Bourland, Heflin, Alvarez, Minor & Matthews, PLC v. Rodney Heaton and Margaret Heaton and Loeb Properties

                IN THE COURT OF APPEALS OF TENNESSEE
                             AT JACKSON
                                January 17, 2012 Session

  BOURLAND, HEFLIN, ALVAREZ, MINOR & MATTHEWS, PLC v.
RODNEY HEATON and MARGARET HEATON and LOEB PROPERTIES

              Direct Appeal from the Chancery Court for Shelby County
                   No. CH-09-0514-2    Arnold Goldin, Chancellor


                  No. W2011-01693-COA-R3-CV - Filed April 9, 2012


The parties entered into a Contract for the sale and purchase of commercial real estate, and
the purchaser deposited $50,000.00 earnest money. The purchaser terminated the Contract,
citing the economic downturn and the purchaser’s resulting inability to secure retail tenants
for its planned development. The parties disputed whether such termination was appropriate
under the Contract, and thus, whether the purchaser was entitled to a return of its earnest
money. The trial court granted summary judgment in favor of the purchaser and further
awarded the purchaser its attorney fees and expenses. We find the economic downturn did
not provide an appropriate basis for termination of the Contract. Thus, we reverse the trial
court’s grant of summary judgment to the purchaser, and we enter summary judgment in
favor of the sellers. The sellers shall be awarded the $44,362.57 remaining in the escrow
account, and the purchaser shall pay the sellers an additional $5,637.43, for a total of
$50,000.00. Additionally, pursuant to the Contract, the sellers are awarded attorney fees and
expenses incurred in both the trial court and in this Court, and we remand for a determination
of such award.


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

A LAN E. H IGHERS, P.J., W.S., delivered the opinion of the Court, in which D AVID R. F ARMER,
J., and J. S TEVEN S TAFFORD, J., joined.

Joseph C. Clark, Jonathan L. May, Memphis, Tennessee, for the appellant, Rodney Heaton
and Margaret Heaton

William M. Jeter, Memphis, Tennessee, for the appellee, Loeb Properties, Inc.
                                                 OPINION

                                 I.   F ACTS & P ROCEDURAL H ISTORY

      Pursuant to a Real Estate Purchase Agreement (the “Contract”) executed on October
3, 2008, Rodney and Margaret Heaton agreed to sell, and Loeb Properties, Inc. (“Loeb
Properties”) agreed to purchase, 4.18 acres of commercial property located in Princeton,
Kentucky, for $700,000.00.1 As required by the Contract, Loeb Properties deposited
$50,000.00 earnest money into an escrow account held by Bourland, Heflin, Alvarez, Minor
& Matthews, PLC (“Bourland Heflin”).

        In a March 2, 2009 letter, Loeb Properties notified the Heatons that it was terminating
the Contract effective March 3, 2009, based upon “the current state of the economy” and its
inability to secure retail tenants for the planned development. Following termination, the
parties disagreed as to the appropriate disbursement of the $50,000.00 earnest money held
by Bourland Heflin–each arguing that it was entitled to such. As a result, Bourland Heflin
filed a Complaint for Interpleader with the trial court and it deposited the earnest money with
the Clerk and Master.2

       Subsequently, both parties filed competing motions for summary judgment. In its
motion, Loeb Properties contended that its termination based upon its inability to secure retail
tenants was appropriate pursuant to Section 7 of the Contract, which provides:

        7.      INSPECTION PERIOD/CANCELLATION. Purchaser shall have the
        right to inspect the Property in all respects for ninety (90) days after the
        delivery to Purchaser of all the documents described on Exhibit A (the
        “Inspection Period”). All information and documents provided by Seller shall
        be complete and accurate to the best of Seller’s knowledge and belief. All and
        any such inquiry, inspection and examination of the Property and related
        issues, including, but not limited to, survey, title work, environmental issues,
        soil tests, borings, appraisal, zoning and utilities, must be satisfactory and
        acceptable to Purchaser, and if not, Purchaser may, in its sole discretion,
        cancel this Agreement upon written notice within the Inspection Period, and
        in such event the Earnest Money shall be returned to Purchaser and neither


        1
            The Contract was later amended in ways not relevant to this appeal.
        2
        Subsequently, Bourland Heflin was dismissed with prejudice from the case and $5,637.43 from the
$50,000.00 earnest money was disbursed to it for attorney fees and costs incurred in bringing the interpleader
action.

