Sherman v. American Water Heater Co., Inc.

Citations: 50 S.W.3d 455; 2001 Tenn. App. LEXIS 119; 2001 WL 185208Docket: E2000-01389-COA-R3-CV

Court: Court of Appeals of Tennessee; February 27, 2001; Tennessee; State Appellate Court

Original Court Document: View Document

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The Court of Appeals of Tennessee reversed the lower court's ruling that a release signed by plaintiff Vickie J. Sherman barred her claim for statutory indemnification against American Water Heater Company, Inc. (AWHC). The appeal arose from a summary judgment, where the trial court dismissed Sherman’s motion and granted AWHC's motion based on the release agreement she signed upon termination. The release waived all potential claims against the company, including those related to federal and state employment laws. However, the court noted that while there were factual disputes concerning the circumstances of the sexual harassment claim, these were not material to the indemnification issue. The central question was whether AWHC was entitled to judgment as a matter of law based on the undisputed facts surrounding the release and the circumstances of Sherman’s employment.

Plaintiff in a sexual harassment lawsuit filed a Notice of Dismissal regarding the claim against Defendant Vickie J. Sherman, indicating a complete settlement with Co-Defendant SouthCorp. The dismissal was with prejudice, and an Agreed Order of Dismissal was subsequently entered. The Trial Court ruled that the defendant's indemnification claim was barred by the Release and Settlement Agreement, emphasizing the validity of a release for potential claims. The Court noted that the agreement, signed on July 9, 1997, aimed to release both parties from all claims related to their employment relationship, even if the claims had not yet accrued at the time of signing. The plaintiff argued that the indemnification claim did not arise until after a favorable judgment against her, thus maturing post-agreement. The Court referenced the principle that the intent of the parties, as expressed in the contract, governs the scope of the release. The Release explicitly stated that it covered all claims existing as of the agreement's signing and included various claims, with the exception of those under the Age Discrimination in Employment Act arising after the agreement date. The Trial Judge's interpretation focused on the phrase allowing for the release of claims before they accrue, affirming that such releases are common practice.

The Court determines that the release language encompasses the indemnification claim, despite it not maturing when the release was signed. The Trial Court's interpretation was flawed as it focused on a single phrase, disregarding the overall context of the Release, which includes a clause whereby the employee waives all claims as of the signing date. This interpretation conflicts with the plain meaning of other provisions in the Release, including a temporal limitation that the Trial Court overlooked. The comprehensive reading of the Release indicates it covers all claims existing at the time of signing, including those arising under various legal statutes. 

Case law supports that a general release, unless explicitly limited, covers all claims the parties contemplated at execution. The Tennessee Supreme Court has established that releases apply only to matters present at the time of signing and cannot operate prospectively. The defendant cites Donahue v. East Tennessee Natural Gas Co., where the court ruled that plaintiffs were barred from claims for damages occurring after a release was signed, as those damages were a foreseeable result of prior work. Thus, the Court emphasizes the importance of assessing the Release in its entirety to maintain its intended temporal boundaries.

Donahue distinguishes between “general” and “specific” releases, asserting that damages accruing post-release are barred only if they were contemplated by both parties. The release in Donahue was a specific release, limited to claims arising from the gas company’s pipeline construction, without any temporal limitations like those in the current case. The current release allows for claims that existed but were not yet judicable at the time of signing. The court adopts the reasoning from Schenck v. Minolta Office Systems, wherein a release signed did not bar a later claim for malicious prosecution, as the claim did not exist at the time of the release due to the ongoing criminal prosecution.

The plaintiff seeks mandatory indemnification under T.C.A. 48-18-503 and 48-18-507, which require indemnification for directors who are wholly successful in their defense. The defendant contends the plaintiff is not entitled to indemnification, arguing she was not wholly successful nor sued "because of" her corporate role. The court, however, considers her dismissal from a related lawsuit as a successful resolution, indicating that the suit was linked to her position at American Water Heater.

Entitlement to indemnification for Ms. Sherman hinges on her success in defending against Mr. Cable's lawsuit, which is determined by whether she was "wholly successful, on the merits or otherwise." This standard, based on the Tennessee statute modeled after the Revised Model Business Corporation Act (RMBCA), requires that a defendant is only considered "wholly successful" if the case concludes without any finding of liability. The statute allows for indemnification based on procedural successes, such as dismissals or settlements, without necessitating a trial on the merits. The document affirms that Ms. Sherman achieved dismissal and incurred no liability, thus qualifying as "successful on the merits or otherwise." 

Indemnification eligibility also requires that she was sued "because [she] is or was a director, officer, or employee" of the corporation. The text notes the broader interpretation of indemnification found in other states, particularly Delaware, which includes suits arising from a director's official capacity and related roles. The document references cases from Delaware and other jurisdictions that affirm this interpretation. Additionally, the issue of indemnification concerning sexual harassment claims has been addressed in California and Minnesota, reinforcing the principle that indemnification applies when a party is sued due to their corporate role.

Paulson, having previously faced a sexual harassment lawsuit and secured a favorable jury verdict, was found entitled to indemnification due to the nature of the employment relationship, which was pivotal to the lawsuit. In the current case, Cable, the plaintiff, was the Vice President of Human Resources and had a mixed professional and personal relationship with Sherman. Cable's complaint alleges that Sherman exploited her position to coerce him into sexual relations, both at work and off-site, from November 1995 until Cable's termination on May 2, 1996. Cable claimed he felt compelled to comply with Sherman’s demands to avoid losing his job, as she made it clear that her satisfaction influenced his employment status. The court determined that Cable’s allegations were intrinsically linked to Sherman’s employment role, indicating she was not solely liable in her individual capacity. Given that the success of the lawsuit hinged on Sherman’s position, she was entitled to indemnification under T.C.A. 48-18-503. Consequently, the Trial Court’s judgment was vacated, and it was ordered to award Sherman her reasonable expenses as mandated by the statute, with the appeal costs assigned to American Water Heater Company, Inc.