Bayrock Investment Co. v. Joseph D. Blankenship, M.D. ( 2014 )

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
February 18, 2014 Session
BAYROCK INVESTMENT CO. v. JOSEPH D. BLANKENSHIP, M.D.,
ET AL.
Direct Appeal from the Circuit Court for Madison County
No. C11273 Donald H. Allen, Judge
No. W2013-01091-COA-R3-CV - Filed April 15, 2014
This is a breach of contract case stemming from a commercial lease between Plaintiff
Landlord and Defendant Tenants. Beginning in August 2011, Defendants failed to make rent
payments in violation of their lease with Plaintiff. Plaintiff subsequently filed this lawsuit
seeking damages specified in the lease. In response, Defendants raised the affirmative
defense of unclean hands, contending that Plaintiff breached the lease first by objecting to
and/or interfering with Defendants’ right under the lease to sublease the property without
Plaintiff’s consent. The trial court granted summary judgment to Plaintiff, finding that
Defendants failed to perform under the lease by failing to pay rent, and finding no genuine
issue of material fact regarding any allegation that Plaintiff interfered with Defendant’s
ability to sublease the property. The Defendants argue that summary judgment was
inappropriate because there exists a genuine issue of material fact regarding whether Bayrock
breached the lease first by interfering with Defendants’ right to sublease. We disagree and
affirm the trial court’s grant of summary judgment to Plaintiff.
Tenn. R. App. P. 3 Appeal as of right; Judgment of the Circuit Court Affirmed and
Remanded
D AVID R. F ARMER, J., delivered the opinion of the Court, in which A LAN E. H IGHERS, P.J.,
W.S., and H OLLY M. K IRBY, J., joined.
Daniel Davis Warlick, Nashville, Tennessee, for the appellants, Joseph D. Blankenship,
M.D., Med-North Clinic, PLLC f/k/a MNG, PLLC, Med-North Group, PLLC, and Caresouth
Clinic, P.C.
Jonathan David Buckner, Donald D. Glenn and William B. Mauldin, Jackson, Tennessee, for
the appellee, Bayrock Investment Co.
OPINION
I. B ACKGROUND AND P ROCEDURAL H ISTORY
In June 2003, CareSouth Clinic, P.C., as tenant, entered into a twenty-year commercial
lease agreement1 (the “Lease Agreement”) with LPM CareSouth Jackson, LLC, as landlord,
concerning property at what is now 1203 Vann Drive, Jackson, Tennessee (the “Subject
Property”). At the same time, the President of CareSouth Clinic, P.C., Joseph D.
Blankenship (“Blankenship”), also executed an agreement to personally guarantee the
repayment of all amounts due under the Lease Agreement (the “Lease Guaranty”).
In June 2008, Med-North Group, PLLC (“Med-North”), with Blankenship as its
manager, entered an agreement in which it was assigned all of the rights of the tenant under
the Lease Agreement. Around the same time, a North Carolina general partnership named
Bayrock Investment Co. (“Bayrock”) purchased the Subject Property for a price of
$5,612,000 and became assignee of all of the rights of the landlord under the Lease
Agreement and Lease Guaranty. At all times relevant in this matter, Med-North was the
tenant of the Subject Property, and Bayrock was its landlord.
Pursuant to the Lease Agreement, Med-North was obligated to make payments to
Bayrock each month to cover rent and other expenses. Med-North defaulted on the Lease
Agreement when it failed to make a monthly payment due for August 2011. Upon Med-
North’s default, the Lease Agreement authorized Bayrock to charge a five percent late fee
on overdue amounts owed. Additionally, Bayrock had the option to declare immediately due
and payable all rents and other sums owed for the remainder of the lease term through
January 2024. Pursuant to the Lease Guaranty, Blankenship was secondarily liable for all
amounts due by Med-North under the Lease Agreement.
On October 21, 2011, Bayrock filed a complaint against Med-North and Blankenship
(collectively the “Appellants”) in the Circuit Court of Madison County asserting breach of
contract against each for failure to make payments due under the Lease Agreement and Lease
Guaranty. Bayrock contended that $39,707.17 in monthly rent and $3,498.57 in monthly
taxes from August 2011 was overdue on the Subject Property at that time. Bayrock requested
that the trial court enter a judgment against Appellants for all amounts due under the Lease
Agreement and Lease Guaranty, including late fees and attorney’s fees.
1
Since the original Lease Agreement was signed in 2003, it has been amended three times. The
original agreement and each of the subsequent amendments are all collectively referred to herein as the
“Lease Agreement.” The rent commencement date was later changed to January 7, 2004.
