Gibbs v. Breed, Abbott & Morgan

271 A.D.2d 180, 710 N.Y.S.2d 578, 2000 N.Y. App. Div. LEXIS 7754

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: July 13, 2000
• Status: Published

Opinions

OPINION OF THE COURT

Mazzarelli, J.

Plaintiffs Charles Gibbs and Robert Sheehan are former partners of Breed, Abbott & Morgan (BAM) who specialize in trust and estate law. They withdrew from BAM in July 1991 to join Chadbourne & Parke (Chadbourne), and brought this action for monies due to them under their BAM partnership agreement. Defendants asserted various counterclaims alleging that plaintiffs breached their fiduciary duty to BAM. The counterclaims were severed and tried without a jury. Plaintiffs appeal from the trial court’s determination that, in the course of both partners’ planning and eventually implementing their withdrawal from BAM, they breached their fiduciary duty to the partnership. Plaintiffs also appeal from the trial court’s determination that $1,861,045 in damages resulted from these transgressions.

From January 1991 until July 1991, plaintiffs were the only partners in the trusts and estates department (T/E) at BAM; plaintiff Gibbs was the head of the department. A third partner, Paul Lambert, had been the former head of the department, and he had obtained many, if not most, of the department’s clients. In 1989 he had left the firm to become the United States Ambassador to Ecuador and was still on leave in 1991. Lambert intended to return to the firm upon completion of his term as ambassador. The BAM trusts and estates department also employed three associate attorneys, Warren Whitaker (fifteenth year), Austin Wilkie (fourth year), and Joseph Scorese (first year); two accountants, Lois Wetzel and Ellen Furst; and two paralegals, Lee Ann Riley and Ruth Kramer.

Gibbs had become dissatisfied with BAM, and in January 1991 he began interviews to locate a new affiliation. He also approached Sheehan to persuade him to move with him. Sheehan and Gibbs subsequently conducted a number of joint interviews with prospective employers. In May 1991, Ambassador Lambert visited BAM, and Gibbs told him that he had been interviewing. Lambert relayed this information to the other partners. In early June, plaintiffs informed the executive committee that they had received an offer from two firms: McDermott, Will & Emory and Bryan Cave.

On June 19, 1991, both plaintiffs informed Stephen Lang, BAM’s presiding partner, that they had accepted offers to join Chadbourne. Lang asked Gibbs not to discuss his departure with any of the T/E associates, and Gibbs agreed not to do so. On June 20, 1991, Lawrence Warble, a BAM partner who was named temporary head of the T/E department, met with its associates and nonlegal personnel to inform them that plaintiffs were leaving the firm.

On June 24, 1991, Gibbs and Sheehan sent Chadbourne a memo listing the names of the personnel in the T/E department at BAM, their respective salaries, their annual billable hours, and the rate at which BAM billed out these employees to clients. The memo included other information about the attorneys, including the colleges and law schools they attended and their Bar admissions. This list had been prepared by Sheehan on April 26, 1991, months before the partners announced they were leaving. Sheehan specifically testified that the memo was prepared in anticipation of discussions with prospective firms, and both Gibbs and Sheehan testified at trial that the recruitment of certain associates and support personnel was discussed with different firms between March and May, as the partners were considering various affiliations. While Gibbs and Sheehan were still partners at BAM, Chadbourne interviewed four BAM employees that Gibbs had indicated he was interested in bringing to Chadbourne with him. On June 27, 1991, plaintiffs submitted their written resignations. Before Gibbs and Sheehan left BAM, they wrote letters to clients served by them, advising that they were leaving BAM and that other attorneys at BAM could serve them. These letters did not mention the fact that the two partners were moving to Chadbourne. Although the partnership agreement required 45 days’ notice of an intention to withdraw, BAM waived this provision upon plaintiffs’ production of their final billings for work previously performed.¹ Gibbs left BAM on July 9, 1991, and Sheehan left on July 11, 1991, both taking various documents, including their respective “chronology” or desk files.² With the assistance of his chronology file, Gibbs began to contact his former clients on July 11, 1991. On July 11th, Chadbourne made employment offers to Whitaker, Wilkie, Wetzel, and Riley. Wilkie, Wetzel, and Riley accepted that same day; Whitaker accepted on July 15, 1991. In the following weeks, 92 of the 201 BAM T/E clients moved their business to Chadbourne.

