Mike Allmand v. Jon Pavletic

IN THE SUPREME COURT OF TENNESSEE
AT JACKSON
November 5, 2008 Session
MIKE ALLMAND v. JON PAVLETIC, IND. AND AS MAYOR OF THE
CITY OF RIPLEY, TENNESSEE ET AL.
Rule 23 Certified Question of Law
United States District Court for the Western District of Tennessee
No. 06-2128 D P Bernice Bouie Donald, Judge
No. M2008-00459-SC-R23-CQ - Filed August 26, 2009
The United States District Court for the Western District of Tennessee has submitted a
certified question of law pursuant to our Rule 23 as to the validity of certain provisions within two
separate employment contracts: “Whether a municipal utility board has the authority to enter into
a contract with an appointed city official who serves at the will and pleasure of the Board of Mayor
and Aldermen whereby the utility board contracts to continue to pay the official’s salary for a multi-
year time period [8 and 14 years] after the official’s employment is terminated.” Because it is within
our discretion to do so, we have elected to answer the question in a manner designed to fit the facts
and circumstances in this particular case. Our conclusion is that neither Ripley Power and Light nor
Ripley Gas, Water, and Wastewater, utility boards for the City of Ripley, Tennessee, had the
authority to enter into multi-year contracts with Mike Allmand, the former superintendent of the two
utilities, or to obligate the City for the payment of salary and benefits as provided by the terms.
Tenn. Sup. Ct. R. 23 Certified Question of Law
GARY R. WADE, J., delivered the opinion of the court, in which JANICE M. HOLDER, C.J., CORNELIA
A. CLARK, and SHARON G. LEE , JJ., joined. WILLIAM C. KOCH , JR., J. filed a separate dissenting
opinion.
Tim Edwards and James F. Horner, Jr., Memphis, Tennessee, for the plaintiff, Mike Allmand.
Edward J. McKenney, Jr., Memphis, Tennessee, for the defendants, Jon Pavletic, Billy Chipman,
Billie Anne Hendren, Jimmy Harrison, John Gaines, Robert T. Hightower, Ripley Gas, Water and
Wastewater Department, and the City of Ripley; and Henry Clay Shelton, III, Memphis, Tennessee,
for the defendant, Ripley Power and Light Company.
OPINION
In August of 2006, the Plaintiff, Mike Allmand (“Allmand”), filed a complaint in the United
States District Court for the Western District of Tennessee seeking damages against the City of
Ripley, Tennessee, its Mayor and Board of Aldermen, individually and in their official capacities,
Ripley Power and Light Company, and the Ripley Gas, Water and Wastewater Department
(collectively, the “Defendants”),1 for the breach of two separate employment contracts. During the
course of the litigation, the District Court entered an order certifying a question of law to this Court
pursuant to Rule 23 of the Tennessee Supreme Court Rules.2 Our recitation of the facts and
procedural history is taken from the order entered by the District Court.
Background
City of Ripley’s Charter
The City of Ripley, Tennessee, became an incorporated municipality pursuant to a Charter
that was authorized by the Tennessee General Assembly in 1901 Private Acts, Ch. No. 223. The
Charter provides for a Board of Mayor and Aldermen, consisting of seven members, one of whom
serves as the Mayor. Pursuant to Section 5 of the Charter, the Mayor and other members of the
Board of Mayor and Aldermen have terms of four years. Section 7 of the Charter includes the
following language:
Be it further enacted, that the City shall be organized into departments of general
government, police, fire, gas and water, electricity, parks and recreation, and public
works. However, the Board of Mayor and Aldermen may abolish any of those
departments, may create new departments, and may combine, or consolidate or merge
any present or future departments. The Board of Mayor and Aldermen shall appoint
the heads of the departments, and those heads of departments shall serve at the will
and pleasure of the Board.
(Emphasis added). Further, Section 17 of the Charter provides as follows:
[T]he Board of Mayor and Aldermen may make all proper and necessary contracts
for corporate purposes and uses, which shall be made in the name of the corporation,
and signed by the Mayor and Recorder, and no person shall have power to create any
1
The District Court’s order refers to the latter two entities as “Ripley Power” and “Ripley Gas.” In 2007, the
certified population of Ripley was 7,844. Municipal Incorporation, County, Charter and Population Table, Tenn. Code
Ann. Vol 13, at 250 (2008 Supp.).
2
“The Supreme Court may, at its discretion, answer questions of law certified to it by the Supreme Court of
the United States, a Court of Appeals of the United States, a District Court of the United States in Tennessee, or a United
States Bankruptcy Court in Tennessee. This rule may be invoked when the certifying court determines that, in a
proceeding before it, there are questions of law of this state which will be determinative of the cause and as to which it
appears to the certifying court there is no controlling precedent in the decisions of the Supreme Court of Tennessee.”
Tenn. Sup. Ct. R. 23, § 1.
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liability against the corporation except by express authority of the Board, conferred
at a meeting duly and regularly convened.
(Emphasis added).
