Allocation, Not Priority: Sixth Circuit Limits Insurers’ Post-Verdict Challenges and Adopts Leasehold-Value Allocation for Joint “As Interests May Appear” Loss-Payable Clauses

Introduction

This appeal is the latest chapter in long-running litigation arising from the 2015 arson of the House of Blues studio in Memphis. At its center is a $2.5 million Business Personal Property (BPP) insurance payout under a Hanover American Insurance Company policy issued to John Falls, who leased Studio B and its recording equipment from Christopher C. Brown and his company, Tattooed Millionaire Entertainment, LLC (TME). A 2018 jury found Falls entitled to BPP coverage and business-income benefits; the district court set aside the verdict via a Rule 50(b) motion, but the Sixth Circuit in 2020 (Hanover I) reinstated the jury verdict because Hanover never made a pre-verdict Rule 50(a) motion.

That verdict spawned parallel proceedings—Hanover’s federal interpleader and a state-court fight between Falls and TME over who should receive the BPP proceeds. After this court reversed an injunction against the state action, the federal district court (on summary judgment and then after a bench trial) held that res judicata barred Hanover from re-arguing against paying Falls; valued the parties’ interests; allocated most of the proceeds to Falls; and concluded Brown/TME’s remainder could not be paid because public policy forbids a wrongdoer from profiting by fraud. Hanover and TME appealed.

The Sixth Circuit affirms in full. The court establishes two especially important rules: first, an insurer that forfeited Rule 50(b) in the original trial cannot relitigate allocation against the prevailing insured in a later interpleader; second, in a lessor–lessee context with a joint “as interests may appear” loss-payable clause, Tennessee law does not give the loss payee automatic priority to all proceeds—courts must allocate proceeds according to the value of the respective interests, with lease intent guiding the analysis. The court further holds that a fire does not necessarily terminate a lease where the lease and insurance were designed for mutual benefit, and that Tennessee’s “no profit from one’s wrong” policy bars Brown from receiving his allocated share.

Summary of the Opinion

- Preclusion: Applying Tennessee claim-preclusion principles per Semtek, the court holds Hanover is precluded from contesting Falls’s entitlement or the amount owed to him, because those arguments either were made or could have been made in Hanover I, which reinstated a jury verdict awarding Falls his policy limits. Hanover I preserved only public-policy arguments against Brown—not allocation arguments against Falls.

- Loss-payable clause: The policy’s requirement to pay “jointly … as interests may appear” to Falls (insured) and TME (loss payee) does not give TME priority to the entire BPP payout. In the lessor–lessee context, Tennessee law supports dividing proceeds by the value of the respective interests, not awarding everything to the named loss payee.

- Lease controls allocation: Although the district court used the wrong lease (the space lease, not the equipment lease), the error was harmless. Under Tennessee law, where leases assign repair/replacement duties and require insurance, casualty does not automatically terminate the lease; instead, the parties’ intent governs the distribution of proceeds. Here, the leases and insurance were for both parties’ mutual benefit; allocation by the leasehold’s value was proper.

- Valuation: The district court’s leasehold valuation—anchored in expert evidence, market comparators, and the probability of renewal—was not clearly erroneous. It was reasonable to value the leasehold as renewed into the future given the parties’ relationship and the evidence.

- Public policy: Tennessee’s anti-fraud principle (Box v. Lanier) bars Brown from receiving the portion otherwise allocable to his ownership interest, given his admitted insurance fraud touching the Studio B equipment claims. The allocation stands; Brown simply cannot take his share.

