Thomas Krajenta v. Volker Paul Westphal

09/27/2022

IN THE COURT OF APPEALS OF TENNESSEE

AT JACKSON

April 19, 2022 Session

THOMAS KRAJENTA ET AL. v. VOLKER PAUL WESTPHAL ET AL.

Appeal from the Chancery Court for Shelby County

No. CH-18-0278 JoeDae L. Jenkins, Chancellor

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No. W2021-00832-COA-R3-CV

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Appellants, board members and members of Appellee homeowner’s association, filed a

pro se lawsuit against the homeowner’s association and other board members, who are also

Appellees. Appellees filed a motion to dismiss the amended petition on the ground that

Appellants failed to bring a proper derivative action. Appellants filed voluntary nonsuits

before the trial court heard the motion to dismiss. Despite the voluntary nonsuits, the trial

court granted the motion to dismiss and denied the voluntary nonsuits. The trial court also

awarded Appellees a portion of their attorney’s fees under Tennessee Code Annotated

section 48-56-401(e), and, alternatively, under Tennessee Code Annotated section 20-12-

119(c). Because the trial court should have allowed Appellants’ nonsuits, we: (1) reverse

the trial court’s denial of the nonsuits; (2) vacate the trial court’s order granting Appellees’

motion to dismiss; and (3) vacate the trial court’s order granting Appellees’ attorney’s fees.

The trial court’s order dividing the special master fees equally between the parties is

affirmed.

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

Vacated in Part; Reversed in Part; Affirmed in Part; and Remanded

KENNY ARMSTRONG, J., delivered the opinion of the court, in which J. STEVEN STAFFORD,

P.J., W.S., and ARNOLD B. GOLDIN, J., joined.

Michael F. Rafferty and Emily Hamm Huseth, Memphis, Tennessee, for the appellants,

Thomas Krajenta, Johnny Pulliam, and Kim Wagner.

Jonathan L. Miley, Mt. Juliet, Tennessee, for the appellant, David G. Mills.

Canon F. Allen, Sr., Memphis, Tennessee, for the appellees, Volker Paul Westphal, Karen

Taylor, Mike Poindexter, Janice Tankson, and Riverwood Farms Association, Inc.

OPINION

I. Background

This case arises out of a dispute between members of the Riverwood Farms

Association, Inc. (the “HOA”), the homeowner’s association that manages the Riverwood

Farms neighborhood in Cordova, Tennessee. The HOA is run by a Board of Directors (the

“Board”) consisting of seven homeowners, who are elected annually. On March 1, 2018,

Thomas Krajenta, Johnny Pulliam, Michael Pickens, David Mills (“Appellant Mills”),

Terry Coggins, and Kim Wagner (together, the “Petitioners”) filed a pro se verified petition

to appoint a receiver to administer the affairs of the HOA in the Chancery Court of Shelby

County (“trial court”).1 The petition listed only the HOA as a defendant. At the time of

the filing, Messrs. Krajenta, Pulliam, and Pickens were incumbent Board members of the

HOA. Appellant Mills was a former Board member, and Messrs. Coggins and Wagner

were homeowners and members of the HOA but not Board members.

On May 1, 2018, the HOA filed a motion to dismiss the verified petition to appoint

a receiver. In essence, the motion argued that, “[b]ased on the allegations of the

[p]etition[,] the only action [the Petitioners] could bring [was] a derivative action,” and,

“[b]ecause they [did] not [bring a derivative action], the [p]etition should be dismissed.”

On May 14, 2018, the Petitioners filed a pro se first amended verified complaint for a

derivative suit, petition to stop ultra vires activity, verified petition to appoint a receiver to

administer the affairs of the HOA, and request for declaratory judgment (the “amended

petition”). The Petitioners added the other four incumbent Board members as defendants:

Volker Paul Westphal, Karen Taylor, Mike Poindexter, and Janice Tankson (together with

the HOA, “Appellees”). Although not pertinent to the issues raised in this appeal, we note

that the trial court appointed a special master to oversee a limited issue in May 2018.

On June 7, 2018, Appellees filed a motion to dismiss the amended petition. In

pertinent part, and as discussed further below, Appellees alleged that, although the

Petitioners asserted that they were bringing a derivative action, they failed to bring a proper

derivative action. In support of their motion to dismiss, Appellees argued, inter alia, that

derivative actions require an attorney to file them. Because the Petitioners filed the lawsuit

pro se, Appellees maintained that it was not a proper derivative action and should be

dismissed. In their motion, Appellees requested attorney’s fees under two statutes,

discussed further below. We note that, when the petitions were filed, Appellant Mills was

a retired attorney with an inactive Tennessee license. On June 18, 2018, Carol Molloy, a

Massachusetts attorney (with a Tennessee license) and a former colleague of Appellant

Mills, filed an appearance on behalf of the Petitioners. The same day, the Petitioners filed

their response in opposition to the motion to dismiss the amended petition. On July 10,

1

For purposes of this appeal, it is not necessary to examine the underlying issues that precipitated

this lawsuit.

