Will Shatford v. Smallbusiness.com, Rex Hammock, and Hammock Publishing, Inc. ( 2005 )

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
November 3, 2004 Session
WILL SHATFORD v. SMALLBUSINESS.COM, REX HAMMOCK, and
HAMMOCK PUBLISHING, INC.
An Appeal from the Chancery Court for Davidson County
No. 01-2169-I Irvin H. Kilcrease, Jr., Chancellor
No. M2003-02315-COA-R3-CV - Filed June 13, 2005
This case is about fraud and negligent misrepresentation. In the fall of 2000, the plaintiff employee
accepted an offer for employment with the defendant’s internet company. Approximately three
months after the employee began work, the company became insolvent and closed. The employee
sued the defendant owner of the internet company, asserting that the company owner made false
statements to him regarding the financial strength of the company. The employee sought damages
for breach of contract and for fraud and negligent misrepresentation. The employee received a
judgment against the company for contract damages related to the employment contract. The
company owner then sought summary judgment on the remaining claims of fraud and negligent
misrepresentation. The trial court granted the company owner’s motion for summary judgment,
finding that the employee could not, as a matter of law, establish that he had relied on the company
owner’s statements that were the basis for the claims of fraud and negligent misrepresentation. The
employee appeals. We reverse, finding that the employee’s reasonable or justifiable reliance on the
statements was a genuine issue of fact and thus summary judgment was not proper.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court is Reversed
HOLLY M. KIRBY , J., delivered the opinion of the Court, in which DAVID R. FARMER , J. AND FRANK
G. CLEMENT , JR., J., joined.
Irwin Venick, Nashville, for plaintiff/appellant Will Shatford
Leslie Goff Sanders, Nashville, for defendant/appellees smallbusiness.com, Rex Hammock, and
Hammock Publishing, Inc.
OPINION
Defendant/appellee Rex Hammock (“Hammock”) is the founder of Hammock Publishing,
Inc. and smallbusiness.com. In the mid 1990's, Hammock developed an internet based company,
called smallbusiness.com, that allowed small business owners to work together and share ideas. In
1999, Hammock began to turn the concept of smallbusiness.com into an ongoing business. In early
2000, Hammock raised approximately $2.5 million as a first round of financing for the business and
began to hire employees. In the summer of 2001, smallbusiness.com began negotiations to raise an
additional $3 million in capital. By the fall of 2000, smallbusiness.com was recruiting potential
employees for the position of Chief Technology Officer.
Meanwhile, plaintiff/appellant Will Shatford (“Shatford”) was working in California for an
internet company. Shatford had been approached by other internet based companies interested in
employing him. In September 2000, a recruiter working on behalf of smallbusiness.com approached
Shatford to discuss possible employment. Shatford first met with the principals of
smallbusiness.com, including Hammock, in Nashville at an interview in early October 2000. In this
interview, Shatford learned general information about the company and was told that
smallbusiness.com had gone through a “first round” of financing and was in the process of securing
the “second round” of financing–a $3 million “bridge” loan.1 However, Shatford was not provided
specific financial information at this time.
Later that month, Shatford and his wife, Debra, went to Nashville for a second interview with
smallbusiness.com. Shatford spoke to Tom Wylly, the company’s Executive Vice President of
Finance, Kevin O’Hara (“O’Hara”), its Chief Operating Officer, and Hammock. At this meeting,
Shatford was told the general business plan for smallbusiness.com but was not provided any
financial information. However, Hammock told Shatford’s wife, Debra, that the $3 million in
financing was “all lined up.” Debra Shatford relayed this information to her husband.
After the second interview, Shatford was offered the position of Chief Technology Officer
for smallbusiness.com. In November 2000, Shatford and Hammock negotiated the final details of
Shatford’s employment agreement. According to Shatford, during these negotiations, Hammock told
him that the $3 million in additional financing was “fully subscribed and locked up” and that the
company would received $2 million on December 6 and the remaining $1 million by the end of the
year. Shatford told Hammock that accepting the position with smallbusiness.com would require him
to leave a secure position in California. Shatford says that he asked for and received assurances from
Hammock that the $3 million in financing was secure.
On November 4, 2000, Shatford accepted employment with smallbusiness.com. He resigned
from his existing position in California the next day, November 15, 2000. Two days later, on
November 17, 2000, Shatford received a formal offer letter from smallbusiness.com. Shatford
signed and returned the letter and then began preparations to move his family to Nashville. Shatford
began regular telephone conversations with smallbusiness.com and was scheduled to begin work in
Nashville on January 3, 2001.
