Adam R. Shaw
Adam R. Shaw ()

This column reports on recent notable decisions of the U.S. District Court for the Northern District of New York. This article discusses two companion opinions by District Judge Mae A. D’Agostino addressing the legal implications caused by an altered release and an opinion by Senior District Judge Thomas J. McAvoy holding that the doctrine of judicial estoppel precluded a party from pursuing litigation claims that he failed to disclose in a prior bankruptcy.

Altered Releases

In a move that has spawned several lawsuits, Steifel Laboratories, Inc. conducted a buyback of its employees’ stock and then quickly sold all its shares to Glaxosmithkline at a significant profit. One of those lawsuits is Glaxosmithkline v. Beede.1 There, the defendant Clifford Beede worked for Steifel for many years and then continued to work for Glaxosmithkline until he was let go in 2011 as part of a reduction in force. Steifel had bought back some of Beede’s stock in the company during his tenure and prior to the sale to Glaxosmithkline. When he was terminated, Steifel offered Beede a severance package conditioned on Beede’s signing a general release.

Beede signed the release, but added a typewritten alteration that purported to exclude any claims Beede had against Steifel related to the stock buyback. Steifel apparently overlooked the alteration and started paying out the severance and benefits. It discovered the mistake a year later and demanded that Beede either sign a full general release or return the severance and benefits. When he refused, Steifel sued claiming that the alteration was a breach of contract and a fraud and the payout resulted in an unjust enrichment. Beede moved to dismiss the case.

On the motion to dismiss, Judge D’Agostino rejected the breach of contract claims, explaining that the alteration of the release was not a breach of contract. A breach of contract occurs after the formation of a contract. Here, the court reasoned, the alteration was alleged to have occurred at the time of the contract signing and not afterward. Instead, the court found, either the defendant’s signature was an acceptance of a unilateral contract and the alteration was not effective at all, or the alteration served as a counteroffer that was accepted by Steifel through payment of the benefits. Either way, the court held, there was no breach of contract.

The court similarly dispatched Steifel’s fraud claim ruling that Beede’s failure to alert Steifel to the alteration was not an omission or misrepresentation. The alteration was plainly visible, Steifel just overlooked it. Moreover, according to the court, omissions only support fraud claims if the party has a duty to disclose the information. The court found, however, as contracting parties, Beede did not owe a duty of disclosure to Steifel.

Steifel’s unjust enrichment claim fared better. Unjust enrichment is a quasi-contract claim that creates a legal obligation in the absence of a binding contract. The court found that the complaint stated a claim for unjust enrichment because the parties’ dispute centered on the terms and existence of a valid contract and whether it would be inequitable for Beede to retain the severance and benefits if there were no contract.

In a companion case, Beede v. Steifel Laboratories,2 D’Agostino upheld a complaint claiming that Steifel Laboratories’ buyback of its stock from its employees’ stock purchase plan violated securities antifraud laws. Plaintiffs were employees who sold their stock back to Steifel under a special one-time sale opportunity when the company’s employee stock option plan merged into a 401k plan. At that time, the stock was valued by Steifel’s finance firm at approximately $16,500 per share. Plaintiffs allege that prior to the buyback, Steifel had received offers for and sold its own stock for much higher values. One month after the buyback, Steifel sold its stock for $68,500 per share. Plaintiffs alleged that Steifel defrauded them by using the lower valuation.

Curiously, Steifel moved to dismiss the case for lack of subject matter jurisdiction arguing that the releases the plaintiff employees had signed deprived them of standing. As in the companion case, the plaintiffs had signed altered releases that purported to exclude from the release any claims relating to Steifel’s buyback of their stock. The court rejected the subject matter jurisdiction argument, reasoning that “the existence of a valid and applicable release, assuming one exists, is an affirmative defense that goes to the merits of a litigant’s claim, and not an issue that concerns standing.”

