Upon the foregoing papers, it is ORDERED that this motion by defendants for an order pursuant to CPLR 3212 for partial summary judgment dismissing the complaint in Action 1, granting summary judgment to defendant Terrence O’Hanlon on his first three counterclaims, and dismissing the first, second and third causes of action in Action 2 is decided as follows:Plaintiff UE System, Inc. (“UE”) is a closely held New York corporation primarily engaged in the business of manufacturing and marketing ultrasonic testing products used for inspection of industrial equipment and machinery. Defendant Terrence O’Hanlon (“O’Hanlon”), who had begun working for plaintiff sometime around 1982, served as president of UE and a member of its Board of Directors until his departure from the company in October 1999. O’Hanlon and his wife, defendant Kelly (Rigg) O’Hanlon, who had also worked for UE, formed a company known as NetExpress, Inc. for the initial purpose of seeking clients in order to perform Internet publishing or to create Internet web pages.Plaintiff commenced Action 1 for an accounting and injunctive relief in connection with defendants’ alleged unlawful use of plaintiff’s trade secrets and misappropriation of its Internet business plan, and to enforce a confidentiality agreement executed by the O’Hanlon defendants. Action 1 additionally seeks money damages for defendant O’Hanlon’s alleged breach of fiduciary duty as president and chief operating officer of plaintiff by misappropriating the trade secrets and commercially sensitive business information of plaintiff to form a competing enterprise. O’Hanlon asserts counterclaims against plaintiff for breach of contract seeking compensation for employment and repayment of loans allegedly made by O’Hanlon to UE, a counterclaim for quantum meruit for services rendered to the company, and a counterclaim alleging interference with business relations. In Action 2, which is brought solely against O’Hanlon, plaintiff alleges causes of action for breach of contract based on an option to purchase a 25 percent equity interest in UE, unjust enrichment, recovery of unauthorized loans, and breach of contract related to patent rights.[1] O’Hanlon has asserted no counterclaims in the second action. These two actions have been consolidated for all purposes pursuant to the order of this Court dated January 9, 2003.Defendants move herein for summary judgment dismissing plaintiff’s complaint in the first action based on collateral estoppel. Collateral estoppel or issue preclusion “precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party or those in privity, whether or not the tribunals or causes of action are the same” (Ryan v. New York Tel. Co., 62 N.Y.2d 494, 500). This doctrine binds parties and their privies to issues necessarily decided in the prior action provided that a fair opportunity to be heard on the contested issues was afforded to the party to be estopped (Koch v. Con. Edison Co., 62 N.Y.2d 548; Gilberg v. Barbieri, 53 N.Y.2d 285; Schwartz v. Public Administrator, 24 N.Y.2d 65).Defendants contend that plaintiff is barred from relitigating the issues in Action 1 as they were necessarily decided in a prior action brought by UE against James Hall in the United States District Court for the Southern District.[2] In that action, UE asserted claims of breach of contract, misappropriation of trade secrets and unfair competition against its former sales employee, and relied on an employee agreement of confidentiality (“Employee Agreement”). By decision and order dated August 31, 2001, Hon. Mart D. Fox, Magistrate, United States District Court, held that the Employee Agreement relied upon by plaintiff was intended to bind the parties to its terms for only the duration of employment. Thus, the Court found that there was no restrictive covenant within the Employee Agreement not to compete after termination of employment. As to the claim of misappropriation of trade secrets, the Court found that the customer and contact information that Hall was alleged to have misappropriated did not constitute trade secrets.[3] On the instant motion, defendants contend that the Employee Agreements allegedly binding O’Hanlon and his wife are identical to the agreement that was the subject of the prior action, and that the issues of confidentiality and trade secrets are the same as those addressed in that action. According to defendants, plaintiff’s allegations relate to acts conducted after the termination of employment and relate to the misappropriation of customer and contact information which does not constitute a trade secret, and plaintiff had a full and fair opportunity to litigate those issues in the federal court action.Plaintiff, however, argues that collateral estoppel is inappropriate as the issues decided in the prior action are not identical to those raised in the instant action. Plaintiff asserts that Hall’s post employment misconduct of which UE complained is dissimilar to O’Hanlon’s alleged misconduct while he was employed by the company as its president and company director. In this action, the claims of UE concern O’Hanlon’s actions during the course of his employment as president of the company, whereas the prior case dealt with Hall’s post employment