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FEDDEMAN & CO. v. LANGAN ASSOC., et al.



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FEDDEMAN & CO.

v.

LANGAN ASSOC., et al.


June 9, 2000

Record No. 991996

FEDDEMAN & COMPANY, C.P.A., P.C.

v.

LANGAN ASSOCIATES, P.C., ET AL.

FROM THE CIRCUIT COURT OF THE CITY OF ALEXANDRIA

Alfred D. Swersky, Judge

Present: All the Justices


OPINION BY JUSTICE ELIZABETH B. LACY

Feddeman & Company appeals a judgment setting aside a
$3,300,000 jury verdict in its favor against six of its former
employees and one of its competitors. Feddeman & Company, the
plaintiff below, is a certified public accounting firm that, in
1997, had 31 employees and over $3,000,000 in yearly revenues. W.
Kent Feddeman was a 95% shareholder and the president of the
company.

The defendants are Langan Associates, a rival accounting firm,
John P. Langan, its president, three former directors and
employees of Feddeman & Company, Joseph M. Kotwicki, Cheryl
L. Jordan, and J. Andrew Smith, and three former employees of
Feddeman & Company, Nathaniel T. Bartholomew, Robert A.
Casey, and John G. Wooldridge.

The events giving rise to this litigation began in August
1996, when Kent Feddeman initiated discussions with John Langan
regarding a possible buyout or merger of the two companies. In
early 1997, Feddeman asked Kotwicki to take over the
negotiations.

In the summer of 1997, the American Express Company made an
offer to purchase both Langan Associates and Feddeman &
Company. On August 31, 1997, Langan, Kotwicki, Bartholomew,
Smith, Casey, Wooldridge, and Jeffrey S. Tenenbaum, Langan
Associates’ attorney, met in Tenenbaum’s office. At this meeting,
the attendees determined that they would refuse the American
Express offer, and Kotwicki, Smith, Bartholomew, Casey, and
Wooldridge would form a "Buying Group." The Buying
Group planned to purchase Feddeman’s 95% interest in Feddeman
& Company and then merge the company with Langan Associates.
The Buying Group also raised the possibility that they might have
to resign from Feddeman & Company if the buyout negotiations
were unsuccessful. The members of the Buying Group signed a
retainer agreement with Tenenbaum authorizing him to represent
them. At this meeting, or shortly thereafter, Kotwicki gave
sample Feddeman & Company engagement letters and
nonsolicitation agreements, along with other corporate and
employment documents, to Tenenbaum in preparation for the merger.
Feddeman was aware of and did not oppose this two-step merger
process.

On September 29, 1997, the Buying Group offered Feddeman
$2,000,000 for his interest in Feddeman & Company. In making
the offer, Kotwicki reminded Feddeman that the corporate
directors were not bound by noncompete agreements and that they
were free to leave Feddeman & Company if they wished.

On November 4, 1997, Feddeman made a counteroffer to the
Buying Group. Four days later, Kotwicki told Feddeman that the
counteroffer nullified the Buying Group’s prior offer, and that
if the Buying Group were to make another offer, it would be lower
than the first.

On November 10, 1997, a second meeting was held at the offices
of Langan Associates, again with Langan, Tenenbaum, and the
Buying Group. Tenenbaum had been asked to do legal research on
any potential liability which could arise if the Buying Group
resigned and were subsequently employed by Langan Associates.
Based on his research, Tenenbaum advised the Buying Group that to
avoid liability, if they ultimately chose to resign, they should
not solicit Feddeman & Company clients or employees until
after their resignation, not use company resources in the
preparation of their resignations, not make negative or adverse
statements about Feddeman & Company, and not remove any
company property. The Buying Group agreed that they would resign
on December 1, 1997 if they "hadn’t made a deal" with
Feddeman and that the resignations "would be a form of
leverage that could be used" in the negotiations.

On November 12, 1997, at 7:00 a.m., Jordan, the members of the
Buying Group except Casey, and four other Feddeman & Company
senior employees met at Smith’s house. At this meeting, the
Buying Group reported on the status of the merger negotiations,
and indicated that if the negotiations did not improve there was
a possibility that the Buying Group would resign on December 1,
1997. The Buying Group indicated that they believed Langan
Associates would hire them if they resigned. They also told the
senior employees present that they "would take care of
them."

On November 19, 1997, Kotwicki again discussed the resignation
plan with Jordan. She indicated that she would be on vacation on
December 1, so Kotwicki gave her a letter of resignation drafted
for her by Tenenbaum, which she signed and gave to her own
attorney.

On November 24, Feddeman’s attorney presented Kotwicki with a
$4,000,000 stock purchase proposal in which Feddeman would be
paid over the course of eight years. Two days later, the Buying
Group made a counteroffer of $4,000,000 to be paid over a ten
year period, with no personal guarantees and a covenant not to
compete from Feddeman.

Meanwhile, Feddeman learned of the proposed walkout and
contacted Johnson & Lambert, a national accounting firm, to
see if it could provide assistance if needed, and additionally to
discuss possible merger options.

On December 1, 1997, Feddeman announced to some of his
employees that Johnson & Lambert had expressed interest in
making a presentation to Feddeman & Company employees on
December 3. The Buying Group met with Feddeman immediately after
this announcement. Feddeman told them Johnson & Lambert had
an interest in acquiring the firm, and that there would be
positions for everyone. The Buying Group met with Feddeman a
second time in his office, this time without Kotwicki. They
questioned the potential merger with Johnson & Lambert and
its impact on the planned buyout and merger with Langan
Associates. Feddeman told them he just wanted them to hear of
another opportunity and he advised them to talk to his lawyer.

Following the meetings with Feddeman, members of the Buying
Group met at lunch and decided to resign. They planned to talk to
the senior managers after work to inform them of the resignation
decision. After lunch, Kotwicki called Langan, informed him that
the Buying Group was resigning, and asked if Langan Associates
would hire the Buying Group and any others who might resign.
Langan agreed.

Kotwicki had letters of resignation prepared for three senior
employees, Mary D. Komatsoulis, James B. Kanuch, and Mike A.
Benoudiz. That evening, after attending an event with Feddeman,
Benoudiz and Kanuch met with Smith and were given the prepared
letters of resignation. They were told of the Buying Group’s
decision to resign and to work for Langan Associates, and that
"they could come too." Smith, Benoudiz, and Kanuch
returned to the office, and while Smith gathered his personal
effects, Benoudiz and Kanuch signed their letters of resignation
and gave them to Smith. That evening Komatsoulis, at
Bartholomew’s request, met with him. After the meeting,
Komatsoulis returned to the office and signed her letter of
resignation. A fourth employee was told to contact Kotwicki
because he had a letter of resignation for her to sign.

That evening, Kotwicki called Jordan, who contacted her
attorney and instructed him to release her letter of resignation.
Kotwicki also obtained a letter of resignation from his son,
Michael Kotwicki, a Feddeman & Company employee.

The next morning, December 2, prior to going to work, Kotwicki
went to Smith’s house and collected the letters of resignation
obtained from various employees. After leaving Smith’s house,
Kotwicki delivered 11 letters of resignation to Kent Feddeman.
Feddeman accepted the resignations.

That evening, Langan Associates held a reception for the
Feddeman employees who had not yet resigned. Eventually, 25 of
the 31 Feddeman & Company employees resigned and began
working for Langan Associates. By December 3, all the Feddeman
& Company clients had been contacted by employees of Langan
Associates, and 50% of those clients eventually transferred their
business to Langan Associates.

On April 9, 1998, Feddeman & Company filed an Amended
Motion for Judgment asserting inter alia the
following causes of action: Count I – Breach of Fiduciary Duty by
Director Defendants, Count II – Usurpation of Corporate Business
Opportunity as to Director Defendants and Employee Defendants,
Count III – Breach of Fiduciary Duty of Employee Defendants,
Count IV – Intentional Interference with Contract and Business
Expectancies By All Defendants, and Count VI – Violation of
Va. Code ?? 18.2-499 and –500, Conspiracy to Injure
Another in Trade or Business, By All Defendants. Count V was
dismissed by the trial court upon defendants’ Plea in Bar.

The defendants filed a counterclaim which alleged intentional
interference with contractual rights and prospective economic
advantage, unfair competition, and libel and slander.

Following a seven-day trial, the jury returned a verdict in
favor of Feddeman & Company and against the defendants on all
remaining counts in the Amended Motion for Judgment, with one
exception. Cheryl Jordan was found not to have usurped a
corporate business opportunity. The jury awarded damages in the
amount of $3,300,000. The jury found in favor of the plaintiff on
defendants’ counterclaim.

The defendants filed a Motion To Strike and To Set Aside the
Verdict and, following further briefing and argument, the trial
court granted that motion. Feddeman & Company filed
this appeal, and the defendants assigned cross-error.

I.

On appellate review of the trial court’s action setting aside
the verdict, we consider whether there was sufficient credible
evidence to establish the claims against the defendants, and we
consider the evidence and reasonable inferences therefrom in the
light most favorable to the plaintiff. Nichols v. Kaiser
Foundation Health Plan
, 257 Va. 491, 494, 514 S.E.2d 608, 609
(1999); Carter v. Lambert, 246 Va. 309, 313-14, 435 S.E.2d
403, 405-06 (1993).

In Counts I and III of the Motion for Judgment, the plaintiff
claimed that defendants Kotwicki, Smith, Jordan, Casey,
Bartholomew, and Wooldridge breached their fiduciary duties to
the corporation. In setting aside the jury’s verdicts in favor of
the plaintiff on Counts I and III, the trial court concluded that
these defendants did not breach their fiduciary duties because
they were entitled to engage in "reasonable preparations to
compete within certain limitations."

We agree that, prior to resignation, these defendants were
entitled to make arrangements to resign, including plans to
compete with their employer, and that such conduct would not
ordinarily result in liability for breach of fiduciary duty.
However, the right to make such arrangements is not absolute.
This right, based on a policy of free competition, must be
balanced with the importance of the integrity and fairness
attaching to the relationship between employer and employee or
corporation and corporate director. Science Accessories Corp.
v. Summagraphics Corp.
, 425 A.2d 957, 962-63 (Del. 1980); Maryland
Metals, Inc. v. Metzner
, 382 A.2d 564, 568 (Md. 1978). Under
certain circumstances, the exercise of the right may constitute a
breach of fiduciary duty. Restatement (Second) of Agency
? 393 cmt. 1 (1957).

Liability for breach of fiduciary duty has been imposed when
the employees or directors misappropriated trade secrets, misused
confidential information, and solicited an employer’s clients or
other employees prior to termination of employment. See, e.g.,
Maryland Metals, and cases cited therein. Whether specific
conduct taken prior to resignation breaches a fiduciary duty
requires a case by case analysis.

In Duane Jones Co. v. Burke, 117 N.E.2d 237 (N.Y.
1954), certain officers, directors, and employees of an
advertising agency "met and agreed to take over the
business" of their employer "either by purchase of the
controlling interest in the corporation or by resignation en
masse and the formation of a new agency." Id. at 245.
The employees presented a purchase offer for the controlling
interest in the agency and told the majority stockholder, who was
also president of the agency, that if the offer was not accepted,
the employees would resign. The offer was rejected and shortly
thereafter the members of the group submitted resignations on the
same day in substantially identical form. A new advertising
agency was formed and, within a month, the new agency had
acquired 9 of the approximately 25 clients formerly serviced by
the old company, Duane Jones Co., and had acquired more than 50%
of that agency’s personnel. The evidence also showed that the new
agency acquired certain clients and employees through the action
of the defendants while those defendants were completing their
duties with their former employer, although the defendants had
already stated their intention to resign. Id.

In approving the jury verdict in favor of the plaintiff, the
Court of Appeals of New York concluded that each of the
defendants was required to " ‘exercise the utmost good faith
and loyalty in the performance of his duties’ " and that
their conduct " ‘fell below [that] standard.’ " Id.
at 245.

Similarly in ABC Trans National Transport, Inc. v.
Aeronautics Forwarders, Inc.
, 413 N.E.2d 1299 (Ill. App.
1980), the court found that the coordinated resignation of key
management employees pursuant to their organized plan resulting
in "the sudden, potentially crippling loss of half of [the
employer's] business and major customers, as well as substantial
numbers of its personnel" was an actionable breach of
fiduciary duty. Id. at 1306.

The evidence in the instant case is substantially similar to
that in the Duane Jones case. Here, the employee and
director defendants met and formulated a plan to resign en
masse if Kent Feddeman rejected their buyout offer,
knowing that a resignation or walk out by all of them would
"be devastating to" the corporation. The plan included
anticipation of future employment with Langan Associates, a rival
business, and such future employment included securing
plaintiff’s clients and employees as clients and employees of
Langan Associates. The record shows that these defendants
informed other employees of the plan to resign, supplied
resignation letters for use by other employees, and told
employees that they were "going to go join John Langan, and
they could come too."

