david-t-bailey-and-e-lynn-wagner-in-their-own-right-and-derivative-for ( 2004 )

I N THE COURT OF APPEALS OF TENNESSEE
EASTERN SECTI ON
DAVI D T. BAI LEY a nd ) KNOX COUNTY
E. LYNN W AGNER, i n t he i r own ) 03A01- 9606- CV- 00190
r i g h t a nd de r i va t i ve l y f or t he )
u s e a n d be ne f i t of Sout he a s t e r n )
He a l t h c a r e Se r vi c e s , L. P. )
)
Pl a i nt i f f s - Appe l l a nt s )
)
v. )
)
TOM HOLBERT, a s g e ne r a l p a r t ne r )
o f So u t he r n He a l t hc a r e )
Se r v i c e s , L. P. )
a nd )
M OORE' S PHARM ACY, I NC. ) HON. HAROLD W W M
. I BERLY,
d/ b/ a M ARCUM S HEALTHCARE
' ) J UDGE
SERVI CES, a nd CARL M ARCUM , )
GI NA M ARCUM PI NNEY, a nd )
TOM HOLBERT, a s o f f i c e r s , )
d i r e c t o r s a nd/ or e mpl oye e s )
a n d a g e nt s of a nd f or )
M o r e ' s Pha r ma c y, I nc .
o )
a nd )
TOM HOLBERT, CARL M ARCUM , )
a n d GI NA M ARCUM PI NNEY, )
I ndi vi dua l l y )
) AFFI RMED I N PART; VACATED I N
De f e nda nt s - Appe l l e e s ) PART a nd REM ANDED
DALE C. ALLEN a nd H. BRUCE GUYTON OF KNOXVI LLE FOR APPELLANTS
DAVI D T. BAI LEY a nd E. LYNN WAGNER
W LLI AM K. ROGERS OF KI NGSPORT FOR APPELLEE TOM HOLBERT
I
PATRI CK LEDFORD OF KI NGSPORT FOR APPELLEES MOORE' S PHARMACY, CARL
MARCUM a nd GI NA MARCUM PI NNEY
O P I N I O N
Godda r d, P. J .
Thi s i s a s ui t by Da vi d T. Ba i l e y a nd E. Lynn W gne r i n
a
t h e i r o wn r i ght a nd de r i va t i ve l y f or t he us e a nd be ne f i t of
So u t h e a s t e r n He a l t hc a r e Se r vi c e s , L. P. , a Li mi t e d Pa r t ne r s hi p i n
wh i c h t he y we r e pa r t ne r s , a ga i ns t Tom Hol be r t , a s ge ne r a l
pa r t ne r , Moor e ' s Pha r ma c y, I nc . , d/ b/ a M r c um' s He a l t hc a r e
a
Se r v i c e s , a nd Ca r l M r c um a nd Gi na M r c um Pi nne y, a s Of f i c e r s a nd
a a
Di r e c t o r s a nd/ or Empl oye e s a nd Age nt s of a nd f or Moor e ' s
Ph a r ma c y, I nc . , a nd Tom Hol be r t , Ca r l M r c um a nd Gi na M r c um
a a
Pi n n e y , I ndi vi dua l l y. The s ui t s t e ms f r om t he pur c ha s e by
So u t h e a s t e r n He a l t hc a r e Se r vi c e s of a uni t dos a ge pha r ma c y
b u s i n e s s f r om Moor e ' s Pha r ma c y, I nc . , f or t he s um of $275, 000.
Th e c o mpl a i nt a l l e ge d a c a us e of a c t i on f or ne gl i ge nt mi s -
r e p r e s e nt a t i on a nd br e a c h of wa r r a nt y.
