Hodak v. Madison Capital Management, LLC, 091009 FED6, 08-6142

Docket Nº:08-6142, 08-6543
Opinion Judge:GILMAN and McKEAGUE, Circuit Judges; and SARGUS, District Judge
Party Name:KEN HODAK, Plaintiff-Appellant, v. MADISON CAPITAL MANAGEMENT, LLC, et al., Defendants-Appellees.
Judge Panel:BEFORE: GILMAN and McKEAGUE, Circuit Judges; and SARGUS, District Judge.
Case Date:September 10, 2009
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit
 
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KEN HODAK, Plaintiff-Appellant,

v.

MADISON CAPITAL MANAGEMENT, LLC, et al., Defendants-Appellees.

Nos. 08-6142, 08-6543

United States Court of Appeals, Sixth Circuit

September 10 2009

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF KENTUCKY

BEFORE: GILMAN and McKEAGUE, Circuit Judges; and SARGUS, District Judge.[*]

OPINION

McKEAGUE, Circuit Judge.

Ken Hodak was hired as CEO of United American Resources GP Services, LLC, in May 2006. In his first four months, Hodak's performance was less than satisfactory. After management came to suspect that Hodak had breached his Confidentiality Agreement by improperly disclosing to third parties UAR's pending negotiations to acquire other companies, Hodak was terminated for cause without prior notice in September 2006. Hodak commenced this action, asserting breach of contract, fraud and other claims against his former employer. UAR responded by filing counterclaims against Hodak for breach of contract and breach of fiduciary duties.

The district court granted UAR's motion for summary judgment on Hodak's claims, awarded UAR attorneys' fees as prevailing party on these claims, granted UAR's motion to voluntarily dismiss its counterclaims without prejudice, and denied Hodak's motion for attorneys' fees on the counterclaims. Hodak now appeals all of these rulings.

This litigation stems fundamentally from Hodak's claim that the manner in which UAR discharged him, i.e., for cause and without notice, was in breach of the Employment Agreement. The district court concluded that the asserted confidentiality breaches were "material" and therefore represented valid justification for discharge for cause. Yet, irrespective of whether the asserted confidentiality breaches represented valid justification for discharge for cause, we find insufficient record support for the district court's implicit determination that UAR treated the confidentiality breaches as material and relied on them as the actual reason for Hodak's discharge. In our opinion, the record evidence poses triable fact issues as to whether the now asserted confidentiality breaches were the actual reason for Hodak's firing, as opposed to a pretext for other reasons that did not amount to grounds for termination for cause. We therefore vacate the district court's summary judgment ruling on Hodak's breach of contract claim and vacate the district court's award of attorneys' fees and costs to UAR as prevailing party. In all other respects, the district court's rulings are affirmed.

I. BACKGROUND

In the Spring of 2006, United American Resources GP Services, LLC ("UAR"), recruited appellant Ken Hodak initially to serve as its Chief Operating Officer and subsequently, when the position became open, as Chief Executive Officer. UAR is one of several entities whose business plan was to create a master limited partnership of privately-owned coal companies that would eventually go public.1 Management services were provided to UAR by Madison Capital Management, LLC, and Madison Investment Partners 24, LLC, which are also named defendants in this action. Based on representations made by UAR, Hodak left his job with National Coal Corporation, accepted the UAR CEO position, and entered into an Employment Agreement with UAR on May 12, 2006. On the same day, in a separate document, Hodak and UAR entered into a Confidentiality Agreement that prohibited Hodak from disclosing, among other things, UAR transactions and acquisitions to those not involved in those transactions.

During his first four months on the job, Hodak failed to perform up to expectations. According to Bryan Gordon, Managing Director of Madison Capital Management, LLC, and of UAR, Hodak "had overpromised and underdelivered in terms of his capabilities." Gordon explained his dissatisfaction with Hodak as follows:

He was fired because he was completely and utterly inadequate with respect to the job he had been hired to perform. He did not achieve any of the goals or objectives or milestones which had been agreed upon over time that he would achieve. It was my feeling that his leadership skills were lacking at best, his industry instincts were unimpressive, his presence both internally and externally were appalling, his preparedness and his ability to answer questions was absolutely substandard, and I felt his judgment was poor, and he had completely and utterly lost the confidence of the people who were closest to the project on a day-to-day basis and whose counsel I respected greatly, and had no results to speak of after being teed up with a great deal of opportunity and resources, and I felt that, you know — to use an expression, I felt that he had overpromised and underdelivered in terms of his capabilities, and he was essentially an empty suit.

