Innerimages, Inc. v. Robert Newman , 579 S.W.3d 29 ( 2019 )

03/26/2019
IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
December 6, 2018 Session
INNERIMAGES, INC. v. ROBERT NEWMAN ET AL.
Appeal from the Circuit Court for Sevier County
No. 15-410-I Carter Scott Moore, Judge
___________________________________
No. E2018-00375-COA-R3-CV
___________________________________
Innerimages, Inc. (“Innerimages” or “the developer”) filed suit against homeowners
Robert Newman, David and Melba White,1 and David and Susan Schilt as trustees for the
David Schilt and Susan Schilt Trust. It sought to recover unpaid maintenance fees
required by the restrictive covenants governing their real property. The homeowners
filed a counterclaim, seeking various forms of relief. The homeowners also joined the
following third-party defendants: Sandra Gunn, the president of Innerimages,
homeowners David and Joan Barrett, and property owner Cupid’s Rose, LLC.2 After a
bench trial, the court dismissed the collection action filed by the developer. The court
determined: (1) that the restrictive covenants are unenforceable as to the four
homeowners and their successors in title; (2) that the developer is liable for breach of
fiduciary duty for its failure to honor its obligations under the restrictive covenants; and
(3) that Sandra Gunn is personally liable under an alter ego theory of piercing the
corporate veil. Finally, the court awarded the homeowners damages in the amount of all
fees paid since taking ownership of their property or, in the case of the Schilt family, fees
paid over the last three years. In a subsequent order, the trial court clarified that only Mr.
Newman was entitled to money damages because the other homeowners had not paid
fees to the developer during the relevant time period. The court also denied the
homeowners’ request for attorney’s fees. Innerimages, Sandra Gunn, and Cupid’s Rose,
LLC appeal. Because this appeal presents novel issues relating to the enforceability of
restrictive covenants, we take this opportunity to adopt the Restatement (Third) of
Property: Servitudes § 6.19(1)-(2) (Am. Law Inst. 2000). We modify the trial court’s
judgment pursuant to the principles set forth in the Restatement. As modified, we affirm
the judgment of the trial court.
1
The Whites were married during the course of this litigation. Consequently, the trial court and
the parties sometimes refer to Mrs. White by her maiden name “Nelson.”
2
Ms. Gunn testified that Cupid’s Rose, LLC is an entity composed of Innerimages and a third
party, “Global International.”
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court
Affirmed as Modified; Case Remanded
CHARLES D. SUSANO, JR., J., delivered the opinion of the court, in which JOHN W.
MCCLARTY and THOMAS R. FRIERSON, II,, JJ., joined.
Heather G. Anderson, Knoxville, Tennessee, for the appellants, Innerimages, Inc., Sandra
Gunn, and Cupid’s Rose, LLC.
Brian T. Mansfield, Sevierville, Tennessee, for the appellees, Robert Newman, David
White, Melba Marie Nelson, David Schilt, Susan Schilt, The David Schilt and Susan
Schilt Trust, U/T/D, and Daniel Montgomery.
OPINION
I.
Innerimages is a Tennessee corporation. It develops real property in Sevier
County.3 It also performs design services for a prominent defense contractor in
Maryland. Sandra Gunn is the president and sole shareholder of Innerimages. Ms. Gunn
owns a home in Sevierville. At various times, she also resides in Maryland.
In September 1993, Innerimages acquired approximately fifteen acres of
undeveloped real property located in the “Shagbark” neighborhood in Sevierville.
Shagbark is a gated community that contains approximately 300 homes and 550 property
owners. It provides twenty-four hour security with a guard at its entrance gate.
Residents of Shagbark have access to amenities, such as a pool, tennis courts, an office
building, and a picnic area. Residents are members of the Shagbark Property Owners
Association (POA) and pay dues for maintenance of the amenities described above.
Residents must also abide by the Shagbark Declaration of Restrictions (Shagbark
Restrictions).
In October 1993, Innerimages recorded an instrument titled “Land Use
Restrictions, Protective Covenants and Building Standards for The Village” (The Village
Restrictions). This document declared the developer’s intent to use its recently acquired
property in Shagbarks to establish “The Village” – a small residential community within
the larger Shagbark property.4 According to The Village Restrictions, property owners in
3
The following facts are undisputed unless otherwise noted.
4
The Village Restrictions incorrectly state that The Cloisters in Shagbark, Inc. still owned much
of the land that would become The Village. Evidence in the record suggests that The Cloisters in
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The Village remain residents of Shagbark. Consequently, property owners in The Village
must continue to abide by the Shagbark Restrictions and must also pay fees to the
Shagbark POA.
The Village Restrictions impose additional restrictive covenants governing the use
and appearance of property in The Village. In some ways, these restrictive covenants are
more stringent than the Shagbark Restrictions. The Village Restrictions also require
property owners to pay a monthly maintenance fee to the developer – forty dollars per
month for an unimproved vacant lot and eighty dollars per month for an improved lot.
According to The Village Restrictions, these fees
shall be used by The Developer for: the maintenance of THE
VILLAGE roadways; the overall security of the development;
the maintenance of the utility plants, security entrance
features and landscaping; the Shagbark [POA] maintenance
fees and assessments when appropriate; and for such other
purposes as The Developer or Association pursuant to its by-
laws, deem necessary for property maintenance of services. It
is anticipated that private recreational facilities will be
constructed within THE VILLAGE. Said monthly fees will
increase for improved lots in order to defer operational costs,
maintenance, insurance and utilities at the time that these
recreational facilities are constructed and in use for THE
VILLAGE owners and guests.
(Capitalization in original.)
Finally, The Village Restrictions provide that until seventy-five percent of the
lots in The Village have been sold, “[t]he [d]eveloper shall exercise all rights herein.”
When this occurs, “[a]ll owners of property shall automatically become members of The
Village Property Owners Association,” and the association will exercise the rights and
responsibilities formerly exercised by the developer.
In 1996, the developer recorded two plats that identified how The Village would
be subdivided. Together, the plats depicted eighty-six lots,5 several recreation areas, and
Shagbark, Inc. conveyed its interest in the land to Innerimages approximately one month prior to the
recordation of The Village Restrictions. That quitclaim deed was later recorded in December 1993.
5
The trial court found that The Village initially contained eighty-four lots. However, testimony
at trial revealed that Innerimages purchased eighty-four lots from The Cloisters in Shagbark, Inc. and that
Innerimages already owned two lots. That would make a total of eighty-six lots. Our review of the
recorded plats confirms this calculation.
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a network of private roads. The property would be developed in five phases (Phases A –
E). One of the plats showed an “Inn of the Clouds Conference Center” and a
“Conference Center & Executive Suites” adjacent to The Village. At some point, the
developer combined various lots, which reduced the total number of lots to eighty-two.
Since 1993, the developer has only sold six lots in Phase A of The Village.6 Four
of those lots are improved with homes. One lot, owned by the White family, is used as a
septic drain field. The other lot, which is owned by Cupid’s Rose, LLC, remained
unimproved at the time of trial. Development of Phase B began on the eve of trial. The
remainder of the property is unimproved. No property owners association has ever been
formed.
