Countryside Orthopaedics, P.C. v. Peyton

Present: All the Justices

COUNTRYSIDE ORTHOPAEDICS, P.C., ET AL.

v. Record No. 000558

RANDALL S. PEYTON OPINION BY
JUSTICE CYNTHIA D. KINSER
January 12, 2001
RANDALL S. PEYTON

v. Record No. 000572

COUNTRYSIDE ORTHOPAEDICS, P.C., ET AL.

FROM THE CIRCUIT COURT OF LOUDOUN COUNTY
James H. Chamblin, Judge

In these two appeals, the first question we address is

whether four agreements executed as part of a single

transaction to accomplish an agreed purpose should be

construed together even though all the agreements were not

executed by the same parties. The second question is

whether a doctor, who was a party to three of the

agreements, can enforce a provision providing for severance

pay. Because we conclude that the agreements should be

construed as one instrument and that the doctor now

claiming severance pay was the first party to commit a

material breach, we will reverse that part of the circuit

court’s judgment awarding severance pay to that doctor.

However, we will affirm that portion of the court’s

judgment with regard to the doctor’s base compensation.
 FACTS AND MATERIAL PROCEEDINGS

Raymond Francis Lower, D.O., F.A.A.O.S., an

orthopaedic surgeon, formed Countryside Orthopaedics, P.C.

(Countryside), in 1993. Dr. Lower was Countryside’s sole

officer, director, and shareholder until 1997. As of

January 1, 1997, Randall Sutton Peyton, M.D., also an

orthopaedic surgeon, became a 50 percent shareholder in

Countryside.

Dr. Peyton first started working for Countryside in

1995 as an employee physician. The terms of the employment

contract between Dr. Peyton and Countryside at that time

granted Dr. Peyton, inter alia, the right to purchase 50

percent of the stock in Countryside if Dr. Peyton met a

certain level of productivity based on his billings. Dr.

Peyton satisfied the billing threshold during his first

year of employment, so he and Dr. Lower began negotiations

late in 1996 to effect the purchase of stock by Dr. Peyton

and to agree upon the terms of the documents needed to

accomplish that purpose. Those negotiations culminated

with the execution of the following four agreements in June

1997, to be effective retroactively to January 1, 1997:

I. “Stock Purchase Agreement” between Dr. Peyton and
Dr. Lower;

II. “Employment Agreement” between Countryside and
Dr. Peyton;

2
 III. “Employment Agreement” between Countryside and
Dr. Lower; and

IV. “Stockholders’ Agreement” between Dr. Lower,
Dr. Peyton, and Countryside.

The purpose of the Stock Purchase Agreement was to

enable Dr. Peyton to purchase from Dr. Lower 50 shares of

the 100 shares of the issued and outstanding common stock

of Countryside. The purchase price for the 50 shares was

$94,258, to be paid “unconditionally, with [Dr. Peyton]

having no right of set-off against [Dr. Lower], in forty-

eight (48) equal monthly payments beginning January 1,

1997.” The terms of the Stock Purchase Agreement further

required, in the event the closing occurred after January

1, 1997, that Dr. Peyton immediately bring the monthly

payments current as of the closing date. Pursuant to the

terms of this agreement, Dr. Peyton “irrevocably”

authorized Countryside to withhold the required monthly

payments from his salary and to pay that sum directly to

Dr. Lower.

The terms of the two employment agreements were

virtually identical. Each physician could terminate his

employment with Countryside by mutual agreement or by

giving ninety days written notice, and neither doctor was

3
restricted in his right to compete with Countryside after

termination of his employment. 1

Two provisions of Dr. Peyton’s Employment Agreement

are at issue in this case. The first one, found in

paragraph 3(a), establishes his base entitlement to

compensation and provides the following method of

calculating that portion of his compensation:

Base Entitlement. An Entitlement (salary, retirement
plan contributions and Additional Benefits, as defined
below) which will be the excess of his “Collections”
(as defined below) over (i) his proportionate share
(initially 50 percent) of the Corporation’s “Fixed
Expenses”, plus (ii) 100 percent of his “Individual
Expenses”, plus (iii) 100 percent of his “Variable
Expenses”. “Fixed Expenses”, “Individual Expenses”
and “Variable Expenses” shall be defined by mutual
agreement of the Corporation and the Physician and
applied consistently from year to year.

