David T. Bailey and E. Lynn Wagner in their own right and derivative for the use and benefit of Southeastern Healthcare Svcs., L.P. v. Tom Holbert, as general partner of Southeastern Healthcare Svcs. L.P.

Opinion

I N THE COURT OF APPEALS OF TENNESSEE EASTERN SECTI ON

DAVI D T. BAI LEY a nd ) KNOX COUNTY E. LYNN W AGNER, i n t he i r own ) 03A01- 9606- CV- 00190 r i g h t a nd de r i va t i ve l y f or t he ) u s e a n d be ne f i t of Sout he a s t e r n ) He a l t h c a r e Se r vi c e s , L. P. )

)

Pl a i nt i f f s - Appe l l a nt s )

)

v. )

)

TOM HOLBERT, a s g e ne r a l p a r t ne r ) o f So u t he r n He a l t hc a r e ) Se r v i c e s , L. P. ) a nd ) M OORE' S PHARM ACY, I NC. ) HON. HAROLD W W M . I BERLY,

d/ b/ a M ARCUM S HEALTHCARE ' ) J UDGE SERVI CES, a nd CARL M ARCUM , ) GI NA M ARCUM PI NNEY, a nd ) TOM HOLBERT, a s o f f i c e r s , ) d i r e c t o r s a nd/ or e mpl oye e s ) a n d a g e nt s of a nd f or ) M o r e ' s Pha r ma c y, I nc .

o ) a nd ) TOM HOLBERT, CARL M ARCUM , ) a n d GI NA M ARCUM PI NNEY, ) I ndi vi dua l l y )

) AFFI RMED I N PART; VACATED I N De f e nda nt s - Appe l l e e s ) PART a nd REM ANDED

DALE C. ALLEN a nd H. BRUCE GUYTON OF KNOXVI LLE FOR APPELLANTS DAVI D T. BAI LEY a nd E. LYNN WAGNER

W LLI AM K. ROGERS OF KI NGSPORT FOR APPELLEE TOM HOLBERT I

PATRI CK LEDFORD OF KI NGSPORT FOR APPELLEES MOORE' S PHARMACY, CARL MARCUM a nd GI NA MARCUM PI NNEY

O P I N I O N

Godda r d, P. J .

Thi s i s a s ui t by Da vi d T. Ba i l e y a nd E. Lynn W gne r i n

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t h e i r o wn r i ght a nd de r i va t i ve l y f or t he us e a nd be ne f i t of So u t h e a s t e r n He a l t hc a r e Se r vi c e s , L. P. , a Li mi t e d Pa r t ne r s hi p i n wh i c h t he y we r e pa r t ne r s , a ga i ns t Tom Hol be r t , a s ge ne r a l

pa r t ne r , Moor e ' s Pha r ma c y, I nc . , d/ b/ a M r c um' s He a l t hc a r e

a

Se r v i c e s , a nd Ca r l M r c um a nd Gi na M r c um Pi nne y, a s Of f i c e r s a nd a a

Di r e c t o r s a nd/ or Empl oye e s a nd Age nt s of a nd f or Moor e ' s

Ph a r ma c y, I nc . , a nd Tom Hol be r t , Ca r l M r c um a nd Gi na M r c um a a

Pi n n e y , I ndi vi dua l l y. The s ui t s t e ms f r om t he pur c ha s e by So u t h e a s t e r n He a l t hc a r e Se r vi c e s of a uni t dos a ge pha r ma c y b u s i n e s s f r om Moor e ' s Pha r ma c y, I nc . , f or t he s um of $275, 000. Th e c o mpl a i nt a l l e ge d a c a us e of a c t i on f or ne gl i ge nt mi s - r e p r e s e nt a t i on a nd br e a c h of wa r r a nt y.

The Tr i a l J udge di s mi s s e d t he c ompl a i nt . Al t hough he f o u n d t ha t mi s l e a di ng i nf o r ma t i on 1 r e ga r di ng t he pr of i t a bi l i t y o f the business in question was negligently furnished to the Plaintiffs, he also found that because the bookkeeping for the business sold was kept in conjunction with that of a separate pharmacy business owned by Moore's Pharmacy, Inc., "it was difficult to determine what was what, what this business was actually earning and what the other business was earning," and that there was no intent on the part of the Defendants to

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S o me o f t h e i n f o r ma t i o n f u r n i s h e d wa s g r o s s l y mi s l e a d i n g . Fo r e x a mp l e , i t wa s r e p r e s e n t e d t h a t t h e b u s i n e s s p u r c h a s e d wa s g e n e r a t i n g a g r o s s p r o f i t o f $ 1 0 , 0 0 0 p e r mo n t h , wh e n i n f a c t t h e l o s s e s p e r mo n t h we r e a p p r o x i ma t e l y t h a t a mo u n t .

