Case Title: Countryside Orthopaedics P.C. v. Peyton

Citation: 

Docket Number: 000558

State: virginia

Court: Virginia Supreme Court

Date: 2001-01-12T00:00:00Z

Document:
Present:  All the Justices 
 
COUNTRYSIDE ORTHOPAEDICS, P.C., ET AL. 
 
v. Record No. 000558 
  
RANDALL S. PEYTON 
 
 
 
    OPINION BY 
 
 
 
 
 
 
JUSTICE CYNTHIA D. KINSER 
 
 
 
 
 
 
 
  January 12, 2001 
RANDALL S. PEYTON 
 
v. Record No. 000572 
 
COUNTRYSIDE ORTHOPAEDICS, P.C., ET AL. 
FROM THE CIRCUIT COURT OF LOUDOUN COUNTY 
James H. Chamblin, Judge 
 
 
 
In these two appeals, the first question we address is 
whether four agreements executed as part of a single 
transaction to accomplish an agreed purpose should be 
construed together even though all the agreements were not 
executed by the same parties.  The second question is 
whether a doctor, who was a party to three of the 
agreements, can enforce a provision providing for severance 
pay.  Because we conclude that the agreements should be 
construed as one instrument and that the doctor now 
claiming severance pay was the first party to commit a 
material breach, we will reverse that part of the circuit 
court’s judgment awarding severance pay to that doctor.  
However, we will affirm that portion of the court’s 
judgment with regard to the doctor’s base compensation. 
FACTS AND MATERIAL PROCEEDINGS 
Raymond Francis Lower, D.O., F.A.A.O.S., an 
orthopaedic surgeon, formed Countryside Orthopaedics, P.C. 
(Countryside), in 1993.  Dr. Lower was Countryside’s sole 
officer, director, and shareholder until 1997.  As of 
January 1, 1997, Randall Sutton Peyton, M.D., also an 
orthopaedic surgeon, became a 50 percent shareholder in 
Countryside. 
Dr. Peyton first started working for Countryside in 
1995 as an employee physician.  The terms of the employment 
contract between Dr. Peyton and Countryside at that time 
granted Dr. Peyton, inter alia, the right to purchase 50 
percent of the stock in Countryside if Dr. Peyton met a 
certain level of productivity based on his billings.  Dr. 
Peyton satisfied the billing threshold during his first 
year of employment, so he and Dr. Lower began negotiations 
late in 1996 to effect the purchase of stock by Dr. Peyton 
and to agree upon the terms of the documents needed to 
accomplish that purpose.  Those negotiations culminated 
with the execution of the following four agreements in June 
1997, to be effective retroactively to January 1, 1997: 
I. 
“Stock Purchase Agreement” between Dr. Peyton and 
Dr. Lower; 
 
II. “Employment Agreement” between Countryside and 
Dr. Peyton; 
 
2
III. “Employment Agreement” between Countryside and 
Dr. Lower; and 
 
IV. “Stockholders’ Agreement” between Dr. Lower, 
Dr. Peyton, and Countryside. 
 
 
The purpose of the Stock Purchase Agreement was to 
enable Dr. Peyton to purchase from Dr. Lower 50 shares of 
the 100 shares of the issued and outstanding common stock 
of Countryside.  The purchase price for the 50 shares was 
$94,258, to be paid “unconditionally, with [Dr. Peyton] 
having no right of set-off against [Dr. Lower], in forty-
eight (48) equal monthly payments beginning January 1, 
1997.”  The terms of the Stock Purchase Agreement further 
required, in the event the closing occurred after January 
1, 1997, that Dr. Peyton immediately bring the monthly 
payments current as of the closing date.  Pursuant to the 
terms of this agreement, Dr. Peyton “irrevocably” 
authorized Countryside to withhold the required monthly 
payments from his salary and to pay that sum directly to 
Dr. Lower. 
 
The terms of the two employment agreements were 
virtually identical.  Each physician could terminate his 
employment with Countryside by mutual agreement or by 
giving ninety days written notice, and neither doctor was 
 
3
restricted in his right to compete with Countryside after 
termination of his employment.1
 
Two provisions of Dr. Peyton’s Employment Agreement 
are at issue in this case.  The first one, found in 
paragraph 3(a), establishes his base entitlement to 
compensation and provides the following method of 
calculating that portion of his compensation: 
Base Entitlement.  An Entitlement (salary, retirement 
plan contributions and Additional Benefits, as defined 
below) which will be the excess of his “Collections” 
(as defined below) over (i) his proportionate share 
(initially 50 percent) of the Corporation’s “Fixed 
Expenses”, plus (ii) 100 percent of his “Individual 
Expenses”, plus (iii) 100 percent of his “Variable 
Expenses”.  “Fixed Expenses”, “Individual Expenses” 
and “Variable Expenses” shall be defined by mutual 
agreement of the Corporation and the Physician and 
applied consistently from year to year. 
 