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Appellants answered on December 21, 2010, admitting the terms of the Lease
Agreement and Lease Guaranty, but denying that they had breached either contract, and
asserting the affirmative defense of unclean hands. Appellants contended that Bayrock had
breached the Lease Agreement prior to Med-North’s nonpayment by denying Med-North’s
request to sublet the Subject Property in bad faith. Appellants requested that the trial court
dismiss Bayrock’s complaint.
On October 10, 2012, Bayrock filed a motion for summary judgment along with a
supporting memorandum of law and a statement of undisputed facts. Attached to its motion
was the affidavit of Bayrock’s asset manager, Matt Bogdovitz (“Bogdovitz”), copies of the
Lease Agreement and Lease Guaranty, a ledger estimating the total amounts due for the
remainder of the lease term (the “Ledger of Amounts Owed”), and a portion of
Blankenship’s deposition. In its statement of undisputed facts, Bayrock submitted that Med-
North’s failure to make its monthly payment for August 2011 constituted an event of default
of the Lease Agreement. Additionally, Bayrock stated that Med-North had vacated the
Subject Property in February 2012, however the obligation to pay rent under the Lease
Agreement does not terminate until January 2024. Citing the attached Ledger of Amounts
Owed and Bogdovitz’s affidavit, Bayrock stated that Appellants owed $7,599,988.04 for
unpaid rent, taxes, and penalties due under the Lease Agreement. Bayrock contended that
in the absence of any genuine issue of material fact, it was entitled to a judgment in that
amount plus attorney’s fees.
On January 28, 2013, Appellants responded to Bayrock’s motion for summary
judgment. Appellants’ response submitted that disputed material facts precluded a grant of
summary judgment to Bayrock. Specifically, Appellants cited paragraph 7(c) of the Lease
Agreement, which provided Med-North, as tenant, the right to sublease the Subject Property
to any entity who would succeed to Med-North’s business through a sale of assets without
Bayrock’s consent. Appellants attached an affidavit from Blankenship to support their
contention that prior to the nonpayment of rent, Med-North entered into an agreement with
Elie Korban, M.D. (“Korban”) and Delta Convenient Care, P.C. (“Delta”) wherein Delta
would purchase the assets of Med-North and sublease the Subject Property from it effective
on June 8, 2011. In his affidavit, Blankenship stated that on June 25, 2011 Korban sent him
an email stating that Bayrock would not allow him to sublease the Subject Property.
Appellants contended that Bayrock’s denial of the sublease was a breach of paragraph 7(c)
of the Lease Agreement, which ultimately caused Med-North to be unable to make its
monthly lease payments.
On February 5, 2013, Bayrock filed an reply in which it again denied the existence of
any material facts precluding summary judgment in its favor. Bayrock did not dispute the
existence of an agreement between Med-North and Delta, however it objected to
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Blankenship’s statement regarding the email from Korban as hearsay. A hearing was held
on Bayrock’s motion for summary judgment on February 8, 2013. At the hearing, the trial
court concluded that it was not prepared to rule on Bayrock’s motion for summary judgment,
and it adjourned the hearing so that the parties could submit additional information.
On February 26, 2013, Appellants filed a supplemental response to Bayrock’s motion
for summary judgment along with a response to Bayrock’s statement of undisputed facts.
Attached to the supplemental response was a second affidavit of Blankenship, a copy of the
sublease agreement between Med-North and Delta, and a copy of a detainer summons filed
by Bayrock against Med-North and Delta on July 22, 2011 seeking possession of the Subject
Property. In the supplemental response, Appellants admitted that Med-North failed to pay
rents due beginning in August 2011, and that failure to do so constitutes an event of default
under the Lease Agreement. Appellants further admitted that Med-North vacated the Subject
Property in February 2012 even though the obligation to pay rent under the Lease Agreement
will not terminate until January 2024. However, Appellants disputed the assertion that they
owed Bayrock $7,599,988.04 for unpaid rent, taxes, and penalties due under the Lease
Agreement. Appellants contended that Med-North reached an agreement to sublease the
Subject Property to Delta, which the Lease Agreement provided it could do without
Bayrock’s consent. Appellants further asserted that Bayrock terminated their agreement with
Delta by filing a detainer action seeking to evict Delta and alleging nonpayment of rent by
Med-North. Appellants submitted that Bayrock’s action in filing the detainer action caused
Med-North to lose its agreement with Delta and caused Appellants to suffer damages leading
to their inability to continue occupying the Subject Property.
