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Tyco International, Ltd., and Tyco International (Us), Inc v. L. Dennis Kozkowski

May 24, 2011



Plaintiffs Tyco International, Ltd. and Tyco International, Inc. ("Tyco") sue on numerous claims against their former Chief Executive Officer and Chairman, Dennis Kozlowski, including fraud, breach of fiduciary duty, and breach of contract. On December 1, 2010, this court issued an opinion ruling on the parties' cross-motions for summary judgment. Tyco Intern., Ltd. v. Kozkowski, slip. op., No. 02cv7317, 2010 WL 4903201 (S.D.N.Y. Dec. 1, 2010). The opinion dismissed essentially all of Mr. Kozlowski's counterclaims and granted summary judgment to Tyco as to liability on number of its claims, including on its remedy for disgorgement of all compensation earned by Kozlowski during his period of disloyalty. The opinion relied on New York law rather than Bermuda law in coming to the conclusion that the remedy of disgorgement is appropriate. The court also applied the doctrine of collateral estoppel to preclude Kozlowski from denying facts established by his criminal convictions. Kozlowski now wishes to challenge the summary judgment rulings on appeal before final judgment in the case, and to do so moves for certification for interlocutory appeal pursuant to 28 U.S.C. § 1292(b) and for entry of partial final judgment on his counterclaims pursuant to Rule 54 (b) of the Federal Rules of Civil Procedure.

Kozlowski's motions are denied.


In June 2002, Kozlowski was discharged from Tyco as he faced imminent indictment in the state of New York for sales tax evasion. An ensuing investigation revealed that Kozlowski had conspired with other corporate officers to pilfer Tyco's treasury of tens of millions of dollars. This led to a major New York state criminal case involving various charges. Kozlowski was convicted on 22 felony counts involving his stealing of money from Tyco and his efforts to hide his thefts.

Tyco brought this suit against Kozlowski for, among other things, breach of fiduciary duty. Based on this breach, Tyco seeks to have Kozlowski disgorge all compensation earned during the period of his disloyalty, amounting to several hundred million dollars. Kozlowski, in turn, brought several counterclaims against Tyco seeking payment on unfulfilled compensation agreements. After discovery, both sides moved for summary judgment.

Previous Opinion

In an opinion dated December 1, 2010, this court granted summary judgment as to liability on six of Tyco's 12 causes of action and dismissed completely all but two of Kozlowski's counterclaims, while dismissing the remaining two only in part. While the court assumes knowledge of the opinion, a brief summary and explanation will be helpful in disposing of the current motion. The undisputed facts relied on by the court in granting summary judgment on Tyco's causes of action and dismissing Kozlowski's counterclaims came in large part from Kozlowski's criminal convictions, which, via collateral estoppel, established that Kozlowski stole millions of from Tyco through unauthorized bonuses and other compensation and hid his thefts from Tyco through, among other things, the falsification of documents submitted to Tyco's compensation committee.

The court, in its opinion, also had to make a determination as to which law to apply to certain claims, as during much of the time Kozlowski was stealing from and lying to Tyco the company was incorporated in Bermuda. Kozlowski argued first that a conflict existed between Bermuda law and New York law on the claim for constructive fraud and the remedy of disgorgement, claiming Bermuda, unlike New York, does not recognize the claim of constructive fraud or the remedy of disgorgement. Kozlowski then argued that Bermuda, as the state of incorporation and principle place of business of Tyco, should have its law applied in case of conflict under the "internal affairs doctrine" and that Bermuda, as the place of the injury and thus the locus of the tort, had a greater interest in the case. Tyco did not dispute that Bermuda does not recognize a claim for constructive fraud but argued that there was no conflict as to the remedy of disgorgement and that, in any case, it was New York's law that should apply if any conflict exists since New York, as the place of much of the conduct, has a greater interest in the case.

The court could not make a clear determination as to whether Bermuda law would permit disgorgement under these circumstances and so, for the purposes of the choice of law analysis, assumed a conflict as to disgorgement. The court also assumed a conflict as to constructive fraud since Tyco had not disputed Kozlowski's contention that Bermuda did not recognize such a claim.

The court then turned to a choice of law analysis. The court rejected automatic application of Bermuda law based on internal affairs doctrine, finding that the place of incorporation is just one of many factors that must be considered in determining which state has greater interest in having its law applied in a case. The court also determined that in a case such as this, involving a multinational corporation and conduct in multiple jurisdictions, determining the locus of the tort is very difficult. The court thus centered its choice of law analysis on the conduct of Kozlowski. This analysis involved a consideration of all the facts of the case. For example, the court took additional note of Kozlowski's New York criminal convictions because, as the judge in the criminal case instructed to the jury, for each conviction the jury must have found that Kozlowski or "another for which he is legally accountable" engaged in conduct in New York "sufficient to establish either an element of such offense or an attempt to commit such offense." In other words, for 22 different criminal acts against Tyco, Kozlowski's conduct in some way touched New York. Although not dispositive, this fact was certainly important to the court's analysis. The court also noted, for example, Kozlowski's use of the New York relocation program to steal money from Tyco and his use of stolen funds to purchase artwork in New York. These and other facts made it clear to the court that New York was an important locus of Kozlowski's conduct in this case.

It was the large amount of conduct that occurred in New York that underlay the court's determination that, in this case, New York's interest in deterring such conduct predominated over Bermuda's interest in governing the conduct of officers of corporations incorporated in its territory. As the court said:

While New York has a clear interest in deterring fraud and theft within its borders, an interest that would be thwarted by applying Bermuda's arguably more lenient standards to Kozlowski's conduct, Bermuda has no corresponding interest in applying those more lenient standards to foreign defendants who cause injury to plaintiffs domiciled in Bermuda.

Kozlowski, 2010 WL 4903201 at *5. With this determination, the court applied New York law and held that Kozlowski may be liable for constructive fraud and that Tyco is entitled to have Kozlowski disgorge all compensation earned during his period of disloyalty to the company. His forfeiture of compensation was also a factor in dismissing many of his counterclaims, which sought payment of unpaid benefits accrued after the beginning of his disloyalty. ...

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