Murphy v. Gutfreund

• Decision Date: 03 April 1984
• Docket Number: No. 82 Civ. 2394 (MEL).,82 Civ. 2394 (MEL).
• Parties: Vincent B. MURPHY, Jr., Plaintiff, v. John H. GUTFREUND, Richard J. Schmeelk, Gedale Horowitz, Richard G. Rosenthal, J. Ira Harris, Thomas W. Strauss and William J. Voute, Liquidators of Salomon Brothers Holding Company and Salomon Brothers, Defendants.
• Court: U.S. District Court — Southern District of New York

583 F. Supp. 957

Vincent B. MURPHY, Jr., Plaintiff, v. John H. GUTFREUND, Richard J. Schmeelk, Gedale Horowitz, Richard G. Rosenthal, J. Ira Harris, Thomas W. Strauss and William J. Voute, Liquidators of Salomon Brothers Holding Company and Salomon Brothers, Defendants.

No. 82 Civ. 2394 (MEL).

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

April 3, 1984.

COPYRIGHT MATERIAL OMITTED

Patterson, Belknap, Webb & Tyler, New York City, for plaintiff; Frederick T. Davis, Leslie C. Levin, Lynn P. Freedman, New York City, of counsel.

Wachtell, Lipton, Rosen & Katz, New York City, for defendants; Herbert M. Wachtell, Theodore N. Mirvis, Barry A. Weprin, Louis J. Barash, New York City, of counsel.

LASKER, District Judge.

This suit arises out of the buyout of Salomon Brothers in 1981 by Phibro Corp. Plaintiff Vincent B. Murphy, until 1980 a former Salomon Brothers general partner, has brought this action for the alleged breach of an annuity agreement by defendants under which plaintiff was to receive $125,000 per year for ten years. Defendants, Liquidators of Salomon Brothers Holding Company ("SBHC") and of Salomon Brothers, move to dismiss the complaint for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.¹ For the reasons set forth below, defendants' motion is granted in part and denied in part.

I.

The relevant facts alleged in the complaint are that from 1967 to 1980 Murphy was a general partner of Salomon Brothers. In late 1979, he began to consider leaving Salomon and in early 1980 spoke about the possibility to defendant John Gutfreund, at that time managing partner of Salomon and head of its Executive Committee. Later in 1980, Murphy initiated discussions with Merrill Lynch & Co. about his becoming a Senior Advisor to that organization's residential real estate and mortgage insurance businesses. Murphy told Gutfreund about these discussions to see whether Salomon Brothers would object to his association with Merrill Lynch. Murphy had to receive the approval of the Salomon Brothers' Executive Committee before he could accept the Merrill Lynch position. Under the terms of the non-competition provision in the Salomon Brothers partnership agreement, former general partners of Salomon Brothers were barred from competing against Salomon Brothers Holding Company or its subsidiaries by engaging in "a securities, financial or kindred business" for two years after they terminated their status as general partners unless they received approval from the Executive Committee. Gutfreund subsequently informed Murphy that the Executive Committee would raise no objections to his association with Merrill Lynch because the Committee believed that he would not be competing with Salomon.

In reliance upon this representation, in October 1980 Murphy resigned as a general partner to become a Senior Advisor to Merrill Lynch's residential real estate and mortgage insurance businesses. Murphy held that position until February 1982 when he became president of Merrill Lynch Capital Resources, Inc. In September, 1980, the Executive Committee had voted to make Murphy a limited partner effective at the time of his resignation as a general partner in recognition of Murphy's contribution to Salomon Brothers.²

In early August of 1981, Phibro agreed to purchase the assets of Salomon Brothers for approximately $550 million. Pursuant to the Plan of Dissolution adopted by the Salomon Brothers Executive Committee at that time, all former general Salomon partners who had become limited partners were to receive an annuity of $125,000 per year for ten years provided that they signed an agreement prohibiting them from competing with Salomon Brothers, Inc., the new Phibro entity, and releasing Salomon Brothers, SBHC, and its partners from any and all claims arising out of or relating to the dissolution.

On August 11, 1981, Murphy discussed with Gutfreund whether, in light of his work for Merrill Lynch, the non-competition provision in the annuity agreement would apply to him. While Gutfreund stated that he thought that Murphy would be eligible to receive the annuity benefits, he referred Gutfreund to Allan Sperling, Salomon Brothers' attorney.³ Sperling adopted a different position. He stated that Murphy's position with Merrill Lynch might put him in competition with Salomon Brothers, SBHC, or Salomon Brothers, Inc.⁴ Sperling subsequently drafted a letter on August 19, 1981 stating that all former general partners who were then limited partners and who wished to accept the proposed annuity would have to execute the annuity agreement.

