### IN THE COURT OF APPEALS OF TENNESSEE AT NASHVILLE October 8, 2002 Se ssion RIVER LINKS AT DEER CREEK, LLC v. J OSEPH MELZ, ET AL 

### .

Appeal from the Circuit Court for Williamson County No. 01545 R.E. Lee Davies, Judge

No. M2002-00043-COA-R3-CV - Filed December 31, 2002

The developer of a golf course br ought a fraud complaint

against the property

owner who furnished the land for

the cour se, and a

gainst t he compa nie s he co ntrolled. The defendants argued that the plaintiff’s remedies were limited by the arbitration clauses in two of the three contracts that defined the relationship between them. The trialcourt ruled tha t the arb itration c lauses we re not ap plicable to the plaintiff’s claims. We affirm the trial court.

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

Affirmed and Remanded

B EN H. C ANT RELL , P.J., M.S., deliveredthe opinion of the court, in which W IL LI AM B. C AIN , J. and T OM E. G RAY , S P

. J., joined. Phillip Nort

h and R.J. Pu rsel l, Na shvil le, T enne ssee , for the a ppel lants , Jose

ph Me lz, Deer Creek Golf Interests, L

LC and Deer Cree

k Construction, Inc. Nancy S. Jones and Caroline Thomas Trost, Nashville, Tennessee, for the appellee, River Links at Deer Cr eek, L LC.
OPINION

I. A N A MBITIOU S P ROJECT
The parties in this case wished to develop an eigh teen-ho le champ ionship-c aliber g olf cour se and an adjoining residential community in Spring Hill, Tennessee. To accompl ish their p urposes, they entere d into two contracts: a Development Agree ment, which was executed on May 1, 2000, and an Oper

ating A greem

ent under the Tennessee L

imited L iability Company

Act, Tenn. Code Ann. § 48-201-101, et seq. , whic h was exec uted shor tly t hereaf ter. Bo th of thes e agre

ements c ontain provisions that claims and disputes between the parties have to be settled through binding arbitration.

River Links at Deer Creek, L

LC, (River L

inks) was to be the d

evelope r and owner of the

golf
course. The Operating Agree ment set out the terms whereby River Links was to regula ted. Joseph Melz was a mem

ber of the Boar

d of Mana

gers of River L inks, an d t he pr in ci pa l o f a no th er en ti ty,-2-

Deer Creek Go lf In

terests, LL

C. That entity in

turn was a

member o f River L

inks, along with four individua ls. Mr. Melz was also the president of Deer Creek Construction, I nc., the purported owner of the tra ct on which the proj ect was t o be built. One hundred and sixty acres was planned f or the golf course, while

50 acres, more or less, was intended for re sidential and commercial development around the periphery

of the course.

The Development Agreement rec ited that Deer Creek Construction was the fee simple owner of the development property . Under the Agreement, River L inks was to pay Dee

r Creek $375,000 for its interest in 160 acres, and the const ruction c ompany

was to re tainthe 50 acres, and to develop the residential and commercialcomponents of the project. In re cognition of the “additional value the Go lf Fa ci li ty a dd s t o t he Re si de nt ia l D ev el op me nt ,” De er Cr ee k w as to pa y R i ver L inks a development

fee of $1,000 per residential unit for the first 375 units it com

pleted, p ay able at th

e time of the cl osing on

each un it.

Several contract provisions were designed to prot ect the interest of River Links in the development

fees: regardless of the sale of residential units, Deer Creek Construction was to pay River Linksthe entir

e $375,00 0 with in sixty -six months of the closing of the Development Agree ment; if Deer

Creek wi shed to sell all or pa rt of the d evelopme nt, it was obligated to give River Links the right of firs t refusa l; i f Deer Creek sold the property to a third party, the unpa id balance on the $375,000 became immediately due and pay able.

In Septe mber of 20 00, Jos eph M elz, in his capacity as Pre sident of Deer Creek Construction, and Joseph Sauger as President of River Links, executed a document wher eby River L

inks waived the first rig

ht of ref usal it wa s entitled

to under t he Development Ag

reemen t. The waiver recited

that Mr. Melz and hi s wife ha

d entere d into a pur

chase a nd sale agreement for

the fifty -acre propert y w ith Main Street Ho mes, L

LC; tha t D eer Creek Construction would pay River L inks $25,000 at the closing of the sa

le; that th is sum was to be applied to the $375,000 obligation; and that if Deer Creek repu rcha sed the property, the first right of refusal would be restored to River L inks. There is no arbitra tion clau se in the Wa

iver Ag reemen t.
Ac cording to the allegations of the later-filed complaint, Mr. Melz induced Mr. Saug er t o sign the Waiver Agreement by claiming that Main Street Homes was to be a joint venturer with Deer Creek Cons truction in the residential development, and that the title had to be transferre d so that Main Street c ould obtain financ ing. He allege dly claimed that the transfer was a mere formality , and that Deer Creek’s title would be restored in due course. Mr. Melz insisted that since the convey ance to M ain Street “was no t really a sa le” it did not trigger the obligation to pay the remainder of the development fee.

