Court Opinion

ID: 8209733
Source: CourtListenerOpinion
Date Created: 2022-09-27 21:10:32.640058+00
Date Added: 2024-06-11T16:41:44.235477
License: Public Domain

09/27/2022
                IN THE COURT OF APPEALS OF TENNESSEE
                             AT JACKSON
                                  April 19, 2022 Session

  THOMAS KRAJENTA ET AL. v. VOLKER PAUL WESTPHAL ET AL.

                  Appeal from the Chancery Court for Shelby County
                   No. CH-18-0278 JoeDae L. Jenkins, Chancellor
                       ___________________________________

                            No. W2021-00832-COA-R3-CV
                        ___________________________________

Appellants, board members and members of Appellee homeowner’s association, filed a
pro se lawsuit against the homeowner’s association and other board members, who are also
Appellees. Appellees filed a motion to dismiss the amended petition on the ground that
Appellants failed to bring a proper derivative action. Appellants filed voluntary nonsuits
before the trial court heard the motion to dismiss. Despite the voluntary nonsuits, the trial
court granted the motion to dismiss and denied the voluntary nonsuits. The trial court also
awarded Appellees a portion of their attorney’s fees under Tennessee Code Annotated
section 48-56-401(e), and, alternatively, under Tennessee Code Annotated section 20-12-
119(c). Because the trial court should have allowed Appellants’ nonsuits, we: (1) reverse
the trial court’s denial of the nonsuits; (2) vacate the trial court’s order granting Appellees’
motion to dismiss; and (3) vacate the trial court’s order granting Appellees’ attorney’s fees.
The trial court’s order dividing the special master fees equally between the parties is
affirmed.

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

KENNY ARMSTRONG, J., delivered the opinion of the court, in which J. STEVEN STAFFORD,
P.J., W.S., and ARNOLD B. GOLDIN, J., joined.

Michael F. Rafferty and Emily Hamm Huseth, Memphis, Tennessee, for the appellants,
Thomas Krajenta, Johnny Pulliam, and Kim Wagner.

Jonathan L. Miley, Mt. Juliet, Tennessee, for the appellant, David G. Mills.

Canon F. Allen, Sr., Memphis, Tennessee, for the appellees, Volker Paul Westphal, Karen
Taylor, Mike Poindexter, Janice Tankson, and Riverwood Farms Association, Inc.
                                               OPINION

                                            I. Background

        This case arises out of a dispute between members of the Riverwood Farms
Association, Inc. (the “HOA”), the homeowner’s association that manages the Riverwood
Farms neighborhood in Cordova, Tennessee. The HOA is run by a Board of Directors (the
“Board”) consisting of seven homeowners, who are elected annually. On March 1, 2018,
Thomas Krajenta, Johnny Pulliam, Michael Pickens, David Mills (“Appellant Mills”),
Terry Coggins, and Kim Wagner (together, the “Petitioners”) filed a pro se verified petition
to appoint a receiver to administer the affairs of the HOA in the Chancery Court of Shelby
County (“trial court”).1 The petition listed only the HOA as a defendant. At the time of
the filing, Messrs. Krajenta, Pulliam, and Pickens were incumbent Board members of the
HOA. Appellant Mills was a former Board member, and Messrs. Coggins and Wagner
were homeowners and members of the HOA but not Board members.

        On May 1, 2018, the HOA filed a motion to dismiss the verified petition to appoint
a receiver. In essence, the motion argued that, “[b]ased on the allegations of the
[p]etition[,] the only action [the Petitioners] could bring [was] a derivative action,” and,
“[b]ecause they [did] not [bring a derivative action], the [p]etition should be dismissed.”
On May 14, 2018, the Petitioners filed a pro se first amended verified complaint for a
derivative suit, petition to stop ultra vires activity, verified petition to appoint a receiver to
administer the affairs of the HOA, and request for declaratory judgment (the “amended
petition”). The Petitioners added the other four incumbent Board members as defendants:
Volker Paul Westphal, Karen Taylor, Mike Poindexter, and Janice Tankson (together with
the HOA, “Appellees”). Although not pertinent to the issues raised in this appeal, we note
that the trial court appointed a special master to oversee a limited issue in May 2018.

