IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
December 17, 2013 Session
DAVID KANIECKI v. O’CHARLEY’S INC. ET AL.
Appeal from the Chancery Court for Davidson County
No. 12209II Carol L. McCoy, Chancellor
No. M2012-02221-COA-R3-CV - Filed February 11, 2014
The sole issue in this putative class action is whether Plaintiffs are entitled to recover
attorneys’ fees under the common law substantial benefit doctrine. Plaintiffs, shareholders
of O’Charley’s Inc., filed this action against several parties to enjoin the imminent merger
with and acquisition by Fidelity National Financial, Inc.; no monetary relief was sought. The
gravamen of the complaint was breach of fiduciary duty. Plaintiffs requested additional
disclosures but did not seek to enjoin the merger. After the merger was completed,
Defendants filed motions to dismiss pursuant to Tenn. R. Civ. P. 12.02(6) for failure to state
a claim upon which relief could be granted; Plaintiffs contemporaneously filed a motion to
recover attorneys’ fees. Plaintiffs did not oppose the motions to dismiss and an agreed order
was entered by which the complaint was dismissed but, by agreement, the issue of attorneys’
fees was reserved for hearing. Plaintiffs acknowledged this was not a shareholder derivative
action and that they were not entitled to recover attorneys’ fees pursuant to Tennessee Code
Annotated § 48-17-401; however, Plaintiffs claimed they were entitled to attorneys’ fees
under the common law substantial benefit doctrine. The chancellor disagreed and denied
Plaintiffs’ request for attorneys’ fees. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed
F RANK G. C LEMENT, J R., J., delivered the opinion of the Court, in which A NDY D. B ENNETT
and R ICHARD H. D INKINS, J.J., joined.
Randall J. Baron, pro hac vice, Kevin K. Green, A. Rick Atwood, Jr., and David T.
Wissbroecker, San Diego, California; George E. Barrett, Douglas S. Johnston, Jr., and
Timothy L. Miles, Nashville, Tennessee, for the appellants, David Kaniecki, Brady White,
and Hilary Kramer Coyne.
W. Brantley Phillips, Jr., Joseph B. Crace, Jr., and Overton Thompson, III, Nashville,
Tennessee, for the appellees, O’Charley’s, Inc., Arnaud Ajdler, William F. Andrews,
Douglas N. Benham, David W. Head, Philip J. Hickey, Jr., Gregory R. Monahan, Dale W.
Polley, Richard Reiss, Jr., H. Steve Tidwell, Robert Jackson Walker, Shirley A. Zeitlin.
John Lee Farringer, IV, and L. Webb Campbell, II, Nashville, Tennessee, for appellee,
Fidelity National Financial, Inc.
OPINION
The matters at issue arise from the merger of Fidelity National Financial, Inc.
(“Fidelity”), a leading provider of multiple services, including a substantial restaurant
company, and O’Charley’s Inc. (“O’Charley’s”), a Tennessee restaurant corporation
headquartered in Nashville. These two entities announced on February 6, 2012, that they had
entered into a merger agreement, which was structured as a tender offer by Fidelity’s wholly-
owned subsidiary Fred Merger Sub Inc. (“Fred”). Thus, a majority of O’Charley’s
shareholders had to agree to tender their shares for the merger to proceed.
Three days after the announcement, shareholder David Kaniecki filed suit challenging
the details of the merger. Over the next couple of weeks, four additional actions were filed
with substantially similar allegations.
On February 27, 2012, O’Charley’s filed a 14D-9 disclosure with the United States
Securities and Exchange Commission (the “SEC”).
An amended complaint was filed on March 12, 2012, which was concomitantly
designated by the court as the operative complaint; at that time, the court also consolidated
all merger-related litigation, appointed co-lead counsel for the action, and set a May 8, 2012,
deadline for Plaintiffs to move for class certification.
The crux of the amended complaint was a putative “class action” filed on behalf of
all public shareholders of O’Charley’s against its Board of Directors (“Board”) for breach
of fiduciary duty. O’Charley’s, Fidelity, and Fred were included as defendants for allegedly
aiding and abetting the Board’s breaches. The amended complaint alleged, inter alia, that the
merger price was unfair, inured to the benefit of Fidelity, and that Defendants had engaged
in self-dealing, stood to reap personal rewards, and had withheld “material information”
about the merger from O’Charley’s shareholders. Moreover, the 14D-9 was allegedly
deficient in that it failed to disclose material information crucial to the shareholders in
determining whether to tender their shares, namely, financial advice and data used to
determine the share price being offered. No monetary damages were sought; the sole remedy
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pled by Plaintiffs was in the form of injunctive relief. Defendants timely answered, and each
of them asserted that the amended complaint failed to state a claim upon which relief may
be granted.
