Carco Group, Inc. v. Maconachy

• Decision Date: 21 April 2009
• Docket Number: No. CV 05-6038 (ARL).,CV 05-6038 (ARL).
• Parties: CARCO GROUP, INC. and Ponjeb V, L.L.C., Plaintiffs, v. Drew MACONACHY, Defendant.
• Court: U.S. District Court — Eastern District of New York

644 F.Supp.2d 218

CARCO GROUP, INC. and Ponjeb V, L.L.C., Plaintiffs, v. Drew MACONACHY, Defendant.

No. CV 05-6038 (ARL).

United States District Court, E.D. New York.

April 21, 2009.

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James M. Wicks, Franklin McRoberts, Farrell Fritz, P.C., Uniondale, NY, Edward F. Cunningham, Garden City, NY, for Plaintiffs.

Kenneth A. Novikoff, Rivkin Radler, LLP, Uniondale, NY, Kesari Ruza, Sheppard Mullin Richter & Hampton LLP, New York, NY, for Defendant.

OPINION AND ORDER

LINDSAY, United States Magistrate Judge:

Plaintiffs Carco Group, Inc. and its affiliate Ponjeb V, L.L.C. (collectively "Carco") filed this action against their former employee Drew Maconachy ("Maconachy") alleging inter alia breach of contract and breach of fiduciary duty. The parties have consented to the undersigned's jurisdiction pursuant to 28 U.S.C. § 636. (See Docket Entries 37 & 40.) Beginning on July 21, 2008, and continuing for four weeks thereafter, the undersigned presided over a bench trial. Having considered all of the evidence and testimony presented, and for the reasons that follow, the court finds in favor of plaintiff Carco and judgment shall be entered against defendant Maconachy in the amount of $1,791,356. The court also finds that Carco is entitled to attorneys' fees, prejudgment interest and a declaratory judgment as described herein.

FINDINGS OF FACT

"In an action tried on the facts without a jury ..., the court must find the facts specifically and state its conclusions of law separately."¹ FED. R. CIV. P. 52(a). The following findings of fact are drawn from the evidence and testimony presented at trial.

A. Carco's Purchase of MMI

Maconachy and John Murphy² ("Murphy") are longtime friends who are both former FBI agents with investigative experience. Murphy and Maconachy co-founded Murphy & Maconachy, Inc. ("MMI"), a security consulting firm that offered investigation and litigation support services. MMI was in business for approximately fifteen years prior to its acquisition by Carco. MMI had offices in both California, known as "MMI West," and Virginia, known as "MMI East." Maconachy was in charge of the MMI West operation and served as MMI's President.

Peter O'Neill ("O'Neill") is also a former FBI agent and is Carco's majority owner and Chairman. Carco was in the business of providing research and background check services. Beginning in the late 1990s, O'Neill sought to expand Carco's business to include investigative services. (Tr. at 369-70.)³ O'Neill focused on MMI because of his common background with Maconachy and Murphy as FBI agents, and because MMI could provide Carco a foothold into investigative services.

In late 1998, MMI engaged Merrill Lynch Business Advisory Services ("Merrill") to determine the fair market value of MMI for potential sale of the business. Merrill produced a report which among other things noted that MMI's revenue generation was heavily dependent upon Maconachy and Murphy, who together owned 84% of the business. (Pl.'s Ex. 2.)⁴ The report described that MMI's business was derived principally through relationships and word of mouth, and it projected increased annual revenues of approximately 5%.

In February 1999, a meeting took place between Maconachy, Murphy and Carco's representative Mike Giordano ("Giordano") to discuss Carco's possible acquisition of MMI. The issues which would eventually destroy the business relationship surfaced at that first meeting: Maconachy and Murphy expressed discomfort with the notion that Carco would exercise control over their conduct of MMI's business. At this meeting, Maconachy also expressed his belief that MMI's go-forward revenue would be higher than Merrill's projections. (Tr. at 367, 371; Pl.'s Exs. 2, 200.)

O'Neill's decision to acquire MMI depended on Maconachy and Murphy's continued association with MMI. Maconachy and Murphy were MMI's key assets as it owned no buildings or real estate. In fact, O'Neill considered them to be so essential to the purchase that he required Maconachy and Murphy to each sign unusually long employment agreements of eight years. The eight-year term coincided with Carco's time line to repay a Chase bank loan obtained to acquire MMI. (Tr. at 717, 720-22, 730-32; Pl.'s Ex. 370.)