        On June 7, 2018, Appellees filed a motion to dismiss the amended petition. In
pertinent part, and as discussed further below, Appellees alleged that, although the
Petitioners asserted that they were bringing a derivative action, they failed to bring a proper
derivative action. In support of their motion to dismiss, Appellees argued, inter alia, that
derivative actions require an attorney to file them. Because the Petitioners filed the lawsuit
pro se, Appellees maintained that it was not a proper derivative action and should be
dismissed. In their motion, Appellees requested attorney’s fees under two statutes,
discussed further below. We note that, when the petitions were filed, Appellant Mills was
a retired attorney with an inactive Tennessee license. On June 18, 2018, Carol Molloy, a
Massachusetts attorney (with a Tennessee license) and a former colleague of Appellant
Mills, filed an appearance on behalf of the Petitioners. The same day, the Petitioners filed
their response in opposition to the motion to dismiss the amended petition. On July 10,

        1
          For purposes of this appeal, it is not necessary to examine the underlying issues that precipitated
this lawsuit.
                                                   -2-
2018, after reinstating his law license, Appellant Mills filed a notice of appearance on
behalf of the Petitioners. Such notice provided that he would be lead counsel, and that Ms.
Molloy would remain as co-counsel.

        On July 13, 2018, Appellees filed a motion to disqualify Appellant Mills as counsel
for the Petitioners, arguing that he could not serve in such capacity because he was a
“material witness” in the lawsuit. On August 6, 2018, Appellant Mills filed a voluntary
nonsuit without prejudice of his action against Appellees. On August 31, 2018, the trial
court entered an order granting Appellees’ motion to disqualify Appellant Mills as the
Petitioners’ counsel on its finding that Appellant Mills was “likely to be a necessary
witness” at trial. On October 12, 2018, attorneys Emily Hamm Huseth and Michael F.
Rafferty filed notices of appearance as well as a motion to substitute counsel on behalf of
all of the Petitioners except for Appellant Mills. Although Ms. Molloy filed an objection
to the substitution, the trial court granted it on October 29, 2018. On November 30, 2018,
Messrs. Krajenta, Pickens, Pulliam, Coggins, and Wagner filed a notice of voluntary
nonsuit without prejudice.

       Despite the voluntary nonsuits, the trial court heard Appellees’ motion to dismiss
on December 7, 2018. By order of January 31, 2019, the trial court denied both voluntary
nonsuits and granted in part and denied in part Appellees’ motion to dismiss. The trial
court reserved the issue of attorney’s fees. The trial court’s January 31st order does not
provide any explanation as to why it denied the nonsuits and granted the motion to dismiss,
and there is no transcript of the hearing or the trial court’s oral ruling.

       On April 17, 2020, Appellees filed their motion for fees and expenses. Appellees
argued that the trial court had the authority to award them $118,832.00 for fees and
expenses under Tennessee Code Annotated section 48-56-401(e), which allows for the
award of reasonable expenses (including attorney’s fees) in the defense of a frivolous or
bad-faith derivative action against a non-profit corporation. Alternatively, Appellees
argued that the trial court should award them fees and expenses under Tennessee Code
Annotated section 20-12-119(c), which compels an award of up to $10,000.00 for a party
that successfully brings a motion to dismiss, i.e., the “loser pays” statute. On May 31,
2020, Appellant Mills filed a motion for special appearance and opposition to Appellees’
motion for attorney’s fees. On February 24, 2021, Messrs. Krajenta, Pulliam, Pickens, and
Wagner filed a response in opposition to Appellees’ motion for fees and expenses. We
note that, by this time, Mr. Coggins had filed a petition for bankruptcy and was no longer
an active party in this case.

       On February 26, April 12, and May 13, 2021, the trial court heard Appellees’ motion
for fees and expenses. As discussed more fully below, by order of July 8, 2021, the trial
court awarded Appellees: (1) a $95,000.00 judgment under Tennessee Code Annotated
section 48-56-401(e); and, alternatively, (2) a $10,000.00 judgment under Tennessee Code
Annotated section 20-12-119(c). Both judgments were awarded jointly and severally
                                            -3-
against Appellant Mills, and Messrs. Krajenta, Pulliam, Pickens, and Wagner. Appellant
Mills appeals. Separately, Messrs. Krajenta, Pulliam, and Wagner (the “Krajenta
Appellants,” and together with Appellant Mills, “Appellants”) also appeal.2

                                                II. Issue

       Although the parties raise several issues on appeal, we perceive the dispositive issue
to be whether the trial court erred in denying Appellants’ voluntary nonsuits.

                                      III. Standards of Review

        The issue in this case requires this Court’s review of the Tennessee Rules of Civil
Procedure and statutory construction, both of which are questions of law, which we review
de novo with no presumption of correctness. See Lacy v. Cox, 152 S.W.3d 480, 483 (Tenn.
2004) (rules of civil procedure); In re Estate of Tanner, 295 S.W.3d 610, 613 (Tenn. 2009)
(statutory construction).

