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