Balles v. Babcock Power Inc.

Rule of Law:

When a contract defines termination "for cause" and includes a provision requiring notice and an opportunity to cure a breach, the employer must strictly adhere to that provision before the termination can be considered "for cause," unless the employer can prove that providing an opportunity to cure would be futile.

Facts:

• In 2002, Eric N. Balles, an executive at Babcock Power Inc., entered into a stockholders' agreement that granted him 100,000 shares of company stock.
• The agreement stipulated that if Balles were terminated 'for cause,' Babcock could repurchase his stock for a nominal price of $0.001 per share.
• The definition of 'cause' included a clause for a 'willful and material breach' of duties, but required that Babcock provide written notice and a thirty-day period for Balles to 'correct' the breach.
• From 2008 to 2010, Balles engaged in an ongoing extramarital affair with a female subordinate whom he supervised.
• During the affair, Balles used his company-issued laptop to store sexually explicit photographs and falsified at least one travel reimbursement request to conceal the relationship.
• On August 30, 2010, Babcock's CEO learned of the affair, and the company suspended Balles.
• On September 15, 2010, Babcock terminated Balles's employment without providing written notice or a thirty-day opportunity to correct his conduct.
• After his termination, Babcock's board of directors met and formally voted that Balles had been terminated 'for cause,' proceeding to repurchase his stock at the nominal price.

Procedural Posture:

• Eric N. Balles sued Babcock Power Inc. in the Superior Court (trial court).
• Balles sought a declaratory judgment to invalidate the repurchase of his shares and alleged breach of contract for withheld dividends and severance pay.
• Babcock asserted seven counterclaims, including breach of fiduciary duty.
• The trial was bifurcated into a jury trial for most of Babcock's counterclaims and a jury-waived trial for Balles's claims and Babcock's fiduciary duty counterclaim.
• The jury found in favor of Balles on Babcock's counterclaims.
• The trial judge, in the jury-waived trial, ruled that Balles was not fired 'for cause' under the stockholders' agreement and was entitled to the return of his stock and dividends.
• The judge also found Balles had breached his fiduciary duty of loyalty, ordering an equitable forfeiture of over $400,000 of his past salary, and rejected Balles's claim for severance pay.
• Babcock (appellant) appealed from the judgment of the jury-waived trial, and the Supreme Judicial Court of Massachusetts (the state's highest court) granted its application for direct appellate review.