### IN THE COURT OF APPEALS OF TENNESSEE AT KNOXVILLE October 15, 2003 Se ssion JAMES L. JACKSON v. JACKSO N, JOHNSON & MURPHEY, P.C.

Appeal from the Chancery Court for Hamilton County No. Part 2 99-0507 Neil Thomas, III, Judge FILED DECEMBER 31, 2003 No. E2002-02476-COA-R3-CV

This litigation is between a former shareholder - l ater employee - of the defendant accounting corporation. Theseparties entered into an employ ment contract together with a defer red compensation agreement. After two y ears, each party

claimed the other wa s in material breach: the Plaintiff asserted a breach beca

use, inter alia , the Defenda nt refused to treat him as an employee, while the Defendant asserted a brea ch because thePlain

tiff prep ared a num ber o f tax r

etur ns [66 ], inter alia , for clients of the firm without recourse to the firm. The trial court found that no mutual material breaches had occurred, a nd that the Plaintiff was entitled to recover t he balance o f his deferred compensation which had

been ter minated b y the Defe

ndant owi ng to the Plaintiff’s alleged breaches. The judgment is modified. Tenn. R. App.P. 3 Appe al as of Right ; Judgme nt of the Cha

ncery Court is Modi

fied
W ILLI AM H. I NMAN , S R
. J., deliver ed the opinion of the

court, in which H ERSCHEL P. F RANKS and D. M ICHAEL S WINEY , JJ., joined.
Lex A. Colema

n and Doug

las R

. Johnson, Chattanooga, Te nnessee, attorney s for Appellant, Jackson, Johnson & Mu

rphey , P.C. Boyd Stewar

t Jenkins, Chattanooga, Tennessee, Attorney for Appellee, James L. Jackson. OPINION Jackson, Johnson and Murphey, P.C.[hereafte r “JJM], is a public accounting firm of which the Plaintiff was a shareholder and officer. In 1996 the Plaintiff injured himself while vacationing in Scotland a

nd there after w as partiall y di s abled and unable t o perfor m regul arly

as a publi c accoun tant. Be cause of

these ci rcumstan ces the p arties e

ntered i nto a ser

ies of pr olix agreements, each of which was effective August 1, 1996. As pertinent here, the Employment Agr eement , cre ated the relationship of employer

employee between these parties and required JJM to provide Plaintiff with a prop erly equipped office-2-

adequa te for his nee ds as a CPA. F or any fiscal y ear “in which the

employ ee is a f ull time employee”JJM agreed to pay the Plaintiff’ s parking expenses, continuin g educ ation expe nses, professional dues, group health insurance, and automobile expense. For those “final ye ars in which employee is a part time empl oy ee” JJM ag reed to “ pay a perce ntage o f employ

ee’s re asonable expenses”

for the enumerated obligations, such percentage to “be equa

l to the number of billable and non-billable hours of employe r for the prior month divided by 166.” The Employment Agr

eement bound the Plaintiff, during its term, to practice acc ou ntin g solely as an employee

of JJM, and for a period of one year follo wing the termination of the Agree ment, the Plaintiff agreed that he wou ld no t dire ctly or in direct ly engage in public accounting in Hamilton County. He further a greed that during the

term of the Agreement all work he performed would be billed through JJM. He further agreed that if he violated the cove nant not to

compete in a material way , as jud icially de termined, he would no longer be entitled to pay ments of deferred compensation. The preparation of tax returns and rendering of accounting advice for “f riends and family members” was contractually not deemed the practic e of acc ounting i f the Plain tiff did not bill for these services. The Deferred Compensation Agree ment , as pertinent here, promised that JJM would pay the Plaintiff annually beginning October 15, 1997, for five years, a sum equal to 15 percent of “JJM’s gross collecti ons” for

the prec eding f

iscal y ear fr om clientsof the Pla

intiff. I f the Plain

tiff was still alive on Octobe

r 15, 2002 , and if the total pay ments t o him were less than $300,000.00, JJM was required to pa y, upon the death of the Plaintiff, an additional amount to him of $300,000.00, less the total of the five annual

installme nts, and le ss $40,000 .00, and le ss a reduc tion of 6 pe rcent inte rest on the fiv e installm ents. The Stock Purc hase Ag reement memorial ized the sa

le of the Plaintiff ’s 45 per cent ownership interest in JJM to the corporation for $40,000.00. The Stock Purchase Agree ment is not r

