                      IN THE COURT OF APPEALS OF TENNESSEE
                           WESTERN SECTION AT JACKSON




HENRY COUNTY MEDICAL CENTER )
                            )
    Plaintiff/Appellant,    )               Henry Law No. 9886
                            )
vs.                         )
                            )
HENRY GRONSKI, M.D.         )               Appeal No. 02A01-9412-CV-00279
                            )
    Defendant/Appellee.     )



                                                                      FILED
                APPEAL FROM THE CIRCUIT COURT OF HENRY COUNTY September 9, 1996
                             AT PARIS, TENNESSEE
                                                              Cecil Crowson, Jr.
                                                                      Appellate C ourt Clerk


                     THE HONORABLE C. CREED McGINLEY, JUDGE



For the Plaintiff/Appellant:         For the Defendant/Appellee:

David F. Hessing                     William R. Neese
Paris, Tennessee                     Dresden, Tennessee




                                     AFFIRMED AND REMANDED




                                     HOLLY KIRBY LILLARD, J.



CONCUR:


W. FRANK CRAWFORD, P.J., W.S.


HEWITT P. TOMLIN, JR., SR. J.
                                            OPINION

       This is a breach of contract action brought by Henry County Medical Center (HCMC)

against Henry Gronski, M.D. (Gronski). In response, Gronski admitted the amounts owed to

HCMC under the contract but claimed that he was owed a larger amount as set-off. The trial

court awarded HCMC a judgment of $44,900.40 on the contract and awarded Gronski $56,204 as

set-off. The court also ordered HCMC to pay Gronski's attorney's fees and accountant fees.

HCMC appeals the court’s award of set-off to Gronski as well as the award of attorney’s and

accountant fees. We affirm the trial court on all issues.

       On July 19, 1991, HCMC and Gronski entered into a Net Income Guarantee Agreement.

The gist of the contract was that HCMC guaranteed Gronski a net income of $400,000 in his first

two years of practice. In addition, HCMC would provide an allowance of $200,000 to cover

operating expenses. Thus, the subsidy totaled $600,0000. HCMC was to subtract Gronski's

practice expenses from his gross cash collection each month and compare that to the net monthly

income guarantee of $16,667. Any shortfall would be paid by HCMC to Gronski; any excess

would be paid by Gronski to HCMC, up to the amount of advance monies paid by HCMC to

Gronski. After two years, Gronski would repay any subsidy monies exceeding the $600,000

subsidy cap.

       The contract also provided that HCMC would purchase medical equipment and office

furniture for Gronski’s practice. At the end of two years, Gronski would pay HCMC three-fifths

of the cost of this equipment. Pursuant to this provision, HCMC purchased office furniture and

equipment for Gronski totaling $79,059.50.

       Finally, the contract included a clause requiring arbitration of disputes regarding the

reasonableness of claimed professional expenses. In the event of litigation, the contract required

the payment of costs and reasonable attorney's fees to the prevailing party.

       Over the course of the contract period, several disagreements arose between the parties,

one being whether Gronski could claim the depreciation of the office equipment supplied by

HCMC as a professional expense under the terms of the agreement. Gronski requested

arbitration, but HCMC refused, claiming that the clause only applied to disagreements regarding

the reasonableness of office expenses. HCMC argued that the question regarding the

depreciation of the office equipment was not whether it was a reasonable expense but was,

instead, whether it was a deductible expense under the contract since HCMC claimed it owned
the equipment until the end of the contract term, when Gronski would begin his installment

payments. At the end of the two-year period, Gronski began his monthly payments for the

equipment but stopped these after he moved out of the state. HCMC sued for the remainder due

on the equipment; Gronski admitted this debt but counterclaimed for set-off for the depreciation

value of the equipment plus some other smaller expenses. The trial court found for HCMC on its

suit, awarded set-off to Gronski, and ordered HCMC to pay costs and attorney’s fees.

        HCMC appeals the decision of the trial court, and the parties raise the following issues:

        1. Was Gronski entitled under the terms of the contract to set-off for the
        depreciation value of the office furniture and equipment?

        2. Under the contract terms, did Gronski prevail on the suit, entitling him to an
        award of costs and attorney's fees?

        3. Under the contract terms, if Gronski prevails on appeal, is he entitled to an
        award of costs and attorney's fees?

        The standard of review in this case is set forth in Park Place Center Enterprises v. Park

Place Mall Associates, 836 S.W.2d 113 (Tenn. App. 1992). "The interpretation of a written

agreement is a matter of law and not of fact. Therefore, our scope of review is de novo on the

record with no presumption of correctness of the trial court's conclusions of law." Id. at 116

(citations omitted). Park Place also described the general principles of contract interpretation:

                The cardinal rule for interpretation of contracts is to ascertain the intention
        of the parties and to give effect to that intention consistent with legal principles.
        In construing contracts, the words expressing the parties' intentions should be
        given their usual, natural and ordinary meaning. All provisions of a contract
        should be construed as in harmony with each other, if such construction can be
        reasonably made, so as to avoid repugnancy between the several provisions of a
        single contract. If the provisions are repugnant and cannot be reconciled, the first
        and principle clause is controlling and the subsequent provisions repugnant
        thereto are void and unenforceable.

