Articles Posted in Contract/Corporate

Some time ago, as part of a discussion about equitable rescission based on fraud, we noted that recovery based on a fraud claim where damages were not specifically alleged and sufficiently supported was the subject of a split between the First and Second Departments.  The Second Department had held that even if just nominal damages are generally alleged, the complaint would survive dismissal. The First Department disagreed and held that a claim of specific damages was required. Recently, the Court of Appeals addressed the split and sided with the First Department.

In Connaughton v. Chipotle Mexican Grill, Inc., Connaughton, a chef hired by Chipotle, alleged that he was fraudulently induced into selling his business idea to Chipotle. Specifically, Connaughton claimed that he was hired by Chipotle to develop an idea for a ramen noodle restaurant chain. He was promised a salary plus future equity. After investing substantial efforts over 18 months in publicly building the concept, Connaughton learned that Chipotle had a relationship with another chef who previously worked on the same concept and with whom Chipotle had signed a non-disclosure agreement. The relationship with the other chef had terminated before Connaughton joined Chipotle. It seemed that all of management except Connaughton were aware of this and that once the new chain opened, that chef would sue Connaughton and Chipotle. Chipotle ignored Connaughton’s concerns and demanded that he continue his work. When he refused he was fired.

Connaughton’s theory for recovery, as succinctly explained by the Court of Appeals, is critical to the case’s outcome in the First Department and in the Court of Appeals. Connaughton alleged that:

Leisure Time Travel, Inc., specializes in “producing holiday tours and vacations that comport with Jewish law and tradition.” Villa Roma claims to be the last resort in the Catskills region.

In 2001, the parties entered into a contract whereby Villa Roma would be rented for five Passover holidays, from 2002 through 2006. In 2005, the parties extended the contract for five years, through 2011.

The agreement called for Leisure Time to take over the hotel approximately one week before Passover. The day before Passover in 2006, a fire destroyed the hotel. The hotel refused to return Leisure Time’s $220,000 down payment. When Villa Roma reopened in late 2008, Leisure Time contacted Villa Roma to book the hotel for the 2009-2011 Passover holidays. Villa Roma refused to allow Leisure Time to book the hotel claiming that the fire rendered the parties’ contract impossible to perform thus terminating it. Leisure Time sued claiming that it was entitled to the return of its deposit paid in 2006 and to use the hotel under the terms of the parties’ agreement.

A buyer of real property that sued the seller before the parties’ closing date seeking to cancel the contract, but without a valid reason, was deemed to have breached that contract.

The buyer entered into a contract to buy two parcels of land in Staten Island. The contract was to close 30 days after the seller obtained certain regulatory approvals, but not later than 18 months from the contract date. If the approvals could not be obtained either party could terminate the contract or seek to renegotiate the purchase price, without obligation to close.

Because the approvals were delayed, the seller opted to terminate the contract and return the downpayment unless the buyer agreed to modify the contract. The contract was modified to extend the deadline to close, increase the price, and have the buyer reimburse the seller for certain costs incurred in doing the work that would release the regulatory approvals. The parties also agreed that the buyer would not sue the seller if the approvals could not be timely delivered. Believing that the approvals were forthcoming, the parties extended the closing deadline. Before that newly extended closing deadline, the buyer sued the seller seeking to cancel, or rescind, the contract. The seller counterclaimed claiming that the buyer’s lawsuit, by which it announced that it would not close and sought to cancel the contract, was itself a default entitling the seller to keep the buyer’s substantial downpayment. After the buyer’s lawsuit for rescission was dismissed, the seller pursued its counterclaim for the downpayment.

NBTY, Inc. is a manufacturer and seller of vitamins and nutritional products. Piping Rock Health Products, LLC is a competitor run by NBTY’s former CEO. Between the end of 2014 and the middle of 2015, a number of high-level NBTY employees resigned and went to work at Piping Rock. In 2011, while already employed, these individuals signed stock-option/trade secret agreements with Alphabet Holding Company, Inc., NBTY’s parent. Under these agreements, the individuals were (i) able to purchase a number of shares of the common stock of Alphabet, vesting over a period of time, and (ii) learn NBTY’s trade secrets. These agreements also contained restrictive covenants prohibiting the individuals from competing with NBTY for a one-year period following the end of their employment with NBTY and from revealing any of NBTY’s business secrets. After they resigned and went to Piping Rock, NBTY sued to enforce these individuals’ non-compete agreements.

Judge Emerson, sitting in the Commercial Division of Suffolk County, refused to enforce the non-compete provision. The court considered Delaware law (as provided for in the parties’ agreements but noted that it largely tracked New York law), and found that the non-compete restrictions were not supported by valid consideration. This meant that these individuals received no additional benefit for agreeing not to compete and the agreements were therefore not enforceable against them. NBTY argued that the options and access to NBTY’s trade secret were sufficient consideration. The court disagreed and stated that there was no evidence that these individuals did not have access to these secrets before they signed, and the options expired, unexercised, 90 days after they left NBTY. Thus, the court held that because the individuals had a choice between their continued employment with NBTY and exercising their benefits, or foregoing those benefits and competing, which they did, resulted in the individuals receiving no benefit in exchange for the non-compete agreements. The court noted further that while Delaware law allows consideration to be in the form of continued employment, the language of the agreements with NBTY specifically provided that NBTY made no promise of continued employment.

