Opinion ID: 1057658
Heading Depth: 2
Heading Rank: 2

Heading: The Municipal Electric Plant Law

Text: Allmand argues that the Electric Department employment contract with Allmand and the post-termination compensation provision and, by extension, the contract approved by the Gas Department Board, were authorized under the Municipal Electric Plant Law of 1935. He cites Tennessee Code Annotated section 7-52-103(a), which empowers every municipality to (1) Acquire, improve, operate and maintain within or without the corporate or county limits of such municipality, and within the corporate or county limits of any other municipality, with the consent of such other municipality, an electric plant and to provide electric service to any person, firm, public or private corporation, or to any other user or consumer of electric power and energy, and charge for the electric service; .... (7) Make contracts and execute instruments containing such covenants, terms and conditions as in the discretion of the municipality may be necessary, proper or advisable for the purpose of obtaining loans from any source, or grants, loans or other financial assistance from any federal agency; make all other contracts and execute all other instruments as in the discretion of the municipality may be necessary, proper or advisable in or for the furtherance of the acquisition, improvement, operation and maintenance of any electric plant and the furnishing of electric service; and carry out and perform the covenants and terms and conditions of all such contracts and instruments; .... (9) Do all acts and things necessary or convenient to carry out the powers expressly given in this part. Tenn. Code Ann. § 7-52-103(a); see also Tenn. Code Ann. § 7-52-107 (giving municipality authority to create board of public utilities). Allmand also relies upon Tennessee Code Annotated section 7- 52-134, which permits municipal authorities to “do all things necessary or convenient to carry out the purposes of this part in addition to the powers expressly conferred in this part” and which requires that the powers granted by the Municipal Electric Plant Law be “liberally construed to effectuate the purposes of this part.” Tenn. Code Ann. § 7-52-134. The statutes cited by Allmand, however, must be read in conjunction with Tennessee Code Annotated section 7-52-114(b), which specifically states as follows: The supervisory body shall appoint an electric plant superintendent . . . who shall be qualified by training and experience for the general superintendence of the acquisition, improvement and operation of the electric plant. The superintendent -10- need not be a resident of the state at the time of appointment. The superintendent’s salary shall be fixed by the person or agency appointing such superintendent. The superintendent shall serve at the pleasure of the supervisory body and may be removed by such body at any time. Tenn. Code Ann. § 7-52-114(b) (emphasis added). This specific provision controls over the more general ones cited by Allmand. Moreover, this provision is almost identical to the restrictions in the City’s Charter, which likewise prevails over the general statutory provisions relied upon by Allmand. See Grubb v. Mayor of Morristown, 203 S.W.2d 593, 596 (Tenn. 1947) (holding that a general law will not repeal particular provisions of a city charter unless clearly intended). Thus, the statutes cited by Allmand are not dispositive of the certified question posed to this Court. III. Sewer, Gas, and Waterworks Statutory Provisions Lastly, Allmand argues that the employment contracts with the post-termination compensation provisions were authorized under various statutes governing Gas, Sewers and Waterworks. For example, he cites the provisions of Tennessee Code Annotated section 7-35406(a): Every incorporated city and town in this state acquiring a waterworks or sewerage system under the provisions of this part shall be required and is hereby authorized and empowered to appoint a board of waterworks and/or sewerage commissioners to have supervision and control of construction and operation of such works. “Board,” as used in this part, means a board of waterworks and/or sewerage commissions as required and authorized in this section, constituted and appointed as provided in §§ 7-35-407 – 7-35-409. The governing body of any incorporated city or town may, by proper ordinance, elect to perform the duties required of the boards under this part, in which event the governing body shall have all the powers, duties and responsibilities imposed upon the board, and all references to the board shall refer to such governing body acting in the capacity of such board. Tenn. Code Ann. § 7-35-406(a); see also Tenn. Code Ann. § 7-35-406(b) (“Municipalities . . . owning or operating a gas system shall have the power and are hereby authorized to transfer to and confer upon the board of waterworks and sewerage commissioners the jurisdiction over such gas system.”). Allmand also points to Tennessee Code Annotated section 7-35-412, which provides, in part, as follows: The board of waterworks or sewerage commissioners . . . has the power to take all steps and proceedings and to make and enter into all contracts and agreements necessary or incidental to the performance of its duties and the execution of its powers under this part, subject only to limitations on matters requiring approval by the governing body of the city or town in question. . . . After completion and acceptance of the works by the board, and approval of such acceptance by the governing body of the city or town, the board