Lascassas presents the following issues, which we have restated

slightly, for review on appeal:

1. Did the trial court err in ruling that the quitclaim deed executed by

Allen was a valid transfer of title to A&R rather than a voidable

transaction;

2. Did the trial court err in finding that Allen did not breach his

fiduciary duty to Lascassas by engaging in an undisclosed self-

dealing transaction;

3. Did the trial court err in failing impose a constructive trust in favor

of Lascassas on the proceeds from the sale of Lots 109 and 110;

4. Did the trial court err in dismissing the claim for punitive damages

against Allen;

5. Did the trial court err in awarding $512,795.07 to A&R for its

construction costs;

6. Did the trial court err in awarding $23,670.57 to Allen, representing

the amount he paid for the promissory note, when Allen never

asserted a counterclaim.

For the following reasons, we affirm in part, reverse in part, and remand for further

proceedings.

III. STANDARD OF REVIEW

“When reviewing a trial court’s findings following a bench trial, this Court

reviews the record de novo and presumes that the trial court’s findings of fact are correct

unless the preponderance of the evidence is otherwise.” M & M Elec. Contractor, Inc. v.

Cumberland Elec. Membership Corp., 529 S.W.3d 413, 422 (Tenn. Ct. App. 2016)

(citing Nashville Ford Tractor, Inc. v. Great Am. Ins. Co., 194 S.W.3d 415, 424 (Tenn.

Ct. App. 2005)). However, we review a trial court’s legal conclusions without a

presumption of correctness. Id.

IV. DISCUSSION

A. Breach of Fiduciary Duty and the Limited Liability Company Act

We find it appropriate to begin with the issue of whether Allen breached his

fiduciary duty to Lascassas by conveying the four lots to A&R. This issue requires us to

examine the Tennessee Limited Liability Company Act, Tennessee Code Annotated

section 48-201-101, et seq.6

It is important to note, at the outset, that a member of an LLC “has no interest in

specific LLC property.” Tenn. Code Ann. § 48-215-101(a). Rather, “[a]ll property

transferred to or acquired by an LLC is property of the LLC itself.” Id. The LLC has an

existence separate from its members and managers. Collier v. Greenbrier Developers,

We note that the Tennessee Revised Limited Liability Company Act, Tenn. Code Ann. § 48-249-101, et

seq., “made extensive revisions to the operation of LLCs in Tennessee and became effective on January 1,

2006.” Bridgeforth v. Jones, No. M2013-01500-COA-R3-CV, 2015 WL 336376, at *24 n.18 (Tenn. Ct.

App. Jan. 26, 2015). The revised Act applies to all LLCs formed after January 1, 2006, and to LLCs

formed prior to that date if they expressly choose to be governed by the revised Act. Id. (citing Tenn.

Code Ann. § 48-249-1002(b)). Lascassas Land Company, LLC, was formed in 2000, and there is nothing

in the record to indicate that it has expressly elected to be governed by the revised Act. The parties rely

on provisions of the original LLC Act in their briefs on appeal. Accordingly, we have applied the original

LLC Act in this opinion.

LLC, 358 S.W.3d 195, 200 (Tenn. Ct. App. 2009). Tennessee Code Annotated section

48-238-103 addresses the issue of agency for members in a member-managed LLC:

(a) Unless the articles otherwise provide, if an LLC is member-managed,

every member is an agent of the LLC for the purpose of its business, and

the act of every member, including the execution in the LLC name of any

instrument, for apparently carrying on in the usual way the business of the

LLC of which such member is a member, binds the LLC, unless the

member so acting has in fact no authority to act for the LLC in the

particular matter, and the person with whom the member is dealing has

knowledge of the fact that the member has no such authority.

(Emphasis added.) Although the trial court in this case did not mention this statute, the

court made several findings that aid us in applying it. After discussing the Lascassas

operating agreement in depth, the trial court concluded that “Allen had no authority to

sign the Quitclaim deed on behalf of Lascassas.” The trial court further found, “At the

time he executed the Quitclaim Deed from Lascassas to A&R, Allen understood that only

the Chief Manager (Dempsey) had authority to execute deeds on behalf of Lascassas[.]”

These findings are amply supported by the record. Pursuant to the aforementioned

statute, the action of a member is not binding on the LLC if “the member so acting has in

fact no authority to act for the LLC in the particular matter, and the person with whom

the member is dealing has knowledge of the fact that the member has no such authority.”

Id. Allen did not in fact have authority to act for the LLC in the particular matter at issue,

and because Allen was simultaneously acting as the agent for A&R in the transaction,

A&R necessarily had knowledge of the fact that the transacting member of Lascassas had

no authority. As a result, Allen’s unauthorized actions did not bind the LLC under the

circumstances of this case.

The LLC Act also addresses the fiduciary duty owed by members of an LLC and

the standard of conduct that applies to the discharge of the members’ duties: