Court Opinion

ID: 4018156
Source: CourtListenerOpinion
Date Created: 2016-07-22 15:04:29.427423+00
Date Added: 2024-06-11T12:58:08.233640
License: Public Domain

ATTORNEY FOR APPELLANT                                      ATTORNEYS FOR APPELLEE
      Todd J. Kaiser                                              Eric S. Pavlack
      Christopher C. Murray                                       Colin E. Flora
      Amanda Couture                                              Pavlack Law, LLC            FILED
      Ogletree, Deakins, Nash, Smoak, &                           Indianapolis, Indiana   Jul 22 2016, 9:04 am
      Stewart, P.C.                                                                           CLERK
      Indianapolis, Indiana                                                               Indiana Supreme Court
                                                                                             Court of Appeals
                                                                                               and Tax Court

                                                   IN THE
          COURT OF APPEALS OF INDIANA

      Gregg Appliances, Inc., and                                 July 22, 2016
      HHGregg, Inc.,                                              Court of Appeals Case No.
      Appellant-Defendant,                                        49A04-1509-PL-1434
                                                                  Appeal from the Marion Superior
              v.                                                  Court
                                                                  The Honorable Robert R. Altice,
      Dwain Underwood, on behalf of                               Jr., Judge
      himself and all others similarly                            Trial Court Cause No.
      situated,                                                   49D05-1302-PL-7683
      Appellee-Plaintiff.

      MAY, Judge

[1]   Dwain Underwood and other senior managers at HHGregg, Inc. (“Gregg”)

      brought a class action after Gregg did not pay them bonuses based on Gregg’s

      2012 earnings before interest, taxes, depreciation, and amortization

      (“EBITDA”). Gregg asserted its EBITDA was below the threshold level for

      payment of the bonuses, but its calculation of EBITDA excluded nearly forty

      million dollars in life insurance proceeds it received after its executive chairman

      Court of Appeals of Indiana | Opinion 49A04-1509-PL-1434 | July 22, 2016                     Page 1 of 9
      died. The trial court granted summary judgment for Underwood after

      determining a Total Rewards Statement (“TRS”) Gregg provided, indicating

      what level of EBITDA would result in bonuses, required the EBITDA to

      include the insurance proceeds. As the life insurance proceeds Gregg received

      that year were properly excluded from EBITDA, Gregg was not obligated to

      pay the bonuses. 1 We therefore reverse and direct entry of summary judgment

      for Gregg.

                             Facts and Procedural History                              2

[2]   Gregg has an annual incentive plan for certain management employees. The

      plan is based on Gregg’s annual performance and the achievement of that year’s

      financial objectives. Certain high-level Gregg employees make

      recommendations as to whether the incentive should be paid, and in what

      amount, but the compensation committee of the board of directors has the sole

      authority to authorize incentive compensation payments in any given year.

[3]   The incentive is determined using EBITDA. At the beginning of fiscal year

      2012, the class members were provided a document called Total Rewards

      Statement (“TRS”). (Appellant’s App. at 411.) The TRS indicated bonuses

      would be paid at one of three levels based on EBITDA. A “threshold”

      1
        As we so hold, we need not address Gregg’s alternative argument the TRS was merely an informational
      statement and not a contract that could have required it to pay bonuses.
      2
        We heard oral argument at the Indiana Statehouse on June 29, 2016. We commend counsel on the quality
      of their oral advocacy.

      Court of Appeals of Indiana | Opinion 49A04-1509-PL-1434 | July 22, 2016                     Page 2 of 9
      EBITDA of $112,300,000 would result in a bonus of $12,500. The “target”

      EBITDA of $129,500,000 would result in a $25,000 bonus. And a “maximum”

      EBITDA of $144,700,000 would result in a bonus of $30,000. Included as part

      of the TRS and on the same page as the chart indicating the possible bonus

      amounts was a letter from Gregg’s president and CEO, Dennis May.

[4]   The letter referred to the company’s expansion and said “the impressive effort

      put forth by you and your associates was the critical difference in making this

      expansion” successful. (Id.) It noted the company’s “performance level” would

      permit payment of “59% of your 2011 Annual Incentive Target,” (id.), and that

      the company’s future success “relies heavily on improving our performance.”

      (Id.)

[5]   During that fiscal year, Gregg’s Executive Chairman of the Board, Jerry

      Throgmartin, died. Gregg held a forty-million-dollar life insurance policy for

      him. Gregg did not include the proceeds of that policy when it calculated the

      2012 incentive pay because those proceeds represented a one-time event that

      did not reflect the company’s performance. 3 Gregg’s Proxy Statement for fiscal

      2012 showed an EBITDA of $143,552,000, which exceeded the “target”

      amount and would have resulted in a $25,000 bonus. But the proxy statement

      also showed an “adjusted EBITDA,” (id. at 367), which indicated the

      3
         The chart in the TRS refers to “FY2012 Incentive – EBITDA.” (Appellants’ App. at 411) (italics added).
      We agree with Gregg that the intent of “incentive” pay is to “reward company-wide growth and profitability.
      It is not intended to reward senior management for the death of key personnel.” (Reply Br. of Appellants,
      Gregg Appliances and HHGREGG, Inc. at 7.)