                                              IV. Analysis

        As an initial note, we agree with the Krajenta Appellants that this case presents a
“legal quagmire,” which is further complicated by the trial court’s incomplete and
contradictory orders. Given that this case turns on the question of whether the trial court
should have allowed Appellants’ voluntary nonsuits, we begin with a review of Tennessee
Rule of Civil Procedure 41.01, which governs voluntary nonsuits to dismiss actions without
prejudice. The rule provides that, “[s]ubject to the provisions of Rule 23.05, Rule 23.06,
or Rule 66 or of any statute, . . . plaintiff[s] shall have the right to take a voluntary nonsuit
to dismiss an action without prejudice by filing a written notice of dismissal at any time
before the trial of a cause . . . .” Tenn. R. Civ. P. 41.01(1) (emphasis added). Under the
plain language of Rule 41.01, unless an exception applied, it was error for the trial court to
deny Appellants’ voluntary nonsuits.

       One of the exceptions to Rule 41.01 is found in Rule 23.06. Rule 23.06 provides
that, when a plaintiff brings a derivative action on behalf of a corporation, the plaintiff is
required to seek court approval before the action may be voluntarily dismissed. Tenn. R.
Civ. P. 23.06. Similar provisions are found in the statutes concerning derivative actions,
Tennessee Code Annotated section 48-56-401 (addressing derivative actions on behalf of
non-profit corporations) and section 48-17-401 (addressing derivative actions on behalf of
for-profit corporations). See Tenn. Code Ann. § 48-56-401(d); Tenn. Code Ann. § 48-17-
401(c). As discussed further below, although the trial court’s denial of the voluntary
nonsuits was premised on Rule 23.06 and Tennessee Code Annotated section 48-56-401,

        2
          Mr. Pickens did not file a timely appeal of the trial court’s order. Accordingly, he is not a party
to this appeal.
                                                   -4-
the trial court made contradictory findings concerning whether Appellants’ lawsuit
constituted a proper derivative action. The resolution of this question is important. If
Appellants did not bring a proper derivative action, then Appellants would not have been
required to obtain the trial court’s approval of the voluntary nonsuits; under this scenario,
the trial court’s denial of the nonsuits would constitute reversible error. Accordingly, the
threshold question is whether Appellants brought a proper derivative action.

       “A derivative action is an extraordinary, equitable remedy available to shareholders
when a corporate cause of action is, for some reason, not pursued by the corporation itself.”
Memphis Health Ctr., Inc. ex rel. Davis v. Grant, No. W2004-02898-COA-R3-CV, 2006
WL 2088407, at *8 (Tenn. Ct. App. July 28, 2006) (quoting Lewis v. Boyd, 838 S.W.2d
215, 221 (Tenn. Ct. App. 1992)). As the Tennessee Supreme Court has explained, “[a]
shareholders’ derivative action seeks redress for a wrong to the corporation, and the right
of the shareholder to maintain the action is derivative or secondary.” Keller v. Est. of
McRedmond, 495 S.W.3d 852, 868 (Tenn. 2016) (citation omitted) (emphasis added).
“The derivative suit is a statutorily created substantive right.” Walker v. Tri-Cnty. Elec.
Membership Corp., No. 01-A-01-9002-CH00049, 1990 WL 120721, at *4 (Tenn. Ct. App.
Aug. 22, 1990). “To guard against misuse of the derivative action, preconditions to such
lawsuits are imposed.” Memphis Health Ctr., Inc. ex rel. Davis, 2006 WL 2088407, at
*9. Indeed, to “ensure that the statutory scheme provided for the maintaining of a
derivative suit remains uniform[,] . . . a party must meet all the requirements of both
[Tennessee Rule of Civil Procedure] 23.06 and Tennessee Code Annotated section 48-56-
401.” Walker, 1990 WL 120721, at *3. We turn to those requirements now.

        As an initial matter, any action “to redress injuries to a corporation . . . cannot be
maintained by a stockholder in his own name but must be brought in the name of the
corporation . . . and can be asserted only through the corporation.” Third Nat. Bank in
Nashville v. Celebrate Yourself Prods., Inc., 807 S.W.2d 704, 707-08 (Tenn. Ct. App.
1990) (emphasis added) (citing Com. Credit Dev. Corp. v. Scot. Inns of Am., Inc., 69
F.R.D. 110, 117 (E.D. Tenn. 1975)). Tennessee Code Annotated section 48-56-401(a)
provides that a derivative suit may be brought by: (1) “[a]ny member or members having
five percent (5%) or more of the voting power or by fifty (50) members, whichever is
less; or (2) [a]ny director.” Tenn. Code Ann. § 48-56-401(a). Tennessee Code Annotated
section 48-51-201(12) defines “directors,” in part, as “natural persons . . . elected or
appointed to act as members of the board, irrespective of the names or titles by which such
persons are described[.]” Tenn. Code Ann. § 48-51-201(12). Although Tennessee law
permits individuals to represent themselves pro se, such laws “are not applicable to
corporations [as] a corporation cannot file a lawsuit pro se.” Humphreys v. Breakstone,
No. W1999-02502-COA-R3-CV, 2001 WL 99570, at *3 (Tenn. Ct. App. Jan. 30, 2001).
Because the Rules of the Tennessee Supreme Court “prohibit any person from engaging in
the practice of law without a license[,] a non-lawyer agent, such as a shareholder, may not
represent a corporation in court proceedings.” Id. (emphasis added) (citing Old Hickory
Eng’g & Mach. Co. v. Henry, 937 S.W.2d 782, 786 (Tenn. 1996)); see also Tenn. Sup.Ct.
                                             -5-
R. 7, § 1.01. In short, any derivative action brought by a pro se plaintiff is improper, and
any petition for a derivative action must be signed by a licensed attorney.