David and Susan Schilt purchased their home on Lot 25/12B in March 2007.7 At
the time, the Schilts lived in Florida. They used their home in The Village as a vacation
home and went there about four times a year. In 2012, the Schilts conveyed their home
by quitclaim deed to the David Schilt and Susan Schilt Trust. In 2014, they moved from
Florida to Seymour and began using their home in The Village about once a month.
From 2007 to 2014, the Schilts paid monthly maintenance fees to the developer. They
stopped paying the fees in 2015.
David and Joan Barrett bought their home on Lot 6A in August 2011. Their
permanent residence is in Baxter. When they still owned their home in The Village, they
used it about once a month. The Barretts always paid maintenance fees to the developer
and did not wish to be parties to this litigation; however, they were subsequently joined
as necessary and indispensable parties. After trial, the Barretts sold their home to Daniel
Montgomery, who was substituted for the Barretts as an appellee. For convenience sake,
we will continue to refer to this property as the Barretts’ home.
Robert Newman purchased his home on Lot 1A in November 2013. He and his
wife reside in The Village for about six months of the year. The Newmans also have a
home in Louisiana. Mr. Newman paid maintenance fees to the developer in 2014. He
stopped paying maintenance fees in 2015.
David and Melba White purchased their home on Lot 26/12B in April 2014.
Because the Whites’ septic tank was tied to a drain field on Lot 3A, the Whites also
purchased Lot 3A. The Whites are permanent residents in The Village. They have never
paid maintenance fees to the developer.
6
In 1999, the developer also sold eleven lots in Phase C to a third party. The developer lifted the
restrictive covenants as to those lots because the third party did not want to be associated with The
Village.
7
Although the Schilts’ lot is designated “Lot 25/12B,” all parties testified that the Schilts’ lot is
located in Phase A, not Phase B. The same is true for the White lot, which is designated “Lot 26/12B.”
-4-
This litigation began in February 2015 when the developer filed three sworn
accounts against Mr. Newman, the Whites, and the Schilts in the General Sessions Court
for Sevier County, seeking the collection of unpaid maintenance fees. According to the
developer, Mr. Newman and the Schilts both owed $650 plus interest, attorney’s fees,
and costs. The Whites allegedly owed $1,125 plus interest, attorney’s fees, and costs.
Each of the three families filed an answer and counterclaim.
By agreed order, the general sessions court consolidated the three cases and
transferred them to the trial court. The trial court ordered the joinder of necessary and
indispensable parties. Thereafter, the defendant homeowners filed an amended
counterclaim and third party complaint, naming the following third-party defendants:
Sandra Gunn, the president of Innerimages, homeowners David and Joan Barrett, and
property owner Cupid’s Rose, LLC.
The homeowners sought the following forms of relief: an order declaring The
Village Restrictions to be unenforceable; an order compelling the developer to account
for all funds allegedly spent on common expenses; a money judgment equal to the
amount of any misappropriated funds; punitive damages for willful or intentional
misconduct in the misappropriation or misuse of funds, breach of fiduciary duty, and
conflict of interest; an order enjoining the developer from further interference with the
homeowners’ use of their property; and an award of attorney’s fees and costs. The
homeowners also alleged that Ms. Gunn should be held personally liable under an alter
ego theory of piercing the corporate veil. In response, the developer filed a motion for
summary judgment, which the trial court denied.
A four-day bench trial followed.8 The parties stipulated as to the amount of fees
that each homeowner allegedly owed. All homeowners, except Mr. Newman, also
stipulated that The Village Restrictions were in their respective chains of title. The
developer called the following witnesses: Ms. Gunn (the president of Innerimages),
Stephen Gunn (Ms. Gunn’s ex-husband and the vice-president of Innerimages), Janie
Click (a lawn care and maintenance worker), Dan Hager (a board member of the
Shagbark POA), Mark Gaisser (security chief and facility manager for Shagbark POA),
and Rick Bearfield (an attorney qualified as an expert in title searches). The homeowners
called: Mr. Barrett, Ms. Schilt, Mr. Newman, Mr. White, Michael Atchley (an employee
of the Tennessee Department of Environment and Conservation (TDEC)), Daniel
Ferguson (an environmental specialist for Sevier County Environmental Health
Department), and James Temple (former assistant director of the Sevier County Planning
Department). Witnesses testified about the relationship between Shagbark and The
8
The Honorable Ben W. Hooper II presided. After the court entered its memorandum opinion,
Judge Hooper retired from the bench. The case was then assigned to the Honorable Carter Scott Moore.
Judge Moore entered the final order from which this appeal was taken.
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Village, the enforcement of The Village Restrictions, the services provided (or not
provided) by the developer, the developer’s lack of accounting, etc. From this testimony,
two radically different stories emerged.
According to the appellants, the developer has always intended to use its property
to establish a residential community. Ms. Gunn testified about her plans to use The
Village to support “Leslie’s Week,” a non-profit organization founded by Ms. Gunn that
gives breast cancer patients and their families a one-week paid vacation. According to
Ms. Gunn, the developer will eventually build a “spa” in Phase B of The Village and
women will be able to rent certain homes in The Village for one week per year.
Ms. Gunn testified that development of The Village has been delayed due to
“downturns in the economy,” low appraisals, and federal laws that have restricted lending
policies. Nevertheless, Ms. Gunn claimed that the developer has invested significant
amounts of time and money into the project. According to her, the developer has: graded
roads, recorded plats, paid for engineering and surveying services, applied for various
permits from regulatory agencies, and installed underground utilities (conduits for
electric, telephone, and cable as well as pipes for water and sewer collection). Mr. Gunn,
the “project manager” of The Village, testified that the developer spent “close to sixty
thousand dollars” on an experimental “Anflow system” that was designed to treat sewage
for about sixty homes.9 Although the Anflow system was never operational,10 Ms. Gunn
testified that it will eventually be modified to operate as a drip system. Ms. Gunn also
testified that the developer continues to maintain roads in The Village and pays lawn care
workers to weed-eat along the edges of roads, clear debris from ditches and culverts, and
mow a drain field that services the septic systems of two homeowners in The Village.
Ms. Gunn also testified that she has consistently enforced the architectural review
restrictions.
According to the homeowners, The Village is virtually non-existent. The
homeowners testified that the developer has only constructed four homes in twenty-four
years, the last of which was built in 2007. The community’s one paved road – Village
Summit Drive – was actually paved pursuant to a private agreement between the
homeowners and the developer; costs were shared equally. Although the developer and
all residents in The Village have an easement to use the road, the homeowners insist that
it rests entirely on their private property. There is also a gravel road leading to the
9
The Anflow system consists of two 3,900-gallon tanks with a pumping chamber and a reactor
where bacteria digest the effluent. The Anflow system was designed so that the effluent, once treated,
would be discharged into a wetland and would then flow to a chlorination station, to a holding pond, and
finally to a large lake.
10
The proof showed that during the testing phase, the Anflow system was connected to a couple
of homes not associated with The Village. Appellants concede, however, that the Anflow system never
treated effluent from any homes in The Village.
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Barretts’ home. There was an unresolved factual dispute regarding the extent to which
the developer maintained these roads.
The Barretts’ home and the Newmans’ home have traditional septic tank systems
that tie into a common drain field allegedly maintained by the developer. The Schilts’
home has a traditional septic tank system that ties into a drain field that the Schilts own
and privately maintain. The Whites’ septic system is a low pressure piping system that
ties into a drain field on Lot 3A, which the Whites own and privately maintain.
