Ackerman v. Pilipiak

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
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In re
Case No. 05-86636-reg
MARINE RISKS, INC., 	Chapter 7
Debtor.
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NEIL H. ACKERMAN, CH. 7 BANKR. TRUSTEE
OF MARINE RISKS, INC., 	Adv. Proc. No. 06-08419-reg
Plaintiff,
v.
WALTER PILIPIAK,
Defendant.
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MEMORANDUM DECISION
This matter is before the Court pursuant to a third-party complaint commenced by the
Debtor pre-petition, which was subsequently removed to the Bankruptcy Court. Neil H.
Ackerman, Esq. (“Trustee”), the Chapter 7 trustee in the matter of Marine Risks, Inc. (“Debtor”)
has been substituted as the plaintiff in place of the Debtor, and Walter Pilipiak (“Defendant”) is
the defendant. The first cause of action in the complaint asserts that the Defendant breached his
fiduciary duties as an officer and a director of the Debtor by soliciting the Debtor’s clients for his
own benefit while he was employed by the Debtor. In the second cause of action, the Trustee
asserts that the Debtor breached his fiduciary duties as an officer and director of the Debtor by
appropriating for his own benefit a business opportunity belonging to the Debtor while he was
employed by the Debtor. In the third cause of action, the Trustee alleges that the Defendant
tortiously interfered with a proposed transaction between the Debtor and a third party.
The Trustee has concluded his case in chief and requests that the first two causes of
action in the complaint be amended to conform to the evidence presented at trial pursuant to Fed.
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R. Civ. P. 15(b). The Trustee seeks to amend the first and second causes of action to include the
Defendant’s conduct after he resigned from the Debtor, and to add to the second cause of action
that the Defendant misappropriated key employees of the Debtor. The Trustee also seeks to add
to the second cause of action a claim that the Defendant breached his fiduciary duties as an
officer and director of the Debtor by misappropriating a second business opportunity of the
Debtor’s for his own benefit. 	The Defendant opposes the Trustee’s request and moves for
judgment in favor of the Defendant dismissing all three counts of the complaint pursuant to Fed.
R. Civ. P. 52(c) and Fed. R. Bankr. Proc. Rule 7052 (“Motion”). For the reasons set forth below,
(1) the Trustee’s request to amend the complaint is granted except as to the allegation that the
Defendant breached his fiduciary duties to the Debtor after he resigned, and (2) the Motion is
granted as to all causes of action as amended. The Plaintiff has failed to establish a prima facie
case under any of the three causes of action. As to the first two causes of action, the Trustee
failed to meet his burden of proof that the Defendant breached his fiduciary duties as an officer
and director of the Debtor, and that the Defendant’s conduct caused injury to the Debtor,
resulting in quantifiable damages. The Plaintiff has also failed to establish a prima facie case for
tortious interference with a proposed transaction between the Debtor and a third party because
there was no binding agreement that the Defendant could interfere with, and there is no evidence
that the Defendant’s conduct caused the third party to breach any contract. In addition, there is
no evidence of damage to the Debtor flowing from the Defendant’s conduct.
Procedural History
On November 6, 2000, the Debtor filed the complaint as a third-party action against the
Defendant in New York State Supreme Court, New York County. The third-party action was
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commenced in response to a complaint filed by the Defendant and Robert Ludemann
representing the shareholders of the Debtor, against Bruce Keyes, the Debtor and other directors
of the Debtor. The complaint alleged that Bruce Keyes and the other individual defendants
engaged in a course of conduct in violation of their fiduciary duties to the Debtor. The third-
party action was removed to the United States District Court for the Southern District of New
York on January 4, 2001 (the “SDNY Lawsuit”). The allegations contained in the SDNY
Lawsuit describe a course of conduct by the Defendant whereby he intended to and in fact did
interfere with and prevent a proposed transaction between the Debtor and a competitor, Nausch,
Hogan and Murray (“NHM”). As set forth in greater detail below, the beneficiaries of the NHM
transaction would have been solely the shareholders of the Debtor. Under the transaction the
shareholders would have received a stream of payments based on a percentage of income
generated by the former clients of the Debtor over five years. In the SDNY Lawsuit, the Debtor
asserted the following three causes of action against the Defendant: 1) prior to his resignation as
an officer and director of the Debtor, Defendant “actively solicited clients of [the Debtor], and
diverted those clients and their business away from [the Debtor] for his own purposes” in breach
of his fiduciary duties to the Debtor; 2) the Defendant breached his duties as an officer and
director of the Debtor when he “utilized his position and information acquired while in a
fiduciary role as an officer and director of [the Debtor], to appropriate the business opportunity
afforded by [the NHM transaction] for his own benefit, by diverting the business and clients
encompassed by [the NHM transaction] to his own use while continuing to serve as a member of
the Board of Directors of [the Debtor];” and 3) the Defendant tortiously interfered with the
agreement between the Debtor and NHM, resulting in NHM’s withdrawal of its proposed NHM
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transaction.1 For each count, the plaintiff sought damages of at least $1 million, a figure based
on the aggregate amount of revenues the shareholders would have received from NHM over the
five year period had the NHM transaction taken place. On January 8, 2001, the Defendant filed
an answer to the complaint and asserted, inter alia, following affirmative defenses: 1) failure to
state a claim, 2) a defense is founded upon documentary evidence, 3) any loss or damage
resulted from the breach of duty or fault of the Debtor and/or others for whom the Defendant is
not responsible, 4) the Debtor is not the real party in interest, failure to mitigate damages, the
complaint is interposed in bad faith and is barred by the equitable doctrine of unclean hands.
Thereafter, in late 2005, the SDNY Lawsuit was marked off the District Court’s calendar for lack
of prosecution.
On September 22, 2005, the Debtor filed a petition for relief under Chapter 7 of the
Bankruptcy Code, and thereafter the Trustee was appointed as acting trustee in the Debtor’s
bankruptcy case. By stipulation between the parties so-ordered by the District Court on
September 18, 2006, the SDNY Lawsuit was reopened and transferred to the Bankruptcy Court,
without any amendment to the claims originally asserted by the Debtor. February 1, 2006, was
fixed as the last date to file claims in this case. According to the claims register, there are
$153,742.92 in unsecured claims, and one secured claim in the amount of $250,000. The law
firm currently representing the Defendant filed the secured claim based on an alleged charging
lien against the Debtor. The Trustee’s administration claims have not been calculated to date,
but the Trustee’s professionals have spent considerable time on this case. Based on the time
spent by the Trustee’s professional litigating this adversary proceeding to date, these
1A fourth cause of action was dismissed by order entered on January 10, 2003.
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professionals will be seeking compensation from this estate in amounts which will be significant
in relation to the dollar amount of claims filed in this case.
On February 23, 2009, the parties filed a Joint Pretrial Memorandum outlining the
parties’ summaries of the case and the facts and issues of law in dispute. Included in the Joint
Pretrial Memorandum is the Trustee’s contention that “[a]s a result of [the Defendant’s] breach
of fiduciary duty in diverting the clients and key employees of the Debtor for his own benefit,
appropriation of the business opportunity of the Debtor presented by [Cosmos Services America,
Inc. (“Cosmos”), another insurance broker], and the tortuous (sic) interference with the NHM
Sales Agreement, the Debtor became unsalvageable and its demise imminent.” The Joint Pretrial
Memorandum also includes the Trustee’s recitation of issues of law to be determined, including,
“[w]hether [the Defendant] breached his fiduciary duty as an officer, director and employee of
the Debtor by misappropriating the business opportunity presented by Cosmos?”
The trial took place on February 26, 2009, April 21, 2009, August 4 - 6, 2009, October
13 - 15, 2009, October 23, 2009, October 28, 2009, November 17, 2009 and January 5, 2010.
On January 25, 2010, the Defendant filed the Motion. On February 24, 2010, the Trustee filed
opposition to the Motion, and included his request to amend the complaint to conform to the
evidence presented at trial. On April 17, 2010, the Defendant filed a response to the Trustee’s
opposition in which the Defendant objected to the Trustee’s request to amend the complaint.
Thereafter, the Motion was marked submitted.
Facts
The Debtor was a New York corporation engaged in the business of brokering marine,
automobile and other types of insurance. Bruce Keyes is the majority shareholder of the Debtor,
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holding fifty-nine (59) shares of common stock, representing 62.8% of the common shares
issued, and ten (10) shares of preferred stock, representing 33.33% of the preferred shares issued.
The Defendant holds fifteen (15) shares of common stock in the Debtor, representing 16% of the
common shares issued, and ten (10) shares of preferred stock, representing 33.33% of the
preferred shares issued. The Defendant was an Officer and Director of the Debtor until his
resignation on December 21, 1998. Frank Marcigliano was a Director of the Debtor during the
relevant time period and is an attorney licensed to practice law in the State of New York. During
the time period relevant to this proceeding, Keyes was the President and a Director of the
Debtor. Robert Ludemann is also a shareholder of the Debtor owning approximately 5% of the
common shares of the Debtor and 16% of the preferred shares of the Debtor. Kevin Mullady
was an employee and an officer of the Debtor and he held approximately 5% of the Debtor’s
common stock and 16% of the Debtor’s preferred stock.
The Debtor was in the insurance brokerage business. The Debtor’s business involved
assisting clients in analyzing their specific insurance needs, then obtaining the appropriate
policies for the clients. The Debtor’s income was derived from commissions earned for
procuring the insurance for its clients. 	(2/26/09 Tr. p. 53) The Debtor was also in the
reinsurance business, which assisted insurance companies in spreading their insurance risks.
Most of the policies procured by the Debtor for its clients provided coverage for one year, at
which time the client was free to renew the policy or terminate the policy. (2/26/09 Tr. p. 54)
Towards the end of each coverage year, the Debtor would present the client with a proposal
based on the Debtor’s analysis of the client’s insurance needs for the coming year. Once the
client agreed to purchase insurance using the Debtor as its broker, the client would issue a
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“broker of record” letter stating that the Debtor was the client’s agent for all purposes except the
collection of premiums. Commissions on policies were earned by the Debtor as broker as of the
date the business was first placed, and remained property of the Debtor as the original broker.
