Naylor Medical Sales & Rentals, Inc. et al v. Invacare Continuing Care, Inc et al

Filing 110

BENCH MEMORANDUM. Signed by Judge S. Thomas Anderson on 6/3/11. (Anderson, S.)

UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TENNESSEE
WESTERN DIVISION
NAYLOR MEDICAL SALES & RENTALS,
INC. and JERRY ALLEN UNDERWOOD,

)
)
)
Plaintiffs/Counter-Defendants,
)
)
v.
)
No. 09-2344-STA-cgc
)
INVACARE CONTINUING CARE, INC., f/k/a )
HEALTHTECH PRODUCTS, INC., and
)
INVACARE CORPORATION,
)
)
Defendants/Counter-Plaintiffs
)
______________________________________________________________________________
BENCH MEMORANDUM
______________________________________________________________________________
On April 22, 2009, Plaintiffs Naylor Medical Sales & Rentals, Inc. (“Naylor”) and Jerry
Allen Underwood (“Underwood”) (collectively “Plaintiffs”) filed a Complaint in Shelby County
Chancery Court asserting claims of breach of contract, conversion, defamation, and violations of
the Tennessee Consumer Protection Act. Defendants Invacare Continuing Care, Inc. and
Invacare Corporation (collectively “Defendants”) filed a Notice of Removal (D.E. # 1) with this
Court on June 2, 2009. Defendants then filed an Answer to Plaintiff’s Complaint (D.E. # 3) on
June 5, 2009. After receiving leave of this Court, Plaintiffs filed a Second Amended Complaint
on May 25, 2010, asserting the additional claims of intentional misrepresentation and fraud.
(D.E. # 54.)
The Court tried this civil action, without a jury, beginning on March 7, 2011. Following
the trial, the parties filed proposed findings of fact and conclusions of law. Federal Rule of Civil
Procedure 52 requires that, “[i]n an action tried on the facts without a jury . . . , the court must
1

find the facts specially and state its conclusions of law separately.”1 In accordance with this
Rule, the Court finds and states the following:
FINDINGS OF FACT
Defendants are in the business of manufacturing and distributing medical equipment.
Naylor was a health care equipment rentals company, a market in which Defendants sought to
expand their business. Underwood was the President of Naylor.
In late 2006, Defendants and Underwood began discussing the sale of Naylor’s assets.
During this time, Defendants were utilizing the services of Scott McDaniel (“McDaniel”), an
independent contractor hired by Defendants as a consultant in December 2006. McDaniel had
experience in medical equipment rentals, and Defendants hired him to help develop their rental
division.
McDaniel introduced Underwood to the Defendants. McDaniel was a close friend and
former business associate of Underwood. Underwood knew that McDaniel was consulting for
the Defendants. In fact, Underwood accompanied McDaniel to a meeting with Defendants in
Savannah Lakes in which McDaniel made a bed rental business proposal to Defendants.
Underwood knew that the business McDaniel was designing with Defendants would compete
with Naylor Medical; however, Underwood did not know the business was going to be in the
same geographical location as Naylor.
McDaniel’s employment with Defendants is governed by a Consulting Agreement. This
agreement provides that he is compensated through a flat monthly fee and a quarterly bonus
based on a percentage of Defendants’ rental revenue. Underwood knew that part of McDaniel’s

1

Fed. R. Civ. P. 52(a)(1).
2

compensation was the bonus or fee on his growth of Defendants’ rental revenue. As such, in the
event that Defendants ultimately purchased Naylor, Underwood expected that McDaniel would
be paid a bonus based on growing the revenue of Naylor.
From early 2007 to the actual time of acquisition, Defendants performed their due
diligence and attempted to obtain all necessary information from Underwood to ascertain an
appropriate purchase price for Naylor’s assets. On October 25, 2007, Defendants sent
Underwood a Letter of Intent. Part one of the Letter of Intent provided for a purchase price of
between $1.8 million and $2.1 million, subject to the conditions set forth in the Letter of Intent
and the results of the due diligence process. On October 31, 2007, Plaintiffs and Defendants
executed the Letter of Intent.
Prior to receiving the Defendants’ offer in the Letter of Intent, Underwood had been
approached by two other companies that were interested in acquiring Naylor. One of these two
companies offered Underwood $1 million for Naylor.
Defendants based their valuation of Naylor on a multiple of EBITDA (Earnings Before
Interest Depreciation and Amortization) derived from the financial information provided by
Underwood to Daryn Kinkoph (“Kinkoph”), the Controller for Defendants’ Rental Division.
Underwood knew that Defendants were contemplating paying a multiple of EBITDA in the “four
to five times range.”
Based on the financial information given to Kinkoph by Underwood, Kinkoph calculated
the EBITDA value of Naylor at $427,000. Using a multiplier of five, Defendants assigned a
maximum value of Naylor at $2.135 million. There were multiple versions of Defendants’
valuation document for Naylor. These versions changed based on the information provided by

3

Underwood. At one point, Defendants estimated an EBITDA for Naylor of $513,000 based on
preliminary information, which was subsequently reduced to the final calculation of EBITDA at
$427,000, based on an actual eleven (11) months of earnings and one month of estimated
earnings for 2007.
During the months following the Letter of Intent, the parties exchanged offers and
counter-offers. Defendants had originally offered $1.9 million for Naylor’s assets. In the last of
those exchanges, Underwood demanded the payment of $2.1185 million for his business. The
parties ultimately agreed on a purchase price of $2.1 million. After this agreement, McDaniel
testified that Underwood told him that he thought he had “skinned” the Defendants and that he
had gotten a good deal.
Defendants’ offer of $2.1 million to Plaintiffs was approved by Defendants’ CEO Mal
Mixon. The offer was not presented to Defendants’ board of directors for approval, and no
approval of the board of directors was required.
On March 31, 2008, the parties signed the Asset Purchase Agreement (“APA”).
Pursuant to the APA, Plaintiffs sold substantially all of the Naylor’s assets to Defendants for the
purchase price of $2.1 million. Section 3.2 of the Asset Purchase Agreement detailed exactly
how the purchase price was to be paid. According to 3.2, the purchase price of $2.1 million
would be paid to Plaintiffs in two steps: first, Defendants were to wire $1,720,000 to Plaintiffs;
and, second, Defendants were to deposit $380,000 into the Escrow Account “pursuant to the
terms of the Escrow Agreement.”
The Escrow Agreement, pursuant to which Defendants deposited $380,000 of the
purchase price (“Escrow Funds”), explained that First Tennessee Bank (“First Tennessee”) was

