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Krzastek v. Global Resource Industrial and Power

September 11, 2008

WALTER R. KRZASTEK, PLAINTIFF-RESPONDENT,
v.
GLOBAL RESOURCE INDUSTRIAL AND POWER, INC., BARLETTA ENGINEERING AND CONSTRUCTION, INC., BARLETTA HEAVY DIVISION, INC., VINCENT BARLETTA, THOMAS BUCHANAN, AND PINELAWN CONSTRUCTORS, LLC, DEFENDANTS-APPELLANTS.



On appeal from the Superior Court of New Jersey, Chancery Division, Bergen County, Docket No. C-104-05.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted March 5, 2008

Before Judges Axelrad, Payne and Sapp-Peterson.

Defendants, Global Resource Industrial and Power, Inc., Barletta Engineering and Construction, Inc., Barletta Heavy Division, Inc. (BHD), Vincent Barletta, Thomas Buchanan, and Pinelawn Constructors, LLC, appeal from a judgment entered following a bench trial in which the court awarded plaintiff, Walter Krzastek, damages for defendants' breach of an employment agreement and for the value of plaintiff's minority shares in a closely held corporation based on defendants' abuse and oppression. Defendants claim that the court should have applied Massachusetts law to the corporate claims, that the court invoked the wrong procedure for adjudicating those claims, and that the court erred in its calculation of the value of plaintiff's interest in the corporation. Defendants also allege error in the amount of damages awarded plaintiff for his breach of employment claims, as well as error in the court's determination to award counsel fees.

We have considered these contentions in light of the record and applicable legal standards, and with the exception of the damages awarded on plaintiff's employment claims, which we modify, we affirm.

I.

We recount the evidence presented at trial relevant to the issues on appeal. Plaintiff is a business entrepreneur with extensive experience in the engineering, procurement, and construction of power plants (known in the industry as EPC). As of 2001, he had worked on hundreds of such projects, including nuclear plants. Plaintiff developed a business relationship with Darryl Jenkins (Jenkins), vice president of DiFazio Electric, Inc. (DiFazio Electric). In late 2003, Jenkins introduced plaintiff to an employee of Vincent Barletta (Barletta). It was through this introduction that plaintiff met Barletta, who was the president of Barletta Engineering and Construction, Inc. (BEC), and learned that Barletta was interested in starting a power and industrial group of his own. Plaintiff explained his background to Barletta, including his most recent stint with the power division of Modern Continental that resulted in a first-year profit to the company of more than $30 million dollars. In subsequent meetings, plaintiff brought along Thomas Buchanan (Buchanan), with whom he had worked at Modern Continental. Buchanan had extensive experience in the construction end of power plant projects.

Plaintiff made it clear to Barletta that he was looking for two things from him: financial backing and bonding. Barletta told plaintiff on numerous occasions that his companies had the bonding capacity to do the types of jobs in which plaintiff had expressed an interest. Based upon financial statements he reviewed, plaintiff believed that Barletta's companies, which had been in existence since 1914, were pre-qualified for up to a $350 million bond.

Barletta admitted it was assumed that he would finance the payroll and startup costs for the new venture, which was envisioned as a "sole purpose entity" to procure power projects for the Barletta "team." It was his understanding that this entity's accounting and "infrastructure" would be through the Barletta infrastructure in order to avoid duplication of expenses.

Plaintiff came up with the name Global Resource Industrial and Power, Inc. (GRIP) for the new company, which was to be an EPC contractor. Barletta offered plaintiff ten percent of GRIP and told him he could split his ten percent with whomever he chose. Plaintiff chose to give three percent of the company to Buchanan and to retain seven percent for himself. It was plaintiff's understanding that Barletta or one of his companies would own ninety percent of GRIP because they were providing the financial backing. Plaintiff, in turn, was bringing his thirty-five years of experience in the power industry, as well as his "proven" business plan and business contacts. Plaintiff understood his seven percent ownership to mean his entitlement to seven percent of the profits of the company.

GRIP was incorporated in Massachusetts on February 2, 2004. According to its Articles of Organization, its purpose was "[t]o engage in and conduct a general construction business for the purpose of building, designing and repairing bridges, roads, highways, water and pollution control projects, sewer and waste treatment projects, and every other kind of public and private construction project."

Under the GRIP business plan, the operation of the company called for plaintiff to have the overall responsibility for managing the company, including cost negotiations and business development, while Buchanan would handle all of the construction activities. The business plan called for GRIP, under optimum conditions, to secure one project every six months for the first eighteen months of its operation and, under the worst projection, one project in the first eighteen months.

On February 1, 2004, plaintiff signed an employment contract with BEC. The contract, which was largely drafted by plaintiff, provided that he would be the president and chief executive officer of GRIP, which would be a subsidiary of BEC. His annual salary would be $225,000 and he would own seven percent of the company. BEC would be entitled to ninety percent of the profits earned by GRIP.

