Cook Martin Poulson PC v. Smith

• Decision Date: 09 April 2020
• Docket Number: No. 20180488-CA,20180488-CA
• Citation: 464 P.3d 541
• Parties: COOK MARTIN POULSON PC, Appellee, v. Daniel G. SMITH, Appellant.
• Court: Utah Court of Appeals

464 P.3d 541

COOK MARTIN POULSON PC, Appellee,

v.Daniel G. SMITH, Appellant.

No. 20180488-CA

Court of Appeals of Utah.

Filed April 9, 2020

Russell S. Walker, Troy L. Booher, and Beth E. Kennedy, Salt Lake City, Attorneys for Appellant

Thomas J. Burns, Salt Lake City, and Aaron R. Harris, Attorneys for Appellee

Judge Michele M. Christiansen Forster authored this Opinion, in which Judges David N. Mortensen and Ryan M. Harris concurred.

Opinion

CHRISTIANSEN FORSTER, Judge:

¶1 Daniel G. Smith appeals the district court's finding of contempt against him, entry of sanctions, entry of final judgment in favor of Cook Martin Poulson PC (CMP), and entry of summary judgment on Smith's third-party complaint against CMP shareholders Troy Martin, Richard Poulson, Kirk Eck, and John Adams.¹ We reverse in part and affirm in part.

BACKGROUND

¶2 Smith began working as an accountant for CMP in 1995. Each year through 2004, Smith signed an Employment Agreement. The 2004 agreement permitted Smith's termination if he failed "to faithfully and diligently perform duties of his employment." It also included a non-compete provision, which prohibited Smith, for a period of two years following his termination, from providing "accounting services to any client for whom [CMP] has performed accounting services during the twelve-month period immediately preceding the termination of [Smith's] employment." The agreement further provided that in the event Smith breached the non-compete provision, CMP would be entitled to liquidated damages equal to 150% of what it had billed the clients to whom Smith provided services during the twelve-month period preceding his termination.

¶3 In 2005, Smith became one of five shareholders in CMP, pursuant to a Shareholders’ Agreement. The Shareholders’ Agreement granted CMP the "right to purchase all of [a] Shareholder's shares" if the shareholder "engages in one or more acts that in the unanimous opinion of the remaining Shareholders, is discreditable." The agreement outlined how the value of the shares would be calculated as well as the manner and timeframe in which the buyout would be paid. The agreement also included a non-compete clause in which each shareholder agreed not to "perform[ ] accounting services" for two years following termination of employment with CMP "to any client for whom [CMP] or Shareholder has performed accounting services during the five year period immediately preceding the termination of Shareholder's employment." Finally, the agreement provided that if a shareholder violated the non-compete provision after having been bought out under the discreditable acts provision, "the balance remaining on the note payable" for the buyout would "be deemed paid in full" and CMP would "have no further obligation" to that shareholder.

¶4 On July 31, 2014, CMP terminated Smith's employment "as a result of [his] failure to diligently perform the duties of his employment despite repeated requests for improvement and also as a result of discreditable acts committed by Smith during his employment with CMP." Specifically, CMP alleged that Smith (1) "Submitted falsified production reports and billing statements"; (2) "Failed to follow CMP's billing procedures"; (3) "Failed to follow CMP's written and institutionalized due diligence protocols"; (4) "Engaged in reckless oversight and preparation of tax returns, schedules, audits, and financial statements for numerous clients over many years"; (5) "Refused to comply with demands from other Shareholders that he follow CMP's billing procedures, due diligence protocols, and other policies"; and (6) "Provided accounting services for CMP clients and non-CMP clients without informing CMP of the work done while utilizing CMP-owned software, hardware, and other resources and while not billing those clients[ ] for the benefit of CMP, but instead billing the clients directly and accepting payment without transferring the funds to CMP." The other four shareholders also invoked the discreditable acts provision of the Shareholders’ Agreement to buy Smith out of his shares.

¶5 Following Smith's termination, CMP learned that Smith was continuing to hold himself out as a CMP employee and was providing accounting services to a number of CMP clients. In December 2014, CMP filed a complaint against Smith requesting a declaratory judgment regarding Smith's obligations and breaches under the Employment and Shareholders’ Agreements; alleging claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and breach of fiduciary duty; requesting liquidated damages for violation of the Employment Agreement; and requesting a temporary restraining order (TRO) and injunction prohibiting Smith from providing accounting services to CMP clients or from influencing any clients of CMP to terminate their relationship with CMP in violation of the agreements.

