                 IN THE COURT OF APPEALS OF TENNESSEE
                              AT JACKSON
                                    April 23, 2003 Session

                           EDWIN BOOTH v. FRED'S, INC.

                 A Direct Appeal from the Circuit Court for Shelby County
                 No. CT 000227-01    The Honorable D'Army Bailey, Judge



                   No. W2002-01414-COA-R3-CV - Filed August 19, 2003


       Defendant-employer terminated plaintiff-employee for cause based on plaintiff’s negligent
performance of executive duties. Plaintiff-employee sued employer for benefits due under
employment contract and certain pension plans. Issues at non-jury trial included whether termination
was for cause and the effective date of termination. The trial court awarded plaintiff damages
pursuant to the employment contract finding, in part, that employer failed to comply with
employment contract provision requiring written notice of termination at least 90 days prior to
termination for cause. Trial court also awarded plaintiff benefits under two stock option plans.
Defendant employer appeals. We affirm in part and reverse in part.

  Tenn. R. App. P. 3; Appeal as of Right; Judgment of the Circuit Court Affirmed in Part
                                   and Reversed in Part

W. FRANK CRAWFORD , P.J., W.S., delivered the opinion of the court, in which DAVID R. FARMER ,
J. joined; HOLLY M. KIRBY, J., dissents in part with separate opinion.

Charles W. Hill, Memphis, For Appellant, Fred's, Inc.

Stephen W. Vescovo, Timothy R. Johnson, Memphis, For Appellee, Edwin Boothe

                                            OPINION

       This case involves an action for breach of an employment contract. Defendant Fred’s Inc.
(“Fred’s”) is a Tennessee corporation that operates discount general merchandise stores in 11
southeastern states and “also markets goods and services” to franchised stores. Prior to his
termination in November 2000, plaintiff Edwin Boothe (“Boothe”) was an employee of Fred’s, in
some capacity, for nearly 25 years.

      On February 1, 1998, Boothe was promoted to the position of Chief Operating Officer. That
same day, plaintiff and defendant entered into a written Employment Agreement setting forth the
terms, conditions, and obligations governing Boothe’s employment as Chief Operating Officer.1 The
agreement specified that Fred’s promoted Boothe to serve as its Chief Operating Officer for an initial
term of two years, subject to automatic renewal for additional one-year terms “unless either party
shall have given to the other written notice of termination at least six (6) months prior to the end of
the then current term (which termination shall become effective at the end of the then current term).”
Under the agreement, Boothe was to receive a compensation package including an annual base salary
beginning at $120,000.00, a yearly bonus of at least $20,000.00, qualified stock options pursuant to
an Incentive Stock Option Agreement, a conditional award of 2,500 shares of Common Stock
pursuant to a Restricted Stock Award Agreement, and certain health and medical benefits.

        Boothe’s duties as Chief Operating Officer under the agreement included plaintiff’s
acknowledgment that he was to “assume primary responsibility (subject at all times to the control
of the Chief Executive Officer of the Company) for matters assigned to him by the Chief Executive
Officer.” According to Boothe’s testimony at trial, plaintiff’s duties specifically included overall
responsibility for the performance of store operations, protection of the physical assets of the
company’s retail stores, distribution center and pharmacies, and inventory control.2


       With regard to termination of employment, the agreement contains the following provision:


                          This Agreement shall continue unless and until terminated, (i)
                  with or without cause, by written notice of termination as provided in
                  Section 1 above, (ii) by either party for cause, upon not less than
                  ninety (90) days prior written notice to the other (except that such
                  notice of termination may be (x) effective immediately in the case of
                  termination by Company for acts of Executive involving moral
                  turpitude or breach of duty of loyalty, or (y) effective in ten (10) days
                  in the case of termination by Executive for cause, or (iii) as otherwise
                  provided herein.



       1
           Bo othe was one of only a handful of Fred’s o fficers with a written E mplo yment Agreement.

       2
           Fred’s President John Reier described B oothe’s duties on the “operations side of the com pany” as follows:

                  W ell, the operations side – the first thing would be checking in the freight to make
                  sure the freight shipments from the distribution center to the store were received
                  correctly. The seco nd thing would be guarding the assets in the store to see that
                  cashiers or any other employees weren’t stealing or that customers weren’t stealing.
                  So the main thing on the store operating side as far as on the sales floor would be
                  protecting the company’s assets, and on the backside, receiving merchandise
                  correctly.




                                                          -2-
Cause justifying termination, for purposes of the Employment Agreement, was defined to include
acts of misconduct or negligence on behalf of an executive in the performance of his employment
duties, or an executive’s violation of his duty of loyalty to Fred’s. Duty of loyalty is not defined in
the agreement.

        As a retail merchandise business, Fred’s is forced to deal with and account for inventory
shrinkage. Shrinkage, with regard to the retail merchandise industry, “is a term of art applied to
describe losses of merchandise caused by employee or customer theft, clerical error due to mis-
shipment, transfers of goods not being recorded, damages not being recorded, and markdowns not
being recorded.” Plaintiff explains that shrinkage “represents the difference between inventory book
value and actual physical inventory which can be accounted for at the actual store locations.” To
account for losses due to shrinkage, Fred’s developed a shrinkage plan and budgeted a shrink reserve
or accrual for each new fiscal year. According to defendant, “[t]he shrinkage plan is accounted for
by accruing a dollar amount in the Defendant’s financial reports to anticipate losses due to
shrinkage.” The essential effect of controlling or maintaining shrinkage below the accrual budget
is an increase to defendant’s annual profit.3 As Chief Operating Officer, Boothe was responsible for
monitoring shrinkage levels.

        In the early months of 2000, Fred’s experienced an escalation in shrinkage in January and
February of 2000. The increase in shrinkage coincided with the closing of two Fred’s retail stores,
located in Chattanooga, Tennessee and Hixson, Tennessee respectively. Upon closing, the inventory
of both stores, in keeping with the common practice of defendant, was transferred to “recipient
stores.” In March 2000, Chief Financial Officer Rick Witazak (“Witazak”) informed Boothe that
there was approximately $500,000.00 in unreconciled inventory remaining on both the Chattanooga
and Hixson books.4 According to his testimony, Boothe predicted that the remaining book inventory
represented inventory that was transferred from the Chattanooga and Hixson stores to one or several
recipient stores that, upon receipt, failed or neglected to submit the proper paperwork to account for
the transfer and receipt.

        Based on these observations, Boothe and Witazak decided to delay an inventory of the
Chattanooga and Hixson stores until inventories of the suspected recipient stores were completed.
The rationale for this decision was to first determine the inventory totals for the recipient store(s),
and then compare these totals with the amount of inventory on the books of the two closing stores.


       3
           In its brief, defendant explained:

                  The Defendant sets aside “shrinkage” reserves as best estimate s to account for
                  potential losses due to shrinkage. Shrinkage affects the D efendant’s pro fitability,
                  decreasing its earnings per share. If the Defendant can reduce its shrinkage reserve,
                  it can show m ore p rofit in term s of earnings per share. Thus, the Company’s goal
                  is to carry as low a shrinkage reserve as possible.


       4
           W itazak left Fred’s in March or April 2000. Jerry Shore took over as Chief Financial Officer in April 2000.

                                                          -3-
Armed with this information, the defendant’s financial office could then “reconcile the accounting
records for the closed stores and report the actual shrinkage and take it off the books of Fred’s.”
Despite these plans, no inventory of the recipient store(s) was taken; rather, the officers decided to
wait until the next regularly scheduled physical inventories.

       Shrinkage amounts for Fred’s continued to escalate over the summer of 2000. During this
time, Boothe and several other company officials engaged in weekly operations meetings at which
shrink was always a topic. In June 2000, Boothe had his annual evaluation meeting with Reier.
Pursuant to an Employee Data Change form approved on July 5, 2000, Boothe was awarded a merit
increase, raising plaintiff’s annual salary from $128,000.00 to $140,000.00.5 Aside from the pay
increase, this form reflects no other status, compensation, or benefit change.

        Reier testified that throughout the summer, Boothe advised that shrinkage levels were
anticipated to improve as physical inventories were taken of recipient stores. Prior to the Board of
Directors meeting in August 2000, Hayes met at least twice with Boothe, Shore, and new Head of
Store Operations, Charles Brunjes (“Brunjes”), to discuss the “escalation in reserve.” Hayes testified
that Boothe assured him during these meetings that the shrink problem was going to improve.

        At the Board of Directors meeting on August 13, 2000, Hayes and Shore gave a report to the
board on company shrink reserve levels. In light of the increased shrinkage, Hayes recommended
to raise shrink accruals by approximately 2.34 percent. Hayes testified that he also reported to the
directors that the company was in the process of conducting weekly inventory checks on 17 selected
stores. However, despite these assurances, Hayes testified that he later learned that the company was
not reaching its goal of 17 inventory checks per week.

        In September 2000, Hayes called a meeting with Reier, Boothe, Merle McGruder, and
Brunjes to further address the shrinkage problem. Shortly after the meeting adjourned, Hayes
directed Boothe and Shore to prepare a shrink analysis report providing an accurate shrink projection
for the balance of the fiscal year. Hayes specifically directed Boothe to “check” every single
inventory, and ordered Shore to “check the number and to back up [Boothe].”

       In October 2000, Boothe and Shore submitted a shrink analysis report providing positive
news that the company experienced a net shrinkage pickup in the amount of $195,824.50. Hayes
explained the term “pickup,” stating:

                         Remember when I said that we set up accruals on the books
                  and we have accruals for the stores so what it suggested was that the
                  accruals that we had put on the books for the stores would be less


         5
           The parties dispute what plaintiff’s July 2000 pay increase represents. Plaintiff maintains that the increase
in pay reflects only an increase in salary, fully independent and apa rt from all bonuses owed to plaintiff under the
Employment Agreement and subsequent 2003 Key Employee Incentive Plan. Defendant contends that plaintiff’s pay
increase was ca lculated to include a portion of Boo the’s annual bonus.

                                                          -4-
               than what we had set up for. It does not mean that we found
               merchandise. If we assumed that a store was going to have a two
               percent shrink and instead it had a one percent shrink, there would be
               a pickup.

        On November 1, 2000, Boothe and Shore discovered that their October 2000 projection was
inaccurate. Instead of a positive variance of $195,000.00, Boothe and Shore now reported a negative
shrink variance of $799,000.00. Shore testified that $799,000.00 in cost represents approximately
$1,100,000.00 at retail. According to Shore, the negative variance constituted a swing of
approximately “$200,000 positive to an $800,000 negative or about a million dollars swing at cost.”
Shore further testified that he learned that the Chattanooga and Hixson stores had not been
inventoried, and that the accounting records for these stores had not been adjusted for “the shrinkage
or for the physical inventory that had been taken.”

         According to the company’s December 2000 shortage report, Fred’s wrote off $231,288 in
retail dollars for the Chattanooga store. Fred’s wrote off an additional $158,705 in retail dollars for
the Hixson store. Both write-off’s were the result of the company’s inability to account for
transferred merchandise.

        Upon discovery of the negative shrink variance, Boothe and Shore immediately reported the
information to Reier and Hayes. In response to this new report, Hayes ordered Reier to instruct
Boothe to leave the company premises and submit to an immediate and mandatory leave of absence.
Boothe was further instructed not to contact anyone at Fred’s, and was temporarily banned from
returning to the company or participating in board meetings. The accounting firm of Price
Waterhouse was contacted to conduct an independent investigation and audit of Fred’s books.

        The Price Waterhouse audit confirmed that Boothe was not guilty of any dishonesty, and
further verified that Boothe had not taken any money from the company. At the Board of Directors
meeting on November 13, 2000, Hayes and Shore discussed the Price Waterhouse audit and the issue
of shrinkage with the board. After the meeting, as a result of the unexplained escalation in
shrinkage, and despite the Price Waterhouse report exonerating Boothe of criminal or dishonest
conduct, Hayes determined that Boothe should no longer hold the position of Chief Operating
Operator for Fred’s.

        Despite his desire to terminate Boothe, Hayes agreed to offer Boothe a new position as
Executive Vice President in charge of real estate and distribution, on Reier’s recommendation. This
new position included a decrease in job duties, a reduced annual salary of $120,000.00, and stock
options. Reier proposed the new offer to Boothe at a lunch meeting on or around November 10,
2000. Without Reier’s knowledge, and in violation of an existing company policy that prohibited
the recording of any “in-person conversation and/or telephone conversation of any other employee
without his/her permission unless approved in writing by one of the Executive Vice Presidents and




                                                 -5-
the Director of Personnel and the General Counsel,” Boothe tape recorded the conversation.6 On
cross examination, Reier testified that he informed Boothe that if he didn’t take the new position,
“he would be terminated for cause.”

        Boothe returned to work on or around November 14, 2000, approximately one day after the
November Board of Directors meeting. Boothe testified that he met with Hayes on November 14
to discuss his role in the shrinkage problem and to address several other job performance issues.
Fred’s new proposal was not discussed at this meeting, and Boothe testified that to this point, there
had been no mention that he was being removed from his position as Chief Operating Officer.

        On approximately November 16, Boothe had a telephone conversation with Reier to discuss
his future with Fred’s. According to Boothe, Reier told him that Hayes was “very amenable” to the
prospect of Boothe leaving Fred’s, with the condition that Boothe be allowed to keep his stock and
severance. Later that same day, Boothe again met with Hayes to discuss Boothe’s future with Fred’s.
Boothe testified that Hayes spelled out the terms and compensation for the new offer during this
conversation. Additionally, Boothe testified that Hayes informed him that if plaintiff wished to leave
the company, he could contact Fred’s in-house counsel and work out a fair settlement agreement.
Boothe made no decision to accept or reject defendant’s offer at this time.

        Three days later, Boothe met with Reier to further discuss his future with Fred’s, and the
terms of the new offer. On direct examination, Boothe noted that he asked Reier about the “cause
issue” of his Employment Agreement. According to Boothe, Reier informed him that “he didn’t
think [Boothe] would be terminated for cause, that if [Boothe] was terminated, [Boothe] would be
terminated for performance.”

        On November 20, Boothe met with Hayes and Reier to offer his decision. After learning that
Fred’s stood by their offer, and viewing the new position as a demotion, Boothe rejected the
opportunity to stay on as Executive Vice President of real estate and distribution. Boothe was then
given time to pack his belongings and exit the building. Before exiting, Boothe testified that Reier
affirmed that there would likely be no issue with regard to plaintiff retaining his severance and stock.




         6
          Violation of this po licy mandated immediate d ismissal o f the offend ing employee. The evidence indicates
that Boothe made five tape recordings of his meetings with Hayes and Reier from approximately November 10, 2000
until November 20, 2000.

                                                        -6-
Despite these assurances, Boothe received no salary, health benefits,7 or stock incentives after
November 20, 2000.

        According to defendant’s brief, Hayes “testified that he terminated the Plaintiff’s
employment as Chief Operating Officer because the Plaintiff breached the duties he owed the
Company as one of its top officers.” Among the reasons for Boothe’s dismissal was his failure to
properly monitor shrinkage and keep senior management accurately apprised of the escalating
situation. Although other officers were disciplined for their roles in the shrinkage problem, no other
officer was demoted or fired for their conduct.

         In a letter dated January 8, 2001, Reier confirmed Boothe’s termination, stating:

                  This will confirm your termination from employment with Fred’s,
                  Inc., effective November 20, 2000 for cause and violation of your
                  duty of loyalty to the company.

Boothe received the letter on January 9, 2001. It is undisputed that the letter of January 8, 2001 was
the first written notice given to Boothe that he was being fired for cause and for breach of duty of
loyalty.

        Boothe maintains that throughout his November 2000 conversations with Reier, Reier
indicated that plaintiff was not being terminated for cause. Reier confirmed these assurances, but
further testified that he informed Boothe that if plaintiff “didn’t take the other job, he would be
terminated for cause.” On cross examination, Hayes acknowledged that there was no mention of
“termination for cause” on plaintiff’s tape recording of the November 20 meeting.

         With regard to defendant’s allegations of breach of duty of loyalty, Boothe maintains that he
first learned of said allegations upon his receipt of the January 8 termination letter. In his testimony
before the trial court, Reier admitted that there had been no mention of breach of duty of loyalty prior
to January 8, to his knowledge. Hayes testified that he mentioned breach of duty of loyalty to Boothe
during a November meeting with Boothe, but admitted that his assertions were not recorded on any
of the tapes that he had heard.




         7
           In late November 2000, Boothe took his son to the hospital for surgery. Boothe testified that the hospital
called the compa ny’s insurance carrier to verify coverage and was told that Boothe no longer had an insurance policy
through Fred’s. Boothe called Reier in search of an explanation, and Reier in turn contacted the company’s in-house
counsel. Reier was informed that Boothe’s insurance had been cancelled upon termination on Novem ber 20, 2000 , and
he relayed this information to Boothe in a return phone call. Reier advised Boothe to take out a COBR A policy to cover
his son’s medical expenses. Boothe testified that he wa s required to pay a p ro-rated po rtion of the $292.6 2 mo nthly
COBRA charges for the months of November and December 2000. Boothe further noted that he continued to pay
monthly COBRA premiums until he was hired at his new job in May 2001.



                                                          -7-
        On January 12, 2001, Boothe filed a Complaint for Breach of Contract against Fred’s.
Pursuant to this complaint, Boothe asserted that he “fully complied with all of his duties and
obligations as Chief Operating Officer,” and alleged that Fred’s failed to comply with the 90-day
written notice provision set forth in the Employment Agreement, governing termination with or
without cause. Boothe specifically alleged the following material breaches on behalf of defendant:

               a.. Defendant has failed to continue to pay plaintiff his annual base
               rate of compensation of One Hundred Forty Thousand Dollars
               ($140,000.00).

               b. Defendant has failed to provide plaintiff and his family the same
               benefits to which other executives and their families are entitled as
               employees of the company, including health insurance benefits, life
               insurance benefits, vacation, and use of company automobile.

               c. Defendant has failed to recognize plaintiff’s entitlement to an
               annual minimum bonus of Twenty Thousand Dollars ($20,000.00) for
               the remaining term of the contract.

               d. Defendant has failed and refused to provide or allow plaintiff to
               purchase and/or exercise his rights pursuant to certain Incentive Stock
               Option Agreements and Restricted Stock Award Agreements as
               incorporated in plaintiff’s Employment Agreement and for which
               plaintiff is a party to said contracts with defendant.

               e. Defendant has breached its contract with plaintiff by failing and
               refusing to pay plaintiff his salary which was earned prior to the
               attempted termination and continuing through the date that defendant
               formally tendered plaintiff a written notice of termination in early
               January, 2001.

Based on these allegations of breach, Boothe sought damages to include payment of his annual base
rate of compensation and annual minimum bonus, continuation of company benefits, including
health insurance, an “award of any and all qualified stock options to which [Boothe] is entitled under
the Stock Option Agreements and Restricted Stock Award Agreements,” punitive damages, and
reasonable attorney’s fees.


        Fred’s filed an Answer on February 13, 2001 seeking dismissal of plaintiff’s Complaint to
the extent that it inappropriately sought punitive and exemplary damages in an action for breach of
contract. On June 12, 2001, Fred’s filed an Amended Answer admitting that Hayes invited Boothe
to “contact the company’s attorney to discuss issues related to his severance,” and raising allegations
that “Plaintiff secretly tape recorded conversations with members of management in violation of


                                                 -8-
express company policy of which the Plaintiff was aware and that such secret tape recording
constitutes “cause” for termination as defined in the Plaintiff’s employment agreement.” In support
of these allegations, defendant attached the Affidavit of Michael Hayes, in which Hayes stated:

                 I have been advised by my counsel that during November 2000
                 shortly before Mr. Boothe’s discharge from employment, he tape
                 recorded five separate conversations had with either me or John
                 Reier. Mr. Boothe did not have permission to tape record any
                 conversation with me nor any conversation with Mr. Reier. Had I
                 been made aware of the fact that Mr. Boothe was tape recording our
                 conversations regarding his work performance, I would have
                 immediately terminated his employment for misconduct.

        On November 20, 2001, Fred’s filed a Motion for Summary Judgment, seeking judgment as
a matter of law on the basis that plaintiff’s conduct in tape recording conversations constituted cause
for termination.8 Defendant further asserted that Boothe “committed acts of negligence in the
performance of his employment duties and which amount to violation of his duty of loyalty to the
company. As a matter of law, such conduct amounts to cause for termination as defined by the
Plaintiff’s employment agreement.”

       On January 17, 2002, Fred’s filed a Motion to Strike Boothe’s claim for punitive damages.
That same day, plaintiff filed his own affidavit, setting forth the following assertions of fact:

                         10. On or about November 20, 2000, I met with Mr. Hayes
                 and John Reier, President of the defendant. At that time, Mr. Hayes
                 indicated that I had two choices: take the new position (demotion) or
                 leave the company and “we” would reach a “fair settlement.”

                          11. When I refused to accept the demotion, Mr. Hayes
                  immediately terminated my employment with the company. He
                  further instructed me to meet with the company attorney, Sam
                  Chafetz, to “work out the details of my severance package.”

                         12. On or about November 23, 2000, John Reier called me at
                  my home and indicated that if I did not accept the severance package
                  that had been discussed (which was far less than I was entitled to
                  under my Employment Agreement), then he believed Mr. Hayes



        8
           Boothe justified his conduct with the assertion that the tape recorded conversations took place after the
defendant had alread y “engaged in a scheme to defraud plaintiff of his rights under the Emplo yment Agreement.”
Mo reover, Boothe denied knowledge of the defendant’s policy prohibiting unauthorized tape recordings, and further
challenged defendant’s assertion that plaintiff would have b een fired for such cond uct.

                                                        -9-
               would pursue the “for cause” provision in the Employment
               Agreement.

                      13. At no time during this meeting with Mr. Hayes and Mr.
               Reier or during any prior meetings, did either individual state that I
               was being terminated “for cause” as that term is used in my
               Employment Agreement.

                       14. Further, during one of the meetings in November, 2000,
                Mr. Hayes acknowledged that the defendant was not attempting to
                invoke the “for cause” section of the Employment Agreement.

                       15. It was not until I received the written Notice of
                Termination letter dated January 8, 2001, from the president of the
                company, John Reier, that I learned for the first time that the
                defendant was alleging I had violated my “duty of loyalty” to the
                company. The Employment Agreement requires written notice of
                termination to effectively terminate employment.

        In February 2002, Fred’s filed a Motion for Interlocutory Appeal seeking application of the
doctrine of after acquired evidence for the purposes of establishing misconduct on behalf of Boothe
for the unauthorized tape recording of several conversations. On February 15, 2002, the trial court
entered an Order denying Fred’s Motion for Summary Judgment. Soon thereafter, the trial court
entered a second Order denying Fred’s Motion for Interlocutory Appeal.

       On February 18, 2002, the parties entered a Stipulation conceding that Boothe’s February 1,
1998 Employment Agreement was written and prepared by defendant. A non-jury trial was held
from February 18, 2002 through February 28, 2002. On April 16, 2002, the trial court filed its
Findings of Fact and Conclusions of Law.

        The trial court found that Boothe was terminated for cause and further determined that
plaintiff “committed acts of “misconduct and/or negligence in the performance of the duties of his
employment” as those terms are used in the Employment Agreement dated February 1, 1998.”
Despite this ruling, the trial court found that Boothe did not violate his duty of loyalty to Fred’s, and
thereby concluded that defendant failed to give the required 90-day written notice of termination for
“cause due to reasons other than breach of duty of loyalty.” In addition to these holdings, the court
found that Boothe was an employee of Fred’s through April 9, 2001, as the 90-day termination
period did not begin until January 9, 2001, the date written notice was first received.

        The trial court further determined that Boothe’s annual salary was $140,000.00, and that no
salary or benefits were received after November 20, 2000. The court calculated plaintiff’s salary
award at $54,055.55, covering his salary for the time period spanning November 20, 2000 through
April 9, 2001. With regard to other benefits and compensation entitlements, the court found:


                                                  -10-
       8. That plaintiff is entitled to reimbursement of his health
insurance premiums which he paid in the amount of $292.63 per
month for COBRA coverage plus partial payment for coverage for the
month of November, 2000 in the amount of $97.54, and partial
payment through April 9, 2001 in the amount of $87.78, for a total
award of $1,355.84.

        9. That the plaintiff cannot exercise Incentive Stock Option
Agreement dated February 2, 1998 because the Court finds that the
defendant failed to achieve its plan for the third year of the grant
(target earnings per share of $1.28 for the fiscal year 2000 at the time
this Option Agreement was granted).

         10. That having found that plaintiff continued to be an
employee of the defendant until April 9, 2001, the restrictions on the
shares of stock awarded by the Restricted Stock Award of February
28, 1996 lapsed and plaintiff’s rights to those shares vested. After the
three stock splits which took place after the said Restricted Stock
Award was granted, said grant now is for 4,099 shares and plaintiff
is entitled to these shares pursuant to the Restricted Stock Award
Agreement.

        11. That plaintiff is entitled to the dividends issued from the
Restricted Stock Award Agreement since November 20, 2000.

         12. That plaintiff was an employee of the company at the time
the first third of the shares represented by the Incentive Stock Option
Agreement granted March 2, 2000 vested. That the company made
its “plan” for fiscal year 2000 under the 2000 Plan, and the plaintiff’s
“plan” was the same as the company “plan” for fiscal year 2000 under
the 2000 Plan. Further, after adjusting for the two stock splits which
occurred after the plan was put into effect, the plaintiff would be
entitled to exercise this Incentive Stock Option to purchase up to a
total of 8,124 shares at the new exercise price of $7.92 per share.

******************************************************

       15. That the plaintiff was a participant under the “2003 Key
Employee Incentive Plan.” That the plaintiff was entitled to a
separate bonus pursuant to [this plan] in lieu of the minimum annual
bonus of $20,000 set forth in the Employment Agreement of Edwin
Boothe. For the year 2000, defendant achieved its corporate goal as



                                 -11-
               set forth in said Plan, entitling plaintiff to 26 bonus pool plan “points”
               which entitled plaintiff to a bonus of $52,000.

                       16. That the plaintiff is not entitled to attorney fees as set forth
               in the Employment Agreement for having to initiate this litigation to
               enforce the terms of this Agreement because the Court finds both
               parties to be in breach of the Employment Contract.

      Upon entry of the trial court’s Findings of Fact and Conclusions of Law, both parties filed
motions seeking discretionary costs. Additionally, Boothe filed a Motion for Prejudgment Interest.
On May 15, 2002, the trial court entered an Order on Judgment, providing in pertinent part:

               The Court having heard all of the evidence of the parties, examined
               the exhibits introduced in trial, and having heard arguments of the
               parties, and from the entire record in the cause, finds that the
               defendant breached the notice of termination provisions in the
               Employment Agreement with plaintiff and that plaintiff, Edwin
               Boothe, is entitled to damages of $54,055.55 representing past-due
               salary, $1,355.84 for reimbursement of health insurance premiums,
               and to an additional sum of $52,000.00 representing plaintiff’s bonus
               for fiscal year 2000 which was earned by plaintiff but not paid by
               defendant.

                     Further, the Court holds that the plaintiff is awarded a
               judgment for 4,099 shares of stock pursuant to the Restricted Stock
               Award dated February 28, 1996.

                       Further, plaintiff is entitled to the dividends from the 4,099
               shares of stock from the Restricted Stock Award dated February 28,
               1996 through the entry of this Order and is awarded judgment in the
               total amount of $737.82, and such additional dividends as may
               accrue.

                       Further, the Court awards plaintiff a judgment holding the
               plaintiff is entitled to exercise the Incentive Stock Option Agreement
               granted March 2, 2000 to purchase the first one-third of the shares
               awarded up to a total of 8,124 shares at the exercise price of $7.92 per
               share.

That same day, the court filed an Order denying Boothe’s motions for prejudgment interest and
discretionary costs, and further denying defendant’s motion for discretionary costs.




                                                  -12-
        Fred’s filed a Notice of Appeal and moved for entry of an order staying execution of the trial
court’s May 15, 2002 judgment pending appeal. On appeal, Fred’s presents the following issues for
review, as quoted from defendant’s brief:

               1. Did the trial court err in concluding that the Plaintiff did not violate
               the duty of loyalty set forth in the employment agreement sued upon?

               2. Did the trial court err in denying summary judgment to the
               Defendant by declining to consider after acquired evidence of
               misconduct and breach of duty of loyalty to establish cause for
               termination of the employment agreement?

               3. Did the trial court err in finding and concluding that the Plaintiff
               was an “employee” of the Defendant through April 9, 2001?

               4. Did the trial court err in finding and concluding that the Plaintiff
               is entitled to be granted the shares of stock and dividends awarded in
               the Restricted Stock Award Agreement of February 28, 1996?

               5. Did the trial court err in finding and concluding that the Plaintiff
               is entitled to exercise an option to purchase one-third of the shares
               granted in the Incentive Stock Option Agreement of March 2, 2000?

               6. Did the trial court err in concluding that Plaintiff was entitled to
               payment of salary and reimbursement of COBRA insurance
               premiums through April 9, 2001?

               7. Did the trial court err in finding and concluding that the Plaintiff
               was entitled to a salary bonus of $52,000.00 for his work performance
               during the year 2000?

Plaintiff Boothe asserts two additional issues for review, as quoted from his brief:

               Whether the trial court erred in holding that Boothe was terminated
               by Defendant for cause.

               Whether the trial court erred in denying an award of attorney’s fees
               to Boothe as the prevailing party as set forth in the Employment
               Agreement.

       Since this case was tried by the trial court sitting without a jury, we review the case de novo
upon the record with a presumption of correctness of the findings of fact by the trial court. Unless



                                                  -13-
the evidence preponderates against the findings, we must affirm, absent error of law. See Tenn. R.
App. P. 13(d).

                                                 I.

        Recognizing that the issues presented by defendant and plaintiff regarding “cause for
termination” and “breach of duty of loyalty” are both tied to an interpretation or analysis of the
termination provisions and definitions contained within the Employment Agreement, we will
consider these issues as separate parts to a single question. Beginning with plaintiff’s issue of
whether the trial court erred in holding that defendant had cause to terminate Boothe from his
position as Chief Operating Officer, we find that the evidence in the record support’s the court’s
ruling that plaintiff was negligent in the performance of the duties of his employment.

        Section 5(a) of the Employment Agreement provides that the agreement can be terminated
by either party for cause. “Cause” is defined in section 5(e) to include:

               (i) conviction for a felony;
               (ii) refusal to perform the duties of [executive’s] employment;
               (iii) misconduct or negligence in the performance of the duties of
               [executive’s] employment; or
               (iv) violation of [executive’s] duty of loyalty to Company.

         The trial court determined that Fred’s was justified in dismissing Boothe for cause based on
its finding of negligence on plaintiff’s behalf. In his comments from the bench, the judge offered
several reasons in support of his finding of negligence or misconduct. The court noted that Boothe
was negligent in failing to expedite inventories of the Chattanooga and Hixson stores, or apprise
senior management of the missing inventory, despite knowledge of the problem as early as March
2000. The trial court admonished Boothe for allowing Hayes to discuss the company’s shrink
accruals with the Board of Directors at the August 2000 meeting without the full benefit of Boothe’s
knowledge of the escalating shrinkage problem. The court further found that Boothe was negligent
in his failure to inform Reier of the unreconciled Chattanooga and Hixson inventory until November
1, 2000, especially in light of Reier’s July 2000 evaluation of Boothe in which Reier commented that
plaintiff needed to make a concerted effort to keep management apprised of important business
developments. Finally, the court cited to several unrelated acts of negligence, including Boothe’s
failure to monitor the company’s supply account.

       The term negligence is not defined in plaintiff’s Employment Agreement. A common law
cause of action for negligence requires proof of the following elements:

               (1) a duty of care owed by the defendant to the plaintiff; (2) conduct
               falling below the applicable standard of care amounting to a breach
               of that duty; (3) an injury or loss; (4) causation in fact; and (5)
               proximate or legal cause.


                                                -14-
Roe v. Catholic Diocese of Memphis, Inc., 950 S.W.2d 27, 31 (Tenn. Ct. App. 1996) (citing
McClenahan v. Cooley, 806 S.W.2d 767, 774 (Tenn. 1991)).

Although the case at bar does not involve a common law negligence action, we find that the above
factors are nonetheless applicable to defendant’s argument that Boothe breached the Employment
Agreement by engaging in negligent conduct.
        Considering first the element of duty of care, we note that Section 2 of the Employment
Agreement generally defines the scope of Boothe’s duties as Chief Operating Officer of Fred’s.
Section 2 states in pertinent part:
                        As COO, Executive shall have and agrees to assume primary
               responsibility (subject at all times to the control of the Chief
               Executive Officer of the Company) for matters assigned to him by the
               Chief Executive Officer. In the performance of such duties,
               Executive agree to make available to Company all of his professional
               and managerial knowledge and skill and all of his gainful time in
               order to properly fulfill his duties.

        It is undisputed that in his role as Chief Operating Officer, Boothe had overall responsibility
for the performance of store operations, including a primary duty to protect the physical assets of the
company. Hayes testified that Boothe failed to protect the physical assets of the company, and that
such failure thereby constituted an act of negligence in breach of the Employment Agreement. Hayes
explained Boothe’s negligent conduct as follows:

                      Well, negligence was not properly supervising his personnel
               and seeing to it that the paperwork was being funneled to the financial
               department on the capital account. That’s one form of negligence.

                       In the case of this, not going back immediately with those
               store closes and instantly saying, okay, we have missing inventory
               here, the RIPs are showing me the inventory is gone. Going to the
               regional director and saying to the regional director, listen, I want all
               the inventories taken right now of the stores that we believe this
               inventory went to and walk over to the CFO and say take any
               overages and accrue them because we have this write-off that will
               surely occur. It’s another form of negligence.

                       Failing to follow specific directions, which he was more than
               capable of doing. I don’t know, it’s just plain misconduct and breach
               of duty of loyalty.

               Q:      And when you say failing to follow specific directions, you’re
               referring to?



                                                 -15-
               A:      I was giving two very, very specific directions. One, he knew
               how to go out and do an evaluation as to whether everything was on
               that report. He knew the district managers and regional managers had
               methodology of slowing down inventories, but the inventories had
               been taken so the information was there. It could be at the regional
               level. It could be at the district manager level, but it was there if you
               wanted to get it.

        Reier testified that he considered Boothe responsible for the “surprise” report of November
1, 2000 that plaintiff’s October 2000 shrink projection was inaccurate, and confirmed his belief that
Boothe had a significant role in the company’s escalating shrinkage. Moreover, Reier noted that
Boothe failed to comply with the industry “rule” that inventories are always taken of closed retail
stores before merchandise is transferred to another location. Had Boothe inventoried the stores in
compliance with the industry “rule,” Fred’s would have known how much inventory was in each
particular store, thereby avoiding unreconciled shrinkage. According to Reier, the unreconciled
shrinkage at the Chattanooga and Hixson stores forced Fred’s to substantially raise shrinkage
reserves or accruals, thereby cutting into the company’s profit margin.

         Boothe admitted that his primary goal as Chief Operating Officer was to control inventory
numbers in the retail stores, and that the only way to totally verify inventory is to take a physical
inventory of the merchandise in the store. Plaintiff further acknowledged that it is “business
practice” to reconcile inventory on closed stores within 60 to 90 days of the closing date. Boothe
testified that had he accelerated the inventories of the recipient stores, the increased shrinkage would
have been reported earlier, thereby ensuring a more accurate financial picture for the company. We
quote from Boothe’s cross examination testimony before the trial court:

               Q: And you have acknowledged, haven’t you, that if you did
               something wrong in your mind in this case, it’s that you didn’t set a
               priority to inventory those stores in the district where the goods were
               transferred from Chattanooga and Hixson?

                A: You mean to accelerate them?

                Q: Yes.

                A: Yes.

                Q: Had you accelerated those inventories into the first quarter of the
                year or the second quarter of the year, then this additional shortage
                problem would not have been reported in the third quarter?

                A: It would have been reported earlier, yes.



                                                 -16-
               Q: And you would have – had you reported it earlier, then you would
               have had a more accurate financial picture of what was going on in
               the company earlier in the year, true?

               A: Yes.

               Q: And I believe your words were that you hadn’t been on it to the
               extent you should have been, meaning to expedite those inventories,
               true?

               A: I don’t remember my exact words, but I did not expedite the
               inventories.

               Q: Well, I’ve heard the tapes, and if I tell you without playing the
               tapes that you said in the discussion with Mr. – in the November 14
               tape that the problem is the goods were transferred without
               inventories and that you hadn’t been on it to the extent you should
               have been, do you disagree with that statement?

               A: It was my responsibility to make sure everything in the stores was
               run within the guidelines.

        From the testimony in this case, it is apparent that Boothe, as Chief Operating Officer, had
a duty to protect and control the inventory in the retail stores. It is also apparent that Boothe had a
duty to provide an accurate account of the shrinkage problem to senior management, a duty plaintiff
breached by failing to expedite or perform inventories of recipient stores in accordance with Hayes’
directions.

       In breaching this duty, Boothe failed to notify Hayes or Reier of the fact that approximately
$500,000.00 (retail dollars) remained on the books of both the Chattanooga and Hixson stores.
Ultimately, Fred’s was forced to write-off roughly $400,000.00 in shrinkage, representing transferred
inventory that could not be located. This $400,000.00 write-off cut directly into the company’s
annual profit margin.

        Based on the above conclusions, we find that Boothe engaged in negligent conduct in direct
violation of his Employment Agreement. Boothe’s negligent conduct thereby provided defendant
with just cause for termination of plaintiff’s employment as Chief Operating Officer.

       Finding that Boothe was guilty of negligent conduct in breach of his Employment Agreement,
we must now consider defendant’s issue of whether the trial court erred in finding that plaintiff did
not breach his duty of loyalty to Fred’s.




                                                 -17-
       We begin by noting that the contract, as drafted by Fred’s, does not define the nature of
conduct that rises to a breach of duty of loyalty. Hayes explained breach of duty of loyalty as
follows:

                Q: Explain what you mean by breach of duty. Tell me how you
                consider Mr. Boothe to have breached any duty owed the company,
                or you, for that matter.

                A: Anybody who is an officer of a company, and particularly when
                you are the number two man or number three man in a company of
                9,000 employees, is held to a higher standard. There’s no question
                about that. When you talk about what does duty of loyalty mean,
                what it means is that you will preserve, protect, enhance the assets of
                a company. You will protect its reputation and you will follow out
                the legal orders of your supervisors.

                Q: How did Mr. Boothe fail you in those respects?

                A: He failed to follow directions. He failed to follow the orders that
                I gave him, all of which were legal. He did not protect the reputation
                of the company. He knew that I was giving information to the board
                of directors based upon the information he had given me.

                         The most defined thing that had occurred was that he was
                aware in March and April when we were going through the capital
                accounts, he was aware that this company had $400,000 worth of
                fictitious assets on the book, and he did nothing about it.

        Reier defined breach of duty of loyalty in his testimony as a duty “[t]o keep the company out
of harm’s way by informing everybody of certain circumstances that might disrupt the profitability
of the company or the legalities of the company or compromise it in any form or shape.”

         Based on this Court’s understanding and interpretation of traditional breach of duty of loyalty
situations, we are unable to accept the definitions and explanations put forth by Hayes and Reier in
their testimony before the trial court. We equate breaches of duty of loyalty with the acts of a traitor.
Traditional examples of breaches of loyalty duties in the employment context include acts of an
employee in direct competition with the financial, proprietary, or business interests of an employer,
thereby placing the personal interests of the employee before those of the employer, the sale or
distribution of employer’s protected trade secrets, and a myriad of other destructive acts amounting
to more than mere mistaken judgment or negligence. Breaches of loyalty are most often intentional,
destructive acts completed explicitly for the employee’s own self-interests, in direct violation or
competition with the interests of an employer.



                                                  -18-
        The explanations or definitions provided by Hayes and Reier are couched largely in terms
of negligence. Undoubtedly, Boothe, as Chief Operating Officer, had a duty to protect the assets,
financial interests, and reputation of the company. However, there is no evidence in the record to
indicate that Boothe intentionally placed his interests before those of the defendant in failing to
control, monitor, or report the escalating shrinkage. While it may be true that Boothe’s failure to
adequately perform these duties could have led to non-renewal of his Employment Agreement had
defendant been aware of his negligence in August 2000, we do not find sufficient evidence in the
record to indicate that Boothe intentionally withheld damaging information (i.e., escalating
shrinkage) for the purpose of ensuring renewal of his contract.

       Moreover, this Court is perplexed by the defendant’s decision to offer Boothe a new position
as Executive Vice President of real estate and distribution, considering the company’s allegations
that Boothe was disloyal to defendant. Acts of disloyalty, in this Court’s eyes, amount to the most
devastating and egregious violations of an employer’s trust. In light of the obvious severity of an
executive’s breach of duty of loyalty, we are unable to reconcile the defendant’s decision to offer
Boothe a new position rather than opt for immediate termination as permitted under the Employment
Agreement. For these reasons, we find that the trial court correctly held that Boothe did not violate
his duty of loyalty to Fred’s.

                                                   II.

        The next issue presented for review by defendant is the question of whether the trial court
erred in “denying summary judgment to the Defendant by declining to consider after acquired
evidence of misconduct and breach of duty of loyalty to establish cause for termination of the
employment agreement.” Having determined in the previous section that Fred’s had cause to
terminate Boothe on the basis of his negligent conduct, consideration of defendant’s issue hinges
solely on the question of whether the tape recordings made by plaintiff, in violation of company
policy, should have been considered as evidence sufficient to justify immediate termination for
breach of duty of loyalty.

        To briefly recount the pertinent procedural history, Fred’s first learned of the existence of the
secret tape recordings during discovery on Boothe’s breach of contract action. On June 12, 2001,
Fred’s filed an Amended Answer including the following affirmative defense:

                Pleading alternatively, the Defendant alleges that the Plaintiff secretly
                tape recorded conversations with members of management in
                violation of express company policy of which the Plaintiff was aware
                and that such secret tape recording constitutes “cause” for termination
                as defined in the Plaintiff’s employment agreement barring the
                Plaintiff from any recovery in this cause.

Fred’s was permitted to amend its original Answer to include the above “cause defense.” On
November 20, 2001, Fred’s filed a Motion for Summary Judgment, alleging in part:


                                                  -19-
                       The material undisputed facts show that the Plaintiff
               surreptitiously tape recorded conversations with members of
               Defendant’s executive management in violation of express company
               policy. As a matter of law, such conduct constitutes cause for
               termination as defined in his employment agreement.

The trial court denied defendant’s motion in an Order filed February 15, 2002, stating that the motion
was not “well-taken and should be denied.”


        On February 7, 2002, Fred’s filed a Motion for Interlocutory Appeal, appealing the trial
court’s Order denying defendant’s Motion for Summary Judgment. In support of this motion, Fred’s
noted that “[t]he determination to apply after acquired evidence to defeat a breach of contract claim
is a matter of first impression under Tennessee common law,” and further explained:

                      The trial court denied the Plaintiff’s Motion for Summary
               Judgment declining to permit the Defendant to introduce after
               acquired evidence of misconduct to defeat the Plaintiff’s breach of
               contract claim.

Defendant’s Motion for Interlocutory Appeal was subsequently denied by the trial court in an Order
filed February 18, 2002. All of these pleadings and orders were entered prior to trial.


        A motion for summary judgment should be granted when the movant demonstrates that there
are no genuine issues of material fact and that the moving party is entitled to a judgment as a matter
of law. See Tenn. R. Civ. P. 56.04. The party moving for summary judgment bears the burden of
demonstrating that no genuine issue of material fact exists. See Bain v. Wells, 936 S.W.2d 618, 622
(Tenn. 1997). On a motion for summary judgment, the court must take the strongest legitimate view
of the evidence in favor of the nonmoving party, allow all reasonable inferences in favor of that
party, and discard all countervailing evidence. See id. In Byrd v. Hall, 847 S.W.2d 208 (Tenn.
1993), our Supreme Court stated:

               Once it is shown by the moving party that there is no genuine issue
               of material fact, the nonmoving party must then demonstrate, by
               affidavits or discovery materials, that there is a genuine, material fact
               dispute to warrant a trial. In this regard, Rule 56.05 provides that the
               nonmoving party cannot simply rely upon his pleadings but must set
               forth specific facts showing that there is a genuine issue of material
               fact for trial.

Id. at 210-11 (citations omitted) (emphasis in original).



                                                 -20-
         Summary judgment is only appropriate when the facts and the legal conclusions drawn from
the facts reasonably permit only one conclusion. See Carvell v. Bottoms, 900 S.W.2d 23, 26 (Tenn.
1995). Since only questions of law are involved, there is no presumption of correctness regarding
a trial court’s grant of summary judgment. See Bain, 936 S.W.2d at 622. Therefore, our review of
the trial court’s grant of summary judgment is de novo on the record before this Court. See Warren
v. Estate of Kirk, 954 S.W.2d 722, 723 (Tenn. 1997).

       The doctrine of newly discovered evidence provides:

                       Generally, in order for a party to obtain a new trial based on
               newly discovered evidence, it must be shown that the evidence was
               discovered after the trial, that it could not have been discovered
               earlier with due diligence, that it is material and not merely
               cumulative or impeaching, and that the evidence will probably change
               the result if a new trial is granted. 20 Tennessee Jurisprudence, New
               Trials §§ 6, 7, 8, 9 and 10.

Estate of Hamilton v. Morris, 67 S.W.3d 797, 797-98 (Tenn. Ct. App. 2001) (quoting Crain v.
Brown, 823 S.W.2d 187, 192 (Tenn. Ct. App. 1991)).

In the instant case, defendant relied upon the newly discovered evidence of the tape recorded
conversations, not for the purpose of obtaining a new trial, but rather as the basis for a summary
judgment motion seeking judgment as a matter of law with regard to Boothe’s breach of contract
action. Therefore, because the original trial in this matter had yet to commence, we find that the
doctrine of newly discovered evidence is inapplicable to the situation at bar. However, because
Fred’s made all reasonable efforts to introduce claims and defenses based upon this evidence prior
to trial, we find it necessary to consider whether the trial court properly refused to consider the tape
recorded conversations.

        The evidence is undisputed that Boothe tape recorded several conversations with both Hayes
and Reier, without authorization or the necessary prior approval, and in direct violation of company
policy. On November 30, 1992, Fred’s instituted the following policy prohibiting unauthorized tape
recordings:

                               RECORDING CONVERSATIONS

                No employee is permitted to record and/or tape an in-person
                conversation and/or telephone conversation of any other employee
                without his/her permission unless approved in writing by one of the
                Executive Vice Presidents and the Director of Personnel and the
                General Counsel.

                Violation of this policy will result in immediate dismissal.


                                                 -21-
      Defendant’s argument in favor of consideration of the recorded evidence is premised on the
company’s belief that violation of established company policy constitutes a breach of duty of loyalty.
Defendant’s assertion is best summarized in the following passage from its brief:

                  The Plaintiff owed a duty of loyalty to the Defendant to not violate its
                  policies precluding the secret tape recording of conversations taking
                  place at work. However, even absent a policy expressly precluding
                  secret tape recording, under no set of circumstances could the
                  Plaintiff be said to have acted out of loyalty to the Defendant when
                  tape recording the president and its chief executive officer in
                  discussions over Plaintiff’s job performance. Here again the Plaintiff
                  placed his self interest ahead of the Company’s interests.

        For the following reasons, we find that the trial court did not err in declining to consider the
tape recorded conversations as evidence of misconduct and breach of duty of loyalty. We begin by
noting that the trial court did not offer any explanation for his refusal to consider evidence of the tape
recorded conversations. Regardless, we find no case law to support defendant’s base assertion that
violation of established company policy necessarily constitutes a breach of duty of loyalty.
Moreover, it is apparent that Boothe’s motives for tape recording his conversations with Hayes and
Reier were to protect against possible future misrepresentations, and not to use such evidence to
blackmail, harass, or injure defendant. In his brief, Boothe advances the following explanation for
his actions:

                          The purpose of the tapes was to prevent defendant from
                   misrepresenting or even lying about defendant’s grounds for
                   terminating plaintiff.... The tapes eliminated any such possibility that
                   Hayes or Reier would stray from the truth.

                          Plaintiff submits the trial court correctly observed that all Mr.
                   Boothe was attempting to do was protect himself in the future if the
                   company attempted to claim it was not obligated under Mr. Boothe’s
                   employment contract. There is no evidence in the record that the
                   tapes were shared with any other employee of the company, nor did
                   they cause loss or harm to Fred’s.9

       Under the specific facts of this case, we find that Boothe’s motives for tape recording
conversations with company officials, and his subsequent acts of taping such conversations, do not
amount to a breach of duty of loyalty. While this Court certainly does not condone plaintiff’s



         9
          W e note that the trial court, in responding to plaintiff counsel’s stated intent to ask Boothe about his motives
for making the tape recordings, determined that at that point in trial, testimony regarding Boothe’s motives did not appear
relevant.

                                                          -22-
conduct, we note that Boothe was motivated purely by a desire to protect against the potential of
future misrepresentations, and not to infringe upon or interfere with the rights of defendant.

         Additionally, we recognize that defendant’s summary judgment motion, and Hayes’s
Affidavit in support of said motion, both fail to explicitly assert that Boothe’s acts of tape recording
conversations with company officials constituted a breach of duty of loyalty. Defendant’s motion
alleges that Boothe’s conduct constituted cause for termination as defined in the employment
agreement, but fails to delineate whether this conduct constitutes misconduct or a breach of duty of
loyalty. Despite defendant’s failure to specify whether Boothe’s conduct amounted to misconduct
or breach of duty of loyalty, Hayes, in his affidavit, stated that “[h]ad I been aware of the fact that
Mr. Boothe was tape recording our conversations regarding his work performance, I would have
immediately terminated his employment for misconduct.” (emphasis added). In recognition of
Hayes’s statement and defendant’s failure to explicitly assert a breach of duty of loyalty claim with
regard to the acts of tape recording, we conclude that defendant originally intended to introduce the
tapes as evidence of misconduct rather than breach of duty of loyalty. As there is sufficient evidence
in the record to support a finding of cause for termination on the basis of negligence, we find that
the trial court did not err in refusing to consider further evidence of misconduct.

        Moreover, we find that the following allegation from defendant’s summary judgment motion,
specifically asserting that Boothe’s “negligent” conduct amounted to a breach of duty of loyalty,
supports our finding that defendant did not originally base its theory of breach of duty of loyalty on
Boothe’s “surreptitious” tape recordings:

                The material undisputed facts show that the Plaintiff committed acts
                of negligence in the performance of his employment duties and which
                amount to violation of his duty of loyalty to the company. As a
                matter of law, such conduct amounts to cause for termination as
                defined by the Plaintiff’s employment agreement.

       We therefore find that the trial court did not err in refusing to consider the tape recordings
as evidence of plaintiff’s alleged breach of duty of loyalty.

                                                  III.

         The third issue for review is the question of whether the trial court erred in finding that
Boothe was an employee of Fred’s through April 9, 2001. The trial court arrived at the April 9, 2001
termination date by counting 90 days from January 9, 2001, the date Boothe received written notice
of his termination for cause. Defendant asserts that the Employment Agreement, as drafted, dictates
that Boothe’s date of termination was November 20, 2000 - Boothe’s final “active” day of
employment.

       “A determination of the parties’ written intent in a written contract is a question of law
resolved by examining the four corners of the contract and the circumstances at the time of


                                                 -23-
contracting.” BVT Lebanon Shopping Center, Ltd. v. Wal-Mart Stores, Inc., 48 S.W.3d 132, 135
(Tenn. Ct. App. 2001) (citing Realty Shop, Inc. v. RR Westminster Holding, Inc., 7 S.W.3d 581,
597 (Tenn. Ct. App. 1999); Gredig v. Tenn. Farmers Mut. Ins. Co., 891 S.W.2d 909, 912 (Tenn.
Ct. App. 1994)). In Warren v. Metro. Gov’t of Nashville & Davidson County, 955 S.W.2d 618
(Tenn. Ct. App. 1997), we discussed the role of a Court in interpreting a contract:

                 Courts are to interpret and enforce the contract as written, according
                 to its plain terms. Petty v. Sloan, 197 Tenn. 630, 277 S.W.2d 355,
                 358 (1955); Home Beneficial Ass’n v. White, 180 Tenn. 585, 177
                 S.W.2d 545, 546 (1944). We are precluded from making new
                 contracts for the parties by adding or deleting provisions. Cent.
                 Adjustment Bureau, Inc. v. Ingram, 678 S.W.2d 28, 37 (Tenn.
                 1984); Shell Oil Co. v. Prescott, 398 F.2d 592 (6th Cir. 1968). When
                 clear contract language reveals the intent of the parties, there is no
                 need to apply rules of construction. An ambiguity does not arise in
                 a contract merely because the parties may differ as to interpretation
                 of certain of its provisions. Oman Construction Co. v. Tennessee
                 Valley Auth., 486 F. Supp. 375 (M.D. Tenn. 1979). A contract is
                 ambiguous only when it is of uncertain meaning and may fairly be
                 understood in more ways than one; a strained construction may not be
                 placed on the language used to find an ambiguity where none exists.
                 Empress Health and Beauty Spa, Inc. v. Turner, 503 S.W.2d 188,
                 190-91 (Tenn. 1973). We are to consider the agreement as a whole
                 in determining whether the meaning of the contract is clear or
                 ambiguous. Gredig v. Tenn. Farmers Mut. Ins. Co., 891 S.W.2d
                 909, 912 (Tenn. Ct. App. 1994). If a contract is plain and
                 unambiguous, the meaning thereof is a question of law for the court.
                 Petty v. Sloan, 277 S.W.2d at 358.

Id. at 622-23.


       Section 5(a) of the Employment Agreement states:

                 This Agreement shall continue unless and until terminated, (i) with
                 or without cause, by written notice of termination as provided in
                 Section 1 above, (ii) by either party for cause, upon not less than
                 ninety (90) days prior written notice to the other (except that such
                 notice of termination may be (x) effective immediately in the case of
                 termination by Company for acts of Executive involving moral
                 turpitude or breach of duty of loyalty, or (y) effective in ten (10) days
                 in the case of termination by Executive for cause, or (iii) as otherwise
                 provided herein.


                                                   -24-
(emphasis added).

         Based on our reading of the plain language of the above provision, we find that the trial court
did not err in concluding that Boothe’s final date of termination was April 9, 2001. The plain
language of Section 5(a) provides that Boothe’s Employment Agreement “shall continue unless and
until terminated ... by either party for cause, upon not less than (90) days prior written notice to the
other.” (emphasis added). The evidence is undisputed that Boothe did not receive written notice of
his termination until January 9, 2001. Because the plain language of Section 5(a) requires 90 days
prior written notice of termination for cause, we are unable to agree with defendant’s proposed
termination date of November 20, 2000. Rather, we find that the termination provision of the
Employment Agreement was not triggered until Boothe’s receipt of written notice of termination on
January 9, 2001. Counting 90 days from this date, the trial court correctly set Boothe’s termination
date as April 9, 2001.

