Talkington v. Anchor Gasoline Corp. (821 F. Supp. 505, 1993)

MEMORANDUM

MORTON, Senior District Judge.

This case involves a breach of contract claim. The plaintiff alleges that the defendant corporation’s president orally promised to provide deferred compensation in lieu of the company’s standard retirement plan, and the employer defends primarily on the basis of the statute of frauds. This court has jurisdiction by diversity of citizenship. The court finds in favor of the plaintiff and awards damages in the amount of $33,000 plus prejudgment interest.

I. FACTS

The court conducted a bench trial beginning 17 March 1993, and makes the following findings of fact. The defendant is Anchor Gasoline Corporation (“Anchor Gas”), an Oklahoma corporation with principal offices in Tulsa. Anchor Gas owns 80 percent of the stock in Anchor Coal Company (“Anchor Coal”), and the Joe Wright family, 20 percent. Joe Wi’ight was the chairman of the board and president of Anchor Gas as well as president of Anchor Coal until he died in 1986. Anchor Coal, in turn, owns the stock in Clear Creek Coal Company (“Clear Creek”), of which Joe Wright was also chairman.

A. The Employment Agreement.

Before Anchor Gas incorporated Anchor Coal in order to purchase the stock in Clear Creek, Clear Creek’s sole shareholder, president, and CEO was Harry Talkington, the plaintiff. Its principal business was deep shaft mining and marketing of coal from the Wilder Seam, in Tennessee. On 18 November 1970, Anchor Coal purchased Clear Creek from Talkington and hired him to supervise Clear Creek and in general be responsible for its operations. The purchase price was $100,000 cash with a $400,000 unpaid balance. A written employment agreement provided Talkington with a salary of $18,000 per year plus five percent of Clear Creek’s net receipts for five years or until the balance of the purchase price was paid. Until this contract expired in 1977, Talking-ton served as president and as a director of Clear Creek.

Although he continued to work in this capacity after the first contract expired, Talkington eventually sought a new written agreement. By then he was an important asset of Clear Creek. He was well educated and well qualified for his position, and he was uniquely familiar with the geology of the Upper Cumberland region. In response to Talkington’s request for a written agreement, and in order to keep him with the company, in May of 1978 Joe Wright verbally proposed the terms of Talkington’s continued employment with Clear Creek. They were essentially the same as the previous written agreement, but with the addition of a deferred compensation feature by which, beginning five years after the agreement, Clear Creek would pay Talkington $1000 per month for each month that he had worked. Talkington verbally accepted the proposal and shook Wright’s hand, and the court holds that at this time they had reached an agreement substantially in the following general form:

1. Clear Creek would hire Talkington for another five years at a salary to be adjusted as for other mining employees.

2. There would be a written agreement to memorialize their contract. This memorandum would reflect the terms they had agreed to, including . Talkington’s salary and the deferred compensation provision.

3. The memorandum would provide for the salary as reflected by his upcoming raise. ■

There were other provisions as well, dealing with the effects pf termination or resignation, bonuses, and duties of the parties. Wright told Talkington that he would instruct Raynolds, the company attorney, to prepare a draft of their memorandum for Talkington’s review. The purpose of the draft was not to continue the negotiations, but' to afford Talkington an opportunity to be sure it properly reflected his agreement with Wright. Raynolds sent a draft under cover letter dated 26 October 1978. Talkington made minor changes to the draft copy and signed it. He returned the draft to Wright and Raynolds, but they never prepared a signature copy and Wright never signed the draft.

Talkington pressed Wright more than once for his signature, but without success. The court concludes from testimony as to Wright’s conduct and character that he was very proud of his reputation and would easily take offense if Talkington pressed too hard. Accordingly, it was reasonable for Talkington to rely on Wright’s statement that Raynolds had been busy, that a signed writing was forthcoming, but that Talkington had his word on the deal anyway. Based on this conduct Talkington continued to- work as agreed, and in order to preserve their relationship of friendship and mutual respect and to maintain a productive business relationship, he relaxed his efforts to obtain a signed memorandum of their agreement. He continued to-work this way without any changes until 1981.