(2/26/09 Tr. p. 62) With respect to marine insurance, the Debtor customarily billed the client
for the premium after the client signed the insurance binder, and remitted the premium, minus
the commission earned by the Debtor, to the insurance company actually providing the
insurance. To the extent the client was billed on a monthly basis, as was the case for marine
open cargo contracts, the Debtor would collect the monthly premiums and deduct its
commission, forwarding the remainder to the appropriate insurance company.
The Defendant was hired by the Debtor in 1987 as a Vice President in the Debtor’s
marine insurance department. Initially the Defendant was responsible for soliciting new clients,
negotiating insurance contracts, procuring insurance for clients, and resolving claims filed by
clients. (10/13/09 Tr. p. 85) Kevin Mullady, who worked with the Defendant at his prior
employer, also joined the Debtor shortly thereafter. The Defendant was ultimately named a
director of the Debtor and was promoted to the position of Executive Vice President. (10/13/09
Tr. p. 105) In 1994, Marcigliano became a Director of the Debtor, joining Keyes and the
Defendant.
In the Summer of 1997, after the Defendant’s responsibilities had been increased to
include oversight of the Debtor’s general operations, the Defendant discovered that the Debtor
was retaining return premium checks which belonged to the Debtor’s clients. When the
Defendant questioned Keyes about this practice, Keyes directed that false memo bills be drawn
up to correspond to the deposits in question. Thereafter, the Defendant undertook, on his own,
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an internal investigation of the Debtor’s prior and current billing processes. Upon completion of
the Defendant’s investigation in December 1997, he concluded that the Debtor had been
systematically improperly collecting and retaining funds which belonged to clients of the Debtor.
In addition to discovering these improper diversions of funds, the Defendant determined that the
Debtor’s financial statements were materially false. (10/15/09 Tr. p. 98) The Defendant admits
that he did not share the results of his investigation with either Keyes or Marcigliano, the two
other Directors of the Debtor.
In late 1997, after a consultant had been retained to review the Debtor’s operations and
make recommendations to improve the Debtor’s business, the Debtor underwent an internal
restructuring, resulting in significant changes in the Defendant’s responsibilities. On December
23, 1997, the Debtor issued an inter-office memorandum summarizing the proposed restructuring
(“Restructuring Memo”). (Plaintiff’s Ex. 118) According to the Restructuring Memo, as of
early January, 1988 the Defendant would be responsible for sales, marketing and new business
development, and would be coordinating with the branch managers for the Debtor’s Midwest
and West Coast offices. In addition, the Defendant would work directly with the general
managers of the Debtor in charge of marine and non-marine business, while continuing to have
senior account executive responsibilities for the following six clients of the Debtor: Evergreen
America Corporation, Eva Air, Yamato Transport, Rico Corporation, Atlantic Container Line,
and co-account executive responsibilities for Matheson Gas Products. (Plaintiff’s Ex. 118)
Significantly, the Debtor’s accounting department would no longer report to the Defendant, and
the Defendant would not be responsible for supervising the Debtor’s employees. As a result of
the restructuring, according to the Defendant’s testimony, the Defendant’s time would now be
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spent on sales and marketing. (10/15/09 Tr. p. 107, 111) The Defendant objected to his
decreased role in operations and voiced these objections to Keyes, but the Defendant’s new role
remained unchanged. (10/15/09 Tr. p. 121)
In January and February 1998, the Defendant was interviewed by the New York State
Department of Insurance to discuss his investigation of the Debtor’s accounting irregularities.
(10/15/09 Tr. p. 58, 164) In the Spring of 1998, the Defendant met with the New York County
District Attorney’s office to discuss these findings. (10/15/09 Tr. p. 165)
During the second half of 1998, the Debtor’s account managers were in the process of
ensuring that the Debtor’s clients renewed their broker of record contracts with the Debtor which
were set to expire at the end of the year. This process involved gathering information from the
current clients, meeting with the clients to determine the best insurance products for each client,
organizing information received from each client, and suggesting insurance products to each
client. (8/4/09 Tr. p. 42) Once the client agreed in principal to the next year’s coverage, the
account manager would notify the insurance company of the policy being renewed and its terms,
and an insurance binder would be prepared. (8/4/09 Tr. p. 42)
As of November 1, 1998, the Debtor had approximately 100 clients. Keyes testified that
the Debtor’s gross revenues for 1998 were approximately $2.4 to $2.5 million. Nippon Express
was the Debtor’s largest client, and represented between 30% and 40% of the Debtor’s revenue.
(8/4/09 Tr. p. 41, 10/28/09 Tr. p. 157) Approximately 60% to 70% of the Debtor’s clients were
Japanese-owned businesses. (8/4/09 Tr. p. 47) The Debtor had approximately twenty four
employees at this time. Approximately 70% of the Debtor’s Japanese accounts were scheduled
for renewal at the end of 1998. (8/4/09 Tr. p 47)
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On or before November 10, 1998, Keyes learned that the District Attorney for New York
County, had obtained a criminal indictment naming him. On November 11, 1998, Keyes asked
the Defendant to sign a copy of the minutes of a special meeting of the Debtor’s Board of
Directors dated November 10, 1998, which, inter alia, provided that the “full resources of the
[Debtor]” would be employed to defend any action brought against the Debtor or Keyes,
including any criminal action against Keyes. (Defendant’s Ex. G) The Defendant refused to
sign the minutes as he was not present at this meeting, and he did not consent to the use of the
Debtor’s funds to pay the costs of defending Keyes in a criminal action against him personally.
On November 12, 1998, Keyes was arrested and charged with nineteen counts of fraud
and grand larceny. On the evening of November 12, 1998, Keyes convened a telephone
conference call with the Defendant and the other key employees of the Debtor to discuss his
strategy to retain the Debtor’s clients in light of his indictment. The Defendant testified that
after Keyes was indicted, the Debtor could only continue as a viable business if Keyes “stepped
down” from his involvement with the Debtor. (10/28/09 Tr. p. 50) Immediately after Keyes’
indictment became public knowledge, clients and other parties began contacting the Debtor with
questions concerning the indictment. One of the people who contacted the Defendant was Mr.
Hiroyuki Nonomura, an officer of Cosmos, who discussed with the Defendant possible
employment opportunities, which the Defendant declined. (10/28/09 Tr. p. 9, 98) The
Defendant testified that Mr. Nonomura asked whether Keyes was considering selling the Debtor,
to which the Defendant responded that Nonomura would have to ask Keyes. (10/28/09 Tr. p. 98)
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On November 16, 1998, Keyes met with the Defendant and other members of the
Debtor’s management, during which Keyes stated he would be meeting with certain clients to
“handle damage control.” (10/28/09 Tr. p. 76) On November 25, 1998 the Debtor’s
management team, including the Defendant, met and discussed the indictment and jointly
requested in writing that Keyes take a leave of absence from his duties at the Debtor until the
indictment was resolved. (10/28/09 Tr. p. 90-93) Keyes declined to step down.
Keyes received word from the Debtor’s largest client, Nippon Express, that it would not
support Keyes after his indictment. (8/4/09 Tr. p. 28) According to Keyes’ testimony, it was
becoming clear to him that as a result of his indictment, the retention of “many” of the Debtor’s
major clients was “in jeopardy.” (8/4/09 Tr. P. 27, 28) Upon further questioning at trial, Keyes
admitted that unless the Debtor entered into a transaction with a “white knight,” many of the
clients would have eventually left the Debtor. (8/5/09 Tr. p. 85, 86)
On the evening of December 2, 1998, Keyes convened a meeting of the Debtor’s
management and revealed that he had met with NHM concerning a potential transaction between
the Debtor and NHM. (10/28/09 Tr. p. 102-103, 4/21/09 Tr. p. 78) Keyes advised that he had
agreed to the terms of a letter of intent between the Debtor and NHM (“Letter of Intent”), subject
to completion of due diligence by NHM. (10/28/09 Tr. p. 115) Pursuant to the terms of the
Letter of Intent, which was executed on December 9, 1998, NHM confirmed its agreement
effective January 1, 1999 to acquire all of the ongoing business interests of the Debtor with
respect to its insurance brokerage, reinsurance brokerage and/or consulting services. (Plaintiff’s
Ex. 67) As of January 1, 1999, NHM would provide services to the clients transferred by the
Debtor. The Letter of Intent provided that NHM would pay to the Debtor’s shareholders 20% of
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the commissions generated by these clients each year for the following five years. The Debtor
would receive nothing from NHM in exchange for the transfer of its assets. Under the structure
of the transaction, Keyes would reap the greatest benefit as the largest shareholder of the Debtor,
and the other shareholders of the Debtor, including the Defendant, would also benefit from the
transaction. Keyes acknowledged in his testimony that only the shareholders of the Debtor
would benefit from the transfer. (4/21/09 Tr. p. 85-86), but the Debtor itself would receive no
monetary benefit.
According to Keyes, the business being transferred to NHM transaction generated to the
Debtor approximately $1 million in annual revenues. (4/21/09 Tr. p. 85) 	The Debtor
designated approximately twenty-eight clients Keyes believed he could have secured the
renewals for ultimate transfer to NHM. (8/4/09 Tr. p. 106) 	According to Keyes’ testimony, this
business comprised approximately 40% of the Debtor’s total business. (8/4/09 Tr. P. 82) Nippon
Express was not included in the business the Debtor agreed to transfer to NHM.
