Keith v. Day, 8510SC548

• Decision Date: 03 June 1986
• Docket Number: No. 8510SC548,8510SC548
• Citation: 81 N.C.App. 185,343 S.E.2d 562
• Court: North Carolina Court of Appeals
• Parties: John E. KEITH v. Charles H. DAY and Ace Town & Country Hardware Store, Inc.

Page 562

343 S.E.2d 562

81 N.C.App. 185

John E. KEITH v. Charles H. DAY and Ace Town & Country Hardware Store, Inc.

No. 8510SC548.

Court of Appeals of North Carolina.

June 3, 1986.

Hunter, Wharton & Howell by John V. Hunter, III, Raleigh, for defendants-appellants.

Kimzey, Smith, McMillan & Roten by James M. Kimzey, Raleigh, for plaintiff-appellee.

COZORT, Judge.

This case has been before us once before: Keith v. Day, 60 N.C.App. 559, 299 S.E.2d 296 (1983).

Defendant Day appeals from a jury verdict awarding plaintiff $85,782 in damages for Day's breach of a covenant not to compete in the hardware business. Both defendants appeal from plaintiff's recovery of $252,120 on the theory of quantum meruit for plaintiff having assisted Day in establishing the corporate defendant. We affirm on the covenant not to compete issue, reverse on the quantum meruit issue, and remand for entry of judgment consistent with this opinion.

Plaintiff John E. Keith and his business partner, Howard Jung, are officers and principal shareholders in Ace Hardware and Home Center, Inc., which operates two Ace hardware stores in the Raleigh area. In late 1978 defendant Charles H. Day, a retired executive of Miller Brewing Company and a resident of Wisconsin, approached Keith and Jung about the possibility of opening a third Ace hardware store in the Raleigh area. Day had the capital to invest in such a venture but no experience in the hardware business. Keith and Jung had insufficient capital at that time to establish a third store but had the knowledge, experience, and know-how to establish the new store.

On advice of their attorney, Keith & Jung would not discuss preincorporation matters until a letter agreement had been drafted and signed by Keith, Jung, and Day. That document, dated 7 December 1978, was signed by Keith, Jung, and Day, and by its terms, is a "mutual statement of intent and agreement to obtain and operate an Ace Hardware franchise in the Raleigh, North Carolina area." The agreement further provided, in pertinent part, the following:

Negotiation. We intend to negotiate in good faith with a view to reaching final agreement on matters related to the successful operation of an Ace Hardware franchise. While we are confident that we can work out any obstacles which stand in the way of final agreements, in the event that we are unable to do so, we agree to share the legal expenses attributable to the effort. Additionally, in that the experience and know-how of hardware merchandizing [sic ] will be contributed to the business association primarily by Howard and John, which fundamental know-how will be fully disclosed to Charles, Charles agrees that, in the unlikely event that we cannot reach mutually satisfactory agreements, he will not attempt to own or operate, in any form, any type of retail hardware operation in the greater Raleigh area (using the telephone book as the greater Raleigh index) for at least two years from the point at which any negotiations discontinue, as will be evidenced by our mutual statements that they have discontinued.

After Day signed the agreement, Keith showed Day a site in north Raleigh which Keith considered a good location for the new store. That site was selected.

Prior to the 7 December 1978 agreement, Keith told Day that he expected to be compensated for his services as a consultant. Day wrote Keith and suggested that in lieu of a cash outlay by Keith that his consulting services be used in a joint effort to make the operation a success for both of them.

During 1979, while Day was still residing in Wisconsin, Keith performed services related to obtaining the land and initial construction of the site. Day wanted to buy the land and build the building which he would then lease to the corporation which would be formed to operate the store. Keith did not want to be financially involved in the real estate or in the ownership of the building to be constructed. Keith assisted in the real estate and construction projects because he wanted to be an owner and shareholder in the store. Keith told Day that gaining a percentage share in the new business was the compensation he wanted, and Day agreed that was to be Keith's compensation.

At trial, Keith testified that, in expectation of becoming an owner and shareholder, he continued to work on Day's behalf while Day was in Wisconsin. Keith's efforts included meeting with developers, bankers, engineers, the contractor, city government officials, property owners, salesmen, and Ace Hardware officials. Keith testified that he worked 35 to 50 hours per week for almost all of 1979 on the new hardware store project, in addition to working full time as president and chief operating officer of his own hardware company.

