TBC Corporation v. Gene Wall, Geraldine Wall, Joe Wall, and Helen Wall v. Marvin Bruce

• Court: Court of Appeals of Tennessee
• Decided: August 17, 2004
• Docket: 02A01-9310-CH-00229
• Status: Published

Opinion

IN THE COURT OF APPEALS OF TENNESSEE WESTERN SECTION AT JACKSON ______________________________________________________________________________

TBC CORPORATION, Shelby Chancery No. 97909-2 C.A. No. 02A01-9310-CH-00229 Plaintiff/Appellant, Hon. Floyd Peete, Chancellor v.

GENE WALL, GERALDINE WALL, JOE WALL and HELEN WALL,

Defendants/Third-Party Plaintiffs,

v.

MARVIN BRUCE,

Third-Party Defendant/Appellant.

JOHN I. HOUSEAL, JR. and JAMES S. STRICKLAND, JR., Glankler Brown, Memphis, Attorneys for Plaintiff/Third-Party Defendant/Appellants.

THOMAS F. JOHNSTON, PAUL E. PRATHER and STEVEN W. LIKENS, Armstrong, Allen, Prewitt, Gentry, Johnston, & Holmes, Memphis, Attorneys for Defendants/Third- Party Plaintiffs/Appellees.

REVERSED IN PART AND AFFIRMED IN PART

Opinion filed: ______________________________________________________________________________

TOMLIN, Sr. J.

TBC Corporation (“Plaintiff”) filed suit in the Chancery Court of Shelby County

against Joe Wall, Helen W all, Gene Wall and Geraldine Wall (collectively “The W alls”

or “Defendants”) seeking a judgment for an amount due on an account secured by

personal guaranties signed by defendants. The defendants filed an answer and a third-

party complaint, the latter against Marvin Bruce, plaintiff’s president, (“Bruce”), by

which they sought indem nification in the event plaintiff obtained a judgment against

them. In their answer, the defendants denied that the guaranties were still in effect, and

in addition, raised the affirmative defenses of release, waiver, abandonment and

estoppel. 1 The answer and third-party complaint also demanded a jury.2

1 For convenience, the major parties will be the only ones hereafter referred to. 2 While not an issue in this case, the chancellor entered an order denying the jury demand as well as denying the Wall’s request for permission to seek an Plaintiff subsequently filed a motion in limine seeking an order precluding

the Walls from: “(1) offering testimony, in violation of the Statute of Frauds, the

Parol Evidence Rule and the express terms of the guaranty sued on, seeking to

prove an oral modification or termination of the defendants’ Guaranty; and (2)

offering the testimony of [David Saxon].” The testimony of Saxon was objected

to, generally speaking, upon the grounds that he was a “paid witness.” We will

subsequently explore this allegation in more detail. Following a hearing, the

chancellor entered an order denying the motion in limine to exclude the

testimony of Saxon and granting the motion excluding evidence of the oral

modification or cancellation of the written guaranties. The order also held that

the Wall’s were substantially precluded from offering proof as to the defenses of

estoppel, release, abandonment and waiver.

Both plaintiff and defendants filed Rule 9 Applications for Permission to

Appeal that portion of the chancellor’s order adverse to them.3 This court

granted both applications and designated the defendants to proceed as

appellees.

On appeal, each party has presented one issue for our consideration. In

its role as appellant, plaintiff contends that the chancellor erred in denying its

motion in limine relative to the testimony of the witness David Saxon. The

defendants contend that the chancellor erred in ruling that they were

precluded from introducing oral and extrinsic evidence to establish estoppel

and waiver on the part of plaintiff. For the reasons hereinafter stated, we reverse

the trial court’s order granting the motion in limine as to defendants presenting

interlocutory appeal. This court subsequently entered an order granting the interlocutory appeal and reversed the chancellor’s order denying the Wall’s request for a jury. 3 The chancellor granted permission to seek an interlocutory appeal from his order.

2 oral and extrinsic evidence pertaining to their defenses of estoppel and waiver

and affirm the trial court regarding the testimony of Saxon.

Inasmuch as the two issues presented on appeal are narrow in scope, we

will confine our recitation of the facts to those facts that this court considers

relevant to these issues.