Thereafter, on March 29, 2012, O’Charley’s filed with the SEC an amended Schedule
14D-9 which set forth additional financial disclosures. While Plaintiffs take credit for this
disclosure, Defendants maintain these supplemental disclosures were voluntary and, more
importantly, the additional disclosures were not material to the shareholders’ decision-
making process. They further assert that much of the information had previously been
disclosed to shareholders in other reports.
The parties also differ as to other events that ensued. Plaintiffs contend they
negotiated core discovery in an expedited fashion; Defendants perceive discovery as very
limited, noting that O’Charley’s voluntarily produced approximately 180 pages of
documents, and no depositions were taken. In brief, Plaintiffs contend they won a significant
battle without going to war, meaning a trial on the merits. Defendants disagree, noting that
Plaintiffs never attempted to enjoin or otherwise prevent the closing of the tender offer or the
merger, Plaintiffs did not seek class certification, and there was no settlement. The case was
simply dismissed for failure to state a claim.
While the motions to dismiss were pending, Plaintiffs filed a motion seeking $850,000
in attorneys’ fees and expenses based on the common law substantial benefit doctrine. The
plaintiffs also filed a response to the Rule 12.02(6) motions advising the court the motions
were not opposed; however, Plaintiffs requested that the trial court maintain jurisdiction to
adjudicate their motion for attorneys’ fees. An agreed order was submitted granting the
motions to dismiss with prejudice, which was accordingly entered by the chancellor on
August 13, 2012; the order expressly stated that the court retained jurisdiction over the
outstanding issue of Plaintiffs’ attorneys’ fees.
Following a hearing, the trial court denied attorneys’ fees for four reasons outlined in
the order: (1) under the common fund doctrine in Tennessee, Plaintiffs had not secured a
tangible recovery from which others in the action could benefit; (2) the putative “class
action” did not constitute a shareholder derivative suit which would potentially trigger
attorneys’ fees under Tennessee Code Annotated § 48-17-401; (3) even if the substantial
benefit doctrine elucidated in the derivative action statute applied to class actions in this
state, Plaintiffs had not demonstrated that a substantial benefit had been achieved for
O’Charley’s shareholders; and (4) assuming, arguendo, that Plaintiffs were entitled to a fee
award, the documentation to support the Fee Application was patently insufficient and the
fees were excessive and in contravention to the factors set forth in Tennessee Supreme Court
Rule 8.
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Plaintiffs appeal the denial of attorneys’ fees on three grounds which we restate. First,
we are asked to determine whether the trial court erred in determining that the common law
substantial benefit doctrine did not apply. The two remaining issues presume the doctrine
should be applied. Specifically, Plaintiffs also appeal whether the supplemental Schedule
14D-9 disclosures produced by Defendants conferred a substantial benefit warranting
attorneys’ fees and whether under the substantial benefit doctrine it was necessary to submit
detailed time and expense records. We begin our analysis with the first issue, as it is wholly
dispositive of this appeal.
S TANDARD OF REVIEW
As the issues are framed, our determination hinges upon the proper interpretation of
Tennessee statutes, the common law, and their application to the facts of this case. The
threshold issue is whether under the laws of this state, Plaintiffs have a right to seek recovery
of attorneys’ fees under the common law substantial benefit doctrine. This state’s
constitution, statutes, judicial decisions, and applicable rules of common law convey the
public policy of Tennessee. Cary v. Cary, 937 S.W. 2d 777, 781 (Tenn. 1996). The
determination of this state’s public policy is primarily the role of the General Assembly;
however, if the constitution and our statutes are silent and the area is governed by common
law doctrines, it is the “province of the courts” to consider the public policy of the state as
reflected in the common law. Id. Whether a common law doctrine applies in a given case is
a question of law for the court to decide. See e.g. House v. Estate of Edmondson, 245 S.W.3d
372, 378 (Tenn. 2008) (considering the application of the common law common fund
doctrine). Additionally, issues involving the construction of statutes and their application to
facts involve questions of law. King v. Pope, 91 S.W.3d 314, 318 (Tenn. 2002). Accordingly,
our standard of review on this issue is de novo, affording no presumption of correctness to
the trial court’s conclusions of law. Id.; Kline v. Eyrich, 69 S.W.3d 197, 203 (Tenn. 2002).