The Tr i a l J udge di s mi s s e d t he c ompl a i nt . Al t hough he
f o u n d t ha t mi s l e a di ng i nf o r ma t i on 1 r e ga r di ng t he pr of i t a bi l i t y o f
the business in question was negligently furnished to the
Plaintiffs, he also found that because the bookkeeping for the
business sold was kept in conjunction with that of a separate
pharmacy business owned by Moore's Pharmacy, Inc., "it was
difficult to determine what was what, what this business was
actually earning and what the other business was earning," and
that there was no intent on the part of the Defendants to
1
S o me o f t h e i n f o r ma t i o n f u r n i s h e d wa s g r o s s l y mi s l e a d i n g . Fo r
e x a mp l e , i t wa s r e p r e s e n t e d t h a t t h e b u s i n e s s p u r c h a s e d wa s g e n e r a t i n g a g r o s s
p r o f i t o f $ 1 0 , 0 0 0 p e r mo n t h , wh e n i n f a c t t h e l o s s e s p e r mo n t h we r e
a p p r o x i ma t e l y t h a t a mo u n t .
2
deceive. Consequently, he concluded that the Plaintiffs were
guilty of at least equal negligence i n f a i l i ng t o i nve s t i ga t e t he
i n f o r ma t i on f ur ni s he d, whi c h woul d ha ve di s c l os e d t he t r ue
f i n a n c i a l c ondi t i on of t he bus i ne s s pur c ha s e d. ( Se e Appe ndi x. )
The Tr i a l Cour t a l s o di s mi s s e d t he br e a c h of wa r r a nt y
c l a i m i n a s uc c i nc t c ol l oquy wi t h c ouns e l f or t he Pl a i nt i f f s a t
t h e c o n c l us i on of hi s me mor a ndum opi ni on:
So f or t ha t r e a s on, t he j udgme nt of t he Cour t i s
t h a t t he de f e nda nt s s houl d pr e va i l be c a us e t he f a ul t
h e r e i s a t l e a s t e qua l . And t he r e i s no ot he r ba s i s ,
a s I ha ve j us t out l i ne d, I t hi nk, f or r e c ove r y.
Now, i s t he r e a n yt hi ng e l s e t ha t you woul d l i ke t o
a s k me t ha t you f e e l I ha ve n' t c ove r e d wi t hout
r e a r gui ng t he c a s e ?
MR. LEDFORD: No, Your Honor .
MR. GUYTON: I s t he Cour t ' s opi ni on a l s o t o ha ve
i n c l ude d t he a ddr e s s i ng t he i s s ue of t he wa r r a nt y?
THE COURT: Ye s . The s ol e ba s i s f or r e c ove r y a s I
s t a t e d i t , a nd t ha t i nc l ude s e ve r yt hi ng. I t ' s my
i n t e nt i on t o i nc l ude e ve r yt hi ng.
The Pl a i nt i f f s a ppe a l , r a i s i ng t he f ol l owi ng t wo
i s s ue s :
1. W t he r t he t r i a l c our t e r r e d i n i t s f a i l ur e
he
t o hol d de f e nda nt s / a ppe l l e e s l i a bl e f or br e a c h of
wa r r a nt y a nd/ or br e a c h of c ont r a c t , whe r e t he
d e f e nda nt s / a ppe l l e e s wa r r a nt e d t he a c c ur a c y of t he
f i na nc i a l s t a t e me nt s pr ovi de d t o pl a i nt i f f s / a ppe l l a nt s
p r i or t o t hi s t r a ns a c t i on, a nd t he pl a i nt i f f s /
a p pe l l a nt s r e l i e d o n t he f i na nc i a l s t a t e me nt s , b ut t he
f i na nc i a l s t a t e me nt s we r e di s c ove r e d t o be i na c c ur a t e
a nd f a l s e a f t e r t he t r a ns a c t i on.
2. W t he r t he t r i a l c our t e r r e d i n i t s f a i l ur e
he
t o hol d de f e nda nt s / a ppe l l e e s M r c um a nd Pi nne y
a
p e r s ona l l y a nd i ndi vi dua l l y l i a bl e f or t he
mi s r e pr e s e nt a t i ons a nd br e a c he s of wa r r a nt y ma de by
t h e i r a ge nt s , Hol be r t a nd Rhot on?
