Bradford E. Holliday v. Homer C. Patton

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
January 23, 2014 Session
BRADFORD E. HOLLIDAY, ET AL. v. HOMER C. PATTON, ET AL.
Appeal from the Chancery Court for Shelby County
No. CH-11-1246-3 Kenny W. Armstrong, Chancellor
No. W2013-00545-COA-R3-CV - Filed March 31, 2014
Bradford E. Holliday, Michael A. Holliday, and Clayton E. Holliday (collectively
“Plaintiffs”) sued Homer C. Patton and Jeffrey B. Presley (collectively “Defendants”) for
breach of contract and specific performance. Plaintiffs filed motions for summary judgment,
which the Trial Court granted after finding and holding, inter alia, that the release provision
contained in an amended agreement executed by Defendants “contains broad release
language which the Court finds to be adequate to release claims of fraud asserted now by the
Defendants in this action.” Defendants appeal to this Court raising issues regarding whether
the release was sufficient to waive claims of fraud and whether the Trial Court erred in
finding that Defendants could not have reasonably relied upon representations made by
Bradford E. Holliday. We find and hold that the release language contained in the amended
agreement was insufficient to release claims of fraud and that there are genuine issues of
material fact as to the issue of reasonable reliance, and we reverse the grant of summary
judgment. We, however, affirm that portion of the Trial Court’s order memorializing
Defendants’ voluntary dismissal with prejudice of their counterclaims for fraud against
Michael A. Holliday and Clayton E. Holliday.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
Reversed, in part; Affirmed, in part; Case Remanded
D. M ICHAEL S WINEY, J., delivered the opinion of the Court, in which D AVID R. F ARMER
and J. S TEVEN S TAFFORD, JJ. joined.
Randall J. Fishman and Richard S. Townley, Memphis, Tennessee, for the appellants, Homer
C. Patton and Jeffrey B. Presley.
Taylor A. Cates, Memphis, Tennessee, for the appellee, Bradford E. Holliday.
Clinton J. Simpson, Memphis, Tennessee, for the appellees, Michael A. Holliday and
Clayton E. Holliday.
OPINION
Background
Plaintiffs sued Defendants for breach of contract and specific performance with
regard to the sale of a corporation that owned and operated retail clothing stores under the
trade name of Holliday’s Fashions. Defendants answered the complaint asserting, among
other things, both a counterclaim for fraud and the affirmative defense of fraud in the
inducement with regard to the amendment to the stock purchase agreement entered into by
the parties.
In pertinent part, the amendment to the stock purchase agreement (“Amended
Agreement”), which was entered into by the parties on March 17, 2010 1 , provides:
This Amendment No. 1 to Stock Purchase Agreement (“Amendment”)
is made as of March 17, 2010 by and among Homer C. Patton (“Patton”) and
Jeffrey B. Presley (“Presley”) (each individually, or its assigns and collectively
“Purchaser”), and HOLLIDAY INVESTMENT CORPORATION, a
Tennessee corporation (“Seller”) and Bradford E. Holliday (“Brad” or
“Owner”). Clayton E. Holliday (“Clay”) and Michael A. Holliday (“Andrew”)
join in this Agreement as former stockholders who presently hold notes from
Seller and will participate in the transaction contemplated hereby as more
specifically set forth in this Agreement. Purchaser, Seller and Owner are each
individually referred to herein as a “Party” and are collectively referred to
herein as the “Parties.”. [sic]
***
7. Notwithstanding Seller and Owner’s obligations to indemnify Purchaser set
forth in the Agreement, including any limitation of such indemnifications, or
Purchaser’s right to offset against deferred Purchase Price set forth in Section
8(E)(2)(c) of the Agreement, and as additional consideration for Seller, Owner,
Clay and Andrew to enter into this Amendment, Purchaser for itself, and for
1
The Amended Agreement states that it was made as of March 17, 2010 and was executed on March
22, 2010.
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its successors, assigns and representatives hereby releases and discharges
Seller, Owner, Clay and Andrew and any past, present and/or future
subsidiaries, affiliates, predecessors, successors, assigns, partners, members,
directors, officers, employees, agents, representatives, principals, managers,
attorneys and insurance carriers of the foregoing, from any and all claims,
liabilities, and causes of action, whether accrued or unaccrued, discovered or
undiscovered, asserted or unasserted, arising out of, relating to or resulting
from (i) Seller and Owner’s operation of the Company prior to the Closing,
including but not limited to the results of the Audit, or (ii) Seller and Owner’s
representations and warranties set forth in the Agreement, including, without
limitation, claims for breach of the Agreement.
