### IN THE COURT OF APP EALS OF TENNESS EE AT NAS HVILLE Jul y 12, 200 5 S es sio n
CON SU MERFIN AN CIA L SER VIC ES ( MA NA GEME NT) , IN C. , G

. RON ALD HA LL, and JA CQU ELEN E O'R OUR KE HA LL v. CO NS UM ER FINANCIAL SERVI CES MANAGEME NT, L.L.C., and GABRI EL, L.L.C..

An Appeal f

romthe Chancer y Court for Williamson County No. 26675 R. E. Lee Davie s, Chancellor

No. M2003- 02030-COA-R 3-CV - F iled Dece m ber 9, 2005

Th is is a c on tr a c t a c tio n. Th e se lle rs so ld t o th e pu rc ha se rs a loan c omp a ny

de a lin g in s ub -p ri me residential loans a nd m o rt g ag es and third- party financ es, as we ll as equity interests in a re lated limit ed liability

company . After

clos i n g the transa ction, numerous fina ncial and ope rational pr ob le ms be c a me app are nt. Th e pu rc ha se rs a tte mpt e d to re sc ind the tr a ns a c tio n, as t he busi ne ss founder ed. Eve ntually , the sellers took ba ck the business a nd s u ed t h e purc haser s for bre ach of contra ct. The purchase rs fil ed a counter -complaint, alleging that the s ellers fraudulently induced the contra ct throug h multipl e ora l and written m i s re p rese ntations. After a bench trial, the trial court found that the seller s had committed fraud in inducing the contra ct. The pur chase rs were g rante d
resc ission o f t h e s al e ag ree ment, as we ll as compensatory damag es. The trial court dismissed the
se lle rs ’ b re a c h o f c on tr a c t c omp la int . T he se lle rs app e a le d. We a ff ir m.
Rul e 3 A ppe al; Judg m e nt of t he Cha nc e r y C our t i s a ffirm e d.

H OL L Y M. K I RBY , J. , d e li v e r e d th e o p in io n o f th e Co u r t, in w h ic h W. F RAN K C RAW FORD , P.J ., W.S ., and D AVI D R. F ARMER , J ., joined.

J ohn R. Rey nolds, Nashville, and Mar k E. Ellmore, Na shville, for Appe llants Consum er F inancial Se rv ic e s ( Ma na g e me nt) , Inc ., G. Ron a ld H a ll, a ndJac qu e le ne O’ Rou rk e Ha ll.
Mary A. Parke r, Na shville, for Appe llees Consumer F inancia l Services Ma nag ement, L .L .C., and Gabriel, L .L .C..-2- OP IN ION

This case involves the sale of business assets and e quity interests. Due to the c omplex ity of the intertwined c orporate structure s and business intere sts, we wi l l first identify the parties and interests involved, and the n discuss the eve nts leading up to this l itigation.
Plaintiff/Appellants Ronald and J acque lene Ha ll were office rs, share holders, and me mbers of the B oard of

Direc tors of Plaintiff/Appellant Consumer Financ ial Service s (Mana g ement), Inc. (“ CF SM, I nc .” ). CF SM, I nc . w a s a Ten nes see cor po ratio n w ith its princ ipa l pl a c e of bu sin e ss l o c a t e d i n M ar s h a l l C o u n t y, T e n n e s s e e

. T h e c o mp a n y w a s l i c e n s e d a s a n i n d u s tr i a l l o a n c o m p a n y, a nda c te d p ri mari ly a s a bro ke r fo r sub -p ri me loans a nd thi rd -p arty fi na nc e s. CF SM, I nc .’ s b us ine ss cente red a round orig inating and brokering r esidential loans and mortg ag es. I ts loa ns and mortg ag es we re fu nd e d th ro ug h a

wa re ho us e lin e of c re dit , wh ic h e na ble s c omp a nie s to bu y

a ndse ll l oa ns in bulk. Typically , once the mortg ag es and loans wer e sold by CFSM, Inc. to third parties, CF SM, I nc. wo uldthe n u se the pr oc e e ds of the sa le to p a y

on the wa

re ho us e lin e of

c re dit

. The De fenda nts in thi s case wer e comprised of seve ral individuals and the business entities set forth b el o w. As d i scussed inf ra , the business transa ctions betwee n the Plaintiffs and the De fe nd a nts re su lte d in the fo rm a tio n of De fe nd a nt/Ap pe lle e Con su me r F inancial Se rv ic e s, M a n a g e m e n t , L

. L

. C

. ( “ C F S M , L

. L

. C

. ” )

. C F S M , L

. L

. C

. w a s a T e n n e s s e e l i m i t e d l i ab i l i t y c o m p a n y, with its principal office s located in Willi amson County , Tenne ssee.

De fe nd a nt/Ap pe lle e Ga

brie l, L .L .C. (“ Ga

brie l” ) w a s a T e nn e sse e lim ite d li abil ity corpor ation. Gabriel and Plaintiffs Ronald and Jacquelene Hal l were the member s and owne rs of CFSM, L .L .C. Defe ndant Sandra Ray acte d as the g ener al manag er of CFSM, L .L .C. a nd also as the g ener al manag er of

Gab ri el

. S an d ra Ray

and De fenda nt Kevin Gar dner w ere both members of Ga brie l.

Con su me r M ortg a g e Compa ny (“ CMC” ) w a s a lso na me d a s a de fe nd a nt i n th is s uit . CM C
was a Tenne ssee corporation licensed by the S tate as a mortg ag e banke r. Ga

briel and the Halls wer e share holders o f C M C ; the Halls maintained a minorityinterest. De fenda nt Kevin Gar dner, a member of

Gabriel, was the c hief ope rating office r of CMC.

Th e se so me wh a t c on vo lut e d b us ine ss r e la tio ns hip s w e re larg e ly the re su lt o f the bu sine ss d e a l i n g s o f

D e f e n d a n tS a n d r a R a y w i t h t h e P l a i n t i f f H a l l s

. R a y w a s i n tr o d u c e d t o t h e H a l l s b y a business associate who was, at one point, a potential pur chase r of CF SM, I nc. and CMC. Ray share d the bu sin e ss a sso c ia te ’s int e re st i n p ur c ha sin g tho se c omp a nie s. Th e bu sin e ss a sso c ia te e ve ntu a lly dropped out.