In that year, Talkington stopped working full time for Clear Creek because he started an enterprise of his own—Talkington Mining Corporation (“TMC”). Although he obtained Wright’s permission to do this, there is not enough credible evidence to find that Wright and Talkington considered this a modification of the contract. It is unlikely that Wright would agree to less than 'half of Talkington’s previqus work without any corresponding-change in Clear Creek’s duties to Talkington. There is no evidence of the terms of this new contractual relationship other than the fact that Talkington continued to draw the same salary while working less. Whatever the terms of the new agreement, the court finds that the agreement Wright and Talkington had reached in May of 1978 was now terminated. Accordingly, the damages will be calculated only to that time.

B. The Coi~porate Structure.

The defendants claim that Anchor Gas is not liable for any deferred compensation obligations of Clear Creek under Talkington’s employment agreement. However, Anchor Gas formed Anchor Coal for the purpose of purchasing Clear Creek from Talkington, and advanced all of the funds necessary to keep Clear Creek in existence. Importantly, the three corporations had interlocking directorates and officers; the individuals who made decisions for the three were all the same.

There are other indications of instrumentality. Anchor Gas accountants did Clear Creek bookkeeping from Tulsa and prepared and filed Clear Creek’s tax returns. Anchor Gas lawyers did Clear Creek’s legal work, and Clear Creek’s corporate officers were located in Anchor Gas’s offices in Tulsa. Clear Creek never borrowed money from a commercial bank after 1970; all funds necessary for Clear Creek to exist were provided by Anchor Gas, and at the time Clear Creek was administratively dissolved, it owed Anchor Gas $2.7 million. Anchor Gas and its subsidiaries, including Clear Creek, filed consolidated tax returns and Anchor Gas received the tax benefits of Clear Creek’s losses. Anchor Gas made the decision to shut down Clear Creek, sell its equipment, parts, and inventory, and apply the sale proceeds to its own account. Anchor Gas made the decision not to commit to Talkington’s salary after November 1988. Anchor Gas made the decision to allow Clear Creek to be administratively dissolved.

In fact, as long as Wright was alive, the whole business was run like a “mom & pop” operation. Corporate formality was almost unheard of, and corporate acts were almost never approved by the board of directors or reflected in the corporate minutes.

II. DISCUSSION

The defendant raises the defenses of the statute of frauds and separate corporate identity.

A. Statute of Frauds.

Few areas of the law have departed so far from their original logical beginnings as the doctrines of part performance and equitable estoppel as applied in Tennessee to the statute of frauds. The resulting confusion in this state is compounded by the fact that the rules of part performance and equitable estoppel logically must apply differently in different sections of the statute. That is because of the functions served by the different provisions of the statute and the manner in which the remedial doctrines supplant them. The problem is that Tennessee courts have applied these doctrines even where there was no meaningful link to the functions for which they should substitute. Because most of these decisions reached results that are intuitively correct, and in fact could have been decided logically with the same result, the law governing the statute of frauds and its exceptions has not faced serious challenge even though it is confused and conflicting.

England first passed the statute of frauds in 1677 to avoid those “many fraudulent practices, which are commonly endeavored to be upheld by perjury and subornation of perjury.” The statute has changed little since then, and Tennessee’s is in the mainstream. Its original purpose was evidentiary, for it served as a reliable way to prove the terms of an agreement. Most of its provisions seive this purpose to some extent, and some of them serve other purposes as well. For example, the suretyship provision serves an important cautionary function, and the land contract provision serves a channeling function by providing a bright line test of enforceability. Tennessee long ago recognized the evidentiary purpose of the requirement of a writing.

The provision at issue in this case—the one-year provision—is difficult to classify; it serves none of the possible functions well. The evidentiary function is not well served because this provision is not applied so as to maximize its evidentiary reliability.

If the one-year provision is based on the tendency of memory to fail and of evidence to go stale with the passage of time, it is ill-contrived, because the one-year period does not run from the making of the contract to the proof of the making, but from the making of the contract to the completion of performance. If an oral contract that cannot be performed within a year is broken the day after its making, the provision applies though the terms of the contract are fresh in the minds of the parties. But if an oral contract that can be performed within a year is broken and suit is not brought until nearly six years (the usual statute of limitations for contract actions) after the breach, the provision does not apply, even though the terms of the contract are no longer fresh in the minds of the parties.

Farnsworth § 6.4 at 391 (footnotes omitted).

