# FILED July 10, 1998 Cecil W. Crowson Appellate Cou rt Clerk IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

______________________________________________ KENNETH M. BESS and THOMAS R. CUMMINGS, JR., Plaintiffs-Appel

lants, Davidson Chancery No. 95-2864-II vs. C.A. No. 01A01-9707-CH-00319 ASSOCIATED BROKERS OF TENNESSEE, INC., Defendant-Appellee.

________________________________________________________ ____________________ FROM THE DAVIDSON COUNTY CHANCERY CO URT THE HONORABLE CAROL L. MCCOY, CHANCELLOR

D. Alexander Fardon; Harwell Howard Hyne Gabbert & Manner

, P.C. of Nashville For Appellants Richard M. Smith, Kenneth S. Schrupp Smith & Cashion, PLC of N ashville For Appellee

REVERSED AND REMANDED Opinion filed:

W. FRANK CRAWFORD,

PRESIDING JUDGE, W.S.
CONCUR: DAVID R. FARMER,

JUDGE HOLLY KIRBY LILLARD, JU DGE2 This appeal involves a

dispute concern

ing distribution to sto

ckholders in a clo

sely held corporation. Plaintiff-stockholders, Kenneth M. Bes s (Bess) and Thomas R. Cummings, Jr., (Cummings) appeal from the judgment of the tria l court denying the

relief sought aga

inst defendant,

Associated Brokers of Tennessee, Inc. (ABT). Plaintif fs’ complaint alleges that b y virtue of the stockholder agreement dated May 3, 1990, between them and William W. Johnson (Johnson) and ABT, Bess became a 25 percent shar

eholder of ABT an

d Cummings became

a 20 percent shareholder of ABT. Plaintiffs allege that in late 1994, Johnson caus

ed ABT to sell all
or substantially all of

its assets to Acosta Sales Company, Inc. (Acosta). The plaintiffs aver that although they were directors and shareholders, they were not informed of the transaction until it had been consummated and were not given an opportunity to vote on the transaction. Plaintiffs further allege that since the sale of the assets to Acosta, ABT has been diverting all of the payments made by Acosta to Johnson, who is not performing any services for ABT. Plaintiffs
aver that as shareholders, they wer e entitled to vote pursuant to T.C.A. § 48-22-102 (1995) concerning the sale of the assets, an d f urther that they were not advised of their rights as dissenters as provided in T.C.A. §§ 48-23-201, et seq. (1995). Plaintiffs’ complaint

seeks an injunction requiring ABT to comply with the provisions of T.C.A. § 48-23-201 et seq. , or, alternative ly, for a judgment a

gainst ABT in an amount equal to the fair value of

their st ockat the time of the sale. Plaintiffs also seek attorney’s fees and costs. ABT’s answer admits that the plaintiffs became shareholders on May 3, 1990, but avers that they were not shareholders at the time of the sale of the assets to Acosta. It admits that the plaintiffs were directors at the time of the Acosta transaction and that they were not notified and given the opportunity to vote upon the transaction. ABT admits that Johnson has been receiving the payments made by Acosta for the assets, stating specifically: “As the sole shareholder of the Defendant,

William W. Johnson r

eceived and is c

urrently recei

ving payments from

Acosta Sales C ompany, Inc. in return for the sale of the assets of the Defendant.” The answer den ies th e remaining material allegations of the complaint and joins issue thereon. Bess and Cum ming s
were employed by ABT

in 1976 and 1980 respectively. At the time that Cummin gs joined ABT in 1980, Johnson served as president of the corporation and owned one hundred (100%) percent of the stock. By 1990, ABT was struggling financially. As a result, Johnson and the plaintiffs3

entered into a Stockholder Agreement whereby Johnson agreed to

sell 125 shares of

ABT to Bess (25% of the company’s stock) in exchange for a $30,000 promissory note, and 100 shares of ABT to Cummings (20% of the stock) in exchange f or a $24,000 promissory note. The Stockholder Agre

ement states in per

tinent part: Payment shall be made by the

execution of a pr

omissory note in the original principal amount of the purchase price for each of the purchasers . . . . The promissory notes signed by the plaintiffs each include a payment schedule and an acceleration

clause whereby

the holder (Johnso

n) ma y elect for the pr

incipal to become im mediately

due and payable in the event of default. The notes are collateralized by th e respective shar

es sold by the agre

ement, and the note

s specifically pr

ovide: As security for the payment of this Note, the holder shall retain possession of in pledge and have a security intere st in the one hundred (100) shares of common stock of Associated Brokers, Inc., being conve yed pursuant to a St

ock holder Agreement

of even date

herewith between William W. Johnson, Kenneth M. Bess, and Thomas

R. Cummings, Jr., until such time as this Note has been p aid i n full. All rights in c onnection with or incident to

the ownership of s

uch shares shall

be vested solely in the holder of this N

ote unti l such t ime as this Note has been paid in full. It is undisputed that at the time of the trial, no payments had been made on the notes by either Bess or Cummings, and Johnson had not demanded payment or otherwise taken any ac tio n authorized by the notes. In December of

1993, a representative

of Acosta Sales Co., Inc., a large regional broker, indicated an interest in

purchasing ABT’s assets. Johnson negotiated a sale on behalf of ABT, which entered into a Master Broker Agreement and an Agreement for Pu

rchase of Asset

s with Acosta on February 28, 1994. In accordance with the Master Broker Agreement, Acosta agreed to pay ABT over a period of ten years a variable stream of revenue that reflects a portion of the commissions that Acosta earns from ABT’s product lines. Johnson testified that he orally agreed at this time to retire after one ye ar and sign a non-compete covenant. The Agreement for Purchase of Assets includes the following clause:

Covenant Not to Compete. To facilitate the sale and t h e purchase of the Assets pursuant to this Agreement, Seller hereby agrees that it shall not within the Central and East Tennessee [illegible] engage in competition with Buyer, either directly or indirectly, in the operation or ow nersh ip of a food brokerage or food services businesses [sic].1 We note that the Agreement for Purchase of Assets contains no sale price.

Apparently, the sale price for the assets is included in the sums due under the Master Broker Agreement. 4 The Agreement for

Purchase of Assets explicitly defines “Seller” as “ABT.” 1 The remainder of ABT’s employees, including the plaintiffs, were to be indefinitely employed by Acosta. Many of these employe es, including the plain tiffs, signed non-

compete covena

nts with Acosta in exchange for the consideration of employment with Acosta. On May 31, 1994, Johnson, acting on behalf of ABT, entered into a revised Master Broker Agreement with Ac

osta. This r

evi sed agreement a

lters the revenu

e stream and also includes a non-compete c ovenant that did no

t appear in

the original Master Broker Agreement signed on Februar

y 28, 1994. This cla

use states: Johnson agrees that during such period of receipt of monthly payments hereunder, he will not directly or indirectly enter into, or in any man ne r take part in, any business, profession or other en deavor, whether

as an employee, agent, independent contractor, owner or otherwise, i n the Central and Ea st Tennessee Mar

kets wh ich is in competition with Acosta’s food br

okerage busines s.

. . . One of Acosta’s remedies for breach of this covenant is relief from the obligation to ma ke payments under the

terms of the agre

ement. Following a bench trial, the tr ial cou rt found that Bess is a 25 percent shareholder and Cummings is a 20 percent shareholder of ABT. The trial court, ho wev er, found that Johnson held a security interest in the plaintiffs’ shares, thus entitling Johnson to “all the r ights in connection with or incident to the ownership of the shares.” Because Johnson was a beneficial shareholder, the trial co urt held that the plaintiff

s did not have the sta

tutory right to exe

rcise dissenters’ rights in accordance with T.C.A. §§ 48-23-201 et seq. . The trial court proceeded to find that the value of Johnson’s non-compete covenant reflected in the revised Master Broker Agreement equals $90,000 per y ear for e ach of the ten years of the revenue stream pursuant to the agreement. The trial court, then, orde

red ABT to

pay Jo hnson $7,500 each month for ten years as consideration for his signing the covenant. After eachmonthly payment has been made to Johnson, the trial court held tha t eac h of the shareholders is entitled to any remainder of the proceeds from ABT’s sale in accordan ce wit h their proportionate ownership. The trial court, however, held that ABT is not required to make2 The trial court a lso held that each

of the shareholde

rs bears pro rat

a responsibility for any shortfal

l for payments to be

made to Johnson pur

suant to the $900,00

0 non-compete covenant.