The contract also provided that GRIP's home office would be located in a place most convenient to attracting qualified personnel and that a northeastern New Jersey location was anticipated. Plaintiff was a New Jersey resident. However, GRIP was entitled to engage in all EPC activities on a worldwide basis in any field that did not conflict with GRIP's charter.

A key provision of the agreement provided:

As the key member of the management staff of GRIP, [plaintiff] will be required to execute a Confidentiality, Non-Compete & Severance Agreement. Based on [plaintiff's] execution of the aforementioned agreement, [he] will be entitled to one year*fn1 severance if [his] service is terminated by BEC for any reason (except cause). However, it is agreed that neither [plaintiff] or BEC will terminate this employment relationship and [plaintiff] will remain as President of the company so long as GRIP remains reasonably profitable.

Plaintiff anticipated that the non-compete agreement he would be asked to sign would preclude him from competing with GRIP or Barletta for the length of the term of his severance pay, which was to be six months. Plaintiff included this provision in the contract because he believed it was only "fair to the company" that he not compete against it while he was collecting severance pay. Notably, the contract did not define the term "reasonably profitable" for purposes of the termination provision. However, plaintiff was never presented with a non-compete/confidentiality agreement during the course of his employment with BEC, nor were there any further discussions on the subject. Buchanan signed a similar employment agreement with BEC, joining GRIP as its executive vice president of operations, with an annual salary of $175,000. The agreement also provided that he would receive a three percent ownership interest in the company.

On February 24, 2004, GRIP entered into a joint venture agreement with DiFazio Electric. The agreement stated that each entity would be 50/50 partners in a joint venture known as Pinelawn Contractors,*fn2 LLC (Pinelawn), whose purpose was to construct a power plant in Babylon, New York. The joint venture agreement was governed by New York law and was to continue for eighteen months with an automatic extension of three years unless either party wanted to terminate it. The management committee of Pinelawn consisted of plaintiff and Buchanan for GRIP, with Barletta as their alternate representative, and Frank DiFazio and Jenkins on behalf of DiFazio Electric, with Tony DiFazio as its alternate.

The joint venture agreement also provided that to the extent required by the owner of the power plant project, the joint venture "shall procure and maintain performance and payment bonds and the cost of such bonds shall be chargeable to the Joint Venture." Further, each party to the agreement would execute indemnity and any other agreements required by the surety writing the bonds, but no party's aggregate liability would exceed its fifty percent interest in the joint venture. As to this latter provision, according to plaintiff, even though GRIP was a fifty percent partner in Pinelawn, it was anticipated that BEC, as a ninety percent owner of GRIP, would provide any bonds contemplated by this provision of the agreement and also act as a guarantor of any bond issued in GRIP's name. Barletta's understanding was that he would try to have the bond issued in GRIP's name; otherwise, the bond would have to be issued to Barletta's company.

Pinelawn was the successful bidder on the Babylon power plant project and began work on the project in the summer of 2004. GRIP, whose office was located in Woodcliff Lakes, New Jersey, provided all the field staff, did all the procurements, hired and monitored the engineers, and issued subcontracts for the actual construction. All of the staff were from either GRIP or DiFazio Electric; BEC had only one employee on site.*fn3 BEC, or one of Barletta's other entities, signed and paid for the office space, as well as for the staff's salaries, the utilities, and the computers. From the start, Barletta thought that plaintiff had hired too many employees. He told plaintiff that he was concerned with the amount being spent on salaries, which he believed "was going to eat into the general administrative costs of running GRIP."

Plaintiff admitted that Buchanan handled most of the dayto-day details on the project. Buchanan was in charge of the subcontracts, buying the equipment, overseeing the delivery of the equipment, and doing the cost and reporting work. Jenkins, as Buchanan's counterpart at DiFazio Electric, did essentially the same things. Buchanan estimated that both he and Jenkins were at the job site anywhere from four to seven days a week, and from ten to twelve hours a day.

After June 2004, plaintiff was primarily pursuing other projects for GRIP. Despite that fact, as of December 2004, GRIP still had not been awarded any other contracts. Because of the time plaintiff spent pursuing these projects, he and Barletta started having disagreements over which ones to pursue.

Barletta terminated plaintiff's employment with GRIP on January 27 2004. However, plaintiff "stayed on" until February 4, 2005. Plaintiff claimed that Barletta showed up with his attorney and chief financial officer and asked plaintiff to sign stock certificates for GRIP and a release allowing a shareholder's meeting without prior notice. Plaintiff complied. Barletta told plaintiff that he would be paid through February 4 and that Buchanan would be replacing him. Barletta also told plaintiff that he was being terminated because he (Barletta) did not like the jobs plaintiff had been "chasing." According to plaintiff, Barletta's attorney told him that he would be receiving severance pay.

