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stating that "a provision for attorney's fees that requires a victorious party to pay the attorney's fees of the losing party" must be "strictly construed" because "such an arrangement creates an incentive to engage in litigation that might not have otherwise been brought — or that might have been conducted differently — had the losing party been forced to bear the risk of paying its own fees"
Summary of this case from Bobrow Palumbo Sales, Inc. v. Broan-Nutone, LLCOpinion
01 Civ. 9295 (RMB)(GWG)
October 24, 2003
REPORT AND RECOMMENDATION
On October 30, 2002, this Court issued a Report and Recommendation recommending that the defendants' motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) be granted in part and denied in part. See Kleinberg v. Radian Group. Inc., 2002 WL 31422884 (S.D.N.Y. Oct. 29, 2002) ("RR"). The Report and Recommendation was thereafter adopted by the District Court in Kleinberg v. Radian Group. Inc., 240 F. Supp.2d 260 (S.D.N.Y 2002).
Plaintiff Brian Kleinberg has now made an application for attorney's fees. Defendants Radian Group, Inc. and Enhance Financial Services Group, Inc. ("Enhance") have opposed the application. For the reasons stated below, plaintiffs motion for fees should be denied.
I. BACKGROUND
A. Kleinberg's Employment and Resignation
The facts underlying this dispute are fully set forth in the twoKleinberg decisions. In brief, Kleinberg was hired in January 1999 to serve as Executive Vice President of Enhance and as Chief Executive Officer of Singer Asset Finance Company, LLC ("Singer"), a wholly owned subsidiary of Enhance. See Second Amended Complaint, filed June 21, 2002 (Docket #23) ("Complaint"), ¶¶ 12, 18. The specific terms of his employment were embodied in a letter agreement, which provided, inter alia, that his compensation would include an "annual target bonus for calendar periods of not less than 50% of then base salary." Letter from Elaine Eisenman to Brian Kleinberg, dated January 4, 1999 ("Employment Letter") (annexed as Ex. B to Complaint), at 1.
Thereafter, Kleinberg and Enhance entered into a "golden parachute" agreement in order to provide Kleinberg with certain severance benefits in the event of a change-in-control at Enhance. Complaint ¶¶ 19-21;see Second Amended and Restated Change-in-Control Protection Agreement, dated March 23, 2000 ("Agreement") (annexed as Ex. A to Complaint). In relevant part, the Agreement provided that if a "Termination Event" occurred within two years after a change-in-control at Enhance, Kleinberg would be entitled to a lump-sum payment that included three times his "Annual Cash Compensation" plus a pro-rated bonus. The bonus was to be calculated as follows:
[T]he greater of (i) the Adjusted Bonus paid [Kleinberg] in respect of the calendar year immediately preceding the Date of Termination, [or] (ii) the Adjusted Bonus paid [Kleinberg] in the year preceding the calendar year in which the Change in Control Date occurs . . . pro-rated over the period beginning January 1 in the year in which the Notice of Termination is given and ending on the Date of Termination.
Id. § 1.1. The "Adjusted Bonus" was defined as Kleinberg's "actually paid or actual target bonus (as applicable) for the relevant prior period." Id. § X.2.
On its face, the Agreement contemplated only a change-in-control at Enhance and not a change-in-control at Enhance's subsidiary, Singer. Because Kleinberg wanted the Agreement to apply to a change-in-control at either entity, Kleinberg allegedly sought and received verbal assurances from the then-President of Enhance that Kleinberg would be protected "in the event of a change-in-control at Singer, in the same manner, and to the same extent, as if there were a change-in-control at Enhance." Complaint ¶¶ 23-24.
Kleinberg resigned from Enhance and Singer in December 2000. See Letter from Brian Kleinberg to Elaine Eisenman, dated December 29, 2000 (annexed as Ex. E to Complaint). It was undisputed that his resignation constituted a "Termination Event" under the Agreement. Agreement § X.I 2, 17. Following the terms of the Agreement, the defendants calculated the bonus based not on Kleinberg's bonus in the year preceding the change-in-control at Singer, which took place in 2000, but rather on his bonus in the year preceding the change-in-control at Enhance, which took place in 2001. Complaint ¶ 55. Kleinberg's severance compensation package totaled more than $2.7 million. See Withholding Statement, dated April 2, 2001 (annexed as Ex. C to Complaint). Kleinberg's attorney contacted defendants in July 2001 and told them of the claimed "miscalculation of the monies due Mr. Kleinberg pursuant to the Agreement, [which resulted] in an underpayment . . . of approximately $437,500." Letter from Kenneth W. Taber to C. Robert Quint, dated July 5, 2001 (annexed as Ex B. to Affidavit of Kenneth W. Taber, dated March 10, 2003 (Docket #45)). The alleged miscalculation is based on Kleinberg's contention that the date of the change-in-control at Singer — not Enhance — should have been used to calculate his severance bonus. Id.: see Complaint ¶ 55.