         To briefly address defendant’s argument that Boothe’s “active employment” with Fred’s
ended November 20, 2000, we note that the mere fact that Boothe ceased having any authority to
perform the duties or responsibilities of Chief Operating Officer as of November 20, 2000 does not
necessitate a finding that plaintiff’s employment was terminated on this date. Section 2 of the
Employment Agreement states that the responsibilities assigned to Boothe as Chief Operating
Officer are subject “at all times” to the control of the Chief Executive Officer. Therefore, pursuant
to this provision, Hayes was empowered to reduce or eliminate Boothe’s duties and responsibilities
as he saw fit, without terminating employment. For this reason, we find that the mere fact that
Boothe’s authority to act on behalf of defendant as Chief Operating Officer was revoked on
November 20, 2000, is not dispositive of the issue of whether he was an employee of defendant from
November 20, 2000 through April 9, 2001.

                                                  IV.

      Fred’s next presents several issues for review regarding plaintiff’s entitlement to certain
compensation and benefits.

                   A. Restricted Stock Award Agreement of February 28, 1996

       The first related issue is the question of whether the trial court erred in finding that Boothe
was “entitled to be granted the shares of stocks and dividends awarded in the Restricted Stock Award
Agreement of February 28, 1996.”

        Introduced as an exhibit at trial, the Restricted Stock Award Agreement (“RSAA”) granted
to Boothe “a conditional award (the “Award”) of 1,750 shares of no par value common stock of the
Company (the “Shares”), subject in all respects to the terms, definitions and provisions of this
agreement (the “Agreement”) and the 1993 LONG-TERM INCENTIVE PLAN (the “Plan”)
adopted by the Company which is incorporated herein by reference.” (emphasis supplied). Under
the terms of the RSAA, the shares granted by the award are deposited with the company until the


                                                 -25-
restrictions governing the grant expire, lapse, or are removed. The RSAA contains the following
pertinent restrictive clauses:

               (b) The Shares shall be forfeited to the Company, and all rights of the
               Grantee to such Shares shall terminate without any payment, if the
               Grantee fails to remain continuously as an employee of the Company
               until the Restrictions lapse for any reason other than (i) Termination
               Without Cause (as defined), or (ii) by reason of any other
               circumstances the Committee may, in its discretion, find acceptable.


               (c) As used herein, “Termination Without Cause” shall mean the
               cessation of the Grantee’s employment with the Company for any
               reason (including, without limitation, by reason of death) other than
               (i) conviction for a felony, (ii) refusal to perform the duties of the
               Grantee’s employment, (iii) misconduct or negligence in the
               performance of the duties of the Grantee’s employment, or (iv)
               violation of the Grantee’s duty of loyalty to Company.

       Fred’s 1993 Long-Term Incentive Plan provides in pertinent part:

               (d) Lapse of Restrictions. The restricted stock agreement shall
               specify the terms and conditions upon which any restriction upon
               restricted stock awarded under the Plan shall expire, lapse, or be
               removed, as determined by the Committee. Upon the expiration,
               lapse, or removal of such restrictions, Shares free of the restrictive
               legend shall be issued to the grantee of [sic] his legal representative.


        Section 2 of the RSAA sets the restriction date on all shares covered by the RSAA as the
“fifth anniversary of the date of grant set forth below....” The date of grant is listed in the RSAA as
February 28, 1996. Therefore, according to the terms of the RSAA, the restriction period ended, and
the restrictions contained therein subsequently lapsed, on February 28, 2001.

       Defendant’s argument challenging the trial court’s award of shares to Boothe pursuant to the
RSAA hinges primarily on the assertion that the trial court improperly “superimposed” the
termination provisions of Boothe’s Employment Agreement onto the RSAA. Specifically, defendant
maintains that the trial court erred in applying the April 9, 2001 termination date to the RSAA, where
the Employment Agreement neither references nor incorporates the RSAA. On the basis of this
argument, defendant contends that the RSAA should be read alone, and not in conjunction with an
Employment Agreement executed two years after implementation of the stock award agreement.
       We find defendant’s argument unpersuasive. First, we note that there is no indication in the
Employment Agreement, RSAA, or the 1993 Long-Term Incentive Plan, that an employee’s date of


                                                 -26-
termination, and specifically Boothe’s date of termination, is automatically deemed to be the
employee’s final “active day” of employment. Second, we find that the Employment Agreement
expressly governed Boothe’s employment, and thus the termination of plaintiff’s employment.
Neither the RSAA or the 1993 Long-Term Incentive Plan include any provisions regarding the
calculation of an employee’s termination date. Thus, the trial court correctly relied upon the
Employment Agreement in setting plaintiff’s termination date.

        For the above reasons, we find that the trial court correctly concluded that Boothe was
entitled to an award of 4,099 shares of stock pursuant to the Restricted Stock Award dated February
28, 1996, and to “the dividends from the 4,099 shares of stock from the Restricted Stock Award
dated February 28, 1996 through the entry of this Order and is awarded judgment in the total amount
of $737.82, and such additional dividends as may accrue.”

                     B. Incentive Stock Option Agreement of March 2, 2000

       Fred’s next asserts that the trial court erred in finding that Boothe was entitled to “exercise
an option to purchase one-third of the shares granted in the Incentive Stock Option Agreement of
March 2, 2000.” Defendant specifically objects to the trial court’s award on the following grounds:
(1) Boothe was not an employee of Fred’s on March 2, 2001 as required by the Incentive Stock
Option Agreement (“ISO”); (2) Boothe did not achieve his personal plan for fiscal year 2000; and
(3) Boothe was terminated “for cause,” warranting immediate termination pursuant to the terms of
the ISO.

        Under the ISO, Boothe was granted an option to “purchase a total of 13,000 shares of no par
value Class A common stock of the Company (the “Shares”), at the price determined as provided
herein, and in all respects subject to the terms, definitions and provisions of the 1993 LONG-TERM
INCENTIVE PLAN (the “Plan”)....” (emphasis supplied). The ISO set the option price as $15.00
per share, and mandated that the option to purchase shall be exercisable pursuant to the following
conditions:

               4. Extent of Exercise. This Option shall be exercisable to the extent
               of 1/3 of the Shares covered hereby on or after March 2, 2001 if the
               Grantee is still employed by the Company and has achieved his/her
               plan for the fiscal year and if the Company earned for its fiscal year
               net income per share (as reported in the Company’s audited
               consolidated statements of income) of at least $1.16....

       Section 5 of the ISO contains the following restrictions on exercise:

               5. Restrictions on Exercise. This Option may not be exercised if the
               issuance of such Shares upon such exercise would constitute a
               violation of any applicable federal or state securities laws or other law
               or regulation. Further, this Option may not be exercised if the


                                                 -27-
               Optionee has been terminated by the Company for any “Termination
               For Cause” reasons which include but are not limited to (i) conviction
               of a felony, (ii) refusal to perform the duties of the Optionee’s
               employment, (iii) misconduct or negligence in the performance of the
               duties of the Optionee’s employment, (iv) violation of the Optionee’s
               duty of loyalty to the Company, or etc...

Section 13 of the ISO sets forth the defendant’s rights with regard to termination of employment
under this stock agreement:

               13. Rights to Terminate Employment. Nothing in the Plan or in this
               Agreement shall confer upon any person the right to continue in the
               employment of the Company or affect any right which the Company
               may have to terminate the employment of such person except as
               follows:

                      (a) The Company covenants with the Optionee that any
               termination of the Optionee’s employment by the Company shall
               require one (1) month’s notice by the Company to the Optionee
               except in cases of “For Cause” termination which will result in
               immediate termination.

(emphasis added).

         The trial court specifically held that Boothe was “entitled to exercise the Incentive Stock
Option Agreement granted March 2, 2000 to purchase the first one-third of the shares awarded up
to a total of 8,124 shares at the exercise price of $7.92 per share.” Based on our reading of the plain
language of Sections 4, 5, and 13 of the ISO, we find that the trial court erred in concluding that
Boothe was entitled to exercise his option to purchase the first one-third of shares granted by the
ISO. Unlike the RSAA and the Employment Agreement, the ISO explicitly provides that “for cause”
termination will result in immediate termination of the employee. Under the ISO, no notice is
required where an employee is terminated for cause. Therefore, for purposes of the ISO only,
Boothe’s date of termination would be calculated as November 20, 2000. For this reason, we find
that Boothe was not an employee of Fred’s under the ISO on March 2, 2001, and therefore not
entitled to exercise his option pursuant to this agreement.

                           C. Salary and COBRA Insurance Premiums

       The next issue presented for review is the question of whether the trial court erred in
“concluding that [Boothe] was entitled to payment of salary and reimbursement of COBRA
insurance premiums through April 9, 2001.”

       Section 3 of the Employment Agreement governed Boothe’s compensation and benefits
package as Chief Operating Officer, providing:

                                                 -28-
                       As compensation for all of the services to be performed
               hereunder, Company agrees to pay and Executive agrees to accept an
               annual base salary of $120,000, which shall be reviewed annually and
               shall be subject to upward adjustment from the aforesaid level at the
               discretion of the Board of Directors of Company.... Company will
               make available to Executive such benefits on the same terms as are
               or shall be granted or made available by Company to its other
               executive employees, to the extent that Executive shall become
               qualified or eligible for such employee benefits....