The second provision pertains to Dr. Peyton’s right to 
receive severance pay upon termination of his employment 
with Countryside.  In pertinent part, that section of the 
Employment Agreement establishes the amount of severance 
pay, the time of payment, and a condition precedent to 
Countryside’s obligation to make such a payment: 
 
3. . . . 
 
(e) Severance Pay.  In the event that the 
Physician dies or otherwise ceases his employment 
under this Agreement for any reason[,] . . . the 
                     
1 Dr. Peyton’s first employment contract with 
Countryside contained a restrictive covenant. 
 
4
Corporation shall pay the Physician . . . severance 
pay (“Severance Pay”) as follows: 
 
(1) Amount.  Severance Pay shall be an amount 
equal to eighty percent (80%) of his “Collections[”] 
less the Physician’s Individual Expenses remaining 
unpaid at the time the cessation of employment 
occurred reduced by any Excess Amount remaining 
unrepaid. 
 
 
(2) Payment.  The Severance Pay determined in 
accordance with Paragraph 3(e)(1) shall be paid no 
later than ninety (90) days after the cessation of 
employment occurred, and then every ninety (90) days 
thereafter. 
 
. . . . 
 
(4) Physician’s Compliance.  The Physician’s 
. . . full, timely, and continuing compliance in all 
material respects with every material term with this 
Agreement and of every other written agreement between 
the Physician and the Corporation in force after the 
effective date of termination is a condition precedent 
to the Corporation’s obligation to pay Physician 
Severance Pay in accordance with this paragraph. 
 
The Stockholders’ Agreement established the internal 
operating structure of Countryside.  The only provision of 
that agreement at issue in this appeal concerns the 
requirement that a corporate decision to “[i]ncur any debt 
or issue any note in an aggregate principal amount 
exceeding [$5,000] in a single transaction” be approved by 
all the stockholders. 
When the respective parties executed these four 
agreements in June 1997, Dr. Peyton, pursuant to the terms 
of the Stock Purchase Agreement, owed monthly payments to 
Dr. Lower for the months of January through June.  Dr. 
 
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Peyton did not, however, make those payments at closing, 
and Countryside never withheld the monthly payments from 
Dr. Peyton’s salary.  In fact, Dr. Peyton did not make any 
payments for his purchase of stock in Countryside until 
August 1997, when he paid Dr. Lower the sum of $13,745.97 
out of the proceeds of a bonus that each doctor had 
received from Countryside in July.  Dr. Peyton’s stock 
purchase payment in August covered the past due payments 
for the months of January through July, and was the only 
payment that Dr. Peyton made for his purchase of stock in 
Countryside. 
Subsequent to the closing, the relationship between 
Dr. Lower and Dr. Peyton deteriorated.  One particular 
disagreement that arose concerned the question whether Dr. 
Peyton’s payments pursuant to the Stock Purchase Agreement 
were to be made with pre-tax or post-tax dollars.  
According to Dr. Peyton, this problem and other concerns 
caused him to become dissatisfied with his relationship 
with both Dr. Lower and Countryside.  Consequently, on 
October 3, 1997, Dr. Peyton tendered a letter terminating 
his employment with Countryside, to be effective as of 
December 31, 1997.  Dr. Peyton then filed a suit against 
 
6
Countryside and Dr. Lower.2  In his amended bill of 
complaint, Dr. Peyton asked for specific performance of his 
Employment Agreement with regard to the records and charts 
of patients he treated while at Countryside, an accounting 
of the payments that he alleged were due to him from 
Countryside pursuant to the terms of the Employment 
Agreement, damages for breach of his Employment Agreement 
by Countryside, and damages for breach of fiduciary duty by 
Countryside for allegedly depleting Dr. Peyton’s accounts 
receivable and increasing the expenses charged to him.3  In 
response, Dr. Lower and Countryside, in an amended cross-
bill of complaint, sought a declaratory judgment as to the 
rights of Countryside and Dr. Peyton under the 
Stockholders’ Agreement, damages for Dr. Peyton’s alleged 
breach of fiduciary duty, rescission of the June 1997 
agreements due to Dr. Peyton’s alleged breaches of 
contract, and damages for alleged fraud by Dr. Peyton in 
inducing Dr. Lower to enter into those agreements. 
                     
2 Dr. Peyton originally named an additional party 
defendant but later dismissed that defendant without 
prejudice pursuant to a joint stipulation. 
 
3 The circuit court sustained a demurrer with regard to 
several other claims in Dr. Peyton’s amended bill of 
complaint. 
 