A NALYSIS
In litigation in this state, the American Rule governs the payment of attorneys’ fees;
attorneys must look solely to their own client for payment of their fees. Kline v. Eyrich, 69
S.W.3d 197, 204 (Tenn. 2002); Fossett v. Gray, 173 S.W.3d 742, 752 (Tenn. Ct. App. 2004).
As the Tennessee Supreme Court has explained:
This Court has adhered strictly to the guiding principle that the American Rule,
prohibiting an award of attorney fees, will apply unless a contract specifically
and expressly creates a right to recover ‘attorney fees’ or some other
recognized exception to the American Rule is present.
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Cracker Barrel Old Country Store, Inc. v. Epperson, 284 S.W.3d 303, 310 (Tenn. 2009).
(emphasis added).
In addition to contract, statutory provisions may also operate as exceptions to this
Rule. See J & B Investments, LLC v. Surti, 258 S.W.3d 127, 138 (Tenn. Ct. App. 2007);
House, 245 S.W.3d at 377-78; Kline, 69 S.W.3d at 204. However, in order for the court to
award attorney’s fees to a prevailing party under the umbrella of either contractual or
statutory authority, a clear intent of the parties or the General Assembly, respectively, must
be evident. See e.g. Cracker Barrel, 284 S.W.3d at 310-12.
The only other recognized exception to the American Rule, which is at issue here, is
the common law common fund doctrine. See House, 245 S.W.3d at 377-78; Kline, 69 S.W.3d
at 204. The common fund doctrine may be invoked if the attorney has succeeded “in
securing, augmenting, or preserving property or a fund of money in which other people are
entitled to share in common.” House, 245 S.W.3d at 377 (quoting Travelers Ins. Co. v.
Williams, 541 S.W.2d 587, 589-90 (Tenn.1976)). In such a case, the attorney may oblige the
beneficiaries of the fund or property to contribute to his or her fee by assessing that fee
directly against the fund or property itself. Id.
In this case, however, Plaintiffs do not rely on any of the “recognized exceptions” to
the American Rule. Moreover, Plaintiffs concede the common fund doctrine does not apply.
Nevertheless, and not to be deterred, Plaintiffs ask that we take this opportunity to implement
the common law substantial benefit doctrine, which they insist has “deep roots” in Tennessee
law.
The substantial benefit doctrine has been described as “one that accomplishes a result
which corrects or prevents an abuse which would be prejudicial to the rights and interests of
the corporation or affect the enjoyment or protection of an essential right to the stockholder’s
interest.” Mills v. Electric Auto-Lite Co., 90 S. Ct. 616, 627 (1970) (citing Bosch v. Meeker
Coop. Light & Power Ass’n, 101 N.W. 2d 423, 425-27 (Minn. 1960)). Thus, it is an
additional “equitable exception” to the American Rule, one that has developed in the context
of federal litigation as an extension of the common fund doctrine. See Hall v. Cole, 93 S. Ct.
1943, 1946-1947 (1973).
In Tennessee, however, this doctrine has enjoyed very limited application and only
in the context of Tennessee Code Annotated § 48-17-401(d)(1), which governs shareholder
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derivative litigation.1 Although this action involves shareholder litigation, it is undisputed by
the parties that this is not a derivative action. To the contrary, this is a putative “class action.”
The foregoing notwithstanding, Plaintiffs contend that the substantial benefit doctrine
is well-entrenched in the common law of our state, and it should therefore be available in
class actions. For this proposition, Plaintiffs cited three appellate decisions, Marable v.
Jordan, 24 Tenn. 417 (Tenn. 1844), Grant v. Lookout Mtn., Co., 28 S.W. 90 (Tenn. 1894),
and the concurring opinion in Hannewald v. Fairfield Cmtys., Inc., 651 S.W. 2d 222, 231
(Tenn. Ct. App. 1983) (Franks. J., concurring). We respectfully disagree with Plaintiffs’
conclusion, for neither Marable nor Grant were premised on the substantial benefit doctrine.
Significantly, Marable does not even contemplate the award of attorney’s fees. Although the
phrase “substantial benefit” is utilized in Grant, the Tennessee Supreme Court was merely
asked to consider a tangible award of property obtained on behalf of a company by a
derivative plaintiff, Grant, 28 S.W. at 92, which by definition, is akin to the common fund
doctrine, not the substantial benefit doctrine. More importantly, Grant has been superseded
by Tennessee Code Annotated § 48-17-401. As for the concurrence in Hannewald, we find
it unpersuasive. It is, therefore, our conclusion that the substantial benefit doctrine is not
entrenched in our common law.
