david-k-wachtel-jr-v-western-sizzlin-corporation-fka-franchisee ( 1998 )

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
FILED
July 1, 1998
DAVID K. WACHTEL, JR., )
)
Cecil W. Crowson
Plaintiff/Appellant, )
Appellate Court Clerk
) Appeal No.
VS. ) 01-A-01-9708-CH-00396
)
THE WESTERN SIZZLIN ) Davidson Chancery
CORPORATION f/k/a FRANCHISEE ) No. 95-781-I
ACQUISITION CORPORATION, )
)
Defendant-Counter )
Claimant/Appellee )
)
VS. )
)
DAVID K. WACHTEL, JR., AND )
RESTAURANT MANAGEMENT )
SERVICES, INC., )
)
Counter-Defendants. )
APPEALED FROM THE CHANCERY COURT OF DAVIDSON COUNTY
AT NASHVILLE, TENNESSEE
THE HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR
JON D. ROSS
EDMUND L. CAREY, JR.
2000 First Union Tower
150 Fourth Avenue North
Nashville, Tennessee 37219
Attorneys for Plaintiff/Appellant
MICHAEL L. DAGLEY
OVERTON THOMPSON III
STEPHEN H. PRICE
424 Church Street, Suite 1900
Nashville, Tennessee 37219
Attorneys for Defendant/Appellee
REVERSED AND REMANDED
BEN H. CANTRELL, JUDGE
CONCUR:
KOCH, J.
BUSSART, S.J.
OPINION
This breach of contract case is before us on a Rule 54.02, Tenn. R. Civ.
Proc. appeal. The only question for our decision is whether the trial court erred in
granting the defendant’s motion for partial summary judgment on the plaintiff’s claim
for certain consequential damages arising from the defendant’s breach of contract.
We reverse the trial court.
I. Facts and Prior Proceedings
The plaintiff, David K. Wachtel, Jr., is an experienced restaurant
executive, who had been the President of Shoney’s, and the President and C.E.O. of
the O’Charley’s restaurant chain. Mr. Wachtel was also the sole owner of Restaurant
Management Services, Inc. (RMS), a former franchisee of restaurants operated as
part of the Western Sizzlin chain of steakhouses. In 1992, Western Sizzlin’s parent
company, Western Sizzlin, Inc. (WSI) filed for Chapter 11 bankruptcy.
Restaurant Management Services was a secured creditor of WSI, and
Mr. Wachtel sponsored a reorganization plan that enabled him to settle the claims of
RMS for cash plus stock in WSI’s successor corporation. This corporation was initially
called Franchisee Acquisition Corporation, but the name was later changed to
Western Sizzlin Corporation (WSC).
The reorganization plan involved changes in the structure of the
franchisor, designed to enable it to go public within five years. Mr. Wachtel proposed
that the company make itself attractive to the financial markets by creating a profitable
core of company-operated franchises in geographically concentrated areas, a tactic
that he had successfully pursued in turning O’Charley’s into a publicly-owned
company.
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After extensive negotiations, Mr. Wachtel and Franchisee Acquisition
Corporation agreed on an employment contact, which the parties signed on November
11, 1993. The agreement provided that Wachtel was to become the President and
CEO of the reorganized company for five years, and to receive a base annual salary,
annual cost of living increases, and an annual bonus equaling 3.5% of the
corporation’s pretax operating income. On the same day that the employment
contract was signed, the Board of Directors instructed Mr. Wachtel to carry out the
reorganization plan, with the ultimate goal of offering the company’s stock to the
public.
We note that a considerable part of the employment agreement deals
with the consequences of its premature termination. Paragraph 7 sets out the
company’s financial obligations if David Wachtel were to die or become disabled
during the course of the contract. Paragraph 8 provides that aside from death or
disability, Mr. Wachtel can only be terminated prior to completion of five years for
“cause,” a term that is defined in some detail. Paragraph 9 gives Wachtel the right to
terminate his obligations under the contract, and to receive specified compensation,
in the event of a change in control of the company.
On February 28, 1995, WSC’s Board of Directors fired Wachtel as
President and CEO. They purportedly did not give their reasons at that time, but in
a counterclaim they alleged that they were compelled to take this action because of
Wachtel’s refusal to abide by the decisions of the Board of Directors, and because he
followed a consistent course of action calculated to benefit him personally, but which
was detrimental to the company and its other shareholders.
They also claimed that after his termination, Mr. Wachtel, a multi-
millionaire in his own right, vowed to destroy the company through litigation. Mr.
Wachtel denied that he was acting out of any such motive. While we have no way to
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evaluate the defendant’s allegation, we note that the record on appeal includes five
boxes, containing thirteen volumes of the transcript of the record, and literally
hundreds of exhibits, far more documentation than is needed to resolve the single
interlocutory issue before us. The Designation of the Record on Appeal, which lists
the items Mr. Wachtel asked to be included in the record, itself runs over six legal-
sized pages.
On March 13, 1995, David Wachtel filed the instant suit against WSC
for breach of the employment contract. He later added a claim for $8.5 million in
special damages, arguing that the abandonment of the plan to bring WSC public had
cost him this sum in potential profits on his stock entitlements.
On March 27, 1997, the defendant filed a Motion for Partial Summary
Judgment on the claim for special damages. The defendant advanced three
arguments in support of its motion: (1) that the termination of Mr. Wachtel had
actually been for cause, and that his recovery therefore had to be limited to the
amount specified in Paragraph 8 of the employment contract, (2) that the gravaman
of his injury was the loss of the potential increase in value of the WSC stock he
owned, and that a derivative shareholder’s suit was therefore his sole legitimate
avenue of recovery, and (3) that his damages were so remote and speculative as to
be unprovable, and were therefore unrecoverable.
