In November 2014, Buyer, an accounting firm in Plymouth, Indiana (about 27 miles south of South Bend, Indiana) acquired Seller, an accounting firm in South Bend, through an asset purchase agreement. At the closing Buyer entered into employment agreements with Greg and John, both accountants, and the owners of Seller. The employment agreements included two-year restrictive covenants preventing John and Greg from competing with Buyer if Buyer terminated their employment for cause.
In February 2016, after reviewing the accounting work performed by John and Greg during the 2015 tax season, Buyer found numerous errors that John and Greg had allegedly made, including:
- John took a $36K deduction for taxes on a return that the client had never paid.
- John failed to report $119K of income on a Michigan tax return resulting in $8,000 more in taxes for the client.
- John missed a $198K capital loss carryover for a client resulting in a significant increase in tax.
- Greg failed to record $3.2 million in loans on a client’s balance sheet or to disclose those loans in the notes of the financial report.
- Greg and John concealed from Buyer that they were making thousands of dollars in payments to clients to settle penalties those clients had incurred due to poor accounting work.
In May 2016, Buyer notified John and Greg that Buyer was terminating their employment for cause. Under the employment agreement, “for cause” included termination of employment for inaccurate work or late work, or any other conduct that is injurious to or adverse to the employer-employee relations. However, there could be no termination for cause unless John and Greg’s performance had a meaningful effect on Buyer’s ability to serve its clients.
John and Greg challenged (in an Indiana state court) Buyer’s “for cause” termination of John and Greg’s employment with Buyer, in order to avoid the 2-year noncompetition covenant. The trial court said that John and Greg’s errors were not beyond normal; and that no actual harm to Buyer’s clients was demonstrated; nor did the errors have a meaningful effect on the ability of Buyer to serve its clients. Thus, the trial court concluded that Buyer had not terminated the employment of John and Greg for cause, as that term was used in the employment agreements.
The Indiana Court of Appeals, in upholding the trial court decision, noted that Buyer presented evidence that John and Greg committed numerous errors, some of which may have been sufficient grounds to fire John and Greg if there had been not been an employment agreement with a requirement that Buyer only terminate John and Greg for cause (as defined in the employment agreements).
The appellate court held that John and Greg’s employment agreements controlled this dispute and agreed with the trial court that the evidence established proof of John and Greg’s inaccurate work and other errors, but that such inaccuracies and errors did not have a meaningful effect on the ability of Buyer to serve its clients.
Therefore, the appellate court held that Buyer did not have cause to fire John and Greg within the meaning of the employment agreements. The result, John and Greg could compete against Buyer.
This case is referred to as Weidner and Company, PC v. Jurgonski & Fredlake CPAS, PC, No. 18A-MI-535, Court of Appeals of Indiana (October 31, 2018).
Comment. Buyer needed to establish that John and Greg’s employment with Buyer was terminated for cause (as defined in the employment agreements) in order to enforce a 2-year noncompetition covenant.
In many cases, a seller’s owner would promise not to compete with the business sold. This promise would be in the business purchase agreement and this noncompetition covenant’s enforceability would probably not depend upon whether or not the buyer breached any employment agreement it had with the seller’s owner.
By John McCauley: I help people start, grow, buy and sell their businesses.
Telephone: 714 273-6291
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