Lazy Seven Coal Sales, Inc. v. Stone & Hinds, P.C., 314

• Decision Date: 17 June 1991
• Docket Number: No. 314,314
• Citation: 813 S.W.2d 400
• Parties: LAZY SEVEN COAL SALES, INC., and/or Zena Mehler, Executrix of the Estate of Frank T. Mehler, Deceased, Plaintiff-Appellant, v. STONE & HINDS, P.C., Defendant-Appellee. 813 S.W.2d 400
• Court: Tennessee Supreme Court

Page 400

813 S.W.2d 400

LAZY SEVEN COAL SALES, INC., and/or Zena Mehler, Executrix of the Estate of Frank T. Mehler, Deceased Plaintiff-Appellant, v. STONE & HINDS, P.C., Defendant-Appellee.

No. 314.

813 S.W.2d 400

Supreme Court of Tennessee at Knoxville.

June 17, 1991.

Larry C. Vaughan, Vaughan & Zuker, Knoxville, Neale J. Poller, Hall, Poller & O'Brien, P.A., Miami, Fla., for plaintiff-appellant.

Darryl G. Lowe, Lowe, Hogan, Shirley & Yeager, Robert R. Campbell, Hodges, Doughty & Carson, Knoxville, for defendant-appellee.

OPINION

REID, Chief Justice.

This case is a civil action for legal malpractice. The estate of Frank Mehler, the real party in interest, appeals from the judgment of the Court of Appeals, which reversed a jury verdict against Stone & Hinds, P.C. (Stone & Hinds), granted Stone & Hinds' motion for directed verdict, and dismissed Mehler's complaint.

The Court of Appeals, in reversing the trial court, held that appellant Mehler failed to prove at trial the standard of care required of the appellee-lawyers and that, further, he had waived any claim against the lawyers by failing to move with reasonable promptness for their disqualification. Mehler seeks reversal of the Court of Appeals' decision and reinstatement of the jury verdict. Stone & Hinds would have this Court affirm the decision of the Court of Appeals and hold further that the evidence preponderates against the jury verdict and that the trial court erred in the admission of evidence, instructions to the jury, and entry of judgment.

This Court finds that the record supports both findings by the Court of Appeals that Mehler failed to prove the standard of care and that he waived any claim based on conflict of interests. In addition, the record contains no material evidence of causation between the acts claimed to constitute negligence and the damages alleged. The other issues are pretermitted.

Proof

Lazy Seven Coal Sales, Inc. (Lazy Seven) was incorporated in August 1979 by Sam Cox and Frank Mehler for the purpose of engaging in the coal brokerage business. Cox owned 51% of the stock, was designated president, and was responsible for the operation of the business, which involved the purchase and sale of coal. Forty-nine percent of the stock was issued to Mehler, a resident of Palm Springs, Florida, who had no responsibility for the daily management of the business but provided the financial resources for the corporation.

Approximately one year after Lazy Seven was organized, Cox, as president, employed the law firm of Stone & Hinds to act as legal counsel for the corporation. Stone & Hinds' representation continued until the corporation was dissolved in June 1981. During the course of its representation, Stone & Hinds prepared, at Mehler's request, a family voting trust agreement whereby Mehler, or alternately his wife, could vote the shares issued to Mehler, some of which he transferred to his wife and children. The agreement was executed by Mehler and his family members. Stone & Hinds also prepared, at the requests of both Cox and Mehler, drafts of a shareholder's agreement between Cox and Mehler, bylaws for the corporation, and an employment contract between the corporation and Cox as president. None of these instruments were executed because Cox and Mehler were not able to agree upon the terms. The preparation of these instruments by Stone & Hinds and its subsequent representation of the corporation in a controversy with Mehler is the basis for Mehler's claim against Stone & Hinds for legal malpractice.

The controversy, which culminated in the dissolution of Lazy Seven, began on April 17, 1981, when Mehler, who had not been involved in the corporation's daily affairs, went to the corporate office and, insisting the business was being run inefficiently made demands upon employees, threatened to fire them, and generally disrupted business. Stone & Hinds, as corporate counsel, advised Cox of possible responses to Mehler's interference. Although Stone & Hinds recommended a compromise with Mehler to resolve any differences, Cox, as president of Lazy Seven, elected to seek a temporary restraining order, a complaint for which Stone & Hinds filed on behalf of Lazy Seven. An order was entered prohibiting Mehler from interfering with the operation of the corporation. Mehler defied the order of the court and instructed the corporation's banks to withhold all payments from corporate funds. Upon proceedings initiated by the chancellor, and after a hearing at which Mehler was represented by counsel, he was found to be in contempt of court.

Mehler filed a counter-complaint seeking the appointment of a receiver, dissolution of the corporation, and distribution of the assets. The court appointed a receiver and subsequently ordered that all claims against Lazy Seven be filed within six months and that the corporation thereafter be dissolved and the assets liquidated. The appointment of a receiver constituted a default by the corporation on a line of credit guaranteed by Mehler and extinguished the corporation's access to operating funds. The court found the shareholders to be bitterly hostile and the corporation insolvent. Lazy Seven, represented by Stone & Hinds, filed a petition in bankruptcy seeking a Chapter 11 reorganization. In order to expedite the dissolution, bankruptcy proceedings were dismissed by consent, and the receiver accepted Mehler's offer to purchase the assets of the corporation, including the right to use the name Lazy Seven Coal Sales, Inc., for ten dollars and the assumption of all corporate debts.

In the course of the dissolution proceedings, Stone & Hinds filed a claim for attorneys' fees in the amount of $22,842.23. Stone & Hinds also filed a claim against the receiver on behalf of a former sales employee of Lazy Seven for commissions due on sales made for the benefit of Lazy Seven. Mehler, approximately one year after the filing of the original complaint, filed a third-party complaint against Stone & Hinds seeking damages for alleged legal malpractice. The jury returned verdicts of $2,600,000 for Mehler against Stone & Hinds and $6,000 for Stone & Hinds against Mehler.

Standard of Review

The Court of Appeals, after examining the evidence, held the trial court in error in not sustaining Stone & Hinds' motion for a directed verdict. In reviewing that action by the Court of Appeals, this Court also must review the record to ascertain if material evidence is present to support the verdict. Hohenberg Bros. Co. v. Missouri Pacific R.R. Co., 586 S.W.2d 117, 119 (Tenn.Ct.App.1979); T.R.A.P. 13(d). This determination must be based on proof that Stone & Hinds owed Mehler a duty, Stone & Hinds breached that duty, and the breach of the duty proximately caused damages to Mehler. Spalding v. Davis, 674 S.W.2d 710 (Tenn.1984); Sammons v. Rotroff, 653 S.W.2d 740 (Tenn.Ct.App.1983); Stricklan v. Koella, 546 S.W.2d 810, 813 (Tenn.Ct.App.1976).

Although standard of care, causation, and waiver are interrelated and cannot be separated precisely, the issues presented will be discussed under those headings.

Standard of Care

Mehler insists that the Code of Professional Responsibility is the standard of care in a legal malpractice suit and that proof of a violation of the Code is sufficient basis for liability. Mehler's position is that "a violation of the Code itself when coupled with testimony regarding the deleterious results thereof, are and should be sufficient upon which to predicate an action for legal malpractice in Tennessee." (Emphasis added.)

The initial inquiry, whether the Code is the standard of care in an action based on negligence, is answered by the Code itself. The purpose of the Code is set forth in the Preliminary Statement, which includes the following The Code is designed to be adopted by appropriate agencies both as an inspirational guide to the members of the profession and as a basis for disciplinary action when the conduct of a lawyer falls below the required minimum standards stated in the Disciplinary Rules.

....

The Disciplinary Rules, unlike the Ethical Considerations, are mandatory in character. The Disciplinary Rules state the minimum level of conduct below which no lawyer can fall without being subject to disciplinary action.... The Code makes no attempt to prescribe either disciplinary procedures or penalties for violation of a Disciplinary Rule, nor does it undertake to define standards for civil liability of lawyers for professional conduct. (Emphasis added.)

It is clear that the purpose of the Code is to state when a lawyer will be subject to disciplinary action and not to define standards whereby he may be held civilly liable for damages. Conduct that violates the Code may not breach a duty to the client and therefore will not constitute actionable malpractice. Although this issue has not been considered previously by this Court, other jurisdictions have held that the state Code of Professional Responsibility does not create a private cause of action for damages. See, e.g., Terry Cove North, Inc. v. Marr & Friedlander, P.C., 521 So.2d 22 (Ala.1988); Roberts v. Langdale, 185 Ga.App. 122, 363 S.E.2d 591 (1987); Bob Godfrey Pontiac, Inc. v. Roloff, 291 Or. 318, 630 P.2d 840 (1981); Martin v. Trevino, 578 S.W.2d 763 (Tex.Civ.App.1978).

When presented the issue, the Alabama Supreme Court held, "The Code of Professional Responsibility is designed not to create a private cause of action for infractions of disciplinary rules, but to establish a remedy solely disciplinary in nature." Terry Cove North, 521 So.2d at 23. The court also found, "The sole remedy [for breaches of disciplinary rules] is the imposition of disciplinary measures. Like the [ABA] Model Code, Alabama's Code of Professional Responsibility does not set out standards for civil liability." Id. at 24.

The Court of Appeals of Georgia considered the issue and found, quoting East River Savings Bank v. Steele, 169 Ga.App. 9, ...