Countryside Orthopaedics, PC v. Peyton

• Decision Date: 12 January 2001
• Docket Number: Record No. 000572.,Record No. 000558
• Citation: 541 S.E.2d 279,261 Va. 142
• Court: Virginia Supreme Court
• Parties: COUNTRYSIDE ORTHOPAEDICS, P.C., et al., v. Randall S. PEYTON. Randall S. Peyton, v. Countryside Orthopaedics, P.C., et al.

541 S.E.2d 279

261 Va. 142

COUNTRYSIDE ORTHOPAEDICS, P.C., et al., v. Randall S. PEYTON.

Randall S. Peyton, v. Countryside Orthopaedics, P.C., et al.

Record Nos. 000558, 000572.

Supreme Court of Virginia.

January 12, 2001.

Lewis T. Booker (Vernon W. Johnson, III; Hunton & Williams; Jackson & Campbell, on briefs), for appellants (Record No. 000558).

John W. Toothman (David H. White; Toothman & White, on brief), for appellee (Record No. 000558).

John W. Toothman (David H. White; Toothman & White, on briefs), for appellant (Record No. 000572).

Vernon W. Johnson, III (Lewis T. Booker; Jackson & Campbell; Hunton & Williams, on brief), for appellees (Record No. 000572).

Present All the Justices.

KINSER, Justice.

In these two appeals, the first question we address is whether four agreements executed as part of a single transaction to accomplish an agreed purpose should be construed together even though all the agreements were not executed by the same parties. The second question is whether a doctor, who was a party to three of the agreements, can enforce a provision providing for severance pay. Because we conclude that the agreements should be construed as one instrument and that the doctor now claiming severance pay was the first party to commit a material breach, we will reverse that part of the circuit court's judgment awarding severance pay to that doctor. However, we will affirm that portion of the court's judgment with regard to the doctor's base compensation.

FACTS AND MATERIAL PROCEEDINGS

Raymond Francis Lower, D.O., F.A.A.O.S., an orthopaedic surgeon, formed Countryside Orthopaedics, P.C. (Countryside), in 1993. Dr. Lower was Countryside's sole officer, director, and shareholder until 1997. As of January 1, 1997, Randall Sutton Peyton, M.D., also an orthopaedic surgeon, became a 50 percent shareholder in Countryside.

Dr. Peyton first started working for Countryside in 1995 as an employee physician. The terms of the employment contract between Dr. Peyton and Countryside at that time granted Dr. Peyton, inter alia, the right to purchase 50 percent of the stock in Countryside if Dr. Peyton met a certain level of productivity based on his billings. Dr. Peyton satisfied the billing threshold during his first year of employment, so he and Dr. Lower began negotiations late in 1996 to effect the purchase of stock by Dr. Peyton and to agree upon the terms of the documents needed to accomplish that purpose. Those negotiations culminated with the execution of the following four agreements in June 1997, to be effective retroactively to January 1, 1997:

I. "Stock Purchase Agreement" between Dr. Peyton and Dr. Lower;

II. "Employment Agreement" between Countryside and Dr. Peyton;

III. "Employment Agreement" between Countryside and Dr. Lower; and

IV. "Stockholders' Agreement" between Dr. Lower, Dr. Peyton, and Countryside.

The purpose of the Stock Purchase Agreement was to enable Dr. Peyton to purchase from Dr. Lower 50 shares of the 100 shares of the issued and outstanding common stock of Countryside. The purchase price for the 50 shares was $94,258, to be paid "unconditionally, with [Dr. Peyton] having no right of set-off against [Dr. Lower], in forty-eight (48) equal monthly payments beginning January 1, 1997." The terms of the Stock Purchase Agreement further required, in the event the closing occurred after January 1, 1997, that Dr. Peyton immediately bring the monthly payments current as of the closing date. Pursuant to the terms of this agreement, Dr. Peyton "irrevocably" authorized Countryside to withhold the required monthly payments from his salary and to pay that sum directly to Dr. Lower.

The terms of the two employment agreements were virtually identical. Each physician could terminate his employment with Countryside by mutual agreement or by giving ninety days written notice, and neither doctor was restricted in his right to compete with Countryside after termination of his employment.¹

Two provisions of Dr. Peyton's Employment Agreement are at issue in this case. The first one, found in paragraph 3(a), establishes his base entitlement to compensation and provides the following method of calculating that portion of his compensation:

Base Entitlement. An Entitlement (salary, retirement plan contributions and Additional Benefits, as defined below) which will be the excess of his "Collections" (as defined below) over (i) his proportionate share (initially 50 percent) of the Corporation's "Fixed Expenses", plus (ii) 100 percent of his "Individual Expenses", plus (iii) 100 percent of his "Variable Expenses". "Fixed Expenses", "Individual Expenses" and "Variable Expenses" shall be defined by mutual agreement of the Corporation and the Physician and applied consistently from year to year.

