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Barbagallo v. Marcum LLP

United States District Court, E.D. New York

January 10, 2013

Joseph S. BARBAGALLO, Plaintiff,
v.
MARCUM LLP, John Does 1-9, Defendants. Marcum LLP, on Counterclaims, and as Third-Party Plaintiff,
v.
Joseph S. Barbagallo, on Counterclaims, and Citrin Cooperman & Company, LLP, as Third-Party Defendant.

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[Copyrighted Material Omitted]

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Derek Eddy, Fellheimer & Eichen, LLP, New York, NY, for plaintiff.

John Houston Pope, Epstein Becker & Green, P.C., Raymond T. Mak, Epstein Becker & Green PC, New York, NY, for defendant.

Frank Christian Welzer, Zuckerman Gore & Brandeis LLP, New York, NY, for third-party defendant.

MEMORANDUM, FINDINGS OF FACT, CONCLUSIONS OF LAW, AND JUDGMENT

JACK B. WEINSTEIN, Senior District Judge.

I. Introduction 278

II. Findings of Fact 278

III. Procedural History 284

IV. Choice of Law: New York 285

V. Barbagallo's Claims 285

A. ERISA 285

B. Breach of Contract: Retirement Benefit, PTO, and Commissions 286

VI. Marcum's Counterclaims 293

A. Breach of Contract 293

B. Breach of Loyalty and Fiduciary Duty 296

C. Marcum's Remaining Claims: Negligence and Reformation 298

VII. Conclusion 298

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I. Introduction

With the consent of the parties the claims of plaintiff Joseph S. Barbagallo (" Barbagallo" ) and defendant and counterclaim plaintiff Marcum LLP (" Marcum" ) were tried without a jury. See Fed.R.Civ.P. 52(a)(1). After assessing credibility and reviewing the documents the court sets forth below its factual findings and legal conclusions and applies the law to the facts. Id. Neither party can recover.

Either party may move within twenty days to " question the sufficiency of the evidence supporting the findings" or on any other ground, and may request changes in any portion of this memorandum. See Fed.R.Civ.P. 52(a)(5).

The case is brought by an experienced, independent, certified forensic accountant, Barbagallo, with a substantial number of his own long-time clients. During the space of a few years, he left his private practice to enter an accounting firm, Margolis & Company P.C. (" Margolis" ); then left that firm to join another, Marcum; he left Marcum to join Citrin Cooperman & Company, LLC (" Citrin" ); and then left Citrin to resume his own independent practice. In each of these large accounting firms, he was a non-equity partner. At each move he took his original clients with him.

Two principles affecting employment of professionals in partnerships are revealed: first, when a deal among professionals for services turns sour, it is usually best to promptly terminate the relationship without recriminations and litigation; and, second, well advised clients will usually follow the talent— that is the professional they trust— rather than the organizations to which their adviser temporarily attaches himself.

Barbagallo claims that, pursuant to their employment agreement, Marcum owed him a substantial retirement benefit, along with other payments, when he left the firm for Citrin. He alleges that Marcum's failure to make these payments, particularly the retirement benefit, constituted a breach of their employment agreement and a violation of the Employee Retirement Income Security Act (ERISA). Marcum denies that it has any monetary obligations to the plaintiff. It counterclaims against Barbagallo, asserting that the plaintiff is liable, in contract and in tort, for misconduct while an employee of the firm and for impermissibly taking client business with him to his subsequent employer, Citrin.

Initially Citrin was a party to the litigation. Marcum accused Citrin of taking Marcum clients when it employed the plaintiff. Citrin has reached a settlement with Marcum and Barbagallo. The latter parties remain in the litigation.

II. Findings of Fact

1. Joseph Barbagallo is a certified public accountant in Pennsylvania. He practiced accounting on his own from 1976 until March 2003, when he joined Margolis & Company P.C. (" Margolis" ) as a non-equity partner. Trial Tr. (" Tr." ) 416-17, Nov. 30, 2012. At Margolis, located in Pennsylvania, the plaintiff performed a mix of forensic and tax-related work for individuals and businesses. Id.; Tr. 62, Nov. 27, 2012. He brought to Margolis his own clients. See Marcum Trial Exhibit (" Def. Ex." ) 265. Six more clients were acquired by him while he worked for Margolis. Tr. 759:18-23, Dec. 13, 2012.