Id. (citations omitted). Finally, "doubtful language in a contract should be interpreted most

strongly against the party who drew or prepared it. This last rule is to be applied, however, only

where other rules of construction fail to give certainty to the written expression." Coble Sys.,

Inc. v. Gifford Co., 627 S.W.2d 359, 363 (Tenn. App. 1981) (citations omitted).

        HCMC first contends that the contract did not entitle Gronski to count as an expense the

depreciation of the equipment and furniture supplied to him by HCMC. The applicable clauses

of the contract state:

        ARTICLE II.


                                                   2
                                            *   *    *

       Net practice income is defined as gross collections . . . minus reasonable
       professional expenses (any expense the Internal Revenue Service (I.R.S.)
       considers as allowable operating expenses for Federal Income Tax purposes. It
       does not include personal income taxes and deferred compensation plans.).

                                            *    *   *

       (i)     The Physician agrees to pay for three-fifths (3/5) of the cost of capitalized
       equipment and furniture purchased by the Hospital located at the Physician’s
       office after the initial twenty-four (24) month period. This obligation will be
       repaid by the Physician in equal installments over three (3) years at no interest.
       Equipment and furniture may be purchased by the Physician during the twenty-
       four (24) month period. In the event all subsidies are not repaid at the end of said
       24 month period, the above stated repayment formula shall apply to the equipment
       and furniture purchased by the Physician.

The appendix to the contract includes the following example of how the Net Income Guarantee

Agreement was to be applied:

       2.        Practice expense . . . includes any expenses the IRS considers allowable
       for federal income tax purposes. Examples are: rent, utilities, maintenance,
       employee salaries, office supplies, malpractice, insurance, phones, accounting,
       etc. . . . It does not include personal income, personal income taxes or deferred
       compensation plans.

       The trial court found that, upon signing the contract, Gronski became legally obligated to

make payments for three-fifths the cost of the office equipment, these payments being deferred

until the end of the contract term. This legal obligation made Gronski the owner of the

equipment. As such, he was entitled to depreciate the equipment under § 179 of the Internal

Revenue Code. 26 U.S.C.S. § 179 (1995). Both the contract and the appendix define a practice

expense as any expense allowed by the I.R.S. for tax purposes. The contract and appendix both

specifically except personal income taxes and deferred compensation plans from this definition

but do not disallow depreciation of office furniture and equipment. Thus, the contract expressly

provides that Gronski was entitled to claim the depreciation value of the office furniture and

equipment purchased for him by HCMC.

       HCMC argues that it purchased the equipment and remained the owner until the end of

the contract term, when Gronski’s duty to make payments began. HCMC notes the following

language in the contract: “Equipment and furniture may be purchased by the Physician during

the twenty-four (24) month period. In the event all subsidies are not repaid at the end of said 24

month period, the above stated repayment formula shall apply to the equipment and furniture

purchased by the Physician.” HCMC contends that this language refers to the equipment bought

                                                3
for Gronski by HCMC and that it gave Gronski the right to purchase that equipment before the

end of the contract term. HCMC maintains that, unless Gronski exercised this option, no legal

purchase would be made until Gronski’s monthly payments became due. Gronski argued, and

the trial court found, that this contract clause gave Gronski the right to purchase office equipment

on his own, apply the purchase cost to the net income guarantee as a practice expense, and then

repay the purchase cost to HCMC if, at the end of the contract term, all subsidies had not been

repaid. The interpretation of the clause at issue adopted by the trial court gives ordinary

meaning to the contract language and is consistent with the rest of the contract.

       HCMC also contends that Gronski could not claim depreciation of the equipment under

the Internal Revenue Code. In support of this position, HCMC cites Miller v. Commissioner, 68

T.C. 767 (U.S. Tax Ct. 1977). While Miller is not precisely on point, it does involve a party

trying to claim depreciation on property for tax purposes where the party holds "only the barest of

legal titles." Id. at 778. The tax court stated that "[t]he critical question therefore is whether the

taxpayer made a capital investment in property. If a taxpayer has no capital investment in

property, he has no right to depreciation or amortization deductions with respect to the capital

asset." Id. at 775. HCMC relies on this case because, while Gronski was legally obligated to

purchase the furniture in two years, he had no actual capital invested in it at the time he claimed

depreciation value.

