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WALL STREET SYSTEMS, INC. v. LEMENCE

September 1, 2005.

WALL STREET SYSTEMS, INC., Plaintiff,
v.
RICARDO P. LEMENCE, Defendant. RICARDO P. LEMENCE, Third-Party Plaintiff, v. LUCIEN KNEIP, JOSEPH A. PATRINA, J. WATKINS STROUSS, and JAMES M. PATRINA, Third-Party Defendants.



The opinion of the court was delivered by: JED RAKOFF, District Judge

MEMORANDUM ORDER

Plaintiff Wall Street Systems, Inc. ("WSS") seeks a declaration of the amounts it owes defendant Ricardo P. Lemence for salary, incentive compensation, dividends, and disability insurance premium payments for the years 2001, 2002, and 2003. Lemence, in addition to disputing the amounts WSS claims it owes, alleges that WSS breached its contract with Lemence by not paying Lemence the amounts he claims he was owed. He further claims that third-party defendants Lucien Kneip, Joseph A. Patrina, J. Watkins Strouss, and James M. Patrina (collectively, the "Board") breached their fiduciary duty to Lemence. See Defendant's First Answer, Counterclaims and Third Party Complaint and Verified Shareholder's Derivative Third Party Complaint ("Am. Countercls.") ¶¶ 110-128.*fn1 Following discovery, plaintiff and defendant both moved for summary judgment. By Order dated June 22, 2005, the Court denied defendant's motion in all respects and granted plaintiff's motion in some, but not all, respects. This Memorandum Order reconfirms those rulings and sets forth the reasons therefor.

The following facts are supported by competent evidence of record and either are admitted or are not genuinely disputed by any competent evidence to the contrary.

  WSS is a software technology company formed in 1986 by Kneip, Joseph Patrina, Jeffrey A. Lambert, and defendant Lemence (the "Founding Shareholders"). See Declaration of Lucien Kneip, January 28, 2005 ("Kneip Decl.") ¶¶ 2-4. Lemence, a computer programmer, held the title of Vice President. See Declaration of Mary Ann Lemence, dated February 10, 2005 ("Lemence Decl."), ¶ 3. On or about December 29, 1993, the Founding Shareholders entered into the Wall Street Systems, Inc. Shareholders' Agreement (the "Shareholders' Agreement"), which replaced earlier agreements among them and which provided, inter alia, for an automatic 10% increase each year in the Founding Members' salaries. See Kneip Decl. ¶ 6; Wall Street Systems Shareholders' Agreement, December 29, 1993, § 2(b), attached as Exhibit A to Kneip Decl. (Shareholders' Agreement). Specifically, section 2(b) of the Shareholders' Agreement provides as follows:
During the period that the Founding Officers are employed by the Corporation as officers, the Corporation has paid to the respective Founding Officers, as compensation for their services to the Corporation, the base salaries per annum set forth below (which were effective in calendar year 1988):
Kneip $132,000 Patrina $132,000 Lampert $121,000 Lemence $110,000
Each of the foregoing base salaries has been and shall continue to be automatically increased 10% per annum.
Shareholders' Agreement § 2(b).
  Additionally, section 2(c) of the Shareholders' Agreement provides for certain additional, incentive compensation, as follows:
During the period that the Founding Officers are employed by the Corporation as officers, the Corporation shall pay to the respective Founding Officers, as incentive compensation for their services to the Corporation, bonuses per fiscal year of the Corporation as set forth below in respect of the Combined Earnings (as defined in Paragraph 9(a)(II) below) of the Corporation and each Affiliate.
Kneip 10% of the Combined Earnings in such fiscal year Patrina 10% of the Combined Earnings in such fiscal year Lampert 5% of the Combined Earnings in such fiscal year Lemence 5% of the Combined Earnings in such fiscal year
The amount of such bonuses, the dates of payment thereof and the amount of Combined Earnings pursuant to this Paragraph 2(c) shall be determined by the Board in its sole discretion. Shareholders' Agreement § 2(c).
  Finally, section 2(f) of the Shareholders' Agreement provides as follows:
 
Termination of Employment. In the event of the Permanent Disability*fn2 of any Founding Officer, the Corporation shall continue to pay such Founding Officer all compensation due to him hereunder up to the date of his termination, less any amount received by such Founding Officer under disability income insurance maintained by [WSS].
Id. § 2(f).
  In or around the summer of 2000, the tech "bubble" burst, and, whether for this reason or otherwise, on May 14, 2001 the Board and the Founding Shareholders (including defendant) executed a Unanimous Joint Written Consent (the "May 2001 Consent") that amended the foregoing provisions of the Shareholders' Agreement as follows:
RESOLVED, that the Shareholders agree that the Board, in its sole discretion, shall determine to pay or not to pay, or to accrue or reverse the accrual of, salaries for the Shareholders for all or part of 2001, and, if the Board determines to pay or accrue Shareholders' salaries for all or a part of 2001, the Company shall pay or accrue such salaries, as the case may be, as to all (but not less than all) the Shareholders at the same respective annual salary amounts paid to the Shareholders in 2000. . . . RESOLVED, that during the time period that the Company shall not be paying or accruing Shareholders' salaries as aforesaid, the company shall not pay or accrue any incentive compensation, stock bonuses or dividends for or to the shareholders with respect to such time period.
The Shareholders' Agreement in this Written Consent with respect to incentive compensation and salaries shall be deemed to be amendments to the Shareholders' Agreement dated as of December 29, 1993 by and among the Shareholders and [WSS]. . . .
Unanimous Joint Written Consent of the Board of Directors and Shareholders of Wall Street Systems, Inc., May 14, 2001) (May 2001 Consent) at 3, attached as Exhibit B to Kneip Decl.
  Pursuant to the May 2001 Consent, the Board ultimately determined not to increase 2001 salaries for the Founding Shareholders above their 2000 levels, and, moreover, to authorize such salaries only for three of the four quarters of 2001. These determinations were implemented by a Unanimous Joint Written Consent of the Board of Directors dated January 30, 2002 (the "January 2002 Consent"), which allocated 2001 salaries and incentive compensation for the Founding Shareholders as follows:
Salary for 2001: Kneip $484,804.70 Patrina $484,804.70 Lampert $440,797.40 Lemence $400,593.20.
  Incentive Compensation for 2001: Kneip $379,666.00 Patrina $379,666.00 Lampert $189,834.00 Lemence $189,834.00 See Unanimous Joint Written Consent of the Board of Directors of Wall Street Systems, Inc., January 30, 2002 (January 2002 Consent), attached as Exhibit C to Kneip Decl. The January 2002 Consent also authorized the Board, in its discretion, either to pay these amounts or to accrue them, in whole or in part. Id.

