IN THE COURT OF APPEALS OF TENNESSEE

AT KNOXVILLE

October 28, 2014 Session

JOY LITTLETON, ET AL. v. TIS INSURANCE SERVICES, INC.

Appeal from the Circuit Court for Knox County

No. C-11-034211 Deborah Stevens, Judge

No. E2014-00938-COA-R3-CV-FILED-FEBRUARY 3, 2015

During a prior lawsuit, a construction company – in exchange for a covenant not to execute

against the company’s assets – assigned to the entity that obtained a judgment against it the

company’s insurance coverage claims. The plaintiffs in the previous action thereafter

assigned those rights to the current plaintiffs to allow them to step into the shoes of the

construction company and bring suit against the insurance broker. The trial court entered

judgment on the pleadings in favor of the insurance broker on the ground that the current

plaintiffs would not be entitled to recover any compensatory damages at trial. The plaintiffs

appeal. We reverse.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court

Reversed; Case Remanded

JOHN W. MCCLARTY,J., delivered the opinion of the Court, in which THOMAS R. FRIERSON,

II, J., and NORMA MCGEE OGLE, SP. J., joined.

Robert B. Littleton, Nashville, Tennessee, and Robert R. Kurtz, Knoxville, Tennessee, for

the appellants, Joy Littleton, Grayling Littleton, and Will Allen Hildreth, as assignees of

Merit Construction, Inc.

Barry L. Howard, Nashville, Tennessee, for the appellee, TIS Insurance Services, Inc.

OPINION

I. BACKGROUND

The plaintiffs, Joy Littleton, Grayling Littleton, and Will Allen Hildreth (“the

Assignees”) were assigned a judgment and settlement order obtained by JAG Properties,
LLC (“JAG”) against Merit Construction, Inc. (“Merit”). The current action arises as a result

of a prior lawsuit, JAG Properties, LLC v. Merit Construction, Inc., d/b/a Merit

Construction, et al., No. 10296, Chancery Court of Loudon County, Tennessee (“the Merit

Litigation”). The Merit Litigation arose out of a contract between JAG and Merit for the

construction of a Holiday Inn Express hotel in Loudon, Tennessee. The litigation concerned

claims by JAG of property damage to the hotel as a result of the negligent acts or omissions

of Merit, the project architect, various subcontractors, and others in the construction of the

hotel. A settlement agreement was entered into on October 19, 2004, by JAG and Merit for

$3.9 million dollars. As a result of the settlement agreement, Merit consented to the entry of

a judgment against it for $3.9 million and assigned to JAG all rights, causes of action, and

other claims that Merit had or might have against Merit’s insurers, Merit’s broker, and

Merit’s agents arising from or in connection with the dispute between Merit and its insurers,

broker, or agent. The judgment was entered on November 1, 2004.

The exact language of the covenant not to execute on the judgment is as follows:

6. Upon entry of the consent judgment, JAG agrees not to execute

against any assets (other than applicable insurance) of Merit or

its successors and/or assigns in exchange for the assignment of

all rights, claims, causes of action and demands that Merit has

or might have against insurers that have provided policies of

insurance that may provide coverage for the damages claimed in

this action, as well as all other rights, causes of action and other

claims that Merit has or might have against Highlands, AH, and

Broker, their agents and representatives, and any other parties

including those employed or hired by, acting in concert with or

under the direction of Highlands, AH, and Broker, arising from

or in connection with the Dispute and/or Litigation (“Merit

Action”) including but not limited to claims for the wrongful

denial of coverage, violation of the Tennessee Consumer

Protection Act, bad faith statute, common law bad faith, breach

of contract, together with any other legal, equitable or

contractual rights that Merit possesses or may possess against

such parties arising from or in connection with the Merit Action.

To the best of its knowledge, Merit was not presented with, and

has not executed, any written acknowledgment or disclosure

from Broker regarding the financial condition of Highlands

and/or the risk associated with same at the time Broker placed

Merit’s primary and excess liability coverage with Highlands.

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The settlement agreement further provides as follows:

11. It is expressly understood and agreed by all parties to this

consent judgment that the terms and provisions outlined herein

shall not release or in any way be deemed or interpreted to

release Merit, Highlands, AH, Broker and/or any other insurer

that has issued a policy of insurance that may provide coverage

for damages claimed in this action.