4

to be the escrow agent and directed First Tennessee to invest the Escrow Funds in a money
market account. The parties agreed to the deposit of the Escrow Funds in the event Defendants
had a claim against Plaintiffs under the APA.
Section 3 of the Escrow Agreement specifically states that:
From time to time on or before March 31, 2009 . . . , Buyer may give notice (a
“Notice”) to Seller and Escrow Agent specifying in reasonable detail the nature and
dollar amount of any claim (a “Claim”) it may have under the Purchase Agreement.
If a Notice is given with respect to a Claim, Escrow Agent shall make payment with
respect thereto only in accordance with (i) joint written instructions of Buyer and
Seller or (ii) a final non-appealable order of a court of competent jurisdiction.
Pursuant to this agreement, absent a claim against the escrow funds by Defendants within twelve
(12) months of the signing of the APA, the escrow funds were to be automatically released to
Underwood on March 31, 2009. To date, the Escrow Funds remain on deposit with First
Tennessee and are approximately $385,000.
Finder’s Fee Provisions
Section 5.2.4 of the Asset Purchase Agreement included the following representations:
(1) that “[n]o broker or finder has acted for Buyer or its Affiliates in connection with this
Agreement,” and (2) that “no broker or finder retained by Buyer or its Affiliates is entitled to any
brokerage or finder’s fee.” Section 5.2.4 was not in the original draft of the APA prepared by
Defendants, but was inserted by Underwood’s attorney. Additionally, section 5.2.6 of the APA
provides in part that: “No representation or warranty by Buyer in this Agreement . . . contains
any untrue statement of a material fact, or omits to state a material fact necessary to make the
statements contained therein, in light of the circumstances in which they are made, not
misleading.” Section 5.2.6 was likewise not in the original draft of the APA prepared by
Defendants, but was inserted by Underwood’s attorney.
5

In March 2008, nearing the close of the Naylor deal, Chris Yessayan (“Yessayan”), Vice
President of Invacare Partner Solutions, discovered an ambiguity in Defendants’ contract with
McDaniel. This ambiguity provided for the inclusion of the acquired revenue of acquisitions
like Naylor in his quarterly bonus. Recognizing the issue, Yessayan and Mike Will (“Will”),
Director of Rentals for Defendants and Defendants’ point man for the acquisition, met with
McDaniel at P.F. Chang’s Restaurant in Memphis, Tennessee a few days before the March 31
closing date to discuss Defendants’ solution to the ambiguity. Rather than paying McDaniel the
quarterly bonus calculated on rental revenue, Defendants told McDaniel that they had decided to
pay him a flat bonus of $30,000. McDaniel did not know of Defendants’ decision to pay him the
bonus until this meeting. McDaniel did not negotiate the amount of the bonus, as it was set
unilaterally by Defendants, and he was not happy with the decision. McDaniel accepted the
bonus.
For accounting reasons, Defendants called the bonus a “finder’s fee” in order to allow
Defendants to capitalize the expense in the purchase price and to avoid having to expense the
cost against the operating income (or bottom line) of the new business. The $30,000 payment
made by Defendants to McDaniel was referenced in several of Defendants’ documents and was
consistently referred to as a “finder’s fee.” Additionally, McDaniel, Will, and Kinkoph
specifically testified in depositions to the $30,000 payment being a “finder’s fee.”
As early as February 5, 2008, Will believed that Defendants should disclose McDaniel’s
finder’s fee to Underwood. In fact, Defendants internally discussed disclosing McDaniel’s
finder’s fee to Underwood and Defendants decided not to do so.

6

Neither Defendants nor McDaniel advised Underwood that McDaniel was paid a $30,000
finder’s fee. Underwood did not discover this information prior to closing. In fact, Underwood
did not discover the payment of the finder’s fee to McDaniel until almost two years after the sale
of Naylor.
McDaniel described his involvement in Underwood’s discussions with Defendants about
the asset purchase as “very limited”. McDaniel testified that he did not give Underwood any
substantive advice regarding Defendants’ purchase of Naylor’s assets nor did he encourage
Underwood to accept the deal or the purchase price offered by Defendants. McDaniel also
testified that he did not recall Underwood telling him that, in his opinion, Naylor was worth
upwards of $3 million.
Underwood, on the other hand, testified that he had advised McDaniel that he valued his
company above $3 million, and that, in response, McDaniel told him that Defendants’ Board of
Directors had only approved $2.1 million and urged Underwood to consider the value of all of
the other things that came along with a sale to Defendants. Underwood also testified that he
spoke with McDaniel almost daily, and he relied on McDaniel’s advice, in part, because
McDaniel had experience with and had earlier sold his own larger medical equipment rental
business.
Underwood stated that had he known that McDaniel was receiving a finder’s fee, he
would not have sold his business to Defendants for $2.1 million; instead, he would have changed
the purchase price to something higher than $3 million. Additionally, Underwood stated that had
Defendants refused to pay $3 million for Naylor, Underwood would have continued to operate
Naylor at a profit of approximately $550,000 per year.

