Opinion
00 Civ. 1615 (GEL)
December 10, 2001
Thomas John Minotti, Minotti Iaia, LLP, White Plains, NY for Plaintiff.
Jonathan Mazer and Richard L. Huffman, Baden Kramer Huffman Brodsky PC, New York, N.Y. (Wayne I. Baden, of counsel) for Defendant.
Brian Gilbert Cesaratto PC, White Plains, N.Y. for Defendants.
OPINION AND ORDER
Plaintiff Arthur Eng ("Eng"), was fired as general manager of defendant Battery City Car Limousine Service, Inc. ("Battery City"), and brought this action for breach of his employment contract, which permitted termination only for cause. Battery City answered not only by arguing that there was ample cause due to various types of malfeasance by Eng, but also by counterclaiming against him, and impleading third-party defendants it claims conspired with him in his misconduct. The case is now before the Court on cross-motions by all parties for summary judgment in whole or in part, and on plaintiff's motion to add an additional defendant. The various motions for summary judgment are denied, except to the extent that Eng's cross-motion for summary judgment is granted in part and the cross-motion of third-party defendant Allen Express, Inc., is granted. The motion to add a party is denied.
BACKGROUND
Battery City operated a car service business in New York City, catering primarily to a business clientele. Drivers would contract with Battery City as franchisees, and be assigned work for various of its customers. Beginning in November 1994, Eng was employed as General Manager of Battery City under a written contract that provided for a five-year term, followed by automatic renewal for another five years. (Eng Aff. 2.) The contract specified Eng's compensation, including a provision that should Battery City be sold, Eng would receive 10% of the proceeds. (Id. 4.)
On or about December 1, 1999, Battery City terminated Eng as General Manager. Eng argues that he was fired because Battery City was having financial difficulties, and wanted to avoid its obligation to pay him the salary owed under his contract, as well as his promised share of the proceeds of the sale of the business, which was then allegedly being contemplated and was eventually concluded in July 2000.
Battery City, in contrast, claims that Eng was fired because of various violations of his contractual obligations, including taking kickbacks from franchise drivers in exchange for preference in assignments to more lucrative jobs; misrepresenting to Battery City's insurer that customers of an insurance brokerage in which he and members of his family had an interest were Battery City franchise drivers, in order to obtain advantageous insurance rates for them; embezzling American Express vouchers for services provided by Battery City and submitting them for payment through another business operated by him; and attempting to organize a competing car service company in violation of the non-competition clause of his contract. (Passy Aff. 14.) Based on these allegations, Battery City not only defends its firing of Eng as amply justified, but also counterclaims for damages allegedly resulting from the claimed breaches, and seeks damages as well from third-party defendants Ykea Insurance Agency, Inc. ("Ykea"), the insurance agency involved in the alleged insurance scheme, and Allen Express, Inc. ("Allen"), the firm involved in the alleged embezzlement of American Express vouchers.
Discovery has been completed. Eng now moves to add Phil Shaw, the former president and sole shareholder of Battery City, as a defendant, on the ground that the corporation has been dissolved and its interest transferred to Shaw. See Fed.R.Civ.P. 25(c). Eng also moves on various grounds for summary judgment on all of Battery City's counterclaims, as do the third-party defendants Ykea and Allen with respect to the claims against them. Battery City, in turn, moves for summary judgment dismissing all claims against it, and granting all its counterclaims against Eng and its claims against Ykea and Allen.
DISCUSSION I. Eng's Breach of Contract Claim
Battery City's motion for summary judgment on Eng's breach of contract claim is denied. Battery City presents significant evidence that Eng engaged in at least some of the misconduct it charges against him. For example, it offers an affidavit from Gil Perloni, another supervisor who worked under Eng. Perloni avers that he became aware that some drivers were receiving preferential assignments in violation of company policy, that such assignments became known to other drivers and caused resentment among them, and, most importantly, that Eng admitted to him that the preferred drivers were paying $100 per week for such preference, attempted to recruit him to join the scheme, and paid him $300 for his allegedly brief participation in it. (Passy Aff. Ex. H.) Battery City also claims that an analysis of the assignments for three drivers who allegedly paid the kickbacks shows a "disproportionate pattern of lucrative out of town job assignments given to those drivers." (Passy Aff. 25 Ex. I, J, K.)
