                     IN THE COURT OF APPEALS OF TENNESSEE
                          WESTERN SECTION AT JACKSON
                  _______________________________________________            FILED
ANTHONY P. GUILIANO,
                                                                                July 1, 1997
       Plaintiff-Appellee,
                                                                            Cecil Crowson, Jr.
                                                                             Appellate C ourt Clerk
Vs.                                                   Shelby Circuit No. 67428
                                                      C.A. No. 02A01-9608-CV-00201
CLEO INC.,

      Defendant-Appellant.
____________________________________________________________________________

                   FROM THE SHELBY COUNTY CIRCUIT COURT
                 THE HONORABLE JAMES E. SWEARENGEN, JUDGE



                     Frank L. Watson, III; Waring Cox, PLC of Memphis
                                        For Appellee

                       James H. Stock, Jr. and George H. Rieger, II;
                      Weintraub, Robinson, Weintraub, Stock, Bennett,
                          Ettingoff & Grisham, P.C. of Memphis
                                      For Appellant




                              REVERSED AND REMANDED

                                         Opinion filed:




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




CONCUR:

ALAN E. HIGHERS, JUDGE

HEWITT P. TOMLIN, JR., SENIOR JUDGE

       This is a breach of an employment contract case. Defendant, Cleo, Inc. (Cleo), appeals

the order of the trial court granting summary judgment in favor of plaintiff, Anthony P. Guiliano
(Guiliano).

       The material facts are essentially undisputed. Cleo is a Tennessee corporation engaged

in the production and manufacture of gift wrap and related accessories, and its principal place

of business is in Memphis, Tennessee. In 1991, Cleo hired Guiliano as one of its directors of

marketing. In November of 1992, Cleo promoted Guiliano to Vice President of Marketing and

entered into a contract (Agreement) stating the terms of this employment. This Agreement,

consisting of a letter from Michael Pietrangelo, then Cleo’s President and Chief Executive

Officer, provided in relevant part as follows:

               Cleo Inc and I are very pleased that you have agreed to serve as
               Vice President, Marketing of Cleo Inc (the “Company”), a wholly
               owned subsidiary of Gibson Greetings, Inc.1 As Vice President,
               Marketing you will report to the President, and perform those
               functions currently assigned, which functions and responsibilities
               can be changed at the discretion of the Company. The following
               terms and conditions will govern your service to the Company:

               1.      You will the serve the Company on a full-time basis as a
               senior executive employee, and the Company will employ you as
               such, for a period of three years commencing November 1, 1992
               and ending October 31, 1995 unless you are terminated at an
               earlier date pursuant to Paragraphs 6, 7, or 9 of this Agreement.
               Your annual salary will be $103,000 . . . . No later than six
               months prior to the expiration of the original term, or any renewal
               term, of this Agreement, it will be reviewed by the Company for
               the purpose of deciding whether or not it will be renewed upon its
               expiration. You will be notified of a decision not to renew. If
               you are not notified of a decision not to renew, the Agreement
               will automatically renew from year to year.

               *                                 *                            *

               7.      In the event you voluntarily terminate your employment
               during the term of this Agreement, or if the Company terminates
               this Agreement and your employment for cause, your right to all
               compensation hereunder shall cease as of the date of termination.
               As used in this Agreement, “cause” shall mean dishonesty, gross
               negligence, or willful misconduct in the performance of your
               duties or a willful and material breach of this Agreement.
               Termination of employment shall terminate this Agreement with
               the exception of the provisions of Paragraphs 8, 9, 10, and 12.

               8.      Also in the event you voluntarily terminate your
               employment hereunder, or in the event the Company terminates
               this Agreement and your employment for cause you agree that for
               a period of two years after such termination, you will not
               compete, directly or indirectly, with the Company or with any
               division, subsidiary, or affiliate of the Company or participate as


       1
         At all times relevant to this dispute, CEO was a wholly owned subsidiary of Gibson
Greetings, Inc.

                                                 2
               a director, officer, employee, consultant, advisor, partner, or joint
               venturer in any business engaged in the manufacture or sale of
               greeting cards, gift wrap, or other products produced by the
               Company, or by any division, subsidiary, or affiliate of the
               Company, without the Company’s prior written consent.

               9.     In the event the Company terminates this Agreement and
               your employment without cause, you shall continue to be paid
               your then current salary from the date of termination through
               October 31, 1995.