I n th e me a nti me , w he n th e Ha lls be c a me int e re ste d in se lli ng the ir bu sin e ss, the y

sp ok e wi th
a c omp a ny

c a l l e d t h e M ar c h G r o u p , w h i c h s o u g h tt o w o rk o n t h e H a l l s ’ b e h a l f

t o s e l l t h e H a l l s’ bu sin e ss. I n o rd e r t o mar ket th eir se rv ic e s, the Ma

rc h G ro up pe rf

orme d a va luatio n o f the Ha lls ’ bu sin e ss, e sse nti a lly to g ive the Ha lls a n e sti ma te of the se lli ng pric e the Ma rc h G ro up be lie ve d it-3-

c ou ld o btain. Th e va luatio n w a s not a fo rm a l app raisa l; it was do ne fo r the Ha lls ’ be ne fi t on ly , w ith unaudited information obtained from the Ha lls and not independently verifie d by the Marc h Group. The re port, ref

err ed to as the Ma

rch Report, was issued, coinc identally , in Ma rch of 1998. Among other thing s, the Marc h Report indicated a preta x 1997 income for the Halls’ business of approximately

$312,000.

At abo ut the sa me tim e , Ma

rc h 19 98 , Ra y a nd the Ha lls e nte re d int o ne g oti a tio ns fo r Ra y to pu rc ha se the Ha lls ’ b us ine sse s, CF SM, I nc

. a nd CMC. Du ri ng the c ou rs e of the ne g oti a tio ns , d e sp ite the fa ct that the Mar ch Report wa s done only for the pu rpose of persua ding the Halls to use the service s of the Mar ch Gr oup in selling their busine ss, the Halls g ave the Marc h Report to Ray . The Ma rc h Re po rt

g ive n to Ra y

inc lud e d th e $3 12 ,0 00 inc ome fi g ur e fo r 19 97 . In th e fo llo wi ng mon ths , Ray eng ag ed in “due diligenc e,” that is, investigation of the businesse s for the purpose of purc hasing the m.

D u r i n g t h i s t i m e p e r i o d , t h e H a l l s f i l e d t h e 1 9 9 7 i n c o m e t a x r e t u r n f o r t h e i r b u s i n e s s

. It showed that the inc ome for the y ear 1997 was a neg ative $125,000. R ay , who had be en g iven the Marc h Report indicating an estimated inc ome for 1997 of $312,000, did not obtain a co py of the 1997 tax return.
Eventually , in the course of t he negotiations, t he parties enter ed int o a quiet period for norma l business operations from late Jul y 1998, to the closing of the tra nsaction, set for September 11, 1998. The ne g otiations resulted in two contra cts to be executed at closing: a n Asset Sale Ag ree ment and
a Sto c k/L .L .C. I nte re st Pu rc ha se Ag re e me nt.

The Asse t Sale Ag ree ment was enter ed into at the September 11, 1998 c losing. The parties to the As se t Sa le Ag re e me nt w e re CF SM, I nc . a ndthe ne wl y -forme d CF SM, L .L .C. Pur su a nt t o the Asset Sa le A g r e e me n t, CF SM , I n c

. c o n v e y e d a ll o f it s a s s e ts , in c lu d in g th e lo a n s on the
war ehouse line a nd its mortgag es, to CFSM, L .L .C. The mortg ag es w er e funded and c losed, but
rema ined unsold. The purpose of the Asse t Sale Agr eement was to sell CFSM, I nc. to Ray and Ga brie l. B y virtue of the As se t Sa le Ag re e me nt, CF SM, L .L .C. a ssu me d CF SM, I nc .’ s d e bts

. Con sid e ratio n f

or the As set Sa le Ag re e me nt i nc lud e d a $2 52 ,5 00 pa y me nt. Part of thi s pa y me nt wa s due in ca sh at the c los ing , with the re ma ind e r sub je c t to a pr omi sso ry

no te to b e pa id
on Janu ary

4, 19 99

. Th e pr omi sso ry no te , in the a mou nt o f $ 13 4, 40 8. 28 , w a s se c ur e d b y a ll a sse ts, bo th ta ng ibl e a nd int a ng ibl e , inc lud ing c a sh , a c c ou nts , tr a de fi xtur e s, too ls, ma c hin e ry , c omp ute rs , softwar e, proprietary

softwar e, equipment, a nd any resulting proce eds fr om the acquisition of equipment. Plaintiff Ronald Hall s i gn ed t h e Asset Sale Ag ree ment in his capac ity as both chief manag er of

CFSM, L .L .C. and as pre sident of CFSM, I nc.
Th e Sto c k/L .L .C. I nte re st Pu rc ha se Ag re e me nt ( “ Sto c k Ag re e me nt” ) w a s a lso e nte re d in to at t he S eptember 11, 1998 closing , contempora neously with the Asset Sale Ag ree ment. The Stock Ag re e me nt tr a ns fe rr e d the Ha lls ’ ma jority ow ne rs hip int e re sts in CMC a nd De fe nd a nt C FSM, L .L .C. to Gabriel. As a

result of the transaction, Ga briel owne d 90% of the st o ck i n t h o s e two-4-

companies a nd the Halls re tained a 10% interest. As consideration for the sale, the Halls rec eived $299,408.28 in cash at closing f or 54% of their owne rship interests, a n d we re owed a n additional $2 06 ,5 91 .7 2 a s p a y me nt f or the re ma ini ng 36% of the Ha lls ’ o wn e rs hip int e re sts . Pu rs ua nt t o Exhi bit C of the Sto c k A g re e me nt, Gabriel also ag ree d to assume ce rtain d eb t s and oblig ations be lon g ing to the Ha lls

