Hometown Folks, LLC v. S & B Wilson, Inc., et al
Filing
OPINION and JUDGMENT filed: District court's denial of S&B Wilson's motion for judgment as a matter of law on damages is REVERSED. Because the district court miscalculated a reasonable attorneys' fee award, the attorneys' fee decision is REVERSED and the case is REMANDED, decision for publication pursuant to local rule 206. Boyce F. Martin, Jr. (AUTHORING), Alan E. Norris (CONCURRING IN THE RESULT REACHED BY THE MAJORITY OPINION), Deborah L. Cook, Circuit Judges. [09-6004, 09-6007]
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Document: 006111001060
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RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 11a0169p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
HOMETOWN FOLKS, LLC,
Plaintiff-Appellant/Cross-Appellee, Nos. 09-6004/6007
v.
>
,
S & B WILSON, INC.; WILLIAM L. WILSON;
SALLY B. WILSON,
Defendants-Appellees/Cross-Appellants. N
Appeal from the United States District Court
for the Eastern District of Tennessee of Chattanooga.
No. 06-00081—Harry S. Mattice, Jr., District Judge.
Argued: December 7, 2010
Decided and Filed: June 30, 2011
Before: MARTIN, NORRIS, and COOK, Circuit Judges.
_________________
COUNSEL
ARGUED: John P. Konvalinka, GRANT, KONVALINKA & HARRISON, P.C.,
Chattanooga, Tennessee, for Appellant. Thomas Greenholtz, CHAMBLISS, BAHNER
& STOPHEL, P.C., Chattanooga, Tennessee, for Appellees. ON BRIEF: John P.
Konvalinka, Charles G. Fisher, Richard G. Pearce, GRANT, KONVALINKA &
HARRISON, P.C., Chattanooga, Tennessee, for Appellant. Thomas Greenholtz, T.
Maxfield Bahner, Richard W. Bethea, CHAMBLISS, BAHNER & STOPHEL, P.C.,
Chattanooga, Tennessee, for Appellees.
MARTIN, J., delivered the opinion of the court. NORRIS, J. (pp. 23-24),
delivered a separate opinion concurring in the result reached by the majority opinion, in
which COOK, J., joined.
1
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_________________
OPINION
_________________
BOYCE F. MARTIN, JR., Circuit Judge. Hometown Folks, LLC entered into
an Agreement with S & B Wilson Corporation to buy eleven Burger King restaurants.
S & B Wilson terminated the Agreement, and Hometown sued for breach of contract and
breach of the duty of good faith and fair dealing. After a trial, the jury found that S & B
Wilson had properly terminated the Agreement but had breached the duty of good faith
and fair dealing, and it awarded Hometown $190,907.27 in damages. Over one year
later, the district court entered a partial judgment relative to the jury verdict. The district
court denied specific performance and awarded Hometown $5,176.24 of the $424,282.19
in attorneys’ fees and expenses that it incurred in connection with the litigation.
On appeal, the parties raise a number of issues. As an appellant, Hometown
argues that the district court erred in: (1) refusing to award Hometown all of its
attorneys’ fees and expenses incurred in connection with the litigation; (2) failing to
enter judgment promptly after the jury verdict; and (3) denying Hometown’s claim for
specific performance. As a cross-appellant, S & B Wilson argues that the district court
erred in: (1) denying S & B Wilson’s motion for judgment as a matter of law as to the
claim alleging breach of the duty of good faith and fair dealing; (2) denying S & B
Wilson’s motion for judgment as a matter of law with respect to damages; and (3)
awarding any attorneys’ fees and expenses to Hometown.
The district court correctly denied S & B Wilson’s motion for judgment as a
matter of law as to the claim alleging breach of the duty of good faith and fair dealing.
However, we REVERSE the district court’s denial of judgment as a matter of law to
S & B Wilson on damages. Furthermore, although the district court used an acceptable
method to determine a reasonable attorneys’ fee award, it applied this method
incorrectly. Therefore, we REVERSE the award of attorneys’ fees and REMAND for
a new determination. Because we grant judgment as a matter of law to S & B Wilson
on damages, we need not address Hometown’s remaining claims that the district court
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erred in failing to enter judgment promptly after the jury verdict and in denying
Hometown’s claim for specific performance.
I. FACTUAL AND PROCEDURAL BACKGROUND
William and Sally Wilson are the sole shareholders, directors, and officers of
S & B Wilson, which owns and operates eleven Burger King restaurants in the
Gainesville, Georgia area. Gordon Davenport and Elliott Davenport are the only
members of Hometown, which owns and operates a number of Burger King restaurants
in the Chattanooga, Tennessee area. The Wilsons decided to sell their restaurants, and
Hometown and S & B Wilson entered into a Purchase and Sale Agreement for the eleven
Burger King restaurants on October 4, 2005.
The Agreement required Burger King Corporation to consent to the transaction.
On November 8, Burger King sent a letter to Gordon Davenport stating that Hometown
had been approved to purchase S & B Wilson’s Burger King restaurants. The letter
stated that Burger King would require S & B Wilson to place $98,800 in escrow at
closing. The jury found, and it is not disputed, that this was the date that Burger King
consented to the transaction.
While conducting due diligence on the properties, Hometown became aware of
environmental issues at two of the restaurant locations. The transaction stalled during
January and February of 2006 as Hometown and S & B Wilson proposed various
solutions such as escrow arrangements and set-offs to the purchase price. Hometown’s
attorney sent one proposal to S & B Wilson’s attorney on March 7. S & B Wilson’s
attorney responded that he was out of the country until March 20, but that he would
continue to work on the deal when he returned. On March 14, Hometown notified S & B
Wilson that it intended to close the transaction on March 29.
On March 21, S & B Wilson sent a letter to Hometown stating that it was
terminating the Agreement pursuant to Section 9.1, which states:
This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the Closing:
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....