The trial court granted partial summary judgment to the defendant on
June 4, 1997, and dismissed the claim for special damages. The court did not specify
which of the defendant’s three arguments was (or were) persuasive. Finding no just
reason for delay, the court subsequently granted the plaintiff’s motion for entry of its
order as a final judgment pursuant to Rule 54.02 of the Tennessee Rules of Civil
Procedure, thus setting the stage for this appeal. The Court stayed all further
proceedings pending this court’s resolution of the appeal.
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II. The “For Cause” Issue
Although one of the grounds on which the company moved for summary
judgment in the trial court was that it terminated Mr. Wachtel for cause, that issue is
not pressed on appeal. Mr. Wachtel, on the other hand, insists that he was
terminated without cause.
About the best we can do on this issue is to recognize that the facts in
the record are in dispute. Thus, this question is left open for final resolution in the trial
court.
III. The Derivative Suit Issue
The company insists that the trial court could have dismissed the claim
for special damages on the ground that Mr. Wachtel’s claims are identical to those of
all the other Western Sizzlin shareholders. It reasons that his damages are only for
the loss of the potential increase in value of his shares in the company, and that,
therefore, his remedy is to bring a shareholder’s derivative action on behalf of the
company and all its shareholders. Mr. Wachtel’s reply is that his claim is based on an
employment contract under which the company had a special duty to him, a duty not
owed to any other shareholder.
On this issue we think Mr. Wachtel is correct. “Stockholders may bring
an action individually to recover for an injury done directly to them distinct from that
incurred by the corporation and arising out of a special duty owed to the shareholders
by the wrongdoer.” Hadden v. City of Gatlinburg, 746 S.W.2d 687 (Tenn. 1988). In
this case the wrongdoer is the corporation itself, but that fact does not change the
general rule. Nor does the fact that the other shareholders may have suffered the
same harm in proportion to the number of shares they owned. The cause of action
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for the other shareholders would be against the directors for violating their fiduciary
duty to take the corporation public. Wachtel’s cause of action is against the
corporation for breaching his employment contract. The loss he alleges is a
consequence of that breach.
IV. The Remoteness Issue
On this issue it is important to review Mr. Wachtel’s specific claims. The
plan of reorganization for WSC included the issuance of 184,000 shares of W SC’s
common stock and 25,000 shares of WSC Series A preferred stock to Mr. Wachtel’s
wholly-owned corporation, Restaurant Management Services Inc. (RMS). These
shares were issued in partial satisfaction of a pre-bankruptcy debt to RMS, and the
preferred shares could be converted to 250,000 shares of common stock in WSC in
the event the company went public. These shares were issued “[a]s an additional
incentive and in consideration of Mr. Wachtel’s execution of the Employment
Agreement . . . .” In addition, Mr. Wachtel loaned $1 million to WSC and received
100,000 shares of its common stock and 125,000 Series B preferred shares. The
preferred shares could also be converted to common shares on a ten to one ratio if
the company went public. Thus, Mr. Wachtel stood to reap an enormous benefit from
a public offering.1
Mr. Wachtel’s employment contract does not refer to his shares in the
company, nor does it include in the description of his duties a duty to take the
company public. It does refer to his duty to “conduct the company’s business for the
greatest advantage and benefit of the company and its shareholders.” When the
contract was signed, however, the WSC board had already approved the plan of
1
Whether he can reco ver th e dam age to RM S his who lly-own ed co rpor ation , is not a n issu e in
this a ppe al.
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reoganization and it referred to the conversion features of the plan as an incentive to
get Mr. Wachtel to sign the employment agreement.
It is true that remote and speculative damages may not be recovered for
a breach of contract, Black v. Love & Amos Coal Co., 206 S.W.2d 432 (Tenn. App.
1947), but contract damages that are proved with reasonable certainty may be
recovered. Chisholm & Moore Mfg. Co. v. United States Canopy Co., 77 S.W. 1062(Tenn. 1903)(adopting the rule in Hadley v. Baxendale, 9 Ex., 341). The Court in
Chisholm said:
“The rule in Hadley v. Baxendale would seem to mean
that plaintiff may recover such damages as normally
result from the breach of contract, or he may show certain
special facts to have been known to the defendant at the
time of the contract, which would give notice to him that a
breach of the contract would result in an otherwise
unexpected loss, and in such case the plaintiff might
recover his special loss.”
77 S.W. at 1064. All the people involved in the plan of reorganization knew that Mr.
Wachtel’s primary aim was to take the company public; they knew it was his primary
interest in becoming involved in the company; they knew that he had accepted a
modest salary (for him) in contemplation of a greater reward in the future. Therefore,
the special damages alleged fall well within the contemplation of the parties.
We cannot say as a matter of law that Mr. Wachtel’s claims are
incapable of proof. In fact, in opposition to the motion for summary judgment, Mr.
Wachtel offered expert opinions that showed a probability that he would have been
able to take the company public within the term of his employment agreement. While
this type of proof falls far short of settling the question, it does make a contested issue
of fact on whether he has suffered the damages he claims from the alleged breach
of his contract.
We therefore reverse the lower court’s judgment dismissing Mr.
Wachtel’s claim for special damages. We stress the fact, however, that all of the
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issues relating to this claim are still open, and it remains to be seen whether Mr.
Wachtel can prove that the alleged breach of contract caused the damages he claims.
The cause is remanded to the Chancery Court of Davidson County for further
proceedings in accordance with this opinion. Tax the costs on appeal to the appellee.
____________________________
BEN H. CANTRELL, JUDGE
CONCUR:
__________________________________
WILLIAM C. KOCH, JR., JUDGE
__________________________________
WALTER W. BUSSART, SPECIAL JUDGE
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