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Great American Opportunities, Inc. v. Patterson

Court of Appeals of Tennessee, Nashville

April 6, 2018


          Session August 23, 2017

          Appeal from the Chancery Court for Davidson County No. 11-1419-IV Russell T. Perkins, Chancellor

         This is a breach of contract action in which the plaintiff employer filed suit against its employee, claiming that he was liable for balances on his commission and sales accounts and for breach of loyalty pursuant to the terms of the employment agreement. Following a bench trial, the court ruled in favor of the employee and ordered the employer to direct the redemption of his stock held in the parent company. We reverse, in part, and hold that the parent company is not obligated to redeem the stock and that the employer is entitled to $15, 000 in damages for unearned compensation as a result of the employee's breach of loyalty. The court's judgment is affirmed in all other respects. We remand for the collection of attorney fees and costs.[1]

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

          Paul S. Davidson, Laura P. Merritt and William Randall O'Bryan, Jr., Nashville, Tennessee, for the appellant, Great American Opportunities, Inc.

          Brad Patterson, Hixson, Tennessee, pro se.

          John W. McClarty, J., delivered the opinion of the Court, in which D. Michael Swiney, C.J. and Andy D. Bennett, J., joined.



         I. BACKGROUND

         Great American Opportunities, Inc. ("GAO"), founded in 1974, provides services and products to promote fundraising activities for schools and civic organizations. GAO is a subsidiary of Southwestern/Great American, Inc. ("Southwestern"), a separate legal entity and a Tennessee corporation. GAO employs commissioned sales representatives who work with individuals within participating schools and organizations to promote fundraising efforts. Brad Patterson ("Employee") worked for GAO as a sales representative from February 2003 through June 16, 2011.

         GAO claimed that it provided Employee with a contract entitling him to a guaranteed draw plus earned commissions for his first two years of employment. GAO asserted that upon the expiration of his initial two-year term, Employee would then be entitled to an unguaranteed draw against earned commissions paid in accordance with a yearly Pay Plan. Employee would also then be responsible for certain business expenses maintained on an open account, referred to by the Parties as the "8000 account."[2]Further, Employee was also then liable for his balance on an open commission account that documented cash advances provided in excess of his actual earned commissions - referred to by the Parties as an overdraw.

         The contract at issue provided, in pertinent part, as follows:

(a) For all services rendered by Employee under this Agreement, [GAO] shall compensate him/her in accordance with the Compensation Schedule which is attached hereto as Exhibit A, and which shall be deemed for all purposes to be an integral part of this Agreement.
(b) Each fiscal year during the term of this Agreement, [GAO] shall cause to be executed in writing a new Compensation Schedule and Sales Representative's Pay Plan, effective July 1 of the new corresponding year, indicating the amount of compensation and the method for payment of said compensation for the services of Employee during the following fiscal year beginning July 1st. The new Compensation Schedule shall be considered a part of this Agreement and shall be known as Exhibit A for the corresponding year. In conjunction with each new fiscal year, [GAO] will advise Employee of his/her applicable Pay Plan to be set forth in a written Notification given in accordance herewith comparable in form to the Addendum made a part hereof.
** *
Modification and Waiver of Breach. No waiver or modification of this Agreement shall be binding unless it is in writing, signed by the parties hereto. No waiver of a breach hereof shall be deemed to constitute a waiver of a further breach, whether of a similar or dissimilar nature.
* * *
Entire Agreement. This Agreement constitutes the entire understanding between the parties with respect to the subject matter hereof, superseding all prior discussions, representations and preliminary agreements, whether written, oral or implied. This Agreement will not be amended or modified except in writing executed by the parties.

         (Emphasis added.). A Notification of Pay Plan, dated February 14, 2003, was attached to the contract and signed by the Parties. The document provided as follows:

         Exhibit A

         Notification of Pay Plan

         ** *

         Compensation in First Year

Monthly Compensation: Employee will receive monthly compensation of $13, 542 for the term [beginning February 17, 2003, and ending February 16, 2004].
Bonus Compensation Opportunity: For any business booked over the $300, 000 net wholesale target outlines above, [GAO] will pay [Employee] a bonus of 10% of the excess net wholesale. The bonus will be accrued at the time the net wholesale is recorded on the books of the company and payable to [Employee] no later than 30 days after the end of the season in which the bonus compensation was accrued.
Compensation in Second Year In the event that [Employee's] Employment Agreement is renewed for the year following the term of his Notification, [Employee] will continue to receive this monthly compensation. However, in that year, $2, 500 of the monthly compensation will be considered salary. The remainder of the monthly compensation will be a guaranteed draw against commissions, bonuses and allowances earned. If aggregate commissions, bonuses and allowances earned as outlined below exceed the aggregate monthly compensation amounts, [GAO] will pay [Employee] excess amount. If, however, the amounts earned do not exceed aggregate monthly compensation amounts, the shortfall (overdraw) will NOT be due and payable to [GAO].
For all lines of business except Magazines, [Employee] will [] earn commissions, bonuses and allowances according to the Company's Experienced Pay Plan in effect at that time. For Magazines, [Employee] will earn commission of 25% of aggregate base wholesale. [Employee] will also earn a bonus of $1.00 for each subscription sold in excess of a base subscription amount to be determined at the time the Employee's employment with [GAO] commences.

(Emphasis added.). The Pay Plans referenced in Exhibit A were not signed by the Parties but were mailed to Employee. The Pay Plans contained the following general terms that remained unchanged throughout Employee's tenure with GAO:

7. Compensation And Draw. [Employee] will receive a monthly compensation, payable semi-monthly, a portion of which may be a base compensation with any remaining amount to serve as an advance or a "draw" against commissions and bonuses earned during the fiscal year as defined in the new hire and experienced sections of this pay plan. For each fiscal year, [Employee]'s applicable Notification of Pay Plan will also note his/her compensation and draw.
8. Adjustments To Compensation And Draw. [GAO] may at its discretion adjust or discontinue [Employee's] monthly compensation at any time if, in the opinion of [GAO] management, [Employee] has not performed at an acceptable level.
9. Draw In Excess of Commission. If at any time the draw paid to [Employee] exceeds commissions earned by more than the amount approved by management, [Employee] may not be paid any additional draw until the excess amount is within approved limits. However, if such a draw is allowed, [GAO] may, at its option, recover the entire aggregate excess draw above commission and bonuses as, among other things, a debt on open account or offset such aggregate excess draw against bonuses, compensation and/or commissions, as the case may be.
** *
14. [Employee's] 8000 Account. [GAO] will provide [Employee] monthly invoices and statements detailing charges to [Employee's] account with [GAO] (the "8000 account"). All charges to [Employee's] account will be reconciled and paid each month. [Employee] must notify Customer Service of billing errors within 60 days of receipt of the applicable monthly statement. Failure to do so constitutes acceptance of charges invoiced.
** *
17. Year-End Settlement of Accounts. All amounts due [GAO] at fiscal year-end may be withheld from bonuses and any other compensation amounts that would normally be paid to [Employee] by August 31 following the close of that fiscal year. These amounts due include but are not limited to draws paid in excess of commission earned, advances in excess of expense allowance earned and charges made to [Employee's] 8000 account. If these compensation amounts due to [Employee] are not sufficient to cover amounts due to [GAO], the excess is due and payable . . . by August 31 following the end of the fiscal year. Or [GAO] may, at its option, offset such amounts as set forth in Paragraph 9.

         According to GAO, Employee was not responsible for his 8000 account or any overdraw for his first two years of employment based upon his specific offer of employment. Beginning in 2005, GAO provided Employee with invoices documenting his 8000 account balance. Employee never reconciled his 8000 account as provided for in the yearly Pay Plans; however, he made a payment of $14, 000 on the account in June 2008. GAO also withheld some of his earnings, referred to as "C-Prize" money, in an attempt to reconcile his account liability. Employee resigned on June 16, 2011, with an outstanding balance of $149, 497.67 on his commission account and $98, 155.85 on his 8000 account.

         GAO filed suit for breach of the employment agreement and quantum meruit. As pertinent to this appeal, GAO claimed that Employee was liable for the balance on the commission account and the 8000 account and that he had breached his duty of loyalty and good faith by:

(a) filing false and fraudulent expense reports concerning work purportedly performed by [him], through his spouse, for [GAO];
(b) falsely representing to [GAO his] intention to remain with [GAO] in the Fall of 2011;
(c) contacting [GAO] customers, while still employed by [GAO], and soliciting the transfer of customers' business to [him] or [his] new business venture.

         GAO claimed that Employee was also liable for wrongful inducement to breach contract by encouraging Shannon Coley, a fellow employee, to breach his contract and join him in a business venture and for misrepresentation and/or fraud, for civil conspiracy by working with Mr. Coley to solicit business.[3] Lastly, GAO claimed that Employee was jointly and severally liable for the wrongful acts of Mr. Coley. GAO sought a judgment in the amount of $247, 653.52, plus prejudgment interest, legal fees, and costs for the balance remaining on the commission and 8000 accounts. GAO also requested damages directly and proximately caused by the breach of Employee's duty of loyalty. The parties later entered into a stipulation prior to trial providing that the court "shall determine the entitlement to, if any, as well as the amounts, of any awards of attorneys' fees and costs."