2. On September 1, 2009, Margolis effectively merged with Marcum, whose

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principal place of business was in Melville, New York. See Tr. 697-98, Dec. 12, 2012; Tr. 776. Along with other Margolis partners, Barbagallo moved his clients to Marcum. He was one of three Margolis partners to join Marcum as a non-equity partner. Barbagallo remained at Marcum from September 1, 2009 until October 31, 2010 when he went to Citrin. Tr. 62.

3. In September of 2009, he entered into a non-equity partnership agreement (" Agreement" ) with Marcum. See generally Plaintiff's Trial Exhibit (" Pl. Ex." ) 1. The Agreement superseded his prior contract with Margolis. It governed the scope of his employment relationship with Marcum and is the central document.

4. The Agreement is comprehensive. It contains a number of terms that are common to the agreements for the two other Margolis principals who, like Barbagallo, joined Marcum as non-equity partners. It also contains language governing compensation that is individually tailored for each non-equity partner. Barbagallo was entitled to a base annual salary of $183,625, approximately $15, 302 per month. Pl. Ex. 1, § 5.1a. The Agreement covered a wide variety of matters, including benefits, the services he was to provide at Marcum, and his obligations as a non-equity partner. Some of these contract provisions are at the heart of the present dispute, which centers on the circumstances surrounding plaintiff's move from Marcum to Citrin in October of 2010.

5. The plaintiff claims that upon withdrawing from Marcum, he was owed a number of payments, principally a retirement benefit under Section 15.1 of the Agreement. This provision states: " In the event that the Non-Equity Partner withdraws voluntarily from Marcum or is involuntarily terminated by Marcum during the term of this Agreement he shall be entitled to the Retirement Earnings Benefit as provided for in this Agreement." Pl. Ex. 1, § 15.1 (emphasis added). The defendant's position is that under Article X, which primarily governs retirement benefits, Barbagallo should have provided Marcum with " twelve (12) months prior written notice of his intent to retire," which he did not do. See Pl. Ex. 1, § 10.3.

6. Barbagallo claims that since he voluntarily withdrew, and did not retire, Section 14.1 of the Agreement governs. That provision required him to provide only ninety days written notice. See Pl. Ex. 1, § 14.1. He gave ninety days notice. In addition to a retirement benefit, plaintiff also asserts claims for unused Paid Time Off (" PTO" ), under Article VII of the Agreement, and for unpaid client commissions, pursuant to the 2009 Marcum Philadelphia Office Employee Handbook.

7. Marcum's position is that under the contract, plaintiff is not entitled to any of these benefits. One counterclaim alleges that when Barbagallo left the firm for Citrin, he breached Article XIII of the Agreement— the liquidated damages provision for the Agreement's non-compete covenant— by taking some client business without paying Marcum the required fee. Barbagallo contends that he did not run afoul of Article XIII and therefore does not owe any payments. Marcum's two other counterclaims for breach of loyalty and fiduciary duty, and for negligence, stem from the plaintiff's conduct with respect to one particular client matter and to the overall performance of his job.

8. Although as part of their cases both parties dispute the interpretation and application of various contractual provisions, evidence established controlling facts about the legal effect of Barbagallo's conduct while employed at Marcum that bear directly on the resolution of this case.

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9. During his stay at Marcum, Barbagallo primarily focused on forensic investigations and business valuations. He brought to Marcum his prior clients, including the six he had acquired while at Margolis. Tr. 760-61.

10. There was one client that Barbagallo acquired with the assistance of Marcum, but then concealed from this employer— the Tuscano account. With an eye on his imminent— though unannounced departure— to Citrin, but while still a paid employee of Marcum, Barbagallo covertly engaged and began working on this matter on behalf of Citrin, his next employer— ultimately taking the Tuscano client with him to that firm.

11. The trial testimony of a number of witnesses— chiefly the plaintiff himself, the client, Richard Tuscano, his attorney, Scott Unger, and Gary Karlitz, the practice leader of Citrin's valuation and forensic group— collectively establishes the chronology with regards to Barbagallo's acquisition of the Tuscano matter and how it interacted with his employment at Marcum.