elevant to th is li ti ga ti on an d w il l n o l on ge r b e n ot ic ed ex ce pt in ci de nt al ly. As we have

indicate d, these c ontract s were d esigne d to minimize t

he loss of the firm’s revenue and asset

value, on the one hand, an d to provid e the Plai ntiff, in h

is disable d conditio n, with a regular income, on the other. The Plaintiff

was past s eventy

years of age. He was a

public ac countant

for most of

his adult life, and was legislatively lice nsed as a CPA in 1989; soon after, he acqu ired his 4 5 perce

nt intere st in the fi rm for $900. 00. He al way s had the l arges t client ba se in the f irm, ge nerate d the most revenue , and han dled the f irm’s adm

inistrativ e matter s.1 To paraphrase th e observat ion of t he tri al judge.
2 No d ec laratory judgment was sought , except perhaps by a general demand for other relief . There was no motio n for a p articular ized sta teme nt.

3 This defense was not furt her pursued, for whatever reason.
4 Th is issue is mo ot. 5 This and oth er decretal provisi ons indi cated t hat the judgme nt i s not a fi nal one, thu s ra isi ng t he spe cter of a re mand. Howeve r, th e Def enda nt ’s Rul e 59 Moti on, tog eth er w it h t he c ourt ’s act ion th ere on, cur ed t he pr oble m. -3- The Complaint These professionals’ feathers gra dually beca

me ruffled, 1 culminating in the filing o f this complain t. The Plaintiff alleged, with no specifi city , th at “JJM has materially breached” the employment

agreement “entitling

the Plaintiff to damages” and to “have set aside” the covenant not to compete, 2 because of the unspecified breac h. The Respo nse JJM filed an answer, counterclai m and cross-claim. By answer, JJM pleaded that the complaint failed to state a claim for which relief could be granted. 3 It also pleaded that the Plaintiff had breached the

non-compete agreement, and ha d committed fraud and

acts of conversion of JJM’s propert y, but with no sp ecifici

ty. By counter claim JJM soug

ht a declaratory

judgment

(1) that the covenant notto compet

e is enfo rceabl e inthis jurisdiction, 4 and (2) that JJM is not indebted to the Plaintiff on account of his breaches. The cro ss-cla im is no l ong er v iab le, ex cep t i nci den tal ly. It allegedthat the Plaintiff was the executor/trustee of certain estates for w hich he perf

orme d professional services, entitling JJM to com pen sat ion , an d th at h e ha

d no t ac counte d toJJM for thes e fees. The Findings and Judgment The trial court found that the mutually-c laimed breaches were not material, and thus not redressable. He found that the Plaintiff was entitledto recover “accrued va cation and leave time in accordance with the firm’s manual and unpaid fees due him,” and that h e should r eceive monthly reimbur sement

of [auto] expense [some amount less than $375.00 per month] and deferr e d compensation i n “acc ordance with the agreeme nt.” The Plaintiff admittedly had pre pared 66 tax returns with out ac count ing for them, and wi thou t bil ling; the trial judge held that JJM “may choose, or choose not to, bill the clients for whom the 66 returns were prepared.” The judgment entered pursuant to these findings ordered a recove ry by the Plaintiff

for $6360 .00 plus 10

percen t interes t per year f rom April 21, 1997 for accrued vacation and lea ve t ime. The Def

endant w as order

ed to account to the Plaintiff for “all monies due him for the fiscal yea

rs ending July 31, 1999, and July 31, 2000, the rate and amount of interest to be later determined. 5 The Def endant w as permit

ted to bill the 66 clients for whom the Plaintiff had performed services, a nd to pay the

Plaintiff one-third-4-

plus 15 perce

nt of any fees thu s collec ted other than fro m the Plaintiff’s family members. The Defendant

was ordered to pay

$297.37 for reimbursement of an insurance premium, and directed to re-issue a check in the amount of $3635.10 for work performed by the Plaintiff on the estate of Daffronwith an “acco unting by the Plaintiff showing that the Defendant is to receive credit for $683.40 for deferred compensation for fisc al year 1999.” Plaintiff was ordered

to pay the Def

endant two-thir ds of $255 .00 for se

rvices he perfo

rmed for a trust. The Rule 59 Motion and Judgment Thereon JJM filed a

Rule 59 motion, complaining of the court’s action in finding that any breaches of either contract were immaterial, and that the court should have found that the Plaintiff made the first uncured breach, when he pre pared 66 tax returns without accounting to JJM. The motion also raised th e issue th at the Pla