The plaintiff subsequently lear ned that there was no joint venture or partnership betwee n Deer Creek Construction and Main Street Homes, and that Mr. Melz had failed to disclose that the transaction was an ou

tright sa le for $1 .5 million c ash. Fur ther, in h is capacity

as President of Deer Creek, Mr. Melz had allegedly executed a Quitclaim Deed to h imself o f the residential portion of the developm

ent prope rty more tha n a y ear pri or to the d ate of the De velopmen t Agre ement, bu

t did notregister the deed until after the wa iver was executed. Upon learning of Mr. Melz’s actions, River-3-

Links demanded that the waiver be retracted, and that he or Deer Creek pay the $350,000 remainder of the development fee. Mr. Melz refused.

II. P ROCEEDINGS IN THE T RIAL C OURT
On September 6, 2001, River Links filed a Complai nt for Declaratory Relief and for Damag es, naming Joseph Mel z and the two companies he controlled as defendants. The plaintiff askedthe cour

t to set asi de the Wai ver Ag reemen t as frau dulently

induced, and to hold

Mr. Melz liable for compensatory

damages of $350,0 00, as well as for punitive damages, costs and pre- a nd post-judgment

interest

. In addition to the fraud claim, the complaint also included claims fo r unjust
en ri ch me nt an d b re ac h o f f id uc ia ry d ut y.
Additiona

lly the complaint recited

that both Ri ver L

inks, L LC an d Deer Cr

eek Golf Inte rests, LLC had been administratively dissolved for failure to file an annual repo rt with the Secretary of State, but that bo th entitie s had subse quently reconst ituted the ms elves. The plaintiff asked for a declaratory

judgment as to the validity of its actions subsequent to dissolution.

The defenda

nts respo nded tothe complaint on October 22, 2001, by moving the court to stay the proc eeding s and to enforce the Arbitration Agreements. See Tenn. Code Ann. § 29-5-303(d). On Novembe

r 26, 2001 , the cour

t heard oral arg uments on the defendants’ motion. It denied the motion in an order filed on December 6, 2001.

The court ag

reed wit h the plai ntiff tha

t since the

re was n o arbitra

tion clau se in the w aiv e r agreement , the claims based upon that agreement did not have to be a rbitrated. The court further noted that Mr. Melz was not a party in his individual capac ity to any contract requiring arbitration, and reasoned that claims against him personally were also not subject to arbitration, but that“[t]o the extent those claims can be co nstrued to state a claim for relief aga inst Defendants Deer Creek Gol f Interests, L

LC or Deer Cree

k Construction, Inc., those claims are stay ed and referred t o arbitration.” Fi na ll y, t he co ur t r ul ed th at th e D ec la ra to ry J udgment cla im relate d to the pos tdissolution actions of the plaintiff was a matter o f statu tory interpre tation an d a questi on of fir st impression for the T ennesse e courts , and that for rea sons of jud

icial ec onomy , the cour

t would re tain jurisdiction of the claim. This appeal followed.

III. T HE W AIVER A GREEMENT Appellant Melz notes t

hat the pu blic policy

of this state, a s expresse d in both sta tute and c ase law, strongl

y f avors the enforc ement of

arbitra tion agr eements . See the U

niform Ar

bitration Act, Tenn. Code Ann. § 29-5-301, et seq., and Buraczynski v. Eyring , 919 S.W.2d 314 (Tenn. 1995). He contends that the Waiver Agreement incorporate s the Development Agreement by implication, and thus that all the claims arising from the Waiver Agree ment can and should be settled in accordance with the a rbitrati on clause

of the De velopmen t Agre ement.
The trial court determined to the contrary

that claims related to the Waiver Agree ment did nothave to be settled by a rbitration, b ecause t hat Agreement did not contain its own arbitration-4-

clause. It ap

pears to us, howev er, that the arbi tr ation statute itself furnishes a stronger reason for declining to order arbitration of those claims. Tenn. Code Ann. § 29-5-302 reads in pertinent part,
(a) A written

agree ment to sub mit any

existing c ontrover sy

to arbitration or
a provision

in a writte

n contra ct to submit

to arbitr atio n anycontroversy the reafter arising between the parties is valid, enforceable a nd irrevo cablesave upon such grounds as exist at law or in equity f or the revocation of any

contract . . . .
Fraud has long been a recognized ground for contrac t recission or revocation. Garrett v. Mazda Motors of America , 844 S.W.2d 178 (Ten n. Ct. App. 1992); Vance v. Schulder , 547 S.W.2d 927 (Tenn. 1 977); Staggs v. H erff Motor

