McDonnell P.L.C. v. Select-O-Hits ( 2000 )

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
OCTOBER 10, 2000 Session
McDONNELL DYER, P.L.C. v. SELECT-O-HITS, INC.
Direct Appeal from the Chancery Court for Shelby County
No. 108323-2; The Honorable Floyd Peete, Jr., Chancellor
No. W2000-00044-COA-R3-CV - Filed April 20, 2001
This is a suit for the recovery of attorney’s fees. The Appellee brought a complaint against the
Appellant in the Chancery Court of Shelby County, seeking to recover $120,000.00 in attorney’s
fees. The Appellant filed an answer and counterclaim, seeking to recover $10,000.00 it paid to the
Appellee and $10,953.05 it paid in legal fees to another law firm. The Chancery Court of Shelby
County found that the $120,000.00 fee was excessive and entered a judgment in favor of the
Appellee in the amount of $89,685.00. The trial court dismissed the Appellant’s counterclaim.
The Appellant appeals from the decision of the Chancery Court of Shelby County granting a reduced
amount of attorney’s fees to the Appellee and dismissing the Appellant’s counterclaim. For the
reasons stated herein, we affirm the trial court’s decision as modified.
Tenn. R. App. P. 3; Appeal as of Right; Judgment of the Chancery Court Affirmed as
Modified
ALAN E. HIGHERS, J., delivered the opinion of the court, in which DAVID R. FARMER , J., and HOLLY
KIRBY LILLARD, J., joined.
Scott F. May, Memphis, TN; Robert Malouf, Jackson, MS, for Appellant
Glen Reid, Jr., Mark Vorder-Bruegge, Jr., Memphis, TN, for Appellee
OPINION
I. Facts and Procedural History
The Appellant, Select-O-Hits, Inc. (“Select-O-Hits”) is a Tennessee corporation in the
wholesale and retail music distribution business. During the times relevant to the dispute that is the
subject of this litigation, Select-O-Hits was owned by Sam Phillips, John Phillips, and Kathy Phillips
Gordon (“the Phillips”). The Appellee, McDonnell Dyer, P.L.C. (“McDonnell Dyer”) is a former
law firm in Memphis, Tennessee, that is now in liquidation.
In the fall of 1994, Select-O-Hits was approached by a competitor, MS Distributors of
Chicago, Illinois, concerning a potential purchase of Select-O-Hits and its distribution network.
Richard Thomas (“Mr. Thomas”), a personal insurance salesman for the Phillips, advised the Phillips
as to the price they should obtain from MS Distributors. The sale to MS Distributors fell through.
In March 1995, Mr. Thomas asked the Phillips if they would be interested in selling half of the
business of Select-O-Hits for more than they had contemplated selling the entire business to MS
Distributors. The Phillips advised Mr. Thomas that they were interested. Mr. Thomas contacted
Wesley Grace (“Mr. Grace”), a registered securities representative of Progressive Capital Investment
Corporation. Mr. Grace contacted Lee Harkavy (“Mr. Harkavy”), an attorney for McDonnell Dyer,
and asked to meet with him regarding a potential private placement transaction.
On March 17, 1995, McDonnell Dyer attorneys Mr. Harkavy, Bob Ratton (“Mr. Ratton”),
and Bill Solmson (“Mr. Solmson”) met with Mr. Thomas and Mr. Grace to discuss the structure of
the transaction. The attorneys claim that Mr. Thomas and Mr. Grace stated that they were meeting
with McDonnell Dyer on behalf of the Phillips who did not want to be involved in the initial aspects
of structuring the transaction. Select-O-Hits claims that Mr. Thomas was not an agent or employee
of Select-O-Hits but was an independent contractor, or promoter, working directly with McDonnell
Dyer. On March 27, 1995, Mr. Harkavy opened the file for this matter at McDonnell Dyer but failed
to get an engagement letter contrary to instructions in the firm’s New Matter Report. McDonnell
Dyer attorneys claim that there was no formal policy at the law firm to get engagement letters.
McDonnell Dyer never entered into a written fee agreement with Select-O-Hits concerning legal
services to be performed in relation to the transaction.
Mr. Harkavy, Mr. Ratton, and Mr. Solmson had a meeting to discuss the amount of legal fees
to charge Select-O-Hits. The attorneys claim that they took various factors into consideration in
determining the amount to be charged. The Phillips had requested that the transaction be completed
in thirty days. The complexity of the transaction was complicated by the Phillips’ desire to use
Charitable Remainder Unit Trusts to shelter the income the Phillips would receive from the proposed
transaction. In addition to the securities and tax work, McDonnell Dyer’s intellectual property
attorneys would be required to devote considerable time to the project. Taking into consideration
all of these factors, the attorneys decided that the fee for legal services would be $120,000.00. Mr.