The Letter of Intent further provides that NHM would make an offer of
employment “to all key employees and branch office personnel currently employed by the
[Debtor]” and would be conducting due diligence investigations of the business and staff
interviews commencing the week of December 7, 1998. (Plaintiff’s Ex. 67) The Letter of Intent
also provides that “within a reasonable time after the due diligence investigation is completed by
[NHM, NHM] shall inform [the Debtor], in writing, whether or not, in the sole opinion of
[NHM], there is adequate merit to purchase the assets of [the Debtor].” (Plaintiff’s Ex. 67)
Keyes signed the Letter of Intent on behalf of the Debtor, and added after his signature “subject
to shareholders approval.” (Plaintiff’s Ex. 67) According to the testimony of the Debtor’s
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Director and in house counsel, Frank Marcigliano, the Debtor was not insolvent at the time that
the Letter of Intent was executed. (1/5/2010 Tr. p. 56, 59)
Keyes did not consider the Letter of Intent to be a “firm” contract, and it was subject to a
formal written agreement by the parties, completion of due diligence by NHM and ultimate
approval by the shareholders of the Debtor. (8/5/09 Tr. p. 112-113) Likewise, Marcigliano
testified that the Letter of Intent did not constitute a binding agreement between the Debtor and
NHM for the transfer of the Debtor’s assets. (1/5/10 Tr. p. 49)
At the December 2, 1998 meeting, Keyes stated that Bill Murray, one of the founding
members of NHM, would determine which employees NHM would hire as of January 1, 1999.
(10/28/09 Tr. p. 105) The Defendant interpreted this statement as a de facto dismissal of all
employees of the Debtor, effective as of December 31, 1998. Despite this belief, the Defendant
continued to report to work and to draw a salary from the Debtor after December 2, 1998.
(10/28/09 Tr. p. 105)
After hearing the details of the NHM transaction on December 2, 1998, the Defendant
told Keyes he would be willing to purchase the same assets that NHM was proposing to purchase
under the same terms, which offer was rejected by Keyes and was never presented to the
Debtor’s Board of Directors to consider. (4/21/09 Tr. p. 88) According to Keyes, the Defendant
was unqualified to take over the responsibilities of running the Debtor, and in fact the Defendant
had recently been relieved of his responsibilities as chief operating officer of the Debtor.
(4/21/09 Tr. p. 88) The Defendant also advised Keyes about the phone call he received from
Cosmos on November 12, 1998 and Cosmos’ expressed interest in entering into some type of
transaction with the Debtor. (10/28/09 Tr. p. 116, 1/5/2010 Tr. p. 65) Keyes replied that he was
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not interested in pursuing any opportunity with Cosmos because the Debtor’s largest client at the
time, Nippon Express, was not in favor of a merger with Cosmos. Marcigliano testified that he
recalled the Defendant mentioning Cosmos to Keyes at or around the time of the December 2,
1998 meeting, but he did not believe that an acquisition of the Debtor by Cosmos would be a
“reasonable possibility.” (10/23/09 Tr. p. 115 - 117)
On December 3, 1998, the Debtor issued a press release disclosing the potential NHM
transaction for the purposes of advising the Debtor’s clients that the Debtor intended to transfer
clients and key employees to NHM. (Plaintiff’s Ex. 9, 8/5/09 Tr. p. 92) The press release also
contained the disclosure that Keyes would no longer be involved with the ongoing business of
the Debtor as of January 1, 1999.
On December 3, 1998 through December 21, 1998, the Defendant continued to meet with
the Debtor’s clients and to seek renewals of the insurance contracts which were set to expire at
the and of the year. (Plaintiff’s Ex. 87) Although no former clients of the Debtor were called to
testify at trial, the record includes one e-mail from Howard Heslin of ACL, a client of the
Debtor, to another employee of ACL, dated December 7, 1998, indicating that the Defendant
provided ACL with a proposed renewal contract on behalf of the Debtor, and that the Defendant
advised ACL that he would decide shortly whether he would be leaving the Debtor’s
employment. The e-mail further states that the reason for “this [the Defendant’s impending
decision] is that Bruce Keyes has announced the sale of [the Debtor] to [NHM] selling Walter
down the river. Policies are in Walter’s control as the Broker of Record. I have a scheduled
appointment here with a broker from Marsh-Sedgwick, on Wednesday: 12/9.” (Plaintiff’s Ex.
87)
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On December 3, 1998, the Defendant contacted Cosmos regarding his possible
employment. (10/28/09 Tr. p. 110) Mr. Nonomura, then the Senior Vice President and
Treasurer of Cosmos, returned his call that day or the next day, and by letter dated December 6,
1998, the Defendant related to Cosmos that he “wished to make the following offer for Cosmos
to consider.” (Plaintiff’s Ex. 10) First, he would accept the offer by Mr. Nonomura for
employment by Cosmos as President and a Director. (Plaintiff’s Ex. 10) The Defendant further
outlined that he would bring six key employees to Cosmos as well as “a block of Marine and non
Marine business estimated to generate revenues between $400,000 and $800,000 after a 24
month period.” (Plaintiff’s Ex. 10) No specific clients of the Debtor were named in the letter
except for Nittsu, for the purposes of excluding it in the Defendant’s calculations of potential
revenues. The Defendant further requested in the letter to Cosmos that the listed employees be
offered sign-on bonuses by Cosmos. On December 7, 1998, the Defendant, along with Keyes
and Kevin Mullady, met with Mr. Murray to discuss the NHM transaction. (10/28/09 Tr. p. 154)
Neither the Defendant nor Mullady was offered employment with NHM at that meeting.
(10/28/09 Tr. p. 179)
On December 10, 1998, the Debtor’s largest client, Nippon Express, terminated its
relationship with the Debtor and did not retain Cosmos as its broker. (10/28/09 Tr. p. 94) Keyes
admitted that Nippon Express’s actions would be “tremendously influential” to many of the other
Japanese clients, who would ultimately “look elsewhere” for their insurance needs as well.
(8/4/09 Tr. p. 92)
By letter dated December 11, 1998, Keyes advised the shareholders and directors of the
Debtor of his indictment and stated as follows:
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As you are no doubt aware, recent criminal charges brought by the Manhattan
District Attorney’s office against the undersigned alleging that I caused Marine
Risks, Inc. to engage in multiple schemes to defraud and to wrongfully take
property belonging to customers and/or reinsurance clients of Marine Risks, Inc.
has had a material adverse affect [sic] on the conduct of our ongoing business
operations.
At this writing, we have over 50% of our clients’ renewals coming up within
the next thirty days and can safely say that most, if not all, of these renewals
are in serious jeopardy due solely to the criminal indictment brought by the
District Attorney’s office.
(Defendant’s Ex W-2) (emphasis added).
In Keyes’ letter to the shareholders and directors of the Debtor, Keyes also discussed the
proposed transaction with NHM, and annexed a copy of the Letter of Intent. Keyes also advised
that a special meeting of shareholders and directors would be held on December 29, 1998, for the
purposes of, inter alia, 1) approving the actions taken by the Debtor’s board of directors on
November 10, 1998 on behalf of the defense of officers of the Debtor, 2) approving the proposed
sale of assets to NHM, 3) authorizing the termination of a shareholders agreement between the
Debtor and Keyes, and the Debtor and the Defendant, and 4) approving a new slate of directors
of the Debtor, which did not include the Defendant. (Defendant’s Ex. W-2)
The Defendant testified he arranged a meeting with Cosmos during the week of
December 14, 1998 and received an offer of employment from Cosmos a few days later.
(10/28/09 Tr. p. 126) The Defendant accepted the offer from Cosmos on December 17 or 18,
1998. (10/28/09 Tr. p. 141) The Defendant testified that between December 6, 1998 and
December 21, 1998, he contacted one employee of the Debtor, Kevin Mullady, to inquire
whether he was interested in joining Cosmos. (10/28/09 Tr. p. 127) At the time, Mullady was
an officer and shareholder of the Debtor as well as an employee. According to Mullady, his sole
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initial contact regarding a job opportunity at Cosmos was the Defendant. (10/28/09 Tr. p. 197)
The Defendant continued to meet with clients on behalf of the Debtor. The Defendant
advised clients who asked that he was not going to work for NHM. However, according to the
Defendant he did not advise the clients that he was seeking employment with Cosmos.
(10/28/09 Tr. p. 137, 139) As previously stated, clients were free to leave the Debtor and move
to another broker once their insurance contracts with the Debtor expired. (8/5/09 Tr. p. 118-19)
The following clients of the Debtor did not renew their insurance contracts for the year
commencing January 1, 1999 and instead transferred their accounts to Cosmos prior to January
1, 1999: Yamato Transport USA, Inc., China Products, Evergreen America Corporation, Atlantic
Container Lines, Fox, Inc., Kaline Air Services, Ferdinand Gutman & Co., Mathison Gas
Products, Minami International Corp., Night Hawk Services, Webster Mechanical and Omni
Development. (10/28/09 Tr. p. 133 - 135, 8/4/09 Tr. p. 118 - 142, Plaintiff’s Exs. 17, 87, 109,
110, 131)
On December 21, 1998, the Defendant resigned as an employee of the Debtor, effective
immediately. The morning the Defendant delivered his letter of resignation to Keyes, the
Defendant joined Cosmos as a Vice President. Kevin Mullady resigned from the Debtor on
December 21, 1998. Robert Ludemann submitted his letter of resignation to Keyes on December
28, 1998, which was effective as of December 31, 1998. (Plaintiff’s Ex. 75) Ludemann went to
work for Cosmos as its West Coast manager. (8/4/09 Tr. p. 112) Tamoko Ono resigned from
the Debtor effective December 28, 1998, and she joined Cosmos thereafter. (8/4/09 Tr. p. 108).
However, Ms. Ono had received a letter from the Debtor advising her that she would be
terminated effective December 31, 1998. (8/4/09 Tr. p. 158) Tersa Moya also resigned from the
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Debtor effective December 25, 1998, and she joined Cosmos shortly after her resignation from
the Debtor. (10/28/09 Tr. p. 127, Plaintiff’s Ex. 70) Jim Murphy resigned from the Debtor, and
joined another insurance broker. Some time in 2001, Murphy then joined Cosmos.