intiff did not seek a

n accou nting, a s ordere d by

the cour t. The motion was granted, and the parties were allowed

to present additional proof respecting the alleged breaches of the Plaintiff as to the diversion of clients and damage s resultin g there

from. Further testimony wa s heard in March and August 2002, resulting in a n order which recited that 1. The motion to alter or amend the judgment is denied. 2. Rather

than account to Plaintiff as heretofore refe renced . . . the Defendant will pay $55,057.0 5 in defe

rred co mpensatio n to the Pl aintiff for the ye ars 1999, 2000, and 2001. 3. Th e c ou nt ’s fi na l o rd er en te re d o n J ul y 19 , 2 00 1 s ta nd (s ) i n i ts en ti re ty. This order was later amended to substitute $42,457.05 in lieu of $55,057.05.
The Issues
I. Whether

the trial court erred in determining that the Plaintiff did not materially bre ach his covenant not to compete;
II. Whether

the trial court should

have declared that the Plaintiff forfeited a ny further right to deferr ed compe nsation or other be nefits;
III. Whether

the trial court erred in finding that the fee s for the 66 tax returns for 1998 amounted to $4300.00, as contrasted to $23,606.94
IV. Wh et he r t he Pl ai nt if f w as en ti tl ed to va ca ti on an d l ea ve pa y. V. Whether pre-judgment interest was properly disallowed.-5- Analy sis At the outset, we are unable to reconcile dec retal provision number one to the second provision, which ob vi ou sl y altered the judgment contrary to the denial of the motion to alter or amend. Moreover, the motion was initially g ranted by or

der entered

March 8, 2002. We are permitte d to assume

that the in adverte

nces of t hese ord ers pose no conse quence s. Our review i s de novo on the record accompanied with the presumption that as to factual matters the judgment

is correct unless the

evidenc e preponderate s again st it. Rule 1 3(d) Ten n. R. App. P. Questions of law bear no presumption. Guiliano v. Cleo Inc. , 995 S.W.2d 88 (Tenn. 1999). The Breach of Contract The trial judge found that neither party committed amaterial breach of either ag reement. The preponderance

of the evidence supports this finding except with respect to the sub rosa

preparation by the Plaintiff of 66 tax returns for c lients of JJM. The Plaint

iff conc edes tha

t in early 1999 he pr

epared 66 tax retu

rns, for the 1998 tax year, of which twelve were corporate ret urns. He claim ed that he

had not billed the c lients for his services because they

were friends, and

thus his actions were protected by the agreement. He kept no time records for the work performed. The taxpayers we re long-time clients of JJM; in 1998 - for the 1997 tax year - JJM prepared t he s ame returns and received $23,606.94 as compe nsation therefore. The Plaintiff retained, at his residence, the files pertinent to these c lients. He argues that the contract allowed

him to prep are tax re

turns for family and frie nds so long as h

e did not receive compensation for the work. Ap parentl y, n one of the se taxpay

ers was a family member; a

ll had been clients of the firm for

years. The

re is no proof whatever

in the record - other than the testimony of the Plaintiff - that

these 66 clients expected that they would notbe charged the usual fee for the tax service. We a

gr ee w ith J JM th at t he Plai ntif

f delibe rat ely preven ted JJM from performing tax-return work for these 66 clients, thus deprivi ng the fi rm of the r evenue s, and fut

ure go od will of t

hese clients. We also ag

ree tha t in so doing

the Plainti ff was c ompeting withJJM in a somewhat flagrant breach of his contractual duty . It issignific ant that in prior yea rs the Plaintiff never did more than two free tax return s for cor

poration s and rar

ely did free tax return s for indiv

iduals. As we have observed, we

agree with the tr

ial judg e that most

of the various peccadillos each party accused the other of having eng aged in are not material, but we ca nnot agree that the matter of the 66 t

ax return s was imma

terial. The contract required the Plaintiff to give his best efforts to the firm. He engag ed in a degree of peccancy with respect to the 66 returns apparently relying on the non-billing of them, at least for the time being, as a defense to his ac t ions. Mate riality of actio ns, unlesspreced ent inter venes, is essentia lly a subjective matter; if, for instance, the Plaintiff had prepared ten returns for friends withoutcharge, and advised JJM that he had done so, no que stions rea sonably would arise. But we cannot accept that the large number of returns the Plaintiff prepared, ostensibly without charge, can-6-

be attributa

ble to any rea son other than machination, and we find that this conduct by the Plaintiff constituted a mater

ial brea ch of his c ontract

. The trial court relied on the opinion of this Court in United Br a ke Systems v