7

Underwood testified that in calculating the EBITDA value of Naylor, as mentioned
above, Defendants did not add back Underwood’s salary, insurance, 401k, the company car,
travel expenses or other expenses typically added to individually owned companies. Had those
items been added back, the EBITDA figure would have been higher. Based on Naylor’s 2006
figures, Underwood calculated Naylor’s EBITDA to be “right around $600,000" and using a
“conservative factor of five,” valued Naylor at $3 million or more.
Consulting Agreement
Apart from the asset purchase, Defendants also agreed to hire Underwood as a consultant
for a six-month period following the acquisition, memorialized in a Consulting Agreement
executed by Defendants and Underwood. Underwood testified that he agreed to the purchase
price of $2.1 million based on the opportunity of future work with Defendants, “to be able to
have a job in the future, you know, with benefits and all the other things and thinking about the
great opportunities that me and [McDaniel] had at the time with a lift company.” Underwood
thought that, because Defendants had little experience in the rental market, Defendants would
value his experience and that his Consulting Agreement might lead to future employment with
Defendants.
The Consulting Agreement provided for a consulting period of one hundred and eighty
(180) days, with no promise of any extension. The agreement also contained a “zipper clause”
stating that it constituted the entire agreement of the parties as to the consulting services.
Underwood testified that he knew what he was doing when he signed the Consulting
Agreement and that he was represented by counsel.

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Defendants did not renew the Consulting Agreement after the one hundred and eighty
day period.
Escrow Account
Section 7.6 of the APA provides:
Receivables. Buyer shall use all reasonable efforts to collect the accounts receivable
included in the Purchased Assets but Buyer shall not be required to take or threaten
legal action to collect any such accounts receivable. At the option of Buyer, Seller
and the Shareholder jointly and severally agree to repurchased from Buyer, for an
amount equal to the unpaid balance thereof, less any amount by which the Closing
Net Book Value exceeds the Target Net Book Value (the “Excess”) (as such may be
reduced by the application of Section 8.4(b)), and which have not been paid within
one hundred eighty (180) days after the date of the invoice, it being understood that
Buyer shall exercise such option at any time after such date up to the first (1st)
anniversary of the Closing Date without waiving any rights hereunder. Seller shall
have the right to verify the existence of the unpaid balance of any accounts
receivable.
Section 8.2 of the APA provides as follows:
Indemnification of Buyer. Buyer shall indemnify Seller and Shareholder . . . against
and hold them harmless from (a) any and all loss, damage, liability or deficiency
resulting from or arising out of any inaccuracy in or breach of any representation,
warranty, covenant or obligation made or incurred by Buyer herein or in any other
agreement, instrument, or document delivered by or on behalf of Buyer in connection
herewith . . . and (c) any and all costs and expenses (including reasonable legal and
accounting fees) related to any of the foregoing.
Section 8.4 of the APA provides as follows:
Survival; Limitations on Indemnification. The indemnification of Buyer provided
for under Section 8.1(a) shall be limited in certain respects as follows: (b) Neither
Seller nor Shareholder shall be liable to Buyer for indemnification under this
Agreement until the aggregate amount of indemnification claims exceeds the Excess
(as such may be reduced by application of Section 7.6). Thereafter, neither Seller
nor Shareholder shall be liable to Buyer for indemnification under Section 8.1(a)
until the aggregate amount of indemnification claims under Section 8.1(a) exceeds
the Excess plus Fifty Thousand Dollars ($50,000) (the Indemnity Deductible), at
which time, Seller and Shareholder shall be liable for the entire amount of all such
indemnification claims which exceed the Indemnity Deductible, but in no event shall

9

Seller or Shareholder’s liability exceed Nine Hundred Fifty Thousand Dollars
($950,000).
By a Notice Letter dated January 30, 2009, Defendants asserted a claim against the
Escrow Funds held at First Tennessee. The Notice Letter asserted a claim under Section 7.6 of
the APA for unpaid accounts receivable. Additionally, the Notice Letter also provided that
Plaintiffs failed to disclose material information and made materially inaccurate representations
to the Defendants in breach of the Asset Purchase Agreement. Specifically, this Notice Letter
indicated that Defendants had “become aware that at least three accounts to which [Plaintiffs
were] renting products as of the Closing had previously indicated to [Plaintiffs] that they
intended to cease doing business with [Defendants], and these three accounts have since carried
out their previously-announced intention . . . .”
In the Notice Letter, Defendants demanded that the $380,000 held in escrow be turned
over to it and that the balance of Defendants’ damages be paid by Underwood. Below are the
facts regarding the unpaid accounts receivable and the accounts ceasing to do business with
Defendants.
Unpaid Accounts Receivable
As mentioned above, pursuant to Section 7.6 of the APA, Plaintiffs “have the right to
verify the existence of the unpaid balance of any accounts receivable” and Defendants were to
use “all reasonable efforts” to collect accounts receivables.
Kinkoph testified that Defendants took reasonable steps to collect on the accounts
receivable and in seeking repayment from Plaintiffs for the uncollected accounts receivable.
Kinkoph testified that Defendants’ collection efforts were hampered by the lack of information
on the accounts that Underwood was to provide.
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Underwood, on the other hand, testified that he, through his attorney, attempted to obtain
from Defendants a readable spreadsheet for the unpaid accounts receivable as well as the unpaid
invoice numbers and invoice dates. And, that, even up to the date of trial, he had not received
the requested information to back up the Defendants’ claim with respect to unpaid accounts
receivable.
The APA provides in Section 3.1 that the Target Net Book Value is $600,000. The
parties agreed that the equipment and other hard assets comprised $400,000 of the $600,000
Target Net Book Value. Because Plaintiffs guaranteed $600,000 value and the parties agreed
that the equipment was valued at $400,000, Plaintiffs only guaranteed the collection of $200,000
on the accounts receivable. The “excess” is the amount by which the Closing Net Book Value
exceeds the Target Net Book Value. Plaintiffs receive credit for the amount by which the assets
exceed $600,000. In calculating the amount due Defendants from Underwood for unpaid
accounts receivable, Underwood is entitled to a credit for the excess.
The numbers regarding the monies owed are in dispute. In one exhibit presented to the
Court by Plaintiffs, the numbers show that unpaid accounts receivable exist in the amount of
$85,048.83 and the amount of the excess is $37,492.24. In another exhibit presented to the
Court by Defendants, the numbers show that unpaid accounts receivable exist in the amount of
$85,048.83 and the amount of excess is $22,492.24 (Defendants note that the difference in this
number reflects a $15,000 deduction made pursuant to an email from Underwood dated May 9,
2009).
In addition to the excess, Plaintiffs are entitled to a credit for the $50,000 deductible set
forth in Section 8.4(b) of the APA.