3 The plaintiffs do n

ot appeal the tria

l court’s holding th

at they are not en

titled to exercise dissenters’ rights, and ABT does not appeal the trial court’s finding that the plaintiffs are sh

areholders.
4 The plaintiffs poi

nt out that the non-c

ompete clause in t

he Agreement to Pu

rchase Assets states that ABT (in contrast to Johnson) may not compete. 5 certain distributions to the plaintiffs until the expiration of the ten-year period. 2 In addition, the trial court ruled

that ABT is not required to make distributions to the plaintiffs until they have fully paid the amounts due under the promissory notes. On appeal, the plaintiffs contend t hat the trial court erred when it ordered ABT to pay Johnson $900,000 for the no n-compete cove

nant. The plaintif

fs also argue tha

t the tria l c ourt erred when it held that ABT need not make certain distributions to the plaintiffs until the ten-year revenue stream expires and until the promissory notes are paid. 3 Since this case was tried by the trial court sitting without a jury, we review the case de
novo upon the record with a presumption of correctness of the findings of fact by the trial court. Unless the evidence p reponderat es against the findings, we must affirm, absent error of law. T.R.A.P. 13(d). It is fundamental corporate law that an owner of a corporation’s stock is e n titl ed t o a proport i onate sha re o f an y o f t h e co rpo rati o n ’s dist r i b u t i o n s . See, e.g., 7

Tenn. Jur
. Corporations § 43 ( 1997) ;

11 F letch er’s C ycl opedi a of C o r por a t i ons Stock & Stockholde

rs § 5352 ( 1995)
.The pl a i

n t i f f s c ont end th a t th e tria l
cour t ’ s r u l i ng abr ogat e s t h i s pr i nci p l e : by m andati ng that proceeds f rom t he A cost a re venu e st rea m are i n i t i a l l y diver t e d t o com pensat e Johnson for t

he no n-com pet e coven ant , t he plai n t i f f s ar e ef fec t i vel y divest ed of t hei r pr o rat a shar e of t h e revenue. T he plai n t i f f s not e t hat Johnson’s non-com

pet e coven ant w as not executed unti

l t he revi sed M ast er Broker A g r eem ent w a s si gned i n M ay of 1994, t h r ee m ont hs a f t e r t he i n i t i a l M a s t e r B r oker A g r eem ent w a s si gned. 4 Since al l o f t he agr eem ent s bet w een A B T and A cost a re quir e A cost a t o m ake al l paym ent s t o A B T , t he pl a i n t i f f s f u r t her ar gue t hat t he t r i a l court has ef fec t i vel y rew r i t t en t hese agreem

ent s s o t hat $90 0 , 000 f r o m t h i s r evenue st r eam i s di ver t ed t o Johns on.Fi nal l y , t he pl a i n t i f f s a s s e r t t hat t he r ecor d does not suppor t t he t r i a l cou rt’ s f i ndi ng t hat Johns on’ s noncom pet e coven ant w as w ort h $9 00,000 t o A cost a . ABT r e s ponds by c ont endi n g t hat A B T benefi t t ed fr o m Johnson’s non-com

pet e covena n t , si nce A cos t a w oul d5 ABT disputes the pla intiffs’ argumen

t that the original a

greements signed

in February of 1994 did not include Johnson’s non-compete covenant. ABT contends that the intent of the covenant in the Agreement for Purchase of Assets was to apply to Johnson and not to ABT. ABT also asserts that ABT and Acosta orally agreed throughout the course of the negotiations th

at Johnson would be

barred from com

peting with Acosta

and that he would retire after one year. ABT notes that the trial court found that the initial Master Broker Agreement that di

d not contain the co

venant was draf

ted “in a hurried

fashion . . . beca

use payroll had to be made on March the 1st.” 6 not have e n t e r ed i n t o t he agr eem ent s ha d t he cove nant s not been i ncl uded. 5 If the p lain t i ffs’ t heory prevai l s , A B T in sis t s t hat Johns on w i l l r ece i ve no cons i der a t i on f o r and b enefi t fr o m t he no n-com pet e covena n t .I n cont r a s t , A B T has not
rec e i ved a bene f i t f r o m t he non- com pet e cove nant s by the p lain t i ffs, w h o are abl e t o con t i nue to be em p l oyed by A cost a . I n addit i on, A B T contends t hat i t w i l l be “un j ust l y enri ched” if i t i s per m i t t e d t o ret a i n t he ben efi t f r o m Johns on’ s noncom pet e cove nant w i t hout com pens a t i ng Johns on. I n Warren v. Metropolitan Gov’t of Nashville & Davidso

n County ,

955 S. W
. 2d 618 ( Tenn. A pp. 1997), w e di scuss ed t he rol e of a C ourt i n i n t erpr e t i ng a co n t rac t : Courts are to interpre

