Johnson v. Stumbo

• Decision Date: 25 October 1938
• Citation: 126 S.W.2d 165,277 Ky. 301
• Parties: JOHNSON et al. v. STUMBO et al.
• Court: Kentucky Court of Appeals

126 S.W.2d 165

277 Ky. 301

JOHNSON et al. v. STUMBO et al.

Court of Appeals of Kentucky

October 25, 1938

As Modified on Rehearing Jan. 24, 1939.

Appeal from Circuit Court, Knott County.

Suit by R. S. Johnson and others against W. L. Stumbo and another for an injunction restraining the defendants from violating the restrictive covenants of a contract for the sale of a hospital, wherein the defendants filed a cross-complaint. From an adverse judgment, the plaintiffs appeal.

Reversed with directions.

Andrew E. Auxier and E. D. Stephenson, both of Pikeville, and Claude P. Stephens, of Prestonsburg, for appellants.

J. W Howard, Edward L. Allen, and Joe P. Tackett, all of Prestonsburg, and James Burnette, of Hindman, for appellees.

STANLEY Commissioner.

The Beaver Valley Hospital was established in Martin, Floyd County, in 1918 by Dr. W. L. Stumbo, and his brother, Dr. Ed Stumbo. After the latter's death it was owned and operated by the former. Its services to the men of the numerous mining and other industries in the community have been very extensive. It likewise has taken care of many pauper patients for which Floyd County was responsible. The services were rendered under contracts with the industries for the hospitalization of their employees and families. The contracts seem to have been made at the instance of the men and negotiated with the labor unions. Deductions were made from their wages and paid to the hospital. The county patients were cared for under a contract with the fiscal court, which paid a considerable sum annually. A few days before Dr. Stumbo qualified as county judge in January, 1930, he transferred title to the hospital property to his wife, Mrs. Annie Stumbo. But he continued the active management and operation. In January, 1935, Dr. Stumbo and his wife sold the property to six doctors, who, as partners, were conducting the Pikeville Clinic. This case arises out of that sale. It involves the validity of a contract restricting competition by Dr. Stumbo, its breach, the justification thereof and remedy therefor. These primary questions present several subsidiary ones. The record is very large and the briefs exhaustive. The demands for some degree of brevity confine us to but little more than a statement of the points and our conclusions on the evidence.

The deed to the property, including equipment, executed on January 30, 1935, is in the usual form. It recites the consideration to be $40,000, of which $15,000 was cash and $500 payable monthly, as evidenced by fifty (50) notes. The grantees were R. S. Johnson, S. B. Casebolt, R. W. Raynor, M. D. Flannery, A. G. Osborne and Paul Gronerud. There was contemporaneously executed by all the parties a contract which recites that, "Whereas, the first parties (the Stumbos) have this day sold and conveyed," the hospital property for the consideration stated:

"It is mutually agreed that first parties will not own or operate a hospital by purchase or lease, or otherwise, in Floyd County, Kentucky, for a period of 10 years from date hereof, and in consideration of the purchase of said hospital property by second parties as aforesaid, and the said agreement of first parties of first part not to own or operate a hospital as aforesaid for said period of time is declared to be a moving consideration in the purchase of said hospital property described in said deed aforesaid, the parties of the first part, jointly and severally, covenant and agree with the parties of the second part, their successors or assigns, in ownership of said hospital property, that they or either of them will not own or operate a hospital by purchase, lease or otherwise, directly or indirectly, in Floyd County, Kentucky, for said period of 10 years from date hereof.

"It is mutually agreed between the parties hereto that Dr. W. L. Stumbo shall have the right to bring his patients to the Beaver Valley Hospital, Inc., the corporation organized to take over said hospital property for medical or surgical treatment, under the usual custom, the patients to pay the usual fees and compensation charged other patients in said hospital. All contracts with coal and gas companies and the U. M. W. of A. are to be assigned to the Beaver Valley Hospital, Inc. Also rights to Floyd Fiscal Court order."