       Yet there are several distinguishing factors between Miller and the instant case. In

Miller, the taxpayer had purchased only the rights of payment in an existing leaseback

arrangement set up to finance a construction project for the benefit of a New York college. Id. at

774-75. He had not taken over any of the obligations associated with the property, the college

enjoyed the use of the property during the leaseback term, and at the end of the leaseback term,

the college, if not in default, would become the owner of the property. Id. at 777-78. In contrast,

Gronski accepted a legal obligation to pay three-fifths the cost of the equipment in a deferred

payment plan, used the equipment himself, and would be the undisputed property owner after all

payments were made. Miller does not mandate reversal of the trial court’s decision.

       The contract provides that practice expenses include those expenses allowed by the I.R.S.

for tax purposes, and this is reiterated in the appendix. At trial, Gronski’s expert testified that

depreciation of the equipment would be allowed by the I.R.S. under 26 U.S.C.S. § 179, which

                                                  4
reads: “A taxpayer may elect to treat the cost of any section 179 property as an expense which is

not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the

taxable year in which the section 179 property is placed in service.” 26 U.S.C.S. § 179(a)

(1995). For depreciation on office furniture and equipment to be deductible, the property must

be “acquired by purchase for use in the active conduct of in [sic] a trade or business.” 26

U.S.C.S. § 179(d)(1) (1995). “Purchase” is defined in the Code and the Regulations as “any

acquisition of property.” 26 U.S.C.S. § 179(d)(2) (1995); 26 C.F.R. § 1.179-4(c)(1)(i) (1996).

The property must be placed in service. 26 U.S.C.S. § 179(a) (1995); see Crawford v.

Commissioner, 65 T.C.M. (CCH) 2540, 2549 (U.S. Tax Ct. 1993). “The term placed in service

means the time that property is first placed by the taxpayer in a condition or state of readiness

and availability for a specifically assigned function, whether for use in a trade or business, for the

production of income, in a tax-exempt activity, or in a personal activity.” 26 C.F.R. § 1.179-4(e)

(1996). Gronski satisfies the criteria of § 179. He purchased the property when he signed the

contract making him legally liable to pay for it, he acquired it for his medical practice, and he put

it into service upon acquisition. The depreciation of the equipment would be allowed by the

I.R.S. for tax purposes, and the contract expressly includes such allowable expenses in the

definition of practice expense. Moreover, HCMC carried the equipment on its books as an

account receivable from Gronski. HCMC explained that this was the only way HCMC, as a

nonprofit hospital, could gain any tax benefits from the equipment because it could not claim the

depreciation. Regardless, the fact that HCMC carried the equipment as an account receivable on

its books indicates that Gronski was legally obligated to pay for the equipment and was, for both

tax purposes and practice expense purposes, the owner. Consequently, we affirm the decision of

the trial court on this issue.

        The trial court found that, contrary to HCMC’s contention, HCMC had not paid Gronski

in excess of its $600,000 subsidy cap. Our review of the record does not indicate that the

evidence at trial preponderates against the trial court’s finding.

        HCMC also appeals the trial court’s award of attorney’s fees to Gronski, pursuant to the

terms of the contract. The contract states:

        ARTICLE XII.

        Attorney’s Fees

                                                  5
          In the event that suit is brought regarding the provisions of this Agreement or the
          enforcement thereof, the prevailing party shall be awarded its costs of suit and
          reasonable attorney’s fees as part of any judgment rendered therein.

HCMC argues that it instituted the suit and is a prevailing party insofar as it received judgment

against Gronski for the debt owed on the equipment. It acknowledges that Gronski prevailed on

his countersuit. Consequently, HCMC contends that both parties prevailed and each party should

bear its own costs and attorney’s fees. Gronski admitted his debt in his answer to the complaint

and argues that the only issue at trial was whether he was due a set-off against HCMC. He notes

that he prevailed on the set-off issue and was awarded more money than was HCMC. Therefore,

Gronski maintains that he is the prevailing party and was properly awarded costs and attorney’s

fees under the contract.

          Because there was no genuine issue regarding Gronski’s debt to HCMC and Gronski

prevailed on his counterclaim against HCMC and was awarded an amount which exceeded the

amount he admittedly owed HCMC, we affirm the decision of the trial court awarding attorney’s

fees and costs to Gronski.

          We also find that Gronski is the prevailing party on appeal and award him costs and

reasonable attorney’s fees for defending the appeal, pursuant to the terms of the contract.

          The judgment of the trial court is affirmed on all issues. Costs and reasonable attorney’s

fees are assessed against HCMC, for which execution may issue if necessary. We remand the

cause to the trial court for a determination of the amount of the costs and attorney’s fees on

appeal.


                                                HOLLY KIRBY LILLARD, J.

CONCUR:


W. FRANK CRAWFORD, P. J., W.S.


HEWITT P. TOMLIN, JR., SR. J.




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