Prior to this litigation, the defendants owned and operated a company

engaged in the sale of tires, batteries and automotive accessories known as

Wall Tire Distributors, Inc. (“WTD”). WTD purchased inventory on open account

from TBC. In connection with the TBC account defendants individually

executed personal guaranties in favor of TBC. The pertinent provisions of these

guaranties are as follows:

FOR VALUE RECEIVED and in consideration of the credit which you may hereafter extend to Wall Tire Distributors, Inc., your customer, the Guarantors hereby guarantee the payment when and as due of any and all present or future indebtedness of any nature to you now owing or hereafter incurred by said customer, including, but not limited to, any such indebtedness arising out of the sale of goods, wares and merchandise sold by you to said customer or by any successor thereof.

If not paid when due, the Guarantors promise to pay said indebtedness on demand.

The Guarantors hereby waive notice of the acceptance of this Guaranty and of credit given or to be given to said customer and hereby consent that without prior notice, (1) the time of payment of such indebtedness or any portion thereof may be extended from time to time after the same becomes due, (2) that any such indebtedness may from time to time be converted from any particular form to any other form and (3) you may surrender or deal with any collateral security or other guaranties, all without releasing or affecting the liability of the Guarantors hereunder. You or your successors and assigns may, at your discretion, proceed hereunder at any time against the Guarantors for all or any part of the amount hereby guaranteed without taking any action against Wall Tire Distributors, Inc., Liquidation of the business to which credit is extended shall not constitute a demand nor shall it be construed or be pleaded as a release from the terms and provisions of this Guaranty.

This Guaranty is an absolute and continuing Guaranty to continue

3 until you shall receive notice in writing of its revocation, but such revocation shall not in any way relieve the Guarantors from liability for indebtedness contracted prior to the service of such notice.

In addition to the written guaranties TBC also held an inventory lien on all

products shipped by it and stored at WTD’s place of business.

In 1986, a group of investors formed a company know n as Automotive

Industries, Inc. (“Automotive”) for the purpose of purchasing the tire and automotive

parts and accessories business (WTD) from defendants. During the course of the

negotiations, representatives of Automotive discussed the sale of WTD w ith TBC and

raised the question of whether or not Automotive would be permitted to maintain the

sam e supplier relationship that then and there existed between TBC and WTD.

Automotive advised TBC that it would not be able to provide a personal guaranty on

any accounts payable to TBC for merchandise purchased by it from TBC. This

condition was accepted by TBC. The sale was to close in Decem ber 1986, subject to

financing, with the actual transfer of ownership of W TD taking place in April 1987.

Following the sale, Joe Wall was employed by Automotive as a salaried “Consultant”

to insure the smooth transfer of ownership and provide training to employees of

Autom otive.

In 1989, Autom otive experienced severe cash flow problems resulting in its

account with TBC falling into arrears. Ultimately, Autom otive filed for bankruptcy in

the fall of 1989. At that time, the outstanding balance on this account, while in dispute,

approached or exceeded three million dollars ($3,000,000.00). It just so happens that at

or about the same time plaintiffs’ treasurer discovered the written guaranties of the

various defendants, executed in 1976, in a vault in the company headquarters. Plaintiff

thereafter filed this suit against defendants for the outstanding balance on the account,

relying upon the guaranties in question.

The material facts surrounding the w itness David Saxon are as follows. Saxon, a

4 former employee of TBC, approached defendants, seeking compensation in return for

his assistance in proving that TBC had indeed waived and/or abandoned the W alls’

personal guaranties. Counsel for the W alls took Saxon’s deposition in order to

determine whether he had in fact knowledge of any material facts. During the

deposition, Saxon testified to the effect that he had no first hand knowledge of TBC’s

dealings, but rather would assist the Walls in providing investigatory leads, reviewing

depositions and identifying documents or other persons who might have knowledge of

discoverable information. Saxon entered into an agreement with the defendants’

counsel to provide information, in exchange for which he would receive $5,000.00 up

front with a fee of $35,000.00 contingent upon the Walls receiving a favorable decision

at the trial level. Saxon’s own counsel, as w ell as counsel for the W alls, specifically

advised Saxon that he could not be compensated for giving testimony.

