                 IN THE COURT OF APPEALS OF TENNESSEE
                            AT KNOXVILLE
                                   February 6, 2004 Session

                 LINDA G. JOHNSON v. MARK REINEKE, ET AL.

                     Appeal from the Chancery Court for Loudon County
                          No. 10250    Jerri S. Bryant, Chancellor

                                  FILED FEBRUARY 25, 2004

                                 No. E2003-01972-COA-R3-CV



The Petitioner was discharged from her executive position as Director of the Lenoir City Housing
Authority for misconduct connected with her employment. The Authority was awarded McKinney
Act funds, an audit of which revealed that $156,000.00 of these funds were inappropriately
expended, which led to the discharge of the Petitioner.

     Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed

WILLIAM H. INMAN , SR. J., delivered the opinion of the court, in which HERSCHEL P. FRANKS and
CHARLES D. SUSANO , JR., JJ., joined.

William Allen, Oak Ridge, Tennessee, attorney for appellant, Linda G. Johnson.

Paul G. Summers, Attorney General and Reporter; Warren A. Jasper, Assistant Attorney General,
General Civil Division, for appellee, Department of Labor and Workforce Development.

John E. Winters, Knoxville, Tennessee, attorney for appellee, Lenoir City Housing Authority.

                                            OPINION

                                                 I.

        An audit of Lenoir City Housing Authority revealed that $156,000.00 of federal funds had
been inappropriately expended. The Executive Director of the Authority was terminated and she
sought unemployment compensation which was initially awarded to her by the Department of Labor,
whose decision was affirmed by the Appeals Tribunal. The decision of the Tribunal was reversed
by the Board of Review which concluded the Plaintiff was discharged for misconduct connected with
her employment, resulting in a denial of benefits. The decision of the Board of Review was affirmed
on judicial review, and the Plaintiff appeals to this Court. Our review is de novo on the record, and
we apply the same standard as the Chancellor in reviewing the case. Ford v. Traughber, 813
S.W.2d 141 (Tenn. Ct. App. 1991).
                                                 II.

       The Petitioner was the executive director of the Lenoir City Housing Authority from May
3, 1983, until December 6, 2001. She was discharged “for failure to comply with the directives of
the Lenoir City Housing Authority Board of Directors,” and because she was unable to satisfactorily
explain apparent malfeasance and/or misfeasance with regard to certain HUD refinancing funds
expended outside the allowed parameters.

        An audit by the Knoxville Office of Public Housing, U.S. Department of Housing and Urban
Development (HUD) revealed that the expenditure of about $156,000.00 of McKinney Act funds
provided to the employer was not made in accordance with the requirements of that Act. Improper
expenditures included purchases of “protective wear,” including 72 pairs of socks, four pairs of
gloves, six coats, one hat, a pair of overalls, and 19 pairs of boots and shoes.

        Additionally, Petitioner allegedly accepted donation of a horse without authority from her
employer potentially incurring additional expense liability of her employer. Although she was
directed to return the horse, she failed to do so, and instead boarded the horse in another county at
her employer’s expense, including the construction of a shelter for the horse.

        The audit determined that “[i]t is the responsibility of the [executive director] to remain
cognizant of the laws, regulations, and HUD guidance regarding public housing operations and to
ensure that the authority operates within those directives” and that “[i]t is also the [executive
director’s] responsibility to inform the Board of Commissioners regarding the laws, regulations and
guidance impacting the programs operated by the authority” and to “[a]ssure that activities of the
Authority are within federal, state and local laws, regulations, policies and procedures.” The audit
further found that “[h]ad this provision of the contract been met, the authority would not be in the
tenuous position it currently finds itself” of facing reimbursement of the funds that were improperly
spent.

                                                III.

       The Board of Review made these findings:

               FINDINGS OF FACT: The claimant’s most recent employment prior
               to filing this claim for benefits was as the executive director of the
               Lenoir City Housing Authority from May 3, 1983 until December 6,
               2001. She was discharged primarily “for failure to comply with the
               directives of the Lenoir City Housing Authority Board of Directors.
               Further, (the) claimant was unable to satisfactorily explain apparent
               malfeasance and/or misfeasance with regard to certain HUD
               refinancing funds expended outside the allowed parameters
               apparently for claimant’s personal use.”



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              A recent audit showed over $150,000 of expenditures from
              McKinney Act funds provided to the employer that were not in
              accordance with the requirements of that Act. The audit stated that
              “(i)t is the responsibility of the executive director to remain cognizant
              of the laws, regulations, and HUD guidance regarding public housing
              operations and to ensure that the authority operates within those
              directives. It is also the executive director’s responsibility to inform
              the Board of Commissioners regarding the laws, regulations and
              guidance impacting the programs operated by the authority.” It was
              the claimant’s responsibility to “(a)ssure that activities of the
              Authority are within federal, state and local laws, regulations, policies
              and procedures.” The audit further stated that “(h)ad this provision
              of the contract been met, the authority would not be in the tenuous
              position it currently finds itself: of facing reimbursement of the
              monies that were improperly spent.

                                                IV.

