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KAMFAR v. NEW WORLD RESTAURANT GROUP

United States District Court, S.D. New York


December 9, 2004.

RAMIN KAMFAR, Plaintiff,
v.
NEW WORLD RESTAURANT GROUP, INC. f/k/a NEW WORLD COFFEE-MANHATTAN BAGEL, INC., et ano., Defendants.

The opinion of the court was delivered by: LEWIS KAPLAN, District Judge

MEMORANDUM OPINION

Ramin Kamfar was the founder, chief executive officer, and chairman of New World Restaurant Group, Inc. ("New World" or the "Company"). He left the Company in April 2002 amid questions about the propriety of bonus payments he and other officers had received. The agreement governing the terms of Kamfar's departure included a confidentiality provision, a non-disparagement provision, and a covenant not to sue. After Kamfar's departure, the defendants described the disputed payments in various public statements as "unauthorized." Kamfar challenges those statements in this diversity action for breach of contract and defamation. The defendants allege in a counterclaim that Kamfar has breached the covenant not to sue by bringing this action. The matter now is before the Court on defendants' motion for summary judgment dismissing the complaint and plaintiff's motion for summary judgment dismissing the counterclaim.

  Facts

  A. Background

  New World, a Delaware corporation with its principal place of business in Colorado, is a public company that operates a chain of coffee stores.*fn1 Kamfar, a resident of New York, founded the Company in 1993, was chief executive officer from 1996 to 2001, and chairman from December 1998 until his departure on April 1, 2002.*fn2 Defendant Anthony Wedo was hired as chief executive officer in August 2001, became chairman upon Kamfar's departure, and remained in that position throughout the events at issue in this action.*fn3

  In 2000, New World was immersed in a protracted effort to acquire the Einstein/Noah Bagel Corporation ("Einstein"), which had filed for bankruptcy.*fn4 That year Kamfar, prompted by Michael Konig, New World's general counsel, proposed to New World's board of directors a bonus plan to compensate certain employees who had been working intensively on the Einstein acquisition, including Kamfar himself, Konig, and chief financial officer Jerold Novack. The plan eventually included a bonus to be paid if the acquisition was completed and a bonus to be paid if the relevant employees were dismissed following a change of control in connection with the acquisition.*fn5

  The plan was discussed by the Compensation Committee in December 2000*fn6 and eventually, in an attachment to an email message, forwarded with no explanation in April 2001 to the board,*fn7 which never actually discussed it.*fn8 The beneficiaries of the plan eventually received bonus payments totaling $3.5 million; Kamfar's share was $1,620,000.*fn9 The board of directors was not aware of these payments, some of which were in the form of advances in cash and stock before the bonuses had actually vested under the plan.*fn10 The bonus plan was not disclosed in any of New World's public filings or private financing contracts.*fn11

  The parties dispute vigorously, as they apparently have been doing since February 2002, whether the bonus plan was duly authorized. They dispute, among other things, whether the Compensation Committee had the authority to approve the bonus plan on its own, and whether, if it did not, the board of directors ever approved it. The Court finds it unnecessary to review the complicated factual history relevant to these issues.

  The plan did not become a subject of controversy until February 15, 2002, when the Proskauer Rose law firm discovered it while advising New World on several unrelated matters.*fn12 Proskauer, after discussion with the board, launched an investigation.*fn13 The investigation, which was conducted over several weeks, involved more than twenty attorneys who together spent more than 2,200 hours reviewing approximately fifty boxes of documents, interviewing seventeen witnesses, and collecting and reviewing computer files.*fn14 Proskauer retained also forensic accountants, an information technology firm, and Delaware counsel.*fn15

  On March 7 and 15, 2002, Proskauer gave the board oral presentations on its findings. It advised the board, among other things, that the bonus payments had not been authorized and that the Company's financial statements would have to be restated in order to give the payments the appropriate accounting treatment.*fn16 On April 1, 2002, Kamfar and New World entered into a settlement agreement (the "Agreement") pursuant to which Kamfar agreed to repay the $1,620,000 he had received in bonus payments, New World agreed to pay Kamfar $1,445,000, and Kamfar waived his right to severance payments under pre-existing contracts.*fn17 The parties agreed to release each other from any claims that they might have had against each other up to the date of the Agreement.*fn18

  The Agreement included also mutual covenants not to make disparaging statements, covenants not to sue, and an agreement to keep the terms and conditions of the Agreement confidential. The non-disparagement and confidentiality provisions included exceptions for disclosures that New World believes in good faith are "necessary or desirable to protect the Company's interests." The covenants not to sue included an exception for the parties' rights to enforce the Agreement.*fn19

