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