Court Opinion

ID: 1044102
Source: CourtListenerOpinion
Date Created: 2013-10-08 02:09:21.554825+00
Date Added: 2024-06-11T12:22:04.247944
License: Public Domain

IN THE COURT OF APPEALS OF TENNESSEE
                            AT NASHVILLE
                                    May 8, 2013 Session

                 DANNA OWEN v. TIMOTHY SCOTT HUTTEN

                 Appeal from the Circuit Court for Williamson County
                       No. 2010550     Michael Binkley, Judge

              No. M2012-02387-COA-R3-CV - Filed September 27, 2013

This case involves a man and a woman who formed a limited liability company under the
Tennessee Revised Limited Liability Company Act, Tenn. Code Ann. §§ 48-249-101 et seq,
with the ostensible purpose of investing in real estate. The only investment it made,
however, was the purchase of a house for the man and his children to live in. The woman
supplied all the money to buy the house, as well as all the capital that was invested in the
company. After personal differences arose between the parties, the woman petitioned the
court to dissolve the company and to distribute its assets. The man asked the court to divide
the assets of the company equally between the parties in accordance with the provisions of
Tenn. Code Ann. § 48-249-305(b). The woman asked the court to order that she be repaid
her entire financial contribution to the company. The trial court dissolved the company.
After hearing proof and argument, it ordered that the house be sold, with the net proceeds of
the sale to be applied first to the return of the woman’s capital contributions, with any profits
beyond those contributions to be divided equally between the parties. We affirm the trial
court.

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

P ATRICIA J. C OTTRELL, P.J., M.S., delivered the opinion of the Court, in which F RANK G.
C LEMENT, J R. and R ICHARD H. D INKINS, JJ., joined.

Joshua G. Strickland, David Scott Parsley, Michael K. Parsley, Nashville, Tennessee, for the
appellant, Timothy Scott Hutten.

John Lester Whitfield, Nashville, Tennessee, for the appellee, Danna Owen.
                                         OPINION

                    I. T HE F ORMATION AND D ISSOLUTION OF AN LLC

       The parties to this dispute are plaintiff Danna Owen, an experienced real estate
investor, and defendant Timothy Hutten, a disabled veteran and former advertising executive.
The parties met in early 2008 and began a dating relationship. Ms. Owen was relatively well
off, while Mr. Hutten primarily relied on his military disability check for living expenses.
Mr. Hutten wanted to purchase a home, but did not have the means to do so. Ms. Owen
wished to help him. She consulted with her attorneys, and on the basis of their advice, she
and Mr. Hutten formed a Limited Liability Company called Back 2 Good, LLC.

        The Articles of Organization for the LLC were filed with the Tennessee Secretary of
State on December 17, 2008. Mr. Hutten signed the Articles as the organizer of the LLC,
and Mr. Hutten and Ms. Owen both signed as its members. Although Mr. Hutten testified
that the parties intended to use the LLC as a vehicle for real estate investment, the only
property it acquired was a residence located at 5011 Country Club Court in Brentwood. All
the funds to purchase the residence ($340,000) were supplied by Ms. Owen. The warranty
deed to the property, executed on December 23, 2008, named Back 2 Good, LLC as owner.
After the purchase, extensive renovations were done on the property. Ms. Owen paid the
entire cost of those renovations, about $260,000.

        In April of 2009 Mr. Hutten, a divorced father of two teenaged children, moved into
5011 Country Club Court with his children. At about the same time, the relationship between
Ms. Owen and Mr. Hutten soured. Ms. Owen filed a Complaint for Declaratory Judgment
in the Williamson County Circuit Court on October 13, 2010, asking the court to declare the
rights of the parties to the real property at 5011 Country Club Court.

        Ms. Owen alleged that the parties had contemplated that Mr. Hutten would sign a
written lease and occupy the property, and that his rental payments would go towards the
purchase price until he owned the property. In the alternative, the LLC would eventually sell
the property and repay Ms. Owens for the purchase price. She further alleged that Mr.
Hutten had refused to sign the lease and did not made any rental payments. She accordingly
asked the court to quiet title and grant her exclusive ownership of the property, to terminate
Mr. Hutten’s membership in Back 2 Good, LLC, and order Mr. Hutten to pay reasonable rent
for the time he had occupied the property.

                                             -2-
       Mr. Hutten’s answer denied that the parties had contemplated that he would sign a
lease or that he refused to sign one. He admitted that he paid no rent, but claimed that he was
never required to pay rent, and he denied that he owed the LLC or Ms. Owen any money.
He asserted that the LLC owned the property, that the parties each owned 50% of the LLC,
and thus that he was entitled to 50% of its assets. Ms. Owen subsequently amended her
complaint to add a demand that the court terminate the LLC, pursuant to Tenn. Code Ann.
§ 48-249-616.

