Tennessee Supreme Court hears arguments over enforceability of escalating earnest‑money clauses in $80 million hotel sale

NASHVILLE — The Tennessee Supreme Court heard oral argument in October in SH Nashville LLC v. FWREF Nashville Airport LLC over whether a series of purchase agreements and amendments that increased earnest‑money deposits in a proposed $80,000,000 hotel sale should be enforced as liquidated damages or struck as an unenforceable penalty.

At the hearing, Sarah Miller, counsel for FWREF Nashville Airport LLC, urged the court to affirm a business‑court ruling granting summary judgment for the seller. "This case centers around 25 agreements under which the plaintiffs repeatedly agreed and failed to purchase an $80,000,000 hotel property," Miller said, adding that the agreements are unambiguous and repeatedly stipulate that the earnest money would be "deemed earned and non‑refundable." She told the court the agreements and related addenda "show both the clear parties in the contract and the circumstances around which they entered into those contracts."

Opposing counsel Donald Caporello, representing the purchasers, argued the trial court erred by denying discovery into how the earnest‑money figure grew over repeated amendments and by resolving the matter on summary judgment. Caporello told the justices the purchasers had produced an affidavit asserting the amendments were part of coercive negotiations and said, "Over time, this went from an earnest money deposit into a coercive situation where they were squeezing us for more money because they knew something we didn't know." He asked the court to allow inquiry into the circumstances surrounding formation of the amendments before enforcing the provisions.

Justices pressed both sides on whether Tennessee precedent requires only a parties‑focused inquiry into intent under Giuliano or whether courts must apply an objective measure of the reasonableness of a stipulated sum. In several exchanges, one justice asked whether the Giuliano factors should be applied contract‑by‑contract or in the aggregate and whether a high aggregate percentage would create a genuine issue for trial. "If we approve this language and say, 'they stipulated, that's enough,' then you're going to have a form contract out there that copies and pastes this exact language in a much different unequal situation," a justice said during questioning.

Miller responded that Giuliano provides the controlling framework and that the agreements here—she said there are 307 pages of written amendments and stipulations—demonstrate the parties' intent. Miller noted the per‑agreement liquidated‑damages percentages ranged, she said, from about 0.124% to 4.4% of the purchase price on an individual agreement basis and argued those per‑contract figures fall "well below what the courts say is reasonable." She also told the court that the agreements expressly address industry fluctuations and allocate risk across multiple amendments.

Caporello and the justices debated whether the burden of proof should rest with the party seeking to enforce the clause (the seller) or with the party seeking to avoid enforcement (the purchaser). Caporello cited prior Tennessee authority and the parties' briefs to assert that the seller should bear the burden of showing both Giuliano prongs—(1) difficulty of measuring potential damages at contract formation and (2) that the stipulated sum is a reasonable estimate. Counsel for the seller pointed to cases the Court of Appeals relied on and to the business court's handling of the procedural record, arguing discovery was not warranted and that the contracts themselves supply the relevant evidence.

Both sides acknowledged the absence of a bright‑line percentage threshold in Tennessee case law. Counsel and justices referenced out‑of‑state decisions and treatises in hypotheticals about when an earnest‑money figure (they discussed examples ranging up to 100% in hypotheticals) would clearly be a penalty. The parties and justices also discussed the practical consequences of a ruling that would allow parties to avoid written stipulations simply by asserting post‑contract evidence.

The argument record shows the purchasers sought discovery under the court rules to probe the formation of the original purchase and the subsequent amendments and to develop evidence of alleged coercion or nondisclosure; the seller contended the request was overbroad, that the plaintiffs had not identified the specific non‑parol evidence they would use, and that the contracts already address the relevant circumstances. The transcript does not contain a final ruling; the court concluded oral argument and took the matter under advisement.

Why it matters: The court's decision could affect how Tennessee courts treat liquidated‑damages clauses in real‑estate transactions, the allocation of discovery and burdens on summary judgment in declaratory‑judgment actions challenging such clauses, and the drafting of earnest‑money provisions in commercial real‑estate contracts.

What happened next: The justices ended oral argument after extended questioning and stated the court would consider the parties' submissions. No decision was announced during the hearing recorded in the transcript.

Sources: Tennessee Supreme Court oral argument transcript (October session); statements by Sarah Miller (counsel for FWREF Nashville Airport LLC) and Donald Caporello (counsel for SH Nashville LLC).