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I n c onne c t i on wi t h t he br e a c h of wa r r a nt y c l a i m,
M o r e ' s Pha r ma c y, I nc . , a c t i ng t hr ough i t s Pr e s i de nt , Gi na M r c u m
o a
Pi n n e y, a nd i t s Se c r e t a r y , Ca r l M r c um, e xe c ut e d a n " AGREEM
a ENT
FOR SALE AND TRANSFER OF ASSETS, " whi c h c ont a i ne d t he f ol l owi n g
p r o v i s i ons :
SECTI ON FI VE
WARRANTI ES AND COVENANTS OF SELLER
Se l l e r a gr e e s , r e pr e s e nt s , a nd wa r r a nt s a s
f o l l ows :
. . . .
( d) Se l l e r h a s ma de a va i l a bl e t o Buye r i t s pr of i t
a nd l os s s t a t e me nt s a nd s a me ha ve c or r e c t l y r ef l ect ed
t he f i na nc i a l c ondi t i ons , a s s e t s a nd l i a bi l i t i e s , a nd
o p e r a t i on of Se l l e r a s of t he da t e s s t a t e d i n s uc h
d o c ume nt s .
. . . .
( p) Se l l e r wi l l pr ompt l y a dvi s e Buye r i n wr i t i ng
o f t he oc c ur r e nc e of a ny ma t e r i a l e ve nt s whi c h c ome t o
t h e knowl e dge of Se l l e r a f t e r t he e xe c ut i on of t hi s
Ag r e e me nt a nd pr i or t o or on t he Cl os i ng Da t e r e l a t i ng
t o a ny ma t t e r s whi c h a r e t he s ubj e c t s of t he s e
c ove na nt s , r e pr e s e nt a t i ons a nd wa r r a nt i e s of t he Se l l e r
c o nt a i ne d i n t hi s Se c t i on.
( q) No r e pr e s e nt a t i ons or wa r r a nt i e s by Se l l e r ,
i t s o f f i c e r s o r d i r e c t or s , n or a ny s t a t e me nt , l i s t or
c e r t i f i c a t e f ur ni s he d or t o be f ur ni s he d t o Buye r
p u r s ua nt he r e t o, or i n c onne c t i on wi t h t he t r a ns a c t i ons
c o nt e mpl a t e d he r e by, c ont a i ns or wi l l c ont a i n a ny
u n t r ue s t a t e me nt of a ma t e r i a l f a c t or omi t s or wi l l
o mi t t o s t a t e a ma t e r i a l f a c t ne c e s s a r y t o ma ke t he
s t a t e me nt s t he r e i n n ot mi s l e a di ng. Al l s uc h
s t a t e me nt s , l i s t s , o r c e r t i f i c a t e s a r e t r ue a nd c or r e c t
i n a l l ma t e r i a l r e s pe c t s .
( r ) The wa r r a nt i e s , r e pr e s e nt a t i ons a nd c ove na nt s
o f t he Se l l e r c ont a i ne d i n t hi s Agr e e me nt s ha l l be t r ue
a nd c or r e c t i n a l l r e s pe c t s a s of t he Cl os i ng Da t e wi t h
4
t h e s a me f or c e a nd e f f e c t a s i f gi ve n a nd ma de on a nd
a s of t he da t e a nd t i me of t he Cl os i ng Da t e , a nd s uc h
r e pr e s e nt a t i ons , wa r r a nt i e s a nd c ove na nt s s ha l l s ur vi ve
t h e Cl os i ng Da t e a nd t he c ons umma t i on of t he
t r a ns a c t i ons c ont e mpl a t e d by t hi s Agr e e me nt .