Analysis

Precedents Cited and Their Influence

• Hanover I, 974 F.3d 767 (6th Cir. 2020): The keystone prior decision. The court reinstated Falls’s verdict because Hanover never made a Rule 50(a) motion and thus forfeited Rule 50(b). Hanover I emphasized the case went to the jury on a “separability” theory—each party’s misrepresentations were adjudicated only against that party’s coverage—and criticized post-verdict “sandbagging.” It also foreshadowed that allocation/public-policy issues could be litigated later, but did not license Hanover to relitigate Falls’s entitlement or amount.
• Hanover Am. Ins. Co. v. TME, 38 F.4th 501 (6th Cir. 2022): Reversed an Anti-Injunction Act injunction; relevant for trajectory, not merits.
• Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001): A federal diversity judgment has the same preclusive effect as it would in the forum state; drives the application of Tennessee claim-preclusion law.
• Tennessee claim-preclusion framework: Elvis Presley Enters., Inc. v. City of Memphis, 620 S.W.3d 318 (Tenn. 2021). The court uses its elements to hold Hanover is barred from re-arguing against Falls.
• Union Planters Nat’l Bank v. Am. Home Assurance Co., 2002 WL 1308344 (Tenn. Ct. App. Mar. 18, 2002), Reeves v. Granite State Ins. Co., 36 S.W.3d 58 (Tenn. 2001), Benton Banking Co. v. Tenn. Farmers Mut. Ins. Co., 906 S.W.2d 436 (Tenn. 1995), Hocking v. Va. Fire & Marine Ins. Co., 42 S.W. 451 (Tenn. 1897): These loss-payee/mortgagee cases explain that a loss payee’s right is limited by “as interests may appear,” and often arise in the mortgage context. The court distinguishes Union Planters and declines to apply strict loss-payee priority in a lessor–lessee, joint-pay context.
• Charter Oak Fire Ins. Co. v. Lexington Ins. Co., 2004 WL 431488 (Tenn. Ct. App. Mar. 2, 2004), Osborn v. Home Ins. Co., 914 S.W.2d 35 (Mo. Ct. App. 1996), Grand Forks Seed Co. v. Northland Greyhound Lines, Inc., 168 F. Supp. 882 (D.N.D. 1959), Hartsell v. Integon Indem. Corp., 493 S.E.2d 740 (N.C. 1997): Support allocation among lessor/lessee according to their interests, not absolute priority to one side.
• Condemnation/leasehold valuation: State v. Gee, 565 S.W.2d 498 (Tenn. Ct. App. 1977) and City of Johnson City v. Outdoor West, Inc., 947 S.W.2d 855 (Tenn. Ct. App. 1996) provide methodology and confirm that renewal probabilities can be considered in valuing leaseholds.
• Lease-intent and insurance: EVCO Corp. v. Ross, 528 S.W.2d 20 (Tenn. 1975), St. Paul Surplus Lines Ins. Co. v. Bishops Gate Ins. Co., 725 S.W.2d 948 (Tenn. Ct. App. 1986), Hall v. Park Grill, LLC, 2021 WL 2135952 (Tenn. Ct. App. 2021), Taylor v. White Stores, Inc., 707 S.W.2d 514 (Tenn. Ct. App. 1985). These cases teach that where a lease requires insurance and contemplates repair/replacement, casualty does not automatically terminate the lease; insurance serves the parties’ agreed risk allocation, and proceeds are applied accordingly.
• Contract harmonization: Bank of Commerce & Trust Co. v. Nw. Nat’l Life Ins. Co., 26 S.W.2d 135 (Tenn. 1930) (read clauses in harmony), Cummings, Inc. v. Dorgan, 320 S.W.3d 316 (Tenn. Ct. App. 2009) (use extrinsic evidence for ambiguous terms).
• Norton v. McCaskill, 12 S.W.3d 789 (Tenn. 2000): Options to renew are effective during the term; the court harmonizes that rule by allowing valuation that accounts for likely renewal.
• Public policy: Box v. Lanier, 79 S.W. 1042 (Tenn. 1904), and K&T Enters., Inc. v. Zurich Ins. Co., 97 F.3d 171 (6th Cir. 1996) (no one may profit from their own wrong). Applied to bar Brown’s recovery.
• Standards and appellate principles: Fox v. Washington, 949 F.3d 270 (6th Cir. 2020) (bench-trial standards), Osborn v. Griffin, 865 F.3d 417 (6th Cir. 2017) (clear-error standard), Garza v. Lansing Sch. Dist., 972 F.3d 853 (6th Cir. 2020) (affirm on any ground).

Legal Reasoning

1) Claim Preclusion and the Scope of What Hanover I Preserved

The court carefully parses Hanover I’s mandate. Hanover I reinstated a jury verdict that expressly awarded Falls the BPP and business-income benefits based on his own (absence of) misrepresentations; it rejected Hanover’s attempt to use Brown’s fraud to unwind Falls’s recovery after the fact. Because Hanover never moved under Rule 50(a) on Falls’s claims and sent the case to the jury on a party-by-party liability theory, it could not later pivot to a contrary theory via Rule 50(b)—and, by extension, could not relitigate allocation against Falls now.

The Sixth Circuit acknowledges Hanover I noted that “arguments … as to the disposition of the funds” could be raised “in whatever subsequent proceedings” would ensue. But the court construes that reservation narrowly: it preserved Hanover’s public-policy defense against paying Brown’s share, not a license to revisit Falls’s entitlement or reduce his award. That is consistent with the separability built into the verdict form, Hanover’s forfeiture, and Hanover I’s admonition against “lying in the weeds.”

