Taylor v. T&N Office Equipment ( 1997 )

IN THE COURT OF APPEALS OF TENNESSEE
WINDON H. TAYLOR and ) C/A NO. 01A01-9609-CV-00411
SARAH A. TAYLOR, )
)
Plaintiffs-Appellees, )
)
) APPEAL AS OF RIGHT FROM THE
v. ) SUMNER COUNTY CIRCUIT COURT
) No. 13574-C
)
T&N OFFICE EQUIPMENT, INC., )
JERALD W. NICHOLS and )
GAYLE J. NICHOLS, )
) HONORABLE THOMAS GOODALL,
Defendants-Appellants. ) JUDGE
For Appellants For Appellees
LARRY L. CRAIN LOUIS W. OLIVER, III
Brentwood, Tennessee Hendersonville, Tennessee
FILED
May 23, 1997
Cecil W. Crowson
Appellate Court Clerk
OPINION
AFFIRMED IN PART
VACATED IN PART
REMANDED Susano, J.
1
Windon H. Taylor and his wife, Sarah A. Taylor
(collectively “the Taylors”), sued T&N Office Equipment, Inc.
(T&N) and Jerald W. Nichols and his wife, Gayle J. Nichols
(collectively “the Nichols”), alleging that the defendants had
defaulted on a promissory note. The trial court found that a
default had occurred. It then held that the Nichols1 were
obligated under the note to pay $11,960.13 in attorney’s fees.
The Nichols appealed, raising the following questions for our
review:
1. Did the trial court err in finding that
the Nichols had defaulted on the promissory
note?
2. Did the trial court err in awarding as
reasonable attorney’s fees the amount of
$11,960.13, being one-sixth of the principal
recovered on the promissory note?
I. Facts
Between 1978 and 1991, Mr. Taylor and Mr. Nichols each
owned fifty percent of the stock of T&N. In January, 1991, T&N
purchased Mr. Taylor’s interest in the corporation, leaving Mr.
Nichols as its sole owner. At that time, T&N, acting through Mr.
Nichols, executed a promissory note obligating T&N to pay the
Nichols $135,000, with interest, in monthly installments of
$2,087.36. At the bottom of the note, the Nichols
“unconditionally” guaranteed payment of the note. The Nichols
also signed a hypothecation agreement pledging two $50,000
1
While it is not entirely clear in the record, the judgment does not
appear to be against T&N Office Equipment, Inc. This may be explained by Mr.
Nichols’ testimony that “[i]n January, 1995, T&N filed for Chapter 7
bankruptcy.” The complaint in this case was filed on October 28, 1994.
2
certificates of deposit as collateral for the debt. The parties
also executed a security agreement that granted the Taylors a
security interest in, among other things, T&N’s accounts
receivable.
The promissory note defines “default” as occurring
under various circumstances, including each of the following:
[T&N] becoming insolvent or generally failing
to pay its debts as they become due;
* * * *
Failure of [T&N] to abide by the terms of the
security agreement which partially secures
this note or to provide the collateral as
provided herein;...
(Emphasis added). The note also provides that
[a]s the unpaid balance on this note shall
decline, [T&N] shall not be required to
maintain cash collateral in excess of the
unpaid balance due hereon. When the unpaid
balance due hereunder shall be One Hundred
Thousand ($100,000.00) Dollars or less, the
Security Agreement shall be released.
In the event this note is placed in the hands
of an attorney for collection or for
protection of any interest [the Taylors]
might have in collateral securing payment of
this note, [T&N] and all sureties,
guarantors, endorsers and other parties
hereto agree to pay reasonable attorneys’
fees and court and other costs incident to
such efforts.
In 1993, without the plaintiffs’ knowledge, Mr. Nichols
cashed one of the certificates and left town after falsely
representing to the issuing bank that the certificate had been
3
lost or destroyed. Upon Mr. Nichols’ return, the Taylors met
with the Nichols, who agreed to deposit approximately $45,000
into a joint account with the Taylors as collateral for the note
in place of the certificate of deposit. One thousand dollars was
to be transferred from that account each month into Mr. Taylor’s
account, as a part of the monthly payment due under the note.