(d) By Seller if the Closing shall not have occurred on or before the
Outside Date [120 days after the Consent Date]; provided that Seller
shall not be entitled to terminate this Agreement pursuant to this clause
if the failure of Seller to fulfill any of its obligations under this
Agreement shall have been the reason that the Closing shall not have
occurred on or before said date . . . .
....
(g) By Seller if Burger King requires in excess of $100,000 of
remodeling and repair expenditures in order to provide the Burger King
Consent.
On April 3, Hometown filed suit against S & B Wilson in the United States
District Court for the Eastern District of Tennessee, alleging breach of contract and
breach of the duty of good faith and fair dealing, and requesting specific performance
and indemnification. On July 10, S & B Wilson moved to dismiss the case for lack of
personal jurisdiction and for summary judgment. The district court denied both motions.
The district court determined that a jury should decide the claims related to
breach of contract, breach of the duty of good faith and fair dealing, and indemnification,
except for those portions related to attorneys’ fees and expenses associated with the
litigation. After the jury trial, the district court planned to decide the issues of specific
performance, attorneys’ fees incurred during the underlying transaction, and expenses
incurred by Hometown related to the litigation.
The district court held a twelve-day jury trial beginning on November 13, 2007.
The parties presented evidence about their intent with regard to the meaning of disputed
contract terms, particularly sections 9.1(d) and 9.1(g). In addition, Hometown presented
evidence that S & B Wilson breached its duty of good faith and fair dealing by failing
to diligently carry out its responsibilities pursuant to the Agreement.
On November 29, S & B Wilson moved for judgment as a matter of law pursuant
to Federal Rule of Civil Procedure 50 on a number of grounds. Among other things,
S & B Wilson asserted that Hometown presented no evidence to allow a reasonable jury
to find that a breach of the duty of good faith and fair dealing prevented a closing from
taking place. The district court granted the motion for judgment as a matter of law with
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respect to a claim that S & B Wilson waived certain contractual defenses, but denied the
motion on all other grounds. S & B Wilson renewed its motion at the close of its case,
and the district court again denied the motion.
On December 11, the jury returned a verdict on a special verdict form. As to
Section 9.1(d), the jury found that the “Outside Date” had passed when S & B Wilson
terminated the Agreement. It also found that the reason that the transaction had not
closed by the Outside Date was not due to S & B Wilson’s failure to fulfill any of its
obligations under the Agreement. The jury found, however, that S & B Wilson should
be estopped from terminating the Agreement pursuant to this section.
As to Section 9.1(g), the jury found that Burger King required more than
$100,000 in repair and maintenance expenditures in order to grant its consent to the
transaction. The jury also found that S & B Wilson should not be estopped from
terminating the contract pursuant to this section. According to the jury instructions, as
discussed further below, these findings imply that the jury found that S & B Wilson
properly terminated the Agreement under this provision.
The jury found that S & B Wilson had breached its duty of good faith and fair
dealing so as to constitute a breach of contract by either its actions leading up to the
termination of the Agreement or its course of conduct in carrying out the terms of the
Agreement. The jury awarded Hometown $190,907.27 in damages. This amount is
equal to Hometown’s expenses in connection with the transaction, exclusive of
attorneys’ fees, to which a representative testified at trial.
After the trial, the district court ordered the parties to submit briefs on whether
Hometown was entitled to specific performance, attorneys’ fees and expenses in
connection with the transaction, and attorneys’ fees and expenses relating to the
litigation. On April 3, 2008, the district court entered an order that denied specific
performance, but concluded that Hometown could recover its fees and expenses incurred
in the underlying transaction and its fees and expenses “arising out of the instant
litigation, with the caveat that Plaintiff is entitled to only those expenses that arose out
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of, or resulted from, the Defendants’ breach of the duty of good faith and fair dealing.”
The district court ordered Hometown to submit proof of attorneys’ fees and expenses.
Hometown submitted proof of attorneys’ fees and expenses in connection with
the transaction in the amount of $40,292.04, and in connection with the litigation in the
amount of $424,282.19. Hometown asserted that it was entitled to recover $346,398.19
of that amount, even though some of that time was spent developing claims on which it
did not prevail, because its successful claim was so entwined with its unsuccessful
claims that segregation of fees was impossible. On March 5, 2009, the district court
entered an order awarding Hometown all of its attorneys’ fees and expenses in
connection with the transaction in the amount of $40,292.04. Using a “results-based
methodology” that will be discussed in detail further below, the district court awarded
Hometown only $5,176.24 of the $424,282.19 in attorneys’ fees and expenses that
Hometown incurred in connection with the litigation.
On December 24, Hometown filed a motion to confirm or enter a judgment on
the jury verdict. On January 7, 2009, the district court granted Hometown’s motion and
entered a partial judgment relative to the jury verdict. On January 20, Hometown filed
a Motion to Alter or Amend Judgment, in which it requested that the Partial Nonappealable Judgment be amended to be entered nunc pro tunc as of December 11, 2007,
the date of entry of the jury’s verdict. On March 30, 2009, the district court denied
Hometown’s motion and entered a final judgment awarding Hometown damages of
$45,468.28 in addition to damages awarded by the jury of $190,907.27. Hometown
timely filed a Notice of Appeal on August 20, 2009.
Section 10.10 of the Agreement states that “it shall be governed by and construed
and enforced in accordance with the laws of the State of Tennessee without regard to its
choice of law principles.” The parties agreed that the district court should apply
Tennessee law.
