Hydra Pools, Inc. v. Lingerfelt

HYDRA POOLS, INC. v. DANNY MITCHELL LINGERFELT

No. E2018-01399-COA-R3-CV

COURT OF APPEALS OF TENNESSEE AT KNOXVILLE

April 17, 2019 Session

June 10, 2019

Appeal from the Chancery Court for McMinn County

No. 2016-CV-294

Jerri Bryant, Chancellor

This appeal concerns whether a confidentiality agreement was assigned from one corporation to another. Danny M. Lingerfelt ("Lingerfelt") was an employee for many years of P.I., Inc. ("P.I."), a manufacturer. In 2015, Lingerfelt left P.I and a year later went to work for another company. In the meantime, Hydra Pools, the P.I. division in which Lingerfelt had worked, had become a separately chartered corporate entity, Hydra Pools, Inc. In 2016, Hydra Pools, Inc. filed a verified complaint against Lingerfelt in the Chancery Court for McMinn County ("the Trial Court") alleging that he violated the terms of a non-competition and confidentiality agreement ("the Agreement") he had entered into with P.I. Lingerfelt filed a motion for summary judgment asserting, among other things, that Hydra Pools, Inc. had no privity of contract with him because he had worked for P.I. and not its supposed successor. The Trial Court granted summary judgment to Lingerfelt on the basis that Hydra Pools, Inc. was not a party to or successor in interest to the rights or obligations of the Agreement. Hydra Pools, Inc. appeals. We hold that there is a genuine issue of material fact as to whether the Agreement was assigned by P.I. to Hydra Pools, Inc. We reverse the Trial Court's grant of summary judgment and remand for further proceedings consistent with this Opinion.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed; Case Remanded

D. MICHAEL SWINEY, C.J., delivered the opinion of the court, in which JOHN W. MCCLARTY and THOMAS R. FRIERSON, II, JJ., joined.

Ryan E. Jarrad and Ann C. Pederson (Kapsimalis), Knoxville, Tennessee, for the appellant, Hydra Pools, Inc.

Tasha C. Blakney and Troy S. Weston, Knoxville, Tennessee, for the appellee, Danny M. Lingerfelt.

OPINION

Background

Lingerfelt worked for P.I. from 2007 to 2015. In March 2007, Lingerfelt signed the Agreement (formally the "Acknowledgement and Agreement Concerning Non-Competition and Confidentiality"). The Agreement contains, as relevant to the issues on appeal,¹ the following provisions:

1. In consideration of my employment, my continued employment, and the offer of certain benefits described and fully set forth herein below, acceptance of which is acknowledged, I, Danny Mitchell Lingerfelt, residing at ... Madisonville, Tennessee ... SSN: ... make this agreement with P.I., Inc., (herein "the Company," a Tennessee corporation with its principal office in McMinn County), and agree to the noncompetition and confidentiality provisions set forth further below.

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7. Further, I acknowledge that because of my employment, I have had and/or will have access to become familiar with various trade secrets and confidential information which belong to the Company, and I agree that such confidential information and trade secrets including copies thereof are owned and shall continue to be owned solely by the Company. This includes but is not limited to any customer files, customer lists, any business, marketing, financial, or sales records, data, plans or surveys or any other record or information relating to the present or future business, product, or services rendered or contemplated by the Company. It does not include information which the Company has voluntarily disclosed to the public without restriction or which has otherwise lawfully entered the public domain. Accordingly, I shall not now or hereafter, directly or indirectly, disclose such information to anyone outside the Company or use same for any use other than pursuant to my employment and for the benefit of the Company.

8. I agree not to remove from the Company's offices any of its property, books, records, documents, customer lists, or any copies in such documents, nor make any copies of these for any purpose whatsoever unrelated to my employment with the Company, nor to use, communicate,reveal or otherwise make available such information for any purpose whatsoever, or to divulge such information, other than to authorized employees or officers of the Company, to any other person, partnership, corporation or entity unless compelled to disclose such information by judicial process.

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15. I agree that this agreement constitutes the complete understanding between the parties and that all prior representations or agreements having been merged into this agreement, that no alteration or should be of or modification to any of the provisions of this agreement shall be valid unless made in writing and signed by the parties, and that it shall apply to the benefit of the parties and any successors. I agree it is subject to and governed by the laws of Tennessee, and that any action to enforce it any provision hereof shall be localized and filed in a court of appropriate jurisdiction in McMinn County, Tennessee, venue being consented to be in McMinn County.

