CITY OF OWENSBORO, KENTUCKY v. LARRY SABO
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APRIL 28, 2006; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2004-CA-002645-MR
CITY OF OWENSBORO, KENTUCKY
APPELLANT
APPEAL FROM DAVIESS CIRCUIT COURT
HONORABLE HENRY M. GRIFFIN, III, JUDGE
ACTION NO. 99-CI-00829
v.
LARRY SABO
APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
GUIDUGLI AND JOHNSON, JUDGES; HUDDLESTON, SENIOR JUDGE.1
GUIDUGLI, JUDGE:
The City of Owensboro, Kentucky (hereinafter
“the City”) has appealed from the trial judgment and from the
order denying its motion for a Judgment Notwithstanding the
Verdict (hereinafter “JNOV”) entered by the Daviess Circuit
Court.
Following a jury trial, former City employee Larry Sabo
was awarded a judgment of $129,160 in damages for the City’s
breach of the implied duty of good faith and fair dealing in
1
Senior Judge Joseph R. Huddleston, sitting as Special Judge by assignment of
the Chief Justice pursuant to Section 110(5)(b) of the Kentucky Constitution
and KRS 21.580.
relation to a May 11, 1998, written agreement (hereinafter “the
Agreement”) extending his probationary period.
Having
determined that the City owed Sabo a duty of good faith and fair
dealing pursuant to the Agreement, we affirm.
Because the issue on appeal concerns an issue of law,
which we review de novo, we shall only briefly set forth the
salient facts.
On February 1, 1997, Sabo was appointed by the
City’s Board of Commissioners to the classified civil service
position of Director of Finance and Administration on a twelvemonth probationary basis pursuant to KRS 90.350.
Office
relationship problems arose during Sabo’s probationary period,
leading the Board of Commissioners to vote at the April 22,
1998, Board meeting to extend his probationary period for six
months, through October 6, 1998.
The minutes of the meeting
read, in part, as follows:
Sabo’s attorney, Ralph Wible, talked
about a complaint filed by Alma Randolph,
the City’s Human Resources/Community
Relations Specialist, dealing with issues of
conflict between Randolph, Sabo, and Bill
Dixon, Executive Director of the Owensboro
Human Relations Commission. Wible said
according to a mediator’s report, the
relationship problems were hostile but that
they could be resolved.
Mayor Waymond Morris pointed out that
there has been threat of litigation; that
the Commission has discussed the matter
twice in closed session; and that the
practice of the Commission has been not to
discuss personnel matters publicly.
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After further comments, Wible said Sabo
would be agreeable to an extension of his
probationary period “so that you may
evaluate for yourself his employment,
whether he is a competent finance manager,
whether he can do a good job, whether he can
work well with other people, and whether he
is a loyal employee of the City of
Owensboro.”
On May 11, 1998, City Manager Ronald L. Payne and Sabo
entered into the following Agreement:
THIS AGREEMENT made and entered into
this the 11th day of May, 1998, by and
between THE CITY OF OWENSBORO, KENTUCKY, a
municipal corporation of the Second Class,
101 East Fourth Street, P. O. Box 10003,
Owensboro, Kentucky 42302-9003, and LAWRENCE
D. SABO, 4248 Wood Trace, Owensboro,
Kentucky 42303.
RECITALS
WHEREAS, pursuant to KRS 90.350 and
Section 201 of the City of Owensboro
Personnel Policy Manual, Lawrence D. Sabo
(hereafter “Sabo”) was appointed by the
Board of Commissioners to the classified
civil service position of “Director of
Finance and Administration” on a
probationary full-time basis, on February 1,
1997; and
WHEREAS, at a specially called meeting
on Wednesday, April 22, 1998, the Board of
Commissioners (hereafter “City”), by a
majority vote, agreed to grant Sabo’s
request for continuation of his probationary
full-time employment through October 7,
1998, to permit further evaluation of Sabo’s
performance; and
WHEREAS, the City hereby agrees to the
continuation of Sabo’s probationary full-
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time employment status on the terms and
conditional set forth hereinbelow;
NOW, THEREFORE, in consideration of the
recitals set forth hereinabove, and for
other good and valuable consideration, the
receipt of which is acknowledged herein, the
parties mutually covenant and agree as
follows:
1. Sabo agrees that he is a
probationary employee and that his
probationary appointment shall continue from
February 1, 1997, for a maximum period of
time ending October 7, 1998.