Harkavy claims that he informed Mr. Thomas and Mr. Grace of the $120,000.00 fee. Mr. Harkavy
further contends that he advised that Select-O-Hits would need to pay a $10,000.00 retainer before
McDonnell Dyer would begin working on the proposal. On April 18, 1995, McDonnell Dyer
received a $10,000.00 check from Select-O-Hits. Select-O-Hits denies that the $10,000.00 payment
was a retainer but instead terms the payment “seed money” or “earnest money.”
On April 24, 1995, McDonnell Dyer attorneys Mr. Harkavy, Mr. Ratton, and Cheryl
Patterson (“Ms. Patterson”) met with the Phillips, Mr. Thomas, Mr. Grace, and an estate planning
attorney, John Parker (“Mr. Parker”), at the Select-O-Hits office. McDonnell Dyer claims that the
purpose of the meeting was twofold: (1) to confirm that Select-O-Hits and not Mr. Thomas and Mr.
Grace had engaged McDonnell Dyer to perform the transaction; and (2) to confirm that the Phillips
understood that the structure for the transaction was complicated. McDonnell Dyer further claims
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that its attorneys explained to the Phillips that Select-O-Hits would be primarily obligated to pay the
attorney’s fees of $120,000.00. If the transaction closed, however, the $120,000.00 fee would be
paid for out of the proceeds of the closing. McDonnell Dyer contends that the Phillips, on behalf
of Select-O-Hits, approved the fee and authorized McDonnell Dyer to proceed with the transaction.
The Phillips state that, on behalf of Select-O-Hits, they committed to be responsible for the legal fee
if the transaction did not close; however, they claim that McDonnell Dyer did not inform them of
the amount of the fee at the April 24, 1995, meeting. The Phillips contend that based on assurances
that the transaction would close, they considered Select-O-Hits’ liability, if any, to be merely
collateral. Mr. Harkavy claims that he cautioned that there was no guarantee that the transaction
would close.
On May 15, 1995, McDonnell Dyer produced the first draft of the Disclosure Statement and
forwarded it to Mr. Thomas, Mr. Grace, Mr. Parker, and the Phillips. The Disclosure Statement
included a specific reference to a $120,000.00 fee termed “offering expenses.” There was no
explanation in the Disclosure Statement as to what constituted offering expenses. On May 18, 1995,
McDonnell Dyer created SOH Investors, LP, which was the limited partnership that was going to
be sold to investors. Additionally, McDonnell Dyer created several new entities related to the
transaction in a mass filing on May 17 and 18, 1995. On May 22, 1995, McDonnell Dyer forwarded
a second draft of the Disclosure Statement to the interested parties. A footnote contained in the
second draft defined the term “offering expenses” as legal fees associated with the offering. Select-
O-Hits claims that it did not learn the amount of legal fees that McDonnell Dyer expected to receive
until mid May of 1995.
In July, 1995, the Phillips asked Mr. Harkavy who McDonnell Dyer was representing in the
transaction. Mr. Harkavy responded, “we are representing the deal.” McDonnell Dyer contends that
“the deal” consisted of Select-O-Hits and the newly created entities. The Phillips claim that Mr.
Harkavy stated that McDonnell Dyer was not representing the Phillips individually or Select-O-Hits.
Mr. Harkavy asserts that on numerous occasions he explained to the Phillips that McDonnell Dyer
was representing Select-O-Hits and not the Phillips individually. McDonnell Dyer contends that Mr.
Parker represented the Phillips individually. The Phillips deny that Mr. Parker was their attorney.
After their conversation with Mr. Harkavy, the Phillips retained Sam Chafetz (“Mr. Chafetz”), an
attorney with the Waring Cox law firm, to represent them in the transaction. Mr. Chafetz claims
that he informed Mr. Harkavy that he was representing Select-O-Hits and the Phillips individually.
Mr. Harkavy asserts that Mr. Chafetz was only representing the Phillips individually.
The final draft of the Disclosure Statement was prepared on or about September 19, 1995,
and was delivered to Mr. Thomas for marketing. The offering was priced at $4,500,000.00, which
constituted fifteen units for sale at $300,000.00 each. Prior to Mr. Chafetz’s involvement, fifty-one
percent of Select-O-Hits was to be sold to investors. After Mr. Chafetz’s involvement, however,
forty-nine percent of Select-O-Hits was to be sold. Mr. Chafetz states that it would have been in
Select-O-Hits’ best interest to offer more units for sale to investors which would lower the offering
price per unit. As an explanation for the small number of high priced units, Mr. Chafetz points out
that Mr. Thomas was not a licensed broker or dealer. Mr. Chafetz claims that McDonnell Dyer was
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attempting to avoid Mr. Thomas being licensed by not offering over fifteen units.1 Nevertheless, Mr.
