Johnson v. Welch, No. M2002-00790-COA-R3-CV (Tenn. App. 2/9/2004)
| Decision Date | 09 February 2004 |
| Docket Number | No. M2002-00790-COA-R3-CV.,M2002-00790-COA-R3-CV. |
| Parties | JAY JOHNSON, ET AL. v. REED WELCH, ET AL. |
| Court | Tennessee Court of Appeals |
Appeal from the Circuit Court for Putnam County, No. 99 N 0330, John J. Maddux, Jr., Judge.
Judgment of the Circuit Court Affirmed in part, Reversed in part and Remanded.
Jay S. Bowen, Timothy L. Warnock, Taylor A. Cates, Nashville, Tennessee, for the appellants, Reed Welch, Olive Welch, Quality Metal Treating, Inc., and S&S Screw Machine Co., Inc.
S. Roger York, Crossville, Tennessee; William S. Walton, Nashville, Tennessee, for the appellees Jay Johnson and QMT Quality Metal Treating, Inc.
Patricia J. Cottrell, J., delivered the opinion of the court, in which Ben H. Cantrell, P.J., M.S., and Russ Heldman, SP. J., joined.
This appeal involves a business dispute with multiple claims for breach of three separate contracts. The trial court found Reed Welch and his company, S& S Screw Machine Company, Inc., in breach in various ways and awarded a total of $1,032,133.15 in damages to Jay and Gail Johnson, both personally and as the owners of Quality Metal Treating, Inc. We affirm in part and reverse in part the judgment of the trial court.
This is a breach of contract action arising from three separate agreements. The first involves an employment agreement between S&S Screw Machine Co., Inc. ("S&S")1, and Jay Johnson. The second contract involves the purchase of a heat treating business known as Quality Metal Treating, Inc. ("QMT"), by Jay Johnson and his wife, Gail Johnson, from Reed Welch and his wife, Olive Welch. The final agreement involves the Johnsons' lease and subsequent purchase of commercial property from the Welchs.
In April, 1993, Reed Welch hired Mr. Johnson to become the general manager of his business, S&S.2 The company manufactures screw machine parts for industrial tractor trailers and dump trucks. Mr. Johnson's new position required him to relocate to Tennessee from Washington state with his family. The employment agreement provided that S&S would pay part of the Johnsons' relocation expenses, and Reed Welch personally guaranteed S&S's commitment. The agreement had two provisions entitled "Relocation Expenses" which specifically provided:
Relocation Expenses: Temporary living expenses and transportation will be provided by S&S Screw Machine Company.
Relocation Expenses: Expenses associated with the sell [sic] and purchase of a home, moving of household goods and relocating my family will be shared by both me and S&S Screw Machine Company.
Contemporaneously with the signing of the employment agreement, Mr. Johnson presented Mr. Welch a list entitled "Anticipated Re-location Expenses" which estimated the expenses to be approximately $35,000. Following the move, on July 30, 1993, Mr. Johnson provided Mr. Welch with a letter setting forth a total of $29,986.77 in relocation expenses and requested that S&S pay its portion. S&S delayed payment for almost nine months and then reimbursed the Johnsons for only $5,000 of the expenses.
Despite S&S's failure to promptly reimburse the Johnsons for relocation expenses, in October, 1993, the Johnsons purchased the on-going business, QMT, from the Welchs for $186,000. QMT heat treats specialized auto and truck parts such as those produced by S&S.3 In fact, S&S was QMT's largest customer, and the QMT furnaces were uniquely suited to heat treat S&S parts. Approximately 50 to 60 percent of QMT's revenue was generated by heat treating S&S parts. The parties executed a sales contract which included the following language:
Buyers [Johnsons] . . . .will have the exclusive rights to heat treat all of the metal treating process required of all goods manufactured by S&S Screw Machine Co., Inc. coming under Quality Metal Treatment, Inc.'s capabilities as long as Quality Metal Treatment, Inc. is competitive in price, quality and delivery. The price specified in paragraph 6 below is agreed to be `competitive' price. S&S Screw Machine Co., Inc. agrees it will not decrease its production requiring heat treatment to be supplied by Buyers except in the ordinary course of business, i.e. loss of business due to competitiveness in price, quality and delivery.