2. Sabo agrees that he has no greater
rights during the continuation of his
probationary period than he had at the time
of his initial probationary appointment as
Director of Finance and Administration.
3. Sabo agrees to waive any and all
legal rights, if any he may have, to
challenge in any way the right of the City
to extend his probationary period
appointment for a maximum period of time
ending October 7, 1998.
4. Sabo covenants and acknowledges
that he has read and understands all of the
provisions in this Agreement, has retained
and been advised by legal counsel of his
choice with regard to applicable law and his
rights and obligations hereunder, and
voluntarily, knowingly, and intelligently
agrees to execute same without any duress or
coercion to do so.
IN TESTIMONY WHEREOF, the parties have
affixed their signatures to this Agreement
on this the day and date first hereinabove
written.
In order to evaluate Sabo’s performance, Payne distributed a
leadership assessment survey to several City employees.
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It is
Sabo’s contention that these surveys and later resurveys were
not conducted in good faith by Payne, as he focused for the most
part on negative responses and on responses from individuals who
did not report directly to Sabo.
At the regularly scheduled September 15, 1998, Board
meeting, the Board of Commissioners again considered Sabo’s
regular civil service appointment.
Payne recommended to the
Board that Sabo’s performance should not be deemed satisfactory
based upon his evaluation, and that he should be released from
his probationary employment.
At a special session on September
17, 1998, the Board accepted Payne’s recommendation, and
released Sabo from his position by a 4 to 1 vote.
On October 20, 1998, Sabo filed a complaint in Daviess
Circuit Court against the City and the members of the Board of
Commissioners (hereinafter “Sabo I”),2 alleging that he was
wrongfully terminated and asserting that by operation of law,
his probationary period ended in February 1997 after twelve
months and at that time he became a fully vested, permanent,
full-time civil service employee.
He argued that his rights
were violated when he was terminated without notice or the
opportunity for a due process hearing pursuant to KRS 90.360.
On motion for summary judgment, the circuit court ruled that
Sabo remained a probationary, at-will employee at the time of
2
Case No. 98-CI-01230.
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his termination because the Board had to deem him satisfactory
pursuant to KRS 90.350(9) before he could achieve regular civil
service status.
A three-judge panel of this Court affirmed this
ruling in an unpublished opinion rendered August 25, 2000.3
Sabo filed the action presently before this Court on
July 13, 1999, alleging claims of defamation, tortious
interference with a business relationship, and civil conspiracy.
As defendants, he named the City, Payne, employee Alma Randolph,4
and James Anthony Fulkerson, the City’s former deputy finance
director and current Director of Finance and Administration.
Early in the lawsuit, the circuit court dismissed Sabo’s
complaint, concluding that the defendants were protected by
either an absolute or a qualified privilege.
Another three-
judge panel of this Court reversed that ruling, and remanded the
case for further proceedings, holding that Sabo’s complaint
sufficiently stated a viable cause of action.5
After that
opinion became final, Sabo filed a third Amended Complaint
alleging a claim against the City and Payne for breach of an
implied duty of good faith and fair dealing in relation to the
May 11, 1998, Agreement.
3
Sabo claimed that the City and Payne
Appeal No. 1999-CA-000727-MR.
4
Sabo voluntarily dismissed his claims against Randolph during the course of
the litigation.
5
Appeal No. 2000-CA-000021-MR.
-6-
fraudulently entered into the Agreement without any intention of
honoring their obligation.
Following extensive discovery, the defendants filed a
motion for summary judgment on all claims.
Regarding the breach
of the implied covenant, they argued that the doctrine of res
judicata applied to block Sabo’s claim as he impermissibly split
his cause of action, asserting that he should have raised his
claim in Sabo I.
Furthermore, the defendants argued that the
implied duty of good faith and fair dealing does not flow to
probationary or at-will employees.
The circuit court summarily
denied that motion as well as a subsequent one, and the matter
proceeded to a jury trial on August 9, 2004.
At the directed
verdict stages, the City argued that Sabo was not owed a duty of
good faith and fair dealing because he was an employee at-will.
However, Sabo countered with the argument that consideration
flowed between the two parties to the Agreement because at the
time they entered into it, his at-will status was an open
question and he gave up that claim for the right to be
evaluated.
