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SUDUL v. COMPUTER OUTSOURCING SERVS.

March 10, 1996

JOSEPH SUDUL, Plaintiff, against COMPUTER OUTSOURCING SERVICES, INC., a New York Corporation; DATAFAST, INC., a New York Corporation; ZACHARY LONSTEIN, also known as ZACH LONSTEIN and JAMES E. DELLARMI, Defendants.


The opinion of the court was delivered by: KOELTL

 JOHN G. KOELTL, District Judge:

 The plaintiff Joseph Sudul ("Sudul") has sued the defendant Computer Outsourcing Services, Inc. ("COSI") for alleged breach of an employment agreement. COSI maintains that it had "just cause" under the terms of the agreement to terminate Sudul and that it did so in good faith as determined by its Board of Directors. This case was tried to the Court without a jury. At the conclusion of the trial, the defendant moved to amend its answer pursuant to Fed. R. Civ. P. 15(b) to add a defense of fraudulent inducement, which it contends was supported by the evidence and tried by the express or implied consent of the parties.

 As discussed below, the defendant's motion is denied because the defense was not implicitly or expressly tried, and the plaintiff would be prejudiced by adding such a defense after the trial has concluded. Even if the amendment were allowed, the defense would fail in any event because the evidence admitted at the trial does not support it. Accordingly, for the reasons explained below, the Court denies the defendant's motion to amend the answer and, in the alternative, dismisses the defendant's defense of fraudulent inducement.

 The Court enters the following Findings of Fact and Conclusions of Law pursuant to Fed. R. Civ. 52(a).

 Findings of Fact

 1. Joseph Sudul is a citizen of the State of Connecticut.

 3. DFI is a computer service company that provides accounts receivable and batch data processing services. (Pl.'s Exh. 4(c) (Draft Processing Agreement).)

 4. James Dellarmi performed most of DFI's sales and marketing functions, and Sudul managed the data processing functions of DFI. (Undisputed Fact ("UF") 4(c).)

 5. Defendant Computer Outsourcing Services, Inc. ("COSI") is a New York Corporation with its principal place of business in New York, New York.

 6. COSI provides comprehensive data processing services to commercial customers principally in the New York metropolitan area. The Company's services can provide all or a portion of a client's internal data processing functions and are known as "outsourcing". (Pl.'s Exh. 1 (COSI Prospectus).)

 7. Zach Lonstein is and was at all times relevant to this case the President and Chairman of the Board of COSI as well as a principal shareholder of COSI.

 8. In the summer of 1992, Dellarmi unsuccessfully attempted to negotiate a sale of DFI or its business to COSI.

 9. With Mr. Sudul's assistance, Mr. Dellarmi thereafter negotiated a written agreement with COSI on behalf of DFI (the "Processing Agreement"). Under this contract, dated December 4, 1992, DFI subcontracted its data processing requirements to COSI. COSI agreed to perform for a four-year period all the data processing services DFI offered to its clients at the time of the Agreement. In addition, COSI had the right of first refusal to perform any new types of services DFI might offer in the future. (Joint Exh. A. P 11.) DFI agreed to relocate its data processing operations from its Westchester, New York office to COSI's office in New York City. Under the contract, DFI would perform its services through a newly created Division at COSI (the "Division" or "DFI Division"). The parties agreed that they would cooperate to convert all of the operating and application software and all of the data files DFI used in its computer service business to run on COSI's IBM mainframe computers and peripheral equipment. COSI and DFI agreed to use their respective best efforts to complete the conversion as soon as reasonably practicable, and in any case before January 30, 1993. (Joint Exh. A P 3.) COSI's obligation to perform services under the Processing Agreement ran for a four-year period beginning the date the conversion would be complete, called the Conversion Date. (Joint Exh. A P 5.) The conversion was concluded on March 8, 1993.

 10. Under the Processing Agreement, the newly created Division at COSI performing the services under the Processing Agreement was to hire selected employees of DFI whose services were necessary to the operation of the Division. All such employees were to be "at will" employees except Sudul, who was to be offered a written employment agreement by the DFI Division as its Operations Manager for a term coextensive with the four-year initial term of the Processing Agreement. (Joint Exh. A P 7.)

 11. Sudul and COSI entered into an Employment Agreement dated December 4, 1992. (Joint Exh. B.) The term of the Employment Agreement was to commence on the Commencement Date of the Processing Agreement and continue for four years. Accordingly, the Employment Agreement was to be effective for four years beginning March 8, 1993.