The court also rejected defendants’ motion to dismiss the complaint for failure to state a claim. The defendants again argued that the releases precluded the plaintiffs from bringing any claims. As an initial matter, the court evaluated whether it could even consider the releases on a motion to dismiss and if so whether the releases unambiguously barred the claims. Steifel sought to have the court take judicial notice of the releases and also of affidavits plaintiffs filed in other lawsuits.

The court declined to do so. The court found that it could take judicial notice of public records to establish the fact of their existence, but not to the truth of the matters in them. The court ruled that “consideration of the affidavits would necessarily be for the truth of the allegations therein, which is not a permissible use of judicial notice.” The court also held it could not take judicial notice of the releases. Although releases are operative documents that are relevant for the fact that they exist, in this case—due to the alterations—the validity and scope of the releases was not apparent from the face of the documents. Because the validity and effect of the releases could not be determined by the document itself, the court declined to take judicial notice of them and denied the motion to dismiss.

Judicial Estoppel

In Amash v. Home Depot3 Judge McAvoy granted summary judgment dismissing plaintiff’s claims based on the doctrine of judicial estoppel. Plaintiff was an assistant store manager for Home Depot. In 2006, he joined a certified collective action asserting claims against Home Depot for unpaid overtime under the Fair Labor Standards Act (FLSA). After the action was decertified, plaintiff and others brought their own actions in federal court in Connecticut alleging FLSA and multistate wage and hour law claims. Ultimately, plaintiff’s case was served and transferred to the Northern District of New York.

After plaintiff had joined the collective action, but before he brought his own action, he and his wife filed for bankruptcy under Chapter 13. In several documents filed with the Bankruptcy Court, plaintiff was required to identify his contingent claims and lawsuits. He never identified his FLSA claims against Home Depot in those papers.

Defendants argued that judicial estoppel prevents plaintiff from verifying to the Bankruptcy Court that he has no assets in order to obtain a discharge and then assert later in federal court that he is entitled to money damages for pre-bankruptcy claims. The court agreed, explaining that in simple terms, the doctrine of judicial estoppel prevents a party from asserting a factual position in one legal proceeding that is contrary to a position that it successfully advanced in another proceeding. Judicial estoppel requires an actual inconsistent assertion in a prior proceeding and that the assertion be adopted by the court in the prior proceeding in some manner.

The court found that plaintiff’s assertion in Bankruptcy Court that he had no claims or lawsuits was inconsistent with the assertion of claims in the instant lawsuit. Plaintiff was required to disclose his assets and claims and repeatedly failed to disclose his claims against Home Depot. The court found this to be an actual assertion inconsistent with plaintiff’s current lawsuit asserting a claim. Further, the court found, the Bankruptcy Court relied on the prior assertion when it voided liens and confirmed a Chapter 13 plan in plaintiff’s favor.

The court rejected plaintiff’s contention that failure to list his claims against Home Depot was not an actual assertion because he thought the Home Depot claims were not “real” and the collective action “was all a scam.” The court disagreed because plaintiff intentionally opted in to the collective action and had several conversations with the attorneys in the case about his claims. Moreover, there was no basis to believe plaintiff made an inadvertent mistake on his bankruptcy forms since he clearly had notice of the claims and a monetary incentive to not list them. Nor would the court allow plaintiff to amend his bankruptcy pleadings at such a late date and after a charge of judicial estoppel because it would prejudice defendant and undermine the integrity of the bankruptcy system. Accordingly, the court dismissed the complaint.

Adam R. Shaw is a partner in the Albany office of Boies, Schiller & Flexner.

Endnotes:

1. No. 13-cv-0001 (MAD/RFT), 2014 WL 896724 (N.D.N.Y. March 6, 2014).

2. No. 13-cv-120 (MAD/RFT), 2014 WL 896725 (N.D.N.Y. March 6, 2014).

3. 503 B.R. 232 (N.D.N.Y. 2013).