I N THE COURT OF APPEALS OF TENNESSEE

EASTERN SECTI ON

DAVI D T. BAI LEY a nd ) KNOX COUNTY 

E. LYNN WAGNER, i n t he i r own ) 03A01- 9606- CV- 00190

r i ght a nd de r i va t i ve l y f or t he )

us e a nd be ne f i t of Sout he a s t e r n )

Heal t hcar e Se r vi ces , L. P. )

)

Pl a i ntif f s - Appe lla nt s )

 )

v. )

)

TOM HOLBERT, as ge ne r a l pa r t ne r ) 

of Sout he r n He a l t hc a r e )

Se r vi c e s , L. P. )

a nd )

MOORE' S PHARMACY, I NC. ) HON. HAROLD W. WI MBERLY,

d/ b/ a MARCUM' S HEALTHCARE ) J UDGE

SERVI CES, a nd CARL MARCUM, )

GI NA MARCUM PI NNEY, a nd )

TOM HOLBERT, a s of f i c e r s , )

di r e c t or s a nd/ or e mpl oye e s )

a nd a ge nt s of a nd f or )

Moor e ' s Pha r ma c y, I nc . )

a nd )

TOM HOLBERT, CARL MARCUM, )

a nd GI NA MARCUM PI NNEY, )

I ndi vi dua l l y )

) AFFI RMED I N PART; VACATED I N

De f e nda nt s - Appe l l ees ) PART a nd REMANDED

DALE C. ALLEN a nd H. BRUCE GUYTON OF KNOXVI LLE FOR APPELLANTS

DAVI D T. BAI LEY a nd E. LYNN WAGNER

WI LLI AM K. ROGERS OF KI NGSPORT FOR APPELLEE TOM HOLBERT

PATRI CK LEDFORD OF KI NGSPORT FOR APPELLEES MOORE' S PHARMACY, CARL

MARCUM a nd GI NA MARCUM PI NNEY

 O P I N I O N
1

So me of t h e i n f o r ma t i on f u r n i s h e d wa s gr o s s l y mi s l e a d i ng. Fo r

e x a mp l e , i t wa s r e p r e s e n t e d t h a t t h e bus i n e s s pur c h a s e d wa s gene r a t i ng a gr o s s

p r o f i t o f $ 1 0 , 0 0 0 p e r mo n t h , wh e n i n f act t h e l o s s es per mo n t h we r e

a ppr oxi ma t e l y t h a t amount .

2

 Godda r d, P. J .

Thi s i s a s ui t by Da vi d T. Ba i l e y a nd E. Lynn Wa gne r i n

t he i r own r i ght a nd de r i va t i ve l y f or t he us e a nd be ne f i t of

Sout heas t e r n Heal t hcar e Se r vi ces , L. P. , a Li mi t e d Pa r t ne r s hi p i n

whi c h t he y we r e pa r t ne r s , a ga i ns t Tom Hol be r t , a s ge ne r a l

pa r t ne r , Moor e ' s Pha r macy, I nc . , d/ b/ a Ma r c um' s Heal t hcar e

Se r vi ces , and Ca r l Ma r c um and Gi na Ma r c um Pi nne y, as Of f i cer s and

Di r e c t or s a nd/ or Empl oye e s a nd Age nt s of a nd f or Moor e ' s

Pha r macy, I nc . , and Tom Hol be r t , Ca r l Ma r c um and Gi na Ma r c um

Pi nne y, I ndi vi dua l l y. The s ui t s t e ms f r om t he pur c ha s e by

Sout heas t e r n Heal t hcar e Se r vi ces of a uni t dos a ge pha r macy

bus i ne s s f r om Moor e ' s Pha r ma c y, I nc . , f or t he s um of $275, 000.

The c ompl a i nt a l l e ge d a c a us e of a c t i on f or ne gl i ge nt mi s -

r e pr e s e nt a t i on a nd br e a c h of wa r r a nt y.

The Tr i a l J udge di s mi s s e d t he c ompl a i nt . Al t hough he

f ound t ha t mi s l e a di ng i nf or ma t i on1 r e ga r di ng t he pr of i t a bi l i t y of

the business in question was negligently furnished to the

Plaintiffs, he also found that because the bookkeeping for the

business sold was kept in conjunction with that of a separate

pharmacy business owned by Moore's Pharmacy, Inc., "it was

difficult to determine what was what, what this business was

actually earning and what the other business was earning," and

that there was no intent on the part of the Defendants to
3

deceive. Consequently, he concluded that the Plaintiffs were

guilty of at least equal negligence in f a iling to inve s tiga t e the

i nf or ma t i on f ur ni s he d, whi c h woul d ha ve di s c l os e d t he t r ue

f i na nc i a l c ondi t i on of t he bus i ne s s pur c ha s e d. ( Se e Appe ndi x. )

