FILED

July 10, 1998

Cecil W. Crowson

Appellate Court Clerk

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

 ______________________________________________

KENNETH M. BESS and 

THOMAS R. CUMMINGS, JR., 

Plaintiffs-Appellants,

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 COURT

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 Nashville

For Appellee

REVERSED AND REMANDED

Opinion filed: 

W. FRANK CRAWFORD,

PRESIDING JUDGE, W.S.

CONCUR:

DAVID R. FARMER, JUDGE

HOLLY KIRBY LILLARD, JUDGE
2

This appeal involves a dispute concerning distribution to stockholders in a closely held

corporation. Plaintiff-stockholders, Kenneth M. Bess (Bess) and Thomas R. Cummings, Jr.,

(Cummings) appeal from the judgment of the trial court denying the relief sought against

defendant, Associated Brokers of Tennessee, Inc. (ABT). Plaintiffs’ complaint alleges that by

virtue of the stockholder agreement dated May 3, 1990, between them and William W. Johnson

(Johnson) and ABT, Bess became a 25 percent shareholder of ABT and Cummings became a 20

percent shareholder of ABT. Plaintiffs allege that in late 1994, Johnson caused 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 were entitled to vote pursuant to T.C.A. § 48-22-102 (1995)

concerning the sale of the assets, and further 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, alternatively, for a judgment against ABT in an amount equal

to the fair value of their stock at 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 received and is currently receiving payments from Acosta Sales

Company, Inc. in return for the sale of the assets of the Defendant.” The answer denies the

remaining material allegations of the complaint and joins issue thereon. Bess and Cummings

were employed by ABT in 1976 and 1980 respectively. At the time that Cummings 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 plaintiffs
3

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 for a $24,000 promissory note. The

Stockholder Agreement states in pertinent part:

Payment shall be made by the execution of a promissory 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 (Johnson) may elect for the principal to become

immediately due and payable in the event of default. The notes are collateralized by the

respective shares sold by the agreement, and the notes specifically provide: 

As security for the payment of this Note, the holder shall

retain possession of in pledge and have a security interest in the

one hundred (100) shares of common stock of Associated

Brokers, Inc., being conveyed pursuant to a Stockholder

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 paid in full. All rights in connection with

or incident to the ownership of such shares shall be vested solely

in the holder of this Note until such time 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 action

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 Purchase of Assets 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 year 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 the

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 ownership 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 employees, including the plaintiffs, signed non-compete covenants 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 Acosta. This revised agreement alters the revenue stream and also

includes a non-compete covenant that did not appear in the original Master Broker Agreement

signed on February 28, 1994. This clause states:

 Johnson agrees that during such period of receipt of monthly

payments hereunder, he will not directly or indirectly enter into,

or in any manner take part in, any business, profession or other

endeavor,whether as an employee, agent, independent contractor,

owner or otherwise, in the Central and East Tennessee Markets

which is in competition with Acosta’s food brokerage business.

. . .

One of Acosta’s remedies for breach of this covenant is relief from the obligation to make

payments under the terms of the agreement.

Following a bench trial, the trial court found that Bess is a 25 percent shareholder and

Cummings is a 20 percent shareholder of ABT. The trial court, however, found that Johnson

held a security interest in the plaintiffs’ shares, thus entitling Johnson to “all the rights in

connection with or incident to the ownership of the shares.” Because Johnson was a beneficial

shareholder, the trial court held that the plaintiffs did not have the statutory right to exercise

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 year for each of the ten

years of the revenue stream pursuant to the agreement. The trial court, then, ordered ABT to pay

Johnson $7,500 each month for ten years as consideration for his signing the covenant. After

each monthly payment has been made to Johnson, the trial court held that each of the

shareholders is entitled to any remainder of the proceeds from ABT’s sale in accordance with

their proportionate ownership. The trial court, however, held that ABT is not required to make
2

 The trial court also held that each of the shareholders bears pro rata responsibility

for any shortfall for payments to be made to Johnson pursuant to the $900,000 non-compete

covenant.

3

 The plaintiffs do not appeal the trial court’s holding that they are not entitled to

exercise dissenters’ rights, and ABT does not appeal the trial court’s finding that the

plaintiffs are shareholders.

4

 The plaintiffs point out that the non-compete clause in the Agreement to Purchase

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 that the trial court erred when it ordered ABT to pay

Johnson $900,000 for the non-compete covenant. The plaintiffs also argue that the trial court

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 preponderates 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 & Stockholders § 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 d
5

 ABT disputes the plaintiffs’ argument that the original agreements 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 that Johnson would be barred from competing with Acosta and that he would

retire after one year. ABT notes that the trial court found that the initial Master Broker

Agreement that did not contain the covenant was drafted “in a hurried fashion . . . because

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 & Davidson 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 interpret and enforce the contract as written,

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 contracts for the parties by adding or deleting

provisions. Central Adjustment Bureau, Inc. v. Ingram, 678

S.W.2d 28, 37 (Tenn.1984); Shell Oil Co. v. Prescott, 398 F.2d

592 (6th Cir.1968). When clear contract language reveals the

intent of the parties, there is no need to apply rules of

construction. An ambiguity does not arise in a contract merely

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). Acontract is ambiguous only

when it is of uncertain meaning and may fairly be understood in

more ways than one; a strained construction may not be placed on

the language used to find an ambiguity where none exists.

Empress Health and Beauty Spa, Inc. v. Turner, 503 S.W.2d

188, 190-91 (Tenn.1973). We are to consider the agreement as a

whole in determining whether the meaning of the contract is clear

or ambiguous. Gredig v. Tennessee Farmers Mut. Ins. Co., 891

S.W.2d 909, 912 (Tenn.App.1994). If a contract is plain and

unambiguous, the meaning thereof is a question of law for the

court. Petty v. Sloan, 277 S.W.2d at 358.

Id. at 622-23. According to the plain terms of the contracts between ABT and Acosta, which

Johnson negotiated for on behalf of ABT, the revenue stream paid by Acosta is paid solely to

ABT. Nothing in the contracts indicates that any of the proceeds should be paid directly to

Johnson, nor is there evidence of any agreement between ABT and Johnson by which ABT

agrees to compensate Johnson for acceding to the non-compete covenant.

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 o
6

 This principle is found in the revised Fletcher’s treatise at 12A Fletcher’s

Cyclopedia of Corporations Stock & Stockholders § 5656 (1993).

7

Johns o n for the n o n -co m p e te co v e n 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 & Stockholders § 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 e n 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 i ch 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 Trust 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 Pledgee 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 Record 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 fits
8

( 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 e n 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 i on. 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, JUDGE