In addition to the bonus just discussed, the Agreement separately required the defendants to make certain "Tax Reimbursement Payments" either directly to Kleinberg or into a "rabbi trust" for his benefit. Agreement § 1.5; see Complaint ¶ 57.
B. The Claims in the Complaint
In this action, Kleinberg advanced three main causes of action. First, he alleged breach of the Agreement by claiming that defendants improperly used the change-in-control at Enhance as opposed to the change-in-control at Singer to calculate his bonus and failed to make the tax reimbursement payments into the "rabbi trust." See Complaint ¶¶ 62-67. Next, Kleinberg claimed that defendants breached the Employment Letter by,inter alia, failing to set a target bonus, see Employment Letter at 1.See Complaint ¶¶ 68-73. Third, he advanced a claim for promissory estoppel based on the alleged oral promises that the Agreement would apply to a change-in-control at Singer, not just at Enhance. See id. ¶¶ 74-80.
C. The Court's Disposition of Plaintiffs Claims
As reflected in the RR and the Opinion subsequently adopting it, the Court granted the defendants' motion to dismiss all three of these claims. It held that Kleinberg's claim for the breach of the Agreement had to fail because the Agreement was clear on its face that it applied to a change-in-control at Enhance and not to a change-in-control at Singer. RR at *4-*5. The Court rejected any effort to introduce parol evidence to alter the explicit terms of the Agreement. Id. at *5. The Court held that there was no basis for requiring the defendants to set a "target bonus" since it would make no difference to the calculation of his severance. Id. at *5-*6. The Court also held that Kleinberg was not entitled to any additional payments with respect to the tax reimbursement payment provision. Id. at *6-*8.
Next, the Court rejected Kleinberg's second claim alleging breach of the Employment Letter. The Court held that the only breach claimed by Kleinberg in his opposition to the motion to dismiss — the failure to set a "target bonus," see Pl. 12(b)(6) Opp. at 19-21 — would afford him no relief anyway because even if it were set now, his bonus would remain unchanged under the Agreement. Id. at *9.
With respect to the claim for promissory estoppel, the Court held that, assuming arguendo that such a claim was permissible under New York law, Kleinberg could not have reasonably relied on any extra-contractual promises due to the existence of the written Agreement that contained a clause stating unequivocally that the Agreement could not be modified except in writing. Id. at*9-*11.
D. Kleinberg's Application for Attorney's Fees
Kleinberg's complaint also sought a declaratory judgment that he was,inter alia, entitled to his attorney's fees as provided by Section V of the Agreement. Complaint ¶¶ 81-84. The pertinent portion of Section V provides:
The Company shall pay all reasonable attorney fees and expenses incurred by the Executive in connection with, but not limited to, a bona fide dispute regarding the application of any and all the provisions under this Agreement, [or] the Executive's seeking to obtain or enforce any right or benefit provided under this Agreement. . . . Payment under this Section V shall be made within ten business days after delivery of the Executive's written request for payment accompanied by such evidence of fees and expenses incurred as the Company reasonably may require.
Agreement § V. The Court denied the defendants' motion to dismiss this portion of the complaint on the ground that Kleinberg's claims were not "bona fide" or "reasonable." RR at *11; see also Kleinberg, 240 F. Supp.2d at 263 ("premature to determine Plaintiffs claim for attorney's fees" because discovery and fact finding were "necessary to determine whether the attorney's fees requested . . . [were] bona fide and reasonable").
Discovery on this claim has concluded and Kleinberg has now filed an "application" for attorney's fees. He filed his application on March 10, 2003. See Memorandum in Support of Plaintiff Brian Kleinberg's Application for Attorneys' Fees, filed March 10, 2003 (Docket #44). Defendants filed their opposition on April 7, 2003. See Defendants' Memorandum of Law in Opposition to the Plaintiffs Application for Attorneys' Fees, filed April 7, 2003 (Docket #46) ("Def. Opp."). After Kleinberg replied to defendants' opposition, see Reply Memorandum in Further Support of Plaintiff s Application for Attorneys' Fees, filed April 29, 2003 (Docket #49) ("Reply Mem."), the matter was referred to the undersigned for a Report and Recommendation. By order dated July 23, 2003, the Court sought and received supplemental submissions from the parties further describing the nature of the fees being sought.