The Tr i a l Cour t a l s o di s mi s s e d t he br e a c h of wa r r a nt y

c l a i m i n a s uc c i nc t c ol l oquy wi t h c ouns e l f or t he Pl a i nt i f f s a t

t he c onc l us i on of hi s me mor a ndum opi ni on:

So f or t ha t r e a s on, t he j udgme nt of t he Cour t i s

t ha t t he de f e nda nt s s houl d pr e va i l be c a us e t he f a ul t

he r e i s a t l e a s t e qua l . And t he r e i s no ot he r ba s i s ,

a s I ha ve j us t out l i ne d, I t hi nk, f or r e c ove r y.

Now, i s t he r e a nyt hi ng e l s e t ha t you woul d l i ke t o

a s k me t ha t you f e e l I ha ve n' t c ove r e d wi t hout

r ear gui ng t he case?

MR. LEDFORD: No, Your Honor .

MR. GUYTON: I s t he Cour t ' s opi ni on a l s o t o ha ve

i nc l ude d t he a ddr e s s i ng t he i s s ue of t he wa r r a nt y?

THE COURT: Ye s . The s ol e ba s i s f or r ecove r y as I

s t a t e d it, a nd tha t inc l ude s e ve r yt hi ng. It' s my

i nt e nt i on t o i nc l ude e ve r yt hi ng.

The Pl a i ntif f s a ppe a l, ra i s i ng the f ollowi ng two

i ssue s :

1. Whe t he r the tr i a l c our t e r r e d in its f a ilur e

t o hol d de f e nda nt s / a ppe l l e e s l i a bl e f or br e a c h of

wa r r a nt y a nd/ or br e a c h of c ont r a c t , whe r e t he

de f e nda nt s / a ppe l l ees wa r r a nt e d t he accur acy of t he

f i na nc i a l s t a t eme nt s pr ovi de d to pl a i ntif f s / a ppe lla nt s

pr i or to thi s tr a ns a c tion, a nd the pl a i ntif f s /

a ppe lla nt s r e lie d on the f i na nc i a l s t a t eme nt s , b ut the

f i na nc i a l s t a t e me nt s we r e di s c ove r e d t o be i naccur a t e

a nd f a l s e af t e r t he t r a ns act i on.

2. Whe t he r the tr i a l c our t e r r e d in its f a ilur e

t o hol d de f e nda nt s / a ppe l l e e s Ma r c um a nd Pi nne y

pe r s ona l l y a nd i ndi vi dua l l y l i a bl e f or t he

mi s r e pr e s e nt a t i ons and br eache s of wa r r a nt y ma de by

t he i r a ge nt s , Hol be r t a nd Rhot on?
4

I n c onne c t i on wi t h t he br e a c h of wa r r a nt y c l a i m,

Moor e ' s Pha r ma c y, I nc . , a c t i ng t hr ough i t s Pr e s i de nt , Gi na Ma r c um

Pi nne y, and i t s Se c r e t ary , Carl Marcum, exe cut e d an "AGREEMENT

FOR SALE AND TRANSFER OF ASSETS, " whi c h c ont a i ne d t he f ol l owi ng

pr ovi s i ons :

SECTI ON FI VE

WARRANTI ES AND COVENANTS OF SELLER

Se l l e r agr ees , r e pr e s e nt s , and wa r r a nt s as

f ollows :

. . . .

( d) Se l l e r ha s ma de ava i l a bl e t o Buye r i t s pr of i t

a nd l os s s t a t e me nt s and s a me ha ve cor r ect l y r e f l ect e d

t he f i na nc i a l c ondi t i ons , a s s e t s a nd li a bi l i t i e s , a nd

ope r a t i on of Se l l e r a s of t he da t e s s t a t e d i n s uc h

doc ume nt s .

. . . .

( p) Se lle r will pr omptly a dvi s e Buye r in wr iting

of t he occur r e nce of any ma t e r i a l eve nt s whi c h come t o

t he knowl e dge of Se l l e r a f t e r t he e xe c ut i on of t hi s

Agr e e me nt a nd pr i or t o or on t he Cl os i ng Da t e r e l a t i ng

t o a ny ma t t e r s whi c h a r e t he s ubj e c t s of t he s e

c ove na nt s , r e pr e s e nt a t i ons and wa r r a nt i e s of t he Se l l e r

c ont a i ne d i n t hi s Se c t i on.