On December 21, 1998, NHM advised the Debtor that it was no longer interested in
pursuing the proposed transaction set forth in the Letter of Intent. (8/4/09 Tr. p. 66) By letter
dated December 30, 1998, the Debtor requested the parent company of Cosmos to consider
compensating the shareholders of the Debtor for the accounts and employees of the Debtor
which had transferred to Cosmos. (Plaintiff’s Ex. 88) As in the NHM transaction, the
shareholders would be paid a stream of income over five years and the Debtor would receive no
monetary benefit from the transaction. Cosmos rejected the proposal and rejected any assertion
that they owed any duty to the Debtor. (Plaintiff’s Ex. 89)
As of January 1999, the Debtor employed only approximately eight to ten employees.
(8/4/09 Tr. p. 155) The record does not contain any direct evidence regarding which clients
remained with the Debtor, or whether the Debtor’s profit margin decreased after January 1, 1999.
According to the testimony of Mullady, the Debtor’s former Vice President, if the NHM
transaction had been consummated, the Debtor would not have survived and would have been
dissolved thereafter. (10/28/09 Tr. p. 188-89, 197)
On March 7, 2000, Keyes was convicted of fraud and grand larceny by embezzlement
arising out of a scheme under which he caused the Debtor to overcharge clients for premiums
and to divert premiums which should have been refunded to the Debtor’s customers. Keyes’
conviction was affirmed on October 17, 2002. People v. Keyes, 298 A.D.2d 234, 748 N.Y.S.2d
557 (N.Y. App. Div 2002).
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According to the IRS transcripts of the Debtor’s tax returns, the Debtor’s gross revenues
for 1997 were $2,493,067 (Plaintiff’s Ex. 124), and the Debtor’s gross revenues for 1998 were
$2,229,016. (Plaintiff’s Ex. 124) The IRS transcripts for the Debtor’s tax returns for 1999
reflect sharply lower gross revenues in the amount of $538,934. 	(Plaintiff’s Ex. 122)
According to the Debtor’s tax returns for the years 2000 and 2001, the Debtor’s gross income
decreased from $219,125, to $144,820, respectively. (Plaintiff’s Ex. 125) At least 30% and up
to 40% of the decrease in revenues from 1998 to 1999 was caused by the departure of Nippon
Express, which did not become a client of Cosmos. The record contains no evidence quantifying
the amount of revenue generated by the clients of the Debtor which agreed to transfer their
broker of record designation to Cosmos in late 1998 or 1999, or quantifying the Debtor’s
expected profit margin from these revenues. The Debtor’s consolidated financial report for the
years ended December 31, 1998 and December 31, 1997, include a reference to Keyes’
indictment and a statement by the accounting firm preparing the financial report that his
indictment had a “material affect [sic] on the continued and ongoing business [of the Debtor].”
(Plaintiff’s Ex. 124)
The State of New York revoked both the Debtor’s license and Keyes’ license to engage
in insurance business by a Final Determination and Order dated March 5, 2001 (“License
Revocation Order”). The revocation was effective as of May 21, 2001. The Debtor’s license
was revoked at the same time, because its license depended upon the existence of Keyes’ license.
According to Keyes, he doubted that the State Insurance Department would have approved any
request by Keyes to substitute another broker in place of Keyes. (8/4/09 Tr. p. 162) At that
point the Debtor was out of business. (10/28/09 Tr. p. 194)
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Discussion
A. Amendment of Complaint to Conform to Facts at Trial
The Trustee has moved pursuant to Rule 15(b) of the Federal Rules of Civil
Procedure to amend and conform the pleadings to the evidence presented at trial, alleging that
the parties expressly and implicitly consented to try certain issues not included in the original
complaint. Although not well articulated,2 it appears that the Trustee seeks to amend the
complaint to include the following: First claim for relief: (1) in addition to soliciting clients of
the Debtor, the Defendant solicited key employees of the Debtor for his own benefit; and (2) the
Defendant’s breached his fiduciary duty as an officer and director of the Debtor by soliciting
clients and key employees of the Debtor for the benefit of another company (Cosmos). Second
claim for relief: the Defendant breached his fiduciary duties as an officer and director of the
Debtor by usurping the Debtor’s right to enter into a transaction with Cosmos for his own
benefit. The Trustee also seeks to include in both counts the Defendant’s actions after December
21, 1998, the date the Defendant submitted his letter of resignation to the Debtor, as evidence of
breach of his fiduciary duty to the Debtor.
If the amendments to the complaint are permitted, the complaint will be enlarged to
include allegations that the Defendant misappropriated the Debtor’s opportunity to enter into a
transaction with Cosmos, for his own benefit and that the Defendant solicited clients and key
employees the Debtor for his own benefit during and after his employment by the Debtor. As a
2The Trustee states in his post-trial brief that “[t]o the extent that the original contentions
contained in the Complaint with respect to the basis for liability of the Defendant [under each
claim] have been expanded or altered by the evidence received at trial, . . . the Court [should]
deem the Complaint amended to incorporate such facts and evidence.” 	The Trustee relies on the
Court to determine the contours of these expansions or alterations.
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result, the focus of the second cause of action would shift away from the Defendant’s alleged
misappropriation of the proposed NHM transaction to the Defendant’s alleged misappropriation
of a potential deal with Cosmos.3
Rule 15 of the Federal Rules of Civil Procedure, made applicable by Rule 7015 of the
Federal Rules of Bankruptcy Procedure, governs amended and supplemental pleadings in
adversary proceedings in bankruptcy. Fed. R. Bank. P. 7015. Rule 15 allows for amendment
during and after trial and provides, in 	relevant part:
When an issue not raised by the pleadings is tried by the parties’ express or
implied consent, it must be treated in all respects as if raised in the pleadings. A
party may move - at any time, even after judgment - to amend the pleadings to
conform them to the evidence and to raise an unpleaded issue. But failure to
amend does not affect the result of the trial of that issue.
Fed. R. Civ. P. 15(b)(2).
The rule instructs that a request to amend pleadings to conform to evidence raised at trial may be
made by motion and that a party may move “at any time, even after judgment.” Id.
“Rule 15(b) is ‘mandatory, not merely permissive,’ and requires that ‘issues that are tried,
though not raised in the pleadings, be treated as though they were raised in the pleadings.’” In re
Cross Media Mktg. Corp., 367 B.R. 435, 451 (Bankr. S.D.N.Y. 2007) (quoting Ostano
3 The Trustee should have carefully reviewed the proceedings which took place prior to
having the matter reopened and transferred to the Bankruptcy Court to ascertain whether the
Debtor’s estate stood to gain from the Trustee’s prosecution of the claims set forth in the SDNY
Lawsuit. This step was especially important in this case, where the parties holding the largest
claims in the case are the Defendant’s counsel and the Trustee’s counsel. If the Trustee is
successful, then the Trustee’s expenses in bringing this action will be reimbursed and the
Defendant’s counsel will receive a distribution on its claim. If the Trustee loses, then there will
most likely be insufficient funds in the estate to pay the Trustee’s expenses. The purpose of
bringing this action seems to have been lost in the fog of litigation, but at this point, it is obvious
that there is no body of creditors of the Debtors for whose benefit this action was prosecuted.
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Commerzanstalt v. Telewide Sys., Inc., 880 F.2d 642, 646 (2d Cir.1989) (other citations omitted).
Because Rule 15(b) mandates amendment of the pleadings to conform to the evidence
presented at trial, the sole issue to decide is whether these issues were actually tried by express
or implied consent. Once such consent is found, the issues raised by the amendment must be
treated as if they had been raised in the pleadings. In re Cross Media Mktg. Corp., 367 B.R. at
452 (citing O’Brien v. Moriarity, 489 F.2d 941, 943 (1st Cir. 1974). A court may find express
consent between the parties in a stipulation or pretrial order which references the issues sought to
be added, and may infer consent when the non-movant has failed to object to evidence
introduced at trial. Id. (quoting Casey v. Lewis, 43 F.3d 1261, 1269 (9th Cir. 1994), rev’d on
other grounds, 518 U.S. 343 (1996) (other citations omitted)). Where there is no express
consent, the court must also determine whether the non-movant would be prejudiced by the
opposing party’s request for amendment. New York State Elec. & Gas Corp. v. Sec’y of Labor,
88 F.3d 98, 104 (2d Cir. 1996). The Second Circuit has reasoned that a proper finding of
prejudice requires that the amendment result in a disadvantage to the non-movant in presenting
its case. 	Id.
In the Joint Pretrial Memorandum, the Trustee set forth all of the new facts and issues
raised by the amendments without any objection by the Defendant, except for the inclusion of
the Defendant’s conduct post-resignation. At trial, testimony and/or documentary evidence
concerning an offer by Cosmos to purchase the Debtor’s assets and the Defendant’s actions in
connection with the offer by Cosmos was introduced without objection by the Defendant.
Except for objecting to the entry of evidence regarding the Defendant’s conduct after December
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21, 1998, the Defendant never objected that the claims sought to be added were not included in
the original complaint. Therefore, the Defendant consented, both explicitly and implicitly, to try
the issues related to the offer by Cosmos.
The Defendants are not prejudiced by these amendments because the facts surrounding
these new claims are substantially similar to the original claim - that the Defendant breached his
fiduciary duties as an officer and director of the Debtor by soliciting and taking the Debtor’s
clients with him to Cosmos for his personal benefit. Therefore, the Court, as it must, grants the
Trustee’s motion to amend the pleadings to include in the first claim that employees of the
Debtor were taken as well, and to include in the second claim that the Defendant usurped the
Debtor’s business opportunity presented by the Cosmos offer for his own benefit. The portion of
the Trustee’s motion seeking to amend the complaint to include the Defendant’s conduct after
December 21, 1998 is denied.
B. Standard for Granting Directed Verdict
Federal Rule of Civil Procedure 52(c), made applicable pursuant to Bankruptcy Rule
7052, provides, in pertinent part:
If a party has been fully heard on an issue during a nonjury trial and the court
finds against the party on that issue, the court may enter judgment against the
party on a claim or defense that, under the controlling law, can be maintained or
defeated only with a favorable finding on that issue.
Fed. R. Civ. P. 52(c); Fed. R. Bank. P. 7052.