Furthermore, he asserted that good faith was implied
in the Agreement, and it was up to the jury to determine whether
the City acted accordingly.
The circuit court, in deciding what
it termed a legal question, determined that the Agreement was a
contract, and that while it did not set out all of the burdens,
expectations, and ramifications, it was a sufficient document to
-7-
find legally enforceable terms, subject to review and
interpretation by the court, and carried with it the contractual
requirement of good faith.
During the discussion of the jury
instructions, the City also argued that there was no evidence
presented to the jury that the Commissioners ever ratified the
Agreement.
The jury found for the defendants on all of Sabo’s
claims, except for its finding that the City had breached its
implied duty of good faith and fair dealing.
Interrogatory No.
11 provided as follows:
You are instructed that there is an
implied covenant of good faith and fair
dealing in every contract. Each party to a
contract is bound to act in good faith and
without willful misconduct or gross
negligence in his or her performance or
enforcement of the contract. The exercise
of “good faith” excludes a variety of types
of conduct characterized as involving ‘bad
faith’ because they violate community
standards of decency, fairness or
reasonableness.
You will find for Plaintiff Sabo if you
determine from the evidence that:
(1) Plaintiff Sabo entered a contract
with Defendant City of Owensboro;
(2) the City of Owensboro failed to
exercise good faith in the performance or
enforcement of the contract; and
(3) Plaintiff Sabo suffered damages as
a result.
-8-
Otherwise you will find for the City of
Owensboro.
The jury then awarded Sabo $113,000 in lost wages, nothing in
lost retirement benefits, $2,160 in expenses reasonably incurred
in seeking new employment, and $14,000 for the loss on the sale
of his residence.
The circuit court entered its final Order and
Judgment memorializing the jury’s verdict on September 16, 2004.
The City then filed a motion for a JNOV, arguing that
the instruction on the implied duty of good faith was improper
as the Agreement was not a contract and because Sabo was not
entitled to a duty of good faith and fair dealing as he was an
at-will employee.
The circuit court denied the motion in an
order entered November 15, 2004:
The jury has rendered a verdict finding
the defendant City of Owensboro liable for
damages in the amount of $129,160.00 to
Larry Sabo (Sabo) for breach of the implied
warranty of good faith and fair dealing in
connection with a written agreement executed
on May 11, 1998. The agreement purported to
extend Sabo’s probationary employment with
the City of Owensboro for a period of six
months for the purpose of evaluation and
attempted to settle certain legal
differences between the parties. The City
of Owensboro has filed a motion for a
judgment notwithstanding the verdict arguing
that since Sabo was an at-will employee he
cannot maintain a claim for breach of an
implied warranty of good faith and fair
dealing.
It was not disputed at trial and the
jury was instructed that at all times
previous to his termination of employment
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Sabo was an at-will employee dischargeable
by the City of Owensboro for any reason or
no reason at all. This finding is res
judicata in other litigation between the
parties that arose prior to the filing of
this action.
The Court ruled prior to trial that the
written agreement entered into by Sabo and
the City of Owensboro on May 11, 1998 was a
legally binding contract for
consideration.[6] The contract incorporated
and memorialized the decision of the City
Commission made at its meeting on April 28,
1998 to extend Sabo’s probationary
employment. The agreement was negotiated,
prepared and reviewed by legal counsel for
the parties. Both Sabo and the City of
Owensboro, by and through the City Manager
Ron Payne, signed the document. Both the
City of Owensboro and Sabo received rights
and benefits under the contract.
The basic purpose of the law of
contract is to establish legally enforceable
expectations of performance by the
contracting parties. The right to petition
for legal redress assures the integrity of
the agreement. In this case the contract
expressed the intentions of the parties that
Sabo would continue employment in an at-will
status for an additional six-month period
for the purpose of further evaluation of his
job performance. The agreement provided
that Sabo would give up any claim that he
had become a merit employee due to the
delayed action on the part of the City
Commission on permanent status with civil
service protection. At the time the written
contract was executed this was an important
legal question that was resolved by the
parties’ expressed conditions and
stipulations in the contract.
6
The record reflects that the circuit court ruled during the directed verdict
stage at trial, rather than prior to trial, that the agreement was a
contract.