Alternatively, Plaintiffs invite us to adopt the substantial benefit doctrine; this
invitation by Plaintiffs is based on Mills v. Electric Auto-Lite Co., wherein the United States
Supreme Court extended the rationale of the common fund exception to employ the
substantial benefit doctrine in a shareholder derivative suit where no monetary fund was at
stake. Mills, 90 S. Ct. at 627-28. We respectfully decline the invitation, for Mills is both
factually and procedurally distinguishable.
Mills was a derivative action that was initially brought by shareholders of Electric
Auto-Lite Company to forestall a merger with Mergenthaler Linotype Company; however,
the petitioners did not seek a temporary restraining order, and the merger vote went ahead
as scheduled. Id. at 618. The petitioner later filed an amended complaint to set aside the
unlawful merger claiming violation of federal securities laws including allegations that a
proxy statement distributed by management to solicit votes in favor of a merger was
misleading. Id. When the petitioners filed a partial motion for summary judgment on this
particular issue, the district court ruled that the claimed defect in the proxy statement was a
material omission which caused injury to the petitioners and granted an interlocutory
judgment on the issue of liability. Id. at 618-19.
1
Specifically, this provision states that the trial court may order “[t]he corporation to pay the
plaintiff’s reasonable expenses, including counsel fees, incurred in the proceeding, if the court finds that the
proceeding has resulted in a substantial benefit to the corporation.”
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On interlocutory appeal, the Seventh Circuit Court of Appeals affirmed in part and
reversed in part. It affirmed the determination that the proxy statement was materially
deficient, but reversed on the issue of whether the material omission had a causal relation to
the outcome of the vote on the merger. Id. at 619. The United States Supreme Court affirmed
the Court of Appeals ruling that the shareholders had established their cause of action;
however, as for the issue of liability, the Court found that the shareholders were entitled to
prevail on the issue of liability and, thus, the district court’s grant of summary judgment in
favor of the shareholders should have been affirmed. Id. at 619-20. In so holding, the
Supreme Court concluded that although there was no express statutory authorization under
federal securities law, the petitioners were entitled to an interim award of reasonable
attorneys’ fees and expenses pursuant to the substantial benefit doctrine. Id. 625-26. In a
departure from the traditional American Rule, the Court observed that in the context of
shareholder derivative suits, reimbursement of attorneys’ fees had been permitted by some
courts where the litigation conferred a substantial benefit on the members of an ascertainable
class, or where “the expenses incurred by one shareholder in the vindication of a corporate
right of action can be spread among all shareholders through an award against the
corporation, regardless of whether an actual money recovery has been obtained in the
corporation’s favor.” Id. at 626-27. The Supreme Court further explained:
To award attorneys’ fees in such a suit to a plaintiff who has succeeded in
establishing a cause of action is not to saddle the unsuccessful party with the
expenses but to impose them on the class that has benefitted from them and
that would have had to pay them had it brought the suit.
Id. at 628. (emphasis added).
As we stated earlier, Mills is procedurally distinguishable because, unlike here, the
plaintiffs in Mills prevailed on summary judgment. Here, Plaintiffs’ complaint was dismissed
for failure to state a claim, thus, Plaintiffs did not survive the pleading stage. Therefore,
Plaintiffs have not “succeeded in establishing a cause of action,” a condition precedent to
application of the substantial benefit doctrine. Id. at 628; see also Hall v. Cole, 93 S. Ct. at
1946 (holding the substantial benefit doctrine applied to award attorney’s fees to
a“successful” plaintiff under the Labor-Management Reporting and Disclosure Act of 1959).
Moreover, to saddle Defendants with attorneys’ fees in this matter would be in direct
contravention to the plain language of Tennessee Code Annotated § 20-12-119. This
statutory provision awards reasonable attorney’s fees to the parties who have successfully
been granted dismissal for failure to state a claim, not the parties’ whose pleadings were
found insufficient.
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We are constrained to apply the American Rule “strictly” and commensurate with the
“recognized exceptions” within the laws of this state, see Cracker Barrel, 284 S.W.3d at 396-
97, and Plaintiffs have presented no legal authority or basis upon which they are entitled to
recover their attorneys’ fees. Accordingly, we affirm.
I N C ONCLUSION
The judgment of the trial court is affirmed, and this matter is remanded with costs of
appeal assessed against the appellants/plaintiffs.
______________________________
FRANK G. CLEMENT, JR., JUDGE
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