.
I n addition, the Stock Ag ree ment contained a non-compe te cove nant which pr ovided that the Halls would not compete w ith CMC or CFSM, L .L .C. by operating a

mortg ag e compa ny

that
war ehouses loans for a period of ten y ear s following the ag ree ment. I n consideration for the noncompete c lause, the H alls were to be paid $750,000 in installments over the ten y ear period.
Shortlyafte r the Septembe r 11, 1998 closing , Sandra Ray , Gabriel’s chief manag er, took over ope ration of CF SM, L .L .C. Ray soon discovere d that the financ ial and oper ational condition of CFSM, I nc. and CMC was not as it had a ppear ed during the neg otiations. On t he first day afte r the takeove r, numerous f

iscal and ope rational problems became apparent. This led Ray to question the ver acity of t he represe ntations made to her during the neg otiations, as well as the ove rall financ ial health of the companies. O n October 10, 1998, less than a month af ter the c losing, Ray

sent a letter to the Ha lls ind ic a tin g he r de sir e to re sc ind the c on tr a c ts. I t is un c le ar h ow the Ha lls re sp on de d to thi s le tte r; ne ve rtheless, Ra y re ma ine d o n a s th e c hie f e xec uti ve of fi c e r andtr ie d to make the be st of a le ss-than-de sirable situation.

I n li g h t o f

th e p r e v io u s ly

u n d is c lo s e d f

in a n c ia l d if

f ic u lt ie s , w ith in th e f

ir s t f e w months fo llo wi ng the Se pte mbe r 1 1, 19 98 c los ing , th e pa rt ie s ex ecut ed v ari ou s r e vis ion s to the pu rc ha se ag ree men t s , altering the terms of those a g ree ments. These a mendments included, a mong othe r thi ng s, a re du c tio n o f the pa y me nt f or the no n- c omp e te , f

ro m $7 50 ,0 00 pa y able ov e r t e n y e ars to $525,000 pay able ove r eig ht y ear s. The businesses c ontinued to have c onsiderable difficulties.
Finally , on November 3, 1999, the Halls re enter ed the of fice s of CFSM, L .L .C., chang ed the locks on the doors, a nd ref used to g ive Ray

a key

. L at er that afte rnoon, Ray submitt ed her resig nation as chie f mana g er of CF SM, L .L .C.

After retaking c ontrol of the compa ny on Dec ember

1, 19 9 9 , t h e Plaintiffs, CFSM, I nc., Ronald Hall , a n d Ja c q u e le n e H a ll f il e d a la w s u it a g a in s t th e D e f

e n d a n ts , in c lu d in g Ray , in the Cha nc ery Co urt f

or Willi a mso n Co un ty . T he c omp la int so un de d in c on tr a c t, a lle g ing mul tip le br e a c he s of the As se t Sa le Ag re e me nt a nd the Sto c k Ag re e me nt. Th e Pla int if fs so ug ht d a ma g e s in excess of $450,000.

I n r e sp on se , o n M arc h 2 , 2 00 0, the Defendant s f ile d a n a ns we r andc ou nte r- c omp la int

. Def endants Ga

briel and Ray

filed t heir counter-c omplaint ag ainst CFSM, I nc. and the Halls, alleg ing that, prior to the sale , the Halls made numerous misrepre sentations to Ray reg arding the oper ations
a nd fi sc a l sta tus of CF SM, I nc . a ndCMC. Th e c ou nte r- c la im a sse rt e d th a t, p ri or to the c los ing in September 1998, the Halls failed to disclose m ore than $200,000 in liabiliti es related to the status of c e rt a in l oa ns andpr oje c ts o n th e wa re ho us e lin e of

c re dit . T he De fe nd a nts a ve rr e d th a t, i n-5-

relianc e on other misrepre sentations, Gabriel executed the Stock A g ree ment. Furthermor e, the Def endants a lleg ed that the Ha lls breac hed the Stock Agr eeme nt by (1) falsely repr esenting that the financ ial statements provided to the D efe ndants ac curately ref l ec t ed the financial position of the bu sin e ss, (2 ) p ro vid ing ina c c ur a te inv e nto ri e s, (3 ) f a lse ly re pr e se nti ng that th e c or

po ratio ns we re in g ood standing with c ustomers and suppliers of the business, and (4) f alsely repr esenting that there
wer e no def

aults under a ny

ag ree ments.

The De fenda nts also al leg ed numer ous misreprese ntations in connection with the Asset Purchase Ag ree ment. Acc ording to D efe ndants, the false repr esenta tions by the Halls included ( 1)
va luatio n o f CF SM, I nc

. a t ov e r $ 40 0, 00 0 mo re than it wa s w orth, (2 ) r e pr e se ntatio ns that CF SM, I nc. had a g ood relationship wit h customers a nd suppliers, and (3) repr esenta tions that CFSM, I nc. wa s in c omp lia nc e wi th a ll l a ws a ndno t in de fa ult un de r any

a g re e me nts

. The De fenda nts’ counter -cla im further a sserted that the Halls repr esente d to Gabrie l and Ray that the business was r

unning so w ell that they

would avoid the oper ational difficulties of a start-up business and be a

ble to focus on innovation and business improvement. The De fenda nts alleg ed that this did not turn out to be the ca se. The D efen d an t s as serted that they found a numbe r of se rious op e ratio na l de fi c ie nc ie s a ndthat th e Pla int if fs ha d e ng a g e d in sig nif ica nt omi ssi on s a ndfa lse
re pr e se ntatio ns inc lud ing , b ut n ot l imi te d to , ( 1) the e xiste nc e of su sp e nd e d lic e ns e s andina de qu a te ins ur a nc e , ( 2) the abs e nc e of su mma ri e s f or e qu ipm e nt l e a se s, (3 ) i nc omp l e t el oa ns on the wa re ho us e lin e of c re dit that c ou ld n ot b e so ld, (4 ) l oa ns on the wa re ho us e lin e of

c re dit that we re in d e fa

ult , (5) incomplete and inacc urate employ ee rec ords, (6) the use of imprope r ac counting methods, and (7) undisclosed litig ation.

