Covered Bridge Resort on Waldens Creek, LLC (Seller) sold its interest in a resort development to Tennessee Covered Bridge, LLC (Purchaser), with Seller financing the sale and Purchaser securing the debt with a mortgage. Mountain National Bank (Bank) agreed to provide a construction loan contingent upon its mortgage being in first position, leading Seller to subordinate its mortgage in exchange for personal guarantees from Purchaser’s members. After Purchaser defaulted, it was revealed that the members refused to execute the guarantees. Seller initiated legal action against the Bank, Purchaser, and the Lawyers who prepared the sale documents. During depositions, the Bank’s loan officer was instructed by the Bank’s counsel not to answer certain questions due to privilege, prompting Seller to file a motion to compel, which the trial court granted, determining that the information sought was not privileged. An interlocutory appeal was permitted, and the appellate court affirmed the trial court's decision to grant the motion to compel and to hold the Bank's motion for summary judgment in abeyance pending further discovery. The case also involved Tennessee Covered Bridge Clubhouse, LLC, whose interests were aligned with Purchaser. The court's ruling was delivered by Judge Charles D. Susano, Jr., with participation from Judges Herschel P. Franks and D. Michael Swiney.
Key points include the reliance on personal guaranties from Purchaser’s members and the real property for the Bank's deed of trust, with Seller required to subordinate its mortgage to the Bank's. Mr. Melton approached Seller, assuring them of Purchaser's financial strength and the members' commitment to execute personal guaranties. This assurance led Seller to agree to the subordination. The Bank, which had a longstanding relationship with the Lawyers, hired them to manage the transaction, including the subordination and personal guaranties.
The Lawyers sent closing documents to Seller via express mail, including a "Seller/Buyer Disclosure and Consent to Intermediary Representation," detailing the Lawyers' role as intermediaries and their obligations to multiple clients. Seller claims that the executed documents differed from the agreed terms, specifically that the subordination was intended for only the first three phases of development, while the closing documents applied to all five phases. Additionally, the purchase agreement reportedly lacked a requirement for personal guaranties from Purchaser's members, although blank copies of the guaranties were included. Seller believed the members would execute these guaranties, bolstered by a letter from the Lawyers promising to send them. However, after about a year of false assurances, the Lawyers informed Seller that Purchaser's members were unwilling to provide the guaranties, enclosing a letter from Purchaser confirming this refusal.
Lawyers informed all parties in March 2007 that the members of Purchaser would not provide personal guaranties to Seller. Following Purchaser's default on payments, Seller initiated legal action seeking damages attributed to this default, which Seller contends would not have occurred had the guaranties been executed. The amended complaint references legal malpractice by the Lawyers, negligence by the Bank, and breach of contract by Purchaser.
Seller alleges that the Bank, through its employee Mr. Larry Melton, negotiated a Subordination Agreement with Seller, promising guaranty agreements from the Guarantors if Seller subordinated its Deed of Trust to the Bank’s. The Bank assured Seller of the financial stability of Purchaser and the Guarantors and was responsible for securing the personal guaranties. The Bank's failure to confirm the execution of these guaranties before closing the construction loan is cited as a direct cause of Seller's damages. Seller seeks rescission of the subordination agreement to regain priority over the Bank regarding the mortgages.
The Lawyers contended they acted as intermediaries, not as advocates for Seller. During Mr. Melton's deposition, Seller explored several topics, including Melton's belief that the Lawyers were acting on Seller's behalf, and communications regarding the personal guarantees. The Bank's counsel objected to these inquiries based on attorney-client privilege. Melton testified that he believed the personal guaranties were being provided; had he known otherwise, he would have halted the loan closing. The Lawyers provided interrogatory responses indicating that they communicated with Melton about the transaction's closing and loan document structure. Additionally, a letter from Purchaser stated that personal guarantees were not negotiated and would not be signed, which was communicated to Seller's manager, who intended to discuss it with Purchaser's principals.
Charlie R. Johnson informed Larry Melton that the Purchaser's members would not sign a personal guaranty for the Seller. Despite this, Melton requested the personal guaranty documents due to a prior request from Larry Johnson. The Lawyers had no obligation to secure executed personal guaranty agreements for the Seller, as the Seller failed to negotiate for them and they were not required by the terms of the contract the Seller voluntarily entered. The Seller was aware that the Purchaser's members did not execute these agreements around April 2, 2007, or shortly before or after closing.