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deceive. Consequently, he concluded that the Plaintiffs were guilty of at least equal negligence i n f a i l i ng t o i nve s t i ga t e t he i n f o r ma t i on f ur ni s he d, whi c h woul d ha ve di s c l os e d t he t r ue f i n a n c i a l c ondi t i on of t he bus i ne s s pur c ha s e d. ( Se e Appe ndi x. )

The Tr i a l Cour t a l s o di s mi s s e d t he br e a c h of wa r r a nt y c l a i m i n a s uc c i nc t c ol l oquy wi t h c ouns e l f or t he Pl a i nt i f f s a t t h e c o n c l us i on of hi s me mor a ndum opi ni on:

So f or t ha t r e a s on, t he j udgme nt of t he Cour t i s t h a t t he de f e nda nt s s houl d pr e va i l be c a us e t he f a ul t h e r e i s a t l e a s t e qua l . And t he r e i s no ot he r ba s i s , a s I ha ve j us t out l i ne d, I t hi nk, f or r e c ove r y.

Now, i s t he r e a n yt hi ng e l s e t ha t you woul d l i ke t o a s k me t ha t you f e e l I ha ve n' t c ove r e d wi t hout r e a r gui ng t he c a s e ?

MR. LEDFORD: No, Your Honor .

MR. GUYTON: I s t he Cour t ' s opi ni on a l s o t o ha ve i n c l ude d t he a ddr e s s i ng t he i s s ue of t he wa r r a nt y?

THE COURT: Ye s . The s ol e ba s i s f or r e c ove r y a s I s t a t e d i t , a nd t ha t i nc l ude s e ve r yt hi ng. I t ' s my i n t e nt i on t o i nc l ude e ve r yt hi ng.

The Pl a i nt i f f s a ppe a l , r a i s i ng t he f ol l owi ng t wo i s s ue s :

1. W t he r t he t r i a l c our t e r r e d i n i t s f a i l ur e he

t o hol d de f e nda nt s / a ppe l l e e s l i a bl e f or br e a c h of wa r r a nt y a nd/ or br e a c h of c ont r a c t , whe r e t he d e f e nda nt s / a ppe l l e e s wa r r a nt e d t he a c c ur a c y of t he f i na nc i a l s t a t e me nt s pr ovi de d t o pl a i nt i f f s / a ppe l l a nt s p r i or t o t hi s t r a ns a c t i on, a nd t he pl a i nt i f f s / a p pe l l a nt s r e l i e d o n t he f i na nc i a l s t a t e me nt s , b ut t he f i na nc i a l s t a t e me nt s we r e di s c ove r e d t o be i na c c ur a t e a nd f a l s e a f t e r t he t r a ns a c t i on.

2. W t he r t he t r i a l c our t e r r e d i n i t s f a i l ur e he

t o hol d de f e nda nt s / a ppe l l e e s M r c um a nd Pi nne y

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p e r s ona l l y a nd i ndi vi dua l l y l i a bl e f or t he mi s r e pr e s e nt a t i ons a nd br e a c he s of wa r r a nt y ma de by t h e i r a ge nt s , Hol be r t a nd Rhot on?

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I n c onne c t i on wi t h t he br e a c h of wa r r a nt y c l a i m,

M o r e ' s Pha r ma c y, I nc . , a c t i ng t hr ough i t s Pr e s i de nt , Gi na M r c u m o a

Pi n n e y, a nd i t s Se c r e t a r y , Ca r l M r c um, e xe c ut e d a n " AGREEM a ENT

FOR SALE AND TRANSFER OF ASSETS, " whi c h c ont a i ne d t he f ol l owi n g p r o v i s i ons :

SECTI ON FI VE

WARRANTI ES AND COVENANTS OF SELLER

Se l l e r a gr e e s , r e pr e s e nt s , a nd wa r r a nt s a s f o l l ows :

. . . .

( d) Se l l e r h a s ma de a va i l a bl e t o Buye r i t s pr of i t a nd l os s s t a t e me nt s a nd s a me ha ve c or r e c t l y r ef l ect ed t he f i na nc i a l c ondi t i ons , a s s e t s a nd l i a bi l i t i e s , a nd o p e r a t i on of Se l l e r a s of t he da t e s s t a t e d i n s uc h d o c ume nt s .

. . . .

( p) Se l l e r wi l l pr ompt l y a dvi s e Buye r i n wr i t i ng o f t he oc c ur r e nc e of a ny ma t e r i a l e ve nt s whi c h c ome t o t h e knowl e dge of Se l l e r a f t e r t he e xe c ut i on of t hi s Ag r e e me nt a nd pr i or t o or on t he Cl os i ng Da t e r e l a t i ng t o a ny ma t t e r s whi c h a r e t he s ubj e c t s of t he s e c ove na nt s , r e pr e s e nt a t i ons a nd wa r r a nt i e s of t he Se l l e r c o nt a i ne d i n t hi s Se c t i on.