A judgment pursuant to Rule 52(c) “operates as a decision on the
merits in favor of the moving party . . .” and “should be granted where plaintiff fails to make out
a prima facie case, or despite the prima facie case, the court determines that the preponderance of
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the evidence goes against the plaintiff's claim.” Matis v. United States, 236 B.R. 562, 569
(E.D.N.Y. 1999) (citing In re Regency Holdings (Cayman), Inc., 216 B.R. 371, 375 (Bankr.
S.D.N.Y. 1998); Stokes v. Perry, No. 94 Civ. 0573, 1997 WL 782131, at *9 (S.D.N.Y. Dec. 19,
1997)).
A judgment granted pursuant to Rule 52(c) operates as a decision on the merits. See,
e.g., Matis v. United States, 236 B.R. at 569 (citing In re Regency Holdings (Cayman), Inc., 216
B.R. at 375). Judgment should be granted in favor of the moving party if (1) the nonmoving
party fails to make out a prima facie case, or (2) despite the existence of a prima facie case, the
court determines by a preponderance of the evidence that judgment should be entered against the
plaintiff. Matis v. United States, 236 B.R. at 562 (citing Stokes v. Perry,1997 WL 782131 at *9).
The rule “authorizes the court to enter judgment at any time that it can appropriately make a
dispositive finding of fact on the evidence.” Fed. R. Civ. P. 52 Advisory Committee note. The
judge “must weigh and evaluate the evidence in the same manner as if he were making findings
of fact at the conclusion of the entire case,” as provided for in Rule 52(a). Benton v. Blair, 228
F.2d 55, 58 (5th Cir. 1955).
Unlike a motion for summary judgment or directed verdict, the court is not
required under Fed. R. Civ. P. 52(c) to “draw any special inferences in the nonmovant’s favor, or
consider the evidence in the light most favorable to the nonmoving party.” Matis v. United
States, 236 B.R. at 569 (citing In re Regency Holdings (Cayman), Inc., 216 B.R. at 371); 9A
Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2573.1 (2d ed.
1995))
In general, “[i]t is doubtful if federal judges would enter judgment on the merits against a
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plaintiff at the conclusion of its case if the evidence making out a prima facie case is
unimpeached. It is only when the evidence has been impeached that there is any real occasion
for the judge to weigh the evidence before the moving party presents its case.” 9C Charles Alan
Wright & Arthur R. Miller, Federal Practice and Procedure § 2573.1 (3d ed. 2008). See also
LaMarca v. United States, 31 F. Supp. 2d 110, 123 (E.D.N.Y. 1998) (stating “[u]sually, Rule
52(c) motions are made by the defendant at the close of plaintiff’s case and are granted when
plaintiff has failed to carry its burden of establishing a prima facie case”).
C. Causes of Action
Based on the record at trial, it is clear that the three Directors of the Debtor had decided
after Keyes’ indictment that the Debtor could no longer operate with Keyes at the helm. At that
point, Keyes and Marcigliano pursued a course of conduct which would have caused the transfer
of all of the Debtor’s assets to NHM for no consideration to the Debtor, and would have
benefitted the shareholders of the Debtor. The Defendant pursued a course of conduct which
resulted in keeping him employed and servicing the Debtor’s clients. Under either scenario, the
Debtor never stood to benefit. This was in fact an internecine struggle between the shareholders
of a solvent corporation. Shifting the focus of the complaint from the aborted NHM transaction
to an alleged diversion of a corporate opportunity between the Debtor and Cosmos does not alter
the fact that the Debtor was never the intended beneficiary of either transaction. The Trustee’s
arguments in the first cause of action and one prong of the second cause of action are based on
the false premise that but for the Defendant’s actions, the Debtor would have retained most of its
clients and would have continued to thrive into 1999 and beyond. 	In order to accept this, one
would have to ignore that the Debtor had already determined to transfer its assets, leaving the
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Debtor with little to no clients and no employees. This is disingenuous at best and completely
unsupported by the record. With this in mind, the Court will examine each cause of action.
1. First claim
In the Trustee’s first claim as amended, the Trustee alleges that Pilipiak breached his
fiduciary duties as director and officer of the Debtor by soliciting and diverting the Debtor’s
clients and key employees away from the Debtor to Cosmos for his own benefit, while he was
employed by the Debtor. 	In order to establish a prima facie case against the Defendant on the
first claim the Trustee must prove 1) the Defendant owed a fiduciary duty to the Debtor, 2) the
Defendant breached this duty, and 3) the Defendant’s breach of his fiduciary duties caused
damages to the Debtor which are ascertainable and are proximately caused by the breach. 	See
Am. Fed. Grp., Ltd. v. Rothenberg (American Federal Group 1), 136 F.3d 897, 905-08 (2d Cir.
1998) (other citations omitted), RSL Commc’ns PLC v. Bildirici, 649 F. Supp. 2d 184, 198-99,
208-10 (S.D.N.Y. 2009) (other citations omitted). Generally, the laws of the state of
incorporation govern issues concerning the conduct of the directors and officers of a corporation.
Burg v. Horn, 380 F.2d 897, 899 (2d Cir. 1967) (citing Hausman v. Buckley, 299 F.2d 696, 702-
05 (2d Cir.), cert. denied, 269 U.S. 885 (1962)). The Debtor was incorporated in New York,
therefore New York law applies. The Court is charged with analyzing each element of the
Trustee’s claims to determine whether Trustee established a prima facie case.
a. Fiduciary Duty
It is undisputed that the Defendant, as an officer and director of the Debtor, owed a
fiduciary duty to the Debtor. A director owes the corporation a duty of care and a duty of
loyalty. Norlin Corp. v. Rooney, Pace, Inc.,744 F.2d 255, 264 (2d Cir. 1984). The duty of care,
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as set forth in Section 717(a) of New York Business Corporation Law, requires that a director
perform his duties “in good faith and with that degree of care which an ordinarily prudent person
in a like position would use under similar circumstances.” N.Y. Bus. Corp. Law § 717(a). The
duty of loyalty “derives from the prohibition against self-dealing that inheres in the fiduciary
relationship.” Norlin Corp. v. Rooney, Pace, Inc.,744 F.2d at 264 (citing Pepper v. Litton, 308
U.S. 295, 306-07 (1939)). Under New York law, the duty of loyalty requires a director to
subordinate his own personal interests to the interests of the corporation. Patrick v. Allen, 355 F.
Supp. 2d 704, 710 (S.D.N.Y. 2005). “The scope of this fundamental duty is . . . determined by
the circumstances of each case, and does not run to every act having every semblance of
employee self-interest.” American Federal Group 1, at 906.
The Second Circuit in Burg v. Horn cites examples illustrative of what a corporate
directors may not do: a director may not draw away existing customers of the corporation, Burg
v. Horn, 380 F.2d at 899 (citing as example Sialkot Importing Corp. v. Berlin, 295 N.Y. 482, 68
N.E.2d 501 (N.Y. 1946)), nor “purchase property which the corporation needs or has resolved to
acquire, . . . or which it is contemplating acquiring,” Id. (citing Blake v. Buffalo Creek R.R., 56
N.Y. 485 (N.Y. 1874); New York Trust Co. v. American Realty Co., 244 N.Y. 209, 219, 155 N.E.
102, 105 (N.Y. 1926)), nor “take advantage of an offer made to the corporation, . . . or of
knowledge which came to him as a director.” Id. at 900 (citing as examples Kelly v. 74 & 76
West Tremont Ave. Corp., 4 Misc.2d 533, 151 N.Y.S.2d 900 (N.Y. Sup.Ct. 1956), modified on
other grounds sub nom. Procario v. 74 & 76 West Tremont Ave. Corp., 3 A.D.2d 821, 160
N.Y.S.2d 932 (N.Y. App. Div. 1957), aff'd mem., 3 N.Y.2d 973, 169 N.Y.S.2d 39, 146 N.E.2d
795 (N.Y. 1957); In re McCrory Stores Corp., 12 F. Supp. 267 (S.D.N.Y.1935)).
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Although the Defendant’s fiduciary duty to the Debtor extended beyond the date the
Defendant ceased working for the Debtor because the Defendant remained an officer and a
Director after such date, the Trustee limited his allegations in the complaint to the Defendant’s
conduct while he was employed by the Debtor. Therefore, the Court can only consider the
Defendants actions during the time period he was employed by the Debtor. The Trustee asserts
that the Defendant was employed by the Debtor until he submitted his letter of resignation
effective December 21, 1998. The Defendant asserts that he was “effectively” terminated on
December 2, 1998, based on the statements made by Keyes at the meeting regarding the
contemplated transfer of clients and employees of the Debtor to NHM. Regardless of the
Defendant’s belief that he would no longer be employed by the Debtor as of December 31, 1998,
there is no evidence that the Defendant was ever terminated by the Debtor. The record is clear
that the Defendant remained employed by the Debtor until December 21, 1998, when he
tendered his resignation. After December 2, 1998, the Defendant continued to draw a salary
from the Debtor and continued to act as an employer of the Debtor by performing work for the
Debtor and meeting with clients of the Debtor. The Defendant’s belief that he would no longer
have a position with the Debtor after December 31, 1998, does not affect the Defendant’s
employment status with the Debtor through December 21, 1998, the date he actually resigned as
an employee, officer and director of the Debtor
b. Breach of Fiduciary Duty
Once the Defendant is determined to owe the Debtor a fiduciary duty to act in good faith
and with that degree of care which an ordinarily prudent person in a like position would use
under similar circumstances, any breach of this fiduciary duty may be actionable if the remaining
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elements of causation and damages are established. The Trustee must establish that the
Defendant’s actions, while he was employed by the Debtor, constituted a breach of his fiduciary
duty. While the Defendant is not accused of soliciting clients to terminate their ongoing
contracts with the Debtor, the Defendant is charged with soliciting the Debtor’s current clients to
enter into new contracts with a third party after their contracts with the Debtor expired.
