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Stephen J. Hopkins and Stephen Hopkins Associates, Inc v. Dennis J. Duckett

January 17, 2012


On appeal from Superior Court of New Jersey, Chancery Division and Law Division, Bergen County, Docket Nos. C-449-06 and L-7575-07.

Per curiam.


Argued October 4, 2011

Before Judges Payne, Simonelli and Hayden.

Plaintiffs, Stephen Hopkins, and his firm, Stephen Hopkins Associates, Inc. (SHA), appeal various rulings that resulted in their failure to obtain recovery in their action against defendants Nightingale & Associates, L.L.C. (N&A), a Delaware entity, and those of its members named as defendants, Dennis J. Duckett, Michael R. D'Appolonia, Kevin I. Dowd, and Howard S. Hoffmann. Defendants cross-appeal. We affirm.


The facts and procedural history of this matter are lengthy.

Prior to 1997, N&A was known as Nightingale & Associates, Inc., a company founded in 1975 as a turnaround management consulting firm providing advice and assistance to financially troubled businesses, their creditors, insurance companies, and to financially troubled debtors. Hopkins was, for a period of time commencing in 1993, its president. He also served as the company's managing member until December 31, 2001. In 1995, Hopkins held an eighty percent ownership share in the corporation. In 1997, Nightingale & Associates, Inc. became Nightingale & Associates, L.L.C., a Delaware limited liability company, with its principal place of business located in Stamford, Connecticut. Pursuant to N&A's February 21, 1997 operating agreement, the interest held by Hopkins in the business was reduced from eighty to twenty-five percent, with the remaining members each holding a fifteen-percent ownership interest. The operating agreement for N&A established Delaware law as governing disputes. Additionally, the operating agreement provided that individual members of N&A would not be personally liable for any act done on behalf of the company unless the act constituted fraud, bad faith, gross negligence, or willful misconduct. All members of N&A shared in the profits and losses of the company in proportion to their ownership interests. Major management decisions required more than a seventy-five percent vote that Hopkins could block as the result of his retained ownership interest.

In addition to his ownership interest in N&A, Hopkins performed services as an independent contractor for it through a services agreement between N&A and Hopkins's Delaware corporation, SHA. During part of the period that the services agreement was in effect, Hopkins was a New Jersey resident, and he did some work out of his home in New Jersey. He later moved to Indiana. The services agreement between N&A and SHA provided that disputes arising from it would be governed by Connecticut law. It did not contain a "non-compete" clause. Similarly, services agreements between N&A and its other members did not contain such a clause.

Plaintiffs' suit arose from the fact that, in 2000, internal disputes commenced in N&A regarding Hopkins's leadership. In particular, intense acrimony developed between Hopkins and members D'Appolonia and Dowd. In July 2000, Hopkins announced that he intended to step down as managing member at the end of the year, and to retire at the end of 2002.

In response, the members of N&A commenced discussion of amendments to the operating agreement, which failed to provide retirement benefits or a means for removing a member.

On August 16, 2000, the principals of N&A sent a written proposal for retirement benefits to Hopkins, independent of the operating agreement, that offered percentage of earnings pay-outs in the two years following retirement. The proposal listed as Hopkins's retirement date, "[o]n or before 12/31/02." Hopkins responded to the proposal in a letter dated September 17, 2000, in which he agreed to the payment terms, and to relinquishing his position as managing member on December 31, 2000, but he rejected the fixed retirement date. Hopkins stated:

Although it may not have been intended, the terms of the proposal require that I must retire by 12/31/02 to be eligible for any payments. I am offended by this and reject it. I have expressed an expectation that I will retire within this time frame, but see no reason that this must be a condition of your proposal to me.

In response, the August 16 letter was revised to state: "You have expressed a desire to continue working full time until 12/31/02. This firm is flexible regarding this date, both earlier and later."

On January 26, 2001, the members met to determine who should become the next managing member, eventually designating Hoffmann. They designated D'Appolonia as president, with direct responsibility for the company's marketing efforts.

Hopkins claims that at a February 26, 2001 members meeting, the company's members offered him project work to supplement his income following retirement. Additionally, he claims that he was promised a role in defining the duties and responsibilities of the managing member and president, in allocating personnel resources, in maintaining the quality of the firm's work, in the hiring and training of new employees, and in the company's marketing activities, including new business campaigns. In the present suit, Hopkins alleges that none of these promises was kept.

On May 14, 2001, the members memorialized Hopkins's retirement agreement. Additionally, on that date, they unanimously adopted an amended and restated operating agreement. Pursuant to that agreement, each member, including Hopkins, was given a fifteen-percent interest in the company, with ten percent of the ownership interest reserved for new members. The agreement also reduced the percentage of votes needed for an amendment to the agreement from more than seventy-five percent to sixty percent. In connection with the amended agreement, Hopkins thus gave up his blocking vote, stating in later trial testimony that he did so in reliance upon the other members' promises regarding his retirement and his post-retirement participation in company business.

Paragraph 3.5 of the amended operating agreement provided that the members could remove a fellow member without cause upon six months' notice and with cause upon fourteen days' notice. In either case, the removed member's shares would be repurchased by the company. However, the provisions for compensation of members dismissed with and without cause differed. The amended agreement preserved the provisions conditionally absolving individual members of personal liability and designating Delaware law for choice of law purposes.

In October 2002, the company planned a major marketing event in Sea Island, Georgia, culminating in a black-tie dinner. A proposal was circulated to utilize the dinner as an opportunity to honor Hopkins and his retirement. However, when Hoffmann mentioned the proposal to Hopkins in August 2002, Hopkins announced that he had changed his mind, and that he was not retiring. Among other things, Hopkins was reported by Hoffmann as stating that the retirement benefits offered to him by separate agreement were less than those offered by the amended operating agreement to persons removed without cause. Hoffmann was concerned by Hopkins's revised plans, fearing that the acrimony that had existed in 2000 would be rekindled to the detriment of the company.

According to the allegations of the complaint later filed by Hopkins in this matter,

[d]uring the above-referenced August 2, 2002 conversation, in response to my question to the Defendant Hoffmann as to why I should be forced out (on December 31, 2002), he stated to me that turnaround management was a young man's business and that there was an image to uphold. I responded to the Defendant Howard D. Hoffmann that that explains why Michael R. D'Appolonia, who was now President, with primary responsibility for marketing, won't use me for new business presentations and meetings. In response to my statement, the Defendant Mr. Hoffmann admitted: "Yes."

At the time, Hopkins was sixty-seven years of age.

By letter dated September 2, 2002, Hopkins formally informed the other company members that he did not intend to retire on December 31, 2002, and he listed in detail his reasons for that decision, including his dissatisfaction with the retirement benefits offered to him. On September 25, 2002, Hoffmann circulated a proposed revision to the operating agreement that reduced the payout for a person removed without cause to the level that Hopkins was to receive as the result of his retirement agreement. The amended agreement also shortened the notice period for removal without cause to thirty days. Hopkins testified at trial that he thought this latter provision was targeted at him.

On September 30, 2002, at a members meeting in Connecticut, Hopkins formally announced that he was not retiring. In response, the members demanded that, within one week, Hopkins provide his retirement plans in writing. Additionally, the members, with the exception of Hopkins and his son Douglas, voted to accept the second amended operating agreement.

On October 6, 2002, Hopkins informed the members in writing that he had "no intention of retiring until some later date." By notice dated November 1, 2002, a meeting was scheduled for November 15, 2002 to consider "whether a Requisite Voting Interest (as defined in the Operating Agreement) of the Members desires to give notice to Stephen J. Hopkins of their intention to vote on the removal of Mr. Hopkins as a member pursuant to the terms of the Operating Agreement, and any matters related thereto." On the day of the November 15 meeting, D'Appolonia and Hoffmann met with Hopkins in an attempt to resolve matters without the necessity for a vote on removal. Hopkins offered to retire by December 31, 2003. However, the offer was rejected because Hopkins could give no assurance that his undertaking would not again be rescinded.

