New England Biz Law Update
Lawyers who recently won a $5 million jury verdict in a breach-of-contract suit in the Massachusetts Business Litigation Session say their case was bolstered when the defense changed its strategy on the eve of trial, making available crucial evidence that had previously been privileged.
The case revolved around the dismissal of David Landrith, a co-founder of the Internet start-up company One to One Interactive. Landrith claimed under the terms of his contract he was owed $3.5 million if he were let go from One to One.
Landrith’s former employer sued, seeking a declarative judgment that the buyout language in the contract was not enforceable. Landrith then countersued, seeking the $3.5 million he said he was owed.
In 2004, summary judgment in the case was awarded in Landrith’s favor, but the company declared bankruptcy. Landrith, as plaintiff-in-counterclaim, then pursued the claim against his former business partners as individuals.
Landrith’s attorney, Jeffrey J. Upton of Boston – who tried the case alongside his colleague, Daniel J. Dwyer – said the other founders who ousted Landrith initially argued certain documents in the case were subject to attorney-client privilege because one of the defendants was the in-house counsel for One to One.
“At the 11th hour, they decided to raise advice-of-counsel as a defense,” Upton said. “So, after having withheld all these attorney-client privileged documents, they ended up waiving that privilege [and] had to turn [the e-mails] over.”
Upton said the e-mails were sent during a “very critical time period – between their discovery that putting this $3.5 million obligation on their financial statements would impact their ability to borrow money without personal guarantees, and the time period four weeks later when they decided to renege on the deal.”
Upton added that “curiously, the e-mails did not contain any statements from the in-house counsel to the effect of, ‘Don’t worry, the agreement with Landrith is not enforceable.’ Rather, it shows an attempt to scramble to come up with a creative way to structure the deal so the full liability wouldn’t show on the transfer sheet, and they could get non-recourse financing.”
The attorney for the defendants-in-counterclaim, Kirk W. Griffin of Boston, declined to comment.
‘Actual malice’
The case was among the first contractual disputes to go to trial since the Supreme Judicial Court’s decision in Blackstone v. Cashman earlier this year. In that case, the court found that a corporate director who was sued for tortious interference with an advantageous economic relationship with an employee was entitled to a jury instruction that he could not be found liable absent proof of “actual malice,” instead of the lower standard of “improper means.”
However, Judge Allan van Gestel found that Blackstone did not apply to Landrith’s claim against his former business partners.
Van Gestel “looked at this a few times and found that the SJC was reaffirming an existing line of cases, not creating new law,” said Upton.
The judge declined to give the instruction because he found that “an actual malice instruction is only required in the context of a claim [over an] employment contract,” Upton added. “This [claim] was redemption of ownership, so he did not give the actual malice instruction.”
Because his client prevailed in seeking damages on both counts of fiduciary and intentional interference, Upton said he is confident the verdict will withstand any potential appeals over the jury-instructions issue.
Even though van Gestel had already ruled for Landrith in the summary judgment claim against the corporation, Landrith sought a jury trial because it would be a more expedited process and a more appeal-proof verdict, his attorneys noted.
“There was a palpable wrongness to what was done to David, and we felt that a jury would be sympathetic,” said co-counsel Dwyer.
Jury told of bankruptcy
The only live witnesses who testified at trial were Landrith and his four former business partners, according to Upton. (Deposition statements from a former in-house counsel and an auditor were also read.)
While cross-examining the ex-business partners, Upton said he and Dwyer tried to point out alleged inconsistencies between their depositions and the documents in the case.
“We cross-examined them using their deposition testimony and their e-mails that we had from the key time period between the forming of this contract and the date they reneged on it,” said Upton. “Those documents told a very clear and unambiguous story. By the time the [former partners] were deposed, they’d come up with a different story, and by the time they took the stand at trial, they’d come up with a variation on that different story.”
Upton said he tried to prove that “the story they were telling of there being no enforceable agreement to buy [Landrith] out was something they made up after the fact, and the testimony was inconsistent with their documents, with the deposition testimony and, in a number of instances, inconsistent with each other.”
In contrast, Dwyer said the Landrith “had a very good memory of events and told the same story from day one.”
At the outset of the trial, van Gestel allowed a motion by Landrith’s counsel to keep out evidence of references to One to One’s bankruptcy.
“The problem with succeeding [with the motion] is it leaves the question in the jury’s mind of why [our client is] proceeding against individuals when he’s got a judgment,” said Dwyer. “The fact of the judgment was evidence. … So it’d be only natural to wonder why are we bothering with a lawsuit against the individuals.”
But when the subject of damages arose, the jury learned that Landrith had received $40,000 from the bankruptcy estate. Van Gestel then found that to keep the bankruptcy from the jury would be too confusing.
“At that point, it was a relief because it gave us an opportunity to answer the question we knew would be on the jurors’ minds,” said Upton. The judge allowed “just enough testimony to explain the circumstances of the [bankruptcy estate] settlement, as opposed to allowing testimony on why the company went into bankruptcy when it was irrelevant to either the liability or the damages.”
The challenge of presenting a complex business dispute to a jury was made easier by the jury’s makeup, which included a mutual fund consultant, a bank vice president and an accountant, Landrith’s lawyers noted.
The attorneys said the verdict is the latest twist in an extended, acrimonious dispute in which the remaining business partners cut off the interest payments that accounted for Landrith’s income, as well as the issuing of a K-1 form that caused him to be hit with a too-high tax bill.
Asked whether the verdict is collectible, Dwyer said he doubted that any of the former business partners had $5 million, plus $2.5 million in interest, “tucked under their mattresses. Clearly, if all the $7.5 million is collected, it’ll be a struggle. We’re certainly confident that these [former partners] have the wherewithal to cover a substantial portion of the judgment.”
The decision, Upton said, shows that “when business owners and managers choose the path that these [former partners] did, the corporation does not act as a shield if they are personally involved.”