According to the Trustee, the Defendant’s conduct constitutes usurpation of a corporate
opportunity of the Debtor. The corporate opportunity doctrine prohibits “a corporate employee
from utilizing information obtained in a fiduciary capacity to appropriate a business opportunity
belonging to the corporation.” American Federal Group 1, at 906 (citing Alexander &
Alexander, Inc. v. Fritzen, 147 A.D.2d 241, 542 N.Y.S.2d 530, 533 (N.Y. App. Div. 1989).
It is clear that any solicitation by the Defendant of the Debtor’s clients during the time
that the Defendant was employed by the Debtor, would constitute a breach of the Defendant’s
fiduciary duty to the Debtor. Am. Fed. Grp., Ltd. v. Rothenberg (American Federal Group 2),
No. 91Civ.7860, 1998 WL 273034, at *1 (S.D.N.Y. May 28, 1998). This is true whether the
Defendant solicited clients of the Debtor to obtain their current business, or whether the
Defendant solicited clients of the Debtor to obtain their business after their contracts with the
Debtor expired. See id. (finding that former officer, shareholder and employee of plaintiff
company breached his fiduciary duty by soliciting clients to transfer their current insurance
broker accounts and by soliciting clients to transfer their insurance accounts upon expiration of
the current accounts with the plaintiff) (citing American Federal Group 1, at 906; Keehan v.
Keehan, No. 97 Civ. 6580, 2000 WL 502852, at *5 (S.D.N.Y. April 26, 2000)). The Defendant,
as an officer and director, breached his duty to the Debtor if he “‘had been intrusted with the
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duty of re-engaging [an employee] for [the Debtor’s benefit] and had then engaged him for his
own.’” Keehan v. Keehan, 2000 WL 502854 at *5 (citing New York Auto. Co. v. Franklin, 49
Misc. 8, 97 N.Y.S. 781, 785 (N.Y. 1905)).
The Defendant cites to American Federal Group 2 for the proposition that an insurance
broker such as the Debtor could not have a continuing “tangible expectancy” in retaining its
ongoing business if the contracts were up for renewal.4 However, the court in American Federal
Group 2 was addressing whether an officer and shareholder breached his duty to a corporation
when he solicited clients of that corporation for prospective business after he no longer had a
relationship with that corporation. The court correctly distinguished between competing with a
former employer in the highly competitive insurance broker business, which is permitted, and
soliciting business in which a former employer had an existing “tangible expectancy,” which is
not. American Federal Group 2, at *15.
The Court must now determine whether the Trustee made a prima facie case that the
Defendant solicited clients of the Debtor to enter into new contracts with Cosmos. The Trustee
relies on the following to make his case: (1) a series of e-mails to or from employees of ACL,
one of the clients of the Debtor which signed with Cosmos shortly after the Defendant resigned
from the Debtor (Plaintiff’s Ex. 87), (2) Plaintiff’s Ex. 109, which was not admitted into
evidence, (3) Plaintiff’s Ex. 61, which was also not admitted into evidence, and (4) the Trustee’s
conclusion that because the Defendant solicited ACL and Evergreen prior to his resignation, the
4A business opportunity “in which a corporation has a ‘tangible expectancy’
which means ‘something much less tenable than ownership, but, on the other hand,
more certain than a desire or hope.’” American Federal Group 1, at 906 (citing
Alexander & Alexander, Inc. v. Fritzen, 542 N.Y.S.2d at 534).
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Defendant must have been soliciting other customers of the Debtor as well.
The evidence admitted at trial, coupled with the letter from the Defendant to Cosmos
dated December 6, 1998 that he would bring with him a “block” of the Debtor’s clients, and the
timing of the broker of record letters supports a finding that it was possible that the Defendant
solicited the Debtor’s clients to enter into new contracts for his own benefit and for the benefit of
Cosmos. However, all of the evidence is circumstantial and is not sufficiently probative to
establish that the Defendant actually solicited the clients to leave the Debtor for Cosmos.
The only direct evidence regarding the Defendant’s contact with the clients during this
time period are e-mails reflecting that the Defendant furnished renewal contracts to ACL on
behalf of the Debtor, and the Defendant advised ACL that he would either be starting his own
business or joining another insurance agency. (Plaintiff’s Ex. 87) This evidence does not
support a finding that the Defendant sought to retain ACL’s business at his new employment,
wherever that may be. Advising a client that you are leaving a company does not constitute a
breach of a director’s fiduciary duty. American Federal Group 2, at *8. The only other
representations contained in the e-mail from ACL are the reference to Keyes “selling Walter
down the river” and the reference that ACL’s policies currently with the Debtor are under the
Defendant’s control as the broker of record. While the Defendant was not the broker of record,
there is no indication that it was the Defendant who gave ACL this false impression in order to
convince ACL to follow the Defendant to his new employer. The ACL e-mail actually supports
a finding that ACL had already decided not to renew its contract with the Debtor, because ACL
discusses scheduling an interview with another insurance broker to take the Debtor’s place. The
Trustee did not call any former clients of the Debtor to testify regarding representations the
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Defendant may have made.
In sum, the evidence the Trustee relies on to support a finding that the Defendant
solicited clients of the Debtor to leave the Debtor upon the expiration of their current contracts
and join the Defendant is based largely on the clients’ failure to renew with the Debtor. Unlike
the American Federal Group 2, where the court determined after a lengthy trial with testimony
from over twelve former clients of the plaintiff corporation that the defendant had solicited some
of the clients to follow him to his new firm, there is no testimony by any former clients of the
Debtor that the Defendant solicited their business and sought their assurance that they would
follow the Defendant. The only testimony in the record supports a finding that the Defendant
presented renewal contracts to the Debtor’s clients, and he advised the Debtor’s clients that he
was leaving the Debtor.
c. Causation
Even if the Court were to find that the Defendant breached his fiduciary duty to the
Debtor, in a claim based on breach of fiduciary duty, where the remedy sought is damages to
compensate for losses incurred by the claimant, the claimant must show causation as a necessary
element of its claim. American Federal Group 1 at 907, n.7; RSL Commc’ns PLC, 649 F. Supp.
2d at 208 (other citations omitted). If the remedy sought is restitution against the party
breaching his or her fiduciary duty, then it is sufficient to show that the breach was a “substantial
factor” in contributing to the injury. American Federal Group 1 at 907 n.7. Because the Trustee
seeks damages based on losses suffered by the Debtor, the more stringent test for causation must
be satisfied. As set forth in RSL Commc’ns PLC the usual causation rule under this test requires
“but for” and proximate causation:
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These are not novel concepts. “[C]ausation has been ‘a well-recognized
and essential element of the [tort] plaintiff's case in chief’ since at least the early
17th century, and probably much, much before.” Williams v. KFC Nat'l Mgmt.
Co., 391 F.3d 411, 426 (2d Cir. 2004) (Calabresi, J., concurring) (quoting
Zuchowicz v. United States, 140 F.3d 381, 384 n.2 (2d Cir. 1998)). Nor, contrary
to Plaintiff's argument, is the application of these causation principles limited to
instances in which the plaintiff “is . . . seeking damages to compensate it for lost
profits or lost earnings.” . . . The only distinction drawn in the Second Circuit
authority on this issue focuses on the difference between restitutionary remedies
and compensatory damages. See American Federal Group 1, at 907 n.7. Lost
profits, as relevant in [American Federal Group 1], are simply a subset of
compensatory damages. See 1 Dan B. Dobbs, Handbook on the Law of Remedies
§ 3.3(4), at 302. . . . [Because the plaintiff seeks restitution] Plaintiff must
establish both “but for” and proximate causation.
“But for” causation, which the Court refers to as “factual causation,”
presents a “threshold question” of whether the alleged breach of fiduciary duty
was a “cause in fact” of the loss complained of by the plaintiff. Semi-Tech Litig.,
LLC v. Bankers Trust Co., 353 F. Supp. 2d 460,484 (S.D.N.Y. 2005); see also
Petitt v. Celebrity Cruises, Inc., 153 F. Supp. 2d 240, 252 n.10 (S.D.N.Y. 2001);
Barnes v. Andrews, 298 F. 614, 616 (S.D.N.Y. 1924) (Hand, J.) (“The plaintiff
must accept the burden of showing that the performance of the defendant's duties
would have avoided loss, and what loss it would have avoided.”).
RSL Commc’ns PLC, 649 F. Supp. 2d at 208.
In this case, the Trustee must establish that the Defendant’s solicitation of clients and
employees was a cause in fact of the losses suffered by the Debtor. To hold otherwise would
permit the Defendant to be liable for an injury the Defendant did not actually cause. See Ryder
Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 684 F. Supp. 27, 35 (S.D.N.Y.
1988) (stating “fault unrelated by causal connection to injury is without legal significance”).
Where there are multiple possible causes of a single harm, which the Trustee readily concedes is
the case, the Court my still find cause based on one single factor where each of the potential
causes are sufficient, standing alone, to have caused the injuries sustained by the claimant. RSL
Commc’ns PLC, 649 F. Supp. 2d at 209 (citing Point Prods. A.G. v. Sony Music Entm’t, Inc.,
215 F. Supp. 2d 336, 342 (S.D.N.Y. 2002)).
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The record does not support a finding that if the Defendant did solicit the Debtor’s
clients, this solicitation in fact caused the clients not to renew their contracts with the Debtor. At
the time the Defendant was advising clients of the Debtor that he was departing from the Debtor,
the clients were also aware that 1) Keyes had been indicted for committing fraud with respect to
funds belonging to clients of the Debtor, and 2) the Debtor was negotiating a transfer of its
clients and employees to a third party, NHM. These two factors, standing alone, had a much
greater negative effect on the Debtor’s chances of renewing the contracts than the Defendant’s
actions alone. Keyes admitted that his indictment placed the Debtor’s business in serious
jeopardy. Keyes also admitted that the departure of Nippon Express, its largest client, was due
to Keyes’ indictment, and other Japanese clients would be influenced by the departure of Nippon
Express. The belief that the clients would not renew their contracts with the Debtor due to
Keyes’ indictment was echoed in the Debtor’s own financial statements for the relevant time
period, and by Keyes’ actions post-indictment. Keyes testified that he sought a suitor to run the
Debtor’s business in his place so the business would not be tainted by his indictment because he
knew that if he stayed on, the Debtor would lose the bulk of its clients. At this point, all of the
Debtor’s clients were aware that the Debtor was attempting to transfer most of its business to
NHM and therefore, the Debtor would not be in a position to service these clients after January
1, 1999 in any event. This fact seemed to have played a significant role in ACL’s decision to
decline to renew its contract with the Debtor in December 1998. (Plaintiff’s Ex. 87).