  B. The Defendants' Public Statements

  On April 3, 2002, New World issued a press release announcing Kamfar's departure and his severance payment.*fn20 On May 31, New World filed its Form 10-K and issued a press release. Both disclosed that the Company had revised its financial statements in order to give the proper treatment to "unauthorized bonus payments" of $3.5 million.*fn21

  Proskauer attorneys advised on the drafting and issuance of these documents.*fn22 Proskauer believed that the Company was obligated, pursuant to the securities laws, to disclose "the circumstances underlying the Restatements" and "the $1,445,000 in compensation that Mr. Kamfar received as part of the Settlement Agreement."*fn23

  On June 4 the Asbury Park Press ("APP"), a New Jersey newspaper, published an article about New World which attributed to Anthony Wedo, Kamfar's successor as chairman, a statement identifying Kamfar as one of the recipients of unauthorized bonuses.*fn24 New World's public relations consultant, William Parness, testified that he, on behalf of Wedo, communicated with the reporter in connection with the article*fn25 and that Wedo provided the reporter with the information that Kamfar was a recipient of the bonuses.*fn26

  On June 24, 2002, Wedo held a conference call with analysts and shareholders in which he made statements about the bonuses that conveyed substantially the same information as the statements in the May 31 press release and the 10-K filing.*fn27 Proskauer attorneys helped Wedo prepare for the call.*fn28 On the following day, the APP published another article on New World. This article, which reported on the conference call, mentioned unauthorized bonuses again and referred to Wedo's earlier statement that Kamfar was one of the recipients.*fn29

  C. This Action

  Kamfar here asserts claims for defamation and breach of contract based on alleged violations of the confidentiality provision and the non-disparagement provision of the Agreement. The complaint challenges the statements in the APP articles; it does not refer to the press releases or the conference call.*fn30 Kamfar requests also declarations "that New World's Compensation Committee and Board of Directors had, in fact, authorized bonus agreements for plaintiff and Novack in the amount of $2.6 million" and that "nothing was improper or inappropriate about the $1.4 million paid to and received by plaintiff Kamfar as severance in accordance with the terms and conditions of the parties' April 1, 2002 settlement agreement."*fn31 The defendants subsequently counterclaimed for breach of Kamfar's covenant not to sue and for rescission of the Agreement. They assert also seven claims for relief arising out of Kamfar's alleged conduct prior to his departure.

  Discussion

  A. Summary Judgment Standard

  Summary judgment is appropriate if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.*fn32 The moving party has the burden of demonstrating the absence of a genuine issue of material fact,*fn33 and the Court must view the facts in the light most favorable to the nonmoving party.*fn34 Where the burden of proof at trial would fall on the nonmoving party, it ordinarily is sufficient for the movant to point to a lack of evidence to go to the trier of fact on an essential element of the nonmovant's claim.*fn35 In that event, the nonmoving party must come forward with admissible evidence*fn36 sufficient to raise a genuine issue of fact for trial in order to avoid summary judgment.*fn37

  B. The Claims

  1. Defamation

  As an initial matter, the defendants argue that the defamation claim is time-barred because all of the allegedly defamatory statements were published before June 4, 2002.*fn38 According to the defendants, the statements made on or after June 4, 2002 were simply repetitions of the earlier ones, not new publications, and therefore are not actionable under the single publication rule.*fn39

  Even assuming that the defendants are correct about the application of the single publication rule, an issue as to which the Court expresses no opinion, the argument fails. In opposing summary judgment, Kamfar challenges only the statement, attributed to Wedo in the June 4 and June 25 APP articles, that Kamfar and Novack received $2.6 million in unauthorized bonuses. The defendants had not made that statement publicly before.*fn40 As this assertion first appeared on June 4, it is within the limitations period.

  The defendants argue that the record contains no admissible evidence that defendants actually made that statement. The Court disagrees. There is strong evidence that Wedo, through his publicist, communicated with the APP reporter and provided the information at issue in that article. The Court thus finds that the record contains evidence of defamatory statements made within the limitations period.

  Defendants next seek dismissal on the ground that the plaintiff has not raised a genuine issue of fact as to fault. Under New York law, a private figure defamation plaintiff*fn41 suing on a statement that is "arguably within the sphere of legitimate public concern"*fn42 must demonstrate, among other things,*fn43 that the defendant "acted in a grossly irresponsible manner, without due consideration for the standards of information gathering and dissemination ordinarily followed by responsible parties."*fn44 The defendants argue that the plaintiff has failed to raise a triable issue as to whether the defendants acted with gross irresponsibility.

