VOCC v. NUCKOLL'S CONCRETE SERVICE, 97-1614.

• Decision Date: 09 September 1999
• Docket Number: No. 97-1614.,97-1614.
• Citation: 599 N.W.2d 684
• Parties: VAN OORT CONSTRUCTION COMPANY, INC., Jerry Van Oort, Casey Van Oort, and Jeff Wangsness, Appellants, v. NUCKOLL'S CONCRETE SERVICE, INC., Appellee.
• Court: Iowa Supreme Court

599 N.W.2d 684

VAN OORT CONSTRUCTION COMPANY, INC., Jerry Van Oort, Casey Van Oort, and Jeff Wangsness, Appellants, v. NUCKOLL'S CONCRETE SERVICE, INC., Appellee.

No. 97-1614.

Supreme Court of Iowa.

September 9, 1999.

Rehearing Denied September 27, 1999.

Jonathan C. Wilson and Kris Holub Smith of Davis, Brown, Koehn, Shors & Roberts, P.C., Des Moines, for appellants.

Denis Y. Reed of the Reed Law Office, Des Moines, and Colin C. Murphy, Des Moines, for appellee.

Considered by CARTER, P.J., and LAVORATO, NEUMAN, TERNUS, and HARRIS,¹ JJ.

TERNUS, Justice.

Appellee, Nuckoll's Concrete Service, Inc., purchased the assets of appellant, Van Oort Construction Company, Inc. Subsequently, Nuckoll's stopped making payments under a collateral noncompete agreement, claiming that Van Oort Construction and appellant, Jerry Van Oort, had breached the covenant not to compete. Appellants then brought this action for breach of contract; Nuckoll's filed a counterclaim. The trial court ruled that the Van Oort parties had breached the contract and that consequently Nuckoll's was justified in not making payments under the noncompete agreement. The court dismissed the plaintiffs' claim and awarded damages to Nuckoll's.

On review by the Iowa Court of Appeals, the court of appeals reversed the trial court's dismissal of the plaintiffs' claim and awarded damages to them; the court affirmed the trial court's judgment on Nuckoll's counterclaim. On further review, we vacate the decision of the court of appeals and affirm the judgment of the district court.

I. Background Facts.

A. Randall Van Oort agreement. Van Oort Construction Company, Inc. [hereinafter VOCC] was a family-owned business engaged in supplying concrete ready-mix. The company stock was owned by four siblings, Jerry Van Oort, Randall Van Oort, Casey Van Oort, and Shelly Van Oort Wangsness, and Shelly's husband, Jeff Wangsness. This ownership continued until January of 1993, when Randall Van Oort sold his shares in the company to the other stockholders.

Included in the purchase agreement between Randall and the other shareholders was a covenant not to compete executed by Randall. Under this covenant, Randall agreed, for a period of ten years and within a fifty-mile radius of any place of business of VOCC, not to

directly or indirectly, own, manage, operate, control, be employed by, participate in or be connected in any manner with the ownership, management, operation or control of any business similar to the type of business conducted by [VOCC] or that delivers any product also delivered by [VOCC] ..., except as agent or employee of Central Redi-Mix, Inc.

In addition, during this same ten-year period, Randall could not

lend credit or money for the purpose of establishing or operating a construction business nor lend nor allow his name or reputation to be used in any such construction business or otherwise allow his skill, knowledge or experience to be used in any such business.

In consideration for this covenant, VOCC agreed to pay Randall a $50,000 lump sum and, for sixty months thereafter, $4050 per month with a final payment of $3000. The noncompete covenant was binding upon and inured to the benefit of each party's successors and assigns, including any purchaser of VOCC's assets.

At the time of the Randall Van Oort agreement, Central Redi-Mix was an incorporated business owned by Jerry, Casey and Randall Van Oort. It was not actively in operation at that time.

B. Nuckoll's contracts. Approximately one year after Randall was bought out of the family corporation, VOCC's remaining shareholders sold the assets of VOCC to Nuckoll's Concrete Service, Inc. for $3.4 million. At the time of this sale, Nuckoll's was engaged in the ready-mix concrete business in some of the same markets as VOCC. Therefore, in addition to the purchase contract, the parties executed a separate noncompete agreement. Under this agreement, Jerry Van Oort, Casey Van Oort, and Jeff Wangsness agreed, for a period of five years, not to

directly or indirectly, enter the employment of, or perform any advisory or consulting service for, or make a substantial investment in, any company, partnership, organization, proprietorship, or other entity that engages in the ready-mix concrete business within [a] one hundred (100) mile radius of SELLERS' [VOCC's] current business operations....