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II. DUTY OF GOOD FAITH AND FAIR DEALING
Because this is a diversity action, we review the denial of S & B’s motion for
judgment as a matter of law using the standards applicable under Tennessee law. See
K & T Enters., Inc. v. Zurich Ins. Co., 97 F.3d 171, 176 (6th Cir. 1996). Under
Tennessee law we must “take the strongest legitimate view of the evidence in favor of
the opponent of the motion, allow all reasonable inferences in his or her favor, discard
all countervailing evidence, and deny the motion where there is any doubt as to the
conclusions to be drawn from the whole evidence.” Holmes v. Wilson, 551 S.W.2d 682,
685 (Tenn. 1977). A verdict should be directed only “where a reasonable mind could
draw but one conclusion.” Id.
S & B Wilson alleges that the district court erred in denying its motion for
judgment as a matter of law that it had not breached the duty of good faith and fair
dealing. Interrogatory six of the special verdict form contained the following language:
Because you have found that Defendants could properly terminate the
contract under one of the termination provisions, by law, Defendants’
termination of the Agreement on March 21, 2006, was not a breach of the
duty of good faith and fair dealing. However, actions leading up to the
termination of the Agreement or course of conduct in carrying out the
terms of the Agreement could be a breach of the duty of good faith and
fair dealing.
Not considering Defendants’ termination of the Agreement on March 21,
2006, did Defendants breach the duty of good faith and fair dealing such
that it constituted a breach of contact?
The jury answered this interrogatory in the affirmative. Thus, we must determine
whether Hometown presented evidence showing that S & B Wilson’s actions prior to
terminating the Agreement breached its duty of good faith and fair dealing.
Tennessee law imposes a duty of good faith and fair dealing in the performance
of every contract. See, e.g., Lamar Adver. Co. v. By-Pass Partners, 313 S.W.3d 779,
791 (Tenn. Ct. App. 2009). The purpose of this implied covenant is: “(1) to honor the
reasonable expectations of the contracting parties and (2) to protect the rights of the
parties to receive the benefits of the agreement into which they entered.” Id. S & B
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Wilson argues that Hometown could have had no reasonable expectation of a closing for
two alternative reasons. First, S & B Wilson properly terminated the Agreement.
Second, Hometown itself was unwilling to close on the terms of the Agreement. Both
arguments fail.
A. Proper Termination of the Agreement
S & B Wilson argues that it could not have breached the duty of good faith and
fair dealing as a matter of law because it was entitled to terminate the Agreement. S & B
Wilson moved pursuant to Federal Rule of Civil Procedure 50(b), which provides that:
If the court does not grant a motion for judgment as a matter of law made
under Rule 50(a), the court is considered to have submitted the action to
the jury subject to the court’s later deciding the legal questions raised by
the motion. No later than 28 days after the entry of judgment—or if the
motion addresses a jury issue not decided by a verdict, no later than
28 days after the jury was discharged—the movant may file a renewed
motion for judgment as a matter of law and may include an alternative or
joint request for a new trial under Rule 59. In ruling on the renewed
motion, the court may:
(1) allow judgment on the verdict, if the jury returned a verdict;
(2) order a new trial; or
(3) direct the entry of judgment as a matter of law.
“‘Because the Rule 50(b) motion is only a renewal of the preverdict motion, it can be
granted only on grounds advanced in the preverdict motion.’” Ford v. Cnty. of Grand
Traverse, 535 F.3d 483, 491 (6th Cir. 2008) (quoting Fed. R. Civ. P. 50 Advisory
Committee Note). With regard to the duty of good faith and fair dealing, the only
argument presented by S & B Wilson in its Rule 50(a) motion was a sufficiency of the
evidence argument. Having reviewed the trial transcript, we conclude that S & B Wilson
failed to raise a legal argument with respect to any inconsistency in allowing the jury to
find both that the Agreement had been properly terminated and that the duty of good
faith and fair dealing had been breached.
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During the district court’s Rule 51 charge conference, S & B Wilson failed to
object to the instruction that explicitly allowed the jury to find a breach of the duty of
good faith and fair dealing after it found that S & B Wilson’s termination of the
Agreement was proper. This omission implies that S & B Wilson conceived of this
argument only post-verdict. Cf. Conseco Fin. Servicing Corp. v. N. Am. Mortg. Co., 381
F.3d 811, 882 n.7 (8th Cir. 2004) (“It is apparent that [defendant] developed the theory
raised in their Rule 50(b) motion only after the jury’s verdict because it (1) failed to
object to the general-verdict form, (2) offered no jury instructions explaining [the legal
theory advanced in its post-verdict motion], and (3) made no substantive objection to the
[jury] instruction.”). Because S & B Wilson conceived of this argument post-verdict,
it is improper to assert it in a Rule 50(b) motion. See Ford, 535 F.3d at 493 (holding that
defendant was barred from raising an issue on a Rule 50(b) motion where defendant did
not engage in a colloquy with the district court or opposing counsel on this point and did
not request a jury instruction clarifying its argument). Thus, we review only S & B
Wilson’s sufficiency of the evidence argument.
B. Sufficiency of the Evidence
The duty of good faith and fair dealing requires parties to a contract to conduct
themselves fairly and responsibly. See, e.g., Winfree v. Educators Credit Union, 900
S.W.2d 285, 289 (Tenn. Ct. App. 1995) (“[T]here is an implied undertaking in every
contract on the part of each party that he will not intentionally or purposely do anything
. . . which will have the effect of destroying or injuring the right of the other party to
receive the fruits of the contract.” (internal quotation marks and citation omitted));
Williams v. Maremont Corp., 776 S.W.2d 78, 81 (Tenn. Ct. App. 1989) (“All parties are
bound by law to act in word and deed, in a responsible manner . . . .” (internal quotation
marks omitted)). Parties have a duty of good faith and fair dealing not only in executing
the transaction ultimately contemplated by the contract, but also in fulfilling the
preconditions and contingencies set forth in the contract. See Covington v. Robinson,
723 S.W.2d 643, 646 (Tenn. Ct. App. 1986) (finding that duty of good faith and fair
dealing required purchasers in real estate contract to work in good faith to obtain
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financing). Because the nature of the duty of good faith and fair dealing depends on the
contract at issue, “courts look to the language of the instrument and to the intention of
the parties, and impose a construction which is fair and reasonable.” TSC Indus., Inc.
v. Tomlin, 743 S.W.2d 169, 173 (Tenn. Ct. App. 1987).