 
7
 
At the conclusion of a bench trial, the circuit court 
awarded judgment in favor of Dr. Lower on the claims 
asserted against him individually.  The court also 
determined that the evidence did not support an award of 
punitive damages against Dr. Peyton.  The court then took 
all other issues under advisement and subsequently issued a 
letter opinion.  The following findings by the court are 
pertinent to the issues raised in this appeal: 
 
I. Dr. Peyton’s claims: 
 
 
 
A. The court did not order an accounting by 
Countryside but did direct Countryside to comply with 
the Employment Agreement and to pay Dr. Peyton his 
severance pay. 
 
 
 
B. The court granted judgment in favor of Dr. 
Peyton against Countryside in the amount of 
$140,634.23 for unpaid severance pay but concluded 
that Dr. Peyton was not entitled to any additional pay 
for 1997 because he had been overpaid for that year in 
the amount of $1,100.35.4
 
 
 
C. The court did not award any separate damages 
for breach of fiduciary duty but considered that in 
determining the damages owed to Dr. Peyton. 
 
II. Countryside’s claims: 
 
 
 
A. The court found that Countryside had validly 
exercised its right to repurchase Dr. Peyton’s stock 
                     
4 The court initially awarded Dr. Peyton severance pay 
in the amount of $333,282.85.  The court then reconsidered 
it decision and, in a second letter opinion, reduced the 
amount to $140,634.23.  That figure includes a deduction 
for the overpayment to Dr. Peyton in 1997 in the amount of 
$1,100.35.  The court also determined that Dr. Peyton would 
be entitled to 80 percent of his accounts receivable 
collected by Countryside after January 1, 1999. 
 
8
in the corporation pursuant to the Stockholders’ 
Agreement. 
 
 
 
B. The court concluded that Dr. Peyton had not 
breached any fiduciary duty to either Countryside or 
Dr. Lower. 
 
 
 
C. The court denied the claim for rescission 
because it concluded that Dr. Peyton had not 
materially breached any of the 1997 agreements. 
 
 
 
D. The court concluded that Dr. Peyton did not 
commit fraud and did not fraudulently induce Dr. Lower 
to enter into the agreements. 
 
 
In determining the amount of Dr. Peyton’s severance 
pay, the circuit court rejected Countryside’s argument that 
Dr. Peyton was not entitled to any severance pay because he 
had not satisfied the condition precedent in the Employment 
Agreement, i.e., that Dr. Peyton comply “in all material 
respects with every material term” of the Employment 
Agreement and any other agreement in force between him and 
Countryside.  The court concluded that, by its own terms, 
the condition precedent applies only to the Employment 
Agreement because it is the only agreement between Dr. 
Peyton and Countryside.  Thus, the court held that Dr. 
Peyton’s compliance with the terms of the Stock Purchase 
Agreement regarding his payments was not a condition 
precedent to Dr. Peyton’s right to receive severance pay.  
The court stated, “[t]he parties are bound by the words 
they used, and not by some nebulous concept of a ‘package’ 
 
9
as argued by the Defendants.”  The court then entered a 
final decree in accordance with its letter opinions. 
 
This Court awarded cross-appeals.  In his first three 
assignments of error, Dr. Peyton challenges the circuit 
court’s calculation of his severance pay.  His remaining 
two assignments of error address the court’s computation of 
his base entitlement for 1997.  In Countryside’s only 
assignment of error, it asserts that “the circuit court 
erred by ruling that Dr. Peyton was entitled to recover 
severance pay when Dr. Peyton failed to make the buy-in 
payments required as a material term of his agreements with 
Countryside and Dr. Lower.”  We will first address 
Countryside’s assignment of error because our resolution of 
that issue affects the disposition of Dr. Peyton’s 
assignments of error challenging the amount of his 
severance pay. 
ANALYSIS 
I. Countryside’s Appeal 
Countryside argues that the four agreements executed 
in June 1997 should be construed as a “package” or as parts 
of a single transaction.  Countryside asserts that, when 
the agreements are viewed in that manner, the condition 
precedent contained in paragraph 3(e)(4) of the Employment 
Agreement requiring Dr. Peyton to be in compliance with 
 
10
every material term is not limited to the terms of the 
Employment Agreement but includes his obligation to pay for 
his purchase of stock in a timely fashion.  Thus, 
Countryside contends that Dr. Peyton is not entitled to 
receive any severance pay not only because he failed to 
comply with that condition precedent but also because he 
committed the first material breach of the terms of the 
agreements. 
 
In response to Countryside’s argument, Dr. Peyton 
rejects the theory that the four agreements should be 
viewed as a “package” and advances four reasons why he has 
not forfeited his right to receive severance pay.  First, 
he claims that, even if his nonpayment of the stock 
purchase installments constituted a breach of the 
Employment Agreement, Countryside was not damaged.  
According to Dr. Peyton, this is so because Countryside was 
required under the Stockholders’ Agreement to buy back Dr. 
Peyton’s stock in Countryside upon his termination of 
employment.  Next, Dr. Peyton contends that Countryside is 
estopped from claiming any breach relating to Dr. Peyton’s 
failure to make the stock purchase payments because Dr. 
Lower allegedly “agreed to wait” on Dr. Peyton’s payments 
until the dispute concerning whether those payments were to 
be made with pre-tax or post-tax dollars could be resolved.  
 