After hearing all the testimony and the parties’ arguments, the trial court determined that Gibbs’ actions in persuading his partner Sheehan to leave BAM, “and the way in which the leave was orchestrated, were done, at least partially, with the intention of crippling BAM’s trusts and estates (T/E) department,” (181 Misc 2d 346, 348) and constituted a breach of loyalty to BAM. The court also found that Gibbs and Sheehan had breached their fiduciary duties to BAM by sending Chadbourne the April 26, 1991 memo detailing personal information about the individuals in the T/E department at BAM, because this gave Chadbourne a competitive advantage in offering employment to other members of the department. Finally, the court found that Gibbs and Sheehan breached their fiduciary duties to BAM by taking their chronology files with them to Chadbourne. Specifically, the court concluded that by taking their respective chronology files, the partners “to a large degree hobbled their former partners in their effort to rebuild the Trusts and Estates department, in order to maintain a viable department, and in their ability to serve clients without undue disruption.”

With respect to damages, the court concluded that both Gibbs and Sheehan were entitled to recover their share of BAM profits accruing until the end of July 1991, and that Sheehan was entitled to the remainder of his capital account with the firm. Although there was no evidence that the partners had improperly solicited former BAM clients, the court found that despite BAM’s efforts to mitigate damages by hiring a new partner and two associates into the T/E department, that department suffered financial losses as a result of plaintiffs’ conduct, and concluded that it was entitled to recover lost profits for a reasonable period following plaintiffs’ departure. The court directed that lost profits be calculated from July 1991, when the partners left the firm, to November 1993, when BAM dissolved. Gibbs and Sheehan were held jointly and severally liable for $1,861,045. The court also awarded defendants prejudgment interest and attorneys' fees. The court’s liability finding should be modified, the damage award vacated, and the matter remanded for a determination of the financial loss, if any, occasioned by plaintiffs’ disloyal act of supplying competitors with BAM’s confidential employee data.

The members of a partnership owe each other a duty of loyalty and good faith, and “[a]s a fiduciary, a partner must consider his or her partners’ welfare, and refrain from acting for purely private gain” (Meehan v Shaughnessy, 404 Mass 419, 434, 535 NE2d 1255, 1263). Partners are constrained by such duties throughout the life of the partnership and “[t]he manner in which partners plan for and implement withdrawals * * * is [still] subject to the constraints imposed on them by virtue of their status as fiduciaries” (Hillman, Loyalty in the Firm: A Statement of General Principles on the Duties of Partners Withdrawing from Law Firms, 55 Wash & Lee L Rev 997, 999 [1998]). According the trial court’s findings on issues of fact and credibility appropriate deference, we uphold that portion of the court’s liability determination which found that plaintiffs breached their fiduciary duty as partners of the firm they were about to leave by supplying confidential employee information to Chadbourne while still partners at BAM (see, Graubard Mollen Dannett & Horowitz v Moskovitz, 86 NY2d 112, 120-121). However, we find no breach with respect to Gibbs’ interactions with Sheehan, or with respect to either partner’s removal of his desk files from BAM.

Defendants did not establish that Gibbs breached any duty to BAM by discussing with Sheehan a joint move to another firm, or that Sheehan’s decision was based upon anything other than his own personal interests. In addition, while in certain situations “[A] lawyer’s removal or copying, without the firm’s consent, of materials from a law firm that do not belong to the lawyer, that are the property of the law firm, and that are intended by the lawyer to be used in his new affiliation, could constitute dishonesty, which is professional misconduct under [Model] Rule 8.4 (c)” (DC Bar Legal Ethics Comm Opn 273, at 192), here, the partners took their desk copies of recent correspondence with the good faith belief that they were entitled to do so.

Contrary to the finding of the trial court, and applying the principle that “[t]he distinction between motive and process is critical to a realistic application of fiduciary duties” (Hillman, op. cit., at 999), we find no breach of duty in plaintiffs taking their desk files. These were comprised of duplicates of material maintained in individual client files, the partnership agreement was silent as to these documents, and removal was apparently common practice for departing attorneys (compare, Graubard Mollen Dannett & Horowitz v Moskovitz, supra, at 121 [“abandoning the firm on short notice (taking clients and files) would not be consistent with a partner’s fiduciary duties”]; Kaufman v International Bus. Machs. Corp., 97 AD2d 925, affd 61 NY2d 930 [employee who had been working with trade secrets and had signed an agreement that his files belonged to his employer denied injunction barring firm from keeping certain documents from him upon his termination]; Matter of Cupples, 952 SW2d 226 [attorney committed professional misconduct by secreting client litigation files from his partners and appropriating cases to himself in preparation for withdrawal]).

However, the record supports the court’s finding that both partners committed a breach of their fiduciary duty to the BAM partners by supplying Chadbourne, and presumably the other partnerships they considered joining, with the April 26, 1991 memorandum describing the members of BAM’s T/E department, their salaries, and other confidential information, such as billing rates and average billable hours, taken from personnel files. Moreover, a closer examination of the record does not support the dissent’s conclusion that these partners did not engage in surreptitious recruiting. The partners may not have discussed with firm employees the possibility of moving with them prior to June 20, 1991, but they indicated to Chadbourne the employees they were interested in prior to this date, and Gibbs specifically testified that he refrained from telling one of his partners, to whom he had a duty of loyalty, about his future plans to recruit specific associates and support staff from the partnership.

