Wednesday, June 3, 2009

Contract claims have a 6-year statute of limitations, and the doctrine of unclean hands must relate specifically to the transaction


This is an action to recover a real estate commission. The defendants are the general partners of a partnership that owned a single asset, an apartment complex. In 1992, the partnership filed a reorganization petition in bankruptcy. The partnership hired the plaintiff real estate agency to sell the apartment complex while it was in bankruptcy. After a hearing to establish the value of the property, the bankruptcy court permitted the partnership to buy back the property for $9.8 million. Soon after the bankruptcy plan was confirmed, however, the partnership, through the plaintiff real estate agency, contracted to sell the property to a third party for $12.5 million. Upon discovering this, the bankruptcy court permitted the sale to the third party to take place for $12.5 million, but it ordered that the excess proceeds of the sale be placed in escrow. When the escrow funds were released, the plaintiff real estate agency did not receive its commission on the sale of the property. Consequently, the real estate agency filed this lawsuit against the general partners to recover its commission. The defendants filed a motion to dismiss based on the statute of limitations and on the equitable doctrine of “unclean hands.” The trial court denied the motion and awarded the plaintiff real estate agency the commission sought plus prejudgment interest. The defendants now appeal. We affirm, finding that the lawsuit was timely filed, that the trial court did not err in declining to apply the unclean hands doctrine, and that the trial court did not abuse its discretion in awarding prejudgment interest.

Opinion may be found at the TBA website:

"[T]he applicable statute of limitations for Coleman Management’s breach of contract claim is six years... A cause of action for breach of contract accrues on the date of the breach or when one party demonstrates a clear intention not to be bound by the contract.“Thus, the statute of limitations begins to run when a contracting party first knows or should know that the contract will not be performed.’ Id.

“The doctrine of unclean hands has been described as follows: The principle is general, and is one of the maxims of the Court, that he who comes into a Court of Equity asking its interposition in his behalf, must come with clean hands; and if it appear from the case made by him . . . that he has himself been guilty of unconscientious, inequitable, or immoral conduct, in and about the same matters whereof he complains of his adversary, or if his claim to relief grows out of, or depends upon, or is inseparably connected with his own prior fraud, he will be repelled at the threshold of the court.” Id.

“This is a legal and not an equitable claim, Coleman Management argues, and so the doctrine of “unclean hands” applies only if the unconscionable conduct arises out of the “particular transaction which is the subject of the litigation.” Metric Partners Growth Suite Investors, L.P. v. Nashville Lodging Co., 989 S.W.2d 700, 703 (Tenn. Ct. App. 1998). Here, in the absence of any proof of fraud with respect to the management agreement, the doctrine of “unclean hands” is not a valid defense.” Id.

“Simply stated, the court must decide whether the award of pre-judgment interest is fair, given the particular circumstances of the case. In reaching an equitable decision, a court must keep in mind that the purpose of awarding the interest is to fully compensate a plaintiff for the loss of the use of funds to which he or she was legally entitled, not to penalize the defendant for wrongdoing.” Id.