Source: https://www.tennesseeappellatereview.com/
Timestamp: 2019-04-24 04:59:17+00:00

Document:
The Sixth Circuit recently issued a divided opinion holding that Tennessee’s statutory cap on punitive damages, Tenn. Code Ann. § 29-39-104, is unconstitutional. What makes the case interesting is that the court decided the issue solely under the Tennessee Constitution. The majority opinion, authored by Judge Clay and joined by Judge Stranch, held that the cap violates the right to a trial by jury as provided in Article I, Section 6 of the Tennessee Constitution. The dissenting opinion by Judge Larsen argued that, for purposes of the appeal, the issue should have been certified to the Tennessee Supreme Court. Judge Larsen also disagreed with the majority’s conclusion on the merits.
The case, Lindenberg v. Jackson National Life Insurance Company, arose out of a dispute over life insurance proceeds and presented only state-law causes of action. Because the parties were not citizens of the same state, the case was heard by the federal court sitting in diversity jurisdiction in the Western District of Tennessee. At trial, the jury returned verdicts in favor of the plaintiff for $350,000 in compensatory damages and $3 million in punitive damages. As provided under Tennessee’s punitive damages statute, the jury is not informed of the statutory cap on punitive damages, and it is the role of the trial court to apply the cap and reduce the punitive damages verdict to either twice the total amount of compensatory damages awarded or $500,000, whichever is greater. Tenn. Code Ann. § 29-39-104(5). Accordingly, the district court reduced the jury’s punitive damages award to $700,000 and entered judgment for that amount. On appeal, the plaintiff argued that the cap was unconstitutional, and the majority agreed. It held that the cap unconstitutionally violates the Tennessee Constitution’s guarantee that “the right of trial by jury shall remain inviolate.” Articulating an originalist approach to constitutional interpretation, the majority reasoned that at the time the Tennessee Constitution was adopted, the proper amount of punitive damages was a determination delegated to the jury. For the Tennessee Legislature to impose a statutory cap on the amount of punitive damages that may be awarded would thus unconstitutionally infringe on the jury’s “inviolate” fact-finding ability.
The constitutionality of Tennessee’s punitive damages cap has not yet been decided by the Tennessee Supreme Court. In her dissent, Judge Larsen argued that the panel should have certified the question to the court. Notably, the district court attempted to certify the issue to the Supreme Court, but it declined to issue an opinion. The court indicated that its reason for doing so was because the district court had failed to certify the separate question of whether the plaintiff could actually recover punitive damages in the first place, since the plaintiff had already recovered bad-faith statutory damages. The Supreme Court stated that it remained open to certification of both the statutory and constitutional questions by the Sixth Circuit. In her dissent, Judge Larsen argued that the panel should have taken the Supreme Court up on its invitation. Judge Larsen also disagreed with the majority’s conclusion that the cap is unconstitutional. Although the majority recognized that Tennessee statutes are afforded a strong presumption of constitutionality, Judge Larsen argued that it did not actually apply that presumption to the statutory cap and failed to prove beyond a reasonable doubt that the cap is unconstitutional.
The Sixth Circuit can agree to rehear cases en banc, meaning that the original decision will be vacated and the case will be reheard before all active judges on the court. The State of Tennessee, which intervened in the lawsuit to defend the cap’s constitutionality, has filed a petition for rehearing en banc. The petition echoes Judge Larsen’s dissent and also highlights the policy rationale behind the Tennessee Legislature’s decision to impose the statutory cap on punitive damages—before the cap’s enactment, surrounding states that already possessed a damages cap had an advantage in attracting business. Concern for the Legislature’s authority to make policy judgments and set the parameters of damage awards was also raised in the amicus brief filed in support of the statute’s constitutionality by the Beacon Center, the National Federation of Independent Business Small Business Legal Center, and “concerned Tennessee legislators” Randy McNally, Beth Harwell, Gerald McCormick, Bill Ketron, Glen Casada, Jack Johnson, and Pat Marsh.
Unless Lindenberg is reheard and reversed, it remains binding authority on federal courts within the Sixth Circuit. It is not binding precedent on Tennessee state courts, however, since they are not required to adopt a federal court’s decision on a purely state-law issue. Nevertheless, the decision is important persuasive authority. Under the panel’s decision in Lindenberg, federal courts within the Sixth Circuit may not impose Tennessee’s statutory cap on punitive damages, but Tennessee state courts may still lawfully apply the cap. This distinction could be an important consideration in deciding whether to file or remove a case involving punitive damages under Tennessee law to federal court. Of course, when the Tennessee Supreme Court takes up the issue, its decision will be binding on both state and federal courts.
The Tennessee Supreme Court overruled three decades of precedent in Athlon Sports Communications, Inc. v. Duggan, giving trial courts broad discretion in the method used to determine the “fair value” of shares in “dissenters’ rights” actions.
When a closely held Tennessee corporation seeks to undergo a structural change such as a merger, dissenting minority shareholders are afforded a statutory “appraisal remedy” pursuant to Tennessee Code Annotated § 48-23-101, et seq. This “dissenters’ rights” statute allows dissenting shareholders to escape the involuntarily altered investment with the “fair value” of their shares, plus accrued interest. But “fair value” means “the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects” under Tennessee Code Annotated § 48-23-101(4). This is not the “fair market value” of a bargained-for exchange between motivated buyers and sellers. If the corporation and dissenting shareholders cannot agree on the shares’ “fair value,” the corporation can commence a proceeding under Section 48-23-301, petitioning the court to determine the “fair value.” As expected, the abstract notion of “fair value” has proven elusive to courts, corporations, and shareholders alike.
Though the statute is silent as to which methods courts should use to determine “fair value,” the Tennessee Supreme Court implicitly mandated the “Delaware Block Method” in 1983. Through Blasingame v. American Materials, Inc., Tennessee “adopt[ed] the Delaware rule requiring the use of [asset value, market value, and earnings value] in determining the fair value of a dissenting minority stockholder’s shares.” However, that same year, the Delaware Supreme Court in Weinberger v. UOP, Inc. abandoned exclusive application of the Delaware Block Method in favor of a liberal approach aligned with generally acceptable methods in the financial community. Although Tennessee courts generally look to Delaware law in unsettled matters of corporate law, Tennessee did not divest itself of exclusive use of the Delaware Block Method for over three decades.
Moving forward, corporations, dissenting shareholders, and courts may now consider other valuation methods for “fair value” that include projections of future value, provided that they are provable and not speculative. Likewise, Tennessee trial and appellate courts may find themselves determining the “strike price” of speculation when it comes to weighing elements of future value now that Athlon Sports has “rung the opening bell” for a new dissenters’ rights regime.

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