Present: All the Justices
FEDDEMAN & COMPANY, C.P.A., P.C.
v. Record No. 991996 OPINION BY JUSTICE ELIZABETH B. LACY
June 9, 2000
LANGAN ASSOCIATES, P.C., ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF ALEXANDRIA
Alfred D. Swersky, Judge
Feddeman & Company appeals a judgment setting aside a
$3,300,000 jury verdict in its favor against six of its former
employees and one of its competitors. Feddeman & Company, the
plaintiff below, is a certified public accounting firm that,
in 1997, had 31 employees and over $3,000,000 in yearly
revenues. W. Kent Feddeman was a 95% shareholder and the
president of the company.
The defendants are Langan Associates, a rival accounting
firm, John P. Langan, its president, three former directors
and employees of Feddeman & Company, Joseph M. Kotwicki,
Cheryl L. Jordan, and J. Andrew Smith, and three former
employees of Feddeman & Company, Nathaniel T. Bartholomew,
Robert A. Casey, and John G. Wooldridge.
The events giving rise to this litigation began in August
1996, when Kent Feddeman initiated discussions with John
Langan regarding a possible buyout or merger of the two
companies. In early 1997, Feddeman asked Kotwicki to take
over the negotiations.
In the summer of 1997, the American Express Company made
an offer to purchase both Langan Associates and Feddeman &
Company. On August 31, 1997, Langan, Kotwicki, Bartholomew,
Smith, Casey, Wooldridge, and Jeffrey S. Tenenbaum, Langan
Associates' attorney, met in Tenenbaum's office. At this
meeting, the attendees determined that they would refuse the
American Express offer, and Kotwicki, Smith, Bartholomew,
Casey, and Wooldridge would form a "Buying Group." The Buying
Group planned to purchase Feddeman's 95% interest in Feddeman
& Company and then merge the company with Langan Associates.
The Buying Group also raised the possibility that they might
have to resign from Feddeman & Company if the buyout
negotiations were unsuccessful. The members of the Buying
Group signed a retainer agreement with Tenenbaum authorizing
him to represent them. At this meeting, or shortly
thereafter, Kotwicki gave sample Feddeman & Company engagement
letters and nonsolicitation agreements, along with other
corporate and employment documents, to Tenenbaum in
preparation for the merger. Feddeman was aware of and did not
oppose this two-step merger process.
On September 29, 1997, the Buying Group offered Feddeman
$2,000,000 for his interest in Feddeman & Company. In making
the offer, Kotwicki reminded Feddeman that the corporate
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directors were not bound by noncompete agreements and that
they were free to leave Feddeman & Company if they wished.
On November 4, 1997, Feddeman made a counteroffer to the
Buying Group. Four days later, Kotwicki told Feddeman that
the counteroffer nullified the Buying Group's prior offer, and
that if the Buying Group were to make another offer, it would
be lower than the first.
On November 10, 1997, a second meeting was held at the
offices of Langan Associates, again with Langan, Tenenbaum,
and the Buying Group. Tenenbaum had been asked to do legal
research on any potential liability which could arise if the
Buying Group resigned and were subsequently employed by Langan
Associates. Based on his research, Tenenbaum advised the
Buying Group that to avoid liability, if they ultimately chose
to resign, they should not solicit Feddeman & Company clients
or employees until after their resignation, not use company
resources in the preparation of their resignations, not make
negative or adverse statements about Feddeman & Company, and
not remove any company property. The Buying Group agreed that
they would resign on December 1, 1997 if they "hadn't made a
deal" with Feddeman and that the resignations "would be a form
of leverage that could be used" in the negotiations.
On November 12, 1997, at 7:00 a.m., Jordan, the members
of the Buying Group except Casey, and four other Feddeman &
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Company senior employees met at Smith's house. At this
meeting, the Buying Group reported on the status of the merger
negotiations, and indicated that if the negotiations did not
improve there was a possibility that the Buying Group would
resign on December 1, 1997. The Buying Group indicated that
they believed Langan Associates would hire them if they
resigned. They also told the senior employees present that
they "would take care of them."
On November 19, 1997, Kotwicki again discussed the
resignation plan with Jordan. She indicated that she would be
on vacation on December 1, so Kotwicki gave her a letter of
resignation drafted for her by Tenenbaum, which she signed and
gave to her own attorney.
