Gallagher v. Lambert
532 N.Y.S.2d 255, 143 A.D.2d 313, 1988 N.Y. App. Div. LEXIS 8954 (1988)
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Rule of Law:
An employer does not owe an at-will employee, even one who is a minority shareholder subject to a mandatory stock repurchase agreement upon termination, a fiduciary duty or an obligation of good faith and fair dealing that limits the employer's right to terminate employment for any reason, including to obtain shares at a lower contractually agreed-upon price.
Facts:
- Plaintiff began his association with Benjamin Lambert (principal shareholder of Eastdil Realty, Inc.) in the 1960s and accepted a vice-president position at Eastdil in 1968.
- Plaintiff left Eastdil in 1973 but returned in April 1976 as vice-president, later becoming president and CEO of Eastdil Associates (a subsidiary) and was elected to Eastdil's board of directors in 1980.
- In January 1981, plaintiff purchased shares of nonvoting stock in Eastdil.
- In the spring of 1983, Eastdil underwent a capital reorganization, converting nonvoting shares into voting shares, and plaintiff received 8.5% of the new voting stock, making him the third largest shareholder.
- Plaintiff executed an amended stockholders’ agreement, which obligated him to tender his shares to Eastdil and obligated Eastdil to purchase them upon termination of his employment.
- The agreement stipulated that if plaintiff's employment ceased on or before January 31, 1985, his shares would be purchased at book value, but after that date, the buy-out price would be based on a formula tied to Eastdil’s earnings (which would be substantially higher).
- Plaintiff was, at all times, an at-will employee of Eastdil.
- Eastdil terminated plaintiff’s employment on January 10, 1985, 21 days before the effective date for the higher stock valuation formula.
Procedural Posture:
- Plaintiff instituted an action against his former employer, Eastdil Realty, Inc., alleging breaches of fiduciary duty, the obligation of good faith and fair dealing, and the amended stockholders’ agreement.
- Defendants (Eastdil and Benjamin Lambert) moved for summary judgment on all causes of action and for specific performance of the amended stockholders’ agreement on their counterclaim.
- The Supreme Court, New York County (trial court), denied defendants’ motion for summary judgment regarding the first, second, and third causes of action (breach of fiduciary duty, good faith, and stockholders’ agreement).
- The Supreme Court, New York County, also denied specific performance on defendants’ counterclaim to enforce the shareholders’ agreement.
- Defendants appealed the Supreme Court's order to the Supreme Court, Appellate Division, First Department, seeking dismissal of the first three causes of action and specific performance of the agreement.
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Issue:
Does an employer owe an at-will employee, who is also a minority shareholder, a fiduciary duty or an obligation of good faith and fair dealing that would prevent the employer from terminating the employee shortly before a stock buy-out agreement would trigger a significantly higher valuation for the employee's shares?
Opinions:
Majority - Per Curiam
No, an employer does not owe such a fiduciary duty or obligation of good faith and fair dealing to an at-will employee, even if that employee is a minority shareholder. The Court of Appeals has previously rejected the doctrine of abusive discharge for at-will employees, establishing that such an employment relationship may be terminated by either party at any time for any reason or even for no reason at all (citing Murphy v American Home Prods. Corp.). While defendants stood to gain substantially by purchasing plaintiff’s shares at the lower pre-January 31, 1985 price, plaintiff had no contractual guarantee of continued employment. The shareholders' agreement, which included a mandatory repurchase-upon-termination clause, did not create a fiduciary duty that superseded the at-will employment relationship (Bevilacque v Ford Motor Co.). Plaintiff's right to be a shareholder was contingent upon his continued employment, and his employment was always subject to the unfettered discretion of his employer (Coleman v Taub). Since the terms of the amended stockholders’ agreement are clear, specific performance of that agreement is warranted.
Dissenting - Kupferman, J. P., and Smith, J.
The dissenting justices would affirm the lower court’s decision for the reasons stated by Justice Stecher. This implies that the dissent believed there were sufficient grounds to deny summary judgment to the defendants, potentially acknowledging a breach of duty or good faith in the circumstances of the plaintiff's termination and stock repurchase.
Analysis:
This case strongly reaffirms New York's robust adherence to the at-will employment doctrine, even in situations where an employee's termination significantly benefits the employer financially, such as in a stock buy-out scenario. It establishes that the existence of a mandatory stock repurchase agreement tied to employment termination does not, by itself, create a fiduciary duty or an implied covenant of good faith that circumscribes an employer's right to terminate an at-will employee. This ruling provides employers with broad discretion in termination decisions, emphasizing that, absent specific contractual provisions guaranteeing employment or explicitly limiting the grounds for termination, the at-will nature of employment prevails over potential financial detriments to a minority shareholder-employee.