shall have the power, and it shall be its -11- duty, to proceed with all matters and perform everything necessary to the proper operation of the works and collection of charges for service rendered, subject only to the limitation of funds available for operation and maintenance. To this end, the board may employ such employees as in its judgment may be necessary and may fix their compensation, all of whom shall do such work as the board shall direct. Tenn. Code Ann. § 7-35-412 (emphasis added). Again, these general statutory provisions must be read in conjunction with the City Charter and the prohibition against actions beyond the powers conferred by the City Charter. See Grubb, 203 S.W.2d at 596. The statutes cited by Allmand do not negate the requirement that he serve at the will and pleasure of the board. Post-Termination Compensation Allmand further argues that the post-termination compensation described in the contracts were mere severance payments that would not have conflicted with the at-will nature of his employment. Cf. Myers v. Town of Plymouth, 522 S.E.2d 122, 124 (N.C. Ct. App. 1999) (holding that lump-sum severance provision did not violate requirement that town employer manager serve “at its pleasure”). Regardless of whether some form of severance compensation would have been permissible, the specific provisions at issue not only are inconsistent with the at-will nature of the employment, but also do not authorize an award of severance. By the terms in each of the two contracts, Allmand would have been entitled to continuing pay and benefits upon termination for any reason other than “voluntarily abandon[ing] his job or engag[ing] in intentional conduct that operated to the specific detriment of the [City’s] welfare.” If those provisions are enforceable, the Electric and Gas Departments will undergo the full cost of a superintendent but receive no benefit from Allmand’s services for a period of years. Such an onerous requirement would have the practical effect of establishing precisely the type of long-term obligation that the City’s charter forbids. See Haynes v. City of Pigeon Forge, 883 S.W.2d 619, 622 (Tenn. Ct. App. 1994). One cannot do indirectly what is prohibited directly. However onerous the obligation may be, we emphasize that our response to the question of law does not rest on that fact alone. Instead, we further conclude that the provisions obligating the Departments to continue to pay salary years after the termination of employment have few of the characteristics associated with a traditional severance package, and that the contracts, read as a whole, do not suggest that the parties intended them as such. A cardinal rule of contractual interpretation is to ascertain and give effect to the intent of the parties. Allstate Ins. Co. v. Watson, 195 S.W.3d 609, 611 (Tenn. 2006) (citing Christenberry v. Tipton, 160 S.W.3d 487, 494 (Tenn. 2005)); see also U.S. Bank N.A. v. Tenn. Farmers Mut. Ins. Co., 277 S.W.3d 381, 386-86 (Tenn. 2009) (citing Christenberry, 160 S.W.3d at 494). Courts must look at the plain meaning of the words in a contract to determine the parties’ intent. Watson, 195 S.W.3d at 611. If the contractual language is clear and unambiguous, the literal meaning controls; -12- however, if the words are ambiguous, i.e., susceptible to more than one reasonable interpretation, the parties’ intent cannot be determined by a literal interpretation of the language. Id. In such circumstances, “the court must apply established rules of construction to determine the intent of the parties.” Id. (citing Planters Gin Co. v. Fed. Compress & Warehouse Co., 78 S.W.3d 885, 890 (Tenn. 2002)). This Court’s decision in Guiliano v. Cleo, Inc., 995 S.W.2d 88 (Tenn. 1999), illustrates these key principles in determining whether a contract provides for severance pay or for liquidated damages. In Guiliano, the employee entered into a three-year employment contract with his employer. Paragraph 9 provided that if the employer terminated the contract without cause, the employee “shall continue to receive [his] then current salary from the date of termination through [the contract expiration date].” Id. at 92-93. Although the trial court awarded a judgment based on breach of contract for the balance due for the term, the Court of Appeals classified the provision as one for liquidated damages and concluded that the damage award qualified as an unlawful penalty.7 On appeal to the Court, the employee argued that he was terminated without cause before the contract expired and that he was entitled to “severance pay,” if not liquidated damages, pursuant to the language in paragraph 9. Id. at 94. After granting further review, this Court began its analysis by describing severance pay as a form of compensation paid by an employer to an employee at a time when the employment relationship is terminated through no fault of the employee. Black’s Law Dictionary 1374 (6th ed. 1990). The reason for severance pay is to offset the employee’s monetary losses attributable to the dismissal from employment and to recompense the employee for any period of time when he or she is out of work. . . . The amount of payment is generally based upon the types of services and the number of service years performed by the employee on behalf of the employer. Id. at 97 (footnote and case citations omitted). We emphasized that severance, unlike liquidated damages, is not conditioned upon a breach of contract or a reasonable estimation of damages in consequence thereof, but is instead an absolute entitlement to recovery regardless of any breach. Id. Applying