Although the developer installed underground utilities (conduits and piping), the
homeowners testified that the developer does not provide water. Instead, all four
homeowners receive water from a well that is located on the Whites’ property. The
homeowners entered into a private well agreement that governs their use of the well.
In 2008, the Schilts demanded an accounting from the developer. Other
homeowners demanded an accounting in October 2014. Although Ms. Gunn testified
that the developer kept records of all expenses, she did not produce a complete
accounting until litigation was underway. At trial, Ms. Gunn testified that, until shortly
before trial, she deposited the homeowners’ maintenance fees into the developer’s
operating account, which was used to pay expenses incurred by both The Village and
Innerimages. Ms. Gunn insisted, however, that she kept track of how the maintenance
fees were being spent. The homeowners argued that many of the “expenses” listed in the
accounting were not “common expenses.” The homeowners also alleged that Ms. Gunn
comingled funds. Finally, the homeowners testified about Ms. Gunn’s enforcement of
the architectural review restrictions. All of the homeowners recounted stories of Ms.
Gunn’s strict interpretation and/or arbitrary application of the restrictions. This became a
severe source of distress for the Schilt, Newman, and White families.11
After trial, the court produced a forty-page memorandum opinion. Findings of
fact and credibility determinations were scattered throughout the court’s summary of the
testimony and the court’s subsequent legal analysis. Although the court did not resolve
all factual disputes that arose from the parties’ testimony, the court clearly determined
that the developer “cannot and has not fulfilled her obligations to the landowners under
[The Village Restrictions].” The court also found that the developer never intended to
relinquish control of The Village to a homeowners association. Instead, the court found
that Innerimages “is used as a business conduit or a place to divert assets to the detriment
of creditors” and is “purely an instrument for the enrichment of Sandra Gunn.”
Ultimately, the court ruled that The Village Restrictions appear in the
11
Because this case involves the enforceability of The Village Restrictions as a whole rather than
the enforceability or interpretation of individual restrictions, we will not summarize every alleged
violation.
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homeowners’ respective chains of title and “run with the land.” However, the court also
determined: (1) that the restrictive covenants governing The Village are unenforceable as
to the four homeowners and their successors in title; (2) that the developer is liable for
breach of fiduciary duty for failing to honor its obligations under The Village
Restrictions; and (3) that Sandra Gunn is subject to personal liability under an alter ego
theory of piercing the corporate veil. Finally, the court awarded damages to the
homeowners in the amount of all fees paid since taking ownership of their respective
property or, in the case of the Schilt family, fees paid over the last three years. The court
reserved the issue of attorney’s fees as well as the calculation of the aforementioned
money judgments.
On February 21, 2018, the trial court entered an order resolving the issues
previously reserved. The order stated that only Mr. Newman was entitled to money
damages because the other homeowners had not paid fees to the developer during the
time period identified in the court’s memorandum opinion. The trial court also denied
the homeowners’ request for attorney’s fees. This order was certified as final pursuant to
Tenn. R. Civ. P. 54. Innerimages, Sandra Gunn, and Cupid’s Rose, LLC appealed.
II.
We restate and consolidate the issues raised by the appellants as follows:
Whether the trial court committed reversible error by
admitting extrinsic evidence that was offered at trial for the
purpose of impeaching Ms. Gunn’s character for truthfulness?
Whether the trial court erred in holding that The Village
Restrictions are unenforceable as to the four homeowners.12
Whether the trial court erred in determining that the developer
owed and breached a fiduciary duty to the homeowners.
Whether the trial court erred in piercing the corporate veil to
hold Ms. Gunn personally liable for the developer’s alleged
breach of fiduciary duty.
The homeowners raise the additional issue of whether the trial court erred in
denying their request for attorney’s fees.
12
As we see it, issues 1, 2, 3, 4, and 7 in appellants’ brief all relate to the enforceability of The
Village Restrictions.
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III.
We begin by considering the potentially dispositive issue of whether the trial court
committed reversible error when it admitted extrinsic evidence that was offered at trial
for the purpose of impeaching Ms. Gunn’s character for truthfulness. Questions
regarding the admissibility of evidence are reviewed for abuse of discretion. Shipley v.
Williams, 350 S.W.3d 527, 552 (Tenn. 2011). Even when a trial court abused its
discretion, however, this Court will not reverse the judgment of the trial court “unless,
considering the whole record, error involving a substantial right more probably than not
affected the judgment . . . .” Tenn. R. App. P. 36(b).
Counsel for the homeowners apparently asked the trial court in a post-trial brief to
admit into evidence an exhibit that was previously marked for identification purposes
only.13 The exhibit contained several court documents relating to a 1989 judgment of the
U.S. District Court for the Eastern District of Tennessee that afforded full faith and credit
to judgments entered in a Colorado state court in favor of First Federal Savings Bank and
against Mr. Gunn and Caltennco-Colorado, Inc. In that case, the federal court concluded
that “Caltennco was a mere alter ego or instrumentality of Stephen A. Gunn, used as a
conduit for passing loan proceeds siphoned from [a real estate development] project on to
other entities for the personal benefit of Mr. Gunn, his wife Sandra W. Gunn, and the
objects of their affections.” The federal court also determined that Ms. Gunn
“participated knowingly and voluntarily in her husband’s fraudulent scheme to divert
loan proceeds to personal uses.” According to the federal court, Mr. and Mrs. Gunn were
not credible witnesses. Various documents relating to that federal court case were
offered at trial for the purpose of impeaching Ms. Gunn’s character for truthfulness. Ms.
Gunn’s counsel immediately objected, citing Rule 608(b) of the Tennessee Rules of
Evidence. The trial court sustained the Rule 608(b) objection but allowed the evidence to
be entered as exhibit twenty-five and marked for identification purposes.
In its memorandum opinion, the trial court in this case reversed its earlier
evidentiary ruling and admitted exhibit twenty-five into evidence pursuant to Rules
405(b) and 406 of the Tennessee Rules of Evidence. Appellants argue that the trial court
erred by admitting this exhibit into evidence. They argued that this error demands
outright reversal. According to the appellants, exhibit twenty-five “played a large role”
in the trial court’s judgment because the court heavily relied upon the federal court’s
memorandum opinions in that exhibit. Appellants also argue that the trial court “made
credibility determinations about witnesses” based on exhibit twenty-five, which “colored
the entire process.”
We decline to address whether the trial court erred in admitting exhibit twenty-five
13
This post-trial brief is not included in the appellate record, but neither party disputes its
existence or its contents.
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into evidence because, after considering the whole record, we cannot say that the
evidence “more probably than not affected the judgment . . . .” Tenn. R. App. P. 36(b).
The trial court primarily relied on the evidence in exhibit twenty-five to substantiate the
trial court’s own independent findings that (1) Sandra and Stephen Gunn were not
credible witnesses; and (2) that Innerimages is the alter ego of Ms. Gunn.
For example, after considering the evidence in exhibit twenty-five, the trial court
remarked that the credibility of Ms. Gunn and her ex-husband “has been destroyed.”
Standing alone, it would appear that the trial court’s credibility determination was
significantly, if not entirely, based on the evidence in exhibit twenty-five. A closer
review of the trial court’s memorandum opinion, however, reveals that the court had
already independently determined that
the credibility of Sandra Gunn and Stephen Gunn had been
seriously damaged by their demeanor while testifying and
their bold assertions in responding to questions not only at
trial but in pretrial depositions without ever producing any
evidence to support their claims[.]