Negotiations for determining the shares of stock to be owned by Keith, Jung, and Day had begun in late 1978 and continued through 1979 and 1980. The parties tentatively agreed that Day was to own 50% of the stock with Keith and Jung owning 25% each. Day was to loan Keith and Jung the funds to purchase their shares. While no definite agreement had been worked out, Day assured Keith and Jung that the matter would be resolved when he moved to North Carolina.

In early 1980, Day moved to Raleigh. He set up his office directly in one of Keith's and Jung's stores in free office space. Day and employees for the new store were provided with access to books and accounts of Keith's business and were trained in the procedures which Keith and Jung used to run the hardware stores.

In early 1980 Ace Town & Country Hardware Store (hereinafter "Ace Town & Country Hardware") was incorporated with Day as 100% shareholder. Keith was made a director of the corporation and remained so until he resigned from the corporation on 6 February 1981. Jung was made a director of the corporation, but after a disagreement with Day, he resigned from the corporation on 18 July 1980.

On 8 October 1980 Day and Keith signed a letter which provided that Keith would acquire 50% percent ownership in Ace Town & Country Hardware. In substance the 8 October 1980 agreement provided that Day was to sell one thousand shares of Ace Town & Country Hardware stock to Keith at $15.00 per share. The transfer of the shares was to take place between 8 October 1980 and 15 January 1981 at Day's option. Day was to loan $45,000 to Keith to purchase the shares and in return Keith was to loan $30,000 to the new corporation. The agreement set forth the terms of Day's loan to Keith and Keith's loan to Ace Town & Country Hardware, and provided that the corporate by-laws would be changed to give Day and Keith equal votes on the Board. No stock was ever transferred, however, from Day to Keith.

On 9 August 1981 Day informed Keith and Jung in writing that he was merging Ace Town & Country Hardware with Falls American Hardware. Joe Johnson, owner of Falls American Hardware, became co-owner and general manager of the merged corporation with Day as president and principal stockholder.

Keith obtained an assignment of Jung's rights on the 7 December 1978 agreement not to compete and filed suit against Day and Ace Town & Country Hardware on 30 October 1981. In the first count of the two count amended complaint Keith alleged that defendants breached the 7 December 1978 agreement not to compete and that defendants breached the 8 October 1980 agreement to sell him 50% of the Ace Town & Country Hardware stock by Day refusing to loan plaintiff the money to purchase the stock, causing plaintiff $500,000 in damages. In the second count, plaintiff alleged that

[i]n the alternative to the breach of contract damage to which the Plaintiff is entitled, the Plaintiff is entitled to be compensated for his services rendered on the basis of quantum meruit to the Defendants as well as the unjust enrichment to the Defendants for the services rendered to the Defendants in training and importing knowledge and know-how of the hardware business to the Defendants.

Defendants answered denying any liability to the plaintiff though defendants admitted the validity of the 8 October 1980 agreement. Defendant Day counterclaimed alleging that it was plaintiff who had breached the 8 October 1980 agreement by failing to perform his obligations under the agreement. Defendant Day also counterclaimed for compensation on a quantum meruit basis for helping plaintiff run his business successfully and for imparting business knowledge to the plaintiff.

This matter came on for trial before a jury on 17 September 1984.

At trial plaintiff's and defendants' versions of the facts concerning the 8 October 1980 agreement differed. Plaintiff presented evidence which tended to show the following:

T. Michael McLarry, an attorney, drafted a note in accordance with the 8 October 1980 agreement after clarification of certain issues through several meetings with Day. Though Day continued to promise Keith that he would sell him the stock with the stock itself as the only security for the note and though the 8 October 1980 agreement specified that the stock was to be delivered by 15 January 1981, Day transferred no stock when a promissory note signed by Keith was presented to him on 15 January 1981. Day told Keith that he had wadded up the note and thrown it in the fireplace. Other notes were drafted but were never signed by Keith because Day told McLarry it was useless to deliver the notes to Day. Day introduced new demands on 18 January 1981. He refused to sell the stock even on his own terms, even after Keith had obtained a release of rights on the covenant not to compete from Jung to allay Day's fears of being sued by Jung. Keith told Jung he planned to purchase 50% of the stock in Day's store and then resell it to the company owned by Keith and Jung.

Keith testified that Day would not sell half the shares because he wanted to sell 100% of the business. Keith and Jung discussed buying the entire 100% of the stock from Day but were unable to...