The opinion of the court was delivered by: DENNY CHIN, District Judge
In this case, plaintiff Rakesh K. Kaul, the former President and
Chief Executive Officer of defendant Hanover Direct, Inc. ("Hanover"),
sues the company he once headed to recover compensation that he claims
should have been paid to him under various employment agreements and
benefit plans. Before the Court are three motions: (1) Hanover's motion
for summary judgment dismissing all of Kaul's claims and in its favor on
a counterclaim for monies purportedly owed by Kaul, (2) Kaul's motion for
partial summary judgment striking certain of Hanover's affirmative
defenses and counterclaims, and (3) Hanover's motion
for reconsideration of this Court's order denying Hanover leave to
amend its answer and counterclaims.
For the reasons that follow, the three motions are granted in part and
denied in part.
The principal facts are not in dispute, and I have noted the
disagreements where they exist.
1. Kaul's Employment With Hanover
Hanover is a direct marketing company that sells merchandise to
consumers through catalogues and the internet. Kaul served as its
President and Chief Executive Officer from March 7, 1996 through December
On or about March 7, 1996, Hanover and Kaul entered into an employment
agreement to govern the terms and conditions of Kaul's employment (the
"1996 Agreement"). (McGrath Decl., Ex. 6). As expressly stated in the
1996 Agreement, Kaul was hired as "an employee `at will,'" and his
employment could be terminated "for cause" or "other than for `cause.'"
(1996 Agreement §§ 1, Ka), 1(b)).
In early April 2000, the 1996 Agreement was superseded by an employment
agreement executed by Hanover and Kaul dated as of March 6, 2000 (the
"Agreement"). The Agreement provided for a 36-month period of employment
at a base salary of $597,300 per annum, subject to annual review but not
to be decreased below
that amount. (Agreement §§ 1, 3) (attached to McGrath Decl. as Ex.
7). It also provided for certain benefits and incentives. (Id. §§ 4,
5, 6). The Agreement provided that the employment period could be
extended for 12 months in certain circumstances. (Id. § 1). The
Agreement also provided that Kaul's employment could be terminated with
or without cause. (Id. § 7).
In December 2000, the Board of Directors of Hanover (the "Board")
decided to terminate Kaul's employment. (Quasha Dep. at 99-101, 103)
(McGrath Decl., Ex. 16). Hanover contends (and Kaul denies) that the
Board made this decision because the company had "net cumulative losses
of approximately $225 million under his stewardship." (Def. SJ Mem. at
1).*fn1 On December 5, 2000, Alan G. Quasha, the Chairman of the Board,
informed Kaul of the Board's decision. (Quasha Dep. at 114-17). Kaul
resigned, with the understanding that the Board would treat his
resignation as a termination without cause for purposes of the
Agreement. (Id. at 115-16; McGrath Decl., Ex. 20; Harriss Dep. at
211-12, 279-80 (McGrath Decl., Ex. 36)).
Kaul asserts essentially five claims (or sets of claims), based on the
following: (a) § 7(b) of the Agreement,
which provides for certain benefits in the event of termination;
(b) § 12 of the Agreement, which provides for attorneys' fees; (c) a
long-term incentive plan, which provided for bonuses to be paid to Kaul
to enable him to purchase Hanover stock; (d) a change of control plan
that provided Kaul with certain compensation if his employment were
terminated following a change of control of Hanover; and (e) vacation
pay. I review the facts relating to each of these claims.
a. § 7(b) of the Agreement
Section 7 of the Agreement covered termination. It provided, in part:
In the event of a termination of [Kaul]'s employment
during the Employment Period except in connection with
or following a Change of Control as such term is
defined in the Hanover Direct, Inc. Key Executive
Thirty-Six Month Compensation Continuation Plan, . .
. he shall be entitled to compensation and benefits on
and after the date of such termination only as
provided in this Section 7, the 2000 Short-Term Plan
and the 2000 Long-Term Plan and under the terms of any
prior agreement still in effect on the date of
termination as set forth in Section 10, or pursuant to
the terms of any benefit plan maintained by [Hanover]
and in which [Kaul] is a participant or a beneficiary
at the time of his termination.