The argument that Defendant’s conduct caused the Debtor’s losses is unsupported by the
record. The Trustee failed to call any witnesses to establish that the clients left the Debtor
because of the Defendant’s solicitation, unlike the plaintiff in American Federal Group 2.
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There, the record reflected that clients of the plaintiff left the plaintiff because of the defendant’s
solicitation, coupled with the fact that the defendant alone had access to a certain type of
insurance. We have no such record in this case. The court in American Federal Group 2 had
the benefit of testimony from these clients to review when determining the relative weight the
differing factors had in the client’s decisions to leave the plaintiff. In our case, the record
indicates that more likely cause of the clients’ failure to renew their contracts with the Debtor
was the indictment of Keyes.
d. Damages
Even if the Trustee had established that the Defendant solicited the Debtor’s clients, and
his conduct was the proximate cause of injury to the Debtor, the Trustee has failed to prove with
any degree of certainty what if any damages are the result of the Defendants actions. 	In the
original complaint, the plaintiff (the Debtor) asserted that the Defendant’s conduct caused
damages in an amount of not less than $1 million. In its post-trial memorandum, the Trustee
argues that the Defendant’s conduct caused the Debtor to suffer significant harm which can be
measured by the reduction in revenues from the years prior to 1998 to the levels during the years
1999 and thereafter. The only evidence introduced by the Trustee to support the claim for
damages as set forth in the complaint are copies of tax returns and financial reports of the Debtor
for 1997, 1998, and 1999. Although the complaint calculated damages based on the value of the
NHM proposal to the shareholders, at trial, the Trustee appears to have abandoned that theory
and is now seeking to calculate the damages based on lost earnings suffered by the Debtor for
the time after the Defendant resigned from the Debtor and after many of the Debtors’ clients
failed to renew their policies with the Debtor.
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In order to recover damages for lost earnings based on breach of fiduciary duty, the
plaintiff must “prove with certainty that any losses sustained were caused by the breaches
alleged.” American Federal Group 1, at 911 (citing Stoekel v. Block, 170 A.D.2d 417, 417-18,
566 N.Y.S.2d 625, 626 (N.Y. App. Div. 1991)). Loss of profits can be determined by evidence
of earnings history, or by examining the commission revenue lost when the Debtor’s clients
transferred their business to Cosmos.
The Trustee has failed to meet his burden to quantify the damages allegedly caused by
the Defendant’s conduct. The record is barren regarding the extent to which the Debtor’s loss in
income for 1999 and thereafter can be specifically attributed to the migration of the Debtors
clients to Cosmos. The Trustee has also introduced into the record no evidence regarding the
Debtor’s profit margin on these contracts. See American Federal Group 2 at *23 (earnings
margin of 60% was applied to quantify value of lost commissions caused by defendants
improper solicitation and subsequent departure of clients). The Trustee also failed to introduce
any evidence regarding whether the loss of clients was ameliorated in any way by the
corresponding loss in overhead due to the departure of a substantial number of employees.
Finally, the Trustee failed to recognize that in calculating any claim for damages the Debtor may
have had with regard to the contract renewals such calculation could not extend beyond one year.
The Debtor had no “tangible expectancy” in these contracts for subsequent years once the clients
did not renew with the Debtor. See Abbott Redmont Thinlite Corp. v. Redmont (Abbott), 475
F.2d 85, 88 (2d Cir. 1973) (citing S.W. Scott & Co. v. Scott, 186 App. Div. 518, 174 N.Y.S. 583
(N.Y. App. Div. 1919)). Even if the Debtor did suffer ascertainable damages based on the
clients’ failure to renew the contracts, the Debtor would not have a continuing right for
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compensation for the years thereafter. American Federal Group 2 at *18. Because the record is
barren of any quantifiable basis to fix damages with any degree of certainty, the Trustee has
failed to satisfy his burden of proof.
2. Second Claim
In order to establish a prima facie case on the second claim, the Trustee must prove that
1) Defendant, as an officer and director, owed a fiduciary duty to the Debtor, the 2) Defendant
breached that duty by appropriating the business opportunity presented by the NHM deal for his
own benefit, by diverting the clients and employees of Debtor to Cosmos, or the Defendant
breached that duty by assuming the business opportunity presented by Cosmos for his own
benefit, and 4) damages flowing from the breach. The Court has already concluded that Trustee
has introduced sufficient evidence for the Court to find that the Defendant owed a fiduciary duty
to the Debtor during the time period in question.
a. Breach of Fiduciary Duty
The Trustee has failed to introduce evidence that the NHM proposal and the opportunity
presented by Cosmos were in fact corporate opportunities belonging to the Debtor. According
to the Trustee, the NHM venture and the Cosmos proposal regarding the transfer of a block of
clients and employees of the Debtor created a valuable potential interest that rightfully belonged
to the Debtor. The alleged property interest is an interest in the payment stream from the sale of
the Debtor’s assets. However, these income streams were only to go to the shareholders of the
Debtor and not the debtor itself. Neither the NHM nor the Cosmos venture satisfies the
“tangible expectancy” test set forth above, and therefore neither venture qualifies as a corporate
opportunity. Because neither venture constituted a corporate opportunity, the Plaintiff has failed
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to establish a prima facie case that the Defendant breached his fiduciary duties by usurping a
corporate opportunity of the Debtor.
(1) The NHM and Cosmos Ventures Did Not Constitute Corporate
Opportunities
Under relevant case law, the property interest attributable to the NHM proposal did not
rise to the level of a “tangible expectancy” as a matter of law. In Abbott the Court of Appeals
held that pre-contractual relationships between the plaintiff corporation and certain architects for
the supply and installation of glass blocks and roof lights, constituted a tangible expectancy of
the plaintiff corporation. Abbott, at 88-89. The contracts in question in Abbott would almost
certainly have been finalized with the plaintiff corporation if the defendant director had not taken
the opportunity for himself. Id. The Court of Appeals in Abbott reasoned that “but for” the
defendant’s entry into direct competition with the corporation, the business would have been the
corporation’s. Id. Furthermore, once the corporation’s specifications were written into the
architectural plans for the five contracts, “it was almost a certainty” that the contract with the
plaintiff corporation would be entered. Id. at 88. Unlike Abbott, in the instant case, the NHM
pre-contract relationship was far less certain. The Letter of Intent stated that the transaction was
subject to NHM’s due diligence, and the closing was contingent upon successful completion of
this due diligence.
In addition, the NHM transaction was not in fact a corporate opportunity - rather it was a
scheme which allowed the shareholders to transfer the assets of the Debtor for their personal
benefit. Burg v. Horn provides a list of proscriptions, one of which condemns a fiduciary’s
“purchase of property which the corporation needs or has resolved to acquire . . . or which it is
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contemplating acquiring.” See Burg v. Horn, 380 F.2d at 899 (emphasis added). The NHM deal
did not represent a property interest that the Debtor was seeking to acquire. In fact, it was the
direct opposite. If the NHM deal had been consummated, the Debtor would have been divested
of its clients and employees for no consideration. The NHM deal provided that only
shareholders would benefit and the Debtor would receive nothing. Shareholders and the
corporate entity are not one and the same, see Manley v. Ambase Corp., 121 F. Supp. 2d 758,
769-70 (S.D.N.Y. 2000) (citing cases), and there is no evidence in the record that the Debtor and
the shareholders are one and the same. See OM Intercontinental v. Geminex Intern., Inc., No. 03
Civ. 6471(RCC), 2006 WL 2707327, at *7 (S.D.N.Y. Sept. 18, 2006) (stating that New York
courts are reluctant to disregard the corporate form, unless the “‘form has been used to achieve
fraud or when the corporation has been so dominated by an individual or another corporation . . .
and its separate identity so disregarded, that it primarily transacted the dominator's business
rather than its own and can be called the other's alter ego . . .’”) (citing cases). Therefore, the
venture with NHM could not be deemed an asset of the corporation and fails to constitute a
corporate opportunity of the Debtor.
The Cosmos venture also did not rise to the level of a corporate opportunity. The
Cosmos venture consisted of a phone call on November 13, 1998 from Mr. Nonomura, an officer
of Cosmos, to the Defendant inquiring whether Keyes was considering selling the Debtor. In
that conversation the Defendant responded that any inquiries should be directed to Keyes. On
December 2, 1998 the Defendant advised Keyes about the phone call from Mr. Nonomura.
Keyes responded that he was not interested in any transaction with Cosmos, and Mr.
Marcigliano, who also learned of this opportunity on that date, agreed that the venture was not a
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“reasonable possibility.” The Debtor had no “tangible expectancy” of any deal to sell assets to
Cosmos.
In addition, the Trustee has not demonstrated that the agreement between the Defendant
and Cosmos constituted the diversion of a corporate opportunity of the Debtor. Because the
Debtor had already determined to transfer its clients to a third party for no consideration the
Trustee cannot argue that these clients had real value to the Debtor and that the Debtor’s future
depended upon the continued retention of these clients. A corporate opportunity cannot exist
where the “opportunity” has no value to the corporation, and the Trustee cannot now complain
that the Debtor lost out on realizing the value of the transfer of its clients. Whether NHM,
Cosmos, or some other third party could find value in the contracts is not before the Court. The
question is whether the property in question, in this case the contracts with the clients,
represented tangible expectancies of the Debtor. They clearly did not and the Trustee has failed
to establish a prima facie cause of action set forth in the second count, as amended.
(2) The Defendant Did Not Usurp Any Corporate Benefit Represented
by Either the NHM Venture or the Cosmos Venture
Even if the Trustee could establish that the NHM or Cosmos deal was a corporate
opportunity, the Trustee has not established that the Defendant usurped the opportunity.