1
Apparently the “first round” of financing came from the owner and his friends or family, and the “second
round” was to come from small institutional investors.
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On December 15, 2000, Shatford received an email from O’Hara, the Chief Operating Officer
for smallbusiness.com. The email was in response to a prior email that Shatford sent to O’Hara,
raising several issues, including the status of the $3 million bridge loan.2 O’Hara’s reply email
stated that the company was in “final negotiations” for a $1 million piece of the $3 million bridge
loan. Three days later, on December 18, 2000, Shatford met with Hammock in Nashville. In
response to Shatford’s questions, Hammock assured Shatford that the full $3 million was committed
and would close during the first week of January. Although not completely clear from the record,
it appears that Shatford went to Nashville and began work as scheduled on January 3, 2001.
On January 9, 2001, after starting work in Nashville, Shatford learned that the $3 million in
financing for smallbusiness.com had not closed. At this time, Shatford was still in the process of
moving to Nashville from California and his possessions were scheduled to arrive in Nashville on
January 15, 2001. Shatford again asked for and received assurances from Hammock that the
financing was secure. Later that month, on January 23, 2001, Shatford and his wife signed a contract
to purchase a home in Nashville.
On January 30, 2001, Shatford learned that one of the investors for smallbusiness.com had
backed out and that only half of the $3 million loan was finalized. The following day, Shatford,
anxious about closing on the purchase of a home while the company financing was incomplete,
discussed his concerns with Hammock. Hammock purportedly assured Shatford that even if
smallbusiness.com went out of business, Shatford would be employed with Hammock Publishing.
Shatford and his wife subsequently closed on their home in Nashville.
By March 2001, after smallbusiness.com experienced further financial difficulties, the
company’s principals began working on ways to salvage it. In April 2001, approximately half of the
employees of smallbusiness.com were laid off. In May 2001, the remaining employees, including
Shatford, were laid off. At that time, smallbusiness.com owed Bank of America $2.25 million on
a line of credit personally guaranteed by Hammock. Hammock paid off the line of credit and
foreclosed on smallbusiness.com. The remaining assets of smallbusiness.com were then transferred
to Hammock Publishing.
At the time smallbusiness.com laid off Shatford and the other remaining employees,
Hammock told Shatford that employment with Hammock Publishing was not possible. Shatford
then requested severance benefits in the amount of $396,933.44, based on the employment
agreement between Shatford and smallbusiness.com. Shatford received four weeks of vacation pay
but did not receive the remaining $374,308.15 in severance benefits.
In July 2001, Shatford filed suit against smallbusiness.com, Hammock Publishing, Inc., and
Rex Hammock in the Chancery Court of Davidson County. The suit alleged that smallbusiness.com
and Hammock Publishing were liable for breach of contract and that Rex Hammock was liable for
fraud and negligent misrepresentation. Discovery ensued.
2
The record does not show when Shatford sent the email to O’Hara.
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In January 2002, Shatford filed a Motion for Partial Summary Judgment against
smallbusiness.com on the claim of breach of contract. Subsequently, the trial court granted
Shatford’s motion for partial summary judgment and awarded him contract damages against
smallbusiness.com in the amount of $374,308.15, plus costs.
After completion of discovery, defendants Hammock and Hammock Publishing, Inc. filed
a motion for summary judgment, seeking dismissal of Shatford’s remaining claims. By an order
dated August 11, 2003, the trial court granted the defendants’ motion for summary judgment. The
trial court held that, as a matter of law, Shatford could not establish that he relied on Hammock’s
alleged statement relating to the status of the company’s financing. The trial court also found that
Hammock’s promise of future employment did not give rise to a legally recognized claim in
Tennessee. As to Shatford’s oral contract claim against Hammock Publishing, the trial court found
that Shatford could not establish the elements of an oral contract.