At trial, Hometown presented evidence that S & B Wilson failed to meet a
number of its pre-closing requirements under the Agreement. For example, Hometown
presented evidence that S & B Wilson delayed giving Hometown access to certain
properties to perform due diligence as required by the Agreement. In addition,
Hometown presented evidence that S & B Wilson failed to meet its deadline to deliver
financial documents to Hometown within twenty days after the end of an accounting
period. Thus, Hometown presented evidence that S & B Wilson breached its duty of
good faith and fair dealing by blocking due diligence and failing to deliver required
financial information.
Hometown also presented evidence at trial showing that S & B Wilson hindered
its attempts to close the transaction contemplated by the Agreement. Tennessee courts
have found that “[e]ach party to the contract [is] under an implied obligation to restrain
from doing any act that would delay or prevent the other party’s performance of the
contract. . . . Each party [has] the right to proceed free of hinderance by the other party.”
ACG, Inc. v. Se. Elevator, Inc., 912 S.W.2d 163, 168 (Tenn. Ct. App. 1995). Passive
non-cooperation, as well as active non-cooperation, may constitute breach of the duty
of good faith and fair dealing. See German v. Ford, 300 S.W.3d 692, 707 (Tenn. Ct.
App. 2009). Hometown presented evidence that S & B Wilson was slow to respond, if
it responded at all, to Hometown’s attempts to find a solution to the environmental
issues. Hometown also introduced evidence that in March 2006, S & B Wilson
deliberately stalled the transaction in an attempt to invoke a termination provision.
Thus, under our extremely deferential standard of review, Hometown presented evidence
at trial that S & B Wilson breached the duty of good faith and fair dealing by hindering
Hometown’s attempts to close the transaction.
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Furthermore, the district court was correct to hold that a reasonable jury could
have found that Hometown was willing to close on the Agreement as it was written.
S & B Wilson points to some evidence that indicates that Hometown was hesitant to
close the transaction before the environmental issues were resolved. For example, it
points to testimony from Gordon and Elliott Davenport that Hometown was unwilling
to close without some adjustments based on environmental concerns, and to several
proposals by Hometown to renegotiate the terms of the Agreement. However, Gordon
and Elliott Davenport also testified that Hometown was ready to move forward with a
closing. When taking the strongest legitimate view of the evidence in favor of
Hometown, there was evidence from which a reasonable jury could conclude that
Hometown was willing to close the transaction regardless of the environmental issues.
There is sufficient evidence to support the jury’s finding that S & B Wilson’s
actions leading up to the termination of the Agreement or its course of conduct in
carrying out the terms of the Agreement breached its duty of good faith and fair dealing.
Thus, we AFFIRM the district court’s denial of S & B Wilson’s motion for judgment
as a matter of law as to the breach of the duty of good faith and fair dealing.
III. DAMAGES
The jury awarded Hometown $190,907.27 in damages for the breach of the duty
of good faith and fair dealing. The amount of the verdict appears to be taken from
Plaintiff’s Trial Exhibit 39, Appx. 51, which is entitled “Summary of Fees and Expenses
In Connection With The Transaction (Other Than Expenses of Counsel).” This exhibit
summarizes costs incurred by Hometown before S & B Wilson terminated the
transaction. S & B Wilson argues that the district court erred in denying its motion for
judgment as a matter of law with respect to damages because no evidence shows that
Hometown suffered any damages as a result of the actions it claimed violated the duty
of good faith and fair dealing.
As discussed above, when reviewing a denial of judgment as a matter of law, we
must “take the strongest legitimate view of the evidence in favor of the opponent of the
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motion, allow all reasonable inferences in his or her favor, discard all countervailing
evidence, and deny the motion where there is any doubt as to the conclusions to be
drawn from the whole evidence.” Holmes, 551 S.W.2d at 685. Tennessee courts have
found that “[t]he purpose of assessing damages in a breach of contract suit is to place the
plaintiff, as nearly as possible, in the same position he would have had if the contract had
been performed.” Wilhite v. Brownsville Concrete Co., Inc., 798 S.W.2d 772, 775
(Tenn. Ct. App. 1990). To support an award of damages, “[t]he injured party must
sustain damages that consequently result from the breach.” Metro. Gov’t v. Cigna
Healthcare of Tenn., Inc., 195 S.W.3d 28, 35 (Tenn. Ct. App. 2005). Thus, we must
determine whether a reasonable jury could have found that Hometown established that
it suffered $190,907.27 in damages as a result of S & B Wilson’s breach of the duty of
good faith and fair dealing.
We do not know which specific conduct the jury found violated S & B Wilson’s
duty of good faith and fair dealing. There appear to be two alternative ways in which
the jury could have found that Hometown sustained $190,907.27 in damages as a result
of S & B Wilson’s breach of the duty of good faith and fair dealing. First, the jury
could have found that Hometown sustained the damages as a result of S & B Wilson’s
actions blocking due diligence and failing to deliver required financial information as
discussed above. However, Hometown suffered no damages from these actions because
S & B Wilson properly terminated the Agreement.
Alternatively, the jury could have concluded that Hometown suffered
$190,907.27 in damages as a result of S & B Wilson’s delay in informing Hometown
that the amounts that Burger King was requiring in escrow and its expenditures on
repairs had triggered its right to terminate the Agreement under Section 9.1(g).
