Interest-Based Allocation of Joint Loss‑Payee Insurance Proceeds and Preclusion of Insurer’s Post‑Verdict Attacks under Tennessee Law

Introduction

This appeal—Hanover American Insurance Co. v. Tattooed Millionaire Entertainment, LLC; Christopher C. Brown; and John Falls—marks the latest chapter in a long-running dispute over who may take, and in what amount, a multi‑million‑dollar insurance payment arising from a catastrophic 2015 arson at a Memphis recording studio. The parties are:

Hanover American Insurance Company (Hanover): the insurer.
John Falls: a Memphis musician who leased Studio B and its high‑end equipment; he carried a separate BPP (Business Personal Property) policy from Hanover with a $2.5 million limit for gear and $500,000 for business income.
Christopher C. Brown/Tattooed Millionaire Entertainment (TME): the owner/lessor of the studio and its equipment; also insured the same equipment under a separate Hanover policy.

At a 2018 federal jury trial (Hanover I), the jury found Brown/TME had committed insurance fraud, found Falls had not, and awarded Falls his BPP limit ($2.5 million) and additional business‑income benefits. The district court granted Hanover’s post‑verdict Rule 50(b) motion as to Falls, but the Sixth Circuit reversed in 2020 because Hanover had never made a pre‑verdict Rule 50(a) motion. The Sixth Circuit reinstated the jury verdict and flagged that allocation issues among the stakeholders could be hashed out later in interpleader or related proceedings.

This appeal arises from Hanover’s federal interpleader and parallel state litigation between Falls and TME. The district court ultimately:

Held Hanover precluded (under Tennessee claim‑preclusion rules) from relitigating its obligation to pay Falls or the amount payable to him;
Allocated most proceeds to Falls based on the value of his leasehold interest and the remainder to Brown—but barred Brown’s recovery on Tennessee public‑policy grounds given his fraud;
Entered judgment accordingly.

The Sixth Circuit affirms. In doing so, it clarifies two important Tennessee‑law propositions with broad practical consequences for insurance allocation disputes:

When a lessee is the named insured and the lessor is a “loss payee” with payment “as interests may appear,” proceeds are divided according to the value of the parties’ respective interests; the clause does not automatically give the loss payee absolute priority.
Where a prior appellate decision reinstated a verdict in favor of the lessee and preserved only certain public‑policy arguments for later allocation litigation, the insurer is claim‑precluded from re‑attacking the lessee’s entitlement or amount on arguments it could have raised earlier.

Summary of the Opinion

The Sixth Circuit (Judge Julia Smith Gibbons) affirms in full:

Preclusion: Applying Tennessee claim‑preclusion principles (via Semtek), Hanover cannot contest Falls’s recovery or the amount payable to him on grounds it could have brought in Hanover I. The court reads its 2020 opinion as preserving Hanover’s public‑policy argument only as against Brown (the wrongdoer), not as a vehicle to relitigate Falls’s entitlement.
Loss‑Payee Clause: The policy’s “loss payable” language requiring joint payment “as interests may appear” supports division by underlying interests; it does not mandate paying the lessor/owner first or in full in the lessor–lessee context.
Lease/Intent and Harmless Error: Although the district court mistakenly referenced the studio‑space lease rather than the equipment lease, the error was harmless. Under Tennessee law, the parties’ intent—gleaned from express repair/maintenance, replacement, and insurance obligations—controls post‑fire allocation. Here, the insurance was for the mutual benefit of lessor and lessee; a loss did not automatically terminate the lease; and allocation based on the value of interests was proper.
Valuation: The district court permissibly valued the lessee’s advantageous leasehold using an income/market comparison approach, including the probability of renewal, and its findings were not clearly erroneous.
Public Policy: Tennessee’s “no profit from one’s own fraud” principle bars Brown/TME from receiving the amount otherwise allocable to them because Brown made material misrepresentations (and later pled guilty to mail fraud) tied to the claims.