The second provision pertains to Dr. Peyton’s right to

receive severance pay upon termination of his employment

with Countryside. In pertinent part, that section of the

Employment Agreement establishes the amount of severance

pay, the time of payment, and a condition precedent to

Countryside’s obligation to make such a payment:

3. . . .

(e) Severance Pay. In the event that the
Physician dies or otherwise ceases his employment
under this Agreement for any reason[,] . . . the

1
Dr. Peyton’s first employment contract with
Countryside contained a restrictive covenant.

4
 Corporation shall pay the Physician . . . severance
pay (“Severance Pay”) as follows:
(1) Amount. Severance Pay shall be an amount
equal to eighty percent (80%) of his “Collections[”]
less the Physician’s Individual Expenses remaining
unpaid at the time the cessation of employment
occurred reduced by any Excess Amount remaining
unrepaid.

(2) Payment. The Severance Pay determined in
accordance with Paragraph 3(e)(1) shall be paid no
later than ninety (90) days after the cessation of
employment occurred, and then every ninety (90) days
thereafter.

. . . .

(4) Physician’s Compliance. The Physician’s
. . . full, timely, and continuing compliance in all
material respects with every material term with this
Agreement and of every other written agreement between
the Physician and the Corporation in force after the
effective date of termination is a condition precedent
to the Corporation’s obligation to pay Physician
Severance Pay in accordance with this paragraph.

The Stockholders’ Agreement established the internal

operating structure of Countryside. The only provision of

that agreement at issue in this appeal concerns the

requirement that a corporate decision to “[i]ncur any debt

or issue any note in an aggregate principal amount

exceeding [$5,000] in a single transaction” be approved by

all the stockholders.

When the respective parties executed these four

agreements in June 1997, Dr. Peyton, pursuant to the terms

of the Stock Purchase Agreement, owed monthly payments to

Dr. Lower for the months of January through June. Dr.

5
Peyton did not, however, make those payments at closing,

and Countryside never withheld the monthly payments from

Dr. Peyton’s salary. In fact, Dr. Peyton did not make any

payments for his purchase of stock in Countryside until

August 1997, when he paid Dr. Lower the sum of $13,745.97

out of the proceeds of a bonus that each doctor had

received from Countryside in July. Dr. Peyton’s stock

purchase payment in August covered the past due payments

for the months of January through July, and was the only

payment that Dr. Peyton made for his purchase of stock in

Countryside.

Subsequent to the closing, the relationship between

Dr. Lower and Dr. Peyton deteriorated. One particular

disagreement that arose concerned the question whether Dr.

Peyton’s payments pursuant to the Stock Purchase Agreement

were to be made with pre-tax or post-tax dollars.

According to Dr. Peyton, this problem and other concerns

caused him to become dissatisfied with his relationship

with both Dr. Lower and Countryside. Consequently, on

October 3, 1997, Dr. Peyton tendered a letter terminating

his employment with Countryside, to be effective as of

December 31, 1997. Dr. Peyton then filed a suit against

6
Countryside and Dr. Lower. 2 In his amended bill of

complaint, Dr. Peyton asked for specific performance of his

Employment Agreement with regard to the records and charts

of patients he treated while at Countryside, an accounting

of the payments that he alleged were due to him from

Countryside pursuant to the terms of the Employment

Agreement, damages for breach of his Employment Agreement

by Countryside, and damages for breach of fiduciary duty by

Countryside for allegedly depleting Dr. Peyton’s accounts

receivable and increasing the expenses charged to him. 3 In

response, Dr. Lower and Countryside, in an amended cross-

bill of complaint, sought a declaratory judgment as to the

rights of Countryside and Dr. Peyton under the

Stockholders’ Agreement, damages for Dr. Peyton’s alleged

breach of fiduciary duty, rescission of the June 1997

agreements due to Dr. Peyton’s alleged breaches of

contract, and damages for alleged fraud by Dr. Peyton in

inducing Dr. Lower to enter into those agreements.

2
Dr. Peyton originally named an additional party
defendant but later dismissed that defendant without
prejudice pursuant to a joint stipulation.
3
The circuit court sustained a demurrer with regard to
several other claims in Dr. Peyton’s amended bill of
complaint.

7
 At the conclusion of a bench trial, the circuit court

awarded judgment in favor of Dr. Lower on the claims

asserted against him individually. The court also

determined that the evidence did not support an award of

punitive damages against Dr. Peyton. The court then took

all other issues under advisement and subsequently issued a

letter opinion. The following findings by the court are

pertinent to the issues raised in this appeal:

I. Dr. Peyton’s claims:

A. The court did not order an accounting by
Countryside but did direct Countryside to comply with
the Employment Agreement and to pay Dr. Peyton his
severance pay.