In addition, VOCC and its shareholders agreed that Randall Van Oort's noncompete agreement would remain in force as a part of Nuckoll's purchase and would be enforced by VOCC and its shareholders upon Nuckoll's demand. Separate consideration of $450,000, payable in monthly installments, was given for the covenant-not-to-compete agreement.

C. Randall's breach of contract. Nuckoll's made the required monthly payments under the noncompete agreement until March 1994, when a dispute developed over whether Jerry Van Oort was engaged in prohibited competitive actions. Nuckoll's immediately stopped making payments, but the matter was soon settled without court action. Nuckoll's resumed payments and paid the back payments it had withheld; VOCC agreed to reduce the amount of Nuckoll's final payment by $11,700.

Another problem developed in March of 1996. At that time, Nuckoll's learned that Randall was employed by M. Peterson Construction Co. as a dispatcher for its ready-mix business, A-1 Ready Mix. Randall's duties included significant customer contact, including answering the phone, scheduling drivers, and scheduling deliveries of ready-mix concrete.

Nuckoll's believed that Randall was violating his noncompete agreement with VOCC, which had been made a part of Nuckoll's contract with VOCC and its shareholders. Nuckoll's demanded that VOCC enforce the agreement. VOCC, through its attorney, then sent a letter to Randall demanding that he cease his employment with M. Peterson. After receiving this letter, and at Jerry's suggestion, Randall filed articles of incorporation for "Central Redi-Mix, Inc." (Apparently, the prior family-owned corporation known as "Central Redi-Mix, Inc." had ceased to exist.)

Randall continued to work at M. Peterson in the same capacity, but his paychecks were made payable to Central Redi-Mix, Inc. Randall was the sole officer and employee of Central Redi-Mix. He engaged in no other business efforts other than his service for M. Peterson. Neither M. Peterson nor Central Redi-Mix withheld taxes or social security from Randall's earnings. M. Peterson continued to withhold Randall's personal child support obligation from its checks to Central Redi-Mix. Randall filed no corporate tax returns and held no corporate meetings.

D. VOCC's injunction action against Randall Van Oort. By this time Nuckoll's had ceased making payments under the VOCC noncompete agreement. VOCC then sought a temporary injunction against Randall to enjoin him from violating the terms of his covenant not to compete. Nuckoll's was aware that this action was pending, but was not involved in the proceeding.

After a trial to the court, the district court denied VOCC's request for injunctive relief. The court ruled that Randall did not violate his covenant not to compete because he engaged in the prohibited competition as an employee of Central Redi-Mix, Inc. In dicta, the district court also held that VOCC had satisfied its obligation under its noncompete agreement with Nuckoll's by bringing the injunction action against Randall.

E. Jerry's breach of contract. In January 1997, Jerry Van Oort reentered the ready-mix business as V.O.C. Concrete in direct violation of the VOCC noncompete agreement. The cement operation was formed under Jerry's partnership in a land excavating business that he started in 1994 with the proceeds from the sale of VOCC's assets. Jerry testified that he was forced into the cement business because he needed to mitigate his damages resulting from Nuckoll's continued refusal to make the installment payments under the noncompete agreement. After Jerry formed V.O.C. Concrete, Randall, still operating as Central Redi-Mix, Inc., began to work for Jerry as an independent mix designer.

II. Present Proceedings.

A. District court. In June 1996, VOCC, Jerry Van Oort, Casey Van Oort, and Jeff Wangsness filed this action against Nuckoll's claiming that Nuckoll's was in breach of the noncompete agreement by its continued failure to make the monthly installment payments. Nuckoll's asserted as an affirmative defense that Randall's employment constituted a material breach of the noncompete agreement between Nuckoll's and the plaintiffs, thereby excusing Nuckoll's refusal to make the monthly payments. Nuckoll's also filed a counterclaim based on VOCC's alleged breach of contract, seeking to recover the almost $90,000 Nuckoll's had already paid for the covenant not to compete.

The case proceeded to a bench trial. VOCC asserted that Nuckoll's was precluded from relitigating the issues previously determined in the injunction action: (1) that Randall had not violated the terms of his noncompete agreement with VOCC; and (2) that VOCC had satisfied its contractual obligation to enforce the Randall Van Oort covenant not to compete. The trial court ruled that issue preclusion was unavailable on the second issue because that issue was not material and relevant to the disposition of the prior action. As to the first issue, the trial court held that Nuckoll's did not have a full and fair opportunity to litigate this issue and therefore was not bound by the prior resolution of that issue.

After determining that issue preclusion did not apply, the court considered the merits of the parties' claims. The court held that Randall's employment at M. Peterson and V.O.C. Concrete through Central Redi-Mix, Inc. was a sham and in direct violation of his noncompete agreement with VOCC. The court also concluded that Jerry had breached his noncompete agreement with Nuckoll's by his reentry into the ready-mix business. Because the court...