Lawrence v. Kennedy — Lessons for the Unwary

By: Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes, P.C. in Melville, can be reached at lkb@barnespc.com

 

In Lawrence v. Kennedy, — N.Y.S.2d —-, 2011 WL 5107234, 2011 N.Y. Slip Op. 21377 (Nassau Sup. Ct. 2011), plaintiff Lawrence S. Lawrence, a New York attorney, moved for summary judgment in lieu of complaint against defendants Michael F. Kennedy and his former law firm Lawrence and Walsh, P.C.  In response both defendants moved to dismiss the complaint against them.

 

According to the decision, plaintiff, a New York attorney, was the founding partner of defendant law firm Lawrence and Walsh, P.C. (the “Firm”), which was established in 1972.  In 2008, an agreement was reached between the plaintiff and the Firm as follows:  (1) plaintiff would relinquish his status as a member of the Firm, and (2) in exchange for relinquishing his status, plaintiff would remain at the Firm as an employee acting in an “of counsel” capacity.

 

Two agreements were executed in January 2008 to effect this agreement between the parties, namely a “Stock and Related Asset Purchase Agreement” and an Employment Contract.  In these agreements plaintiff conveyed his 50% ownership interest in the Firm to the Firm itself, and in exchange plaintiff was offered a 4 ½ year term employment contract with the Firm, which would end in June 2012.

 

The employment contract set forth that the plaintiff would assume the “responsibilities, duties and authority” customarily associated with his “of counsel” position, and that he was to devote “substantially all of his business time, attention, expertise and efforts to the business and affairs of the Firm in the same manner as past practices”.  As compensation, plaintiff would be entitled to $418,300 in fixed salary to be spread evenly over the employment contract term, and was entitled to receive performance based salary amounts calculated in accordance with a pre-determined formula set forth in the agreement.  The agreement set forth, however, that the plaintiff “irrevocably waives” a right to enforce the agreement against any individual members of the firm and that plaintiff can look solely to the Firm for recovery.

 

In addition, the employment agreement contained a clause stating that the agreement “shall be deemed an instrument for the payment of money, provided, however, that this provision shall not constitute a waiver of any defenses or counterclaims the Firm may have to enforcement of this provision.”  It further provided that the Firm could terminate plaintiff “for cause” and that plaintiff could be terminated upon plaintiff’s death or disability for 90 days.  If the Firm were to terminate the plaintiff for death or disability, the Firm would remain responsible “for accrued, performance-based salary earned up to the date of termination,” and fixed salary amounts “for the remainder of the Term…”.  If the Firm were to default in paying plaintiff’s fixed salary and that default remained uncured for more than 30 days, then the entire unpaid, fixed salary amount would at plaintiff’s option become immediately due and owing.

 

After the agreements were executed, plaintiff continued to work for the Firm until September 2010 when plaintiff suffered a stroke.  Thereafter, plaintiff was unable to perform his employment duties under the contract due to neurological ailments the plaintiff suffered from.  Soon thereafter, plaintiff’s daughter informed defendant Michael Kennedy (“Kennedy”), the managing member of the Firm, that plaintiff could not return to the Firm due to medical issues associated with plaintiff’s stroke.

 

When plaintiff’s daughter asked about the Firm’s obligation under the employment contract, Kennedy stated to plaintiff’s daughter that the Firm had “some real concerns and issues with respect to …[the plaintiff’s] conduct” and that these concerns were “allegedly founded on ‘significant and serious claims’ which the Firm had against the plaintiff – in sums purportedly exceeding any salary amounts the Firm might owe the plaintiff under the 2008 employment agreement.”

 

According to plaintiff’s summary judgment papers, the Firm subsequently terminated him in January 2011 and failed to pay any remaining salary amounts.  Plaintiff claims that at the time he was terminated, there were amounts outstanding which were owed to him under  from February 2010.  Subsequent to his termination, plaintiff served a notice of default upon the Firm.  When the amounts claimed to be due and owing were not cured, plaintiff filed the instant action against the Firm and Michael Kennedy individually.