11
Third, Dr. Peyton contends that, since the Stock Purchase 
Agreement was not between Countryside and Dr. Peyton, 
compliance with that agreement was not a condition 
precedent to Countryside’s obligation under the Employment 
Agreement to pay Dr. Peyton severance pay.  Finally, Dr. 
Peyton argues that the Stock Purchase Agreement was not an 
agreement in force after the effective date of his 
termination from employment and thus was not subject to the 
condition precedent contained in paragraph 3(e)(4) of the 
Employment Agreement. 
 
The first step in analyzing this issue is to determine 
whether the four agreements executed in June 1997 should be 
construed together as one instrument or contract.  This 
Court has repeatedly stated that “[w]here two papers are 
executed at the same time or contemporaneously between the 
same parties, in reference to the same subject matter, they 
must be regarded as parts of one transaction, and receive 
the same construction as if their several provisions were 
in one and the same instrument.”  Oliver Refining Co. v. 
Portsmouth Cotton Oil Refining Corp., 109 Va. 513, 520, 64 
S.E. 56, 59 (1909); accord First Am. Bank of Va. v. J.S.C. 
Concrete Constr., Inc., 259 Va. 60, 67, 523 S.E.2d 496, 500 
(2000); Daugherty v. Diment, 238 Va. 520, 524, 385 S.E.2d 
572, 574 (1989); J.M. Turner & Co. v. Delaney, 211 Va. 168, 
 
12
171-72, 176 S.E.2d 422, 425 (1970); Bolling v. Hawthorne 
Coal & Coke Co., 197 Va. 554, 566, 90 S.E.2d 159, 167 
(1955); Texas Co. v. Northup, 154 Va. 428, 440-41, 153 S.E. 
659, 662 (1930); Luck v. Wood, 144 Va. 355, 357, 132 S.E. 
178, 178 (1926).  “Where a business transaction is based 
upon more than one document executed by the parties, the 
documents will be construed together to determine the 
intent of the parties; each document will be employed to 
ascertain the meaning intended to be expressed by the 
others.”  Daugherty, 238 Va. at 524, 385 S.E.2d at 574  
(citing American Realty Trust v. Chase Manhattan Bank, 222 
Va. 392, 403, 281 S.E.2d 825, 830 (1981)). 
 
We recognize that Dr. Peyton, Dr. Lower, and 
Countryside were not signatories to all four of the 1997 
agreements.  The Stockholders’ Agreement was the only one 
that all three parties executed.  The two employment 
agreements were executed by Countryside and the respective 
physician, and both Dr. Lower and Dr. Peyton signed the 
Stock Purchase Agreement. 
Nevertheless, we conclude that in the present case the 
four agreements executed in June 1997 should be regarded as 
“parts of one transaction” and construed as “one and the 
same instrument.”  Oliver Refining Co., 109 Va. at 520, 64 
S.E. at 59.  We reach this conclusion because all the 
 
13
parties knew about the agreements and executed them at the 
same time as part of a single transaction to accomplish an 
agreed purpose, i.e., to effect Dr. Peyton’s purchase of 50 
percent of the stock in Countryside, and to structure both 
his and Dr. Lower’s employment relationship with 
Countryside and the internal operating procedures of 
Countryside in light of the fact that Dr. Peyton was now an 
equal shareholder.  See Gordon v. Vincent Youmans, Inc., 
358 F.2d 261, 263 (2d Cir. 1965) (“New York law . . . 
requires that all writings that form part of a single 
transaction and are designed to effectuate the same purpose 
be read together, even though they were executed on 
different dates and were not all between the same 
parties”); Cushman v. Smith, 528 So.2d 962, 964 (Fla. Dist. 
Ct. App. 1988) (“instruments entered into on different days 
but concerning the same subject matter may under some 
circumstances be regarded as one contract and interpreted 
together”); Atlas Indus., Inc. v. National Cash Register 
Co., 531 P.2d 41, 46-47 (Kan. 1975) (two documents 
construed together when parties complied with provisions of 
interrelated documents although one document was not 
executed by party to transaction); Schlein v. Gairoard, 22 
A.2d 539, 540-41 (N.J. 1941) (“where several instruments 
are made as part of one transaction, relating to the same 
 
14
subject-matter, they may be read together as one instrument 
. . . even when the parties are not the same, if the 
several instruments were known to all the parties and were 
delivered at the same time to accomplish an agreed 
purpose”); Baker v. Wilburn, 456 N.W.2d 304, 306 (S.D. 
1990) (writings executed together as part of single 
transaction should be interpreted together and “it is not 
critical whether the documents were executed at exactly the 
same time or whether the parties to each agreement were 
identical”).  Despite Dr. Peyton’s argument that the 
agreements should not be viewed as a “package,” we believe 
that he has treated them in that manner as evidenced by his 
acknowledgement before both this Court and the circuit 
court that all four agreements had to be signed together or 
there would not have been a deal. 
 