( q) No r e pr e s e nt a t i ons or wa r r a nt i e s by Se l l e r ,

its of f i c e r s or di r e c t or s , n or a ny s t a t eme nt, lis t or

c e r t i f i c a t e f ur ni s he d or t o be f ur ni s he d t o Buye r

pur s ua nt he r e t o, or i n c onne c t i on wi t h t he t r a ns a c t i ons

c ont e mpl a t e d he r e by, c ont a i ns or wi l l c ont a i n a ny

unt r ue s t a t eme nt of a ma t e r i a l f a c t or omits or will

omi t t o s t a t e a ma t e r i a l f act necess a r y t o ma ke t he

s t a t eme nt s the r e i n not mi s l e a di ng. All s uc h

s t a t e me nt s , l i s t s , or cer t i f i cat e s ar e t r ue and cor r ect

i n al l ma t e r i a l r e s pect s .

( r ) The wa r r a nt i e s , r e pr e s e nt a t i ons and cove na nt s

of t he Se l l e r c ont a i ne d i n t hi s Agr e e me nt s ha l l be t r ue

a nd cor r ect i n al l r e s pect s as of t he Cl os i ng Da t e wi t h
5

t he s a me f or ce and ef f ect as i f gi ve n and ma de on and

a s of t he da t e a nd t i me of t he Cl os i ng Da t e , a nd s uc h

r e pr e s e nt a t i ons , wa r r a nt i e s a nd c ove na nt s s ha l l s ur vi ve

t he Cl os i ng Da t e a nd t he c ons umma t i on of t he

t r a ns a c t i ons c ont e mpl a t e d by t hi s Agr e e me nt .

Al t hough t he Tr i a l Cour t a ppa r e nt l y f ound t ha t

ne gl i ge nc e ma y a l s o ba r a n a c t i on f or br e a c h of c ont r a c t , ne i t he r

t he Tr i a l Cour t nor c ouns e l f or t he De f e nda nt s ha ve c i t e d a ny

s uc h a ut hor i t y. Mor e ove r , we ha ve not be e n a bl e t o f i nd a ny i n

our r e s e a r c h. We a c c or di ngl y c onc l ude t ha t t he Pl a i nt i f f s a r e

e nt i t l e d t o a j udgme nt a ga i ns t t he Cor por a t i on be c a us e of br e a c h

of wa rra nt y.

I n s o f i ndi ng, we a c c e pt a s tr ue tha t the Pl a i ntif f s

di d not ma ke s uc h a n i nve s t i ga t i on t ha t t he y mi ght ha ve t o

di s c l os e t he mi s r e pr e s e nt a t i on, but poi nt out t ha t t he pur pos e of

a wa r r a nt y, i n pa r t , i s t o r e l i e ve one t o whom t he wa r r a nt y i s

gi ve n f r om t ha t r e s pons i bi l i t y. I n Pa c c on, I nc . v. Uni t e d

St a t e s , 399 F. 2d 162, 166 ( 1968) , t he Uni t e d St a t e s Cour t of

Cl a i ms ma ke s t hi s poi nt i n quot i ng wi t h a ppr ova l f r om a n e a r l i e r

cas e :

" I n es s e nce a wa r r a nt y i s an as s ur a nce by one pa r t y t o

a n a gr e e me nt of t he e xi s t e nc e of a f a c t upon whi c h t he

ot he r pa r t y ma y r e l y; i t i s i nt e nde d pr e c i s e l y t o

r e l i e ve t he pr omi s ee of any dut y t o as cer t a i n t he f act s

f or hi ms e l f . Thus , a wa r r a nt y a mount s t o a pr omi s e t o

i nde mni f y t he pr omi s e e f or a ny l os s i f t he f a c t

wa r r a nt e d pr ove s unt r ue . " Da l e Cons t r . Co. v. Uni t e d

St a t e s , 168 Ct . Cl . 692, 699 ( 1964) .
6

I n the i r br i e f the Pl a i ntif f s c ont e nd tha t if the

r e me dy t o whi c h t he y ar e ent i t l e d i s r e s c i s s i on, t he "meas ur e of

da ma ge s woul d be t he r e t ur n of t he c ons i de r a t i on pa i d, . . . a s

we l l a s the a mount i nve s t e d in the bus i ne s s , wi t h int e r e s t, a nd

t he va l ue of t he i r l a bor , " whi c h t he y cal c ul a t e t o be i n exces s

of $600, 000. I n t he a l t e r na t i ve , t he y a s s e r t t ha t i f t he y a r e

a wa r de d c ompe ns a t or y da ma ge s onl y, " t he y s houl d r e c e i ve t he

di f f e r e nc e i n va l ue of wha t t he y pa i d ve r s us t he va l ue of wha t

t he y act ua l l y r ecei ve d. "

We conc l ude unde r al l t he f act s of t hi s cas e t he l a t t e r

me a s ur e of da ma ge i s t he a ppr opr i a t e one . I t doe s not a ppe a r ,

howe ve r , t ha t t hi s f i gur e wa s a de qua t e l y a ddr e s s e d i n t he pr oof ,

a nd in the int e r e s t of jus tic e to bot h pa r tie s , we de e m it

a ppr opr i a t e t ha t t he caus e be r e ma nde d f or s uc h a de t e r mi na t i on

a nd a j udgme nt e nt e r e d a ga i ns t t he Cor por a t i on f or t ha t a mount .