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2018, after reinstating his law license, Appellant Mills filed a notice of appearance on

behalf of the Petitioners. Such notice provided that he would be lead counsel, and that Ms.

Molloy would remain as co-counsel.

On July 13, 2018, Appellees filed a motion to disqualify Appellant Mills as counsel

for the Petitioners, arguing that he could not serve in such capacity because he was a

“material witness” in the lawsuit. On August 6, 2018, Appellant Mills filed a voluntary

nonsuit without prejudice of his action against Appellees. On August 31, 2018, the trial

court entered an order granting Appellees’ motion to disqualify Appellant Mills as the

Petitioners’ counsel on its finding that Appellant Mills was “likely to be a necessary

witness” at trial. On October 12, 2018, attorneys Emily Hamm Huseth and Michael F.

Rafferty filed notices of appearance as well as a motion to substitute counsel on behalf of

all of the Petitioners except for Appellant Mills. Although Ms. Molloy filed an objection

to the substitution, the trial court granted it on October 29, 2018. On November 30, 2018,

Messrs. Krajenta, Pickens, Pulliam, Coggins, and Wagner filed a notice of voluntary

nonsuit without prejudice.

Despite the voluntary nonsuits, the trial court heard Appellees’ motion to dismiss

on December 7, 2018. By order of January 31, 2019, the trial court denied both voluntary

nonsuits and granted in part and denied in part Appellees’ motion to dismiss. The trial

court reserved the issue of attorney’s fees. The trial court’s January 31st order does not

provide any explanation as to why it denied the nonsuits and granted the motion to dismiss,

and there is no transcript of the hearing or the trial court’s oral ruling.

On April 17, 2020, Appellees filed their motion for fees and expenses. Appellees

argued that the trial court had the authority to award them $118,832.00 for fees and

expenses under Tennessee Code Annotated section 48-56-401(e), which allows for the

award of reasonable expenses (including attorney’s fees) in the defense of a frivolous or

bad-faith derivative action against a non-profit corporation. Alternatively, Appellees

argued that the trial court should award them fees and expenses under Tennessee Code

Annotated section 20-12-119(c), which compels an award of up to $10,000.00 for a party

that successfully brings a motion to dismiss, i.e., the “loser pays” statute. On May 31,

2020, Appellant Mills filed a motion for special appearance and opposition to Appellees’

motion for attorney’s fees. On February 24, 2021, Messrs. Krajenta, Pulliam, Pickens, and

Wagner filed a response in opposition to Appellees’ motion for fees and expenses. We

note that, by this time, Mr. Coggins had filed a petition for bankruptcy and was no longer

an active party in this case.

On February 26, April 12, and May 13, 2021, the trial court heard Appellees’ motion

for fees and expenses. As discussed more fully below, by order of July 8, 2021, the trial

court awarded Appellees: (1) a $95,000.00 judgment under Tennessee Code Annotated

section 48-56-401(e); and, alternatively, (2) a $10,000.00 judgment under Tennessee Code

Annotated section 20-12-119(c). Both judgments were awarded jointly and severally

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against Appellant Mills, and Messrs. Krajenta, Pulliam, Pickens, and Wagner. Appellant

Mills appeals. Separately, Messrs. Krajenta, Pulliam, and Wagner (the “Krajenta

Appellants,” and together with Appellant Mills, “Appellants”) also appeal.2

II. Issue

Although the parties raise several issues on appeal, we perceive the dispositive issue

to be whether the trial court erred in denying Appellants’ voluntary nonsuits.

III. Standards of Review

The issue in this case requires this Court’s review of the Tennessee Rules of Civil

Procedure and statutory construction, both of which are questions of law, which we review

de novo with no presumption of correctness. See Lacy v. Cox, 152 S.W.3d 480, 483 (Tenn.

2004) (rules of civil procedure); In re Estate of Tanner, 295 S.W.3d 610, 613 (Tenn. 2009)

(statutory construction).

IV. Analysis

As an initial note, we agree with the Krajenta Appellants that this case presents a

“legal quagmire,” which is further complicated by the trial court’s incomplete and

contradictory orders. Given that this case turns on the question of whether the trial court

should have allowed Appellants’ voluntary nonsuits, we begin with a review of Tennessee

Rule of Civil Procedure 41.01, which governs voluntary nonsuits to dismiss actions without

prejudice. The rule provides that, “[s]ubject to the provisions of Rule 23.05, Rule 23.06,

or Rule 66 or of any statute, . . . plaintiff[s] shall have the right to take a voluntary nonsuit

to dismiss an action without prejudice by filing a written notice of dismissal at any time

before the trial of a cause . . . .” Tenn. R. Civ. P. 41.01(1) (emphasis added). Under the

plain language of Rule 41.01, unless an exception applied, it was error for the trial court to

deny Appellants’ voluntary nonsuits.