On March 7, 2013, Bayrock replied to Appellants’ response and statement of
additional facts. In its reply, Bayrock did not dispute that Med-North entered into an
agreement whereby Delta would sublease the Subject Property. Additionally, Bayrock did
not dispute that it filed a detainer action against Med-North and Delta on July 22, 2011,
however Bayrock did dispute that it terminated the sublease agreement between Med-North
and Delta by doing so. In support of its contention, Bayrock attached a second affidavit of
Bogdovitz.
In his second affidavit, Bogdovitz stated that Bayrock never objected to Med-North’s
sublease to Delta, and, in fact, that Bayrock explicitly communicated to both parties that it
did not oppose the sublease. Bogdovitz relied on several documents attached to his affidavit
to support the contention. The first was a letter that Bayrock sent to Delta on July 22, 2011,
the same day Bayrock filed its detainer action against Med-North and Delta. In the letter,
Bayrock acknowledged that Delta had been granted a purported sublease of the Subject
Property and informed Delta that it would be filing the action to recover possession of the
Subject Property due to nonpayment of rent. The second document was a request, filed by
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Bayrock on August 2, 2011, to non-suit Delta in the pending detainer action. The third
document was a letter from Bayrock to Appellants dated August 5, 2011, in which Bayrock
stated that it did not raise any objection to the sublease by Delta. Additionally, Bayrock
indicated in the letter that it understood from a prior conversation that Blankenship would
be paying the June and July rents the following day, and that Korban would be paying rent
for August. Bayrock further stated that it would not pursue the pending detainer action once
the rent was brought current. The fourth document was a letter dated August 17, 2011, from
Bayrock to Delta in which Bayrock assured Delta it was not subject to an eviction action at
that time. The fifth and final document was also a letter from Bayrock to Delta dated August
18, 2011, in which Bayrock gave Delta assurances it would not be evicted as long as it made
timely rent payments and otherwise complied with the terms of its agreement with
Blankenship.
After holding a hearing on the matter, the trial court granted Bayrock’s motion for
summary judgment on April 12, 2013. The trial court found that the parties did not dispute
the validity or terms of the Lease Agreement or the Lease Guaranty. The trial court found
that in light of their failure to perform under the Lease Agreement, Med-North owed Bayrock
monthly rent payments from August 2011 forward. The trial court noted that in the event of
default, Bayrock had the option to declare all amounts owed under the Lease Agreement
immediately due and payable. The trial court further found that there was no genuine issue
of material fact regarding the allegation that Bayrock interfered with Med-North’s right to
sublease the Subject Property. In fact, the trial court found that Bayrock took specific actions
to ensure that it did not interfere with any agreement between Med-North and Delta. Citing
Bayrock’s Ledger of Amounts Owed, the trial court determined that the total amount Med-
North owed Bayrock for payments from the time of its default in August 2011 through the
expiration of the lease term equaled $7,599,988.04. Additionally, the trial court noted that
the Lease Agreement provided for Bayrock to recover its reasonable attorney’s fees, which
it found to be $24,176.10. The trial court found that Blankenship was personally obligated
to pay the debt to Bayrock pursuant to the Lease Guaranty. Accordingly, the trial court
entered a judgment in favor of Bayrock and against Appellants jointly and severally, in the
amount of $7,624,164.14, and ordered that amount to be offset by monthly rental payments
Bayrock received from any new tenant of the Subject Property prior to the expiration of the
lease term. On April 24, 2013, Appellants filed a notice of appeal from the trial court’s
judgment.
II. I SSUES P RESENTED
Slightly restated, the issues Appellants raise on appeal are:
1. Whether the trial court erred by finding that there was no issue of
material fact as to their liability for breach of contract.
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2. Whether the trial court erred in calculating the damages it awarded to
Bayrock.
III. S TANDARD OF R EVIEW
Summary judgment is appropriate only when the moving party can demonstrate that
there are no disputed issues of material fact, and that it is entitled to judgment as a matter of
law. Tenn. R. Civ. P. 56.04; Martin v. Norfolk S. Ry. Co., 271 S.W.3d 76, 83 (Tenn. 2008).
The party seeking summary judgment has the burden to demonstrate, by a properly supported
motion, that there are no issues of material fact and that it is entitled to judgment as a matter
of law. Martin, 271 S.W.3d at 83. (citations omitted).
This action commenced after July 1, 2011, therefore Tennessee Code Annotated § 20-
16-101 is applicable to this matter. The statute states:
In motions for summary judgment in any civil action in Tennessee, the
moving party who does not bear the burden of proof at trial shall prevail on its
motion for summary judgment if it:
(1) Submits affirmative evidence that negates an essential element of
the nonmoving party’s claim; or
(2) Demonstrates to the court that the nonmoving party’s evidence is
insufficient to establish an essential element of the nonmoving party’s claim.
