Ellis v. Pauline S. Sprouse Residuary Trust

• Decision Date: 23 March 2009
• Docket Number: No. E2006-01771-SC-R11-CV.,E2006-01771-SC-R11-CV.
• Parties: Mike ELLIS v. PAULINE S. SPROUSE RESIDUARY TRUST et al.
• Court: Tennessee Supreme Court

280 S.W.3d 806

Mike ELLIS v. PAULINE S. SPROUSE RESIDUARY TRUST et al.

No. E2006-01771-SC-R11-CV.

Supreme Court of Tennessee, at Knoxville.

September 4, 2008 Session.

March 23, 2009.

G. Wendell Thomas, Jr., Rob Quillin, and Catherine E. Shuck, Knoxville, Tennessee, for the appellant, Mike Ellis.

W. Tyler Chastain and Margo J. Maxwell, Knoxville, Tennessee, for the appellees, Pauline S. Sprouse Residuary Trust and Kerry M. Sprouse.

OPINION

WILLIAM C. KOCH, JR., J., delivered the opinion of the court, in which JANICE M. HOLDER, C.J., WILLIAM M. BARKER, CORNELIA A. CLARK, and GARY R. WADE, JJ., joined.

This appeal involves the exercise of an option to extend a lease that did not specify how or when the option should be exercised. Approximately two and one-half years after the lessee believed he had exercised the option to extend the lease, the lessor sold the property to a third party who was aware that the lessee was actively farming the property. Thereafter, the new owner trespassed on the property and ordered the lessee to vacate. The lessee complied but filed suit in the Circuit Court for Knox County seeking damages for the new owner's trespass and for the profits he would have earned had he been permitted to continue to farm the property for the remaining term of the lease. A jury determined that the lessee had effectively extended the lease and that the new owner had actual notice of the lease. Accordingly, the jury awarded the lessee $82,534 in compensatory damages and $30,000 in punitive damages. The owner appealed. The Court of Appeals upheld the jury's $534 award for damages caused by the owner's trespass but vacated the remainder of the award of compensatory damages after concluding that the lessee had not effectively extended the lease. The court also vacated the punitive damages award because it was excessive in comparison to the reduced compensatory damages award and remanded the case for a new trial on punitive damages. Ellis v. Pauline S. Sprouse Residuary Trust, No. E2006-01771-COA-R3-CV, 2007 WL 3121666 (Tenn.Ct.App. Oct.26, 2007). We granted the lessee's application for permission to appeal. In accordance with Carhart v. White Mantel & Tile Co., 122 Tenn. 455, 123 S.W. 747 (1909), we have determined that the lessee effectively extended the lease by holding over and continuing to pay the rent required by the lease. Accordingly, we reverse the judgment of the Court of Appeals and remand the case to the Court of Appeals for further proceedings consistent with this opinion.

I.

Mike Ellis is a farmer who owns a 177-acre farm and who works an additional 800 to 900 acres of leased farmland. In 1997, he leased a 103.3-acre tract on Arnold Road in Mascot, Tennessee, from Mary Bruce Williams Bagwell.¹ Mr. Ellis and Ms. Bagwell agreed on the terms of the lease over the telephone, and Mr. Ellis reduced their agreement to writing. The lease, written in capital letters, provided:

Lease Agre[e]ment

This lease between Mary Bruce Williams and Mike Ellis for her property at the end of Arnold Road in Mascot, Tennessee. [excluding house]

This lease will be for a per[io]d of five years with Mike Ellis having option of five ad[d]itional years

This lease will begin January 1 1997

Payment will be three thous[]and dollars per year due on or before January 31 of each year

(phrase "[excluding house]" in original). Mr. Ellis signed and mailed the lease to Ms. Bagwell. Ms. Bagwell, having misplaced and forgotten about the lease after she received it, signed the lease on January 25, 1999, after Mr. Ellis prompted her to do so. Mr. Ellis never recorded the lease.

Mr. Ellis farmed the sixty acres of arable farmland on the property and had every intention of extending the lease for an additional five years. In late 2001, he sowed a crop of winter wheat on the property. According to Mr. Ellis, he spoke with Ms. Bagwell by telephone "probably sometime in January [2002]" but "possibly in later December [2001]" and told her that he was exercising his option to extend the lease for an additional five years. Ms Bagwell denied that she ever talked with Mr. Ellis about exercising the option to extend the lease. There is no disagreement, however, that Mr. Ellis paid and Ms. Bagwell accepted Mr. Ellis's timely three-thousand-dollar rent payments in January 2002, January 2003, and January 2004. There is also no disagreement that Mr. Ellis continued to actively farm the leased property.

In 2004, Kerry M. Sprouse, a Knoxville real estate developer and broker,² became interested in the leased property. According to Mr. Ellis, when Mr. Sprouse visited the property on April 23 or 24, 2004, he told Mr. Sprouse that he had leased the property. Mr. Sprouse later denied that Mr. Ellis mentioned his lease during this conversation.

