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Totaro, Duffy, Cannova and Co., L.L.C. v. Lane

May 24, 2007

TOTARO, DUFFY, CANNOVA AND COMPANY, L.L.C., A LIMITED LIABILITY COMPANY OF THE STATE OF NEW JERSEY, PLAINTIFF-RESPONDENT,
v.
LANE, MIDDLETON & COMPANY, L.L.C., A LIMITED LIABILITY COMPANY OF THE STATE OF NEW JERSEY AND DAVID P. MIDDLETON, DEFENDANTS, AND MERRITT LANE, III, DEFENDANT-APPELLANT.



On appeal from the Superior Court, Appellate Division.

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

Defendant Merritt Lane, III is an accountant who began his practice in 1978. In 1996, he decided to cease performing "compliance work," which consists of preparing corporate and personal income tax returns, financial statements, bookkeeping and general payroll accounting, and to focus instead on financial planning and estate planning matters. In 1997, Lane agreed to form a new accounting firm with David Middleton. The new firm was known as Lane, Middleton & Co., L.L.C. (LMC), but was owned entirely by Middleton.

In 2000, Middleton decided to sell LMC to plaintiff, Totaro, Duffy, Cannova & Co., L.L.C. Although Lane was reluctant to sign a restrictive covenant, he did consent to the agreement of sale of LMC to plaintiff, and agreed that for four years he would not solicit opportunities to provide compliance accounting services to any of the clients of LMC or any parties that were Lane's clients prior to the sale of his practice to Middleton. In exchange for Lane's non-solicitation agreement, plaintiff agreed to provide Lane with free office space for a year and paid him at closing the final payment he would have been entitled to as a result of his agreement with Middleton. Following the closing, plaintiff began to perform accounting services, including compliance accounting services, for all of the then-existing clients of LMC. Lane continued to work for former LMC clients following the sale of the practice. In early May 2001, Lane notified plaintiff that he was ending their business relationship and reiterated his agreement that he would not solicit compliance work. Lane then immediately opened up his own competing accounting practice across the hall from plaintiff.

Prior to his departure, Lane obtained a list of plaintiff's clients. Using that information, Lane sent a solicitation package to approximately 150 clients he had worked for while associated with plaintiff, including clients of that firm, clients that plaintiff had secured in its purchase of LMC, and clients original to Lane. The package included a letter announcing the opening of Lane's office; a comprehensive fee schedule which included pricing for compliance work; and a form "disengagement" letter for clients to send to plaintiff. Lane does not dispute that this package constituted his solicitation of compliance work from those clients in violation of the terms of his agreement with plaintiff. Plaintiff received 159 disengagement letters and, at the time of trial, Lane was performing compliance accounting work for 140 of those 159 clients.

Plaintiff filed suit. Lane contended that the clients who left plaintiff and retained him were long-time personal clients of his who would not have remained as clients of plaintiff after he left. Therefore, plaintiff could not prove it suffered any damages attributable to his breach. Following a lengthy bench trial, the trial court found that Lane had breached his non-solicitation agreement. The trial court utilized a multi-part approach to calculate the damage award: identifying lost compliance business due to Lane's solicitation letter during the first year of Lane's departure, reducing that by business plaintiff would have been expected to lose, and then multiplying the amount of lost profits by the three additional years that remained on the agreement. Lane filed his appeal.

In an unpublished decision, the majority of the appellate panel affirmed the trial court. The dissenting Appellate Division judge contended that the temporal proximity and the conceded use of Lane's form disengagement letter were insufficient to support an award of damages. Rather, the dissenting judge reasoned that the trial court erred in failing to use a proximate cause analysis to link Lane's mailing of the solicitation letter to plaintiff's damages. This matter comes before the Court as of right based on the dissenting opinion in the Appellate Division, and its consideration is limited to the question raised in the dissent.

HELD: Plaintiff is entitled to compensatory damages for the loss of compliance work resulting from the breach of the non-solicitation agreement. The loss of compliance work was a foreseeable consequence of Lane's breach. The record supports only the trial court's conclusion that each of the clients would have remained a client of plaintiff's in the first year following Lane's departure. Therefore, damages should be based only on the first-year losses.