-10-
The Court finds as a matter of law and
equity that the written contract entered
into between Sabo and the City of Owensboro
on May 11, 1998 distinguishes the facts of
this case from other at-will employment
cases that do not recognize a duty of good
faith and fair dealing on the part of the
employer. Under the unique sequence of
events in this case by entering into the
written contract with Sabo the City of
Owensboro was required to act in good faith
in evaluating Sabo over the extended sixmonth period of time. It was not required
to grant him permanent merit status or even
evaluate him in a business-like manner. The
City of Owensboro would have been privileged
in a claim of negligence in its evaluation.
The Court finds however that under these
circumstances the City of Owensboro was not
privileged to act dishonestly, violate good
faith or generally accepted standards for
fair dealing in contract. The Court finds
that the claim of the City of Owensboro that
Sabo’s at-will status precludes the jury
finding that it violated the implied
warranty of good faith and fair dealing is
subject to the doctrine of equitable
estoppel. Sabo had the right under the
contract to be treated honestly. The jury
found that City of Owensboro employees
engaged in a conspiracy to deprive Sabo of
his employment. The jury also found that
the City of Owensboro acting through its
officials breached the implied duty of good
faith and fair dealing in contracting with
Sabo and awarded him damages. The Court
finds that the jury could reasonably believe
that the action by the City Manager in
presenting only negative evaluations to the
City Commission was in furtherance of a
conspiracy among certain city employees to
rid themselves of Sabo in favor of the local
candidate for the job. The Court finds that
the evidence presented at trial supported
the verdict of the jury.
-11-
The City of Owensboro also argues that
Sabo failed to prove the loss on the sale of
his home. Sabo testified that he sold his
home for the price he paid for it but was
damaged by the amount of the real estate
commission incident to the sale. There was
no evidence at trial that the commission was
unreasonable. The Court finds the evidence
sufficient on this point.
IT IS THEREFORE ORDERED AND ADJUDGED
that the motion for judgment n.o.v. is
denied.
This appeal followed.7
On appeal, the City continues to argue that the
circuit court erred when it instructed the jury that it could
find a breach of an implied duty of good faith and fair dealing
by the City, when it failed to determine that Sabo’s claim was
barred by the doctrine of res judicata, and because no
employment contract existed between Sabo and the City.
On the
other hand, Sabo argues that the circuit court did not commit
any error.
We shall address first the City’s argument that Sabo I
should have a res judicata affect in the present case and that
Sabo should not be permitted to split his cause of action, in
reliance upon Yeoman v. Commonwealth.8
argument.
We disagree with this
In Sabo I, Sabo raised a wrongful discharge claim,
naming the City and the members of the Board of Commissioners.
7
Sabo’s cross-appeal (case No. 2005-CA-000072-MR) was dismissed on April 25,
2005, as untimely filed.
8
983 S.W.2d 459 (Ky. 1998).
-12-
In the present case, he sued the City and several City employees
and raised several claims not related to his eventual discharge,
but were based on other torts and breach of contract.
Therefore, we cannot hold that Sabo’s current case should be
barred by the doctrine of claim preclusion.
Next, we shall address the City’s argument that no
contract of employment existed between it and Sabo.
Relying
upon Gambrel v. United Mine Workers of America,9 the City posits
that Sabo had to establish that there was an obligation on his
part to render service for a fixed amount of time and a
reciprocal obligation of the City to retain his employment in
order to sustain his claim for breach of an employment contract.
Because the Agreement at issue in this case did not contain
those specific temporal terms, the City asserts, it could not be
an employment contract.
Alternatively, the City argued that
even if the Agreement were considered to be an employment
contract, the City, through its Board of Commissioners, never
authorized such an action.
On the other hand, Sabo argues that
the Agreement constituted a contract and that his status as an
at-will employee did not negate the City’s obligation to fairly
evaluate him according to that Agreement.
While we agree with the City that an employment
contract did not exist, we nevertheless conclude that the
9
249 S.W.2d 158 (Ky. 1952).
-13-
Agreement entered into by the parties constituted a contract.
Black’s Law Dictionary defines a contract as “[a]n agreement
between two or more parties creating obligations that are
enforceable or otherwise recognizable at law.”10
Consideration
is defined as “[s]omething (such as an act, a forbearance, or a
return promise) bargained for and received by a promisor from a
promisee; that which motivates a person to do something, esp. to
engage in a legal act.