The De fenda nts sought dama ges for misrepr esenta tion, breac h of contra ct, bre ach of
war ranties, a nd also soug ht indemnification in an amount approa ching $500,000. I n the alternative, the Def endants soug ht rescission of the Asset Sale Agre ement and the S tock Agre ement, as w ell as
a mon e y jud g me nt f

or a ll a mou nts pa id t o th e Ha lls a ndCF SM, I nc . a ndfo r a ll los se s su ff e re d a s a re su lt o f the De fe nd a nts ’ o pe ratio n o f the bu sin e ss. F ina lly , th e De fe nd a nts a sk e d th e tr ia l c ou rt to decla re the ag ree ments void and unenfor cea ble due to misrepr esenta tions, fraud, a nd the fa ilure of conditions prece dent.

The Plaintiffs re sponded to the counte r-c laim by deny ing any false r epre sentations in either the Asset Sale Ag ree ment or the Stock Ag ree ment, denying any oral misrepr esenta tions, deny ing loc kin g the De fe nd a nts ou t of the bu sin e ss, an d de nying the e xiste nc e of a ny ma te ri a l bu sin e ss problems re quiring corr ection.

A benc h trial was he ld on April 23 and 24, 2003, in t h e C h an cery Court for Willi amson County . The testim o n y p er tinent to this appea l center ed on Ray ’s ac cess to re liable information about the business, the Ha lls’ repre sentat i o n s to Ray reg arding the value of

the business, Ray ’s relianc e on those re prese ntations, and the condition of the c ompany ’s oper ations at the time Ray and Gabriel assumed contr ol.-6-

At tr ia l, the re wa s c on sid e ra ble test im ony

re g ard ing Sa nd ra

Ra y ’s du e dil ig e nc e e ff

orts t o learn about CFSM, I nc., and spe cifica lly reg ardin g Ray ’s fre edom of a cce ss to the company ’s ph y sic a l pr e mis e s, the c omp a ny ’s re c or ds , a ndthe c omp a ny ’s e mpl oy e e s. Ron a ld H a ll t e sti fi e d th a t,
a t on e po int du ri ng the ne g oti a tio ns , Ray ha d u nf e tte re d a c c e ss t o CF SM, I nc .’ s p re mis e s. I n f a c t, h e t est ified, Ray ’s pre sence was suff iciently conspicuous to make the employ ees ne rvous about wh e the r the c omp a ny

wa s a bo ut t o be so ld. Othe r t e sti mon y , h ow e ve r, ind ic a te d th a t Ro na ld H a ll h ad , on numerous occ asions, instructed Ray and other

potential buy ers to stay away from the business so as not to interfe re with operations. For instance, L

y ndon Bates, an investor a nd office r in G abriel , tes ti fi ed that Ro na ld H a ll o rd e re d B a te s to stay a way fr om the c omp a ny

a ndto r e fr a in from talking to any

employ ees during the due dilige nce p er i o d . As a c onsequenc e, B ates said, he relied on Ray

to perform the due dilige nce. Sandra Ray ’s testimony

on her a cce ss to information sharply contra sted wi t h testimonyof Ronald Hall. Be tween Julyand September of 1998, Ray had ac cess to the c ompany . She testified that the para meters of her acc ess wer e well define d. Ray had no dire ct ac cess to employ ees or to the
c omp a ny ’s fi le s. Whe n s he wa nte d to re vie w a fi le , s he wo uldre qu e st the do c ume nt f ro m th e Ha lls , and she r elied upon the Ha lls to pul l the document and deliver it to her. D uring this due diligenc e p er i o d , Ray

reque sted transa ction reports, budge ts, tax returns, le ases, a nd various other pertinent contra cts and business docume nts. On a number of occ as i o n s , R ay reque sted a re port on ag ed pay ables. She emphasized the importance of a report of ag ed pay ables, beca use the absenc e of a g ed pay ables indicates that the compa ny is curre nt in its oblig ations. Ray asserted that she ne ver r ece ived an ag ed pay ables re port, and testified that J acque lene Ha ll told her that everything was p ai d and
c ur re nt andthe re fo re the re we re no a g e d p a y able s.

I n his testimony , on cross e x amination, Ronald Hall admitted to te lling the purcha sers that the company was making betwee n $200,000 and $300,000, based on t ax i n fo rm ation. Mr . H a ll repr esente d to L y ndon Bates that the compa n y wa s profitable, a nd pointed to the Marc h Report’s estimate of $312,000 i n i n co m e fo r 1997 as e vidence of that prof itability . The letter s of intent circ ulated betwe en the pa rties also indicate d an under standing that the net income of the company for 1997 wa s approximately $312,000, as set forth in the March Re port.

The trial court also hea

rd testimony

from Jeff Dunkle, the financ ial analy st for the Mar ch Group, re sponsible for perf orming the ana ly sis for the Ha lls. Dunkle testified that the Mar ch Gr oup relied only

on the Hal l s ’ re p re sentations about the bac kg round history of the business and the potential perf

ormanc e of the business. The Marc h Group believed the Halls’ r epre sentations to be
re liab l e , a n d d i d n o ta s s u m e r e s p o n s i b i l i t y f o r v e r i f y i n g t h e a c c u r a c y

o f t h e s t a t e m e n t s

. Du nk le ind ic a te d th a t th e Ma

rc h G ro up didno t in te ndfo r the re po rt to b e us e d a s a

fo rm a l app raisa l.
Dunkle explained that the Mar ch Gr oup utiliz es business valuations like the Marc h Report
as a ma rketing tool to induce a potential cu s t o m er, suc h as the Ha lls, to employthe Marc h Group for mar keting service s. He said t hat the purpose of the re port was to provide the Halls with a business valuation to inform them of the amount that the Marc h Group thoug ht it could obtain for the company

if t h e Ha l l s ch o s e t o s ell it. The Marc h Report stated that it was not to be c opied or-7-

used for any purpose other than t he marketing endea vor. According to Dunkle, the Mar ch Report
wa s n ot int e nd e d to be use d by a bu sin e ss o wn e r f

or the pu rp os e of

se lli ng his or

he r o wn bu sin e ss.