Accordingly, Hanover is claim-precluded from advancing allocation/coverage arguments against Falls; Brown/TME, however, can raise contract-construction arguments in their own right (they had no incentive to attack Falls in Hanover I), and Hanover may press public-policy objections to paying Brown.

2) Interpreting the Loss-Payable Clause: Joint Payment Means Allocation by Interests, Not Absolute Priority

The policy named TME as loss payee and required Hanover to pay “jointly … as interests may appear.” Hanover and TME argued that, as loss payee, TME must take all proceeds (or at least be paid first), relying on Union Planters. The court disagrees for two reasons:

• Text and context: The clause mandates joint payment keyed to “interests” in the insured property, which contemplates division by the value of those interests; it does not award a categorical priority to the loss payee.
• Distinguishing mortgage cases: Union Planters and related authorities typically involve mortgagees, not lessors; in a lease context, Tennessee decisions and persuasive cases from other jurisdictions employ allocation based on the parties’ respective property/contract interests. The court cites Charter Oak, Osborn, Grand Forks Seed, and analogizes to condemnation methodology (Gee).

Result: The court adopts an allocation approach—valuing Falls’s leasehold and Brown/TME’s reversionary ownership (subject to the lease)—rather than loss-payee priority.

3) Lease Intent Controls: Casualty Does Not Automatically Terminate the Lease When Insurance and Repair/Replacement Are Part of the Bargain

The district court mistakenly relied on the space lease’s automatic-renewal term, rather than the equipment lease’s option-to-renew. But the Sixth Circuit deems the error harmless because the dispositive point under Tennessee law is the parties’ intent as expressed in the lease, not a mechanical rule of termination on fire loss.

Here, five clauses of the equipment lease are pivotal:

• Lessor repairs and maintains the equipment at lessor’s cost.
• Lessee must return the equipment at the lease’s end.
• Lessee assumes risk of damage and must return in good condition (normal wear and tear excepted), unless otherwise provided.
• Unless otherwise provided, upon damage/loss, lessor can require lessee to repair or replace with like equipment, which becomes subject to the lease.
• Lessee must insure the equipment (here, “at least $2,500,000”).

Reading these provisions “in harmony” (Bank of Commerce), the court concludes the parties structured a relationship in which:

• The lease would continue despite casualty.
• The insurance was for mutual benefit—protecting Falls’s advantageous long-term leasehold and Brown’s expectation of ultimately receiving equipment back (after years of use and repair).
• Replacement/repair obligations and the “option to replace” framed how the insurance would be applied if the studio had been rebuilt; given the passage of time without rebuild, a present-day allocation effectuating those interests is appropriate.

This approach aligns with EVCO, St. Paul, and Hall: where leases assign responsibility to insure and to repair/replace, courts use the policy proceeds to effectuate the agreed risk allocation rather than declare the lease automatically terminated.

4) Valuing the Leasehold: Methodology and Renewal Probabilities

The district court credited expert evidence (Vance) that used both market and income approaches: it compared Falls’s below-market equipment lease to market rental rates (supported by audio engineer testimony), determined annual net profits under both scenarios, and valued the leasehold as the difference, projecting forward (with discounting) and crediting business-income payments already made. It then apportioned between equipment and space (90/10) based on record testimony. This was not clearly erroneous under deferential review standards.

Tennessee condemnation cases permit considering the probability of renewal in leasehold valuation (Outdoor West), and Norton’s rule about options remaining effective during the term does not preclude evidence that renewal was likely in valuing the leasehold. The record— including the parties’ “spectacular” working relationship, their stated plan to rebuild, and the “ridiculously good deal” structure—supports the renewals assumption.

5) Public Policy Bars Brown’s Recovery

The court applies Tennessee’s “no profit from one’s own wrong” rule (Box v. Lanier; K&T Enterprises). The Hanover I jury found Brown committed fraud in inflating loss values, and Brown has since pled guilty to related mail fraud. The record shows his misconduct touched Studio B’s BPP claims (the very proceeds at issue here). Consequently, even though the allocation recognizes an ownership-interest component in theory, Brown cannot receive it as a matter of public policy. The district court’s denial of payment to Brown is affirmed.

