Opinion
No. 2-574 / 01-1353
Filed January 29, 2003
Appeal from the Iowa District Court for Scott County, James E. Kelley, Judge.
Quad City Quality Service, Inc. appeals from adverse rulings by the district court. AFFIRMED IN PART, REVERSED IN PART, AND REMANDED WITH INSTRUCTIONS.
Mark McCormick and Margaret Callahan of Belin Lamson McCormick Zumbach Flynn, P.C., Des Moines, and Samuel Mchard, Rock Island, Illinois, for appellant.
Robert Gallagher of Gosma Gallagher Goebel, P.L.C., Davenport, and Michael Galvin, Rock Island, for appellee.
Heard by Vogel, P.J., and Zimmer and Hecht, JJ.
Quad City Quality Service, Inc. appeals from adverse rulings by the district court. We affirm in part, reverse in part, and remand with instructions.
I. Background Facts and Proceedings.
Dale Grunwald started his own business, Quad City Quality Servicing, Inc. (QCQS) in 1994. Because of the extremely high number of hours he found himself working, Grunwald decided to sell the company in 1997. Steve Cotton expressed an interest in purchasing QCQS, and Grunwald hired him for six months to allow Cotton to learn the business. The assets of QCQS were sold to Cotton Acquisition Corporation, Inc. on April 24, 1998. The buyer changed its name to QCQS, and the seller changed its corporate name to R-Five.
As part of the sale of the business, QCQS and Grunwald executed a three-year employment contract and a covenant not to compete. These contracts were fully integrated with the purchase agreement. The employment contract provided that Grunwald could be terminated for cause, and cause was defined as follows:
"Cause" shall include the following, to be determined in the sole judgment of the president (reasonably exercised).
(i) employee's fraud, misappropriation, embezzlement or willful misconduct;
(ii) employee's material violation of any provision of this agreement, provided that the Company shall be obligated to give Employee at least fifteen (15) days, prior notice of such violation and no breach shall be deemed to have occurred hereunder if Employee cures the same within such fifteen-day period, or if the same cannot reasonably be cured within fifteen (15) days, if within such period Employee commences to cure and proceeds diligently thereafter to accomplish the same;
(iii) employee's conviction of a felony; or
(iv) employee's material violation of Employer's reasonable work rules and policies.
The contract also provided that if Grunwald were terminated for cause, he would be entitled to compensation at a rate of $75,000 a year for the balance of the contract, but that if he were terminated without cause, he would be entitled to compensation at a rate of $150,000 per year. The employment agreement contemplated Grunwald would work 45 hours per week, and that he would be entitled to "comp time" on an hour-for-hour basis if he worked more than 45 hours a week. "Comp time" was not defined in the contract.
On June 4, 1999, QCQS terminated Grunwald, asserting it was a termination with cause and paid him at the $75,000 annual rate. Grunwald, however, disagreed and brought suit against QCQS seeking payment of the full $150,000 annual rate for the balance of the employment contract. Soon after, he began competing with QCQS.
After a bench trial, the district court found that QCQS had terminated Grunwald without cause and awarded Grunwald $203,365.71. The court also found Grunwald was entitled to compensation for 250 hours of vacation time at $64.10 per hour, totaling $16,025.67, as well as $16,000 for attorney fees. Grunwald filed a motion to enlarge, claiming entitlement to compensation for "comp time" earned. The court, in its decision on the motion to enlarge, found that Grunwald was entitled to $75,670.05 in payment for 1180.5 hours of "comp time." The court further found Grunwald was entitled to $75,670.05 in liquidated damages and additional attorney fees of $18,000.00 under Iowa Code section 91A.8 (2001).
This amount represented the balance of the base salary due Grunwald under the contract ($450,000) less the payments received by Grunwald from QCQS.
QCQS appeals, alleging several errors by the district court. QCQS contends the district court erred in (1) concluding QCQS terminated Grunwald without cause; (2) failing to reduce the post-termination compensation awarded to Grunwald by the amount of income he realized by being released from the covenant not to compete; and (3) by awarding Grunwald compensation for "comp time" earned, incorrectly calculating the amounts due for vacation time, and awarding duplicative attorney fees.
II. Standard of Review.
Our review is for errors at law. Fausel v. JRJ Enters., 603 N.W.2d 612, 617 (Iowa 1999). The district court's findings of fact are binding on appeal if supported by substantial evidence. Id. We will review both contract construction and contract interpretation as conclusions of law when the district court's interpretation does not depend on extrinsic evidence. Id. at 618.
