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MURPHY v. GUTFREUND

April 3, 1984

VINCENT B. MURPHY, JR., Plaintiff,
v.
JOHN H. GUTFREUND, RICHARD J. SCHMEELK, GEDALE HOROWITZ, RICHARD G. ROSENTHAL, J. IRA HARRIS, THOMAS W. STRAUSS and WILLIAM J. VOUTE, Liquidators of Salomon Brothers Holding Company and Salomon Brothers, Defendants.



The opinion of the court was delivered by: LASKER

LASKER, District Judge

This suit arises out of the buyout of Salomon Brothers in 1981 by Phibro Corp. Plaintiff Vincent B. Murphy, until 1980 a former Salomon Brothers general partner, has brought this action for the alleged breach of an annuity agreement by defendants under which plaintiff was to receive $125,000 per year for ten years. Defendants, Liquidators of Salomon Brothers Holding Company ("SBHC") and of Salomon Brothers, move to dismiss the complaint for failure to state a claim upon which relief can be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. *fn1" For the reasons set forth below, defendants' motion is granted in part and denied in part.

 I.

 The relevant facts alleged in the complaint are that from 1967 to 1980 Murphy was a general partner of Salomon Brothers. In late 1979, he began to consider leaving Salomon and in early 1980 spoke about the possibility to defendant John Gutfreund, at that time managing partner of Salomon and head of its Executive Committee. Later in 1980, Murphy initiated discussions with Merrill Lynch & Co. about his becoming a Senior Advisor to that organization's residential real estate and mortgage insurance businesses. Murphy told Gutfreund about these discussions to see whether Salomon Brothers would object to his association with Merrill Lynch. Murphy had to receive the approval of the Salomon Brothers' Executive Committee before he could accept the Merrill Lynch position. Under the terms of the non-competition provision in the Salomon Brothers partnership agreement, former general partners of Salomon Brothers were barred from competing against Salomon Brothers Holding Company or its subsidiaries by engaging in "a securities, financial or kindred business" for two years after they terminated their status as general partners unless they received approval from the Executive Committee. Gutfreund subsequently informed Murphy that the Executive Committee would raise no objections to his association with Merrill Lynch because the Committee believed that he would not be competing with Salomon.

 In reliance upon this representation, in October 1980 Murphy resigned as a general partner to become a Senior Advisor to Merrill Lynch's residential real estate and mortgage insurance businesses. Murphy held that position until February 1982 when he became president of Merrill Lynch Capital Resources, Inc. In September, 1980, the Executive Committee had voted to make Murphy a limited partner effective at the time of his resignation as a general partner in recognition of Murphy's contribution to Salomon Brothers. *fn2"

 In early August of 1981, Phibro agreed to purchase the assets of Salomon Brothers for approximately $550 million. Pursuant to the Plan of Dissolution adopted by the Salomon Brothers Executive Committee at that time, all former general Salomaon partners who had become limited partners were to receive an annuity of $125,000 per year for ten years provided that they signed an agreement prohibiting them from competing with Salomon Brothers, Inc., the new Phibro entity, and releasing Salomon Brothers, SBHC, and its partners from any and all claims arising out of or relating to the dissolution.

 On August 11, 1981, Murphy discussed with Gutfreund whether, in light of his work for Merrill Lynch, the non-competition provision in the annuity agreement would apply to him. While Gutfreund stated that he thought that Murphy would be eligible to receive the annuity benefits, he referred Gutfreund to Allan Sperling, Salomon Brothers' attorney. *fn3" Sperling adopted a different position. He stated that Murphy's position with Merrill Lynch might put him in competition with Salomon Brothers, SBHC, or Salomon Brothers, Inc. *fn4" Sperling subsequently drafted a letter on August 19, 1981 stating that all former general partners who were then limited partners and who wished to accept the proposed annuity would have to execute the annuity agreement.