Chafetz approved the Disclosure Statement and nature of the transaction.
Mr. Thomas was unable to sell a single unit. In early 1996, John Phillips called Mr. Harkavy
and informed him that he wished to terminate the offering. Mr. Harkavy notified Mr. Thomas to
cease marketing efforts and requested that Mr. Thomas return all of the Disclosure Statements. Mr.
Harkavy claims that he reminded John Phillips that Select-O-Hits was responsible for the
$120,000.00 fee. Mr. Harkavy contends that John Phillips acknowledged that Select-O-Hits owed
the fee. Mr. Harkavy further asserts that he advised John Phillips that the fee could be paid monthly
or could be reduced to $80,000.00. Select-O-Hits refused to pay the attorney’s fees McDonnell Dyer
claimed were due.
On October 8, 1996, McDonnell Dyer filed a complaint on sworn account for money
damages in the Chancery Court of Shelby County claiming that Select-O-Hits was indebted to
McDonnell Dyer for the sum of $113,475.83, plus interest. On January 3, 1997, Select-O-Hits filed
its answer and counterclaim to recover the $10,000.00 Select-O-Hits paid McDonnell Dyer and the
$10,953.05 in legal fees Select-O-Hits paid to Mr. Chafetz and the Waring Cox law firm. Select-O-
Hits pled several affirmative defenses in its answer including failure to state a claim upon which
relief can be granted, statute of frauds, lack of an attorney-client relationship between Select-O-Hits
and McDonnell Dyer, unreasonable and excessive fee by McDonnell Dyer, and negligent conduct
by McDonnell Dyer. The trial court found that the Phillips knew or should have known that
McDonnell Dyer was not representing them personally. The trial court further found that the
$120,000.00 fee was excessive. On December 9, 1999, the trial court entered a final judgment in
favor of McDonnell Dyer against Select-O-Hits in the amount of $89,685.00 (the time value of the
fee based on standard hourly rates).2 This appeal followed.
II. Standard of Review
The standard of review for a non-jury case is de novo upon the record. See Wright v. City
of Knoxville, 898 S.W.2d 177, 181 (Tenn. 1995). There is a presumption of correctness as to the
trial court's factual findings, unless the preponderance of the evidence is otherwise. See TENN. R.
APP . P. RULE 13(d). For issues of law, the standard of review is de novo, with no presumption of
correctness. See Ridings v. Ralph M. Parsons Co., 914 S.W.2d 79, 80 (Tenn. 1996).
III. Law and Analysis
1
A security that is being sold must be registered at the state level; how ever, there is an exemp tion to this rule
if there are fifteen or fewer purchasers. M r. Chafetz claims that McD onnell Dyer was a ttempting to avoid the state
registration req uirement and the resulting state sc rutiny by offering o nly fifteen units.
2
On M arch 21, 2 001, the trial c ourt entered a judgme nt dismissing Se lect-O-Hits’ co unterclaim.
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Select-O-Hits raises the following issues for our review:
1. Whether the trial court erred by denying the statute of frauds defense raised by Select-O-Hits;
2. Whether the trial court erred by permitting McDonnell Dyer to recover attorney’s fees after finding
that the $120,000.00 fee was excessive;
3. Whether the trial court erred by impliedly denying the negligence defense raised by Select-O-Hits;
4. Whether the trial court erred by impliedly denying the no meeting of the minds defense raised by
Select-O-Hits;
5. Whether the trial court erred by impliedly denying the quantum meruit and unclean hands defenses
raised by Select-O-Hits; and
6. Whether the trial court erred by dismissing the counterclaim brought by Select-O-Hits to recover
the $10,000.00 payment made to McDonnell Dyer and the $10,953.05 payment in legal fees made
to Mr. Chafetz and the Waring Cox law firm.
We will examine each of these issues in turn.
Statute of Frauds
The first issue presented for our review is whether the trial court erred by denying the statute
of frauds defense raised by Select-O-Hits. Select-O-Hits argues that it was secondarily liable for the
attorney’s fees such that, pursuant to the statute of frauds, the agreement must be in writing and
signed by Select-O-Hits in order to be enforceable. Section 29-2-101(a)(2) of the Tennessee Code
states:
(a) No action shall be brought: (2) To charge the defendant upon
any special promise to answer for the debt, default, or miscarriage
of another person; . . . unless the promise or agreement, upon which
such action shall be brought, or some memorandum or note thereof,
shall be in writing, and signed by the party to be charged therewith,
or some other person lawfully authorized by such party.