In reaching this conclusion, we are also persuaded by 
the fact that some of the agreements contain explicit 
references to the other agreements.  For example, a 
provision in each of the employment agreements states that, 
upon the termination of the employment of that respective 
physician, the purchase of any capital stock of Countryside 
owned by that physician “shall be governed by provisions 
with respect thereto in the Bylaws of the Corporation, any 
Stockholders’ Agreement then in effect and by the governing 
 
15
statute.”  (Emphasis added.)  A section in the 
Stockholders’ Agreement limits the “Book Value” of Dr. 
Peyton’s stock to the amount of the purchase price as 
defined in the Stock Purchase Agreement between Dr. Lower 
and Dr. Peyton.  Finally, in the Stock Purchase Agreement, 
the sale of stock to Dr. Peyton is “subject to the terms of 
a Stockholders’ Agreement . . . to be executed as a 
condition of Closing.” 
Thus, we conclude that the circuit court erred in 
refusing to construe the four agreements as a “package” or  
“as if their several provisions were in one and the same 
instrument.”  Oliver Refining Co., 109 Va. at 520, 64 S.E. 
at 59.  By limiting its view to the terms of each separate 
document, the circuit court determined that Dr. Peyton had 
satisfied the condition precedent in paragraph 3(e)(4) of 
the Employment Agreement and was thus entitled to receive 
severance pay.  Because the court looked at each agreement 
in isolation, it never specifically addressed the questions 
whether Dr. Peyton’s failure to pay for his purchase of 
stock in a timely fashion was a material breach of the 
agreements, viewed as one instrument, and whether such a 
breach would preclude Dr. Peyton from enforcing his right 
to receive severance pay.  Accordingly, we now turn to 
those questions. 
 
16
In doing so, we apply the principle that “[g]enerally, 
a party who commits the first breach of a contract is not 
entitled to enforce the contract.”  Horton v. Horton, 254 
Va. 111, 115, 487 S.E.2d 200, 203 (1997) (citing Federal 
Ins. Co. v. Starr Elec. Co., 242 Va. 459, 468, 410 S.E.2d 
684, 689 (1991); Hurley v. Bennett, 163 Va. 241, 253, 176 
S.E. 171, 175 (1934)).  There is, however, an exception to 
that general rule “when the breach did not go to the ‘root 
of the contract’ but only to a minor part of the 
consideration.”  Horton, 254 Va. at 115, 487 S.E.2d at 203 
(quoting Federal Ins., 242 Va. at 468, 410 S.E.2d at 689; 
Neely v. White, 177 Va. 358, 366, 14 S.E.2d 337, 340 
(1941)).  Nevertheless, when the first breaching party 
commits a material breach, that party cannot enforce the 
contract.  Horton, 254 Va. at 115, 487 S.E.2d at 204.  “A 
material breach is a failure to do something that is so 
fundamental to the contract that the failure to perform 
that obligation defeats an essential purpose of the 
contract.”  Id. 
 
Upon construing the four agreements in the present 
case as “parts of one transaction,” Oliver Refining, 109 
Va. at 520, 64 S.E. at 59, we conclude that Dr. Peyton  
committed the first material breach when he failed to make 
his monthly payments for the purchase of stock in 
 
17
Countryside in accordance with the terms of the Stock 
Purchase Agreement.  It is not disputed that Dr. Peyton did 
not bring his stock purchase payments current at the 
closing and waited until August before he made the lump-sum 
payment, which covered only the months of January through 
July.  Nor is it disputed that he never made any other 
payments. 
We believe that Dr. Peyton’s failure to make his stock 
purchase payments goes to the “root” of the transaction.  
The four agreements were executed in order to effect Dr. 
Peyton’s purchase of 50 percent of the stock in Countryside 
and to structure the relationship between the three parties 
in light of the fact that he was now an equal shareholder 
rather than a mere employee.  If Dr. Peyton and Dr. Lower 
had not executed the Stock Purchase Agreement, the other 
three agreements would not have been necessary.  
Furthermore, the terms of Dr. Peyton’s Employment 
Agreement, as an equal shareholder in the professional 
corporation, were more lucrative than the terms of his 
first employment contract with Countryside.  A significant 
benefit for Dr. Peyton was the elimination of the 
restrictive covenant that had been part of his first 
employment contract. 
 