 On October 1, 1981 Salomon Brothers and SBHC were dissolved and were succeeded by the SBHC Liquidating Partnership. The members of the Salomon Brothers Executive Committee became the liquidators of SBHC on that date and they are the defendants in this suit. On October 6, 1981, Murphy received two unsigned copies of the annuity agreement which provided for payment of the first installment of the annual annuity on or about January 4, 1982. Murphy signed both copies and returned them to the SBHC Liquidating Partnership's attorneys. On December 30, 1981, Sperling contacted Murphy to determine whether he still held his position with Merrill Lynch. When Murphy answered that he did, Sperling stated that it was his clients' position that Murphy's work for Merrill Lynch violated the non-competition clause in the annuity agreement. Murphy said he believed his activities for the real estate and mortgage insurance businesses of Merrill Lynch & Co. were not competitive with any business of Salomon Brothers, Inc. Notwithstanding this disagreement between the parties, on December 31, 1981 a copy of the annuity agreement bearing the signature of Donald M. Feurstein, representing Salomon Brothers and SBHC, was delivered to Murphy's office.

 The first payment under the annuity agreement was due on January 4, 1981. When Murphy did not receive the remittance his attorneys wrote Gutfreund demanding payment under the terms of the annuity agreement. By letter of January 20, 1982, from the liquidating partnership, Murphy was informed that he was not entitled to payments under the agreement because since October 1, 1981 he had been employed by a competitor of Salomaon Brothers, Inc.

 Murphy commenced this action on April 15, 1982 to enforce the agreement in his favor. His complaint alleges that: defendants have breached the annuity agreement (count 1); the non-competition provision in the annuaity agreement is impermissibly overbroad, constitutes an unreasonable restraint of trade and is contrary to public policy (count 2); defendants' repudiation and non-performance of the annuity agreement is a breach of the agreement which entitles him to the total amount due under the agreement (count 3); Murphy detrimentally relied upon defendants' assurances that his activities for Merrill Lynch were not in competition with the business of Salomon Brothers or of Salomon Brothers, Inc. (count 4); defendants are estopped from claiming that Murphy's activities violate the annuity agreement because they signed the agreement fully aware of his employment and intent (count 5); defendants have breached a fiduciary duty which they owed to Murphy (count 6); and that defendants have violated Section 10(b) of the Securities Exchange Act of 1934, and SEC Rule 10b-5 (count 7). Defendants move to dismiss the complaint on the ground that it fails to state a claim upon which relief can be granted.

 II.

 Count 1 - Breach of the Annuity Agreement

 Defendants make several arguments in support of a dismissal of the fist count of the complaint which alleges that they have breached the annuity agreement. The one argument which we consider dispositive is their assertion that plaintiff was aware of defendants' interpretation of the non-competition provision in the annuity agreement before he entered into the agreement with them. They point out that Allan Sperling advised Murphy on August 11, 1981 that his position with Merrill Lynch would fall within the annuity agreement's non-competition provision and that in executing the agreement in October 1981 Murphy fully understood that his continued employment for Merrill Lynch would render him ineligible to receive payments.

 Murphy argues that the annuity agreement should be enforced against the defendants because they were fully aware at the time they entered into the agreement that he considered the scope of the non-competition clause to be so limited as not to apply to his activities as an employee of Merrill Lynch. Because they chose to sign the agreement on those terms, Murphy asserts that they are bound by that understanding.

 Whether Murphy's allegation of a breach of the agreement is sufficient turns upon which party is entitled to a favorable interpretation of the non-competition provision. We are guided by Judge Lumbard's view that:

 "It is well settled that if two parties give different meanings to the words of a purported agreement, the party who sues for enforcement in accordance with his own meaning has the burden of proving that the other party knew what the claimant's meaning was and that the claimant did not and had no reason to know that the other party gave the words a different meaning." *fn5"

 In this case, Murphy seeks to enforce the terms of the annuity agreement in his favor, based upon his understanding that his work for Merrill Lynch's real estate and insurance businesses did not preclude his receipt of the annual annuity. As the facts discussed above indicate, however, defendants, through their attorney Allan Sperling, had stated to Murphy, despite Murphy's protests to the contrary, that his employment might come within the terms of the non-competition provision. Accordingly, since the complaint itself asserts, at paragraph 25, that plaintiff's activities at Merrill Lynch might constitute competition with Salomaon, the anjuity agreement must be construed in fairness in favor of the defendants. *fn6" Accordingly, defendants' motion to dismiss the first count of the complaint is granted.