TENN. CODE ANN . § 29-2-101(a)(2) (2000).
Whether an oral agreement to pay the debt of another is enforceable under the statute of
frauds depends on whether the agreement is original or collateral. In 37 C.J.S. Statute of Frauds §
22 (1997) it is said:
As a general rule, a promise to pay the debt of another if the latter
defaults in the payment, or in other words the guaranty of a debt,
is collateral and within the statute of frauds; in fact whether the
promisor assumes a primary obligation or a secondary one dependent
on another’s default is often applied as a test to determine whether
a promise is original or collateral. However, where the main object
of guarantors is not to answer for the debt, default, or miscarriage
of another whose debt is guaranteed, but to obtain substantial benefits
or advantages to themselves which actually inure to them, their
guaranty is also their own original agreement, and no writing is
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essential to its validity under the statute of frauds.
Id.
The evidence is uncontroverted that McDonnell Dyer failed to obtain a written agreement
concerning the attorney’s fees to be paid by Select-O-Hits. The evidence is further uncontroverted
that Select-O-Hits agreed to pay the attorney’s fees to McDonnell Dyer. Select-O-Hits argues,
however, that its liability was not original but merely collateral in the form of a guarantee because
Select-O-Hits was liable for the attorney’s fees only if the transaction failed to close. McDonnell
Dyer claims that Select-O-Hits agreed to be primarily liable for the attorney’s fees; however, if the
transaction closed, the attorney’s fees would be paid out of the proceeds of the closing.
The agreement made by Select-O-Hits was an original undertaking and outside the statute
of frauds. The leading purpose of Select-O-Hits, in agreeing to pay the attorney’s fees to McDonnell
Dyer if the transaction did not close, was to promote Select-O-Hits’ own interest in selling
approximately half of its business to potential investors. Because the main object of Select-O-Hits
in making the agreement was to gain substantial benefit for itself, we find this agreement to be
original in nature and thus outside the scope of section 29-2-101(a)(2) of the Tennessee Code.
Accordingly, the trial court did not err by denying the statute of frauds defense raised by Select-O-
Hits.
Excessive Fees
The second issue presented for our review is whether the trial court erred by permitting
McDonnell Dyer to recover attorney’s fees after finding that the $120,000.00 fee was excessive.
Select-O-Hits cites White v. McBride, 937 S.W.2d 796 (Tenn. 1996), in support of its argument that
McDonnell Dyer should not be permitted to recover any attorney’s fees because the $120,000.00 fee
was “clearly excessive.” In White, the Tennessee Supreme Court granted review to determine
whether an attorney’s fee contract violated Disciplinary Rule 2-106 of the Code of Professional
Responsibility (“DR 2-106") and, if so, whether the attorney was entitled to recover on the basis of
quantum meruit. See id. at 800. The supreme court first addressed the issue whether the fee contract
was in violation of DR 2-106. DR 2-106 states:
(A) A lawyer shall not enter into an agreement for, charge, or
collect an illegal or clearly excessive fee.
(B) A fee is clearly excessive when, after a review of the facts,
a lawyer of ordinary prudence would be left with a definite and
firm conviction that the fee is in excess of a reasonable fee. Factors
to be considered as guides in determining the reasonableness of a
fee include the following:
(1) The time and labor required, the novelty and difficulty of the
questions involved, and the skill requisite to perform the legal
service properly.
(2) The likelihood, if apparent to the client, that the acceptance of
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the particular employment will preclude other employment by the
lawyer.
(3) The fee customarily charged in the locality for similar legal
services.
(4) The amount involved and the results obtained.
(5) The time limitations imposed by the client or by the circumstances.
(6) The nature and length of the professional relationship with
the client.
(7) The experience, reputation, and ability of the lawyer or
lawyers performing the services.
(8) Whether the fee is fixed or contingent.
CODE OF PROFESSIONAL RESPONSIBILITY DR 2-106 (2000).
In determining whether the fee contract was clearly excessive, the supreme court relied on the factors
set out in DR 2-106 but also noted that “[a]lthough these factors are to be used as guides, ultimately
the reasonableness of the fee must depend upon the particular circumstances of the individual case.”