Gordon dep. pp. 100-01, ROA 1322-23. Gordon alluded to the existence of other reasons for the discharge decision, but refused to disclose them. Gordon identified these other reasons as having been the subject of discussions with counsel and therefore protected by the attorney-client privilege.

UAR Chairman of the Board Chauncey Curtz had the impression that Hodak was overwhelmed by the job. He identified two specific examples of Hodak's shortcomings. First, Hodak was unfamiliar with the due diligence review procedures he was charged with implementing. Second, Hodak over-valued reserves available to UAR for a proposed acquisition. While Gordon and Curtz had discussed their concerns with Hodak, both acknowledged they had not advised him that his job was in jeopardy prior to his discharge.

In August and September 2006, Hodak met with representatives of two heavy equipment dealers in Birmingham, Alabama. One meeting was initiated by a Komatsu equipment dealer, Tractor & Equipment Company, in relation to the status of an equipment lease it had with Tuscaloosa Resources ("TRI") and whether the lease could be assigned to UAR, which was then negotiating to acquire TRI. During the meeting, the representative of the equipment dealer asked Hodak whether UAR was also engaged in negotiations with another company, Mann Steel Products. Hodak acknowledged that UAR probably was.

The second meeting was initiated by Thompson Tractor, a Caterpillar equipment dealer that had leased equipment to Mann Steel. The Caterpillar dealer was interested in doing business with TRI. During this meeting, Hodak confirmed that UAR was engaged in negotiations to acquire TRI, although he did not disclose any details of the negotiations.

Curtz became aware of these disclosures by Hodak shortly after they occurred. He learned about the disclosure made to the Komatsu dealer from Sam Johnson, who was also present at the meeting. Curtz learned about the disclosure made to the Caterpillar dealer in an e-mail message from Hodak himself. Curtz had continually reminded Hodak about the necessity for confidentiality—both before and after the meetings with the equipment dealers. Yet, again, Curtz did not advise Hodak that the disclosures could be considered breaches of confidentiality sufficiently serious to warrant discharge.

Curtz considered it likely that he discussed the disclosures, along with other concerns about Hodak's performance, with Gordon. It was Gordon who made the decision to discharge Hodak. The decision was communicated to Hodak by telephone by attorney Jonathan Baum on September 29, 2006. Baum advised Hodak that UAR believed it had cause for termination, as defined in the Employment Agreement, but he did not explain what this "cause" consisted of. Baum further advised that Hodak would be granted a severance allowance if he opted to resign, an offer Hodak rejected.

Shortly thereafter, Hodak was fortunate enough to be offered a position with his former employer National Coal Corporation, which he accepted on March 1, 2007. In the meantime, Hodak had filed this action in the Eastern District of Kentucky on January 10, 2007. In relevant part, the complaint asserts claims for breach of contract (for discharging Hodak without cause and without prior notice); fraud (making misrepresentations to induce him to leave National Coal and accept employment with UAR); declaratory judgment (to the effect that the covenant not to compete included in the Employment Agreement is unenforceable because contrary to public policy), and tortious interference with contractual relations (that Gordon, in managing UAR on behalf of the Madison defendants, interfered with Hodak's employment relationship with UAR). Federal jurisdiction is premised on the parties' diversity of citizenship. UAR filed counterclaims for breach of contract and breach of fiduciary duties.

After completion of discovery, the parties filed cross-motions for summary judgment. The district court awarded summary judgment to UAR on all of Hodak's claims on August 19, 2008. The district court then granted UAR's motion to voluntarily dismiss its counterclaims without prejudice, and awarded UAR $198,026.75 in attorneys' fees and costs expended in defending against Hodak's claims. Finally, on December 18, 2008, the district court denied Hodak's motion for attorneys' fees relating to UAR's dismissed counterclaims. This appeal followed.

II. ANALYSIS

A. Breach of Contract

In his most important claim, Hodak alleges that UAR breached the Employment Agreement when it terminated him without cause and without the required prior notice. If UAR had "cause" to discharge as defined in the Employment Agreement, then prior notice was not required. If UAR wished to...

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