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Lovink v. Guilford Mills Inc.

decided: June 21, 1989.

G. JAAP LOVINK, PLAINTIFF-APPELLEE,
v.
GUILFORD MILLS, INC., DEFENDANT-APPELLANT



Appeal from judgment of the United States District Court for the Southern District of New York (Daronco, J.) awarding appellee $5.2 million for breach of an employment contract. Reversed and remanded for retrial.

Van Graafeiland, Meskill and Miner, Circuit Judges.

Author: Van Graafeiland

VAN GRAAFEILAND, Circuit Judge

Guilford Mills, Inc. ("Guilford"), a North Carolina textile knitting company, appeals from a $5.2 million judgment of the United States District Court for the Southern District of New York which followed a jury trial before the late District Judge Richard Daronco and a jury. We reverse and remand for retrial.

For several years prior to 1983, appellee, G. Jaap Lovink, was president of Verosol B.V., a wholly-owned American subsidiary of a Dutch company named Blydenstein Willinck and a major producer of pleated window shades. In 1983, because of "[differences] of opinion, how to manage the business of the company in this country," Lovink resigned. Following his resignation, he hoped to form a business of his own, a corporation with only a select few outside shareholders. Instead, on February 1, 1984, he entered into an employment contract with Guilford. The $5.2 million judgment in favor of Lovink is based upon alleged breach of this contract.

The contract provided that Guilford would create a new window treatment division and that Lovink would be president and managing director of the division. The contract was for a base term of five fiscal years ending June 30, 1989, but this term was contingent upon the division meeting certain annual goals. The contract contained a five-year projection of anticipated sales and income and provided that, if in any year the sales or operating income was less than 85 percent of the projected figure, Guilford might terminate Lovink's employment. The contract also provided for a five-year renewal term that would go into effect automatically if division sales during the initial five-year term exceeded $70 million and operating income, averaged over the five-year period, exceeded 18 percent of sales. Lovink was to receive a base salary of $100,000 plus incentive compensation equal to 1 percent of net sales and 7 percent of pretax operating income, with an annual overall ceiling of $750,000.

As Lovink reasonably might have anticipated, running a division of a large company such as Guilford presented numerous problems that would not vex a small independent corporation. Plant facilities and equipment had to be allocated, bookkeeping and billing practices coordinated, major expenditures approved, quality maintained, and goodwill protected. Difficulties and disagreements inherent in the solution of these problems almost inevitably resulted in claims by Lovink that Guilford was in breach of his employment contract. A few examples will suffice. Guilford refused to market flame-retardant material called "Decopleat" because its colors faded in strong sunlight. Lovink claimed that several colors of Decopleat had better light fastness than the product he had sold for Verosol. He asserts, therefore, that Guilford's refusal to market Decopleat constituted a breach of contract. Guilford decided to use a yarn manufactured by one company rather than a yarn manufactured by another. Guilford's expressed reason for doing this was that the second company's yarn varied in width and often snagged during the knitting process, creating "an abnormal high amount of seconds." Lovink claimed that this was a breach of his contract. Guilford refused to authorize the purchase of a second ninety-inch pleating machine because the first ninety-inch machine, whose purchase Guilford had authorized, was not being fully utilized. Again, breach of contract is alleged. The foregoing examples are not all-inclusive; however, they are typical. It is upon acts such as these that Lovink's breach of contract claim largely is based.

On January 23, 1985, Lovink sent a memo to the Chairman of Guilford's Board presenting him with the following four options for future conduct:

1. The window shade division is closed down, and the inventory and equipment are sold.

2. Lovink resigns.

3. The window shade division is continued with Lovink in "full control" and with production and marketing operations independently and physically separated from Guilford.

4. Feasibility of making the window shade division a joint venture with investors, competitors or customers is explored.

We do not know whether Lovink anticipated that Guilford would accept his offer to resign. His diary for January 31, 1985 contains the notation "Battle eager, can they do without Lovink empire?" Regardless of what Lovink anticipated, his offer to resign was accepted, and he resigned. His contract provided that, in the event of voluntary termination, he would receive his salary to the date of termination and prorated incentive compensation. He was offered $75,000 to reflect these amounts at the time he resigned, but he refused it. He sued instead for breach of contract.

The district court agreed, and correctly so, with Guilford's contention that Lovink's resignation was not the product of unlawful duress and refused to submit this issue to the jury. However, the district court then proceeded to treat the resignation almost as if it hadn't occurred, stating "if the jury believes the plaintiff's claim for breach of contract, he had no alternative but to leave." This broadbrush treatment of the nature and effect of Guilford's alleged breach of ...


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