B. The court granted judgment in favor of Dr.
Peyton against Countryside in the amount of
$140,634.23 for unpaid severance pay but concluded
that Dr. Peyton was not entitled to any additional pay
for 1997 because he had been overpaid for that year in
the amount of $1,100.35. 4

C. The court did not award any separate damages
for breach of fiduciary duty but considered that in
determining the damages owed to Dr. Peyton.

II. Countryside’s claims:

A. The court found that Countryside had validly
exercised its right to repurchase Dr. Peyton’s stock

4
The court initially awarded Dr. Peyton severance pay
in the amount of $333,282.85. The court then reconsidered
it decision and, in a second letter opinion, reduced the
amount to $140,634.23. That figure includes a deduction
for the overpayment to Dr. Peyton in 1997 in the amount of
$1,100.35. The court also determined that Dr. Peyton would
be entitled to 80 percent of his accounts receivable
collected by Countryside after January 1, 1999.

8
 in the corporation pursuant to the Stockholders’
Agreement.

B. The court concluded that Dr. Peyton had not
breached any fiduciary duty to either Countryside or
Dr. Lower.

C. The court denied the claim for rescission
because it concluded that Dr. Peyton had not
materially breached any of the 1997 agreements.

D. The court concluded that Dr. Peyton did not
commit fraud and did not fraudulently induce Dr. Lower
to enter into the agreements.

In determining the amount of Dr. Peyton’s severance

pay, the circuit court rejected Countryside’s argument that

Dr. Peyton was not entitled to any severance pay because he

had not satisfied the condition precedent in the Employment

Agreement, i.e., that Dr. Peyton comply “in all material

respects with every material term” of the Employment

Agreement and any other agreement in force between him and

Countryside. The court concluded that, by its own terms,

the condition precedent applies only to the Employment

Agreement because it is the only agreement between Dr.

Peyton and Countryside. Thus, the court held that Dr.

Peyton’s compliance with the terms of the Stock Purchase

Agreement regarding his payments was not a condition

precedent to Dr. Peyton’s right to receive severance pay.

The court stated, “[t]he parties are bound by the words

they used, and not by some nebulous concept of a ‘package’

9
as argued by the Defendants.” The court then entered a

final decree in accordance with its letter opinions.

This Court awarded cross-appeals. In his first three

assignments of error, Dr. Peyton challenges the circuit

court’s calculation of his severance pay. His remaining

two assignments of error address the court’s computation of

his base entitlement for 1997. In Countryside’s only

assignment of error, it asserts that “the circuit court

erred by ruling that Dr. Peyton was entitled to recover

severance pay when Dr. Peyton failed to make the buy-in

payments required as a material term of his agreements with

Countryside and Dr. Lower.” We will first address

Countryside’s assignment of error because our resolution of

that issue affects the disposition of Dr. Peyton’s

assignments of error challenging the amount of his

severance pay.

ANALYSIS

I. Countryside’s Appeal

Countryside argues that the four agreements executed

in June 1997 should be construed as a “package” or as parts

of a single transaction. Countryside asserts that, when

the agreements are viewed in that manner, the condition

precedent contained in paragraph 3(e)(4) of the Employment

Agreement requiring Dr. Peyton to be in compliance with

10
every material term is not limited to the terms of the

Employment Agreement but includes his obligation to pay for

his purchase of stock in a timely fashion. Thus,

Countryside contends that Dr. Peyton is not entitled to

receive any severance pay not only because he failed to

comply with that condition precedent but also because he

committed the first material breach of the terms of the

agreements.

In response to Countryside’s argument, Dr. Peyton

rejects the theory that the four agreements should be

viewed as a “package” and advances four reasons why he has

not forfeited his right to receive severance pay. First,

he claims that, even if his nonpayment of the stock

purchase installments constituted a breach of the

Employment Agreement, Countryside was not damaged.

According to Dr. Peyton, this is so because Countryside was

required under the Stockholders’ Agreement to buy back Dr.

Peyton’s stock in Countryside upon his termination of

employment. Next, Dr. Peyton contends that Countryside is

estopped from claiming any breach relating to Dr. Peyton’s

failure to make the stock purchase payments because Dr.

Lower allegedly “agreed to wait” on Dr. Peyton’s payments

until the dispute concerning whether those payments were to

be made with pre-tax or post-tax dollars could be resolved.

