Hoag v. Chancellor, Inc.

• Decision Date: 20 August 1998
• Citation: 677 N.Y.S.2d 531,246 A.D.2d 224
• Parties: , 136 Lab.Cas. P 58,491, 1998 N.Y. Slip Op. 7457, 1998 N.Y. Slip Op. 7458 Jay HOAG, et al., Plaintiffs-Appellants, v. CHANCELLOR, INC., et al., Defendants-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 531

677 N.Y.S.2d 531

246 A.D.2d 224, 136 Lab.Cas. P 58,491,

1998 N.Y. Slip Op. 7457,

1998 N.Y. Slip Op. 7458

Jay HOAG, et al., Plaintiffs-Appellants, v. CHANCELLOR, INC., et al., Defendants-Respondents.

Supreme Court, Appellate Division First Department.

Aug. 20, 1998.

Martin Flumenbaum, of counsel (Daniel J. Kornstein, Eric S. Goldstein, Hillary B. Smith, Emily Rosdeitcher, on the brief, Paul, Weiss, Rifkind, Wharton & Garrison and Kornstein Vests & Wexler, LLP, attorneys), for plaintiffs-appellants.

Bettina B. Plevan, of counsel (Peter J.W. Sherwin and Katya T.P. Jestin, on the brief, Proskauer Rose LLP, attorneys), for defendants-respondents.

SULLIVAN, J.P., ELLERIN, NARDELLI, RUBIN and MAZZARELLI, JJ.

SULLIVAN, Justice Presiding.

This is an appeal from the dismissal, pursuant to CPLR 3211(a)(7) for failure to state a cause of action, of plaintiffs' third and fourth causes of action for tortious interference with contract and conspiracy, respectively. Plaintiffs, two former executives of Chancellor, Inc., and Chancellor Capital Management, Inc. (collectively Chancellor), who worked in Chancellor's Alternative Asset Management Group (AAMG), sue Chancellor and Warren Shaw, Penny Zuckerwise, Robert Wade and Parag Saxena (the individual defendants), at all times relevant herein Chancellor executives, alleging as against the individual defendants that they, knowingly and intentionally interfered with employment-related contracts between plaintiffs and Chancellor and conspired to deprive plaintiffs of their rights and entitlements under the contracts.

On April 1, 1992, in conjunction with a management buyout, plaintiffs, who had been Chancellor employees for some time, entered into written contracts continuing their employment from that date until December 31, 1994 as executive employees and members of AAMG, whose specialty was the investment of venture-capital funds. The contracts provided that plaintiffs were to receive compensation, consisting of a minimum base salary, bonus and incentive fees and carried interests. Incentive fees are monies received by AAMG for investments, typically made several years before, in private companies, and reflect the efforts of AAMG's individual members, who would raise the funds and then invest them. According to plaintiffs, it was understood by the parties that such fees would be paid to the AAMG personnel who helped generate them, even though they might no longer be employed by Chancellor. Such understanding, it is alleged, was a matter of custom and usage among venture-capital investment professionals and at Chancellor. Consistent with such a practice, both plaintiffs, contemporaneously with the signing of their employment contracts on April 1, 1992, entered into an agreement set forth in a side letter, dated April 3, 1992 and signed by the parties, as well as individual defendants Saxena, Foley and Wade, Chancellor's chairman, covering the distribution of incentive fees and carried investments. The side letter expressly provides that "75% of the [incentive fees and carried interest fees received through December 31, 1996] shall be distributed to employees in [AAMG]" and that "[AAMG's] head will allocate the [f]ees among employees of [AAMG] with the consent of [Chancellor's chairman] or [his] successor, which shall not be unreasonably withheld." The side letter further provides that the "[AAMG] head may give consideration to payment of [f]ees to departed key employees of [AAMG], except those terminated ... for cause or who terminate without good reason," subject to the Chancellor chairman's consent, "which shall not be unreasonably withheld." Chancellor paid incentive fees to defendant Saxena after he left AAMG on the recommendation of defendant Foley, the then AAMG head.