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       party will have any further obligation or liability under this Agreement. Seller
       agrees to cooperate reasonably with any such investigations, inquiries,
       inspections or studies made by or at Purchaser’s discretion. Purchaser shall
       have the right to extend the Inspection Period in sixty (60) day increments, not
       to exceed one (1) extension by delivering written notice to Seller prior to
       expiration of the then-current Inspection Period expiration. If this Purchase
       Agreement is not terminated in writing as provided for herein prior to the end
       of the Inspection Period, the Earnest Money shall become non-refundable to
       Purchaser but applicable to the Purchase Price at the end of said Inspection
       Period, unless there is a default by Seller.

The Heatons, however, argued that the Contract did not contemplate termination based upon
an economic downturn, and therefore that Loeb Properties’ had breached the Contract and
forfeited its earnest money. Both parties sought attorney fees and expenses pursuant to
Section 21(g) of the Contract, which entitled the prevailing party to such.

       Following a hearing on the parties’ motions for summary judgment, the trial court
entered an order granting summary judgment in favor of Loeb Properties, relying upon
Section 8(a) of the Contract, which provides:

       8.      CONDITIONS PRECEDENT. In addition to other conditions set
       forth in this Agreement, including those related to inspection of the Property,
       Purchaser’s obligation to purchase the Property shall be subject to and
       contingent upon the following conditions precedent, any or all of which
       Purchaser may waive by written notice only:

             (a)     Adverse Conditions.        There shall be no material adverse
       change in the condition of or affecting the Property not caused by Purchaser
       between the end of the Inspection Period and Closing.

Specifically, the trial court found that “[t]he change in the national economic climate,
particularly in the real estate sector, is . . . a material change so as to trigger Loeb’s right
under Section 8[(a)] to terminate the contract between the parties.” Therefore, the trial court
ordered that the remaining $44,362.57 earnest money be paid to Loeb Properties, that the
Heatons pay Loeb Properties $5,637.43 “to make Loeb [Properties] whole for the $50,000.00
earnest money originally placed in escrow[,]” and that the Heatons pay Loeb Properties’
$8,000.00 attorney fees pursuant to the Contract.3 The Heatons timely appealed.


       3
           The trial court entered an Amended Final Order noting that its previous order had inadvertently
                                                                                             (continued...)

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                                   II.    I SSUE P RESENTED

       On appeal, we are asked to determine whether the trial court erred in granting
summary judgment in favor of Loeb Properties rather than in favor of the Heatons. For the
following reasons, we reverse the trial court’s grant of summary judgment and award of
attorney fees and expenses to Loeb Properties and we grant summary judgment and attorney
fees and expenses to the Heatons.


                                III.     S TANDARD OF R EVIEW

         Summary judgment is appropriate “when the undisputed facts, as well as the
inferences reasonably drawn from the undisputed facts, support only one conclusion–that the
moving party is entitled to a judgment as a matter of law.” Green v. Green, 293 S.W.3d 493,
513 (Tenn. 2009) (citing Griffis v. Davidson County Metro. Gov't, 164 S.W.3d 267, 283-84
(Tenn. 2005); Pero's Steak & Spaghetti House v. Lee, 90 S.W.3d 614, 620 (Tenn. 2002)).
The only issue before this Court is the appropriate construction of the Contract between Loeb
Properties and the Heatons. “Questions of contract interpretation are generally considered
to be questions of law, and thus are especially well-suited for resolution by summary
judgment.” Ross Products Div. Abbott Labs. v. State, No. M2006-01113-COA-R3-CV,
2007 WL 4322016, at *2 (Tenn. Ct. App. Dec. 5, 2007) perm. app. denied (Tenn. Apr. 28,
2008) (citing Doe v. HCA Health Servs. of Tenn., 46 S.W.3d 191, 196 (Tenn. 2001); Guiliano
v. Cleo, 995 S.W.2d 88, 95 (Tenn. 1999); Hamblen Co. v. City of Morristown. 656 S.W.2d
331, 335-36 (Tenn. 1983)). The resolution of a motion for summary judgment is a matter of
law, which we review de novo with no presumption of correctness. Martin v. Norfolk S. Ry.
Co., 271 S.W.3d 76, 84 (Tenn. 2008). However, “we are required to review the evidence in
the light most favorable to the nonmoving party and to draw all reasonable inferences
favoring the nonmoving party.” Id. (citing Staples v. CBL & Assocs., Inc., 15 S.W.3d 83,
89 (Tenn. 2000)).