A total of 11 resignations were submitted on December 2 and,
within four days, a total of 25 of the plaintiff’s 31 employees
resigned and joined Langan Associates. By December 5, all of the
plaintiff’s clients had been solicited to join Langan Associates
and approximately half of those clients eventually moved their
accounts to Langan Associates.

In considering this evidence, the jury was instructed that
employees and directors of a corporation are required to
"exercise the utmost good faith and loyalty" toward the
corporation and may not act "in a manner adverse to the
corporation’s interest." The jury was also told that
corporate directors, while employed by the corporation, could
inform other employees of their intent to leave the corporation,
but could not solicit such employees to join them in a rival
business and could not use confidential or proprietary
information.

The evidence shows that these defendants did more than prepare
to leave their employment and advise others of their plan. As in Duane
Jones
, the totality of the defendants’ actions provided
credible evidence to support a jury determination that their
conduct fell below the required standard of good faith and
loyalty and constituted a breach of fiduciary duty. Therefore,
the judgment of the trial court setting aside the jury verdict in
favor of plaintiff on Counts I and III was error.

II.

Count VI of the Motion for Judgment charged that the employee
and director defendants, along with Langan Associates and John P.
Langan, individually, violated Code ?? 18.2-499 and
–500 because these defendants, intentionally and without
legal justification, conspired to injure plaintiff’s business
and, as a result of that conspiracy, plaintiff suffered financial
harm. The jury was instructed that to prevail on this count, the
plaintiff had to prove by clear and convincing evidence that
these defendants combined for the purpose of willfully and
maliciously injuring plaintiff’s business and that the business
was injured as a result of these actions. The jury was further
told that

[t]he term ‘malice’ means that the defendants acted
intentionally, purposefully and without legal justification.
Without legal justification may include a breach of their
fiduciary duty or assisting someone to breach their fiduciary
duty. Should corporate officers or directors act in concert to
breach their fiduciary duties and cause injury to the
corporation, they may be liable for conspiracy. The term ‘malice’
does not require the plaintiff to prove that a conspirator was
motivated by hatred, personal spite, ill will or a desire to
injure the plaintiff.

The jury returned a verdict finding that all corporate
director and employee defendants as well as John Langan and
Langan Associates violated ?? 18.2-499 and -500. The trial
court set aside the jury verdict, finding that there was no
evidence that these defendants "combined with an intent to
injure" plaintiff and that there was no evidence of
"unlawful acts in furtherance of the combination."

The plaintiff contends that the jury’s finding of conspiracy
was supported by evidence that John Langan and the members of the
Buying Group met on August 31, November 10, and November 12 and
formulated a plan to impose "leverage" on Feddeman to
accept the buyout offer. The plan was that the members of the
Buying Group would resign en masse if Feddeman
refused the buyout offer and, with Langan’s agreement, go to work
for Langan Associates. Jordan, although not a member of the
Buying Group, was told of and agreed to participate in the
resignation plan. The plan also included securing the
resignations of other senior employees, whom John Langan also
agreed to hire.

The plaintiff maintains that Langan Associates’ participation
in the conspiracy is shown by evidence that its legal counsel
represented the Buying Group, advised the Buying Group regarding
the resignation and solicitation of other employees and clients
of the plaintiff, drafted Jordan’s resignation letter, and was
paid for these services by Langan Associates.

Establishing a conspiracy in violation of ?? 18.2-499
and –500 does not require proof that the conspirators’
"primary and overriding purpose is to injure another." Advanced
Marine Enterprises v. PRC Inc.
, 256 Va. 106, 117, 501 S.E.2d
148, 154 (1998). As indicated in the instruction given to the
jury in this case, the plaintiff was only required to show that
the defendants acted "intentionally, purposefully, and
without lawful justification." Id., 501 S.E.2d at
154-55.

The trial court concluded that the defendants’ actions were
undertaken for no other purpose than "to effectuate the
planned merger." However, considering the evidence and all
reasonable inferences therefrom in the light most favorable to
the plaintiff, as we must, we find that this conclusion was
error.