(Emphasis added.) To support this conclusion, the court specifically and repeatedly
identified portions of the Gunns’ testimony that the trial court found incredible.
Similarly, in the trial court’s alter ego/veil-piercing analysis, the court cited a
“very convenient expression of the applicable law” as set forth in a federal court
memorandum opinion in exhibit twenty-five. The quoted passage, however, merely
articulated factors that a court should consider when conducting an alter ego/veil-piercing
analysis. The trial court proceeded to conduct its own independent analysis and made
numerous factual findings based on the testimony and exhibits introduced at trial.
Although the trial court also quoted liberally from other passages in the federal court
memorandum opinions, the court’s purpose in doing so is not entirely clear. Some
quotations seem to establish the general relevancy of the evidence (i.e., the names of the
parties, overlapping dates, etc.). Other quotations contain harsh language directed at the
Gunns, which the trial court apparently incorporated for dramatic effect. On balance,
however, it appears that the trial court placed greater weight on its own factual findings
and legal analysis than on the evidence presented in exhibit twenty-five.
Viewing the trial court’s memorandum opinion in its totality, we do not think the
court’s consideration of exhibit twenty-five “more probably than not affected the
judgment . . . .” Tenn. R. App. P. 36(b). Consequently, the consideration of exhibit
twenty-five, if erroneous, was harmless.
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IV.
Turning to the substantive issues raised in this appeal, we now consider whether
The Village Restrictions are enforceable by the developer against the homeowners. This
presents a question of law that we review de novo without affording a presumption of
correctness to the conclusions of the trial court. See Harris v. Aldmon, No. E2014-
002303-COA-R3-CV, 2015 WL 1518599, at *4 (Tenn. Ct. App., filed Mar. 30, 2015),
rehearing granted in part (Apr. 21, 2015), no appl. perm. app. filed. In conducting our
legal analysis, however, we will afford a presumption of correctness to the trial court’s
factual findings, unless the preponderance of the evidence requires otherwise. Hicks v.
Cox, 978 S.W.2d 544, 547 (Tenn. Ct. App. 1998). We will also give significant weight
to factual findings that “are dependent upon the credibility of the witnesses,” because the
trial court had the “opportunity to observe the appearance and demeanor of the
witnesses.” St. Clair v. Evans, 857 S.W.2d 49, 51 (Tenn. Ct. App. 1993) (citing Tenn–
Tex Properties v. Brownell–Electro, Inc., 778 S.W.2d 423 (Tenn. 1989)).
“A property owner’s right to own, use, and enjoy private property is a fundamental
right.” Hughes v. New Life Dev. Corp., 387 S.W.3d 453, 474 (Tenn. 2012) (citations
omitted). “Not surprisingly, then, Tennessee law does not favor restrictive covenants,
because they are in derogation of the rights of free use and enjoyment of property.” Id. at
474-75. Generally, restrictive covenants are only enforceable in equity if: (1) the
restrictions “ ‘touch and concern’ the land”; (2) the original parties intended that the
restrictions would “run with the land and bind remote grantees”; and (3) the remote
grantees had notice of the restrictions. Gambrell v. Nivens, 275 S.W.3d 429, 437 (Tenn.
Ct. App. 2008) (quoting Tennsco Corp. v. Attea, No. M2001-01378-COA-R3-CV, 2002
WL 1298808, at *2 (Tenn. Ct. App., filed June 13, 2002)).
Here, the trial court determined that The Village Restrictions, as initially drafted,
were valid and therefore binding on remote grantees. We agree. The restrictions, which
govern the use and appearance of property in The Village, certainly “touch and concern
the land.” The restrictions also expressly state the developer’s intent that the restrictions
“run with the title to said land[.]” Finally, the developer presented proof that the
restrictions were recorded and appear in the chain of title to each of the defendants’
properties, thus putting the defendants on constructive notice.14
14
As previously indicated, all of the defendants except Mr. Newman stipulated that The Village
Restrictions appear in their respective chains of title. A footnote in defendants’ brief reiterates Mr.
Newman’s position that the restrictions do not appear in his chain of title. However, Mr. Newman
provides no argument or citation to authority for his position. Instead, the brief incorrectly states that “the
issue was rendered moot by the Court’s ruling.” The issue is not moot because appellants’ brief argues
that the trial court correctly ruled on this matter. Because Mr. Newman failed to respond to this
argument, we deem the issue waived. See Tenn. R. App. P. 36(a).
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As the trial court correctly observed, however, a determination that restrictive
covenants are valid as initially drafted does not end the analysis. Our courts have
recognized several equitable defenses to the enforcement of otherwise valid restrictive
covenants, including: laches, waiver/estoppel, abandonment, unclean hands, and radical
change in conditions. See, e.g., Hackett v. Steele, 297 S.W.2d 63 (Tenn. 1956); Harris v.
Aldmon, No. E2014-002303-COA-R3-CV, 2015 WL 1518599 (Tenn. Ct. App., filed
Mar. 30, 2015); Wilson v. Woodland Presbyterian Sch., No. W2001-00054-COA-R3-
CV, 2002 WL 1417064 (Tenn. Ct. App., filed Jun. 25, 2002); Scandlyn v. McDill
Columbus Corp., 895 S.W.2d 342 (Tenn. Ct. App. 1994); Elm Hill Homes, Inc. v.
Jessie, 857 S.W.2d 566 (Tenn. Ct. App. 1993). It is important to note that these defenses
implicate the enforceability of restrictive covenants, not the interpretation of them.
Accordingly, it is not necessary for us to recite the principles of contract interpretation
that we have previously applied when interpreting restrictive covenants. See, e.g.,
Maples Homeowners Ass’n, Inc. v. T & R Nashville Ltd. Partnership, 993 S.W.2d 36,
39 (Tenn. Ct. App. 1998).
The trial court stated the following with respect to the enforceability of The
Village Restrictions:
As the court has found, Sandra Gunn cannot and has not
fulfilled her obligations to the landowners under the
covenants and restrictions and because she has committed
fraud on the defendants, the covenants and restrictions will be
unenforceable as to the four (4) landowners identified in this
case, or their successors in title. . . .
On appeal, the parties struggle to label the equitable grounds for the trial court’s
ruling. Appellants first argue that the trial court erred in determining that The Village
Restrictions were unenforceable on the ground that the developer committed “fraud”
against the defendants.15 An action for fraud requires proof of the following elements:
(1) intentional misrepresentation of a material fact; (2)
knowledge that the representation was false—that the
misrepresentation was made knowingly or recklessly or
without belief or regard for its truth; (3) reasonable reliance
on the misrepresentation by the plaintiff and resulting
damages; (4) “that the misrepresentation relates to an existing
15
Disturbingly, neither the appellants nor the defendants cite to a single legal authority to support
their respective positions on this issue. Despite both parties’ noncompliance with Tenn. R. App. P. 27,
we choose to exercise our discretion to address the merits of this issue. See Tenn. R. App. P. 2; Lacy v.
HCA Tristar Hendersonville Hosp., No. M2017–01055–COA–R3–CV, 2018 WL 575346, at *6 (Tenn.
Ct. App., filed Jan. 26, 2018).
