A company that prevailed in a lawsuit brought by its former general counsel could not recoup litigation costs in the absence of a contractual clause, rule or statute specifically providing for that remedy, the 1st U.S. Circuit Court of Appeals has ruled.

The company argued that, by filing suit, the general counsel violated a general release of claims he had executed at the time of his termination.

But the 1st Circuit disagreed.

“An interpretation of the release that would deprive [the executive] of any recourse in the
event of violation of an unliquidated obligation on the part of the Company is simply untenable,” Judge Juan R. Torruella wrote on behalf of the court. “We also agree that … [a] release is an affirmative defense [but] does not supply a defendant with an independent claim for breach of contract.”

However, the 1st Circuit affirmed a summary judgment for the company on the underlying claim, finding that the company had, in fact, paid the general counsel all he was entitled to under the severance agreement.

The 26-page decision is Bukuras v. Mueller Group, LLC.

Not off the hook

Jeremiah P. Sullivan of Roslindale, Mass., who represented the plaintiff general counsel, said the ruling on the counterclaim should serve as a warning to corporations that “when they think by putting together a fancy release they’ll get off the hook entirely, they’d better think again.”

At the same time, Sullivan said, he was disappointed with the court’s ruling on his client’s underlying claim alleging breach of his severance agreement.
The agreement had entitled the client, upon termination, to 18 months’ salary as well as 150 percent of “the bonus” he had received the previous fiscal year.

But the employer, in calculating the executive’s severance pay, did not include as part of the previous year’s bonus a one-time “transactional bonus” for helping the company get sold. The court found that the plaintiff was not entitled to have the transactional bonus factored into his severance pay because he received it during the same fiscal year as his termination, and because the parties intended the phrase “the bonus” to refer only to his annual bonus.

“We think the clear language of the agreement shows that [the plaintiff] was entitled to [have the transactional bonus calculated as part of the severance package],” Sullivan said.

Christopher Cole of Manchester, N.H., who represented the employer, said he was pleased with the court’s ruling on the underlying severance claim.

“The court understood what the parties intended when the contract was executed in 2003 —
that the word ‘bonus’ in the severance provision of the [employment agreement] meant the ‘annual bonus’ provided for in the annual compensation provisions,” he said.

With respect to the counterclaim, Cole said he was disappointed that his client could not collect litigation costs, given the time and expense it had incurred defending claims “that never should have been brought.”

Meanwhile, in light of the ruling, Cole suggested that employers seeking to retain the right to sue for damages in the form of litigation costs incurred defending released claims include both an affirmative “covenant not to sue” and an express provision permitting such recovery in the release agreement itself.

“Without that kind of language, all the party receiving the release has bargained for is an affirmative defense, not a contractual remedy,” he said.

Severance dispute

In August 2000, the defendant, Mueller Group LLC, hired plaintiff George Bukuras to serve as the company’s general counsel. The defendant’s offer included an executive severance policy.

Two years later, the plaintiff and the defendant executed a new employment agreement,
which provided a severance package worth 18 months’ salary plus 150 percent of “the bonus paid or payable … for the fiscal year immediately preceding the fiscal year in which termination occurs.”

The plaintiff also executed a general release of claims against the defendant as consideration for the severance agreement.

The company was sold at auction in June 2005, subject to antitrust review by the Federal Trade Commission.

Meanwhile, the board passed a resolution that month setting aside a pool of up to $10 million for a “transaction bonus” to personnel instrumental in closing the deal, as an incentive for them to remain with the defendant company until the merger was complete.

The plaintiff, who was part of that group and who apparently expected to be terminated after the deal went through, anticipated receiving $1 million as his share of the bonus.

In September 2005, the FTC approved the merger, which closed on Oct. 3, the first business day of fiscal year 2006. A month later, the plaintiff was terminated without cause.

The defendant gave the plaintiff a severance payment of $1,040,700 in May 2006, reflecting 1.5 times his annual salary and 1.5 times the annual bonus he had received the prior fiscal year. It did not incorporate his $1 million transaction bonus into the calculation of the severance payment.

In February 2007, the plaintiff sued the defendant in U.S. District Court in Boston, alleging breach of contract based on the company’s failure to include the transaction bonus in calculating his severance pay.

The defendant then filed a counterclaim, alleging that the plaintiff breached his release of claims by filing his action. The defendant sought litigation costs incurred defending the plaintiff’s lawsuit.

Judge Douglas P. Woodlock granted summary judgment for the defendant on the plaintiff’s underlying claim. However, he granted summary judgment for the plaintiff on the counterclaim.

No separate cause of action

On appeal, the 1st Circuit held that the plaintiff’s underlying claim regarding his severance payment was outside the scope of the release he had signed because the precise amount of the severance payment had not been liquidated when the plaintiff signed the release in 2003.
“Bukuras’s claim for breach of the Severance Provision alleged that the Company failed to pay him the full benefits he was promised in consideration for signing the release,” Torruella said. “As the district court noted, Mueller’s proposed interpretation would permit the Company to violate the terms of his employment contract by paying him less severance than he was due.”

Such an interpretation would deny the plaintiff any recourse should the defendant violate an unliquidated obligation, the judge said, adding that such a situation was “simply untenable.”
Thus, the 1st Circuit found, the release did not prevent the plaintiff from bringing a “good faith challenge” to the company’s interpretation of its obligations under the severance agreement.
The 1st Circuit also found that the defendant had no cause of action in the first place, holding that a release may be an affirmative defense, but does not provide a defendant with an independent basis for a breach-of-contract claim.

Meanwhile, the court found, “under the American Rule, which is followed in Massachusetts, attorneys’ fees and costs are generally not recoverable by a prevailing litigant in the absence of an explicit contractual provision or other applicable rule or statute.”

And though there was no Massachusetts case directly on point, “the vast majority of jurisdictions adhering to this Rule do not permit a litigant pursuing claims for breach of a release to recover attorneys’ fees and costs as damages in the absence of a contractual clause, rule or statute specifically providing for that remedy,” Torruella said. “We conclude that Massachusetts courts would also take this view.”

Eric T. Berkman, an attorney and formerly a reporter for Massachusetts Lawyers Weekly, is a freelance writer.