One of the exceptions to Rule 41.01 is found in Rule 23.06. Rule 23.06 provides

that, when a plaintiff brings a derivative action on behalf of a corporation, the plaintiff is

required to seek court approval before the action may be voluntarily dismissed. Tenn. R.

Civ. P. 23.06. Similar provisions are found in the statutes concerning derivative actions,

Tennessee Code Annotated section 48-56-401 (addressing derivative actions on behalf of

non-profit corporations) and section 48-17-401 (addressing derivative actions on behalf of

for-profit corporations). See Tenn. Code Ann. § 48-56-401(d); Tenn. Code Ann. § 48-17-

401(c). As discussed further below, although the trial court’s denial of the voluntary

nonsuits was premised on Rule 23.06 and Tennessee Code Annotated section 48-56-401,

2

Mr. Pickens did not file a timely appeal of the trial court’s order. Accordingly, he is not a party

to this appeal.

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the trial court made contradictory findings concerning whether Appellants’ lawsuit

constituted a proper derivative action. The resolution of this question is important. If

Appellants did not bring a proper derivative action, then Appellants would not have been

required to obtain the trial court’s approval of the voluntary nonsuits; under this scenario,

the trial court’s denial of the nonsuits would constitute reversible error. Accordingly, the

threshold question is whether Appellants brought a proper derivative action.

“A derivative action is an extraordinary, equitable remedy available to shareholders

when a corporate cause of action is, for some reason, not pursued by the corporation itself.”

Memphis Health Ctr., Inc. ex rel. Davis v. Grant, No. W2004-02898-COA-R3-CV, 2006

WL 2088407, at *8 (Tenn. Ct. App. July 28, 2006) (quoting Lewis v. Boyd, 838 S.W.2d

215, 221 (Tenn. Ct. App. 1992)). As the Tennessee Supreme Court has explained, “[a]

shareholders’ derivative action seeks redress for a wrong to the corporation, and the right

of the shareholder to maintain the action is derivative or secondary.” Keller v. Est. of

McRedmond, 495 S.W.3d 852, 868 (Tenn. 2016) (citation omitted) (emphasis added).

“The derivative suit is a statutorily created substantive right.” Walker v. Tri-Cnty. Elec.

Membership Corp., No. 01-A-01-9002-CH00049, 1990 WL 120721, at *4 (Tenn. Ct. App.

Aug. 22, 1990). “To guard against misuse of the derivative action, preconditions to such

lawsuits are imposed.” Memphis Health Ctr., Inc. ex rel. Davis, 2006 WL 2088407, at

*9. Indeed, to “ensure that the statutory scheme provided for the maintaining of a

derivative suit remains uniform[,] . . . a party must meet all the requirements of both

[Tennessee Rule of Civil Procedure] 23.06 and Tennessee Code Annotated section 48-56-

401.” Walker, 1990 WL 120721, at *3. We turn to those requirements now.

As an initial matter, any action “to redress injuries to a corporation . . . cannot be

maintained by a stockholder in his own name but must be brought in the name of the

corporation . . . and can be asserted only through the corporation.” Third Nat. Bank in

Nashville v. Celebrate Yourself Prods., Inc., 807 S.W.2d 704, 707-08 (Tenn. Ct. App.

1990) (emphasis added) (citing Com. Credit Dev. Corp. v. Scot. Inns of Am., Inc., 69

F.R.D. 110, 117 (E.D. Tenn. 1975)). Tennessee Code Annotated section 48-56-401(a)

provides that a derivative suit may be brought by: (1) “[a]ny member or members having

five percent (5%) or more of the voting power or by fifty (50) members, whichever is

less; or (2) [a]ny director.” Tenn. Code Ann. § 48-56-401(a). Tennessee Code Annotated

section 48-51-201(12) defines “directors,” in part, as “natural persons . . . elected or

appointed to act as members of the board, irrespective of the names or titles by which such

persons are described[.]” Tenn. Code Ann. § 48-51-201(12). Although Tennessee law

permits individuals to represent themselves pro se, such laws “are not applicable to

corporations [as] a corporation cannot file a lawsuit pro se.” Humphreys v. Breakstone,

No. W1999-02502-COA-R3-CV, 2001 WL 99570, at *3 (Tenn. Ct. App. Jan. 30, 2001).