As t o t he s e c ond i s s ue r a i s e d, whe r e i n t he Pl a i nt i f f s '

i ns i s t e nc e tha t the indi vi dua l De f e nda nt s a r e like wi s e lia bl e in

wa r r a nt y, we f i nd t he onl y wa r r a nt y e xt e nde d wa s t ha t c ont a i ne d

i n t he agr eeme nt f or s a l e and t r a ns f e r of as s e t s , whi c h wa s

e xe c ut e d by t he Cor por a t i on a nd s i gne d by Ms . Pi nne y a nd Mr .

Ma r c um i n t he i r r e pr e s e nt a t i ve capaci t i e s .
7

I n c onc l us i on, we ha ve not ove r l ooke d t he De f e nda nt s '

c ont e nt i ons t ha t br e a c h of wa r r a nt y ma y not be a s s e r t e d be c a us e

t he c ont r a c t i s a mbi guous , wa s not br e a c he d, wa s not r e a s ona bl y 

r e l i e d upon, a nd di d not c a us e da ma ge s t o t he Pl a i nt i f f s . Unde r

t he f i ndi ngs of t he Tr i a l Cour t , t he t e s t i mony a dduc e d a nd t he

e nt i r e r e c or d, we f i nd e a c h c ont e nt i on t o be wi t hout me r i t .

For t he f or e goi ng r e a s ons t he j udgme nt of t he Tr i a l

Cour t i s a f f i r me d i n pa r t , va c a t e d i n pa r t , a nd t he c a us e

r e ma nde d f or f ur t he r pr oc e e di ngs not i nc ons i s t e nt wi t h t hi s

opi ni on. Cos t s of a ppe a l a r e a dj udge d one - ha l f a ga i ns t t he

Pl a i nt i f f s a nd one - ha l f a ga i ns t t he Cor por a t i on.

_______________________________

Houston M. Goddard, P.J. 

CONCUR:

________________________________

Herschel P. Franks, J.

________________________________

Don T. McMurray, J.
APPENDIX

And this business, when it was operated by the defendants, was

operated, of course, with their other business in such a way

that, to the defendants and really to anybody else, it was

difficult to determine what was what, what this business was

actually earning and what the other business was earning. And

this method of accounting that we went into great detail in

describing, in effect, concealed the actual status and condition

of this business that was finally purchased by the plaintiff. 

This resulting concealment was not, in the Court's mind and the

Court's opinion, done in some intentional way to deceive anyone. 

It was just simply the way that it was set up.

When the plaintiffs purchased the business, they were

provided the papers that we've spent a lot of time discussing,

and these papers, in effect, gave plaintiff what turned out to be

a false impression about the status of this business that they

purchased. Now, plaintiffs accepted these without question, and

when offered the opportunity to determine for themselves the

validity, in effect, of those papers that they've been furnished

and the information they've been furnished, the plaintiffs wound

up relying upon their accountant that they sent to investigate. 

And the accountant actually did no investigation and, repeating

several times that these people involved were fraternity brothers

and if they could not trust each other and rely on each other, he

did not see that he had any part in questioning them any further

than what appeared on the surface.
9

APPENDIX

Page 2

misleading. They did not do so intentionally or willfully or

actually knowingly. They were relying upon their people, their

accountant who prepared these statements, and they are shown not

to take much direct interest in determining and separating the

accounts of that business from the other business. Then when the

sale was done, the plaintiffs, having the opportunity to

investigate the business and accomplish what we referred to in

the -- as a term of art, supposedly, due diligence -- which was

in the papers, actually did nothing to determine for themselves

in any meaningful way what the true condition of the business

was.

So in legal terms, I think you would say that the

defendants negligently misrepresented the condition of that

business that was purchased. The plaintiffs then negligently

purchased the business. And that's the problem there. And

that's the nature of the conduct that resulted in this situation

-- negligence on both parts which the Court feels was at least

equal. The other individual defendant we find was not acting for

himself in such a way that would impose liability upon him.