(Agreement § 7). The Agreement then set forth the parties' agreement
with respect to the termination of Kaul's employment by Hanover for cause
(§ 7(a)), by Hanover without cause or by Kaul for good reason (§
7(b)), or as the result of Kaul's death or disability (§ 7(c)).
Pursuant to § 7(b), if Hanover terminated Kaul's
employment without cause, he was entitled to, inter alia, the
continuation of his salary and benefits for 24 months as well as certain
bonuses. These payments and benefits, however, were subject to §
7(g), which provided:
In order to be eligible for the payments and benefits
as set forth in Section 7(b), (i) [Kaul] must execute
and deliver to [Hanover] a general release in favor of
[Hanover], excepting statutory contribution and
indemnity rights to which [Kaul] is entitled, and (ii)
[Kaul] must be and remain in material compliance with
his obligations under the Non-Competition and
(Id. § 7(g)).
As discussed below, the parties never agreed on the terms of a "general
release." Hanover did pay, however, $341,803 in severance benefits to
Kaul following his dismissal even though he did not provide a release.
(See Def. Countercl. ¶ 38).
The Agreement also provided:
This Agreement and attachments hereto constitute the
entire Agreement between the parties pertaining to the
subject matter contained herein and supersede all
prior and contemporaneous agreements, representations
and understandings of the parties with respect to the
subject matter hereof, including without limitation,
the [1996 Agreement]. . . . Notwithstanding the
foregoing, this Agreement shall have no effect on and
shall not supercede the following agreements:
Registration Rights Agreement, dated as of August 23,
1996, between [Hanover] and [Kaul]; Tandem Loan in the
principal amount of $1,047,562, payable to [Hanover];
Tax Note due August 23, 2001 in the principal amount
of $211,729, payable to [Hanover]; [and other
(Agreement § 10).
The Agreement also provided that it was to be "construed and enforced"
in accordance with New Jersey law. (Id. § 13).
The Agreement provided for Hanover to pay Kaul's attorneys' fees in
[Hanover] shall pay [Kaul]'s reasonable legal fees in
full in the event that he must seek legal counsel to
enforce any of his rights under this Agreement,
provided that before he retains legal counsel he must
notify [Hanover] of any alleged failure to abide by
the terms of this Agreement and, to the extent the
matter is subject to cure, provide [Hanover] with a
reasonable opportunity to cure.
(Id. § 12).
By letter dated December 19, 2000, Kaul wrote to Hanover confirming
that he had retained counsel to represent him "in connection with the
termination of [his] employment," and setting forth his understanding
that Hanover had agreed to reimburse him for his legal expenses.
(Bayoneto Decl., Ex. 3). Thereafter, Hanover paid Kaul's attorneys
$36,964.93 in fees and expenses, for the periods ending December 31,
2000, and January 31, 2001, in connection with the termination of his
employment. (Id., Ex. 5).
c. The Long-Term Incentive Plan
The 1996 Agreement provided for Kaul to participate in a "Long-Term
Incentive Plan" (the "LTIP"). (1996 Agreement § 5). The LTIP was set
forth in a document attached to the 1996
Agreement. The LTIP was intended "to promote an alignment" of Kaul's
interests with Hanover's interests. (LTIP § 1). The LTIP gave Kaul
the right to purchase a substantial number of shares of Hanover common
stock on favorable terms. The concept was that with a significant equity
interest in the company, Kaul would have a personal stake in Hanover's
success and the performance of its stock.
The LTIP provided for a "Tandem Stock" bonus. Pursuant to § 5(a),
Kaul was given the right to purchase shares of common stock at fair
market value, with Hanover paying Kaul bonuses to cover the purchase
price. Kaul was to pay 20% of the purchase price in cash, with the
remaining 80% to be financed through a non-recourse promissory note (the
"Note") to be paid in four annual installments, each in the amount of 20%
of the purchase price plus accrued interest. Hanover agreed to pay
bonuses to Kaul to cover both the initial 20% cash payment and the
subsequent four installments, including accrued interest. (See Am. Compl.