Al t hough t he Tr i a l Cour t a ppa r e nt l y f ound t ha t
n e g l i g e nc e ma y a l s o ba r a n a c t i on f or br e a c h of c ont r a c t , ne i t h e r
t h e Tr i a l Cour t nor c ouns e l f or t he De f e nda nt s ha ve c i t e d a ny
s u c h a u t hor i t y. M e ove r , we ha ve not be e n a bl e t o f i nd a ny i n
or
o u r r e s e a r c h. W a c c or di ngl y c onc l ude t ha t t he Pl a i nt i f f s a r e
e
e n t i t l e d t o a j udgme nt a ga i ns t t he Cor por a t i on be c a us e of br e a c h
o f wa r r a nt y.
I n s o f i ndi ng, we a c c e pt a s t r ue t ha t t he Pl a i nt i f f s
d i d n o t ma ke s uc h a n i nve s t i ga t i on t ha t t he y mi ght ha ve t o
d i s c l o s e t he mi s r e pr e s e nt a t i on, but poi nt out t ha t t he pur pos e o f
a wa r r a nt y, i n pa r t , i s t o r e l i e ve one t o whom t he wa r r a nt y i s
g i v e n f r om t ha t r e s pons i bi l i t y. I n Pa c c on, I nc . v. Uni t e d
St a t e s , 399 F.2d 162, 166 ( 1968) , t he Uni t e d St a t e s Cour t of
Cl a i ms ma ke s t hi s poi nt i n quot i ng wi t h a ppr ova l f r om a n e a r l i e r
case:
" I n e s s e nc e a wa r r a nt y i s a n a s s ur a nc e by one pa r t y t o
a n a gr e e me nt of t he e xi s t e nc e of a f a c t upon whi c h t he
o t he r pa r t y ma y r e l y; i t i s i nt e nde d pr e c i s e l y t o
r e l i e ve t he pr omi s e e of a ny dut y t o a s c e r t a i n t he f a c t s
f o r hi ms e l f . Thus , a wa r r a nt y a mount s t o a pr omi s e t o
i n de mni f y t he pr omi s e e f or a ny l os s i f t he f a c t
wa r r a nt e d pr ove s unt r ue . " Da l e Cons t r . Co. v. Uni t e d
St a t e s , 168 Ct . Cl . 692, 699 ( 1964) .
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I n t he i r b r i e f t he Pl a i nt i f f s c ont e nd t ha t i f t he
r e me dy t o whi c h t he y a r e e nt i t l e d i s r e s c i s s i on, t he " me a s ur e of
d a ma g e s woul d be t he r e t ur n of t he c ons i de r a t i on pa i d, . . . a s
we l l a s t he a mount i nve s t e d i n t he bus i ne s s , wi t h i nt e r e s t , a n d
t h e va l ue of t he i r l a bor , " whi c h t he y c a l c ul a t e t o be i n e xc e s s
o f $ 6 0 0 , 000. I n t he a l t e r na t i ve , t he y a s s e r t t ha t i f t he y a r e
a wa r d e d c ompe ns a t or y da ma ge s onl y, " t he y s houl d r e c e i ve t he
d i f f e r e nc e i n va l ue of wha t t he y pa i d ve r s us t he va l ue of wha t
t h e y a c t ua l l y r e c e i ve d. "
W c onc l ude unde r a l l t he f a c t s of t hi s c a s e t he l a t t e r
e
me a s u r e of da ma ge i s t he a ppr opr i a t e one . I t doe s not a ppe a r ,
h o we v e r , t ha t t hi s f i gur e wa s a de qua t e l y a ddr e s s e d i n t he pr oo f ,
a n d i n t he i nt e r e s t of j us t i c e t o bot h pa r t i e s , we de e m i t
a pp r o p r i a t e t ha t t he c a us e be r e ma nde d f or s uc h a de t e r mi na t i o n
a n d a j udgme nt e nt e r e d a ga i ns t t he Cor por a t i on f or t ha t a mount .