         Employee denied liability, claiming that he had been advised that he was not and would never be held liable for any balance held on his commission and 8000 accounts. He filed a counter-complaint, in which he asserted, inter alia, claims of fraudulent inducement, negligent misrepresentation, fraud, unjust enrichment, and violations of the Tennessee Consumer Protection Act and the Tennessee Securities Act of 1980. His claims related to promises made to him upon his hiring and his participation in the company stock program. He also requested an accounting to enable him to determine the value of his stock investment. He later amended his counter-complaint to add Southwestern as a counter-defendant.

         The case proceeded to trial in January 2015. James Ring testified that he left Quality School Plans ("QSP"), a similar fundraising business, to start a magazine division at GAO in 2002. [4] He recalled initially working with Rob Corley, Neil Arnold, Jean Laise, and Kurt Gengenbach, all former QSP employees who joined GAO to develop the magazine division. They referred to themselves as the "magazine team" but did not have formal titles at the time. He stated that Employee and James Brigman were among the first potential hires invited to interview in Nashville. He stated further,

[A] typical day would have a potential candidate arrive first thing in the morning, we would pick them up at the airport, or if they drove, obviously, we did not have to do that. And we would have them taken on a tour of Southwestern facilities to see various companies within Southwestern to see how it operated, to learn a little bit about its history.
Then I would take over and interview them to find out more about them and why they would even want to join us. Would talk about what they could expect if they joined us over their first two years and then on into the future.
I would have [Mr. Corley] in marketing spend time with the candidate discussing our various programs, many on the magazine side that we didn't even have at the time. So we had to tell him where we were going.
We would have [Mr. Arnold] talk a little bit about operations and how this company functioned. I would ask [Ms. Laise] to talk to them about our benefit plans, because I'm from Canada. I just wasn't familiar with that part of it.
Then, later in the day, they would sit with Tom McDowell, the [P]resident of the company at the time. And Tom is a real, real people person, and he would spend at least an hour with these candidates. He would explain our stock plan to them and our profit sharing. That's the part he always liked to talk about, the wealth accumulation piece.
* * *
And then I would get together with them and see how interested they were and make sure they understood our commission structure and so forth.
And then they would leave, and we might actually on the spot say, we would like to hire you, and you go home and think about it. We'll get a contract put together and sent out.

         He explained that GAO offered those leaving QSP to start the magazine division a 25 percent commission rate for magazine sales, a salary, and an automobile reimbursement plan, referred to as the Runzheimer program.

         Mr. Ring identified the Employment Agreement at issue and discussed the specific compensation schedule offered to Employee. He further noted that Employee was bound by a duty of loyalty that required him to use his "best efforts" in promoting and soliciting business for GAO. He recalled that Employee was responsible for a territory comprised of certain parts of Northern Georgia and Southeastern Tennessee and that with the exception of his first year of employment, Employee stayed within that territory. Employee never advised him that the Pay Plans did not apply or that he was not receiving payment in accordance with the Employment Agreement.

         Mr. Ring acknowledged that the compensation structure was unique because those coming from QSP were precluded from selling in their previous territory for the first year. The first year, salary was determined based upon prior sales averages with QSP. The second year, representatives were still provided a salary "guarantee" because GAO recognized that there was an adjustment period when the representative returned to his or her previous territory. He explained that the representatives received the same amount of money but that it was broken into two sections - a $30, 000 salary and a sales-based commission. He further acknowledged that the new hires were not responsible for charges on the 8000 account for those first two years. He stated,

After year two, it became part of the regular compensation system with salary, commissions, bonuses, et cetera. There was one exception, though, and I couldn't tell you the exact years. For a few years in there, the magazine group that came over from [QSP] were getting the 25 percent, and there was a lower percentage paid to [the existing GAO representatives] who were just learning the business.[5]

         Other than the commission "bonus", the sales representatives in the magazine division were paid as outlined in the Pay Plans provided to all employees. He identified the Pay Plan allegedly applicable to Employee and acknowledged that the Pay Plan did not indicate the amount of his compensation. He explained that the plans outlined the commission amounts applicable to each individual but did not contain a salary component applicable to Employee.

