Kass v. William Norwitz Co.

• Decision Date: 31 July 1980
• Docket Number: Civ. No. 79-3099.
• Citation: 509 F. Supp. 618
• Parties: David KASS, Plaintiff and Counterclaim Defendant, v. WILLIAM NORWITZ CO., and William Norwitz, Defendants and Counterclaim Plaintiffs.
• Court: U.S. District Court — District of Columbia

509 F. Supp. 618

David KASS, Plaintiff and Counterclaim Defendant, v. WILLIAM NORWITZ CO., and William Norwitz, Defendants and Counterclaim Plaintiffs.

Civ. No. 79-3099.

United States District Court, District of Columbia.

July 31, 1980.

COPYRIGHT MATERIAL OMITTED

David Epstein, Washington, D. C., for plaintiff and counterclaim defendant.

Christopher Sanger, Washington, D. C., for defendants and counterclaim plaintiffs.

MEMORANDUM OPINION

JOHN H. PRATT, District Judge.

Summary

Plaintiff brings this action against his former employer, William Norwitz, Co., Inc., and its Chairman of the Board, William Norwitz, for breach of his twenty year employment contract. Plaintiff seeks benefits allegedly owed him for calendar year 1978 and for the remaining eleven years of the contract, as well as punitive damages. Defendants counterclaimed against plaintiff for breach of contract and for compensation allegedly overpaid plaintiff. Defendants also joined, and subsequently voluntarily dismissed, plaintiff's present employer as a third-party defendant. This action is now before us on cross-motions for partial summary judgment. For the reasons discussed below, we deny all pending motions for summary judgment.

The Facts

Plaintiff David Kass entered a twenty-year executive employment contract with defendant William Norwitz Company, Inc.¹ on November 5, 1968, effective January 1, 1969. Despite the 20 year term of the contract, plaintiff was discharged by defendants on March 1, 1979. At issue in the instant action is an interpretation of the contract to determine whether the agreement was breached by any party.

The following five provisions of the contract, which was drafted by defendants, are relevant to this action:

(a) Clause 1 ("Term of Agreement") provides that plaintiff shall be employed by the defendant company as an Executive for a term of twenty years, beginning on January 1, 1969.

(b) Clause 2 ("Compensation") provides that plaintiff shall receive an annual salary of $25,000.

(c) Clause 3 ("Additional Compensation") provides that in addition to his annual salary, plaintiff shall receive a percentage of the "net profits" of the company, after payment of salaries to the Partner or Partners of $70,000 per year. The percentage share of the "net profits" plaintiff would receive under the contract ranged from a low of 10% at the close of his first year of employment to a high of 33 and 1/3 % for each calendar year after (but not including) his fifth year of employment.

(d) Clause 3 ("Additional Compensation") also provides that if the defendant company "shall deem that the Executive be disassociated," he shall receive $5,000 severance pay in lieu of any further compensation.

(e) Clause 5 ("Restrictive Covenant") provides that during the life of the contract and for three years thereafter, plaintiff may not engage in or have a financial interest in any business producing, manufacturing, or distributing any product similar to those produced, manufactured, or distributed by the company in or within 40 miles of Washington, D. C.

This action has its origins in a dispute over the meaning of "net profits" in Clause 3 of the contract, which dispute led to plaintiff's summary discharge by defendants on March 1, 1979. This clause provides in pertinent part:²

3. Additional Compensation. In addition thereto, the Executive shall receive a share of the net profits of the Company, after payment of salaries to the Partner or Partners (of Seventy Thousand Dollars ($70,000.00) per year), payable thirty days after the annual audit, on the following schedule:

10% for the period ending December 31, 1969

15% for the period ending December 31, 1970

20% for the period ending December 31, 1971

25% for the period ending December 31, 1972

30% for the period ending December 31, 1973

33 1/3 % for each calendar year thereafter.

For the purposes of calculating plaintiff's percentage share of the profits, defendants maintain that the term "net profits" refers to profits after taxes owed by defendant company have been deducted, and the plaintiff contends that "net profits" means before taxes owed by defendant company have been deducted. The difference between the two formulas, of course, is that under the calculation defendants urge, plaintiff would receive a smaller percentage share of the profits.