Finally, the court also invalidated the non-compete agreements, finding that they were overbroad in restraining competition in North America, Europe and China.

Goli Realty Corp., commenced an action for the recovery of brokerage commissions. Goli sued Halperin claiming to have brought a buyer that was ready, willing and able to purchase certain real property that Halperin and his entity, SPJ LLC, were looking to sell. Goli prepared marketing packages for Hess Oil, Walgreens, and others, detailing the property’s attributes. Hess and Walgreens responded with interest, and Goli showed the property to Hess. Hess had Goli send Halperin a proposal which provided for the minimum rent required by Halperin. Goli sent its commission agreement to Haleprin with Hess’s proposal. Thereafter, Halperin contacted Hess directly. Shortly thereafter, Halperin informed Goli that he was not interested in a gas station as a tenant and claimed that Goli had promised to provide an agreement with Walgreens. A few days later, Goli presented Halperin with a proposal from Walgreens, also with the minimum rent. Goli claimed that Halperin agreed to proceed with negotiations with both prospective tenants and to consider how to buy an adjacent property. Despite what Goli had been told, it learned that Halperin had signed a lease with Hess. Goli sued for its brokerage commissions.

Reviewing how the Court discussed the facts and party testimony makes clear that it found Haleprin’s testimony to not be credible. At one point, the Court states that outright. Among other things, the Court seemed troubled by Halperin’s inability to explain why SPJ did not agree to a lease with Walgreens, as brokered by Goli, if Halperin would not accept a gas station tenant, especially as it ultimately signed with Hess.

At the end, the Court was able to find that an enforceable brokerage agreement existed despite the absence of a formal writing. There was no question that Goji was asked to find a tenant and did so, securing two acceptable tenants. Thus, Goji was entitled to the value of its services, which were the same as the commission that he demanded in his proposed brokerage agreement (even though the Court noted that those commission may have been a bit higher than market rates). The Court did not allow that amount to be awarded against the individual Halperin defendants, however, because Goji had done the work for SPJ, LLC.

Steve Hong is the sole shareholder of Koryeo International Corp. Hong sued his mother, Kyung Ja Hong for looting Koryeo before she transferred the corporation to him.

Hong worked for the corporation after law school. His parents promised to transfer the corporation to him in exchange for his agreement to work for a minimal salary. After the death of Hong’s father, Mrs. Hong assumed sole ownership and control of corporation. In 2012, Mrs. Hong transferred ownership and control of the corporation to Hong. Upon that transfer, Hong learned that the corporation’s bank account held some $50,000, despite revenue in the millions of dollars. Hong and the Corporation sued his mother, claiming that she looted the corporation prior to its transfer, leaving him with a virtually worthless entity. Mrs. Hong sought dismissal of the claims.

Initially, the court found that because Mrs. Hong was the sole shareholder when she allegedly looted the corporation, the corporation could not be a plaintiff against her. The Court would not find anything wrongful in the corporation’s actions, or claims of a wrong, when those actions were sanctioned by its sole shareholder. The Court then held that the vague promise to Hong, made 20 years before the transfer, was too indefinite to create a true contract. Moreover, found the court, Hong received exactly what he was promised–the corporation–and even if looted, that was all he was promised.

One of the repercussions of the mortgage meltdown was the subsequent scrutiny of the bond rating agencies, including S&P. Claims were made that the rating agencies ignored bond risks and overstated the quality of certain bonds so that the agencies would earn more fees from the increased volume of bonds they reviewed and rated. Because those companies issuing bonds would not patronize the agencies that did not endorse the bonds issued, the agencies did not properly police the quality and reliability of the bonds. In the ensuing collapse, numerous federal and state agencies pointed fingers at the rating agencies and launched investigations into the agencies’ business practices. This setting provides the basis for this action.

Under State statute, in certain circumstances, a shareholder of a corporation is allowed to review the corporation’s books and records. Forcing compliance requires a lawsuit, but it is more streamlined than a typical lawsuit and the issues before the court are narrow. The documents to be provided under statute are limited, but a judge has the authority under common law, meaning laws developed over time by the courts, to provide more information than what the statutes allow.

In the S&P case, the shareholders, an individual and a retirement fund, sought access to S&P’s books and records. The shareholders claimed that they were entitled to review a host of S&P’s internal business records to determine how S&P conducted its business and whether management acted improperly (one wonders if the damage to S&P’s stock price had something to do with these demands). S&P disagreed that the shareholders were permitted access to the extensive list of documents demanded, and agreed to provide only the limited information allowed under the statutes.

Confidentiality provisions are common in many different settings, including settlements, business transactions and intellectual property agreements. The cost of violating a confidentiality provision often leads to litigation and damages, and significant aggravation. While a few months old, a recent article I read highlighted some real-life examples. Have a look here and here.

Before signing a confidentiality provision, non-compete, or any agreement, know what is being bound—many times the one agreeing is unaware of some of the sweeping terms of the agreement made. The wake-up can be painful.