The opinion of the court was delivered by: Lindsay, Magistrate Judge:
This action, which arises out of the breach of an employment agreement and asset purchase agreement between plaintiffs, Carco Group, Inc.("Carco") and Ponjeb V, L.L.C ("Ponjeb") (collectively "Carco" or "plaintiffs") and defendant Drew Maconachy ("Maconachy") concerning the plaintiffs' purchase of a private investigation firm of which Maconachy was a principle, is before the Court on remand from the United States Court of Appeals for the Second Circuit. On April 29, 2009, following a bench trial, the undersigned found in favor of plaintiffs on their breach of contract and faithless servant claims and entered judgment against Maconachy in the amount of $1,791,356, plus attorneys' fees, prejudgment interest and a declaratory judgment. By decision dated July 6, 2010, the Second Circuit affirmed the judgment as to the breach of contract and faithless servant claims, but vacated the judgment as to the breach of contract damages award and remanded the case solely to recalculate damages awarded, if any, under Carco's breach of contract claims.
For the reasons set forth below, the court awards Carco damages in the amount of $571,506.85 under its breach of contract claims, plus prejudgment interest to be calculated by the Clerk of the Court.
The factual background to this action is set forth in the undersigned's Opinion and Order, dated April 21, 2009, Carco Group, Inc. v. Maconachy, 644 F. Supp. 2d 218 (E.D.N.Y. 2009) and the Second Circuit's July 10, 2010 Amended Summary Order, Carco Group, Inc. v. Maconachy, 383 Fed. Appx. 73 (2d Cir. 2010), familiarity with which is assumed. The Circuit did not disturb the factual findings in the underlying Opinion and Order and accordingly the court incorporates them in the within decision. See In re M/V DG Harmony, No. 98 Civ. 8394 (DC), 2009 WL 3170301, at *1 (S.D.N.Y. Sept. 30, 2009). The following constitutes the court's additional findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52(a), with relevant prior findings and conclusions repeated for context.
Maconachy and John Murphy owned Murphy & Maconachy, Inc. ("MMI"), a security consulting firm that offered investigation and litigation support services, and had offices in both California, known as "MMI West," and Virginia, known as "MMI East". Carco, 644 F. Supp. 2d at 223. Maconachy was President of MMI West. (Id.) Carco was in the business of providing research and background check services. Id. Peter O'Neill ("O'Neill") was Carco's majority owner and Chairman, and in the late 1990s he sought to expand Carco's business to include investigative services. Id.
In 1998, MMI commissioned Merrill Lynch Business Advisory Services ("Merrill") to prepare a valuation of the company and to determine the fair market value of MMI as of August 1, 1998 for a potential sale of the business (the "Merrill Valuation Report"). (Id; E-1-97.)*fn1 Merrill's valuation in determining the fair market value for MMI and in projecting its post-acquisition revenues was based on an analysis of (i) MMI's financial history, including internal financial statements for years' ended December 31, 1993 through 1997 and interim financial statements for the period ended July 31, 1998; (ii) independent research, including Merrill's research analysis reports, Standard & Poor's Industry surveys, Dow Jones news reports, SEC filings, research reports on publicly traded companies, newspapers and trade magazines; (iii) management interviews with Murphy (Chairman) and Maconachy (President); (iv) sales prices for comparable companies; and (v) trends in the national investigative market. (E-5-6; 42, 53-60.)
The Report stated that the business was a service business with few tangible assets, such as real estate, buildings, equipment or customer accounts receivables, its sales model was heavily dependent upon the development of personal relationships to generate revenue, and Murphy and Maconachy were its most valuable assets. (Carco, 644 F. Supp. 2d at 241; E-17; T-64-65, 180,277.) The Merrill Valuation Report determined that MMI had an enterprise value to a "generic buyer" or "non-strategic buyer" of between $7.7 and $8.5 million and between $10.2 and $12 million to a "synergistic buyer" or "strategic buyer."*fn2 (E-8, 68, 72.) The Report recognized that revenue generation was heavily dependent upon the direct sales approaches of its principals, particularly Murphy and Maconachy,*fn3 and noted that [t]he majority of business comes from reputation and word of mouth or from repeat business with previous clients. MMI's principals are frequently asked to participate as industry specialists in various forums, which is often a source of new clients and enhances MMI's national reputation. MMI also directs market specific clients and/or attorneys in those market sectors in which MMI specializes. (E-17, 22.) The Report stated that MMI's revenues had grown at a compound annual rate of 16.5% from 1994 to 1997, and projected that under the strategic scenario, MMI's revenues could be expected to grow at an annual rate of 20% in the first two years after the acquisition and a rate of 15% per year thereafter. (E-26, 69.)