¶6 Smith filed an answer, counterclaim, and third-party complaint, which purported to add CMP's shareholders as third-party defendants. In opposing CMP's claims, Smith asserted, among other things, that the claims were barred by CMP's own breach of the agreements. Smith's counterclaim and third-party complaint asserted that it was CMP and its shareholders who breached the agreements and their duties of good faith by improperly reducing Smith's salary and distributions and forcing him out of the company. He further asserted that CMP and its shareholders had unjustly deprived him of his shares in CMP.

¶7 On April 15, 2015, the district court issued a TRO

[e]njoining Smith from directly or indirectly, for himself or any third party, soliciting or having any contact with any current client of CMP, or soliciting any person, firm, or corporation who was a customer of CMP within the 12 month period immediately preceding the termination of Smith's employment, with regard to accounting or other services of the type CMP provides.

The court subsequently held a hearing on CMP's request for a preliminary injunction and, in a written memorandum decision, granted the injunction. The court's memorandum decision stated that Smith was not to "work for, or provide services to, the clients [Smith] obtained while he was employed by [CMP]" and directed CMP's counsel to prepare an order in conformance with the court's memorandum decision. Smith objected to CMP's proposed order, and after another hearing, the court overruled Smith's objection and entered the order submitted by CMP's counsel. Significantly, the language of the preliminary injunction order tracked the TRO language except that the preliminary injunction order expanded the no-soliciting restriction to those who had been clients for five years previous to Smith's termination rather than just twelve months.

¶8 The parties then proceeded with discovery. On March 10, 2016, CMP filed a statement of discovery issues alleging that Smith's initial responses to its discovery requests "were incomplete and evasive." On May 24, 2016, the court ordered Smith to "provide supplemental responses to his discovery responses, responding in full to the information requested by [CMP], within 7 days," and to "produce all documents that are responsive to the Requests for Production propounded by [CMP] within 7 days." At the same time, the court issued a protective order permitting Smith to designate documents as confidential and prohibiting use or disclosure of such documents outside of the litigation.

¶9 Ten days after the court's order on discovery issues, Smith's counsel contacted CMP's counsel, offering to "produce the non-privileged documents ... at [his] office at a time which is convenient." CMP's counsel pointed out that the court's deadline had passed and informed Smith's counsel that he expected the documents to be provided as ordered, but Smith's counsel continued to insist that the documents should be inspected on Smith's computer "as they are kept in the usual course of business." CMP's counsel responded that the documents should be "produced in hard copy or electronic format" and requested that Smith's counsel arrange for CMP to "image the hard drive" of Smith's computer. Smith's counsel refused to cooperate with this request, and CMP filed a motion for order to show cause asking that Smith be held in contempt for failing to comply with the court's order on discovery issues.

¶10 In the meantime, CMP received information indicating that Smith had "continued to provide accounting services for several clients of CMP," allegedly in violation of the court's TRO and preliminary injunction order. CMP filed another motion for order to show cause requesting that Smith be held in contempt for his violation of these court orders.

¶11 In response, Smith admitted that he had provided accounting services to over 400 of CMP's former clients but maintained that he had not solicited any current CMP client, had served only "clients who approached him," and had not yet invoiced them. He also argued that he had not violated the injunction, because it was "wrongfully issued," and asserted that his actions had not harmed CMP. With respect to the production of documents, Smith argued that he could not be held in contempt because he had "repeatedly offered to provide CMP's counsel access to the computer" but that CMP's counsel had "refused to meet to inspect the information on Smith's computer."

¶12 The court was unimpressed with Smith's excuses. It found that Smith had "blatantly ignored the Court" and "unashamedly admit[ted] to doing so because he felt" the court's order was "wrongfully entered." The court stated that it did "not care if the clients contacted and requested [Smith] do their accounting, or that [Smith] has not invoiced them for the work done." The court further found that Smith had "ignored the time limitation" in the discovery order "and refused to tender the requested documents in the specific requested form." The court stated, "Merely providing a one-time glance at a computer, 10 days after ...