  In regard to Lemence, while WSS had already paid Lemence $141,667 of his 2001 incentive compensation in December 2001, he was not paid the remaining $48,167 of his 2001 incentive compensation, nor any of his $400,593.20 in 2001 salary, until 2003. See Kneip Decl. ¶¶ 31-32. The reason for the delay is disputed: Lemence claims it was because the Board wanted to renegotiate the Founding Shareholders' salaries, see Defendant's Memorandum in Support of Defendant's Motion for Partial Summary Judgment ("Def. Mem.") at 7, while WSS claims it was because the company, in order to make itself more attractive to outside investors by increasing its cash reserves, decided to accrue, rather than pay, various of the payments otherwise due the Founding Shareholders, see Kneip Decl. ¶ 20. What is not disputed, however, is that WSS did not make any salary payments to any of the other Founding Shareholders (i.e., other than Lemence) for the years 2002, 2003, and 2004. See Kneip Decl. ¶ 42.

  Lemence's case was different, however, because, in October 2002, Lemence, then age 49, suffered a serious stroke that left him permanently disabled. See Lemence Decl. ¶ 6. Under the terms of the Shareholders Agreement and the company's disability insurance policy, the company remained liable to Lemence for his full salary, less certain disability insurance benefits, until October 2004, when he would be deemed permanently disabled, terminated, and eligible to have his shares purchased by WSS. See Shareholders' Agreement §§ 2(f), 5(a); Deposition of Lucien Kneip, December 14, 2004, at 49.

  As a consequence, WSS, after receiving a letter from Lemence's attorney in March 2003, paid Lemence his 2001 salary and his remaining 2001 incentive compensation. Kneip Decl. ¶¶ 31-32; Letter of Melissa L. Jolivet, Esq. to Messrs. Kneip, Patrina, and Lampert dated March 17, 2003, attached as Exhibit 3 to Am. Countercls. There then ensued a series of unsuccessful negotiations between Lemence and WSS, which ultimately culminated with WSS' making the following additional salary payments to Lemence: $440,653 in salary for 2002 (computed by adding 10% to his 2001 salary of $400,593.20); $103,782 in salary for 2003 (computed by adding 10% to his 2002 salary and then subtracting the amount of disability income Lemence received in 2003); and $48,279, for 2004 (computed by adding 10% to his 2003 salary, pro-rating it through the date of his termination, and then subtracting the amount of disability income received in 2004). See Kneip Decl. ¶¶ 40-41.

  In addition, throughout this period, two disability insurance policies were maintained on behalf of Lemence, one an individual insurance policy and the other a group policy. See Id. ¶¶ 46, 50-51. Under these policies, Lemence received $223,000 in net insurance payments for calendar year 2003 and $215,903 in net insurance payments for the period from January 2004 through October 12, 2004 (the date of his termination). See id. ¶ 51. Finally, in December 2001, WSS paid its Founding Shareholders (including Lemence) a dividend previously declared for 1999 but not previously distributed. See id. ¶ 60. Further, on January 7, 2003, the Board declared two additional dividends, one for $1 million authorized on April 3, 2002 and the other for $3 million authorized on December 23, 2002, for a total of $4 million. See Unanimous Written Consent of the Board of Directors of Wall Street Systems, Inc., January 7, 2003, attached at Exhibit D to Kneip Decl. Two million dollars of this $4 million was distributed to the Founding Shareholders (including Lemence)in February and March 2003 and the remaining two million dollars was distributed to the Founding Shareholders (including Lemence) between August and October 2003. See Kneip Decl. ¶ 65. (In December 2003, the Board declared an additional $1 million dividend that, as of the time these motions were submitted, had not yet been distributed to anyone. See id. ¶ 62.)

  Against this background, the Court turns to the summary judgment motions. While the motion papers are filled with appeals to equity, the primary issue is simply one of contract law: has WSS paid Lemence what he is contractually owed, or not? The Court considers this issue, first, as to salary, then as to incentive compensation, then as to dividends, and finally as to disability insurance payments.

  1. Disputes over Salary. On its face, the May 2001 Consent, to which Lemence consented, gives the Board the power to alter 2001 salaries from those calculated under the Shareholders Agreement. Lemence argues, however, that it did not give the Board the power to reduce the salaries to those authorized by the January 2002 Consent, whereas WSS argues that it not only authorized those reductions ...


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