Co ., 39 0 S.W.2d 245 (Tenn. 196 5); Metropol itan Life Insurance Co. v. He dgepath , 185 S.W.2d 906 (Tenn. 1945); Samuel v. King, 14 S.W.2d 963 (Tenn. 1929).
Further, our courts have declared that claims of fr aud in t he inducem ent are not subject to arbitration. This court held t hat wh en a con tract has be en pro cured t hrough fraud, t hen “unle ss the defrauded party elects to affirm it, there is absolutely no c ontract, nothing to be arbitrated.” City of Blaine v. John Coleman Hayes & Associates , Inc., 818 S.W.2d 33, 38 (Tenn. Ct. App. 1991). Our Supreme Court more broadly stated tha t“T ennessee law does not allow arbitration of contract formation issues.” Frizzell Co nstruction Co. v. Gatl inburg LLC , 9 S.W.3d 79, 85 (Tenn . 1999). Appellant argues that a plaintiff should only be allowed to avoid arbitration on thebasis of f raud in the inducement where the alleged f raud induced the executionof the arbitration clause itself, rather than other clauses in the contract. But in City o f Blain e , supra, we rejected such a narr ow construction of the fraud exception.

IV. P ERSONAL L IABILITY
The trial court ruled that

arbitration was not

an appropriate vehicle for settling the plaintiff’ s claims agains t Joseph Melz p ersonally, because he was no t a party to the contracts at issue. The appellant argue s that the c ourt’ s ruling cre ates an e scape ha tch wher eby any plaintiff can avo id arbitration by

simply joining unrelated individuals to its complaint as defenda nts. We do not agree, because the alleg ations of the c omplaint clearly indicate that Mr. Melz is a necessary party to a complete resolution of this dispute.

A party ca

nnot be compelle d to arbitr ate in the absence of a contractual oblig ation. Frizzell Construction Co. v. Gatl inburg LLC , 9 S.W.3d 79, 84 (Tenn. 1999); Aspero v. Shearson American Express, Inc., 768 F.2d 106 (6 th Circuit 1985). The contracts in the record do not indicate that River Links ever

ag re ed to ar bi tr at e d is pu te s w it h M r. Me lz fo r a ct io ns un de rt ak en in hi s p er so na l c ap ac it y. River Linkshas alle ged tha

t Mr. Melz

used his position to convey property away f romDeer Creek Construction, Inc., and

to himself, and that he pocketed the proceeds of the sale of that property. T

he disputed property a

ppears to have been the prime asset of Deer Creek Construction. If the plaintiff’s allegations are tru e, then it is uncer ta in whethe r any judgment against Deer Creek alone, w hether resulting from arbitration or not, can be satisfied fr om the remaining assets of the company

.-5-

It thus appe ars to us th at the tri al court achieved the rig

ht balanc e betw een equitab le considerations and the requirements of the Uniform Arbitration Act by ruling that the c laims agains t Joseph Melz individually could proceed to trial, but that “[t]o the extent those claims can be construedto state a claim for relief against Defendants Deer Creek Golf Inte rests, LL C or Deer Creek Construction, Inc., those claims are stay ed and referred to arbitration.”

V. D ISS OLUTI ON AND D ECLARATOR Y J UDGMENT
Since River Links and Deer Creek Golf I nterests are both limited liability companies, they
are subject to the formal requirements of the Tennessee L imited Liability Company Act, Tenn. Code Ann. § 48-201-101, et seq. [Acts 1994, ch. 868]. In April of 2001, the Tennessee Secreta ry of State issued separa

te notice s t o River Links, LL C and Deer Creek Golf I

nterests, LL

C, that because of failure to file an

nual rep orts, there existed grounds for administrative dissolution

of both co mpanies, and that if they did not file the requir ed reports by July

16, 2001, they would be dissolved. See Tenn. Code Ann. § 48-245-101. Mr. Melz received the notices as the re gistered agent for ser

vice of processfor both

companie s, but alle gedly failed to inform the other members of River L inks about the notice. However, River L inks did file i ts annual rep ort before the deadline, and thus avoided dissolution at that time.