Battery City also offers substantial evidence in support of some of its other allegations. Records of its insurance company strongly support the conclusion that Eng falsely certified drivers to the insurer as Battery City franchisees; most of the pseudo-franchisees used Ykea or related insurance agents, and some of them worked for Allen. (Passy Aff. 27-50 Ex. L-T.) Finally, Battery City offers testimony from the President of Americar, Inc., which at one time attempted to establish a rival car service, that Eng was an undisclosed principal of that company, and that Eng admitted that his interest would not be disclosed because his involvement was in violation of his employment agreement with Battery City. (Passy Aff. Ex. U.)
This evidence might well persuade a jury that Eng violated his employment agreement in at least some of the ways alleged by Battery City. of course, it does not follow that Battery City is entitled to summary judgment. Summary judgment may only be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(b). In considering a motion for summary judgment, ambiguities must be resolved in favor of the nonmoving party, although the nonmoving party cannot rely on conclusory allegations or unsubstantiated speculation. See Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998). The court may not weigh the evidence or make credibility assessments, and is required to view the evidence in the light most favorable to the party opposing summary judgment and to draw all reasonable inferences in favor of that party. See Weyant v. Okst, 101 F.3d 845, 854 (2d Cir. 1996). Here, the facts material to Battery City's claims are hotly disputed, and raise issues of credibility of witnesses and the correctness of inferences to be drawn from the evidence that are appropriately left to resolution by a jury after trial.
Eng swears that he was told by Martin Passy, Battery City's Vice President, that he was being fired "because Battery City was having cash flow problems and. . . could no longer afford to pay [him]." (Eng Aff. 5.) He flatly denies all of the allegations of wrongdoing, swearing that he never received kickbacks from drivers for giving them preferable assignments or instructed Perloni to do so, and that he "was never involved in any manner" with Americar. (Eng Aff. 8 10.) Although Eng was deposed in this matter, Battery City cites no portion of his testimony in which he retreats in any way from these assertions.
Both the kickback and Americar allegations appear to rest on the direct testimony of a single witness, whose credibility vis-a-vis Eng's denials would have to be judged by the jury. Although Battery City claims that its kickback allegations are supported by an analysis of the assignments given to certain drivers, Eng responds by asserting that various "inconsistencies" in its account undermine the inference that it would draw from those records. (Eng Rule 56.1 Statement 12-26.) Similarly, Eng raises a number of questions about when Americar was allegedly formed and when its formation came to the attention of the principals of Battery City that cast doubt on whether this alleged misconduct, even if proved, could have played any role in the decision to terminate him. Whatever inferences the Court might find more persuasive were it the finder of fact on the cold record presented, the testimony and records in the case clearly could generate conflicting inferences and conclusions that are properly left to the jury.
The records relating to the alleged insurance fraud on their face create a more compelling case for Battery City. However, Eng testifies that the certification of non-Battery City franchisees to the insurer was approved by Shaw and by Battery City's attorney as a way of obtaining insurance for back-up drivers associated with Allen who, although not franchisees, were given assignments when not enough franchisee drivers were available. (Eng Aff. 14.) In response, Battery City cites the deposition testimony of Yong Huang, Allen's owner, which, it argues, shows that the back-up drivers from Allen cannot account for the total number of drivers for whom insurance was allegedly fraudulently obtained. (Passy Aff. 38-49 Ex. O-T.) Battery City may well be correct that Huang's explanations are "incongruous and incredible." (Passy Reply Aff. 21.) But once again, this sort of factual dispute cannot be resolved by the Court. Its resolution, rather, requires an assessment of the credibility of Eng and Huang, and a determination of the inferences to be drawn from alleged gaps in Eng's story — functions which are properly performed by a jury.
In short, while Battery City provides substantial evidence in support of its defenses, none of the asserted misconduct is established by conclusive evidence, and Eng provides first-hand testimony stoutly denying all allegations. Under these circumstances, a trial is required.
II. Battery City's Counterclaims
Eng, Ykea and Allen in turn cross-move for summary judgment on Battery City's claims against them. For the most part, those claims are based on the same assertions as Battery City's defenses, and thus would appear to require trial for the same reasons. Eng and the third-party defendants, however, argue for summary judgment based on more specific flaws in Battery City's claims.
A. The Kickback Claim
Eng argues that the kickback claim must be dismissed because Battery City offers no proof of damages resulting from his alleged breach of contract in taking bribes from drivers for preferred assignments. Indeed, Shaw, Battery City's President, when asked at his deposition how much money Battery City lost as a result of the scheme, testified, "I have no knowledge that any money was lost," and that, while Battery City certainly suffered losses, "I don't know how to attribute the loss to what and where. . . . I don't know where the losses come from. It could be from this misconduct." (Minotti Aff. Ex. D at 55.)
