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AM COSMETICS, INC. v. SOLOMON

September 23, 1999

AM COSMETICS INC., A DELAWARE CORPORATION, AND R.H. COSMETICS CORPORATION, A NEW YORK CORPORATION, PLAINTIFFS,
v.
RICHARD SOLOMON, INDIVIDUALLY, MYRA SMOLEV, (A/K/A) MYRA SOLOMON, INDIVIDUALLY AND DOING BUSINESS AS MYRA SMOLEV CONSULTING, SYDRA SMOLEV, INDIVIDUALLY, AND JUST HAVING FUN, INC., DEFENDANTS/THIRD PARTY PLAINTIFFS, V. HARRY SMITH, THIRD PARTY DEFENDANT.



The opinion of the court was delivered by: Casey, District Judge.

      MEMORANDUM AND ORDER

Before the Court is Defendants/Third Party Plaintiffs' motion for partial summary judgment dismissing Counts Three through Seventeen of the Complaint and granting affirmative relief on Counts One, Two, Eight and Fifteen of their Counterclaim. For the reasons set forth below, Defendants' motion is denied.

BACKGROUND

On December 3, 1996, Plaintiff AM Cosmetics (hereinafter AM) purchased all of the outstanding capital stock of R.H. Cosmetics (hereinafter RH). Defendants/Third Party Plaintiffs Richard Solomon, Myra Smolev, and two other individuals owned all of RH's stock. Mr. Solomon and Ms. Smolev (hereinafter the Defendants or Solomon and Smolev, respectively) are married. Pursuant to a written agreement, the parties agreed that AM would purchase RH for a cash price of approximately $7,000,000. The agreement was executed on January 10, 1997.

Pursuant to the terms of the agreement, AM tendered one cash payment to Solomon of $4,267,000, and one cash payment to Smolev, in the amount of $911,000. Plaintiffs and Solomon then executed a promissory note [hereinafter the Note] for the balance of the transaction, in the amount of $3,000,000.

On the same day the stock purchase agreement was executed, Plaintiffs offered Solomon a separate written employment contract (hereinafter the employment agreement). Plaintiffs and Solomon agreed that he would be employed as a consultant, at an annual salary of $400,000. Plaintiffs also retained Smolev, in the same capacity and salary that she received at RH. On January 24, 1997, Smolev was hired by oral agreement as a consultant, at an annual salary of $200,000. Her oral agreement included a stipulation that she not compete with Plaintiffs or their customers during her employment. Plaintiffs terminated Smolev on February 20, 1997, and terminated Solomon on July 2, 1997.

Plaintiffs allege that during the course of their respective employment terms, Solomon and Smolev had continued access to Plaintiff's trade secrets and confidential information. Plaintiffs further allege that beginning in December of 1996, Solomon, Smolev, and their daughter, Sydra Smolev, conspired to steal confidential information and material secrets belonging to Plaintiffs. Plaintiffs maintain Defendants used this stolen information to manufacture its own cosmetic products, and attempted to compete with, and steal business from Plaintiffs. Plaintiffs further allege that on May 28, 1997, Defendants entered Plaintiffs' premises without Plaintiffs' knowledge or consent and stole files and other documents owned by Plaintiffs.

Plaintiffs filed the instant action on August 12, 1997, claiming that Defendants: violated the Racketeer Influenced And Corrupt Organizations Act of the Organized Crime Control Act of 1970, as amended, 18 U.S.C. § 1965 (the RICO Act); conspired to violate the RICO Act; breached their respective contracts; breached the covenant of good faith and fair dealing; misrepresented facts; breached their fiduciary duty to Plaintiffs; engaged in unfair and deceptive trade practices; committed fraud; tortiously interfered with Plaintiffs' business; and, were unjustly enriched.

