Dyer v Select-O-Hits, Inc.

Decision Date20 April 2001
Docket Number00-00044
CourtTennessee Court of Appeals


No. W2000-00044-COA-R3-CV


OCTOBER 10, 2000 Session

Filed April 20, 2001

Direct Appeal from the Chancery Court for Shelby County, No. 108323-2; The Honorable Floyd Peete, Jr., Chancellor

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


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 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...

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