Electric Department
On December 6, 1957, the Board of Mayor and Aldermen, acting pursuant to authority
granted by the Municipal Electric Plant Law of 1935, Tenn. Code Ann. § 7-52-101, et seq. (2005 &
Supp. 2008) created a Board of Public Utilities (“Electric Department”) as follows:
[B]e it resolved by the Board of Aldermen of the City of Ripley that a Board of
Public Utilities be, and it is hereby, constituted and established for the purpose of
taking and having supervision and control of the improvement, operation, and
maintenance of the City of Ripley’s Electric Department, which said Board shall be
the Supervisory Body of the said Department and shall have all the powers and duties
which are, or shall be, conferred upon such Board of Supervisory Body by the laws
of Tennessee, including, but not limited to, the provisions of said Municipal Electric
Plant Act . . . .
(Emphasis added).
The resolution, which went into effect on January 1, 1958, provided that the Board governing
the Electric Department would consist of three members, one of whom was a member of the City’s
Board of Mayor and Aldermen, with each serving a term of four years. Tenn. Code Ann. § 7-52-107.
Pursuant to Tennessee Code Annotated section 7-52-114(b), the 1957 resolution further authorized
the Electric Department’s Board to select and remove a Superintendent: “The Superintendent shall
serve at the pleasure of the Board and may be removed for cause by said Board at any time.” See
also Tenn. Code Ann. § 7-52-114(b) (“The superintendent shall serve at the pleasure of the
supervisory body and may be removed by such body at any time.”).
Gas, Water and Sewer Department
On July 3, 1962, the Board of Mayor and Aldermen adopted a resolution establishing a Board
of Public Utilities (“Gas Department”) to supervise and control natural gas, water, and sewer
facilities:
[B]e it resolved by the Board of Mayor and Aldermen of Ripley that a Board of
Public Utilities be, and it is hereby constituted and established for the purpose of
taking and having supervision and control of the improvement, operation and
maintenance of the City of Ripley’s gas, water and sewer plants, which said Board
shall be the Supervisory Body of the said plants and shall have all the powers and
duties which are, or shall be, conferred upon such Board of Supervisory Body by the
laws of Tennessee. . . .
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(Emphasis added). The 1962 resolution created a Gas Department Board consisting of five
members, one of whom is to be a member of the City’s Board of Mayor and Aldermen. Like the
Electric Department Board, the Board of the Gas Department was delegated the authority to select
and remove a superintendent: “The Superintendent shall serve at the pleasure of the Board and may
be removed for cause by said Board at any time, provided that such action is approved by [the] Board
of Mayor and Aldermen.” While the state statute applicable to the Electric Department directs that
the superintendent “serve at the pleasure of” the board, there is no similar statutory provision
applicable to gas, sewer, or water utilities. See Tenn. Code Ann. § 7-35-101, et seq. (2005 & Supp.
2008).
The Contracts
Beginning in the 1980s, Mike Allmand worked as the superintendent for both the City’s
Electric and its Gas Departments. In 1985, 1991, and 1996, Allmand, desirous of both job security
and freedom from “political influence,” sought and obtained five-year employment contracts. Each
of the contracts contained, among other things, provisions whereby Allmand would continue to
receive his full salary if terminated, regardless of the basis of the termination.3
On October 31, 2003, the Gas Department entered into a new employment agreement with
Allmand, naming him “President and CEO” for an eight-year term and including the following
additional language:
1. The [Gas Department] shall continue to employ Employee as President and CEO,
and Employee hereby accepts and agrees to such continued employment . . . .
....
3. The initial term of this Agreement shall be for a period beginning on the date it
is signed by the parties and ending on October 31, 2011. This Agreement shall
automatically renew for successive five-year terms, provided that neither party
submits written notice of termination six (6) months prior to the termination date. .
..
....
12. In the event that the Employer terminates Employee’s employment for any
reason during the term of this Agreement, or any successive term, Employee shall be
entitled to receive Employee’s annual salary, compensation, and all benefits for the
remaining term of the Agreement or a period of five years from the date of the
Employee’s termination, whichever is greater; provided however, that if the
3
In June of 2003, the Division of Municipal Audit for the State of Tennessee advised the City that the post-
termination benefits in the employment contracts “did not appear to serve a valid municipal purpose.” The audit also
reported that provisions allowing Allmand’s spouse expenses for travel, meals, and entertainment were “void.”
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Employer can prove beyond a reasonable doubt that Employee voluntarily abandoned
his job or engaged in intentional conduct that operated to the specific detriment of the
Employer’s welfare, that the Employer may terminate this Agreement without
obligation to provide the above-noted severance payments. In the event of a
termination prior to the expiration of the Agreement, payments under this provision
shall be paid pursuant to the Employer’s normal bi-weekly schedule. For purposes
of this provision, the annual salary, compensation, bonuses and benefits shall equal
the Employee’s salary, compensation, bonuses and benefits existing at the time of his
termination but in no case to be less than the salary, compensation, bonuses and
benefits Employee received during the year prior to his termination. The term
benefits shall include, but not be limited to, medical insurance, life insurance,
pension and supplemental pension plans, social security, and disability insurance.