Analysis

Precedents Cited and How They Shaped the Decision

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

Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497 (2001): A federal diversity judgment has the same preclusive effect it would have in the courts of the state where the federal court sits. This channeled the court to Tennessee res judicata rules.
Elvis Presley Enters., Inc. v. City of Memphis, 620 S.W.3d 318 (Tenn. 2021): Sets out Tennessee’s elements of claim preclusion—same parties or privies, same claim, a final judgment on the merits by a court of competent jurisdiction, and issues that were or could have been litigated. The court applies this framework to hold Hanover is precluded from revisiting Falls’s entitlement or the amount payable to him.
Restatement (Second) of Judgments § 13(a) (cited for “common sense” finality principle): Although later allocation litigation was contemplated in Hanover I, the Sixth Circuit construes its prior statement as preserving Hanover’s public‑policy argument against Brown only—not as authorization to relitigate Falls’s award.
United States v. Berman, 884 F.2d 916 (6th Cir. 1989) (cf. privity/party alignment note): Used to explain why Brown could raise contract arguments now even though Hanover is precluded; Brown had no incentive to attack his co‑defendant’s interest in Hanover I.

2) Rule 50 and the “Separability” Principle in Hanover I

Hanover I, 974 F.3d 767 (6th Cir. 2020): The earlier opinion reinstated the jury’s award to Falls because Hanover forfeited Rule 50(b) arguments by failing to move under Rule 50(a). Importantly, the case was tried on a “separable liability” theory—each insured’s alleged fraud was adjudicated separately. That procedural posture undergirds the current preclusion ruling: Hanover cannot now collapse Brown’s fraud into an attack on Falls’s verdict.
The court again criticizes “sandbagging”—attempts to change litigation theory post‑verdict. Because Hanover could have structured jury issues differently or requested instructions tying Brown’s acts to Falls’s recovery, it cannot use the later allocation phase to backdoor arguments against Falls that were available before.

3) “Loss Payable” Clauses and Priority

Union Planters Nat’l Bank v. American Home Assurance Co., 2002 WL 1308344 (Tenn. Ct. App. Mar. 18, 2002): While loss‑payee clauses often protect a payee’s interest (frequently a mortgagee), the Sixth Circuit declines to treat Union Planters as imposing a categorical priority rule in the lessor–lessee, joint‑payment “as interests may appear” context.
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): Tennessee authority that a loss payee’s recovery is measured by the size of its underlying interest—not necessarily the entirety of policy limits.
Charter Oak Fire Ins. Co. v. Lexington Ins. Co., 2004 WL 431488 (Tenn. Ct. App. Mar. 2, 2004): In a lessor–lessee allocation, proceeds may be distributed to both actors based on policy/lease language; no blanket payee‑first rule.

4) Lease Intent, Insurance for Mutual Benefit, and Post‑Fire Allocation

EVCO Corp. v. Ross, 528 S.W.2d 20 (Tenn. 1975): The parties’ intent, as expressed in the lease (repair/insurance allocation), governs who bears losses and how proceeds should be used post‑fire. Insurance required by the lease is presumed to be for the mutual benefit of the parties absent contrary indication.
St. Paul Surplus Lines Ins. Co. v. Bishops Gate Ins. Co., 725 S.W.2d 948 (Tenn. Ct. App. 1986): The reverse of EVCO—where the lessee covenants to repair/replace and maintain insurance, the funds are “obviously” for that purpose; when the lease ends and replacement does not occur, the lessor takes the proceeds.
Taylor v. White Stores, Inc., 707 S.W.2d 514 (Tenn. Ct. App. 1985): Lease terms control whether a fire terminates a lease; the clear import of the lease matters.
Hall v. Park Grill, LLC, 2021 WL 2135952 (Tenn. Ct. App. May 26, 2021): Insurance‑proceeds use depends on lease conditions; if contractual prerequisites to repair‑fund usage are not met, the lessor may have no claim to the proceeds—even for a destroyed building.

5) Valuation of Leaseholds; Eminent Domain Analogy

State ex rel. Dep’t of Trans. v. Gee, 565 S.W.2d 498 (Tenn. Ct. App. 1977): In condemnation, Tennessee allows valuing a leasehold first and awarding the remainder of value to the lessor. The Sixth Circuit borrows this approach for insurance‑proceeds allocation.
City of Johnson City v. Outdoor West, Inc., 947 S.W.2d 855 (Tenn. Ct. App. 1996): Probability of lease renewal is a proper factor in valuing a leasehold.
Norton v. McCaskill, 12 S.W.3d 789 (Tenn. 2000): Options to renew must be timely exercised, but that principle does not foreclose fact‑finding on renewal likelihood for valuation.