On October 1, 1981 Salomon Brothers and SBHC were dissolved and were succeeded by the SBHC Liquidating Partnership. The members of the Salomon Brothers Executive Committee became the liquidators of SBHC on that date and they are the defendants in this suit. On October 6, 1981, Murphy received two unsigned copies of the annuity agreement which provided for payment of the first installment of the annual annuity on or about January 4, 1982. Murphy signed both copies and returned them to the SBHC Liquidating Partnership's attorneys. On December 30, 1981, Sperling contacted Murphy to determine whether he still held his position with Merrill Lynch. When Murphy answered that he did, Sperling stated that it was his clients' position that Murphy's work for Merrill Lynch violated the non-competition clause in the annuity agreement. Murphy said he believed his activities for the real estate and mortgage insurance businesses of Merrill Lynch & Co. were not competitive with any business of Salomon Brothers, Inc. Notwithstanding this disagreement between the parties, on December 31, 1981 a copy of the annuity agreement bearing the signature of Donald M. Feurstein, representing Salomon Brothers and SBHC, was delivered to Murphy's office.

The first payment under the annuity agreement was due on January 4, 1981. When Murphy did not receive the remittance his attorneys wrote Gutfreund demanding payment under the terms of the annuity agreement. By letter of January 20, 1982, from the liquidating partnership, Murphy was informed that he was not entitled to payments under the agreement because since October 1, 1981 he had been employed by a competitor of Salomon Brothers, Inc.

Murphy commenced this action on April 15, 1982 to enforce the agreement in his favor. His complaint alleges that: defendants have breached the annuity agreement (count 1); the non-competition provision in the annuity agreement is impermissibly overbroad, constitutes an unreasonable restraint of trade and is contrary to public policy (count 2); defendants' repudiation and non-performance of the annuity agreement is a breach of the agreement which entitles him to the total amount due under the agreement (count 3); Murphy detrimentally relied upon defendants' assurances that his activities for Merrill Lynch were not in competition with the business of Salomon Brothers or of Salomon Brothers, Inc. (count 4); defendants are estopped from claiming that Murphy's activities violate the annuity agreement because they signed the agreement fully aware of his employment and intent (count 5); defendants have breached a fiduciary duty which they owed to Murphy (count 6); and that defendants have violated Section 10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5 (count 7). Defendants move to dismiss the complaint on the ground that it fails to state a claim upon which relief can be granted.

II.

Count 1 — Breach of the Annuity Agreement

Defendants make several arguments in support of a dismissal of the first count of the complaint which alleges that they have breached the annuity agreement. The one argument which we consider dispositive is their assertion that plaintiff was aware of defendants' interpretation of the non-competition provision in the annuity agreement before he entered into the agreement with them. They point out that Allan Sperling advised Murphy on August 11, 1981 that his position with Merrill Lynch would fall within the annuity agreement's non-competition provision and that in executing the agreement in October 1981 Murphy fully understood that his continued employment for Merrill Lynch would render him ineligible to receive payments.

Murphy argues that the annuity agreement should be enforced against the defendants because they were fully aware at the time they entered into the agreement that he considered the scope of the non-competition clause to be so limited as not to apply to his activities as an employee of Merrill Lynch. Because they chose to sign the agreement on those terms, Murphy asserts that they are bound by that understanding.

Whether Murphy's allegation of a breach of the agreement is sufficient turns upon which party is entitled to a favorable interpretation of the non-competition provision. We are guided by Judge Lumbard's view that:

"It is well settled that if two parties give different meanings to the words of a purported agreement, the party who sues for enforcement in accordance with his own meaning has the burden of proving that the other party knew what the claimant's meaning was and that the claimant did not and had no reason to know that the other party gave the words a different meaning."⁵

In this case, Murphy seeks to enforce the terms of the annuity agreement in his favor, based upon his understanding that his work for Merrill Lynch's real estate and insurance businesses did not preclude his receipt of the annual annuity. As the facts discussed above indicate, however, defendants, through their attorney Allan Sperling, had stated to Murphy, despite Murphy's protests to the contrary, that his employment might come within the terms of the non-competition provision. Accordingly, since the complaint itself asserts, at paragraph 25, that plaintiff's activities at Merrill Lynch might constitute competition with Salomon, the annuity agreement...