The final judgment references the settlement agreement between JAG and Merit and

the covenant not to execute on the judgment as follows:

Whereas, Merit and JAG seek to conclude the Litigation and have entered into

a settlement dated October 19 [handwritten in original], 2004 (the “Settlement

Agreement”) pursuant to which Merit has consented to the entry of a judgment

against it and JAG has agreed to limit its collection efforts as set forth in the

Settlement Agreement[;]

Now, therefore, in consideration of the foregoing premises, and because of the

uncertainty of litigation, the additional expenses to be incurred and the

anticipated value of the Claims, Merit and JAG agree to waive trial and to

stipulate to the entry of a Final Judgment pursuant to the following terms:

1. Merit agrees to the entry of a judgment against it and in favor

of JAG in the sum of 3.9 million dollars; and

2. JAG covenants not to execute against the assets other than

insurance and claims assigned in the Settlement Agreement of

Merit to satisfy the Final Judgment.

The trial court further provided:

ORDERED and ADJUDGED:

1. Judgment is entered in favor of the Plaintiff, JAG Properties, LLC, and

against Defendant, Merit Construction, Inc., on the admissions

contained in the Joint Motion for Entry of Final Judgment filed by the

parties in the amount of Three Million Nine Hundred Thousand Dollars

($3,900,000.00), which shall bear interest at the rate of ten percent

(10%) from the date of entry of this judgment. Plaintiff shall not

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collect and execute against Defendant, Merit Construction, Inc., to

recover this judgment even if Plaintiff is unsuccessful in its attempts to

collect and execute this judgment against other parties. Plaintiff may

collect and execute this Final Judgment as provided in the Settlement

Agreement between Plaintiff and Merit.

After entry of the judgment, JAG was able to collect only a portion of its $3.9 million

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judgment against Merit because Merit’s Commercial General Liability (“CGL”) carrier, the

Highlands Insurance Group (“Highlands”), was placed in receivership by the State of Texas

during the pendency of the Merit Litigation. TIS Insurance Services, Inc. (“TIS”) was

Merit’s insurance broker and the entity that placed Merit’s CGL coverage with Highlands.

The current action was filed on January 28, 2011, seeking recovery from TIS of the

unpaid balance of the judgment (approximately $2.67 million). The Assignees asserted four

separate causes of action: 1) negligence; 2) fraud and intentional misrepresentation; 3)

negligent misrepresentation; and 4) violation of the Tennessee Consumer Protection Act. In

March 2012, TIS filed a motion for judgment on the pleadings, contending that the

Assignees’ damages were limited to the sum of $25,000 because

“Merit sustained $25,000 in actual compensatory damages since this is the

amount paid to JAG to settle the Merit Litigation, and JAG agreed, pursuant

to the Order and Settlement Agreement to not execute on the remainder of the

$3.9 million judgment, even should JAG be unable to recover the excess from

other parties.”

On October 12, 2012, the trial court granted the motion and held “that the [Assignee]s’ claim

for compensatory damages which they may seek in the trial of this cause is limited to the

$25,000 actually paid by Merit Construction in this matter.”

The Assignees thereafter sought an interlocutory appeal, but this court denied the

application in February 2013. The Assignees subsequently filed a motion to amend their

complaint to assert the $25,000 payment made by Merit was not a payment on the judgment

in the Merit Litigation. The trial court granted the motion to amend by an order entered in

October 2013, and on April 21, 2014, amended its earlier partial judgment on the pleadings

“to hold that the [Assignee]s will not be entitled to any compensatory damages at trial.

Therefore, the Court hereby grants judgment on the pleadings in favor of the Defendant, TIS

Insurance Services, Inc., and dismisses this cause with prejudice.” The Assignees then filed

this timely notice of appeal.

The Assignees were the principals in JAG. 1

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II. ISSUE

The issue before us is whether the trial court erred in entering judgment on the

pleadings in favor of TIS on the ground that the Assignees would not be entitled to recover

any compensatory damages at trial.

III. STANDARD OF REVIEW

The issue presented for review in this case is a question of law. Our review is

therefore de novo without a presumption of correctness as to the resolution of the issue by

the trial court. Bain v. Wells, 936 S.W.2d 618, 622 (Tenn. 1997).