The evidence is clear that the plan to submit resignations was
initiated as a means of exerting leverage against Feddeman to
accept the Buying Group’s offer and thus facilitate a merger of
plaintiff with Langan Associates. This plan was based on the
principle that the departure of the defendants and the other
employees would so adversely impact the plaintiff that Feddeman
would not accept those resignations and let the employees depart.
Injury to the plaintiff was a known and intended result of the
plan. The employee and director defendants cannot avoid
responsibility for their actions because their resignation plan
was not their first or preferred choice of action. The evidence
in this case is clearly sufficient to support a jury
determination, not only that the defendants acted intentionally
and purposefully, but that they knew and intended that their
resignation plan, if implemented, would injure the plaintiff.

This knowledge was not limited to the employee and director
defendants. John Langan and Langan Associates were aware that the
resignation plan was considered "leverage" and that, if
implemented, would adversely affect the plaintiff. Langan and
Langan Associates facilitated development of the plan by
providing legal services and agreeing to hire plaintiff’s former
employees.

The evidence also supports a jury determination that the
defendants’ actions were without legal justification. The jury
was instructed that the failure of legal justification "may
include a breach of their fiduciary duty or assisting someone to
breach their fiduciary duty." As discussed above, the
evidence was sufficient to support a jury finding that the
planned resignation en masse from Feddeman &
Company was a breach of the director and employee defendants’
fiduciary duties. The evidence was also sufficient to show that
the conduct of John Langan and Langan Associates assisted the
director and employee defendants in the breach of their fiduciary
duties. Applying the jury instruction to this evidence, we find
there was sufficient credible evidence for the jury to conclude
that the defendants’ actions were without legal justification.

Accordingly, the trial court erred in setting aside the jury
verdict in favor of the plaintiff on Count VI.

III.

The plaintiff sought compensatory damages for a single injury
resulting from the various causes of action and the jury awarded
a single damage amount of $3,300,000. In light of our holding
that the trial court erred in setting aside the jury verdict in
favor of the plaintiff on the breach of fiduciary duty counts,
and the statutory conspiracy count, it is unnecessary to consider
the plaintiff’s assignments of error regarding the trial court’s
action in setting aside the jury’s verdicts on the intentional
interference with contract and business expectancy and usurpation
of corporate opportunity.[1] However, the defendants argue
that, even if the trial court erred in setting aside the jury
verdict, final judgment should not be entered in favor of the
plaintiff, because the trial court erred in instructing the jury.

In an assignment of cross-error, the defendants assert that
the trial court erred when it refused two jury instructions
offered by the defendants concerning breach of fiduciary duty.
The trial court stated that it would not give these two
instructions because the matters they addressed were covered in
other instructions. Additionally, the trial court observed that
other instructions adequately set out the elements of the cause
of action and that one of the instructions "sounds like
[defendants'] closing argument."

We agree that the proposed instructions were cumulative of
other instructions given on this issue. While a party is entitled
to jury instructions supporting his theory of the case, if
supported by adequate evidence, a trial judge is not required to
give proffered jury instructions which are cumulative or repeat
matters contained in other instructions. Medlar v. Mohan,
242 Va. 162, 168-69, 409 S.E.2d 123, 127 (1991); Adams v.
Plaza Theatre, Inc.
, 186 Va. 403, 409-10, 43 S.E.2d 47, 51
(1947). Therefore, the trial court’s refusal to give the
defendants’ proffered instructions was not error.

IV.

In summary, for the reasons stated, we will reverse the
judgment of the trial court and reinstate the verdict of the jury
in favor of the plaintiff on Counts I, III, and VI. Because the
trial court did not consider entry of an award in accordance with
the provisions of ? 18.2-500, we will remand the case for
entry of a judgment consistent with this opinion.[2]

Reversed and remanded.

FOOTNOTES:

[1] We also note that usurpation of
corporate business opportunity is generally considered a breach
of fiduciary duty rather than conduct constituting a distinct
cause of action. Trayer v. Bristol Parking, Inc., 198 Va.
595, 603-04, 95 S.E.2d 224, 230 (1956); Meiselman v. Meiselman,
309 N.C. 279, 306-08, 307 S.E.2d 551, 567 (N.C. 1983).

[2]
Section 18.2-500 provides that a person injured in his business
through violation of ? 18.2-499 may recover
"three-fold the damages by him sustained" along with
costs and attorneys’ fees.

 

 

 

 

 

 

 

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