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Knight v. Harris

Court of Appeals of Tennessee, Nashville

January 11, 2018

ALFRED H. KNIGHT, ET AL.
v.
TYREE B. HARRIS, IV

          Session October 3, 2017

         Appeal from the Chancery Court for Davidson County No. 11-1045-III Ellen H. Lyle, Chancellor

         This case arises out of the dissolution of a law firm and the resulting accounting. The trial court held that Appellant, who withdrew as a member of the Appellee/Firm, converted a portion of an earned fee by withdrawing the fee directly from the Firm's trust account. The trial court further held that the conversion was done through concealment so as to warrant an award of punitive damages. Appellant appeals the trial court's finding of conversion, the award of punitive damages, and its award of various accounts receivable and payables. We reverse the trial court's award of punitive damages against Appellant and reduce the compensatory damages award.

         Tenn. R. App. 3 Appeal as of Right; Judgment of the Chancery Court Reversed in Part, Affirmed in Part, and Remanded

          Katherine Anne Brown, Nashville, Tennessee, for the appellant, Tyree Bryson Harris, IV.

          Robert L. Delaney and James Leroy Weatherly, Jr., Nashville, Tennessee, for the appellee, Willis & Knight, PLC.

          Kenny Armstrong, J., delivered the opinion of the court, in which Andy D. Bennett and W. Neal McBrayer, JJ., joined.

          OPINION

          KENNY ARMSTRONG, JUDGE

         I. Background

         Appellant Tyree B. Harris, IV is an attorney licensed in Tennessee. In 1999, Mr. Harris joined Appellee Willis & Knight (the "Firm") as a partner. At that time, the Firm operated as a partnership, and there were five partners: William R. Willis, Jr. (father of Russell Willis), Alfred H. Knight, Alan Johnson, Reese Willis, Russell Willis (William R. Willis, Jr.'s son), and Marian Harrison. Russell Willis was made managing partner of the Firm in 1997. When Mr. Harris joined the Firm, he did not execute a partnership agreement, nor was he required to make a capital contribution. Rather; Mr. Harris met with William Willis, a senior partner, and based on the business Mr. Harris anticipated bringing to the Firm, an agreement was reached as to Mr. Harris' percentage of ownership. The percentage of ownership of each partner varied from year-to-year; however, each partner had an equal vote and expenses were shared equally, without regard to actual overhead per partner or percentage of ownership. Effective January 1, 2003, the Firm registered as a PLC with the State of Tennessee. Partners joined and left the Firm such that, by January 1, 2010, there were only three partners remaining: Russell Willis, Mary Arline Evans, and Mr. Harris. As the number of partners decreased, the Firm's revenue also decreased.

         The building where the Firm's offices were located was owned by W&K Properties, which was owned by Alfred H. Knight and William R. Willis, Jr. In November 1978, the Firm entered into a triple net lease agreement with W&K Properties. By 2010, the lease was month-to-month with rental amounts varying monthly; at times, the monthly rent was as high as $10, 000.00. However, the Firm was no longer occupying all of its leased space due to the decrease in employees and partners. Some adjustment to the Firm's overhead was needed. To that end, in early 2010, Russell Willis, as managing partner, met with his father, William Willis, to discuss a reduction in the rent. William Willis allegedly agreed to defer 25% of the total rent amount, but allegedly rejected the Firm's demand for a 50% reduction in the rent.

         Due to his parents' declining health, Russell Willis could not continue to serve as managing partner of the Firm. In approximately June of 2010, Mr. Harris assumed the position of interim managing partner until Russell Willis resumed his practice full time in late August of 2010.

         At issue in this appeal is the distribution of a fee of $336, 857.57, which the Firm received from its client, Restaurant Supply Solutions, Inc. (the "RSSI Fee"). Restaurant Supply Solutions, Inc.'s check was dated February 24, 2010; however, there is some dispute as to when the Firm received the check. Regardless, Mr. Harris was the principal lawyer on the case and was assisted by associate Katherine A. Brown. A dispute arose between the Firm and the client as to a portion of the fees (i.e. approximately $70, 000.00--$80, 000.00 in fees paid for work done by accountants, who were called as experts in the case). Mr. Harris agreed to place the entire fee (not just the disputed portion) into the Firm's trust account pending resolution of the client's dispute. Angela Haynie Scherzer, the Firm's bookkeeper, testified that she deposited the check for the RSSI Fee into the Firm's trust account on or about May 28, 2010. At some point between May 28, 2010 and the end of the year, Mr. Harris, Russell Willis, and Mary Arline Evans met to discuss allocation of the RSSI Fee. They allegedly agreed that the RSSI Fee would be allotted as follows: Mr. Harris would receive $225, 000.00; Ms. Evans would receive $70, 000.00, and Russell Willis would receive $41, 857.57. This agreement was not reduced to writing. At the time the allocation decision was made, the Firm was allegedly current on all bills including rent.