                                         IV. D ISCUSSION

                                       A. Governing Law

      The Contract at issue provides that it “shall be governed by and construed in
accordance with the laws of the State of Kentucky.” “‘Tennessee will honor a choice of law


       3
        (...continued)
entered a final order pursuant to Tennessee Rule of Civil Procedure 54.02 when the prior judgment
apparently disposed of all claims.

                                               -4-
clause if the state whose law is chosen bears a reasonable relation to the transaction and
absent a violation of the forum state’s public policy.’” Wright v. Rains, 106 S.W.3d 678, 681
(Tenn. Ct. App. 2003) (quoting Bright v. Spaghetti Warehouse, Inc., No. 03A01-9708-CV-
00377, 1998 WL 205757, at *5 (Tenn. Ct. App. Apr. 29, 1998)).

       In this case, the Heatons are residents of Kentucky and the real estate that is the
subject of the Contract is located in Kentucky. Finding a “reasonable relation” to Kentucky
and no objection by either party to the application of Kentucky law, we will uphold the
choice of law provision in the Contract. Thus, we will apply the substantive law of the State
of Kentucky, while applying the procedural law of the State of Tennessee. See State v.
Early, 934 S.W.2d 655, 657 (Tenn. Ct. App. 1996).

                                  B. Summary Judgment

        It is undisputed that Loeb Properties terminated the contract based upon its inability
to secure retail tenants as a result of the “global economic downturn.” On appeal, the parties
dispute only whether this was a proper ground for termination pursuant to the Contract,
entitling Loeb Properties to a return of its earnest money. Loeb Properties contends that its
termination was proper pursuant to either Section 7 or Section 8(a) of the Contract. We
consider each provision below.

                                        1.   Section 7

        As set out above, Section 7 provides that the Heatons’ delivery of certain documents
will trigger a ninety day “Inspection Period” during which Loeb Properties, “in its sole
discretion,” may terminate the Contract upon written notice if “[a]ll and any such inquiry,
inspection and examination of the Property and related issues, including, but not limited to,
survey, title work, environmental issues, soil tests, borings, appraisal, zoning and utilities”
are unsatisfactory or unacceptable to Loeb Properties. (emphasis added). If such termination
is made, Loeb Properties is entitled to a return of its earnest money. However, Section 7
further provides that “[i]f this [Contract] is not terminated in writing as provided for herein
prior to the end of the Inspection Period, the Earnest Money shall become non-refundable
to Purchaser but applicable to the Purchase Price at the end of said Inspection Period, unless
there is a default by Seller.”

       On appeal, the parties dispute whether termination due to the economic downturn was
included within the class of “related issues” for which termination was permitted under
Section 7. Loeb Properties asserts that “[t]he plain language of the Contract is clear and
unambiguous: Loeb Properties’ inability to secure the commitment of retail tenants is a valid
basis for termination of the contract during the Inspection Period.” In making this assertion,

                                              -5-
Loeb Properties relies upon Section 7’s language that Loeb Properties has “sole discretion”
to terminate the Contract if unsatisfactory or unacceptable “issues” are revealed during the
Inspection Period. Additionally, at oral argument before this Court, Loeb Properties
emphasized Section 7’s “all and any such inquiry” language, and it argued that this provision
effectively converted the Contract into an option contract which could be terminated by Loeb
Properties for any reason or no reason at all. The Heatons, however, argue that the Contract
unambiguously provides that Loeb Properties’ inability to secure retail tenants is not a valid
basis for termination during the Inspection Period, and alternatively, they argue that even if
ambiguous, the Contract should be interpreted as precluding termination based upon an
economic decline.4

        “The primary object in construing a contract . . . is to effectuate the intentions of the
parties.” Cantrell Supply, Inc. v. Liberty Mut. Ins. Co., 94 S.W.3d 381, 384 (Ky. App.
2002) (citing Withers v. Commonwealth, Dept. of Transp., 656 S.W.2d 747, 749 (Ky. App.
1983)). When there exists no ambiguity, “the parties’ intention must be gathered from the
four corners of the instrument at issue, and extrinsic evidence may not be admitted to vary
the instrument’s terms.” First Home, LLC v. Crown Comm’ns, Inc., No. 2010-CA-001701-
MR, 2012 WL 95560, at *5 (Ky. App. Jan. 13, 2012) (citing McCarthy v. Chromium Process
Co., 13 A.3d 715, 720 (Conn. App. 2011)). Typically, if “a contract is ambiguous or silent
on a vital matter, a court may consider parol and extrinsic evidence involving the
circumstance surrounding execution of the contract, the subject matter of the contract, the
objects to be accomplished, and the conduct of the parties.” Cantrell Supply, 94 S.W.3d at
385. However, at the summary judgment stage, ambiguity with regard to a material fact
creates a genuine issue precluding summary judgment. See generally Frear v. P.T.A. Indus.,
Inc., 103 S.W.3d 99, 106 n.17 (Ky. 2003) (“If the trial court had perceived an ambiguity, a


