Saye v. Old Hill Partners, Inc.

• Decision Date: 12 March 2007
• Docket Number: No. 3:03CV01071(DJS).,3:03CV01071(DJS).
• Citation: 478 F.Supp.2d 248
• Court: U.S. District Court — District of Connecticut
• Parties: Jeffrey M. SAYE, Plaintiff, v. OLD HILL PARTNERS, INC., Defendant.

Page 248

478 F.Supp.2d 248

Jeffrey M. SAYE, Plaintiff, v. OLD HILL PARTNERS, INC., Defendant.

No. 3:03CV01071(DJS).

United States District Court, D. Connecticut.

March 12, 2007.

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Brian P. Daniels, David R. Schaefer, Rowena Amanda Moffett, Brenner, Saltzman & Wallman, New Haven, CT, Martin E. Karlinsky, Katten Muchin Rosenman LLP, New York City, for Plaintiff.

A. Robert Fischer, Jackson Lewis, Stamford, CT, Travis M. Pauley, Old Hill Partners, Darien, CT, for Defendant.

MEMORANDUM OF DECISION

SQUATRITO, District Judge.

On June 18, 2003, Plaintiff, Jeffrey M. Saye ("Saye"), commenced this action, alleging that Defendant, Old Hill Partners, Inc. ("OHP") violated certain agreements under which OHP was to repurchase Saye's shares in OHP and grant an option for Saye to purchase stock in OHP thereafter. In the First and Second Claims for Relief in the Complaint, Saye asks the court to issue declaratory judgments, pursuant to 28 U.S.C. § 2201, with regard to the appraisal of Saye's shares in OHP. Saye also alleges breach of contract (Third Claim), unfair trade practices in violation of Connecticut's Unfair Trade Practices Act ("CUTPA"), Conn. Gen.Stat. §§ 42-110a et seq. (Fourth Claim), and breach of the implied covenant of good faith and fair dealing (Fifth Claim).

In response to Saye's Complaint, OHP filed Defendant's Amended Answer, Affirmative Defenses, Set-off and Counterclaim. In its Amended Counterclaim, OHP has set forth seven claims: (1) breach of contract (First Count); (2) breach of the duty of loyalty (Second Count); (3) breach of fiduciary duty (Third Count); (4) breach of Connecticut's Uniform Trade Secrets Act ("CUTSA"), Conn. Gen.Stat. §§ 35-51 et seq. (Fourth Count); (5) tortious interference with business relationships and expectancies (Fifth Count); (6) breach of CUTPA (Sixth Count); and (7) constructive trust (Seventh Count). OHP's second and third affirmative defenses state that Saye has violated a confidentiality and non-compete agreement. In these affirmative defenses, OHP asserts that Saye is not entitled to the remedies he seeks pursuant to the shareholder agreement, and that there has been a failure of consideration with regard to any transfer of shares to Saye and with regard to the alleged granting of an option to Saye. Now pending are Defendant's Motion for Summary Judgment (dkt.# 136) and Plaintiff's Motion for Summary Judgment Dismissing Defendant's Counterclaim and Striking Affirmative Defenses (dkt.# 141). For the reasons stated herein, OHP's motion (dkt.# 136) is DENIED, and Saye's motion (dkt.# 141) is GRANED in part and DENIED in part.

I. FACTS¹

Saye is a natural person who resides in California. OHP is a closely-held corporation, formed by John Howe ("Howe"), that is organized in Delaware with its principal place of business in Darien, Connecticut. OHP serves as an unregistered investment advisor, a hedge fund manager, and a general partner of certain investment funds. Howe formed OHP to operate as the management company that runs a hedge fund named Footbridge Capital LLC ("Footbridge"). On February 1, 2000, Saye began working at OHP as a fund manager, whereby he was responsible for certain OHP investments. At the commencement of Saye's employment, Saye and the shareholders of OHP, Howe and Mark A. Samuel, executed the "Old Hill Partners Inc. Shareholder Agreement" ("Shareholder Agreement"),² which set forth the rights and obligations of parties owning shares in OHP. The Shareholder Agreement provided that Saye would receive a 15% equity interest in OHP, which would indefeasibly vest at 5% increments on December 1, 2000, October 1, 2001, and August 1, 2002, so long as Saye remained employed at OHP on those dates. Saye and OHP also executed the "Summary of Terms," which granted Saye an option to purchase an additional 5% equity interest in OHP at the price of $250,000 if OHP's assets under management were valued at $80,000,000 prior to February 1, 2001, the first anniversary of Saye's employment with OHP. In addition, Saye and OHP executed an "Employee Confidentiality and Non-Compete Agreement" ("Confidentiality/NonCompete Agreement"), in which Saye covenanted that during the period of his employment and for six months following his termination, he would not, for any reason, accept employment with, or in any other manner agree to provide, for compensation, services for any other person or entity that competes with OHP within the geographic radius of fifty miles of New York City. Saye further covenanted that he would not materially disrupt or interfere with OHP's business for the same period of time (i.e., six months), and that he would not, for a period of two years following his termination, use or disclose OHP's "trade secrets" or proprietary or confidential information.

