Opinion
Index No. 654803/2019 Motion Seq. No. 002 003
10-07-2022
JIANHAI XU Plaintiff, v. CASTLETON COMMODITIES INTERNATIONAL LLC, Defendant.
Unpublished Opinion
MOTION DATE N/A, N/A
DECISION + ORDER ON MOTION
ANDREW S. BORROK, J.S.C.
The following e-filed documents, listed by NYSCEF document number (Motion 002) 50, 51, 52, 53, 54, 55,56,57,58,59,60,61,62,63,64,65,66,67,68,69,70,71,72,73,74,75, 109, 110, 111, 112, 113, 114, 115, 119, 120, 121 were read on this motion to/for JUDGMENT-SUMMARY
The following e-filed documents, listed by NYSCEF document number (Motion 003) 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92, 93, 94, 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 107, 108, 116, 117, 118, 122 were read on this motion to/for SUMMARY JUDGMENT(AFTER JOINDER
Castleton Commodities International LLC's (the Company) motion for summary judgment (Mtn. Seq. No. 002) must be granted. While Jianhai Xu was employed by the Company, he was compensated in two ways: (i) he received a salary and bonus and (ii) Equity Units to compensate him for forbearing from competing with the Company and from soliciting Company employees for 18 months following his employment with the Company. Stated differently, following his employment, Mr. Xu was given a choice during the next 18 months to either compete with the Company and earn a living based on his competition compensation (but not retain his Equity Units) or forbear from competing and retain his Equity Units and cash them out after the 18-month forbearance period. Mr. Xu's lawsuit is grounded on the mistaken premise that he could do both. He cannot (SCI Funeral Services of New York, Inc. v McGinley, 2021 WL 3468137 [Sup Ct, NY County 2021]). Thus, Company's motion must be granted and Mr. Xu's motion (Mtn. Seq. No. 003) must be denied.
To be clear, Mr. Xu does not dispute that he formed Elion (hereinafter defined) with Elion Resources to compete with the Company by operating as a commodities-trading business that would trade in the exact same types of commodities as the Company and in the same geographic area, or that this violated the non-compete provision and constituted a Covenant Breach (hereinafter defined) in the Equity Agreements (hereinafter defined). Instead, he argues that the non-compete was not breached because he was unsuccessful in his efforts, that he did not solicit Company employees and the non-compete and non-solicitations provisions of the Equity Agreements are not enforceable. The arguments fail.
While working with Elion, Mr. Xu, among other things, (i) created a business plan, (ii) worked to raise money from Elion Resources and other sources, including a Chinese bank, (iii) invested his own money in Elion, (iv) hired employees, and (v) received a salary of $500,000 per year. This goes beyond mere preparation to compete and does not simply involve the internal circulation of a memo or a spreadsheet (cf. In re Document Technologies Litig., 275 F.Supp.3d 454 [SD NY 2017]). The covenant not to compete did not prevent Mr. Xu from competing with the Company or otherwise earn a living. Nor can it be said that the covenant not to compete caused a forfeiture of his retirement benefits (cf. Post v Merrill Lynch, Pierce, Fenner & Smith, 48 N.Y.2d 84 [1979]). This covenant not to compete simply constituted the consideration for his post-employment contractual rights to his Equity Units.
Although the court (Rakoff, J.) in that case examined when harm to the company occurred, the posture of the case was whether the grant of a preliminary injunction was appropriate and the court notes that when harm occurs, the covenant not to compete has certainly been breached. This simply does not mean that absent success, competition has not occurred.
The Relevant Facts and Circumstances
Reference is made to (i) an employment agreement (the Employment Agreement; NYSCEF Doc. No. 56) dated February 12, 2013, pursuant to which Mr. Xu's employment with the Company as the Managing Director, Head of Asian Business Development at the Company's offices in Singapore was extended from March 1, 2013 through February 28, 2014, (ii) an equity incentive program agreement (the 2012 Equity Agreement; NYSCEF Doc. No. 59) dated as of December 31, 2012, pursuant to which Mr. Xu was granted 785,955.8352 Class A Units, (iii) an equity incentive program agreement (the 2013 Equity Agreement; NYSCEF Doc. No. 60) dated as of January 1, 2013, pursuant to which Mr. Xu was granted 2.20 Class B Units, (iv) a management subscription agreement (the 2012 Subscription Agreement; NYSCEF Doc. No. 61; the 2012 Subscription Agreement, together with the 2012 Equity Agreement and the 2013 Equity Agreement, hereinafter, collectively, the Equity Agreements) dated as of December 31, 2012, pursuant to which Mr. Xu was granted 727,505.03 Class A Units, (v) an LLC agreement for the Company (the LLC Agreement; NYSCEF Doc. No. 58) dated as of December 31, 2012, which, among other things, governed certain of the terms of the Equity Agreements, (vi) an employment termination agreement (the Termination Agreement; NYSCEF Doc. No. 62) dated February 25, 2014 by and between Mr. Xu and the Company terminating Mr. Xu's employment with the Company as of the end-date of his employment contract, February 28, 2014, and (vii) a letter of appointment (the Appointment Letter; NYSCEF Doc. No. 68) dated June 5, 2014, pursuant to which Mr. Xu was appointed as Managing Director at Elion International Holding Pte. Ltd. (Elion).
