RETALIATORY DISCHARGE AND EMPLOYEES WITH CONTRACTS FOR A DEFINITE TERM - THERE IS A DIFFERENCE

Tennessee law protects employees who report illegal acts by their employers from retaliation.   In addition to the statutory protection (Tenn. Code Ann. § 50-1-304), there is a “common law” protection.  But, that common law protection does not apply to all employees. 
In Tennessee, the common law protection against retaliatory discharge applies only to “at-will” employees.  If the employee has an employment agreement for a definite term (e.g., one year), the employee is not an “at will employee.”  He or she is not protected from retaliatory discharge.  
     
What if the employment agreement gives the employer the right to terminate at any time without cause?  That was the question in Petschonek v. TheCatholic Diocese of Memphis.  W2011-02216-COA-R9-CV (Tenn. Ct. App., May 23, 2012).  The contract at issue provided a one year term and stated that the principal could terminate the contract at any time for any reason.  The contract granted the employee 30 days of compensation as liquidated damages if the principal exercised this right.  Likewise, the employee could terminate the contract prior to the end of the term if the employee paid liquidated damages to the employer. 

The court of appeals held that the inclusion of a right to terminate the contract before expiration of its term does not change the essence of the agreement.  It remains a contract for a definite term.  The court emphasized that the contract at issue included “mutual” rights to terminate the contract and mutual obligations. 

Now, the unanswered question.  What if the contract did not allow the employee to terminate the contract?  What if the contract did not provide for “liquidated” damages to the employee upon termination by the employer without cause?  In those instances, would the employee have a common law protection from retaliatory discharge.

MORAL OF THE STORY.  Often, the inclusion or exclusion of language in a contract often has important legal consequences.  In this case, the employer’s willingness to give 30 days pay probably avoided a bundle of attorney’s fees.

HOW NOT TO RUN A BUSINESS - MINORITY SHAREHOLDERS AND BREACH OF FIDUCIARY DUTY

In 1994, Husband and his brother start a business.  Because they are intelligent, they incorporate that business.  Brother owns 50% of the corporation’s stock, Husband owns 25% of the stock and Wife owns 25% of the stock.  All is well until 2007 when Husband and Wife divorce.  According to the court, Wife had a “personal relationship” with a Company employee which appeared to precipitate this result. 

Normally, property, such as stock in a family business, would be transferred to one spouse as a part of the property settlement.  In this case, for reasons unknown, Wife kept her stock in the Company after the divorce.  And, Wife continued to be employed by the Company.

Then, in May, 2008, Husband fired Wife – now ex-Wife.  The Company then employed Husband’s new wife. 

At this point, the soap opera changes from a mildly interesting story to a tutorial on corporate law.  Husband testified that as CEO, “I am the company.”  He forgot, however, that Tennessee corporate law protects minority shareholders.  Here are a few of his mistakes: 

1.         Notices of Meetings.  Although Wife was a Director, she did not receive notice of meetings of the Board of Directors.  This included the meeting at which Husband decided to fire Wife.

2.         Bonuses to Insiders.  Husband, new wife and Brother all received bonuses.  These bonuses were not approved by a vote of “disinterested” Directors – in this case Wife.

3.         Actions of the Board.  The Husband and Brother decided to forego exercising an option to purchase property without holding a Board meeting.

4.         Removal of Plaintiff as a Director.  The Husband and Brother removed Wife as a Director without her knowledge.

The trial court concluded that the Husband and his Brother instituted a “systematic scheme” to deny Wife her rights as a shareholder.   The court concluded that they acted with malice and avarice toward Wife.  Consequently, the Court found that Husband and Brother violated their fiduciary duty to Wife.

The Moral of this Story.  If you divorce your business partner, buy out all of the stock.  Husband and Brother could have avoided a lot of attorney’s fees if they had merely purchased Wife’s stock. 

Proffit v. Smoky MountainWoodcarvers Supply, Inc., No. E2011-0180-COA-R3-CV (Tenn. Ct. App. May 15, 2012).

FRAUD AND PLEADING - AS WELL AS SOME CHANCERY COURT JURISDICTION ISSUES

Fraud must be alleged with particularity.  That is a simple statement, but is one that causes many attorneys a lot of problems. 

First, some ground rules.  In Tennessee, the courts look at the substance of the complaint, not the form of the complaint.  But, the court will not create a cause of action if the complaint does not allege sufficient facts.  You cannot rely upon allegations of law.  Finally, if you allege fraud, you must allege more than a “short and plain” statement.  The circumstances constituting fraud or mistake must be alleged with particularity.  That means the complaint must include the details.

According to the court of appeals, the term “fraud” for purposes of Rule 9.02 includes any cause of action alleging misrepresentation, including fraudulent concealment and conversion.  To allege these causes of action, the complaint must state the specific representations at issue and identify the persons who made and who received the false information.

This case discusses a cause of action that I did not realize exists in Tennessee – the tort of “aiding and abetting.”  That tort arises if the defendant knows of the wrong being committed and gives substantial assistance or encouragement to the bad actors.  Unlike civil conspiracy, this tort does not require participation in the activities or even knowledge of what actually is occurring.  Even though this tort extends to things other than “fraud,” the court of appeals states that the facts constituting “substantial” assistance must be plead with particularity. 

Two other concepts noted in this opinion.  “Intangible” property cannot be converted.  Money is intangible.  Therefore, the theft of money is not “conversion” unless the amount of money is specific and the funds are identifiable.  If someone removes $100.00 from your bank account, the amount is specific and the funds are identifiable.  If a convenience store is robbed, the perpetrator is not guilty of conversion.  Chancery Courts do not possess jurisdiction over claims for unliquidated damages.  If the exact amount of damages is alleged, the claim is not unliquidated.

So, read those civil procedure rules carefully when you draft your complaint and avoid being the attorney of record in the textbook case on appropriate pleading for the rest of eternity.       

See PNC Multifamily Capital Institutional Fund XXVI Limited Partnership, et al. v. Bluff City Community Development Corporation, et al.

AGREED JUDGMENTS ARE UNENFORCEABLE

Loan workouts occur every day.  Often, the lender requires the borrower to provide an “agreed judgment” as a part of the workout.  This is intended to ensure that the lender does not have to litigate the case. 

If the debtor “revokes” his agreement to the judgment before the judgment is filed or signed by a judge, the agreed judgment is worthless.  All the debtor needs to do is assert a defense of breach of contract.

The good news is that the Court will enforce the terms of the loan modification agreement.  If the debtor, as in this case, failed to make a required $30,000.00 payment, the Court will grant summary judgment.

See The People's Bank v. Raymond E. Lacy.