The Fifth District Appellate Court reversed Madison County Circuit Judge Christopher Threlkeld’s conclusion that the sale of an H&R Block franchise and the previous operator’s employment contract were the same transaction.
Justice Randy Moore delivered the Rule 23 decision on April 23 with Justices Judy Cates and John Barberis concurring.
“The circuit court erred in its summary judgment determination that the two separate writings constituted one contract when the documents did not have terms that relied upon each other, and the plain language of the writings indicated they were to be treated as separate,” Moore wrote. “Additionally, upon remand, the franchiser, H&R Block, must be added as a necessary party given its involvement in the transactions.”
According to the appellate court decision, defendant Daniel Barney is the current owner of Clarence Barney Jr., or CBI, which owns and operates several H&R Block offices. In 2015, CBI discussed the sale and purchase of plaintiff Betty J. Voss’ H&R Block franchise in Highland.
Voss first became a franchisee in 2004, but she received notice in May 2015 that the contract would not be renewed after it expired in October 2014. Thereafter, Voss and CBI began discussing the sale of the Highland franchise.
A Letter of Intent to Transfer Franchise (LOI) states that Voss agreed to transfer her franchise to Barney for $200,000. Voss also intended to work for CBI and continue doing “taxes for her clients next year.”
Voss and Barney executed a sales contract in October 2015, with a payment schedule for $29,500 in October 2015, $28,000 in March 2016, $71,250 in March 2017 and $71,250 in March 2018.
Then Voss and CBI entered into a tax professional employment agreement in January 2016. Voss worked for CBI in Highland during the 2016 tax year. She did not return to work for CBI in 2017, and CBI failed to make its March 2017 payment as required by the sales contract. CBI also failed to make its scheduled 2018 payment.
In response, Voss filed a two-count complaint against CBI and Barney on Aug. 29, 2017. CBI and Barney responded by filing a three-count counterclaim alleging it was excused from the terms of the sales contract because Voss breached the employment agreement by violating certain restrictive covenants.
CBI and Barney also argued in its counterclaim that Voss violated a noncompete clause and alleged tortious interference with a business expectancy.
CBI filed its motion for summary judgment on July 31, 2020. Voss filed a memorandum in opposition. Threlkeld issued an order on March 26, 2021, finding that the sales contract and the employment contract were parts of the same transaction. Because Voss breached the employment contract, Threlkeld held that CBI was entitled to partial summary judgment.
Voss filed a motion to reconsider, which was denied.
A bench trial was held on the remaining pending allegations on Jan. 18, 2023. On Feb. 28, 2023, Threlkeld entered a judgment finding that CBI and Voss negotiated a sale of the Highland franchise and Voss’s retention as a tax professional for CBI in 2015.
Threlkeld found that CBI moved from the Highland office to a new office in late summer or early fall of 2016. During the move, Voss “took a large number of client files belonging to CBI, which still had not been returned.”
“Additionally, the majority of the missing files were for clients whom Voss and her daughter completed tax returns for in previous years,” the appellate court wrote. “The circuit court then awarded damages, costs, and fees to CBI.”
Voss filed an appeal on March 23, 2023, and the appellate court found the findings were made in error.
“Here, the central issue of the motions for summary judgment was whether the two writings were separate contracts or constituted one contract,” Moore wrote. “This was the central issue because that determination would impact all other issues being raised.”
“The issue of whether the sales contract and employment agreement were part of the same transaction and constituted a single contract is a purely legal question and one that is appropriate for summary judgment determination,” he added. “Unfortunately, the circuit court erred in its finding that the two writings were part of the same transaction.”
The appellate court concluded that the sales contract in no way required Voss to maintain employment, rather it set forth her commission should she decide to work for CBI.
Because the contract includes an agreement that if she works for one year, then the retention clause will be dropped, the sale of the Highland franchise was in no way contingent upon Voss's employment.
The appellate court held that the separate nature of the two contracts becomes "even more clear" when looking at the employment agreement. Barney testified that all employment contracts for CBI are annual and identical to the one Voss signed. Therefore, every tax professional who works for an H&R Block franchise signs a "boilerplate employment agreement."
"In other words, this writing is not a part of the transaction of selling the Highland franchise as CBI contends but is a separate contract relating to and required by her employment at [an H&R] Block franchise," Moore wrote.
The appellate court reversed Threlkeld's ruling that the two contracts were one when he granted summary judgment and concluded that the subsequent determinations made during the bench trial must also be vacated.
However, the appellate court also addressed the issue of H&R Block as a necessary party, which was not raised by the plaintiff or defendants. Moore wrote that H&R Block would be materially affected by the judgment because Threlkeld intended to award lost profits under Voss's 2004 contract.
Additionally, H&R Block would have a material interest in who owns and operates its franchise as Voss sought recission of the contract and a return of the parties to positions prior to the franchise transfer.
"It appears that in this provision, [H&R] Block is attempting to both tie itself to the contract as a third-party beneficiary with the ability to enforce certain covenants of the employment agreement and do so without the inclusion of CBI (or the franchisee)," Moore wrote. "Thus, it seems [H&R] Block has reserved the right to seek its own recovery under its own power."
"While the exact legal propriety and effect of these provisions is an issue that remains to be decided," he added. "these provisions do indicate Block’s intent to be able to enforce and protect its own interest in lawsuits related to its franchisees, thus leading to the conclusion that, if not included in a lawsuit where it can articulate its own claims and positions, later litigation could soon follow against the parties who proceeded without it."
The appellate court also found that another question to be answered is “how was Voss capable of selling the Highland franchise to CBI in November 2015, over a year after the expiration of the 2004 FLA?”
“As the franchisor of the Highland Franchise, [H&R] Block may be in the best position to clear up the ambiguity surrounding the transfer of the franchisee rights, and it also may be the only party with proper standing to assert the covenants contained within the 2004 FLA and/or the new FLA, which is an argument put forth by Voss in her motion for summary judgment,” Moore wrote.
Further, Moore wrote that Voss owned the building the Highland franchise was operating out of, so CBI rented the building Voss owned after the transfer. CBI claims H&R Block instructed it to move out of Voss’s building, and then it stopped paying rent.
“This specific issue involves [H&R] Block as a necessary party because if, in fact, [H&R] Block required CBI to move out, then that could leave it subject to various claims by the parties. If [H&R] Block did not instruct CBI to move out, [H&R] Block would be able to properly refute that testimony,” Moore wrote.
“Thus, for the foregoing reasons, when all considered together, we find Block is too intertwined with the various at-issue activities for it to not be considered a necessary party. Without [H&R] Block, the court simply cannot reach a full and final decision as to the issues before it,” he added.