         Mr. Ring described the 8000 account as follows:

It is an account . . . where representatives can charge various items; for instance, maybe they purchase some samples, charge it to that account. They may want to take advantage of a system where they could have their brochure packets for a school. They could have a personalized parent letter inserted in each one. And if they wanted to do that, of course, there was a charge for it. They could put that against their 8000.
Then on the other - - and there are other things as well. Then on the other side, any C prize money was credited to that account to bring it down.[6]

         He believed the representatives were given monthly statements documenting his or her 8000 account balance. Representatives were permitted to question charges on the account, and GAO rectified erroneous charges. He claimed that Employee was charged with 8000 account expenses even during his first two years of employment. While charged, the expenses were "written off" for Employee's first two years of employment.

         Mr. Ring stated that an employee's 8000 account balance was carried forward to the next fiscal year if not reconciled. He noted that GAO often made a "business judgment" based upon a particular representative's profitability in determining whether the amount could be carried forward or whether payment should be due in full. He recalled that Thomas Belli, who was President of GAO, and Kevin Hawley, who was Vice President of Sales, worked with representatives to reconcile his or her 8000 account balance. Employee even provided a check in partial payment of his 8000 account balance in June 2008. Employee did not indicate the money was not owed or that he was paying the amount under protest.

         Mr. Ring stated that Employee was required to submit program agreements, defined as the school's agreement with the representative to run the fundraising program through GAO. These agreements were essential and necessary for GAO to determine the resources and staff needed to support the sales season and to determine a representative's advances against commission. There were two selling seasons for each school year, namely Fall and Spring. He estimated that approximately 80 percent of a representative's business was completed in the Fall, with the rest occurring in the Spring. Accordingly, representatives were encouraged to "work a season ahead." He explained that schools would sign program agreements with other companies if the representative failed to secure agreements in a timely manner. He noted that Employee worked to re-sign his Fall business in the months of January, February, and March.

         Relative to Ms. Laise, Mr. Ring claimed that she played an administrative role after the initial recruitment process was completed. He denied ever hearing anyone refer to her using a formal title. He acknowledged that he held the formal title of Executive Vice President but claimed that he did not acquire said title until GAO purchased QSP, Canada. He agreed that Ms. Laise received a salary of approximately $150, 000 per year in 2002 and that her pay increased to $165, 000 per year in 2007 and to $173, 250 in 2008. She also participated in the stock program, beginning in 2008. He further agreed that her direct supervisor was listed as Henry Bedford, the Chief Operating Officer at the time who later became the Chief Executive Officer. He noted that himself and the other members of the initial "magazine team" also reported to Mr. Bedford. He agreed that Mr. Bedford identified Ms. Laise as a manager in an email, dated August 18, 2005. He later asserted that he and others were given the title of Vice President for insurance purposes because GAO provided an accidental death benefit based upon the level of his or other position in the company. He surmised that Ms. Laise's title was likely given in accordance with the benefits package. He acknowledged that she was also a former executive for QSP and that she was involved in the negotiations with GAO to hire QSP's former senior management team.

         Mr. Ring admitted that it was "possible" that Employee could have had calls or meetings with Ms. Laise concerning his compensation. He stated,

He could have because, as I testified earlier, she was mandated to get information from the candidates, their W-2s, their sales, and those kind of things, so that we could put together a compensation plan. But that would happen only after we had the full day together and determined if we wanted to go forward. We didn't need to do that in advance of the meeting. But then she should. I'm sure she would.

         He denied ever advising anyone that he or she would never be responsible for 8000 account expenses or an overdraw on the commission account or that his or her salary would never decrease. As lead of the recruitment team, he never made such a promise to any of the 50 people he hired. He acknowledged that he had not confirmed the absence of such representations with Ms. Laise prior to deposition or trial because she no longer worked for GAO.

         Carol Costa testified that she has been employed by GAO as a compensation manager for approximately 27 years. She reports to Timothy Underwood and manages a staff of four people. She is "in charge of all of the pay for the salespeople and the payroll for the administrative staff." Her office also mails the 8000 account statements, which are printed through the Great American Sales Information ("GASI") website. The customer service department, headed by Tracy Armstrong, is responsible for drafting the 8000 account statements, while her department is responsible for drafting the commission account statements. The 8000 account and commission account statements are mailed on a monthly basis.

         Ms. Costa testified that she is also responsible for administering the "part-timer program." She explained that some sales representatives were qualified to receive an assistance allowance to pay someone to work for them. Assistants are paid by GAO in accordance with an hourly rate as documented by the individual sales representative. She stated that Employee received an assistance allowance of $6, 000 for the 2009/2010 fiscal year. She noted that in Spring 2011, Employee continued to submit time cards for his spouse who served as an assistant even though he had exhausted his allowance for the year. Employee normally used his assistant hours in the Fall because most business occurred in the Fall. She questioned Employee, who claimed that his wife was already working on things needed for the Fall season. His request was ultimately approved.

