Baugh v. Novak
Annotate this CaseIn 1992, Appellant Wendell Baugh, III acquired Precision Services, Inc. from Ronald and Gayla Miller. The Millers agreed to finance the transaction. Mr. Baugh and his wife personally guaranteed a note executed by the corporation that purchased Precision's assets and the right to use its name. Appellee Herman Novak and his wife were friends and neighbors of the Baughs. In 1995, Messrs. Baugh and Novak bought a company together (Penske Plastics, Inc.), and by contract, were jointly and severally liable for the company's debts and obligations. Both gentlemen agreed to share equally in the company's profits. Mr. Baugh offered to sell one-half of Precision to Mr. Novak. Before he could sell any interest in Precision, Mr. Baugh had to obtain permission from the Millers. Because Mr. Baugh found the Millers difficult to deal with, he asked his attorney to draft an arrangement so that Mr. Novak could purchase an interest in Precision without the Millers' involvement. The document drafted by the attorney included an indemnity agreement by which the Novaks would agree to indemnify the Baughs for fifty percent of any payments they were required to make on the Millers' note and Precision's other debts. Mr. Baugh kept an office at Penske Plastics. Fire destroyed Penske's building in 2003. Of import, a banker-box that contained the original signed copies of the Baugh-Novak 1995 purchase agreement was consumed in the fire. The companies' insurance policies were not enough to cover all the damage caused by the fire. In 2005, Messrs. Baugh and Novak sold Penske Plastics to Alcan Baltec. Up until the time of the closing, Precision's loan obligations were paid from the revenue of Penske Plastics. In late 2005, Mr. Novak sent Mr. Baugh a note essentially "washing his hands" of Precision. In 2006, Mr. Baugh began paying Precision's obligation to the Millers from his personal funds. Mr. Baugh filed suit against the Novaks to enforce the terms of the 1995 agreement, arguing that he was entitled to indemnification and reimbursement for Precision's obligations. The trial court ruled in favor of Mr. Baugh. Mr. Novak appealed, arguing that the trial court erred in several of its evidentiary rulings at trial. The appellate court, on its own motion, reversed the trial court, holding that the purchase agreement and indemnity agreements were contrary to public policy and state law. The Supreme Court found that the evidence did not support the appellate court's holding. The Court reinstated the trial court's decision, and dismissed the Novak's appeal.
Court Description: This appeal raises the issue of whether a contract for the sale of an interest in a corporation and related indemnity agreements are unenforceable because they are contrary to public policy. The sellers of the corporate interest filed suit against the purchasers in the Chancery Court for Williamson County seeking damages for the purchasers alleged breach of their indemnity agreement. The purchasers counterclaimed asserting, among other things, that the sellers had fraudulently induced them to purchase the interest in the corporation. Following a bench trial, the trial court awarded a $201,715.50 judgment to the sellers and dismissed the purchasers counterclaim. On appeal, the Court of Appeals, on its own motion, invalidated the stock purchase agreement and the related indemnity agreements on the ground that they were contrary to the public policy reflected in Tenn. Code Ann. 48-16-208 (2002). Baugh v. Novak, No. M2008-02438-COA-R3-CV, 2009 WL 2474714 (Tenn. Ct. App. Aug. 13, 2009). We granted the sellers Tenn. R. App. P. 11 application for permission to appeal and now find that the Court of Appeals erred by finding that the agreements at issue in this case were contrary to public policy. We have also determined that the evidence fully supports the trial court s decision to dismiss the purchasers counterclaim for fraudulent inducement.
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