Although Battery City's reply papers are styled "Affidavit in Opposition to Cross Motions of Plaintiff and Third Party Defendants," as well as "In Reply and Further Support of [its own] Summary Judgment Motion," Battery City in fact fails to respond directly to this specific argument, or to set forth any calculation of damages or evidence in support of its claim for damages. Nevertheless, a reasonable fact finder could certainly infer that Eng's alleged conduct, if it occurred, would have caused discontent among franchisees and even the defection of some drivers.
Accordingly, since Battery City has presented evidence from which a jury could reasonably conclude that Eng breached his contract, and that Battery City suffered damages as a result, the Court is not prepared to grant summary judgment at this time. If Battery City fails to present evidence at trial from which a jury could determine a non-speculative award of damages, there will be time enough to dismiss its claim at that point.
B. The Insurance Fraud Claim
Eng and Ykea similarly argue that Battery City has not established damages on its insurance fraud claims. Indeed, Eng goes so far as to argue that Battery City has no standing to raise these claims, because any injury was experienced by the insurer and by Battery City's franchisee drivers (whose rates would be increased if, as Battery City alleges, their group policy was illicitly invaded by higher-risk livery drivers), and not by Battery City. (Eng Mem. 10-11.) Once again, Battery City has failed to offer any response to these arguments.
As with the kickback scheme, it is more than reasonable to infer that Battery City suffered damage from the scheme alleged against Eng and Ykea. Battery City's business essentially involved being a middleman or broker between customers in need of car service and drivers who could provide that service. If its reputation among drivers was injured, or drivers associated with it were subjected to higher costs, it would lose drivers, and thus be unable to service its customers effectively in a highly-competitive market. It is difficult to believe that an insurer would continue to provide favorable rates to drivers associated with a particular car service once it learned that the service's general manager was fraudulently certifying higher-risk livery cab drivers as franchisees of a luxury business car service. Higher rates or less-available insurance would surely deter drivers from associating with Battery City, costing it franchise fees and ultimately damaging its ability to retain business customers.
As with the kickback allegations, however, Battery City provides only speculation as to the amount of loss, if any, it actually suffered. In its complaint against Ykea, Battery City seeks $100,000 in compensatory damages. Passy, its Vice President, testified at his deposition that he derived that number as follows: "I believe we took an estimate that it probably cost us ten franchisees at $10,000 each." Asked how he arrived at the number ten, he replied, "We just estimated it." (Cesaratto Aff. Ex. E at 87.)
Nevertheless, while the amount of damages is speculative at this point, evidence in the record supports the theory that Battery City's business reputation was damaged. According to Passy, a representative of the insurer told him that it "would not insure Battery City franchisees for less than $8,000 because of the problems we had, which was more than double the going rate at the time," and that as a result "it would be difficult for our drivers to get competitive rates," since the insurer in question "was amongst the cheapest of the insurance companies offering policies." (Id. at 86.)
Battery City has thus produced enough evidence to allow a reasonable factfinder to conclude that Eng's alleged breach of contract, and Ykea's fraudulent scheme, damaged Battery City's reputation and business prospects. While quantifying this damage, as with any reputational or indirect injury, may be difficult, it cannot be said that Battery City's claimed damages are so speculative that summary judgment is required.
C. The American Express Scheme
Battery City's fourth and fifth counterclaims against Eng (as well as its fourth affirmative defense), and its only claims against Allen, are based on the allegation that Eng converted American Express vouchers for Battery City services and submitted them to American Express on behalf of Allen. This claim, however, is based on no evidence whatsoever, and must be dismissed.
Asked at his deposition to state the basis of these claims, Passy stated that he based it on the fact that over the second half of 1999, "the amount of money that we were charging through to American Express on credit card slips was going down but the amount of jobs was remaining fairly constant." (Cesaratto Aff. Ex. E at 52.) But Passy never even attempted to compare the specific jobs for credit card customers with receipts to see whether Battery City received payment (id.), and he conceded that the assumption that Allen was involved in any way in processing any American Express vouchers that may have been unaccounted for was "only belief, it's not fact" (id. at 55). Passy's assumption that Eng and Allen were involved was based on "rumors" among the drivers, but he could not remember the name of any driver from whom he had heard such allegations, or when the conversations had occurred. (Cesaratto Aff. Ex. D. at 40, Ex. E at 50-51.)