III. Grunwald's Termination.
QCQS argues the district court committed legal error in its determination that Grunwald was terminated without cause. It contends the district court relied upon an erroneous construction and interpretation of the contract to make that determination. Cause, according to the contract, was to be determined in the sole judgment of the president, reasonably exercised. QCQS argues that language means judicial review of the president's termination decision should be limited to an abuse of discretion standard. QCQS, however, offers no authority requiring such judicial deference be given to its president's decision. Determinations of reasonableness are generally questions of fact. See St. Ansgar Mills, Inc., v. Streit, 613 N.W.2d 289, 295 (Iowa 2000). The district court found unreasonable the grounds claimed by QCQS for cause termination. We are bound by the district court's findings if they are supported by substantial evidence. The district court's findings on this issue are supported by substantial evidence, and we affirm.
IV. Grunwald's Competition.
QCQS next argues the district court erred by not reducing Grunwald's damages by the amount of income he realized as a consequence of being released from the covenant not to compete. The contract provides for liquidated damages in the event QCQS breached the employment agreement by terminating Grunwald without cause. Grunwald was to receive $150,000 base salary for each year of the contract remaining. However, the breach by QCQS also released Grunwald from his covenant not to compete. Grunwald was free to, and did, compete against QCQS with his own business.
A party seeking to recover for breach of contract is entitled only to be placed in as good a position as the party would have occupied had the contract been performed. Midland Mut. Life Ins. Co. v. Mercy Clinics, 579 N.W.2d 823, 831 (Iowa 1998). A party is not entitled to use the breach to better its position by recovering damages not actually suffered. Id. These propositions are equally true when the contract calls for liquidated damages. Liquidated damages are permitted in contracts as long as they do not constitute a penalty. Aurora Bus. Park Ass'n v. Michael Albert, Inc., 548 N.W.2d 153, 156 (Iowa 1996); Restatement (Second) of Contracts § 356 (1981). Whether a contract provision is a valid liquidated damages clause or an enforceable penalty is a question of law. Aurora Bus. Park, at 155.
Liquidated damages are not penalties if they are set at an amount reasonable in light of the anticipated or actual loss caused by the breach. Rohlin Constr. Co. v. City of Hinton, 476 N.W.2d 78, 80 (Iowa 1991). In this case, the amount of liquidated damages provided by the contract was not reasonable in light of the actual loss sustained by the breach. Because the breach permitted Grunwald to gain employment from other employers and to compete against QCQS with his own business, and because the liquidated damages provision does not take this potential income into account, it is unreasonable and constitutes a penalty. We reverse the district court's award of $203,365.71 in damages to Grunwald and remand for determination of Grunwald's actual damages for breach of contract. This will require further findings of fact as to the amount of income Grunwald was able to realize by being free of obligations to QCQS for the remaining term of his employment contract.
V. Awards to Grunwald under Iowa Code section 91A (2001).
QCQS presents three challenges to the district court's awards to Grunwald under Iowa Code section 91A (2001): (1) the award for "comp time" is not supported by substantial evidence; (2) the calculation of the award for vacation time is not supported by substantial evidence; and (3) the award of attorney fees for QCQS's failure to pay both "comp time" and vacation time constitutes an abuse of discretion.
A. "Comp Time"
The district court found QCQS treated "comp time" in the same manner as it treated vacation time and that employees were paid for their unused "comp time" upon termination. The district court found "comp time" had been treated that way when Grunwald ran the company and found no evidence the policy had changed after the sale. We, however, can find no support in the record for the court's finding as to the company's post-sale policy of payment for "comp time" upon termination. The portions of the record cited by Grunwald do not support his position or the district court's finding. The uncontroverted record reflects that after the sale the only way a QCQS employee could be compensated for "comp time" was to take paid time off. Indeed, when Grunwald requested payment from QCQS for his "comp time," the company's officers refused to authorize it. After a careful review of the record, we conclude the district court's finding that Grunwald was entitled to payment for his unused "comp time" is not supported by substantial evidence, and we reverse.