Employee shall be paid any and all accumulated sick leave and vacation, and any
other accrued benefits, in a single lump sum if Employee leaves Company for any
reason. . . .
(Emphasis added).
Similarly, on December 11, 2003, the Electric Department entered into a fourteen-year
employment contract with Allmand, providing for automatic renewal after the original term for
successive periods of one year, on the condition that “neither party submits written notice of
termination at least one (1) year prior to the termination date.” Paragraph 14 of the Electric
Department contract contained a post-termination payment provision similar to that in paragraph 12
of the Gas Department contract. The only other significant differences between the two contracts
were that paragraph 14 did not include a provision allowing for “a period of five years from the date
of the Employee’s termination, whichever is greater” and did not use the term “above-noted
severance payments.”
Both contracts provided that Allmand “was being called upon to manage the two departments
as they were merged.” The contracts also included identical severability clauses: “Should any
section or portion of this Agreement be held unreasonable or unenforceable by a court of competent
jurisdiction, such decision of the court shall apply only to the specific section or portion involved
and shall not invalidate the remaining sections or portions of this Agreement.”
On November 7, 2005, Allmand was discharged as superintendent of the Gas and Electric
Departments. He was not paid a post-termination salary and received no other benefits as provided
within the contracts.
District Court Proceedings
On August 31, 2006, some ten months after being discharged from his positions of
employment, Allmand filed a complaint in the United States District Court for the Western District
of Tennessee against the Defendants, seeking damages for the breach of each of the two contracts.
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On July 23, 2007, the District Court granted partial summary judgment for the Defendants,
ruling that “the Ripley City Charter and the Municipal Electric Plant Act, Tenn. Code Ann. § 7-52-
101, et seq. did not allow the Utility Boards to enter into multi-year employment contracts with
[Allmand], an appointed official who serves ‘at the will and pleasure of the board’” and that “in
contracting with [Allmand] for definite term[s] of employment, the Utility Boards acted ultra vires.”
(Emphasis added). As a result, the District Court concluded that the October 31, 2003 and December
11, 2003 multi-year employment agreements were “voidable as to all provisions contingent on a
definite term of employment” but were valid as to “those provisions not contingent upon a definite
term of employment, such as compensation, retirement, and annual/sick leave.” On August 7, 2007,
the District Court entered an “Order of Clarification” which provided, in pertinent part, as follows:
The Court finds that the issue of severance is not precluded by the . . . holding that
the Board lacked the authority to contract for a term of years. The issue of severance
is not inconsistent with an at-will contract. Accordingly, the issue of severance is not
rendered moot by the Court’s earlier Order.
(Emphasis added).
Later, the District Court entered an order certifying the following question of law pursuant
to our Rule 23: “Whether a municipal utility board has the authority to enter into a contract with an
appointed city official who serves at the will and pleasure of the Board of Mayor and Aldermen
whereby the utility board contracts to continue to pay the official’s salary for a multi-year time period
[8 and 14 years] after the official’s employment is terminated.” The specific question, of course, is
whether Allmand is entitled to compensation under the multi-year contracts if the City Charter or
other provisions of law authorized the Electric and Gas Department Boards to offer employment only
upon an at-will basis.
Analysis
Standard of Review
This case presents a certified question of law under Rule 23 of the Tennessee Supreme Court
Rules. In reviewing a question of law, our review is de novo without a presumption of correctness.
Tenn. R. App. P. 13; Colonial Pipeline Co. v. Morgan, 263 S.W.3d 827, 836 (Tenn. 2008) (citing
Perrin v. Gaylord Entm’t Co., 120 S.W.3d 823, 826 (Tenn. 2003); Ganzevoort v. Russell, 949
S.W.2d 293, 296 (Tenn. 1997)); S. Contractors, Inc. v. Loudon County Bd. of Educ., 58 S.W.3d 706,
710 (Tenn. 2001). More specifically, contractual interpretation is a matter of law. See Hamblen
County v. City of Morristown, 656 S.W.2d 331, 335-336 (Tenn. 1983).
Scope of Certified Question
When appropriate, we are empowered to “exercise our discretion to reframe the Rule 23
certified question before us so as to provide the guidance actually sought.” Shorts v. Bartholomew,
278 S.W.3d 268, 280 n.13 (Tenn. 2009) (citing 17A Charles Alan Wright, et al., Federal Practice and
Procedure, Jurisdiction 3d § 4248 n. 67 and accompanying text (Westlaw 2009)). It may, at times,
be necessary to slightly expand or restrict the scope of the question posed to the Court in order to
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further the interests of judicial efficiency, comity, and federalism that underlie our inherent judicial
power to answer certified questions. See Haley v. Univ. of Tenn.-Knoxville, 188 S.W.3d 518, 523
(Tenn. 2006).