misconduct while employed in UE’s Instrument Support Services division as an area sales manager. Plaintiff further claims that the trade secrets allegedly misappropriated are not the same. The trade secrets that Hall was alleged to have misappropriated consisted of customer and contact information contained in the Goldmine database. Here, the trade secrets allegedly misappropriated by O’Hanlon include commercially sensitive business information, a future Internet business plan, certain patented and unpatented instruments, and trademarks. The complaint in this action also contains a claim against O’Hanlon for breach of fiduciary duty as president and COO by forming a competing enterprise while employed at UE.Upon review, this Court finds that the prior decision of the federal District Court must be given collateral estoppel effect to the extent that the confidentiality provisions of the subject Employee Agreement apply only to the period of time that defendants O’Hanlon and his wife were employees of plaintiff. Therefore, plaintiff is barred from relitigating in Action 1 the issue of breach of contract based on post employment activities. Plaintiff is not, however, collaterally estopped from litigating its claim of breach of contract based upon misconduct that took place during employment, as well as its claim of breach of fiduciary duty. Furthermore, the District Court found that UE’s customer list was not a trade secret entitled to protection – a finding that is entitled to collateral estoppel effect herein. Nonetheless, the misappropriations alleged in this action extend beyond the customer and contact lists that the prior court dealt with in its decision and involve claims relating to NetExpress and O’Hanlon’s alleged theft of corporate marketing plans and strategies and similar misconduct. Accordingly, to the extent that plaintiff claims misappropriation of trade secrets in the nature of UE’s customer list, plaintiff is estopped from relitigating that issue. Dismissal of the complaint in Action 1 is otherwise denied.Defendant O’Hanlon seeks additional relief in the form of summary judgment granting his first three counterclaims and dismissing the first, second and third causes of action in Action 2. Summary judgment is a drastic remedy which should not be granted where there is any doubt as to the existence of a material and triable issue of fact (Phillips v. Kantor & Co., 31 N.Y.2d 307). Issue finding, rather than issue determination, is the focus of the Court’s concern in ruling on a motion for summary judgment (Sillman v. Twentieth Century-Fox Film Corp., 3 N.Y.2d 395). Once the proponent of a summary judgment motion has made a prima facie showing of entitlement to judgment as a matter of law, the opposing party must demonstrate by admissible evidence the existence of a triable issue of fact in order to defeat the motion (see, CPLR 3212; Alvarez v. Prospect Hosp., 68 N.Y.2d 320; Zuckerman v. City of New York, 49 N.Y.2d 557).O’Hanlon’s first and third counterclaims allege breach of contract and quantum meruit, respectively, and seek payment of the salary that O’Hanlon allegedly earned while serving as the company’s president from December 1, 1998 through October 31, 1999. Although he was never issued shares in the company, O’Hanlon claims that he had been compensated on an equal basis with his fellow company officers since 1986, and that each earned approximately $407,333 for the 12-month period ending November 30, 1999, thereby entitling him to his pro rata share of $373,000. O’Hanlon further states that there is no question that he acted as president of the company for the subject period of time, and that it was the custom and practice of UE to accrue officers’ salaries in one year and pay them in the early part of the next year.Plaintiff opposes summary judgment on these counterclaims on the grounds that the compensation that O’Hanlon seeks was actually a distribution of UE’s profits, and that O’Hanlon was not entitled to a 25 percent distribution of profits to corporate shareholders in 1999 because he was not a shareholder at the time the distribution was made. According to Michael Osterer, president of UE, the company paid O’Hanlon the salary he had earned during the year. Secondly, plaintiff contends that defendant is not entitled to the compensation he claims is due because he has otherwise forfeited all right to compensation as a result of his breach of fiduciary duty. UE claims in its complaint that O’Hanlon was a disloyal and dishonest employee who engaged in self-dealing while occupying the position of president. More specifically, plaintiff claims that O’Hanlon converted a marketing plan designed by other principals of the company and incorporated NetExpress for the purpose of carrying out the marketing plan that originated during UE’s corporate planning sessions.Although defendant was admittedly not a shareholder at the time, a question of fact nevertheless exists as to what the agreement of the parties was as to the compensation to be paid to defendant for the year’s services to the company. Furthermore, if plaintiff is successful on its claim for breach of fiduciary duty, it could be found that O’Hanlon forfeited his right to compensation for the period