Shatford now appeals the trial court’s grant of summary judgment on his claims of fraud and
negligent misrepresentation against Hammock. Shatford asserts that there is sufficient evidence to
show that he relied on Hammock’s assurances before he agreed to the offer of employment with
smallbusiness.com, and that genuine issues of fact exist as to whether Shatford reasonably relied on
Hammock’s misrepresentations and whether Shatford suffered damages as a result of his reliance
on the misrepresentations.3
A motion for summary judgment should be granted when the movant demonstrates that there
are no genuine issues of material fact and that the moving party is entitled to judgment as a matter
of law. Tenn. R. Civ. P. 56.04. The party moving for summary judgment bears the burden of
demonstrating that no genuine issue of material fact exists. Bain v. Wells, 936 S.W.2d 618, 622
(Tenn. 1997). On a motion for summary judgment, the court must take the strongest legitimate view
of the evidence in favor of the nonmoving party, allowing all reasonable inferences in favor of the
nonmoving party, and disregarding all countervailing evidence. Id. In Byrd v. Hall, 847 S.W.2d
208 (Tenn. 1993), our Supreme Court stated:
Once it is shown by the moving party that there is no genuine issue of material fact,
the nonmoving party must then demonstrate, by affidavits or discovery materials, that
there is a genuine, material fact dispute to warrant a trial. In this regard, Rule 56.05
[now Rule 56.06] provides that the nonmoving party cannot simply rely upon his
pleadings but must set forth specific facts showing that there is a genuine issue of
material fact for trial.
Id. at 211 (citations omitted) (emphasis in original).
Summary judgment is only appropriate when the facts and the legal conclusions drawn from
the facts reasonably permit only one conclusion. Carvell v. Bottoms, 900 S.W.2d 23, 26 (Tenn.
3
Shatford did not appeal the grant of summary judgment in favor of Hammock Publishing.
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1995). Since only questions of law are involved, there is no presumption of correctness regarding
a trial court’s grant of summary judgment. Bain, 936 S.W.2d at 622. Therefore, our review of the
trial court’s grant of summary judgment is de novo on the record before this Court. Warren v. Estate
of Kirk, 954 S.W.2d 722, 723 (Tenn. 1997).
In the instant case, the trial court held that, as a matter of law, Shatford could not establish that
he relied on Hammock’s statements. The trial court did not elaborate further on its reasoning.
Therefore, we review the evidence in the record in accordance with the standard of review noted
above. In opposition to Hammock’s summary judgment motion, Shatford presented evidence that,
after Shatford’s second interview, Shatford and Hammock began to negotiate the final terms of
Shatford’s employment with smallbusiness.com. Shatford stated in his affidavit that, at that time,
Shatford asked for and received assurances from Hammock that the financing was “all locked up.”
Shatford alleged that Hammock even gave him a specific date–December 6–by which the financing
would become available. After receiving an offer letter based on the negotiations, Shatford resigned
from his California job. After the exchange of emails between Shatford and O’Hara, Shatford’s
reliance becomes more questionable. However, viewing the evidence in the light most favorable to
Shatford, we find that there is sufficient evidence to create a genuine issue of fact on Shatford’s
reasonable or justifiable reliance on the financial statements made by Hammock. As such, the grant
of summary judgment on this issue was not proper. We must reverse the grant of summary judgment
in favor of Hammock on the issue of fraud and misrepresentation and remand the cause for further
proceedings.
On appeal, Shatford asks this Court for a determination on whether the reliance on a claim of
fraud is “justifiable reliance” or “reasonable reliance.” We decline, finding that resolution of this
issue is not necessary in order to decide this appeal.
Finally, on appeal, Hammock asserts that Shatford cannot prove that he suffered any damages
as a result of fraud or negligent misrepresentation. Hammock cites Justice v. Anderson County, 955
S.W.2d 613, 616 (Ten. Ct. App. 1997), and Sunderhaus v. Perel & Lowenstein, 388 S.W.2d 140,
144 (Tenn. 1965) for the proposition that when a party enters into an agreement based on false
statements, he may elect between the remedies available in a breach of contract action and the
remedies available in a tort action. Hammock rightly notes that Shatford has already received a
judgment against smallbusiness.com for contract damages and asserts that he can assert no further
claim. Hammock points to no place in the record, however, in which the issue of election of remedies
was raised to the trial court. Issues not raised to the trial court are not addressed on appeal. City of
Lavergne v. Southern Silver, Inc., 872 S.W.2d 687, 691 (Tenn. Ct. App. 1993). As a result, we
decline to address the effect of election of remedies on Shatford’s claims. This does not preclude the
parties from addressing the issue to the trial court on remand.
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The grant of summary judgment in favor of defendant/appellee Rex Hammock on the issue
of fraud and negligent misrepresentation is reversed, and the cause is remanded for further proceeding
not inconsistent with this Opinion. Costs of this appeal are charged to defendant/appellee Rex
Hammock, for which execution may issue, if necessary.
___________________________________
HOLLY M. KIRBY, JUDGE
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