IV. DISCUSSION

The trial court’s ruling is directly contrary to our holding in Tip’s Package Store, Inc.

v. Commercial Insurance Managers, Inc., 86 S.W. 3d 543 (Tenn. Ct. App. 2001), in which

we held that a judgment creditor’s covenant not to execute on a judgment debtor’s assets

does “not extinguish the underlying liability” of the judgment debtor for compensatory

damages. The judgment debtor is “an injured party” that can pursue a negligence claim

against its insurance provider for procuring a liability policy that allowed a gap in coverage.

Id., 86 S.W.3d at 555. In light of our decision in Tip’s, JAG’s covenant not to execute on the

judgment against Merit does not extinguish the underlying liability of Merit under the

judgment. Merit is an injured party because of the outstanding liability against which it

sought to insure itself through TIS. If Merit can pursue a claim against TIS for the unpaid

portion of JAG’s judgment against Merit, that right can be assigned to JAG and JAG,

likewise, can assign the right to the Assignees. See TNPRAC-RCP § 17:3 Assignees (stating

“[a]n assignee is the real party in interest since the assignee not only possesses the right to

be enforced, but also will ultimately benefit from the recovery. The assignee may sue in its

own name.”) (citing V. L. Nicholson Co. v. Transcon Investment, 595 S.W.2d 474, 481

(Tenn. 1980) (holding “JCLHC and Transcon executed an ‘Assignment and Hold Harmless

Agreement.’ Assuming that this assignment is valid, and we have no reason to believe

otherwise, Transcon has the right to assert JCLHC’s claim as a counter-plaintiff and to

appeal the dismissal of it.”); Ford v. Robertson, 739 S.W.2d 3 (Tenn. Ct. App. 1987)

(holding that “if Robertson was entitled to recover damages from the Architects for breach

of contract that he could assign this right to plaintiffs and that they may enforce this right that

Robertson previously possessed”)).

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Our holding is in agreement with the rule followed by most state courts – a covenant

not to execute is “merely a contract and not a release.” Red Giant Oil Co. v. Lawlor, 528

N.W.2d 524, 534 (Iowa 1995). Covenants not to execute are different from releases, as the

legal liability remains in force against those who have covenants, whereas a release

represents “total freedom from liability.” Gray v. Grain Dealers Mut. Ins. Co., 871 F.2d

1128, 1133 (D.C. Cir. 1989). See also Kobbeman v. Oleson, 574 N.W.2d 633, 636 (S.D.

1998) (A covenant not to execute is “merely a contract, and not a release, such that the

underlying tort liability remains and a breach of contract action lies in favor of the insured

if the injured party seeks to collect his judgment.”); J & J Farmer Leasing, Inc. v. Citizens

Ins. Co. of America, 696 N.W.2d 681, 684 (Mich. 2005) (“A release immediately discharges

an existing claim or right. In contrast, a covenant not to sue is merely an agreement not to

sue on an existing claim. It does not extinguish a claim or cause of action.”); Stateline Steel

Erectors, Inc. v. Shields, 837 A.2d 285, 290 (N.H. 2003) (“Unlike a release, a covenant not

to sue does not relinquish a right of claim, or extinguish a cause of action. A covenant not

to sue recognizesthe continuation of the obligation or liability; the party making the covenant

not to sue agrees only not to assert any right or claim based upon the obligation.”); State

Farm Mut. Auto. Ins. Co. v. Paynter, 593 P.2d 948, 953 (Ariz. Ct. App. 1979) (finding a

covenant not to execute is not a release from liability); Miller v. Shugart, 316 N.W.2d 729,

732 (Minn. 1982) (holding when an insured settles directly with the plaintiff, the plaintiff

may seek to collect from the provider).

The Assignees, accordingly, are entitled to assert a claim against TIS for

$2,701,607.67, the uncollected balance of the judgment against Merit.

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V. CONCLUSION

The judgment of the trial court is reversed, and this cause is remanded for all further

proceedings as may be necessary and consistent with this opinion. Costs of the appeal are

assessed to the appellee, TIS Insurance Services, Inc.

_________________________________

JOHN W. McCLARTY, JUDGE

Merit would have had a CGL policy with coverage totaling $6 million available to it to satisfy the 2

$3.9 million judgment of JAG had TIS not placed Merit’s coverage with Highlands. Thus, the proper

measure of damages is the full unpaid balance of the judgment against Merit.

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