        Section 48-56-401 also provides that a complaint in a derivative action must be
verified and “allege with particularity the demand made, if any, to obtain action by the
directors and either why the plaintiffs could not obtain the action or why they did not make
the demand.” Tenn. Code Ann. § 48-56-401(c); see also Tenn. R. Civ. P. 23.06 (“The
complaint shall also allege with particularity the efforts, if any, made by the plaintiff to
obtain the action desired from the directors or comparable authority and, if necessary, from
the shareholders, or members, and the reasons for the plaintiff’s failure to obtain the action
or for not making the effort.”); Lewis, 838 S.W.2d at 221 (“The most common precondition
requires the shareholder to first make a written demand on the corporation’s directors
requesting them to prosecute the suit or to take other suitable corrective action.”).
However, if such a demand would be futile, this requirement may be excused. See
Humphreys v. Plant Maint. Serv., Inc., No. 02A01-98-11-CV-00323, 1999 WL 553715,
at *6 (Tenn. Ct. App. July 30, 1999); Lewis, 838 S.W.2d at 221. Lastly, Rule 23.06
provides that a “derivative action may not be maintained if it appears that the plaintiff does
not fairly and adequately represent the interests of the shareholders or members similarly
situated in enforcing the right of the corporation or association.” Tenn. R. Civ. P. 23.06.

       In the motion to dismiss the amended complaint, Appellees argued that Appellants
failed to satisfy several of the foregoing requirements for a proper derivative action.
Specifically, Appellees argued that the three incumbent board members, Messrs. Krajenta,
Pulliam, and Pickens, were the only Petitioners with standing to bring the suit, and that the
three non-board members, Messrs. Coggins and Wagner, and Appellant Mills, did not have
standing to bring the claim “because there [were] too few of them to bring a derivative
action.” See Tenn. Code Ann. § 48-56-401(a)(1). Thus, Appellees argued that the non-
board members should have been dismissed “because they [could] only assert those claims
as homeowners, not Board members.” Appellees also argued that the amended complaint
was not a properly filed derivative action because it was filed by pro se plaintiffs, not a
practicing attorney. See Humphreys, 2001 WL 99570, at *3 (citing Old Hickory Eng’g &
Mach. Co., 937 S.W.2d at 786). Additionally, Appellees argued that the amended
complaint “contain[ed] no allegations as to what steps Petitioners took to get the Board to
appoint a receiver or get the homeowners to demand that the Board hire a receiver.” See
Tenn. Code Ann. § 48-56-401(c); see also Lewis, 838 S.W.2d at 221-22. Lastly, Appellees
argued that the amended complaint contained “no allegations that the Petitioners ‘fairly
and adequately’ represent[ed] the interest of the shareholders,” and that “Petitioners [did]
not even allege in conclusory fashion that they ‘fairly and adequately’ represent[ed] the
homeowner members.” See Tenn. R. Civ. P. 23.06. Appellees argued that the foregoing
shortcomings required the trial court’s dismissal of “all claims against the HOA[.]”

      Although the trial court failed to articulate why it granted Appellees’ motion to
dismiss, we deduce from its July 8, 2021 order on fees and expenses that the trial court
                                          -6-
adopted Appellees’ arguments, supra. In the order on fees and expenses, the trial court
found, in part, that Appellants: (1) failed to make a demand to the HOA Board prior to
filing suit but alleged that such demand would be futile; (2) commenced this action pro se
and attempted to cure that problem by hiring Ms. Molloy and Appellant Mills; and (3) did
not fairly and adequately represent the interests of the members similarly situated in
enforcing the rights of the HOA. Despite the foregoing findings, the trial court concluded
that: (1) Appellants’ nonsuits required the trial court’s approval under both Rule 23.06 and
Tennessee Code Annotated section 48-56-401, discussed supra; and (2) Appellees could
recover fees and expenses under section 48-56-401(e). See Tenn. Code Ann. § 48-56-
401(e) (“On termination of the [derivative action], the court may require the plaintiffs to
pay any defendant’s reasonable expenses (including counsel fees) incurred in defending
the suit if it finds that the proceeding was commenced frivolously or in bad faith.”). The
foregoing demonstrates the trial court’s contradictory findings and conclusions concerning
whether Appellants brought a proper derivative action. Equally contradictory is the trial
court’s denial of Appellants’ nonsuits on its implicit finding that the underlying action was
derivative and its subsequent grant of Appellees’ motion to dismiss on the supposition that
Appellants failed to assert a proper derivative action.

