Kelly v. Riverside Partners, LLC

          MEMORANDUM AND ORDER FOR JUDGMENT

          DOUGLAS P. WOODLOCK, UNITED STATES DISTRICT JUDGE

         Plaintiff, Gregory Kelly, brought this action against Defendants, Riverside Partners, LLC and Steven Kaplan, based on an alleged $1 million signing bonus agreement he had with them. Defendants denied the existence of such an agreement and, in turn, asserted an indemnification counterclaim against Mr. Kelly for pursuing this litigation. Mr. Kelly responded with his own counterclaim against the Defendant for breach of a settlement agreement.

         Cross-motions for summary judgment were presented to me by the parties as to the Defendants' counterclaim, and Defendant separately sought summary judgment as to Plaintiff's claims and counterclaim. I orally granted Defendants' motion for summary judgment and now, following further briefing, award $250, 000 damages, with pre- and post-judgment interest, to Riverside. This Memorandum fully provides my reasons for these determinations.

         I. BACKGROUND

         A. Factual Background

         1. The Entities Involved in the Transaction

         In 2006, Vermont Fiberlink, LLC (“VFL”), an entity principally owned by Scott Pidgeon, Kenneth Pidgeon, and Alan Pidgeon (collectively “the Pidgeons”), and TelJet, Inc., formed an entity called TelJet Longhaul, LLC (“TelJet”). TelJet built, managed, leased, and maintained a fiber optic communications network and offered telecommunications services, custom solutions for Internet service, point-to-point circuits, and leasing of dark fiber. Plaintiff, Gregory Kelly, served as president of TelJet.

         Tech Valley Holdings, LLC (“Tech Valley”), is a portfolio company of Defendant, Riverside Partners, LLC (“Riverside”), a Boston-based private equity firm.

         TVC Albany, Inc., a/k/a Tech Valley Communications (“TVC”), was a wholly-owned subsidiary of Tech Valley until TVC was sold on September 7, 2016.

         TJL Acquisition Company, LLC (“TJL Acquisition”), was a wholly-owned subsidiary of TVC until TJL Acquisition dissolved in May 2013.

         2. The Transaction

         Around the Fall of 2010, Riverside identified TelJet as a potential acquisition target for its portfolio company, Tech Valley. TelJet had substantial debt, including trade and infrastructure debt, which led to the decision to sell the company.

         In 2011, Ian Blasco and Defendant, Steven Kaplan (an employee of Riverside who served on the boards of various entities at issue, including Tech Valley and TVC), met with Mr. Kelly and the Pidgeons in Burlington, Vermont to discuss TelJet's performance and the potential for Tech Valley to invest in TelJet.

         In 2012 and 2013, Mr. Kaplan and Mr. Blasco had several meetings with Mr. Kelly to discuss both the potential acquisition of TelJet by Tech Valley and Mr. Kelly's post-acquisition role. Discussions regarding Mr. Kelly's post-acquisition role began on November 8, 2012.

         On December 14, 2012, Mr. Kelly (and others) executed a letter of intent (“LOI”) with Riverside affiliates outlining a non-binding proposal for the purchase of the assets of TelJet. The non-binding proposal was said to be “on behalf of Tech Valley [], a portfolio company of Riverside, ” with the ultimate “Bidding Entity” to be TVC. The LOI set forth a “potential transaction structure” of $6.5 million for the purchase of TelJet's assets ($4.2 million cash and $2.3 million equity shares), subject to completion of due diligence, execution of a definitive Asset Purchase Agreement, and execution of mutually acceptable employment agreements designed to keep TelJet management, including Mr. Kelly, at the combined TVC-TelJet company post-transaction. The LOI was signed by Mr. Kaplan and Mr. Kelly.

         On March 27, 2013, pursuant to an Asset Purchase Agreement (“APA”), TelJet's assets were sold to Tech Valley. The transaction closed on June 28, 2013.

         As contemplated in the APA, in conjunction with the closing of the TelJet transaction, Mr. Kelly entered into an employment agreement with TVC. Under his employment agreement, Mr. Kelly was to receive an annual salary of $124, 000 and an “annual bonus of up to $25, 000.”

         3. The APA and its Relevant Provisions

         Defendants Riverside and Steven Kaplan were never parties to the APA. The APA initially defined “Purchaser” as TJL Acquisition.

         Shortly after the APA was entered into, an Amendment to the APA was executed, with this to be effective at the closing of the sale. Among other things, this Amendment amended and restated the preamble of the APA. The “Purchaser” was now to be TVC. Mr. Kelly, Kenneth Pidgeon, Mr. Kaplan, and Douglas Hyde signed the Amendment.