The provision of the agreement giving QMT the exclusive right to all of S&S's requirements for heat treating (also referred to herein as the exclusivity or requirements provision) was crucial to the Johnsons obtaining financing for the purchase of QMT.4 Indeed, the pro forma submitted to the lending institutions specifically identified various parts that were produced by S&S and anticipated to be heat treated by QMT. Prior to the transaction, Mr. Johnson had requested and Mr. Welch had provided a list of parts produced by S&S that could be expected to be heat treated by QMT.
Shortly after the deal closed, S&S lost its contract to make three Paccar parts that had been included in the pro forma and on the list provided by Mr. Welch. The three lost Paccar parts had accounted for almost 40 % of the revenues QMT had generated from S&S work. Mr. Welch had met with Paccar's engineers in Seattle earlier in the year concerning the re-design of the parts S&S made for Paccar. S&S did not have the capability at the time to make the re-designed parts. Mr. Welch never disclosed this information to the Johnsons prior to the sale of QMT. As a result, QMT and its new owners, the Johnsons, lost a substantial portion of its expected revenue from heat treating the Paccar parts.
When the Johnsons purchased the assets of QMT, they agreed to continue to operate it at its then current location in Hendersonville until the lease in effect at that location expired in February of 1997. The Johnsons also agreed to move the business to property owned by the Welchs in Cookville after the expiration of the Hendersonville lease so that QMT would be closer to the S&S plant in Sparta. In furtherance of that mutual plan, on the same day the Johnsons purchased QMT from the Welches, they entered into a separate five year Lease and Purchase Option Agreement with the Welches for their building and land in Cookeville.
The two agreements stated that the Johnsons would have no liability under the existing lease for the Hendersonville property, but that QMT would pay the Welchs $1600 per month on the lease for the Cookeville property during the term of the Hendersonville lease. In other words, Mr. Welch remained personally liable to the Hendersonville landlord until February, 1997, but the Johnsons paid the amount of the Hendersonville lease to Mr. Welch as rent on the Cookeville property QMT would not occupy until February of 1997.
The two documents, the agreement for the purchase of QMT's assets and the lease with option to purchase, contained provisions regarding the parties' responsibilities for the relocation of QMT. The sales contract provided:
Reed Welch agrees to prepare the real property to be leased to Buyer for occupancy of the heat treating process. This will include but will not be limited to, the following work:
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(c) Assist in relocation . . ., installation and start-up of all the office and industrial assets being purchased hereunder when the previously mentioned February 17, 1992 lease on the premises [in Hendersonville] is terminated, or at such time as Quality Metal Treatment, Inc. ceases its rental payment under that lease. The relocation, installation and start-up project to be no more than a period of three (3) months.
Buyers will have the responsibility of making a physical layout as to where all office and industrial assets being purchased hereunder, are to be placed in the industrial facility in Cookeville, TN (described herein) and Lessors will have the responsibility to relocate, install and start-up all the office and industrial assets being purchased, utilizing S&S Screw machines, maintenance personnel and equipment.
The lease contained the same provision, with small variation in the language.
Following the QMT sale in October of 1993, Mr. Johnson continued as the general manager at S&S during the day and worked weekends and some evenings at QMT. In late 1996, shortly before the expiration of QMT's Hendersonville lease, the Johnsons exercised their option to purchase the Welchs' Cookeville building and land for an additional $275,000.
QMT moved to the property in Cookville. Subsequently, a dispute arose over whether S&S had honored its obligations associated with the moving and installation and start-up of QMT's equipment. According to the Johnsons, S&S failed to properly set up the equipment and actually damaged some of the equipment. Edward Newman, a long time S&S employee, admitted that several of the furnaces and other pieces of QMT equipment were damaged by S&S during the move from Hendersonville. Mr. Newman further testified that he had never installed such equipment before. S&S never repaired the damage allegedly done by its employees, and the machinery was not set up and ready to function on time. As a result of this situation and Mr. Welch's threats to terminate the contract if QMT missed any deliveries, Mr. Johnson was forced for nearly six months to out-source parts for heat treatment to another heat treater until he could complete repairs, installation and start-up. He claimed he incurred expenses of over $65,000 due to S&S's failure to abide by the terms of the relocation assistance provision in both contracts.
In the same month the Cookeville deal closed and Mr. Welch's obligation on the Hendersonville lease expired, Mr. Johnson's employment with S&S was terminated without notice. Mr. Johnson testified that Mr. Welch fired him. Mr. Welch testified at trial that Mr. Johnson had "terminated himself" as general manager of S&S due to a conflict of interest, i.e., being manager of S&S and owner of QMT, although that situation had existed with Mr. Welch's...
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