Court Opinion

ID: 1069984
Source: CourtListenerOpinion
Date Created: 2013-10-09 19:36:39.066641+00
Date Added: 2024-06-11T12:32:50.141258
License: Public Domain

IN THE COURT OF APPEALS OF TENNESSEE
                              AT NASHVILLE
                                  February 19, 2002, Session

 ARTHUR INGRAM, JR., ET AL. v. BEAZER HOMES CORPORATION
              d/b/a PHILLIPS BUILDERS, INC.

             Appeal from the Chancery Court, Part I, for Davidson County
             No. 98-2433-I, Honorable Irvin H. Kilcrease, Jr., Chancellor

               No. M2001-01641-COA-R3-CV - Filed March 25, 2003

        This litigation arises from the 1994 sale of a newly constructed house and lot backing up to
a subdivision common area with an existing natural sinkhole, which is utilized for surface water
drainage from several nearby lots. During development of the subdivision the defendant filled the
area including a portion of the lot purchased by the plaintiffs. In 1997, the plaintiffs became
concerned about the ground settling in their back yard and about perceived dangers of the nearby
sinkhole. They sued the defendant as subdivision developer, house builder, and seller of the property
and sought rescission or alternative relief. The Chancery Court ordered rescission with the plaintiffs
recovering the appreciated value at the time of trial and the cost of improvements, plus prejudgment
interest on that total, but without any setoff for the rental value during the plaintiffs' occupancy. We
reverse and remand due to errors in the trial court's calculation of the amount payable upon rescission
and related issues. While we could affirm the rescission, we are reluctant to limit the parties and the
trial court to that remedy, since we anticipate additional proof by the parties and a significantly
different result upon remand.

          Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
                                Reversed and Remanded

ROBERT L. JONES, Sp. J., delivered the opinion of the court, in which BEN H. CANTRELL , P.J.,M.S.,
and WILLIAM C. CAIN , J., joined.

Todd E. Panther, Nashville, Tennessee, for Appellant, Beazer Homes Corporation, d/b/a Phillips
Builders, Inc.

Paul T. Housch, Nashville, Tennessee, for Appellees, Arthur Ingram, Jr., et al.
                                                       OPINION

        This civil action arises from the 1994 sale of a newly constructed house and lot backing up
to a subdivision common area with an existing natural sinkhole, which is utilized for surface water
drainage from several nearby lots. During development of the subdivision and before being seen by
the plaintiffs, the defendant had placed large crushed rock in and near the sinkhole and filled the area
including a portion of the lot purchased by the plaintiffs. In 1997 state environmental authorities
became concerned that sediment was getting into subsurface water through other sinkholes in the
subdivision and met with the homeowners' association, which owned the common areas with all
sinkholes.

        The plaintiffs became concerned about the ground settling in their back yard and about
perceived dangers of the nearby sinkhole. In 1998, they sued the defendant as subdivision developer,
house builder, and seller of the property and sought rescission or alternative relief. The Chancery
Court ordered rescission with the plaintiffs recovering the appreciated value at the time of trial and
the cost of improvements, plus prejudgment interest on that total, but without any setoff for the rental
value during the plaintiffs' occupancy. The defendant appeals and contends that an adequate legal
remedy made rescission inappropriate or, in the alternative, that the amount to be paid to the
plaintiffs for rescission was not properly calculated. We reverse and remand due to errors in the trial
court's calculation of the amount payable upon rescission and related issues. While we could affirm
the rescission, we are reluctant to limit the parties and the trial court to that remedy, since we
anticipate additional proof by the parties and a significantly different result upon remand.

         I.        FACTS AND PROCEDURAL HISTORY

        This case involves Lot 11 of Brandywine Subdivision developed by the defendant, Phillips
Builders, Inc., near Smyrna in Rutherford County, Tennessee.1 The subdivision land had a number
of natural sinkholes. The defendant located the streets and the lots in such a way as to minimize the
effects of the sinkholes, which were primarily limited to common areas owned by a homeowner’s
association. Besides being the subdivision developer, the defendant was also constructing and
selling houses in the subdivision.

         According to the expert witnesses for both sides, sinkholes are common in the central basin
area of middle Tennessee and often serve as a natural drain for surface water. In fact, during the
development of this subdivision, governmental authorities expressly approved the use of sinkholes
in this subdivision as a means of providing for the drainage of surface water from lots and streets.