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Accounts Ceasing to do Business with Defendants
Several of Naylor’s customers ceased doing business or significantly decreased their
business with Defendants soon after the closing. These businesses include Select Medical (also
referred to as Select Specialty) (“Select”), The Regional Medical Center (“The Med”), Methodist
Hospital (“Methodist”), Kindred Hospital (“Kindred”), and Briley Nursing Home (“Briley”).
Defendants state that after the closing they began to learn that Plaintiffs made misrepresentations
regarding certain customers’ willingness to continue doing business with Naylor.2 The
Defendants included these claims in the above mentioned Notice Letter to Plaintiffs and First
Tennessee, which demanded the $380,000 held in escrow be turned over to Defendants. Details
of each specific business entity mentioned are discussed below.
Regarding Kindred, Defendants note that Charles Nunn (“Nunn”), Materials Manager
and Buyer for Kindred, testified that Kindred began transitioning toward using a national
contract for rentals in 2007 and that he had advised Underwood of that transition at or around
that time. Additionally, Nunn testified that he informed Jason Dragavon (“Dragavon”), an
employee of Naylor and later of Invacare, of the national contract as well.
Plaintiffs note that approximately four months prior to the sale of Naylor, Will, an
employee of Defendants, knew that Kindred was in the process of changing national accounts
and that Nunn was getting pressure to use the national contract. Will discussed this situation in a
series of emails with Underwood presented at trial and at a meeting with Dragavon and
Underwood before Defendants purchased Naylor. Moreover, after the completion of the sale of

2

On December 3, 2010, this Court granted the Plaintiffs’/Counter-Defendants’ Motion
for Summary Judgment on these claims asserted by the Defendants.
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Naylor, Kindred continued to do business with Defendants, and the amount of rentals remained
about the same as they had been with Naylor. Neither before the completion of the sale nor at
any time thereafter did Nunn tell Underwood or Dragavon or anyone else at Naylor that Kindred
was going to stop doing business or decrease the amount of business with Naylor. At some point
after the sale, Kindred simply started calling Defendants less frequently.
With regard to the other four businesses, the Plaintiffs highlight the facts below.
After the sale of Naylor to Defendants, the amount of business that Briley did with
Defendants increased. Dragavon also serviced this account. Briley then abruptly stopped doing
business with Defendants. The first notice Dragavon received of Briley’s termination of
Defendants was when Briley called requesting that Defendants’ equipment be picked up. Before
the completion of the sale of Naylor, no one with Briley told Dragavon that it was terminating its
business with Naylor or significantly decreasing the amount of business it did with Naylor.
While an employee of Naylor and Defendants, Brad Hays (“Hays”) serviced the accounts
for the Methodist facilities and The Med in Memphis. At no time before the completion of the
sale, did anyone, at any of these facilities, tell Hays that it was going to stop doing business with
Naylor or decrease the amount of business it did with Naylor. Plaintiffs submit that if these
facilities did stop doing business with Defendants it was lost solely by Defendants because of
bad service, lack of experience, bad luck, changes in service practices, billing errors, and
competition.
As for Select, prior to the closing of the sale, the Freedom Medical contract was assigned
to Defendants and covered the Select locations in Memphis and Nashville, Tennessee and
Jackson, Mississippi. Defendants were initially able to retain the business for Select in Memphis

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and Jackson, but, ultimately lost that business. Plaintiffs argue that Defendants lost the business
of Memphis Select because of Defendants’ dropping service times and failure to meet the
expectations of the facility.
Underwood testified that the medical equipment rental business is extremely competitive,
and a business has to fight to keep customers every day.
Defendants, on the other hand, note that individuals at each of these four companies
advised Naylor or Underwood that their business would be going away in 2008. Defendants,
however, were uncertain as to the identity, customer location, and specific statements made.
Enclosure Beds
During the negotiation of the asset purchase, Defendants decided not to purchase
enclosure beds from the Plaintiffs, and, as such, the beds were omitted from the Asset Purchase
Agreement. Defendants, however, were aware that the enclosure beds were required to be held
as part of the portfolio offered to Naylor’s clients. Accordingly, Underwood left the enclosure
beds at Naylor’s Nashville and Memphis facilities. Underwood testified that Defendants rented
these beds with his full consent. Additionally, Underwood testified that the enclosure beds were
functional at the time that the sale closed and that spare parts were also left with the beds.
In February 2009, after receiving the Notice Letter, Underwood demanded that
Defendants immediately return the enclosure beds and demanded that Defendants pay the full
rental rate for the equipment, for a total of $99,900. Defendants and Underwood had discussed a
split revenue-sharing arrangement related to the enclosure beds, under which Plaintiffs would be
paid fifty (50) percent of the revenues Defendants received on the beds. Underwood, however,
testified that he did not agree to this split revenue-sharing arrangement.

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Defendants received approximately $14,000 in revenue from the rental of the enclosure
beds. After some back and forth, Defendants allowed Plaintiffs to retrieve the enclosure beds.
Underwood testified that some of the beds had sustained some damage while in Defendants’
care.
CONCLUSIONS OF LAW
The Court notes that both parties cite to Tennessee law and do not dispute that the
substantive law of Tennessee applies in this matter.
I.