         Ms. Costa identified the Employment Agreement at issue and explained that Employee received a two-year guaranteed salary and that he was not responsible for the balance on his commission and 8000 accounts. She acknowledged that the 8000 account arrangement was never evidenced in writing. She provided that after the initial two-year term, he was paid in accordance with the yearly Pay Plans sent by her office.[7] She confirmed that Employee never received another Notification of Pay Plan and that the yearly Pay Plans were not wholly applicable to him because he received a guaranteed salary and a car allowance program, among other things, as employment incentives. She recalled that the yearly Pay Plans were revised for the 2008/2009 fiscal year to reflect a salary component for all representatives.

         Ms. Costa stated that Employee never indicated that the yearly Pay Plans did not apply to him, that he was not paid in accordance with his agreement, or that he was not responsible for the balances reflected on his statements. She explained that representatives were permitted to object to items listed on the 8000 account within 60 days of receipt of the statement and that any objections to the balance on the commission account should be made within 10 days of receipt of the statement.

          Ms. Costa testified that representatives, including Employee, worked with his or her manager to calculate commission draws in accordance with a "12-pay" system, meaning that their projected earnings were divided into 12 equal payments and paid on a monthly basis each year. She explained,

A 12-pay is a worksheet that the manager works up with the [representative], which it begins with what contracts they have in-house for the upcoming fiscal year. And they equate that into sales and then apply that to the commission rates and say - which tells a [representative] they're going to earn so much for the next 12 months, and that money can be divided . . . from that amount into the upcoming 12 months.

         Representatives were permitted to purchase prizes at the national meeting each year through the bulk buy program, where items selected by the representatives were charged to the 8000 account but reconciled through the 12-pay system. She explained,

When we're doing the 12-pay, there is a section of money before it is spread that goes against the bulk buy, whatever their bulk buy payment was, or if they want to take a certain amount of money up front, that is taken off of the 12-pay first and then the remaining amount is spread.

         Representatives could requests advances for cash prizes, which are deducted from the 12-pay before the remainder of the projected balance is spread into 12 equal payments.

         Ms. Costa identified one of Employee's 12-pay worksheets, which reflected that he was entitled to an annual draw of $105, 000, less a bulk buy payment of $7, 782 and total cash advances of $16, 000, leaving him with 12 equal monthly payments of $6, 768 for the 2010/2011 fiscal year. She believed the bulk buy payment and cash advances evidenced his payment of fundraising expenses. His cash advances were not taxed in accordance with the accountable expense program. She explained,

[The accountable expense program is] an approved program through the [Internal Revenue Service ("IRS")] where we can allow our sales representatives to take nontaxed money during the year, and then they are responsible - they have to turn their receipts in to us. It's their responsibility to turn their receipts in to [GAO], and then we'll offset the nontaxed income with the amount of receipts they've turned in.

         She provided that if Employee only provided $10, 000 in receipts, then GAO would have converted the remaining $6, 000 into income and documented that amount on his W-2.

         Ms. Costa acknowledged that Employee was not responsible for the cost of fundraising for his first two years of employment with GAO. In 2004, he received an advance of $50, 000 for his fundraising efforts, while his bulk buy payment was $5, 500. She provided that these amounts were covered by GAO. Beginning in 2005, money earned through the C-Prize program was applied internally to his 8000 account balance and documented as payroll deductions. Employee's commission draw was also reduced on a number of occasions, beginning in July 2006. She stated that his commission draw was reduced again by $2, 000 per month in February 2009 and by an additional $200 per month in August 2009 and that two additional reductions occurred in February 2010 and January 2011. She provided that Employee did not object to these reductions.

         Relative to Ms. Laise, Ms. Costa confirmed that internal titles were sometimes assigned for purposes of the life insurance program. She identified an internal document that classified Ms. Laise as a vice president for insurance purposes. She identified a different document that provided for Ms. Laise's classification as a manager. She explained that Ms. Laise did administrative work similar to her role. She admitted that her salary was much less than $150, 000 in 2002 and agreed that a $150, 000 salary was "more of an executive-type salary."

         Tracy Armstrong testified that she has been employed by GAO as the director of customer care for approximately 16 years. Her department is responsible for all customer communications. She explained that GAO's customers consist of its representatives, those working with representatives to coordinate a fundraising program, and consumers of products sold through ...

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