White, 937 S.W.2d at 800. The supreme court affirmed the trial court’s holding that the fee sought
to be charged was clearly excessive in violation of DR 2-106. See id. at 801. Upon determining that
the fee contract was in violation of DR 2-106, the supreme court then addressed the issue whether
the attorney could recover a fee under quantum meruit. See id. The supreme court held that an
attorney who enters into a fee contract that is clearly excessive in violation of DR 2-106 generally
may not recover under quantum meruit. See id. at 803. The court, however, did find that a recovery
under quantum meruit is warranted in situations where an attorney makes an innocent mistake that
renders the fee contract unenforceable, such as an oversight in drafting. See id.In the case at bar, the trial court stated that, “the contract fee of $120,000.00 was excessive.
Therefore the Defendant owes the Plaintiff $89,685.00 (the time value of the fee based on standard
hourly rates).” The trial court never stated that the $120,000.00 fee was clearly excessive. We must
determine whether there is a distinction between a fee being “excessive” versus a fee being “clearly
excessive” in violation of DR 2-106.
Courts in other jurisdictions have labeled attorney’s fees as clearly excessive in the following
circumstances: (1) where the fee was grossly out of proportion with the fees charged for similar
services by other lawyers in the same locale, see In re Brown, 511 N.E.2d 1032, 1033-34 (Ind. 1987);
(2) where a lawyer induced a client to pay for unnecessary services, see In re Tobin, 628 N.E.2d
1268, 1270 (Mass. 1994); (3) where a lawyer submitted reconstructed time records in an attempt to
collect a fee equal to a disallowed contingent fee, see In re Conduct of Barber, 904 P.2d 620, 629-30
(Or. 1995); (4) where a lawyer solicited a fee for work already paid for, see Attorney Grievance
Comm’n v. Korotki, 569 A.2d 1224, 1236 (Md. 1990); (5) where a lawyer attempted to collect a fee
exceeding an authorized amount, see People v. Walker, 832 P.2d 935, 936 (Colo. 1992), Iowa Sup.
Ct. Bd. of Prof’l Ethics & Conduct v. Evans, 537 N.W.2d 783, 785 (Iowa 1995); and (6) where a
lawyer attempted to collect a fee that was unexplainedly disproportionate to the amount in
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controversy, see Florida Bar v. Mirabole, 498 So. 2d 428, 429 (Fla. 1986), In re Disciplinary
Proceedings Against Bult, 469 N.W.2d 653, 654 (Wis. 1991). In each of these cases, the attorneys
placed the desire to make money over the importance of the fiduciary relationship existing between
attorney and client. We find that the White court was attempting to prevent these types of cases
where the fee sought was so far out of relation to the services rendered as to rise to the level of “an
ethical transgression of the most flagrant sort.” White, 937 S.W.2d at 803. We do not construe
White as an attempt to discourage merely high fees. Thus, we find that a fee can be high, even
excessive, yet not be clearly excessive, such that an attorney may recover under quantum meruit.
In the case at bar, the $120,000.00 fee was a fixed fee which Ms. Patterson testified was
common in securities transactions. McDonnell Dyer attorneys testified that Select-O-Hits presented
them with a highly complex securities transaction. The transaction was further complicated by
Select-O-Hits’ personal tax concerns. Select-O-Hits informed McDonnell Dyer that they wanted the
work performed on a fast track of thirty days. The transaction required the work of numerous
attorneys and paralegals, including attorneys in the securities, tax, and intellectual property divisions
of the law firm. The attorneys and paralegals logged approximately 826 hours of work on the Select-
O-Hits transaction. Ms. Patterson testified that McDonnell Dyer attorneys had other matters on
which they could have worked on an hourly basis had they not been working on the Select-O-Hits
transaction. Mr. Chafetz testified that a reasonable fee for this type of transaction would be between
$45,000.00 and $67,000.00. Mr. Chafetz characterized the $120,000.00 fee as being “very much on
the high side” of these numbers; however, Mr. Chafetz never characterized the $120,000.00 fee as
clearly excessive. Taking into account the factors established in DR 2-106 and the circumstances
involved in this particular case, we find that the fees sought by McDonnell Dyer, while high, or
excessive, did not rise to the level of being clearly excessive. Accordingly, we find that the trial
court did not err in permitting McDonnell Dyer to recover attorney’s fees under quantum meruit after
finding that the $120,000.00 fee was excessive.
The trial court reduced the $120,000.00 fee to $89,685.00. Tennessee courts have
traditionally determined the reasonable value of an attorney’s services by considering the number
of hours billed and the lawyer’s customary hourly rate. See In re Estate of Davis, 719 S.W.2d 526,
529 (Tenn. Ct. App. 1986). McDonnell Dyer attorneys and paralegals logged 826.49 hours of work
on the Select-O-Hits transaction. The trial court stated that it computed the $89,685.00 amount by
considering the time value of the fee based on standard hourly rates. After finding that the
$120,000.00 was excessive, the trial court properly set the attorney’s fees at $89,685.00 in
accordance with Tennessee law.