Because the Rules of the Tennessee Supreme Court “prohibit any person from engaging in

the practice of law without a license[,] a non-lawyer agent, such as a shareholder, may not

represent a corporation in court proceedings.” Id. (emphasis added) (citing Old Hickory

Eng’g & Mach. Co. v. Henry, 937 S.W.2d 782, 786 (Tenn. 1996)); see also Tenn. Sup.Ct.

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R. 7, § 1.01. In short, any derivative action brought by a pro se plaintiff is improper, and

any petition for a derivative action must be signed by a licensed attorney.

Section 48-56-401 also provides that a complaint in a derivative action must be

verified and “allege with particularity the demand made, if any, to obtain action by the

directors and either why the plaintiffs could not obtain the action or why they did not make

the demand.” Tenn. Code Ann. § 48-56-401(c); see also Tenn. R. Civ. P. 23.06 (“The

complaint shall also allege with particularity the efforts, if any, made by the plaintiff to

obtain the action desired from the directors or comparable authority and, if necessary, from

the shareholders, or members, and the reasons for the plaintiff’s failure to obtain the action

or for not making the effort.”); Lewis, 838 S.W.2d at 221 (“The most common precondition

requires the shareholder to first make a written demand on the corporation’s directors

requesting them to prosecute the suit or to take other suitable corrective action.”).

However, if such a demand would be futile, this requirement may be excused. See

Humphreys v. Plant Maint. Serv., Inc., No. 02A01-98-11-CV-00323, 1999 WL 553715,

at *6 (Tenn. Ct. App. July 30, 1999); Lewis, 838 S.W.2d at 221. Lastly, Rule 23.06

provides that a “derivative action may not be maintained if it appears that the plaintiff does

not fairly and adequately represent the interests of the shareholders or members similarly

situated in enforcing the right of the corporation or association.” Tenn. R. Civ. P. 23.06.

In the motion to dismiss the amended complaint, Appellees argued that Appellants

failed to satisfy several of the foregoing requirements for a proper derivative action.

Specifically, Appellees argued that the three incumbent board members, Messrs. Krajenta,

Pulliam, and Pickens, were the only Petitioners with standing to bring the suit, and that the

three non-board members, Messrs. Coggins and Wagner, and Appellant Mills, did not have

standing to bring the claim “because there [were] too few of them to bring a derivative

action.” See Tenn. Code Ann. § 48-56-401(a)(1). Thus, Appellees argued that the non-

board members should have been dismissed “because they [could] only assert those claims

as homeowners, not Board members.” Appellees also argued that the amended complaint

was not a properly filed derivative action because it was filed by pro se plaintiffs, not a

practicing attorney. See Humphreys, 2001 WL 99570, at *3 (citing Old Hickory Eng’g &

Mach. Co., 937 S.W.2d at 786). Additionally, Appellees argued that the amended

complaint “contain[ed] no allegations as to what steps Petitioners took to get the Board to

appoint a receiver or get the homeowners to demand that the Board hire a receiver.” See

Tenn. Code Ann. § 48-56-401(c); see also Lewis, 838 S.W.2d at 221-22. Lastly, Appellees

argued that the amended complaint contained “no allegations that the Petitioners ‘fairly

and adequately’ represent[ed] the interest of the shareholders,” and that “Petitioners [did]

not even allege in conclusory fashion that they ‘fairly and adequately’ represent[ed] the

homeowner members.” See Tenn. R. Civ. P. 23.06. Appellees argued that the foregoing

shortcomings required the trial court’s dismissal of “all claims against the HOA[.]”

Although the trial court failed to articulate why it granted Appellees’ motion to

dismiss, we deduce from its July 8, 2021 order on fees and expenses that the trial court

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adopted Appellees’ arguments, supra. In the order on fees and expenses, the trial court

found, in part, that Appellants: (1) failed to make a demand to the HOA Board prior to

filing suit but alleged that such demand would be futile; (2) commenced this action pro se

and attempted to cure that problem by hiring Ms. Molloy and Appellant Mills; and (3) did

not fairly and adequately represent the interests of the members similarly situated in

enforcing the rights of the HOA. Despite the foregoing findings, the trial court concluded

that: (1) Appellants’ nonsuits required the trial court’s approval under both Rule 23.06 and

Tennessee Code Annotated section 48-56-401, discussed supra; and (2) Appellees could

recover fees and expenses under section 48-56-401(e). See Tenn. Code Ann. § 48-56-

401(e) (“On termination of the [derivative action], the court may require the plaintiffs to

pay any defendant’s reasonable expenses (including counsel fees) incurred in defending

the suit if it finds that the proceeding was commenced frivolously or in bad faith.”). The

foregoing demonstrates the trial court’s contradictory findings and conclusions concerning

whether Appellants brought a proper derivative action. Equally contradictory is the trial

court’s denial of Appellants’ nonsuits on its implicit finding that the underlying action was

derivative and its subsequent grant of Appellees’ motion to dismiss on the supposition that

Appellants failed to assert a proper derivative action.