As t o t he s e c ond i s s ue r a i s e d, whe r e i n t he Pl a i nt i f f s '
i ns i s t e nc e t ha t t he i ndi vi dua l De f e nda nt s a r e l i ke wi s e l i a bl e i n
wa r r a n t y, we f i nd t he onl y wa r r a nt y e xt e nde d wa s t ha t c ont a i ne d
i n t h e a gr e e me nt f or s a l e a nd t r a ns f e r of a s s e t s , whi c h wa s
e x e c u t e d by t he Cor por a t i on a nd s i gne d by M . Pi nne y a nd M .
s r
M r c um i n t he i r r e pr e s e nt a t i ve c a pa c i t i e s .
a
6
I n c onc l us i on, we ha ve not ove r l ooke d t he De f e nda nt s '
c o n t e n t i ons t ha t br e a c h of wa r r a nt y ma y not be a s s e r t e d be c a us e
t h e c o n t r a c t i s a mbi guous , wa s not br e a c he d, wa s not r e a s ona bl y
r e l i e d upon, a nd di d not c a us e da ma ge s t o t he Pl a i nt i f f s . Unde r
t h e f i n di ngs of t he Tr i a l Cour t , t he t e s t i mony a dduc e d a nd t he
e n t i r e r e c or d, we f i nd e a c h c ont e nt i on t o be wi t hout me r i t .
For t he f or e goi ng r e a s ons t he j udgme nt of t he Tr i a l
Co u r t i s a f f i r me d i n pa r t , va c a t e d i n pa r t , a nd t he c a us e
r e ma n d e d f or f ur t he r pr oc e e di ngs not i nc ons i s t e nt wi t h t hi s
opi ni on. Cos t s of a ppe a l a r e a dj udge d one - ha l f a ga i ns t t he
Pl a i n t i f f s a nd one - ha l f a ga i ns t t he Cor por a t i on.
_______________________________
Houston M. Goddard, P.J.
CONCUR:
________________________________
Herschel P. Franks, J.
________________________________
Don T. McMurray, J.
7
APPENDIX
And this business, when it was operated by the defendants, was
operated, of course, with their other business in such a way
that, to the defendants and really to anybody else, it was
difficult to determine what was what, what this business was
actually earning and what the other business was earning. And
this method of accounting that we went into great detail in
describing, in effect, concealed the actual status and condition
of this business that was finally purchased by the plaintiff.
This resulting concealment was not, in the Court's mind and the
Court's opinion, done in some intentional way to deceive anyone.
It was just simply the way that it was set up.
When the plaintiffs purchased the business, they were
provided the papers that we've spent a lot of time discussing,
and these papers, in effect, gave plaintiff what turned out to be
a false impression about the status of this business that they
purchased. Now, plaintiffs accepted these without question, and
when offered the opportunity to determine for themselves the
validity, in effect, of those papers that they've been furnished
and the information they've been furnished, the plaintiffs wound
up relying upon their accountant that they sent to investigate.
And the accountant actually did no investigation and, repeating
several times that these people involved were fraternity brothers
and if they could not trust each other and rely on each other, he
did not see that he had any part in questioning them any further
than what appeared on the surface.
APPENDIX
Page 2
misleading. They did not do so intentionally or willfully or
actually knowingly. They were relying upon their people, their
accountant who prepared these statements, and they are shown not
to take much direct interest in determining and separating the
accounts of that business from the other business. Then when the
sale was done, the plaintiffs, having the opportunity to
investigate the business and accomplish what we referred to in
the -- as a term of art, supposedly, due diligence -- which was
in the papers, actually did nothing to determine for themselves
in any meaningful way what the true condition of the business
was.
So in legal terms, I think you would say that the
defendants negligently misrepresented the condition of that
business that was purchased. The plaintiffs then negligently
purchased the business. And that's the problem there. And
that's the nature of the conduct that resulted in this situation
-- negligence on both parts which the Court feels was at least
equal. The other individual defendant we find was not acting for
himself in such a way that would impose liability upon him.
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