Spirit Broadband, LLC v. Armes, M2015-00559-COA-R3-CV

CourtCourt of Appeals of Tennessee
Writing for the CourtW. NEAL MCBRAYER, JUDGE
Docket NumberNo. M2015-00559-COA-R3-CV,M2015-00559-COA-R3-CV
Decision Date27 January 2017


No. M2015-00559-COA-R3-CV


January 28, 2016 Session
January 27, 2017

Appeal from the Chancery Court for Davidson County
No. 121023II
Carol L. McCoy, Chancellor

This case arises from the sale of the assets of a small cable television system. DirecTV program channels constituted the majority of the system's programming. Three years after the sale, DirecTV stopped providing its programming signal to the cable system, claiming the signal had been obtained illegally. The buyer of the cable system filed suit against DirecTV for breach of contract and defamation. After reaching a settlement with DirecTV, the buyer filed this action against the seller of the cable system, seeking damages for breach of contract and fraud and a declaratory judgment that the promissory note the buyer had executed as part of the purchase was not yet due and payable. The seller filed a counterclaim, seeking payment of the promissory note. After a bench trial, the trial court dismissed the buyer's claims against the seller. The court also dismissed the seller's counterclaim under the doctrine of unclean hands. After a review of the record, we conclude that the chancery court did not abuse its discretion in determining that the doctrine of unclean hands barred the seller's counterclaim. Accordingly, we affirm.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed

W. NEAL MCBRAYER, J., delivered the opinion of the court, in which ANDY D. BENNETT and RICHARD H. DINKINS, JJ., joined.

William T. Alt, Chattanooga, Tennessee, for the appellants, Joseph Anthony Armes and Cumberland County Cable, Inc.

Robert J. Mendes and R. Mark Donnell, Jr., Nashville, Tennessee, for the appellee, Spirit Broadband, LLC.

John R. Wingo and Nicholas R. Barry, Nashville, Tennessee, for the appellee, U.S. Bank, N.A.

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The principal players in this dispute, Joseph Armes and Vincent King, have been involved in the cable television industry for over thirty years. Both are experienced businessmen, familiar with the process of buying or selling a cable system.1

Mr. Armes owned Cumberland County Cable TV, Inc. ("CCC"), a cable system that served mostly rural subscribers in Cumberland County, Tennessee. The system was small, consisting of one "headend"2 and approximately one hundred miles of transmission cables or "plant." The system offered its subscribers approximately 60 basic channels and 70 digital channels, the majority of which were DirecTV, Inc. channels.

On July 29, 2006, Mr. King offered to purchase the assets of CCC for five million dollars. Mr. King made the offer subject to a number of conditions, including a reasonable due diligence investigation. The offer resulted in an asset purchase agreement, executed on January 28, 2007. In the agreement, CCC made a series of representations and warranties about the cable system and its assets. The sale was conditioned upon, among other things, the purchaser "be[ing] fully satisfied, in its sole and absolute discretion, with its due diligence investigation" of CCC and its assets.

After several months of due diligence, the sale closed on June 6, 2007. CCC sold to Spirit Broadband, LLC ("Spirit"), a company formed by Mr. King, all of CCC's "right, title and interest, legal or equitable, in and to the assets." The assets included, among other items, "[a]ny and all rights of [CCC] under the . . . programming agreements, contracts, agreements and permits necessary to operate the Systems (the "Operating Contracts")." The bill of sale delivered by CCC and Mr. Armes expressly incorporated the terms of the asset purchase agreement and provided that the representations and warranties contained in the asset purchase agreement would survive the closing.

At closing, Spirit paid a net purchase price of $4.8 million.3 Spirit delivered a promissory note made payable to CCC in the principle amount of $1.5 million, secured

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by the system's assets and equipment. Spirit paid the balance, after holdbacks and prorations, to CCC in cash.

Spirit financed the cash consideration through a loan from U.S. Bank. Contemporaneously with the sale, Spirit signed a promissory note payable to U.S. Bank in the amount of $2.5 million, which was also secured by a security interest in the system's equipment. As a condition of the loan, U.S. Bank required Spirit and CCC to execute a subordination agreement, subordinating CCC's right to payment under its promissory note and security interest to the rights of U.S. Bank. Specifically, among other things, the subordination agreement provided that no payments were due to CCC "until the U.S. Bank Note has been paid in full or until one (1) year past the maturity date of the U.S. Bank Note, whichever first occurs."