II. DISCUSSION
A. Governing Law
The Second Circuit has made clear that a party is entitled to have a jury decide whether it may recover attorney's fees pursuant to a contract, although the actual amount of such fees must be determined by the court. See, e.g., McGuire v. Russell Miller. Inc., 1 F.3d 1306, 1313 (2d Cir. 1993). In this case, however, both parties have fully briefed the application for attorney's fees without arguing that there is any factual issue that must be submitted to a jury. Moreover, even if either party had sought trial on the entitlement to attorney's fees, such a trial would not have been appropriate in this case inasmuch as the only dispute between the parties regarding Kleinberg's entitlement to fees relates to legal issues. Such issues may be appropriately decided only by a court. Accordingly, the Court will decide Kleinberg's application based on the written submissions of the parties.
New York law governs this dispute. See Agreement § IX. 3. New York adheres to the "American Rule," which provides that "'attorney's fees are incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule.'" Baker v. Health Mgmt. Sys., Inc., 98 N.Y.2d 80, 88 (2002) (quoting Hooper Assocs. v. AGS Computers. Inc., 74 N.Y.2d 487, 491 (1989)); accord Emerald Advisors. Inc. v. Incredibleart.com. Inc., 2001 WL 1670990, at *1 (S.D.N.Y. Dec. 28, 2001). Of great significance to this case, contractual provisions to pay attorney's fees under New York law must be "strictly construed." F.H. Krear Co. v. Nineteen Named Trs., 810 F.2d 1250, 1263 (2dCir. 1987): accord United States Fid. Guar. Co. v. Braspetro Oil, 226 F. Supp.2d 459, 462 (S.D.N.Y. 2002). This rule of construction is based on the notion that the payment of attorney's fees is in derogation of the normal presumption that each party will be required to bear its own fees. Cf Swiss Credit Bank v. Int'l Bank. Ltd., 23 Misc.2d 572, 574 (Sup.Ct. 1960) ("as . . . an agreement contrary to what is usual, specific language would be needed to show such an agreement") (cited inF.H. Krear Co., 810 F.2d at 1263). It is particularly appropriate to construe strictly a provision for attorney's fees that requires a victorious party to pay the attorney's fees of the losing party. This is because such an arrangement creates an incentive to engage in litigation that might not otherwise have been brought — or that might have been conducted differently — had the losing party been forced to bear the risk of paying its own fees.
B. Applicability of the Agreement
In the briefing on the motion to dismiss, the defendants raised the issue of Kleinberg's entitlement to attorney's fees. See Defendants' Motion to Dismiss the Second Amended Complaint, filed July 31, 2003 (Docket #26), at 17-18. At that time, the Court construed the defendants' submission as raising only the argument that Kleinberg could not prevail under Section V because the disputes in this case were neither "bona fide" nor "reasonable." See RR at *11; see also Kleinberg, F. Supp.2d at 263 (it is "necessary to determine whether the attorneys' fees requested in this case are bona fide and reasonable").
The defendants, however, have now expounded at length on an entirely different argument in opposition to the request for attorney's fees: they argue that Kleinberg's claims are not even within the contemplation of Section V because the claims in the complaint are not "under [the] Agreement" within the meaning of Section V. Def. Opp. at 5-11. Section V permits recovery of fees only for disputes "regarding the application of any and all the provisions under this Agreement, [or] the Executive's seeking to obtain or enforce any right or benefit provided under this Agreement." Agreement § V (emphasis added).
An examination of Kleinberg's claims shows that all of them stray far a field from the provisions, rights or benefits set forth in the Agreement. While Kleinberg denominated his first claim as one for "Breach of Change-in-Control Agreement," Complaint at 15, in fact the bulk of this claim related to his effort to introduce parol evidence outside of the Agreement in order to alter its terms. See RR at *4-*5. Thus, he pointed to an oral statement by the President of Enhance, Complaint ¶¶ 23-24; a handwritten notation by Kleinberg, coupled with another oral statement by the President, id. ¶¶ 25, 28; and an unanswered email from Kleinberg to the President, id. ¶ 27. All of these were alleged to have altered the terms of the actual Agreement. See id. ¶ 55; Memorandum in Opposition to Defendants' Motion to Dismiss the Second Amended Complaint, filed August 12, 2002 (Docket #27) ("PI. 12(b)(6) Opp."), at 4-7.