¶¶ 24-27; Lipner Dep. at 39 (McGrath Decl., Ex. 27)). As set forth in
Twenty percent of the purchase price for such shares
shall be paid in cash, and 80% shall be financed with
a nonrecourse Note. . . . [Hanover] shall pay [to
Kaul] on or before the date of such purchase a sign-on
bonus equal to the portion of the purchase price
required to be paid in cash, and shall pay [Kaul], on
or before each due date . . . of any payment of
principal and/or interest on the Note, a bonus equal
to the amount of such principal and/or interest then
(LTIP § 5(a)).
On August 23, 1996, Kaul exercised his right under the LTIP to purchase
1,510,000 shares at a total price of $1,745,937.50. He was required to
make a cash payment of 20%, or $349,187.50. As provided in the LTIP,
Hanover made a book entry recording a bonus payment to Kaul in that
amount, which Hanover applied to satisfy Kaul's obligation to pay in cash
20% of the purchase price of the stock. This book entry resulted in
personal tax liability to Kaul, as the "bonus" constituted income to
Kaul. Kaul paid this tax liability himself. (See Am. Compl. ¶ 28;
Lipner Dep. at 9-19).
On August 22, 1997, Kaul was obligated to make the first of the four
20% payments under the Note, in the amount of $349,187.50. With accrued
interest, he owed a total of $445,786.73. The same procedure was
followed: Hanover made a book entry reflecting a bonus payment to Kaul in
that amount, which was then applied to pay the principal and interest due
under the Note. (See Am. Compl. ¶ 30; Lipner Dep. at 13; Kingsford
Decl., ¶ 1).
In late 1997 or early 1998, however, to avoid the tax liability that he
would incur as a result of the payment of the "bonuses" to be used to
satisfy the Note obligations, the Note was amended to provide for a
single balloon payment at maturity of principal and interest, and the
maturity date was extended to August 23, 2001. (Kaul Dep. at 172-75
(McGrath Decl., Ex. 38); Lipner Dep. at 17-20; Am. Compl., Ex. C;
Kingsford Decl. ¶ 2).
The August 22, 1997 "bonus" created personal income tax liability for
Kaul in the amount of $211,729, which Hanover paid to the Internal
Revenue Service (the "IRS") on Kaul's behalf. Hanover loaned this amount
to Kaul by adding $211,729 to the principal of the amended Note. (Kaul
Dep. at 171-73 (McGrath Decl., Ex. 38); Kingsford Decl. ¶ 2).
As discussed below, Kaul's employment with Kaul was terminated on
December 5, 2000. The Note provided that:
[Kaul] shall prepay the entire unpaid principal amount
of this Note together with interest accrued on such
principal amount to the date of prepayment without
premium . . . on the thirtieth day following
termination of [Kaul]'s employment with [Hanover] for
any reason other than [death or long-term
(McGrath Decl., Ex. 6 at HDI 03085; see Bayoneto Decl., Ex. 10).
On December 31, 2000, Hanover recorded a book entry payment to Kaul in
an. amount equal to the principal and interest then due on the amended
Note, $1,277,561.42. Hanover then applied that amount on Kaul's behalf to
satisfy the amended Note, except for the additional amount that had been
loaned to Kaul to pay the IRS, $211,729.08, plus interest. (Kingsford
Decl. ¶ 3). In other words, even though Kaul was no longer employed
by Hanover, Hanover nevertheless "paid" him a bonus in an amount
sufficient to cover the outstanding principal and interest: due on the
amended Note, with, the exception of the $211,729.08 plus interest.
On January 10, 2001, however, Kaul contacted Hanover arid requested
that it reverse the payroll entry. (Id. ¶ 5 & Ex.