. AEP , 963 S.W.2d 749. Both parties breached a contract, and a significant issue was which party committed the first, uncured breach. To determine this issue, five fa ctors were to be considered: the extent t o which the injured party

will be deprived of

the benefit reasonably

expected, the extent the injured party can be compensated, the extent of the fo rfeitur e involve d, the like

lihood of t he defa ulting pa rty to cure or offer to cure his failure , and the extent of the defaulting party ’s behavior as it co mp orts withgood faith and

fair dealing. The trial court found that the “total value of the tax returns” was about $4300.00; we cann ot agree with this finding because the proof is well-nigh irre futable that

the value of the services required to prepare the 66 retur n s for the previous year w as $23,606.00, superimposed upon a clear inference that the 1998 r eturn, prepared in1999, req uired mor e time. When it is considered that the employment ag reement required the Plaintiff to devote the necessa ry time and best efforts in the per formance of his duties for JJM in accordance with Professional Standard s, we think it

is clea r beyond per

adventure that the Plaintiff committed a material breach of the conditions of his agreement. We have c onsider ed the fact that while the Plaintiff prepared these returns, apparently

withoutbill ing the clients, and that the contract allowed him to prepare returns for fami ly a

nd frien ds provided he cha rged n o fee, w e are not satisfie d from t he proof and reasona ble inference

to be drawn therefrom that such conduct was within the purview of the parties when the contract was executed. The covenant provides that if the employee [Plaintiff] is foun d b y a court of competent jurisdiction to have materially violated the covenant not

to compete, the employee shall no longer be ent itled to fu

rther pa yme nts of def erred c ompensat

ion. Acc ordingl

y, s ince we

have fou nd th a t the Plaintiff

clearly violate d the covena nt not to co mpete in a

materia l way , the pena

lty p rovision is thereby a ctivated, and the award of defer red compensation is vacated.
JJM argues that the Plaintiff is liable t o it for the fees it would have collected during the remaining three ye ars of the Deferred Compensation Ag reement if the Plaintiff

had not de

liberate ly divertedthe 66 sec

ret retu rns he pr epared in 1999. Th

e trial ju dge all owed JJM to bil l for such service s, apparently f

inding that none of

the 66 clients had been billed, by the Plaintiff, or had pa

id for tax services rendered by

the Plaintiff. While this decretal provision is somewhat unusual, we see no reason to disturb i

t, nor to render a judgment aga inst the Plaintiff for a like amount for 2000 and 2001. W e note tha

t JJM made pecuniary

advanc es of $10, 059.60 to th e Plaintif f betwee n August 1, 1998 and December 15, 1998 before JJM learned of the dece ption practiced by

the Pl ainti ff. We agree the JJM is entitled to a refund of this amount, with interest fr om Dece mb er 15, 1998. The Plaintiff was awarded $6360.00 for accr ued vacation and leave

time. JJM complains that this award is not supported by t

he evide nce bec ause the

employ ment manu al - dra

fted by the Plainti ff - limits the amount of

vacatio n and lea

ve time that c arri ed ov er fr

om year t o y ear. We agree. The Plaintiff exhausted 213 hours of vacation and leave time after his injur y in 1996. JJM argue s that simpl e calculation reveals that the Plaintiff could recover a maximum of 1.42 hours, or $42.00 for unused time, because

his calcu lations did not take into account the carryover limitation. This conclusion-7-

appare ntly is not seriously controver ted by the Plaintiff, since he did not brie f the issue. This award is accordingly

vacated.
We have considered the

remaining arguments by

each party

and have determined that they are de minimi

s , or have not been p

resente d as issue s. In sum, we find that the Plaintiff materially br eached the employ

ment agreement, and

that he is not entitled to recover further deferre d compensation. We find that the Plaintiff is not entitled to recover the vacation and leave time. We affirm the order allowing JJM to bill for the preparation of the tax returns for

1999, 2000, and 2001, remitting to the Plaintiff his contractual percentile: we affirm the judgment for $297.37: we affirm the judgments pe rtaining to the Daffron estate and to a trust. The judgments for $42,457.05 and $6360.00 for the Plai ntiff ar e vacat ed, all a s herein provided. The judgment is modified and remanded for all nece ssary

purposes . Costs are

assesse d to the Appellee.

___________________________________ WILL IAM H. I NMAN, SENIOR JUDGE