On May 10, 2004, Mr. Sprouse³ signed a contract to purchase the property for $440,000. The contract contained a handwritten notation that admonished that the "Current lease not ... be disturbed." Ms. Bagwell later testified that this notation referred to Mr. Ellis's lease but that she thought that Mr. Ellis's lease was year-to-year because he had not exercised his option.⁴ Mr. Sprouse testified that he thought the notation referred to Mr. Ellis's interest in harvesting his crop in 2004.

On the day after she signed the contract to sell the property to Mr. Sprouse, Ms. Bagwell faxed a copy of Mr. Ellis's lease to the real estate agent handling the transaction. Ms. Bagwell and her brother and sister also executed three affidavits stating that they were in possession of the property and there were no tenants on the property. Apparently Mr. Sprouse did not see the copy of Mr. Ellis's lease prior to the closing. While he professed to rely completely on the affidavits executed by Ms. Bagwell and her siblings, he conceded that he knew that both Mr. Ellis and William Brown, who rented the house on the property, had "some interest" in the property. Mr. Sprouse received a warranty deed to the property on May 25, 2004.

In mid-June 2004, Mr. Sprouse entered the property without Mr. Ellis's permission and drove through Mr. Ellis's waist-high corn crop on his way to the river. At trial, Mr. Sprouse explained his actions by saying, "I drove on top of the land that I owned to get to the other side of the land I own." When Mr. Ellis telephoned to complain about the damage to his crop, Mr. Sprouse threatened to plow under the entire crop. Later, Mr. Sprouse offered to pay for the damage but never did so because he received Mr. Ellis's bill only a short time before litigation commenced. In September 2004, Mr. Sprouse's lawyer sent Mr. Ellis a letter demanding that he vacate the property by the end of December 2004. Mr. Ellis did so but was unsuccessful in finding comparable farmland to lease.

On January 28, 2005, Mr. Ellis filed suit against Mr. Sprouse in the Circuit Court for Knox County seeking to recover compensatory damages for the damage to his corn crop and for the profits he would have earned had he been able to continue to farm the property for the remaining two years of the lease. He also sought punitive damages. Following a two-day trial in March 2006, a jury found (1) that Mr. Ellis had effectively extended the lease for five years, (2) that Mr. Sprouse had actual knowledge of the lease, and (3) that Mr. Sprouse had trespassed on the property or had interfered with Mr. Ellis's use and possession of the property. Accordingly, the jury awarded Mr. Ellis $534 for the damage caused by Mr. Sprouse's trespass, $82,000 for lost profits, and $30,000 in punitive damages. Mr. Sprouse perfected an appeal to the Court of Appeals.

On appeal, Mr. Sprouse asserted that the trial court had erred by instructing the jury that Mr. Ellis had a reasonable time after the expiration of the lease to exercise his option to extend the lease and that continuing to occupy the land and to pay rent raised a presumption that he had effectively exercised his option to extend the lease. Mr. Sprouse insisted that these instructions were contrary to Norton v. McCaskill, 12 S.W.3d 789 (Tenn.2000). He also asserted (1) that the failure to execute a new lease violated the statute of frauds, Tenn.Code Ann. § 29-2-101 (Supp. 2008), (2) that Mr. Ellis did not present sufficient proof regarding his claim for lost profits,⁵ and (3) that Mr. Ellis's evidence regarding punitive damages was insufficient to warrant submitting the question of punitive damages to the jury.

The Court of Appeals found that the jury's conclusion that Mr. Ellis had effectively exercised the option to extend the lease was factually and legally unsupportable. First, the court decided that Mr. Ellis's testimony that he had informed Ms. Bagwell that he was exercising his option to extend the lease "possibly" in 2001 but "probably" in 2002 was insufficient to establish that the conversation occurred in 2001 during the original term of the lease. Second, the court concluded that Mr. Ellis's holding over by continuing to farm the property and by continuing to pay the required rent in 2002, 2003, and 2004 could not, as a matter of law, amount to an exercise of the option to extend the lease because Norton v. McCaskill required Mr. Ellis to give notice of his intention to extend the lease prior to the end of 2001.

Having found that the record did not support the jury's conclusion that Mr. Ellis had extended the lease for an additional five years, the Court of Appeals affirmed the $534 damage award for the 2004 trespass but reversed the $82,000 award for lost profits in 2005 and 2006. In light of its decision to affirm only the $534 award for compensatory damages, the court vacated the $30,000 award of punitive damages on the ground that it was excessive when compared to the compensatory damage award and remanded the case for a new trial on punitive damages. The Court of Appeals did not address Mr. Sprouse's issues regarding the statute of frauds, the inadequacy of Mr. Ellis's...