       Before the trial of this case in March of 2001, the defendant had developed 20 to 25
subdivisions in the previous fifteen years and had constructed 4,000 to 4,500 homes. Sinkholes had

         1
           Bea zer H ome s Corporation is m entioned only in the original pleadings and apparently is the parent of Phillips
Builders, Inc.

                                                            -2-
been encountered by the defendant in a number of other subdivisions, but no sinkhole has ever
affected a house built by the defendant.

        In November 1994 the plaintiffs, Arthur and Brenda Ingram, looked at, and signed a contract
to purchase Lot 11 in Phase I of Brandywine Subdivision with a house nearing completion. With
the help of a mortgage loan, the plaintiffs paid $118,635, which included $1,000 as a “premium” due
to Lot 11 backing up to a common area with trees, rather than to the back of another lot. The
plaintiff closed their transaction December 16, 1994, and immediately moved into the house.

       While the sales representative gave the Ingrams a “map” of the subdivision, the map did not
show sinkholes nor were the Ingrams otherwise made aware of the presence of a sinkhole in the
common area immediately behind their lot. They testified they did not know of the existence of the
sinkhole until April 1997.

       The first dispute between the parties arose in 1995 when the development of Phase II of the
subdivision resulted in the removal of many trees, which Phillips’ sales agent and the plaintiffs had
previously thought were in the common area, but were in fact on the rear of a lot in Phase II being
developed across the narrow common area from the plaintiffs’ back yard. Rock and soil were placed
in and around the sinkhole depression in the common area as the lots in Phase II were being
excavated. Later erosion and settlement of that rock and soil in the sinkhole area resulted in the
second and more serious dispute between the parties in 1997.

        In response to the 1995 removal of trees, the plaintiffs had an attorney, James Cope, write
the defendant October 5, 1995, requesting that the defendant refund the $1,000 lot premium because
the trees had been removed. The defendant contended in response that the plaintiffs' lot was still
“premium” to some extent because of the adjoining common area, and the parties agreed upon a
$500 refund which was paid by the defendant and accepted by the plaintiffs, thereby reducing the
purchase price to $118,135.

         In April 1997 a representative of the Tennessee Department of Environment and
Conservation met with the subdivision’s homeowners association to discuss sediment runoff getting
into underground water through certain sinkholes. The Department was not then concerned about
the sinkhole behind Lot 11, but the plaintiffs attended that association meeting and testified that was
their first knowledge of the existence of that sinkhole.

         Thereafter, the plaintiffs became concerned about depressed areas in their rear yard, about
a knee-deep hole developing near their rear lot line, and whether the sinkhole was expanding onto
their property and toward their house. It was not established whether the hole was on the plaintiffs’
lot, in the common area, or on the boundary between the two.

        After the April 1997 meeting, the plaintiffs had an attorney, Arnie Martin, send a letter asking
that something be done about the sinkhole. The defendant responded that the sinkhole was small,
stable, and performing as it should, but agreed that the area around it needed the exposed rock
removed and re-seeding. By a letter dated July 30, 1997, the plaintiffs and their third attorney,

                                                  -3-
Robert Notestein, requested that Phillips repair the sinkhole or trade the plaintiffs a new house and
lot. This was the first mention of anything akin to rescission.

        After the parties could not agree on what should be done to the sinkhole area, the plaintiffs
hired their fourth attorney, Gina Lewis, who filed a lawsuit in the Chancery Court of Davidson
County on August 11, 1998.2

       After two scheduling orders and the plaintiffs employing their fifth attorney, Paul T. Housch,
they employed Geotech Engineering Company, Inc., and its professional engineer, Louis Mishu, to
"obtain site-specific subsurface data in the back yard, between the house and the sinkhole . . . to
determine the likelihood that the sinkhole will migrate into the yard and possibly compromising the
foundation of the house.”

        Geotech’s subsurface investigation included three trenches dug with a backhoe and identified
as Test Pits 1, 2, and 3. That work was done January 31, 2000. Test Pit 1 was 45 feet long across
the back yard and parallel to the back of the plaintiffs’ house. The report shows that portion of Lot
11 had up to five feet of fill on top of the natural topsoil and that the fill material included trash,
vinyl siding, other construction debris, and parts of trees. Geotech’s second test pit near the
boundary with the common area revealed approximately 2½ to 4 feet of fill above the natural topsoil.
The third test pit in the front yard of Lot 11 showed less than a foot of fill material.