The parties had a mutual understanding that all four of their
signatures would be required before any funds could be withdrawn
from the joint account; however, the bank’s policy required only
one signature to authorize a withdrawal, and the account was
apparently set up with this proviso.
In October, 1994, Mr. Taylor learned that one of T&N’s
creditors, Panasonic, was attempting to recover a debt of
$5,295.36 by enforcing a personal guaranty signed by Taylor in
1985. The Panasonic obligation had been incurred by T&N after
Mr. Taylor sold his interest in the business.
Mr. Taylor also discovered that Mr. Nichols had again
left the area. He was told by Mrs. Nichols that she did not know
where her husband was; that the Panasonic debt was not going to
be paid; that she was not obligated for T&N’s debts; that Mr.
Nichols had spent all of their money; and that she was uncertain
as to what she would do with the remaining funds in the joint
account. On October 27, 1994, Mrs. Nichols withdrew the sum of
$34,737 -- all but about $1,000 -- from the joint account. The
following day, the Taylors declared the note in default and filed
this action.
4
The Taylors and their attorney agreed to a fee of one-
third of any amount recovered, but they subsequently reduced the
percentage to one-sixth.
On November 1, 1994, after having been served with a
copy of the Taylors’ complaint, Mrs. Nichols attempted to pay off
the balance on the note, but payment was refused by the Taylors
and their attorney. On November 7, 1994, the trial court entered
an order allowing the payment of $71,760 by the Nichols in full
payment of the note.
The remaining issues, pertaining to default, attorney
fees and the Panasonic obligation, were argued before the trial
court on April 23, 1996. The trial court found that T&N and the
Nichols had defaulted on the note by failing to pay the
obligation to Panasonic and by removing the cash collateral from
the bank. The court found that the Taylors were justified in
declaring a default under the terms of the note. The court also
found that they were justified in fearing that the Nichols were
attempting to evade payment of the note and the Panasonic
obligation. It based this conclusion on the following
circumstances: Mrs. Nichols’ statement that T&N was without
funds; Mr. Nichols’ fraudulent procurement of the first
certificate of deposit; Mr. Nichols’ disappearance on two
occasions; and Mrs. Nichols’ withdrawal of the collateral from
the joint bank account without the Taylors’ knowledge or consent.
The court held that the default entitled the Taylors to recover
their reasonable attorney’s fees, which it fixed at $11,960.13,
being one-sixth of the principal recovered on the note.
5
II. Standard of Review
In this non-jury case, our review is de novo upon the
record with a presumption of correctness as to the trial court’s
findings, unless the preponderance of the evidence is otherwise.
Rule 13(d), T.R.A.P.; Hackett v. Smith County, 807 S.W.2d 695,
699 (Tenn.App. 1990); Smith v. Jarnagin, 436 S.W.2d 310, 313
(Tenn.App. 1968). Conclusions of law come to us free of any such
presumption. Adams v. Dean Roofing Co., 715 S.W.2d 341, 343
(Tenn.App. 1986).
III. Finding of Default
The trial court found a number of defaults under the
terms of the promissory note. We agree that there was a default.
As indicated earlier, the note defines default as, among other
things, any failure by T&N “to abide by the terms of the security
agreement... or to provide the collateral as provided herein.”
When Mrs. Nichols withdrew all but $1,000 from the joint account,
she removed the collateral that secured the debt; thus, from that
moment forward, the defendants were in default due to their
failure “to provide the collateral as provided [in the note].”
Mrs. Nichols took this action without the consent or knowledge of
the Taylors.
