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Sullivan v. Kahn, Litwin, Renza & Co., Ltd.

Superior Court of Massachusetts, Suffolk, Business Litigation Session

May 24, 2016

Timothy J. Sullivan
Kahn, Litwin, Renza & Co., LTD No. 134122


          Mitchell H. Kaplan, Justice

         The plaintiff, Timothy J. Sullivan, is a certified public accountant and was an employee of the defendant Kahn, Litwin, Renza & Co., Ltd. (KLR), a public accounting firm. He became an employee of KLR when it acquired Sullivan, Shuman & Freedberg, LLC (SSF), a public accounting firm in which Sullivan was a principal. The acquisition was accomplished pursuant to a Practice Contribution and Asset Purchase Agreement (the Purchase Agreement) dated October 22, 2008. Under the terms of the Purchase Agreement, KLR was to pay Sullivan, $1 million plus interest for his goodwill in SSF (the Purchase Price) over a period of ten years, monthly payments to begin upon Sullivan's retirement from KLR. Sullivan terminated his relationship with KLR effective February 21, 2014; however, KLR refused to make these payments to Sullivan. Sullivan filed this action against KLR alleging breach of contract. In its answer, KLR denied any liability to Sullivan and filed counterclaims against Sullivan for Breach of the Covenant of Good Faith and Fair Dealing (Count I) and Intentional Interference with Contractual Relations (Count II).[1] The case is before the court on cross motions for summary judgment. For the reasons that follow, Sullivan's motion is ALLOWED, in part, and DENIED, in part, and KLR's motion is DENIED.


         Although the parties filed a 92-page joint statement of purportedly material, relevant, undisputed facts, most of these facts are neither relevant nor undisputed. They are not relevant because the parties' relationship is governed by carefully crafted, written contracts. Whether Sullivan was reluctant or enthusiastic to sell his interests in SSF to KLR, he did so pursuant to the Purchase Agreement. Whether thereafter he was a good, bad, or indifferent employee of KLR is likewise irrelevant, as KLR's rights to withhold all or part of the Purchase Price were clearly stated in the Purchase Agreement and an Employment Agreement between KLR and Sullivan executed with the Purchase Agreement as an integrated part of the transaction. The following facts are either undisputed or viewed in the light most favorable to the non-moving party, a moving target given the cross motions.

         KLR is a Rhode Island based accounting firm which sought to acquire SSF's practice. The Purchase Agreement was entered into by SSF, KLR, Sullivan, and the other principals of SSF, in particular Shuman, as of October 22, 2008. While, under the terms of the Purchase Agreement, all of the principals of SSF (and several of its more junior accountants) became employees of KLR, the principals of SSF, other than Sullivan, also became owners of KLR. The sale was structured in the following manner: SSF assigned to Sullivan and the other SSF principals all of SSF's assets (with certain exclusions not relevant to this case) including specifically its goodwill (client relationships) and thereafter dissolved; the other SSF principals transferred their interest in the SSF assets to KLR in return for KLR stock; and Sullivan sold his interests in SSF for $1 million (the Purchase Price). The terms of Sullivan's sale of his SSF interests to KLR are set out in Section 3.4(a) of the Purchase Agreement. As relevant to this case, that section provides:

The Purchase Price shall be reduced by 50% in the event that [Sullivan] ceases to be employed by KLR prior to January 1, 2013 for any reason other than (i) . . . death or Permanent Disability . . . (ii) termination of such employment by KLR without Cause (as defined in the Employment Agreement of [Sullivan]), or (iii) termination of such employment by [Sullivan] for Good Reason (as defined in the Employment Agreement of [Sullivan]).

         Under Section 3.5, payment of the Purchase Price was deferred until the first day of the first month after Sullivan's employment with KLR ceased. Interest was to accrue on the Purchase Price and principal and accrued interest to be paid in equal installments over the ensuing 120 months. Subject to certain notice requirements, if KLR failed to make a monthly payment, Sullivan could declare the principal balance and accrued interest then remaining to be immediately due and payable. Further, in the event of litigation over payment of the Purchase Price, the prevailing party could recover the costs and expenses of the suit including reasonable attorneys fees. The Purchase Agreement is 32 pages long, plus schedules. It was clearly drafted by sophisticated attorneys.

