In the case of Dawson v. Pittco Capital Partners, L.P., C.A. No. 3148-VCN (Del. Ch., Jan. 31, 2013), the Court of Chancery ruled on the application of legal fees of the Plaintiffs, Dale E. Dawson and Bruce H. DeWoolfson, in connection with a declaratory judgment action regarding future obligations of Defendant LaneScan, LLC (“LaneScan”) to repay loans under Notes issued in 2004. After reviewing the underlying Notes upon which the dispute centered, the Court entered an order awarding attorneys’ fees, but limited such fees to “reasonable” attorneys’ fees, the amount of which would require further review of the Court.
The Plaintiffs obtained a declaratory judgment confirming their continuing rights under the Notes and the Security Agreement executed by LaneScan. LaneScan had unsuccessfully asserted that the Notes had been extinguished because of a merger. Relying upon the language of the Notes, and having been successful in the underlying dispute, Plaintiffs have sought to recover their attorneys’ fees and expenses.
The Court applied Tennessee law to the matter, and stated as follows:
“It is the Court’s duty to enforce contracts according to their plain terms.” Cocke Cty Bd. of Highway Comm’rs v. Newport Utils. Bd., 690 S.W. 2d 231, 237 (Tenn. 1985). In addition, “[i]f the language of the contract is clear and unambiguous, the literal meaning controls the outcome of the dispute. In such a case, the contract is interpreted according to its plain terms as written, and the language used is taken in its plain, ordinary, and popular sense.” Maggart v. Almay Realtors, Inc., 259 S.W.3d 700, 704 (Tenn. 2008). Agreements permitting the prevailing party to recover its attorneys’ fees are enforceable, but they are “strictly construed.” Adkins v. Chrysler Fin. Corp., 344 Fed. App’x 144, 148 (6th Cir. 2009).
Section 2.3 of the Notes, entitled “Remedies” contained potentially conflicting language upon which each side relied to support their position. The first sentence began with the phrase “Upon the occurrence of an Event of Default hereunder…” LaneScan argued that no default had occurred given that payment is not due until 2014, and therefore this phrase precluded a granting of fees to the Plaintiffs. However, sentence two of Section 2.3 indicated that LaneScan “shall pay all reasonable costs and expenses incurred by or on behalf of [plaintiffs] in connection with [Plaintiffs] exercise of any or all of its rights and remedies under this Note, including … reasonable attorneys’ fees.”
Plaintiff argued that moving for declaratory relief was a valid exercise of its “rights or remedies” under the Notes. Moreover, though Defendant’s payment was not yet due, it had asserted that the Notes had been extinguished as a result of the merger, and essentially repudiated the contract by effectively announcing that it would not pay the debts evidenced by the Notes. The Court held that Plaintiffs’ interpretation of the Notes requiring payment of attorneys’ fees was correct.
The Court rejected LaneScan’s assertion that Tennessee law precludes attorneys’ fees in connection with declaratory judgment actions. In addition, the Court found that the debate was not so much over what the law of Tennessee provided, but what the Notes provide about the agreement of the parties with respect to attorneys’ fees.
While the Court awarded fees to the Plaintiffs, it indicated that it was not at the stage where the fees to be awarded could be determined. Plaintiffs did not prevail on all of their claims in the underlying litigation, and LaneScan argued that the fees should be limited to those claims on which Plaintiffs prevailed. The Court determined that the effort would require some assessment of the overall reasonableness of the fee application.