       The standard for judicial review of unemployment insurance benefit cases is provided by
Tenn. Code. Ann. § 50-7-304(i)(2) and (3):

              (2) The chancellor may affirm the decision of the [Board of Review]
              or . . . may reverse, remand or modify the decision if the rights of the
              petitioner have been prejudiced because the administrative findings,
              inferences, conclusions or decisions are:
                        (A) In violation of constitutional or statutory
                        provisions;
                        (B) In excess of the statutory authority of the agency;
                        (C) Made upon unlawful procedure;
                        (D) Arbitrary or capricious or characterized by abuse
                        of discretion or clearly unwarranted exercise of
                        discretion; or
                        (E) Unsupported by evidence which is both
                        substantial and material in the light of the entire
                        record.
              (3) In determining the substantiality of evidence, the chancellor shall
              take into account whatever in the record fairly detracts from its
              weight, but the chancellor shall not substitute the chancellor’s
              judgment for that of the board of review as to the weight of the
              evidence on questions of fact. No decision of the board shall be
              reversed, remanded or modified by the chancellor unless for errors
              which affect the merits of the final decision of the board . . . .



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       These sections limit the reviewing court to questions of law if there is substantial and
material evidence upon which the Board of Review based its findings. See, Cawthron v. Scott, 400
S.W.2d 240, 242 (Tenn. 1966).

                                                  V.

        The Appellant-Petitioner argues that the expenditures for clothing and boots were approved
by her employer, and that checks for payment of these items were signed by one or more Board
members. We agree with the Commissioner that the duty of the Petitioner was transcendent as to
the McKinney Act funds which were expended inappropriately. It clearly was the duty of the
Petitioner to safeguard these funds and spend them lawfully. While the audit report is hearsay, it was
admissible and thus entitled to consideration. Goodwin v. Metropolitan Bd. of Health, 656 S.W.2d
383 (Tenn. Ct. App. 1983). The expenditure of the McKinney Act funds for apparel, etc., is not
seriously disputed.

        The statute does not define “misconduct connected with work.” In Weaver v. Wallace, 565
S.W.2d 867, 870 (Tenn. 1978), the Supreme Court held that for conduct to amount to misconduct
it must be a “breach of duty owed to the employer, as distinguished from society in general.”

       In Armstrong v. Neel, 725 S.W.2d 953, 955 (Tenn. Ct. App. 1986) we held that misconduct
must at least be intentional conduct that materially breaches a duty the employee owes to the
employer, and adopted the following standard from Wisconsin:

                . . . conduct evincing such willful and wanton disregard of an
                employer’s interests as is found in deliberate violations or disregard
                of standards of behavior which the employer has the right to expect
                of his employee, or in carelessness or negligence of such degree or
                recurrence as to manifest equal culpability, wrongful intent or evil
                design, or to show an intentional and substantial disregard of the
                employer’s interests or of the employee’s duties and obligations to the
                employer. On the other hand mere inefficiency, unsatisfactory
                conduct, failure in good performance as the result of inability or
                incapacity, inadvertence or ordinary negligence in isolated instances,
                or good faith errors in judgment or discretion are not to be deemed
                “misconduct” within the meaning of the statute.” Boynton Cab Co.
                v. Neubeck, 237 Wis. 249, 296 N.W. 636, 640 (1941).

         This standard was affirmed in Cherry v. Suburban Mfg. Co., 745 S.W.2d 273, 275 (Tenn.
1988).

         The issue is whether the Petitioner materially breached a duty owed to her employer. She
had a duty to insure that the program’s funds were expended properly, and it is clear that she did not
do this.


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        The Board of Review found:

                CONCLUSIONS OF LAW: The Board finds the evidence sufficient
                to establish that the claimant was discharged for work-related
                misconduct within the meaning of T.C.A. § 50-7-303(a)(2) in this
                case. The evidence shows that the claimant’s failure “to ensure that
                the authority operates” within the relevant governmental directives
                resulted in over $150,000.00 of expenditures that were not in
                accordance with those directives. It was the claimant’s responsibility
                to make certain the monies were spent within established guidelines
                and to seek assistance for any expenditures that might be
                questionable. Her failure to do so substantially disregarded the
                employer’s interests and constituted misconduct.

        In response to a petition to rehear, the Board of Review also made the following conclusions:

                In petitioning the Board, the claimant requests another hearing to
                present witnesses who would testify that she performed her work with
                great ability and skill. She also includes copies of an agreement
                between the federal government and the local housing authority, with
                various appendices and other documents. In our opinion, this
                additional evidence would not outweigh her sworn admissions during
                the previous hearing about the numerous items of clothing and shoes
                for herself and employees that she either purchased or authorized
                others to purchase. Such excessive purchases out of public funds that
                were intended for the betterment of public housing were a conscious
                misuse of those funds, and justified her termination for cause.

                                              The Horse

        A horse was donated to the Authority. Petitioner apparently believed that the security officer
might become a mounted patrol and recommended that the officer, Ms. Ladd, be sent to an
equestrian training school. A Board member testified that the Petitioner was instructed to return the
horse. Ms. Ladd lived in another County. She took the horse to her residence and according to the
testimony of a Board member, was given a check for $2000.00 with which to construct a shelter for
the horse at her residence. The minutes reflect little about the horse; Petitioner argues that the weight
of the proof supports her position that the gift of the horse was approved by the Board and that she
was not instructed to return the horse. But the circumstances strongly tend to show that the
Petitioner was insubordinate as claimed by the Commissioner; the horse was apparently released to
Ms. Ladd, at the expense of the Authority.




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       The judgment is affirmed. Costs of the appeal are assessed against the Appellant-Petitioner,
Linda G. Johnson.


                                                      ___________________________________
                                                      WILLIAM H. INMAN, SENIOR JUDGE




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