- 12 -
or past fact[.]” Stacks v. Saunders, 812 S.W.2d 587, 592
(Tenn. Ct. App. 1990).
Dog House Investments, LLC v. Teal Properties, Inc., 448 S.W.3d 905, 916 (Tenn. Ct.
App. 2014). Elsewhere in its memorandum opinion, the trial court found that
from the very beginning [the developer intended] to practice a
fraud as to any homeowners that bought a lot in The Village.
The original plat was deceptive by showing inns and
conference centers, security gates maintained by the
Developer, management companies to handle all day to day
operations, recreational areas and drain fields with Anflow
sewage systems. . . .
The court also stated that “any attempt to persuade a prospective purchaser on the basis
of this grand proposed Anflow sewage system amounts to fraud.”
Even assuming, without deciding, that the developer’s recorded plats and
restrictive covenants contained intentional misrepresentations, a finding of fraud is not
warranted. Mrs. Schilt, Mr. Newman, and Mr. White testified that they were unaware of
the recorded plats and The Village Restrictions at the time they purchased their homes.
Mr. Barrett attempted to testify about oral representations made by his real estate agent,
but that testimony was excluded by the trial court as inadmissible hearsay. Accordingly,
defendants’ own testimony shows that there was no “reasonable reliance” on the alleged
misrepresentations made by the developer. We therefore hold that the developer did not
commit fraud against the defendants; the trial court erred in concluding otherwise.
Appellants also argue that the trial court erred to the extent that its ruling may
have relied on the radical change in conditions defense. The Supreme Court has
explained that this defense is only applicable
when there has been a radical change in the conditions
existing when the restrictive covenants were created which
completely defeats the objects and purposes of the covenants
so that they are no longer effective, and their enforcement
would not afford the protection which was in the
contemplation of the parties[.]
Hackett v. Steele, 297 S.W.2d 63, 67 (Tenn. 1956). For example, in Harris v. Aldon, this
Court refused to enforce a “residential only” restriction, in part, because the subject
property:
(a) no longer ‘appears’ to be part of the subdivision and (b) it
- 13 -
is impossible for [the] property to be used in the manner
intended in the original deeds. Real estate expert Richard
Smith testified that the property is unsuitable and
unmarketable as residential property, and therefore nearly
worthless as long as the restrictive covenant is enforced as
written.
No. E2014-00203-COA-R3-CV, 2015 WL 1518599, at *12 (Tenn. Ct. App., filed Mar.
30, 2015).16
Here, defendants emphasize the radical differences between The Village as it
exists today and as it is depicted on recorded plats. That is not the proper inquiry.
Rather, one must look to the conditions of the property as it actually existed “when the
restrictive covenants were created.” Id. The plats were created three years after the
restrictive covenants were recorded and merely identified what the developer hoped
would be the future conditions of the property. Moreover, unlike the property in Harris,
which a real estate expert testified was “unsuitable and unmarketable as residential
property,” the property in The Village can still be converted to residential use. The trial
court did make a finding that the 0.18-acre lots “are too small for a septic system with
field lines.” This does not mean, however, that it is “impossible” to build and sell more
homes in The Village. Future residents may choose to purchase multiple lots (like the
Whites) or the developer may install a drip system (or other drain fields) to service
additional homes. Ms. Gunn also testified, without contradiction, that investors have
expressed interest in proceeding with Phase B.
Defendants attempt to shoehorn their argument into the radical change in
conditions defense by emphasizing the cases in which we have held that “restrictions lose
their force when they fail to serve any useful purpose.” Elm Hill Homes, Inc. v. Jessie,
857 S.W.2d 566, 571 (Tenn. Ct. App. 1993). However, we have explained that
[w]hen determining whether a restrictive covenant continues
to serve any useful purpose, the courts must be concerned
primarily with the continuing value of the restrictive covenant
to the entire neighborhood, not the hardship to the parties
attempting to avoid the restrictive covenant[.]
Harris, 2015 WL 1518599, at *6 (emphasis added) (quoting Jones v. Englund, 870
S.W.2d 525, 528 (Tenn. Ct. App. filed Aug. 20, 1993)). Some of the homeowners
admitted at trial that the developer’s ability to enforce architectural review restrictions
16
In Harris, we also held that the “residential only” restriction was unenforceable because
“neighborhood residents have acquiesced in commercial activity” by using the property to sell Christmas
trees and wreaths “each Christmas season since the 1980s[.]” Id. at *14.
- 14 -
has the potential to increase property values in the entire neighborhood. Similarly, the
developer’s ability to collect maintenance fees has the potential of facilitating
development of the entire neighborhood. It is simply inaccurate to say The Village
Restrictions lack any useful purpose. For all of the foregoing reasons, we agree with
appellants that the radical change in conditions defense is not applicable.
Nevertheless, appellate courts have the authority to affirm a trial court’s decision
if it “reached the right result for the wrong reason.” Shutt v. Blount, 249 S.W.2d 904,
907 (Tenn. 1952) (citing Sheafer v. Mitchell, 71 S.W. 86, 87 (Tenn. 1902); Brooks v.
George H. Friend Paper Co., 31 S.W. 160, 161 (Tenn. 1895); Chambers v. Chambers,
23 S.W. 67, 68 (Tenn. 1893); Little Rock & M. Railway Co. v. Wilson, 16 S.W. 613, 614
(Tenn. 1891); Southern Ry. Co. v. City of Elizabethton, 10 Tenn. App. 119, 132 (Tenn.
Ct. App. 1929)). Here, the trial court’s decision can be affirmed by applying the
principles articulated in the Restatement (Third) of Property: Servitudes § 6.19(1)-(2),
which we take this opportunity to adopt.
We recognize that the homeowners did not seek affirmance of the trial court’s
decision on the basis of the Restatement. Nevertheless,
[f]ailure to make the argument before the trial court is not the
proper focus of the right result for the wrong reason doctrine.
Consideration of the facts in the record and whether
additional factual presentation is necessary to resolve the
newly-advanced reason is the proper focus of the application
of the doctrine.
Perry v. Commonwealth, 701 S.E.2d 431, 436 (Va. 2010); see also Robertson v. State,
829 So. 2d 901, 906-07 (Fla. 2002) (“The key to the application of [the right-result-for-
the-wrong-reason] doctrine of appellate efficiency is that there must have been support
for the alternative theory or principle of law in the record before the trial court.”). As we
explain below, there are sufficient facts in the record to affirm the trial court’s decision
on the basis of the Restatement.
In any event, this Court may also exercise its discretion to
consider other issues [not presented for review] in order,
among other reasons: (1) to prevent needless litigation, (2) to
prevent injury to the interests of the public, and (3) to prevent
prejudice to the judicial process.
Tenn. R. App. P. 13(b). We find it prudent to consider the applicability of the
Restatement in order “to prevent injury to the interests of the public.” See id. As the
Supreme Court recently noted, “residential developments subject to restrictive covenants
- 15 -
and governed by homeowners’ associations . . . have rapidly proliferated in recent
decades.” Hughes v. New Life Development Corp., 387 S.W.3d 453, 475 (Tenn. 2012)
(citing Lee Anne Fennell, Contracting Communities, 2004 U. Ill. L. Rev. 829, 829 (2004)
(“Fennell”)). “According to the Community Associations Institute, more than 63,000,000
Americans live in an estimated 323,600 association-governed communities.” Id.