        4
         The Heatons cite certain contract interpretation maxims as helpful in determining the proper scope
of Section 7’s termination grounds. However, because we find the contract unambiguous, we will not resort
to such maxims. See generally, Klein v. Miller, No. 2010-CA-000750-MR, 2011 WL 6955927, at *5 (Ky.
App. 2012) (“[T]he maxim expressio unius est exclusio alterius, i.e., the enumeration of particular things
excludes the idea of something else not mentioned . . . ‘is resorted to only when the relevant language is
ambiguous[.]’” (quoting Public Ser. Comm’n of Ky. v. Commonwealth, 320 S.W.3d 660, 666 (Ky. 2010));
McMullin v. McMullin, 338 S.W.3d 315, 322 (Ky. App. 2011), (“[T]he rule of contra proferentem, is a
maxim of contract interpretation that ambiguities will be construed against the drafter of a contract when the
contract is susceptible of two meanings.”) (emphasis added); ACSR, Inc. v. Cabinet for Health Servs., 32
S.W.3d 96, 101 (Ky. App. 2000) (“Ejusdem generis is merely a general rule to aid in construing otherwise
ambiguous statutory provisions[.]”) (citing Norfolk & Western Ry. Co. v. Am. Train Dispatcher’s Ass’n, 499
U.S. 117, 129, 111 S.Ct. 1156, 1163, 113 L.Ed.2d 95 (U.S. 1991)); McKee v. Pope, 18 B.Mon. 548, 57 Ky.
548, 1857 WL 4430, at *2 (Ky. App. 1857) (A court “‘is not allowed to interpret what has no need of
interpretation[.]’”) (quoting Broome’s Maxims, 266).


                                                     -6-
material issue of fact would have existed to preclude summary judgment.”) (citations
omitted); see also First Home, 2012 WL 95560, at *5 (“If there is an ambiguity in the
Declaration of Easement, this is a material fact about which there is a genuine issue
precluding summary judgment.”) (citations omitted).

        Again, Loeb Properties contends that the Contract, itself, unambiguously authorizes
termination based upon economic decline; however, in support of this argument, Loeb
Properties cites correspondence between the parties which allegedly demonstrates “Loeb’s
contemplation that the economic difficulties were a valid reason to terminate – and the lack
of any objecting correspondence in the Records that indicates the Heatons[’] acquiescence
in this understanding.” We may not, however, properly consider this proffered evidence at
this stage: If the Contract is unambiguous, the extrinsic evidence is inadmissible to vary its
terms, and if the Contract is, in fact, ambiguous, the case is not ripe for summary judgment.

        “A contract is ambiguous if a reasonable person would find it susceptible to different
or inconsistent interpretations.” Cantrell Supply, 94 S.W.3d at 385 (citing Transport Ins. Co.
v. Ford, 886 S.W.2d 901, 905 (Ky. App. 1994); Luttrell v. Cooper Inds., Inc., 60 F.Supp.2d
629, 631 (E.D. Ky. 1998)). However, “[t]he fact that one party may have intended different
results . . . is insufficient to construe a contract at variance with its plain and unambiguous
terms.” Id. (citing Green v. McGrath, 662 F.Supp. 337, 342 (E.D. Ky. 1986)). We will not
“‘torture words to import ambiguity into a contract where the ordinary meaning leaves no
room for ambiguity.’” First Home, 2012 WL 95560, at *5 (quoting McCarthy, 13 A.3d at
720). “Where the contract’s language is clear and unambiguous, the agreement is to be given
effect according to its terms, and ‘the court will interpret the contract’s terms by assigning
language its ordinary meaning and without resort to extrinsic evidence.’” Id. (quoting Frear,
103 S.W.3d at 106); see also Mounts v. Roberts, 388 S.W.2d 117, 119 (Ky. 1965) (“In the
absence of ambiguity a written instrument will be strictly enforced according to its terms.”)
(citations omitted).