I n compiling the Ma

rch Report, Dunkle testified the Ma rch G roup did not rely

on audi ted financ ial information; beca use he w as not furnished the tax i nforma ti o nf o r 1 9 9 7 , the Marc h Report’s conclusions did not refle ct that information. B ased on his e valuation, Dunkle initiallyestimated that the e nti ty ’s e arn ing s be fo re int e re st a nd ta xes we re app ro xima te ly $1 74 ,0 00

. Du nk le te sti fi e d th a t, ha d h e be e n f

urnis he d w ith a ud ite d f

inanc ia l in fo rm a tio n, inc lud ing the 19 97 ta x inform atio n, his estimate of the 1997 preta x income of the c ompanies would have been muc h lower- -instead of the $174,000 in income he initially estimated, the Marc h Report would have ref lected a net loss in 1997 of $124,952. Dunkle a cknowledg ed that ultimately , the Marc h Report indicated an estimated net income for

1997 of $312,116, rather than the initial estim ate of $174,0 0 0

. Du nkle explained that the Halls insisted that the number be revised to r efle ct a hig her inc ome fig ure, a nd Dunkle spec ulated that the amount was r evised upwa rd by removing the owner s ’ co mpensation and re ducing administrative expenses from the e quation.
Appar ently

two versions of the Marc h Report wer e g ener ated; both ve rsions were introduced into evidence at trial. One versio n wa s n o t i ceably thicker tha n the other. Ray testified that she
rec eived the thinner version prior to c losing the sale, and did not rec eive the thicker version until one month before the trial. The thicke r ver sion co n tained an a ssumptions section not included in the thinner ver sion; the assumptions s ection explained the assumptions upon which the valuation wa s based.

Th e Ma

rc h Re po rt

ind ic a te d, in so me pla c e s, that the inc ome a na ly sis fo r 1 99 7 w a s me re ly a foreca st. On other pag es, howeve r, the 1997 numbers wer e not note d to be fore casts. A p age entitled “F inancial History and Ec onomic Adjustments” provi d ed a “h istoric income stateme nt comparison,” and dire ctly compar ed the r evenue , expenses, and net income for the y ear s 1994, 1995, 1996, and 1997, without noting that the 1997 fig ure was a fore cast. The pag e showed that the net income for

1997 was $312,116, while listing the n et i n co m e fo r the pre vious three y ear s as $102,039, $43,738, and $24,448 re spectively . Ray testified that, when she asked the Halls about the company ’s dra matic 1997 improvement, the Halls explained that the g rowth in 1997 was simplythe f ru it o f th e ir la b o r

. H o w e v e r , Je f

f D u n k le te s ti f

ie d that t wo m onths prior to the closing date, the Halls filed their 1997 inc ome tax for CFSM, I nc., and, at that point, knew that the actual income for 1997 for the c ompany

was a neg ative $124,952, and not the $312,116 fig ure tha t was re flec ted in the letters of intent, the ne g otiations, and the Marc h Report.
Ray , as well as her business associate s, testified that they relied he avily

on the re prese ntation in the Marc h Report and the repr esenta tions by the Halls re g arding the company ’s income, a nd that they would not h av e i n v es t ed money in the venture wer e it not for those re prese ntations. Ray
a dmi tte d d uring c ro ss e xami natio n th a t prior to the pu rc ha se , s he did no t do a s muc h a s sh e c ou ld have to e ducate herse lf about th e b u siness. For instanc e, she did not see k expert input on the business’ value, did not attempt to obtain independe ntly -verified audited f inancial information, and did not seek outside counse l for an unbia sed exam i n ation of the wa rehouse line of cr edit. She-8-

admittedly

failed to obtain a

copy of the c ompany ’s 1997 tax return prior t o closing

. She said that sh e a sk e d f

or the 19 97 re turn a ndthe Ha lls sa id the y didno t ha ve it.
Ray testifi ed that, afte r the tra nsaction closed and she and G abrie l assumed control of the companies, she learned that the c ompany had an a pproxi mate bank balanc e of neg ative $4,800. Ray said that cre ditors were constantly calling , wanting to be paid, and ther e we re outstanding liabiliti es about which the purchaser s had no knowledg e, because they wer e not on the Exhibi t C attachment to the purcha se ag ree ment. More o ver, the list of leases attac hed to the purc hase a g ree ment was inc or re c t. O ne da y

a ft e r the c los ing , th e De fe nd a nts le arn e d th a t on e loan h a d b e e n p la c e d in ba nk ru ptc y a nd that sev e ra l othe rs we re de fi c ie nt. Ad dit ion a lly , th e De fe nd a nts ma int a ine d, the lis t of ac c o u n ts p a y ab le p r o v id e d b y th e H a ll s to th e p u r c h a s e r s w a s n o t a c c u r a te , a n d the offic e equipment was not ope rational.

Ly ndon Bates and Sandra Ray also testified that the Ha lls did not disclose ong oing litig ation by the Halls and CFSM, Inc. ag ainst SunTrust B ank. Ronald Hall disputed whether Bates and Ray ha d kno wl e dg e of

the su it. He c la ime d tha t Bate s and Ra y c ho se to re ma in uni nv olv e d in th e su it beca use they did not want to sour their ong oing r elationship with SunTrust.

After hearing the testimony , the trial court enter ed an order dated Ma y 28, 2003. The trial court found that the materia l issues in the sale of the businesses inc luded the income stre am to the prior owne rs and the va lue of the c ompanies sold. The court noted t hat t he Halls commissioned the Marc h Group to compile the March Report, and the Ma rch Report was base d solely on information provided by

the Halls. It found that the ver sion o f t h e M ar ch R eport re ceive d by Sandra Ray

and Ly ndon Bates was incomplete in that it did not contain the pr ovisions, included in the thicker
ve rs ion , s ta tin g that th e re po rt wa s a n e sti ma te on ly

. I t ob se rv e d that th e mos t impo rt a nt f a c tor in the Marc h Report for the purpose of valuing t he company was income, and the income fig ure f or the y ear 19 9 7 w a s g iv e n th e mo s t w e ig h t. T h e tria l c o u r t f o u n d th a t th e M ar c h Re p o r t’ s projec ted income for

1997 of $312,116 had be en re vised upwar ds on the instr u ct i o n o f Mr. Hall from the initial estim ated f

igur e of $174,000. Howeve r, i n J uly 1998, the Halls filed the c orporation’s 1997 tax returns, which re flec ted a ne g ati v e i n co m e of $125,000. The trial court held that the approximately