Negligence
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The third issue presented for our review is whether the trial court erred by impliedly denying
the negligence defense raised by Select-O-Hits. Select-O-Hits argues that the transaction was so
flawed as to amount to a breach of McDonnell Dyer’s duty to Select-O-Hits. In support of its
position, Select-O-Hits cites the Tennessee Supreme Court case of Crawford v. Logan, 656 S.W.2d
360 (Tenn. 1983). In Crawford, the supreme court cited with approval several cases holding that
malfeasance or breach of faith by an attorney against his client during the performance of services
may support a complete forfeiture of fees. See id. at 364 (citations omitted). The supreme court did
qualify this general rule, however, by stating that such misconduct by an attorney does not result in
an automatic forfeiture of his fees. See id. at 365. Rather, “[e]ach case involving misconduct of an
attorney and the forfeiture of his fee must be viewed in the light of the particular facts and
circumstances of the case.” Id.The trial court in the case at bar was faced with sharply conflicting testimony from
McDonnell Dyer on the one hand and Select-O-Hits on the other. Resolving the conflict in
testimony depends in large part upon the trial court’s assessment of the credibility of the witnesses
who testified in the case. As the trier of fact, the trial court had the opportunity to observe the
manner and demeanor of the witnesses as they testified. See Whitaker v. Whitaker, 957 S.W.2d 834,
837 (Tenn. Ct. App. 1997). The weight, faith, and credit to be given to a witness’s testimony lies
in the first instance with the trial court as the trier of fact, and the credibility accorded will be given
great weight on appeal. See Mays v. Brighton Bank, 832 S.W.2d 347, 352 (Tenn. Ct. App. 1992);
Sisk v. Valley Forge Ins. Co., 640 S.W.2d 844, 849 (Tenn. Ct. App. 1982). On issues which hinge
on witness credibility, the trial court “will not be reversed unless, other than the oral testimony of
the witnesses, there is found in the record clear and convincing evidence to the contrary.” Thompson
v. Creswell Indus. Supply, Inc., 936 S.W.2d 955, 957 (Tenn. Ct. App. 1996) (quoting Tennessee
Valley Kaolin Corp. v. Perry, 526 S.W.2d 488, 490 (Tenn. Ct. App. 1974)).
Select-O-Hits claims that McDonnell Dyer was negligent in its representation of Select-O-
Hits because McDonnell Dyer stretched the securities laws and chose a complicated organizational
form. Mr. Chafetz testified at trial that McDonnell Dyer attorneys attempted to circumvent the
securities laws by offering only fifteen units for sale at $300,000.00 per unit. Mr. Chafetz testified
that it would have been in Select-O-Hits’ best interest to offer more units for sale at a lower offering
price per unit. Ms. Patterson, testified that McDonnell Dyer attorneys did nothing to circumvent the
securities laws. McDonnell Dyer notes that Mr. Chafetz approved the Disclosure Statement and the
nature of the transaction. Ms. Patterson further testified that Mr. Chafetz was responsible for
changing the amount of the business to be sold to investors from fifty-one percent to forty-nine
percent which she claimed was not an attractive business proposition. McDonnell Dyer contends
that Select-O-Hits’ tax concerns drove the complexity of the transaction and that this complexity
was not generated by the attorneys at McDonnell Dyer. In impliedly rejecting Select-O-Hits’
negligence defense, the trial court apparently found McDonnell Dyer’s witnesses to be more credible
than the witnesses Select-O-Hits presented. Our review of the record, taking into account the trial
court’s credibility determination, leads us to conclude that the evidence does not preponderate
against the trial court’s implied rejection of Select-O-Hits’ negligence defense. Accordingly, the trial
court did not err by impliedly denying the negligence defense raised by Select-O-Hits.
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Meeting of the Minds
The fourth issue presented for our review is whether the trial court erred by impliedly denying
the no meeting of the minds defense raised by Select-O-Hits. Select-O-Hits argues that
there were not mutually agreed upon terms between the parties relating to the scope of the work, the
cost of the work, and for whom the work was to be performed. It is well established in this
jurisdiction that a contract can be expressed, implied, written, or oral, but an enforceable contract
must, among other elements, result from a meeting of the minds and must be sufficiently definite to
be enforced. See Johnson v. Central Nat’l Ins. Co., 356 S.W.2d 277, 281 (Tenn. 1962); Price v.
