Capital One Fin. Corp. v. Kanas
| Decision Date | 17 May 2012 |
| Docket Number | Civil Action No. 1:11–cv–750. |
| Citation | 871 F.Supp.2d 520 |
| Parties | CAPITAL ONE FINANCIAL CORPORATION, Plaintiff, v. John A. KANAS and John Bohlsen, Defendants. |
| Court | U.S. District Court — Eastern District of Virginia |
OPINION TEXT STARTS HERE
Brent Manning Timberlake, Capital One Services, LLC, Richmond, VA, James Alwin Murphy, Murphy & McGonigle PC, Glen Allen, VA, Michael Stephen Diamant, Jason Craig Schwartz, Gibson Dunn & Crutcher LLP, Washington, DC, for Plaintiff.
James Herr Rodio, James H. Rodio PLC, Alexandria, VA, for Defendants.
This matter comes before the Court on Defendants John A. Kanas and John Bohlsen's Motion for Summary Judgment (Dkt. No. 82). Defendants ask the Court to void the non-compete agreement they entered into with their former employer, Capital One. In the alternative, Defendants request partial summary judgment with regardto their breach of the non-compete agreement and for the Court to strike Plaintiff's request for relief in the form of disgorgement. For the reasons that follow, the Court DENIES Defendants' Motion but reserves judgment on Defendants' alternative requests.
Defendants John Kanas and John Bohlsen were executives of North Fork Bancorporation, Inc. (“North Fork”), a bank holding company, and its wholly owned subsidiary North Fork Bank, for some thirty years. North Fork Bank offered banking products and services through a network of over 350 branches, mostly in the New York Metropolitan Area. Kanas and Bohlsen managed North Fork Bank as it grew from a small local bank to a large, efficient, and profitable financial institution.
In 2006, Capital One Financial Corporation (“Capital One”) acquired North Fork in a transaction valued at approximately $13.2 billion. As of the merger, Kanas was President, Chief Executive Officer, and Chairman of the Board of Directors of North Fork. Kanas held the position of President of North Fork Bank for nearly 30 years and Bohlsen had served on the North Fork Board of Directors as Vice Chairman for approximately 15 years. Each Defendant held less than 1% of North Fork's outstanding shares.
On March 12, 2006, Kanas and Bohlsen each executed a Restricted Share Agreement (“RSA”) with Capital One that was contingent upon the merger's consummation and the Defendants' transfer of their respective 1% interests in North Fork to Capital One. Under the RSA, the Defendants were entitled to receive additional compensation ($24 million in restricted shares of Capital One common stock to Kanas, $18 million to Bohlsen) if (1) the $13.2 billion acquisition closed, and (2) the Defendants remained employed by Capital One for a period of three years after the date of the merger. The RSA contained a covenant restricting Defendants from engaging in a competitive business for five years after ending their employment with Capital One. The geographic areas covered by the RSA varied by the competitive business involved; most were national in scope.
The merger closed in December 2006 and Kanas and Bohlsen became Capital One employees. However, in July 2007, Capital One and the Defendants agreed to end their employment relationship. At the time, Kanas was President of Capital One's Banking Segment, and Bohlsen was Executive Vice President of Commercial Banking. On July 9, 2007, Capital One and each Defendant executed a Separation Agreement, which superseded the RSA. As part of the Separation Agreement, Capital One agreed that Kanas and Bohlsen did not need to work for Capital One for three years for their restricted shares to vest. Under the Agreement, their restricted shares vested on August 6, 2007, their final day as Capital One employees, rather than December 2009 as proscribed by the RSA.
The Separation Agreement also superseded the RSA's noncompetition covenant. The Separation agreement narrowed the covenant not to compete in terms of geography and the lines of business covered. It also provided exceptions. As revised, the covenant provides that Defendants may not “engage in a Competitive Business (whether as director, stockholder, investor, member, partner, principal, proprietor, agent, consultant, officer, employee or otherwise)” in New York, New Jersey, or Connecticut, subject to three exceptions:
[I]n no event will any of the following activities constitute a breach of the Non–Competition Covenant: (i) ownershipfor investment purposes of not more than ten percent (10%) of the total outstanding equity securities (or other interests) of any entity; (ii) the provision of services to a corporation or other entity, a portion of the business of which is a Competitive Business, provided that the Executive is not providing services to the portion of the business which is directly engaged in a Competitive Business; or (iii) serving as a principal, partner, director, employee, consultant or advisor to a private equity firm, investment bank (but in the case of an investment bank that is part of a financial services company that also engages directly in the Competitive Business, not for the Competitive Business of that financial services company) or hedge fund, provided that such activities do not involve advising such firm, investment bank or hedge fund with respect to, or analyzing investments in, the Company or its Affiliated Entities.