Similarly, the one-year provision fails to serve the channeling and cautionary functions because it does not distinguish between significant and insignificant promises:

If the one-year provision is an attempt to separate significant contracts of long duration, for which writings should be required, from less significant contracts of short duration, for which writings are unnecessary, it is equally ill-contrived because the one-year period does not run from the commencement of performance to the completion of performance, but from the making of the contract to the completion of performance. If an oral contract to work for one day, 13 months from now, is broken, the provision applies, even though the duration of performance is only one day. But if an oral contract to work for a year beginning today is broken, the provision does not apply, even though the duration of performance is a full year.

Id. (footnotes omitted).

Because the one-year provision has been particularly difficult to rationalize, Tennessee courts have been hostile to it, construing it extremely narrowly, and this court is bound to do so as well. In particular, they have held the words “not to be performed” to mean “not performable.” Therefore, if the contract is at all capable of performance within a year, the provision will not apply. This might be true even though the parties did not actually contemplate that the contract would be performed within the year. The initial test, however, is whether by its terms the agreement provides that the contract could or could not be performed within a year. By no reasonable interpretation of the agreement between Wright and Talkington could the contract in this case be fully performed within one year. Part VI of the draft memorandum provides:

Commencing June 30, 1983, [as corrected by Talkington] or one month after

Employee ceases to be employed by Employer, whichever date is later, Employer will pay an amount equal to $1000 multiplied by the number of full months of Employee’s employment under this agreement (a maximum of 60 months) as follows: Monthly installments of $1000 to Employee until full payment of such amount or Employee’s death, whichever first occurs; and if Employee dies before full payment of such amount, monthly installments of $1000 to his widow until full payment of such amount or until his widow’s death, whichever first occurs; or if both Employee and his widow should die before full payment of such amount (or if Employee should die leaving no widow), a single payment of the balance of such amount to the Employee’s estate!

The one-year provision applies to this contract because by its terms the employer would under no circumstances commence deferred compensation payments before June 30, 1983, five years after Talkington was employed under this agreement. Therefore, if this contract is to be enforced it will be because of an exception to the statute of frauds. In Tennessee, this has been done by applying the doctrines of part performance and equitable estoppel.

The part performance doctrine evolved from the sales provision, in which the evidentiary function of the statute is most directly served. The Statute of 1677 expressly provided for satisfaction not only by a memorandum, but also by part performance. This provision is now codified in Tennessee’s version of the Uniform Commercial Code. The rationale for this exception is easy to understand. If the purpose of a writing is to provide good evidence of the terms of a contract, then surely the terms upon which the contract has already been partly performed prove the terms of the agreement just as well. One would expect that the performance of the parties would indicate the terms to which they agreed. Therefore, the part performance serves the evidentiary function that prompted the need for the statute of frauds just as well as the writing requirement. In fact, the drafters of the code commented that “receipt and acceptance either of goods or of the price constitutes an unambiguous overt admission by both parties that a contract actually exists.” The first paragraph of UCC 2-201, comment 2 is further evidence that part performance was intended as an evidentiary substitute for a writing:

“Partial performance” as a substitute for the required memorandum can validate the contract only for the goods which have been accepted or for which payment has been made and accepted.

Thus, in the sales provision, part performance quite naturally is evidence of the agreement only to the extent that it was performed. Nonetheless, courts have been willing to remove the contract from the statute entirely, once a part performance has been established, probably because they are confident of their ability to find the terms of the agreement the way they do in any other contract case not involving the statute. One early Tennessee case along these lines is Ashley v. Preston, 162 Tenn. 540, 39 S.W.2d 279 (1931). The parties had entered into an oral purchase-repurchase agreement. In 1928, the plaintiffs purchased cattle from the defendants with the understanding that the plaintiffs would graze them for one year. The defendants would then repurchase the cattle at an agreed price. In September of 1929, the defendants refused to repurchase, and the plaintiffs sued. The defendants raised the statute of frauds as a defense, seeking to avoid the contract, but the court held that their part performance of the contract took it out of the statute.

The problem is that the part performance gives proof of the terms of the contract only as far as the contract was performed.- In this case, the plaintiffs performed their half of the contract; they purchased the cattle at 11? per pound plus $1 per head. Although it tends to show an agreement to purchase cattle at ll