        Appellees’ arguments on appeal are similarly confusing and contradictory. When
asked at oral argument whether Appellants brought this case “as a proper derivative
action,” counsel for Appellees stated: “[W]e contend that this was not a proper derivative
action.” However, later in oral argument, counsel argued that this “is not a 40.01 dismissal,
this could only be a 23.06 dismissal because it’s a derivative action.” Perhaps as an
explanation for this apparent contradiction, Appellees argue in their appellate brief that
Appellants’ suit was “derivative in nature,” and “it was because [Appellants] failed to
properly pursue their clearly derivative claims that [Appellees] argued dismissal was
appropriate.” From the foregoing, it appears that Appellees’ argument is that if a plaintiff’s
claims are “derivative in nature,” and the plaintiff intends to and attempts to assert a
derivative action, then Rule 23.06 and Tennessee Code Annotated section 48-56-401 apply
to the action despite the plaintiff’s failure to adhere to the requirements in the rule and the
statute.

        Tennessee case law belies Appellees’ reasoning. As discussed supra, there are
“preconditions to [derivative] lawsuits[,]” Memphis Health Ctr., Inc. ex rel. Davis, 2006
WL 2088407, at *9, and “a party must meet all the requirements of both [Tennessee Rule
of Civil Procedure] 23.06 and [Tennessee Code Annotated section] 48-56-401,” Walker,
1990 WL 120721, at *3, for his or her action to “qualify as a derivative suit.” Id. In
Kovacs-Whaley v. Wellness Sols., Inc., No. M2011-00089-COA-R3-CV, 2012 WL
927777 (Tenn. Ct. App. Mar. 16, 2010), this Court held that the for-profit derivative statute
(Tennessee Code Annotated section 48-17-401) was inapplicable where a plaintiff
attempted to bring a derivative action but failed to “comply with the requirements of the
statute in bringing her action.” Id. at *10. Although the statute at issue here concerns non-
profit derivative suits, it is similar to the statute concerning for-profit derivative suits, and
                                                -7-
so the reasoning in the Kovacs-Whaley opinion is instructive. Both Kovacs-Whaley and
Walker hold that a plaintiff must fully comply with Tennessee statutes and rules concerning
derivative actions in order for his or her action to “qualify as a derivative suit”; a party’s
attempt or intent is irrelevant. In view of the foregoing, we turn to the question of whether
Appellants fully complied with the relevant statute and rule concerning non-profit
derivative actions. We begin with a review of the amended complaint.

       The amended complaint was filed by pro se plaintiffs, some of whom did not have
standing to bring the action. While derivative actions must be filed by an attorney licensed
to practice law in Tennessee, Appellants attempted to “cure” this issue when they later
retained counsel. See Humphreys, 2001 WL 99570, at *3 (citing Old Hickory Eng’g &
Mach. Co., 937 S.W.2d at 786); see also Tenn. Sup.Ct. R. 7, § 1.01. Further, as Appellees
argued, only three of the Petitioners had standing to bring a derivative action. Messrs.
Krajenta, Pulliam, and Pickens were the only active Board members of the HOA when the
amended petition was filed; Appellant Mills, and Messrs. Coggins and Wagner were
simply homeowner members, and, as such, required 5% or more of the voting power, or
50 members, whichever was less, to have standing to bring the action. Tenn. Code Ann. §
48-56-401(a). In the amended complaint, Petitioners alleged that there were approximately
1,134 single family dwellings and 2,700 to 3,000 individuals residing in the subdivision.
Given these numbers, it is clear that Appellant Mills, and Messrs. Coggins and Wagner did
not, as Appellees argued, have standing to bring a derivative action because there were
“too few of them.” We need not address whether Appellants “cured” the foregoing issues
given our analysis below.

        On this Court’s review, we conclude that the substance of the amended complaint
was insufficient to satisfy the pleading requirements for a derivative action. We recall that
a written demand to a corporation’s directors is a requirement for a derivative action. See
Lewis, 838 S.W.2d at 221. Indeed, a complaint in a derivative action must “allege with
particularity the demand made, if any, to obtain action by the directors and either why the
plaintiffs could not obtain the action or why they did not make the demand.” Tenn. Code
Ann. § 48-56-401(c); see also Tenn. R. Civ. P. 23.06. The policy behind the demand
requirement was explained by the Tennessee Supreme Court:

       [I]t is clear that no stockholders should be permitted to interfere and control
       the management or frustrate the purposes of the corporation merely upon an
       allegation of the existence of a state of affairs contrary to their judgment of
       propriety, without any effort to have it charged in the mode indicated. Any
       other view would be destructive of the purposes for which corporations are
       formed, and of the principle of corporate action and management. It would
       make them hot-houses of litigation, and leave the valuable franchises held by
       them at the mercy of the misjudgment, passion, or speculative propensities
       of individual stockholders. While the rule announced neither permits abuses
       in this or the opposite direction, it does not prevent suits for abuse of trust,
                                              -8-
      or mismanagement. It only requires that stockholders proceed in that
      lawful and orderly way for the correction of abuses within the corporation
      which they have engaged to do on becoming shareholders in it, which its
      existence and interest require they shall do,—to reform alleged abuses
      before involving the corporation and other shareholders therein in
      litigation; but it equally provides that when they have done this, and found
      themselves unable to obtain relief to which they are entitled, it will be given
      them by the courts.

Akin v. Mackie, 310 S.W.2d 164, 167-68 (Tenn. 1958) (quoting Boyd v. Sims, 11 S.W.
948, 949 (Tenn. 1889)) (emphases added).

       There is no indication in the amended complaint that Appellants served a written
demand on Appellee Board members. As noted above, this requirement may be excused
if such exercise would be futile. Humphreys, 1999 WL 553715, at *6; Lewis, 838 S.W.2d
at 221. There are two circumstances in which a demand may be futile: where a demand is
refused and where a demand is excused. Lewis, 838 S.W.2d at 222. Importantly, even in
“demand refused” and “demand excused” cases the statute and rule still require the
complaint to allege “with particularity” why any demand would be futile. See Tenn. Code
Ann. § 48-56-401(c); see also Tenn. R. Civ. P. 23.06.

       In demand refused cases, “the corporation’s directors have [already] refused to take
action in response to a shareholder’s [previous] demand.” Lewis, 838 S.W.2d at 222.
Accordingly, for the plaintiff to be relieved of the demand requirement under this
exception, a complaint must allege, with particularity, how a corporation’s directors
previously refused a plaintiff’s demands. It appears that Appellants relied on the “demand
refused” exception to excuse them from the demand requirement. In the amended
complaint, Appellants alleged that “[t]he verified affidavits of the petitioning incumbent
Board members . . . support[ed] the futility of making a demand under the present
circumstances[.]” The affidavits stated:

      5. [Appellant Board members] were concerned that actions of the Board
      were taken without consideration of [the HOA’s] Governing Documents or
      state statutes and were outside of the Board’s authority.

      6. [Appellant Board members] discovered that there is so much that needs
      to be done that it cannot possibly be accomplished during the one year term
      of a single group of Board members.

      7. [Appellant Board members] also discovered that the [HOA] had not been
      too successful in managing long-term maintenance, repair, and replacement
      projects.

                                           -9-
        8. [Appellant Board members’] efforts to fulfill [their] duties as Board
        members were met with resistance and outright hostility by Ms. Joyce
        Sp[ei]cha,3 the other Board members[,] and at least one (1) other individual
        who had been a Board member the prior year but had not been re-elected.

        9. Despite [their] best efforts it became obvious to [Appellant Board
        members] that [their] efforts to resolve these matters were futile.

(Emphases added). Similarly, the amended complaint alleged:

        280. Three (3) members of the 2017 Board, Mr. Krajenta, Mr. Pulliam[,] and
        Mr. Pickens, have attempted to address issues related to security, the lack of
        a financial audit[,] and other vendor contracts[,] including with the
        Management Company, Ambassador [(security/patrol company)][,] and
        Echo Systems [(landscaping company)].

        281. They have attempted to no avail to have the Board meet to adopt
        policies to improve Board management and operation of the [HOA’s]
        business affairs.

        285. Sincere efforts to resolve [the] serious and fundamental matter of the
        Board’s authority to use Assessment funds have been futile as have been
        efforts to resolve the matter of members and Directors access to and rights
        to review [HOA] records including contracts with vendors.

(Emphases added).

       In the amended complaint, Appellants alleged facts concerning seven categories of
issues before pleading four causes of action, requesting a declaratory judgment, and
requesting the appointment of a receiver.4 Problematically, Appellants failed to allege,