         Effective as of March 28, 2013, an Assignment and Assumption Agreement (“AAA”) was entered into between TJL Acquisition and TVC. Pursuant to this AAA, TJL Acquisition “assign[ed] all of its rights and obligations under the [APA] . . . .” The AAA stated that “[f]or the avoidance of doubt, references to the “Purchaser” in the [APA] shall be deemed to be references to TVC . . . .” Mr. Kelly, Mr. Kaplan, and Kenneth Pidgeon signed the AAA.

         Section 3.26 of the APA provided that “Affiliate” would have the meaning ascribed to it in Rule 405 of the Securities Act of 1933, which defines the term as “a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.” 17 C.F.R. § 230.405. Rule 405 further provides, “[t]he term control (including the terms controlling, controlled by and under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” Id.

         Article 2 of the APA dealt with representations and warranties concerning the Sellers, of which Mr. Kelly was one by terms of the preamble paragraph of the APA Specifically, Section 2.1 provided that “[t]he execution, delivery and performance of this [APA] . . . will not . . . be in conflict with . . . or cause the acceleration of any obligation . . . under any . . . agreement [or] contract . . . to which the Seller is a party . . . .” Section 3.23(f) provided that “[t]he consummation of the Transactions contemplated by this [APA] will not . . . (iii) increase the amount of compensation or benefits due to any individual.”

         Article 9 of the APA provided for indemnification for any breaches of the covenants or representations and warranties. Specifically, Section 9.1 states that “[n]o action for a breach of the representations and warranties contained herein shall be brought more than eighteen months following the Closing Date, except for (a) claims arising out of the representations and warranties contained in ARTICLE 2 or Sections 3.4(a), 3.11(b)-(c) or 3.26, which shall survive indefinitely after the Closing . . . and (d) claims based upon fraud.”

         Section 9.4(a) directed that:

The Selling Entities and the Sellers shall jointly and severally indemnify and hold the Purchaser and its Affiliates (the “Purchaser Indemnified Parties”) harmless from and against all claims, liabilities, obligations, costs, damages, losses and expenses (including reasonable attorneys' fees and costs of investigation) of any nature (collectively, “Losses”) arising out of or relating to (i) any breach or violation of the representations or warranties of any of the Sellers (other than those set forth in ARTICLE 2) or the Selling Entities set forth in this [APA] (including the Schedules hereto) or in any certificate or document delivered pursuant to this [APA], (ii) any breach or violation of the covenants or agreements of the Selling Entities set forth in this [APA], (iii) any breach or violation of the covenants or agreements of the Sellers set forth in this [APA] . . . .

         Section 9.4(b) stated that “[e]ach Seller shall severally, but not jointly, indemnify and hold the Purchaser Indemnified Parties harmless from and against all Losses arising out of or relating to (i) any breach of violation of the representations or warranties of such Seller in ARTICLE 2 of this [APA] . . . .”

         Section 9.3, however, set limitations on indemnifications. Section 9.3 provides that:

If the Closing occurs, the Purchaser Indemnified Parties (as hereinafter defined) shall not be entitled to recover any Losses (as hereinafter defined) for breach of the representations and warranties of the Sellers and/or the Selling Entities contained herein (a) unless and until the Purchaser Indemnified Parties' aggregate claims therefor exceed $50, 000, in which event the Purchaser Indemnified Parties shall be indemnified for all such Losses in excess of, but not including such $50, 000 (the “Basket”), or (b) for an aggregate amount in excess of $3, 000, 000 (which amount includes the Escrow) (the “Cap”) . . . provided, that claims based upon fraud or for breach of the Uncapped Representations [i.e., the representations and warranties contained in ARTICLE 2] shall not be subject to the foregoing limits, including the Cap and Basket . . . .

         Section 10.2 of the APA provided that the APA:

[S]hall be governed by and construed in accordance with the internal laws of the State of Delaware applicable to agreements executed and to be performed solely within such State. Any judicial proceeding arising out of or relating to this [APA] shall be brought in the courts of the State of Delaware, and, by execution and delivery of this [APA], each of the parties to this [APA] accepts the exclusive jurisdiction of such courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this [APA].

         4. Post-Closing Issues and Settlement Agreement

         On October 8, 2013, Tech Valley and TVC gave Notice of Claims for Indemnification under the APA against TelJet, VFL, and the Pidgeons, for alleged breaches of certain representations and warranties contained in the APA. Tech Valley and TVC did not give formal notice at that time of any claim for indemnification against Mr. Kelly.