•
Consideration, or a substitute such
as promissory estoppel, is necessary for an agreement to be
enforceable.”11
In Conseco Finance Servicing Corp. v. Wilder,12
this Court held, “A fundamental rule of contract law holds that,
absent fraud in the inducement, a written agreement duly
executed by the party to be held, who had an opportunity to read
it, will be enforced according to its terms.”
In the present case, it is clear to this Court that
the May 11, 1998, Agreement constituted an enforceable contract
between Sabo and the City.
The Agreement contains the necessary
recitals of consideration to create an enforceable contract in
that the City was required to act (to permit further evaluation
of his performance) and Sabo was required to forbear from
challenging the City’s right to extend his probationary period
10
Black’s Law Dictionary 341 (8th ed. 2004).
11
Id. at 324.
12
47 S.W.3d 335, 341 (Ky.App. 2001)(citing Cline v. Allis-Chalmers
Corporation, 690 S.W.2d 764 (Ky.App. 1985).
-14-
and to agree that he had no greater rights during the
continuation of his probationary period.
Furthermore, while we
recognize that a city is required to ratify or authorize a
contract through its Board of Commissioners,13 in this case the
minutes of the Board of Commissioners’ meeting and the Agreement
itself both indicate that the Board authorized the contract.
Finally, we shall address whether the City owed an
implied duty of good faith and fair dealing to Sabo, despite his
position as a probationary, at-will employee.
The City argues
that the trial court erred as a matter of law in instructing the
jury that it could find a breach of this implied duty because
there is no cause of action for this breach available for
probationary, at-will employees.
In support of this argument,
the City cites to several state and federal cases examining
Kentucky law, which hold that an at-will employee cannot
establish a claim for a breach of an implied duty of good faith
and fair dealing.14
On the other hand, Sabo argues that the
implied covenant attaches to the May 11, 1998, Agreement, even
though he remained an at-will employee, as every contract
includes an implied duty of good faith and fair dealing, citing
13
Lewis v. Board of Education of Johnson County, 348 S.W.2d 921 (Ky. 1961).
14
Wymer v. JH Properties, 50 S.W.3d 195 (Ky. 2001); Wyant v. SCM Corporation,
692 S.W.2d 814 (Ky.App. 1985); McCart v. Brown-Foreman Corporation, 713
F.Supp 981 (W.D.Ky. 1998).
-15-
Ranier v. Mount Sterling National Bank.15
This implied duty
obligated the City to fairly evaluate him according to the terms
of the Agreement.
Because of this separate Agreement, he argues
that the case law cited by the City is not applicable to him.
We agree with Sabo that the cases cited and relied
upon by the City are inapplicable in the present case.
While it
is true that the employees in those cases and Sabo were all atwill employees, the Agreement Sabo entered into with the City
brought him out of that category, albeit limited to his claim
that the City be required to fairly evaluate him.
It is,
however, well settled in this Commonwealth that, “[w]ithin every
contract, there is an implied covenant of good faith and fair
dealing, and contracts impose on the parties thereto a duty to
do everything necessary to carry them out.”16
In the May 11,
1998, Agreement, Sabo agreed that his probationary status was to
continue for up to another six months and gave up his right to
challenge the City’s right to extend this period.
In return,
the City was to permit further evaluation of his job
performance.
The Agreement contained an inherent promise by the
City to perform these evaluations in good faith.
The record
contains sufficient evidence to support the jury’s finding that
15
812 S.W.2d 154 (Ky. 1991).
16
Farmers Bank and Trust Company of Georgetown, Kentucky v. Willmott
Hardwoods, Inc., 171 S.W.3d 4, 11 (Ky. 2005). See also 17A Am.Jur.2d
Contracts § 336.
-16-
the City breached its duty to perform those evaluations fairly
and in good faith.
Finally, we note that Sabo is not contesting
his actual discharge in this case; rather, he is asserting that
the City breached its implied duty as a party to the Agreement
by not allowing him to be evaluated in good faith.
The trial
court did not commit any error in denying the City’s motion for
a JNOV.
For the foregoing reasons, the judgment of the Daviess
Circuit Court is affirmed.
ALL CONCUR.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEE:
Robert T. Watson
Chris J. Gadansky
Louisville, KY
Dennis D. Murrell
Amy E. Shoemaker
Louisville, KY
Patrick D. Pace
Owensboro, KY
ORAL ARGUMENT FOR APPELLEE:
Dennis D. Murrell
ORAL ARGUMENT FOR APPELLANT:
Patrick D. Pace
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