1 ("I . . . would appreciate a confirmation of a reversal of the payroll
entry. . . .")). As Hanover's tax advisors explained, a "payment" of the
Tandem Bonus to Kaul would generate substantial personal income tax
liability, while no such tax liability would result if Kaul surrendered
his shares in full satisfaction of the amended Note in lieu of receiving
the bonus. (Id. ¶ 7). Moreover, because the value of the shares had
dropped considerably, with the latter option Kaul would receive a tax
benefit in the form of a long term capital loss. (Id.).
Hanover gave Kaul the option of "receiving" the Tandem Bonus and
retaining the shares or surrendering the shares in satisfaction of the
amended Note (except for the $211,729.08 plus interest) in lieu of the
bonus. Kaul elected to surrender the shares. (Id. ¶ 8, 9; Shull
Decl. ¶¶ 2, 3; Pl. Opp. Mem. at 11-14 (acknowledging that Kaul
tendered his shares)).
d. The Change of Control Plan
Effective December 26, 1999, Hanover established a "Key Executive
Thirty-Six Month Compensation Continuation Plan." (the "Plan"). (McGrath
Decl., Ex. 9). Kaul was the sole participant in the Plan. (Id. §
2.9). By its terms, the Plan was intended "to attract and retain key
management personnel by reducing uncertainty and providing greater
personal security in the event of a Change of Control." (Id. § 1.1).
The events constituting a Change of Control were defined in § 2.2 of
the Plan. (Id. § 2.2). The Plan provided that "prior to a Change of
Control the participation in the Plan of any Participant shall cease on
. . .
the date on which a Participant is terminated by [Hanover]." (Id. Art.
3). The Plan further provided that "[a] Participant shall be entitled to
severance pay and benefits under the Plan only if there occurs a Change
of Control and thereafter [Hanover] terminates his/her employment." (Id.
Article 10 of the Plan gave the Board the ability to amend or terminate
The Board . . . reserves the right at any time to
amend or terminate the Plan, except that if the Plan
is terminated in anticipation of or upon or after a
Change of Control has occurred, the Board . . . may
not terminate the participation in the Plan of any
Participant who is in the Plan when a Change of
Control is anticipated or as of the date of the Change
of Control. . . .
(Id. Art. 10).
On April 25, 2001, as reflected in the minutes of meeting, the Board
terminated the Plan. (Shull Decl. ¶ 1 & Ex. 1). The minutes show
that the Board determined that "no `Change of Control' . . . is
anticipated." (Id., Ex. 1 at 8).
No "Change of Control" has occurred within the meaning of the Plan.
(See Kaul Dep. at 308-10) (McGrath Decl., Ex. 39).
In the amended complaint, Kaul asserts a claim for compensation for 13
weeks of accrued and unused vacation, in the amount of $149,325. (Am.
Compl. ¶¶ 16-18). In his opposition papers to Hanover's motion, he
reduces the claim, seeking compensation for only five weeks of accrued
and unused vacation.
I discuss the additional facts relating to the vacation pay claim
On June 28, 2001, Kaul commenced this action against Hanover in the
Supreme Court of the State of New York, New York County. The complaint
alleged a breach of contract based, inter alia, on §§ 7(b) and 12 of
the Agreement. It contended that Hanover had failed to make "certain
termination payments" to Kaul as required by § 7(b) and to pay Kaul's
reasonable attorneys' fees as required by § 12. (See Compl. ¶¶
34, 40; see Id. ¶¶ 5-15). It also asserted claims for accrued and
unused vacation pay, for compensation under the Plan, and for bonuses
under the LTIP. (Id. ¶¶ 43-61).
On July 25, 2001, Hanover removed the case to this Court on the basis
of federal question jurisdiction, as Kaul was asserting claims under an
employee benefit plan within the meaning of the Employment Retirement
Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq.
2. The Exchange of Proposed Releases
By letter dated July 30, 2001, counsel for Hanover wrote to counsel for
Kaul, transmitting a proposed "Confidential General Release and Covenant
Not To Sue." ...