 

Plaintiff’s verified complaint contained three causes of action; two against both the Firm and Kennedy for gross negligence and willfully breaching their obligations under the contracts to pay plaintiff’s fixed and performance based salary, and the third cause of action for an accounting alleging that a fiduciary relationship existed wherein plaintiff would be entitled to an accounting.  At the same time as he served the verified complaint, plaintiff moved for summary judgment in lieu of complaint with respect to the fixed salary portion of the employment agreement under CPLR 3213.  Thereafter, each defendant separately moved to dismiss the complaint.

 

In making the motion to dismiss, defendants argued that: “(1) the power of attorney relied on by Sherry Lawrence is defective, and the plaintiff otherwise lacks capacity to commence and maintain the action; (2) [] the employment agreement precludes enforcement of the contract against individual firm members, including managing member, Michael F. Kennedy; (3) there exists no fiduciary relationship between the defendants and the plaintiff and thus no accounting is warranted; and (4) the employment contract does not constitute an instrument for the ‘payment of money only’ within the meaning of CPLR 3213 and, in any event, the Firm possesses a fraudulent inducement defense which warrants dismissal of the complaint as a matter of law.”  Lawrence, 2011 WL 5107234 at *3.

 

The court granted defendant Kennedy’s cross motion to dismiss the causes of action asserted against him, finding that it was undisputed that Kennedy did not execute the employment agreement in his individual capacity and thus he was not a party to the contract sued upon by the plaintiff.  Furthermore, the court found the exculpatory clause in the employment agreement to be important, wherein the plaintiff irrevocably waived the right to enforce the agreement against any individual members of the Firm and that he can only look to the Firm for recovery under the agreement.  The court noted that it will not “add or excise terms *** so as to make a new contract under the guise of interpreting the writing,” especially where the plaintiff is a sophisticated businessman and the agreement is negotiated by sophisticated and well-counseled parties.

 

The court then turned to defendants’ motion to dismiss the third cause of action for an accounting based on an alleged breach of a fiduciary duty.  In dismissing the cause of action, the court found that even interpreting the facts alleged in the complaint in a light favorable to the plaintiff, the complaint did not show an “arms-length, employer-employee relationship at issue here [giving] rise to a fiduciary between the parties.”  Upon review of the contract, the court merely found that after the conveyance of the stock to the Firm, the Firm’s obligation to pay plaintiff was merely “contractual and commercial” and not fiduciary in nature.

 

Next, the court analyzed plaintiff’s motion for summary judgment in lieu of complaint.  The court found that employment agreement concerning plaintiff’s right to fixed income was not an agreement for the payment of money only in which CPLR 3213 would apply.  Instead, the court found that the agreement was “an employment contract – one which contains a variety of interrelated provisions governing the parties’ respective rights, duties and obligations.”  Furthermore, the court reject plaintiff’s argument that the Firm had no defenses at this point in time and that the promise to pay is now unconditional due to the Firm’s default.  The court noted that a reading of the instrument in the first instance should be that of an unconditional promise to pay, not through a later performance by the parties, and that here the agreement between the parties at execution of the agreements was that of an employment contract and not an agreement for money only.

 

Lastly, the court denied the Firm’s motion to dismiss the first and second causes of action against the Firm.  The court found allegations in the complaint sufficiently plead the causes of action for breach of contract for failure to pay both fixed and performance based salary amounts under the employment agreement.

 

The decision is particularly important to attorneys who engage in transactional drafting practice and those who litigate the same.   First, it appears that the Plaintiff, by entering into an employment agreement with his former partner, lost any fiduciary benefit which ran between the partners, when the Court ruled that the employment agreement alone was insufficient to impute a fiduciary obligation upon the defendant sufficient to found an accounting claim.  Second, despite the Plaintiff’s effort to expedite a monetary damages claim by characterizing the agreement as an instrument for the payment of money only (thereby triggering expedited relief via CPLR 3213), the Court rejected the Plaintiff’s proposed use of CPLR 3213 to found his claim against the former partner.   Third, the Plaintiff lost the ability to pursue the Firm for claims premised upon the employment agreement.  These three strikes undermined the Plaintiff’s claims against the Defendants, rendering the claims more difficult to resolve.

 

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