$400,000 discrepancy

betwee n the 1997 income of the company

as repr esente d and the ac tual income of the company place d a duty on the sellers to disclose to the pur chase rs the ac tual inc ome fi g ur e s f

or 19 97

. Th e 19 97 inc ome fi g ur e of $3 12 ,1 16 wa s r e fl e c te d in the Ma rc h Re po rt , the le tte rs of

int e nt b e tw e e n th e se lle rs a ndthe pu rc ha se rs , a ndin o ra l r e pr e se ntatio ns by Mr . H a ll t o t h e p u r c h a s e r s , a n d t h e tr i a l c o u r tf o u n d t h a t t h i s w a s a

m a t e r i a l i s s u e i n t h e s a l e

. A d d i t i o n a l l y, the trial court found that there wer e misrepr esenta tions in Ex hibit C to the orig inal contra ct re g arding the number a nd amount o f p ay ables owe d by the businesses; the trial c ourt conc luded that the pay ables turne d out to be much gre ater than what was repre sented to the purchaser s. Finally , the trial
c ou rt fo un d that the e xistin g loans in the wa re ho us e lin e we re in vio la tio n o f t he w arehou se a g re e ment th at re qu ir e d n o mo re than f orty -f ive da y s f

or c los ing the loans , a ndthat th is w a s a materia l fac t not disclosed to the purcha sers prior to the closing of the tra nsaction.-9-

Ba sed upon these f

indings, the tria l court conclude d that the Halls committed fraud which induced the D efe ndants to enter into the purcha se ag ree ment. Ba sed upon its finding of fraud, the trial court dismissed the P laintiffs’ complaint ag ainst the Defenda nts, and held that r escission was
an appropriate reme dy in the case

. The court then a war ded dama g es in the amount of $390,231.28 to th eD e f e n d ants/Count er- Plaintiff, Gabrie l, ag ainst the Halls. The da mag e aw ard w as broke n down as follows: $320,408.84 for a ctual contr act pay ments to the Halls for the businesses; $61,775.00 for pa y me nts to the Ha lls on the no nc omp e te a g re e me nt; $3 ,6 00 .0 0 fo r p a y me nts un de r the c on tr a c t to F ir st F arm e rs B a nk , w hic h th e Ha lls we re re qu ir e d to m ake a ndwe re ult imate ly a ssu me d b y

Ga br ie l; and, $4,448.00 re prese nting a n automobile lease . Fr om this j udg ment, the Hall s an d C FS M, I nc. now appe al.

On appea l, the Halls and CFSM, Inc. (c ollectively , “Appe llants”) ra ise numerous issues. The Appellants ar g ue that the tria l court erred in dismiss ing the ir complaint, err ed in finding fraudulent ind uc e me nt o f the Se pte mbe r 11 , 19 98 c on tr a c t, e rr e d in f ind ing that th e Ha lls ’ f

a ilu re to d isc los e the 19 97 ta x r e turns wa s f ra ud ule nt, e rr e d in ru lin g that r e sc iss ion wa s a n a pp ro pria te re me dy

in this
case , and er

red in c alculati n g d amage s. The Appe llants also contend that the tria l judge violated their due pr ocess rights by failing to rec use hi mself from the case. The Appellants additionally arg ue t h at t he trial c ourt err ed by dismiss ing the ir complaint, finding that they fraudulently

induced the contra ct, and f

inding that they fraudulently failed to disc lose the 1997 corpor ate income tax returns to the De fe nd a nts

. On appe al, the trial c ourt’s findings o f fact ar e re viewed de novo upon the re cord w ith a presumption of cor

rec tness, unless th e ev idence preponde rate s otherwise. See Te nn . R. Ap p. P. 13(d). The trial court’s leg al conc lusions, however, a re r eviewe d de novo , with no presumption of
corr ectne ss. In re C.K.G. , 173 S.W .3d 714, 721 (Tenn. 2005)

.
To e sta bli sh a c la im o f f

ra ud ule nt i nd uc e me nt of a c on tr a c t, the c la ima nt mus t pr ov e a fa lse repr esentation of a m aterial fac t, that the false r epre sentation was made knowing ly , that the complainant re asonably

relied on that repr esenta tion, a nd that the complainant suff ere d damag e as a re sult of that relianc e. Ma c h. Sa le s Co ., Inc . v. Di amond c ut Fore str

y Pr od s, LL C, 102 S.W .3d 638, 643 (Tenn. Ct. App. 2002) (c iting Maddux v. Cargil l, Inc. , 77 7 S. W.2 d 6 87 , 6 91 -9 2 ( Te nn . Ct

. Ap p. 19 89 )) ; see also Burton v. Hardwood Pallets, Inc. , 2004 WL 572350, *2 (Tenn. Ct. App. Marc h 22, 2004). The bur den of proving eac h element lies with t he complaina nt. Mach. Sales Co. , 10 2 S. W.3 d at 64 3. Ul tim a te ly , th e c re dib ili ty de te rminat ion s o f the tr ia l ju dg e are e nti tle d to signific ant weig ht upon review

. Id

. (c i t i n g In re Est ate of Wa lto n v . Young , 950 S.W .2d 956, 959 (T e nn . 1 99 7) ; Whit

aker v. Whitaker , 957 S.W .2d 834, 837 (Tenn. Ct. App. 1997)) . This defe renc e is due, in larg e part, to the fac t that the trial judg e has the opportunity to observe the manner

and demea nor of witnesse s as they testify
. Id. (c i t i n g McCaleb v. Saturn Corp. , 910 S.W .2d 412, 415 (Tenn. Spec ial Workers’ Comp. App. Panel 1995))

.
I n the instant case , the Appellants a ssert that the Def endants failed to produce any evidenc e o f fr audulent stateme nts or relianc e. The y liken the Halls’ r epre sentations to litt le more tha n statements of opinion, intent, or sales puf fing

.-10-

Our revi ew of

the trial evide nce c ompels a contra ry conclusion. The e vidence at trial
e sta bli sh e d a mul titud e of

mis re pr e se ntatio ns a ndomi ssi on s ma de by the Ha lls to the De fe nd a nts

