Opinion ID: 1059533
Heading Depth: 2
Heading Rank: 2

Heading: Dr. Peyton's Appeal

Text: 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 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 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 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 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 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 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] 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.