Hallett v. Stuart Dean Co.

• Decision Date: 25 August 2020
• Docket Number: 20-CV-3881 (JSR)
• Citation: 481 F.Supp.3d 294
• Parties: Bruce HALLETT, Plaintiff, v. STUART DEAN CO., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

481 F.Supp.3d 294

Bruce HALLETT, Plaintiff,

v.STUART DEAN CO., et al., Defendants.

20-CV-3881 (JSR)

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

Signed August 25, 2020

Lauren M. Paxton, Calcagni & Kanefsky LLP, Newark, NJ, for Plaintiff.

Michael Alan Jakowsky, Jackson Lewis LLP, White Plains, NY, Lauren Alyssa Parra, Jackson Lewis P.C., New York, NY, for Defendants.

OPINION & ORDER

JED S. RAKOFF, U.S.D.J.

Plaintiff Bruce Hallett, the former Chief Executive Officer of Stuart Dean Co., brings this suit against Stuart Dean and various members of its Board of Directors, claiming he is owed various forms of additional compensation and damages. The defendants now move to dismiss eight of the nine counts of the complaint. For the reasons that follow, the motion is granted in part and denied in part.

BACKGROUND

The following allegations are taken from the complaint, unless otherwise noted. The Court presumes them to be true solely for the purpose of this motion.

Bruce Hallett is the former CEO of Stuart Dean Company, Inc., a New York corporation operating across the U.S. and Canada, specializing in restoration and maintenance of architectural surfaces.¹ Hallett has served in executive capacities in various companies, including publications and publishers (TIME Magazine, Sports Illustrated, Murdoch Books, MyPublisher, PlayBill magazine). Compl., ECF No. 1, at ¶ 25. From 2011 to 2018, Hallett served on Stuart Dean's Board of Directors. Id. ¶¶ 26-27. While on the Board, he served on the Compensation Committee and, inter alia, helped to create a long-term incentive plan ("LTIP") for the then-CEO. Id. ¶ 45. He worked with the firm PayGovernance in designing that plan, which "offered multi-million dollar payouts to the CEO if the value of Stuart Dean increased significantly during the period between 2013 and 2018." Id. The right to these payouts "vested immediately in the event of a change of control." Id.

In 2018, Hallett was approached to become President and CEO of Stuart Dean. Id. ¶ 27. He signed an agreement (the "Employment Agreement") on or about March 12, 2018. Id. ¶ 29. The Employment Agreement is attached to the complaint. ECF No. 1-1. The Chairman of the Board of Directors signed the Employment Agreement for Stuart Dean. Id. at 14.

The Employment Agreement provided for the following compensation:

• A base salary of $425,000, which could not be decreased ("Base Salary");

• "an annual bonus award ... with a target payout of $175,000, or 40% of Base Salary, whichever is greater, based upon the achievement of annual targets under a weighted plan comprising three components, i.e., profit, growth, and Board Specified Special objectives according to a 50-25-25 allocation thereof, subject to the terms and conditions of the Bonus Plan to be reviewed and approved annually by the Board" (the "Annual Bonus");

• certain vacation days, personal days, and holidays;

• benefits plans, including health, dental, and disability insurance ("Employee Benefits");

• reimbursement of qualifying business expenses;

• "perquisites" in the form of a parking allowance and a club allowance; and

• that Hallett "shall be eligible to participate in the Company's Long Term Incentive Plan (the ‘LTIP’) which will be mutually agreed by the Company and Executive [Hallett.]² The terms of the LTIP are subject to annual review by the Board."

ECF No. 1-1, at ¶¶ 3-11.

According to the complaint, the Board "failed to create a viable LTIP during [Hallett's] two years as CEO." Compl. ¶ 43. "Many assurances were given during Compensation Committee reports to the Board that a long term incentive plan was imminent, but none was forthcoming." Id. In 2018, the Board proposed a plan " ‘in lieu of an LTIP’ that provided compensation above and beyond salary and bonus based on 2019 revenue increases." Id. However, the complaint does not indicate whether that plan was ever finalized.

Early in 2019, the Chairman of the Board "assured" Hallett "that he could expect to be contacted by PayGovernance," the firm that had worked on the prior CEO's LTIP. Id. ¶ 45. In mid-2019, "[a] copy of the [prior CEO's LTIP] was ... circulated to the Board ... as a model." Id. In August 2019, the Board's minutes listed a target of January 17, 2020 to prepare a draft of the LTIP, and a target date of March 6, 2020 for Board approval. Id. ¶ 44.