The Seller filed a motion to compel responses from Melton, which the trial court granted. The court ruled that communications between the Bank and the Lawyers were not protected by attorney-client privilege due to the Lawyers' dual representation of both the Seller and the Bank, which created no reasonable expectation of confidentiality among the parties involved. The court referenced an American Law Reports article regarding the inapplicability of privilege in dual representation situations.
The Bank claimed it could not be liable for the Lawyers' actions as dual agents, thus asserting that the Seller's liability claims against the Bank should pertain solely to the Lawyers' conduct. The court acknowledged that the Bank might be liable for improper handling of transaction-related information, pending trial facts. The motion for summary judgment was held in abeyance until discovery was completed. The Bank sought permission for an interlocutory appeal, which the trial court granted, and this Court also granted the Bank's application without specifying the issues to be addressed.
The Bank poses several legal questions:
1. Whether two adverse parties using the same attorneys for separate transactions can be considered "jointly represented," impacting the waiver of attorney-client privilege.
2. If a trial court can compel the disclosure of attorney-client communications at the request of a third party claiming joint representation, given that the existence of the attorney-client relationship is a disputed factual issue.
3. If joint representation is established, whether the court can mandate the disclosure of all communications between the joint clients and their attorneys without assessing if the communications pertain to matters of "common interest."
4. In cases of dual agency, whether Tennessee law protects a principal from the tortious conduct of a dual agent, potentially leading to the dismissal of a Seller's negligence claims against the Bank.
The document emphasizes that a trial court's decision regarding the discovery of privileged material is subject to an abuse of discretion standard, which allows for a less rigorous review of decisions and acknowledges that the court has multiple acceptable options. However, reviews must ensure that the lower court considered applicable laws and relevant facts appropriately. Discretionary decisions must be supported by evidence, apply proper legal principles, and fall within acceptable alternatives.
The discussion highlights a potential "Catch 22" in discovery disputes involving privilege claims: if the existence of an attorney-client relationship is a factual question, the Bank contends that the trial court erred by removing this issue from jury consideration, arguing that courts should defer such decisions until after a jury resolves underlying factual disputes.
The Bank's argument that communications could be concealed under privilege until it is too late is rejected, consistent with the Supreme Court’s opinion in Lee Medical, which asserts that trial courts must address privilege issues during the discovery phase. The trial court can make factual findings regarding discoverability, which are presumed correct on appeal unless evidence suggests otherwise, with rulings reviewed for abuse of discretion.
The trial court found that the communications between Mr. Melton and the Lawyers were not privileged due to the lack of an expectation of privacy during discussions involving multiple parties (Bank, Seller, Purchaser, and Lawyers) that were aimed at finalizing a transaction. It clarified that the attorney-client privilege is not absolute and only protects communications intended to be confidential. The burden of proof lies with the party claiming privilege, and there was substantial evidence supporting the trial court’s finding that the communications were not made with confidentiality in mind.
Consequently, the trial court did not err in determining that the communications were not privileged or in granting the Seller’s motion to compel. The case did not warrant a decision on adopting the “joint client exception” for attorney-client privilege, as the principles for such exceptions vary across cases and jurisdictions, and the current ruling aligns with those principles.
The trial court determined that the communications in question were not protected by attorney-client privilege, a conclusion the appellate court upheld. The court found no error in the trial court's decision to hold the Bank's motion for summary judgment in abeyance pending the completion of discovery, stating that the record was incomplete and might yield additional evidence regarding the Bank's duty to the Seller. The Bank contended that without a written agreement, it could not have assumed a duty to the Seller per Tenn. Code Ann. § 45-1-127(a). However, the appellate court referenced a conflicting case, Morimanno v. Middleton, where a verbal assurance from a bank led to liability. Additionally, the court noted that the Bank's late argument in its reply brief prevented the Seller from responding, which is considered improper. The court emphasized that deciding on the Bank's entitlement to summary judgment without a trial court's prior ruling would be inappropriate for an interlocutory appeal. Ultimately, the appellate court affirmed the trial court's order, taxed costs to the appellant, and remanded the case for further proceedings.
