GENESEE VALLEY TRUST COMPANY v. THE WATERFORD GROUP, LLC

SUPREME COURT OF THE STATE OF NEW YORK
Appellate Division, Fourth Judicial Department
780
CA 15-00009
PRESENT: SCUDDER, P.J., SMITH, SCONIERS, VALENTINO, AND DEJOSEPH, JJ.
GENESEE VALLEY TRUST COMPANY AND CANANDAIGUA
NATIONAL CORPORATION,
PLAINTIFFS-APPELLANTS-RESPONDENTS,
V MEMORANDUM AND ORDER
THE WATERFORD GROUP, LLC, BRIAN P. COSTELLO
AND MICHAEL J. MERRIMAN,
DEFENDANTS-RESPONDENTS-APPELLANTS.
UNDERBERG & KESSLER LLP, ROCHESTER (PAUL F. KENEALLY OF COUNSEL), FOR
PLAINTIFFS-APPELLANTS-RESPONDENTS.
LECLAIR KORONA GIORDANO COLE LLP, ROCHESTER (JEREMY M. SHER OF
COUNSEL), FOR DEFENDANTS-RESPONDENTS-APPELLANTS.
Appeal and cross appeal from an order and interlocutory judgment
(one paper) of the Supreme Court, Monroe County (Matthew A. Rosenbaum,
J.), entered March 28, 2014. The order and judgment denied the cross
motion of plaintiffs for, inter alia, summary judgment and granted the
motion of defendants for summary judgment in part by issuing a
declaration that § 7.1 of the employment agreements of defendants
Brian P. Costello and Michael J. Merriman with plaintiff Genesee
Valley Trust Company is invalid and unenforceable and dismissing the
fifth and eighth causes of action.
It is hereby ORDERED that the order and judgment so appealed from
is unanimously modified on the law by vacating the declaration with
respect to defendant Brian P. Costello, denying that part of
defendants’ motion seeking summary judgment dismissing the fifth cause
of action and reinstating that cause of action, and granting that part
of defendants’ motion seeking summary judgment dismissing the fourth
cause of action, and as modified the order and judgment is affirmed
without costs.
Memorandum: Plaintiff Canandaigua National Corporation (CNC)
purchased plaintiff Genesee Valley Trust Company (GVT), an investment
management firm, on or about January 2, 2008. Defendants Brian P.
Costello and Michael J. Merriman were employees of GVT, and Costello
had been a GVT shareholder and was paid for his shares in the sale to
CNC. Costello and Merriman signed new employment agreements with GVT
that became effective January 3, 2008. Section 7.1 of the agreements
provided that the employee would pay GVT a fee in the event that the
employee solicited and obtained business from GVT clients within a
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year of leaving its employ, and that the amount of the fee would be
based on two times the total amount of fees and payments made to GVT
by the solicited client in the 12 months prior to the employee’s
departure. In addition, section 7.2 prohibited the employee from
soliciting other GVT employees to leave their employment under certain
circumstances. Costello, Merriman, and nonparty Mary O’Brian, another
GVT employee, all left GVT between December 31, 2010 and January 7,
2011, and Costello signed a termination agreement with a clause that
prohibited him from making disparaging statements about GVT. Later in
January 2011, Costello, Merriman, and O’Brian became the sole members
of defendant The Waterford Group, LLC (Waterford), another investment
management firm.
Plaintiffs commenced this action alleging, inter alia, that
defendants solicited GVT clients to move their business to Waterford,
that Merriman solicited O’Brian to leave GVT and join Waterford in
violation of section 7.2, and that Costello disparaged GVT in
violation of his termination agreement. Plaintiffs sought damages and
a judgment declaring that amounts were due to GVT from Costello and
Merriman pursuant to section 7.1. After obtaining dismissal of
several of plaintiffs’ causes of action on a motion to dismiss,
defendants moved for summary judgment seeking a declaration that
section 7.1 is unenforceable and dismissal of the remaining causes of
action. Plaintiffs cross-moved for, inter alia, summary judgment
seeking a declaration that section 7.1 is enforceable against both
Costello and Merriman. Supreme Court denied plaintiffs’ cross motion
and granted defendants’ motion in part by issuing a declaration that
section 7.1 is “invalid and unenforceable,” and dismissing the fifth
and eighth causes of action on the ground that section 7.2 is likewise
unenforceable. The court denied defendants’ motion with respect to
the fourth cause of action, which alleges that Merriman breached his
duty of fidelity and loyalty to GVT, and the twelfth cause of action,
which alleges that Costello breached the nondisparagement clause of
his termination agreement. Plaintiffs appeal and defendants cross-
appeal.
