Varney Business Services, Inc. v. Pottroff

• Decision Date: 20 December 2002
• Docket Number: No. 88,120,88,120
• Citation: 59 P.3d 1003,275 Kan. 20
• Parties: VARNEY BUSINESS SERVICES, INC., Appellee, v. HARLEY W. POTTROFF, Appellant.
• Court: Kansas Supreme Court

275 Kan. 20

59 P.3d 1003

VARNEY BUSINESS SERVICES, INC., Appellee, v. HARLEY W. POTTROFF, Appellant.

No. 88,120

Supreme Court of Kansas

Opinion filed December 20, 2002.

C. Brooks Wood, of Morrison & Hecker, L.L.P., of Kansas City, Missouri, argued the cause, and Erik P. Klinkenborg, of the same firm, and Joseph H. Cassell, of Cassell & Lower, LLC, of Wichita, were with him on the brief for appellant.

William L. Frost, of Morrison, Frost and Olsen, LLP, of Manhattan, argued the cause, and was on the brief for appellee.

The opinion of the court was delivered by

LOCKETT, J.:

Defendant Harley W. Pottroff appeals the district court's grant of summary judgment in favor of Varney Business Services, Inc. (Varney), a corporation into which Varney & Associates, P.A. (Varney & Associates), a professional association, of which Pottroff was a previous officer and shareholder, had merged. In granting summary judgment, the district court found that the corporation had standing and was the real party in interest to bring the action. The action was based on an employment agreement that obligated signatories to pay a percentage of fees earned for services provided to former clients during the 5 years subsequent to terminating their relationship with the association. The district court interpreted and enforced the terms of the employment agreement and granted a money judgment to the corporation. On appeal, defendant claims (1) the corporation was not a real party in interest and did not have standing to assert a claim, (2) the corporation was not a party to the employment agreement, and the employment agreement was not supported by consideration; (3) the district court failed to evaluate the reasonableness of the employment agreement; (4) the employment agreement is contrary to public policy and illegal; (5) the employment agreement terminated and released the defendant from liability; (6) the district court erred in calculating the fees due under the employment agreement; and (7) the district court erred in awarding prejudgment interest.

The professional accounting firm of Varney & Associates, P.A., formerly Varney, Mills, Rogers, Burnett & Associates, P.A., was formed in 1977. On July 1, 1988, an officers' employment agreement (Employment Agreement or Agreement) was entered into by the 10 shareholders of the firm. Appellee Harley W. Pottroff was an officer/shareholder of the firm at the time. Article X of the Employment Agreement was entitled "AGREEMENT NOT TO COMPETE." It provided that all parties to the agreement, upon leaving the firm, could not, directly or indirectly, engage in the practice of public accounting or computer services in the city of Manhattan, Kansas, all other cities in which the firm maintained an official office, or within a 35-mile radius of such areas for a period of 5 years.

Pottroff was elected to serve as Chairman of the Board and Chief Executive Officer (CEO) of Varney & Associates in June 1994. At the July 1994 meeting of Varney & Associates' Board of Directors it was determined that revisions to the Employment Agreement were necessary. Pottroff was responsible for circulating suggested changes to the Employment Agreement. The Board of Directors unanimously approved the revisions to the Employment Agreement at its December 1994 meeting. All 10 shareholders signed the revised Employment Agreement. Article X of the 1988 version of the Employment Agreement effectively became Article IX of the revised agreement and retained the title of "AGREEMENT NOT TO COMPETE." The article was amended to provide that all parties to the agreement that left the firm for any reason were obligated to compensate the firm for the firm's clients that they provided services to over the subsequent 5 years. Compensation to the firm was to be determined by a declining percentage schedule applied to fees earned.

In an agreement dated May 8, 1996, Joseph Mills resigned as an officer/shareholder of Varney & Associates. In addition to setting forth the amount Varney & Associates would compensate Mills for his shares of Varney & Associates under the Employment Agreement, the agreement also provided that Mills agreed to abide by Article IX of the Employment Agreement as modified, set forth the percentages of fees Mills would pay, and noted that the fees earned by Mills in the performance of personal financial planning services were exempt from inclusion in the calculation of compensation owed. All 10 shareholders signed the agreement. At the June 18, 1996, meeting of the Board of Directors of Varney & Associates, the shareholders voted to approve additional modifications to the Employment Agreement. Pottroff was still acting CEO of Varney & Associates at the time. The approved modifications to Article IX stated:

"AGREEMENT NOT TO COMPETE

"It is understood and agreed that anyone who is allowed to be associated with this firm learns the business secrets of the clients of the firm as well as those of the firm itself. It is, therefore, normal and prudent that the firm acquire agreements from all employees restricting their activities after parting from the firm. Therefore, all parties to this agreement agree and promise that if they leave the firm, terminate or are terminated, retire, for any reason, they will compensate the firm for the firm's clients they provide service to for the subsequent five (5) years. The firm's clients are defined as any client the firm provided service to or for in the year of or the year preceding the termination of the stockholder/officer. The amount of the compensation paid to the firm will be the scheduled percentage of the fees earned from the client by the terminated officer/shareholder. These amounts will be remitted to the firm not later than 60 days after the end of each year of the five year period subsequent to the officer's date of termination or resignation. The firm has the right to audit the records of the terminated officers/shareholders.

Year 1-35% Year 2-25% Year 3-15% Year 4-10% Year 5-10%." (Emphasis added to show modifications from 1994 version.)

The modified Employment Agreement was signed by eight of the nine remaining shareholders. L. Gary Boomer did not sign.

In an agreement dated December 31, 1996, L. Gary Boomer resigned as an officer/shareholder of Varney & Associates. The agreement acknowledged the "non-competition agreement" that was in existence and provided that Boomer would pay Varney & Associates a declining percentage of all fees earned, net of client reimbursed expenses, from Varney & Associates' clients over the next 5-year period. The declining percentage schedule was the same as that set forth in Article IX of the Employment Agreement. Client reimbursed expenses were defined as "direct travel, supplies, hardware and software associated with the delivery of client service." A list of Varney & Associates' clients was attached to the agreement. The agreement also provided that Varney & Associates had the right to review records of receipts and collections during this 5-year period. Unlike under the Employment Agreement, however, payment was to be made within 30 days after the close of the calendar year. The agreement was signed by Pottroff, for Varney & Associates, and L. Gary Boomer.

A supplemental termination agreement was subsequently entered into between Varney & Associates and L. Gary Boomer. The supplemental agreement provided that upon closing of a contract between L. Gary Boomer and Practitioners Publishing Company (Practitioners), Boomer would pay a lump sum of $300,000 to Varney & Associates rather than the declining percentage of fees earned over the next 5 years. The supplemental agreement was to be null and void if the contract was not closed by June 15, 1997. The supplemental agreement was signed by Pottroff, for Varney & Associates, and L. Gary Boomer.

On March 3, 1998, Pottroff entered into an agreement with Varney & Associates. The agreement noted that Pottroff had resigned as an officer and director of Varney & Associates effective August 31, 1997, and that Pottroff was to receive $108,734.17 for his 340 shares of Varney & Associates' stock. The agreement allowed Pottroff to surrender his shares of stock and absolve himself of future liability. The agreement also provided that Varney & Associates' right to recover any sums due pursuant to other agreements with Pottroff was not prejudiced.

On June 17, 1998, Century Business Services, Inc. (Century), a Delaware corporation, B.A. Acquisition Corp. (BA), an Ohio corporation, and the six remaining shareholders of Varney & Associates, entered into an "Agreement and Plan of Merger" (Merger Agreement). Pursuant to the Merger Agreement, Varney & Associates and its shareholders agreed to convert Varney & Associates from a professional association into a business corporation. The Merger Agreement further provided for Varney & Associates to merge into BA and for Varney & Associates to cease to exist. In completing the merger, BA was to change its name to Varney Business Services, Inc., an Ohio corporation. The Merger Agreement provided that each officer of Varney & Associates would become an initial officer of Varney. The merger was contingent upon each shareholder entering into an employment agreement with Varney and upon Varney & Associates, CPA's, LLC (Varney CPA's), entering into an administrative services agreement (Services Agreement) with Varney. Varney CPA's was created immediately following the merger and was comprised of certified public accountants (CPAs) who were employees of Varney and Varney CPA's. Under the Services Agreement, Varney received 85 percent of Varney CPA's gross revenues as payment for services provided to Varney CPA's in the form of office space, equipment support staff, professional staff, and administrative staff. The Services Agreement was approved by the Kansas Board of Accountancy.

After this action was filed, Varney, pursuant to an asset purchase...