Pursuant to the Equity Agreements, Mr. Xu received 1,513,460.8652 Class A Equity Units and 2.20 Class B Equity Units (the Equity Units). Each of the Equity Agreements was subject to the terms of the LLC Agreement and incorporated the terms of the LLC Agreement by reference (NYSCEF Doc. No. 59, ¶ l). The Equity Agreements specifically set forth:
As relevant for purposes of these motions, each of the Equity Agreements contains identical or substantially similar language. For the sake of convenience citations herein are made to the 2012 Equity Agreement.
Capitalized terms used herein without definition shall have the meanings assigned to them in the LLC Agreement, a copy of which is attached hereto. This Agreement and the Equity Program Units shall be subject to the LLC Agreement, the terms of which are hereby incorporated by reference, and in the event of any conflict or inconsistency between this Agreement and the LLC Agreement, the LLC Agreement shall govern.
Subject to the terms and conditions contained herein and in the LLC Agreement, including the requirement that the Service Member execute a counterpart to the LLC Agreement, the Company shall grant to the Service Member the number of Equity Program Units specified on the signature page hereof.
The Service Member and the Company hereby confirm that, effective as of the date of the grant, the Service Member shall be deemed to be a "Service Member" with respect to the Equity Program Units for the purposes of the LLC Agreement and the Service Member agrees to be bound by all the terms of the LLC Agreement applicable to Service Members and Equity Program Units(NYSCEF Doc. No. 59, ¶¶ 1-3).
The LLC Agreement provides that a Service Member forfeits his right to Equity Units upon a Covenant Breach and, in fact, must repay in cash the gross amount of any converted Equity Units if a breach occurs within 12 months of the exercise of a Put Right or Call Right:
In the event of a Covenant Breach, all Equity Program Units and Rollover Units held by the applicable Service Member as of the date of such breach, whether or not such Incentive Units are vested at such time, together with all amounts withheld by the Company pursuant to Section 9.01(d) with respect thereto, shall be forfeited to the Company, unless the Board otherwise determines in its sole discretion. If such Covenant Breach occurs within twelve (12) months following the exercise of a Put Right or Call Right, the Service Member shall repay to the Company in cash the entire gross amount received in respect of such Put Right or Call Right within thirty (30) days following notice from the Company(NYSCEF Doc. No. 58, § 5.03). The LLC Agreement defines a Covenant Breach as:
with respect to a Service Member or former Service Member, that such Service Member, without the prior written consent of the Board, has (i) Competed or Solicited at any time during the period services are or were provided to any CCI Entity or any Affiliate of any CCI Entity or within eighteen (18) months after his or her Separation from Service or (ii) breached in any material respect, his or her obligations with respect to Confidential Information set forth in Section 14.07(b) of this Agreement at any time during or following the period services are or were provided to any CCI Entity or any Affiliate of any CCI Entity(id., at 10 [emphasis added]). The LLC Agreement defines Compete to mean:
that a Service Member, without the prior written consent of the Board, directly or indirectly, on the Service Member's own behalf or on behalf of any Person other than an CCI Entity, (i) engages or participates in any business, or performs any services or acts as an employee, director, officer, manager, consultant or otherwise, for any person or enterprise that (x) competes with any CCI Entity or any Affiliate of any CCI Entity, (y) uses or proposes to use any corporate opportunities, track records, products or work product of any CCI Entity or any Affiliate of any CCI Entity or (z) supplies or proposes to supply any services, products or work product which have the same or similar characteristics as any
services, products or work product performed by, engaged in or rendered by any CCI Entity or any Affiliate of any CCI Entity (any of the foregoing, a "Competitive Business") or (ii) has any interest as an owner, partner, member, stockholder or otherwise, in or for any Competitive Business; provided that "Compete" shall not include (A) the ownership of less than (i) 5% of the issued and outstanding capital stock of a publicly-traded corporation in which the Service Member is a passive investor or (ii) 5% of the issued and outstanding equity interests of any other business entity in which the Service Member is a passive investor or (B) the performance of services for or on behalf of a Person that is not engaged in a Competitive Business at the time of the Service Member's Separation from Service from the Company but subsequently becomes engaged in a Competitive Business solely as a result of any CCI Entity's or any Affiliate's of any CCI Entity entering into a new line of business in which it did not engage and would not reasonably have been expected to engage at the time of such Service Member's Separation from Service. The terms "Competing" and "Competed" shall have meanings correlative to the foregoing(id., at 8 [emphasis added]).