       In 1994, Cleo underwent some changes in its upper management. Jack Rohrbach

replaced Michael Pietrangelo as the President of Cleo, and Marc English joined Cleo as its

Senior Vice President of Marketing and Creative. On September 13, 1994, Cleo informed

Guiliano that it would not renew his employment contract and that his employment would end

on October 31, 1995. There is no evidence in the record that Cleo had any cause to terminate

Guiliano. Jack Rohrbach later testified that he decided at about this time not to use Guiliano as

Vice President of Marketing in the future. On September 28, 1994, Guiliano received a letter

from Cleo informing him that he was “relieved of his duties as Vice President Marketing,” that

he was to receive any future assignments from the president of the company, and that he was to

perform these assignments from home. The letter also advised Guiliano that he had no authority

to bind, represent, or speak for Cleo in any manner. Rohrbach also testified that it was his

opinion that Cleo did not have a Vice President of Marketing at this time. Instead, the majority

of Guiliano’s authority and responsibilities were assumed by Marc English. On November 3,

1994, Cleo sent Guiliano a letter informing him that he was not authorized to use any corporate

credit cards and that he was to return these credit cards to Cleo. Guiliano later received another

letter, dated November 17, informing him that as of December 1, 1994, Cleo would no longer

answer a telephone line for him, that all calls would be screened to determine if they were of a

business or personal nature, and that only the personal calls would be directed to Guiliano’s

home phone. The letter further informed Guiliano that he could retrieve only the personal names

in his Rolodex because the business contacts were the property of Cleo. In an affidavit

submitted in support of Guiliano, Jan Sobierski stated that upon placing a telephone call to Cleo

and asking to speak to Guiliano, the receptionist said that Guiliano was no longer with the




                                                3
company.2 Guiliano did not receive any assignments from Cleo after September 28, 1994, but

he received his full salary and benefits. On December 12, 1994, Guiliano accepted employment

with Wang’s International, Inc. (Wang’s) at a salary of $110,000 a year.3

           On January 26, 1995, Guiliano filed a complaint, alleging that Cleo “terminated” him

without cause in breach of the Agreement. In this complaint, Guiliano avers that Cleo

constructively terminated him when it reduced and removed his duties and that he is therefore

entitled to damages. On March 29, 1995, Cleo filed its answer admitting that it relieved Guiliano

of his duties as Vice President of Marketing, but denying that it constructively terminated him

in breach of the Agreement. On January 5, 1996, Guiliano filed his Motion for Summary

Judgment. On February 28, 1995, Cleo filed its Motion for Summary Judgment and Response

to Plaintiff’s Motion for Summary Judgment. After a hearing, the trial court entered an order

on April 16, 1996 granting Guiliano’s Motion for Summary Judgment and denying Cleo’s

Motion for Summary Judgment. The trial court awarded Guiliano his salary remaining under

the contract, $90,125.00, plus $14,296.54 in prejudgment interest, for a total award of

$104,421.54. Cleo appeals the trial court’s decision.

       On appeal, Cleo presents two issues for review as stated in its brief:

                 1. Did the trial court err in failing to grant defendant’s Motion for
                 Summary Judgment where defendant established that it did not
                 terminate plaintiff, it did not breach the employment agreement
                 with plaintiff, and there are no genuine issues of material fact?

                 2. Assuming, arguendo, that the trial court did not err in granting
                 plaintiff’s Motion for Summary Judgment, did the trial court err
                 in holding that plaintiff was entitled to recover damages?

       A trial court should grant a motion for summary judgment 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. Tenn. R. Civ. P. 56.03. The phrase "genuine issue" as stated in

       2
          At the summary judgment hearing, Cleo insisted that this affidavit should be
stricken on the grounds that the affidavit set forth facts that would not be admissible in
evidence as required by Tenn. R. Civ. P. 56.05. We disagree. This is clearly an admission by
an agent of Cleo that is against Cleo’s interest, as argued by Guiliano, and would be
admissible as such under the Tennessee Rules of Evidence 803(1.2)(D). In any event, there
is ample other evidence to support our conclusion.
       3
          Cleo makes much of the fact that Guiliano indicated that he was currently employed
on his application to Wang’s. This does not present a genuine issue of material fact. The
issue in this case is whether the removal of Guiliano’s duties was a constructive termination
in breach of the contract, not whether Guiliano was actually terminated or whether he
perceived that he had been terminated.