In support of his interpretation, plaintiff notes that for nine years, from 1969 to 1977, plaintiff's percentage share of the business was calculated without subtracting income taxes.³ According to the deposition of defendant company's certified public accountant, Morris Hariton, and of defendant William Norwitz, these calculations were made by M. B. Hariton & Company and approved by defendants. No income taxes could be deducted for the years 1969 and 1970 because defendant company was then a partnership, which is not a taxable entity for purposes of income taxes. However, in June, 1971 William and Martin Norwitz incorporated the company.⁴ Despite the fact that a corporation is now and since 1971 has been a taxable entity for purposes of income taxes, the defendant company continued its practice of not deducting income taxes payable by the corporation from profits when calculating plaintiff's percentage share of profits.

Based on the calculation made by CPA Hariton, for the year 1978 defendant company had "net profits" of $156,006.36, entitling plaintiff to a percentage share, at 33 and 1/3 percent, of $52,002.12. Clause 3 provides that payment of the plaintiff's percentage share is to be made 30 days after the annual audit. According to plaintiff's affidavit of May 27, 1980, plaintiff's share of profits for a calendar year were paid in March or April of the following year. According to plaintiff's affidavit of June 27, 1980 defendant William Norwitz on, February 22, 1979, gave him a revised employment contract and asked him to sign it. The new employment contract⁵ would have altered the formula for calculation of plaintiff's percentage share of the profits by providing that the term "net profits" was to mean profits after deduction of certain corporate expenses and after the deduction of all federal, state and local income taxes payable by the corporation.⁶ The new contract, presented for plaintiff's signature in February, 1979, was to be effective prospectively for the 11 year balance of plaintiff's employment term, and retrospectively for the year 1978.

According to plaintiff's June 27, 1980 affidavit, he called Morris Hariton, defendant's accountant, to determine the effect of this alteration and was told that for calendar year 1978 it meant that instead of receiving a percentage profit share of approximately $52,000, he would receive approximately $26,000 under the new contract. Plaintiff's affidavit further states that when he told defendant William Norwitz on March 1, 1979 that he had not made a decision whether or not to sign the new contract, he was fired. On March 6, 1980 defendants gave plaintiff a check for $3,689.50, representing $5,000 severance pay pursuant to Clause 3 of the employment contract, less withholding and FICA taxes.

On June 1, 1979 plaintiff Kass began working for Universal Bindery, Inc. (Universal), a bindery located in Tuxedo, Maryland.

Invoking this court's jurisdiction under 28 U.S.C. § 1332(a), diversity of citizenship, plaintiff on November 14, 1979 filed the present complaint consisting of five counts against defendant William Norwitz and William Norwitz Company, Inc. Count I alleges defendants have wrongfully withheld payment of plaintiff's percentage share of profits for calendar year 1978, and seeks $52,002.12 plus interest, costs and attorney's fees. Count II alleges breach of contract resulting in plaintiff losing salary, additional compensation, and other benefits under the contract until December 31, 1989, and seeks $815,730, plus interest, costs, and attorney's fees. Count III alleges defendants have wrongfully withheld plaintiff's percentage share of profits earned as a result of his employment in January and February, 1979, and seeks $8,667.02 in estimated profits. Count IV alleges tortious wrongful discharge and seeks compensatory and punitive damages. Count V alleges defendant William Norwitz wrongfully interferred with plaintiff's contractual relationship with defendant corporation, and seeks compensatory and punitive damages.

Defendants responded on December 11, 1979 with a counterclaim⁷ against plaintiff for breach of contract, alleging that plaintiff sought and accepted employment with Universal Bindery, Inc. in violation of Clause 5 of the employment contract, which restricts plaintiff's employment with a competitor while the contract is in effect and for three years afterward. Defendants also allege that plaintiff has wrongfully solicited the customers and clients of defendant Norwitz Company to transfer their business to Universal and has wrongfully diverted the business of defendants' customers and clients to Universal.

Defendants also counterclaimed against plaintiff for $80,000 allegedly overpaid plaintiff because the percentage share of profits paid to plaintiff each year since 1971 was based on a calculation in which income taxes payable by the corporation were not deducted from profits to arrive at "net profits," as defendants allege should have been done under a proper reading of the employment contract.

To round out this action, plaintiff has filed a counterclaim against defendants. The first count of the counterclaim alleges that defendants have failed to conduct an annual audit for the years 1971 through 1978, as required by Clause 3 of the contract in order to determine the "net profits" for purposes of calculating plaintiff's percentage share. Plaintiff thus seeks an audit for the years 1971 through 1978, to be conducted at defendants' expense.⁸ Count II of the counterclaim seeks compensatory and punitive damages for defendants allegedly tortious interference with pla...