      Court of Appeals of Indiana | Opinion 49A04-1509-PL-1434 | July 22, 2016                        Page 3 of 9
      $40,000,000 in life insurance proceeds was subtracted from the EBITDA. The

      “adjusted EBITDA” was below the threshold level, and based on that amount

      Gregg paid no bonuses.

[6]   Underwood and other senior managers brought a class action claiming the

      insurance proceeds should have been included in the incentive pay calculation

      and he and the class members should have been paid a bonus based on the

      inclusion of the insurance proceeds. Underwood and Gregg both moved for

      summary judgment. The trial court denied Gregg’s motion and granted

      Underwood’s. We accepted jurisdiction over this interlocutory appeal.

                                  Discussion and Decision
[7]   Summary judgment orders are reviewed de novo, and a reviewing court applies

      the same standard of review that is applied by the trial court. AM Gen. LLC v.

      Armour, 46 N.E.3d 436, 439 (Ind. 2015). The movant must show the

      designated evidence raises no genuine issue of material fact and the moving

      party is entitled to judgment as a matter of law. Id. On that showing, the

      nonmoving party then has the burden to show there is a genuine issue of

      material fact. Id. All reasonable inferences will be construed in favor of the

      nonmoving party. Id. That the parties have filed cross-motions for summary

      judgment does not alter our standard of review. Floyd Cty. v. City of New Albany,

      1 N.E.3d 207, 213 (Ind. Ct. App. 2014), trans. denied.

      Court of Appeals of Indiana | Opinion 49A04-1509-PL-1434 | July 22, 2016   Page 4 of 9
[8]    The trial court made findings and conclusions in support of its entry of

       summary judgment. We are not bound by such findings and conclusions, but

       they aid our review by providing reasons for the decision. Allen Gray Ltd. P’ship

       IV v. Mumford, 44 N.E.3d 1255, 1256 (Ind. Ct. App. 2015). We will affirm a

       summary judgment on any theory or basis found in the record. Id.

[9]    For purposes of our analysis, we assume without deciding that the language in

       the TRS was a contract between Gregg and its employees. Summary judgment

       is especially appropriate in the context of contract interpretation because the

       construction of a written contract is a question of law. Rice v. Meridian Ins. Co.,

       751 N.E.2d 685, 688 (Ind. Ct. App. 2001), trans. denied. When we interpret

       contract provisions, our goal is to enforce the intent of the parties as provided in

       the contract. Id. If the language is clear and unambiguous, we give that

       language its plain and ordinary meaning and enforce the contract according to

       its terms. Id. A contract is to be read as a whole when trying to ascertain the

       parties’ intent, and we will make all attempts to construe the language in a

       contract so as not to render any words, phrases, or terms ineffective or

       meaningless. Id. We must accept an interpretation of the contract that

       harmonizes its provisions, as opposed to one that causes the provisions to

       conflict. Id.

[10]   The meaning of a contract is to be determined from an examination of all of its

       provisions, not from a consideration of individual words, phrases, or even

       paragraphs read alone. Payday Today, Inc. v. Defreeuw, 903 N.E.2d 1057, 1062

       (Ind. Ct. App. 2009), reh’g denied. In determining the intention of the parties, a

       Court of Appeals of Indiana | Opinion 49A04-1509-PL-1434 | July 22, 2016   Page 5 of 9
       contract should be considered in light of the surrounding circumstances when it

       was made. Allen v. Clarian Health Partners, Inc., 980 N.E.2d 306, 309 (Ind.

       2012). Specifically, we should consider the nature of the agreement, the facts

       and circumstances leading up to the execution of the contract, the relation of

       the parties, the nature and situation of the subject matter, and the apparent

       purpose of making the contract. Id.

[11]   It is clear from the language in the TRS that the parties could not have intended

       life insurance proceeds would be included in EBITDA for purposes of

       determining a performance-based “incentive” bonus. (Appellants’ App. at 411.)

       The TRS includes a letter from Gregg president and CEO Dennis May to

       Underwood, a table showing 2011 compensation, and a table showing 2012

       targets. We examine all three parts in determining the intention of the parties,

       as our Indiana Supreme Court has instructed us to consider the nature of the

       agreement, the facts and circumstances leading up to the execution of the

       contract, the relation of the parties, the nature and situation of the subject

       matter, and the apparent purpose of making the contract. Id. The whole text of

       the contract indicates the parties intended to reward company-wide

       profitability, and not to “reward senior management for the death of key

       personnel.” (Br. of Appellants, Gregg Appliances and HHGREGG, Inc.

       (hereinafter “Gregg Br.”) at 24.)