On November 24, Feddeman's attorney presented Kotwicki
with a $4,000,000 stock purchase proposal in which Feddeman
would be paid over the course of eight years. Two days later,
the Buying Group made a counteroffer of $4,000,000 to be paid
over a ten year period, with no personal guarantees and a
covenant not to compete from Feddeman.
Meanwhile, Feddeman learned of the proposed walkout and
contacted Johnson & Lambert, a national accounting firm, to
see if it could provide assistance if needed, and additionally
to discuss possible merger options.
4
On December 1, 1997, Feddeman announced to some of his
employees that Johnson & Lambert had expressed interest in
making a presentation to Feddeman & Company employees on
December 3. The Buying Group met with Feddeman immediately
after this announcement. Feddeman told them Johnson & Lambert
had an interest in acquiring the firm, and that there would be
positions for everyone. The Buying Group met with Feddeman a
second time in his office, this time without Kotwicki. They
questioned the potential merger with Johnson & Lambert and its
impact on the planned buyout and merger with Langan
Associates. Feddeman told them he just wanted them to hear of
another opportunity and he advised them to talk to his lawyer.
Following the meetings with Feddeman, members of the
Buying Group met at lunch and decided to resign. They planned
to talk to the senior managers after work to inform them of
the resignation decision. After lunch, Kotwicki called
Langan, informed him that the Buying Group was resigning, and
asked if Langan Associates would hire the Buying Group and any
others who might resign. Langan agreed.
Kotwicki had letters of resignation prepared for three
senior employees, Mary D. Komatsoulis, James B. Kanuch, and
Mike A. Benoudiz. That evening, after attending an event with
Feddeman, Benoudiz and Kanuch met with Smith and were given
the prepared letters of resignation. They were told of the
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Buying Group's decision to resign and to work for Langan
Associates, and that "they could come too." Smith, Benoudiz,
and Kanuch returned to the office, and while Smith gathered
his personal effects, Benoudiz and Kanuch signed their letters
of resignation and gave them to Smith. That evening
Komatsoulis, at Bartholomew's request, met with him. After
the meeting, Komatsoulis returned to the office and signed her
letter of resignation. A fourth employee was told to contact
Kotwicki because he had a letter of resignation for her to
sign.
That evening, Kotwicki called Jordan, who contacted her
attorney and instructed him to release her letter of
resignation. Kotwicki also obtained a letter of resignation
from his son, Michael Kotwicki, a Feddeman & Company employee.
The next morning, December 2, prior to going to work,
Kotwicki went to Smith's house and collected the letters of
resignation obtained from various employees. After leaving
Smith's house, Kotwicki delivered 11 letters of resignation to
Kent Feddeman. Feddeman accepted the resignations.
That evening, Langan Associates held a reception for the
Feddeman employees who had not yet resigned. Eventually, 25
of the 31 Feddeman & Company employees resigned and began
working for Langan Associates. By December 3, all the
Feddeman & Company clients had been contacted by employees of
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Langan Associates, and 50% of those clients eventually
transferred their business to Langan Associates.
On April 9, 1998, Feddeman & Company filed an Amended
Motion for Judgment asserting inter alia the following causes
of action: Count I - Breach of Fiduciary Duty by Director
Defendants, Count II - Usurpation of Corporate Business
Opportunity as to Director Defendants and Employee Defendants,
Count III - Breach of Fiduciary Duty of Employee Defendants,
Count IV - Intentional Interference with Contract and Business
Expectancies By All Defendants, and Count VI – Violation of
Va. Code §§ 18.2-499 and –500, Conspiracy to Injure Another in
Trade or Business, By All Defendants. Count V was dismissed
by the trial court upon defendants' Plea in Bar.
The defendants filed a counterclaim which alleged
intentional interference with contractual rights and
prospective economic advantage, unfair competition, and libel
and slander.
Following a seven-day trial, the jury returned a verdict
in favor of Feddeman & Company and against the defendants on
all remaining counts in the Amended Motion for Judgment, with
one exception. Cheryl Jordan was found not to have usurped a
corporate business opportunity. The jury awarded damages in
the amount of $3,300,000. The jury found in favor of the
plaintiff on defendants' counterclaim.