Appellees’ arguments on appeal are similarly confusing and contradictory. When

asked at oral argument whether Appellants brought this case “as a proper derivative

action,” counsel for Appellees stated: “[W]e contend that this was not a proper derivative

action.” However, later in oral argument, counsel argued that this “is not a 40.01 dismissal,

this could only be a 23.06 dismissal because it’s a derivative action.” Perhaps as an

explanation for this apparent contradiction, Appellees argue in their appellate brief that

Appellants’ suit was “derivative in nature,” and “it was because [Appellants] failed to

properly pursue their clearly derivative claims that [Appellees] argued dismissal was

appropriate.” From the foregoing, it appears that Appellees’ argument is that if a plaintiff’s

claims are “derivative in nature,” and the plaintiff intends to and attempts to assert a

derivative action, then Rule 23.06 and Tennessee Code Annotated section 48-56-401 apply

to the action despite the plaintiff’s failure to adhere to the requirements in the rule and the

statute.

Tennessee case law belies Appellees’ reasoning. As discussed supra, there are

“preconditions to [derivative] lawsuits[,]” Memphis Health Ctr., Inc. ex rel. Davis, 2006

WL 2088407, at *9, and “a party must meet all the requirements of both [Tennessee Rule

of Civil Procedure] 23.06 and [Tennessee Code Annotated section] 48-56-401,” Walker,

1990 WL 120721, at *3, for his or her action to “qualify as a derivative suit.” Id. In

Kovacs-Whaley v. Wellness Sols., Inc., No. M2011-00089-COA-R3-CV, 2012 WL

927777 (Tenn. Ct. App. Mar. 16, 2010), this Court held that the for-profit derivative statute

(Tennessee Code Annotated section 48-17-401) was inapplicable where a plaintiff

attempted to bring a derivative action but failed to “comply with the requirements of the

statute in bringing her action.” Id. at *10. Although the statute at issue here concerns non-

profit derivative suits, it is similar to the statute concerning for-profit derivative suits, and

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so the reasoning in the Kovacs-Whaley opinion is instructive. Both Kovacs-Whaley and

Walker hold that a plaintiff must fully comply with Tennessee statutes and rules concerning

derivative actions in order for his or her action to “qualify as a derivative suit”; a party’s

attempt or intent is irrelevant. In view of the foregoing, we turn to the question of whether

Appellants fully complied with the relevant statute and rule concerning non-profit

derivative actions. We begin with a review of the amended complaint.

The amended complaint was filed by pro se plaintiffs, some of whom did not have

standing to bring the action. While derivative actions must be filed by an attorney licensed

to practice law in Tennessee, Appellants attempted to “cure” this issue when they later

retained counsel. See Humphreys, 2001 WL 99570, at *3 (citing Old Hickory Eng’g &

Mach. Co., 937 S.W.2d at 786); see also Tenn. Sup.Ct. R. 7, § 1.01. Further, as Appellees

argued, only three of the Petitioners had standing to bring a derivative action. Messrs.

Krajenta, Pulliam, and Pickens were the only active Board members of the HOA when the

amended petition was filed; Appellant Mills, and Messrs. Coggins and Wagner were

simply homeowner members, and, as such, required 5% or more of the voting power, or

50 members, whichever was less, to have standing to bring the action. Tenn. Code Ann. §

48-56-401(a). In the amended complaint, Petitioners alleged that there were approximately

1,134 single family dwellings and 2,700 to 3,000 individuals residing in the subdivision.

Given these numbers, it is clear that Appellant Mills, and Messrs. Coggins and Wagner did

not, as Appellees argued, have standing to bring a derivative action because there were

“too few of them.” We need not address whether Appellants “cured” the foregoing issues

given our analysis below.

On this Court’s review, we conclude that the substance of the amended complaint

was insufficient to satisfy the pleading requirements for a derivative action. We recall that

a written demand to a corporation’s directors is a requirement for a derivative action. See

Lewis, 838 S.W.2d at 221. Indeed, a complaint in a derivative action must “allege with

particularity the demand made, if any, to obtain action by the directors and either why the

plaintiffs could not obtain the action or why they did not make the demand.” Tenn. Code

Ann. § 48-56-401(c); see also Tenn. R. Civ. P. 23.06. The policy behind the demand

requirement was explained by the Tennessee Supreme Court:

[I]t is clear that no stockholders should be permitted to interfere and control

the management or frustrate the purposes of the corporation merely upon an

allegation of the existence of a state of affairs contrary to their judgment of

propriety, without any effort to have it charged in the mode indicated. Any

other view would be destructive of the purposes for which corporations are

formed, and of the principle of corporate action and management. It would

make them hot-houses of litigation, and leave the valuable franchises held by

them at the mercy of the misjudgment, passion, or speculative propensities

of individual stockholders. While the rule announced neither permits abuses

in this or the opposite direction, it does not prevent suits for abuse of trust,

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or mismanagement. It only requires that stockholders proceed in that

lawful and orderly way for the correction of abuses within the corporation

which they have engaged to do on becoming shareholders in it, which its

existence and interest require they shall do,—to reform alleged abuses

before involving the corporation and other shareholders therein in

litigation; but it equally provides that when they have done this, and found

themselves unable to obtain relief to which they are entitled, it will be given

them by the courts.

Akin v. Mackie, 310 S.W.2d 164, 167-68 (Tenn. 1958) (quoting Boyd v. Sims, 11 S.W.

948, 949 (Tenn. 1889)) (emphases added).

There is no indication in the amended complaint that Appellants served a written

demand on Appellee Board members. As noted above, this requirement may be excused

if such exercise would be futile. Humphreys, 1999 WL 553715, at *6; Lewis, 838 S.W.2d

at 221. There are two circumstances in which a demand may be futile: where a demand is

refused and where a demand is excused. Lewis, 838 S.W.2d at 222. Importantly, even in

“demand refused” and “demand excused” cases the statute and rule still require the

complaint to allege “with particularity” why any demand would be futile. See Tenn. Code

Ann. § 48-56-401(c); see also Tenn. R. Civ. P. 23.06.

In demand refused cases, “the corporation’s directors have [already] refused to take

action in response to a shareholder’s [previous] demand.” Lewis, 838 S.W.2d at 222.

Accordingly, for the plaintiff to be relieved of the demand requirement under this

exception, a complaint must allege, with particularity, how a corporation’s directors

previously refused a plaintiff’s demands. It appears that Appellants relied on the “demand

refused” exception to excuse them from the demand requirement. In the amended

complaint, Appellants alleged that “[t]he verified affidavits of the petitioning incumbent

Board members . . . support[ed] the futility of making a demand under the present

circumstances[.]” The affidavits stated:

5. [Appellant Board members] were concerned that actions of the Board

were taken without consideration of [the HOA’s] Governing Documents or

state statutes and were outside of the Board’s authority.

6. [Appellant Board members] discovered that there is so much that needs

to be done that it cannot possibly be accomplished during the one year term

of a single group of Board members.

7. [Appellant Board members] also discovered that the [HOA] had not been

too successful in managing long-term maintenance, repair, and replacement

projects.

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8. [Appellant Board members’] efforts to fulfill [their] duties as Board

members were met with resistance and outright hostility by Ms. Joyce

Sp[ei]cha,3 the other Board members[,] and at least one (1) other individual

who had been a Board member the prior year but had not been re-elected.

9. Despite [their] best efforts it became obvious to [Appellant Board

members] that [their] efforts to resolve these matters were futile.

(Emphases added). Similarly, the amended complaint alleged:

280. Three (3) members of the 2017 Board, Mr. Krajenta, Mr. Pulliam[,] and

Mr. Pickens, have attempted to address issues related to security, the lack of

a financial audit[,] and other vendor contracts[,] including with the

Management Company, Ambassador [(security/patrol company)][,] and

Echo Systems [(landscaping company)].

281. They have attempted to no avail to have the Board meet to adopt

policies to improve Board management and operation of the [HOA’s]

business affairs.

285. Sincere efforts to resolve [the] serious and fundamental matter of the

Board’s authority to use Assessment funds have been futile as have been

efforts to resolve the matter of members and Directors access to and rights

to review [HOA] records including contracts with vendors.

(Emphases added).

In the amended complaint, Appellants alleged facts concerning seven categories of

issues before pleading four causes of action, requesting a declaratory judgment, and

requesting the appointment of a receiver.4 Problematically, Appellants failed to allege,

3

The amended complaint alleged that Ms. Speicha was the management company’s representative.

From the pleading, it appears she was neither a Board member nor member of the HOA.