Lingerfelt voluntarily left P.I. in March 2015. Shortly thereafter, P.I. reorganized, and the Hydra Pools division where Lingerfelt had worked became a separate corporation, Hydra Pools, Inc. Meanwhile, P.I. continued to exist. Approximately one year following Lingerfelt's departure from P.I., he began working for Findlay Vinyl, a business that sells pool liners and covers.

In September 2016, Hydra Pools, Inc. filed a verified complaint against Lingerfelt for breaching the Agreement by allegedly using customer information he retained from his time in the Hydra Pools division of P.I. to benefit Findlay. Hydra Pools, Inc. sought, among other things, injunctive relief and $60,000 in liquidated damages pursuant to the Agreement. Hydra Pools, Inc. alleged, in part:

At the time of Defendant's termination of employment at issue in this Complaint, "Hydra Pools" was a division of PI, Inc. Hydra is now a separately chartered Tennessee corporation and is the successor in interest to the rights of PI, Inc. for the entire former "Hydra Pools" division of PI, Inc. including that certain agreement entered into by Defendant with PI, Inc. dated March 19, 2007 attached hereto as Exhibit A. As such, for purposes of this Complaint, Defendant's employment at issue in this suit is regarded and referred to as employment with Hydra.

James Jefferson Beene, II, President of both P.I. and Hydra Pools, Inc. signed an affidavit in support of the verified complaint. Lingerfelt filed an answer in opposition. In his answer, Lingerfelt denied that he had any relationship with or obligations to Hydra Pools, Inc., stating:

It is admitted that the Defendant signed the document attached as Exhibit A. In further response to Paragraph 7, the Defendant states that the referenced document speaks for itself and is the best evidence of the contents thereof. However, it is denied that this agreement was between Mr. Lingerfelt and Hydra. It is further denied that Mr. Lingerfelt ever had an employment relationship with Hydra.

In May 2018, Lingerfelt filed a motion for summary judgment arguing, as relevant, that Hydra Pools, Inc. was not a proper party to bring this lawsuit. In June 2018, Hydra Pools, Inc. filed its response to Lingerfelt's motion for summary judgment. As part of its response to Lingerfelt's motion for summary judgment, Hydra Pools, Inc. filed the affidavit of one Robert Todd Harris, Chief Financial Officer and Secretary for both Hydra Pools, Inc. and P.I. Harris stated, in part:

3. PI was a big company for this area, and at any given time, has employed over 100 people, depending on the season. For various reasons, PI having all of its eggs in one basket, to use a phrase, became imprudent and so commencing in the summer of 2015, PI began reorganizing whereby various divisions of PI became separately chartered Tennessee corporations or limited liability companies, either owned by PI or of common ownership as PI.

4. While Hydra was a division of PI, the Hydra division's revenues and costs were accounted for separately. The Hydra division had its own income statement. Once Hydra Pools was chartered in the summer of 2015, from an accounting perspective, nothing changed. However, from a legal perspective, we began to place the assets used in the Hydra Pools division as assets owned by Hydra Pools, Inc. and not PI. Pertinent to this case, two assets then owned by Hydra Pools, Inc. were the Hydra customers book-of-business and the right to protect that book of business, including the rights under Mr. Lingerfelt's Contract at issue in this case.

5. At the time of the spin-offs, we did not prepare any formal paperwork between PI and the related companies such as purchase-and-sale agreements, bills of sale, or assignments as one might expect with transactions between unrelated parties. Because the ownership of PI and Hydra Pools. Inc. and the various other "spin off" entities is the same, we accounted for "who owns what" internally. However, I understand theabsence of formal paperwork signed by each company documenting asset ownership has lead to an issue in the case regarding Hydra Pool Inc.'s right to protect its customer assets by enforcing the Lingerfelt Contract. Accordingly, and to the extent it is needed, and otherwise helpful, we have recently caused to be prepared such formal paperwork signed by each company. Attached as Exhibit I is a copy of an assignment (actually a ratification of the assignment) signed by PI and Hydra Pools, Inc.²

6. Incidentally, as it is Hydra Pools, Inc., that owns the former Hydra division customer accounts, it is Hydra Pools, Inc. that is damaged by Mr. Lingerfelt's possession of Hydra Pools, Inc.'s customer contact information and contacting those customers.

(Footnote added). In July 2018, the Trial Court entered its final order granting summary judgment in favor of Lingerfelt. The Trial Court stated, as pertinent:

Based upon the motion for

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