Joe David Erwin v. Great River Road Supercross, LLC ( 2020 )


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  •                                                                                         12/01/2020
    IN THE COURT OF APPEALS OF TENNESSEE
    AT JACKSON
    February 11, 2020 Session
    JOE DAVID ERWIN ET AL. v. GREAT RIVER ROAD SUPERCROSS, LLC
    ET AL.
    Appeal from the Chancery Court for Dyer County
    No. 15-CV-218     Tony A. Childress, Chancellor
    ___________________________________
    No. W2019-01005-COA-R3-CV
    ___________________________________
    In this dispute over the sale of real and personal property, the buyers complain that they
    did not receive all the personal property described in the bill of sale and that the real
    property was encumbered.             Their complaint asserted claims for intentional
    misrepresentation, breach of the covenant against encumbrances, and breach of contract.
    After a bench trial, the trial court awarded the buyers damages for breach of contract and
    intentional misrepresentation. Both sides appealed. We conclude that the evidence
    preponderates against the trial court’s finding that the buyers’ reliance on the
    misrepresentation in the warranty deed was reasonable. In all other respects, we affirm.
    Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed
    in Part and Affirmed in Part
    W. NEAL MCBRAYER, J., delivered the opinion of the court, in which J. STEVEN
    STAFFORD, P.J., W.S., and CARMA DENNIS MCGEE, J., joined.
    Matthew W. Willis, Dyersburg, Tennessee, for the appellants, Great River Road
    Supercross, LLC and Brian Klinkhammer.
    Jason R. Creasy, Dyersburg, Tennessee, for the appellees, Joe David Erwin and Amanda
    Rachel Erwin.
    OPINION
    I.
    A.
    Brian Klinkhammer was the sole member and chief manager of Great River Road
    Supercross, LLC. The LLC was administratively dissolved in 2004. Four years later,
    Mr. Klinkhammer orally agreed to sell a 21.61-acre property owned by the LLC, along
    with various improvements and equipment, to Joe and Amanda Erwin for a total purchase
    price of $160,000. The Erwins paid $40,000 down and signed a Real Estate Installment
    Note, secured by a deed of trust, for the balance of the purchase price. The note obligated
    the Erwins to make 10 annual payments of $12,000 to Mr. Klinkhammer.
    Mr. Klinkhammer, on behalf of the LLC, conveyed the real property to the Erwins by
    warranty deed dated July 8, 2008. In the same manner, he also signed a bill of sale for
    designated personal property.
    The warranty deed contained a covenant that the real estate was unencumbered,
    which turned out to be false. A recorded deed of trust in favor of First Citizens National
    Bank encumbered the real property. Although Mr. Klinkhammer notified the Bank about
    the pending sale, he did not pay off the debt or obtain a release of the deed of trust as part
    of the closing.
    A few months later, Mr. Klinkhammer realized that the bill of sale erroneously
    included a John Deere ten-foot fiber shank among the listed items of personal property.
    The LLC did not own the ten-foot fiber shank. The actual owner removed the item from
    the property approximately three months after the sale.
    The first installment on the note was due in July 2009.           Without
    Mr. Klinkhammer’s approval, the Erwins deducted $2,000 from their payment to
    compensate for the loss of the fiber shank. Mr. Klinkhammer declared a default and
    instituted foreclosure proceedings.
    During the foreclosure, Mr. Erwin discovered the pre-existing lien on the real
    property.   He did not submit a bid at the March 1, 2010 foreclosure sale.
    Mr. Klinkhammer was the successful bidder; he purchased the property for $110,000, the
    balance owed on the note.
    B.
    Mr. and Mrs. Erwin sued Mr. Klinkhammer, individually, and the LLC seeking
    compensatory damages for intentional misrepresentation, breach of the covenant against
    2
    encumbrances, and breach of contract. At the bench trial, the court heard testimony from
    the two principal players—Mr. Erwin and Mr. Klinkhammer.
