B & B Equipment Co. v. Bowen
581 S.W.2d 80 (1979)
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Rule of Law:
When an agreement contains both employment obligations and a stock purchase plan, a material breach of the employment obligations can justify rescission of the entire contract if the employee's services were the primary purpose and motivating cause for the agreement, rendering the contract entire and not divisible.
Facts:
- In 1968, Robert Jaecques and William Hughes, owners of B & B Equipment Company, Inc., sought a replacement for a retiring partner, L. D. Braymen.
- On December 28, 1968, they entered an oral agreement with John A. Bowen to become an equal participant in the business.
- Under the agreement, Bowen would purchase Braymen's 100 shares for $15,000 by paying $2,500 upfront, with the corporation financing the remaining $12,500.
- Bowen was to repay the corporation using the dividends he received on the stock and was obligated to perform all corporate bookkeeping and devote his full time to the business.
- From 1969 to 1976, Bowen paid $7,156 towards the stock purchase from dividends received.
- Beginning around 1972, Bowen began engaging in personal business activities during work hours, spending less time on his corporate duties, and performing his bookkeeping responsibilities poorly.
- Jaecques and Hughes grew dissatisfied with Bowen's performance, which they had discussed with him.
- On April 27, 1976, Jaecques and Hughes discharged Bowen from his employment with the company.
Procedural Posture:
- B & B Equipment Company, Inc. filed a suit for declaratory judgment in a Missouri trial court to terminate its contract with John A. Bowen.
- Bowen filed a counterclaim seeking a declaration that the contract was still valid.
- The trial court, sitting without a jury, found that Bowen had breached the contract and ruled in favor of B & B, declaring the contract rescinded.
- Bowen, as the appellant, appealed the trial court's judgment to the Missouri Court of Appeals, with B & B as the appellee.
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Issue:
Does an employee's material breach of his employment obligations justify the employer's rescission of an entire contract that includes both the employment terms and a stock purchase agreement?
Opinions:
Majority - Wasserstrom, Judge
Yes, an employee's material breach of his employment obligations justifies the employer's rescission of the entire contract. The court found that Bowen's failure to devote his full time to the business, his engagement in outside business activities, and his poor performance of bookkeeping duties constituted a material breach. The central purpose of the agreement was not the sale of stock but securing Bowen's services as a working partner. The stock purchase was merely the mechanism to bring him into the business, and its terms were highly favorable to Bowen precisely because they were consideration for his expected valuable services. Therefore, the employment obligations were the 'very substance and root of the contract,' not merely an incidental part. The court applied the test from Williston on Contracts, concluding the parties assented to the promises as a single whole and would not have made the stock deal without the employment commitment, making the contract indivisible. Because Bowen committed a prior material breach, he is not entitled to specific performance of the stock purchase. However, the trial court's remedy was modified to require B & B to reimburse Bowen for income taxes he paid on undistributed corporate profits under its Subchapter S tax status, in addition to refunding the amounts he paid toward the stock.
Analysis:
This case clarifies the distinction between entire and divisible contracts, particularly in the context of employee buy-in agreements. It establishes the precedent that when an employee's services are the fundamental reason for an agreement that includes an equity component, the employment and stock purchase provisions are inextricably linked. A material failure to perform the required services can therefore void the entire deal, preventing the breaching employee from claiming rights under the stock purchase provision. This decision emphasizes that courts will look to the primary purpose of a transaction to determine materiality and divisibility, impacting how future contracts for key employees are structured and enforced.
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