       Court of Appeals of Indiana | Opinion 49A04-1509-PL-1434 | July 22, 2016    Page 6 of 9
[12]   There was evidence before the trial court 4 in the form of a Gregg

       representative’s testimony that EBITDA is an “operating metric of performance

       of the overall company.” (Appellant’s App. at 422.) EBITDA would

       sometimes be adjusted when there were “items that are one time in nature” and

       “without adjusting for it, you would not know the true operating performance

       of the company on how the business is performing on a year-to-year basis.

       Trying to make it a more apples-to-apples comparison.” (Id.)

[13]   The TRS letter refers to the company’s growth and to the importance of

       “improving our performance.” (Id. at 411.) It reflects what is being rewarded

       for 2011 is growth in operations, and nothing in the TRS contemplates the loss

       of a key leader. Life insurance proceeds do not represent “growth” that the

       parties could have intended to result in “incentive” bonus payments to senior

       executives. (Id.)

[14]   Gregg notes the meaning of the acronym EBITDA typically does not include

       “one-time, non-recurring events” like the receipt of life insurance proceeds.

       (Gregg Br. at 30.) That is because the term is used to measure a business’s

       performance in the form of earnings generated by its core operations. One

       dictionary defines EBITDA as:

                 A measure of a company’s ability to produce income on its
                 operations in a given year. It is calculated as the company’s
                 revenue less most of its expenses (such as overhead) but not

       4
           Underwood did not designate any evidence.

       Court of Appeals of Indiana | Opinion 49A04-1509-PL-1434 | July 22, 2016   Page 7 of 9
                subtracting its tax liability, interest paid on debt, amortization or
                depreciation. It is important to note that EBITDA does not account
                for one-off or otherwise unusual revenues and expenses, only recurring
                ones.

       http://financial-dictionary.thefreedictionary.com/EBITDA (last visited July 6,

       2016) (emphasis added). Including insurance proceeds, Gregg notes, would

       “paint a false picture of [Gregg’s] core operating results.” (Gregg Br. at 32.)

[15]   Underwood’s argument the TRS was intended to include the insurance

       proceeds as part of EBITDA is premised on Gregg’s own testimony below and

       that “the TRS says ‘EBITDA,’ which includes the proceeds, not ‘Adjusted

       EBITDA.’” 5 (Underwood Br. at 57.) Underwood says, without citation to

       authority, that key-man policies 6 reflect the concept that the corporation derives

       a pecuniary benefit or advantage from the continued life of the insured, or that

       the corporation will suffer pecuniary loss on the death of the insured. The

       nearly forty million dollars at issue did not go to Throgmartin’s heirs – instead,

       it “went to the coffers of [Gregg] to help offset the pecuniary loss caused by his

       death.” (Id. at 55.) We acknowledge Gregg suffered a loss from Throgmartin’s

       5
         As EBITDA does not, and was not in this case intended to include one-time life insurance proceeds, we
       believe a more useful term than “adjusted” EBITDA, on which Underwood relies, is “actual” EBITDA, as
       used in In re Am. Plumbing & Mech., Inc., 323 B.R. 442, 457 (Bankr. W.D. Tex. 2005): “[t]he actual EBITDA,
       as adjusted for these insurance claims, should be $5,558,069. That is more than 90% of target EBITDA, but
       less than 95%, entitling Riggs to only 75% of the yearly bonus.”
       6
         “Key man” insurance reimburses an employer on the death of a key employee or principal. It is owned by
       the employer who also applies for and is the beneficiary of the policy. Mitzner v. Lights 18 Inc., 660 A.2d 512,
       514 (N.J. App. Div. 1994), aff'd, 660 A.2d 480 (N.J. 1995).

       Court of Appeals of Indiana | Opinion 49A04-1509-PL-1434 | July 22, 2016                             Page 8 of 9
       death, but we decline to hold the insurance proceeds reflected the company’s

       performance or that of the class members.

[16]   There was evidence before the trial court that Gregg has, in the past, adjusted

       EBITDA for one-time, non-recurring events that do not reflect the company’s

       performance. It did so even when those adjustments resulted in higher bonuses.

       For example, in 2009 the company experienced some $600,000 in “asset

       impairments,” (Appellants’ App. at 74), and that money was added to EBITDA

       because the loss “did not reflect upon the Company’s operating performance”

       in fiscal 2009. (Id.) The life insurance payment Gregg received after

       Throgmartin’s death was such a one-time, non-recurring event that did not

       reflect the company’s performance, and it was properly excluded from the 2012

       EBITDA for purpose of determining an incentive bonus.

                                                 Conclusion
[17]   As the parties could not have intended the EBITDA on which the TRS was

       based would include a one-time event in the form of insurance proceeds that

       did not reflect the company’s performance, Gregg was entitled to summary

       judgment. We accordingly reverse and remand for entry of judgment for

       Gregg.

[18]   Reversed and remanded.

       Baker, J., and Brown, J., concur.

       Court of Appeals of Indiana | Opinion 49A04-1509-PL-1434 | July 22, 2016   Page 9 of 9