The second provision pertains to Dr. Peyton's right to receive severance pay upon termination of his employment with Countryside. In pertinent part, that section of the Employment Agreement establishes the amount of severance pay, the time of payment, and a condition precedent to Countryside's obligation to make such a payment:

3....

(e) Severance Pay. In the event that the Physician dies or otherwise ceases his employment under this Agreement for any reason[,] ... the Corporation shall pay the Physician ... severance pay ("Severance Pay") as follows:

(1) Amount. Severance Pay shall be an amount equal to eighty percent (80%) of his "Collections["] less the Physician's Individual Expenses remaining unpaid at the time the cessation of employment occurred reduced by any Excess Amount remaining unrepaid.

(2) Payment. The Severance Pay determined in accordance with Paragraph 3(e)(1) shall be paid no later than ninety (90) days after the cessation of employment occurred, and then every ninety (90) days thereafter.

....

(4) Physician's Compliance. The Physician's... full, timely, and continuing compliance in all material respects with every material term with this Agreement and of every other written agreement between the Physician and the Corporation in force after the effective date of termination is a condition precedent to the Corporation's obligation to pay Physician Severance Pay in accordance with this paragraph.

The Stockholders' Agreement established the internal operating structure of Countryside. The only provision of that agreement at issue in this appeal concerns the requirement that a corporate decision to "[i]ncur any debt or issue any note in an aggregate principal amount exceeding [$5,000] in a single transaction" be approved by all the stockholders.

When the respective parties executed these four agreements in June 1997, Dr. Peyton, pursuant to the terms of the Stock Purchase Agreement, owed monthly payments to Dr. Lower for the months of January through June. Dr. Peyton did not, however, make those payments at closing, and Countryside never withheld the monthly payments from Dr. Peyton's salary. In fact, Dr. Peyton did not make any payments for his purchase of stock in Countryside until August 1997, when he paid Dr. Lower the sum of $13,745.97 out of the proceeds of a bonus that each doctor had received from Countryside in July. Dr. Peyton's stock purchase payment in August covered the past due payments for the months of January through July, and was the only payment that Dr. Peyton made for his purchase of stock in Countryside.

Subsequent to the closing, the relationship between Dr. Lower and Dr. Peyton deteriorated. One particular disagreement that arose concerned the question whether Dr. Peyton's payments pursuant to the Stock Purchase Agreement were to be made with pre-tax or post-tax dollars. According to Dr. Peyton, this problem and other concerns caused him to become dissatisfied with his relationship with both Dr. Lower and Countryside. Consequently, on October 3, 1997, Dr. Peyton tendered a letter terminating his employment with Countryside, to be effective as of December 31, 1997. Dr. Peyton then filed a suit against Countryside and Dr. Lower.² In his amended bill of complaint, Dr. Peyton asked for specific performance of his Employment Agreement with regard to the records and charts of patients he treated while at Countryside, an accounting of the payments that he alleged were due to him from Countryside pursuant to the terms of the Employment Agreement, damages for breach of his Employment Agreement by Countryside, and damages for breach of fiduciary duty by Countryside for allegedly depleting Dr. Peyton's accounts receivable and increasing the expenses charged to him.³ In response, Dr. Lower and Countryside, in an amended cross-bill of complaint, sought a declaratory judgment as to the rights of Countryside and Dr. Peyton under the Stockholders' Agreement, damages for Dr. Peyton's alleged breach of fiduciary duty, rescission of the June 1997 agreements due to Dr. Peyton's alleged breaches of contract, and damages for alleged fraud by Dr. Peyton in inducing Dr. Lower to enter into those agreements.

At the conclusion of a bench trial, the circuit court awarded judgment in favor of Dr. Lower on the claims asserted against him individually. The court also determined that the evidence did not support an award of punitive damages against Dr. Peyton. The court then took all other issues under advisement and subsequently issued a letter opinion. The following findings by the court are pertinent to the issues raised in this appeal:

I. Dr. Peyton's claims:

A. The court did not order an accounting by Countryside but did direct Countryside to comply with the Employment Agreement and to pay Dr. Peyton his severance pay.

B. The court granted judgment in favor of Dr. Peyton against Countryside in the amount of $140,634.23 for unpaid severance pay but concluded that Dr. Peyton was not entitled to any additional pay for 1997 because he had been overpaid for that year in the amount of $1,100.35.⁴

C. The court did not award any separate damages for breach of fiduciary duty but considered that in

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