        Despite Loeb Properties’ assertion to the contrary, its ability, pursuant to Section 7,
to inspect the property and to require satisfactory and acceptable, “all and any such inquiry,
inspection and examination of the Property and related issues, including, but not limited to,
survey, title work, environmental issues, soil tests, borings, appraisal, zoning and utilities,”
simply cannot be interpreted to unambiguously authorize termination due to an economic
downturn. The Contract allows Loeb Properties “in its sole discretion” to terminate the
Contract; however, this discretion is not unrestrained, as Loeb Properties suggests. Instead,
Loeb Properties may exercise its discretion to terminate the Contract only with regard to its
“inquiry, inspection and examination of the Property and related issues.” We recognize that
the list of articulated “issues” about which Loeb Properties is permitted to inquire, inspect,
and examine during the Inspection Period is expressly not exhaustive. But, construing the

                                              -7-
Contract as a whole, as we are required to do, we find the class of permissible “issues” upon
which termination may be based is implicitly, and without serious challenge, limited to those
issues relating to the physical and legal fitness of the property. Additionally, “[a]ny and all
such inquiry” may not reasonably be expanded to include any detrimental discovery
notwithstanding its utter unrelation to the articulated termination grounds. Accordingly, we
find that Section 7 unambiguously does not include an economic downturn within the class
of “issues” for which termination during the Inspection Period may be based.5

                                           2.   Section 8(a)

         Having determined that Section 7 does not permit termination based upon an
economic downturn, we now consider Loeb Properties’ alternative argument that termination
was proper pursuant to Section 8(a). Again, Section 8(a) of the Contract provides that Loeb
Properties’ purchase obligation is “subject to and contingent upon[,]” among other things,
there being “no material adverse change in the condition of or affecting the Property not
caused by Purchaser between the end of the Inspection Period and Closing.” Below, the trial
court sua sponte determined that “[t]he change in the national economic climate, particularly
in the real estate sector, is . . . a material change so as to trigger Loeb’s right under Section
8[(a)] to terminate the contract between the parties.”

       Like Section 7, Loeb Properties contends that Section 8(a) unambiguously allows
termination based upon an economic decline. Specifically, Loeb Properties maintains that
“anything that obstructed the leasing of retail space would most assuredly affect its fitness”
and, therefore, qualify as an adverse condition. The Heatons, however, argue that Section
8(a) unambiguously does not allow for such termination, and that even if the provision is
ambiguous, both the context of the Contract as a whole and the circumstances surrounding
its execution support an interpretation which excludes economic decline as a proper
termination ground.

       We need not resolve the parties’ dispute as to whether the economic downturn
constitutes an “adverse change” “affecting” the property. Even if we assume, arguendo, that
the downturn qualifies as such, it undisputedly did not occur “between the end of the
Inspection Period and Closing” as required by the plain language of Section 8(a). By Loeb
Properties’ own acknowledgment, the economic downturn occurred prior to the Contract’s
execution. We reject Loeb Properties’ argument that an already occurring adverse condition


        5
         On appeal, the parties dispute whether Loeb Properties’ termination was timely made during the
Inspection Period. However, based upon our conclusion that Section 7 does not contemplate termination due
to an economic downturn, we find it unnecessary to consider the timeliness of Loeb Properties’ termination.


                                                   -8-
is sufficient to warrant termination under Section 8(a), as the specific temporal limitations
set forth in Section 8(a) clearly require an “adverse change” “between the end of the
Inspection Period and Closing.” (emphasis added). Accordingly, we find that the trial court
erred in allowing Loeb Properties to terminate the Contract pursuant to Section 8(a), and we
reverse its grant of summary judgment to Loeb Properties on that basis.

                                    IV.   C ONCLUSION

       Based upon our above conclusions that the economic downturn did not provide an
appropriate basis for termination pursuant to Section 7 or Section 8(a) of the Contract, we
find that Loeb Properties’ termination constituted a default, thereby entitling the Heatons to
retain Loeb Properties’ earnest money. Summary judgment is entered in favor of the
Heatons. The Heatons shall be awarded the $44,362.57 remaining in the escrow account, and
Loeb Properties shall pay the Heatons an additional $5,637.43, for a total of $50,000.00.
Additionally, pursuant to Section 21(g) of the Contract, the Heatons are awarded attorney
fees and expenses incurred in both the trial court and in this Court, and we remand for a
determination of such award. Costs of this appeal are taxed to Appellee, Loeb Properties,
for which execution may issue if necessary.

                                                   _________________________________
                                                   ALAN E. HIGHERS, P.J., W.S.




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