At the meeting held on November 15, the requisite voting interest determined to provide notice of their intent to vote on Hopkins's removal, listing the principal reasons for the proposed removal as follows:

fl You have a fundamentally different view of the objectives of the Company (operationally and strategically) than do a Requisite Voting Interest of the Members.

fl The Requisite Voting Interest of the

Members has lost confidence in your ability to conduct Company business in a way that is in the best interest of the Company. fl Relations between you and the

Requisite Voting Interest of the Members is strained and you have acknowledged that your continued presence causes destructive disruption within the Company. fl The disruption caused by the relations between you and the Requisite Voting Interest of the Members is impairing the ability of the Company to conduct its business in a normal manner.

A vote was scheduled for December 16, 2002.

The members met to vote on removal in January 2003, but the required number of votes for removal was not be obtained. However, on September 29, 2003, the members again met, and at that time, they voted in favor of Hopkins's removal, effective October 31, 2003, with the only dissenting votes being cast by Hopkins and his son. He was removed as a member effective November 1, 2003. By letter dated November 14, 2003 from Hoffmann, Hopkins's "change of [his] relationship with Nightingale & Associates, LLC" was confirmed, and his June 1, 1995 services agreement with the company was terminated. In that letter, N&A offered Hopkins an opportunity to remain associated with it and to continue in the role of an independent contractor. However, Hopkins declined the terms offered to him. By letter dated November 24, 2003, Hopkins informed Hoffmann of his intent to approach his three current clients, Xpectra, Brown Schools and Zeta, to determine whether they wished to retain him individually to complete ongoing projects or to have Nightingale assign another principal to take over the work. Eventually, Hopkins offered to complete the three projects at no charge, and the offer was accepted. In December 2003, N&A placed amounts allegedly due to Hopkins and SHA*fn1 in an escrow account. N&A asserted that the funds consisted of Hopkins's retirement proceeds, as well as other funds that were owed to him. However, Hopkins contended that a major portion of those funds were amounts that he was due under his normal distributions, plus the receivables that he had not been paid when he left. He asserted that N&A had issued 1099 tax forms to SHA for the years 2003 and 2004 that stated that SHA had received over $275,000 more in compensation in 2003 than N&A had actually paid to it, and that SHA received $185,188.25 in 2004, when no compensation had been paid. In that regard, the members of N&A claimed that Hopkins was not yet entitled to the compensation, because the clients' bills had not been paid in full, as required by N&A policies.

In the meantime, on November 22, 2002, Hopkins, individually, had filed suit in the United States District Court for the District of New Jersey against Duckett, D'Appolonia, Dowd, Hoffmann, and N&A. The complaint, as subsequently amended, alleged claims under the New Jersey Oppressed Minority Shareholder statute, N.J.S.A. 14A:12-7(1) to -(10), claims under the New Jersey Law Against Discrimination (NJLAD), N.J.S.A. 10:5-12, various breach of contract claims, fraud, retaliation, conversion, breach of fiduciary duty, and an ERISA claim pursuant to 29 U.S.C.A. § 1001 to 1461. Defendants counterclaimed, alleging Hopkins's interference with N&A's business operations and his diversion of funds to himself and SHA.