12. In February of 2010, Barbagallo met Scott Unger, an attorney from the law firm of Stark & Stark, at a Marcum-sponsored reception. Tr. 499-501, Dec. 11, 2012. The purpose of the networking event was to explore business opportunities between the two firms. The following month, on March 12, 2010, Unger emailed Barbagallo and David Glusman, head partner of Marcum's Philadelphia office and member of the firm's management committee. Unger contacted them to discuss a prospective client who might require the assistance of an accounting expert for a business valuation. Def. Ex. 221. At the time, Barbagallo was a nonequity partner at Marcum and had no plans to leave the firm.

13. After receiving the email, Barbagallo informed Glusman that he would work on the prospective matter. Id. Ex. 222. Glusman was not further involved with the account. Barbagallo became the sole Marcum contact. On March 12, the same day he received Unger's email, Barbagallo spoke with Unger about the potential client, Richard Tuscano, and Tuscano's personal accountant. Id. Ex. 223. It seemed likely to all of them that Tuscano would enlist his services. So Barbagallo sent them his resume, qualifications, history as an expert witness, and general information about Marcum. He also requested background information about the matter in order to run a conflicts check at Marcum. Id.; Tr. 507:11-508:13.

14. The Tuscano matter involved litigation between Richard Tuscano and his brother regarding a family business, Northeastern Import-Export, Inc. (" Northeastern" ). Unger represented Richard Tuscano. At the time that Unger and Barbagallo first spoke in late winter of 2010, there had not been any litigation; Richard Tuscano commenced his action in May of that year. Tr. 521; Def. Ex. 228 (email from Scott Unger to Barbagallo attaching complaint). From March through May, Barbagallo spoke and met with Unger, Tuscano, and Tuscano's accountant, on a number of occasions to discuss Marcum's potential engagement, through which Barbagallo would serve as a forensic accountant in the litigation. Tr. 510:2-515:15; Tr. 432. Barbagallo spent some 20 hours of Marcum time cultivating this account. Tr. 510:2-9, 516:1-4.

15. On May 25, 2010, Barbagallo sent Unger the Marcum engagement letter. Tr. 516-17; Def. Ex. 231. The letter purported to engage Marcum as a firm and did not mention Barbagallo by name. Tr. 517:2-4. At this time, Barbagallo had no

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intention of leaving Marcum. Tr. 515:22-516:11.

16. The Marcum engagement letter was never signed, nor did Barbagallo make any efforts to obtain Tuscano's signature. He never opened a " new matter" at Marcum for the Tuscano engagement; he did not record any billable time for it. Tr. 532. The one hour of nonbillable time he attributed to obtaining this matter, on June 8, 2010, was the last recorded entry mentioning this engagement on plaintiff's Marcum timesheets. See Marcum Proposed Findings of Fact and Conclusions of Law After Trial (" Def. Post-Trial PFFL" ) at 7, Dec. 21, 2012, ECF No. 178; Def. Ex. 204. The Tuscano litigation was dormant for most of the summer of 2010, at least with respect to Barbagallo's involvement.

17. On the invitation of a corporate recruiter, over late June and July of 2010, Barbagallo conversed with Citrin about joining this accounting firm. Tr. 421:10-23. Citrin is a large New York City-based accounting firm that competes directly with Marcum in the New York City and Philadelphia metropolitan areas. See Marcum's Amended Ans., Counterclaims, and Third-Party Compl. (" Amended Ans." ) ¶ 140, Sept. 22, 2011, ECF No. 36. Barbagallo had a number of interviews with partners at Citrin, including those in their Philadephia office. Citrin offered to compensate Barbagallo at a base level of $255,000, a substantial increase from his salary at Marcum. Tr. 422:19-21.

18. On July 23, Joel Cooperman, managing partner of Citrin, reached an agreement with plaintiff for a position as a non-equity partner and sent Barbagallo the proposed agreement for his signature. Tr. 145:18-146:14; Def. Ex. 217. On the same day, Barbagallo personally handed a ninety-day notice of resignation to David Glusman of Marcum. Tr. 422:25-423:5. It stated:

This is to inform you that in accordance with section 14.1 of my agreement with Marcum LLP, I wish to terminate my relationship with and services to Marcum. Under that section I am required to give 90 days notice. I am willing to extend the 90 day period if you feel it is necessary for a smooth transition. I am also willing to leave prior to 90 days if we reach a mutually acceptable date. I appreciate having been associated with Marcum and would like to make the transition as smooth as possible.

Pl. Ex. 92.