But Deer Cr eek Golf Inte rests, L LC did not file its annual report, and was notified on June 20, 2001 that i t had bee

n administr

atively dissolved . The disso lution ter minated th

e member ship and governance rights of

Deer Creek Golf I

nterests in River Links by operation of

law. See Tenn. Code Ann. § 48-216-101. It also trigg ered other consequences arising from the May 2000 Ope

rating Agree ment.
The Agree

ment spec ified tha

t certain events would trigger the dissolution of River Links and the winding up of it s affair s. Section 13.1(d) o f the Ag

reemen t lists some o f those events: “upon the death, withdrawal, bankruptcy , or dissolution of a Member or the
occurrence

o f a ny other eve

nt that terminates the continued membership of a Member in the C ompany u nless with in ninety (90) day s after t

he disass ociation

of membe

rship
as so provided in subparagraph (d), a majority of the remaining Members consent t o continue the business of the Company and to the admission of

one or more Members as necessary .”
Thus, according to the terms of the Op erating Agreeme nt, River Links, LL

C was automatic ally

dissolved upon the administrative dissolution of one of its members, Deer Creek Golf Inte rests, LL C Despite

this, RiverLin ks co nt in ue d t o o pe ra te . A cc or di ng to Ri ve r Li nk s’ at to rn ey, it hired and fired employees, formed contracts with vendors, and resolve d a dispute with the Tennessee Department of Environment and Conserva tion. Shortly after receiving notice of the administrative dissolution of Deer Creek Golf I nterests , the rema inin g membe

rs of Rive r Lin ks consen ted in writing to the continu ation of th eir business.-6-

They subsequently voted

to amend the Operating Agreement, to remove Mr. Melz from his position
on the Board o f Manag ers, and to redee m the 18% f

inancia l interes t of Deer

Creek in R

iver L inks.

Mr. Melz subse quently

applied t o the Secr etary of State for the reinstatement of Deer Creek Golf Interests, L

LC His company

was administratively re

instated on August 23, 2001. Tenn. Code Ann. § 48-245-303(c) states that reinstatement “relates back to and

takes effect as of the effective date of the administra tive dissol ution and the LL C resumes carry

ing on its business as if the administrative dissolution had neve

r occur red.” Mr . Melz cont

ends t hat the reins tatement

is retroactive for all pu

rposes, that Deer Creek

Golf I nterestsremains a

Member o f River L

inks with full governance

rights, and that t

he amend ment to the Operating Agree ment is ineffective, as is the redemption of

hi s f in an ci al ri gh ts . H e a ls o d em an ds to be re in st at ed to th e b oa rd of th e c om pa ny.
In its complaint, River Links asked for a declaratory

judgment as to the rights of the parties in regar d to the actions unde

rtaken a fter its d issolution. Mr . Mel z argue s that he isentitled t o arbitration of the question. The trial co urt ri ghtly observe d that this w as a ques tion of fir st impression, and ruled that as a matter

of judicia

l economy , it was pr

efera ble to sett le the mat ter in the courts. We agree.

The purpose of arbitration is to furnish a speedy and inexpensive alternative to litigation. Buraczynski v. Eyring, 919 S.W.2d 31 4 (Tenn. 1996). I n a situati on like the

one befo re us, where only a few of the issue s betwee

n the par ties are subject to

arbitra ti on, a c omprehensive resolution of the disput

e cannot be obtained through an arbitration proc eeding. Further, it appearsto us that arbitrators have a duty to g rant the parties the relief they

are entitled to under the facts and under the law, even thou gh for p

urposes o f finalit

y, a n arbitra tion awar d is not reversible for a mere mistake of factor law. T enn. Code Ann. § 29- 5-313(a

)(5); Arnold v. Morgan Keegan & Co., Inc. , 914 S.W.2d 445 (Tenn. 1996).

The Tenness ee L

imited L iability Company

Act has o nly

been in effect since 199 4. There

is very little case law dealing with the A ct, and none we could find that involves th

e retro active e

ffects flow ing from the r

einstate ment of a company after it s dissolutio n. An arb itrator d ealin g with th e complex facts of this case would have no guidance on the proper interp retation of the Limited Liab ility Company

Act, and would hav e to expend agreat deal of t ime and e nergy to reach a wellconsidered

conclusion, but his ultimate decision would have no precedential value. I t thus appears
reasona ble to us f

or the tri al c ourt to retain jurisdiction of the declaratory judgment issue, and we reject Mr. Melz’ claim that he is entitled to have it arbitrated.

VI.

The order of the trial court is affirmed. Remand this cause to the Circ uit Court of

Williamson County for fur ther pro ceeding s consiste nt with this o

pinion. Ta

x the cost s o n appeal to the appella nts, Joseph M elz, Deer

Creek Con struction , Inc ., and De er Cree k Golf I nterests , LL

C.

_________________________________________-7- BEN H. CA

NTREL L, PRESI DIN G JUDGE, M. S.