The family purpose doctrine was adopted in 1918 to protect the public at large from the hazards of teenage drivers. Essentially, the head of the household is liable if a member of the household has an accident in a car owned by the family. What happens when the parents are divorced, Dad owns the car, son lives with Mom and the divorce decree requires Dad to provide son with the car. That is the question. And the answer is -- Dad is still the "head of the household" even though son does not live with him.
But wait, in an interesting twist, the Tennessee Supreme Court says that because the son does not live with Dad, and the Parenting Plan says that Mom makes all of the decisions regarding son's conduct, then Dad "may" not be responsible because he does not "control" the son. So, the case goes back to the trial court for a determination of whether Dad had the requisite amount of control. Unless Dad is a complete idiot, he will testify that he had absolutely no control over son's use of the car; his ex-wife was the one in control.
Have a great day.
See Starr v. Hill, et al.
Thursday, September 1, 2011
PERFECTING YOUR MECHANIC'S LIEN
For years, the law in Tennessee was that in order for a contractor, subcontractor or supplier to have a lien for its work on real estate, the person had to comply with each and every requirement of the Mechanic's Lien Statute. For an outstanding discussion on this topic, see Andrews Distributing Co. v. Oak Square at Gatlinburg, 757 S.W.2d 663 (Tenn. 1988).
In 2007, the General Assembly amended the Mechanic's and Materialmen's Lien statutes and added the following provisions:
(a) This chapter is to be construed and applied liberally to secure the beneficial results, intents, and purposes of the chapter.
(b) Substantial compliance with this chapter is sufficient for the validity of liens arising under this chapter and to give jurisdiction to the court to enforce the liens.
(c) Any document required or permitted to be served, recorded or filed by this chapter that substantially satisfies the applicable requirements of this chapter is effective even if it has nonprejudicial errors or omissions.
This case is the first case to discuss the effect of this new law. Initially the court of appeals concludes that the new law applies because the contract at issue was executed in December, 2007 and the new law became effective in April, 2007. This issue existed because commencement of work on the project by another contractor occurred prior to April 2007.
Second, the Court of Appeals held that the following defects were not fatal to the lien:
(1) Failed to file its lien complaint under oath;
(2) Failed to timely join the successor trustee on the Deed of Trust;
(3) Failed to have an attachment issued, although an attachment was prayed for in the original complaint; and
(4) Failed to include a proper acknowledgment on its notice of lien.
Under the old law, each of these would have been fatal. Applying the new law's standard, the court of appeals held that none of these defects was fatal. Unfortunately, this opinion also leaves open the question of what defects will be fatal. Presumably, the limitations period remains absolute, but the other requirements are open to debate. This is a title insurance company's nightmare come true.
See Tri Am Construction, Inc., et al. v. J & V Development, Inc.
In 2007, the General Assembly amended the Mechanic's and Materialmen's Lien statutes and added the following provisions:
(a) This chapter is to be construed and applied liberally to secure the beneficial results, intents, and purposes of the chapter.
(b) Substantial compliance with this chapter is sufficient for the validity of liens arising under this chapter and to give jurisdiction to the court to enforce the liens.
(c) Any document required or permitted to be served, recorded or filed by this chapter that substantially satisfies the applicable requirements of this chapter is effective even if it has nonprejudicial errors or omissions.
This case is the first case to discuss the effect of this new law. Initially the court of appeals concludes that the new law applies because the contract at issue was executed in December, 2007 and the new law became effective in April, 2007. This issue existed because commencement of work on the project by another contractor occurred prior to April 2007.
Second, the Court of Appeals held that the following defects were not fatal to the lien:
(1) Failed to file its lien complaint under oath;
(2) Failed to timely join the successor trustee on the Deed of Trust;
(3) Failed to have an attachment issued, although an attachment was prayed for in the original complaint; and
(4) Failed to include a proper acknowledgment on its notice of lien.
Under the old law, each of these would have been fatal. Applying the new law's standard, the court of appeals held that none of these defects was fatal. Unfortunately, this opinion also leaves open the question of what defects will be fatal. Presumably, the limitations period remains absolute, but the other requirements are open to debate. This is a title insurance company's nightmare come true.
See Tri Am Construction, Inc., et al. v. J & V Development, Inc.
GUARANTORS - THE FOOLS WITH THE PEN OR THE RIGHTEOUSLY INDIGNANT
Guarantors are treated like the fools in Tennessee. In fact, courts often reference the well settled princple that "the fool with the pen is entitled to no mercy." In short, a guarantor has very few defenses to an action by the creditor. Fraud in the inducement is always a good one; however, Tennessee courts state the the lender does not have a duty to provide information. What happens when the borrower commits fraud on the lender, and the lender keeps lending money even though it knows about the fraud. That is the question in this case.