       On September 2, 2011, Ms. Owen filed a motion for partial summary judgment. She
asserted that she had a statutory a right to a judicial termination of Back 2 Good, LLC. She
contended that under Tenn. Code Ann. § 48-249-620 the court had the power to dissolve the
LLC and to distribute its assets on any basis that it deemed equitable. She also contended
that because she paid the purchase price and all the costs of renovation, the only equitable
distribution would be to award her the real property by judicial deed. On December 1, 2011,
the court entered a partial summary judgment for Ms. Owen, dissolving the LLC and
declaring that a hearing would be set to determine the distribution of its assets.

                      II. T HE D ISTRIBUTION OF THE LLC’S A SSETS

       The hearing was conducted on September 21, 2012. The parties were the only
witnesses to testify. There were some relatively minor discrepancies between the testimony
of Ms. Owen and Mr. Hutten. For example, Ms. Owen testified that she had an Operating
Agreement prepared for the LLC, as is required by Tenn. Code Ann. § 48-249-202 and 203,
and that Mr. Hutten promised several times to sign it, but never did, so the agreement was
never filed. Mr. Hutten admitted that he did not sign the document, but said that he never
saw it. Similarly, Ms. Owen testified that she prepared a lease agreement for the house at
5011 Country Club Court, which Mr. Hutten refused to sign. Mr. Hutten testified that he
never saw the lease because she never presented it to him.

       However, both parties agreed that Ms. Owen was the source of all the money used to
purchase and renovate the real property at 5011 Country Club Court. They also agreed that
Mr. Hutten did not make any financial contribution to the house or to Back 2 Good, LLC.
Ms. Owen testified that she did not write checks from her personal account to purchase or
renovate the real estate, but rather transferred money from her personal account to the LLC
account. Then she wrote checks from that account for real estate purposes. For his part, Mr.
Hutten testified that his contribution was to supervise the renovation of the property. He
declared that he “[w]atched over subcontractors, made sure they weren’t, you know, stealing,
slacking . . . provided some lunches for the crews to, you know, kind of keep them on the job,
maintain morale, that sort of thing.”

                                              -3-
       Ms. Owen entered into the record K-1 and 1065 forms for the years 2008, 2009 and
2010, which were filed as part of her personal income tax returns.1 Such forms are used to
report income or loss that flows through business entities such as partnerships and LLCs.
The 2008 form showed a contribution of $350,000 by Ms. Owen in the section for “capital
contributed during the year.” The 2009 form listed her capital contribution at $237,771, and
the 2010 form listed her capital contribution at $6,601.

        A separate form identified the LLC’s business activity as “investment in real estate.”
The K-1 forms did not show any profits, but rather losses of several thousand dollars every
year. Those losses were listed as being due to “investment expenses,” which Ms. Owen
testified reflected her payment of insurance, utilities and other expenses on the property at
5011 Country Club Court. She also submitted an itemized “Schedule of Transfers to Back
2 Good, LLC” which showed her total contributions to be $609,800.

       At the conclusion of testimony and argument, the trial court ruled from the bench. Its
ruling was memorialized in a judgment entered on October 10, 2012. The court found that
Ms. Owen had made capital contributions to the LLC totaling $609,800, and that Mr. Hutten
had made no capital contribution. The court rejected Mr. Hutten’s arguments that the
contributions were a gift to him or that he had somehow acquired sweat equity in the house
by overseeing the renovation work on the property.

       The court concluded that the best way to distribute the assets of the LLC would be to
place the house on the market for sale “as quickly as possible,” with Mr. Hutten given 60
days to vacate the premises. Ms. Owen was awarded the net proceeds after payment of the
expenses of the sale, up to a maximum of $609,800. The court declared that if the net
proceeds exceeded that amount, the remainder was to be split equally between the parties.2
The court denied Ms. Owen’s request that Mr. Hutten be ordered to pay the fair rental value
of the property he had occupied at the rate of $2,000 a month. Mr. Hutten appealed.

                                              III. A NALYSIS

       Our review on appeal of the trial court’s findings of fact is de novo with a
presumption of correctness, unless the evidence preponderates otherwise. Tenn. R. App. P.
13(d); Blair v. Brownson, 197 S.W.3d 681, 684 (Tenn. 2006); Bogan v. Bogan, 60 S.W.3d
721, 727 (Tenn. 2001); Hass v. Knighton, 676 S.W.2d 554, 555 (Tenn. 1984). We review

        1
            Mr. Hutten acknowledged that he did not file income taxes in 2008, 2009, or 2010.
        2
         Ms. Owen’s attorney stated during oral argument that the house was sold pursuant to the trial court’s
final order, and that it fetched less than $609,800.