There is no evidence of improper client solicitation in this case, nor is it an issue on this appeal. Although the analogy could be useful in concluding that Gibbs did not breach his fiduciary duty to the partnership by working with Sheehan to find a new affiliation, the fiduciary restraints upon a partner with respect to client solicitation are not analogous to those applicable to employee recruitment. By contrast to the lawyer-client relationship, a partner does not have a fiduciary duty to the employees of a firm which would limit his duty of loyalty to the partnership. Thus, recruitment of firm employees has been viewed as distinct and “permissible on a more limited basis than * * * solicitation of clients” (Hillman, op. cit., at 1031). Prewithdrawal recruitment is generally allowed “only after the firm has been given notice of the lawyer’s intention to withdraw” (ibid.).

However, here Sheehan prepared a memo in April of 1991, well in advance of even deciding, much less informing his partners of his intention to withdraw. There is ample support in the record for the trial court’s finding that the preparation and sending of the April 26, 1991 memo, combined with the subsequent hiring of certain trusts and estates personnel, constituted an egregious breach of plaintiff’s fiduciary duty to BAM. Moreover, it is not speculative to infer more widespread dissemination given Sheehan’s trial testimony that the memo “was prepared in connection with talking to other firms,” and that “he was sure the subject of staffing was discussed at firms other than Chadbourne.” Sheehan’s disclosure of confidential BAM data to even one firm was a direct breach of his duty of loyalty to his partners. Because the memo gave Chadbourne confidential BAM employment data as well as other information reflecting BAM’s valuation of each employee, Chadbourne was made privy to information calculated to give it an unfair advantage in recruiting certain employees (see, Bancroft-Whitney Co. v Glen, 64 Cal 2d 327, 411 P2d 921 [breach of fiduciary duty for corporate officer to surreptitiously provide competitor with selective list of qualified employees and their salaries]).

While partners may not be restrained from inviting qualified personnel to change firms with them (see, Denburg v Parker Chapin Flattau & Klimpl, 82 NY2d 375, 382 [striking down provision which would restrain partner from compéting with his former firm], citing Jacob v Norris, McLaughlin & Marcus, 128 NJ 10, 607 A2d 142 [striking down provision which would prohibit partner from soliciting firm employees for a year after leaving the firm]), here Gibbs and Sheehan began their recruiting while still members of the firm and prior to serving notice of their intent to withdraw. They did so without informing their partners that they were disseminating confidential firm data to competitors. Their actions, while still members of the firm, were intended to and did place BAM in the position of not knowing which of their employees were targets and what steps would be appropriate for them to take in order to retain these critical employees. The dissent’s analysis, that once the firm was notified of the partners’ departure, there was no breach of fiduciary duty, is flawed. The breach occurred in April of 1991 and could not be cured by any after-the-fact notification by the fiduciary who committed the breach that he was withdrawing from the firm. Chadbourne still had the unfair advantage of the confidential information from the April 1991 memo, and still had the upper hand, which was manifested by its ability to tailor its offers and incentives to the BAM recruits.

Contrary to the dissent, I would characterize the memo distributed to prospective competitors as confidential. The data was obtained from BAM personnel files which Sheehan had unique access to as a BAM partner. The dissent’s statement that such financial information is generally known to “headhunters” is without foundation. While the broad outlines of the partners’ profits at a select number of large New York firms and the incremental increases in the base compensation of young associates at some firms are published in professional publications such as the New York Law Journal, or known to some recruitment firms, the available figures often vary substantially from the actual compensation received by specific individuals.

For example, the BAM partnership agreement, which is included in the record, reveals that the approximately 40 partners in the firm earn substantially different percentages of the firm’s earnings. No professional publication would be privy to these financials. With respect to the specific associates and support staff whose compensation was disseminated in the April 1991 memo, the information disclosed to Chadbourne incorporated these individuals’ bonuses. Bonus payments are confidential, often voted by the partnership, based upon the unique quality of an individual’s work, the number of hours billed, and many other intangible factors. These lump-sum payments often constitute a substantial portion of an associate’s salary, and the payments are certainly not available to the public. Finally, support staff also receive bonuses paid to them at the discretion of the individual partners, from their personal accounts. This information is highly individualized and also privileged. Sheehan abused his fiduciary duty to the partnership by accessing personnel files to obtain the actual gross compensation of the associates and support staff he and Gibbs wished to bring with them, including bonuses, and disclosing this information to Chadbourne.