Consequently, novel questions relating to the enforceability of restrictive covenants in
residential communities are increasingly common. In the absence clear legal standards, it
is more difficult for members of the public to order their affairs.
The heart of this controversy is whether a developer who has failed to establish a
homeowners association and provides only minimal services may continue to enforce
restrictive covenants against residents in a common-interest community. Although this is
an issue of first impression in this state, the Restatement directly speaks to it:
(1) The developer of a common-interest-community project
has a duty to create an association to manage the common
property and enforce the servitudes unless exempted by
statute.
(2) After the time reasonably necessary to protect its interests
in completing and marketing the project, the developer has a
duty to transfer the common property to the association, or
the members, and to turn over control of the association to the
members other than the developer. . . .17
Restatement (Third) of Property: Servitudes § 6.19 (emphasis added). Comment (a)
explains the rationale for this provision:
In providing that the developer has an implied duty to create
an association, this section reflects widespread development
practice and follows modern common-interest-community
statutes.
The developer and the purchasers of property in a common-
interest community have interests in controlling the common
property and the association that may come into conflict. The
developer’s primary interest is in completing and selling the
project, while that of the purchasers is in maintaining their
property values and establishing the quality of life they
17
Section 6.19(3) also recognizes an association’s right to terminate certain contracts entered into
by the developer on behalf of the association. That section is not implicated by the facts of this case.
Accordingly, we express no opinion on it.
- 16 -
expected when buying the property. Both the developer and
the purchasers have substantial investment interests that are
affected by the amount of assessments, the level of
maintenance and capital improvements, and the establishment
of reserves for future maintenance and replacement of
common property. The developer needs to retain control of
the association long enough to avoid changes that will
jeopardize its ability to sell the remainder, while the
purchasers need to stabilize assessments and take charge of
the rules governing operation of the community. The longer
the developer retains control, the greater the likelihood of
conflict. Accordingly, modern common-interest-community
statutes specify timetables within which the developer must
turn over control to the members.
Comment (b) elaborates:
In determining when control of a project reasonably must be
turned over to the members, the percentage of lots or units
that have been sold, the interval since the first unit was sold,
and the level of the developer’s construction and marketing
activities are relevant. The Uniform Common Interest
Ownership Act [UCIOA] provides a timetable for turnover of
control based on these factors. In the absence of a controlling
statute, a court may look for guidance to such a timetable in
determining when the developer is required to cede control.
Under the UCIOA, the developer of a common-interest community must cede
control to a homeowners association under any of the following circumstances:
(1) [60] days after conveyance of [three-fourths] of the units
that may be created to unit owners other than a declarant;
(2) two years after all declarants have ceased to offer units for
sale in the ordinary course of business;
(3) two years after any right to add new units was last
exercised; or
(4) the day the declarant, after giving notice in a record to unit
owners, records an instrument voluntarily surrendering all
rights to control activities of the association.
- 17 -
UCIOA § 1-103(d).18
Thus, under the Restatement, developers have a common law duty to create an
association and to turn over control “[a]fter the time reasonably necessary to protect its
interests in completing and marketing the project[.]” Rest. (Third) of Property:
Servitudes § 6.19(1)-(2). The Restatement recommends considering three factors in
determining “the time reasonably necessary to protect [the developer’s] interests”: (1)
“the percentage of lots or units that have been sold”; (2) “the interval since the first unit
was sold”; and (3) “the level of the developer’s construction and marketing activities.”
Id. at § 6.19 cmt. b. In states that have not adopted the UCIOA, such as Tennessee, the
Restatement also recommends looking to the UCIOA as a barometer of reasonableness.
Id.
In the absence of a controlling statute or guidance from the Supreme Court, this
Court has the authority to adopt provisions of a Restatement in order to further the
development of the common law in this state. See, e.g., Ward v. Ward, No. M2014–
02237–COA–R3–CV, 2015 WL 6672581, at *7 (Tenn. Ct. App., filed Oct. 30, 2015), no
perm. app. filed (adopting Restatement (Second) of Torts § 316 (Am. Law Inst. 1965));
Fye v. Kennedy, 991 S.W.2d 754, 763 (Tenn. Ct. App. 1998), perm. app. denied (Tenn.
1988) (adopting Restatement (Second) of Torts § 920A (Am. Law Inst. (1977)); Buda v.
Cassel Bros., Inc., 568 S.W.2d 628, 631 (Tenn. Ct. App. 1978), perm. app. denied (Tenn.
1978) (adopting Restatement (Second) of Torts §§ 674, 675 (Am. Law Inst. 1977)).
Although Section 6.19 of the Restatement is relatively new and has only been
considered by a few courts,19 the principles it articulates are not revolutionary. As the
Restatement observes, Section 6.19 “reflects widespread development practice.” Indeed,
one of the primary goals of a developer is to develop real estate and turn over control of
that property to a self-regulating community. The Tennessee Supreme Court recently
acknowledged this fact, albeit in passing. See Hughes v. New Life Dev. Corp., 387
S.W.3d 453, 775 (Tenn. 2012). In discussing modern real estate development practices,
18
This section is subject to the limitations set forth in UCIOA § 2-123(g), which governs
“master-planned communities” – communities with at least 500 units. See id.
19
At least two courts have cited Section 6.19 favorably. See, e.g., Retreats at Stone Fountain
Condominium Owners Ass’n Bd. v. Wanninger, L.L.C., No. 13–0489, 2014 WL 1495494, at *6 (Iowa
Ct. App., filed Apr. 16, 2014); Chesus v. Watts, 967 S.W.2d 97, 108 (Mo. Ct. App. 1998). We have not
identified a single case in which a court has explicitly rejected the Restatement approach. But see Sewall
Marshal Condominium Ass'n v. 131 Sewall Ave. Condominium Ass'n, 46 N.E.3d 96, 135 (Mass. Ct.
App. 2016) (declining to adopt Section 6.19(3), which is not implicated in the case at bar); Asbury Park,
LLC v. Greenbriar Estate Homeowners’ Ass’n, Inc., 271 P.3d 1194, 1200-01 n.4 (Idaho 2012) (holding
that a trial court did not have the authority to adopt Section 6.19 but noting that it was “unclear” whether
Section 6.19 was even relevant to the facts of the case).
- 18 -
the Court noted that “[t]he developer also creates an association to govern the
community . . . .” Id. (emphasis added). The Court also explained that
people who live in private developments “are not just opting
for private ordering in the form of covenants, but also are
opting for a privatized form of collective decision making that
can undo, replace, modify, or augment the private ordering
already achieved.”
Id. at 476 (emphasis added) (quoting Fennell, supra at 848).20 Requiring developers to
create an association and to turn over control after a reasonable time helps ensure that
property owners can actually obtain the “form of collective decision making” that they
bargained for when they purchased their property. See id.
For the reasons stated above, we agree with the drafters of the Restatement that
developers have a duty (1) to create an association and (2) to turn over control to that
association “[a]fter the time reasonably necessary to protect its interests in completing
and marketing the project.” We therefore adopt Restatement (Third) of Property:
Servitudes § 6.19(1)-(2).