The district court asked “[w]hether a municipal utility board has the authority to enter into
a contract with an appointed city official who serves at the will and pleasure of the Board of Mayor
and Aldermen whereby the utility board contracts to continue to pay the official's salary for a
multi-year time period [8 and 14 years] after the official’s employment is terminated.” Read literally,
this question requests a ruling applicable to all municipal utility boards. According to the United
States Census Bureau’s 1997 census of governments, however, 343 municipal governments operate
within the State of Tennessee. Census Bureau, U.S. Dep’t of Commerce, 1997 Census of
Governments – Volume 1, Government Organization, app. A at A-236 (1997), available at
http://www.census.gov/prod/gc97/gc971-1.pdf. All are different. Further, as this case illustrates,
the phrase “utility board” may refer to a variety of entities providing different services under
different legal constraints. See Black’s Law Dictionary 1582 (8th ed. 2004) (defining “public
utility”).
In an effort to avoid the “limitless field of advisory opinions,” State v. Brown & Williamson
Tobacco Corp., 18 S.W.3d 186, 193 (Tenn. 2000) (quoting Story v. Walker, 404 S.W.2d 803, 804
(1966)), we have reframed the certified question as follows: Whether the Boards of the Ripley Gas
and Electric Departments had the authority to enter into contracts with a superintendent who served
at the will and pleasure of the Board of Mayor and Aldermen, whereby the superintendent was
entitled to salary and benefits for multi-year periods of time [8 and 14 years] after the employment
was terminated. For the reasons below, we conclude that neither the Gas nor the Electric Board had
such authority and any provisions establishing an entitlement to salary and benefits for terms of years
were beyond the powers of the respective departments.
Dillon’s Rule and Long-Term Employment Contracts
“Fundamental in [Tennessee] law is that municipalities may exercise only those express or
necessarily implied powers delegated to them by the Legislature in their charters or under statutes.”
City of Lebanon v. Baird, 756 S.W.2d 236, 241 (Tenn. 1988). “The provisions of the charter are
mandatory, and must be obeyed by the city and its agents . . . .” Barnes v. Ingram, 397 S.W.2d 821,
825 (Tenn. 1965) (quoting Marshall & Bruce Co. v. City of Nashville, 71 S.W. 815, 819 (Tenn.
1903)); see also Faust v. Metro. Gov’t of Nashville & Davidson County, 206 S.W.3d 475, 485
(Tenn. Ct. App. 2006) (holding a reclassification of civilian employees to be outside the authority
provided by the Metropolitan Code). The rationale for these principles is well-settled in the law:
“Municipal corporations represent the public, and are themselves to be protected
against the unauthorized acts of their officers, when it can be done without injury to
third parties. . . . The protection of public corporations from such unauthorized acts
of their officers is a matter of public policy, in which the whole community is
concerned.” . . . That a municipal corporation cannot and should not be bound by an
ultra vires contract is a proposition that is well settled by authority, and sustained by
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reason and justice. To hold otherwise would be to vastly enlarge the authority of
public agents, and permit them to bind a municipal corporation by contracts
absolutely prohibited by law, and would thus expose the public to evils and abuses
that the limitations and restrictions thrown around corporate officers are intended to
prevent.
City of Nashville v. Sutherland, 21 S.W. 674, 676-77 (Tenn. 1893) (quoting oral argument).
In consequence, “[w]hen a municipality fails to act within its charter or under applicable
statutory authority, the action is ultra vires and void or voidable.” Baird, 756 S.W.2d at 241 (citing
Crocker v. Town of Manchester, 156 S.W.2d 383, 384 (Tenn. 1941)); see also Marshall & Bruce
Co., 71 S.W. at 818-19.4 In summary, under Tennessee law a municipal action may be declared ultra
vires “(1) because the action was wholly outside the scope of the city’s authority under its charter
or a statute, or (2) because the action was not undertaken consistent with the mandatory provisions
of its charter or a statute.” Baird, 756 S.W.2d at 241.
In the recent case of Arnwine v. Union County Board of Education, 120 S.W.3d 804 (Tenn.
2003), we set aside a four-year contract for an assistant superintendent of schools (or a teacher)
because the length of the term, absent specific statutory authority, was beyond the power of the
school board.5 The assistant superintendent argued that the board of education was permitted to
enter into such a contract pursuant to Tennessee Code Annotated section 7-51-903, which provides,
in relevant part, that
[e]xcept as otherwise authorized or provided by law, municipalities are . . .
authorized to enter into long-term contracts for such period or duration as the
municipality may determine for any purpose for which short-term contracts not
4
An act is ultra vires when it is “beyond the scope of power allowed or granted by a corporate charter or by
law.” Black’s Law Dictionary 1559 (8th ed. 2004); see Smith v. Nelson, 18 Vt. 511 (1846) (“In the case of the
Presbytery of Auchterarder, which came before the Lords of the Sessions, and, on appeal, to the House of Lords, in 1839,
the act of the presbytery, in rejecting a person presented to them to be ordained, in pursuance of what was termed the
veto act of the General Assembly, was declared to be ultra vires and consequently void.” (emphasis added)). Although
the ultra vires doctrine is often discussed in the context of private corporations, see, e.g., Kent Greenfield, Ultra Vires
Lives! A Stakeholder Analysis of Corporate Illegality (with Notes on How Corporate Law Could Reinforce International
Law Norms), 87 Va. L. Rev. 1279, 1302-04 (2001), the doctrine applies to municipal corporations as well. See 56 Am.