18
Thus, Dr. Peyton’s failure to pay the consideration 
for his 50 shares of stock in Countryside defeated the 
essential purpose of the transaction consummated in July 
1997 with the execution of the four agreements and was, 
therefore, a material breach as a matter of law.  See 
Horton, 254 Va. at 115, 487 S.E.2d at 204.  Accordingly, as 
the first party to commit a material breach, Dr. Peyton 
cannot enforce the contract provision regarding severance 
pay.5  See id.
Not only was Dr. Peyton the first party to commit a 
material breach, he also failed to fulfill the condition 
precedent in paragraph 3(e)(4) of the Employment Agreement, 
requiring “compliance in all material respects with every 
material term with this Agreement.”  When the four 
agreements are viewed as one instrument, that condition 
                     
5 In his reply brief in Record No. 000572, Dr. Peyton 
asserts that Countryside and Dr. Lower were actually the 
first parties to commit a material breach.  Dr. Peyton 
bases that assertion on the assumption that his stock 
purchase payments were, in fact, supposed to have been made 
with pre-tax dollars.  However, Dr. Peyton did not argue 
before the circuit court that Countryside and Dr. Lower 
committed the first breach.  See Rule 5:25.  Furthermore, 
he admitted that the purpose of his testimony regarding 
that dispute was to explain one of the reasons why he 
submitted his letter of termination and also to rebut the 
claim for fraud asserted by Dr. Lower and Countryside.  Dr. 
Peyton also stated on brief in Record No. 000558 that “it 
is now irrelevant to Countryside’s appeal whether the stock 
purchase agreement was to be in pre-tax or post-tax funds.” 
 
 
19
precedent pertains to the entire transaction and makes Dr. 
Peyton’s obligation to pay for his purchase of stock a 
condition precedent to Countryside’s obligation to pay Dr. 
Peyton severance pay. 
Thus, whether Dr. Peyton’s failure to pay for his 
stock is viewed as a first material breach or as a failure 
to fulfill the condition precedent, he cannot enforce the 
provision pertaining to severance pay.  Accordingly, we 
conclude that the circuit court erred in awarding severance 
pay to Dr. Peyton and will reverse that part of the court’s 
judgment.  In reaching this conclusion, we recognize that 
the severance pay represented the collections for services 
that Dr. Peyton had rendered before the effective date of 
his termination from employment.  That fact does not change 
our decision. 
 
However, Dr. Peyton argues that, since the terms of 
the Stockholders’ Agreement obligated Countryside to buy 
back Dr. Peyton’s stock at the same price that he had paid 
for it, neither Countryside nor Dr. Lower suffered any 
damages because of Dr. Peyton’s failure to make his 
required payments, thereby allegedly rendering his breach 
 
20
“immaterial.”6  Dr. Peyton’s argument overlooks the fact 
that, because of his status as a 50 percent shareholder in 
Countryside, he gained certain employment benefits, 
including the elimination of the restrictive covenant, that 
he had not enjoyed under his first employment contract with 
Countryside.  For this reason and the reasons already 
stated, we conclude that Dr. Peyton’s breach was not 
immaterial.  See id. at 116, 487 S.E.2d at 204 (“proof of a 
specific amount of monetary damages is not required when 
the evidence establishes that the breach was so central to 
the parties’ agreement that it defeated an essential 
purpose of the contract”).  Furthermore, this Court has 
stated that the first party to commit a material breach can 
neither enforce the contract nor maintain an action on it.  
Hurley, 163 Va. at 253, 176 S.E. at 175. 
 
We are also not persuaded by Dr. Peyton’s assertion 
that Countryside and Dr. Lower are estopped from claiming a 
breach by Dr. Peyton.  The basis of this argument is Dr. 
Lower’s testimony that he “agreed to wait” for the payments 
and did not press Dr. Peyton for those installments that 
were due either at the closing or for the ensuing months.  
                     
6 As previously noted, the circuit court concluded that 
Countryside had validly and effectively exercised its right 
to repurchase Dr. Peyton’s stock in Countryside. 
 
 
21
Dr. Peyton also states that Dr. Lower did not object to a 
possible restructuring of the stock purchase arrangement so 
that the payments could be made with pre-tax dollars.  
According to Dr. Peyton, he relied on Dr. Lower’s alleged 
acquiescence and, thus, asserts the defense of estoppel. 
Although it is not clear whether Dr. Peyton is arguing 
a theory of estoppel or waiver, he has not established the 
necessary elements of either theory.  See Employers 
Commerical Union Ins. Co. of Am. v. Great Am. Ins. Co., 214 
Va. 410, 412-13, 200 S.E.2d 560, 562-63 (1973) (discussing 
elements of estoppel); Horton, 254 Va. at 117, 487 S.E.2d 
at 204 (discussing waiver).  Furthermore, the conduct to 
which Dr. Peyton alludes is that of Dr. Lower.  Dr. Peyton 
has not identified any conduct or acquiescence by 
Countryside that would support his claim of estoppel.  Yet, 
under the terms of the Employment Agreement, Countryside, 
not Dr. Lower, had the potential obligation for paying Dr. 
Peyton severance pay and is the party claiming a breach by 
Dr. Peyton. 
II.  Dr. Peyton’s Appeal 
Turning now to the appeal by Dr. Peyton, we first note 
that, because of our finding that he is not entitled to 
enforce the provision of his Employment Agreement 
pertaining to severance pay, we do not need to address his 
 