In the present case, the trial court intuitively applied the common law rule
articulated in the Restatement. The following excerpt from the court’s memorandum
opinion is illustrative:
Sandra Gunn protected her intention of never relinquishing
control of The Village to a Homeowners Association by
requiring the sale of 75% of the lots. If that had occurred, the
property owners would assume ownership and responsibility
of the subdivision, and if not, ‘The Developer shall exercise
all rights herein.’ The idea of a homeowners association was
thwarted from the very beginning. These homeowners in this
case have received nothing except grief and torment by
Sandra Gunn . . . . She still talks of proposals and when court
days get near, the mowing and cleaning up, takes place for the
pictures to be taken. . . . It is not really an overstatement at
this point after all the proof is in that nothing in the way of
those things set out hereinabove has been accomplished in 24
years, except the building and sale of four (4) homes. In its
20
In context, the Court was considering which standard of judicial review should apply when
determining the validity of amendments to restrictive covenants in a residential community. Id. at 474.
Ultimately, the Court held that amendments to restrictive covenants that are “uniform in application and
adopted in conformance with [the bylaws of a property owners association], are subject to judicial review
principally under an arbitrary and capricious standard.” Id. at 478 (footnote omitted).
- 19 -
present condition, the Developer cannot go any further. The
Village is at a dead standstill and the poor homeowners are at
the mercy of Sandra Gunn . . . .
It is evident from this excerpt that the trial court considered (1) “the percentage of
lots or units that have been sold”; (2) “the interval since the first unit was sold”; and (3)
“the level of the developer’s construction and marketing activities.” See Rest. (Third) of
Property: Servitudes § 6.19 cmt. b. The trial court also found that the developer had not
constructed a new home since 2007. Under the UCIOA, a developer must cede control
“two years after any right to add new units was last exercised.” UCIOA § 1-103(d)(3). If
that is any measure of reasonableness, then ten years without construction of a new home
is patently unreasonable. Although development of Phase B began around the time of
trial, we agree with the trial court’s implicit determination that these efforts are “too little
too late.”
The evidence in the record does not preponderate against the court’s finding that
the developer has only constructed four homes and provided minimal services in the
twenty-four years since The Village’s conception. Because the developer has failed to
discharge its duty to create a homeowners association and to turn over control “[a]fter the
time reasonably necessary to protect its interests in completing and marketing the
project,” we affirm the judgment of the trial court to the extent that it prohibits the
developer from exercising any further control over the defendants and their property. See
Rest. (Third) of Property: Servitudes § 6.19(1)-(2).
Appellants complain that “[t]he Trial Court’s judgment has left an absolute mess
as a practical matter in The Village.” Specifically, appellants say that the court’s ruling
raises the following questions:
Who will make decisions about what will happen to the
private roadways and common areas such as when to pave
and when to mow? How would money be collected in order
to accomplish these purposes, especially if there is not
unanimous agreement among the owners as to what needs to
be done, when and at what cost? Without the structure set
forth in the Village Restrictions about who maintains the
roads and common areas, there is chaos.
There is a simple solution: the developer should create a homeowners association. Once
again, the Restatement provides guidance in fashioning an equitable remedy:
In projects with multiple phases that will be developed over a
substantial period of time, more flexibility in the required
transfer of control may be appropriate. Sold-out phases of the
- 20 -
project can be given control over the local aspects of the
project without jeopardizing the developer’s ability to
complete the project in accord with the plan. Subassociations
can be used to give local control over budgets for
maintenance, design review, and rules for common areas in
that part of the project, while allowing the developer to retain
control over facilities needed to serve remaining unsold or
unbuilt phases and facilities needed for marketing.
Rest. (Third) of Property: Servitudes § 6.19 cmt. b (emphasis added); see also Harris,
2015 WL 1518599, at *12 (rejecting “an ‘all-or-nothing’ rule [that would] prevent[ ] a
court from cancelling or modifying restrictions on equitable principles for only one, or
some, of the properties in a subdivision”).
Consistent with the foregoing principles, the developer is hereby ordered to create
a homeowners association by delivering a charter to the secretary of state’s office for
filing. The charter and/or bylaws of the association must specify that the association will
consist of the defendant homeowners and their successors in title. Members of the
association must continue to abide by The Village Restrictions, but the association will
have all of the rights and responsibilities of the developer with respect to Lots 1A,
26/12B, 25/12B, 3A, and 6A. The association will also have the responsibility of
maintaining the private roads in Phase A that existed at the time of trial. The association
may amend The Village Restrictions pursuant to Section C.2 of that document; however,
any amendments will only affect the areas of The Village over which the association
exercises local control.
The developer may continue to control the remaining lots in The Village,
including the common drain field currently servicing the Barrett and Newman lots.21 The
developer may enforce The Village Restrictions, as originally drafted, against owners of
property not controlled by the association. These property owners will not become
members of the association until the developer has sold seventy-five percent of the lots or
until “the time reasonably necessary to protect its interests in completing and marketing
the [remaining phases of the] project,” measured from the date this opinion is filed.
When the developer turns over control of the remaining lots, the property owners in the
remaining lots will join the association of the defendant homeowners. At that time, the
association will take control of the remaining property in The Village.
Our holding should not be construed as a license for property owners to escape the
21
This is consistent with the Restatement’s suggestion to “allow[ ] the developer to retain control
over facilities needed to serve remaining unsold or unbuilt phases and facilities needed for marketing.”
We emphasize, however, that the developer may not continue to charge the defendants fees for any
maintenance or improvements to the common drain field.
- 21 -
consequences of valid restrictive covenants before a developer has had a reasonable
opportunity to market and develop the property. Our holding should also not be
construed as prohibiting developers from specifying a period of developer control in a
declaration of restrictions. We merely hold that a developer cannot rely on such a
provision to control property in perpetuity. When the developer’s authority to enforce
restrictive covenants is challenged, courts should consider the principles in the
Restatement (Third) of Property: Servitudes § 6.19(1)-(2) in determining whether the
developer has discharged its duties to the property owners and/or the property owners
association. To the extent that the developer has not discharged its duties under these
provisions, courts may exercise their equitable powers to fashion an appropriate remedy.
V.
Appellants also challenge the trial court’s finding that the developer is liable for
breach of fiduciary duty. With respect to this issue, the trial court stated the following:
The next issue of whether or not Sandra Gunn has a fiduciary
duty owing to these landowners, is easy to answer. She
definitely does. In this case someone must have such a duty.
There is no one else but Sandra Gunn, and she stated in her
deposition that she did have a fiduciary duty, and for all the
reasons stated thus far, she has breached her duties under the
covenants and restrictions duly signed and acknowledged
before a notary public by the President of Innerimages.
As an initial matter, Tennessee law recognizes two types of fiduciary
relationships: relationships that are fiduciary per se (e.g., attorney/client, guardian/ward)
and relationships that are “confidential” due to one party’s ability to exercise “dominion
and control” over another party. Foster Business Park, LLC v. Winfree, No. M2006-
02340-COA-R3-CV, 2009 WL 113242, at *12 (Tenn. Ct. App., filed Jan. 15, 2009).
Because confidential relationships can assume a variety of
forms, the courts have been hesitant to define precisely what a
confidential relationship is and the court must look to the
particular facts and circumstances of the case to determine
whether one party exercised dominion and control over
another, weaker party.
Id. at *13. The existence of a confidential relationship is a question of fact to which a
presumption of correctness attaches. See Matlock v. Simpson, 902 S.W.2d 384, 385
(Tenn. 1995).