Jur. 2d Municipal Corporations, Counties, and Other Political Subdivisions § 454 (2000 & W estlaw 2008). Paul Craig,
a legal scholar from the United Kingdom, described the ultra vires doctrine, as it applies to government entities, as
follows: “Parliament has found it necessary to accord power to ministers, administrative agencies, local authorities and
the like. Such power will always be subject to certain conditions contained in the enabling legislation. The courts’
function is to police the boundaries stipulated by Parliament.” Paul Craig, Ultra Vires and the Foundations of Judicial
Review, 57 Cambridge L.J. 63, 64-65 (1998).
5
The school board may enter into a four-year contract with the director (superintendent) of schools. Tenn.
Code Ann. § 49-2-203(a)(14)(A) (2002 & Supp. 2008). Similarly, a school principal may enter into a multi-year contract
so long as it does not exceed the contract term of the current superintendent. Tenn. Code Ann. § 49-2-303(a)(1) (2002
& Supp. 2008).
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extending beyond the term of the members of the governing body could be entered
....
Tenn. Code Ann. § 7-51-903 (2005). We concluded, however, that section 7-51-903 did not apply
because “there are specific statutes referring to personnel and employment contracts in education”
and those with more specificity prevail over the general rule of section 7-51-903. Arnwine, 120
S.W.3d at 809. Because Arnwine’s contract was governed by specific statutory provisions governing
teachers rather than by the general terms of section 7-51-903, we considered whether those more
specific statutes permitted a multi-year contract in the context of “Dillon’s Rule,”6 which requires
a “strict and narrow construction of local governmental authority” and allows a municipality to act
only when
(1) the power is granted in the “express words” of the statute, private act, or charter
creating the municipal corporation; (2) the power is “necessarily or fairly implied in,
or incident to[,] the powers expressly granted”; or (3) the power is one that is neither
expressly granted nor fairly implied from the express grants of power, but is
otherwise implied as “essential to the declared objects and purposes of the
corporation.”
Id. at 807-08 (quoting S. Constructors, 58 S.W.3d at 710-11). After confirming Dillon’s Rule as a
fundamental canon of construction, this Court emphasized that “[a]ny fair, reasonable doubt
concerning the existence of the power is resolved by the courts against the corporation and the power
is denied.” Id. at 808 (quoting Mayor of Nashville v. Linck, 80 Tenn. 499, 504 (1883) (quoting 1
John F. Dillon, Commentaries on the Law of Municipal Corporation 173 1st ed. 1872)). Our
conclusion was that the relevant statutes confirmed that there was no authority for a multi-year
contract for an assistant superintendent of schools. Id. at 807-09.
As in Arnwine, whether a multi-year employment contract would be permissible in this case
depends upon the level of authority granted under law. In our view, neither the City Charter nor the
relevant statutes empower the Electric Department or the Gas Department to enter an agreement
containing the terms at issue.
I. The City Charter
Initially, the City Charter required that the superintendent serve at the “will and pleasure” of
the Board of Mayor and Alderman. A “pleasure appointment” is “[t]he assignment of someone to
employment that can be taken away at any time, with no requirement for notice or a hearing.”
Black’s Law Dictionary 1192 (8th ed. 2004).
6
John Forrest Dillon served as Judge of Iowa’s Seventh Judicial Circuit from 1858 to 1862. For eight years
thereafter he served on the Iowa Supreme Court before being appointed by President Grant to what eventually became
the Eighth Circuit of the United States Court of Appeals. See Clinton v. Cedar Rapids & the Missouri River R.R., 24
Iowa 455 (1868); see also Hunter v. City of Pittsburgh, 207 U.S. 161, 179-80 (1907); Merrill v. Town of Montecello,
138 U.S. 673, 681 (1891). But see Berent v. City of Iowa City, 738 N.W .2d 193, 196-97 (Iowa 2007) (explaining that
a later Iowa constitutional amendment “reversed the Dillon Rule”).
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II. The Municipal Electric Plant Law
Allmand argues that the Electric Department employment contract with Allmand and the
post-termination compensation provision and, by extension, the contract approved by the Gas
Department Board, were authorized under the Municipal Electric Plant Law of 1935. He cites
Tennessee Code Annotated section 7-52-103(a), which empowers every municipality to
(1) Acquire, improve, operate and maintain within or without the corporate or county
limits of such municipality, and within the corporate or county limits of any other
municipality, with the consent of such other municipality, an electric plant and to
provide electric service to any person, firm, public or private corporation, or to any
other user or consumer of electric power and energy, and charge for the electric
service;
....