11
Third, Dr. Peyton contends that, since the Stock Purchase

Agreement was not between Countryside and Dr. Peyton,

compliance with that agreement was not a condition

precedent to Countryside’s obligation under the Employment

Agreement to pay Dr. Peyton severance pay. Finally, Dr.

Peyton argues that the Stock Purchase Agreement was not an

agreement in force after the effective date of his

termination from employment and thus was not subject to the

condition precedent contained in paragraph 3(e)(4) of the

Employment Agreement.

The first step in analyzing this issue is to determine

whether the four agreements executed in June 1997 should be

construed together as one instrument or contract. This

Court has repeatedly stated that “[w]here two papers are

executed at the same time or contemporaneously between the

same parties, in reference to the same subject matter, they

must be regarded as parts of one transaction, and receive

the same construction as if their several provisions were

in one and the same instrument.” Oliver Refining Co. v.

Portsmouth Cotton Oil Refining Corp., 109 Va. 513, 520, 64

S.E. 56, 59 (1909); accord First Am. Bank of Va. v. J.S.C.

Concrete Constr., Inc., 259 Va. 60, 67, 523 S.E.2d 496, 500

(2000); Daugherty v. Diment, 238 Va. 520, 524, 385 S.E.2d

572, 574 (1989); J.M. Turner & Co. v. Delaney, 211 Va. 168,

12
171-72, 176 S.E.2d 422, 425 (1970); Bolling v. Hawthorne

Coal & Coke Co., 197 Va. 554, 566, 90 S.E.2d 159, 167

(1955); Texas Co. v. Northup, 154 Va. 428, 440-41, 153 S.E.

659, 662 (1930); Luck v. Wood, 144 Va. 355, 357, 132 S.E.

178, 178 (1926). “Where a business transaction is based

upon more than one document executed by the parties, the

documents will be construed together to determine the

intent of the parties; each document will be employed to

ascertain the meaning intended to be expressed by the

others.” Daugherty, 238 Va. at 524, 385 S.E.2d at 574

(citing American Realty Trust v. Chase Manhattan Bank, 222

Va. 392, 403, 281 S.E.2d 825, 830 (1981)).

We recognize that Dr. Peyton, Dr. Lower, and

Countryside were not signatories to all four of the 1997

agreements. The Stockholders’ Agreement was the only one

that all three parties executed. The two employment

agreements were executed by Countryside and the respective

physician, and both Dr. Lower and Dr. Peyton signed the

Stock Purchase Agreement.

Nevertheless, we conclude that in the present case the

four agreements executed in June 1997 should be regarded as

“parts of one transaction” and construed as “one and the

same instrument.” Oliver Refining Co., 109 Va. at 520, 64

S.E. at 59. We reach this conclusion because all the

13
parties knew about the agreements and executed them at the

same time as part of a single transaction to accomplish an

agreed purpose, i.e., to effect Dr. Peyton’s purchase of 50

percent of the stock in Countryside, and to structure both

his and Dr. Lower’s employment relationship with

Countryside and the internal operating procedures of

Countryside in light of the fact that Dr. Peyton was now an

equal shareholder. See Gordon v. Vincent Youmans, Inc.,

358 F.2d 261, 263 (2d Cir. 1965) (“New York law . . .

requires that all writings that form part of a single

transaction and are designed to effectuate the same purpose

be read together, even though they were executed on

different dates and were not all between the same

parties”); Cushman v. Smith, 528 So.2d 962, 964 (Fla. Dist.

Ct. App. 1988) (“instruments entered into on different days

but concerning the same subject matter may under some

circumstances be regarded as one contract and interpreted

together”); Atlas Indus., Inc. v. National Cash Register

Co., 531 P.2d 41, 46-47 (Kan. 1975) (two documents

construed together when parties complied with provisions of

interrelated documents although one document was not

executed by party to transaction); Schlein v. Gairoard, 22

A.2d 539, 540-41 (N.J. 1941) (“where several instruments

are made as part of one transaction, relating to the same

14
subject-matter, they may be read together as one instrument

. . . even when the parties are not the same, if the

several instruments were known to all the parties and were

delivered at the same time to accomplish an agreed

purpose”); Baker v. Wilburn, 456 N.W.2d 304, 306 (S.D.