                                                     -4-
a trial court’s conclusions of law de novo, with no presumption of correctness. Whaley v.
Perkins, 197 S.W.3d 665, 670 (Tenn. 2006); Union Carbide Corp. v. Huddleston, 854
S.W.2d 87, 91 (Tenn. 1993).

                                A. Capital Contribution

       The Tennessee Revised Limited Liability Company Act, Tenn. Code Ann. §§ 48-249-
101 et seq., contains detailed provisions for the formation, financing, management and
dissolution of Limited Liability Companies. An LLC may be created “for the purpose of
engaging in any lawful business.” Tenn. Code Ann. § 48- 249-104(a). It is formed by filing
Articles of Organization with the Tennessee Secretary of State, containing the information
required by Tenn. Code Ann. § 48-249-202.

       The Act contemplates (but does not require) that the members of the LLC enter into
an Operating Agreement to regulate the affairs of the organization, which need not be in
writing. Tenn. Code Ann. § 48-249-203(a). It is undisputed that no Operating Agreement
was ever signed or filed for Back 2 Good, LLC. Ms. Owen testified that Mr. Hutten refused
to sign the Operating Agreement that she prepared. She also testified that Mr. Hutten fully
understood that she expected to eventually receive repayment of her investment, either
through the payment of rent or through the sale of the property, and that although he did not
pay any rent, he moved into the house with an understanding of her expectations.

        A “capital contribution”is defined as “[c]ash, property, or services contributed by
partners to a partnership,”or “[f]unds made available by a shareholder, usually without an
increase in stock holdings.” B LACK’S L AW D ICTIONARY (7th ed. 1999). The trial court
concluded in this case that Ms. Owen’s investments in Back 2 Good, LLC constituted a capital
contribution to the company, and that upon the dissolution of the company, she was entitled
to the return of her contribution.

       The statutes governing capital contributions to an LLC are found at Tenn. Code Ann.
§ 48-249-301 and 302. For the most part, those statutes concern the legal effect of an
agreement to make a contribution to an LLC. Among other things, they state that “[n]either
a purported contribution nor an offer of consideration to make a contribution shall be treated
as a contribution,” until it is accepted as a contribution by its members and the amount and
value of the contribution are recorded in the LLC documents or its records. Tenn. Code Ann.
§ 48-249-301(c). Mr. Hutten insists that the parties did not comply with the above formalities
regarding contributions, and, therefore, the court should have been precluded from finding
that Ms. Owen made any such contributions to the LLC.

       We note, however, that Ms. Owen deposited the money to purchase the house at 5011

                                             -5-
Country Club Court into the LLC account. Mr. Hutten moved into the house and lived there
for over two years, thereby accepting the benefit of Ms. Owen’s contribution. The record
includes the K-1 and 1065 forms for Back 2 Good, LLC, for the years 2008, 2009, and 2010,
which Ms. Owen filed with her personal income tax returns. They document “the amount and
value” of her financial contributions to the company under a column for “Capital
Contributed.” Mr. Hutten does not dispute the fact or the amount of those contributions, but
only its characterization as a “capital contribution.”

        Mr. Hutten relies on the case of Braden v. Strong, 2009 WL 276737 (Tenn. Ct. App.
Feb. 3, 2009), which involved a dispute over the distribution of assets upon the dissolution
of three partnerships. One partner, Mr. Braden, had invested a considerable sum in one of the
businesses to keep it afloat. He asserted that it was a capital contribution, and he asked the
court to order the entire sum returned to him. The trial court found that there was no express
consent by the other partner, Ms. Strong, to a capital contribution, but that “the money had to
come from somewhere,” and that Mr. Braden supplied it, so there was implied consent.

       This court reversed, because there was no evidence in the record to support a finding
of implied consent, but only the trial court’s observation that “the money had to come from
somewhere.” Mr. Hutten particularly focuses on our statement that “[w]e find no basis upon
which to conclude that the mere infusion of cash into a business should be deemed a capital
contribution.” Braden v. Strong, 2009 WL 276737 at *3. We also suggested that “his cash
contributions could just as easily have been treated as loans to the partnership.” Id.

        In the present case, Mr. Hutten argues that the money contributed by Ms. Owen was
not, and could not be, a loan, observing that no promissory notes or other loan documents
were ever executed. His attorney was accordingly asked at oral argument what he thought
was the true nature of Ms. Owen’s contribution, and he suggested that because of the personal
relationship between the parties it was meant to be a gift. But he was unable to direct our
attention to any case where an individual was reported to have made a gift to an LLC.
Further, because Ms. Owen owned 50% of the LLC, Mr. Hutten’s after-the-fact
characterization of the money as a gift leads to an illogical conclusion.

