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Company Must Have Trial on Whether It Breached Golden Parachute Contract With Termination of CEO, Appeals Court Rules

 

In a breach of contract and Illinois Wage Payment Act case, the First District Court of Appeal has ruled that a company and its former executive must have a trial to determine whether it breached the executive’s employment contract. Covinsky v. Hannah Marine Corporation, No. 1-08-0695 (Ill. 1st. Feb. 17, 2009). At issue in the case is a severance clause in Jeffrey Covinsky’s employment contract with Hannah Marine Corp., for which he served as president, CEO and CFO from 1998 to 2006.

Covinsky’s contract specified that he was entitled to a “golden parachute” of 18 months’ salary if there is “…a change in the present ownership which results in the termination of the Employee’s employment…” This agreement was executed in 2004, when Hannah Marine was jointly owned by three people, including Donald Hannah. Hannah sued the other shareholders in 2005 for financial mismanagement, and ended up buying out the other two shareholders. Covinsky told Hannah in 2005 that he assumed Hannah would want to let him go after the change; in 2006, Covinsky told Hannah he did not intend to resign and wanted to finish the contract, which was set to expire in 2006.

A month later, when the takeover was final, Hannah told Covinsky that he was terminated and that Hannah “accepted” Covinsky’s resignation. Covinsky protested that he never resigned, but was not paid the severance. He sued Hannah Marine and Donald Hannah for breach of the employment contract and violating the Illinois Wage Payment Act. Hannah countersued Covinsky for breach of fiduciary duty. The trial court granted summary judgment to Covinsky on both counts as to Hannah Marine, but dismissed the Wage Act claim against Hannah personally. It also dismissed the company’s counterclaim. Both sides appealed, resulting in the consolidated instant appeal.

On appeal, the First District narrowed the issue to the meaning of the word “termination” in the golden parachute clause, which says in part that Covinsky would be entitled to the severance pay if “a change in the present ownership… results in the termination of the Employee’s employment.” Hannah Marine argued that this means just a firing; Covinsky argued that it means either a firing or a resignation. The appeals court found that the dictionary definition could mean either kind of termination, but context makes it clear that the clause refers to an involuntary termination. In fact, the court wrote, to interpret the clause otherwise would “make[] no sense”:

If a paragraph 7(g) “termination” encompasses a voluntary resignation, the employee has no incentive to continue in his position and to make the transition to the new owner/management because he knows, if he resigns upon the transition, he will receive a substantial payout. He will be rewarded for not doing his job.

For that reason, the court said, the issue of whether Covinsky was fired or quit — an issue the trial court had declined to address, believing the clause applied either way — was dispositive of the case. This is a genuine issue of material fact that is inappropriate for summary judgment, the court wrote. Thus, the trial court’s breach of contract decision was reversed and remanded for further proceedings on the subject. For the same reasons, the appeals court also send the Wage Payment Act claims against both Hannah Marine and Donald Hannah back to trial — the law would apply, it said, but only if Covinsky was fired. The judges noted that the trial court found that Hannah didn’t meet the definition of an employer, but nonetheless, it was free to revisit the issue on remand.

Finally, the court addressed Hannah’s appeal of the trial court’s decision to dismiss its breach of fiduciary duty claim against Covinsky. Like the trial court, the appeals court said Hannah failed to state a sufficient claim because the deal that formed the basis of its claim wasn’t necessarily a bad one.

DiTommaso-Lubin’s Chicago breach of contract litigation lawyers and business trial attorneys handle cases of alleged breach of employment contracts and all other types of business contracts, including franchise agreements, purchase and sale contracts, restrictive covenants and non-compete agreements. Our firm serves businesses and individuals acting as both plaintiffs and defendants. With offices in Oakbrook Terrace, near Oak Brook, Naperville, Wheaton, Ill., and Chicago, we help clients throughout Illinois, Wisconsin and Indiana. Our law firm and its Chicago commercial trial attorneys have handled a wide variety of business trials and litigation. To learn more about how we can help you, you can contact us online or call us at 1-877-990-4990.