(7) Make contracts and execute instruments containing such covenants, terms and
conditions as in the discretion of the municipality may be necessary, proper or
advisable for the purpose of obtaining loans from any source, or grants, loans or other
financial assistance from any federal agency; make all other contracts and execute all
other instruments as in the discretion of the municipality may be necessary, proper
or advisable in or for the furtherance of the acquisition, improvement, operation and
maintenance of any electric plant and the furnishing of electric service; and carry out
and perform the covenants and terms and conditions of all such contracts and
instruments;
....
(9) Do all acts and things necessary or convenient to carry out the powers expressly
given in this part.
Tenn. Code Ann. § 7-52-103(a); see also Tenn. Code Ann. § 7-52-107 (giving municipality authority
to create board of public utilities). Allmand also relies upon Tennessee Code Annotated section 7-
52-134, which permits municipal authorities to “do all things necessary or convenient to carry out
the purposes of this part in addition to the powers expressly conferred in this part” and which
requires that the powers granted by the Municipal Electric Plant Law be “liberally construed to
effectuate the purposes of this part.” Tenn. Code Ann. § 7-52-134.
The statutes cited by Allmand, however, must be read in conjunction with Tennessee Code
Annotated section 7-52-114(b), which specifically states as follows:
The supervisory body shall appoint an electric plant superintendent . . . who shall be
qualified by training and experience for the general superintendence of the
acquisition, improvement and operation of the electric plant. The superintendent
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need not be a resident of the state at the time of appointment. The superintendent’s
salary shall be fixed by the person or agency appointing such superintendent. The
superintendent shall serve at the pleasure of the supervisory body and may be
removed by such body at any time.
Tenn. Code Ann. § 7-52-114(b) (emphasis added). This specific provision controls over the more
general ones cited by Allmand. Moreover, this provision is almost identical to the restrictions in the
City’s Charter, which likewise prevails over the general statutory provisions relied upon by Allmand.
See Grubb v. Mayor of Morristown, 203 S.W.2d 593, 596 (Tenn. 1947) (holding that a general law
will not repeal particular provisions of a city charter unless clearly intended). Thus, the statutes cited
by Allmand are not dispositive of the certified question posed to this Court.
III. Sewer, Gas, and Waterworks Statutory Provisions
Lastly, Allmand argues that the employment contracts with the post-termination
compensation provisions were authorized under various statutes governing Gas, Sewers and
Waterworks. For example, he cites the provisions of Tennessee Code Annotated section 7-35-
406(a):
Every incorporated city and town in this state acquiring a waterworks or sewerage
system under the provisions of this part shall be required and is hereby authorized
and empowered to appoint a board of waterworks and/or sewerage commissioners
to have supervision and control of construction and operation of such works.
“Board,” as used in this part, means a board of waterworks and/or sewerage
commissions as required and authorized in this section, constituted and appointed as
provided in §§ 7-35-407 – 7-35-409. The governing body of any incorporated city
or town may, by proper ordinance, elect to perform the duties required of the boards
under this part, in which event the governing body shall have all the powers, duties
and responsibilities imposed upon the board, and all references to the board shall
refer to such governing body acting in the capacity of such board.
Tenn. Code Ann. § 7-35-406(a); see also Tenn. Code Ann. § 7-35-406(b) (“Municipalities . . .
owning or operating a gas system shall have the power and are hereby authorized to transfer to and
confer upon the board of waterworks and sewerage commissioners the jurisdiction over such gas
system.”). Allmand also points to Tennessee Code Annotated section 7-35-412, which provides, in
part, as follows:
The board of waterworks or sewerage commissioners . . . has the power to take all
steps and proceedings and to make and enter into all contracts and agreements
necessary or incidental to the performance of its duties and the execution of its
powers under this part, subject only to limitations on matters requiring approval by
the governing body of the city or town in question. . . . After completion and
acceptance of the works by the board, and approval of such acceptance by the
governing body of the city or town, the board shall have the power, and it shall be its
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duty, to proceed with all matters and perform everything necessary to the proper
operation of the works and collection of charges for service rendered, subject only
to the limitation of funds available for operation and maintenance. To this end, the
board may employ such employees as in its judgment may be necessary and may fix
their compensation, all of whom shall do such work as the board shall direct.
Tenn. Code Ann. § 7-35-412 (emphasis added).
Again, these general statutory provisions must be read in conjunction with the City Charter
and the prohibition against actions beyond the powers conferred by the City Charter. See Grubb, 203
S.W.2d at 596. The statutes cited by Allmand do not negate the requirement that he serve at the will
and pleasure of the board.