The Nichols contend that the trial court mistakenly
assumed that the promissory note required them to maintain cash
collateral at all times in an amount equal to the unpaid balance
of the note. Pointing to the provision in the note that states
6
that the security agreement was to be released once the balance
fell below $100,000, the Nichols argue that, since the balance at
the time of the alleged default was approximately $71,000, they
were relieved of their obligations under the security agreement.
While we agree that the security agreement was released
once the unpaid balance fell below $100,000, we do not agree that
this contingency relieved the Nichols of their separate
obligation to provide cash collateral as specified in the note.
The security agreement, which was released, is distinct from the
collateral requirement. Thus, although T&N and the Nichols were
no longer bound by the security agreement, they were still
subject to the requirements of the promissory note; specifically,
they were obligated to “provide the collateral” that was required
by the note. As far as the note was concerned, the only
significant effect of the diminution in the debt was that the
Nichols were not required, as the balance declined, to “maintain
cash collateral in excess of the unpaid balance.” Thus, the note
implicitly still required them to provide cash collateral in an
amount equal to its outstanding balance, which, at the time of
the withdrawal, was in excess of $71,000. This they failed to
do.
The Nichols also argue that the withdrawal of funds
from the joint account cannot constitute a default, since those
funds were not subject to the provision in the note requiring the
Nichols to “provide the collateral.” They maintain that their
agreement with the Taylors to deposit approximately $45,000 in
the joint account was a separate transaction, wholly independent
7
of the promissory note, and that their withdrawal of those funds
therefore could not constitute a default under the note. We do
not agree. The funds in the joint account were clearly intended
to be substituted as collateral in place of the original $50,000
certificate of deposit that was referred to in the note. It is
well-settled that “the interpretation placed upon a contract by
the parties thereto, as shown by their acts, will be adopted” by
a court that is asked to construe that contract. Hamblen County
v. City of Morristown, 656 S.W.2d 331, 335 (Tenn. 1983); Ogle and
Shelton v. Realty World-Barnes Real Estate Co. and Wood, C/A No.
03A01-9610-CH-00336 (Tenn.App., E.S., filed April 28, 1997,
Franks, J.). In this instance, the parties treated the funds in
the joint account as a substitute for a portion of the original
collateral required by the note. Therefore, according to the
note’s terms, Mrs. Nichols’ withdrawal of those funds constituted
a default in the form of a “[f]ailure to... provide the
collateral as provided [in the note].”
Finally, the Nichols argue that no default occurred,
since, according to their theory, Mrs. Nichols withdrew the
collateral in order to pay the note in full. It is true that the
note authorizes prepayment in full without penalty; however, Mrs.
Nichols’ attempted payment came only after she had been served
with process in this lawsuit. Whether her intent was as stated
by her at trial -- and the timing of her payment certainly brings
this into question -- is not the real issue. What she did was a
default, as defined by the Nichols when they signed the note. If
she had wanted to avoid the consequences of a default, she could
have easily secured the Taylors’ consent. That consent could not
8
have been reasonably withheld under the circumstances of this
case.
In view of the foregoing, we cannot say that the
evidence preponderates against the trial court’s finding that a
default occurred. The parties were free to define default in any
way they chose, and the withdrawal of funds from the joint bank
account falls squarely within the note’s sixth category of
default: “failure... to provide the collateral as provided
herein.” Given our conclusion that the trial court correctly
found that this act constituted a default, it is not necessary
for us to consider the court’s other basis for finding a default
-- T&N’s failure “to pay its debts as they become due.”
IV. Award of Attorney’s Fees
The burden of proof as to what constitutes a reasonable
attorney’s fee rests on the party seeking fees. Wilson
Management v. Star Distributors, 745 S.W.2d 870, 873 (Tenn.
1988). As stated by the Supreme Court,
where an attorney’s fee is based upon a
contractual agreement expressly providing for
a reasonable fee, the award must be based
upon the guidelines by which a reasonable fee
is determined. [citations omitted] The
parties are entitled to have their contract
enforced according to its express terms.