Hometown presented evidence that S & B Wilson knew as early as October 2005
that Burger King was going to require it to spend more than $200,000 in order to
approve the transaction. Hometown also presented evidence that when Burger King
issued its consent form on November 8 stating that it would require S & B Wilson to
place $98,800 in escrow at closing, S & B Wilson had already spent more than $30,000
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on repairs and maintenance. Thus, the evidence shows that S & B Wilson arguably
knew at least by November 8 that it would be able to terminate the Agreement under
Section 9.1(g) because the amount already spent and the amount required in escrow
totaled more than $100,000. Hometown presented evidence that although it had spent
little money at this point, it proceeded to spend significant money on due diligence on
or around November 8. S & B Wilson did not exercise its right to terminate until March
21, 2006, after Hometown had spent $190,907.27 on the transaction. If S & B Wilson
had disclosed its knowledge and intentions about the amount that Burger King was
requiring it to spend in order to gain consent for the transaction, then Hometown may
have been able to avoid nearly all of the $190,907.27 it spent before S & B Wilson
terminated the Agreement.
All three panel members agree that S & B Wilson’s failure to disclose to
Hometown that the amounts that Burger King was requiring in escrow triggered its right
to terminate did not cause Hometown damages. However, we disagree on the reasoning:
I believe that S & B Wilson was under no duty to disclose this information, while the
other two panel members believe that Hometown’s ordinary due diligence should have
revealed that S & B Wilson would be able to terminate the Agreement. I briefly explain
my view below, and they explain theirs in the concurrence.
The jury could have found that S & B Wilson’s delay in informing Hometown
about its decision or right to terminate the Agreement caused Hometown’s damages only
if S & B Wilson had a duty to disclose that information. Cf. Homestead Group, LLC v.
Bank of Tenn., 307 S.W.3d 746, 751 (Tenn. Ct. App. 2009) (stating in the context of the
tort of negligent misrepresentation that “to find such liability, there must also be a
showing that the person accused of the concealment had a duty to the other to disclose
the matter in question”). The Tennessee Supreme Court has held that “each party to a
contract is bound to disclose to the other all he may know respecting the subject matter
materially affecting a correct view of it, unless common observation would have
furnished the information.” Simmons v. Evans, 206 S.W.2d 295, 296 (Tenn. 1947)
(internal quotation marks and citation omitted). Subsequent Tennessee opinions have
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relied on Simmons for the proposition that “[a] party to a contract has a duty to disclose
to the other party any material fact affecting the essence of the subject matter of the
contract, unless ordinary diligence would have revealed the undisclosed fact.” Lonning
v. Jim Walter Homes, 725 S.W.2d 682, 685 (Tenn. Ct. App. 1986). The district court
instructed the jury in accordance with this law.
However, I am convinced that this law could not serve as a basis to award
damages to Hometown. Applying Tennessee law, we have noted that the Lonning
“court’s general statements of law regarding the duty of disclosure are most properly
characterized as dicta.” O’Neal v. Burger Chef Sys., Inc., 860 F.2d 1341, 1351 (6th Cir.
1988). The cases applying this law have generally been limited to real estate purchases
and used car sales. See Shah v. Racetrac Petroleum Co., 338 F.3d 557, 572 n.9 (6th Cir.
2003). Thus, we have declined “to anticipate that the Tennessee Supreme Court would
extend the Simmons and Lonning cases to the context of a franchise dispute.” Id.
Although this case involves a real estate purchase, Hometown is alleging that S & B
Wilson had a duty to disclose a material fact regarding the contract at issue, rather than
the land itself. Furthermore, this case involved an arms-length transaction similar to a
franchise dispute. See O’Neal, 860 F.2d at 1350 (noting that a franchise agreement did
not create any fiduciary or confidential relationship between franchisor and franchisee).
Thus, the Lonning disclosure duties may not apply in this case at all.
Even if Lonning were to apply, neither S & B Wilson’s failure to disclose its
decision to terminate nor its failure to disclose its right to terminate could serve as a
basis for awarding damages to Hometown.
First, S & B Wilson’s failure to disclose its alleged decision to terminate the
Agreement could not serve as a basis for liability because Hometown did not introduce
sufficient evidence to prove when exactly S & B Wilson decided to terminate the
contract. Although Hometown presented evidence that S & B Wilson knew as early as
October 2005 that it had the right to terminate, there is no evidence that it had made the
decision to exercise that option.
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Second, the fact that S & B Wilson failed to disclose that its right to terminate
the contract had been triggered could not serve as a basis for liability. Applying
Tennessee law, we have held that franchisors are not “under any duty to disclose their
long-term corporate strategy to . . . franchise owners.” O’Neal, 860 F.2d at 1352. Thus,
we held that a franchisor is under no duty to disclose its decision to sell the franchise to
franchisees. Id. at 1350. As discussed above, this holding applies to other arms-length
transactions not involving franchises. See id. Therefore, under Tennessee law, a party
to a contract owes no duty to disclose its intent to exercise its contract rights. This is
consistent with the weight of authority. See, e.g., United Roasters, Inc. v. ColgatePalmolive Co., 649 F.2d 985, 989 (4th Cir. 1981) (“[T]here is very little to be said in
favor of a rule of law that good faith requires one possessing a right of termination to
inform the other party promptly of any decision to exercise the right.”); DeWitt Cnty.
Elec. Coop., Inc. v. Parks, 1 S.W.3d 96, 104 (Tex. 1999) (holding that a party to a
contract owes no duty to disclose its intent to exercise its contract rights).