        There are significant differences between the facts of Braden v. Strong and the facts
in the present case, even aside from the fact that Braden involved partnerships, while an LLC
is at the center of the present case. One important distinction is that the Braden partnerships
encompassed a number of different working businesses, including landscaping, construction,
antiques, and a cattle operation. The partners regularly worked at those businesses over a
period of years, generating revenue and profits. In contrast, Back 2 Good, LLC simply
bought and held a single piece of property, without transacting any other business.

                                              -6-
        Two of the three partnerships in the Braden case operated under written agreements
that set out each partner’s rights and responsibilities, including their respective contributions
of capital and labor to the formation of the business, the division of labor between them, and
the share each was entitled to as a result of those contributions. Deeming the money Mr.
Braden infused into the business to be a capital contribution without the specific assent of the
partners would have been in derogation of those specific agreements.3

       Conversely, there was no Operating Agreement in the present case, but there was
testimony by Ms. Owen that she intended her investment to be a capital contribution and that
Mr. Hutten understood it as such. Further, there was no alternate explanation for the
investment that made any sense. We accordingly agree with the trial court’s conclusion that
Ms. Owen’s investment in Back 2 Good, LLC was a capital contribution to the company.

                            B. The Distribution of the LLC’s Assets

       In the absence of an Operating Agreement containing provisions to the contrary, the
governing statutes in the Tennessee Revised Limited Liability Company Act presume that the
members of an LLC will share equally in both profits and losses, Tenn. Code Ann. § 48-249-
304(b), and also that they will equally share in any distributions. Tenn. Code Ann. § 48-249-
305(b). Mr. Hutten contends that under the second of those statutes, he is entitled to half of
the proceeds from the sale of the house at 5011 Country Club Court.

       There are several different methods for the dissolution of an LLC. It may be dissolved
by the agreement of its members or organizers, Tenn. Code Ann. §§ 48-249-602 and 603, by
administrative action, Tenn. Code Ann. §§ 48-249-604 and 605, or by judicial action, Tenn.
Code Ann. §§ 48-249-617 and 618. When, as in the present case, an LLC is dissolved by
judicial action, the relevant statute gives the court broad authority over the ultimate
distribution of its assets:

        A court may grant any equitable relief it considers just and reasonable under
        the circumstances, may dissolve an LLC or may direct that the dissolved LLC
        be merged into another or new LLC or other entity, or otherwise be terminated,
        on the terms and conditions the court deems equitable.

        3
          The opinion cited by Mr. Hutten was one of two involving the dissolution and distribution of the
assets of the three partnerships. That opinion does not contain much information about the formation and
operation of the partnerships. We have drawn the information we have cited from this court’s earlier opinion
in that case, Braden v. Strong, 2006 WL 369274 (Tenn. Ct. App. Feb. 16, 2006) (no Tenn. R. App. P. 11
application filed).

                                                    -7-
Tenn. Code Ann. § 48-249-616.

         The trial court exercised its discretion in this case to fashion a judgment that allowed
the return to Ms. Owen of her capital contribution, to the extent that it could be recovered
from the sale of the property that was purchased by that contribution. The court also decreed
that if the net proceeds of the sale exceeded Ms. Owen’s contribution, those proceeds were
to be divided equally between the parties.

      A court’s discretionary decision may be reversed on appeal only if that discretion has
been abused. Eldridge v. Eldridge, 42 S.W.3d 82, 85 (Tenn. 2001); Boyd v. Comdata
Network, Inc., 88 S.W.3d 203, 211 (Tenn. Ct. App. 2002) Messer Griesheim Industries v.
Cryotech of Kingsport, Inc., 45 S.W.3d 588, 610 (Tenn. Ct. App. 2001).

      A trial court abuses its discretion only when it “applie[s] an incorrect legal
      standard, or reache[s] a decision which is against logic or reasoning that
      cause[s] an injustice to the party complaining.” State v. Shirley, 6 S.W.3d 243,
      247 (Tenn. 1999). The abuse of discretion standard does not permit the
      appellate court to substitute its judgment for that of the trial court. Myint v.
      Allstate Ins. Co., 970 S.W.2d 920, 927 (Tenn. 1998).
Eldridge v. Eldridge, 42 S.W.3d at 85.

        In this case, the trial court reached an equitable result that was just and reasonable,
which was within its discretion under the controlling law, and which did not cause any
injustice to Mr. Hutten. We accordingly affirm the trial court’s judgment.

                                      IV. C ONCLUSION

       The judgment of the trial court is affirmed. We remand this case to the Circuit Court
of Williamson County for any further proceedings. Tax the costs on appeal to the appellant,
Timothy Scott Hutten.

                                                     ___________________________________
                                                           PATRICIA J. COTTRELL, JUDGE

                                               -8-