1. Although plaintiff's complaint included numerous legal theories, the trial court's analysis of the issues relating to an award of damages proceeded on the breach of contract theory alone. The focus of the parties and the appellate panel on proximate cause and the resulting reliance on business tort precedents has, however, confounded the analysis of the sufficiency of the evidence on which the trial court's contract damage award was based. (pp. 12-14)

2. Remedies for breach of contract fall into three general categories: restitution, compensatory damages and performance. Most often, courts award compensatory damages in a breach of contract action. A breaching party is liable for all of the natural and probable consequences of the breach of that contract. A party is not liable for a loss that he did not have reason to foresee as a probable result of the breach when the contract was made. Mere uncertainty as to the quantum of damages is insufficient basis on which to deny the non-breaching party relief. (pp. 14-17)

3. Compensation for the loss of clients comports with well-settled notions of contract law, and was within the parties' contemplation as a consequence of Lane's breach. When plaintiff purchased the practice and requested a non-solicitation agreement, plaintiff contemplated that were Lane to solicit the clients, the compliance work for those clients would be lost. (pp. 17-19)

4. Plaintiff must demonstrate that clients were lost as a consequence of Lane's solicitation letter and there is an appropriate method for quantifying that loss. In Lane's view, his solicitation letter, although a breach of the contract, could not have led to any damages. The Court disagrees. The issue is not whether the clients would have left eventually, but whether they would have left when they did. The breach was the impetus for that business to be lost when it was, an event that occurred earlier than it would have if Lane had been forced to wait until the clients discovered he had departed and found him. Plaintiff had only to demonstrate that the breach caused the clients to leave when they received the solicitation letter. (pp. 19-20)

5. As the trial court recognized, the fact that the clients would have ultimately left bears only on the calculation of damages. The unrebutted proofs also demonstrate that the loss attributed to Lane's breach would not have extended for the full three years remaining on the life of Lane's non-solicitation agreement. The record supports only the trial court's conclusion that each of the clients would have remained a client of plaintiff's in the first year following Lane's departure. Therefore, damages should be based only on the first-year losses. (pp. 20-22)

The judgment of the Appellate Division is AFFIRMED IN PART, REVERSED IN PART, and REMANDED.

CHIEF JUSTICE ZAZZALI and JUSTICES LONG, LaVECCHIA, ALBIN, WALLACE and RIVERA-SOTO join in JUSTICE HOENS' opinion.

The opinion of the court was delivered by: Justice Hoens

Argued November 13, 2006

This breach of contract dispute comes before us as of right based on the dissenting opinion of one of the Appellate Division judges. That opinion raised a narrow issue concerning the trial court's calculation of damages and the sufficiency of the evidence adduced at trial in support of that award. Based on our review of the record and our analysis of the relevant principles of law, we affirm in part, reverse in part and remand.

I.

Defendant Merritt Lane, III is an accountant who began to practice his profession in 1978. In 1996, he decided to cease performing work that accountants refer to as "compliance work," which consists of preparing corporate and personal income tax returns, financial statements, bookkeeping and general payroll accounting. Instead, he decided that he would focus his practice on financial planning and estate planning matters.

In January 1997, as a part of his decision about the future focus of his practice, defendant agreed to form a new accounting firm with David Middleton. The new firm was to be known as Lane, Middleton & Company, L.L.C. (LMC) but was owned entirely by Middleton. In relevant part, Middleton agreed to pay defendant $5,600 for certain software licenses and $5,000 for furniture and related assets, and he agreed that the new business entity would take an assignment of defendant's lease for his office space. At the same time, defendant and Middleton entered into a five-year Consulting Agreement, pursuant to which defendant received an immediate payment of $50,000 and was guaranteed an annual payment representing thirty percent of the gross collections from defendant's then-existing clients. Defendant also agreed that he would work for the new entity as an accountant, for a fixed number of hours, ...


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