On this record, there is no admissible evidence whatsoever that any alleged decline in the amount of American Express receipts was attributable to misconduct on the part of Eng or Allen. Summary judgment dismissing these claims, and the corresponding affirmative defense, is accordingly granted.
D. The Americar Claim
Finally, Eng moves for summary judgment on the Americar claim, arguing that even if it is established that he violated his non-compete obligations by involving himself with Americar — a claim he denies — no damage to Battery City ensued. This argument is stronger than Eng's other claims of failure to prove damages.
As noted above, the only evidence offered by Battery City to show this particular breach of contract is the affidavit of the President of Americar, one Helmy Habib. Habib's testimony, if accepted by the finder of fact, would establish that Eng breached his employment contract by attempting to organize a competing venture, and thus would justify the termination of his employment contract. (Passy Aff. Ex. U.)
Eng's employment contract, however, specifically provides a measure of damages for the breach of this portion of his contract:
Eng acknowledges that it may be difficult for Battery to ascertain any losses it would incur as a result of Eng's breach of the covenants [not to compete]. Eng shall therefore pay Battery twenty-five (25%) per cent of the gross sales proceeds resulting from business generated by Eng either directly or indirectly on his own account or as agent, stockholder, employer, employee or otherwise in conjunction with any person or entity through soliciting or otherwise competing for accounts or personnel which became known to him through his relationships with Battery.
(Eng. Aff. Ex. A 8(a).) In order for damages to be obtained under this formula, therefore, some business must have been generated through Eng's efforts. But Habib's testimony, offered by Battery City, establishes that Americar rented office space but "never commenced operation." (Passy Aff. Ex. U 8.) No other evidence is cited by any party suggesting otherwise. Since the Americar venture came to nothing, and obtained no business through Eng's alleged efforts, the terms of his contract with Battery City establish that no damages would be owed, even if Battery City can establish a breach. Accordingly, Eng is entitled to summary judgment on this claim.
III. Eng's Motion for Costs
Eng argues that because Battery City's summary judgment motion is "completely baseless," he should be awarded costs for having to defend the motion. This claim is denied. While it is true that "if a party's conduct is unreasonable, a district court has the discretion to award fees," Matthew Bender Co. v. West Publ'g Co., 240 F.3d 116, 124 (2d Cir. 2001) (citing Harris Custom Builders. Inc. v. Hoffmeyer 140 F.3d 728, 731 (7th Cir. 1998)), Battery City's motion is not completely frivolous or unreasonable. Battery City's proof that Eng and Ykea defrauded it is strong, and while a reasonable factfinder might eventually reject its position, its motion for summary judgment on Eng's breach of contract suit is within the bounds of appropriate advocacy.
IV. Eng's Motion to Add a Party
Finally, Eng moves to add Phil Shaw, Battery City's sole shareholder, as an additional defendant. Minotti claims that as the sole shareholder of a dissolved corporation, Shaw in effect is the transferee of Battery City's interest in this lawsuit, and should be added as a party defendant. The motion will be denied.
There is some ambiguity about the remedy being requested. The notice of motion and memorandum of law style the motion respectively as one "to add a party" and "to add Phil Shaw as an additional defendant." The attorney's affirmation submitted in support of the motion refers to it as a motion "to substitute Phil Shaw. . . for the Defendant, Battery City. . . ." (Minotti Aff. 1.) In view of the Court's disposition of the motion, it is unnecessary to clarify the point.
In May 2000, several months after Eng's firing, Battery City sold its assets to another company, Battery Holdings of New York. (Minotti Aff. 7, Ex. C at 24, Ex. E.) Battery City subsequently dissolved. (Id. Ex. D.) Most of the proceeds of the sale are apparently being paid to Shaw, though the parties dispute whether this constitutes a distribution of assets or the repayment of loans owed by Battery City to Shaw. (Compare Minotti Aff. 8-9 Ex. C at 28, 30, 58, with Shaw Aff. 1, 4-8.)
Under Rule 25(c) of the Federal Rules of Civil Procedure,
In case of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party.
Notably, the rule does not provide for automatic substitution or addition of the transferee. Where a transfer of interest has occurred, authorizing a change in the parties to the lawsuit is "a discretionary matter for the trial court." In re Chalasani, 92 F.3d 1300, 1312 (2d Cir. 1996).