Mercury Supply Co., Inc., 682 S.W.2d 924, 933 (Tenn. Ct. App. 1984). An oral contract may be
enforced if it can be shown that there was a meeting of the minds, and that both parties have
mutually assented to its terms. See Castelli v. Lien, 910 S.W.2d 420, 426 (Tenn. Ct. App. 1995);
Computer Shoppe, Inc. v. State, 780 S.W.2d 729, 735 (Tenn. Ct. App. 1989). The contemplated
mutual assent and meeting of the minds cannot be accomplished by the unilateral action of one party,
nor can it be accomplished by an ambiguous course of dealing between the two parties from which
differing inferences regarding continuation or modification of the original contract might reasonably
be drawn. See Batson v. Pleasant View Util. Dist., 592 S.W.2d 578, 582 (Tenn. Ct. App. 1979);
Balderacchi v. Ruth, 256 S.W.2d 390, 391 (Tenn. Ct. App. 1952).
Select-O-Hits claims that there was no mutual agreement between the parties as to the scope
of the work, the cost of the work, and for whom the work was to be performed. McDonnell Dyer
attorneys testified that, at the April 24, 1995, meeting, the Phillips, on behalf of Select-O-Hits,
authorized McDonnell Dyer to proceed with the transaction and agreed to pay $120,000.00 in
attorney’s fees if the deal failed to close. The Phillips admit that they, on behalf of Select-O-Hits,
agreed to pay the fees if the transaction failed to close; however, they claim that they were not
informed of the amount of the fees until mid May, 1995. McDonnell Dyer attorneys testified that
they explained to Select-O-Hits on numerous occasions that McDonnell Dyer represented Select-O-
Hits but not the Phillips personally. The Phillips testified that, prior to the July, 1995, conversation
between the Phillips and Mr. Harkavy, they thought McDonnell Dyer was representing them
personally. The trial court specifically found that “the Phillips knew or should have known that the
attorneys were not representing them personally.” The trial court in the case at bar was faced with
conflicting testimony from McDonnell Dyer and Select-O-Hits. In impliedly rejecting Select-O-
Hits’ no meeting of the minds defense, the trial court apparently found McDonnell Dyer’s witnesses
to be more credible than the witnesses Select-O-Hits presented. Our review of the record, taking into
account the trial court’s credibility determination, leads us to conclude that the evidence does not
preponderate against the trial court’s implied rejection of Select-O-Hits’ no meeting of the minds
defense. Accordingly, the trial court did not err by impliedly denying the no meeting of the minds
defense raised by Select-O-Hits.
Quantum Meruit and Unclean Hands
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The fifth issue presented for our review is whether the trial court erred by impliedly denying
the quantum meruit and unclean hands defenses raised by Select-O-Hits. Select-O-Hits argues that
McDonnell Dyer was not entitled to recover under quantum meruit because Select-O-Hits received
no benefit from the work performed by McDonnell Dyer. Quantum meruit is an equitable substitute
for recovery under a contract. See Castelli v. Lien, 910 S.W.2d 420, 427 (Tenn. Ct. App. 1995).
Tennessee law permits an attorney to recover fees on the theory of quantum meruit even if the fee
contract itself is deemed to be unenforceable. See Cooper & Keys v. Bell, 153 S.W. 844, 846 (Tenn.
1912); Planters’ Bank v. Hornberger, 44 Tenn. (4 Cold.) 531, 579 (1867); Cummings v. Patterson,
442 S.W.2d 640, 643 (Tenn. Ct. App. 1968). A party may recover under quantum meruit when the
following five circumstances exist:
(1) there must be no existing, enforceable contract between
the parties covering the same subject matter;
(2) the parties seeking recovery must prove that it provided
valuable goods and services;
(3) the party to be charged must have received the goods and
services;
(4) the circumstances must indicate that the parties involved
in the transaction should have reasonably understood that
the person providing the goods and services expected to be
compensated; and
(5) the circumstances must also demonstrate that it would be
unjust for the party benefitting from the goods or services to
retain them without paying for them.
Castelli, 910 S.W.2d at 427 (internal citations omitted).
Select-O-Hits claims that it received no benefit from McDonnell Dyer because Mr. Thomas
was ultimately unable to sell a single unit of the transaction. We disagree. McDonnell Dyer
attorneys and paralegals logged approximately 826 hours of work during its representation of Select-
O-Hits. McDonnell Dyer attorneys testified that they performed extensive due diligence and a
tremendous amount of tax work for Select-O-Hits. McDonnell Dyer complied with Select-O-Hits’
instruction to create the private placement transaction and make the offering available to potential
investors. While Select-O-Hits did not incur the benefit of selling the transaction, we find that
Select-O-Hits did incur a tangible benefit from McDonnell Dyer which justified a recovery under
quantum meruit. Accordingly, the trial court did not err by impliedly denying the quantum meruit
defense raised by Select-O-Hits.