Through an order to show cause filed prior to the initial vote on his removal, Hopkins sought preliminary restraints against any vote on his removal and the appointment of a custodian to manage the affairs of N&A. However, the application was denied by the court by order dated December 19, 2002. Thereafter, in January 2004, Hopkins moved to supplement his complaint to allege actions occurring since January 2002 and, as an oppressed minority shareholder, to have the court appoint a custodian to manage N&A's affairs as they related to Hopkins. In connection with the latter relief, Hopkins alleged that N&A was withholding money consisting of the value of his ownership interest in the company, performance fees and the earned income being held in the escrow account established by N&A. However, although Hopkins was permitted to amend his complaint, his motion to appoint a custodian was denied by the federal magistrate hearing the matter, who concluded that Hopkins had failed to meet the stringent requirements for appointing a custodian under either New Jersey or Delaware law.

Hopkins appealed the decision not to appoint a custodian, which was affirmed in the District Court. Hopkins v. Duckett, 2005 U.S. Dist. LEXIS 47039, at *9-*11 (D.N.J. May 27, 2005) (Duckett I). In reaching its decision, the court agreed with the tentative decision of the magistrate that Delaware law was applicable to the matter, relying in this regard both on the parties' choice of law and on its finding that Delaware had a greater interest than New Jersey in the affairs of N&A. Id. at *10-*12. Further, the court recognized that Delaware law does not expressly provide for appointment of a custodian to relieve minority shareholder oppression, but instead authorizes such an appointment only when stockholder or director deadlock scenarios occur or when the managers of the corporation are guilty of fraud or gross mismanagement or of creating such extreme circumstances that an imminent danger of great loss that cannot otherwise be prevented occurs. Id. at *12. Such extreme conditions, the court found, had not been demonstrated in this case. Id. at *12-*13. Additionally, the court determined that invocation of Delaware law would not violate public policy. Id. at *13. Although N.J.S.A. 14A:12-7(c) provided for the discretionary appointment of a custodian on proof that officers or directors had acted oppressively or unfairly toward a minority shareholder, the court recognized that appointment of a custodian had long been regarded as an extraordinary remedy. Ibid. (citing Neff v. Progress Bldg. Materials Co., 139 N.J. Eq. 356, 357 (Ch. Div. 1947)). The court held: "Custodianship is unnecessary here where Plaintiff's interest in the disputed funds is amply protected by virtue of the escrow account, an accounting of those funds has been provided, and appointment of a custodian would likely hinder Defendants' ability to conduct their business and serve their clients." Id. at *13-*14.

At a later point, defendants moved for summary judgment on Hopkins's ERISA claim and for dismissal of his remaining claims. Their motion was granted. In a written opinion dated November 21, 2006, the court held that Hopkins was not a "participant" in an ERISA plan offered by N&A, because he was not an "employee" as defined in 29 U.S.C.A. § 1002(6) and as further construed by the Supreme Court in Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323-24, 112 S. Ct. 1344, 1348-49, 117 L. Ed. 2d 581, 589-90 (1992), but rather, an independent contractor. Hopkins v. Duckett, 2006 U.S. Dist. LEXIS 84559, at *8-*16 (D.N.J. November 21, 2006) (Duckett II). As a consequence, the court dismissed Hopkins's federal ERISA claim and, finding that subject-matter jurisdiction was lacking over the remaining state law claims, the court dismissed those claims without prejudice. Id. at *17-*25.

On December 21, 2006, the present action was filed in the Superior Court, Chancery Division, as a verified complaint and order to show cause alleging violations of the Oppressed Minority Shareholder statute, violations of the Law Against Discrimination, breach of contract, violation of the covenant of good faith and fair dealing, fraud, retaliation, tortious interference with contract, and breach of fiduciary duty. As relief, Hopkins sought payment of all money in the escrow account; a detailed accounting and payment of his capital account, distributions, performance fees and invoice collections for the years 2002 through 2004; payment of additional money that would have been payable to him as a former member of N&A under the terms of the May 14, 2002 operating agreement; payment of additional money owed as a continuing member of N&A up to the present, because there had never been a closing to purchase his ownership interest; an order directing sale of his shares in N&A; and compensatory damages. Defendants filed an ...

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