IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
December 6, 2000 Session
ALLIED SOUND, INC., v. EDDIE W. NEELY and JOHNNY JESS DAVIS
Direct Appeal from the Circuit Court for Sevier County
No. 91-299-IV Hon. O. Duane Slone, Circuit Judge
FILED MARCH 29, 2001
No. E2000-01095-COA-R3-CV
In this action alleging misrepresentation, concealment and fraud, the Trial Court granted defendants
summary judgment on the grounds that it was unreasonable for plaintiff to rely on any
representations made by defendants. On appeal, we affirm.
Tenn. R. App. P.3 Appeal as of Right; Judgment of the Circuit Court Affirmed.
HERSCHEL PICKENS FRANKS , J., delivered the opinion of the court, in which HOUSTON M. GODDARD ,
P.J., concurred and CHARLES D. SUSANO, JR., J., concurred in part, dissented in part, and filed an
opinion.
George F. Legg, and Eric J. Morrison, Knoxville, Tennessee, for Plaintiff-Appellant, Allied Sound,
Inc.
Robert S. Stone and Katherine M. Hamilton, Knoxville, Tennessee, for Defendant-Appellee, Eddie
W. Neely.
P. Edward Pratt, Knoxville, Tennessee, for Defendant-Appellee, Johnny Jess Davis.
OPINION
Plaintiff Allied Sound (“Allied”) obtained a judgment against Kingdom Resort, Inc.
(“KRI”) in the amount of $725,000.00 for breach of contract. Allied could not collect this judgment
because KRI later declared bankruptcy. Then Allied filed this suit against Eddie Neely and Jess
Davis, who were the owners of KRI, alleging misrepresentation, concealment and fraud.
In 1988, KRI was constructing a theatrical set in Sevier County to house an outdoor
passion play, and Allied submitted a proposal for the installation of sound and lighting equipment
for the project. KRI provided Allied with a letter of intent in February 1988 which stated that it
would purchase the system from Allied contingent upon securing financing. Allied began ordering
equipment and commenced some work on the project, and Link, president of Allied Sound, was
made aware that the financing of the sound and lighting equipment would be done through a leasing
company.
Link stated that Davis told him in March that the lease financing was “complete and
available”, but that they were working on another deal which could save them money. Link was later
advised that KRI had selected Century Finance and that Allied should bill Century Finance for
progress payments. Davis provided Link with a phone number for Steve Lundergan at Century
Finance, and Lundergan represented that Century Finance had been selected and Lundergan would
be handling the lease. It was Link’s testimony that Lundergan told him to send the invoices, and that
Allied would be paid. Link testified that he received a purchase order from Century on April 21
which stated that other documents would have to be executed by KRI in connection with the lease,
but he did not inquire as to what those documents were. The lease stated that it was contingent upon
a letter of credit being provided, but Link stated that he did not learn of the letter of credit
requirement until July. Link further testified that he would not have moved forward with installation
of the equipment had he known of the letter of credit requirement.
Allied worked on the project and submitted invoices to Century, which were never
paid. Link met with Davis and Neely on May 4 to request progress payments on the job, but was told
no funds were available. At that meeting, Link testified that Neely and Davis asked him to keep
working because the money was set to come in at the end of the construction through the lease, and
there was no provision for progress payments. The record establishes that KRI had been denied
letters of credit by several banks as of May 4.
Summary Judgment was granted previously to Neely and Davis because Allied had
recovered a judgment against KRI on the facts before the Court. On appeal, we reversed, finding
that since corporations act through their agents, then “if KRI made misrepresentations, some
individual or individuals had to make them for it.” The Court further stated that Neely and Davis
were the agents alleged to have made misrepresentations for KRI, and that “[t]here is nothing
inconsistent between the misrepresentations charged in the instant case and the representations found
in the earlier breach of contract case.” This case was remanded for trial.
After remand, defendants again moved for summary judgment, which was granted,
with the Trial Court holding it was unreasonable for Allied to rely upon any representations made
by defendants on May 4.
On appeal, Allied insists that there is a disputed issue of material fact as to whether
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the statements made by Davis constituted fraudulent misrepresentation, and whether Allied’s reliance
on the representations made by defendants was reasonable? Also, plaintiff insists that Davis’
attorney should have been disqualified by the Trial Court.
In determining whether a genuine issue of material facts exists for purposes of
summary judgment, we are required to take the strongest legitimate view of the evidence in favor
of the non-moving party, and allow all reasonable inferences in favor of that party and discard all
countervailing evidence. Byrd v. Hall, 847 S.W.2d 208 (Tenn. 1993).