    Mr. Klinkhammer maintained that he included the fiber shank in the bill of sale by
    mistake. He meant to list another piece of equipment of similar value. Mr. Erwin
    disagreed. And he claimed that Mr. Klinkhammer had agreed to a $2,000 adjustment to
    the total purchase price. For his part, Mr. Klinkhammer denied ever discussing a
    deduction or set off with Mr. Erwin.
    Mr. Klinkhammer conceded that he knew that the real estate was encumbered
    when he signed the warranty deed on behalf of the LLC. But he never intended to
    deceive the Erwins. With the Bank’s permission, he continued to make timely payments
    on the loan after the sale. The Bank released its lien in 2012.
    Still, Mr. Erwin was unaware of any encumbrances when he purchased the real
    property. And he remained ignorant of the true facts until he received the trustee’s notice
    of the pending foreclosure sale. Proof at trial established that, as of July 8, 2009, the
    outstanding balance on the Bank loan was $21,884.06. Mr. Erwin claimed that he
    decided not to bid at the foreclosure sale because of the Bank debt.
    The trial court ruled in favor of the Erwins on their breach of contract claim, but
    dismissed all other claims. The court found that the LLC did not deliver a ten-foot fiber
    shank as promised in the bill of sale. So the Erwins were entitled to recover $1,000 in
    damages for breach of contract, representing the value of the missing item. The court
    dismissed the intentional misrepresentation claim after finding that the Erwins had not
    actually relied on the misrepresentation. And while the covenant against encumbrances
    had been breached, the Erwins had failed to prove their damages. The court awarded
    judgment against Mr. Klinkhammer individually “[s]ince the LLC was dissolved on the
    date of the transaction and has not been reinstated.”
    The Erwins appealed. See Erwin v. Great River Rd. Supercross LLC, No. W2017-
    00150-COA-R3-CV, 
    2017 WL 4743055
    , at *1 (Tenn. Ct. App. Oct. 19, 2017). In the
    first appeal, we concluded that the evidence at trial preponderated against the trial court’s
    reliance finding. Id. at *2. So we vacated the trial court’s judgment and remanded this
    case for further proceedings. Id.
    On remand, the trial court held a hearing limited to the issue of reliance.
    Mr. Erwin, the lone witness at the hearing, testified that he relied on the representation in
    the warranty deed that the property was unencumbered when he completed the purchase
    of the real property.
    Once again, the trial court ruled in favor of the Erwins. This time, the court
    awarded $1,000 in damages for breach of contract and $21,887.06 in damages for
    3
    intentional misrepresentation. The court found that Mr. Erwin “relied on the
    unencumbered language in the deed when making the decision to purchase the real
    property and that reliance was reasonable.” All other claims were dismissed. This
    judgment was also against Mr. Klinkhammer individually.
    II.
    All parties raise issues on appeal. Mr. Klinkhammer and the LLC argue that the
    evidence preponderates against the trial court’s finding that Mr. Erwin’s reliance on the
    misrepresentation in the warranty deed was reasonable. Both sides raise issues with the
    damages awarded for intentional misrepresentation. The Erwins also contend that the
    court erred in failing to award damages for breach of the covenant against encumbrances.
    Finally, Mr. Klinkhammer asserts that the court erred in finding him individually liable.
    Because this was a bench trial, our review is de novo on the record with a
    presumption that the trial court’s factual findings are correct, unless the evidence
    preponderates against those findings. Tenn. R. App. P. 13(d). Evidence preponderates
    against a finding of fact if the evidence “support[s] another finding of fact with greater
    convincing effect.” Rawlings v. John Hancock Mut. Life Ins. Co., 
    78 S.W.3d 291
    , 296
    (Tenn. Ct. App. 2001). Our review of the trial court’s conclusions of law is de novo with
    no presumption of correctness. Kaplan v. Bugalla, 
    188 S.W.3d 632
    , 635 (Tenn. 2006).
    A.