                                                  4
Rule 56.03 refers to genuine factual issues and does not include issues involving legal

conclusions to be drawn from the facts. Byrd v. Hall, 847 S.W.2d 208, 211 (Tenn. 1993).

Because the material facts are undisputed here, we agree that granting summary judgment to one

of the parties was proper. Therefore, we must decide whether the legal conclusions on which

the trial court's grant of summary judgment was based are correct. Our review is de novo on the

record with no presumption of the correctness of the trial court's conclusions of law. Union

Planters Nat'l Bank v. American Home Assurance Co., 865 S.W.2d 907, 912 (Tenn. App.

1993).

         Cleo argues that the trial court erred in granting summary judgment in favor of Guiliano

for two reasons. First, Cleo contends that the Agreement guarantees only that Cleo would

employ Guiliano as a “senior executive employee,” and not as its Vice President of Marketing.

Second, Cleo argues that it did not breach the contract because the Agreement specifically states

that Guiliano’s functions and responsibilities were subject to change at its discretion. Instead,

Cleo maintains that Guiliano voluntarily terminated his employment with Cleo when he accepted

employment with Wang’s.

         This case centers on the construction of the employment contract. As this Court stated

in Park Place Center Enterprises, Inc. v. Park Place Mall Associates, 836 S.W.2d 113 (Tenn.

App. 1992):

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

Id. at 116 (citations omitted).

         With the above well-established rules in mind, we will now examine the contract in

dispute. The first clause in the Agreement provides that Guiliano is to serve as “Vice President,

Marketing.” Subsequent terms in the Agreement provide that Guiliano will serve Cleo as a

“senior executive employee” or an “executive employee.” To the extent that the term “Vice

President, Marketing” conflicts with subsequent terms in the Agreement, the subsequent terms


                                                 5
are therefore void and unenforceable because they are repugnant to the first and principle term

in the contract. Id. at 116. We find that Cleo hired Guiliano to be its Vice President of

Marketing and now turn to whether Cleo breached the Agreement by removing all of Guiliano’s

duties in this capacity.

        Cleo relies on Canady v. Meharry Medical College, 811 S.W.2d 902 (Tenn. App. 1991).

In Canady, Meharry Medical College decided not renew the one-year contract of one its resident

physicians and restricted the resident’s duties for the remainder of his contract term. Id. at 904.

The resident sued for breach of contract for the failure to renew his contract. Id. This Court held

in favor of the medical college as to its failure to renew the contract. Id. at 906. The Court also

addressed the restriction of the resident’s duties, noting that the resident had no claim for breach

of contract because there was no provision in his contract guaranteeing the he would he assigned

particular duties. Id. at 904-05.

        We find that Cleo’s reliance on Canady is misplaced. In Canady, there is nothing to

indicate that the contract called for the medical college to employ the plaintiff as anything but

a resident. In this case, the Agreement guaranteed Guiliano employment as the Vice President

of Marketing with all the prestige and authority that comes with such an executive title. In

addition, the medical college in Canady merely restricted the resident’s duties. It did not remove

all of his duties in the position for which he was hired, as in this case.

        Guiliano principally relies on one of our unpublished cases, Smith v. American General

Corp., No. 87-79-II, 1987 WL 15144 (Tenn. App. Aug. 5, 1987), for the proposition that a

reduction in authority and responsibility can constitute a breach of an employment contract. In

Smith, NTL Corporation hired Smith as its Executive Vice President of Investments and entered

into an employment contract guaranteeing that Smith would be employed in “such employment

or in a position of comparable responsibility.” Id. at *1. Subsequently, American General

Corporation acquired NTL and reduced Smith’s authority and duties. Id. at *2. As a result of

the changes in his authority, Smith resigned and sued for breach of his employment contract for

the failure to employ him as promised. Id. On appeal, this Court stated that:

                Contrary to the insistence of defendant, such reduction in
                authority and responsibility did constitute a violation of the
                contract for which defendant was responsible in damages.
                Superficially it may be argued that an employee whose titular
                position and salary are continued has no basis for complaint as to


                                                 6
               reduction in work load. However, to those highly skilled and
               motivated employees who have the pride in their accomplishment
               and responsibility, salary is not the only remuneration for
               employment. To such employees, the loss of responsibility or
               authority is equal to or worse than loss of pay. Section 5 [the
               “comparable responsibility” provision] of the contract recognizes
               this situation and provides for it.

               Defendant cites authorities to the effect that changes in authority
               are not regarded as a breach of employment contract, however,
               the contract in the present case expressly guaranteed the
               continuation of existing duties and authority or a substitution of
               equivalent duties and authority. Whatever the general law on the
               subject, the provisions of the contract are controlling between the
               parties.

Id. at *4. Accord Lazenby v. American Gen. Corp., No. 89-67-II, 1989 WL 196244 (Tenn. App.

Sept. 13, 1989) (holding that an employer breached an employment contract with a “comparable

responsibility” provision when it reduced an employee’s duties).

       Cleo argues that Smith is distinguishable because the Agreement in this case does not

contain a provision guaranteeing Guiliano employment in a position of “comparable

responsibility.” To the contrary, Cleo points out that the Agreement specifically provides that

Guiliano’s functions and responsibilities are subject to change at its discretion.

       We agree with the Cleo that the Agreement is distinguishable from the employment

contract in Smith because of the absence of a “comparable responsibility” provision. Even

without such a provision, however, Cleo was under a duty to act fairly and in good faith when

exercising its right to change Guiliano’s functions and responsibilities as its Vice President of

Marketing. As stated in TSC Industries, Inc. v. Tomlin, 743 S.W.2d 169 (Tenn. App. 1987):

               It is true that there is implied in every contract a duty of good
               faith and fair dealing in its performance and enforcement, and a
               person is presumed to know the law. See Restatement (2d)
               Contracts, § 205 (1979). What this duty consists of, however,
               depends upon the individual contract in each case. In construing
               contracts, courts look to the language of the instrument and to the
               intention of the parties, and impose a construction which is fair
               and reasonable. See, e.g., Covington v. Robinson, 723 S.W.2d
               643, 645-6 (Tenn. App.1986).

TSC Industries, 743 S.W.2d at 173.

       We do not believe that it is a fair and reasonable construction of the contract to say that

the parties intended Guiliano to serve as Vice President of Marketing in name only and to sit at

home and do nothing until the term of the Agreement expired. Our conclusion is supported by

the testimony of Michael Pietrangelo, the former President and Chief Executive Officer of Cleo:


                                                7
                In my opinion, Tony was -- this document said you are Vice
                President of Marketing for the next three years, and that meant
                that you perform as Vice President of Marketing. Whether or not
                we add or take away responsibilities could be, for example, are
                going to put the art department under you, or going to take
                everyday gift wrap out from under you, but you are still the Vice
                President of Marketing.

        Although the Agreement certainly contemplated a reasonable “change” in Guiliano’s

functions and responsibilities, it did not contemplate the complete removal of his functions and

responsibilities so that his position was rendered a virtual nullity.     Accord McLaughlin v.

Union Leader Corp., 116 A.2d 489, 493 (N.H. 1955); see also Rudman v. Cowles

Communications, Inc., 280 N.E.2d 867, 872 (N.Y. App. 1972) (holding that an employer could

not discharge employee for refusing to perform assignments that were inconsistent with the

executive position called for in the contract, even though the assignments were at the company’s

discretion). Therefore, we hold that Guiliano was entitled to treat his employment as terminated

and the contract as breached when Cleo relieved him of all of his duties and responsibilities as

Vice President of Marketing.

       In the second issue, Cleo argues that the trial court erred in awarding damages because

Guiliano accepted a position with Wang’s at a higher salary and did not suffer any actual harm.

Alternatively, Cleo argues that the provision is a liquidated damages provision that is

unenforceable because it is a penalty. Guiliano, on the other hand, argues that the provision in

the Agreement is a severance pay provision. Even if the provision is construed to be a liquidated

damages provision, Guiliano argues that it is not a penalty.

       Paragraph nine of the Agreement stipulates that if Cleo terminates Guiliano without

cause, Guiliano is entitled to be paid his current salary from the date of termination to the date

of the expiration of the Agreement. It appears to the Court that whatever label or title we put on

this particular provision of the contract, it is a provision calling for payment of a sum certain in

the event of a certain occasion. This is, in effect, a liquidated damages provision, which is a sum

stipulated by the parties in the contract to be paid to compensate for injuries in the event of a

breach. See V.L. Nicholson Co. v. Transcon Inv. & Fin. Ltd., Inc., 595 S.W.2d 474, 484

(Tenn. 1980).