In response, Defendants deny all of Plaintiffs' allegations, and allege that Plaintiffs: breached the terms of the stock purchase agreement; breached the terms of Solomon's and Smolev's consulting agreements; breached the covenant of good faith and fair dealing; misrepresented facts; committed fraud; violated the Securities Exchange Act; defamed Smolev; committed trade libel; tortiously interfered with Smolev's business; were unjustly enriched; and, defaulted on Solomon's promissory note.

Defendants now bring the instant motion before the Court.

DISCUSSION

Summary judgment must be granted when all available evidence "show that there is no genuine issue as to any material fact, and that the moving party is entitled to summary judgment as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509, 91 L.Ed.2d 202 (1986); see Quinn v. Green Tree Credit Corp., 159 F.3d 759, 764 (2d Cir. 1998). The moving party carries the initial burden of demonstrating an absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986); Thompson v. Gjivoje, 896 F.2d 716, 720 (2d Cir. 1990). All facts must be viewed in the light most favorable to the nonmovant, drawing all reasonable inferences in its favor. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (citing Quinn, 159 F.3d at 764). To withstand a summary judgment motion, evidence must exist upon which a reasonable trier of fact could find for the nonmoving party. Liberty Lobby., 477 U.S. at 248-49, 106 S.Ct. at 2510-11; Matsushita, 475 U.S. at 587, 106 S.Ct. at 1356.

I. Plaintiff's Claims

Solomon's Breach

Count Three of the Complaint alleges that Solomon breached both his employment agreement and the stock purchase agreement entered into with AM. Count Four alleges that Solomon breached his duty of good faith and fair dealing concerning these agreements. Defendants argue that Plaintiffs waived their claim regarding Solomon's alleged breach of the employment agreement because AM allowed Solomon to continue his performance under the employment agreement rather than terminating him immediately. See Filmline (Cross-Country) Prod. Inc. v. United Artists Corp., 662 F. Supp. 798, 804-806 (S.D.N.Y. 1987), aff'd 865 F.2d 513 (2d Cir. 1989).

Plaintiffs counter that after they learned of Solomon's alleged breach in February 1997, they advised him his conduct was unacceptable, and then engaged in settlement negotiations. Plaintiffs further claim that their actions did not constitute a waiver because once their negotiations with Solomon proved unfruitful, they terminated Solomon immediately, and commenced legal action against him immediately.

Under New York law, if one party commits a material breach of contract, the other party to the contract is relieved of further performance. Alesayi Beverage Corp. v. Canada Dry Corp., 947 F. Supp. 658, 667 (S.D.N.Y. 1996). Additionally, if one party to a contract materially breaches the contract during the course of a continuing performance, the injured party has two options: he may terminate the contractual relations at that time or he may choose to continue performance under the contract despite that breach. See Nat'l Westminster Bank v. Ross, 130 B.R. 656, 675 (S.D.N Y 1991), aff'd sub nom, Yaeger v. Nat'l Westminster, 962 F.2d 1 (2d Cir. 1992). If the injured party chooses not to terminate the contract, he surrenders his right to terminate later based on that breach. See id. Moreover, where a party to an agreement has actual knowledge of a breach, but elects to continue performance, that party waives the right to sue the breaching party unless timely notice of the breach was provided to the breaching party. See id.

Waiver involves the intentional relinquishment of a known right. "However, a party's reluctance to terminate a contract upon a breach and its attempts to encourage the breaching party to adhere to its obligations under the contract do not necessarily constitute a waiver of the innocent party's rights in the future." Seven-Up Bottling Co. Ltd. v. PepsiCo, Inc., 686 F. Supp. 1015, 1023, (S.D.N.Y. 1988). Additionally, waivers of rights in contract will not be inferred unless the intent to waive is clear. See id. (citing Schubtex Inc. v. Allen Snyder, Inc., 49 N.Y.2d 1, 424 N.Y.S.2d 133, 399 N.E.2d 1154 (1979) (Gabrielli, J., concurring)). Here, a material issue of fact exists as to whether Solomon received notice of his alleged breach. Because a reasonable trier of fact could find that Plaintiffs attempted to resolve their differences with Solomon after learning of his alleged ...


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