        3
           The amended complaint alleged that Ms. Speicha was the management company’s representative.
From the pleading, it appears she was neither a Board member nor member of the HOA.
         4
           The seven categories of alleged issues concerned: (1) public property and public services; (2) the
waterways in the neighborhood; (3) the “lack of expertise and a location for meetings”; (4) the 2012
engineering study; (5) a “lack of transparency and access to [HOA] records and documents”; (6) the HOA’s
independent contractors (the property management company, the law firm that provides the HOA legal
services, the security/patrol company, the grounds and landscaping company); and (7) “the Board of
Directors, and a history of its actions and inactions, and poor decisions.” The four causes of action were:
(1) past and present negligence and intentional acts of the HOA by its Board, officers, and agents; (2) past
and present failure of the HOA, its directors, officers, and agents to comply with state laws generally and
specific statutes; (3) past and present failure or refusal of the Board, its officers, and agents to comply with
the HOA’s governing documents; and (4) past and present ultra vires acts. Additionally, Appellants asked
the trial court to “grant them a declaratory judgment holding that it is unlawful for the [HOA] to contract
for security services for the entire subdivision.” Appellants also alleged that, based on the foregoing claims,
                                                    - 10 -
with particularity, the specific “efforts” Appellants undertook to resolve any of the alleged
issues, and how Appellee Board members resisted, or refused, the same. See Lewis, 838
S.W.2d at 222. By way of example, one of the issues Appellants alleged concerned “the
frequent rise and fall of the lake level[,] . . . [which] has eroded and continues to erode the
shoreline[.]” Appellants further alleged that “[t]his erosion cause[d] trees around the
shoreline to continually fall into the lake . . . and in some places the shoreline may have
cut back fifteen (15) feet or more from when the lake was built.” Accordingly, Appellants
alleged that the HOA “need[ed] to plant water resistant trees and shrubs around the
perimeter of the lake to mediate erosion and that need[ed] to be completed within one (1)
year.” Although Appellants identified an alleged issue and offered a plan for remediation,
they failed to explain whether they attempted to bring this problem to the attention of the
Board or the HOA before bringing the lawsuit. While this is but one example, all of
Appellants’ issues were pleaded in this manner. Indeed, although Appellants’ amended
complaint set out their concerns and suggestions for remedying those concerns, it failed to
allege that Appellants attempted to resolve the issues before filing suit and that Appellee
Board members refused such attempts. Failing to satisfy this requirement contravenes the
policy underlying the demand requirement, i.e., that a plaintiff should attempt to “reform
alleged abuses before involving the corporation and other shareholders therein in
litigation.” Akin, 310 S.W.2d at 167-68 (quoting Boyd, 11 S.W. at 949).

        For completeness, we turn to review whether the amended complaint alleged any
facts to show that a demand would be “excused.” Tennessee case law provides that “a
demand of the agents of a corporation . . . is not necessary if these agents are themselves
guilty of the wrongs complained of against the corporation[.]” Boyd, 11 S.W. at 949-50
(emphasis added); see also Akin, 310 S.W.2d at 168 (quoting Peeler v. Luther, 135 S.W.2d
926, 928 (Tenn. 1940)) (“[Demand] need not be made where the corporation is under the
control of the wrongdoers or of persons who are necessary parties defendant.”) (emphasis
added); Deaderick v. Wilson, 67 Tenn. 108, 131 (Tenn. 1874) (holding that “if the
corporation is still under the control of those who must be defendants in the suit,” the
demand requirement is excused) (emphasis omitted) (emphasis added). This Court has
opined that,

        [i]n demand excused cases, the grounds for the shareholder’s claim are (1)
        that the board is interested and not independent and (2) that the challenged
        transaction is not protected by the business judgment rule. Thus, demand
        excused cases require an examination of the corporate decision-makers’
        interest and independence, as well as the good faith and reasonableness of its
        investigation.

Lewis, 838 S.W.2d at 222. Concerning the business judgment rule, courts “presume that a

“a receiver [was] necessary to protect and manage the property of the [HOA] while Petitioners seek to
remedy the harms to the [HOA] of this past conduct and seek to enjoin or prohibit similar future conduct.”
                                                 - 11 -
corporation’s directors, when making a business decision, acted on an informed basis, in
good faith, and with the honest belief that their decision was in the corporation’s best
interests.” Id. at 221-22. As discussed above, Appellants’ demands would certainly be
futile, and, therefore, excused, if Appellee Board members were “themselves guilty of the
wrongs complained of.” See Boyd, 11 S.W. at 949-50. Tennessee courts have found a
demand futile and unnecessary when: (1) the defendants were the directors of a corporation
and accused of insider trading and scheming to defraud smaller stockholders, see
Deaderick, 67 Tenn. at 112; (2) the president and treasurer, a majority stockholder, was
personally accused of depleting the company’s treasury at the expense of the minority
stockholders, see Akin, 310 S.W.2d at 168; (3) the amended complaint alleged that a
demand would be futile because the defendants had “a direct interest in continuing to
breach their fiduciary duty and violate the Bylaws and federal rules and regulations”),
Memphis Health Ctr., Inc. ex rel. Davis, 2006 WL 2088407, at *10; and (4) the complaint
alleged that “[the board] wast[ed] corporate assets to the detriment of the [c]orporation,
[used] corporate assets for the personal gain of the individual board members,” and
depleted corporate assets, Bourne v. Williams, 633 S.W.2d 469 (Tenn. Ct. App. 1981). No
such circumstances were pleaded in this case. Notably, the amended complaint contained
no allegations of malfeasance or self-dealing by specific Appellee Board members. In fact,
the amended complaint did not allege any actions by specific Appellee Board members,
much less that such actions were “the wrongs complained of against the corporation.”
Boyd, 11 S.W. at 949-50 (emphasis added); see also Akin, 310 S.W.2d at 168 (quoting
Peeler, 135 S.W.2d at 928). Rather, the amended complaint contains a tabulation of
Appellants’ grievances with the HOA and an extensive list of actions Appellants believed
the HOA should undertake to cure those grievances. Accordingly, we conclude that the
amended complaint failed to “allege with particularity the demand made, if any, to obtain
action by the [Appellee Board members] and either why [Appellants] could not obtain the
action or why they did not make the demand.” Tenn. Code Ann. § 48-56-401(c); see also
Tenn. R. Civ. P. 23.06.