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The defendants filed a Motion To Strike and To Set Aside
the Verdict and, following further briefing and argument, the
trial court granted that motion. Feddeman & Company filed
this appeal, and the defendants assigned cross-error.
I.
On appellate review of the trial court's action setting
aside the verdict, we consider whether there was sufficient
credible evidence to establish the claims against the
defendants, and we consider the evidence and reasonable
inferences therefrom in the light most favorable to the
plaintiff. Nichols v. Kaiser Foundation Health Plan, 257 Va.
491, 494, 514 S.E.2d 608, 609 (1999); Carter v. Lambert, 246
Va. 309, 313-14, 435 S.E.2d 403, 405-06 (1993).
In Counts I and III of the Motion for Judgment, the
plaintiff claimed that defendants Kotwicki, Smith, Jordan,
Casey, Bartholomew, and Wooldridge breached their fiduciary
duties to the corporation. In setting aside the jury's
verdicts in favor of the plaintiff on Counts I and III, the
trial court concluded that these defendants did not breach
their fiduciary duties because they were entitled to engage in
"reasonable preparations to compete within certain
limitations."
We agree that, prior to resignation, these defendants
were entitled to make arrangements to resign, including plans
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to compete with their employer, and that such conduct would
not ordinarily result in liability for breach of fiduciary
duty. However, the right to make such arrangements is not
absolute. This right, based on a policy of free competition,
must be balanced with the importance of the integrity and
fairness attaching to the relationship between employer and
employee or corporation and corporate director. Science
Accessories Corp. v. Summagraphics Corp., 425 A.2d 957, 962-63
(Del. 1980); Maryland Metals, Inc. v. Metzner, 382 A.2d 564,
568 (Md. 1978). Under certain circumstances, the exercise of
the right may constitute a breach of fiduciary duty.
Restatement (Second) of Agency § 393 cmt. 1 (1957).
Liability for breach of fiduciary duty has been imposed
when the employees or directors misappropriated trade secrets,
misused confidential information, and solicited an employer's
clients or other employees prior to termination of employment.
See, e.g., Maryland Metals, and cases cited therein. Whether
specific conduct taken prior to resignation breaches a
fiduciary duty requires a case by case analysis.
In Duane Jones Co. v. Burke, 117 N.E.2d 237 (N.Y. 1954),
certain officers, directors, and employees of an advertising
agency "met and agreed to take over the business" of their
employer "either by purchase of the controlling interest in
the corporation or by resignation en masse and the formation
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of a new agency." Id. at 245. The employees presented a
purchase offer for the controlling interest in the agency and
told the majority stockholder, who was also president of the
agency, that if the offer was not accepted, the employees
would resign. The offer was rejected and shortly thereafter
the members of the group submitted resignations on the same
day in substantially identical form. A new advertising agency
was formed and, within a month, the new agency had acquired 9
of the approximately 25 clients formerly serviced by the old
company, Duane Jones Co., and had acquired more than 50% of
that agency's personnel. The evidence also showed that the
new agency acquired certain clients and employees through the
action of the defendants while those defendants were
completing their duties with their former employer, although
the defendants had already stated their intention to resign.
Id.
In approving the jury verdict in favor of the plaintiff,
the Court of Appeals of New York concluded that each of the
defendants was required to " 'exercise the utmost good faith
and loyalty in the performance of his duties' " and that their
conduct " 'fell below [that] standard.' " Id. at 245.
Similarly in ABC Trans National Transport, Inc. v.
Aeronautics Forwarders, Inc., 413 N.E.2d 1299 (Ill. App.
1980), the court found that the coordinated resignation of key
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management employees pursuant to their organized plan
resulting in "the sudden, potentially crippling loss of half
of [the employer's] business and major customers, as well as
substantial numbers of its personnel" was an actionable breach
of fiduciary duty. Id. at 1306.
The evidence in the instant case is substantially similar
to that in the Duane Jones case. Here, the employee and
director defendants met and formulated a plan to resign en
masse if Kent Feddeman rejected their buyout offer, knowing
that a resignation or walk out by all of them would "be
devastating to" the corporation. The plan included
anticipation of future employment with Langan Associates, a
rival business, and such future employment included securing
plaintiff's clients and employees as clients and employees of
Langan Associates. The record shows that these defendants
informed other employees of the plan to resign, supplied
resignation letters for use by other employees, and told
employees that they were "going to go join John Langan, and
they could come too."