19. Glusman accepted Barbagallo's resignation, requesting that the plaintiff spend his ninety-day notice period attending to his client accounts, issuing bills for work already performed, and collecting outstanding account receivables. Tr. 714-16. Barbagallo agreed.

20. Despite Glusman's repeated requests at their meeting, Barbagallo refused to disclose the identity of his new employer, but misled Glusman with the assurance that it would not be a competing accounting firm. Tr. 714-15; Tr. 72:13-25. Barbagallo did not tell Glusman about his agreement with Citrin until he was already there. Tr. 75:17-76:3.

21. On August 2, a little more than a week after Barbagallo announced his resignation from Marcum, Citrin received his signed partnership agreement and started preparing for the plaintiff's arrival at the firm. Tr. 152, Nov. 28, 2012; Def. Ex. 218.

22. About this time, the Tuscano matter became more active. With his new employment agreement finalized, and in anticipation of joining Citrin after the ninety-day notice period ended, the plaintiff used the new activity in the Tuscano matter as his opportunity to divert the account to his prospective employer, Citrin, in August of 2010. This was done

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despite Citrin's instructions to the plaintiff not to disrupt Marcum's client base. Tr. 165-66.

23. On August 9, Barbagallo met with Richard Tuscano. Expecting a significant amount of work on this matter in the near future because of litigation developments, Barbagallo informed the client that he would soon be leaving Marcum for Citrin. Tr. 439, 527. Barbagallo did not ask Tuscano for his consent to move the engagement to Citrin. Tr. 292, Nov. 29, 2012. At their meeting, Barbagallo told Tuscano that he would ask Citrin to run a routine check for any conflicts at the firm. Tr. 440:15-23.

24. On August 9, while still an employee at Marcum, Barbagallo notified Gary Karlitz, the practice leader of Citrin's valuation and forensic group, of the Tuscano account. He stated that Tuscano was a client he wanted to bring to Citrin and engage as a partner there. And he requested an engagement letter from Citrin. Tr. 350-53. See Def. Ex. 232 (" [O]ur client would be Richard Tuscano...." ). From his personal email address, the plaintiff provided Karlitz with the basic information about the Tuscano matter, the identity of the client and the corporate entities involved. Tr. 352-53; Def. Ex. 232. He led Karlitz to believe he had not dealt with the client before, never disclosing that he had been working intermittently on this matter over the last five months or that he had previously submitted to Richard Tuscano a proposed Marcum engagement letter. Tr. 351:17-352:2.

25. On August 10, the day after learning from Barbagallo about his new client, Karlitz performed a conflicts check at Citrin, emailing to the firm information about the Tuscano litigation and the parties involved. Tr. 355-56; Def. Ex. 234. Later that day, in response to Barbagallo's request, Karlitz provided the plaintiff with a proposed Citrin engagement letter for this matter. Tr. 357; Def. Ex. 235. The letter contained the requisite information about the client, Richard Tuscano, and his lawyer, Scott Unger, who facilitated the engagement. Tr. 351:1-7, 357; Def. Ex. 235. It required only Tuscano's signature to be complete. It engaged Citrin as a firm, listed Karlitz as the partner in charge of the matter, and did not mention Barbagallo. Tr. 357; Def. Ex. 235.

26. Karlitz assumed that Citrin could properly engage Tuscano because Barbagallo informed Karlitz that he had disclosed the matter to Marcum; that Marcum had no issue with it; and that he would be joining Citrin very soon anyway. Tr. 358-59. Barbagallo presented the engagement letter to Tuscano. Tr. 441:5-21. He mentioned to Tuscano that the letter would not list the plaintiff by name because he was not yet at Citrin. Id. But Barbagallo still did not disclose the Tuscano matter to anyone at Marcum, nor did he obtain the permission of Marcum's managing partner to engage the client through Citrin. Tr. 527:17-24, 536:19-23.

27. Although Citrin was under the impression that Barbagallo would start shortly after resigning from Marcum, plaintiff kept pushing back the date through September and October of 2010. Tr. 345-50. Citrin continued to make preparations for his arrival, but there was uncertainty about when that would be. See id.

28. During September, because of a court order in the Tuscano litigation, Barbagallo began to work more intensely on the matter. He reviewed document requests in the litigation and communicated with Scott Unger, Tuscano's lawyer, about relevant work on the case, including preparing for an upcoming document inspection. Tr. 243-44, 268-69, 454-60; Def. Exs. 238-42.