Allied argues that there is a question of fact as to whether the statements made by
Davis in March constituted fraudulent misrepresentations. According to Link, Davis represented that
the financing was “complete and available”, but that they were working on another deal which would
save them money. Davis later told Link that they had selected Century Finance and Allied should
bill Century Finance for the progress payments. At the time the statements were made, KRI was still
negotiating with Century regarding the lease, and there were contingencies which KRI had not yet
met.
To prove fraudulent misrepresentation, plaintiff must show that there was an
intentional misrepresentation of a material fact, made with knowledge of its falsity or reckless
disregard for its truth. Hill v. John Banks Buick, 875 S.W.2d 667 (Tenn. Ct. App. 1993.) The
evidence establishes a disputed issue of material fact as to whether the financing was “complete and
available” under the conditions existing between KRI and Century at that time. If, however, a
misrepresentation was made in this regard, Allied must prove that it reasonably relied upon the
misrepresentation to its detriment. Id.
In order to determine whether plaintiff’s reliance upon Davis’ statements was
reasonable, several factors must be considered, including “the plaintiff’s business expertise and
sophistication”, “the availability of the relevant information” and “the opportunity to discover the
fraud.” City State Bank v. Dean Witter Reynolds, Inc., 948 S.W.2d 729, 737 (Tenn. Ct. App. 1996.)
In this regard, Link admits that he was given the name and number of the person at Century Finance
with whom the defendants had been dealing, and was invited to call and get more information. Link
did speak with Lundergan at Century Finance, and according to Link, he was advised that Century
Finance had been selected and that Lundergan would be handling the lease. Lundergan also told
Link to send his invoices, and they would be paid. Link also acknowledged that he received a
purchase order from Century on April 21 which stated that other documents were required from KRI
in connection with the lease, but he did not inquire as to what those documents were. The purchase
order specifically states in two places that other documents must be executed by KRI on or before
a certain date, or the purchase order is “null and void.”
From the undisputed material evidence and Link’s testimony, we conclude that
plaintiff’s reliance on Davis’ statement was unreasonable given the fact that plaintiff was put on
notice at least by April 21 that there were some conditions on the lease, and should reasonably have
inquired as to what those conditions were. Plaintiff had the means to obtain the information needed
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and discover any “fraud” if he had simply asked Century for a copy of the actual lease agreement or
inquired as to what additional documentation was required by Century before continuing the
performance. While Link asserts that he had never been involved in a lease transaction before, he
was an experienced business person, and on this record is charged with knowing there were
contingencies to be met by a certain date in connection with the lease. Where information is
reasonably discovered, and here where the plaintiff was invited to inquire, it cannot claim reasonable
reliance upon a misrepresentation. In Solomon v. First American National Bank of Nashville, 774
S.W.2d 935 (Tenn. Ct. App.1989), this Court stated, "[g]enerally, a party dealing on equal terms with
another is not justified in relying upon representations where the means of knowledge are readily
within his reach."
The trial court also found that plaintiff’s reliance on statements made by Neely and
Davis at the May 4 meeting (that the money was set to come in at the end of construction) was not
reasonable because plaintiff had been found to have notice of the letter of credit requirement by that
time, and because Link had testified in his deposition that he would not have proceeded with the
work if he had known of the letter of credit requirement. Allied concedes that it is bound by the
previous ruling that it had notice of the letter of credit requirement by May 4, but argues that Link
was not told that KRI had applied for a letter of credit at several different banks and been turned
down. Link did not, however, enquire of Neely or Davis about the letter of credit requirement, or
whether the contingencies in the lease had been fulfilled, even though he was charged with knowing
of both conditions at that juncture. Link conceded he should not have gone forward with the work
knowing that a contingency existed. Plaintiff’s alleged reliance on defendants’ statements were
unreasonable, and we find summary judgment to be appropriate. In order to defeat summary
judgment, the reasonableness of the reliance must amount to a genuine issue, not found here. See:
Annaco, Inc., v. Corbin, 1998 WL 929637 (Tenn. Ct. App. 1998).
Plaintiff further argues that Davis’ counsel should have been disqualified, because
his law firm has merged with the law firm which represented Allied in its initial lawsuit against KRI.
The Trial Judge refused to disqualify Davis’ counsel. In Davis’ response to plaintiff’s Motion to
Disqualify, supporting affidavits and documents were filed asserting that even though Davis’
counsel’s firm had merged with the firm which previously represented plaintiff in the first lawsuit
against KRI, sufficient measures had been taken to protect client confidences such that no conflict
existed. Plaintiff insists that Disciplinary Rule 4-101 and Disciplinary Rule 5-105 have been
violated because Heiskell, Donelson represented Allied Sound in the first lawsuit and thus had
substantial communications with Allied of a confidential nature, and further had “complete access
to the records and files of Allied Sound.” Plaintiff argues that this information could have related
to the actions of Neely and Davis, and thus could be used against Allied in the present suit, and
further relies on the case of Manning v. Waring, Cox, James, Skylar and Allen, 849 F.2d 222 (6th Cir.