Under Section 5(c):

                       If, during any term of this Agreement, Company terminates
               this Agreement for any reason, or Executive terminates this
               Agreement, retires or dies, whether at or prior to the end of the Initial
               or any Additional Term, then and in that event, the sole payments to
               which Executive, his heirs, legatees and legal representatives shall be
               entitled shall be payment to Executive of the compensation herein
               provided (i.e., base salary and any minimum bonus) prorated to the
               date of such termination, and thereafter Company shall have no
               further obligations or liabilities hereunder, except as provided in
               subsection (d) below as to certain terminations hereunder.

Section 5(d) provides that pay and benefits will not be extended past the date of termination for
executives terminated for cause.

        As ruled, with respect to the Employment Agreement, Boothe remained an employee of
Fred’s through April 9, 2001. Therefore, in accordance with Section 5(c) we find that the trial court
correctly held that Boothe was entitled to payment of his salary prorated to the date of termination,
April 9, 2001.

        With regard to Boothe’s entitlement to reimbursement of COBRA premiums paid from
November 2000 through April 9, 2001, we find that Section 3 of the Employment Agreement
entitled Boothe to insurance benefits for the life of his employment with Fred’s, so long as he met
the qualifications for such benefits. The crux of defendant’s objection is that Boothe was not
qualified to receive insurance benefits because he ceased being an employee as of November 20,
2000. However, because we have already found that Boothe was an employee of Fred’s until April
9, 2001, we find that plaintiff is entitled to reimbursement for all COBRA premiums paid from
November 2000 through April 9, 2001.

                                     D. Annual Salary Bonus




                                                 -29-
        Defendant’s final issue on appeal is the question of whether the trial court erred in
“concluding that [Boothe] was entitled to a salary bonus of $52,000.00 for his work performance
during the year 2000.” Defendant’s specifically objects to the trial court’s award as “inconsistent,”
noting that it was illogical for the court to reward plaintiff with payment of a full salary bonus for
a performance year that led to his termination “for cause,” especially in light of the fact that Hayes
cut his own bonus by roughly eighty percent for his role in the company’s shrinkage problem.

        Section 3 of the Employment Agreement provides that Boothe shall be paid a minimum
bonus of $20,000.00 for the first three twelve-month periods under the agreement. After the
expiration of the initial three-year period, the Employment Agreement dictates that Boothe shall be
considered for bonus awards on the same basis as other executives.

       In March 2000, Fred’s introduced the 2003 Key Employee Incentive Plan (“Incentive Plan”).
Boothe was selected as a participant in this plan. The trial court found that, as a participant, Boothe
was entitled to a “separate bonus pursuant to [the Incentive Plan,] in lieu of the minimum annual
bonus of $20,000 set forth in the Employment Agreement of Edwin Boothe.” Under the Incentive
Plan, bonuses were awarded for fiscal year 2000 only if Fred’s met its corporate goal of $1.16
earnings per share (“EPS”) for the year. Boothe was awarded 26 bonus pool plan points for fiscal
year 2000. In March 2000, these points were valued at approximately $2,000.00 per point, for a total
of $52,000.00.

        In its Findings of Fact and Conclusions of Law, the trial court determined that Fred’s
achieved its corporate goal of $1.16 EPS for fiscal year 2000, thereby entitling Boothe to 26 bonus
pool plan “points,” and a subsequent bonus of $52,000. To determine whether the trial court
properly awarded this bonus, we must consider (1) whether the company achieved its corporate goal
of $1.16 EPS for 2000, and (2) whether Boothe’s individual conduct or performance as Chief
Operating Officer in fiscal year 2000 has any bearing on his right to collect an annual bonus under
the Incentive Plan.

        Addressing first the question of whether Fred’s achieved its corporate goal of $1.16 EPS, we
note that the Incentive Plan Memo distributed to Boothe identifies the company’s goal as $1.16 EPS.
According to defendant’s Consolidated Statement of Income for fiscal year 2000, the company met
its corporate goal of $1.16 EPS.

        Having determined that Fred’s achieved its corporate EPS goal for fiscal year 2000, we must
now determine whether Boothe’s negligent conduct and performance during fiscal year 2000
prohibits plaintiff from collecting his year end bonus pursuant to the Incentive Plan or, in the
alternative, reduces the amount of bonus to which Boothe is entitled. Under the Incentive Plan, a
participant’s options do not vest unless the company meets its corporate EPS goals. In addition to
corporate EPS goals, the following individual vesting conditions must be met:

               1. Employed
               2. Meet Initial Budget and Goals


                                                 -30-
               3. 60% fixed and 40% subject to recognition, by the manager, that all
               other responsibilities were carried out in a timely and successful
               manner.

        As has been discussed, Boothe was an employee of Fred’s for the entire fiscal year 2000,
ending in February 2000. With regard to the second condition listed above, the evidence is
undisputed that Fred’s exceeded its shrinkage budget for fiscal year 2000. As Chief Operating
Officer, Boothe was charged with monitoring this budget. Therefore, responsibility for failing to
stay within the confines of the shrinkage budget falls, at least in part, on Boothe’s shoulders. There
is some dispute as to whether Boothe met his individual goals for fiscal year 2000 - a dispute that
hinges on the question of whether Boothe’s individual goals were the same as the company’s overall
goals. However, having found that Boothe failed to meet the initial shrinkage budget, we need not
address the question of whether Boothe met individual goals for fiscal year 2000.

        In finding that Boothe failed to perform in compliance with the initial shrinkage budget, and
in recognition of the trial court’s decision to uphold Boothe’s termination for cause on the grounds
of negligent conduct and performance, we are inclined to agree with defendant’s assertion that
Boothe was not entitled to collect his annual bonus. We therefore vacate the portion of the trial
court’s Order on Judgment awarding plaintiff his bonus for fiscal year 2000 pursuant to the Incentive
Plan.


                                                 V.

        Boothe presents for review the additional issue of whether the trial court erred in denying
plaintiff an award of attorney’s fees.

       Section 9 of Boothe’s Employment Agreement states, in pertinent part:

               In the event it should become necessary for either party to initiate any
               suit or proceeding to enforce the terms of this Agreement, the party
               adjudged to be in breach shall pay all costs and expenses thereof,
               including reasonable attorneys’ fees.

Applying Section 9 to the facts and circumstances of the case at bar, we find that the trial court
properly denied Boothe’s claim for attorney’s fees on the basis that both parties breached the
Employment Agreement. With regard to Fred’s, we find that the defendant breached the terms of
the agreement by making no salary payments and providing no health benefits to plaintiff from
November 20, 2000 through April 9, 2001, despite defendant’s admitted failure to provide
contractually-required notice of termination. Boothe, in contrast, breached the Employment
Agreement by failing to comply with Section 2 of the agreement, which provides:




                                                -31-
                       As COO, Executive shall have and agrees to assume primary
               responsibility (subject at all times to the control of the Chief
               Executive Officer of the Company) for matters assigned to him by the
               Chief Executive Officer. In the performance of such duties,
               Executive agrees to make available to Company all of his
               professional and managerial knowledge and skill and all of his gainful
               time in order to properly fulfill his duties.

        The trial court’s finding that defendant properly terminated Boothe for cause on the basis of
plaintiff’s “negligence in the performance of the duties of his employment,” supports our conclusion
that plaintiff failed to comply with Section 2 quoted above, and thereby breached his Employment
Agreement with Fred’s. For these reasons, we find that the trial court properly denied Boothe’s
claim for attorney’s fees.

        The dissent notes that Fred’s did not give Boothe the contractually-provided ninety-day
written notice but instead verbally terminated him on November 20, 2000. As the record reflects,
Fred’s, by written notice to Boothe dated January 8, 2001, confirmed Boothe’s termination,
apparently attempting to comply with the provisions of the contract. The dissent points out that
Fred’s actions effectively terminated Boothe’s employment on November 20, 2000, although this
termination constituted a breach of the contract.
        The clear provisions of the contract require ninety days written notice for termination for
cause, and we believe that this provision should govern the effective termination date of the contract.
In any event, the dispute concerning the effective date of termination, under the circumstances of this
case, does not change the result reached by the Court. If Fred’s breached the contract as to the notice
provision, Boothe is entitled to all damages that are normal and foreseeable resulting from the breach
of the contract. See Moore Const. Co., Inc. v. Clarksville Dep’t. of Electricity, 707 S.W.2d 1, 14
(Tenn. Ct. App. 1985) (aff’d, Supreme Court March 24, 1986). Fred’s is not entitled to breach the
contract and then foreclose Boothe’s right to all the benefits that would accrue to him in the absence
of such a breach.

                                                 VI.

        In sum, the trial court’s judgment allowing plaintiff to purchase shares of defendant’s stock
pursuant to the Incentive Stock Option Agreement is reversed, and the trial court’s judgment
awarding plaintiff $52,000.00 bonus is also reversed. The judgment in all other respects is affirmed.
Costs of the appeal are assessed one-half to plaintiff, Edwin Boothe, and one-half to defendant,
Fred’s, Inc., and its surety. The case is remanded for such further proceedings as are necessary.



                                               __________________________________________
                                               W. FRANK CRAWFORD, PRESIDING JUDGE, W.S.



                                                 -32-