Select-O-Hits also argues that the equitable maxim of unclean hands prevents McDonnell
Dyer from recovering under quantum meruit. Under the doctrine of unclean hands,
[H]e who comes into a court of equity, asking its interposition
in his behalf, must come with clean hands; and if it appears
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from the case made by him or by his adversary that he has
himself been guilty of unconscionable, inequitable, or immoral
conduct in and about the same matters whereof he complains of
his adversary, or if his claim to relief grows out of or depends
upon or is inseparably connected with his own prior fraud, he
will be repelled at the threshold of the court.
C.F. Simmons Med. Co. v. Mansfield Drug Co., 23 S.W. 165, 168 (Tenn. 1893).
This equitable maxim prevents parties from using the courts to enforce agreements “that arise out
of unconscionable, immoral or just plain ‘crooked’ conduct.” Farmers & Merchants Bank v.
Templeton, 646 S.W.2d 920, 924 (Tenn. Ct. App. 1982). A party who seeks equitable relief must
show that his conduct has been fair, equitable, and honest as to the particular controversy connected
with the subject matter of the litigation. See 27A AM . JUR. 2D Equity § 126 (1996).
Although a finding of fraud or conspiracy on the part of the plaintiff may support the defense of
unclean hands, the success of an unclean hands defense is not contingent upon the defendant’s
successful pursuit of any actionable claim against the plaintiff:
[O]ne’s misconduct need not necessarily have been of such a
nature as to be punishable as a crime or as to justify legal
proceedings of any character to warrant application of the
maxim; any wilful act concerning the cause of action which
rightfully can be said to transgress equitable standards of
conduct is sufficient cause for the invocation of the maxim.
Within the purview of the maxim, the hands of the litigant
are rendered unclean by conduct which is “condemned and
pronounced wrongful by honest and fair-minded men,”
inequitable, unfair, dishonest, fraudulent, unconscionable,
or in bad faith.
27A AM . JUR. 2D Equity § 129 (1996) (footnotes omitted).
As stated above, we fail to find that McDonnell Dyer acted negligently in its representation
of Select-O-Hits. There is certainly no evidence in the record supporting a finding that McDonnell
Dyer conducted itself in an unconscionable, inequitable, or immoral manner during the
representation of Select-O-Hits. Thus, Select-O-Hits’ argument that the equitable maxim of unclean
hands prevents a recovery to McDonnell Dyer under quantum meruit is completely without merit.
Accordingly, the trial court did not err by impliedly denying the unclean hands defense raised by
Select-O-Hits.
Counterclaim
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The final issue presented for our review is whether the trial court erred by dismissing the
counterclaim brought by Select-O-Hits to recover the $10,000.00 payment made to McDonnell Dyer
and the $10,953.05 payment in legal fees made to Mr. Chafetz and the Waring Cox law firm. Select-
O-Hits claims that it is entitled to a reimbursement for the $10,000.00 “earnest money” paid to
McDonnell Dyer because it erroneously assumed that McDonnell Dyer was acting as Select-O-Hits’
attorneys. Select-O-Hits also argues that it is entitled to reimbursement for the $10,953.05 payment
in legal fees made to the Waring Cox law firm because it would not have had to hire the law firm
had McDonnell Dyer properly represented Select-O-Hits and the Phillips. As previously stated, we
agree with the trial court’s finding that Select-O-Hits knew or should have known that McDonnell
Dyer was not representing the Phillips personally. Additionally, as stated above, we find that
McDonnell Dyer properly represented Select-O-Hits. Thus, Select-O-Hits’ arguments in support of
its counterclaim are without merit. Accordingly, the trial court did not err by dismissing the
counterclaim brought by Select-O-Hits.
In the alternative, Select-O-Hits requests this Court to credit Select-O-Hits for the $10,000.00
already paid to McDonnell Dyer against any attorney’s fees awarded to McDonnell Dyer. The
$10,000.00 already paid to McDonnell Dyer was in the form of a retainer. We find that this amount
should be credited to Select-O-Hits against the award of attorney’s fees to McDonnell Dyer.
Accordingly, Select-O-Hits owes McDonnell Dyer $89,685.00 in attorney’s fees minus the
$10,000.00 retainer already paid to McDonnell Dyer.
IV. Conclusion
For the foregoing reasons, the decision of the trial court is affirmed as modified. Costs of
this appeal are taxed against the Appellant, Select-O-Hits, Inc., for which execution may issue if
necessary.
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ALAN E. HIGHERS, JUDGE
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