Barletta claimed that plaintiff was terminated because he had not hit Barletta's goals and "definitely [hadn't] even [hit] his [own] business plan," he had no projects waiting to be started, and he refused to follow Barletta's instructions to bring down administrative costs. He was also unhappy that plaintiff had spent a lot of money pursuing small projects.*fn4

Four days later, on January 31, 2005, plaintiff received a letter from Buchanan which stated that a majority of the shareholders of GRIP had voted to terminate his employment. The letter also stated:

According to the Company's records, you have not entered into the agreements required, entitling you to a severance payment as of this date; therefore no such payment is due at this time. If you wish to discuss entering into such an arrangement subsequent to this date, I suggest you convey such interest in writing to the Company for consideration.

On February 11, 2005, Buchanan, on behalf of GRIP, sent plaintiff another letter stating that even though plaintiff had failed to execute a confidentiality/non-compete/severance agreement, GRIP was offering one to him so that he would be entitled to receive his severance pay. The agreement that Buchanan enclosed with the letter offered plaintiff severance pay if he executed and delivered the severance agreement within ten days; otherwise, the letter indicated, "this offer shall be deemed withdrawn."

Under the severance agreement, before September 30, 2005, plaintiff could not accept employment in any capacity, within a 100-mile radius of New York City, from a company that was "competitive with the power related engineering, general contracting and construction business carried out by" GRIP. In addition, plaintiff had to release any and all existing or future claims against GRIP, BEC, Barletta Heavy Division, Inc. (BHD), various other entities affiliated with Barletta, and all entities owned or controlled "by any member of the family of Patricia I. Barletta[,]" Barletta's mother.

Plaintiff objected to the conditions imposed under the proposed non-compete part of the agreement and refused to sign it. He did not interpret Buchanan's cover letter as acknowledging that any of the conditions were negotiable. Rather, plaintiff construed the tone of the letter as "[t]ake it or leave it."

Barletta, however, claimed that there were always changes to be made in any document and he was hoping plaintiff would respond to and start a "dialogue" about the proposed agreement. He put a limit on the response time because he did not want the agreement to sit out there for too long. He claimed that he would have considered eliminating the release provisions in the agreement if plaintiff had asked.

Barletta admitted that he intended the non-compete period in the agreement to coincide with the six-month severance period, or until July 27, 2005, even though the proposed agreement had a date of September 30, 2005. The 100-mile radius was used to prevent plaintiff from competing on jobs at which GRIP and BEC had already looked. When plaintiff did not respond to the proposed agreement, Barletta took that to mean that plaintiff did not plan to abide by the non-compete agreement.

Although plaintiff's team at GRIP attempted to pursue other projects for Pinelawn, no new projects were awarded to Pinelawn, nor were any new projects awarded to GRIP. The advance work extended by the team to acquire new projects was charged to GRIP because, according to Barletta, he had nowhere else to charge these expenses and he owned ninety percent of GRIP anyway.

Pinelawn generated over $12 million in profits from the Babylon power plant project distributed exclusively to BHD and DiFazio Electric in accordance with a decision reached by Buchanan, Jenkins, Barletta, and DiFazio Electric, the latter company having also ultimately provided the bond for the project issued by CHUBBB for $70 million, at a cost to the joint venture of $600,000. A total of $687,500 was distributed from the project as bonuses to ten employees, including $200,000 each to Buchanan and Jenkins. None of the profits from the Pinelawn project were distributed to GRIP because, as Barletta explained, GRIP did not incur any risk.

Plaintiff's expert witness, Leo Zatta, a certified public accountant with expertise in business valuations, testified that he was unable to evaluate GRIP because it was a startup company. Therefore, he performed a valuation of its single achievement, the Pinelawn joint venture. In that regard, he prepared two sets of calculations to determine plaintiff's seven percent interest in GRIP. One was based on the actual performance of the Pinelawn joint venture; the other based on the projected profits of Pinelawn as of January 31, 2005. He assumed that (1) the original joint venture agreement between GRIP and DiFazio Electric was the only valid one, (2) only Pinelawn-related expenses were chargeable to GRIP, (3) GRIP was formed only for the Pinelawn joint venture, (4) plaintiff would not be participating in any of GRIP's future projects even though it was still an ongoing concern, and (5) GRIP was not paid any management fees.

With respect to Pinelawn's actual data, Zatta determined that after certain adjustments were made to the profits reported by defendants, the Pinelawn joint venture realized profits of $12,715,812. One adjustment Zatta made was to add the bonuses back into Pinelawn's profit statement because, in closely held corporations, such bonuses are ordinarily handled as profit distributions. As a fifty percent partner of the Pinelawn joint venture, GRIP's share of $12,715,812 should have been about $6,358,000. Zatta then reduced that amount by GRIP's operating losses. For ...


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