Carco Group, Inc. v. Maconachy ( 2010 )


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  • 09-1994-cv
    Carco Group, Inc. v. Maconachy
    UNITED STATES COURT OF APPEALS
    FOR THE SECOND CIRCUIT
    AMENDED SUMMARY ORDER
    RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT.
    CITATION TO A SUMMARY ORDER FILED AFTER JANUARY 1, 2007, IS
    PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE
    PROCEDURE 32.1 AND THIS COURT'S LOCAL RULE 32.1.1. WHEN CITING A
    SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST
    CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH
    THE NOTATION "SUMMARY ORDER"). A PARTY CITING A SUMMARY ORDER
    MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
    At a stated term of the United States Court of Appeals for the Second Circuit, held at the
    Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York, on
    the 6th day of July, two thousand ten.
    PRESENT:       ROSEMARY S. POOLER,
    REENA RAGGI,
    DEBRA ANN LIVINGSTON,
    Circuit Judges.
    __________________________________________
    CARCO GROUP, INC.,
    Plaintiff-Counter-Defendant-Counter-Claimant-Appellee,
    PONJEB V, L.L.C.,
    Plaintiff-Counter-Defendant-Appellee,
    v.                                                   09-1994-cv
    DREW MACONACHY,
    Defendant-Counter-Claimant-Appellant.
    ___________________________________________
    1
    For Appellant:                                 Gary A. Ahrens, James R. Troupis, Miriam S.
    Fleming, Michael Best & Friedrich, LLP,
    Milwaukee, WI
    Cheryl F. Korman, Merril S. Biscone, Rivkin Radler
    LLP, Uniondale, NY
    For Appellees:                                 James M. Wicks, Franklin C. McRoberts, Farrell
    Fritz, P.C., Uniondale, NY
    Edward F. Cunningham, Garden City, NY
    Appeal from a judgment of the United States District Court for the Eastern District of
    New York (Lindsay, M.J.).
    UPON DUE CONSIDERATION IT IS HEREBY ORDERED, ADJUDGED, AND
    DECREED that the judgment of the district court be AFFIRMED in part, VACATED in part, and
    REMANDED for further proceedings.
    Carco Group, Inc. and its affiliate Ponjeb V, L.L.C. (together, “Carco”) filed suit against
    their former employee Drew Maconachy alleging breach of contract and faithless servant. After a
    four week bench trial, Magistrate Judge Arlene Lindsay of the Eastern District of New York
    found in favor of Carco and entered judgment against Maconachy. Maconachy now appeals. We
    assume the parties' familiarity with the procedural history, facts, and issues on appeal.
    Following a bench trial, we review the district court’s findings of fact for clear error, and
    its conclusions of law de novo. We review mixed questions of law and fact de novo. Roberts v.
    Royal Atl. Corp., 
    542 F.3d 363
    , 367 (2d Cir. 2008).
    I. Breach of Contract
    To establish a prima facie case for breach of contract, Carco must prove: 1. The existence
    of a contract; 2. A breach of the contract; and 3. Damages resulting from the breach. Nat’l Mkt.
    Share, Inc. v. Sterling Nat’l Bank, 
    392 F.3d 520
    , 525 (2d Cir. 2004).
    The district court found two separate breaches of contract. First, Maconachy “failed to
    comply with the reasonable duties and directions given to him by his superiors.” Specifically,
    Maconachy did not take MMI’s financial losses seriously, and refused to follow direction from
    his superior, Peter O’Neill, to remedy them. The court found that this first breach began on
    November 17, 2000 when Maconachy walked out early from a planning meeting. Second, the
    court found a separate breach of contract from Maconachy’s involvement in the alteration of
    employment documents. We affirm the district court on both findings, and its related conclusion
    that Maconachy breached both his employment agreement and the asset purchase agreement.
    2
    The district court, however, erred (1) in concluding that all net operating losses constituted
    general, as opposed to consequential, damages, and (2) in failing to articulate the causal link
    between Maconachy’s breaches and the damages awarded.
    General damages seek to compensate the plaintiff for “the value of the very performance
    promised,” often determined by the market value of the good or service to be provided. Schonfeld
    v. Hilliard, 
    218 F.3d 164
    , 175-76 (2d Cir. 2000). Consequential damages, by contrast, are those
    that result when the non-breaching party’s ability to profit from related transactions is hindered
    by the breach. “In the typical case, the ability of the non-breaching party to operate his business,
    and thereby generate profits on collateral transactions, is contingent on the performance of the
    primary contract. When the breaching party does not perform, the non-breaching party’s business
    is in some way hindered, and the profits from potential collateral exchanges are lost.” Tracetebel
    Energy Mktg., Inc. v. AEP Power Mktg., Inc., 
    487 F.3d 89
    , 109 (2d Cir. 2007) (internal quotation
    marks omitted). Thus, any damages resulting from Carco’s inability to secure new business were
    consequential. The distinction is important because, unlike general damages, consequential
    damages may be recovered only where the amount of loss is “capable of proof with reasonable
    certainty.” 
    Id. Causation is
    an essential element of a claim for damages resulting from breach of contract
    regardless of whether the plaintiff claims general or consequential damages. Damages for breach
    of contract must be “directly and proximately caused” by the breach. Nat’l Mkt. Share, 
    Inc., 392 F.3d at 525
    (citing Wakeman v. Wheeler & Wilson Mfg. Co., 
    4 N.E. 264
    , 266 (N.Y. 1886)
    (emphasis omitted)). They must not “be so remote as not to be directly traceable to the breach, or
    . . . the result of other intervening causes.” 
    Id. at 526
    (citation omitted). Further, the fact of
    damages caused by the breach must be “reasonably certain.” 