On February 24, 2020, Hallett emailed the Compensation Committee regarding Stuart Dean's failure "to deliver an LTIP." Id. ¶ 46. On February 26, the Committee Chairman "responded ... indicating that Hallett would not be receiving any LTIP, as he was no longer eligible given there was only a year left of his employment term." Id. Hallett "immediately responded to the Committee (copying Board Chairman Tim Shea), disputing their conclusion and stating that such failure constituted a material breach of his Employment Agreement; citing, among other reasons, the possibility of a sale in the ensuing 12 months." Id. Hallett received no response. Id.

Meanwhile, under Hallett's leadership, the company "saw significant improvements reflected in the 2019 results." Id. ¶ 33. A potential acquiror, Pritchard Industries, approached a Stuart Dean executive in the fall of 2019. Id. ¶ 34. Hallett and two other Stuart Dean executives met with two Pritchard Industries executives shortly thereafter. Id. Hallett informed Tim Shea, Stuart Dean's Chairman of the Board of Directors, that a prospective buyer had approached them, without naming the prospective buyer, and Shea encouraged Hallett to continue informal discussions. Id. ¶ 35. Informal discussions with Pritchard continued through the fall and winter, and surveys of the Stuart Dean shareholders in late 2019 and early 2020 indicated that many were eager to sell. Id. ¶¶ 26-38. On or about March 11, Pritchard provided a letter to Stuart Dean indicating Pritchard's interest in a potential transaction. Id. ¶ 39.

However, four days prior to that letter, on March 7, 2020, Chairman Shea told Hallett by phone "that the Board ‘was going in a different direction’ and that he would be terminated by ‘unanimous vote’ of the Board the following day." Id. ¶ 48. The Chairman "declined to provide a specific reason, simply stating ‘we're not getting into that.’ " Id. "Nonetheless, Shea assured Hallett that he would receive six [months’] severance pay ... [and that Shea] would recommend to the Board that Hallett receive a performance bonus for 2019, assuming he agreed to sign a general release." Id. ¶ 48.

Hallett refused to resign. Id. The next day, March 8, 2020, he received a termination letter from Chairman Shea, followed by a second letter on March 13. The two letters are attached to the complaint. ECF Nos. 1-2, 1-3.

The Employment Agreement provides that Stuart Dean can terminate Hallett's employment either with or without cause. "Cause" is defined to include, among other things, "willful malfeasance or willful misconduct in connection with Executive's duties hereunder or any act or omission which is materially injurious to the financial condition or business reputation of the Company." ECF No. 1-1, § 10(a)(2). The Employment Agreement provides that, if terminated for cause, Hallett "shall be entitled to receive" the following (collectively, the "Accrued Rights"):

• his Base Salary through the date of termination,

• his Employee Benefits through the date of termination (e.g., health insurance), and

• reimbursement of business expenses incurred through the date of termination.

Id. § 10(a)(3). If terminated without cause, Hallett "shall be entitled to receive" those same Accrued Rights as well as (under certain circumstances) a continuation of his Base Salary for six months and COBRA health insurance premiums for twelve months. Id. § 10(c)(3).

Chairman Shea did not specify during the March 7 phone call or in the March 8 letter whether Stuart Dean was terminating Hallett for cause. Indeed, the March 8 letter expressed uncertainty on the matter, saying, "If the Company determines that there is no cause for your termination pursuant to Section 10 of the Employment Agreement, you will be provided with a Separation Agreement and General Release pursuant thereto." ECF No. 1-2.

Subsequently, however, in the March 13 letter, Stuart Dean asserted that it had fired Hallett for cause: "The Company believes that you have engaged in acts of willful misconduct in connection with your duties as CEO as it relates to unapproved and prohibited negotiations with a potential business partner thereby warranting termination [for cause]." ECF No. 1-3. At the same time, the March 13 letter promised Hallett one form of compensation to which he only would have been entitled if he had been fired without case -- COBRA health insurance premiums for a year. The letter also said that "the Company [will] [is willing] to construe your termination as without cause under Section 10, Subsection C [if you sign an Agreement and General Release]." ECF No. 1-3 (brackets in original).

As noted, defendants now move to dismiss all but Count One of the nine counts of the complaint pursuant to Rule 12(b)(6), Fed. R. Civ. Prod.³

LEGAL STANDARD

To survive a motion to dismiss, a complaint must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The Court must "accept[ ] all factual allegations in the complaint and draw[ ] all reasonable inferences in the plaintiff's favor." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). If a complaint "pleads facts that are ‘merely consistent with’ a defendant's liability, it ‘stops short of the line between possibility and plausibility of "entitlement to relief.’ " " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955 ). The Court may consider the Employment Agreement and termination letters because "the complaint is deemed to include any written instrument...