Impact

This opinion has significant practical consequences across insurance, leasing, and litigation strategy in Tennessee (and persuasive effect elsewhere):

• Insurers’ post-verdict posture:
  • If an insurer lets a case go to the jury on a separability theory and fails to move under Rule 50(a), it risks being claim-precluded from later attacking the prevailing insured’s entitlement or amount in an interpleader. Hanover I’s “you can argue later” language does not reopen allocation against the innocent insured; it preserves only public-policy objections against wrongdoers.
  • Practical takeaway: Raise allocation and cross-party effect theories before verdict; structure verdict forms to connect the issues you intend to rely on, and preserve Rule 50(a) motions as to all parties you may challenge post-verdict.
• Loss-payee drafting and expectations:
  • “Loss payable … jointly … as interests may appear” does not give a lessor/loss payee automatic priority to all proceeds in a lease context. Expect allocation according to the value of the respective interests, not a winner-take-all approach.
  • Draft with precision: If parties intend either priority or a specific application of proceeds (e.g., mandatory rebuild), they must say so clearly. Otherwise, courts will allocate based on lease intent and relative interests.
• Lease casualty provisions and insurance:
  • Tennessee courts will look to repair/replace covenants and insurance requirements to decide if a lease survives casualty and how to allocate insurance. Clauses requiring one party to insure and allocating repair costs strongly support a mutual-benefit view and continuation of the lease framework post-loss.
  • Even if years pass without rebuild, courts may allocate funds now to reflect the parties’ bargained-for interests then.
• Valuation evidence:
  • Income and market approaches, renewal probabilities, and reasonable modeling (including COVID-era impacts) are acceptable in valuing leaseholds. Clear-error deference favors well-supported expert methodologies tied to the record.
• Public policy constraints:
  • Wrongdoers cannot collect their allocated portion, even if named as loss payees or owners. Insurers may rely on Box v. Lanier to withhold payment from fraudsters without impairing payment to innocent insureds.

Complex Concepts Simplified

• Loss payee vs. named insured:
  • The named insured (here, Falls) is the policyholder. A loss payee (here, TME) is someone with an interest in the insured property who can be paid under the policy. “Jointly … as interests may appear” means both can be paid, in proportion to their real interests—not that the loss payee automatically takes all.
• “As interests may appear”:
  • This phrase ties the payout to the actual economic/legal interests of each party in the damaged property. If a lessee’s leasehold has significant value, the lessee can receive a large share even if the lessor owns the property.
• Claim preclusion (res judicata):
  • Once a court issues a final judgment, parties cannot litigate again claims or issues they raised or could have raised. Because Hanover lost the ability to attack Falls’s verdict in Hanover I due to its own procedural choices, it cannot try again in a later action to reduce or eliminate Falls’s recovery.
• Rule 50(a)/(b) and “sandbagging”:
  • Rule 50(a) asks the court for judgment as a matter of law before the case goes to the jury; Rule 50(b) “renews” that motion after the verdict. If you skip Rule 50(a), you generally cannot use Rule 50(b) later. Sending the case to the jury on one theory, then later trying to win on a different theory, is the “sandbagging” the court warns against.
• Leasehold valuation and renewals:
  • A leasehold can be worth the difference between the lessee’s favorable rent and market rent, projected over time. Courts may consider how likely it was that the parties would have renewed the lease in valuing that interest.
• Public policy “no profit from own wrong”:
  • Courts will not let someone benefit from their own fraud (e.g., an owner inflating insurance claims). Even if a contract might entitle them to money, public policy can block payment to that wrongdoer without harming the innocent insured.

Conclusion

The Sixth Circuit’s decision affirms a carefully calibrated outcome: Falls, an innocent insured with a valuable leasehold, receives the bulk of the BPP proceeds; Brown, who owned the equipment but committed insurance fraud, is denied his share by public policy; and Hanover, having forfeited a Rule 50(a) foundation in Hanover I, cannot relitigate allocation against Falls in a later interpleader. In doing so, the court clarifies two important points of Tennessee insurance and contract law as applied in federal court: (1) joint “as interests may appear” loss-payable arrangements in a lessor–lessee relationship call for allocation by the true value of interests—not categorical priority to the loss payee; and (2) casualty does not automatically terminate a lease where the parties contemplated insurance and repair/replacement; instead, courts must effectuate the parties’ intent, even by allocating proceeds years later.

For insurers, the message is procedural and substantive: preserve your challenges early, and do not expect loss-payee designations to trump the insured’s demonstrable leasehold value. For contracting parties, the message is drafting clarity: specify who bears repair/replacement risk and how insurance proceeds must be applied. And for the broader law, the opinion weaves together preclusion, lease-intent doctrine, condemnation-style valuation, and equity’s maxim against profiting from wrongdoing into a coherent allocation framework that will guide future Tennessee cases at the intersection of insurance and leasing.