t and enforce the

contract as w

ri tten, according to its plain terms. Petty v. Sloan , 197 Tenn. 630, 277 S.W.2d 355, 358 (1955); Home Beneficial Ass' n v. White , 180 Tenn. 585, 177 S.W.2d 545, 546 (1944). We are precluded from making new c ontracts for the parties by adding or deleting provisions. Central Adjustment Bureau, Inc. v. Ingra m , 678 S.W.2d 28, 37 (Tenn.1984) ; Shell Oil Co. v. Prescott, 398 F.2d 592 (6th Cir.1968 ). Wh en clear contract language reveals the intent of the parties, there is no need t o apply rules of construction. An ambiguity does notari se in a contract m erely because the parties may differ as to interpretation of certain of

its provisions. Oman Construction Co. v. Tennessee Valley Auth. , 486 F.Supp. 375 (M.D.Tenn.1979 ). A con tract is ambiguous o nly when it is of uncertain m

eaning and may fa

irly be understood in more ways than one; a

strained construction may not be placed on the langu age used to find a n ambiguity where

none exists. Empres s Health and Beauty Spa, Inc. v. Turner , 503 S.W.2d 188, 190-91 (Tenn.1973). We are to consider t he agreement as

a whole in determining whether the meaning of the contract is clear or ambiguous. Gredig

v. Tennessee Farme

rs Mut. Ins. Co. , 891 S.W.2d 909, 912 (Tenn.Ap p.1994). If a con

tract is pla

in an d unambigu ous , the meaning thereof is a question of law for the court. Petty v. Sloan , 277 S.W.2d at 358. Id. at 622-23. Accor

ding to the pla

in terms o f the contracts between ABT and Acosta, which Johnson negotiated for on behalf of ABT, the revenue

stream paid by Ac

osta is paid solely to ABT. Nothing in the contracts indicates that any of the proceeds shou l d be paid directly to Johnson, nor is there ev idence of any agreeme nt between ABT an

d Johnson by which A

BT agrees to compen

sate Johnson for a

cceding to the non

-compete coven

ant. N o t onl y i s t her e i s no e v i dence of any agr eem ent bet w een A B T and Johns on conce r n i ng com pens a t i on t o6 This principle is found in the revised Fletcher’s treatise at 12A Fletcher’s

Cyclopedia of Corporations Stock & Stockholde rs § 5656 (1993). 7 Johns o n for the n o n -co m p e te co v en a nt, Joh nso n’s a nsw er to the c o m

plaint spec i f icall y st a t es t hat he i s r ece i v i ng t h e A cos t a paym ent s a s t h e sol e s har ehol der of A B T and i n r e t u r n f o r t he s a l e of t he as s e t s . M o r eover , w e f i nd not h i ng i n t he r ecor d t o sugge s t a val ue f o r Johns on’ s non- com pet e cove nant . T ennessee C ode A nnot a t ed § 48- 16- 401 ( 1995)

addr e s s e s t he aut hor i zat i on f o r sha r ehol der di s t r i but i on by a boar d of di r ect o r s . I n th e abs ence of any enf o r cea b l e cont r act s t o t he cont r a r y , al l di s t r i but i ons f r o m a cor por a t i on t o sha r ehol der s m ust be di sbur s e d pr o r a t a . Tubb v. Fowler ,

118 Tenn. 325,

99 S. W
.988 ( 1906) ;

7 Tenn. Jur

. Corporations § 43;

11 F l e t cher ’ s Cycl opedi a of C o r por a t i ons Stocks & Stockhold

ers § 53 52. A

B T has not ci t e d any aut hori t y t hat w ould w arr ant an excep t i on to t h i s pr i nci p l e .Since t here i s no evi dence of any pr ovi s i on f o r paym ent b y A B T to J ohnson f o r hi s no n-c o m p e te co v en a nt w i t h A c o sta, an y a m o u nts rece ived by Joh nso n sh o u ld be consi dered
a d i s tri b u tio n fr o m A B T
. See T. C
. A
.§ 48- 11- 201( 8 )