B. Vacation Time
The district court found Grunwald was entitled to payment for his unused vacation time. It then determined Grunwald had earned 250 hours of vacation time and should be compensated at a rate of $64.10 an hour, totaling $16,025.67. However, the district court provided no explanation of its calculation of the vacation hours earned by Grunwald. The contract provides Grunwald was entitled to 200 hours of vacation time each year. Grunwald was employed from April 24, 1998 until June 4, 1999, one year and six weeks, which would seemingly entitle Grunwald to 223 hours of vacation hours. There is also evidence that Grunwald used ninety hours of vacation time during his employment. The district court's finding that Grunwald had accrued 250 hours of vacation time is not supported by substantial evidence, and we reverse and remand for a determination of actual accrued and unused vacation time.
This information comes from Grunwald's own exhibit. This exhibit is a chart detailing PTO accrued by Grunwald and seems to indicate that Grunwald took vacation during the weeks ending October 30, 1998 and April 2, 1999. Grunwald denies the exhibit shows this, but offers no other explanation for the entries labeled "vacation."
The district court finding that Grunwald should be compensated at the rate of $64.10 an hour for his vacation time is supported by substantial evidence. This rate is calculated by dividing Grunwald's annual base salary of $150,000 by the number of regular hours he was expected to work under the contract. We find no error with the district court's calculation of the hourly rate to be paid for vacation hours.
C. Attorney Fees
QCQS's final contention is that Grunwald was awarded duplicative and excessive attorney fees under section 91A.8. In its initial decision, the district court reasoned:
Plaintiff Dale Grunwald claims he is entitled to recover attorney's fees under Iowa Code section 91A.8. The Court finds that there was a violation of Chapter 91A by QCQS. QCQS terminated the employment contract with Dale without paying him his accrued but unused paid time off.
The district court held no hearing to determine the amount of usual and necessary attorney fees, but awarded Grunwald $16,000 for attorney fees apparently in reliance upon an affidavit of counsel attached to Grunwald's written post-trial argument.
This attorney's statement was asserted to be an itemized statement of "all work performed and costs advanced on behalf of the above-named Plaintiffs." Because Jill Grunwald was also a plaintiff in this case, work done on her behalf was included, although not noted separately, in this statement.
In its subsequent decision on Grunwald's motion to enlarge, the district court found Grunwald was entitled to payment for his unused comp time and revisited the issue of attorney fees under § 91A:
The Court has previously ordered payment of $16,000 of attorney's fees due Plaintiff's attorney by Defendant, Quad-City Quality Service, Inc. Those attorney's fees were ordered pursuant to the Court's finding that Quad-City Quality Service, Inc. violated the terms of the asset purchase agreement, including the terms of the employment agreement. The Court finds that those attorney's fees did not include any attorney's fees recoverable under Section 91A.8 of the Iowa Code.
The district court then awarded Grunwald an additional $18,000 in attorney fees under section 91A.8.
Because of our conclusion in section A above, the award for attorney fees under section 91A.8 for nonpayment of accrued comp time is necessarily reversed. However, due to the district court's conflicting language in its two rulings, we are unable to determine whether the initial attorney fee award was based upon section 91A.8 or the asset purchase agreement. Attorney fees are not recoverable for breach of the agreement because the parties did not agree such fees would be owed by the breaching party. Generally, an award for attorney fees is not allowed in the absence of statute or agreement between the parties. Smith v. Board of Sup'rs of Des Moines County, 320 N.W.2d 589, 593 (Iowa 1982). We therefore reverse the judgment for attorney fees and remand to the district court for an evidentiary hearing to determine the amount of attorney fees to which Grunwald is entitled under chapter 91A. See Audus v. Sabre Communications Corp., 554 N.W.2d 868, 874 (Iowa 1996).
VI. Conclusion.
We affirm the district court's finding that Grunwald was terminated without cause. We reverse the district court's award of damages for breach of the employment contract and remand to the district court for a determination of Grunwald's actual damages. We reverse the district court's finding that Grunwald was entitled to payment for accrued "comp time," as well as the liquidated damages and attorney fees awarded in conjunction with that finding. We reverse the district court's finding that Grunwald was entitled to payment of $16,025.67 for his accrued vacation time, and remand for a redetermination of the number of accrued but unused vacation hours for which Grunwald is entitled to compensation. We reverse the district court's award of attorney fees and remand for an evidentiary hearing and determination of the amount of attorney fees owed by Q.C.Q.S. for violation of section 91A.8.
The costs of this appeal shall be divided equally between the parties.