        Geotech concluded that the fill material in the Test Pit 1 area was unsuitable and that the
organic material in that fill would continue to decompose over time causing further settlement in the
back yard The report recommended that the material be removed and replaced with suitable soils
and adequately compacted to reduce the risk of future soil collapses in the back yard area. The
report, dated February 10, 2000, also stated the following:

       From this field investigation, it appears that the probability that the sinkhole behind
       the house affecting the house is low. There was no visible crevice seen during the
       trenching across the back yard. Also, no depressions or sinkholes were observed in
       the front yard and on the east and west sides of the house. However, in our opinion,
       it is unlikely that a sinkhole exists on the Ingram Property. There is always a risk of
       sinkhole development in this area that the owner should take. The risk of sinkhole
       development is not higher at this property than at the other houses in this subdivision.

        The Ingrams moved to amend their complaint on April 14, 2000, after learning of the
improper fill and its contribution to the settling of their back yard. Phillips Builders argued that
Tenn. Code Ann. § 28-3-202 prohibited such claim more than four years after the closing on
December 17, 1994. The trial court properly allowed the amendment to relate back. The discovery
of the concealed fill material during trial preparation was merely another explanation for the settling
problem which was the basis of the original complaint

       2
           No issue has been raised about venue.

                                                   -4-
        Mr. Mishu testified for the plaintiffs at the trial and said he saw “saucers” in the back yard
and thought they were the beginnings of sinkholes, but later discovered that they were caused by the
decomposition of the improper fill. He testified on direct examination that he did locate what he
called a sinkhole dropout about two feet wide and two feet deep on the boundary between the
plaintiffs’ lot and the common area, which he thought indicated the sinkhole was expanding. From
the context of the entire record it appears more likely that the hole described by Mr. Mishu resulted
from soil eroding around and through large crushed rock that was used in 1995 in the sinkhole area
when Phase II was developed and the trees were removed in or near the common area. Neither party
had any digging done around that hole near the property line to make a more specific determination
of whether it was related to improper excavation and fill or was related to the sinkhole.

        Mr. Mishu was properly permitted to give his opinion about the cost of removal and
replacement of the improper fill, along with topsoil and re-seeding, which he estimated would cost
$12,000. That same cost figure was used by the plaintiffs’ real estate appraiser in lowering the value
of the property $12,000 below what comparable sales suggested it should be worth without the
improper fill and the sinkhole.

       A witness for the defendant testified that the improper fill could be removed for as little as
$1,500 and that the plaintiffs’ depressions and the hole were caused by the improper fill and not by
any expansion of the sinkhole.

        After a three-day trial, the chancellor suggested the attorneys submit proposed findings of
fact and conclusions of law. The trial court adopted all 84 of the plaintiffs’ proposed findings of fact
and adopted fifteen of the sixteen conclusions of law proposed by the plaintiffs, rejecting only
proposed conclusion 14 regarding concealment, intentional misrepresentation and the awarding of
punitive damages.

        The plaintiffs' proposed findings, though not fully supported by the preponderance of the
evidence, were adopted verbatim in the trial court’s final judgment. Specifically, the evidence shows
the depressions between the plaintiffs’ house and rear lot line and the hole near that line to be a result
of decomposing fill and of the settling and erosion around the crushed rock, rather than an expansion
of the sinkhole itself. Therefore, the findings of fact and conclusions suggest the sinkhole to be far
more serious and threatening than the actual evidence in the trial.

        The plaintiffs testified the value of their property at the time of trial was $145,000 to
$150,000. Their appraisal expert testified the property would have been worth $133,000 without the
sinkhole and bad fill, but was worth only $121,000 with those alleged defects. The plaintiffs
itemized $12,535 spent on alleged interior and exterior improvements since the 1994 closing. The
trial court adopted proposed findings and conclusions which allowed the plaintiffs to recover
$145,000 plus the actual costs of improvements, or a total of $157,535, even though the market
value, if any, of those improvements should already be included in the $145,000, which is certainly
generous in light of the opinion of the plaintiffs' own expert.

                                                   -5-
        The trial court also ordered that the plaintiffs recover prejudgment interest in the amount of
$98,837.00, which was calculated at the rate of 10% from the closing of December 16, 1994, to the
last day of the trial, March 26, 2001. That amount was supposedly figured on the $157,535.

