Don Long v. Ralph & Edna Langley

Citation: Not availableDocket: W2001-01490-COA-R3-CV

Court: Court of Appeals of Tennessee; February 19, 2002; Tennessee; State Appellate Court

Original Court Document: View Document

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A lawsuit was initiated by Don J. Long against Ralph E. Langley and Edna Elizabeth Langley concerning ownership stakes and salary levels at Gene Langley Ford, Inc., an automobile dealership. The primary issues were the ownership percentages of the stockholders and whether Langley had paid himself an excessive salary from 1992 to 2000. The Chancellor initially ruled that Long owned 49% of the stock while Langley owned 51%, and determined Langley’s salary was reasonable. On appeal, the court reversed the ownership decision, establishing that both parties own 50% of the stock, but upheld the Chancellor's finding regarding the reasonableness of Langley’s salary. 

Background facts reveal that Long, interested in purchasing the struggling Ford dealership in Humboldt, Tennessee, negotiated an agreement in 1979 where each party would contribute $40,000 and jointly borrow $80,000. Initially, all stock was issued to Long to capitalize on tax benefits from prior losses, with a subsequent agreement to transfer 51% of the stock to Langley in early 1980. Long argued that the intention was always for them to be equal owners, which was acknowledged by a Ford representative.

The March 30, 1979 agreement aimed to establish Langley as the owner of fifty-one percent (51%) of the stock in Gene Langley Ford, Inc., while profits were to be shared equally between him and Long. Although Langley managed the dealership from its inception in 1979, Long was not involved in daily operations. On May 20, 1980, a shareholder’s agreement was executed, stating both Long and Langley owned 450 shares each, with provisions for stock acquisition rights. Long transferred 450 shares to Langley, and this transfer was recorded shortly after. 

Despite operating under the assumption that Langley was recognized as the dealer, they discovered in 1988 that this was not the case. Long communicated to Ford that Langley had fifty-one percent (51%) voting power, but Ford later indicated Langley would only be considered a fifty percent (50%) owner due to policy changes requiring a minimum of fifty-one percent (51%) ownership. On September 25, 1989, an amendment to their agreement officially recognized both Long and Langley as fifty percent (50%) owners.

Subsequent annual meeting minutes from May 24, 1991, indicated Long owned 441 shares and Langley 459, with Long voting against a measure to grant Langley majority ownership. Additional documents, including a 1980 Small Business Administration loan application, showed Long owning forty-nine percent (49%) and Langley fifty-one percent (51%). Langley maintained that he was unaware of any issues with his salary until Long filed a lawsuit in October 1995, despite having raised his salary significantly starting in 1992. In July 1998, a CPA firm was appointed as Special Master to manage related financial matters.

The Special Master’s report, issued on November 30, 2000, analyzed the period from 1992 to 1997, revealing that Langley’s average salary was $163,218, constituting 1.61% of the dealership's average annual sales of $10,128,900. Mike Hewitt from Arnold, Spain, Truett and Hewitt, P.L.L.C. testified in the April 2001 trial that Langley’s salary was reasonable based on data from six West Tennessee dealerships and Robert Morris and Associates, despite lacking specific Ford guidelines on dealership manager salaries. The report also indicated an increase in stockholders' equity from $520,807 to $1,533,172 during the same period, with only one dividend of $40,000 paid to each shareholder. Langley had reissued himself a majority stock interest in May 1991, but there was no record of a salary increase thereafter.

Robert Davis, a CPA, provided expert testimony for the opposing party, concluding that Langley was overpaid between $749,517.52 and $972,751.76, suggesting a more appropriate salary of $50,000 plus 10% of net profits. Davis noted the absence of Ford’s salary standards for managers. Michael Steele, another CPA, testified for Langley, stating that Langley had drawn a minimal salary in the early years, but did not comment on the reasonableness of his salary during 1992-1997. For the years 1998-2000, which were not part of the Special Master’s report, Langley’s average salary was $173,768, representing 1.55% of increased average annual sales of $12,569,364.

The Chancellor determined that the plaintiff did not prove Gene Langley paid himself an excessive salary. In 1979, Don Long offered Langley 51% ownership of Cox, White Ford, Incorporated for $40,000, which Langley accepted, thus establishing Langley as the owner of 51% and Long as the owner of 49%. Long argued for equal stock distribution. The Chancellor's ruling on ownership, based on the March 30, 1979 agreement, is reviewed by appellate courts de novo, with a presumption of correctness unless contradicted by evidence. The legal issue is whether a May 20, 1980 shareholder's agreement superseded the earlier agreement. 

Significantly, the second agreement proposed equal ownership and granted both parties the option to buy each other’s stock, unlike the first agreement, which allowed this right only to Long. Generally, the last signed agreement on a subject supersedes earlier ones. Modifying a contract requires mutual assent and consideration, where performance of existing obligations doesn't qualify as consideration for a new contract. The modification in the second agreement regarding stock ownership was deemed supported by adequate consideration, as it granted Langley rights that were not present in the first agreement.

Long had the right to purchase Langley’s stock upon Langley’s death or withdrawal, while Langley lacked reciprocal rights, indicating an imbalance in the 1979 agreement. However, evidence suggests that both parties intended for equal ownership. The course of conduct between the parties serves as strong evidence of their intent, as established in case law (Frierson v. Int’l Agric. Corp. and Pinson, Assoc. v. Kreal). A shareholder agreement from May 20, 1980, explicitly stated that each party would own 450 shares, which Long transferred to Langley on the same day. This equal share distribution remained unchanged until May 1991 when Langley reissued 51% of the stock to himself. For 11 years, they maintained equal ownership, during which Langley was designated a dealer by Ford Motor Company, and an amendment to the Ford Sales and Service Agreement confirmed equal ownership of the business. Langley admitted to dividing profits equally, further supporting the intent for equal ownership despite Long's representation to Ford and the Small Business Administration that Langley owned a majority of the stock, explained by requirements for the managing owner to hold more than 50%. The 1980 shareholder agreement supersedes the earlier one and is valid, affirming equal ownership in Gene Langley Ford, Inc.

The second issue concerns whether Langley paid himself an excessive salary from 1992 to 2000, averaging $173,768 annually, compared to his previous salary of $276 per week plus commissions. The Special Master assessed the reasonableness of Langley’s salary from 1992 to 1997, but did not evaluate the years 1998 to 2000, which is significant given the established rule that concurrent findings of a Special Master and a trial court are conclusive unless certain exceptions apply. The Special Master found Langley’s salary reasonable for the years investigated.

Long did not meet the burden of proof to demonstrate that Langley’s salary was excessive for the years 1992 to 1997. The Chancellor’s rejection of Long’s claim implicitly confirmed the salary's reasonableness. Consequently, both the Special Master and the Chancellor found Langley’s salary during these years to be reasonable, which is conclusive on appeal. Despite concerns regarding Langley’s unilateral salary setting and the timing of Long’s complaint, the evidence supported Langley’s entitlement to the pay, especially considering the dealership's previous financial difficulties and Langley’s contributions over the years. From 1992 to 1997, the dealership's stockholder equity increased by over $1 million, with Langley's salary averaging $163,218, or 1.61% of annual sales. Long’s expert testimony was deemed unconvincing and lacked concrete data. For the years 1998 to 2000, Langley’s salary was approximately $10,500 higher annually but represented a smaller percentage of significantly increased sales, affirming its reasonableness. The court concluded that both parties own equal shares in Gene Langley Ford, Inc., and Langley’s compensation from 1992 to 2000 was reasonable. The trial court's judgment was partially reversed and partially affirmed, with the case remanded for further proceedings and costs split equally between the parties.