these principles, we stated as follows: Paragraph 9 provides that if [the employer] terminates the contract and [the employee’s] employment without cause, the [employee] shall continue to receive his then current salary from the date of termination until October 31, 1995, the contract expiration date. Paragraph 9 does not state that sums payable are based upon an 7 After adopting the “prospective approach” as to liquidated damages – that is, a determination based upon the circumstances existing at the time of the contract – this Court observed that any award is an unenforceable penalty as against public policy if “the provision and circumstances indicate that the parties intended merely to penalize for a breach . . . .” Guiliano, 995 S.W .2d at 100-01. A penalty is “a sum inserted in a contract, not as a measure of compensation for breach, but rather a punishment for default, or by way of security for actual damages which may be sustained by reason of nonperformance, and it involves the idea of punishment.” Id. at 98 n. 9 (quoting 22 Am. Jur. 2d Damages § 684 (1988)). -13- estimation of damages in the event of a breach of contract. However, it is clear that the provision affords the [employee] a set amount of compensation in the event that [the employer] terminates the agreement and [employee’s] employment, without cause, before the end of the contract. Relying on the plain meaning of the language in Paragraph 9, we conclude that recovery therein is conditioned upon [the employer’s] breach of contract. Id. at 97 (emphasis added). As a result, the Court held that the provision was “one for liquidated damages and not severance pay.” Id. at 97-98. Here, the only reference to the term “severance payment” is in paragraph 12 of the Gas Department contract – “above-noted severance payments.” The Electric Department contract does not include the term at all. The payments are predicated upon Allmand’s termination before the expiration of the eight- and fourteen-year terms set forth in the agreements, i.e., a breach of the contract. Conversely, the contracts contain no reference to the nature of Allmand’s services, the length of his tenure to the City, or any other characteristics that might warrant the classification of the post-termination compensation as severance pay. See id. at 97-98. Labeling the post-termination recompense as a “severance payment” in one of the two contracts is not determinative of the parties’ intent. Id. at 98. Instead, “[t]he better rule in all cases is to read the whole instrument and give effect to every part if possible, and thereby reach its true meaning, and not resort to artificial or arbitrary rules until the former rule is exhausted.” Stratton v. Thompson, 78 Tenn. 229, 238 (1882). In each of the two contracts, the provisions governing pay speak in terms of the entitlement to “annual salary, compensation and all benefits” and require the compensation to be payable pursuant to the “normal bi-weekly schedule.” Because “provisions in [a] contract should be construed in harmony with each other, if possible, to promote consistency and to avoid repugnancy between the various provisions of a single contract,” Guiliano, 995 S.W.2d at 95 (citing Rainey v. Stansell, 836 S.W.2d 117, 118-19 (Tenn. Ct. App. 1992)), it is our view that the terms of the two contracts directing post-termination compensation do not describe “severance payments” in any traditional sense. Although severance provisions are common and may be viewed favorably as a matter of policy, our established precedent mandates that the intent of the parties controls. Here, the parties crafted employment agreements in which the post-termination payment provisions were dependent on a breach of the purported employment terms of eight and fourteen years. The practical effect of the provisions would have granted liquidated damages to Allmand for the breach of the very terms that the Departments had no authority to approve. Moreover, it is immaterial whether the City was operating in its “governmental” or “proprietary” capacity when making the contracts, as further argued by Allmand. He insists that the employment agreements and the post-termination payments were authorized under the principle that “a municipality operat[ing] a utility, . . . operates it in a proprietary capacity and is held to the same standard as a private corporation.” Maury County Bd. of Pub. Utils. v. City of Columbia, 854 -14- S.W.2d 890, 892 (Tenn. Ct. App. 1993). As the Defendants correctly observe, however, classifying a municipal utility as a proprietary function is of limited significance: [I]t should be pointed out that our decision is not based on any distinction between “governmental” and “proprietary” functions, as mentioned in Cox[v. Green County, 175 S.W.2d 150 (Tenn. Ct. App. 1943)]. As this Court noted in State ex rel. Association for the Preservation of Tennessee Antiquities v. City of Jackson, 573 S.W.2d 750, 754 (Tenn. 1978), “we do not find the dichotomy of ‘governmental’ and ‘proprietary’ functions to be particularly helpful from a standpoint of legal analysis. . . .” Attempts to distinguish contracts entered into in “governmental” as opposed to “proprietary” capacities contributes only ambiguity and confusion. Courts have been altogether unsuccessful in defining the scope of “governmental” functions. See Garcia v. San Antonio Metro Transit Authority, 469 U.S. 528, 105 S. Ct. 1005, 83 L.Ed.2d 1016 (1985). Washington County Bd. of Educ. v. MarketAmerica, Inc., 693 S.W.2d 344, 348-49 (Tenn. 1985). The broad argument advanced by Allmand does not salvage the claim.