We note at the outset that plaintiffs do not contend in their
brief that the court erred in issuing a declaration that section 7.1
is unenforceable against Merriman or that the court erred in
dismissing the eighth cause of action, and we thus deem any issues
with respect to those matters abandoned (see Burton v Matteliano, 81
AD3d 1272, 1275, lv denied 17 NY3d 703).
We agree with plaintiffs that the court erred in granting that
part of defendants’ motion seeking a declaration that section 7.1 is
unenforceable against Costello. We therefore modify the order and
judgment by vacating the declaration with respect to Costello, thereby
allowing the first cause of action to go forward. Because Costello
sold his GVT shares to CNC, and CNC acquired GVT’s goodwill in the
transaction, the enforceability of section 7.1 against Costello should
be evaluated pursuant to the standard applicable to the sale of a
business rather than “the stricter standard of reasonableness”
applicable to employment contracts (Reed, Roberts Assoc. v Strauman,
40 NY2d 303, 307, rearg denied 40 NY2d 918; see Weiser LLP v
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Coopersmith, 51 AD3d 583, 583-584; Kraft Agency v Delmonico, 110 AD2d
177, 182-183). A covenant restricting the right of a seller of a
business to compete with the buyer is enforceable if its duration and
scope are “reasonably necessary to protect the buyer’s legitimate
interest in the purchased asset” (Hadari v Leshchinsky, 242 AD2d 557,
558; see Mohawk Maintenance Co. v Kessler, 52 NY2d 276, 283-284;
Purchasing Assoc. v Weitz, 13 NY2d 267, 271-272, rearg denied 14 NY2d
584), and we conclude that the scope and one-year duration of section
7.1 are reasonably necessary, as applied to Costello, to protect CNC’s
legitimate interest in GVT’s goodwill (see Weiser LLP, 51 AD3d at 583-
584; see also Purchasing Assoc., 13 NY2d at 271-272; Sarantopoulos v
E-Z Cash ATM, Inc., 35 AD3d 708, 709), except relative to clients, if
any, that Costello independently recruited to GVT after it was sold to
CNC (see Weiser LLP v Coopersmith, 74 AD3d 465, 467-468). Absent
anticompetitive misconduct by the employer not present here, a
restrictive covenant that is overbroad in some respect is “partially
enforceable ‘to the extent necessary to protect [the employer’s]
legitimate interest’ ” (Malcolm Pirnie, Inc. v Werthman, 280 AD2d 934,
935; see BDO Seidman v Hirshberg, 93 NY2d 382, 394-395; see also Brown
& Brown, Inc. v Johnson, ___ NY3d ___, ___ [June 11, 2015] and, with
that limited exception, section 7.1 is prima facie enforceable against
Costello.
In any event, we note that the result would be the same under the
standard applicable to employment contracts, whereby a restrictive
covenant “is reasonable only if it: (1) is no greater than is
required for the protection of the legitimate interest of the
employer, (2) does not impose undue hardship on the employee, and (3)
is not injurious to the public” (BDO Seidman, 93 NY2d at 388-389).
GVT’s interest in protecting its customer relationships and goodwill
for the benefit of CNC is a legitimate interest under that standard as
well (see TBA Global, LLC v Proscenium Events, LLC, 114 AD3d 571, 572;
Gundermann & Gundermann Ins. v Brassill, 46 AD3d 615, 616), and
partially enforcing section 7.1 against Costello will not impose undue
hardship on him or harm the public (see BDO Seidman, 93 NY2d at 393-
394).