The Court is obligated to make a "strict construction" of Section V. Under such a construction, the attorney's fees provision cannot encompass Kleinberg's efforts to go outside the Agreement. In his first claim, Kleinberg never argued that the Agreement as written entitled him to the increased bonus he is seeking. Thus, he was not disputing the "application" of the actual language of the Agreement. Nor was he attempting to enforce a "right or benefit" that was provided to him in the written Agreement. Instead he was attempting to add a provision to the Agreement that did not exist there already: specifically, a provision that made the Agreement applicable to a change-in-control at Singer. The attorney's fees provision, however, did not contemplate that the defendants would be required to pay fees for an attempt to alter the terms of the Agreement the parties entered into. Instead, it contemplated paying fees where Kleinberg needed to resort to legal counsel to obtain a right under the Agreement itself. The fact that Kleinberg's effort, if successful, would have resulted in the Court awarding Kleinberg a bonus as calculated in the Agreement itself does not change this result. In the end, Kleinberg could have prevailed only if the Court were to ignore the actual terms of the Agreement.
The remainder of Kleinberg's claims fall outside Section V as well. His claim that a "target bonus" was required to be set was not based on any language in the Agreement itself but rather on the terms of his initial Employment Letter. See Complaint ¶ 55; Pl. 12(b)(6) Opp. at 19-21. While he contends that the failure to set the bonus had direct consequences for the payments he was to receive under the Agreement (a contention the Court rejected), this contention does not alter the fact that the claimed entitlement to have the defendants set the target bonus is based solely on the Employment Letter and thus falls outside the Agreement itself.
The same is true for his second cause of action, denominated "Breach of the Employment Letter." See Complaint ¶¶ 68-73. Obviously, Section V did not contemplate attorney's fees for claims made under the Employment Letter, which was completely separate from the Agreement and is not incorporated therein.
Kleinberg's remaining claim is for promissory estoppel. Complaint ¶¶ 74-80. This claim is based on the same extra-contractual statements that formed the basis for Kleinberg's attempt to introduce parol evidence to modify the actual Agreement. Such a claim falls outside the reach of Section V as the claim does not purport to dispute the application of the terms of the Agreement or enforce a right contained in the Agreement.
The only remaining claim in the case — but a small piece of Kleinberg's claims — relates to the alleged breach of the provision requiring the tax reimbursement payments to be made into the "rabbi trust." Complaint ¶ 57. Kleinberg's complaint, however, did not seek to require these payments to be made under the terms of the Agreement. Indeed, Kleinberg concedes that the Agreement to make these payments represented an illegal contract. Reply Mem. at 5. Thus, Kleinberg's complaint with respect to the tax payments did not seek to "enforce any right" under the Agreement itself within the meaning of Section V. Nor did it seek to dispute the application of a "provision under the Agreement" as he admits that application of the actual terms of the Agreement would have been an illegal act. Given the strict construction to be afforded Section V, it does not permit recovery of attorney's fees for this claim either. Conclusion
Kleinberg included in the complaint an allegation that the defendants did not timely make the severance payment. See Complaint ¶ 11. This allegation is based on the fact that the severance payment was made four days late. Id. ¶¶ 53-54. The claim amounts to $841. See Letter from Kenneth W. Taber, dated January 28, 2003 (Ex. A to Affidavit of Jon J. Kuster, dated April 7, 2003 (Docket #47)).
It is unclear if Kleinberg still wishes to pursue this claim for interest. If he does so desire, no final judgment should be entered until that claim is adjudicated. Any application for attorney's fees with respect to that claim should be made following the adjudication. Given the size of the claim, it obviously would support only a de minimis award of attorney's fees.
For the foregoing reasons, Kleinberg's application for attorney's fees should be denied.
PROCEDURE FOR FILING OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties have ten (10) days from service of this Report and Recommendation to file any objections. See also Fed.R.Civ.P. 6(a), (e). Such objections (and any responses to objections) shall be filed with the Clerk of the Court, with extra copies sent to the Honorable Richard M. Berman, 40 Centre Street, New York, New York 10007, and to the undersigned at the same address. Any request for an extension of time to file objections must be directed to Judge Berman. If a party fails to file timely objections, that party will not be permitted to raise any objections to this Report and Recommendation on appeal. See Thomas v. Arn, 474 U.S. 140 (1985).