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Employee Claiming Stock Ownership Not Barred by Statute of Limitations

In a recent breach of contract case involving a former employee who was promised 2.5% of the stock of the company which had employed him for twenty-six years, the Court of Appeals of Tennessee made some significant new law on the six year statute of limitations applicable to breach of contract actions.

The case is Powers v. A & W Supply, Inc., and here are the important facts:

  • In 1988, Mr. Powers became employed by A & W
  • In 1993, Mr. Powers and A & W signed an agreement whereby A & W promised Mr. Powers 2.5 % of the total number of issued and outstanding shares of A & W if he remained employed and in good standing with A & W until December 31, 2001
  • The agreement provided that A & W would execute and deliver the promised shares to Mr. Powers when they vested
  • Mr. Powers was still employed and in good standing with A & W as of December 31, 2001
  • No shares were issued to Mr. Powers on December 31, 2001, or ever
  • Mr. Powers was terminated from employment in October 2014
  • After being terminated, Mr. Powers asked about his shares and was told by A & W that it had never made him a shareholder and that the statute of limitations had expired on any breach of contract claim he had against A & W

The breach of contract statute of limitations which was applicable to Mr. Power’s claim was the six year statute. Under Tennessee law, the six year period begins to run when a party’s cause of action accrues.  A & W’s position was that Mr. Powers cause of action accrued on December 31, 2001, the date when his shares vested and on which he was supposed to receive the shares.  If A & W’s position was correct, then the six year statute did bar Mr. Power’s breach of contract claim.

The trial court held that Mr. Power’s breach of contract claim was not barred and the Court of Appeals affirmed. The Court of Appeals reasoned that a principle of equity was applicable:  “Equity regards that as done which in good conscience ought to be done.”  A corollary of this equitable maxim is: “No one can take advantage of his own wrong.”  The Court of Appeals, to reach the result which it reached, also recognized that Tennessee law does not require someone to have actual shares in order to have ownership in a corporation, and that a transfer of stock does not have to be memorialized in writing.

Because A & W should have issued shares to Mr. Powers on December 31, 2001, the Court of Appeals held that Mr. Power’s ownership interest of 2.5% of the stock of A & W vested then. So what about the fact that Mr. Powers had not filed his breach of contract lawsuit within six years from that date?  That fact did not matter to the Court of Appeals which held that Mr. Power’s cause of action did not accrue until A & W first notified him that it would not transfer the shares to him.

The result in this case seems imminently fair, and any other result would not have. Breach of contract lawyers don’t see Tennessee courts employ principles of equity very often, in my experience, when trying to determine when a breach of contract cause of action accrues (or any other cause of action for that matter).  This case is a reminder that equitable principles may be just the ammunition us practitioners need when faced with an argument that elevates form over substance in order to achieve an unjust end.