United States District Court, D. Massachusetts
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.
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