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HERMANOWSKI v. ACTON CORP.

August 10, 1983

CHARLES HERMANOWSKI, Plaintiff, against ACTON CORPORATION, Defendant.


The opinion of the court was delivered by: GLASSER

FINDINGS OF FACT AND CONCLUSIONS OF LAW

GLASSER, United States District Judge:

 This is an action for breach of contract. The jurisdiction of the Court is based on diversity of citizenship. The case was tried to the Court without a jury and the evidence adduced together with the facts to which the parties stipulated established the following.

 On March 19, 1973, the parties entered into a contract by the terms of which the plaintiff was employed as Chairman of the Board, President and Chief Executive Officer of the defendant at a salary of $65,000 per year. The contract was to terminate on December 31, 1976.

 On April 11, 1975 a special meeting of the defendant's Board of Directors was convened at the home of the plaintiff. The minutes of that meeting received in evidence (Pl. # 2) reflect that the plaintiff indicated his belief that it would be in the defendant's best interests if he resigned. After extensive discussion, the Board duly adopted a resolution accepting the plaintiff's resignation and in consideration of the termination of his employment contract also resolved to pay him $25,000 and to grant him a five year non-qualified stock option to purchase 50,000 shares of the defendant's common stock at $2.00 per share. A holographic agreement was then prepared by defendant's counsel and executed by the plaintiff and by an officer of the defendant on its behalf. The portion of that agreement which gave rise to this lawsuit provided that: "As soon as possible after the execution hereof you [defendant] shall issue to me [plaintiff] a five year non-qualified stock option for the purchase of 50,000 shares of [the company's] common stock (unregistered) at $2.00 per share. Said option shall be under the terms of your 1972 non-qualified stock plan."

 At the time of the execution of that agreement the defendant had two stock option plans. One was a qualified plan which provided that the option to purchase stock in accordance with its terms automatically expired upon the termination of the option holder's employment or his death. The other was a non-qualified plan by which option rights may be terminated at the election of the company when the employment relationship ended, or at any time within one year by a notice of termination or on 30 days' notice after the expiration of one year.

 The events which followed that April 11, 1975 meeting need merely be recited. Seven months later, on December 12, 1975, after numerous requests, the defendant mailed to the plaintiff two copies of a non-qualified stock option certificate which bore the date April 12, 1975. The certificate recited the cancellation provision summarized above. The plaintiff executed the certificates and after the words, "Agreed to" above his signature, typed in the following: "with the proviso that said option is non-cancellable." One copy of the certificate as thus executed was returned to the company with a covering letter dated December 17, 1975 in which the plaintiff unequivocally stated that the cancellation provision in the certificate was invalid and that the option was non-cancellable.

 The defendant made no response to the plaintiff's assertion of non-cancellability until June 16, 1976 when, by letter from Samuel Phillips, the President and Chairman of the Board of the defendant company, the plaintiff was advised that the defendant regarded the plaintiff's stock option as cancellable and, by letter dated June 23, 1976, notified the plaintiff that his option would terminate upon the expiration of 30 days.

 The plaintiff rejected the defendant's view of the cancellability of his stock option by letter to Mr. Phillips dated July 5, 1976. Receiving no response, he wrote the virtually identical letter to Mr. Phillips again on September 8, 1976. No response was made to that letter either and there was no communication between the parties until on September 28, 1979 the plaintiff forwarded to the defendant a bank check in the sum of $10,000 and requested the delivery of 5,000 shares of the defendant's common stock in partial exercise of his option. Six weeks later, the defendant returned the check to the plaintiff by letter dated November 9, 1979 which read in part: "After searching the records of this corporation, it has been determined that you have no exercisable stock option." This action followed soon thereafter.

 The plaintiff contends that the reference to the non-qualified plan in the agreement of April 11, 1975 was a matter of technical necessity for if the option he obtained was pursuant to the qualified plan his option would automatically expire simultaneously with the execution of the agreement which terminated his employment -- a consequence obviously not intended. That consideration and that consideration alone prompted the reference to the non-qualified plan.

 The defendant's contention is that the reference to the non-qualified plan incorporated all the terms of that plan, including those dealing with the cancellation or termination of the option.

 The interpretation of a writing being a matter for the Court, Gitelson v. Du Pont, 17 N.Y.2d 46, 268 N.Y.S.2d 11, 215 N.E.2d 336 (1969), I have no difficulty in deciding that the reference to the non-qualified stock option plan in the agreement of April 11, 1975 was made in the belief that it was technically necessary for the reasons already explained and not for the purpose of incorporating by reference all the terms and conditions of that plan. Given the circumstances surrounding its execution, the agreement of April 11th is "instinct with an obligation" of the company to honor the plaintiff's option whenever he chose to exercise it during the ensuing five years. To hold otherwise would require me to believe that the plaintiff, a sophisticated and experienced business man who was President, Chairman of the Board and Chief Executive Officer of a public corporation, released his rights under an unexpired employment contract on which he would receive approximately $100,000 for $25,000 plus an illusory stock option.

 That the significance of the reference to the stock option plan may be fairly characterized as ambiguous is eloquently attested to by the fact of this law suit and by the diametrically opposite interpretations given to that reference by the parties. Parol evidence of the circumstances leading up to, and attending, the execution of the April 11th agreement is, therefore, clearly admissible to explain the doubtful meaning. Petrie v. Trustees of Hamilton College, 158 N.Y. 458, 464, 53 N.E. 216 (1899); J. Prince, Richardson on Evidence, § 626 (10th ed. 1973); J. Calamari and J. Perillo, Contracts, p. 125(2d Ed. 1977); E. Farnsworth, Contracts, pp. 501-507. Accordingly, testimony was received from Abraham Mamber, who was a director of the defendant company and present at the April 11th meeting. He testified that he suggested that stock options be given to the plaintiff in consideration of the termination of the employment contract. He stated that the reasons for his suggestion were that the defendant was cash-poor at the time and granting stock options would be an inexpensive way of settling the contract and still enable the plaintiff to participate in the future of the company. He recalled assurances to the plaintiff that the option was for the full five years and that it was his understanding and the intention of the parties that the option was non-cancellable.

 The testimony of Mr. Seymour Koehl was also received. He, too, was a director of the defendant company and present at the April 11th meeting.He proposed the resolution of the board which authorized the stock option granted to the plaintiff and he, too, testified that the ...


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