1990) (writings executed together as part of single

transaction should be interpreted together and “it is not

critical whether the documents were executed at exactly the

same time or whether the parties to each agreement were

identical”). Despite Dr. Peyton’s argument that the

agreements should not be viewed as a “package,” we believe

that he has treated them in that manner as evidenced by his

acknowledgement before both this Court and the circuit

court that all four agreements had to be signed together or

there would not have been a deal.

In reaching this conclusion, we are also persuaded by

the fact that some of the agreements contain explicit

references to the other agreements. For example, a

provision in each of the employment agreements states that,

upon the termination of the employment of that respective

physician, the purchase of any capital stock of Countryside

owned by that physician “shall be governed by provisions

with respect thereto in the Bylaws of the Corporation, any

Stockholders’ Agreement then in effect and by the governing

15
statute.” (Emphasis added.) A section in the

Stockholders’ Agreement limits the “Book Value” of Dr.

Peyton’s stock to the amount of the purchase price as

defined in the Stock Purchase Agreement between Dr. Lower

and Dr. Peyton. Finally, in the Stock Purchase Agreement,

the sale of stock to Dr. Peyton is “subject to the terms of

a Stockholders’ Agreement . . . to be executed as a

condition of Closing.”

Thus, we conclude that the circuit court erred in

refusing to construe the four agreements as a “package” or

“as if their several provisions were in one and the same

instrument.” Oliver Refining Co., 109 Va. at 520, 64 S.E.

at 59. By limiting its view to the terms of each separate

document, the circuit court determined that Dr. Peyton had

satisfied the condition precedent in paragraph 3(e)(4) of

the Employment Agreement and was thus entitled to receive

severance pay. Because the court looked at each agreement

in isolation, it never specifically addressed the questions

whether Dr. Peyton’s failure to pay for his purchase of

stock in a timely fashion was a material breach of the

agreements, viewed as one instrument, and whether such a

breach would preclude Dr. Peyton from enforcing his right

to receive severance pay. Accordingly, we now turn to

those questions.

16
 In doing so, we apply the principle that “[g]enerally,

a party who commits the first breach of a contract is not

entitled to enforce the contract.” Horton v. Horton, 254

Va. 111, 115, 487 S.E.2d 200, 203 (1997) (citing Federal

Ins. Co. v. Starr Elec. Co., 242 Va. 459, 468, 410 S.E.2d

684, 689 (1991); Hurley v. Bennett, 163 Va. 241, 253, 176

S.E. 171, 175 (1934)). There is, however, an exception to

that general rule “when the breach did not go to the ‘root

of the contract’ but only to a minor part of the

consideration.” Horton, 254 Va. at 115, 487 S.E.2d at 203

(quoting Federal Ins., 242 Va. at 468, 410 S.E.2d at 689;

Neely v. White, 177 Va. 358, 366, 14 S.E.2d 337, 340

(1941)). Nevertheless, when the first breaching party

commits a material breach, that party cannot enforce the

contract. Horton, 254 Va. at 115, 487 S.E.2d at 204. “A

material breach is a failure to do something that is so

fundamental to the contract that the failure to perform

that obligation defeats an essential purpose of the

contract.” Id.

Upon construing the four agreements in the present

case as “parts of one transaction,” Oliver Refining, 109

Va. at 520, 64 S.E. at 59, we conclude that Dr. Peyton

committed the first material breach when he failed to make

his monthly payments for the purchase of stock in

17
Countryside in accordance with the terms of the Stock

Purchase Agreement. It is not disputed that Dr. Peyton did

not bring his stock purchase payments current at the

closing and waited until August before he made the lump-sum

payment, which covered only the months of January through

July. Nor is it disputed that he never made any other

payments.

We believe that Dr. Peyton’s failure to make his stock

purchase payments goes to the “root” of the transaction.

The four agreements were executed in order to effect Dr.

Peyton’s purchase of 50 percent of the stock in Countryside

and to structure the relationship between the three parties

in light of the fact that he was now an equal shareholder

rather than a mere employee. If Dr. Peyton and Dr. Lower

had not executed the Stock Purchase Agreement, the other

three agreements would not have been necessary.

Furthermore, the terms of Dr. Peyton’s Employment

Agreement, as an equal shareholder in the professional

corporation, were more lucrative than the terms of his

first employment contract with Countryside. A significant

benefit for Dr. Peyton was the elimination of the

restrictive covenant that had been part of his first

employment contract.