4

The seven categories of alleged issues concerned: (1) public property and public services; (2) the

waterways in the neighborhood; (3) the “lack of expertise and a location for meetings”; (4) the 2012

engineering study; (5) a “lack of transparency and access to [HOA] records and documents”; (6) the HOA’s

independent contractors (the property management company, the law firm that provides the HOA legal

services, the security/patrol company, the grounds and landscaping company); and (7) “the Board of

Directors, and a history of its actions and inactions, and poor decisions.” The four causes of action were:

(1) past and present negligence and intentional acts of the HOA by its Board, officers, and agents; (2) past

and present failure of the HOA, its directors, officers, and agents to comply with state laws generally and

specific statutes; (3) past and present failure or refusal of the Board, its officers, and agents to comply with

the HOA’s governing documents; and (4) past and present ultra vires acts. Additionally, Appellants asked

the trial court to “grant them a declaratory judgment holding that it is unlawful for the [HOA] to contract

for security services for the entire subdivision.” Appellants also alleged that, based on the foregoing claims,

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with particularity, the specific “efforts” Appellants undertook to resolve any of the alleged

issues, and how Appellee Board members resisted, or refused, the same. See Lewis, 838

S.W.2d at 222. By way of example, one of the issues Appellants alleged concerned “the

frequent rise and fall of the lake level[,] . . . [which] has eroded and continues to erode the

shoreline[.]” Appellants further alleged that “[t]his erosion cause[d] trees around the

shoreline to continually fall into the lake . . . and in some places the shoreline may have

cut back fifteen (15) feet or more from when the lake was built.” Accordingly, Appellants

alleged that the HOA “need[ed] to plant water resistant trees and shrubs around the

perimeter of the lake to mediate erosion and that need[ed] to be completed within one (1)

year.” Although Appellants identified an alleged issue and offered a plan for remediation,

they failed to explain whether they attempted to bring this problem to the attention of the

Board or the HOA before bringing the lawsuit. While this is but one example, all of

Appellants’ issues were pleaded in this manner. Indeed, although Appellants’ amended

complaint set out their concerns and suggestions for remedying those concerns, it failed to

allege that Appellants attempted to resolve the issues before filing suit and that Appellee

Board members refused such attempts. Failing to satisfy this requirement contravenes the

policy underlying the demand requirement, i.e., that a plaintiff should attempt to “reform

alleged abuses before involving the corporation and other shareholders therein in

litigation.” Akin, 310 S.W.2d at 167-68 (quoting Boyd, 11 S.W. at 949).

For completeness, we turn to review whether the amended complaint alleged any

facts to show that a demand would be “excused.” Tennessee case law provides that “a

demand of the agents of a corporation . . . is not necessary if these agents are themselves

guilty of the wrongs complained of against the corporation[.]” Boyd, 11 S.W. at 949-50

(emphasis added); see also Akin, 310 S.W.2d at 168 (quoting Peeler v. Luther, 135 S.W.2d

926, 928 (Tenn. 1940)) (“[Demand] need not be made where the corporation is under the

control of the wrongdoers or of persons who are necessary parties defendant.”) (emphasis

added); Deaderick v. Wilson, 67 Tenn. 108, 131 (Tenn. 1874) (holding that “if the

corporation is still under the control of those who must be defendants in the suit,” the

demand requirement is excused) (emphasis omitted) (emphasis added). This Court has

opined that,

[i]n demand excused cases, the grounds for the shareholder’s claim are (1)

that the board is interested and not independent and (2) that the challenged

transaction is not protected by the business judgment rule. Thus, demand

excused cases require an examination of the corporate decision-makers’

interest and independence, as well as the good faith and reasonableness of its

investigation.

Lewis, 838 S.W.2d at 222. Concerning the business judgment rule, courts “presume that a

“a receiver [was] necessary to protect and manage the property of the [HOA] while Petitioners seek to

remedy the harms to the [HOA] of this past conduct and seek to enjoin or prohibit similar future conduct.”

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corporation’s directors, when making a business decision, acted on an informed basis, in

good faith, and with the honest belief that their decision was in the corporation’s best

interests.” Id. at 221-22. As discussed above, Appellants’ demands would certainly be

futile, and, therefore, excused, if Appellee Board members were “themselves guilty of the

wrongs complained of.” See Boyd, 11 S.W. at 949-50. Tennessee courts have found a

demand futile and unnecessary when: (1) the defendants were the directors of a corporation

and accused of insider trading and scheming to defraud smaller stockholders, see

Deaderick, 67 Tenn. at 112; (2) the president and treasurer, a majority stockholder, was

personally accused of depleting the company’s treasury at the expense of the minority

stockholders, see Akin, 310 S.W.2d at 168; (3) the amended complaint alleged that a

demand would be futile because the defendants had “a direct interest in continuing to

breach their fiduciary duty and violate the Bylaws and federal rules and regulations”),

Memphis Health Ctr., Inc. ex rel. Davis, 2006 WL 2088407, at *10; and (4) the complaint

alleged that “[the board] wast[ed] corporate assets to the detriment of the [c]orporation,

[used] corporate assets for the personal gain of the individual board members,” and

depleted corporate assets, Bourne v. Williams, 633 S.W.2d 469 (Tenn. Ct. App. 1981). No

such circumstances were pleaded in this case. Notably, the amended complaint contained

no allegations of malfeasance or self-dealing by specific Appellee Board members. In fact,

the amended complaint did not allege any actions by specific Appellee Board members,

much less that such actions were “the wrongs complained of against the corporation.”