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29. The inspection occurred on October 5 and 6 at Northeastern's company headquarters in Bohemia, New York. Tr. 460-61; Def. Exs. 252-53. Barbagallo performed the review on-site, along with David Anderson, a former Marcum employee who had just transferred his employment from Marcum to Citrin. Tr. 460-61; Def. Exs. 252-53.

30. At Barbagallo's request, and assuming that the plaintiff was soon to join the firm, Citrin accelerated Anderson's hiring schedule so he could start working on the Tuscano matter, particularly the document inspection under Barbagallo's supervision. Tr. 360-65; Def. Exs. 243-44.

31. Within two weeks after the inspection, Barbagallo and Anderson submitted certifications to the court in the Tuscano litigation, describing their document review and analysis. Tr. 533; Def. Ex. 252. Barbagallo spent substantial time putting together and reviewing his certification, along with Anderson's, and consulting with Tuscano's lawyer before the certifications were submitted to the court. Tr. 538:5-13; Tr. 258-261; Def. Ex. 252.

32. In his certification, Barbagallo did not disclose that he was employed by Marcum. According to his own testimony, his reason for not doing so was because he " wasn't signing this as a partner of Marcum." Tr. 537:13-15.

33. In total, Barbagallo spent at least six days in October on the Tuscano document inspection and follow-up work. Tr. 547-48. For the two days when he performed the on-site inspection in New York, Barbagallo recorded his absence as " vacation" on his Marcum timesheet. Tr. 461:19-21; Def. Ex. 204, at 46. During October, he also performed other work in the Tuscano litigation, including reviewing the opposing party's certifications and drafting responses. Tr. 261, 547-48.

34. Plaintiff never billed any of his work on the Tuscano matter through Marcum. Tuscano testified that he never signed an engagement letter with Marcum, never received a bill from it, and never made any payments to that firm. Tr. 306:4-13; Tr. 299:19-24.

35. On November 17, 2010, Tuscano received a bill from Citrin for the work performed in October. Tr. 297; Def. Ex. 257. This was the first invoice he received listing billable work on this matter, with October 1, 2010 as the first work date. Tr. 299:6-18; Tr. 30; Def. Ex. 257. The bill did not list any time for Barbagallo's work in October, despite the substantial efforts he had put into the case that month. Def. Ex. 257; Tr. 545:14-18. The only mention of his name is tangentially in Anderson's billable entries, where he records traveling to Barbagallo's house for work regarding the document inspection. Def. Ex. 257; Tr. 581.

36. The November bill also credited Tuscano for the $7,000 retainer fee he had paid to Citrin in order for Barbagallo and Anderson to begin work on the matter. Def. Ex. 257; Tr. 312:4-10. The retainer fee was the same amount that Barbagallo intended Tuscano to pay to Marcum in May of 2010 when he initially thought he would, but never did, bill the matter to Marcum. Tr. 525:13-19; Def. Ex. 231. By his own admission, when the plaintiff decided to shift charges to Citrin, he instructed Tuscano to direct the retainer fee to his prospective employer. Tr. 525:13-19.

37. On plaintiff's direction, Tuscano paid the retainer to Citrin in October, while Barbagallo was still an employee of Marcum. Tr. 312:4-10.

38. Barbagallo left Marcum on October 31, 2010. He started at Citrin on November 1. Although he had given ninety-days

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notice of his resignation to Marcum, he had remained there for a total of 100 days. Tr. 449:17-20.

39. During this 100-day period, in addition to working on the Tuscano matter, Barbagallo actively attempted to collect Marcum's outstanding account receivables, transitioned a number of clients staying behind at Marcum, and performed accounting and tax work and other tasks for Marcum. Tr. 425-30, 647-51.

40. Upon leaving Marcum, the only client that Barbagallo took with him to Citrin that he had acquired during his time there was an individual, Dorothy Snyder, for whom Marcum had not done any billable work in the prior year. Tr. 760-61; Def. Ex. 262; Pl. Barbagallo's Post-Trial Proposed Findings of Fact and Conclusions of Law (" Pl. Post-Trial PFFL" ) ¶ 183, Dec. 21, 2012, ECF No. 177; Pl. Ex. 130. All of the other clients that Barbagallo took with him to ...


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