    The plaintiff seeking to recover for intentional misrepresentation must establish
    multiple elements. See Hodge v. Craig, 
    382 S.W.3d 325
    , 343 (Tenn. 2012) (outlining six
    elements of a successful intentional misrepresentation action). Here, we are only
    concerned with one of those elements, reliance. See 
    id.
     (explaining that the plaintiff must
    show that “[he] did not know that the representation was false when made and was
    justified in relying on the truth of the representation”). And to narrow the issue further,
    Mr. Klinkhammer and the LLC do not question the court’s finding of actual reliance. See
    Pritchett v. Comas Montgomery Realty & Auction Co., No. M2014-00583-COA-R3-CV,
    
    2015 WL 1777445
    , at *3 (Tenn. Ct. App. Apr. 15, 2015) (explaining that the reliance
    element involves two inquiries, “whether the plaintiff actually relied on the
    misrepresentation and whether that reliance was reasonable”). They contend the trial
    court erred in finding that Mr. Erwin’s reliance was reasonable.
    Reasonable reliance is a question of fact requiring consideration of a number of
    factors. City State Bank v. Dean Witter Reynolds, Inc., 
    948 S.W.2d 729
    , 737 (Tenn. Ct.
    App. 1996).
    The factors include the plaintiff’s sophistication and expertise in the subject
    matter of the representation, the type of relationship—fiduciary or
    4
    otherwise—between the parties, the availability of relevant information
    about the representation, any concealment of the misrepresentation, any
    opportunity to discover the misrepresentation, which party initiated the
    transaction, and the specificity of the misrepresentation.
    Davis v. McGuigan, 
    325 S.W.3d 149
    , 158 (Tenn. 2010).
    Based on these factors, we conclude that the evidence preponderates against a
    finding that Mr. Erwin’s reliance on the misrepresentation in the warranty deed was
    reasonable. The Bank’s deed of trust was recorded in 2000, placing all the world on
    constructive notice of an encumbrance on the real property. See 
    Tenn. Code Ann. § 66
    -
    26-102 (2015); see also Blevins v. Johnson Cty., 
    746 S.W.2d 678
    , 682-83 (Tenn. 1988)
    (“Constructive notice is notice implied or imputed by operation of law and arises as a
    result of the legal act of recording an instrument under a statute by which recordation has
    the effect of constructive notice.”). This was an arm’s length transaction. There was no
    proof that Mr. Erwin was inexperienced in real estate matters or that Mr. Klinkhammer
    took steps to prevent him from discovering the recorded deed of trust. The true facts
    were readily available through a simple search of the public record. “Generally, a party
    dealing on equal terms with another is not justified in relying upon representations where
    the means of knowledge are readily within his reach.” Solomon v. First Am. Nat’l Bank
    of Nashville, 
    774 S.W.2d 935
    , 943 (Tenn. Ct. App. 1989).
    The Erwins failed to prove an essential element of their claim for intentional
    misrepresentation, that their reliance was reasonable. See Estate of Lambert v.
    Fitzgerald, 
    497 S.W.3d 425
    , 457 (Tenn. Ct. App. 2016). So we reverse the court’s award
    of damages for intentional misrepresentation.
    B.
    The Erwins contend that the trial court erred in failing to award any damages for
    an undisputed breach of the covenant against encumbrances. The covenant against
    encumbrances, if untrue, is broken as soon as it is made. Amos v. Carson, 
    210 S.W.2d 677
    , 679 (Tenn. 1948). This covenant provides “security against those rights to, or
    interests in, the land granted which may subsist in third persons to the diminution in value
    of the estate although consistent with the passing of the fee.” 
    Id.
     (citation omitted). In
    effect, the seller agrees to indemnify the buyer against any encumbrances on the property.
    
    Id.
     The grantee’s actual or constructive knowledge of the encumbrance is irrelevant.
    Murdock Acceptance Corp. v. Aaron, 
    230 S.W.2d 401
    , 405 (Tenn. 1950).