A total of 11 resignations were submitted on December 2
and, within four days, a total of 25 of the plaintiff's 31
employees resigned and joined Langan Associates. By December
5, all of the plaintiff's clients had been solicited to join
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Langan Associates and approximately half of those clients
eventually moved their accounts to Langan Associates.
In considering this evidence, the jury was instructed
that employees and directors of a corporation are required to
"exercise the utmost good faith and loyalty" toward the
corporation and may not act "in a manner adverse to the
corporation's interest." The jury was also told that
corporate directors, while employed by the corporation, could
inform other employees of their intent to leave the
corporation, but could not solicit such employees to join them
in a rival business and could not use confidential or
proprietary information.
The evidence shows that these defendants did more than
prepare to leave their employment and advise others of their
plan. As in Duane Jones, the totality of the defendants'
actions provided credible evidence to support a jury
determination that their conduct fell below the required
standard of good faith and loyalty and constituted a breach of
fiduciary duty. Therefore, the judgment of the trial court
setting aside the jury verdict in favor of plaintiff on Counts
I and III was error.
II.
Count VI of the Motion for Judgment charged that the
employee and director defendants, along with Langan Associates
12
and John P. Langan, individually, violated Code §§ 18.2-499
and –500 because these defendants, intentionally and without
legal justification, conspired to injure plaintiff's business
and, as a result of that conspiracy, plaintiff suffered
financial harm. The jury was instructed that to prevail on
this count, the plaintiff had to prove by clear and convincing
evidence that these defendants combined for the purpose of
willfully and maliciously injuring plaintiff's business and
that the business was injured as a result of these actions.
The jury was further told that
[t]he term 'malice' means that the defendants
acted intentionally, purposefully and without
legal justification. Without legal justification
may include a breach of their fiduciary duty or
assisting someone to breach their fiduciary duty.
Should corporate officers or directors act in
concert to breach their fiduciary duties and
cause injury to the corporation, they may be
liable for conspiracy. The term 'malice' does
not require the plaintiff to prove that a
conspirator was motivated by hatred, personal
spite, ill will or a desire to injure the
plaintiff.
The jury returned a verdict finding that all corporate
director and employee defendants as well as John Langan and
Langan Associates violated §§ 18.2-499 and -500. The trial
court set aside the jury verdict, finding that there was no
evidence that these defendants "combined with an intent to
injure" plaintiff and that there was no evidence of "unlawful
acts in furtherance of the combination."
13
The plaintiff contends that the jury's finding of
conspiracy was supported by evidence that John Langan and the
members of the Buying Group met on August 31, November 10, and
November 12 and formulated a plan to impose "leverage" on
Feddeman to accept the buyout offer. The plan was that the
members of the Buying Group would resign en masse if Feddeman
refused the buyout offer and, with Langan's agreement, go to
work for Langan Associates. Jordan, although not a member of
the Buying Group, was told of and agreed to participate in the
resignation plan. The plan also included securing the
resignations of other senior employees, whom John Langan also
agreed to hire.
The plaintiff maintains that Langan Associates'
participation in the conspiracy is shown by evidence that its
legal counsel represented the Buying Group, advised the Buying
Group regarding the resignation and solicitation of other
employees and clients of the plaintiff, drafted Jordan's
resignation letter, and was paid for these services by Langan
Associates.
Establishing a conspiracy in violation of §§ 18.2-499 and
–500 does not require proof that the conspirators' "primary
and overriding purpose is to injure another." Advanced Marine
Enterprises v. PRC Inc., 256 Va. 106, 117, 501 S.E.2d 148, 154
(1998). As indicated in the instruction given to the jury in
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this case, the plaintiff was only required to show that the
defendants acted "intentionally, purposefully, and without
lawful justification." Id., 501 S.E.2d at 154-55.
The trial court concluded that the defendants' actions
were undertaken for no other purpose than "to effectuate the
planned merger." However, considering the evidence and all
reasonable inferences therefrom in the light most favorable to
the plaintiff, as we must, we find that this conclusion was
error.