Tenn. Code Ann. § 20-16-101 (Supp. 2012).
The trial court should award summary judgment only where a reasonable person could
reach only one conclusion based on the facts and the inferences drawn from those facts.
Staples v. CBL & Assocs., Inc., 15 S.W.3d 83, 89 (Tenn. 2000) (citations omitted). If there
is any doubt about whether a genuine issue of material fact exists, summary judgment is not
appropriate. Martin, 271 S.W.3d at 84. We review a trial court’s award of summary
judgment de novo, with no presumption of correctness afforded to the trial court. Id.
IV. A NALYSIS
We first consider whether the trial court erred by granting summary judgment to
Bayrock on its breach of contract claims. Appellants argue that Bayrock breached the
parties’ contract first and are therefore not entitled to recover on their claims. It is well
settled that “[a] party who has materially breached a contract is not entitled to damages
stemming from the other party’s later material breach of the same contract.” United Brake
Sys., Inc. v. Am. Envtl. Prot., Inc., 963 S.W.2d 749, 756 (Tenn. Ct. App. 1997)(citation
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omitted). Appellants contend that the first material breach of the Lease Agreement in this
case was Bayrock’s interference with Med-North’s sublease agreement with Delta.
However, there is substantial undisputed evidence in the record to establish that Bayrock did
not object to the sublease agreement between Med-North and Delta, and therefore did not
materially breach the Lease Agreement.
The relevant paragraph in the Lease Agreement provides that Med-North “shall have
the right, without the consent of [Bayrock], to sublease the [Subject Property]” to a business
entity who succeeds to the business of Med-North as a result of a sale of assets. It is
undisputed that in July 2011, Med-North entered an agreement with Delta pursuant to which
Delta would sublease the Subject Property. Additionally, it is undisputed that Bayrock filed
a detainer action against Med-North and Delta on July 22, 2011, and at some point after that,
Delta backed out of the agreement with Med-North. However, the evidence clearly shows
that Bayrock’s action did not violate the Lease Agreement or directly cause the agreement
between Med-North and Delta to fall through.
Bayrock stated that it filed its detainer action seeking possession of the Subject
Property after Med-North failed to make rent payments for June and July 2011. Appellants
have not disputed that Med-North failed to make those rent payments. Pursuant to paragraph
18(B)(2) of the Lease Agreement, Med-North’s failure to pay rent for June and July 2011
gave Bayrock the right to take possession of the Subject Property and to expel or remove
Med-North or any other person occupying the Subject Property. Thus, Bayrock was acting
within its rights under the Lease Agreement when it filed the detainer action against Med-
North and Delta seeking possession of the Subject Property.
Additionally, throughout July and August 2011, Bayrock indicated to Delta on several
occasions that it did not object to its sublease of the Subject Property. On July 22, the same
day it filed the detainer action, Bayrock sent a letter to Delta, in which it recognized Delta’s
interest in the Subject Property, stating:
Please accept this notice that the Lease for the above described property is in
default for non-payment of rent. I understand that your client has been granted
a purported sub-lease of the property. Without waiving any term of the lease
as amended, please accept this notice that my client is filing an action to
recover possession of the property and will pursue that action through
judgment if the amounts due on this lease are not brought and maintained
current.
On August 2, Bayrock non-suited Delta from the detainer action. On August 5, Bayrock sent
a letter to Appellants explicitly stating that it did not raise any objection to the sublease to
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Delta. Additionally, the letter stated that it was Bayrock’s understanding that Appellants
would pay amounts due for June and July the next day, and Korban would pay rent for
August. Finally, the letter stated that Bayrock would dismiss the pending detainer action
when rent was brought current. On August 17, Bayrock sent a letter to Delta assuring Delta
that it was not subject to a proceeding for eviction from the property. On August 18,
Bayrock sent another letter to Delta assuring Delta that for the remainder of 2011, Bayrock
would not evict Delta as long as Delta made adequate and timely rent payments and
otherwise fully complied with the terms of the Lease Agreement.
The evidence offered by Bayrock negates an essential element of Appellants’ claim
of breach. The evidence provided shows that Bayrock never objected to the sublease
agreement between Med-North and Delta. Rather, it appears that Bayrock explicitly
recognized the existence of the sublease agreement and attempted to alleviate any uncertainty
on Delta’s part about entering it. Thus, it is clear that Bayrock did not violated the terms of
the Lease Agreement by objecting to or interfering with Med-North’s sublease to Delta.