Here, the trial court found that the developer’s relationship to the homeowners was
- 22 -
fiduciary in nature. We will not disturb that finding of fact. Pursuant to The Village
Restrictions, the developer dictated rules regarding the appearance and use of all property
in The Village. The developer also had the authority to impose assessments on property
owners. No deviation from The Village Restrictions was permitted without the
developer’s approval. The developer also retained the sole right to amend the restrictions
until an association was formed. Because the evidence demonstrates that the developer
exercised dominion and control over the homeowners, there was a confidential fiduciary
relationship.
Courts in other jurisdictions have also held that developers owe fiduciary duties to
homeowners and homeowners associations. See, e.g., Laurel Road Homeowners
Association, Inc. v. Freas, 191 A.3d 938, 951 (Pa. Cmmw. Ct. 2018); Goddard v.
Fairways Dev. Gen. Partnership, 426 S.E.2d 828, 832 (S.C. Ct. App. 1993); Richard
Gill Co. v. Jackson’s Landing Owners’ Ass’n, 758 S.W.2d 921, 924 (Tex. Ct. App.
1988). Reasoning by analogy, some courts compare real estate developers to promoters
of a corporation:
Both are entrusted by interested investors to bring about a
viable organization to serve a specific function. Both should
be expected to use good judgment and act in utmost good
faith to complete the formation of their organization.
Goddard, 426 S.E.2d at 832. We think this analogy is appropriate.
Here, the trial court found that the developer was liable for breach of fiduciary
duty because the developer “breached her duties under [The Village Restrictions.]” We
interpret the trial court’s ruling as a determination that the developer did not act in good
faith in continuing to develop the property and in providing the services promised under
The Village Restrictions. Although the trial court did not resolve all factual disputes with
respect to the developer’s alleged misuse of funds, it is undisputed that the developer
failed to produce an accounting until the discovery phase of this litigation. The evidence
does not preponderate against the trial court’s findings with respect to this issue.
Accordingly, we affirm the trial court’s award of $786.50 to Mr. Newman to the extent
that such an award was based on a finding of breach of fiduciary duty.
VI.
Appellants argue that the trial court erred by piercing the corporate veil and
holding Ms. Gunn personally liable for the $786.50 awarded to Mr. Newman. “There is
no question that the courts may, in appropriate circumstances, pierce the corporate veil
and attribute the actions of a corporation to its shareholders.” CAO Holdings, Inc. v.
Trost, 333 S.W.3d 73, 88 (Tenn. 2010) (citations omitted). “To pierce the corporate veil,
a court must be convinced that the separate corporate entity ‘is a sham or a dummy’ or
- 23 -
that disregarding the separate corporate entity is ‘necessary to accomplish justice.’ ” Id.
(quoting Oceanics Sch., Inc. v. Barbour, 112 S.W.3d 135, 140 (Tenn. Ct. App. 2003)).
In deciding whether to pierce the corporate veil, Tennessee courts consider the following
“Allen factors”:
Factors to be considered in determining whether to disregard
the corporate veil include not only whether the entity has
been used to work a fraud or injustice in contravention of
public policy, but also: (1) whether there was a failure to
collect paid in capital; (2) whether the corporation was
grossly undercapitalized; (3) the nonissuance of stock
certificates; (4) the sole ownership of stock by one individual;
(5) the use of the same office or business location; (6) the
employment of the same employees or attorneys; (7) the use
of the corporation as an instrumentality or business conduit
for an individual or another corporation; (8) the diversion of
corporate assets by or to a stockholder or other entity to the
detriment of creditors, or the manipulation of assets and
liabilities in another; (9) the use of the corporation as a
subterfuge in illegal transactions; (10) the formation and use
of the corporation to transfer to it the existing liability of
another person or entity; and (11) the failure to maintain arms
length relationships among related entities.
Id. (quoting FDIC v. Allen, 584 F. Supp. 386, 397 (E.D. Tenn. 1984)). Importantly,
[t]he conditions under which the corporate entity will be
disregarded vary according to the circumstances present in
each case and the matter is particularly within the province of
the trial court. Moreover, a determination of whether or not a
corporation is a mere instrumentality of an individual or a
parent corporation is ordinarily a question of fact . . . .
Mike v. Po Group, Inc., 937 S.W.2d 790, 795 (Tenn. 1996) (quoting Electric Power Bd.
of Chattanooga v. St. Joseph Valley Structural Steel Corp., 691 S.W.2d 522, 526 (Tenn.
1985)).
In this case, the trial court made several findings of fact that directly relate to the
Allen factors. For example, the court noted that no stock certificates were issued to Ms.
Gunn; Ms. Gunn was the sole shareholder of Innerimages; the “office” of Innerimages is
Ms. Gunn’s home; Ms. Gunn and Innerimages use the same bank; and Ms. Gunn and
Innerimages hired the same attorneys. The court further remarked that the developer’s
business dealings with Ms. Gunn’s ex-husband were “suspect” and had “the appearance
- 24 -
of impropriety.” We also note that Ms. Gunn and Innerimages hired the same employees
– Jamie and Wayne Click – to perform lawn care and maintenance services. The court’s
findings implicate at least one third of the Allen factors and each finding weighs in favor
of piercing the corporate veil. Because the evidence does not preponderate against these
findings, we affirm the trial court’s decision to hold Ms. Gunn personally liable for the
damages incurred by the developer.
VII.
Finally, the homeowners argue that the trial court erred by denying their request
for attorney’s fees. Tennessee courts follow the “American Rule,” which provides that
a party in a civil action may recover attorney’s fees only if:
(1) a contractual or statutory provision creates a right to
recover attorney’s fees; or (2) some other recognized
exception to the American Rule applies, allowing for
recovery of such fees in a particular case.
Eberbach v. Eberbach, 535 S.W.3d 467, 474 (Tenn. 2017) (quoting Cracker Barrel Old
Country Store, Inc. v. Epperson, 284 S.W.3d 303, 308 (Tenn. 2009)).
The homeowners concede that Tennessee courts follow the American Rule, but
argue that “attorney’s fees should have been considered as an award of punitive damages
as a matter of common law and as now codified under [Tenn. Code Ann. § 29-39-104].”
This argument, which was raised for the first time on appeal, is completely without merit.
The trial court did not award punitive damages in this case. Even if it had, attorney’s fees
“are meant to be compensatory, and it is therefore inappropriate to award attorneys’ fees
as punitive damages.” Bridgefourth v. Santander Consumer USA, Inc., No. W2013–
02468–COA–R3–CV, 2014 WL 3563470, at *1 (Tenn. Ct. App., filed July 21, 2014)
(quoting Buttrey v. Holloway’s Inc., No. M2011–01335–COA–R3–CV, 2012 WL
6451802, at *13 (Tenn. Ct. App., filed Dec. 12, 2012)). We therefore affirm the trial
court’s order denying homeowners their request for an award of attorney’s fees.
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VIII.
The judgment of the trial court is affirmed as modified by this Court’s opinion.
Costs on appeal are taxed to the appellants, Innerimages, Inc., Sandra Gunn, and Cupid’s
Rose, LLC. The case is remanded for enforcement of the trial court’s order as modified
by this Court’s opinion, and for collection of costs assessed below.
________________________________
CHARLES D. SUSANO, JR., JUDGE
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