         Ms. Evans left the Firm effective September 14, 2010, which was before the client's accountant dispute was settled, but she allegedly expected to receive her portion of the RSSI Fee. Mr. Harris testified that the partners voted to distribute the RSSI Fee directly from the Firm's trust account to ensure that each partner would pay his or her pro rata share of the Firm's expenses. Ms. Evans testified that she did not recall whether the vote had included an agreement that the funds would be distributed from the trust account. Regardless, Mr. Harris caused three checks to be issued from the Firm's trust account, in the amounts outlined above. The checks, which were dated January 31, 2011, were written by Ms. Scherzer, the Firm's bookkeeper. Mr. Harris then signed his $225, 000.00 check (number 1466) and Ms. Evans' $70, 000.00 check (number 1472). Mr. Harris delivered Ms. Evans' check to her at her new office. As to Mr. Willis' $41, 857.57 check, Mr. Harris testified that he caused the check to be issued but did not sign the check (because Mr. Willis, as a partner, could sign the check himself). It is undisputed that Mr. Willis never cashed his check, and the Firm ultimately transferred the remaining RSSI Fee (i.e., Mr. Willis' portion of the fee) into the Firm's operating account to pay expenses.

         During the period Mr. Willis was not practicing full time, cash flow began to be a problem for the Firm. Allegedly, Russell Willis had not billed his clients during the period that he was helping with his parents, i.e., approximately 3 months. There is also a dispute, in this case, concerning the carry-over of approximately $70, 000 in client expenses on William Willis' capital account. Mr. Harris asserts that these expenses should have been written off (before he joined the Firm), but were carried over in an effort to inflate William Willis' capital account.

         Concerning the rent to W&K Properties, the Firm's cash flow during the first half of 2010 was sufficient to continue to pay the full amount of rent. Allegedly, Russell Willis represented to the other two partners that he was still negotiating a reduction of rent with William Willis. Expecting a reduction in rent, Mr. Harris contends that, after paying full rent through June 2010, the Firm decided to forego further payments because it expected that the amount paid to date for 2010 would cover the entire year if the rent had been reduced as expected. Ms. Scherzer testified that Mr. Harris was the person who told her to withhold rent after June 2010. Mr. Harris was the managing partner of the Firm at that time.

         In July 2010, William Willis died, and Russell Willis became a part owner (19%) of the building where the Firm was located. Mr. Harris alleges that Russell Willis never demanded rent and never disclosed that he had an ownership interest in the building after the death of William Willis. Regardless, in April 2011, representatives of W&K Properties made demand on the Firm for the full rent arrearage accruing from July 1, 2010.

         Mr. Harris left the firm effective May 31, 2011. On July 29, 2011, Alfred H. Knight, W&K Properties, and Willis & Knight filed suit against Mr. Harris for fraud, conversion and outlandish conduct stemming from Mr. Harris' withdrawal of the $225, 000.00 RSSI Fee from the Firm's trust account. The plaintiffs argued that these misappropriated funds should have been deposited into the Firm's operating account and used to pay Firm debts before being distributed to members of the Firm. The Firm sought $225, 000.00 in compensatory damages, $100, 000.00 in punitive damages, and an unspecified amount to pay Mr. Harris' "negative" capital account balance. The complaint further alleged that Mr. Harris engaged in a "fraudulent scheme" to hide income from the juvenile court in order to reduce his child support obligations. W&K Properties sought lost rent in the amount of $72, 591.00 and attorney fees.

         On October 6, 2011, Mr. Harris filed an answer, counter-complaint and third-party complaint, denying that he converted any funds from the Firm's trust account. Based on Russell Willis' alleged renegotiation of the rent amount, Mr. Harris further denied that W&K Properties was owed rent. Mr. Harris averred that he had been purposefully misled concerning the lease agreement between the Firm and W&K Properties. Mr. Harris further averred that he was misled concerning Russell Willis' ownership interest in the building, which interest, Mr. Harris alleged, affected Russell Willis' ability to be unbiased in the rent negotiations he made on behalf of the Firm. Mr. Harris also alleged that William Willis' capital account had been falsely inflated, and that Russell Willis breached his fiduciary duty by failing to maintain time records and failing to bill his clients, causing financial detriment to the Firm. Mr. Harris counter-complaint further alleged that Russell Willis appropriated all of Mr. Harris' accounts receivable after he left the Firm.