         Sullivan's Employment Agreement is also dated October 22, 2008. It too is a sophisticated, well-crafted document, and an essential part of the transaction pursuant to which KLR acquired the SSF practice. The Employment Agreement included a salary schedule for Sullivan pursuant to which he would receive $660, 000 in 2009 and then decreasing amounts each year, reduced to $500, 000 for 2014. There was no specific end date to the Employment Agreement and salary was to be negotiated after 2014.

         Section 5 of the Employment Agreement is entitled Employee Covenants. Section 5.4 is a covenant not to solicit clients. In it Sullivan covenanted that for the period that he was employed by KLR and two years thereafter, he would not, among other things, either " directly or indirectly (a) solicit, call upon or attempt to do business with any client of Company in the area of Company's business, (b) induce or attempt to induce any client of Company to cease doing business with Company [or] (c) interfere with company's relationship with any such client."

         Section 5.10 of the Employment Agreement addresses " Remedies." It provides, among other things: " if a court, in a final, non-appealable judgment, determines that Employee has breached his obligations under Sections 5.3 through 5.8, inclusive, of this Agreement, Company shall be entitled to recovery of any payments made to Employee during any period that the court determines such breach existed, . . ." It also includes a provision permitting the prevailing party in a suit brought under this section to recover litigation costs, including reasonable attorneys fees.

         Section 6 is entitled Termination and Section 6.3 " Cause." Cause includes " any action or conduct such that [Sullivan's] continued employment would be materially detrimental to [KLR], . . . [and] " failure to perform a substantial portion of Sullivan's obligations or duties and responsibilities assigned or delegated under this Agreement."

         The parties spend many pages of their briefs arguing over the degree of effort and diligence with which Sullivan worked after the sale of SSF to KLR and whether Sullivan or Shuman made more inappropriate remarks to other employees during their tenure at KLR. However, for purposes of this motion it is sufficient to note that KLR never terminated (or attempted to terminate) Sullivan's employment at KLR for " Cause, " or otherwise. In October 2012, Sullivan announced his decision to retire on February 21, 2014, his 66th birthday. In late 2013, Sullivan suggested that he might delay his retirement. (He had apparently previously announced his planned retirement on other occasions and then changed his mind.) Shuman, however, responded on behalf of KLR that Sullivan's retirement proposal had already been accepted and the firm would not permit him to change his mind. A disagreement ensued, and Sullivan was eventually told to leave his office on November 4, 2013 and have no further contact with clients. He was placed on administrative leave, with salary and benefits, through February 21, 2014.

         Viewing the summary judgment record in the light most favorable to KLR, it appears that sometime in October 2013, four KLR accountants who had previously worked at SSF told Sullivan that they were planning to leave KLR and start their own accounting firm. This included one accountant, Mark Schofer, who was a proté gé of Sullivan and to whom Sullivan had been transitioning his clients in preparation for retirement. Over the next two months Sullivan met with these accountants at his home and discussed their plans with them. He loaned the group $125, 000 to start their new practice. At some point, Sullivan went over a list of clients who Sullivan thought might be unhappy at KLR and willing to move their work to the new firm. Sullivan continued to recommend Schofer to his clients after he knew that Schofer would be leaving KLR. Sullivan was aware that Schofer and the others were meeting with KLR clients to solicit their business while they were still employed at KLR and before the other KLR principals knew of their plans. The departing accountants did not announce their plan to leave and start a new accounting firm until December 27, 2013. In 2014, the new firm did almost $1 million of business with former KLR clients.

         KLR did not make a Purchase Price payment to Sullivan on March 1, 2014, when the first payment was due, or at any time thereafter. KLR's position is that Sullivan's conduct has relieved it of its obligations to make the monthly Purchase Price payments required by the Purchase Agreement. Sullivan took the steps required under the Purchase Agreement to accelerate the Purchase Price based on failure to ...

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