Carco acquired the assets of MMI on January 7, 2000. The Asset Purchase Agreement ("APA") provided for a cash purchase price of $7.2 million, with $2 million paid up front and the remaining $5.2 million to be paid in thirty-two equal quarterly payments following the closing. (Pl.'s Ex. 252.) Of this amount, Maconachy was to be paid $68,421 each quarter for eight years. Maconachy was made Senior Vice President of Carco, reporting directly to Carco's president. (Tr. at 40.) It was agreed that Maconachy would continue to manage MMI West. (Id. at 34.) Murphy was made a senior corporate officer of Carco and general manager of MMI, with specific responsibility for MMI East. Consistent with Carco's accounting practices, MMI's acquisition costs were expensed to MMI's balance sheet. (Id. at 366.)

Murphy and Maconachy's employment agreements ("EA") were made a condition precedent to the APA and were explicitly described to be an integral part of the APA. (Pl.'s Ex. 252 §§ 5.7, 6.9.) The EA provided that Maconachy would be paid an annual salary of $200,000 as well as incentive compensation that would be calculated semi-annually. The EA provided that Maconachy would "render exclusive and full-time services in such capacities and perform such duties as the Members of the Company may assign, in accordance with such standards of professionalism and competence as are customary in the industry of which the Company is a part." (Id. § 1.1.) The EA further provided: "If the Employee is convicted of any crime or offense, is guilty of gross misconduct or fraud, or materially breaches material affirmative or negative covenants or agreements hereunder, the Company may, at any time, by written notice to the Employee, terminate this Employment Agreement, and the Employee shall have no right to receive any Annual Salary, Incentive Compensation, or other compensation or benefits under this Employment Agreement on and after the effective date of such notice." (Id. § 4.3.)

B. Financial Losses and Development of First Business Plan

Within only a few months of Carco's acquisition of MMI, it began to show heavy losses. In a letter addressed to O'Neill dated November 7, 2000, Chase Bank expressed concern over MMI's declining revenues. (Pl.'s Ex. 317.) Specifically, Chase noted that MMI's revenues were far below Merrill's revenue projections and were trending downward. Chase pointed out that actual 1999 year-end revenue was $4 million, whereas Merrill's projection had been $7.5 million. Chase further noted that, as of October 31, 2000, MMI had already incurred a loss of $1.3 million for the year 2000. Concerned for its investment, Chase suggested that MMI develop a business plan for correcting the situation, and even went so far as to suggest renegotiation of the acquisition terms. Maconachy attributed MMI's losses to acquisition costs.

On November 17, 2000, a critical meeting was held at Carco's headquarters in New York. The meeting was attended by O'Neill, Maconachy, Murphy and Giordano. The purpose of the meeting was to formulate a response to the Chase letter and to discuss a business plan to deal with MMI's declining revenue. It was agreed that Maconachy and Murphy would develop a business plan to address MMI's losses. At this meeting, O'Neill made clear that reversing the revenue trend required that MMI implement a new approach to sales. In particular, O'Neill insisted that MMI focus on bringing in new clients to strengthen revenues and demanded that a concerted effort be made in this regard. O'Neill emphasized the importance of face-to-face meetings with new client prospects. Maconachy was instructed that he bore primary responsibility for improving the sales effort at MMI West and that he was expected to actively solicit new business in the manner outlined by O'Neill. (Tr. at 788; Pl.'s Ex. 279.)

This meeting revealed a deep divide between Maconachy and O'Neill's views on how to increase sales. (Pl.'s Ex. 245.) Maconachy expressed discomfort with O'Neill's sales approach, and indicated that he did not want to become what he perceived to be a full-time salesman. Maconachy also expressed his view that the best source for new business was existing clients. Maconachy's sales approach was rejected. Instead, O'Neill instructed Maconachy and Murphy that each division of MMI had to meet a target of at least twenty face-to-face sales meetings per week with potential new clients. O'Neill also discussed the need to cut MMI's costs. Despite the importance of this meeting, Maconachy unexpectedly left early which caused some consternation with Carco's management. (Tr. at 380-82.)

On November 20, 2000, Maconachy prepared a sales plan for MMI West that was consistent with O'Neill's sales direction. The plan provided for MMI West employees to meet with at least four new client prospects daily. Maconachy personally committed to devoting at least "one or two" days each week to meeting prospective new clients. (Id. at 385-86; Pl.'s Ex. 244.) O'Neill's response to the plan was to stress the importance of a concentrated sales effort. He clarified that the requirement of twenty sales calls per week, set at the meeting in November, was a minimum effort and that this requirement could not be met by a simple phone call. O'Neill also made clear that Maconachy was expected to personally spend at least two days in the field selling MMI's services to new customers. To accomplish this, O'Neill instructed Maconachy to delegate case management to someone else so that he would be available to lead the sales effort. (Pl.'s Ex. 203.) Maconachy, however, never followed the sales plan and by year end MMI West's...