In their complaint, plaintiffs allege a scheme by defendants to oust plaintiffs from their positions with Chancellor, to deprive them of their bonus and incentive fees compensation and to seize the benefits for themselves. In furtherance of this scheme, plaintiffs allege, defendants engaged in a course of conduct designed to force plaintiffs to leave Chancellor by, inter alia, removing the management of the "Small Cap Assets" group from AAMG, thereby diminishing plaintiffs' responsibilities and reducing their potential for future incentive-fee compensation. They also claim that the individual defendants disagreed with the recommendations made by the AAMG group head regarding plaintiff Hoag's bonuses and repeatedly withheld incentive-fee payments from plaintiffs or paid them in an untimely manner.

In granting the individual defendants' motion to dismiss the tortious interference with contract cause of action--the third cause of action--the IAS court correctly noted that "corporate officers may not be charged with tortious interference unless they acted outside the scope of their authority by committing an independent tort or by acting for personal profit aside from the corporation's interests", but held, "No such allegation has been made here." The court dismissed the fourth cause of action, alleging a conspiracy among the individual defendants, because "it was dependent on plaintiffs' claim for tortious interference with contract." Furthermore, while the court denied dismissal of the first and second causes of action for breach of the employment agreement and side-letter agreement, respectively, it rejected plaintiffs' argument that parol evidence and evidence of industry custom and usage would show that incentive fees and carried interests are customarily paid to departed employees and barred such testimony on the ground that since the contract was unambiguous, parol evidence was inadmissible. We modify to reinstate the cause of action for tortious interference with contract.

The standard for determining a CPLR 3211(a)(7) motion is well settled. If a "plaintiff is entitled to a recovery upon any reasonable view of the stated facts", the complaint is legally sufficient and the motion must be denied. (219 Broadway Corp. v. Alexander's, Inc.. 46 N.Y.2d 506, 509, 414 N.Y.S.2d 889, 387 N.E.2d 1205.) "Whatever an ultimate trial may disclose as to the truth of the allegations, on such a motion, a court is to take them as true and resolve all inferences which reasonably flow therefrom in favor of the pleader." (Sanders v. Winship, 57 N.Y.2d 391, 394, 456 N.Y.S.2d 720, 442 N.E.2d 1231; see also, Barr v. Wackman, 36 N.Y.2d 371, 375, 368 N.Y.S.2d 497, 329 N.E.2d 180.)

The elements of a tortious interference with contract claim are well established--the existence of a valid contract, the tortfeasor's knowledge of the contract and intentional interference with it, the resulting breach and damages. (Loftus, Inc. v. White, 150 A.D.2d 857, 859, 540 N.Y.S.2d 610.) Here, the complaint alleged that the individual defendants intentionally interfered with the employment contracts and the side letter agreement by, inter alia, diminishing plaintiffs' responsibilities and prospects for future incentive-fee compensation, freezing plaintiff Hoag's salary and unreasonably disagreeing with the AAMG group head's recommendations regarding his bonuses, repeatedly withholding and delaying payment of incentive fees due plaintiffs and, after their departure from Chancellor, unreasonably withholding consent for the AAMG group heads' recommendations for incentive-fee payments to plaintiffs based on their contributions to the values created that gave rise to the incentive fees. Thus, the complaint asserted the essential elements of a tortious interference with contract claim. ¹

To establish a corporate officer's liability for inducing a breach of a contract between the corporation and a third party, the complaint "must allege that the officers' ...'acts were taken outside the scope of their employment or that they personally profited from their acts'." (Courageous Syndicate v. People-to-People Sports Comm., 141 A.D.2d 599, 600, 529 N.Y.S.2d 520, quoting Citicorp Retail Servs. v. Wellington Mercantile Servs., 90 A.D.2d 532, 455 N.Y.S.2d 98.) Buckley v. 112 Cent. Park South, 285 App.Div. 331, 136 N.Y.S.2d 233, cited favorably by the Court of Appeals in Murtha v. Yonkers Child Care Assn., 45 N.Y.2d 913, 915, 411 N.Y.S.2d 219, 383 N.E.2d 865, involved...