. Take n toge t h er , t h e o ra l repre sentations, the Marc h Report, Exhi bit C t o the ag ree ment, and the letters of intent a

re a mple support for the trial court’s finding of a false represe ntation of t he fina ncial status of the business suffic ient to substantiallyaff ect the va luation of the business. The e vidence
c le arl y pr e po nd e rate s in fa vo r o f a fi nd ing that th e Ha lls ha d kno wl e dg e of the fa lsi ty

of tho se repr esentations. For instance , the 1997 tax returns, filed in J uly 1998, wer e suff

icient to show that the Halls we re a war e that their r epre sentations reg arding the 1997 inc ome wer e incor rec t. The Def endants submitted signific ant evidenc e, particularly throug h their testimony , th at t h ey in fac t
re lie d o n the Ha lls ’ re pr e se ntatio ns re g ard ing the va lue of the c omp a nie s a ndthe e ff ic ie nc y of the ir operations. There w as substantial evidenc e as w ell that the Def endants incur

red sig nificant da mag es direc tly resulting from their r eliance on the Halls’ misrepr esenta tions and omissi ons. More troubling is the analy sis of the duty of the Ha lls and CFSM, I nc. to disclose the 1997 corpor ate tax return information to the Defenda nts prior to closing. T he Appe llants cite Do mest ic Sewin g Mach. v. Jackson , 8 3 Te nn

. 41 8 (1 88 5) , fo r the pr op os iti on that th e y ha d n o d uty

to d isc los e the financ ial information to the Def endants in an a

rm’s-leng th transac tion. How ever , the Tenne ssee Supreme Court has ruled that a seller g ener ally has a duty

to disclose materia l fac ts conce rning the value of property that is know n to the seller, and not r easona bly discovera

ble by the buy er. Simm ons v . Ev ans , 206 S.W .2d 295, 295-96 (Tenn. 1947) . I n the instant case , the Def endants e stablished that they reque sted the 1997 cor

porate tax returns from the Ha lls and the Ha l l s told them they did not have t h em

. T h e Halls filed the tax returns in J uly 1998, two months before the close of the transac tion, and wer e aw arethat the tax returns showed c lear ly that the company ’s income wa s ne arl y $4 00 ,0 00 le ss tha n th e a mou nt r e pr e se nte d to the De fe nd ants . V ie wi ng the e vid e nc e a s a whole, we find that it does not preponde rate ag ainst the t rial court’s conclusion t hat t he Halls had a duty to disclose the tax information to the De fenda nts, and the De fenda nts reasona bly relied on the inf orma tio n g ive n to the m by the Ha lls

. The Appe llants nex t arg ue that the tria l court er red by dismiss ing the ir complaint ag ainst the Def endants for

brea ch of c o n t ra ct

. The Te nnessee Supreme Court has de clar ed that “[w]hile a contra ct may

be either expressed or implied, or written or oral, it m ust result from a me eting of the minds of the parties in mutual assent to the terms. . .[ and be] fre e fr om fraud or undue influenc e. . . .” Johns on v . Cent. Nat’l Ins. C o. of Omah a, Nebraska , 35 6 S.W.2 d 277 , 281 (T e nn . 1 96 2) ; see also Doe v. HCA Health Serv ices of Tennessee, Inc. , 46 S.W .3d 191, 196 (Tenn. 2001) . We find
no e rr or in the tr ia l c ou rt ’s de c isi on to d e c lin e to e nf or c e a c ontr act ind uc e d b y

the Ap pe a lla nts ’ fraud.

Th e Ap pe lla nts ne xt ar g ue that the tr ia l cou rt e rr e d by a wa rd ing the re me dy

of re sc iss ion in this case. Resc ission may be appr opriate w here a misrepre sentation g oes to the essenc e of a contra ct and materially

induces the f

ormation of the c ontrac t. Ston ecipher v. Estate of M.E. Gray , 2 0 0 1 WL 468673, *5 (Tenn. Ct. App. May 4, 2001) (c iting Cooley v. East & West Ins. C o. , 61 S.W .2d 656, 659 (Tenn. 1933) ; Cann on v . Cha dwe ll , 150 S.W .2d 710, 712 (Tenn. Ct. App. 1940)) . Rescission is most appropriate where the parties may be returned to their pre -contra ct status. Id. I f t h e p as s age-11-

of time or a chang e of circ umstances rende rs a return to the status quo impractica l, or an aw ard of damag es would more a dequate ly reme d y t h e i njury , then re scission should not be awar ded. Id

. Ul timately , the re medy

of re scission is not a matter of entitlement; ra ther, it rests within the trial court’s discr etion. Id. a t *6 . N ota bly , th e ru le s g ov e rn ing the re sc iss ion of a c on tr a c t cle arl y app ly to contrac ts induced by

fraud. Se e

, Si mm ons v . Ev ans , 206 S.W .2d 295 (Tenn. 1947) ; Douglas v. Foster , 2002 WL

83605, *1 (Tenn. Ct. App. Jan. 22, 2002).
The Appe llants arg ue that Sandra Ray , by continuing to ope rate the business, ratified the contra ct and c annot be a llowed to later r escind it. They contend that the pa

rties ca nnot be place d back into the status quo, bec ause the Def endants essentially ruined the business once they took over. I n our v i ew , t h e o v er whelmi ng weig ht of the evide nce is to the c ontrary . After taking over the company and discove ring its financial and ope rational proble ms, Ray attempt ed , on numerous occa sions, to rescind the contr act. Af ter he r fr uitless attempts to rescind, Ray continued to over see the oper ati o n s o f t he compa ny , and eve n invested more mone y into it. Had Ray

not done so, the Pl a in ti f f s w o u lds u r e ly

b e ar g u in g th a t she fa il e d to mi ti g a te th e d a ma g e s

. T h e A p p e ll a n ts ’ n e xt arg ument, that they

cannot be place d back into the status quo because of the c ollapse of a signific ant portion of the compa ny

during Sandra Ray ’s term, disreg ards the bulk of the e vidence at trial. The evidenc e shows cle arly