22
three assignments of error challenging the circuit court’s 
calculation of the amount of that severance pay.  Thus, the 
only remaining issues are whether the circuit court erred 
by failing to require that Dr. Peyton’s 1997 base 
entitlement be calculated according to generally accepted 
accounting principles or by the income tax method of 
accounting, and that the court erred in failing to enforce 
the contractual provision in the Stockholders’ Agreement 
requiring that corporate debts in excess of $5,000 be 
approved by all the stockholders.7
 
The crux of Dr. Peyton’s argument with regard to the 
accounting method is the change in the quarterly reports 
prepared by Dante Anthony Zagami, Jr., a certified public 
accountant whose firm commenced performing work for 
Countryside in 1996.  The first two quarterly reports for 
1997 were designated “Statement of Revenue and Expenses,” 
whereas, the last two reports prepared after Dr. Peyton 
tendered his termination of employment were designated 
                     
7 Countryside argues on brief in Record No. 000572 that 
Dr. Peyton’s first material breach should bar not only Dr. 
Peyton’s recovery of severance pay but also any larger sum 
for his 1997 base entitlement.  However, Countryside only 
assigned error to the award of severance pay.  Thus, the 
only issue before this Court with regard to Dr. Peyton’s  
base entitlement is the amount of that compensation and not 
whether he is precluded from enforcing that provision of 
his Employment Agreement because of his first material 
breach. 
 
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“Schedule of Revenue and Operating Costs.”  Dr. Peyton 
contends that the change in the title of the quarterly 
reports denotes a change in the accounting method used for 
Countryside.  Thus, according to Dr. Peyton, the category 
of expenses allocated to him was enlarged, thereby reducing 
his compensation, and the allocation was in violation of 
the requirement in the Employment Agreement that the 
expense categories “shall be defined by mutual agreement of 
the Corporation and the Physician and applied consistently 
from year to year.”  He claims that the expense categories 
were never defined “by mutual agreement” and that Zagami 
created his own accounting method to determine Dr. Peyton’s 
compensation. 
Based on calculations by his accountant, Erik Karl 
Kloster, Dr. Peyton claims that he is still owed $160,961 
for his 1997 base entitlement.  In arriving at this figure, 
Kloster primarily challenged the allocation of certain 
expenses to Dr. Peyton.  Kloster defined the term “expense” 
as “an item that is ordinarily used up during the course of 
an accounting period, such as one year.”  Using that 
definition, he concluded that certain prepaid expenses were 
actually the acquisition of fixed assets that should not 
have been used to reduce Dr. Peyton’s entitlement.  
According to Kloster, a prepaid asset only “becomes an 
 
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expense when the time period of the prepayment has come to 
pass.”  However, Kloster admitted Countryside was on a cash 
basis method of accounting. 
 
The circuit court rejected Kloster’s calculations.  
After examining numerous expenses that Dr. Peyton alleges 
were incorrectly allocated to him, the court concluded that 
Dr. Peyton had actually received an overpayment in 1997.  
The court determined that the Employment Agreement does not 
require the use of generally accepted accounting principles 
or an income tax method of accounting in determining Dr. 
Peyton’s base entitlement.  Instead, the court concluded 
that Zagami calculated Dr. Peyton’s compensation pursuant 
to the terms of the Employment Agreement and allocated 
expenses as mutually agreed upon by Dr. Lower and Dr. 
Peyton.  Finally, the court determined that Zagami changed 
the format of the last two quarterly reports because of the 
execution of the Employment Agreement in June 1997 but that 
Countryside had not changed its method of accounting after 
June 1997. 
 