Maconachy and Murphy proffered the Merrill Valuation Report as an accurate and reliable measure of the fair market value of MMI. (E-5, 527.) At a meeting in February 1999 between Maconachy, Murphy and Carco's representative Mike Giordano to discuss Carco's possible acquisition of MMI, Maconachy represented to Carco his belief that MMI's future revenue would be even higher than Merrill's projections. Carco, 644 F. Supp. 2d at 223. Because Maconachy and Murphy were MMI's key assets, O'Neill's decision to acquire MMI depended on their continued association with MMI. Id. To that end, Carco required that Maconachy and Murphy each sign a long term employment agreement ("EA") as a condition precedent to the asset purchase agreement ("APA"). Id. at 223-24.
In considering the purchase of MMI, Carco relied on the Merrill Valuation Report to determine the purchase price for MMI and to project its potential revenues. (T-92-93, 124, 180.) Carco, through its subsidiary Ponjeb (collectively Carco), acquired the assets of MMI on January 7, 2000, for a total purchase price of $7.2 million, with $2 million paid up front and the remaining $5.2 million to be paid in thirty-two equal quarterly payments, following the closing. Id. Pursuant to the APA, Maconachy executed an EA*fn4 for a term of eight (8) years to "render exclusive and full-time services in such capacities and perform such duties as the Members of the Company may assign, in accordance with such standards of professionalism and competence as are customary in the industry of which the Company is a part." Id. Maconachy was made President of Ponjeb and Senior Vice President of Carco, reporting directly to Carco's president, and agreed to continue to manage MMI West. Id. at 224. The EA provided that Maconachy would be paid an annual salary of $200,000 plus incentive compensation that would be calculated semi-annually. Id. The EA further provided:
If the Employee is convicted of any crime or offense, is guilty of gross misconduct or fraud, or materially breaches material affirmative or negative covenants or agreements hereunder, the Company may, at any time, by written notice to the Employee, terminate this Employment Agreement, and the Employee shall have no right to receive any Annual Salary, Incentive Compensation, or other compensation or benefits under this Employment Agreement on and after the effective date of such notice.
Following Carco's acquisition, from January 2000 to October 31, 2000, MMI incurred a loss of $1.3 million. Id. In a letter addressed to O'Neill dated November 7, 2000, Chase Bank ("Chase"), Carco's lender for the acquisition of MMI, expressed concern over MMI's declining revenues. Id. In response to the Chase letter, Carco held a meeting on November 17, 2000 with Murphy, Maconachy, O'Neill, Carco's corporate planner, Michael Giordano ("Giordano") to discuss a business plan to deal with MMI's declining revenues. Id. At the meeting, O'Neill made clear that reversing the revenue trend required that MMI implement a new approach to sales with a focus on bringing in new clients to strengthen revenues. Id. O'Neill emphasized the importance of face-to-face meetings with new client prospects and instructed Maconachy that he bore primary responsibility for improving the sales effort at MMI West. Id. O'Neill instructed Maconachy and Murphy that each division of MMI had to meet a target of at least twenty face-to-face sales meetings per week with potential new clients in order to increase revenues. Id. at 225. Maconachy expressed disagreement with O'Neill's sales approach and left the meeting early. Id.
(4) Losses Incurred from November 17, 2000 to December 2002
On November 20, 2000, Maconachy prepared a sales plan for MMI West that was consistent with O'Neill's sales direction and provided for his staff to meet with at least four new client prospects daily and for him to devote one or two days per week to meeting prospective clients. Id. The plan acknowledged "the importance of 20 marketing/sales calls per week, and MMI West will work hard to accomplish that goal." (E-749-51.) In response, O'Neill stressed the importance of concentrated sales effort, clarified that the twenty sales calls' requirement was a minimum effort and could not be met by a simple phone call, made clear that Maconachy was expected to personally spend at least two days in the field selling MMI's services to new customers, and instructed Maconachy to delegate case management to someone else so that he could lead the sales effort. Id. In a memo to O'Neill dated December 7, 2000 concerning his sales plan, Maconachy stated, "Everyone involved in sales at MMI West understands your instructions that we attempt to achieve a goal of twenty (20) street calls (defined by you, 'personal, face to face') per week . . . [W]e will put our best foot forward in attempting to . . . satisfy this goal." (E-695.) Maconachy never followed the sales plan and by year end MMI West's revenues were down by a total of $1.9 million. Id.