         Alfred Knight died on October 10, 2011, and his estate was substituted as a party. On Mr. Harris' motion to dismiss W&K Properties' claims, the trial court entered an order on June 13, 2012, dismissing all allegations by W&K Properties as to alleged improprieties of fee allocation, testimony in juvenile court, and punitive damages. W&K Properties then withdrew its claim for attorney's fees. The trial court allowed the claim concerning Mr. Harris' personal responsibility for unpaid rent to stand.

         The case was dormant for nearly two years. On September 12, 2014, Russell Willis filed an answer to the Third Party Complaint and asserted a counter-claim against Mr. Harris. On September 22, 2014, The Estate of Alfred H. Knight filed an answer to the Third Party Complaint. On September 26, 2014, Willis & Knight filed an amended complaint alleging fraud, intentional misrepresentation, concealment of material business information, conversion, and breach of fiduciary duty. Six weeks before trial, Willis & Knight was granted leave to file a second amended complaint, by which it sought an award of a $10, 000.00 judgment Mr. Harris received in circuit court for attorney fees he allegedly earned while still with the Firm.

         The case was tried on July 13 through 16, 2015. On Mr. Harris' motion, the trial court dismissed W&K Properties' complaint against Mr. Harris. On July 22, 2015, the trial court entered findings of fact and conclusions of law, finding that Mr. Harris committed conversion, intentional misrepresentation, misrepresentation by concealment, fraud, and breach of fiduciary duty. The trial court dismissed Mr. Harris' counterclaim against Willis & Knight and awarded it a judgment of $31, 000.00 for Mr. Harris' portion of the Firm's debts including rent and accounting fees. The trial court awarded the Firm the $10, 000.00 attorney fee judgment Mr. Harris received in the circuit court case. The trial court also held that punitive damages against Mr. Harris were warranted.

         On July 24, 2015, the Firm filed a motion to amend the ad damnum for punitive damages to increase the demand from $100, 000.00 to $500, 000.00. The trial court set a hearing and allowed time for discovery. The punitive damages portion of the trial was held on February 29 through March 1, 2016. On April 1, 2016, the trial court entered an order, awarding punitive damages in the amount of $90, 000.00.

         On April 28, 2016, Mr. Harris filed a notice of appeal and an appeal bond, which was secured by Mr. Harris' unencumbered residence. The residence is allegedly valued at $800, 000.00. On May 20, 2016, the Firm filed a motion to reject or disapprove Mr. Harris' appeal bond because Mr. Harris owns the residence in joint tenancy with his wife. Subsequently, Mr. Harris filed a second bond, which was signed by his wife.

         On April 29, 2016, the Firm filed a motion to alter or amend. On July 6, 2016, the trial court filed an amended order, increasing the compensatory award to $41, 000.00 based on the trial court's "miscalculation" of the amount of rent owed. The trial court increased Mr. Harris' portion of the rent to $30, 609.00, awarded accountants' fees of $7, 262.00, and added an additional $17, 101.50 to the judgment against Mr. Harris for monies owed by the Firm to the William Willis estate for the balance remaining in William Willis' capital account. In sum, the Firm was awarded $54, 973.00 in compensatory damages. Initially, punitive damages were awarded in the amount of $90, 000.00; however, in its order on Appellee's motion to alter or amend (see infra), the trial court imposed a "three times multiplier of compensatory damages" in setting the total amount of punitive damages at $164, 919.00. In addition to the $10, 000.00 previously awarded, the total judgment award was increased to $229, 892.00. Then, after a hearing on August 12, 2016, the trial court awarded the Firm discretionary costs of $6, 714.13. In view of the increased judgment, on July 13, 2016, the trial court entered an order granting the Firm's motion to reject Mr. Harris' appeal bond and requiring Mr. Harris to post a $225, 000.00 cash bond. Mr. Harris appeals.

          II. Issues

         Mr. Harris raises the following issues as stated in his brief:

1. The trial court erred in finding the Appellant guilty of conversion, intentional misrepresentation and misrepresentation by concealment, fraud and breach of fiduciary duty, and awarding damages in the amount of $54, 973 and the "Carter Fee"
a. The distribution of the RSSI fee to the members of the firm was made in good faith and in accordance with the express agreement of the members.
b. The trial court erred in awarding $30, 609.00 in unpaid rent as compensatory damages.
c. The trial court erred in awarding $7, 262.00 in accounting fees as compensatory damages.
d. The trial court improperly awarded 50% of the positive capital account of Mr. William R. Willis as an element of compensatory damages.
e. The trial court erred in allowing Appellee to amend its complaint after the running of the statute of limitation and in awarding Appellee the Carter Fee as additional damages.
2. The trial court erred in failing to grant the Appellant's motion in limine re: spoliation requesting a negative inference against Appellee for destroying business records of Willis & Knight, PLC.
3. The trial court erred in finding that the Appellant's conduct rose to the level of misconduct which would justify ...

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