         The dispute which was the subject of the October 8, 2013 Notice was settled on July 31, 2014 with a settlement agreement. The settlement agreement sets out the parties as:

Tech Valley Holdings, LLC, and TVC Albany, Inc., n/k/a FirstLight Fiber (collectively, the “Tech Valley Parties”) on the one hand, and TelJet Longhaul, LLC, TelJet, Inc., Vermont Fiberlink, LLC, Alan Pidgeon, Scott Pidgeon, Kenneth Pidgeon, and Douglas Hyde (collectively “TelJet Parties”), on the other hand. The Tech Valley Parties and the TelJet Parties are hereinafter referred to collectively as the “Parties” and each individually as a “Party.” The parties to this settlement agreement thus were expressly only Tech Valley and TVC, and TelJet, VFL, the Pidgeons, and Douglas Hyde.

         Section IV.A of the settlement agreement contained mutual general releases and covenants not to sue. This section provided that:

Each of the Tech Valley Parties, on behalf of themselves and each of their respective subsidiaries, predecessors, successors and assigns (collectively the “Tech Valley Releasing Parties”), hereby:

1. Fully finally and forever acquit, waive, release, and forever discharge all of the TelJet Parties and each of their respective predecessors, successors, affiliates, shareholders, equity holders, partners, members, managers, officers, directors, agents, investors, trustees, administrators, executors, heirs, family members, attorneys, assigns and insurers (collectively the “TelJet Released Parties”) from and against any and all claims, demands, suits, orders, decrees, complaints, counterclaims, cross-claims, arbitrations, actions, counts, third-party actions, rights, benefits, liabilities, duties, requests, letters, notices, subpoenas, lawsuits, administrative proceedings, inquiries, directives, appraisals, notices, statutory or regulatory duties or obligations, claims of any entity, mediations, causes of action and any other assertions of cost or liability of any kind, nature of type whatsoever, whether legal or equitable, and whether currently known or unknown, fixed or contingent, mature or unmatured, liquidated or unliquidated, direct or consequential, foreseen or unforeseen and whether sounding in tort, contract, contribution indemnification, subrogation, equity, negligence, strict liability or any statutory, regulatory, administrative or common law cause of action, duty or obligation of any sort (collectively, “Claims”) that any of the Tech Valley Releasing parties has, had and/or may in the future have against any of the TelJet Released Parties arising from, involving the subject matter of and/or relating in any way to any act and/or omission of any type, nature or description that occurred or allegedly occurred at any time . . . .

         Importantly, at no time were either Defendant Riverside or Defendant Kaplan a subsidiary, predecessor, successor, or assign of Tech Valley or TVC.

         Section IV.D of the settlement agreement provided:

Notwithstanding anything to the contrary above, insofar as the releases and covenants described in Sections A and B above extend to or otherwise include persons who are current or former employees of any of the Tech Valley Parties, such releases and covenants (i) shall extend only to affirmative Claims made by any Party relating to and/or arising out of the APA, and (ii) shall not prevent any Party from asserting defenses or counterclaims relating to and/or arising out of the APA against any current or former employees of any of the Tech Valley Parties in the event any such person first commences a lawsuit, arbitration proceeding or other formal legal claim against the Party.

         On August 22, 2014, Mr. Kelly voluntarily^[1] resigned from TVC. On September 12, 2014, Mr. Kelly rejected an offered separation agreement and did not sign any release, nor did he receive any severance payments from TVC.

         B. Procedural History

         On August 19, 2016, Mr. Kelly filed the Complaint in this action. The Complaint sought redress against Riverside and Mr. Kaplan for: (i) breach of contract by Riverside; (ii) fraud by Riverside and Mr. Kaplan; (iii) quantum meruit from Riverside; (iv) promissory estoppel by Riverside; (v) unfair or deceptive acts or practices by Riverside; (vi) aiding and abetting fraud by Mr. Kaplan; and (vii) civil conspiracy by Mr. Kaplan.

         On January 27, 2017, in an amended answer, Defendants added a counterclaim for indemnification against Mr. Kelly.

         On February 17, 2017, in an answer to Defendants' counterclaim, Mr. Kelly filed his own counterclaim for breach of the settlement agreement against the Defendants.

         On August 4, 2017, the Defendants filed a motion for summary judgment on all claims and counterclaims. On the same day, Mr. Kelly filed a motion for summary judgment as to Defendants' counterclaim.

         At the conclusion of the hearing on December 19, 2017 regarding the parties' motions for summary judgment, I granted Defendants' motion for summary judgment, and denied Plaintiff's motion for summary judgment and motion to strike and exclude evidence. On the issue of damages, however, I requested further briefing. Supplemental submissions on damages were received shortly thereafter.

         I held a hearing on February 28, 2018 regarding the issue of damages. As a result of issues developed at the hearing, I requested further materials concerning attorneys' fees. ...