During pre-hearing discovery, the Walls requested that TBC provide them with

all documents evidencing the release of any security interest securing any debt ow ed to

plaintiff by W TD, Automotive or the W alls. TBC responded that no such docum ents

had been found. Saxon thereafter advised the Walls that he was aware of the existence

of a certain document that discussed the release by TBC of certain security interests,

including the Walls’ personal guaranties. TBC again denied that such a memorandum

existed. Thereafter, the Walls’ filed Saxon’s affidavit in which he stated that such a

mem orandum did exist. The Walls proceeded to take the deposition of Mr. Charles

Quinn, plaintiff’s treasurer, who admitted that such a memorandum, dated August 12,

1988, did in fact exist and that he had shown it to Saxon. Quinn further testified that

the memorandum was contained in the “old Wall Tire files that were kept in the general

file room.”

In reviewing the contents of the Wall Tire file, counsel for the Walls found two

documents-including Quinn’s memorandum-which discussed the release by TBC of

certain security interest as well as the Walls’ guaranties. One document was an internal

mem orandum written by Quinn to Marvin Bruce, in which Quinn stated that TBC had

5 given up any personal guaranties used to secure inventory which W TD had previously

held. Quinn explains the reasoning behind the memorandum at length in his deposition.

Basically, Quinn was giving warning to Bruce that Automotive’s financial picture was

weakening and that TBC faced an increased risk because they had (1) given up the

Walls’ personal guaranties and (2) had terminated the inventory liens, the latter being

necessary in order for Bank South to make an eleven million dollar ($11,000,000.00)

loan, with a first priority inventory lien on the products supplied by TBC. Bank

South’s loan had enabled Automotive to buy out WTD. Basically, Quinn cautioned

Bruce about TBC increasing its involvement with Automotive as a supplier.

The second memo was sent to TBC’s insurance carrier and was perhaps the

vehicle by which Saxon came to be involved in the entire affair. While an employee of

TBC, Saxon served as liaison between TBC and several different insurers concerning

TBC’s obtaining credit risk insurance on its outstanding accounts receivable portfolio.

In this m atter, Saxon apparently becam e fam iliar with TBC’s accounts receivable

departm ent and thereby learned about the outstanding inventory held by Automotive.

Saxon however, indicated that there was an earlier document in existence that

was not uncovered in the Wall Tire file that further demonstrated that the Walls had

been released from their personal guaranties som e time earlier than Quinn’s

mem orandum of August 12, 1988. Saxon appears ready to be a material fact witness

regarding the existence of a certain document or docum ents that would demonstrate

TBC’s release of the Walls’ personal guaranties. Saxon stated in his deposition that the

August 12, 1988 memo was not the first memo discussing the lack of any personal

guaranty on the Automotive/WTD inventory that was outstanding. To the contrary, he

contends that an earlier mem o serves as further proof that TBC had abandoned the

Walls’ personal guaranties before August 1988.

I. The “Paid Witness” Issue.

6 Both issues in this case stem from a motion in limine filed by TBC and M arvin

Bruce in the trial court, seeking to limit the introduction of certain evidence by

defendants. More specifically, plaintiff sought to prohibit the introduction of testimony

by David Saxon, a non-expert witness, whom plaintiff contended the defendants had

paid the sum of $5,000.00 in addition to a contingency arrangement of $35,000.00,

dependant upon the outcome of the trial. The chancellor denied this motion,

The sole ground relied upon in the motion by plaintiff was that this arrangement

with the witness Saxon was in violation of Disciplinary Rule 7-109(c) of the Code of

Professional Responsibility. Our supreme court adopted the Code of Professional

Responsibility for the purpose of setting the “ethical standards relating to the practice of

law and the administration of law in this court.” Disciplinary Rule 7-109(c) of the

Code reads as follows:

A lawyer shall not pay, offer to pay, or acquiesce in the payment of compensation to a witness contingent upon the content of his testimony or the outcome of the case. But a lawyer may advance, guarantee, or acquiesce in the paym ent of: (1)Expenses reasonably incurred by a witness in attending or testifying. (2)Reasonable compensation to a witness for the loss of time in attending or testifying. (3)A reasonable fee for the professional services of an expert witness.

