Holsapple v. Smith
| Decision Date | 24 March 2004 |
| Docket Number | No. A03A2385.,A03A2385. |
| Citation | 267 Ga. App. 17,599 S.E.2d 28 |
| Parties | HOLSAPPLE et al. v. SMITH. |
| Court | Georgia Court of Appeals |
OPINION TEXT STARTS HERE
Gambrell & Stolz, Robert G. Brazier, Steven G. Hall, Seaton D. Purdom, Atlanta, for appellants.
Carothers & Mitchell, Thomas M. Mitchell, Buford, for appellee.
In general, noncompetition agreements that are ancillary to the sale of a business may be modified by the court if they are found to be overly broad, but similar covenants ancillary to employment agreements may not. In this case, Gloria Smith entered into a letter of intent and an asset purchase agreement in connection with the sale of her business and her continued employment with the buyer, and the agreements contain a covenant against competition. The primary issue on appeal is whether the trial court correctly concluded that the covenant was ancillary to an employment agreement.
Smith, president of Southeastern Home Mortgage Corporation ("SEHM"), and Dean A. Holsapple, president of Holsapple Mortgage Lending, Inc. ("HML"), negotiated the prospect of Smith selling her residential home mortgage business to HML and her continued employment by HML thereafter. On September 1, 2001, Smith, individually and in her capacity as president of SEHM, signed a "Letter of Understanding & Intent," with HML, which Holsapple signed solely in his capacity as president of HML. The first paragraph of the five-paragraph document mentions a noncompetition covenant and indicates that three other agreements are contemplated:
This agreement is between Holsapple Mortgage Lending, Inc. [d/b/a] Southeastern Home Mortgage (HML) and Southeastern Home Mortgage Corp., and it's [sic] principle sole stockholder Gloria N. Smith. By entering into this agreement, Gloria Smith will agree to a No Compete Covenant for a period of five years *as referenced in the Asset Purchase* from the date of sale. Parties agree the date of sale will be September 1, 2001, and hereby agree to enter into a series of three agreements referenced as follows....
(The asterisks indicate a handwritten addition to the letter.) The next three paragraphs describe three proposed agreements: (1) an asset purchase agreement; (2) an agreement whereby HML would purchase Smith's industry knowledge, lender relationships, and the right to process 150 loans originated by Smith; and (3) a twenty-four-month employment agreement.
In the final paragraph, the letter of intent provides that in the event that regulatory approval is not obtained "this agreement" will be null and void:
Buyer has deposited with Gloria Smith $60,000.00 in good faith to be held during the investigative process. Upon approval by the Department of Banking & Finance, this transaction will be finalized. Should the application be declined, the $60,000.00 will be refunded & this agreement will be null & void.
In a document dated September 7, 2001, HML, SEHM, and Smith entered into a two-page asset purchase agreement, by which Smith sold all of the assets of SEHM, with limited exceptions, to HML. The asset purchase agreement included a noncompetition agreement as follows:
HML is further guaranteed by Gloria Smith [that] she will not be a princip [al], stockholder or employee of a business originating loans in Georgia that competes with buyer[']s business for a period of five (5) years from sale date. Gloria Smith further agrees that all Georgia loans she originates will be processed by the buyer[']s company in accordance with the employment agreement referenced in the Letter of Understanding and Intent, at attachment A, incorporated herein by reference.
With the exception of handwritten additions, Holsapple drafted the two documents. There is no evidence in the record that the parties ever executed the two other agreements contemplated in the letter of intent.
After a dispute arose, Smith filed a complaint against HML and Holsapple. She sought a declaration that the noncompetition agreement is not enforceable; damages for wrongful termination, breach of contract, fraud, and slander; and attorney fees and punitive damages. HML and Holsapple answered, and HML counterclaimed seeking enforcement of the noncompetition agreement and damages for breach of contract, breach of fiduciary duty, tortious interference, and fraud. HML also requested attorney fees and punitive damages. HML and Holsapple then moved for partial judgment on the pleadings seeking a declaration that the noncompetition agreement is enforceable and that Holsapple was not a party to any breach of contract. They also sought dismissal or a more definite statement on the slander and fraud claims. Smith responded with a motion for partial judgment on the pleadings on the enforceability of the covenant.
The trial court held that the parties entered into two agreements on September 7, 2001, and that the letter of intent was Smith's employment contract. The court noted that the same noncompetition clause was found in both agreements but concluded that the clause was made ancillary to the employment agreement and that therefore it is subject to strict scrutiny under Swartz Investments v. Vion Pharmaceuticals, 252 Ga.App. 365, 556 S.E.2d 460 (2001). The court then held that under strict scrutiny, the noncompetition covenant was not enforceable; the court also held that it was not enforceable because there was no consideration for that covenant. The court granted judgment to Smith on her claim for declaratory judgment, granted the defendants' motions for a more definitive statement as to fraud, and denied the remainder of the defendants' motions.
1. HML and Holsapple first argue that the covenant was signed in the course of the sale of a business and is subject to a lower level of scrutiny. Accordingly, they assert that the trial court should have granted their motion on the pleadings with regard to the noncompetition agreement and denied Smith's.
"A contract in general restraint of trade or which tends to lessen competition is against public policy and is void." (Footnote omitted.) Habif, Arogeti & Wynne, P.C. v. Baggett, 231 Ga.App. 289, 292(2), 498 S.E.2d 346 (1998). "The first step in considering the enforceability of restrictive covenants is to determine the level of scrutiny to be applied." (Footnote omitted.) Advance Technology Consultants v. RoadTrac, 250 Ga.App. 317, 319(1), 551 S.E.2d 735 (2001). There are three levels: strict scrutiny, which applies to employment contracts; middle or lesser scrutiny, which applies to professional partnership agreements; and much less scrutiny, which applies to sale of business agreements. Habif, 231 Ga.App. at 290-291(1), 498 S.E.2d 346.
The two documents are poorly drafted. The trial court concluded that the letter of intent was the employment agreement, but that is not evident from the plain meaning of the documents. The letter of intent clearly pertains to the entire transaction contemplated by the parties, and it clearly indicates that the parties "agree to enter into a series of three agreements": the asset purchase agreement, the intangible knowledge purchase agreement, and an employment agreement. And the reference to a noncompetition covenant in the letter is found in the opening paragraph, not in the paragraph pertaining to the employment agreement.
Six days later (based on the date shown above the signatures), the parties entered into only one written agreement, an asset purchase agreement. They did not execute the other two identified agreements, including the employment agreement. In fact, the asset purchase agreement contains elements of all three proposed agreements. A section entitled "Terms of Sale," shows that Smith would be paid $50,000 for the business assets, $120,000 for her intangible knowledge, and $40,000 "for the employment agreement referenced in the attached Letter of Understanding and Intent." The plain meaning of this last provision indicates that the employment...
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