Furthermore, Hometown does not identify any authority in Tennessee or
elsewhere that imposes as part of the duty of good faith and fair dealing a duty to inform
the other party of merely a right to terminate. The Agreement provided that S & B
Wilson could terminate the Agreement if Burger King required more than $100,000 of
remodeling and repair expenses in order to consent to the transaction. In other words,
it was within S & B Wilson’s contract rights to terminate the Agreement if Burger King
required more than $100,000 of remodeling and repair expenses. Furthermore, the
condition was waivable and it was also within S & B Wilson’s contract rights to decline
to terminate the Agreement. The Agreement did not contain any notice requirements
relating to this provision. Thus, Hometown is attempting to use the duty of good faith
and fair dealing to incorporate an additional term into the contract that it did not
negotiate. In my view, one party should not be required to give notice to the other that
its right to terminate a contract has been triggered unless the contract so provides. If a
party wants notice when a condition is triggered, it is free to negotiate for that provision.
Thus, I do not believe that the Tennessee Supreme Court would extend the Simmons and
Lonning cases to hold that the duty of good faith and fair dealing encompasses a duty to
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disclose the fact that a right to terminate a contract has been triggered when the contract
itself does not include a notice provision.
S & B Wilson’s actions in blocking due diligence and failing to provide financial
information did not cause Hometown damages because S & B Wilson properly
terminated the Agreement. Furthermore, all three panel members agree that S & B
Wilson’s failure to disclose to Hometown that the amounts that Burger King was
requiring in escrow triggered its right to terminate did not cause Hometown damages,
albeit for different reasons. Thus, we REVERSE the district court’s denial of judgment
as a matter of law to S & B Wilson on damages.
IV. ATTORNEYS’ FEES
The district court correctly held that Hometown could recover only those
expenses that arose out of, or resulted from, S & B Wilson’s breach of the duty of good
faith and fair dealing. Furthermore, the district court used an acceptable method to
determine a reasonable attorneys’ fee award. However, the district court applied this
method incorrectly.
The district court held that Hometown was entitled to recover “only those
expenses that arose out of, or resulted from, the Defendants’ breach of the duty of good
faith and fair dealing,” but not “its expenses arising out of or resulting from its claim that
Defendants’ termination of the Agreement was a breach of contract.” Hometown argues
that it is entitled to recover all of its reasonable attorneys’ fees and expenses in
connection with the litigation, and that the district court failed to apply Tennessee law
regarding the segregation and reasonableness of attorneys’ fees. S & B Wilson argues
that Hometown is not entitled to any award because the district court correctly found that
the claims alleging improper termination and those alleging a breach of the duty of good
faith and fair dealing are separable, and Hometown failed to show what expenses arise
out of or result from the breach of the duty of good faith and fair dealing.
In general, we review “a district court’s award of attorney fees and costs for an
abuse of discretion.” Imwalle v. Reliance Med. Prods., Inc., 515 F.3d 531, 551 (6th Cir.
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2008). Substantial deference “is appropriate in view of the district court’s superior
understanding of the litigation and the desirability of avoiding frequent appellate review
of what essentially are factual matters.” Hensley v. Eckerhart, 461 U.S. 424, 437 (1983).
A district court abuses its discretion if it “applies the wrong legal standard, misapplies
the correct legal standard, or relies on clearly erroneous findings of fact.” Gonter v.
Hunt Valve Co., 510 F.3d 610, 616 (6th Cir. 2007) (internal quotation marks and citation
omitted). However, we review the district court’s interpretation of state law and of
contracts de novo. See Ziegler v. IBP Hog Mkt., Inc., 249 F.3d 509, 512 (6th Cir. 2001);
see also Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186, 198 (2d Cir. 2003).
A. Damages that Hometown Could Recover
In diversity cases, attorneys’ fees are governed by state law. See Poly-Flex
Const., Inc. v. Neyer, Tiseo & Hindo, Ltd., 600 F. Supp. 2d 897, 913 (W.D. Mich. 2009).
Tennessee follows the “American Rule” that “in the absence of a contract, statute or
recognized ground of equity so providing there is no right to have attorneys’ fees paid
by an opposing party in civil litigation.” State ex rel. Orr v. Thomas, 585 S.W.2d 606,
611 (Tenn. 1979). Where a contract provides for attorneys’ fees, however, “[t]he parties
are entitled to have their contract enforced according to its express terms.” Wilson
Mgmt. Co. v. Star Distribs. Co., 745 S.W.2d 870, 873 (Tenn. 1988). The Supreme Court
of Tennessee has held that “costs and attorneys’ fees are recoverable under an express
indemnity contract if the language of the agreement is broad enough to cover such
expenditures.” Pullman Standard, Inc. v. Abex Corp., 693 S.W.2d 336, 338 (Tenn.
1985). Under Tennessee law, “[a] cardinal rule of contract interpretation is to ascertain
and give effect to the intent of the parties.” Allstate Ins. Co. v. Watson, 195 S.W.3d 609,
611 (Tenn. 2006). A court must “ascertain the intention of the parties based upon the
usual, natural, and ordinary meaning of the contractual language.” Guiliano v. Cleo,
Inc., 995 S.W.2d 88, 95 (Tenn. 1999).
Hometown claims that it is entitled to its expenses, including attorneys’ fees,
incurred in its pursuit of the litigation pursuant to Section 7.2(b) of the Agreement,
which states:
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Sellers and Principals, jointly and severally, hereby agree to indemnify,
defend, and hold harmless Purchaser and its officers, managers and
members from and against all Damages asserted against or incurred by
Purchaser or such officers, managers, and members, directly or
indirectly, arising out of or resulting from: (i) breach of any
representation, warranty, covenant or agreement of Seller or Principals
contained in or made pursuant to this Agreement . . . the other
Transaction Documents or the transactions contemplated hereby or
thereby or any facts or circumstances constituting such a breach . . . .
The term “Damages” is defined in Section 7.2(a) as “demands, claims, actions or causes
of action, assessments, losses, damages, liabilities, costs and expenses, including,
without limitation, interest, penalties and reasonable attorney’s fees, costs and
disbursements and expenses.”