The flash revenue reports for January and February 2001 reflected
continuing losses of MMI of approximately $270,000. Id. at 226. On
March 2, 2001, Giordano, with input from Maconachy and Murphy,
compiled a formal business plan for MMI to reverse MMI's losses,
provided that each division of MMI would undertake twenty face-to-face
sales meetings on new clients per week, provided for weekly reports to
O'Neill outlining MMI's sales efforts, and outlined cost containment
strategies. (Id. at 225; E-295-375.) The business plan recognized that
one of the most important of the "[k]eys to success of MMI/CARCO" is
"Marketing. We must focus our efforts on developing successful niche
marketing. We need to find the quality-conscious client in the right
channels, and we need to ensure that the potential client can find
us." (E-301.) Pursuant to the business plan, Maconachy and Murphy
"projected break-even sales of $6 million" for 2001.*fn5
O'Neill prepared a performance evaluation for MMI which concluded that MMI West's sales performance had been dismal, that MMI West had not made any significant effort to meet the target of twenty sales meetings per week, that the few sales calls made were only to existing or former clients, and that Maconachy had ignored the cost containment provisions of the business plan. Carco, 644 F. Supp. 2d at 226. In August 2001, O'Neill sought Murphy's assistance, in his capacity as general manager of MMI, to secure Maconachy's compliance with the business plan, however, as of October 2001, MMI West had yet to come close to meeting the target of twenty sales meetings per week. Id. Carco hired Michael Slattery in October 2001 as its President*fn6 , and O'Neill gave Slattery the task of addressing MMI West's lack of profitability and, more specifically, Maconachy's failure to implement the business plan. Id.
In January 2002, Murphy and Maconachy submitted a second business plan for MMI*fn7 which reiterated MMI's commitment to make twenty face-to-face sales calls on new clients each week, outlined cost containment strategies and specifically identified 381 new businesses*fn8 that would be specifically targeted by MMI West for sales calls*fn9 . Id. at 226-27. By February 2002, O'Neill reported to Slattery that MMI West personnel were not pursuing sales meetings with the target prospects and that Maconachy persisted in meeting only with existing customers. Id at 227. O'Neill directed Slattery to address this issue with Maconachy. Id. After reviewing MMI West's weekly reports which continued to reflect Maconachy's failure to comply with the business plan*fn10 , in March 2002, Slattery demanded an explanation from Maconachy. Id. Slattery also informed Maconachy that his failure to increase revenues would require cuts in MMI West's costs. Id. Maconachy responded in April 2002 that his staff had been too busy to implement the business plan and so he had modified the plan to limit the sales efforts to existing clients; a plan which O'Neill had specifically rejected. Id.
Upon learning of this development, O'Neill instructed Slattery to meet with Murphy and Maconachy to address the sales problem. Id. At this meeting, although Maconachy reiterated that he had abandoned the sales plan because it was unrealistic, Slattery reminded him that he had helped formulate the plan*fn11 and made it clear that implementation of the sales plan was not optional. Id. Slattery agreed to reduce the required number of sales meetings to seven per week on target prospects, restated cost containment strategies and guidelines for business trips, and directed that client meetings be held by a single MMI employee. Id. In a follow-up memo dated April 25, 2002, Slattery told Maconachy and Murphy:
After digesting our conversation and reading your respective responses to my inquiries about your sales plans, it is apparent to me that with few exceptions, the submitted sales plans have not been followed. Accordingly, I was extremely disappointed that I was not notified that you abandoned your sales plan in January 2002, which you originally submitted in November 2001, and resubmitted as part of MMI's business plan in February 2002. Moreover, you did not even prepare and submit a new plan. One has to question how MMI expects to generate new revenues and save the livelihood of our employees without designing and implementing a sales plan.
I have stated from day one that the challenge faced by MMI is one of generating revenues and profit. If the revenues could not be increased, it would be necessary to align our cost structure with existing revenues in an effort to, at minimum, achieve break-even status. With that as a backdrop, I have been disappointed with the marketing efforts. (E-793.) Slattery reported back to O'Neill on the meeting and plans were made to further consolidate operations to reduce expenses and to ramp up the sales effort at MMI West to curtail mounting losses. Carco, 644 F. Supp. 2d at 227. By April 30, 2002, Maconachy again complained about the sales program, and Slattery issued an ultimatum directing him to personally conduct seven face-to-face sales calls each week from the target prospects list and demanding that Maconachy set sales targets for the balance of his staff. Id. at 227-28.
Notwithstanding the continuous direction by his superiors and Maconachy's agreement to sell new and existing services to new clients*fn12 , throughout the balance of 2002, Maconachy failed to follow the sales plan, never met the reduced target of seven sales calls per week on target prospects, and did not comply with Carco's directives and policies. Id. at 228-29. In an effort to further cut costs, Carco reduced the staff at MMI. Id. MMI West's net loss for the period November 17, 2000 through December 2002 totaled $901,645.*fn13 Id. at 240-41.
In January 2003, Slattery reported to Maconachy that MMI West's
business was failing from a lack of management and absence of any good
faith effort to follow corporate directives, and that Maconachy's
refusal to market the business was the chief cause of personnel cuts,
which further diminished the business's overall value.*fn14
Id. at 230. Maconachy suggested they discuss ...