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REEVES v. CONTINENTAL EQUITIES CORP.

March 14, 1991

ALFRED P. REEVES, PLAINTIFF,
v.
CONTINENTAL EQUITIES CORP. OF AMERICA, AND CONTINENTAL CORP., DEFENDANTS.



The opinion of the court was delivered by: Kevin Thomas Duffy, District Judge:

MEMORANDUM & ORDER

Plaintiff Alfred P. Reeves originally filed this action on June 23, 1989, asserting five claims for: (1) wrongful discharge under the federal securities laws; (2) wrongful discharge in breach of an alleged implied contract of employment; (3) severance benefits under New York law; (4) severance benefits accrued under the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. § 1001 et seq. ("ERISA"); and (5) unreimbursed business expenses under New York law. Defendants Continental Equities Corporation of America, and Continental Corporation ("Continental") were granted summary judgment on the first and fourth claims, arising under federal law, and the remaining claims were dismissed for lack of pendent jurisdiction. The Second Circuit affirmed the dismissal of the first claim based on lack of standing to assert federal securities law violations.*fn1 It vacated and remanded for further findings claims brought under the purview of ERISA, because a determination was made that issues of fact existed which were to be resolved pertaining to the reasons why Reeves was discharged from Continental's employ. No mention was made by the Second Circuit regarding the pendent state claims. Reeves v. Continental Equities Corp., 912 F.2d 37 (2d Cir. 1990).

On October 5, 1990, Reeves served an Amended Complaint claiming: (1) wrongful discharge under the federal securities laws; (2) severance benefits accrued pursuant to ERISA;*fn2 (3) wrongful discharge in breach of an employment contract under New York law; (4) defamation;*fn3 and (5) unreimbursed business expenses. Additionally, Reeves makes a demand for a jury trial and requests punitive or exemplary damages as to all claims. Continental now moves pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss Reeves' third, fourth and fifth claims for failure to state a claim upon which relief may be granted. In the alternative Continental seeks dismissal of Reeves' three state law claims on the ground that the factual assertions therein are unrelated to the sole remaining federally based claim for relief, i.e. ERISA, and thus no basis for the exercise of pendent jurisdiction exists. Additionally, Continental moves for an order pursuant to Fed.R.Civ.P. 12(f), striking: (1) Reeves' jury demand as to his second claim; (2) his claim for punitive or exemplary damages as to his second and third claims; and (3) his entire first claim based on the Second Circuit's partial affirmance. Additionally, Continental seeks an order granting reasonable attorney's fees and costs incurred in connection with this motion.

STATEMENT OF FACTS

Continental is a registered broker-dealer under the Securities and Exchange Act of 1934, 15 U.S.C. § 78o (b)(8) ("1934 Act"). At all times relevant to this action, Continental was the principal underwriter, manager and distributor of the Continental Asset Management Funds ("the Funds"), which encompassed five mutual funds. Continental Equities was established as a new venture within the financial services group of Continental Corporation to accomplish the development of new investment products and distribution systems. Amended Complaint ¶¶ 6-8.

Reeves was hired in May of 1985 as Vice President of Compliance & Finance of Continental Equities. He was to act as the Chief Compliance Officer. Amended Complaint ¶ 10. It was his stated responsibility to assure that each day's business was properly recorded in the books and records of Continental Equities before the beginning of the next day's business. Reeves was also responsible for assuring that Continental adhered to and complied with all federal and state securities regulations. In addition, he had to be prepared on any given day to deal with a surprise audit by securities examiners from the Securities and Exchange Commission ("SEC"), National Association of Securities Dealers ("NASD"), or a state jurisdiction.

In August 1987, the SEC began an audit of Continental's mutual funds. At a hearing before the SEC, Reeves was questioned about possible illegal insider trading by officers and directors of the funds. Reeves was also questioned about Continental's practice of designating certain travel, lodging, and entertainment costs as marketing expenses charged to the funds, as permitted under SEC regulation. Amended Complaint ¶¶ 15-17. By letter, Reeves subsequently informed three directors of Continental that it may have committed violations of securities regulations, and that as Chief Compliance Officer, it was incumbent upon him to investigate areas of Continental's business to determine if any violations of securities regulations had occurred. Amended Complaint ¶¶ 19-21. In his letter, citing a conflict of interest, Reeves resigned his post as the Chief Financial Officer of the funds, although he remained in Continental's employ. In a second letter to the directors, Reeves stated that "there may be violations associated with the running of sales incentive programs during 1987, and I am commencing a review of the procedures and the practices that were followed." Amended Complaint ¶¶ 22-26.

Reeves was then summoned to a meeting with the chief of security, a member of the audit department of Continental's parent corporation, and an outside attorney who had represented Continental during the SEC investigation. Amended Complaint ¶ 27. At the meeting, Reeves was confronted with evidence that, in 1987, he had submitted two reimbursement claims with Continental for a single airline trip. Amended Complaint 29. Reeves was immediately suspended. Amended Complaint ¶ 30. An investigation ensued whereby it was found that Reeves had not engaged in any wrongdoing per se. Nonetheless, on June 29, 1988 Reeves was asked to resign. Amended Complaint ¶ 33. Upon refusing to resign, he was immediately discharged.

On August 1, 1988, Reeves requested a hearing on the denial to him of unemployment insurance benefits. A hearing was held before Administrative Law Judge Keal Kaufman on October 5, 1988 at which time Peter Noble, an official of Continental's Human Resources Department, testified. Judge Kaufman reversed the denial of unemployment insurance benefits, finding that Reeves had not engaged in misconduct. No appeal was taken from that ruling. Amended Complaint, ¶¶ 33, 36-37.

DISCUSSION

I. Breach of Contract

Reeves claims that although he was employed at-will, Continental had a termination policy set forth in an employee manual which stated the grounds for which an employee may be subject to dismissal. According to Reeves, that manual created an implied contract of employment because it assured continued employment as long as an employee did not transgress the manual's provisions. Reeves maintains that Continental breached that implied contract because it did not fire Reeves for any of the stated grounds as contained in the employee manual. Reeves thus claims that the termination policy in the employee manual precludes Continental from terminating him, even though he was an employee at-will, because he was fired for no apparent or stated reason or cause.

Under New York law, an at-will employee, "not engaged for a fixed term of employment," can have a "cause of action for breach of [an implied] contract against his employer" where he is discharged in the absence of the circumstances or the procedures specified in the employer's personnel handbook. Weiner v. McGraw-Hill Inc., 57 N.Y.2d 458, 460, 457 N.Y.S.2d 193, 194, 443 N.E.2d 441, 443 (1982); see also Sabetay v. Sterling Drug, Inc., 69 N.Y.2d 329, 334, 514 N.Y.S.2d 209, 211, 506 N.E.2d 919, 921 (1987) (employer has right to terminate at-will employee at any time for any reason or for no reason, unless limited by express agreement) (emphasis supplied). Continental concedes that Reeves satisfied all the elements of the state cause of action but one, namely, Continental avers that the provisions of the Manual upon which ...


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