Breach of Contract
Plaintiffs allege Defendants breached contractual obligations contained in the Escrow

Agreement and the APA. First, Plaintiffs allege that Defendants breached the Escrow
Agreement and APA refusing to permit disbursement of the Escrow Funds to Plaintiffs. Second,
Plaintiffs allege that Defendant breached the APA because the Defendants were obligated to and
did pay a finder’s fee to McDaniel.
Under Tennessee common law, “[t]he essential elements of any breach of contract claim
include (1) the existence of an enforceable contract, (2) nonperformance amounting to a breach
of the contract, and (3) damages caused by the breach of the contract.”3 Additionally, in
Tennessee a duty of good faith and fair dealing is imposed in the performance and enforcement
of every contract.4 The purpose of this implied covenant is “(1) to honor the reasonable
expectations of the contracting parties and (2) to protect the rights of the parties to receive the

3

ARC Lifemed, Inc. v. AMC-Tennessee, Inc., 183 S.W.3d 1, 26 (Tenn. Ct. App. 2005).

4

Lamar Adver. Co. v. By-Pass Partners, 313 S.W.3d 779, 791 (Tenn. Ct. App. 2009)
(citing Wallace v. Nat’l Bank of Commerce, 938 S.W.2d 684, 686 (Tenn. 1996).
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benefits of the agreement into which they entered.”5 Importantly, whether a party acted in good
faith is a question of fact.6
The Court finds that the Defendants breached both of the aforementioned contractual
obligations contained in the APA.
a.

Breach of the Escrow Agreement and Escrow Provision of the Asset
Purchase Agreement
i.

Escrow Agreement

As mentioned above, according to Section 3 of the Escrow Agreement, Defendants “may
give notice to [Plaintiffs] and Escrow Agent specifying in reasonable detail the nature and dollar
amount of any claim it may have under the Purchase Agreement.” In Defendants’ Notice Letter
to Plaintiffs and First Tennessee, Defendants stated that they had “become aware that at least
three accounts to which [Plaintiffs were] renting products as of the Closing had previously
indicated to [Plaintiffs] that they intended to cease doing business with [Defendants] and these
three accounts have since carried out their previously-announced intention . . . .” Since that
letter, Defendants have argued that five of Naylor’s customers have actually either ceased doing
business or significantly decreased their business with Defendants soon after closing. These
businesses include Select, The Med, Methodist, Kindred and Briley.
To prove this claim, Defendants cite two main pieces of evidence. First, Defendants note
that Nunn, an employee of Kindred, testified that he advised Underwood and Dragavon, an
employee of Naylor, of Kindred beginning to transition toward using a national contract for

5

6

Lamar Adver. Co., 313 S.W.3d at 791.
Id.
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rentals in 2007. Second, Defendants state that Defendants were also told by individuals at
Select, The Med, Methodist, and Briley that they had advised Naylor or Underwood that the
business would be going away in 2008.
Plaintiffs, however, refute these claims. Plaintiffs show that approximately four months
prior to the sale of Naylor, Will, Defendants’ employee, knew that Kindred was in the process of
changing national accounts and that Nunn was getting pressure to use the national contract. Will
even discussed this situation in a series of emails with Underwood and at a meeting with
Dragavon and Underwood before Defendants purchased Naylor. Moreover, Plaintiffs highlight
the fact that Defendants were and still are uncertain as to the identity, customer location, and the
alleged statements made by individuals at Select, The Med, Methodist, and Briley.
The Court found Underwood’s testimony to be credible. Underwood testified that the
medical equipment rental business is extremely competitive and that a business has to fight to
keep customers every day. Underwood noted that it is not unusual in this type of business to
lose and gain customers quickly and constantly. Moreover, Defendants provided no evidence
that Underwood or Naylor had any prior knowledge that customers would cease doing business
after the closing on the asset purchase, with the exception of Kindred potentially having to use a
national contract.
Consequently, weighing all of the evidence presented at trial, the Court finds the
Defendants breached the duty of good faith and fair dealing imposed in the performance and
enforcement of the Escrow Agreement. Defendants did not prove via competent evidence that
they had a good faith basis for making this claim against the Escrow Funds and, subsequently,
they had no good faith basis for withholding these funds from Underwood for over two years.

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ii.

Asset Purchase Agreement

Section 7.6 of the APA provides that “[s]eller shall have the right to verify the existence
of the unpaid balance of any accounts receivable.” Underwood testified that he, through his
attorney, attempted to obtain from Defendants a readable spreadsheet for the unpaid accounts
receivable as well as the unpaid invoice numbers and invoice dates. And, that, even up to the
date of trial, he had not received the requested information to back up the Defendants’ claim
with respect to unpaid accounts receivable.
Thus, the Court finds that Defendants breached Section 7.6 as Plaintiffs were unable to
verify the existence of the unpaid balance of any accounts receivable.
b.

Breach of the Brokers and Finders Provisions of the Asset Purchase
Agreement

Section 5.2.4 of the APA includes the following representations: (1) that “[n]o broker or
finder has acted for Buyer or its Affiliates in connection with this Agreement,” and (2) that “no
broker or finder retained by Buyer . . . is entitled to any brokerage or finder’s fee.” Additionally,
section 5.2.6 of the APA provides as follows: “No representation or warranty by Buyer in this
Agreement . . . contains any untrue statement of a material fact, or omits to state a material fact
necessary to make the statements contained therein, in light of the circumstances in which they
are made, not misleading.” Moreover, according to Black’s Law Dictionary, a “finder’s fee” is
defined as “[t]he amount charged by one who brings together parties for a business opportunity.”
Defendants called the $30,000 payment to McDaniel a “finder’s fee” and referenced the
payment as such in internal documents. Even McDaniel, Will, and Kinkoph testified via
deposition to this $30,000 payment being a “finder’s fee.” Moreover, the $30,000 payment to

18

McDaniel has all of the characteristics of a “finder’s fee” as McDaniel introduced Underwood
and Naylor to the Defendants.
Defendants do explain that they called the bonus a “finder’s fee” to allow themselves to
capitalize the expense in the purchase price and avoid having to expense the cost against the
operating income. Defendants also highlight the fact that McDaniel was not happy about taking
this $30,000 lump sum payment. Moreover, Defendants note that Underwood expected
McDaniel to be paid a bonus based on growing the revenue of Naylor.
Taking all of these facts into account, the Court finds this payment to be a “finder’s fee.”
Defendants internally referred to the payment as a finder’s fee and, importantly, the payment had
all of the characteristics of a finder’s fee. As such, the Court finds that Defendants breached
Sections 5.2.4 and 5.2.6 of the APA.
II.