  A number of New York cases have dealt with defamation claims arising out of a corporate employer's publication of the results of an internal investigation that the employer had commissioned from lawyers because the employer was concerned about potential employee misconduct.*fn45 In each case, the courts have found that the company's reliance on a thorough, responsible investigation negated the existence of gross irresponsibility as a matter of law.*fn46

  This case is no different. The undisputed evidence shows that the Proskauer attorneys who advised the board that the bonuses were unauthorized had conducted an extensive investigation. The meager evidence that the plaintiff cites in support of his contention that the investigation was deficient speaks, if at all, to the details of Proskauer's conduct of the investigation, not whether it was grossly irresponsible of the defendants to rely on it.*fn47 The unrefuted evidence demonstrates that the defendants, in publicly characterizing the bonuses as unauthorized, did not act with gross irresponsibility. The claim for defamation must be dismissed.

  2. Breach of Contract

  a. Breach of the Confidentiality Provision

  The confidentiality provision provides that the "terms and conditions of this Agreement are confidential."*fn48 The only actual term of the Agreement disclosed by the defendants was Kamfar's severance payment of $1,445,000. Kamfar, however, does not complain of this disclosure.*fn49 Nor does Kamfar challenge New World's disclosure of the fact and amount of his bonus*fn50 which, though not an actual term of the Agreement, is mentioned in it. Rather, Kamfar challenges only the characterization of his bonus as unauthorized.*fn51 Nowhere in the Agreement, however, are the bonuses described as unauthorized. The disputed statements, therefore, did not disclose any term or condition of the Agreement. As a matter of law, there was no violation of the confidentiality provision.

  b. Breach of the Non-Disparagement Provision

  The non-disparagement covenant provides, as relevant here:

"The Company covenants that its senior management and directors . . . shall not at any time hereafter make any disparaging statements of any kind about Kamfar. The foregoing covenant shall not preclude the Company . . . from disclosing information to the extent that the Company, in good faith, believes that such disclosure is necessary or desirable to protect the Company's interests. . . ."*fn52
  In order to prevail on this claim, plaintiff therefore must establish both that the description of the bonuses as unauthorized was a "disparaging statement" and that the Company did not have a good faith belief that its characterization was necessary or desirable to protect its interests.

  Under New York law, the initial interpretation of a contract is a matter of law for the court to decide.*fn53 Where the agreement is unambiguous, a court may not admit extrinsic evidence and interprets the plain language of the agreement as a matter of law.*fn54

  The meaning of "disparaging statement," as used in the Agreement, is not self-evident.*fn55 Nor have defendants disputed, for purposes of this motion, that the characterization of the bonuses as unauthorized was disparaging. The Court therefore assumes without deciding that the challenged statements were disparaging.

  Defendants do contend that the challenged disclosures were made in a good faith belief that they were necessary or desirable and that there is no genuine issue of fact as to this point.*fn56 They rely heavily on the facts that Proskauer advised New World on the drafting of the press releases and the 10-K and counseled that the Company was obligated to disclose Kamfar's severance and "the circumstances underlying the Restatements" of its financial statements. There is no evidence, however, that Proskauer advised New World to describe the bonuses as unauthorized. In any case, there is no suggestion that Proskauer ever advised Wedo to identify Kamfar in the June 4, 2002 article as a recipient of an unauthorized bonus.*fn57

  In these circumstances, it appears to be undisputed that New World disclosed that it had restated its financials to account properly for certain bonuses and that it did so in consultation with its Proskauer attorneys. It remains unclear whether the characterization of the bonuses as unauthorized was a product of good faith reliance on advice of counsel. And a trier of fact in any case could conclude that Wedo later named Kamfar as a recipient of an unauthorized bonus without a good-faith belief that disclosure of Kamfar's identity was necessary or desirable to protect the Company's interests. Accordingly, there are genuine issues of material fact as to the Company's good faith.

  Wedo stands in a different position because he was not a party to the Agreement. "Corporate officers may not be held personally liable on contracts of the corporation where they did not purport to bind themselves individually."*fn58 There is no suggestion here that Wedo purported to bind himself personally on the Agreement. Wedo therefore will be dismissed from the action.

  3. Declaratory Relief

  Kamfar seeks a declaration "that New World's Compensation Committee and Board of Directors had, in fact, authorized bonus agreements for plaintiff and Novack in the amount of $2.6 million."*fn59 The issuance of declaratory relief is discretionary.*fn60 Issuing the declaration requested in this case would require the Court to adjudicate one of the very issues with respect to which the Agreement was supposed to avoid further litigation. In the exercise of discretion, the Court declines to grant declaratory relief.

  C. The Counterclaim

  1. Breach of Contract

  Paragraph 13 of the Agreement provides, in relevant part:

"Except as to his right to enforce this Agreement, Kamfar covenants, to the maximum extent permitted by law, that he shall not at any time hereafter commence . . . any action . . . with respect to any actual or alleged act . . . including, without limitation, any disclosures made publicly . . . at any time regarding any subject matter against or concerning the Company, . . . [or] . . . [its] . . . officers [or] directors. . . ."*fn61
The counterclaim alleges that Kamfar's assertion of claims for defamation and for declaratory relief violates this covenant.*fn62 Kamfar contends that all of his claims fall within the exception for his right to enforce the Agreement.