As discussed above, a duty of good faith and fair dealing is implied in every
Tennessee contract. See, e.g., Lamar Adver. Co., 313 S.W.3d at 791. Because it is
imposed in every contract, the duty of good faith and fair dealing qualifies as a
“representation, warranty, covenant, or agreement” under Section 7.2(b). The jury found
that S & B Wilson’s actions leading up to the termination of the Agreement or course
of conduct in carrying out the terms of the Agreement was a breach of the duty of good
faith and fair dealing. We are bound by the jury’s determinations of fact when resolving
equitable issues. Arban v. West Pub. Corp., 345 F.3d 390, 408 (6th Cir. 2003).
Tennessee courts have held that “[a]ll provisions of a contract should be
construed as in harmony with each other, if such construction can be reasonably made,
so as to avoid repugnancy between the several provisions of a single contract.” Park
Place Ctr. Enters., Inc. v. Park Place Mall Assocs., L.P., 836 S.W.2d 113, 116 (Tenn.
Ct. App. 1992). The district court correctly noted that the causation element of the
Agreement would be meaningless if the court were to award Hometown all of its trial
expenses.
Thus, the district court correctly interpreted the plain language of
Section 7.2(b) to hold S & B Wilson responsible only for the expenses “arising out of
or resulting from” its breach of the duty of good faith and fair dealing.
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Hometown contends that it is entitled to recover its fees and expenses incurred
in prosecuting its unsuccessful claims because they are inextricably entwined with S & B
Wilson’s breach of the duty of good faith and fair dealing. Hometown relies heavily on
Brunsting v. Brown, No. M2000-00888-COA-R3-CV, 2001 WL 1168186 (Tenn. Ct.
App. Oct. 4, 2001), to argue that Tennessee has recognized that in a lawsuit involving
multiple claims, a party entitled to recover its attorneys’ fees does not have a duty to
segregate those fees to the extent that they relate to a claim that is entwined with a claim
under which attorneys’ fees are allowable. This argument fails for two reasons. First,
the Brunsting opinion is unpublished and thus non-binding. See S. Ry. Co. v. Foote
Mineral Co., 384 F.2d 224, 228 (6th Cir. 1967) (stating that an unpublished opinion from
the Tennessee Supreme Court is not binding on that court or on federal courts). Second,
the attorneys’ fees provision in Brunsting required the non-prevailing party to “pay all
costs and expenses incurred by the other party in enforcing or establishing its rights
hereunder, including, without limitation, court costs and reasonable attorneys’ fees.”
Brunsting, 2001 WL 1168186, at *6. The Brunsting court noted that “[t]his is heady
language, broad and sweeping.” Id. Here, in contrast, the contract specifically provided
that S & B Wilson was required to indemnify Hometown only for damages “arising out
of or resulting from” breach of a covenant. Thus, the language in Brunsting is
significantly broader than the language at issue here. Because the Agreement explicitly
addresses how to apportion fees and expenses among causes of action, the district court
correctly found that Hometown could recover only those expenses that it could prove
arose out of or resulted from S & B Wilson’s breach of the duty of good faith and fair
dealing.
B. Method for Determining a Reasonable Award
The district court determined that the most rational method of calculating the
appropriate fee award in this case was to compare the amount of damages that
Hometown sought and the amount of damages that it recovered. S & B Wilson argues
that Hometown should not recover any of its attorneys’ fees because it failed to meet its
burden of proving which expenses arose out of or resulted from litigating the breach of
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the duty of good faith and fair dealing. Hometown argues that the district court failed
to consider all the relevant factors in fashioning an award.
S & B Wilson’s argument that Hometown should not recover any attorneys’ fees
fails. Hometown had the burden to prove what a reasonable fee would be in this case.
See Wilson, 745 S.W.2d at 873 (“Obviously, the burden of proof on the question of what
is a reasonable fee in any case is upon the plaintiff and plaintiff should be in a position
to tender such proof.”). However, Hometown did submit some evidence of the fees that
it incurred to litigate S & B Wilson’s breach of the duty of good faith and fair dealing
in the form of an affidavit from John P. Konvalinka, an attorney who represented
Hometown in the litigation. Furthermore, the jury found that S & B Wilson violated its
duty of good faith and fair dealing, and according to the plain language of the contract,
Hometown is entitled to recover its fees and expenses that arose out of or resulted from
this breach. Thus, the district court correctly found that Hometown could recover the
attorneys’ fees that arose out of or resulted from this breach.
Hometown argues that the district court failed to consider all the relevant factors
in fashioning an award. The Supreme Court of Tennessee has held that the appropriate
factors to be used as guides in fixing a reasonable attorney’s fee include: (1) the time
devoted to performing the legal services; (2) the time limitations imposed by the
circumstances; (3) the novelty and difficulty of the legal issues and the skill required to
perform the service; (4) the fee customarily charged in the locality for similar services;
(5) the amount involved and the results obtained; and (6) the experience, reputation, and
ability of the attorney. Connors v. Connors, 594 S.W.2d 672, 676 (Tenn. 1980); see also
Tenn. Sup. Ct. R. 8 (setting forth substantially similar guidelines). The United States
Supreme Court has held that “the most critical factor is the degree of success obtained.”
Hensley, 461 U.S. at 436.
Tennessee courts have rejected a methodology based solely on the ratio of the
fees requested to the amounts eventually awarded to the plaintiff. See Keith v.
Howerton, 165 S.W.3d 248, 252-53 (Tenn. Ct. App. 2004). However, the district court
in this case relied on Connors and acknowledged that it was aware of the variety of
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factors that should be considered in fixing a reasonable attorney’s fee. The main factor
that the district court relied on was the amount involved and the results obtained.