Intentional Misrepresentation and Fraud
Plaintiffs assert that Defendants intentionally misrepresented/fraudulently misrepresented

to Plaintiffs that they would not pay a finder’s fee to McDaniel as a result of the Defendants
purchasing Naylor’s assets. Because the Tennessee Supreme Court has noted that the “terms
‘intentional misrepresentation,’ ‘fraudulent misrepresentation’ and ‘fraud’ are synonymous”,7
this Court will treat these two alleged causes of action collectively.
In Tennessee, to prove a claim based on intentional misrepresentation, a plaintiff must
show that:

7

Gardner v. Anesthesia & Pain Consultants, P.C., No. E2003-03027-COA-R3-CV,
2004 WL 2715304, at *5 n.1 (Tenn. Ct. App. Nov. 30, 2004) (citing Concrete Spaces, Inc. v.
Sender, 2 S.W.3d 901, 904 n.1 (Tenn. 1999)).
19

(1) the defendant made a representation of an existing or past fact; (2) the
representation was false when made; (3) the representation was in regard to a
material fact; (4) the false representation was made either knowingly or without
belief in its truth or recklessly; (5) plaintiff reasonably relied on the misrepresented
material fact; and (6) plaintiff suffered damage as a result of the misrepresentation.8
The Tennessee Supreme Court has recently held that “[w]hether a person’s reliance on a
representation is reasonable generally is a question of fact requiring the consideration of a
number of factors.”9 The factors include:
[T]he 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.10
The facts in this case have shown that Defendants, in the APA, represented that no
finder’s fee was paid. As detailed above, this representation was false when made. At the
closing of the asset purchase, Defendants signed the APA representing that no finder’s fee was
paid while simultaneously referring to the $30,000 payment internally as a finder’s fee. The
false representation was in regard to a material fact. In fact, Plaintiffs’ attorney specifically
included the finder’s fee provision in the APA. Moreover, at the very least, the false
representation was made recklessly as the Defendants internally discussed disclosing McDaniel’s
finder’s fee to Underwood, but ultimately decided not to do so. Underwood vehemently testified
that he did rely on this misrepresented fact, and, importantly, he had no opportunity to discover

8

Walker v. Sunrise Pontiac-GMC Truck, Inc., 249 S.W.3d 301, 311 (Tenn. 2008).

9

Davis v. McGuigan, 325 S.W.3d 149, 158 (Tenn. 2010).

10

Id.
20

this misrepresentation. As a result, the Plaintiffs sustained damages, which will be discussed
below.
Therefore, the Court finds that Defendants intentionally misrepresented to Plaintiffs that
they would not pay a finder’s fee as a result of the Defendants purchasing Naylor’s assets.
III.

Conversion Claims
Plaintiffs allege that Defendants converted the enclosure beds owned by Plaintiffs.

Under Tennessee law, conversion “is the appropriation of tangible property to a party’s own use
in exclusion or defiance of the owner’s rights.”11 To make out a prima facie case of conversion,
a party must prove: “(1) the appropriation of another’s property to one’s own use and benefit, (2)
by the intentional exercise of dominion over it, (3) in defiance of the true owner’s rights.”12 In
order to constitute conversion, the defendant must intend to convert plaintiff’s property.13
Underwood testified that the Defendants rented the enclosure beds with his full consent.
He also testified that after a bit of back and forth with the Defendants, he was able to retrieve all
of the beds. Consequently, Plaintiffs are unable to make out a prima facie case of conversion.
Therefore, the Court finds that Defendants did not convert the enclosure beds owned by
Plaintiffs.
IV.

Violations of the Tennessee Consumer Protection Act

11

State ex rel. Paula Flowers v. Tennessee Coordinated Care Network, et al., No.
M2003-01658-COA-R3-CV, 2005 WL 427990, at *7 (Tenn. Ct. App. Feb. 23, 2005).
12

Id.

13

Thompson v. Thompson, No. W2008-00489-COA-R3-CV, 2009 WL 637289, at *14
(Tenn. Ct. App. March 12, 2009).
21

Plaintiffs assert that Defendants representation in the APA that a finder’s fee was not
paid and the claims Defendant made to First Tennessee violated the TCPA as unfair and
deceptive. The TCPA creates a cause of action for “[a]ny person who suffers an ascertainable
loss of money or property . . . as a result of the use or employment by another person of an unfair
or deceptive act or practice declared to be unlawful by” the TCPA.14 Specifically, Plaintiffs
allege violations of Tennessee Code Annotated (“TCA”) section 47-18-104(b)(27) and seek
treble damages for these violations. These provisions read as follows:
(b) . . . the following unfair or deceptive acts or practices affecting the conduct of any
trade or commerce are declared to be unlawful and in violation of this part:
(27) Engaging in any other act or practice which is deceptive to the consumer
or to any other person[.]

According to the Tennessee Supreme Court, the TCPA does not impose a single standard
applicable to all cases for determining whether a particular act or practice is deceptive for the
purpose of TCA section 47-18-104(b)(27).15 The Tennessee Supreme Court, however, has
defined both “deceptive” and “unfair”:
A deceptive act or practice is a material representation, practice or omission likely
to mislead a reasonable consumer. An act is unfair if it causes or is likely to cause
substantial injury to consumers which is not reasonably avoidable by consumers
themselves and not outweighed by countervailing benefits to consumers or to
competition.16
Moreover, “[t]o be considered deceptive, an act is not necessarily required to be knowing or

14

Tenn. Code Ann. § 47-18-109(a)(1).

15

Fayne v. Vincent, 301 S.W.3d 162, 177 (Tenn. 2009).