Dr. Stumbo and his wife executed an instrument assigning and transferring to the "Beaver Valley Hospital, Incorporated" twenty contracts with the industries, and "the rights and benefits of the Floyd County orders of the fiscal court for county patients" made to "Annie Stumbo and the Beaver Valley Hospital." The assignees or transferrees were "To have and to hold and (sic) all the benefits therefrom with our good will and assistance."

The purchasers of the hospital entered into possession and began its operation. They expended a considerable sum in renovating and improving the buildings and modernizing the equipment.

A little more than a year afterward, Dr. Stumbo erected and began the operation of a hospital in Knott County about 300 yards from the Floyd County line. He named it the "Stumbo Memorial Hospital." Soon thereafter, the purchasers of the Beaver Valley Hospital, excepting Dr. Casebolt, whose interest had been acquired by Dr. J. E. Allen, instituted this suit against the Stumbos alleging a violation of the contract they had made not to own or operate a hospital in Floyd county for a period of ten years. The petition charged the defendants had violated the terms and the spirit of their contract in many particulars. A declaration of rights and injunctive remedies were asked. At the end of three months, the defendants having apparently exhausted every conceivable dilatory tactic and built up the record to 225 pages of pleadings and orders, the hearing of evidence was begun by Honorable Chester Bach, as special judge. It consumed thirty-six days.

The answer denied essential allegations of the petition and affirmatively pleaded that the restrictive covenant was void because against public policy in that it undertook to suppress competition and to give plaintiffs a monopoly; also that the consideration for that promise was plaintiff's agreement that Dr. Stumbo should have the right to bring his patients to the Beaver Valley Hospital. Concerning that consideration or provision of the contract it was alleged that the capacity of the hospital was inadequate to meet the needs of the community served; that plaintiffs had failed to increase the facilities of the hospital, and that within 30 days of the making of the contract the purchasers had breached their contract allowing him to take his patients there. This breach was plead in justification of the erection of the Stumbo Memorial Hospital, which, it is alleged, was necessary in order for Dr. Stumbo to care for his patients. The alleged breach of the contract by plaintiffs had damaged the defendants in the sum of $100,000, for which they prayed judgment over against the plaintiffs. But this counter-claim for damages was withdrawn by the defendants when directed by the court to make it more definite and specific. These are but the more important provisions of the pleadings. Other allegations, with the exception of estoppel and the invalidity of the assignment of the contracts, seem to have eventually become of no materiality.

A few days after the taking of evidence was begun, the defendants filed an amended answer withdrawing inconsistent allegations and setting up the invalidity of the contract sued on upon the ground which has become their principal house of refuge, namely, the transaction had been closed by the execution of a contract of sale and purchase of the property on January 26, 1935, which was four days before the contract containing the restrictive covenant was executed. That first contract did not contain such an agreement. The pleading of no consideration, however, was really no consideration except the promise as to accepting Dr. Stumbo's patients, and plaintiffs' breach thereof.

One year, lacking a week, after the suit was filed, Judge Bach rendered judgment denying the plaintiffs any relief except to enjoin the defendants for a period of ten years from January 30, 1935, from admitting into their hospital any patients "covered by the several contracts set out in the assignment of February 1, 1935," being twenty in number. The judgment dismisses the counterclaim, although it had already been dismissed. It recites that the court had not deemed it necessary to pass upon and it should not be construed as passing upon the alleged breach of contract with plaintiffs or defendants. Since half the contracts referred to had been terminated and the others were terminable by either party at will, the result is that the plaintiffs received but little relief.

The question of the validity of contracts in restraint of trade--which relates also to professional competitive occupations--has been the subject of consideration by the courts from a very early period. The law has undergone distinctive stages of transition or development. In later years the rule of reason has been read into the law, so that restraint is recognized as legal if reasonable and limited as to territory or duration. 6 R.C.L. 786. The test of reasonableness is whether the restraint, considering the particular situation and circumstances, is such only as to afford a fair protection to the legitimate interests of the party in favor of whom it is given and not so extensive as to interfere with the interests of the public. Primarily, such a contract, by which one deprives himself of his labor, skill or talent, or his liberty of engaging in similar business must be ancillary to the main purpose of a lawful contract, usually the sale of a business or profession, and...