Plaintiffs filed motions for summary judgment asserting, in part, that the
release language contained in the Amended Agreement was sufficient to release Defendants’
claims of fraud including fraud in the inducement relative to the Amended Agreement itself.
After a hearing the Trial Court entered its order on February 6, 2013 granting Plaintiffs’
motions for summary judgment and dismissing Defendants’ counterclaim. In pertinent part,
the February 6, 2013 order provides:
Plaintiffs/Counter-Defendants have moved for summary judgment both on
their affirmative claims against Defendants/Counter-Plaintiffs and on the
counterclaims for fraud asserted by Defendants/Counter-Plaintiffs.
This matter arises out of a stock sale of Holliday’s General Services
Corporation (“HGSC”) to Defendants from one of the Plaintiffs, Brad
Holliday. The other Plaintiffs are the brothers of Brad Holliday, who had
previously sold their interest in the corporation to their brother, Brad Holliday.
The corporation had outstanding notes to the brothers at the time of this sale.
As part of the sale, the Defendants undertook to personally guarantee the notes
to Brad Holliday’s brothers, Michael and Clay. After the sale of the business,
the Defendants discovered, among other things, that the inventory was grossly
overstated, the payables were grossly understated, and further, that the profit
of the corporation had been misstated for the year prior to sale. While the
Court finds the information provided to the purchasers prior to the amendment
to be fraudulent and/or misrepresented by Brad Holliday, the parties
subsequently elected to enter into an amended agreement on March 22, 2010,
thereby reducing the total purchase price for the stock of the company by
approximately $1.3 Million. The release provision of the amended agreement
contains broad release language, although it does not specifically release fraud
claims.
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As part of the transaction, Defendants agreed to execute promissory
notes to the Plaintiffs. Subsequent to the discovery of the false information
provided to the Defendants by Brad Holliday, and the execution of the
amended agreement, Defendants sent corrected financial information to all the
factors of the business, at which time the factors shut off credit to the business.
The Defendants defaulted on said promissory notes on May 5, 2011.
***
Defendants have asserted as a defense to Plaintiffs’ claims that they
were defrauded into entering the March 22, 2010 amended stock purchase
agreement. Defendants have asserted a counterclaim against Plaintiffs on the
same basis. However, Defendants agreed to dismiss with prejudice their
counter claims for fraud against Andrew Holliday and Clay Holliday in open
Court on December 17, 2012. Defendants allege that Brad Holliday withheld
additional information from them, more specifically that prior P&L statements
from prior years contained false and misleading information concerning the
profit of the company upon which the Defendants relied to determine their
price. Defendants also allege that Mr. Brad Holliday served as the agent for
Plaintiffs, Andrew Holliday and Clay Holliday, in the alleged misleading
conduct. The Court finds that there is no evidence that either Andrew Holliday
or Clay Holliday participated in the sale transaction at issue in this matter and
that there is no evidence that either Andrew Holliday or Clay Holliday made
any representation, fraudulently or negligently, to Defendants regarding the
sale transaction at issue. Furthermore, the Court made no determination
regarding Defendants’ allegation that Brad Holliday served as the agent for
Andrew Holliday and/or Clay Holliday. The Court finds that in light of the
clearly erroneous information the Defendants uncovered after the sale, the
Defendants cannot in good faith argue they justifiably relied on representations
made by the seller to induce them to enter into the amended stock purchase
agreement, and further, that the release provision of the amended agreement,
while not specifically mentioning fraud, contains broad release language which
the Court finds to be adequate to release claims of fraud asserted now by the
Defendants in this action.
Defendants appeal to this Court.
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Discussion
Although not stated exactly as such, Defendants raise two issues on appeal: 1)
whether the Trial Court erred in finding that the release contained in the Amended
Agreement was sufficient to waive claims of fraud including fraud in the inducement relative
to the Amended Agreement itself; and, 2) whether the Trial Court erred in finding that
Defendants could not have reasonably relied upon representations made by Bradford E.
Holliday.
With regard to summary judgments, this Court explained in Estate of Boote v.