As w e have already noted, defendants entered into an agreem ent with Saxon to

compensate him for litigation assistance, such as the review and identification of

documents, the identification of other persons who might have knowledge of

discoverable information and the review of deposition testimony for any

inconsistencies. In addition, defendants’ counsel submitted an affidavit to the effect

that the payments comm itted to Saxon were solely for investigatory and consulting

services, without any indication that Saxon might becom e a material witness.

We are of the opinion that this issue may be disposed of without determining

whether or not a violation of the Tennessee Code of Professional Responsibility has

7 taken place. We have been able to find no appellate court decision in this state in point

on the civil side of the law, but the Court of Criminal Appeals in State v. Webb, 1993

WL 52815 (Tenn. Crim . App. 1993) considered and disposed of a similar question. In

Webb defendant alleged that the trial court had erred in admitting into evidence a

voluntary statement obtained from him. Defendant contended that the statem ent should

be excluded because it was obtained by the prosecutor in violation of the Tennessee

Code of Professional Responsibility. In rejecting this argument, the Webb court stated

that “Even if a violation [of the Code of Professional Responsibility] were present, the

violator might be subject to discipline, but the statement would not be excluded on this

basis alone.”

In Gaylord v. Homemakers of Montgom ery, Inc., 675 So.2d 363, 367 (Ala.

1996) the Alabama Supreme Court considered a potential breach of the Alabama Code

of Professional Responsibility wherein plaintiff’s attorney had communicated with

employees of a hom e health care service that was being sued by plaintiff. That court

stated that even if defendants had clearly proven that plaintiff had violated the Code of

Professional Responsibility by communicating with a defendant previously represented

by counsel, the trial court erred in barring the contents of the conversation from being

admitted into evidence: “The Rules of Professional Conduct are

regulations’ and do not play a role in determining the admissibility of evidence.” Id. at

367.

In this state evidentiary rulings are governed by the Tennessee Rules of

Evidence. Tenn. R. Evid. 101. An examination of these Rules reveals that no provision

has been made for the exclusion of testimony intertwined with an alleged violation of

the Code of Professional Responsibility. Under the Rules of Evidence, counsel for

Plaintiff will be given ample opportunity on cross-examination with respect to any bias

or prejudice on behalf of the witness Saxon. Whether there be a violation of the Code

or not, the evidence should not be excluded. Accordingly, we resolve this issue in favor

of defendants.

8 II. Plaintiff’s [TBC] Motion In Limine.

Plaintiff, in the same motion, moved the trial court for an order “precluding

defendants, at the trial of the above entitled action, from offering testimony, in violation

of the Statute of Frauds, the Parole Evidence Rule and the express terms of the

guaranties sued on, seeking to prove an oral modification or termination of the

defendants’ guaranties . . . . “

Following a hearing on the motion in limine the chancellor entered an order as to

both aspects of plaintiff’s m otion, w hich reads in pertinent part as follows:

IT APPEAR ING TO TH E COURT based upon the m otion, the parties’ mem oranda and supporting authority, including Brewing Corporation v. Pioneer Distributing Co., 194 Tenn. 588, 253 S.W.2d 761 (1952), and statements of counsel, the first part of the motion [

IT FUR THER APPEARING TO THE COURT that the ruling on the first part of the Motion In Limine, on the assertion of Defendants’ counsel, appears to substantially preclude Defendants from offering proof as to the defenses of estoppel, release, abandonment and waiver; that the ruling on the second part of the motion involved the contingent payment to a fact witness who claims to have unique knowledge of the subject personal guaranties; and that, if correct, these rulings may be the basis for reversal and new trial after entry of a final judgment.

IT IS, THEREFORE, ORD ERED, ADJUDGED AND DECR EED that the respective adverse parties are hereby granted leave to take interlocutory appeals from this order and said order entered on September 9, 1994.

One apparent effect of this order, as noted by the court therein, was to preclude

defendants from offering any proof pertaining to their defenses of estoppel, release,

abandonm ent and w aiver.

9 Defendants contend that the trial court erred as a matter of law in holding that

the Statute of Frauds and the Parole Evidence Rule preclude the admission of

subsequent oral and extrinsic evidence to establish estoppel and w aiver as to Plaintiff.

The guaranty in question provides that in order to revoke the guaranties, the guarantee,

TBC, must be given notice in writing of the revocation of the guaranties by the

guarantor. This admittedly was not done by any of the W alls.