Usurpation requires that the Defendant take the opportunity for himself. The fiduciary must
“divert that expectancy to his own profit.” Abbott, at 88. The Defendant did not divert the
proceeds from the sale of assets to himself. With respect to NHM, the Defendant did not “step
into the shoes” of the Debtor, as occurred in the Abbott case. With respect to the Cosmos
transaction, there was never a corporate benefit for the Defendant to usurp.
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3. Third Claim
In the third cause of action, the Trustee alleges that the Defendant tortiously interfered
with the NHM transaction. In order to establish a prima facie case of tortious interference, the
Trustee must prove the following: “(1) the existence of a valid contract between plaintiff and a
third party; (2) the defendant’s intentional procurement of a breach of contract by the third party;
and (3) damages caused by the breach.” Innovative Networks, Inc. v. Young, 978 F.Supp. 167,
178 (S.D.N.Y. 1997) (citing Nordic Bank PLC v. Trend Group, Ltd., 619 F.Supp. 542, 560-61
(S.D.N.Y. 1985). See also Premium Mortg. Corp. v. Equifax, Inc., 583 F.3d 103, 107 (2d Cir.
2009). If the plaintiff cannot prove there was a valid and enforceable contract, the claim must
fail. Mayo, Lynch & Assocs. v. Fine, 538 N.Y.S.2d 579, 579 (N.Y. App. Div. 1989) (citing
Guard-Life Corp. v. Parker Hardware Mfg. Corp., 406 N.E.2d 445 (N.Y. 1980); Taub v. Amana
Imports, 528 N.Y.S.2d 884 (N.Y. App. Div. 1988)). In addition, if the plaintiff cannot prove that
there would not have been a breach but for the activities of the defendant, the claim also fails.
Sharma v. Skaarup Ship Mgm’t Corp., 916 F.2d 820, 828 (2d Cir. 1990).
New York law determines whether a valid contract exists between the parties,
Gorodensky v. Mitsubishi Pulp Inc., 92 F.Supp.2d 249, 254 (S.D.N.Y. 2000), and courts must be
careful not to bind parties to contractual obligations that they never intended. Id. (citing
Teachers Ins. & Anuity Ass’n v. Tribune Co. 670 F.Supp. 491, 497 (S.D.N.Y. 1987). There are
two types of preliminary agreements. Id. The first type is a fully binding preliminary
agreement, where the parties have agreed on all the points requiring negotiation (including
whether to be bound) but agree to subsequently memorialize the agreement in a more formal
document. Id. (citing Adjustrite Sys., Inc. v. GAB Business Servs., Inc. (Adjustrite), 145 F.3d
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543, 548 (2d Cir. 1998)). This type of contract is binding as if it were a formalized agreement
because the signing of a more elaborate document is just a formality. Id. (citing Teachers Ins. &
Anuity Ass’n v. Tribune Co., 670 F.Supp. at 498). The second type of preliminary agreement is
created when the parties “agree on certain major terms, but leave other terms open for further
negotiation.” Id. (citing Adjustrite, 145 F.3d at 548). The parties have a mutual commitment to
negotiate in good faith to reach a final agreement. Gorodensky, 92 F. Supp.2d at 254 (citing
Teachers Ins. & Anuity Ass’n v. Tribune Co., 670 F.Supp. at 498). Thus, a party to this second
type of agreement is not bound, and “has no right to demand performance of the transaction.” Id.
(citing Adjustrite, 145 F.3d at 548).
The test for determining whether the first type of preliminary agreement exists examines
“(1) the language of the agreement; (2) the existence of open terms; (3) whether there has been
partial performance; and (4) the necessity of putting the agreement in final form, as indicated by
the customary form of such transactions.” Id. at 254-55 (citing Adjustrite, 145 F.3d at 549). The
test for determining the presence of the second type of preliminary agreement requires an
examination of these same four factors, along with a fifth factor, which is “the context of the
negotiations resulting in the preliminary agreement.” Id. at 255 (citing Adjustrite, 145 F.3d at
549 n.6).
The first factor, the language of the agreement itself, is recognized as the most important
factor. Id. at 255 (citing Arcadian Phosphates, Inc. v. Arcadian Corp.,884 F.2d 69, 72 (2d Cir.
1989)). The Letter of Intent contains language which clearly indicates that the parties did not
intend the letter to be a binding agreement. First, the subject of the letter is “Letter of Intent.”
Second, while the first paragraph states that NHM “shall” acquire certain ongoing business of
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the Debtor, the third paragraph gives NHM the “sole right” to determine in writing whether there
is adequate “merit” to purchase these assets after conducting due diligence. This indicates that
NHM needed to take further steps before making a firm commitment to purchase any assets of
the Debtor. Third, the Debtor’s signature includes the language “subject to shareholders
approval.” Fourth, the Letter of Intent refers to “papers” including schedules of accounts to be
provided at the closing of the transaction. When viewed in total, the language is clear that
neither party wished to be bound at the time of execution of the Letter of Intent. See id. (finding
that where neither party negotiated for language stating a clear commitment, neither party
evidenced an intent to be bound by its terms). Rather, the Letter of Intent represented an
agreement by NHM to conduct due diligence to determine whether it wished to purchase any
assets of the Debtor under the terms set forth. This alone supports a finding that the Letter of
Intent was not a binding agreement for the sale of the Debtor’s assets to NHM.
The second factor, the existence of open terms, also demonstrates that the Letter of Intent
was not a binding agreement. The terms regarding the actual business to be sold is vague as it is
described as the book of business classified as insurance brokerage, reinsurance brokerage and
consulting services to the Debtor’s clients, without naming any specific client. There is a
reference in the Letter of Intent to a schedule of the Debtor’s accounts “to be attached to the
papers at Closing” but again no clients are listed in the Letter of Intent. The proposed
employment of all key employees of the Debtor is equally unspecific, and does not identify who
the key employees are, the proposed terms of employment, salaries or positions. The Letter of
Intent states that the Debtor’s shareholders were to receive a fixed percentage of the
commissions generated from the business of the former clients of the Debtor, this is the only
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term which supports a finding that the terms of the Letter of Intent were specific. So many terms
of the transaction remained open and subject to due diligence, especially with respect to which
clients were to be acquired and which employees were to receive offers from NHM, that the
Court concludes that this factor supports the Defendant’s contention.
The third factor, partial performance, requires that some part of the actual contract be
performed, and that such performance provide a benefit to the other party. Id. at 256 (citing P.A.
Bergner & Co. v. Martinez, 823 F. Supp. 151, 157 (S.D.N.Y. 1993)). 	In this case, the only part
of the contract which was performed was preliminary due diligence by NHM. Upon performing
the due diligence NHM concluded that it no longer wished to pursue the transaction outlined in
the Letter of Intent. NHM had the specific right under the terms of the Letter of Intent to
determine whether the proposed transaction had merit and to decline to pursue the transaction.
(Plaintiff’s Ex. 67) This right was absolute and subject only to NHM’s sole discretion.
Certainly no transfer of clients took place and no payments were made to the Debtor’s
shareholders.
The remaining factors, the context of the negotiations between the parties and the
requirement of a formal agreement, favor a finding that the Letter of Intent was not a binding
agreement. NHM still had to conduct due diligence before determining whether to purchase any
assets of the Debtor, and the Letter of Intent contemplated entry into formal documents at
closing. Neither the specific accounts to be sold nor the employees to be offered positions were
fixed in the Letter of Intent and NHM and the Debtor had conditions precedent to the closing
which had yet to be satisfied. As the Second Circuit held in Teachers Ins. & Anuity Ass’n v.
Tribune Co., 670 F. Supp. at 499, ‘[t]here is a strong presumption against finding a binding
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obligation in an agreements which include open terms, call for future approvals and expressly
anticipate future preparation and execution of contract documents.” The Trustee has failed to
overcome this presumption, and the Court concludes that the Letter of Intent was not a binding
agreement between the parties.
Even if the Letter of Intent did constitute such a binding agreement, there is insufficient
evidence to support a finding that the Defendant’s actions constituted tortious interference with
the proposed NHM transaction. To make a prima facie case, the Trustee must show that there
was a breach of the contract, and “‘there would have not been a breach but for the activities of
[the Defendant].’” Sharma v. Skaarup Ship Mgm’t Corp., 916 F.2d at 828 (other citations
omitted). The record before the Court does not support a finding of breach of contract by NHM,
which would be a prerequisite to a finding of tortious interference. NHM did not breach the
Letter of Intent because the Letter of Intent gave NHM the right to determine that the value of
the proposed transaction was insufficient, and to terminate the transaction. The Letter of Intent
did obligate NHM to make an offer of employment to all key employees after conducting due
diligence, which included interviewing the Debtor’s staff. The term “key employee” is not
defined in the Letter of Intent. However, it is not clear that NHM had completed its due
diligence, had determined to continue negotiations, and had stopped only after getting the
impression that the Defendant would not consider employment by NHM. It is not clear from the
record that the Defendant’s actions caused NHM to end its negotiations with the Debtor. It
could have been just as likely that the departure of so many clients caused NHM to cease
negotiations, and there is no evidence that but for the Defendant’s actions, the majority or even a
substantial number of clients would have renewed their insurance contracts with the Debtor. It is
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also just as likely that Keyes’ indictment precipitated the departure of the clients, not the
Defendant’s refusal to accept employment by NHM. For these reasons, the Motion is granted as
to the third cause of action.
Conclusion
1) The Trustee’s motion to amend the complaint is granted except to the extent the
Trustee seeks to include the Defendant’s conduct after he resigned from the Debtor on December
21, 1998.
2) The Motion is granted as to the first, second and third causes of action. The Trustee
has failed to establish a prima facie case as to any of these causes of action because essential
elements of each claim have not been proven.
An order and judgment memorializing the Court’s decision shall be entered forthwith.
Dated: Central Islip, New York
August 24, 2010 	By: /s/ Robert E. Grossman___
Robert E. Grossman, U.S.B.J.
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