Roberts:
The trial court’s resolution of a motion for summary judgment is a
conclusion of law, which we review de novo on appeal, according no
deference to the trial court’s decision. Martin v. Norfolk S. Ry. Co., 271
S.W.3d 76, 84 (Tenn. 2008). Summary judgment is appropriate only when the
moving party can demonstrate that there is no genuine issue of material fact,
and that it is entitled to judgment as a matter of law. Tenn. R. Civ. P. 56.04;
see Hannan v. Alltel Publ’g Co., 270 S.W.3d 1, 5 (Tenn. 2008); Byrd v. Hall,
847 S.W.2d 208, 214 (Tenn. 1993).
This action was filed [after July 1, 2011]. Therefore, the trial court was
required to apply the summary-judgment standard set forth in Tennessee Code
Annotated § 20-16-101.2 That statute provides:
In motions for summary judgment in any civil action in
Tennessee, the moving party who does not bear the burden of
proof at trial shall prevail on its motion for summary judgment
if it:
(1) Submits affirmative evidence that
negates an essential element of the nonmoving
party’s claim; or
(2) Demonstrates to the court that the
nonmoving party’s evidence is insufficient to
establish an essential element of the nonmoving
party’s claim.
2
Section 20-16-101 is applicable to all cases filed on or after July 1, 2011.
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Tenn. Code Ann. § 20-16-101 (Supp. 2012).3
Estate of Boote v. Roberts, No. M2012-00865- COA-R3-CV, 2013 Tenn. App. LEXIS 222,
at **24-25 (Tenn. Ct. App. March 28, 2013), no appl. perm. appeal filed (footnotes in
original but renumbered).
We first consider whether the Trial Court erred in finding that the release
contained in the Amended Agreement was sufficient to waive claims of fraud including
fraudulent inducement. In Shelby Electric Co., Inc. v. Forbes, this Court addressing a matter
of first impression held that the defenses of fraud or fraudulent inducement were not waived
in the absence of a specific waiver of these defenses. Shelby Electric Co., Inc. v. Forbes, 205
S.W.3d 448 (Tenn. Ct. App. 2005). The waiver in Shelby Electric Co., Inc. was “a basic
‘catch-all’ waiver provision that appear[ed] to be boilerplate language in guaranties used
routinely by the Bank,” which contained “no mention of a waiver of the defenses of fraud
or fraudulent inducement.” Id. at 455 (footnote omitted). In reaching its decision, the Shelby
Electric Co., Inc. Court noted:
It is well settled in Tennessee that the courts of our State will not be utilized
to enforce a contract which is the product of fraud; indeed, fraud vitiates all
that it touches. The Tennessee Supreme Court has underscored the effect of
fraud on transactions:
Fraud vitiates and avoids all human transactions, from the
solemn judgment of a court to a private contract. It is as odious
and as fatal in a court of law as in a court of equity. It is a thing
indefinable by any fixed and arbitrary definition. In its
multiform phases and subtle shapes, it baffles definition. It is
said, indeed, that it is part of the equity doctrine of fraud not to
define it, lest the craft of men should find ways of committing
fraud which might evade such a definition. In its most general
sense, it embraces all acts, omissions, or concealments which
involve a breach of legal and equitable duty, trust or confidence
justly reposed, and are injurious to another, or by which an
3
Section 20-16-101 was enacted to abrogate the summary-judgment standard set forth in Hannan,
which permitted a trial court to grant summary judgment only if the moving party could either (1)
affirmatively negate an essential element of the nonmoving party’s claim or (2) show that the nonmoving
party cannot prove an essential element of the claim at trial. Hannan, 270 S.W.3d at 5. The statute is
intended “to return the summary judgment burden-shifting analytical framework to that which existed prior
to Hannan, reinstating the ‘put up or shut up’ standard.” Coleman v. S. Tenn. Oil Inc., No. M2011-01329-
COA-R3-CV, 2012 Tenn. App. LEXIS 453, 2012 WL 2628617, at *5 n.3 (Tenn. Ct. App. July 5, 2012).
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undue and unconscientious advantage is taken of another. A
judicial proceeding in rem, while generally binding upon all
persons, is no more free from the fatal taint of fraud than a
proceeding in personam, or an individual contract. When once
shown to exist, it poisons alike the contract of the citizen, the
treaty of the diplomat, and the solemn judgment of the court.
Id. at 455 (citations omitted).
In the case now before us, we note that Defendants raise both the affirmative
defense of fraud and a counterclaim for fraud. The release contained in the Amended
Agreement purports to waive “any and all claims, liabilities, and causes of action,” but does
not address defenses. Thus, the defense of fraud was not specifically waived in the Amended
Agreement.