The facts are simple. The two guarantors were the owners of a trucking business. The business obtained a line of credit loan secured by accounts receivable. To draw money on the line, the company submitted draw requests that included a certification of the amount of the outstanding accounts receivable.
The owners sold the business. At the time of the sale, the balance owed on the loan was $1.5 million and the values of the accounts receivable was $1.8 million. Rather than payoff the loan, the owners allowed the loan and their guaranties to remain in place.
Rather quickly after the sale, the business ran into financial trouble. To keep the company alive, the president submitted false reports to the bank about the accounts receivable. At some point, the bank discovered that these reports were false. The bank continued to lend money to the company even though it knew that these reports were false.
Ultimately, the bank stopped lending money and the company ceased to exist. Predictably, the bank sued the guarantors for payment of the loan. In response, the guarantors asserted fraud by the bank (presumably in continuing to lend money) and breach of the implied covenant of good faith and fair dealing.
After extensive discussion of procedural issues, the court of appeals held that the findings of fact made by the trial court were contradictory and entered an order remanding the case. Thus, the court of appeals did not reach the merits of the case.
The problem is this. Guarantors are fools. Under well-settled Tennessee law, banks do not have an obligation to communicate with guarantors. There is no assertion that the bank lied to the guarantors about the loan or the collateral value of the loan. More importantly, so what? If there was fraud, that fraud was by the borrower on the bank. The bank was free to waive that fraud without contacting the guarantors. And, that is exactly what the bank did. Further, once the bank became aware that the draw requests were false, there was no longer fraud. So whether or not the company defrauded the bank is irrelevant to the issue of the enforcement of the guaranties.
Further, the court of appeals remanded the case as there was no findings of fact on the covenant of good faith and fair dealing. That covenant does not apply to guaranties -- or does it?
This decision creates a number of questions for banks even though it is all dicta. Specifically, does a lender owe a duty to the guarantor to stop lending to the borrower:
a. when the lender knows that the borrower is lying about a material fact?
b. when the lender knows that the borrower cannot repay the debt and is merely digging a bigger hole?
c. when the lender knows that the debt is increasing beyond the amount that the guarantor would have owed at a prior date?
THIS CASE SIGNALS A POSSIBLE MAJOR CHANGE IN TENNESSEE LAW.
See Securamerica Business Credit v. Schledwitz and Lynch.
The facts are simple. The two guarantors were the owners of a trucking business. The business obtained a line of credit loan secured by accounts receivable. To draw money on the line, the company submitted draw requests that included a certification of the amount of the outstanding accounts receivable.
The owners sold the business. At the time of the sale, the balance owed on the loan was $1.5 million and the values of the accounts receivable was $1.8 million. Rather than payoff the loan, the owners allowed the loan and their guaranties to remain in place.
Rather quickly after the sale, the business ran into financial trouble. To keep the company alive, the president submitted false reports to the bank about the accounts receivable. At some point, the bank discovered that these reports were false. The bank continued to lend money to the company even though it knew that these reports were false.
Ultimately, the bank stopped lending money and the company ceased to exist. Predictably, the bank sued the guarantors for payment of the loan. In response, the guarantors asserted fraud by the bank (presumably in continuing to lend money) and breach of the implied covenant of good faith and fair dealing.
After extensive discussion of procedural issues, the court of appeals held that the findings of fact made by the trial court were contradictory and entered an order remanding the case. Thus, the court of appeals did not reach the merits of the case.
The problem is this. Guarantors are fools. Under well-settled Tennessee law, banks do not have an obligation to communicate with guarantors. There is no assertion that the bank lied to the guarantors about the loan or the collateral value of the loan. More importantly, so what? If there was fraud, that fraud was by the borrower on the bank. The bank was free to waive that fraud without contacting the guarantors. And, that is exactly what the bank did. Further, once the bank became aware that the draw requests were false, there was no longer fraud. So whether or not the company defrauded the bank is irrelevant to the issue of the enforcement of the guaranties.
Further, the court of appeals remanded the case as there was no findings of fact on the covenant of good faith and fair dealing. That covenant does not apply to guaranties -- or does it?
This decision creates a number of questions for banks even though it is all dicta. Specifically, does a lender owe a duty to the guarantor to stop lending to the borrower:
a. when the lender knows that the borrower is lying about a material fact?
b. when the lender knows that the borrower cannot repay the debt and is merely digging a bigger hole?
c. when the lender knows that the debt is increasing beyond the amount that the guarantor would have owed at a prior date?
THIS CASE SIGNALS A POSSIBLE MAJOR CHANGE IN TENNESSEE LAW.
See Securamerica Business Credit v. Schledwitz and Lynch.
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