       Lastly, it is clear that Appellants did not “fairly and adequately represent the
interests of the shareholders or members similarly situated.” Tenn. R. Civ. P. 23.06.
Appellants ostensibly admitted such when they alleged that they were “well aware that this
action could be unpopular with a large number of members and they could well be voted
out next November[.]” Indeed, Appellant Board members were voted out of their positions
a mere two months after the amended complaint was filed. In short, other homeowners in
the neighborhood became aware of, and were unhappy with, Appellants’ lawsuit against
the HOA and Appellee Board members, and, in July 2018, an overwhelming majority of
homeowners voted to remove Appellant Board members from their positions. Such action
clearly demonstrates that Appellants did not represent the interests of the majority of
homeowners in the neighborhood.

      Although Appellants’ claims may have been derivative in nature, and Appellants

                                          - 12 -
may have intended to and attempted to bring a proper derivative action,5 they failed to
comply with the requirements of the statute and the rule in bringing such action. Because
of their failure, Appellants’ lawsuit did not qualify as a derivative action. Walker, 1990
WL 120721, at *3; Kovacs-Whaley, 2012 WL 927777, at *10. Accordingly, Tennessee
Code Annotated section 48-56-401 and Tennessee Rule of Civil Procedure 23.06 are
inapplicable here. See Kovacs-Whaley, 2012 WL 927777, at *10. Thus, it was error for
the trial court to rely on Rule 23.06 and section 48-56-401 to deny Appellants’ voluntary
nonsuits. As such, we reverse the trial court’s order denying the nonsuits, and we remand
for entry of an order allowing the nonsuits. See Tenn. R. Civ. P. 41.01(3).

       In view of our conclusion that the trial court should have allowed the nonsuits, it
was error for the trial court to hear and/or grant Appellees’ motion to dismiss, and we
vacate that portion of the trial court’s order. We also vacate the trial court’s order awarding
Appellees’ fees and expenses. Because Tennessee Code Annotated section 48-56-401 is
inapplicable here, it was error for the trial court to award fees under the statute. See Tenn.
Code Ann. § 48-56-401(e); see also Walker, 1990 WL 120721, at *4; Kovacs-Whaley,
2012 WL 927777, at *10. Similarly, because we vacate the trial court’s order on the motion
to dismiss, the trial court’s award of fees under the “loser pays” statute is also vacated.
Tenn. Code Ann. § 20-12-119(c) (“[I]n a civil proceeding, where a trial court grants a
motion to dismiss . . . for failure to state a claim . . . , the court shall award the party or
parties against whom the dismissed claims were pending at the time the successful motion
to dismiss was granted the costs and reasonable and necessary attorney’s fees incurred in
the proceedings . . . .”). Because no party appealed the trial court’s order dividing the
special master fees equally between the parties, this order is affirmed.

                                            V. Conclusion

        For the foregoing reasons, we reverse the trial court’s order denying Appellants’
nonsuits, and we remand the case for entry of an order allowing both nonsuits. We vacate
the trial court’s orders granting Appellees’ motion to dismiss and Appellees’ award of fees
and expenses. We affirm the trial court’s order concerning the special master’s fees. The
case is remanded for such further proceedings as are necessary and consistent with this
Opinion. Costs of the appeal are assessed to Appellees, Volker Paul Westphal, Karen
Taylor, Mike Poindexter, Janice Tankson, and Riverwood Farms Association, Inc., for all
of which execution may issue if necessary.

                                                              s/ Kenny Armstrong
                                                           KENNY ARMSTRONG, JUDGE

        5
            For example, the amended complaint is titled “First Amended Verified Complaint for a Derivative
Suit . . .,” Appellants alleged that they brought the action “derivatively,” and the amended complaint cited
to Tennessee Code Annotated section 48-56-401 as “legal grounds for derivative action.”
                                                  - 13 -