Depending on the case, certain Connors factors may be more relevant than others. Here,
S & B Wilson did not dispute the reasonableness of Hometown’s claimed attorneys’
fees, and the district court’s only duty was to apportion these fees among Hometown’s
claims. Thus, certain factors such as the time limitations imposed by the circumstances,
the fee customarily charged in the locality for similar services, and the experience,
reputation, and ability of the attorney would have little relevance. In addition to the
amount involved and the results obtained, the district court appeared to consider the time
devoted to performing the legal services:
Having presided over a twelve day jury trial and ruled on significant pretrial and post-trial motions, the Court is intimately familiar with this case,
and it is obvious to the Court that what this case was really about was
Plaintiff obtaining ownership of the Burger King franchises. At trial,
Plaintiff was primarily concerned with proving breach of contract in
hopes that the Court would award specific performance and order
Defendants to sell the franchises to Plaintiff.
In addition, the district court carefully considered and rejected the option of awarding
Hometown a portion of its expenses based on the number of claims on which it was
successful compared to the number of claims brought in this case. Typically, the district
court is entitled to wide discretion because of its “superior understanding of the
litigation.” See Imwalle, 515 F.3d at 551. Thus, the district court did not err in placing
primary reliance on the ratio of Hometown’s success to what it claimed in calculating
an attorneys’ fee award.
However, because we grant S & B Wilson judgment as a matter of law as to
damages, the amount that Hometown recovered in damages is now zero.1 Although
1
In addition, we note that despite the fact that the district court properly selected a method for
fashioning an award of attorneys’ fees, it erred in applying that method to the facts of this case. The
district court found that Hometown sought $18,959,899.31 in damages and obtained an award of
$231,199.33. The district court found that Hometown recovered 1.22% of the recovery that it sought.
Thus, the district court found that a reasonable award for expenses and fees to Hometown was 1.22% of
the claimed $424,282.19, or $5,176.24. In making this calculation, the district court listed the value of the
Burger King franchises, increased financing costs, and duplicate closing costs as part of the judgment that
Hometown sought. However, Hometown would have had to pay these amounts in order to purchase the
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Hometown has not proven damages, it has proven that S & B Wilson breached the duty
of good faith and fair dealing. Thus, under the terms of the Agreement, Hometown may
still be entitled to reasonable attorneys’ fees arising out of or resulting from the breach,
determined by the factors outlined in Connors. Thus, we REVERSE the district court’s
award of attorneys’ fees and REMAND for recalculation.
V. REMAINING CLAIMS
Because we grant S & B Wilson judgment as a matter of law as to damages, we
need not address Hometown’s claim that the district court erred in failing to enter
judgment promptly after the jury’s verdict.
Furthermore, because we grant S & B Wilson judgment as a matter of law as to
damages, it is obvious that the district court did not err in denying Hometown’s claim
for specific performance. See, e.g., Shuptrine v. Quinn, 597 S.W.2d 728, 730 (Tenn.
1979) (noting that where the award of damages would be practical and adequate, a court
generally will not compel specific performance). Thus, we AFFIRM the district court’s
denial of specific performance.
VI. CONCLUSION
The district court correctly denied S & B Wilson’s motion for judgment as a
matter of law as to the jury’s finding of a breach of the duty of good faith and fair
dealing. However, we REVERSE the district court’s denial of S & B Wilson’s motion
for judgment as a matter of law on damages. Furthermore, because the district court
miscalculated a reasonable attorneys’ fee award, we REVERSE and REMAND the
attorneys’ fee decision.
franchises from S & B Wilson. Thus, the judgment actually sought by Hometown was much smaller than
the district court calculated.
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_________________
CONCURRENCE
_________________
ALAN E. NORRIS, concurring. I concur in the result reached by Judge Martin’s
opinion, but respectfully disagree with the analysis offered in Section III. While I agree
with the majority that S & B Wilson's failure to disclose its alleged decision to terminate
the Agreement between Hometown and S & B Wilson cannot serve as a basis for
liability because Hometown presented no evidence indicating when S & B Wilson made
its decision to terminate, I disagree that under Tennessee law, S & B Wilson’s failure to
disclose its right to terminate the contract could not serve as a basis for liability. The
majority states that “[i]n our view, one party should not be required to give notice to the
other that its right to terminate a contract has been triggered.” Maj. Op. at 15. I see no
reason to rule on this aspect of Tennessee law because Hometown’s claim would fail
under an expansive interpretation of the duty of good faith and fair dealing.
Hometown’s ordinary due diligence should have revealed that S & B Wilson
would be able to terminate the Agreement. “A party to a contract has a duty to disclose
to the other party any material fact affecting the essence of the subject matter of the
contract, unless ordinary diligence would have revealed the undisclosed fact.” Lonning
v. Jim Walter Homes, Inc., 725 S.W.2d 682, 685 (Tenn. Ct. App. 1986) (emphasis
added). Viewing the evidence in the light most favorable to Hometown, S & B Wilson
knew at least by November 8, 2005 that it would be able to terminate the Agreement
under Section 9.1(g) because the amount already spent and the amount required in
escrow totaled more than $100,000. At this time, Hometown admitted knowing that
Burger King had required S & B Wilson to place $98,900 in escrow. This is still $1,101
short of the amount needed to satisfy Section 9.1(g), but it is enough to place Hometown
on notice that the repairs could exceed $100,000. It is not plausible for Hometown to
claim that it would not have proceeded with its due diligence because of the $1,201
shortfall because only a relatively minor repair would have been necessary to cause
S & B Wilson to meet the $100,000 threshold for termination. Hence, Hometown’s duty
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of due diligence should have led it to ascertain whether any additional repairs had been
made.1
Because I believe that federal courts sitting in diversity should refrain from
unnecessarily deciding issues of state law, I would reverse on the above stated factual
grounds.
1
The record indicates that Hometown was told the amount in escrow decreased after November 8,
2005, and Burger King stated that they would inform Hometown when additional repairs would be
completed. Yet Hometown, performing due diligence, never inquired as to whether any repairs had been
made before November 8.
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