6) Public Policy Against Profiting from Fraud

Box v. Lanier, 79 S.W. 1042 (Tenn. 1904); K&T Enters., Inc. v. Zurich Ins. Co., 97 F.3d 171 (6th Cir. 1996): No one should profit from their own wrong; Tennessee courts apply this maxim in insurance. The Sixth Circuit holds Brown/TME’s fraud bars them from receiving their allocated share.

Legal Reasoning

A. Claim Preclusion Drawn from Hanover I’s “Separability” Posture

The court treats the 2020 Hanover I reinstatement of Falls’s verdict as dispositive as to Falls’s entitlement and the amount awarded. Because Hanover could have tried Hanover I differently—by connecting Brown’s fraud to Falls’s ability to recover—or could have moved pre‑verdict under Rule 50(a), it cannot use the later allocation phase as a second bite at the apple. The Sixth Circuit reads its own “you can make allocation arguments later” language as preserving Hanover’s public‑policy objection to paying Brown, not as reopening the case against Falls.

B. The Loss‑Payee Clause Does Not Create Absolute Priority in the Lessor

Although Hanover argued that listing TME as “Loss Payable” for “ALL INSURED BPP” made TME the sole payee, the policy also said payment would be made “jointly … as interests may appear,” and the parties stipulated that both had insurable interests (ownership subject to lease; leasehold). In Tennessee, a loss payee’s recovery is capped by the size of its underlying property interest; the clause does not magically expand that interest. Especially in the lessor–lessee context, where joint payment is contemplated, the better reading is to divide proceeds by the value of the interests—not to give the loss payee categorical priority.

C. Lease Terms and Mutual‑Benefit Insurance Control Post‑Fire Allocation

The equipment lease contained five key commitments:

Lessor repairs/maintains equipment at lessor’s cost;
Lessee returns equipment at lease end at lessee’s expense;
Lessee assumes risk of damage (with “unless otherwise provided” caveat);
Lessor may require lessee to repair/replace if equipment is damaged or lost;
Lessee must insure the equipment to at least $2.5 million.

Read together and in light of Tennessee’s EVCO/St. Paul line, these provisions point to insurance obtained for the mutual benefit of lessor and lessee. The parties planned to keep the lease in force post‑loss (repair or replace and continue); destruction did not automatically terminate the lease. Although the district court mistakenly relied on the space lease’s auto‑renewal feature, the Sixth Circuit finds the error harmless because the bottom‑line allocation—by valuing the leasehold versus the ownership reversion—aligns with Tennessee law and the parties’ intent.

D. Valuation Methodology Was Permissible and Supported

The district court credited expert Robert Vance’s valuation of Falls’s leasehold, using:

An income approach: projecting net earnings from Falls’s advantageous lease rates compared to market rental cost of equivalent equipment (supported by audio‑engineer testimony);
Modeling modest growth, accounting for COVID‑19 disruptions, discounting to present value;
Considering the probability of renewal through 2030 (age 50), which the record supported given the parties’ “spectacular” relationship and post‑fire plans to rebuild;
Netting out amounts already paid for business income to avoid double counting; and
Apportioning between equipment and space (90/10, consistent with testimony) to isolate the BPP interest.

This approach mirrors accepted Tennessee practice in condemnation cases, where renewal probability is a factual question and leaseholds are valued first with the remainder to the lessor (Gee; Outdoor West). The resulting split—$2,066,217.30 to Falls; $433,782.70 to Brown/TME—was not clearly erroneous.

E. Public Policy Bars Brown/TME’s Receipt of Their Allocated Share

Tennessee’s anti‑fraud maxim (Box v. Lanier) applies with force. The Hanover I jury found Brown/TME made material misrepresentations and committed unlawful insurance acts, and Brown later pled guilty to mail fraud related to these claims. Those acts touched the Studio B gear list. Equity forbids paying Brown/TME their allocated share; the district court’s denial of payment to Brown/TME is affirmed.