16

Davis v. McGuigan, 325 S.W.3d 149, 162 (Tenn. 2010) (citations omitted).
22

intentional. Negligent misrepresentation may be found to be a violation of” the TCPA.17
For the reasons this Court set forth above for finding Defendants liable for both the breach
of contract claims and the intentional misrepresentation claim, this Court finds that Defendants have
violated TCA section 47-18-104(b)(27).
DAMAGES
I.

Breach of Contract
With respect to awarding damages for a breach of contract, Tennessee courts have

explained that:
The purpose of assessing damages in the event of a breach of contract is to place the
injured party in the same position it would have been in had the contract been fully
performed. The mere fact a party breaches a contract does not entitle the other party
to an award of damages. The injured party must sustain damages that consequently
result from the breach. Moreover, the injured party is not entitled to profit from the
breach or be placed in a better position than had the contract been fully performed.18
In this case, Plaintiffs seek damages for both breaches of contract. First, Plaintiffs seek
damages in the amount of $900,000 (the difference between $3 million and the sales price of
Naylor in the amount of $2.1 million) for the breach of Sections 5.2.4 and 5.2.6 of the APA.
Second, Plaintiffs seek the entire balance of the Escrow Fund, $380,000. In addition, Plaintiffs
submit that they are entitled to pre-judgment interest at the statutory rate of ten percent (10%)
per annum on entire balance of the Escrow Fund from April 1, 2009 to the date of this judgment
and to post judgment interest on the escrow funds at the statutory rate of ten percent (10%) per

17

Fayne, 301 S.W.3d at 177.

18

Metro. Gov’t of Nashville & Davidson Cnty. v. Cigna, 195 S.W.3d 28, 35 (Tenn. Ct.
App. 2005) (citations omitted).
23

annum from the date of this judgment until the funds are paid to Plaintiffs. And, lastly, Plaintiffs
assert that, pursuant to Section 8.2 of the APA, they are entitled to their reasonable attorneys’
fees incurred in this action.
Defendants, on the other hand, state that Plaintiffs have suffered no damages because
they received a more than fair price for Naylor’s assets. Additionally, Defendants state that
Plaintiffs have suffered no damages from any breach of the APA because Plaintiffs are entitled
to the amount held in escrow. Moreover, Defendants argue that Plaintiffs are not entitled to
attorneys’ fees under the APA or the Escrow Agreement because, based on the plain meaning of
the language and common sense understanding of those documents, the parties did not agree to
pay each other’s fees in the event of a dispute between them.
The Court finds that Plaintiffs have suffered damages pursuant to the breach of Sections
5.2.4 and 5.2.6 of the APA. Underwood testified that had he known McDaniel was receiving a
finder’s fee, he would not have sold his business for $2.1 million; instead, he would have
changed the purchase price to something higher than $3 million. Additionally, Underwood
testified that had Defendants refused to pay $3 million for Naylor, Underwood would have
continued to operate Naylor at a profit of approximately $550,000 per year. Moreover, the
evidence presented showed that the valuation of Naylor did fluctuate. The Court finds this
testimony to be persuasive.
The Court finds Defendants liable for ten percent (10%) of the contract price, $210,000.
Although Plaintiffs seek an award of $900,000, the Court finds that a number of factors would
operate to make such an award unreasonable. These factors include that: Underwood knew
McDaniel was consulting for Defendants, Underwood knew McDaniel’s compensation was the

24

bonus or fee based on his growth of Defendants’ rental revenue, Underwood expected McDaniel
to be paid a bonus based on growing the revenue of Naylor in the event that Defendants
purchased Naylor, and Underwood made the final accepted offer at $2.1185 million.
Consequently, the Court finds $210,000 to be the reasonable amount of damages incurred by
Plaintiff for this breach of contract.
For the breach of the duty of good faith and fair dealing and Section 7.6 of the APA, the
Court finds Plaintiffs are entitled to the entire amount being held in Escrow. Defendants claim
that Plaintiffs owe $62,556.83 for the unpaid accounts receivable. Defendants arrive at this
number by offsetting the amount of uncollected accounts receivable, $85,048.83, by the excess
net worth, $22,492.00. Plaintiffs, however, state that the $85,048.83 amount should be offset by
$37,492.24, which is the number Plaintiffs provide as the excess net worth. The exact amount of
excess is important. If Plaintiffs’ number is correct, the Plaintiffs do not owe Defendants any
money on these unpaid accounts receivable as the claim would not exceed the $50,000.00
deductible set forth in Section 8.4(b) of the APA.
The Court notes that determining the amount of excess is a close call, but, because
Plaintiffs were never able to obtain a readable copy of the unpaid accounts receivable, the Court
finds in Plaintiffs’ favor. Consequently, Plaintiffs are entitled to the entire amount being held in
Escrow.
In addition to the damages sought for the breach of contract claims, as mentioned above,
Plaintiffs seek pre-judgment interest on the damage award for the breach of the duty of good
faith and fair dealing and Section 7.6 of the APA. Tennessee law provides that prejudgment
interest “may be awarded . . . in accordance with the principles of equity at any rate not in excess

25

of a maximum effective rate of ten percent (10%) per annum.”19 Pre-judgment interest is
intended to compensate parties that have been damaged “because they have been deprived of the
use of that money from the time they should have received it until the date of judgment”–not to
punish the wrongdoer.20 Moreover, the decision of whether to award pre-judgment interest is left
to the “sound discretion” of the trial court.21 Here, both the amount of the obligation and the
specific date of the obligation were certain under the escrow agreement. Additionally, but for
this breach, Plaintiffs would have had the use of this money for over two years. Consequently,
the Court grants the Plaintiffs request for pre-judgment interest at ten percent (10%) per annum.
The pre-judgment interest is awardable from the final disbursement date under the Escrow
Agreement, March 31, 2009, to the date of this judgment. The amount of pre-judgment interest
is inclusive of the $5,000 of interest already accrued on the Escrow Funds.
Plaintiffs also seek attorneys’ fees on both breach of contract actions. Under Tennessee
law, “litigants must pay their own attorneys’ fees unless there is a statute or contractual
provision providing otherwise.”22 In this case, Section 8.2 of the APA provided:
Indemnification of Buyer. Buyer shall indemnify Seller and Shareholder. . . against
and hold . . . harmless from (a) any and all loss, damage, liability or deficiency
resulting from or arising out of any inaccuracy in or breach of any representation,
warranty, covenant or obligation made or incurred by Buyer herein or in any other
agreement, instrument or document delivered by or on behalf of Buyer in connection
herewith . . . and (c) any and all costs and expenses (including reasonable legal and
accounting fees) related to any of the foregoing.