1988), for the proposition of the presumption that an attorney shares his client’s confidences with
all members of his firm.
In that case, the Sixth Circuit adopted the test used by the Seventh Circuit in
determining whether disqualification is warranted. The Court ruled that if the lawyer was privy to
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confidences of the former client, and if there is a substantial relationship between the subject matter
of the former and present representations, then the court must determine if the presumption of shared
confidences has been rebutted. Id. One method of rebutting this presumption is to show that
adequate screening measures have been instituted to prevent the flow of confidential information
from the attorney to other members of the firm. Id.
In determining whether the presumption has been rebutted, the court is to consider
“objective and verifiable evidence” on a “case-by-case basis.” Manning. Factors to be considered
include: 1) the size and structure of the law firm, 2) the likelihood of contact between the “infected”
attorney and the attorneys responsible for the present representation, 3) rules which prevent the
“infected” attorney from access to relevant files, and 4) whether the “infected” attorney will share
in the fee from the present litigation. Id.; see also Formal Ethics Opinion 89-F-118 (adopting the
standards set forth in Manning).
The issue in this case thus becomes whether the presumption has been rebutted. The
Board of Professional Responsibility has opined that screening mechanisms should “be aimed at
confining disqualification to the person who was involved in the substantially related matter and
therefore infected with or tainted by privileged information which is the source of the ethical
problem. Isolation of the infected person would allow the other lawyers and support personnel in
the firm or office to assist in or conduct the questioned representation free from any taint or misuse
of client confidences.” Formal Ethics Opinion 89-F-118. The Board specifically approved screening
mechanisms which forbid discussion of sensitive matters and limit availability of sensitive
documents, restrict access to files, impose sanctions for breach of the mechanisms, and implement
physical, organizational, and geographical barriers. Id.
Plaintiff relies upon the case of Penn Mutual Life Insurance Co. v. Cleveland Mall
Associates, 841 F. Supp. 815 (E.D. Tenn. 1993). The District Court held that, following the merger
of two law firms, it would be improper to allow two attorneys within the same, newly-merged firm
to represent clients on different sides of an ongoing dispute. Thus, regardless of the screening
mechanisms implemented, the court ordered that the firm should be disqualified. Id. In Penn
Mutual and other cases which rely upon it, such as Watson v. Ameredes, 1997 WL 772865 (Tenn.
Ct. App. 1997), there are two lawyers representing adverse parties in a current dispute who end up
working within the same law firm. Such is not the case here.
At the outset, we note that Davis had no involvement whatsoever in the prior
litigation, and was not called as a witness. In this case there are two attorneys 1 from Heiskell,
Donelson who previously represented Allied in the first lawsuit against KRI, who then withdrew
from representation of Allied following the resolution of that suit. Due to a law firm merger, these
two attorneys now practice in the same firm with Pratt, who represents defendant Davis in this
action. The attorneys state unequivocally that they have never discussed this case. However, we are
1
Another attorney for Heiskell, Donelson who represented Allied in the lawsuit against
Century Finance is apparently now deceased.
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required to determine whether sufficient screening mechanisms have been implemented to rebut the
presumption of shared client confidences.
The attorneys involved here state in their affidavits that a conflict policy was adopted
prior to and after the merger which institutes screening mechanisms for situations such as this. The
screening mechanisms include limiting access to the files, limiting places where certain cases can
be discussed, limiting the sharing of secretaries, and the implementation of a “Chinese” wall
specifically between Pratt and the attorneys who formerly represented Allied. The attorneys further
state that the files related to the former Allied representation are maintained in off-site storage, and
the files related to the current Davis representation are maintained in the firm’s Huntsville office
where the infected attorneys have no access.
Disqualification is “a drastic remedy which should be used sparingly” and the trial
court found that it was not warranted herein, thus inherently finding that the screening mechanisms
implemented were sufficient to rebut the presumption of shared confidences. There is no suggestion
in this record which disputes that these mechanisms have been effectively used in this case, and
given the preference stated by the Board and the Courts that disqualification should be confined to
only the infected attorneys, if possible, we conclude that the Trial Court’s ruling on the
disqualification issue was correct.
For the foregoing reasons, we affirm the judgment of the Trial Court and remand with
the cost of the appeal assessed to Allied Sound..
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HERSCHEL PICKENS FRANKS , J.
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