Indeed, a leading commentator has pointed out,
The most significant feature of Rule 25(c) is that it does not require that anything be done after an interest has been transferred. The action may be continued by or against the original party, and the judgment will be binding on his successor in interest even though he is not named. An order of joinder is merely a discretionary determination by the trial court that the transferee's presence would facilitate the conduct of the litigation.
Wright, Miller Kane, Federal Practice Procedure: Civil 2d, § 1958 (1986) (emphasis added; footnotes omitted).
Rule 25 "is procedural. It does not provide for the survival of rights or liabilities but merely describes the method by which the original action may proceed if the right of action survives." Id. § 1952. Thus, in this diversity case, whether Shaw is a transferee of Battery City's interest in this lawsuit who may be bound personally must be determined by reference to New York state law. Id.
The Supreme Court has pointed out that even after a corporation has been dissolved, "a time-honored feature of the corporate device is that a corporate entity may be utterly dead for most purposes, yet have enough life remaining to litigate its actions. All that is necessary is a statute so providing." Defense Supplies Corp. v. Lawrence Warehouse Co., 336 U.S. 631, 634-35 (1949). New York has such a statute. New York Business Corporation Law § 1006 provides:
(a) A dissolved corporation. . . may continue to function for the purpose of winding up the affairs of the corporation in the same manner as if the dissolution had not taken place, except as otherwise provided in this chapter or by court order. In particular, and without limiting the generality of the foregoing: 4. The corporation may sue or be sued in all courts and participate in actions and proceedings, whether judicial, administrative, arbitrative, or otherwise, in its corporate name, and process may be served by or upon it. . . . (b) The dissolution of a corporation shall not affect any remedy available to or against such corporation, its directors, officers or shareholders for any right or claim existing or any liability incurred before such dissolution. . . .
Thus, under New York law, a lawsuit against a corporation may be continued after dissolution.
New York cases consistently hold that under this statute, as under various predecessor statutes, "shareholders who have received distribution of remaining assets of the corporation hold these assets in trust for the benefit of creditors." Wells v. Ronning, 702 N.Y.S.2d 718, 721 (3d Dep't 2000). This, however, does not mean that a direct action against the shareholders is favored: "Normally, a creditor must exhaust his or her remedies against the corporation by obtaining a judgment against it and having it returned unsatisfied. Where this is impossible or futile, an action may be maintained directly against the directors or shareholders to the extent that they received from or continue to hold assets which were the corporation's." Id. (emphasis added). See Rodgers v. Logan, 503 N.Y.S.2d 36 (1st Dep't 1986) (where corporation was dissolved thirty years earlier, direct suit against corporation would be futile).
Both the federal procedural rule and the New York substantive law thus lead to the conclusion that there is no need to add or substitute Shaw as a party defendant. It is clear that if a judgment is obtained and cannot be recovered against the corporation, a remedy against the shareholder will be available if he received transfers of corporate proceeds. Adding him as a party at this point is desirable only if "the transferee's presence would facilitate the conduct of the litigation." Wright, Miller Kane, supra. § 1958. That would hardly be the case here. Before discretionary action under Rule 25(c) can even be contemplated, it must be established that Shaw is a transferee of corporate proceeds. See Chalasani, 92 F.3d at 1312 (allowing substitution in the absence of a transfer of interest is abuse of discretion). It is contested whether Shaw received such proceeds, or merely repayment of loans to the corporation, and resolving this dispute would require an evidentiary hearing. Luxliner P.L. Export Co. v. RDI/Luxliner, Inc., 13 F.3d 69 (3d Cir. 1993). It being far from certain that a judgment against Battery City ever will be obtained, or that any such judgment will not be paid if entered, it is far more efficient to resolve the merits of the dispute first, and then consider whether any judgment against Battery City can be enforced against Shaw, rather than to embark now on a sideshow dispute about the nature of Shaw's receipts from Battery City.
CONCLUSION
For the reasons stated above, Battery City's motion for summary judgment is denied. Eng's motion for summary judgment is granted as to Battery City's fourth, fifth and sixth counterclaims, which are hereby dismissed, and denied in all other respects. Thea's motion for summary judgment is denied. Allen's motion for summary judgment is granted, and the case is dismissed in its entirety as to third-party defendant Allen Express, Inc. Eng's motion for the costs of defending Battery City's summary judgment motion is denied, as is Eng's motion to add Phil Shaw as a defendant.