Foster v. Churchill

• Decision Date: 26 March 1996
• Citation: 642 N.Y.S.2d 583,665 N.E.2d 153,87 N.Y.2d 744
• Parties: , 665 N.E.2d 153 Mark FOSTER et al., Appellants, v. Richard H. CHURCHILL, Jr., et al., Respondents, et al., Defendants.
• Court: New York Court of Appeals Court of Appeals

Page 583

642 N.Y.S.2d 583

87 N.Y.2d 744, 665 N.E.2d 153

Mark FOSTER et al., Appellants, v. Richard H. CHURCHILL, Jr., et al., Respondents, et al., Defendants.

Court of Appeals of New York.

March 26, 1996.

[87 N.Y.2d 745] [665 N.E.2d 154] Miller & Wrubel, P.C., New York City (Joel M. Miller, Charles R. Jacob III and John T. Corcoran, of counsel), for appellants.

[87 N.Y.2d 746] Curtis, Mallet-Prevost, Colt & Mosle, New York City (T. Barry Kingham, Michelle A. Rice and Laleh Ispahani, of counsel), for respondents.

OPINION OF THE COURT

SMITH, Judge.

The issues presented by this appeal are (1) whether the Appellate Division erred in concluding that appellants had not established a claim of tortious interference and (2) whether the Appellate Division erred in affirming the dismissal of appellants' defamation claim.

Appellants Mark Foster and Don Franco are the founders and former chief executive officers of defendant Microband Companies Incorporated (Microband). ^* Microband, incorporated in Delaware, with offices in New York, Washington, D.C., and Detroit, was engaged in the wireless multichannel cable television business. Respondents, collectively referred to as the TA defendants, are a group of venture capital firms and their principals, Richard H. Churchill, Jr., and David D. Croll. Respondents Churchill and Croll were also directors of Microband. Though appellants founded Microband, at some point appellants sold Microband and in 1985 sought to repurchase the company. Respondents provided substantial financing for appellants' repurchase of Microband, resulting in respondents' owning a 75% equity interest in the company and appellants' together owning the remaining 25%. In 1987, Microband was refinanced with a loan of approximately $25 million from defendants New York Life Insurance Company and New York Life Insurance and Annuity Corporation (the New York Life defendants). This loan resulted in the New York Life defendants obtaining nearly 13% of Microband's outstanding stock. Microband was refinanced again in 1989, receiving funds from both the New York Life defendants and respondents TA defendants. At the time of the 1989 refinancing, appellants amended their employment agreements with Microband, extending their employment to 1992 and providing liberal severance packages should Microband terminate appellants prior to 1992 for reasons other than their death, disability, breach of the employment agreement or for cause. Termination for cause, however, was authorized and would result in appellants receiving no further payments (salary, bonuses or severance) under their employment contracts.

Despite the injection of substantial cash, Microband's rapid expansion and need to service existing debt necessitated additional capital. In January 1989, the New York Life defendants conditioned an additional $10 million in financing on Microband achieving 95,000 subscribers by August 1989. Microband was unable to meet this target and further was unable to independently raise the additionally needed funds.

In the fall of 1989, Microband effectively ran out of cash. At a meeting of Microband's board of directors, the decision was made to hire outside consultants to review the company's business affairs. The consultants concluded that Microband was being mismanaged and was in serious financial trouble. The consultants' report prompted Microband's board of directors to develop a strategy to deal with the severe economic crisis facing Microband. A meeting of the board of directors of Microband was scheduled for November 10, 1989. Prior to the meeting, respondents Churchill and Croll circulated a "Schedule of Actions Constituting Cause" enumerating six grounds for terminating appellants "for cause."

In their schedule, respondents Churchill and Croll alleged that (1) appellants prevented the company from securing critical financing during the spring and summer of 1989 by failing to devote the necessary time and attention to the company's operation because appellants were preoccupied with beneficially amending their employment contracts; (2) although appellants knew that Microband was in serious financial trouble, they failed to disclose the extent of the company's dilemma to Microband's financial backers; (3) appellants' operations practices caused nonsubscribers to remain connected and in effect receive cable services at Microband's expense; (4) appellants failed to use their best efforts on the company's behalf; (5) appellants caused the company to incur legal fees which benefited appellants personally, and (6) appellants were grossly negligent and/or willful in their mismanagement of Microband. Appellants were notified, on November 10, 1989, of their termination "for cause" from Microband.

Appellants commenced this action against respondents TA defendants asserting, inter alia, that respondents (i) prevented appellants from carrying out their proper functions as cochief executive officers of Microband; (ii) caused Microband to breach its employment agreements with appellants; (iii) defamed appellants to members of Microband's board of directors, resulting in the wrongful termination of appellants' employment; and (iv) breached their fiduciary duties. Appellants asserted a claim for breach of contract against Microband. Microband subsequently filed for bankruptcy protection and proceedings against it were stayed. Appellants also asserted claims against the New York Life defendants for breach of contract, and aiding in breach of fiduciary duty. The New York Life defendants settled their claims with appellants during the trial and are not involved in this appeal.

Although initially noting that Microband could have fired appellants for no reason, Supreme Court, in a nonjury trial, held that by terminating appellants "for cause" and failing to pay them the required severance, Microband had breached its contracts with appellants. After the trial, the court dismissed all the claims against respondents TA defendants, despite finding that said respondents intentionally caused Microband to breach its contracts with appellants. Prior to dismissing the claims against the TA defendants, the court considered two defenses raised by respondents TA defendants, the business judgment rule and economic justification. Supreme Court concluded that the business judgment rule provided no protection to respondents because they failed to treat appellants with the utmost good faith required of them. As to the claim of tortious interference, the court concluded that respondents were protected by the defense of economic justification, finding that the predominate purpose of respondents' actions was the economic interest of Microband.

Finally, the court concluded that while many of the statements contained in the "Schedule of Actions Constituting Cause" were defamatory per se, such statements were "presumptively privileged because they concern[ed] the proper management of Microband and were published and discussed among persons responsible for its health." The court examined each of the schedule's statements and determined that none of the statements constituted grounds "for cause" within the appellants' contracts. Moreover, the court found most statements were false, that the schedule was ambiguously worded, and while Microband's problems were real, such problems went to "competence," not to "cause."

The Appellate Division affirmed. Citing Felsen v. Sol Cafe Mfg. Corp., 24 N.Y.2d 682, 301 N.Y.S.2d 610, 249 N.E.2d 459, it concluded that the respondents had established the defense of economic justification and had acted with no personal animus. In addition, the Court concluded that respondents had established the defense of business judgment since the case was governed by Delaware law in which the presumption existed that a director's decision was made in good faith. This Court granted leave to appeal.

Appellants appeal to this Court contending (1) that the Appellate Division erred by requiring them to establish a new standard of "personal animus" in order to defeat respondents' defense of economic justification to a claim of tortious interference and (2) that the Appellate Division further erred by requiring appellants to prove "personal spite or ill will" to overcome the defense of qualified privilege to a claim of defamation.

A claim of tortious interference requires proof of (1) the existence of a valid contract between plaintiff and a third party; (2) the defendant's knowledge of that contract; (3) the defendant's intentional procuring of the breach, and (4) damages (Israel v. Wood Dolson Co., 1 N.Y.2d 116, 120, 151 N.Y.S.2d 1, 134 N.E.2d 97). These elements were established. We conclude, however, that the defense of economic justification was established by the respondents. Contrary to the argument of the appellants, the Appellate Division did not require appellants to establish personal animus to defeat the defense of economic justification. Thus the Appellate Division did not establish a new standard for claims...