  Covenants not to sue, requiring that the obligor forbear from bringing any current or future claims against the obligee, are valid in New York.*fn63 The covenant at issue here is not ambiguous, and no material facts are in dispute. Kamfar undertook not to sue the Company except "to enforce [the] Agreement." Unlike a claim for breach of contract, neither a tort claim nor, in all likelihood, a claim for a declaration regarding issues that an agreement was supposed to have put to rest can be said to enforce that agreement. As a matter of law, Kamfar's defamation and, probably, his declaratory judgment claims were prohibited by his covenant not to sue. Relief, however, is another matter. A defendant normally may not recover damages — i.e., litigation expenses — for breach of a covenant not to sue unless the parties specifically intended such recovery.*fn64 The Second Circuit has stated that the

 

"primary function [of the usual covenant not to sue] is to serve as a shield rather than as a sword. . . . In the absence of contrary evidence, sufficient effect is given the usual covenant not to sue if, in addition to its service as a defense, it is read as imposing liability only for suits brought in obvious breach or otherwise in bad faith. . . ."*fn65
Here, the contractual language is silent, the breach is not obvious*fn66 — since the defamation claim arises out of the same conduct as the breach of contract claim*fn67 — and there is no evidence of bad faith.*fn68 Accordingly, the claim for breach of contract will be dismissed.

  2. Breach of the Covenant of Good Faith and Fair Dealing

  "In general, under New York law, a duty of good faith and fair dealing is implicit in every contract. A claim of breach of [the duty of good faith and fair dealing], however, will be dismissed as redundant where the conduct allegedly violating the implied covenant is a predicate also for a claim for breach of an express provision of the contract."*fn69 Kamfar's allegation of breach of the implied covenant of good faith and fair dealing is entirely duplicative of the allegation of breach of the express covenant not to sue and therefore will be dismissed.

  3. Rescission

  The defendants seek rescission of the Agreement on the ground that Kamfar's assertion of non-contract claims has defeated "the objective of the parties in entering into the Agreement."*fn70

  In general, rescission is appropriate to remedy a breach of contract only when the breach is "material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract. . . . If the party who seeks rescission has an adequate remedy at law, ordinarily he is not entitled to rescind. . . ."*fn71

  The defendants argue that New World entered into the Agreement because New World "sought a permanent end to public scrutiny of a chapter in its history" and because, "[a]lthough the Company believed that it had grounds to terminate Kamfar's employment for cause, it did not want to expose itself to the accompanying potential expense and publicity of protracted litigation."*fn72 Thus, the defendants argue, Kamfar has "rendered meaningless the very benefits the Settlement Agreement provided the Company" by asserting non-contract claims.*fn73

  The argument is frivolous. Even if the defendants' characterization of New World's motive for entering into the Agreement were believed, it would be evident that one of the major objects of the Agreement was to settle potential claims arising out of Kamfar's separation. Essential components of the Agreement were Kamfar's agreement to repay the $1,620,000 bonus, New World's agreement to pay Kamfar $1,445,000 severance, and Kamfar's release of the Company from any liability in connection with his termination. Kamfar's assertion of non-contract claims does not affect these features of the Agreement, let alone constitute such a "substantial and fundamental" breach of the Agreement "as to strongly tend to defeat the object of the parties in making it." Moreover, the defendants do not argue that Kamfar's contract claim violated the Agreement, let alone that it is grounds for rescinding it.*fn74 Kamfar's claim for defamation arises out of precisely the same conduct as his contract claim and therefore does no more to defeat the purpose of the Agreement than does the contract claim. And the additional burden in defending against the claim for declaratory relief is trivial.

  The claim for rescission will be dismissed. 4. First Seven Causes of Action

  The first seven causes of action all are based on alleged conduct as to which the Agreement explicitly released Kamfar from liability.*fn75 The defendants concede that these causes of action are barred unless the Agreement is rescinded.*fn76 As there is no basis for rescinding the agreement, the first seven causes of action in the counterclaim fail as a matter of law.

  Conclusion

  The defendants' motion for summary judgment dismissing the complaint [docket item 29] is granted to the extent that the first claim for relief, insofar as it alleges a breach of the confidentiality clause and names Anthony Wedo as a defendant, as well as the second, third, and fourth claims for relief, are dismissed. The defendants' motion for summary judgment is otherwise denied. The plaintiff's motion for summary judgment dismissing the counterclaim [docket item 14] is granted.

  SO ORDERED.


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