The only statement Appellants cite to suggest that Bayrock actually objected to the
sublease agreement comes from Blankenship’s affidavit filed on January 28, 2013. In it,
Blankenship states that on June 25, 2011, he received an email from Korban stating that
Bayrock would not allow him to sublease the Subject Property. Appellants did not present
an affidavit from Korban or any other corroborating evidence to support the statement.
Tennessee Rule of Civil Procedure 56.06 requires that affidavits presented in opposition to
summary judgment must be made on affiant’s personal knowledge, the statements contained
therein must be admissible in evidence, and the affiant must be competent to testify regarding
the substance of the affidavit. Tenn. R. Civ. P. 56.06 (2012). The statement in
Blankenship’s affidavit does not satisfy the requirements of the Rule 56.06, because
Blankenship’s testimony regarding what Korban allegedly said or what Bayrock allegedly
communicated to Korban is hearsay. See Todd v. Shelby County, 407 S.W.3d 212, 218
(Tenn. Ct. App. 2012) (“In applying the burden shifting analysis on a motion for summary
judgment, it is well settled that a court may not consider hearsay evidence.”). Blankenship’s
statement is insufficient to contradict the evidence offered by Bayrock. Accordingly, the trial
court did not err in granting summary judgment to Bayrock on the issue of Appellants’
liability.
Having determined that the trial court’s grant of summary judgment to Bayrock on the
issue of liability was proper, we now turn to Appellants’ argument that the trial court erred
in calculating the correct amount of damages. While Appellants had the burden of proving
the affirmative defense they raised to liability, Bayrock had the burden of proof with regard
to damages. See Old Republic Sur. Co. v. Eshaghpour, M1999-01918-COA-R3CV, 2001
WL 1523364 at *9 (Tenn. Ct. App. Nov. 30, 2001). The only evidence Bayrock submitted
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with regard to the amount of damages due under the Lease Agreement was the Ledger of
Amounts Owed attached to its motion for summary judgment. In the Ledger of Amounts
Owed, Bayrock calculated the rent for each month from Med-North’s default in August 2011
until the lease term’s expiration in January 2024. Bayrock also estimated the monthly taxes
owed during that period. Additionally, Bayrock added a five percent late fee on both rent and
taxes for each month. Upon adding all of the monthly totals together, the Ledger of Amounts
Owed shows that $7,599,988.04 remains due and owing under the Lease Agreement. The
trial court entered a judgment in favor of Bayrock against Appellants in that amount plus
attorney’s fees of $24,176.10, which the parties do not dispute was provided for in the Lease
Agreement. The total judgment against Appellants was $7,624,164.14. On appeal,
Appellants argue that the future amounts due under the Lease Agreement should have been
discounted to their present value.
In addressing Appellants’ argument, we first note that because they did not object to
the admission of the Ledger of Amounts Owed, the trial court did not err in considering it to
determine the proper amount of damages. Summers v. Cherokee Children & Family Servs.,
Inc., 112 S.W.3d 486, 510 (Tenn. Ct. App. 2002). As to Appellants’ argument that the
amount due and owing under the Lease Agreement should have been discounted to its
present value, we find that Appellants have waived this issue on appeal because they did not
raise it before the trial court. It is well settled that an issue cannot be raised for the first time
on appeal. See Pugh’s Lawn Landscape Co. v. Jaycon Dev. Corp., 320 S.W.3d 252, 260
(Tenn. 2010). Appellants contend that their counsel raised the issue at the March 8, 2010,
hearing on Bayrock’s summary judgment motion when he inquired as to whether the amount
of damages would be offset if the Subject Property were sold or leased to a new tenant in the
future. We see no way of construing that inquiry to raise the issue of whether the damages
should have been discounted to their present value. We therefore will not address the merits
of this argument.
V. C ONCLUSION
Based on the foregoing, we affirm the trial court’s grant of summary judgment to
Bayrock and its judgment in favor of Bayrock, against Med-North and Blankenship, jointly
and severally, in the amount of $7,624,164.14; that amount to be offset by future rental
payments Bayrock receives from a new tenant. Costs of this appeal are taxed to the
appellants, Joseph D. Blankenship, M.D., Med-North Clinic, PLLC f/k/a MNG, PLLC, Med-
North Group, PLLC, and Caresouth Clinic, P.C., and their sureties, for which execution may
issue if necessary.
_________________________________
DAVID R. FARMER, JUDGE
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