For the purposes of both the prohibition and exceptions, “Competitive Business” is defined to mean:
the consumer and commercial banking business engaged in by the Company or any Affiliated Entity as of the Separation Date, including the business of acquiring and/or managing (whether by use of a sales force, agents, direct mail, the branch, telemarketing, the Internet or any other channel) all commercial and consumer banking products (including but not limited to, commercial and industrial loans, commercial real estate loans, middle market and small business loans, whether originated directly or indirectly through other lending institutions, and commercial and consumer deposits), in New York, New Jersey and Connecticut.
In May 2009, the Defendants and other investors formed BankUnited. BankUnited, Inc. went public in 2011 and has several subsidiaries. Kanas is Chairman of the Board and CEO of BankUnited, Inc., while Bohlsen is BankUnited, Inc.'s Chief Lending Officer and Senior Executive Vice President. Since May 2009, Kanas has served as the President and CEO of BankUnited and on May 19, 2010, Kanas was affirmed as Chairman, and Bohlsen Vice Chairman, of the Board of Directors of BankUnited. With respect to stock ownership, Kanas owns less than six percent and Bohlsen less than three percent of the stock of BankUnited, Inc.
BankUnited is a Florida Bank with all of its branches located in Florida. Capital One has no branches anywhere in Florida. The Defendants maintain that Capital One never objected to the Defendants' role at BankUnited until filing this lawsuit. Capital One argues otherwise, specifically pointing to a June 2009 meeting between Defendants and Capital One executives to express concern over Defendants' roles with BankUnited given their obligations under the Separation Agreement.1
BankUnited acquired mortgage loan portfolios from the FDIC and on the secondary market. Certain portions of each portfolio were secured by property in the Tri–State Area. As of December 2011, a portion of the total deposit accounts maintained at BankUnited's Florida branches were held by customers who listed a primary address in the Tri–State Area.
In October 2010, BankUnited formed a subsidiary, United Capital Business Lending,Inc. (“United Capital”), which then acquired certain assets of a company located in Maryland that engaged in making equipment loans to franchisees across the United States. Of the total outstanding loans, a portion were secured by equipment located in the Tri–State Area. United Capital is run by its President, Bernard Lajeunesse, who reports to John Bohlsen. Bohlsen is a member of United Capital's board of directors; Kanas is not.
In June 2011, BankUnited, Inc. and Herald National—a commercial bank with all its offices in New York—entered into an agreement under which BankUnited, Inc. would acquire Herald National. The transaction closed in February 2012, after receiving approval from the Federal Reserve Bank of Atlanta and the Office of the Comptroller of the Currency. The assets of Herald National represent approximately five percent of the combined assets of BankUnited, Inc. and its subsidiaries.
BankUnited, Inc. and the Defendants implemented a ring-fencing structure for the Herald National Transaction based on the advice of counsel. The ring-fencing provides that, until the non-competes expire in August 2012, Kanas and Bohlsen will be “fenced out” of providing services to Herald National. Until then, Herald Nation will remain a separate entity and will not be merged into BankUnited, Kanas and Bohlsen will not have any decision-making authority or otherwise participate in Herald National's affairs. The Herald National board would not report to them and they would recuse themselves from any Herald National matter before the BankUnited, Inc. board. By ring-fencing, the Defendants sought to fall within the Separation Agreement's “not providing services” exception. The non-compete agreements and the proposed ring-fencing were fully disclosed to the Federal Reserve Bank and the Office of the Comptroller of the Currency during the approval process. The transaction received approval without objection to using this structure. Capital One disputes whether ring-fencing is consistent with the “not providing services” exception and whether the Defendants have, in fact, been “fenced out.”
In July 2011, Capital One initiated this suit, which contains a single count for breach of the non-compete covenants.
“The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment...
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