18
 Thus, Dr. Peyton’s failure to pay the consideration

for his 50 shares of stock in Countryside defeated the

essential purpose of the transaction consummated in July

1997 with the execution of the four agreements and was,

therefore, a material breach as a matter of law. See

Horton, 254 Va. at 115, 487 S.E.2d at 204. Accordingly, as

the first party to commit a material breach, Dr. Peyton

cannot enforce the contract provision regarding severance

pay. 5 See id.

Not only was Dr. Peyton the first party to commit a

material breach, he also failed to fulfill the condition

precedent in paragraph 3(e)(4) of the Employment Agreement,

requiring “compliance in all material respects with every

material term with this Agreement.” When the four

agreements are viewed as one instrument, that condition

5
In his reply brief in Record No. 000572, Dr. Peyton
asserts that Countryside and Dr. Lower were actually the
first parties to commit a material breach. Dr. Peyton
bases that assertion on the assumption that his stock
purchase payments were, in fact, supposed to have been made
with pre-tax dollars. However, Dr. Peyton did not argue
before the circuit court that Countryside and Dr. Lower
committed the first breach. See Rule 5:25. Furthermore,
he admitted that the purpose of his testimony regarding
that dispute was to explain one of the reasons why he
submitted his letter of termination and also to rebut the
claim for fraud asserted by Dr. Lower and Countryside. Dr.
Peyton also stated on brief in Record No. 000558 that “it
is now irrelevant to Countryside’s appeal whether the stock
purchase agreement was to be in pre-tax or post-tax funds.”

19
precedent pertains to the entire transaction and makes Dr.

Peyton’s obligation to pay for his purchase of stock a

condition precedent to Countryside’s obligation to pay Dr.

Peyton severance pay.

Thus, whether Dr. Peyton’s failure to pay for his

stock is viewed as a first material breach or as a failure

to fulfill the condition precedent, he cannot enforce the

provision pertaining to severance pay. Accordingly, we

conclude that the circuit court erred in awarding severance

pay to Dr. Peyton and will reverse that part of the court’s

judgment. In reaching this conclusion, we recognize that

the severance pay represented the collections for services

that Dr. Peyton had rendered before the effective date of

his termination from employment. That fact does not change

our decision.

However, Dr. Peyton argues that, since the terms of

the Stockholders’ Agreement obligated Countryside to buy

back Dr. Peyton’s stock at the same price that he had paid

for it, neither Countryside nor Dr. Lower suffered any

damages because of Dr. Peyton’s failure to make his

required payments, thereby allegedly rendering his breach

20
“immaterial.” 6 Dr. Peyton’s argument overlooks the fact

that, because of his status as a 50 percent shareholder in

Countryside, he gained certain employment benefits,

including the elimination of the restrictive covenant, that

he had not enjoyed under his first employment contract with

Countryside. For this reason and the reasons already

stated, we conclude that Dr. Peyton’s breach was not

immaterial. See id. at 116, 487 S.E.2d at 204 (“proof of a

specific amount of monetary damages is not required when

the evidence establishes that the breach was so central to

the parties’ agreement that it defeated an essential

purpose of the contract”). Furthermore, this Court has

stated that the first party to commit a material breach can

neither enforce the contract nor maintain an action on it.

Hurley, 163 Va. at 253, 176 S.E. at 175.

We are also not persuaded by Dr. Peyton’s assertion

that Countryside and Dr. Lower are estopped from claiming a

breach by Dr. Peyton. The basis of this argument is Dr.

Lower’s testimony that he “agreed to wait” for the payments

and did not press Dr. Peyton for those installments that

were due either at the closing or for the ensuing months.

6
As previously noted, the circuit court concluded that
Countryside had validly and effectively exercised its right
to repurchase Dr. Peyton’s stock in Countryside.

21
Dr. Peyton also states that Dr. Lower did not object to a

possible restructuring of the stock purchase arrangement so

that the payments could be made with pre-tax dollars.

According to Dr. Peyton, he relied on Dr. Lower’s alleged

acquiescence and, thus, asserts the defense of estoppel.

Although it is not clear whether Dr. Peyton is arguing

a theory of estoppel or waiver, he has not established the

necessary elements of either theory. See Employers

Commerical Union Ins. Co. of Am. v. Great Am. Ins. Co., 214

Va. 410, 412-13, 200 S.E.2d 560, 562-63 (1973) (discussing

elements of estoppel); Horton, 254 Va. at 117, 487 S.E.2d

at 204 (discussing waiver). Furthermore, the conduct to

which Dr. Peyton alludes is that of Dr. Lower. Dr. Peyton

has not identified any conduct or acquiescence by

Countryside that would support his claim of estoppel. Yet,

under the terms of the Employment Agreement, Countryside,

not Dr. Lower, had the potential obligation for paying Dr.