( q) No r e pr e s e nt a t i ons or wa r r a nt i e s by Se l l e r , i t s o f f i c e r s o r d i r e c t or s , n or a ny s t a t e me nt , l i s t or c e r t i f i c a t e f ur ni s he d or t o be f ur ni s he d t o Buye r p u r s ua nt he r e t o, or i n c onne c t i on wi t h t he t r a ns a c t i ons c o nt e mpl a t e d he r e by, c ont a i ns or wi l l c ont a i n a ny u n t r ue s t a t e me nt of a ma t e r i a l f a c t or omi t s or wi l l o mi t t o s t a t e a ma t e r i a l f a c t ne c e s s a r y t o ma ke t he s t a t e me nt s t he r e i n n ot mi s l e a di ng. Al l s uc h s t a t e me nt s , l i s t s , o r c e r t i f i c a t e s a r e t r ue a nd c or r e c t i n a l l ma t e r i a l r e s pe c t s .

( r ) The wa r r a nt i e s , r e pr e s e nt a t i ons a nd c ove na nt s o f t he Se l l e r c ont a i ne d i n t hi s Agr e e me nt s ha l l be t r ue a nd c or r e c t i n a l l r e s pe c t s a s of t he Cl os i ng Da t e wi t h

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t h e s a me f or c e a nd e f f e c t a s i f gi ve n a nd ma de on a nd a s of t he da t e a nd t i me of t he Cl os i ng Da t e , a nd s uc h r e pr e s e nt a t i ons , wa r r a nt i e s a nd c ove na nt s s ha l l s ur vi ve t h e Cl os i ng Da t e a nd t he c ons umma t i on of t he t r a ns a c t i ons c ont e mpl a t e d by t hi s Agr e e me nt .

Al t hough t he Tr i a l Cour t a ppa r e nt l y f ound t ha t n e g l i g e nc e ma y a l s o ba r a n a c t i on f or br e a c h of c ont r a c t , ne i t h e r t h e Tr i a l Cour t nor c ouns e l f or t he De f e nda nt s ha ve c i t e d a ny

s u c h a u t hor i t y. M e ove r , we ha ve not be e n a bl e t o f i nd a ny i n or

o u r r e s e a r c h. W a c c or di ngl y c onc l ude t ha t t he Pl a i nt i f f s a r e

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e n t i t l e d t o a j udgme nt a ga i ns t t he Cor por a t i on be c a us e of br e a c h o f wa r r a nt y.

I n s o f i ndi ng, we a c c e pt a s t r ue t ha t t he Pl a i nt i f f s d i d n o t ma ke s uc h a n i nve s t i ga t i on t ha t t he y mi ght ha ve t o d i s c l o s e t he mi s r e pr e s e nt a t i on, but poi nt out t ha t t he pur pos e o f a wa r r a nt y, i n pa r t , i s t o r e l i e ve one t o whom t he wa r r a nt y i s g i v e n f r om t ha t r e s pons i bi l i t y. I n Pa c c on, I nc . v. Uni t e d St a t e s , 399 F. 2d 162, 166 ( 1968) , t he Uni t e d St a t e s Cour t of Cl a i ms ma ke s t hi s poi nt i n quot i ng wi t h a ppr ova l f r om a n e a r l i e r case:

" I n e s s e nc e a wa r r a nt y i s a n a s s ur a nc e by one pa r t y t o a n a gr e e me nt of t he e xi s t e nc e of a f a c t upon whi c h t he o t he r pa r t y ma y r e l y; i t i s i nt e nde d pr e c i s e l y t o r e l i e ve t he pr omi s e e of a ny dut y t o a s c e r t a i n t he f a c t s f o r hi ms e l f . Thus , a wa r r a nt y a mount s t o a pr omi s e t o i n de mni f y t he pr omi s e e f or a ny l os s i f t he f a c t wa r r a nt e d pr ove s unt r ue . " Da l e Cons t r . Co. v. Uni t e d St a t e s , 168 Ct . Cl . 692, 699 ( 1964) .