Boyd, 11 S.W. at 949-50 (emphasis added); see also Akin, 310 S.W.2d at 168 (quoting

Peeler, 135 S.W.2d at 928). Rather, the amended complaint contains a tabulation of

Appellants’ grievances with the HOA and an extensive list of actions Appellants believed

the HOA should undertake to cure those grievances. Accordingly, we conclude that the

amended complaint failed to “allege with particularity the demand made, if any, to obtain

action by the [Appellee Board members] and either why [Appellants] could not obtain the

action or why they did not make the demand.” Tenn. Code Ann. § 48-56-401(c); see also

Tenn. R. Civ. P. 23.06.

Lastly, it is clear that Appellants did not “fairly and adequately represent the

interests of the shareholders or members similarly situated.” Tenn. R. Civ. P. 23.06.

Appellants ostensibly admitted such when they alleged that they were “well aware that this

action could be unpopular with a large number of members and they could well be voted

out next November[.]” Indeed, Appellant Board members were voted out of their positions

a mere two months after the amended complaint was filed. In short, other homeowners in

the neighborhood became aware of, and were unhappy with, Appellants’ lawsuit against

the HOA and Appellee Board members, and, in July 2018, an overwhelming majority of

homeowners voted to remove Appellant Board members from their positions. Such action

clearly demonstrates that Appellants did not represent the interests of the majority of

homeowners in the neighborhood.

Although Appellants’ claims may have been derivative in nature, and Appellants

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may have intended to and attempted to bring a proper derivative action,5 they failed to

comply with the requirements of the statute and the rule in bringing such action. Because

of their failure, Appellants’ lawsuit did not qualify as a derivative action. Walker, 1990

WL 120721, at *3; Kovacs-Whaley, 2012 WL 927777, at *10. Accordingly, Tennessee

Code Annotated section 48-56-401 and Tennessee Rule of Civil Procedure 23.06 are

inapplicable here. See Kovacs-Whaley, 2012 WL 927777, at *10. Thus, it was error for

the trial court to rely on Rule 23.06 and section 48-56-401 to deny Appellants’ voluntary

nonsuits. As such, we reverse the trial court’s order denying the nonsuits, and we remand

for entry of an order allowing the nonsuits. See Tenn. R. Civ. P. 41.01(3).

In view of our conclusion that the trial court should have allowed the nonsuits, it

was error for the trial court to hear and/or grant Appellees’ motion to dismiss, and we

vacate that portion of the trial court’s order. We also vacate the trial court’s order awarding

Appellees’ fees and expenses. Because Tennessee Code Annotated section 48-56-401 is

inapplicable here, it was error for the trial court to award fees under the statute. See Tenn.

Code Ann. § 48-56-401(e); see also Walker, 1990 WL 120721, at *4; Kovacs-Whaley,

2012 WL 927777, at *10. Similarly, because we vacate the trial court’s order on the motion

to dismiss, the trial court’s award of fees under the “loser pays” statute is also vacated.

Tenn. Code Ann. § 20-12-119(c) (“[I]n a civil proceeding, where a trial court grants a

motion to dismiss . . . for failure to state a claim . . . , the court shall award the party or

parties against whom the dismissed claims were pending at the time the successful motion

to dismiss was granted the costs and reasonable and necessary attorney’s fees incurred in

the proceedings . . . .”). Because no party appealed the trial court’s order dividing the

special master fees equally between the parties, this order is affirmed.

V. Conclusion

For the foregoing reasons, we reverse the trial court’s order denying Appellants’

nonsuits, and we remand the case for entry of an order allowing both nonsuits. We vacate

the trial court’s orders granting Appellees’ motion to dismiss and Appellees’ award of fees

and expenses. We affirm the trial court’s order concerning the special master’s fees. The

case is remanded for such further proceedings as are necessary and consistent with this

Opinion. Costs of the appeal are assessed to Appellees, Volker Paul Westphal, Karen

Taylor, Mike Poindexter, Janice Tankson, and Riverwood Farms Association, Inc., for all

of which execution may issue if necessary.

s/ Kenny Armstrong

KENNY ARMSTRONG, JUDGE

5

For example, the amended complaint is titled “First Amended Verified Complaint for a Derivative

Suit . . .,” Appellants alleged that they brought the action “derivatively,” and the amended complaint cited

to Tennessee Code Annotated section 48-56-401 as “legal grounds for derivative action.”

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