        Liquidated damages provisions must be reasonable in relation to the terms of the contract

and the certainty with which damages can be measured. McGann v. United Safari, Inc., 694


                                                 8
S.W.2d 332, 336 (Tenn. App. 1985). There must be a reasonable relationship between the

amount stipulated as liquidated damages and what might reasonably be expected in the event of

a breach. Id. (citing V.L. Nicholson Co., 595 S.W.2d at 484). Whether a provision for

liquidated damages is reasonable is determined prospectively, at the time that the parties entered

into the contract, rather than retrospectively. Kendrick v. Alexander, 844 S.W.2d 187, 191

(Tenn. App.1992).

       Even if the liquidated damages provision is reasonable at the time of contracting,

recovery will be limited to actual damages if the amount stipulated as liquidated damages is so

greatly in excess of actual damages that it is, in effect, a penalty. Beasley v. Horrell, 864 S.W.2d

45, 50 (Tenn. App. 1993); Harmon v. Eggers, 699 S.W.2d 159, 163 (Tenn. App. 1985).

Because forfeitures and penalties are not favored, any doubt as to whether a sum is a penalty or

liquidated damages will generally be resolved as the former. Beasley, 864 S.W.2d at 50;

Harmon, 699 S.W.2d at 163.

        In Norwalk Door Closer Co. v. Eagle Lock & Screw Co., 220 A.2d 263 (Conn. 1966),

the Court said:

                     The circumstances which the parties might reasonably foresee
                  at the time of making a contract could, in any given case, be
                  vastly different from the circumstances which actually exist when
                  a court is called upon to enforce the contract. It is not the
                  function of the court to determine by hindsight the reasonableness
                  of the expectation of the parties at the time the contract was made,
                  but it is the function of the court at the time of enforcement to do
                  justice. In the ordinary contract action the court determines the
                  just damages from evidence offered. In a valid contract for
                  liquidated damages, the parties are permitted, in order to avoid
                  the uncertainties and time-consuming effort involved, to estimate
                  in advance the reasonably probable foreseeable damages which
                  would arise in the event of a default. Implicit in the transaction
                  is the premise that the sum agreed upon will be within the fair
                  range of those just damages which would be called for and
                  provable had the parties resorted to proof. Consequently, if the
                  damage envisioned by the parties never occurs, the whole
                  premise for their agreed estimate vanishes, and, even if the
                  contract was to be construed as one for liquidated damages
                  rather than one for a penalty, neither justice nor the intent of
                  the parties is served by enforcement. To enforce it would
                  amount in reality to the infliction of a penalty.

Id. at 268 (emphasis added) (citations omitted). The Norwalk opinion is well reasoned and

conforms to this Court’s perception of the law in this jurisdiction.

        In this case, although Guiliano was able to secure employment with Wang’s at a higher



                                                   9
salary, this was not certain at the time the parties entered into the contract. Rather, it was within

the fair contemplation of the parties that, if Guiliano was terminated without cause, he would not

be able to find a comparable position at the same salary or that he would suffer damages that

would be difficult to prove, such as a loss of status or prestige or a loss of advancement

opportunities.   Therefore, the liquidated damages provision was reasonable at the time the

contract was entered into in terms of what might have been anticipated in the event of a breach.

        Nonetheless, there is no proof in the record that Guiliano suffered any actual harm as a

result of the breach. The record indicates that Guiliano was not only able to find comparable

employment, but that he found employment at a higher salary. Moreover, he presented no proof

whatsoever as to any loss of prestige, status, advancement opportunities, or other damages. In

fact, the record shows that Guiliano did not even suffer a loss in pay between positions. Under

these facts, we conclude that the liquidated damages provision, which would allow Guiliano a

recovery of $90,125.00, plus interest, is grossly disproportionate in light of the fact that he

suffered no actual harm. The purpose of a liquidated damages provision is not to provide a party

with a windfall. Therefore, the liquidated damages provision in this case is unenforceable as a

penalty.

        Accordingly, the judgment of the trial court is reversed, and this case is remanded for

such further proceedings as are necessary. Costs of appeal are assessed against the appellee.

                                                        _________________________________
                                                        W. FRANK CRAWFORD,
                                                        PRESIDING JUDGE, W.S.
CONCUR:

____________________________________
ALAN E. HIGHERS, JUDGE

____________________________________
HEWITT P. TOMLIN, JR., SENIOR JUDGE




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