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I n t he i r b r i e f t he Pl a i nt i f f s c ont e nd t ha t i f t he r e me dy t o whi c h t he y a r e e nt i t l e d i s r e s c i s s i on, t he " me a s ur e of d a ma g e s woul d be t he r e t ur n of t he c ons i de r a t i on pa i d, . . . a s we l l a s t he a mount i nve s t e d i n t he bus i ne s s , wi t h i nt e r e s t , a n d t h e va l ue of t he i r l a bor , " whi c h t he y c a l c ul a t e t o be i n e xc e s s o f $ 6 0 0 , 000. I n t he a l t e r na t i ve , t he y a s s e r t t ha t i f t he y a r e a wa r d e d c ompe ns a t or y da ma ge s onl y, " t he y s houl d r e c e i ve t he d i f f e r e nc e i n va l ue of wha t t he y pa i d ve r s us t he va l ue of wha t t h e y a c t ua l l y r e c e i ve d. "

W c onc l ude unde r a l l t he f a c t s of t hi s c a s e t he l a t t e r

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me a s u r e of da ma ge i s t he a ppr opr i a t e one . I t doe s not a ppe a r , h o we v e r , t ha t t hi s f i gur e wa s a de qua t e l y a ddr e s s e d i n t he pr oo f , a n d i n t he i nt e r e s t of j us t i c e t o bot h pa r t i e s , we de e m i t a pp r o p r i a t e t ha t t he c a us e be r e ma nde d f or s uc h a de t e r mi na t i o n a n d a j udgme nt e nt e r e d a ga i ns t t he Cor por a t i on f or t ha t a mount .

As t o t he s e c ond i s s ue r a i s e d, whe r e i n t he Pl a i nt i f f s '

i ns i s t e nc e t ha t t he i ndi vi dua l De f e nda nt s a r e l i ke wi s e l i a bl e i n wa r r a n t y, we f i nd t he onl y wa r r a nt y e xt e nde d wa s t ha t c ont a i ne d i n t h e a gr e e me nt f or s a l e a nd t r a ns f e r of a s s e t s , whi c h wa s

e x e c u t e d by t he Cor por a t i on a nd s i gne d by M . Pi nne y a nd M .

s r

M r c um i n t he i r r e pr e s e nt a t i ve c a pa c i t i e s . a

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I n c onc l us i on, we ha ve not ove r l ooke d t he De f e nda nt s '

c o n t e n t i ons t ha t br e a c h of wa r r a nt y ma y not be a s s e r t e d be c a us e t h e c o n t r a c t i s a mbi guous , wa s not br e a c he d, wa s not r e a s ona bl y r e l i e d upon, a nd di d not c a us e da ma ge s t o t he Pl a i nt i f f s . Unde r t h e f i n di ngs of t he Tr i a l Cour t , t he t e s t i mony a dduc e d a nd t he e n t i r e r e c or d, we f i nd e a c h c ont e nt i on t o be wi t hout me r i t .

For t he f or e goi ng r e a s ons t he j udgme nt of t he Tr i a l Co u r t i s a f f i r me d i n pa r t , va c a t e d i n pa r t , a nd t he c a us e r e ma n d e d f or f ur t he r pr oc e e di ngs not i nc ons i s t e nt wi t h t hi s opi ni on. Cos t s of a ppe a l a r e a dj udge d one - ha l f a ga i ns t t he Pl a i n t i f f s a nd one - ha l f a ga i ns t t he Cor por a t i on.

_______________________________

Houston M. Goddard, P.J.

CONCUR:

________________________________

Herschel P. Franks, J.

________________________________

Don T. McMurray, J.

APPENDIX

And this business, when it was operated by the defendants, was operated, of course, with their other business in such a way that, to the defendants and really to anybody else, it was difficult to determine what was what, what this business was actually earning and what the other business was earning. And this method of accounting that we went into great detail in describing, in effect, concealed the actual status and condition of this business that was finally purchased by the plaintiff. This resulting concealment was not, in the Court's mind and the Court's opinion, done in some intentional way to deceive anyone. It was just simply the way that it was set up.

When the plaintiffs purchased the business, they were provided the papers that we've spent a lot of time discussing, and these papers, in effect, gave plaintiff what turned out to be a false impression about the status of this business that they purchased. Now, plaintiffs accepted these without question, and when offered the opportunity to determine for themselves the validity, in effect, of those papers that they've been furnished and the information they've been furnished, the plaintiffs wound up relying upon their accountant that they sent to investigate. And the accountant actually did no investigation and, repeating several times that these people involved were fraternity brothers and if they could not trust each other and rely on each other, he did not see that he had any part in questioning them any further than what appeared on the surface.

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APPENDIX

Page 2

misleading. They did not do so intentionally or willfully or actually knowingly. They were relying upon their people, their accountant who prepared these statements, and they are shown not to take much direct interest in determining and separating the accounts of that business from the other business. Then when the sale was done, the plaintiffs, having the opportunity to investigate the business and accomplish what we referred to in the -- as a term of art, supposedly, due diligence -- which was in the papers, actually did nothing to determine for themselves in any meaningful way what the true condition of the business was.

So in legal terms, I think you would say that the defendants negligently misrepresented the condition of that business that was purchased. The plaintiffs then negligently purchased the business. And that's the problem there. And that's the nature of the conduct that resulted in this situation -- negligence on both parts which the Court feels was at least equal. The other individual defendant we find was not acting for himself in such a way that would impose liability upon him.