Furthermore, the language in the Amended Agreement waiving “any and all
claims, liabilities, and causes of action,” does not specifically address claims of fraud. As
such, pursuant to the analysis detailed in Shelby Electric Co., Inc., the language in the
Amended Agreement is insufficient to waive claims of fraud.
We next consider whether the Trial Court erred in finding that Defendants
could not have reasonably relied upon representations made by Bradford E. Holliday.
Reasonable reliance is a required element of both a claim for common law fraud, e.g., Black
v. Black, 166 S.W.3d 699, 705 (Tenn. 2005), and one for fraudulent inducement, e.g., Baugh
v. Novak, 340 S.W.3d 372, 388 (Tenn. 2011). With regard to reasonable reliance our
Supreme Court has explained:
Whether a person’s reliance on a representation is reasonable generally
is a question of fact requiring the consideration of a number of factors. E.g.,
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
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. See, e.g., id.; accord Allied Sound, Inc.
v. Neely, 58 S.W.3d 119, 122-23 (Tenn. Ct. App. 2001).
Davis v. McGuigan, 325 S.W.3d 149, 158 (Tenn. 2010).
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The Trial Court found in the case now before us that “in light of the clearly
erroneous information the Defendants uncovered after the sale, the Defendants cannot in
good faith argue they justifiably relied on representations made by the seller to induce them
to enter into the amended stock purchase agreement . . . .” Basically, the Trial Court found
that because Defendants had caught Bradford E. Holliday making misrepresentations in the
past that Defendants’ reliance upon later representations made by Bradford E. Holliday in
relation to the Amended Agreement could not be reasonable. We disagree with this analysis.
We will not hold that as a matter of law the fact that someone may have made fraudulent
misrepresentations, or, to state it more bluntly, told lies in the past, precludes another party
from ever reasonably relying upon representations by the lying party in the future. To hold
as the Trial Court did would give an individual guilty of fraud a free pass to attempt even
more fraud to settle or resolve his initial fraudulent conduct while knowing that his later
fraudulent conduct could not be used against him in a civil court action.
Consideration of the factors to determine if Defendants’ reliance upon
statements or representations made by Bradford E. Holliday was reasonable involves highly
fact dependent determinations not appropriate for summary judgment. Because the record
on appeal reveals that there are genuine issues of material fact with regard to the issue of
whether Defendants’ reliance upon representations made by Bradford E. Holliday was
reasonable, Plaintiffs were not entitled to summary judgment on this issue. We, therefore,
reverse the grant of summary judgment.
Although defendants Michael A. Holliday, and Clayton E. Holliday do not raise
a separate issue on appeal with regard to whether Bradford E. Holliday acted as their agent,
they do present an argument on this issue in their brief on appeal. The Trial Court, however,
specifically made no determination with regard to the agency issue. As such, the agency
issue is not properly before this Court, and we will not address it for the first time on appeal.
In conclusion, we note that in its February 6, 2013 order the Trial Court
memorialized the fact that “Defendants agreed to dismiss with prejudice their counter claims
for fraud against Andrew Holliday and Clay Holliday in open Court on December 17, 2012.”
Defendants acknowledge in their reply brief on appeal that they “agreed in open court to
dismiss the counterclaim against the brothers, Clay and Andrew, . . . but [Defendants]
maintain the fraud of Brad Holliday as an affirmative defense against the claims of the
brother[s], Clay and Andrew.” Given that Defendants voluntarily dismissed with prejudice
their counterclaim against Michael A. Holliday, and Clayton E. Holliday, and the fact that
no issue was raised with regard to this subject on appeal, we affirm that portion of the Trial
Court’s order memorializing Defendants’ dismissal with prejudice of their counterclaims for
fraud against Michael A. Holliday, and Clayton E. Holliday.
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Conclusion
The judgment of the Trial Court is reversed as to the grant of summary
judgment and affirmed as to the dismissal with prejudice of Defendants’ counterclaims for
fraud against Michael A. Holliday, and Clayton E. Holliday. This cause is remanded to the
Trial Court for further proceedings consistent with this Opinion and for collection of the
costs below. The costs on appeal are assessed against the appellants, Homer C. Patton and
Jeffrey B. Presley, and their surety.
_________________________________
D. MICHAEL SWINEY, JUDGE
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