 12. Under the Employment Agreement, Sudul was to serve as the Vice President and Operations Manager of the DFI Division of COSI, or a similar position. He was to "manage the operations of the Division and report directly to the President of COSI." (Joint Exh. B P 2.) Sudul's consideration was an annual base salary of $ 69,400, together with certain employee benefits including medical insurance and "a nonaccountable automobile expense allowance of $ 15,600 per year." (Joint Exh. B P 4.)

 14. Sudul was essential to the transfer of the DFI operation to another site or computer system. He originally told Lonstein that the conversion could be accomplished by the end of January 1993, but that proved unworkable and was only accomplished later with the assistance of COSI personnel. Sudul was the COSI person responsible for the transfer, which he supervised and played an instrumental role in accomplishing. Although the conversion took somewhat longer than the time provided in the Processing Agreement, Mr. Lonstein testified credibly that the delay from January 31, 1993 to March 8, 1993 was not a cause of Sudul's discharge. Although Lonstein was disappointed and upset because representations he had made to the public about the January conversion date proved to be inaccurate Sudul was not fired until August. The problems associated with the delay in the conversion did not cause Sudul's termination.

 15. After the Processing Agreement and the Employment Agreement with Sudul were signed in December 1992, DFI lost its data processing account for Loehmann's. Loehmann's was a major customer of DFI and a major account for Sudul personally. Sudul had been the account executive on the Loehmann's account and servicing that account had been a significant part of Sudul's responsibilities. Sudul did not, however, deliberately withhold from COSI any information about the Loehmann's account. Sudul testified credibly that he was not aware in December 1992 that DFI was about to lose the Loehmann's account. In addition, the evidence showed that Sudul was not responsible for losing the Loehmann's account and that he could not have reasonably kept the account. Richard Davis, the vice president and controller of Loehmann's, testified credibly that DFI had essentially served as Loehmann's data processing department. When Loehmann's subsequently decided to move various functions in house, Loehmann's sought additional data processing functions from an outside supplier. Davis stated that Loehmann's discussed its needs directly with Dellarmi, but Loehmann's went elsewhere because Dellarmi never met those requirements. Dellarmi wanted to handle the Loehmann's account himself, and in the fall of 1992 he specifically told Davis to deal only with him and not Sudul. Davis testified persuasively and very credibly that he had worked with Sudul for 17 years, that he could not have done his job for Loehmann's without Sudul, that Sudul provided a high level of service and commitment, and that Sudul had nothing to do with the decision to take the Loehmann's account away from DFI.

 16. As the conversion took place from December 1992 to March 1993, Sudul worked twelve- to thirteen-hour days and weekends. From March 8, 1993 to June 28, 1993, Sudul continued to work long hours fine-tuning the conversion, which included maintaining the software and programs.

 17. DFI, however, did not meet the budget projections of its agreement with COSI. In the Processing Agreement, COSI agreed to loan DFI $ 200,000 and to share profits with DFI on the DFI business transferred to COSI according to a formula set forth in the Processing Agreement. (Joint Exh. A P 9.) After the Commencement Date, income from the DFI Division was substantially lower than expected, and expenses were higher. COSI's economic benefit from its arrangement with DFI decreased proportionally as expenses rose and revenue declined. Sudul was earning substantially more than any other employee of the DFI Division of COSI, and his salary was a significant expense of the division.

 18. The FMS business of DFI consisted of providing data processing services for small businesses. Although Sudul had handled some technical problems in connection with that business prior to the effective date of the Processing Agreement, he had not directly interacted with the customers or dealt with customer complaints. After the Commencement Date Sudul also remained uninvolved in the customer complaint process and left such matters primarily to Phyllis Williams or to Anne Colavita. Ms. Colavita was a DFI employee who was not scheduled to become a COSI employee.

 19. In about March 1993 it became apparent to Lonstein that the DFI Division was not meeting its revenue projections and that its expenses were higher than projected. Although Lonstein had made specific complaints before about the delay of the conversion date, it was only at this time that he began to complain to Dellmari about Sudul's performance in general. At meetings on May 12, June 16, and July 16, 1993, Dellarmi, who was not an employee or agent of COSI, told Sudul that COSI was dissatisfied with his performance.

 20. Faced with the poor performance of the DFI Division of COSI and the substantial salary that Sudul was earning compared to other employees, Lonstein eventually asked Sudul to accept a reduction of his salary from $ 69,400 to $ 45,000 per year, which was similar to the salary that Sudul had been earning at DFI before he was employed by COSI. When Lonstein made this request, he did not threaten Sudul with discharge and gave Sudul time to consider whether to accept the salary reduction. Sudul took three days to consider it, talked to his wife about it, and agreed to accept it. Sudul voluntarily accepted the salary reduction and was not forced or threatened to do so.

 21. On June 25, 1993, COSI and Sudul effected the reduction in salary by signing a simple two sentence Amendment ...


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