Moreover, the memo contained more than a list of salaries. It itemized each of the employee’s annual billable hours, and the rates at which BAM billed these employees out to their clients, information which was not otherwise publically available. These facts go directly to a potential employee’s value and were accessible only to members of the BAM partnership. Selected partners providing BAM’s confidential information, which they were able to obtain by virtue of their position as fiduciaries, to Chadbourne was an act of disloyalty to their partnership. The confidential information placed Chadbourne, as a competing prospective employer, in the advantageous position of conducting interviews of the associates and support staff with more knowledge than any firm could obtain through independent research, as well as providing it with information BAM partners did not know it had, thereby prejudicing their own efforts to retain their associates and support staff.

The calculation of damages in cases such as this is difficult. “[B] reaches of a fiduciary relationship in any context comprise a special breed of cases that often loosen normally stringent requirements of causation and damages” (Milbank, Tweed, Hadley & McCloy v Chan Cher Boon, 13 F3d 537, 543 [2d Cir 1994]; see, Wolf v Rand, 258 AD2d 401). This is because the purpose of this type of action “is not merely to compensate the plaintiff for wrongs committed * * * [but also] to prevent them, by removing from agents and trustees all inducement to attempt dealing for their own benefit in matters which they have undertaken for others, or to which their agency or trust relates’ ” (Diamond v Oreamuno, 24 NY2d 494, 498 [emphasis in original], quoting Dutton v Willner, 52 NY 312, 319). However, the proponent of a claim for a breach of fiduciary duty must, at a minimum, establish that the offending parties’ actions were “a substantial factor” in causing an identifiable loss (Millbank, Tweed, Hadley & McCloy v Chan Cher Boon, supra, at 543; see, 105 E. Second St. Assocs. v Bobrow, 175 AD2d 746 [awarding amount of loss sustained by reason of the faithless fiduciary’s conduct]).

A reasonable assessment of lost profits has been deemed an appropriate measure of damages in cases where there was evidence that the fiduciary improperly solicited clients to move with him or her (see, Meehan v Shaughnessy, supra, 404 Mass, at 435, 535 NE2d, at 1264), or where the fiduciary’s acts could otherwise be connected to a subsequent loss of business (see, Duane Jones Co. v Burke, 306 NY 172, 192; Bruno Co. v Friedberg, 21 AD2d 336, 341; see also, Wolf v Rand, supra, at 402 [lost profits awarded where defendants in closely held corporation misappropriated company profits to themselves]). Here, the court based its damage award on what it believed to be a series of disloyal acts. Defendants did not establish how the only act of plaintiffs which this Court finds to be disloyal, that of supplying employee information to Chadboume, in and of itself, was a substantial cause of BAM’s lost profits (see, Stoeckel v Block, 170 AD2d 417 [no demonstration that the decline in defendant’s business was attributable to plaintiffs’ alleged wrongful conduct during the term of their employment]). We therefore vacate the court’s award to defendants of the total profits lost by BAM between the time of plaintiffs’ departure in July 1991 and BAM’s dissolution in November 1993, and remand for consideration of the issue of whether plaintiffs’ disloyal act of sending Chadbourne the April 26, 1991 memorandum was a significant cause of any identifiable loss, and, if so, the amount of such loss.

Accordingly, the order, Supreme Court, New York County (Herman Cahn, J.), entered October 1, 1998, which, after a nonjury trial on defendants’ counterclaims, determined that plaintiffs had breached their fiduciary duty to defendants, should be modified, on the law, to limit such conclusion to the act of disseminating confidential employee information, and otherwise affirmed, without costs. Order, same court and Justice, entered on or about June 29, 1999, which, to the extent appealed from as limited by the parties’ briefs, directed that defendants shall recover $1,861,045, plus prejudgment interest, on their counterclaims, should be reversed, on the law, without costs, the damage award vacated, and the matter remanded for recalculation of damages in accordance with this Opinion.

1 . BAM did not attempt to prepare a joint letter with Gibbs and Sheehan, announcing their departure, as recommended by the American Bar Association (ABA) Committee on Ethics and Professional Responsibility (see, ABA Comm on Ethics and Professional Responsibility Inf Opn 1457 [1980]).

2 . The “chronology” or desk files contained copies of every letter written by the respective attorneys during the previous years. The letters included those written to adversaries about pending legal matters, letters written to clients, and letters written to others about ongoing BAM matters. These letters were duplicates of those kept in BAM’s regular client files, but defendants allege that due to the fact that the files are arranged chronologically, active matters are more easily referenced. The original correspondences, left with the firm, have been filed by client and are dispersed throughout the department.