Impact

1) For Insurers Litigating Allocation in Multi‑Party Coverage Disputes

Preclusion hazard: If you try a case on a “separable liability” theory and fail to make Rule 50(a) motions tying one party’s misconduct to another’s recovery, you may be precluded from repackaging those arguments at the allocation stage. Preserve cross‑party effects at the jury‑instruction and verdict‑form stages.
Interpleader limits: Interpleader is not a reset button. It can sort out competing interests, but it cannot undo earlier forfeitures or re‑open adjudicated entitlements.

2) For Lessor–Lessee Insurance Planning

Drafting matters: Repair/maintenance and replacement clauses, coupled with who must insure, will drive allocation. To secure priority for a lessor, consider explicit priority language or structural devices (e.g., a standard mortgagee clause or additional‑insured status where appropriate), understanding that “as interests may appear” invites valuation and division.
Mutual‑benefit presumption: Where a lease requires one party to procure insurance, Tennessee courts will tend to see that coverage as protecting both sides unless the contract clearly says otherwise.

3) For Valuation Practice

Eminent domain tools travel: Tennessee condemnation valuation principles—especially valuing a leasehold first and factoring in renewal probability—are now expressly endorsed for dividing insurance proceeds between lessor and lessee.
Income and market approaches: Courts may accept detailed income comparators (e.g., market rental of comparable equipment) and reasoned renewal horizons, with appropriate discounting and adjustments to avoid double recovery.

4) For Wrongdoers and Their Creditors

No benefit from fraud: Even if an allocation would otherwise yield a share to a loss payee/owner, Tennessee public policy can block payment to a party found to have committed insurance fraud.
Downstream uncertainty: The opinion affirms the bar against Brown/TME but does not specify the ultimate disposition of the barred funds. Stakeholders should address residual distribution (e.g., registry retention, reversion, or application to other valid claims) in the trial court.

Complex Concepts Simplified

Business Personal Property (BPP): Movable property used in a business (here, recording gear). BPP coverage pays for loss/damage to such items.
Loss Payee; “As Interests May Appear”: A person/entity designated to receive insurance proceeds to the extent of their interest in the insured property. “As interests may appear” means payment matches each party’s actual stake, not that one party automatically gets everything.
Interpleader: A procedure allowing a stakeholder (often an insurer) to deposit disputed funds with the court and have competing claimants litigate their respective rights, protecting the stakeholder from multiple liabilities.
Rule 50(a) and 50(b): Federal rules allowing judgment as a matter of law. A post‑verdict Rule 50(b) motion generally must be preceded by a pre‑verdict Rule 50(a) motion; failing to do so typically forfeits the 50(b) motion.
Res Judicata (Claim Preclusion): A final judgment bars the same parties from relitigating claims or defenses that were or could have been raised previously.
Leasehold Valuation and Renewal Probability: The economic value of a tenant’s right to use property (especially at favorable rates) may include the likelihood the lease would have been renewed; courts treat that as a factual component of value.
Public‑Policy Bar on Profiting from Wrongdoing: Courts refuse to award insurance proceeds to a party whose fraud produced or inflated the claim; this is a longstanding equitable rule in Tennessee.

Conclusion

The Sixth Circuit’s decision cements two important guideposts in Tennessee insurance and contract law. First, in the lessor–lessee setting, a “loss payable … as interests may appear” clause does not award the lessor/owner automatic priority; proceeds must be allocated according to the real economic value of the parties’ respective interests—most notably, the lessee’s leasehold and the lessor’s reversion—guided by the lease’s allocation of repair, replacement, and insurance obligations. Second, where a prior appellate decision reinstates a jury’s verdict for the lessee and signals that only allocation among payees remains, an insurer cannot use the allocation phase to mount renewed attacks against the lessee’s entitlement or amount that were available (and forfeited) earlier. The only live preserved objection here was the public‑policy bar as to Brown/TME—and that bar applied.

Practically, the opinion offers a roadmap: draft leases and insurance provisions with precision; if priority is intended, say so clearly and align the insurance structure accordingly; and in litigation, preserve cross‑party theories at trial or risk preclusion later. On valuation, Tennessee courts will entertain detailed, fact‑driven income and market approaches, borrowing condemnation methodologies and considering renewal probabilities. Finally, the decision reiterates a bedrock principle: in Tennessee, a party who commits insurance fraud will not be allowed to profit from it—even where the contract might otherwise point toward a recovery.