What the Defendants are relying upon and seek to prove by parole evidence is

conduct on the part of plaintiff that they contend amounts to either an

abandonment/waiver or an estoppel. The appellate courts of this state have recognized

that a guaranty can be abandoned and have allowed the presentation of oral testimony

to show an abandonment. See W.R. Grace & Company v. Taylor, 398 S.W.2d 81, 55

Tenn. App. 227; Ottenheimer Publishers, Inc. v. Regal Publishers, Inc., 626 S.W.2d

276, 279 (Tenn. App. 1981).

Furthermore, both this court and our suprem e court have held that parole

evidence is adm issible to show a waiver of a contractual provision. Goldkist, Inc. v.

Pillow, 582 S.W.2d 77, 79 (Tenn. A pp. 1979); Baird v. Fidelity-Phenix Fire Ins. Co.,

178 Tenn. 653, 162 S.W.2d 384 (1942). In Baird our supreme court adopted the

following definition of and proof of waiver:

Waiver is a voluntary relinquishment or renunciation of som e right, a foregoing or giving up of some benefit or advantage, which, but for such a waiver, he would have enjoyed. It may be proved by express declaration; or by acts and declarations manifesting an intent and purpose not to claim the supposed advantage; or by a course of acts and conduct, or by so neglecting and failing to act, as to induce a belief that it was his intention and purpose to w aive.

Id.

The W alls have properly pled the defenses of waiver and/or abandonment and

estoppel in their answer. By seeking to rely upon these defenses they are not

attempting to modify the terms of the guaranties nor do these defenses require an

10 interpretation of the guaranties. For this reason, the Parole Evidence Rule would not

apply in our opinion. Stamp v. Honest Abe Log Hom es, Inc. 804 S.W.2d 455, 457

(Tenn. App. 1990).

In so ruling, we are not passing upon the admissability of any portion of

evidence which may be offered by the Walls. What we are saying, is that under the law

of this state they should not be prevented from offering proof in an effort to establish

the permissible defenses of estoppel, and waiver/abandonment. It will be the

prerogative of the trial court to pass upon the admissibility of any evidence so offered.

In his order, the chancellor relied specifically on the case of Brewing Corp. of

Am erica v. Pioneer Distributing Co., 253 S.W.2d 761 (Tenn. 1952). In our opinion, the

chancellor’s reliance upon Brewing Corporation is misplaced. First of all, the court in

Brewing Corporation found that defendant Wilcox, was seeking to prove that he had

been released from the written contract of guaranty by a subsequent oral agreement,

leaving the contract in force against his co-guarantor and, in addition, that Wilcox was

seeking to “alter, modify and contradict” the express terms of the guaranty contract by

the introduction of parole evidence, in violation of the Parole Evidence Rule.

We also note that Brewing Corporation was decided prior to the adoption of the

Tennessee Rules of Civil Procedure. At the time Brewing Corporation was tried, if

defenses of w aiver and estoppel were relied upon in an answer, the facts relative thereto

to show the occurrence of the events claim ed had to be specifically stated with

particularity. In Brewing Corporation, following the filing of his answer in which

Wilcox undertook to raise the affirm ative defenses of estoppel and waiver, plaintiff

responded with a motion to strike, which the chancellor treated as a demurrer, the

purpose of which was to test the sufficiency of the allegations in the answer. The

supreme court held that Wilcox’ pleas of waiver and estoppel were insufficient in that

they did not show any change of position by him nor injury or prejudice to him,

essential elem ents of estoppel. In other words, these pleadings did not m eet the tests

that were applicable under the rules of procedure there existing. The rules relative

11 thereto were drastically changed with the adoption of the Rules of Civil Procedure. This

issue is resolved in favor of defendants.

The decree of the chancellor as to the issue raised by plaintiff is affirmed. The

decree of the chancellor as to the issue raised by the defendants is reversed. This cause

is remanded to the Chancery Court of Shelby County for further proceedings not

inconsistent with this opinion. Costs in this cause on appeal are taxed to Plaintiff, for

which execution may issue if necessary.

_________________________________________ TOMLIN, Sr. J.

_________________________________________ CRAWFORD, P. J. (CONCURS)

_________________________________________ FARMER, J. (CONCURS)