        The prejudgment interest recovery exceeds the plaintiffs' actual mortgage principal and
interest payments of $75,392.72, real estate taxes of $6,765.64, mortgage insurance premiums of
$3,491.59, flood insurance of $2,226.50, and homeowners association dues of $720.00, for a
combined total of $88,596.45. The trial court's prejudgment interest award therefore exceeded by
more than $10,000 the amount of the plaintiffs' actual expenditures, a portion of which reduced their
mortgage indebtedness. If there is to be rescission, the plaintiffs would recover the principal portion
of all mortgage payments when paying off the reduced debt out of rescission proceeds.

       The record does not include any evidence of the fair rental value of the property between
closing and trial. The failure of the parties to offer evidence of rental value suggests that neither
expected rescission to be ordered or that they overlooked the case law regarding rescission when
property was occupied and used by the purchasers.

        II.     STANDARD OF REVIEW

        Tenn. R. App. P. 13(d) establishes that this court shall conduct a de novo review of findings
of fact by the trial court in a non-jury trial, with the trial court’s findings accompanied by a
presumption of correctness, unless contrary to the preponderance of the evidence.

        This court also gives great weight to a trial court’s factual findings that rest on determinations
of credibility. Walton v. Young, 950 S.W.2d 956, 959 (Tenn. 1997). However, if the trial judge has
not made a specific finding of fact on a particular issue, this court may review the record to
determine where the preponderance of evidence applies without applying a presumption of
correctness. Devorak v. Patterson, 907 S.W.2d 815, 818 (Tenn. Ct. App. 1995).

       While the appellate courts review findings of fact with a presumption of correctness,
conclusions of law are reviewed de novo without any such presumption. Hawks v. City of
Westmoreland, 960 S.W.2d 10 (Tenn. 1997); Nutt v. Champion International Corp., 980 S.W.2d
365, 367 (Tenn. 1998).

       In reviewing a trial court’s decision, this court has the responsibility to apply the controlling
law, whether or not cited or relied upon by either party. McClain v. Kimbrough Construction Co.,
806 S.W.2d 194 (Tenn. Ct. App. 1990).

       Finally, if a finding of fact is based on undisputed evidence that can reasonably support only
one conclusion, an appellate court will review that finding without a presumption of correctness.
Hamblen County Educational Association v. Hamblen County Board of Education, 892 S.W.2d 428,
431 (Tenn. Ct. App. 1994).

                                                   -6-
        In applying the foregoing principles, this court is mindful that the trial court's findings of fact
were a verbatim adoption of 84 paragraphs drafted by the plaintiffs' counsel. A trial court’s findings
and conclusions must be its own. Suggested findings and conclusions by counsel can be of
assistance to the trial court, but findings prepared by the trial judge which represent his independent
labor are preferable. Before adopting findings prepared by counsel, the trial judge should carefully
examine them to establish that they accurately reflect his views and conclusions, and not those of
counsel, who are naturally biased . Delevan-Delta Corp. v. Roberts, 611 S.W.2d 51, 52-53 (Tenn.
1981).

        III.    LAW AND ANALYSIS

        The principal issue presented by this appeal is whether rescission was appropriate under the
facts of this case. Tenn. Juris. Rescission, Cancellation, and Reformation, generally states the
Tennessee law on rescission as follows:

                A "rescission" amounts to the unmaking of a contract, or an undoing of it
        from the beginning . . . . It is the annulling, abrogation of the contract and the placing
        of the parties to it in status quo. It necessarily involves a repudiation of the contract
        and a refusal of the moving party to be further bound by it. See id. § 2.
                                                    ***
                If the parties cannot be put in status quo, or if, due to the passage of time, etc.,
        equity cannot be done, there is no ground for rescission. Thus, a contract will not be
        rescinded if the parties cannot be placed in status quo. See id. § 10.
                                                    ***
                Where the vendee elects to treat the contract as closed and absolute, and sues
        for breach of warranty, the measure of damages is the difference between the value
        of the property contracted for and that delivered . . . . See id. § 14.
                                                    ***
                Any conscious recognition of the contract as binding with knowledge of the
        fraud bars the right of rescission. Thus, a party, after having filed a suit for
        rescission, may by his subsequent actions inconsistent with his prayer for rescission,
        thereby affirm the voidable transaction and bar himself from his pending claim for
        rescission. . . . A failure to rescind with reasonable promptitude amounts to
        affirmation of the contract. See id. § 15.