of his disloyalty (see, Feiger v. Iral Jewelry, Ltd., 41 N.Y.2d 928; Royal Carbo Corp. v. Flameguard, Inc., 229 A.D.2d 430). Questions of fact exist as to whether O’Hanlon was a disloyal and dishonest employee, and, if so, whether he is entitled to compensation for the period of his disloyalty. These issues cannot be resolved on the instant motion. Accordingly, defendant’s motion to grant summary judgment on his first and third counterclaims is denied.The second counterclaim in Action 1 is brought to recover the sum of $528,753.93 together with interest from November 30, 2001 for loans allegedly made by defendant to plaintiff and which have not been repaid. According to O’Hanlon, he received compensation in two forms – a weekly salary payment and an annual officers’ lump-sum or bonus payment. The latter was disbursed between three and six months subsequent to the end of UE’s fiscal year, and the officers were required to return the amount of the payment (or an amount net of taxes) to UE to be available as investment capital. O’Hanlon further claims that the officers’ loan balances accrued interest, and that the loans were reflected as liabilities on UE’s financial statements and on its federal tax returns. O’Hanlon’s loan balance was captioned “Loans from employees” while the other officers’ loans were listed as “Loans from shareholders.” O’Hanlon submits company financial records and accountant work papers to show that as of November 30, 1999, one month after defendant left the company, there was a net balance in his “loan account” of $485,406.93. As of November 30, 2001, the amount recorded on the company’s books and reported to the Internal Revenue Service was $528,753.93.In opposition, plaintiff contends that the so-called loans carried on the company books did not reflect anything other than a tax strategy designed to reduce corporate taxes. UE’s officers state that at no time did O’Hanlon or any principal of the company lend money to UE – the money redeposited into UE’s bank account and recorded as officers’ or shareholders’ “loans” were not loans but rather belonged to the company, and the accounts were created merely to take advantage of differing tax brackets between UE as a “C” corporation and the lower tax brackets of company principals. According to UE’s principals, O’Hanlon himself told them on several occasions that the loan accounts did not reflect actual loans to the company and that the funds belonged to UE, and he made sure that UE’s accountants and bookkeeping personnel knew that the funds were corporate monies and were not due and owing to the purported lenders. Based upon the affidavits of UE’s officers/shareholders, bookkeeper and accountant, plaintiff has raised a triable issue of fact as to the true nature of these funds – whether they, in fact, constituted loans to be repaid or simply represented a tax strategy – and whether defendant is entitled to the disputed funds. Therefore, summary judgment as to defendant’s second counterclaim is also denied.O’Hanlon seeks the dismissal of plaintiff’s first and second causes of action in Action 2. The first cause of action sounding in breach of contract alleges that O’Hanlon was given an option, written as well as oral, to purchase a 25 percent equity interest in UE; that defendant assured plaintiff that he would exercise the option and pay the purchase price; and that defendant breached his verbal assurances to purchase the option. Plaintiff seeks to recover compensation and benefits paid to defendant, as well as a 25 percent interest in affiliated companies, based on plaintiff’s treatment of defendant as an equal shareholder. The third cause of action alleges that defendant has been unjustly enriched by virtue of his failure to pay the option purchase price while at the same time receiving the benefits of an equity interest in plaintiff.Concerning the issuance of UE stock to defendant, O’Hanlon agrees that Osterer, Chairman of the Board of Directors of UE and owner of 100 percent of the voting shares, had made oral promises that O’Hanlon would become the owner of 25 percent of the issued and outstanding shares of UE. In 1985, O’Hanlon was presented with a letter which purported to provide him with an option to purchase 16.67 non-voting Class A common shares, without par value, of UE (“Option Agreement”). The Option Agreement further provided that the option would be exercisable for a period of five years. O’Hanlon executed the letter despite what he refers to as its incomplete terms. O’Hanlon contends that the Option Agreement was unenforceable on its face as it failed to include the purchase price and a complete date, and, in any event, any such option agreement discussed orally would require a writing under the Statute of Frauds as it was exercisable over a five-year period. O’Hanlon further states that the reason he never exercised any stock option and never became a shareholder of the company was that there never was any legally enforceable oral or written contract whereby he had the opportunity to purchase the shares; that there was never any agreement as to the option price; and that it was not within his power to exercise an option as the company, through Osterer, had control of when, where and how