19

Tenn. Code Ann. § 47-14-123.

20

Scholz v. S.B. Intern., Inc., 40 S.W.3d 78, 82 (Tenn. Ct. App. 2000).

21

Myint v. Allstate Ins. Co., 970 S.W.2d 920, 927 (Tenn. 1998).

22

Taylor v. Fezell, 158 S.W.3d 352, 359 (Tenn. 2005).
26

As Defendants consented to these terms and conditions through their course of dealing,
Plaintiffs’ request for attorneys’ fees is granted. Plaintiffs shall submit within fifteen (15) days
of the date of this order a motion for attorneys’ fees supported by proper documentation.
Defendants shall then have fifteen (15) days following the filing of Plaintiffs’ motion to respond.
The Court will then determine the amount of fees to be awarded.
II. Intentional Misrepresentation and Fraud
Plaintiffs seek damages in the amount of $900,000 (the difference between $3 million
and the sales price of $2.1 million) for Defendants’ intentional misrepresentation of the finder’s
fee. Plaintiffs are also seeking punitive damages under this claim.
For the intentional misrepresentation of the finder’s fee, the Court finds the Defendants
liable for ten percent (10%) of the contract price, $210,000. The Court finds this amount
appropriate for the intentional misrepresentation claim for the same reasons mentioned for the
breach of Sections 5.2.4 and 5.2.6 of the APA.
As mentioned above, Plaintiffs also seek punitive damages on this claim. Punitive
damages are intended to “punish a defendant, to deter him from committing acts of a similar
nature, and to make a public example of him.”23 “Punitive damages are thus appropriate only in
the most egregious cases and, consequently, a verdict imposing such damages must be supported
by clear and convincing evidence that the defendant acted intentionally, fraudulently,
maliciously, or recklessly.”24 A person acts recklessly “when the person is aware of, but

23

Goff v. Elmo Greer & Sons Const. Co., 297 S.W.3d 175, 187 (Tenn. 2009) (quoting
Huckeby v. Spangler, 563 S.W.2d 555, 558-59 (Tenn. 1978)).
24

Goff, 297 S.W.3d at 187 (citing Hodges v. S.C. Toof & Co., 833 S.W.2d 896, 901
(Tenn. 1992)).
27

consciously disregards, a substantial and unjustifiable risk of such a nature that its disregard
constitutes a gross deviation from the standard of care that an ordinary person would exercise
under all of the circumstances.”25 Here, the Court finds that Defendants acted recklessly.
Defendants were aware of the finder’s fee provision in the APA, Defendants referred to the
$30,000 as a finder’s fee internally, Defendants internally discussed potentially disclosing this
finder’s fee to Underwood, and Defendants consciously disregarded the need to disclose this
finder’s fee to Underwood despite signing a contract explicitly stating otherwise. This is a gross
deviation of the standard of care. An ordinary person would recognized the need to disclose or,
better yet, not pay a finder’s fee when the payment would explicitly be in violation of the signed
contract. Therefore, the Court finds the Plaintiffs are entitled to an award of punitive damages in
the amount of $315,000.
III. Conversion Claims
Although the Court found that Defendants were not liable for Plaintiffs conversion claim,
the Court does find that Plaintiffs are entitled to fifty percent (50%) of the $14,000 in revenue
Defendants received. The Court also awards the Plaintiffs $3,000 for damage to the beds.
Therefore, the Court finds Plaintiffs are entitled to $10,000 for Defendants’ use of the enclosure
beds. The Court does not find that pre-judgment interest on this award is proper.
IV. Violations of the Tennessee Consumer Protection Act
Upon finding that a party violated the TCPA, the court may award damages as well as
reasonable attorneys’ fees.26 Here, for the reasons stated above for both breach of contract

25

Hodges, 833 S.W.2d at 901.

26

Tenn. Code Ann. § 47-18-109(e)(1).
28

actions, the Court finds that Plaintiffs are entitled to an award of $210,000 for the breach of
Sections 5.2.4 and 5.2.6 of the APA, an award of $380,000 plus pre-judgment interest for the
breach of the Escrow Agreement and Section 7.6 of the APA, and attorneys’ fees.
The TCPA goes on to state that, “i[f] the court finds that the use or employment of the
unfair or deceptive act or practice was a willful or knowing violation of this part, the court may
award three (3) times the actual damages sustained and may provide such other relief as it
considers necessary and proper.”27 The Court does not find that the evidence supports an award
of treble damages as the Plaintiffs have not shown that the violations of this part were willful or
knowing.
CONCLUSION
Based on the foregoing, the Court enters judgment for the Plaintiffs on the breach of contract
claims, the intentional misrepresentation claim, and the TCPA claim. The Court finds Plaintiffs are
entitled to: $210,000 for the breach of Sections 5.2.4 and 5.2.6 of the APA; $380,000 of the Escrow
Funds plus pre-judgment interest (inclusive of the $5,000 in interest already accrued); $315,000 in
punitive damages under the intentional misrepresentation claim; and $10,000 for the enclosure beds.
Duplicative awards are not available. Post judgment interest is mandatory, and will be calculated
at a rate pursuant to 28 U.S.C. § 1961. The Court will award attorneys’ fees by separate order.
IT IS SO ORDERED.
s/ S. Thomas Anderson
S. THOMAS ANDERSON
UNITED STATES DISTRICT JUDGE
Date: June 3, 2011.

27

Tenn. Code Ann. § 47-18-109(a)(3).
29

30