Post-Termination Compensation
Allmand further argues that the post-termination compensation described in the contracts
were mere severance payments that would not have conflicted with the at-will nature of his
employment. Cf. Myers v. Town of Plymouth, 522 S.E.2d 122, 124 (N.C. Ct. App. 1999) (holding
that lump-sum severance provision did not violate requirement that town employer manager serve
“at its pleasure”). Regardless of whether some form of severance compensation would have been
permissible, the specific provisions at issue not only are inconsistent with the at-will nature of the
employment, but also do not authorize an award of severance.
By the terms in each of the two contracts, Allmand would have been entitled to continuing
pay and benefits upon termination for any reason other than “voluntarily abandon[ing] his job or
engag[ing] in intentional conduct that operated to the specific detriment of the [City’s] welfare.” If
those provisions are enforceable, the Electric and Gas Departments will undergo the full cost of a
superintendent but receive no benefit from Allmand’s services for a period of years. Such an
onerous requirement would have the practical effect of establishing precisely the type of long-term
obligation that the City’s charter forbids. See Haynes v. City of Pigeon Forge, 883 S.W.2d 619, 622
(Tenn. Ct. App. 1994). One cannot do indirectly what is prohibited directly.
However onerous the obligation may be, we emphasize that our response to the question of
law does not rest on that fact alone. Instead, we further conclude that the provisions obligating the
Departments to continue to pay salary years after the termination of employment have few of the
characteristics associated with a traditional severance package, and that the contracts, read as a
whole, do not suggest that the parties intended them as such.
A cardinal rule of contractual interpretation is to ascertain and give effect to the intent of the
parties. Allstate Ins. Co. v. Watson, 195 S.W.3d 609, 611 (Tenn. 2006) (citing Christenberry v.
Tipton, 160 S.W.3d 487, 494 (Tenn. 2005)); see also U.S. Bank N.A. v. Tenn. Farmers Mut. Ins.
Co., 277 S.W.3d 381, 386-86 (Tenn. 2009) (citing Christenberry, 160 S.W.3d at 494). Courts must
look at the plain meaning of the words in a contract to determine the parties’ intent. Watson, 195
S.W.3d at 611. If the contractual language is clear and unambiguous, the literal meaning controls;
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however, if the words are ambiguous, i.e., susceptible to more than one reasonable interpretation,
the parties’ intent cannot be determined by a literal interpretation of the language. Id. In such
circumstances, “the court must apply established rules of construction to determine the intent of the
parties.” Id. (citing Planters Gin Co. v. Fed. Compress & Warehouse Co., 78 S.W.3d 885, 890
(Tenn. 2002)).
This Court’s decision in Guiliano v. Cleo, Inc., 995 S.W.2d 88 (Tenn. 1999), illustrates these
key principles in determining whether a contract provides for severance pay or for liquidated
damages. In Guiliano, the employee entered into a three-year employment contract with his
employer. Paragraph 9 provided that if the employer terminated the contract without cause, the
employee “shall continue to receive [his] then current salary from the date of termination through
[the contract expiration date].” Id. at 92-93. Although the trial court awarded a judgment based on
breach of contract for the balance due for the term, the Court of Appeals classified the provision as
one for liquidated damages and concluded that the damage award qualified as an unlawful penalty.7
On appeal to the Court, the employee argued that he was terminated without cause before the
contract expired and that he was entitled to “severance pay,” if not liquidated damages, pursuant to
the language in paragraph 9. Id. at 94. After granting further review, this Court began its analysis
by describing severance pay as
a form of compensation paid by an employer to an employee at a time when the
employment relationship is terminated through no fault of the employee. Black’s
Law Dictionary 1374 (6th ed. 1990). The reason for severance pay is to offset the
employee’s monetary losses attributable to the dismissal from employment and to
recompense the employee for any period of time when he or she is out of work. . . .
The amount of payment is generally based upon the types of services and the number
of service years performed by the employee on behalf of the employer.
Id. at 97 (footnote and case citations omitted). We emphasized that severance, unlike liquidated
damages, is not conditioned upon a breach of contract or a reasonable estimation of damages in
consequence thereof, but is instead an absolute entitlement to recovery regardless of any breach. Id.
Applying these principles, we stated as follows:
Paragraph 9 provides that if [the employer] terminates the contract and [the
employee’s] employment without cause, the [employee] shall continue to receive his
then current salary from the date of termination until October 31, 1995, the contract
expiration date. Paragraph 9 does not state that sums payable are based upon an
7
After adopting the “prospective approach” as to liquidated damages – that is, a determination based upon the
circumstances existing at the time of the contract – this Court observed that any award is an unenforceable penalty as
against public policy if “the provision and circumstances indicate that the parties intended merely to penalize for a breach
. . . .” Guiliano, 995 S.W .2d at 100-01. A penalty is “a sum inserted in a contract, not as a measure of compensation
for breach, but rather a punishment for default, or by way of security for actual damages which may be sustained by
reason of nonperformance, and it involves the idea of punishment.” Id. at 98 n. 9 (quoting 22 Am. Jur. 2d Damages §
684 (1988)).