    The trial court concluded that the appropriate measure of damages was “the
    diminution in value of the estate caused by the encumbrance.” Lacking any proof of
    diminished value, the court declined to award damages for the breach. The Erwins
    contend that the trial court used the wrong measure of damages. We review the trial
    5
    court’s choice of the measure of damages de novo, with no presumption of correctness.
    Beaty v. McGraw, 
    15 S.W.3d 819
    , 827 (Tenn. Ct. App. 1998), abrogated on other
    grounds by Bowen ex rel. Doe v. Arnold, 
    502 S.W.3d 102
     (Tenn. 2016).
    According to the Erwins, the trial court should have ordered Mr. Klinkhammer to
    refund their $50,000. As support for their position, they cite the general rule that
    damages for breach of covenants of title “are based upon the consideration received by
    the grantor.” King v. Anderson, 
    618 S.W.2d 478
    , 483 (Tenn. Ct. App. 1980). Even so,
    the Erwins are only entitled to recover their actual losses as a result of the breach. See
    Halford v. Gunn, No. W2006-02528-COA-R3-CV, 
    2007 WL 2380300
    , at *6 (Tenn. Ct.
    App. Aug. 22, 2007). The $50,000 loss was not due to the encumbrance. The Erwins
    lost their purchase money because they failed to comply with the terms of the note.
    The proper measure of damages for breach of the covenant against encumbrances
    depends on the encumbrance at issue. See generally 21 C.J.S. Covenants § 87, Westlaw
    (database updated Sept. 2020) (differentiating between measure of damages depending
    on nature of the encumbrance). When the encumbrance is a lien, our courts typically
    award damages equal to “the cost of removing the encumbrance.” Vaughan v. Vaughan,
    
    6 Tenn. App. 354
    , 359 (1927); see also Halford, 
    2007 WL 2380300
    , at *6 (affirming an
    award of damages equal to the amount of the judgment lien). But when the encumbrance
    cannot be removed at the option of the parties, “the proper measure of damages is the
    property’s diminution in value as a result of the [encumbrance.]” See Mills v. Solomon,
    
    43 S.W.3d 503
    , 509 (Tenn. Ct. App. 2000); see also Carlton v. Williams, No. E2003-
    02996-COA-R3-CV, 
    2004 WL 2636709
    , at *6 (Tenn. Ct. App. Nov. 19, 2004); Ellison v.
    F. Murray Parker Builders, Inc., 
    573 S.W.2d 161
    , 165 (Tenn. Ct. App. 1978).
    Here, the cost of removal is not an appropriate measure of damages. The Erwins
    never paid to remove the encumbrance. And they lost possession of the property for
    reasons unrelated to the encumbrance. So their actual loss can only be measured by the
    diminution in value of the property as a result of the encumbrance at the time of the sale.
    See Ellison, 
    573 S.W.2d at 165
     (holding that damages should be determined as of the date
    the plaintiffs purchased the property). The Erwins bore the burden of proof on damages.
    See Meals ex rel. Meals v. Ford Motor Co., 
    417 S.W.3d 414
    , 419 (Tenn. 2013). Without
    proof of diminished value, the trial court did not err in failing to award damages for
    breach of the covenant against encumbrances.
    C.
    Finally, we turn to the question of Mr. Klinkhammer’s personal liability. For the
    reasons discussed above, we reverse the trial court’s award of damages for intentional
    misrepresentation. So we are left with the judgment against Mr. Klinkhammer for breach
    of contract. Mr. Klinkhammer never raised this issue in his first appeal or otherwise
    contested liability for breach of contract. He concedes as much in his reply brief on this
    6
    appeal. So we deem this issue waived. See Hood v. Jenkins, 
    432 S.W.3d 814
    , 823 n.9
    (Tenn. 2013).
    III.
    Because the evidence preponderates against a finding that Mr. Erwin’s reliance on
    the misrepresentation in the warranty deed was reasonable, we reverse the judgment
    against Mr. Klinkhammer for intentional misrepresentation. In all other respects, we
    affirm the trial court’s decision.
    _________________________________
    W. NEAL MCBRAYER, JUDGE
    7