Upon our review of the record, we conclude that the 
circuit court’s conclusions are not plainly wrong or 
without evidence to support them.  See Code § 8.01-680; 
Martin v. Penn, 204 Va. 822, 826, 134 S.E.2d 305, 307 
(1964) (court trying case without jury determines weight to 
 
25
be given to testimony of expert witness).  Although Dr. 
Peyton has argued in detail about specific expenses that 
were allocated to him, his assignment of error encompasses 
only the question regarding which accounting method should 
have been used to calculate his 1997 base entitlement.  The 
terms of Dr. Peyton’s Employment Agreement do not require 
the use of generally accepted accounting principles or an 
income tax method of accounting.  The agreement does, 
however, say that the terms “Fixed Expenses,” “Individual 
Expenses,” and “Variable Expenses” shall be defined by 
mutual agreement between Countryside and Dr. Peyton.  It 
also states that if Dr. Peyton receives “an Entitlement in 
any fiscal year which is later determined by 
[Countryside’s] accountant to be more than the amount to 
which” Dr. Peyton was entitled to receive, the excess will 
be deducted from Dr. Peyton’s compensation in the 
subsequent year. 
Zagami testified that Countryside did not change its 
method of accounting in 1996 or 1997.  He also testified 
that the “Statements of Revenue and Expenses” for the year 
ending on December 31, 1997, did not establish the 
allocation of expenses to each physician.  For example, 
Zagami explained that the expense category for depreciation 
and amortization was not an expense used in the calculation 
 
26
of base entitlement because the entitlement formula was 
based on cash flow and that particular category related to 
income tax guidelines.  Under the corporation’s cash basis 
of accounting, expenses were deducted when paid and income 
was recognized when received. 
Zagami further testified that he used the parties’ 
agreement in allocating expenses for the purpose of making 
the entitlement calculation and did not follow generally 
accepted accounting principles because the Employment 
Agreement did not require him to do so.  He specifically 
stated that it was his position “that the allocations that 
[he] made were in [accordance with the] agreement[s] of the 
two physicians” and that those agreements were the result 
of conversations that he had with both physicians.  
Notably, his calculations of the 1997 entitlements for Dr. 
Peyton and Dr. Lower, unlike those by Kloster, showed both 
physicians receiving almost equal revenue.8
Thus, finding sufficient evidence to support the 
circuit court’s determination that Zagami calculated Dr. 
Peyton’s 1997 base entitlement pursuant to the terms of the 
Employment Agreement and allocated expenses as mutually 
                     
8 According to Zagami’s calculations, there was a 
difference of approximately $6,000 between Dr. Lower and 
Dr. Peyton with regard to their respective excess revenue 
over operating costs. 
 
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agreed upon by Dr. Peyton and Dr. Lower, we conclude that 
the court did not err in failing to require the use of 
generally accepted accounting principles or the income tax 
method of accounting.  Accordingly, we will affirm the 
circuit court’s judgment with regard to Dr. Peyton’s base 
entitlement for 1997.9  Because the court concluded that Dr. 
Peyton had been overpaid in the amount of $1,100.35, we 
will enter judgment in favor of Countryside in that amount 
since Dr. Peyton will not be receiving any severance pay 
from which to deduct that overpayment. 
 
We now consider the last issue regarding the 
requirement in the Stockholders’ Agreement that any 
corporate debt in excess of $5,000 must be approved by all 
the stockholders.  Dr. Peyton asks this Court to consider 
the alleged violation of this provision as an alternative 
argument if the Court disagrees with his position regarding 
the appropriate accounting method for computing his 1997 
base entitlement.10
                     
9 We also conclude, as did the circuit court, that the 
decisions in Virginia State AFL-CIO v. Commonwealth, 209 
Va. 776, 167 S.E.2d 322 (1969), and Safway Steel Scaffolds 
of Va. v. Coulter, 198 Va. 469, 94 S.E.2d 541 (1956), are 
not relevant to the issues in this appeal, primarily 
because this case must be decided based on the terms of the 
June 1997 agreements. 
 
10 The expenses that Dr. Peyton identifies as having 
been incurred in violation of that provision are changes to 
 
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Dr. Peyton’s accountant, Kloster, identified these 
expenses when he recalculated Dr. Peyton’s 1997 
compensation.  The circuit court considered those expenses 
in that context, but it is not clear whether Dr. Peyton 
made a separate argument that the expenses were incurred in 
violation of the Stockholders’ Agreement.  Nevertheless, in 
determining the amount of Dr. Peyton’s base entitlement, 
the court found that Dr. Peyton had agreed to each one of 
the expenditures.  As we have already stated, we find 
sufficient evidence to support the circuit court’s factual 
findings regarding Dr. Peyton’s 1997 base entitlement.  
Thus, there could not have been a violation of the 
Stockholders’ Agreement with regard to these expenses since 
Dr. Peyton agreed to them. 
CONCLUSION 
 
For these reasons, we will reverse the judgment of the 
circuit court in Record No. 000558 and enter final judgment 
in favor of Countryside.  In Record No. 000572, we will 
affirm the judgment of the circuit court and enter final 
judgment in favor of Countryside in the amount of 
$1,100.35. 
Record No. 000558 — Reversed and final judgment. 
Record No. 000572 — Affirmed and final judgment. 
_________________ 
a new office, overages to build-out the new office, and the 
buy-out of an existing lease. 
 
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