The evidence is clear that the plan to submit
resignations was initiated as a means of exerting leverage
against Feddeman to accept the Buying Group's offer and thus
facilitate a merger of plaintiff with Langan Associates. This
plan was based on the principle that the departure of the
defendants and the other employees would so adversely impact
the plaintiff that Feddeman would not accept those
resignations and let the employees depart. Injury to the
plaintiff was a known and intended result of the plan. The
employee and director defendants cannot avoid responsibility
for their actions because their resignation plan was not their
first or preferred choice of action. The evidence in this
case is clearly sufficient to support a jury determination,
not only that the defendants acted intentionally and
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purposefully, but that they knew and intended that their
resignation plan, if implemented, would injure the plaintiff.
This knowledge was not limited to the employee and
director defendants. John Langan and Langan Associates were
aware that the resignation plan was considered "leverage" and
that, if implemented, would adversely affect the plaintiff.
Langan and Langan Associates facilitated development of the
plan by providing legal services and agreeing to hire
plaintiff's former employees.
The evidence also supports a jury determination that the
defendants' actions were without legal justification. The
jury was instructed that the failure of legal justification
"may include a breach of their fiduciary duty or assisting
someone to breach their fiduciary duty." As discussed above,
the evidence was sufficient to support a jury finding that the
planned resignation en masse from Feddeman & Company was a
breach of the director and employee defendants' fiduciary
duties. The evidence was also sufficient to show that the
conduct of John Langan and Langan Associates assisted the
director and employee defendants in the breach of their
fiduciary duties. Applying the jury instruction to this
evidence, we find there was sufficient credible evidence for
the jury to conclude that the defendants' actions were without
legal justification.
16
Accordingly, the trial court erred in setting aside the
jury verdict in favor of the plaintiff on Count VI.
III.
The plaintiff sought compensatory damages for a single
injury resulting from the various causes of action and the
jury awarded a single damage amount of $3,300,000. In light
of our holding that the trial court erred in setting aside the
jury verdict in favor of the plaintiff on the breach of
fiduciary duty counts, and the statutory conspiracy count, it
is unnecessary to consider the plaintiff's assignments of
error regarding the trial court's action in setting aside the
jury's verdicts on the intentional interference with contract
and business expectancy and usurpation of corporate
opportunity. 1 However, the defendants argue that, even if the
trial court erred in setting aside the jury verdict, final
judgment should not be entered in favor of the plaintiff,
because the trial court erred in instructing the jury.
In an assignment of cross-error, the defendants assert
that the trial court erred when it refused two jury
instructions offered by the defendants concerning breach of
1
We also note that usurpation of corporate business
opportunity is generally considered a breach of fiduciary duty
rather than conduct constituting a distinct cause of action.
Trayer v. Bristol Parking, Inc., 198 Va. 595, 603-04, 95
S.E.2d 224, 230 (1956); Meiselman v. Meiselman, 309 N.C. 279,
306-08, 307 S.E.2d 551, 567 (N.C. 1983).
17
fiduciary duty. The trial court stated that it would not give
these two instructions because the matters they addressed were
covered in other instructions. Additionally, the trial court
observed that other instructions adequately set out the
elements of the cause of action and that one of the
instructions "sounds like [defendants'] closing argument."
We agree that the proposed instructions were cumulative
of other instructions given on this issue. While a party is
entitled to jury instructions supporting his theory of the
case, if supported by adequate evidence, a trial judge is not
required to give proffered jury instructions which are
cumulative or repeat matters contained in other instructions.
Medlar v. Mohan, 242 Va. 162, 168-69, 409 S.E.2d 123, 127
(1991); Adams v. Plaza Theatre, Inc., 186 Va. 403, 409-10, 43
S.E.2d 47, 51 (1947). Therefore, the trial court's refusal to
give the defendants' proffered instructions was not error.
IV.
In summary, for the reasons stated, we will reverse the
judgment of the trial court and reinstate the verdict of the
jury in favor of the plaintiff on Counts I, III, and VI.
Because the trial court did not consider entry of an award in
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accordance with the provisions of § 18.2-500, we will remand
the case for entry of a judgment consistent with this opinion. 2
Reversed and remanded.
2
Section 18.2-500 provides that a person injured in his
business through violation of § 18.2-499 may recover "three-
fold the damages by him sustained" along with costs and
attorneys' fees.
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