O’Hanlon might become a shareholder.In opposition, Osterer states that UE treated O’Hanlon as if he were a 25 percent shareholder entitled to 25 percent of the profits of the company, and that this treatment was based on O’Hanlon’s repeated representation that he would exercise an option to purchase an equity interest in UE and pay the purchase price. According to plaintiff, O’Hanlon agreed to pay the purchase price, which would be fixed depending on the value of the company at the time the option to purchase was exercised, and agreed to exercise the option, but put off doing so to’ avoid the tax consequences to him of the purchase. In reliance upon O’Hanlon’s assurances, UE allegedly treated him as if he had exercised the option and had paid the purchase price. Osterer claims that the timing of the exercise was up to O’Hanlon and that the option could have been exercised up to his departure in 1999. The missing element – the option purchase price – would be fixed between $150,000 to $300,000 depending on the value of the company at the time the option to purchase was exercised. As a result of O’Hanlon’s promise to exercise the option, O’Hanlon received 25 percent of shareholders’ ratable interest in corporate profits and a 25 percent interest in each of the companies affiliated with UE. In further opposition, UE contends that any oral agreement is sufficient here as an agreement for the sale and purchase of securities is not subject to the Statute of Frauds pursuant to UCC 8-113(a). UE also claims that it is the party to be charged with providing the option, and it does not invoke the defense.General Obligations Law provides, in relevant part, that every agreement is void unless it is in writing and signed by the party to be charged if that agreement cannot be performed within one year from its making (GOL 5-701[a][1]). The statute has been consistently interpreted to encompass only those contracts which, by their terms, have absolutely no possibility in fact and law of full performance within one year (Cron v. Hargro Fabrics, 91 N.Y.2d 362; D & N Boening v. Kirsch Beverages, 63 N.Y.2d 449). However, an exemption from the Statute of Frauds exists under Section 8-113 of the Uniform Commercial Code. This section provides, in pertinent part, that a contract or modification thereof for the sale and purchase of a security is enforceable whether or not there is a writing signed by the party against whom enforcement is sought, even if the contract or modification is not capable of performance within one year of its making (UCC 8-113[a]).Here, there was a written agreement, signed by both parties, that certain shares of UE were to be made available to defendant at specific periods of time, and that defendant could purchase them if he exercised his option to do so. Although the purchase amount was left blank, the agreement did provide that the price of the shares was to be based on market value at the time. Dated only as to the year it was signed, the agreement provided for options and payments over the course of five years and could not have been completed before then (before December 31, 1990, using the last possible date upon which to exercise the option). However, the original agreement expired by its terms, and a new agreement either extending its terms or providing for new ones was necessary. Plaintiff contends that the stock option for 25 percent of the company was orally extended to defendant for any time up until defendant left the company, and defendant claims that no agreement was reached, particularly the purchase price, regarding his option to buy a 25 percent interest in the company.Questions of fact exist including whether there was an enforceable agreement regarding the sale and purchase of UE stock to defendant, and, if so, whether defendant indicated his intent to exercise the option and purchase the stock and whether defendant’s compensation was partially conditioned upon his paying the purchase price and becoming a shareholder. Additionally, since it has not been demonstrated that the Statute of Frauds is applicable to the agreement between the parties, defendant is not entitled to summary judgment dismissing the cause of action to recover damages for breach of contract (cf., Chaudhry v. Abadir, 261 A.D.2d 498). Even assuming that the Statute of Frauds applies, plaintiff could still recover on its claim for unjust enrichment (see, Chadirjian v. Kanian, 123 A.D.2d 596).Therefore, the motion is denied as to the first and second causes of action in Action 2.Summary judgment dismissing the third cause of action in Action 2 is also denied. Questions of fact exist as to whether defendant owes UE the sum of $122,000.00 in unauthorized loans.The foregoing constitutes the Decision and Order of this Court.FootNotes:[1] The motion is not directed to O’Hanlon’s fourth counterclaim in Action 1 alleging interference with business relations and plaintiff’s fourth cause of action in Action 2 alleging breach of contract related to patent rights.[2] U.E.. Systems, Inc. v. James M. Hall, Index No. 01 Civ.0202.[3] After submission of defendants’ motion papers, the United States Court of Appeals for the Second Circuit affirmed the lower court’s dismissal of UE’s case against Mr. Hall. n