    Tractebel, 487 F.3d at 110
    (citation
    and emphasis omitted). Here, the district court failed to articulate any causal link between the
    breaches found and the damages awarded, stating only that MMI’s lack of profitability was “due
    almost exclusively to Maconachy’s breach of the Performance Clause” because his “performance
    and obedience was central to Carco’s expectation of receiving a profitable business.” That
    Maconachy breached his employment contract does not necessarily mean the breach caused the
    company to be unprofitable. The district court should have first engaged in a proximate cause
    analysis to show that the breaches caused some loss. It should have then discussed potential
    intervening causes that might have broken the link between Maconachy’s breach and any
    damages suffered.
    Testimony suggested various intervening causes for MMI’s unprofitability that the district
    court should have addressed. For example, MMI was already losing money when it was bought
    by Carco, and MMI was in fact making money by the time Maconachy was fired, despite
    Maconachy’s continued breach of contract. Further, a Carco executive testified that the losses
    were due to “[a] variety of business reasons....They [MMI] were primarily involved in
    environmental investigations. That marketplace had changed.” The 2001 business plan stated:
    “the four-year trend in declining revenues from an ever-shrinking environmental support services
    market resulted in a loss of approximately $1.8 million in the MMI operation.” The 2002 business
    plan also discussed the “highly competitive” market in which MMI operated.
    3
    The district court failed to discuss any of this evidence or explain why factors other than
    Maconachy’s disobedience may have caused the net losses. Nonetheless, the court awarded
    $901,645 in damages for breach of contract. The number reflected the actual economic losses
    Carco suffered from Nov. 17, 2000 through Dec. 2002, which included Maconachy’s
    compensation as well as acquisition costs.
    The court did not find any damages resulting from Maconachy’s breach from his
    involvement in altering documents.
    The district court did not provide any evidence that Maconachy’s disobedience caused any
    losses. On remand, the district court must determine what damages, if any, were directly and
    proximately caused by Maconachy’s breach. These might include loss of salary paid to a
    disobedient employee, the value of lost opportunities, or any other damages the court concludes
    flowed from Maconachy’s breaches. The court must then determine which damages were general
    and which consequential. It may only award consequential damages where the amount of loss can
    be ascertained with reasonable certainty. To award general damages, the court need only be
    certain that some damage resulted from the breach; certainty as to the exact dollar amount is not
    required. 
    Wakeman, 101 N.Y. at 209
    ; 
    Tractebel, 487 F.3d at 110
    .
    We therefore VACATE the breach of contract damages award, and REMAND to the
    district court to recalculate damages, if any, in a manner consistent with this summary order.
    II. Faithless Servant
    “New York law with respect to disloyal or faithless performance of employment duties is
    grounded in the law of agency, and has developed for well over a century.” Phansalkar v.
    Andersen Weinroth & Co., L.P., 
    344 F.3d 184
    , 200 (2d Cir. 2003) (citing Murray v. Beard, 
    7 N.E. 553
    (N.Y. 1886)). “[A]n agent is obligated ‘to be loyal to his employer and is prohibited from
    acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the
    utmost good faith and loyalty in the performance of his duties.’” 
    Id. (quoting W.
    Elec. Co. v.
    Brenner, 
    360 N.E.2d 1091
    , 1094 (N.Y. 1977)). A person who is found to be faithless in his
    performance of services is generally liable for all compensation from the date of the breach, and
    the faithlessness need not have caused damages. 
    Id. As this
    Court has previously observed, New York courts continue to apply two alternative
    standards for determining whether an employee's conduct warrants forfeiture under the faithless
    servant doctrine. 
    Id. at 201-02.
    The first standard requires that “misconduct and unfaithfulness . .
    . substantially violate[] the contract of service,” Turner v. Konwenhoven, 
    2 N.E. 637
    , 639 (N.Y.
    1885). The second standard requires only that an agent “act[] adversely to his employer in any
    part of [a] transaction, or omit[] to disclose any interest which would naturally influence his
    conduct in dealing with the subject of [his] employment.” 
    Murray, 7 N.E. at 554
    . Here, the
    district court found that under either standard, Maconachy was a faithless servant because of his
    self-dealing and deception in removing the name of a family member from employee records
    transmitted on a weekly basis to O'Neill.
    4
    We see no error in this determination. The deception in this case is plain, and an
    employee who puts or keeps a family member on the payroll against his superior’s direct orders
    benefits his own interests at the expense of his employer, conduct squarely within the definition
    of self-dealing. See Black's Law Dictionary 1390 (8th ed. 2004) (defining self-dealing as
    “[p]articipation in a transaction that benefits oneself instead of another who is owed a fiduciary
    duty”). Courts applying even the first of the two legal standards described above “have found
    disloyalty not to be ‘substantial’ only where the disloyalty consisted of a single act, or where the
    employer knew of and tolerated the behavior.” 
    Phansalkar, 344 F.3d at 201-02
    . Here, the name
    of Maconachy’s brother-in-law was ultimately redacted from over one hundred weekly reports,
    during which time he received substantial compensation from MMI, contrary to O'Neill's
    instruction that this relationship be terminated.
    Therefore, we AFFIRM the district court's judgment as to the faithless servant claim.
    We have examined the remainder of plaintiffs’ arguments and find them to be without
    merit. Accordingly, the judgment of the district court is AFFIRMED in part, VACATED in part,
    and REMANDED for further proceedings.1
    FOR THE COURT:
    Catherine O'Hagan Wolfe, Clerk
    1
    Because we vacate and remand as to the district court’s damages award, we need not
    address whether, as both parties agree, the court made a mathematical error in its calculation of
    prejudgment interest.
    5