        In Fullington v. Meadows, Inc., No. 03A01-9212-CA-00439, 1993 WL 166287 ( Tenn. Ct.
App. May 18, 1993), there was a sink or depression along the side lot line between Lots 8 and 9 of
a residential subdivision. Witnesses familiar with the history of the land testified that area previously
had an open sinkhole in which trash had been placed. When the subdivision was developed, the area
was merely a low place surrounded by small locust trees. Fullington bought Lot 8 and built and
occupied a house thereon. Lot 9 was sold to another person named Setsor, but remained unimproved
and vacant. After heavy rains a hole of significant size opened between the two lots, and rescission
of both transactions was ordered and affirmed on appeal. Fullington had purchased the vacant lot

                                                    -7-
for $8,000 and spent $61,000 for erection of a house and was allowed to recover the full $69,000.
The owner of Lot 9 was awarded his purchase price of $12,500.

       The trial court’s granting of prejudgment interest in Fullington was reversed for the following
reasons:

       We must respectfully disagree with the chancellor's exercise of discretion in this case.
       The chancellor specifically noted that there was no intentional fraud on the part of
       the defendant. The record reflects that the Fullingtons have been able to live on the
       property, although perhaps not able to enjoy it to its fullest extent. At any rate, no
       allowance was made for Fullington's occupancy and use of the property. Under the
       circumstances, equity would seem to demand that no award of interest be made on
       top of the free use of the property. As to Setsor [owner of Lot 9], there is nothing in
       the record to indicate that Setsor made any attempted use of the property as impaired,
       nor was there any proof that any sales efforts were made and thwarted by the defect
       in the property. From our view of the record in this case, the equities do not justify
       an award of prejudgment interest.

       The Fullington case involved a defect in the property itself, which “seriously and
substantially impaired the use of the property as residential lots.” In contrast, the sinkhole in the
common area behind the Ingrams' lot only slightly, if at all, affects their settling and erosion
problems, which are caused primarily by the improper fill.

         Isaacs v. Bokor, 566 S.W.2d 532 (Tenn. 1978), affirmed rescission and the purchasers’
recovery of the purchase price and value of improvements less any use or rental value of the
property. That case arose from that defendant’s sale of a multi-acre tract of land and contract to
build the plaintiff a residence upon that land. Unfortunately, the building site agreed upon before
the contract and closing, where construction of the residence began after closing, was on an adjoining
tract owned by a non-party. The Isaacs opinion has a thorough discussion of the alternative remedies
available to a purchaser who is the victim of a misrepresentation or who has been induced to contract
through a mistake of material facts, and is frequently quoted as follows:

       It is too narrow a view to state that a vendee, upon rescission, is limited solely to the
       purchase price which he paid for the property. Where he has changed his position
       and made improvements, he may well be entitled to recover for their value, although,
       in attempting to restore the parties to their former status, courts may require the
       vendee to account to the vendor for the use or rental value of the property, to convey
       improvements to him, and to restore to the vendor anything of value which the
       vendee has received from him in the rescinded transaction.

566 S.W.2d at 540.

        Rescission is an equitable remedy and is not enforceable as a matter of right but is a matter
resting in the sound discretion of the trial court, and the court should exercise the discretion

                                                 -8-
sparingly. Thus the question before this appellate court is whether the trial court abused its
discretion in granting rescission. Vakil v. Idnani, 748 S.W.2d 196, 199-200 (Tenn. Ct. App. 1987).

       In Harrison v. Laursen, No. 01A01-9204-CV-00177, 1992 WL 301309 (Tenn. Ct. App. Oct.
23, 1992), this court stated:

                The remedy of rescission involves the avoidance, or setting aside, of a
       transaction. It usually involves a refund of the purchase price or otherwise placing
       the parties in their prior status. Mills v. Brown, 568 S.W.2d 100, 102 (Tenn. 1978).
       Damages for breach of contract, on the other hand, place the injured party, as nearly
       as possible, in the same position he would have been if the contract had been
       performed. Wilhite v. Brownsville Concrete Co., Inc., 798 S.W.2d 772, 775 (Tenn.
       App. 1990).
                Because these remedies are inconsistent, it is necessary for the injured party
       to elect which remedy to pursue. The law does not allow one to repudiate a contract
       on one hand and claim the benefits of the contract on the other. Isaacs v. Bokor, 566
S.W.2d 532, 537-38 (Tenn. 1978).
                                                  ***
                 . . . . When rescission is granted, the seller is entitled to compensation from
       the buyer for use of the real estate. Such damages are normally measured by the
       rental value of the property while the buyer had the property in his possession or
       under his control. Isaacs v. Bokor, 566 S.W.2d 532, 540. . . . However, such
       damages cannot be speculative; instead, they must be proven with reasonable
       certainty. Buice v. Scruggs Equipment Co., 37 Tenn. App. 556, 571, 267 S.W.2d 119,
       125 (1953).
                In the present case the Harrisons [sellers] have failed to present any proof as
       to the rental value of the property. The lower court’s award of the mortgage
       payments appears to represent a convenient figure chosen because it was available.
       Without proof a finding that such payments were equivalent to the rental value of the
       property would be based on pure speculation.
                Although we do not ordinarily give a party a second chance to prove his
       damages, whole justice would not be accomplished in this case if the Laursens
       [buyers] could recover the amounts they had paid and were not required to reimburse
       the Harrisons for the use of the land. Thus, we remand the case to the lower court in
       order to give the Harrisons the opportunity to present proof concerning the rental
       value of the property while the property was in the Laursens’ possession. In
       determining the amounts owed to each party, the lower court should take into account
       the matters discussed below.
                                                  ***
                Under certain circumstances the buyer is entitled to recover the value of any
       improvements to the property. Estate of Minton v. Markham, 625 S.W.2d 260, 262
       (Tenn. 1981). The measure of compensation is the enhanced value of the land in the
       market as a result of the permanent improvements estimated at the time the election
       of rescission was made. Masson v. Swan, 53 Tenn. 450, 456 (1871).

                                                 -9-
                                               ***
               In summary, we hold that the Laursens are entitled to recover the amounts
       paid on the purchase price plus the taxes. The Harrisons are entitled to be
       compensated for the use of the land while it was in the Laursen's [sic] possession. If
       the changes made on the property by the Laursens increased its value, they are
       entitled to the increase; if the changes caused the property to depreciate, the
       Harrisons are entitled to recover the amount of the depreciation.

       In the case of Campbell v. Lane, No. 03A01-9205-CH-00179, 1992 WL 335947 ( Tenn. Ct.
App. Nov. 18, 1992), rescission was denied because the plaintiffs continued to live in the residence
and make mortgage payments to their vendors after the alleged rescission, thereby nullifying their
attempted rescission by their subsequent acceptance of benefits growing out of the contract.
However, it was not practical for the Ingrams to cease payments and vacate the property because
their mortgage payments were not owed to the defendant.

        With regard to the prejudgment interest issue, Tenn. Code Ann. § 47-14-123 (2001) provides
that such interest, when permitted by law, "may be awarded . . . . in accordance with principles of
equity at any rate not in excess of a maximum effective rate of ten percent (10%) per annum."
(Emphasis added.)

        In this case, the Ingrams cannot recover any prejudgment interest for the period they occupied
and used the property, unless, and only then to the extent, they can show that their actual interest,
taxes and other ownership expenses exceeded the rental value of the property. Neither may they
recover the appreciation in value attributable only to the passage of time. Such appreciation is
inconsistent with the restoring of the parties to the status quo existing at the time of the sale. The
Ingrams may recover only the $118,135 purchase price plus the amount by which their alterations
increased the fair market value of the property. If their alterations decreased the market value of the
property, such decrease would be deducted. There is no authority for adding actual costs of such
alterations. If these limitations produce a harsh result, then the Ingrams should on remand elect
damages over rescission.

       IV.     CONCLUSION

        This court concludes that the sinkhole has only a slight, if any, effect on the rearmost portion
of the plaintiffs’ lot and has no effect whatsoever upon the remainder of the lot, the house and other
improvements. However, the continued natural use of the sinkhole as a method of disposing of
surface water combines with the improper and decomposing fill material on Lot 11 to constitute a
sufficient defect justifying rescission. Neither alone would be sufficient, especially after the passage
of so much time before rescission was suggested and with the likelihood of an adequate alternative
remedy. Even though this court concludes that rescission may be justified and could be affirmed,
this case must be remanded to the trial court for further proceedings on several issues.

       First, the trial court ordered the defendants to pay the appreciated value of the property,
which included the value of any improvements, and then added the actual cost of those same

                                                 -10-
improvements. As indicated by the foregoing cases, rescission normally requires reimbursement of
the purchase price, adjusted by the amount by which the vendees' alterations increased or decreased
the market value of the property. The vendees' actual costs for such alterations are relevant only in
supporting or disputing their effect on market value. By adopting the plaintiffs' proposed findings
and conclusions, the trial court effectively required payment for both the cost and the market value
of the improvements, plus prejudgment interest on both from the closing date, without any regard
for when the improvements were made.