We conclude, however, that plaintiffs are not entitled to a
declaration in their favor at this juncture because they have not
established that the damages clause of section 7.1 is enforceable (see
generally id. at 396). As the parties acknowledge, the provision of
section 7.1 governing the amount of the fee to be paid “essentially
represents a liquidated damages clause” (id.), and is thus enforceable
if, at the time the agreement was made, the amount of plaintiffs’
actual loss was “incapable or difficult of precise estimation” and the
amount liquidated was not “plainly or grossly disproportionate to the
probable loss” (Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 NY2d 420,
425; see JMD Holding Corp. v Congress Fin. Corp., 4 NY3d 373, 380).
Although the record establishes that plaintiffs’ actual damages from
the solicitation of any particular client “are sufficiently difficult
to ascertain to satisfy the first requirement of a valid liquidated
damages provision” (BDO Seidman, 93 NY2d at 396; see Marcone APW, LLC
v Servall Co., 85 AD3d 1693, 1696-1697), and we recognize that
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CA 15-00009
defendants, as the parties seeking to avoid liquidated damages, bear
the ultimate burden of establishing that the clause is unenforceable
(see 172 Van Duzer Realty Corp. v Globe Alumni Student Assistance
Assn., Inc., 24 NY3d 528, 536; JMD Holding Corp., 4 NY3d at 379-380),
we conclude that the sparse financial information submitted by
plaintiffs on their cross motion “by no means conclusively
demonstrates the absence of gross disproportionality” (BDO Seidman, 93
NY2d at 396-397). Accordingly, “further development of the record on
the liquidated damages formula” at trial is necessary (id. at 397; see
Central Irrigation Supply v Putnam Country Club Assoc., LLC, 27 AD3d
684, 685; Tremco, Inc. v Turk, 170 AD2d 987, 987-988).
We also agree with plaintiffs that the court erred in granting
that part of defendants’ motion seeking to dismiss the fifth cause of
action on the basis that plaintiffs had no legitimate interest in
enforcing section 7.2 against Merriman in connection with his alleged
solicitation of O’Brian. We therefore further modify the order and
judgment accordingly. A covenant not to solicit employees is
“ ‘inherently more reasonable and less restrictive’ ” than a covenant
not to compete (OTG Mgt., LLC v Konstantinidis, 40 Misc 3d 617, 621;
see also Natsource LLC v Paribello, 151 F Supp 2d 465, 470-471), and
an employer has a legitimate interest in preventing an employee from
leaving to work for a competitor if the employee has cultivated
personal relationships with clients through the use of the employer’s
resources (see BDO Seidman, 93 NY2d at 391-392; 1 Model Mgt., LLC v
Kavoussi, 82 AD3d 502, 503-504). There is conflicting evidence here
regarding the importance of the personal relationships O’Brian had
with GVT clients, and thus an issue of fact exists whether GVT had a
legitimate interest in preventing Merriman from soliciting her to join
Waterford (see Fewer v GFI Group Inc., 124 AD3d 457, 458).
We agree with defendants on their cross appeal that the court
erred in denying that part of their motion seeking to dismiss the
fourth cause of action, and we therefore further modify the order and
judgment accordingly. The majority of the allegations in that cause
of action were determined in the prior dismissal order to be
insufficiently particularized to satisfy CPLR 3016 (b). Defendants
made a prima facie showing on their motion for summary judgment that
Merriman did not engage in the remaining conduct alleged, and
plaintiffs failed to raise a triable issue of fact (see generally
Zuckerman v City of New York, 49 NY2d 557, 562). Finally, we reject
defendants’ contention that the court erred in denying that part of
their motion seeking to dismiss the twelfth cause of action on the
basis that plaintiffs had not established any damages arising from
Costello’s alleged breach of his termination agreement. Defendants
did not meet their burden on that issue “simply by pointing to gaps in
plaintiff[s’] proof” (Route 104 & Rte. 21 Dev., Inc. v Chevron U.S.A.,
Inc., 96 AD3d 1491, 1492; see Benderson v Ulrich/34 Chestnut St., LLC,
57 AD3d 1417, 1419).
Entered: July 10, 2015 Frances E. Cafarell
Clerk of the Court