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estimation of damages in the event of a breach of contract. However, it is clear that
the provision affords the [employee] a set amount of compensation in the event that
[the employer] terminates the agreement and [employee’s] employment, without
cause, before the end of the contract. Relying on the plain meaning of the language
in Paragraph 9, we conclude that recovery therein is conditioned upon [the
employer’s] breach of contract.
Id. at 97 (emphasis added). As a result, the Court held that the provision was “one for liquidated
damages and not severance pay.” Id. at 97-98.
Here, the only reference to the term “severance payment” is in paragraph 12 of the Gas
Department contract – “above-noted severance payments.” The Electric Department contract does
not include the term at all. The payments are predicated upon Allmand’s termination before the
expiration of the eight- and fourteen-year terms set forth in the agreements, i.e., a breach of the
contract. Conversely, the contracts contain no reference to the nature of Allmand’s services, the
length of his tenure to the City, or any other characteristics that might warrant the classification of
the post-termination compensation as severance pay. See id. at 97-98.
Labeling the post-termination recompense as a “severance payment” in one of the two
contracts is not determinative of the parties’ intent. Id. at 98. Instead, “[t]he better rule in all cases
is to read the whole instrument and give effect to every part if possible, and thereby reach its true
meaning, and not resort to artificial or arbitrary rules until the former rule is exhausted.” Stratton
v. Thompson, 78 Tenn. 229, 238 (1882). In each of the two contracts, the provisions governing pay
speak in terms of the entitlement to “annual salary, compensation and all benefits” and require the
compensation to be payable pursuant to the “normal bi-weekly schedule.” Because “provisions in
[a] contract should be construed in harmony with each other, if possible, to promote consistency and
to avoid repugnancy between the various provisions of a single contract,” Guiliano, 995 S.W.2d at
95 (citing Rainey v. Stansell, 836 S.W.2d 117, 118-19 (Tenn. Ct. App. 1992)), it is our view that the
terms of the two contracts directing post-termination compensation do not describe “severance
payments” in any traditional sense.
Although severance provisions are common and may be viewed favorably as a matter of
policy, our established precedent mandates that the intent of the parties controls. Here, the parties
crafted employment agreements in which the post-termination payment provisions were dependent
on a breach of the purported employment terms of eight and fourteen years. The practical effect of
the provisions would have granted liquidated damages to Allmand for the breach of the very terms
that the Departments had no authority to approve.
Moreover, it is immaterial whether the City was operating in its “governmental” or
“proprietary” capacity when making the contracts, as further argued by Allmand. He insists that the
employment agreements and the post-termination payments were authorized under the principle that
“a municipality operat[ing] a utility, . . . operates it in a proprietary capacity and is held to the same
standard as a private corporation.” Maury County Bd. of Pub. Utils. v. City of Columbia, 854
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S.W.2d 890, 892 (Tenn. Ct. App. 1993). As the Defendants correctly observe, however, classifying
a municipal utility as a proprietary function is of limited significance:
[I]t should be pointed out that our decision is not based on any distinction between
“governmental” and “proprietary” functions, as mentioned in Cox[v. Green County,
175 S.W.2d 150 (Tenn. Ct. App. 1943)]. As this Court noted in State ex rel.
Association for the Preservation of Tennessee Antiquities v. City of Jackson, 573
S.W.2d 750, 754 (Tenn. 1978), “we do not find the dichotomy of ‘governmental’ and
‘proprietary’ functions to be particularly helpful from a standpoint of legal analysis.
. . .” Attempts to distinguish contracts entered into in “governmental” as opposed to
“proprietary” capacities contributes only ambiguity and confusion. Courts have been
altogether unsuccessful in defining the scope of “governmental” functions. See
Garcia v. San Antonio Metro Transit Authority, 469 U.S. 528, 105 S. Ct. 1005, 83
L. Ed. 2d 1016 (1985).
Washington County Bd. of Educ. v. MarketAmerica, Inc., 693 S.W.2d 344, 348-49 (Tenn. 1985).
The broad argument advanced by Allmand does not salvage the claim.
Conclusion
Neither the Ripley Electric nor the Ripley Gas Department Boards had the authority to enter
into an employment agreement with a superintendent providing for multi-year post-termination
compensation.8 Their actions were ultra vires under Tennessee law. The provisions authorizing
future salary and benefits cannot be classified as a permissible form of severance pay.
______________________________
GARY R. WADE, JUSTICE
8
Our resolution of this certified question does not preclude the possibility that a local government may, in some
cases, be authorized to enter into an agreement obligating it to provide severance pay. Cf. Thompson v. Memphis Light,
Gas and W ater Div., 244 S.W .3d 815, 822 (Tenn. Ct. App. 2007) (holding “that a genuine issue of material fact exists
regarding whether the . . . [utility board] exceeded its authority when it included the provision for enhanced severance
benefits”); W alker v. City of Cookeville, No. M 2002-01441-COA-R3-CV, 2003 W L 21918625, at *9 (Tenn. Ct. App.
Aug. 12, 2003) (holding that city-run hospital breached employment contract by failing to make severance payments).
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