Peyton severance pay and is the party claiming a breach by

Dr. Peyton.

II. Dr. Peyton’s Appeal

Turning now to the appeal by Dr. Peyton, we first note

that, because of our finding that he is not entitled to

enforce the provision of his Employment Agreement

pertaining to severance pay, we do not need to address his

22
three assignments of error challenging the circuit court’s

calculation of the amount of that severance pay. Thus, the

only remaining issues are whether the circuit court erred

by failing to require that Dr. Peyton’s 1997 base

entitlement be calculated according to generally accepted

accounting principles or by the income tax method of

accounting, and that the court erred in failing to enforce

the contractual provision in the Stockholders’ Agreement

requiring that corporate debts in excess of $5,000 be

approved by all the stockholders. 7

The crux of Dr. Peyton’s argument with regard to the

accounting method is the change in the quarterly reports

prepared by Dante Anthony Zagami, Jr., a certified public

accountant whose firm commenced performing work for

Countryside in 1996. The first two quarterly reports for

1997 were designated “Statement of Revenue and Expenses,”

whereas, the last two reports prepared after Dr. Peyton

tendered his termination of employment were designated

7
Countryside argues on brief in Record No. 000572 that
Dr. Peyton’s first material breach should bar not only Dr.
Peyton’s recovery of severance pay but also any larger sum
for his 1997 base entitlement. However, Countryside only
assigned error to the award of severance pay. Thus, the
only issue before this Court with regard to Dr. Peyton’s
base entitlement is the amount of that compensation and not
whether he is precluded from enforcing that provision of
his Employment Agreement because of his first material
breach.

23
“Schedule of Revenue and Operating Costs.” Dr. Peyton

contends that the change in the title of the quarterly

reports denotes a change in the accounting method used for

Countryside. Thus, according to Dr. Peyton, the category

of expenses allocated to him was enlarged, thereby reducing

his compensation, and the allocation was in violation of

the requirement in the Employment Agreement that the

expense categories “shall be defined by mutual agreement of

the Corporation and the Physician and applied consistently

from year to year.” He claims that the expense categories

were never defined “by mutual agreement” and that Zagami

created his own accounting method to determine Dr. Peyton’s

compensation.

Based on calculations by his accountant, Erik Karl

Kloster, Dr. Peyton claims that he is still owed $160,961

for his 1997 base entitlement. In arriving at this figure,

Kloster primarily challenged the allocation of certain

expenses to Dr. Peyton. Kloster defined the term “expense”

as “an item that is ordinarily used up during the course of

an accounting period, such as one year.” Using that

definition, he concluded that certain prepaid expenses were

actually the acquisition of fixed assets that should not

have been used to reduce Dr. Peyton’s entitlement.

According to Kloster, a prepaid asset only “becomes an

24
expense when the time period of the prepayment has come to

pass.” However, Kloster admitted Countryside was on a cash

basis method of accounting.

The circuit court rejected Kloster’s calculations.

After examining numerous expenses that Dr. Peyton alleges

were incorrectly allocated to him, the court concluded that

Dr. Peyton had actually received an overpayment in 1997.

The court determined that the Employment Agreement does not

require the use of generally accepted accounting principles

or an income tax method of accounting in determining Dr.

Peyton’s base entitlement. Instead, the court concluded

that Zagami calculated Dr. Peyton’s compensation pursuant

to the terms of the Employment Agreement and allocated

expenses as mutually agreed upon by Dr. Lower and Dr.

Peyton. Finally, the court determined that Zagami changed

the format of the last two quarterly reports because of the

execution of the Employment Agreement in June 1997 but that

Countryside had not changed its method of accounting after

June 1997.

Upon our review of the record, we conclude that the

circuit court’s conclusions are not plainly wrong or

without evidence to support them. See Code § 8.01-680;

Martin v. Penn, 204 Va. 822, 826, 134 S.E.2d 305, 307

(1964) (court trying case without jury determines weight to

25
be given to testimony of expert witness). Although Dr.