Where they specify a reasonable fee rather
than a percentage of recovery, it is clear
that they expect a court to adjudicate the
issue of a reasonable fee...
Id.
9
In the instant case, the promissory note clearly
provides for the payment of the Taylors’ “reasonable attorneys’
fees” in the event they retained an attorney for the purpose of
collecting the unpaid balance on the note or protecting their
interest in the collateral. Thus, by demonstrating that a
default occurred, the Taylors carried their burden of proving
their entitlement to attorney fees under the note. It then
became the duty of the trial court to adjudicate the issue of a
reasonable attorney’s fee, and the duty of the Taylors to present
sufficient proof to enable the court to make that determination.
Id.
The Taylors had the additional responsibility of
presenting evidence relative to the various “guidelines by which
a reasonable fee is determined.” Id. The factors relevant to
the calculation of a reasonable attorney’s fee are essentially
those found in Disciplinary Rule 2-106(B):
(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 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.
10
(7) The experience, reputation, and ability
of the lawyer or lawyers performing the
services.
(8) Whether the fee is fixed or contingent.
Alexander v. Inman, 903 S.W.2d 686, 695 (Tenn.App. 1995). The
reasonableness of a fee depends on the facts of each case; thus,
the trial court must consider all of the surrounding
circumstances as they pertain to the eight criteria listed above.
Id.
The Taylors cite Wilson Management for the proposition
that the trial court may set attorney’s fees even in the absence
of both expert testimony and a prima facie showing of what
constitutes a reasonable fee. Wilson Management, 745 S.W.2d at
873. Again relying on that case, they contend that the Nichols
failed to meet their obligation to insist upon a hearing on the
issue of reasonable fees. Id. We find this reliance to be
misplaced. The relied-upon language in Wilson Management
addresses those situations where a trial court awards attorney’s
fees without conducting any hearing on the issue. In the instant
case, there was a hearing at which the question of attorney’s
fees was addressed. In fact, the trial court’s order of December
5, 1994, specifically reserved the issue for a subsequent
hearing, which hearing ultimately took place on April 23, 1996.
On that occasion, the court heard some, albeit minimal, testimony
regarding the issue of reasonable attorney’s fees for the
Taylors.
11
In setting attorney’s fees in this case, the trial
court should have evaluated all of the surrounding circumstances
against the background of the eight factors set forth in DR 2-
106(B). From all appearances, it did not do so. On the
contrary, the court apparently awarded the Taylors a flat
percentage of their recovery simply because that was the
stipulation in the agreement with their attorney. The Taylors’
fee agreement with their attorney is only one factor in the
analysis. That agreement in and of itself does not automatically
render that fee reasonable.
We conclude that in the interest of justice, this case
should be remanded to the trial court for a proper determination
of the reasonable attorney’s fees to which the plaintiffs are
entitled. T.C.A. § 27-3-128 provides:
The [appellate] court shall also, in all
cases, where, in its opinion, complete
justice cannot be had by reason of some
defect in the record, want of proper parties,
or oversight without culpable negligence,
remand the cause to the court below for
further proceedings, with proper directions
to effectuate the objects of the order, and
upon such terms as may be deemed right.
By this decision, we do not mean to imply that a remand will be
appropriate in all cases where there has been insufficient proof
regarding the reasonableness of attorney’s fees. We merely hold
that, under the facts of this case, a remand for a more thorough
determination is warranted.
12
The judgment of the trial court is affirmed, except for
that portion awarding attorney’s fees of $11,960.13 to the
plaintiffs, which is hereby vacated. This case is remanded to
the trial court for such further proceedings as are appropriate,
consistent with this opinion. Exercising our discretion, we tax
13
the costs on appeal half to the appellants and half to the appellees.
__________________________
Charles D. Susano, Jr., J.
CONCUR:
_________________________
Houston M. Goddard, P.J.
_________________________
Herschel P. Franks, J.
14