A. THE BUY-BACK OF SAYE'S SHARES

Included in the Shareholder Agreement were provisions describing how OHP was to buy back vested shares from a shareholder-employee following the termination of that shareholder-employee's employment. The length of that shareholder-employee's employment determined which provision of the Shareholder Agreement governed OHP's buy-back of the shares. OHP terminated Saye's employment on March 31, 2002. Thus, based on the length of his employment at OHP, the parties agree that OHP's buy-back of Saye's shares was governed by Paragraph 3.8(c)(iii) of the Shareholder Agreement, which states:

If a Shareholder-Employee leaves after twenty-four months (24) of employment, such person shall be paid the per Share price as determined by an appraiser selected (and paid) by the Company. If the Shareholder-Employee disagrees with such appraised Share valuation, such person may engage, at its [sic] own expense, a qualified third party appraisal³ agreed to in advance by the Company.

(Dkt. # 1, Compl., Ex. A ¶ 3.8(c)(iii).)

According to Saye, his termination triggered certain vested rights that he held pursuant to the Shareholder Agreement and the Summary of Terms. Saye claims that, because he had been employed with OHP beyond October 1, 2001, OHP was obligated to pay him, within 180 days of the termination of his employment,⁴ a price per share as determined by an appraisal provided by OHP. If Saye did not agree with OHP's appraisal, he was permitted to engage a third party appraiser. Saye asserts that OHP was obligated to compensate him for the 10% ownership interest he held pursuant to the Shareholder Agreement and for an additional 5% ownership interest pursuant to the option, which Saye claims he intended to exercise, contained in the "Summary of Terms."

Based on the submissions of the parties, the following events transpired subsequent to the termination of Saye's employment. On August 29, 2002, OHP delivered to Saye a report prepared by Deloitte & Touche ("D & T Valuation"), which put the value of Saye's shares between $330,000 and $500,000. Although the D & T Valuation was a report on the value of Saye's shares, Saye disputes the validity of the D & T Valuation. OHP asserts that the D & T Valuation is a proper appraisal of Saye's shares; Saye, on the other hand, claims that because the D & T Valuation did not use proper methodologies or evaluations, it does not qualify as an "appraisal" under the Shareholder Agreement. Saye specifically alleges in the Complaint that the D & T Valuation: (1) unfairly applied minority and liquidity discounts and an arbitrary median ratio adjustment in order to artificially reduce the value of his shares; (2) relied on inaccurate factual assumptions; and (3) inappropriately valued Saye's interest in OHP at 10% (the vested interest), rather than at 15% (the vested interest plus the 5% interest allowed pursuant to the option). Because of Saye's dissatisfaction with the D & T Valuation, he decided to engage a third-party appraiser as provided for in the Shareholder Agreement.

On October 11, 2002, Saye had initially proposed using either Price Waterhouse-Coopers ("PWC") or Standard & Poors ("S & P") as potential third-party appraisers. On October 18, 2002, Howe, the principal of OHP, and Edwin McKeever ("McKeever"), OHP's controller, met with Allen Hahn ("Hahn"), an evaluation expert with S & P, so that OHP would have to opportunity to evaluate the qualifications of S & P and its representative (here, Hahn). Saye subsequently decided that he did not want to use PWC, but that he wanted to engage S & P as the appraiser. On October 23, 2002, Saye notified OHP of his decision and requested OHP's consent to use S & P as a third-party appraiser. OHP responded by requesting that Saye propose other appraisers in addition to S & P because OHP believed that it was entitled to "a meaningful choice" between appraisers. Saye responded to OHP's request by stating that the Shareholder Agreement does not call for OHP to have such "a meaningful choice"; rather, Saye asserted that OHP could only reject S & P if OHP found that S & P was not a "qualified" third party appraiser as required by the Shareholder Agreement (i.e., that S & P lacked the requisite skills to perform the appraisal, had a poor reputation for its business evaluation practice, or was, for some reason, biased in such a way that it could not make an unbiased appraisal). Otherwise, Saye claimed, OHP was obligated to approve his choice of appraisers. Although he initially informed OHP that he wanted S & P to perform his appraisal, Saye, after he filed this lawsuit, obtained his appraisal from a different company, Valuation Research Corp. ("VRC"). Apparently, Saye wished to continue working with Hahn, who, subsequent to his meeting with Howe and McKeever, had left S & P and joined VRC. Saye maintains that Hahn was the best choice as an appraiser because Hahn had previously consulted with Saye, had been interviewed by OHP, and had become familiar with the issues here. Saye also maintains that he wanted to continue using Hahn because of Hahn's reputation...