Peyton has argued in detail about specific expenses that

were allocated to him, his assignment of error encompasses

only the question regarding which accounting method should

have been used to calculate his 1997 base entitlement. The

terms of Dr. Peyton’s Employment Agreement do not require

the use of generally accepted accounting principles or an

income tax method of accounting. The agreement does,

however, say that the terms “Fixed Expenses,” “Individual

Expenses,” and “Variable Expenses” shall be defined by

mutual agreement between Countryside and Dr. Peyton. It

also states that if Dr. Peyton receives “an Entitlement in

any fiscal year which is later determined by

[Countryside’s] accountant to be more than the amount to

which” Dr. Peyton was entitled to receive, the excess will

be deducted from Dr. Peyton’s compensation in the

subsequent year.

Zagami testified that Countryside did not change its

method of accounting in 1996 or 1997. He also testified

that the “Statements of Revenue and Expenses” for the year

ending on December 31, 1997, did not establish the

allocation of expenses to each physician. For example,

Zagami explained that the expense category for depreciation

and amortization was not an expense used in the calculation

26
of base entitlement because the entitlement formula was

based on cash flow and that particular category related to

income tax guidelines. Under the corporation’s cash basis

of accounting, expenses were deducted when paid and income

was recognized when received.

Zagami further testified that he used the parties’

agreement in allocating expenses for the purpose of making

the entitlement calculation and did not follow generally

accepted accounting principles because the Employment

Agreement did not require him to do so. He specifically

stated that it was his position “that the allocations that

[he] made were in [accordance with the] agreement[s] of the

two physicians” and that those agreements were the result

of conversations that he had with both physicians.

Notably, his calculations of the 1997 entitlements for Dr.

Peyton and Dr. Lower, unlike those by Kloster, showed both

physicians receiving almost equal revenue. 8

Thus, finding sufficient evidence to support the

circuit court’s determination that Zagami calculated Dr.

Peyton’s 1997 base entitlement pursuant to the terms of the

Employment Agreement and allocated expenses as mutually

8
According to Zagami’s calculations, there was a
difference of approximately $6,000 between Dr. Lower and
Dr. Peyton with regard to their respective excess revenue
over operating costs.

27
agreed upon by Dr. Peyton and Dr. Lower, we conclude that

the court did not err in failing to require the use of

generally accepted accounting principles or the income tax

method of accounting. Accordingly, we will affirm the

circuit court’s judgment with regard to Dr. Peyton’s base

entitlement for 1997. 9 Because the court concluded that Dr.

Peyton had been overpaid in the amount of $1,100.35, we

will enter judgment in favor of Countryside in that amount

since Dr. Peyton will not be receiving any severance pay

from which to deduct that overpayment.

We now consider the last issue regarding the

requirement in the Stockholders’ Agreement that any

corporate debt in excess of $5,000 must be approved by all

the stockholders. Dr. Peyton asks this Court to consider

the alleged violation of this provision as an alternative

argument if the Court disagrees with his position regarding

the appropriate accounting method for computing his 1997

base entitlement. 10

9
We also conclude, as did the circuit court, that the
decisions in Virginia State AFL-CIO v. Commonwealth, 209
Va. 776, 167 S.E.2d 322 (1969), and Safway Steel Scaffolds
of Va. v. Coulter, 198 Va. 469, 94 S.E.2d 541 (1956), are
not relevant to the issues in this appeal, primarily
because this case must be decided based on the terms of the
June 1997 agreements.
10
The expenses that Dr. Peyton identifies as having
been incurred in violation of that provision are changes to

28
 Dr. Peyton’s accountant, Kloster, identified these

expenses when he recalculated Dr. Peyton’s 1997

compensation. The circuit court considered those expenses

in that context, but it is not clear whether Dr. Peyton

made a separate argument that the expenses were incurred in

violation of the Stockholders’ Agreement. Nevertheless, in

determining the amount of Dr. Peyton’s base entitlement,

the court found that Dr. Peyton had agreed to each one of

the expenditures. As we have already stated, we find

sufficient evidence to support the circuit court’s factual

findings regarding Dr. Peyton’s 1997 base entitlement.

Thus, there could not have been a violation of the

Stockholders’ Agreement with regard to these expenses since

Dr. Peyton agreed to them.

CONCLUSION

For these reasons, we will reverse the judgment of the

circuit court in Record No. 000558 and enter final judgment

in favor of Countryside. In Record No. 000572, we will

affirm the judgment of the circuit court and enter final

judgment in favor of Countryside in the amount of

$1,100.35.

Record No. 000558 — Reversed and final judgment.
Record No. 000572 — Affirmed and final judgment.
_________________
a new office, overages to build-out the new office, and the
buy-out of an existing lease.

29