 III.

 Count 2 - The Unreasonableness of the Annuity Agreement

 The second count of the complaint alleges that the annuity agreement is impermissibly overbroad, constitutes an unreasonable restraint on trade, and is contrary to public policy. Defendants move to dismiss on two grounds. They argue that an inquiry into the reasonableness of the annuity agreement's non-competition provision is not warranted in this instance because the provision does not restrain trade but only affords Murphy the "choice" of accepting the annuity or working for a competitor.As a result, they assert that this case falls within the "employee choice" doctrine which holds that "[u]nder New York case law, a contract which affords an ex-employee a choice between working for a competitor (and thereby foregoing divested benefits) or retaining those benefits by not working for a competitor is not an unreasonable restraint of trade." *fn7"

 Defendants note that the Second Circuit in Bradford v. New York Times Co.,8 decided in 1974, declined to hold that New York had adopted the "employee choice" doctrine because it had not been discussed in any New York Court of Appeals case subsequent to that court's affirmation without opinion of a 1958 Appellate Division case. *fn9" Defendants argue, however, that the New York Court of Appeals has reaffirmed the vitality of the doctrine in Post v. Merrill Lynch, Pierce, Fenner & Smith,10 discussed below.

 Defendants' second ground for dismissal is that the payments to be made under the annuity agreement to Murphy were a gift. Accordingly the terms of the annuity cannot be held to be unreasonable because the general partners of Salomon Brothers had no obligation to make any payments at all to Murphy.

 Murphy contends that he is entitled to challenge the reasonableness of the non-competition provision because the Second Circuit's ruling in Bradford continues to apply. Murphy asserts that proof at a trial would show that he was encouraged by Gutfreund to leave Salomon Brothers, that he received explicit assurances from the Salomon Brothers' Executive Committee that his position with Merrill Lynch was not in competition with Salomon Brothers, and that he would not be prejudiced by taking the position. As a result, Murphy claims that the annuity agreement's non-competition provision created a "Hobson's choice" for him. He could either accept the payments and quit Merrill Lynch or work for Merrill Lynch and forego the annuity. Murphy argues that a true "employee choice" would have existed for him had defendants made known their position about his work for Merrill Lynch at the time he was considering leaving Salomon Brothers.

 Murphy further argues that the payments were not a gift because the annuity agreement explicitly provided that he released SBHC, Salomon Brothers and its partners from "any and all claims which [Murphy, in his capacity as a] Former General Partner at any time had, has, or may have . . . arising out of or in any way relating to the dissolution, liquidation or termination of SBHC or Salomon Brothers." *fn11" It follows, according to Murphy, that the annuity payments were the consideration for the release and support the finding of valid contract. Finally, Murphy asserts that the reasonableness of the annuity agreement's non-competition provision is an issue of fact and that defendants' motion should be denied.

 We agree with Murphy that his release of defendants and other members of Salomon Brothers from exposure to liability constitutes adequate consideration to reject defendants' contention that the annuity payments are a "gift." However, determining whether the "employee choice" doctrine applies in this instance requires a more detained analysis.

 In Bradford v. New York Times Co., Bradford challenged the reasonableness of the non-competition provision embodied in the New York Times Company's Incentive Compensation Plan which it provides for its executives. The Court of Appeals of this Circuit found that the New York courts had not adopted the doctrine because Kristt v. Whelan,12 a 1958 summary affirmance of an "employee choice" case, by the New York Court of Appeals had not been followed or applied in any of its subsequent decisions. *fn13"

 Since Bradford, the New York Court of Appeals has again considered the Kristt rule in Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,14 in which it held that the "employee choice" doctrine does not apply in instances when an employee has been discharged involuntarily and then goes to work for a competitor. Post and Maney were account executives at Merrill Lynch for many years. Following the involuntary termination of their employment in 1974, they began working for a Merrill Lynch competitor. Merrill Lynch subsequently informed Post and Maney that they had forfeited all of their rights in the company-funded pension plan because the plan ...


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