that the financ ial state of the bus iness was plum metting downward unde r the Ha lls ’ w a tc h, bu t th e y

ma na g e d to c on ve y

the bu sin e ss t o the De fe nd a nts sh ortly be fo re it h it b ott om. Mo re ov e r, the Ha lls re too k the bu sin e ss fr om the De fe nd a nts , a nd the e vid e nc e do e s n ot e sta bli sh that the parties cannot be place d back into the status quo. Ultimately , the power to or der r escission, wher e appr opriat e, re s t s within the sound discretion of the tria l court. Ston ecipher , 2 0 0 1 WL 46 86 73 a t *6 ; Douglas , 2002 WL 83605 at *1. We find no abuse of discretion in the trial court’ s awa rd of the r emedy

of re scission.
The Appellants next assert that the t rial court erre d in its calculation of dama g es. F irst, they arg ue that the tria l court’s a war d to Gabriel should be reduc ed by $50,000, asserting that the p u rc h as er s ac t u al l y p ai d $ 2 0 , 0 0 0 l es s t h an t h e a m o u n tt h e c o u rt cr ed i t ed t h e p u rc h as er s wi t h p ay i n g. The re maining $30,000, a ccor ding to the A ppellants, should not have bee n awa rded to the pur ch a s ers beca use the purch aser s retaine d that amount in escrow at the time of the pur chase . They rely on Ronald Hall’s testimony

and a trial exhibi t to support their contention. Sandra Ra y ’s testimony was to the contra

ry ; she testified that the purc haser s paid the $50,000 amount to the Halls. A trial court’s determination of t he amount of da mag es is primarily a fa ctual dete rmination. Beaty v. Mc Graw , 15 S

. W

. 3 d 8 1 9 , 8 2 7 (T en n

. C t

. Ap p

. 1 9 9 8 ) ( ci t i n g Loftis v. Finch
, 49 1 S. W.2 d 3 70 , 37 7 (Tenn . Ct

. Ap p. 19 72 ); Sc hol

od ge Fra nc hise Sy s. , I

nc . v . M c Kib bo n Bro s. , I

nc ., 919 S.W .2d 36, 42 (Tenn. Ct. App. 1995)). I n the instant c ase, the trial court’s finding on this iss ue turns on its determination of the pa rt ie s’ c re dib ili ty , e nti tle d to g re a t w e ig ht o n a pp e a l. See, Mach. Sales Co. , 103 S.W .3d at 643. Wit h appropriate defe renc e to the trial court’s finding s on cre dibilit y , we f ind no error

in the calc ulation of damag es.
The sec ond arg ument that the Appellants raise in opposition t o the trial court’s awa rd of damag e s w a s th at th e tria l c o u r t s h o u ldh a v e r e d u c e d th e a w ar d to th e p u r c h a s e r s b y $ 4 0 0 , 0 0 0,
re pr e se nti ng the pu rc ha se rs ’ unp a id obl ig a tio ns on the no n- c omp e te a g re e me nt u nd e r the c on tr a c t.-12-

Having found that the trial c ourt’s aw ard of resc ission was proper , the non-c ompete agree m ent would be re scinded a s well, so the purc haser s would not be obligated to pay for it. This arg ument is w ith ou t me ri t.

The fina l arg ument that the Appellants raise on appea l is that the trial judge violated their due proce ss rig hts by

not r ecusing himself. As evidenc e of bias, they point to two colloquies between the trial judg e and witnesses as evidence of their allegations of bi as. The fir st instance involved the testimonyof Ly ndon Bates, an off icer of Ga briel and business associate of Sandra Ray . Upon being asked if G abrie l believed it was entitl ed to any portion of t he potential rec overy of the undisclosed SunTrust Bank litig ation, Mr. B ates a nswere d that he “hadn’t even thought a bout it. Iknow we w ere no t to ld a bo ut the la ws uit

or a ny po te nti a l re c ov e ry to co me .” Th e tr ia l ju dg e re sp on de d: “ Pr ob ably g ood advice

. Sounds like a tar baby to me, stay away from it. . . .[The l] ess y ou know, proba bly the better.”

The sec ond alleg ed indication of bi a s c ame d u ring Sandr a Ray ’s direc t examination. R ay was asked if she felt that the Halls had honestly dealt with Ray . Ray

answe red that she “fe lt terrible” a nd that she did, initially , fee l like the Halls had hone stlydealt with her . Howeve r, Ray ’s re sponse was me a nd e ri ng a ndla

rg e ly un re sp on siv e to the qu e sti on

. Con se qu e ntl y , the jud g e a sk e d Ray : “ Wel l, the answe r is y es? ” Ray

responde d, “The answe r i s y es.” To that, the j udg e responded, “T hat was a g imme.”

B e c a us e the Ap pe lla nts didno t r a ise the iss ue of re cus al befor e the tr ia l c ou rt re nd e re d it s decision, the issue is waive d. They cannot wait until they

rec eive an u nfavor able r esult and then
assert that the t rial judg e should have rec used himself. Se e , D av is v . T

e nn. D e p’ t. O f E mploy ment Serv. , 23 S.W .3d 304, 313 (Tenn. Ct. App. 1999) ( decla ring that “re cusal motions must b e filed promptly afte r the fa cts forming the basis for the motion bec ome known . . . and the failure to seek
rec usal in a timely manner results in a waiver of a party ’s rig ht to question a judge ’s impartiality .”) ( c i t a t i o n s o m i t t e d )

. H o w e v e r , e v e n i f t h e i s s u e w e r e n o tw a i v e d , i ti s w h o l l y w i t h o u tm e r i t

. C l e ar l y, all parties be low rec eived a fair and impartial hea

ring

. Th e de c isi on of th e tr ia l c ou rt is a ff ir me d. Cos ts o f this app e a l are ta xedto Ap pe lla nt/Pla int if

f C F SM, I nc

. a nd Pla int if

fs /A pp e lla nts Ron a ld Ha ll a nd Jac qu e le ne Ha ll, a ndthe ir sureties, for

which execution may

issue, if nec essary

.

___________________________________ HOLL Y M. KI RBY, JUDGE