After the closing, Spirit continued to transmit DirecTV programming to subscribers in the same manner as CCC had done before the sale. Over time, however, Spirit replaced a number of the DirecTV channels CCC had provided with programming from other vendors.


Spirit initially filed suit against CCC and Mr. Armes in 2010, alleging breach of contract, fraudulent misrepresentation, fraudulent inducement, unfair and deceptive trade practices, and unjust enrichment. After Spirit and CCC agreed to settle the 2010 action but before a written settlement agreement was executed, DirecTV shut off its signal to Spirit's subscribers and told the subscribers who complained that they were receiving the channels illegally. In light of these developments, in the written settlement agreement, Spirit expressly reserved any claims related to its issues with DirecTV.

After its settlement with CCC and Mr. Armes, Spirit filed suit against DirecTV and others seeking damages for defamation, tortious interference, and violation of the Tennessee Consumer Protection Act, among other claims. DirecTV filed a counterclaim, alleging that Spirit was broadcasting its signal illegally. After discovery revealed that the system's use of DirecTV program channels was illegal, Spirit paid DirecTV $250,000 in settlement of all claims and agreed to the entry of a permanent injunction prohibiting Spirit from retransmitting DirecTV program channels or operating DirecTV satellite receiving equipment without authorization from DirecTV.

Spirit borrowed the funds for the settlement from U.S. Bank. During this time period, Spirit also refinanced its earlier loan from U.S. Bank. The new borrowing for the DirecTV settlement and the refinancing of the earlier loan that funded the purchase of CCC's assets were reflected in a single, amended promissory note in favor of U.S. Bank.

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On July 13, 2012, Spirit filed this action in the Chancery Court for Davidson County, Tennessee, against Mr. Armes and CCC. The suit sought a declaratory judgment that the promissory note held by CCC was not yet due and payable and requested damages for breach of contract, fraudulent misrepresentation, fraudulent inducement, unfair and deceptive trade practices, and unjust enrichment. Spirit alleged that CCC breached the asset purchase agreement because one asset, the DirecTV programming agreement, was not as represented.

With regard to fraudulent misrepresentation and fraudulent inducement, Spirit alleged that Mr. Armes and CCC made misrepresentations knowing Spirit would rely on those misrepresentations in deciding whether to purchase the assets. Spirit claimed these same misrepresentations violated the Tennessee Consumer Protection Act and entitled Spirit to treble damages. See Tenn. Code Ann. §§ 47-18-101 to -130 (2013).

Mr. Armes and CCC denied Spirit's allegations, and CCC filed a counterclaim seeking payment under the amended promissory note.4 According to CCC, when Spirit refinanced the U.S. Bank note, the note was paid in full, thereby fulfilling the terms of the subordination agreement. In its answer to the counterclaim, Spirit asserted the subordination agreement remained in effect and raised several equitable defenses, including the doctrine of unclean hands. In light of the counterclaim, Mr. Armes and CCC moved to add U.S. Bank as a party to the suit, which the chancery court granted.


The chancery court heard testimony from several witnesses over a four-day span. Mr. King and his chief financial officer, Patricia Hasbrouck, testified on behalf of Spirit. Mr. Armes and three former CCC employees also testified. The court heard from competing experts on the cable television industry and an expert witness on the Federal Communications Commission. Additional witnesses testified about the loans from U.S. Bank and the amount due under the promissory note. The court also reviewed the deposition testimony of two witnesses with knowledge of the contract with DirecTV.

Mr. King testified that he noticed DirecTV equipment on his initial inspection of the headend. When he questioned Mr. Armes, he learned that the system had an agreement allowing the transmission of DirecTV programming to its subscribers. Jason Tanner, the head technician, also told Mr. King's engineer that the system owned the DirecTV equipment and had a distribution agreement with DirecTV. The system's use of

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DirecTV programming did not rouse Mr. King's suspicions because he was familiar with other situations in which DirecTV allowed its signal to be rebroadcast on a cable system.

According to Mr. King, Josh Pemberton, Mr. Armes's son-in-law and the system's general manager, confirmed the information. Mr. Pemberton explained that the system was billed monthly for DirecTV programming by another company, Direct Video Networks, which Mr. King assumed to be an aggregator.5

Ms. Hasbrouck learned similar information. In reviewing the system's finances, she discovered a drop in programming costs starting in 2005. When she...

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