( 1995)
. I t i s undi sput ed t hat nei t her pl a i n t i f f has pai d any am oun t due u nder t he pr o m i s s o r y not e s hel d by Johns on f o r t he pur chas e pr i ce of t he s t ock. T he no t es pr ovide t hat t he shares of st ock ar e hel d as se cur i t y f o r t he paym ent of t h e
n o t e s an d w hil e the no tes rem ain u n p aid, Joh nso n, as the h

olde r t h e reo f , retai ns a l l ri g h ts of ow n e rship in the sh

ares,
w h ich necessar

i l y m ust i ncl ude the r i ght t o recei ve a sha r ehol der d i s tri b u tio n . 1 1 F l e t cher ’ s Cycl opedi a of C o r por a t i ons Stocks & Stockholder

s § 538 2 (1995 ) . H o w ever, s i nce t he st ock is hel d as a secur

i t y for an i ndeb t edness, any am oun t s r e c e i ved by t he bene f i c i a l ow ner onl y appl y t o reduce the a m o u nt of the ind e b tedn ess. Payne v. Fowler , 1

2 Tenn. A pp.449, 461 ( 1930) ( “The r u l e i s t hat i n t h e absence of an agreem

ent t o t he con t rar y , a pl edger of s hares of s t ock as coll a t era l secur i t y carr i es w i t h i t , as an i nci dent o f t he pl edgee ’ s s peci a l ow ner shi p , t he r i ght t o r ece i ve di v i dends af t e r decl a r ed, to be applied on the debt , ” (c itin g 6 Fl e t cher ’ s Cycl opedi a of C o r por a t i ons, § 3704) )

6 ( e m phas i s a dded) ; see also Nashville T rust Co. v. First Nat. Bank ,

123 Tenn. 617,

626, 134 S. W
.311, 314 ( 1911) ( “The pl edgee does not acqui r e abs o l u t e t i t l e by s uch a contr act , but onl y a sp e c ial pro p e r t y in the thi n g pled g e d, w i t h the ri g h t t o p osse ssi o n until the object of the pledge be accomplished
. ” ) ( e m phas i s a dded) ; A nnot a t i on, Right of Pled

gee of Corporate Stock in Respect of Dividends Declared Thereon , 67 A
. L . R
.485 ( 1930) , 103 A

. L . R
.849 ( 1936) ; K ennet h B
. D avi s , Jr., Pledged Stock and the Mystique of Recor d Ownership ,

1992 W i s . L. R ev. 997, 1001- 02 ( 1992)
. This

i s rei nfor ced by Tenness ee’ s a dopt i o n of A r t i c l e 9 of t he U n i for m C o m m erc i a l C ode, w h i ch s t a t e s t hat , i n t he abs ence of an agreem ent t o t he con t rar y , w hen the pl edgee p osses ses t he coll a t era l : (c) t he s ecur ed par t y m ay hol d as addi t i onal se cur i t y any i n c r e a s e o r p r o fits8 ( exce p t m oney) r ece i ved f r o m t he col l a t e r a l , but m oney s o rece ived , un less r e m i t t ed t o t he debt o r , sha l l be appl i ed i n r educt i on of t he s ecur ed obl i gat i on. T . C
. A
.§ 47- 9 - 207 ( 2 ) ( c )

( 1996)
. T h e j udgm ent of t he t r i a l cour t or der i ng A B T t o pay t he s u m s a s s e t out t her e i n i s va cat ed. Paym ent s m ade t o Johnson h ere t ofor e ar e consi dered a di s t r i buti on that should be al l ocat e d bet w een Bess , C u m m i ngs, and Johns on, i n accordance w i t h t hei r st ock ow ner shi p . The am oun t s due B e s s a nd C u m m i ngs s hal l f i r s t be pai d on t he not e i ndeb t edness, and t he ca s e m ust be r e m anded t o t he t r i a l cour t f o r det e r m i nat i on a s to the co rrec t am ount of t h e i ndeb t edness du e o n the no tes an d the am o u nt pa id t o Jo h n son thus fa r as a d ist r i b u t i o n . W h en the en t i re ind e b tedn ess
o n t he not e s i s pa i d , t he ow ner shi p of the sha res rev erts t o B ess and C u m m i ngs, and they are t

hen en t i t l ed t o recei ve t hei r p r o ra t a d istr i b u tio n . I n sum , t he j udgm ent of t he t r i a l cour t i s r evers ed, and the case i

s r e m anded t o t he t r i a l court for fur t her p r ocee d i ngs consi s t ent w i t h t h i s opi n ion. Co s t s of t he app eal are a sse sse d o n e-h alf to p lain t i ffs a n d o n e-h alf to def endant
.

_________________________________ W. FRANK CRAWFORD, PRESIDING JUDGE, W.S. CONCUR:

____________________________________ DAVID R. FARMER,

JUDGE

____________________________________ HOLLY KIRBY LILLARD, JU DGE