        Secondly, the prejudgment interest was calculated on the appreciated value from the date of
closing, when any such appreciation likely occurred gradually over the six-plus years between
closing and trial. That method of calculation effectively resulted in something akin to an improper
compounding of interest on any amount above the purchase price. See, Otis v. Cambridge Mut. Fire
Ins. Co., 850 S.W.2d 439 (Tenn. 1992).

         Thirdly, and most importantly, the trial court ordered prejudgment interest at the maximum
discretionary rate from the December 1994 closing on the transaction without offsetting or taking
into consideration the rental or use value of the property since that time. If this property had been
vacant and of no use to the plaintiffs during their ownership, prejudgment interest on the purchase
price might be appropriate. However, such would be a windfall to the plaintiffs who have continued
to use the property as their residence since 1994, unless there is a setoff for the rental value since that
time. This court assumes that the mortgage interest, real estate taxes, and homeowner association
fees would approximately equal the fair market rental value for the property since closing, but the
parties will be permitted to offer evidence on this issue on remand.

        Fourthly, in this case, the trial court's use of the statutory maximum 10% rate for prejudgment
interest resulted in an amount that far exceeded the total of all of the plaintiffs' actual payments for
interest and principal on their mortgage, for real estate taxes, for mortgage insurance premiums, for
flood insurance, and for homeowners association dues. Such is contrary to the spirit of Tenn. Code
Ann. § 47-14-123 (2001), the holding in the Fullington case, and equity principles in general.

        This court has been confronted by the dilemma of choosing between one of the following:
(1) find rescission inappropriate because the off-site sinkhole had little or no impact and the
improper fill could be remedied with damages up to $12,000; or (2) affirm the rescission for
$118,135 without additional compensation for alterations or prejudgment interest; or (3) affirm the
rescission, but remand for determination of the appropriate amount, after reopening proof for offset
of rental value against the plaintiffs' ownership interest and expenses; or (4) remand all issues,
including rescission, for reconsideration in accordance with this opinion and new evidence on
reopening the proof of both parties.

        The Campbell case and the general law of rescission is precedent for the first option of
denying rescission in this case and limiting the plaintiffs to damages only. The Fullington case is
precedent for the second option of merely vacating the award of prejudgment interest and affirming
the rescission for $118,135. The Harrison case is precedent for the third option of affirming
rescission but remanding for the parties to reopen their proof for offsetting claims of interest and

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expenses incurred by purchasers against the rental value of the property and whether alterations
increased or decreased the property value. Even though the defendant did not offer any evidence of
rental value at the trial, the defendant would be entitled to offer such proof upon remand.

         We believe the fourth option is the one most likely to produce a just result to this litigation.
The trial court need not begin anew, but can hear additional evidence from both parties, make some
preliminary findings of fact and conclusions, and let the parties argue between the adequacy of
damages and necessity of rescission. Even if the trial court concludes rescission is still an
appropriate remedy, the plaintiffs may conclude the recovery is too limited at this time and prefer
to retain their property and recover damages adequate to rework their back yard or as compensation
for retaining it as is. Normally, an election must be promptly made as to whether the purchasers
reject the contract and seek rescission versus retaining the property and seeking damages. Here,
however, the election could be after the close of additional proof on remand, because the improper
fill was not discovered as a cause of the problems until five years after closing and well into this
litigation.

        Assuming that fair market rental value may equal or exceed actual ownership interest and
expenses, the plaintiffs could conclude that rescission is not in their best interest, and they may elect
to instead seek damages for the estimated excavation, removal, refilling, top dressing, and seeding
of their back yard so as to give them the benefit of their bargain. It may be appropriate on remand
for the trial court to decide the appropriate amount payable by the defendant for rescission versus
the appropriate amount recoverable by the plaintiffs for damages in lieu of rescission. The plaintiffs
could then make an election of which remedy they prefer.

         Since it appears the plaintiffs are entitled to ultimate relief, but the defendant was entitled to
relief from the trial court judgment, the costs in this court are adjudged one-half against the plaintiffs
and one-half against the defendant.

                                                 ___________________________________
                                                 ROBERT L. JONES, SPECIAL JUDGE

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