Mr. Xu began working for the Company in 2008 (Amended Complaint, ¶ 6 [NYSCEF Doc. No. 43]). The Company trades in global commodities of both physical and financial energy products, including metals, petrochemicals, and natural gas. In February 2013, Mr. Xu entered into the Employment Agreement with the Company to work for CCI Asia pursuant to the terms of the Employment Agreement. In his role with CCI Asia, Mr. Xu was responsible for setting up the Company's subsidiary in China and launching its Asia-based commodities trading and asset investment business. The Employment Agreement provided that Mr. Xu could be terminated either without cause by giving him one month notice before the scheduled last day of his employment or by paying him one month salary in lieu of notice and could terminate his employment for cause without such notice (NYSCEF Doc. No. 56, 2-3). The scheduled last day of his employment was February 28, 2014.
As part of his employment with the Company, and separate from the cash and bonus compensation he was paid, Mr. Xu was entitled to participate in the Company's equity plan pursuant to the terms and conditions of the Equity Agreements. Under the terms of the Equity Agreements, the Equity Units vested 20% on the date of grant and an additional 20% on each of the first four anniversaries of the date of grant (NYSCEF Doc. No. 59, ¶ 4[i]).
As the conclusion of the term of Mr. Xu's agreed upon employment period approached, in February 2014, the parties entered into the Termination Agreement. For purposes of the Equity Units, the parties agreed that the termination would be deemed termination without cause (NYSCEF Doc. No. 62, ¶ 3[1]) and that the Company would call Mr. Xu's Equity Units over two years (2014 and 2015), the earliest possible date for the call, at the fair market value as of the date of the call (id., ¶ 3[3]). At the time the Termination Agreement was entered into, the value of the Equity Units that the Company agreed to call was $1,892,722 (id.).
A few months later in June 2014, Mr. Xu began working for Elion pursuant to the Appointment Letter. In an email chain (NYSCEF Doc. No. 69) between Amy Williams at the Company and Mr. Xu, the parties discussed Mr. Xu's employment with Elion. Specifically, Ms. Williams inquired as to Mr. Xu's new company and position, including a description of the products and markets in which Elion trades and Mr. Xu's role (id., at 5). Mr. Xu initially responded that he would not answer Ms. Williams' questions unless he knew the purpose of them (id., at 4). Subsequently, when Ms. Williams explained that the purpose was to determine whether Mr. Xu was violating the non-competition provisions of the Equity Agreements (id.), Mr. Xu replied that he did not have a non-compete and that, after his separation from the Company, he did not have an equity plan with the Company (id., at 3).
In response, Ms. Williams explained that under the Termination Agreement, Mr. Xu's vested and unvested Equity Units were subject to forfeiture if Mr. Xu refused to abide by the non-compete and non-solicit provisions of the Equity Agreements and that the Company read his email as disavowing his obligations and a declaration by Mr. Xu that he was prepared to forfeit his Equity Units (id., at 2). Mr. Xu explained to Ms. Williams' that the Company should not hold him to the non-compete and non-solicitation covenants that he agreed to because he expected that there would be future cooperation and synergy between Elion and the Company (id., at 1) and that the Company would not be better off by prohibiting him from engaging in commodity trading, particularly because he did not know the Company's core trading strategy (id.).
The Company did not agree and sent a letter dated August 26, 2014 to Mr. Xu informing him that he had engaged in two Covenant Breaches and therefore forfeited his Equity Units (NYSCEF Doc. No. 70). In particular, as relevant herein, the Company wrote:
With regard to your remaining Equity Plan Units, it is our understanding that you are (or have recently been) serving as CEO and President of Elion International Holding Ltd. Pte. It is also our understanding that Elion International is a "global commodity trading and investment platform based on China demand and global resource." Documents establish that "Energy, Metals and Ags, both physical and financial derivatives are the focus of the business." The Company has concluded, therefore, that you are "engaged in [a] business . . . which directly competes with the Company . . . ."
In addition, we have received numerous reports from different CCI staff that since your separation from the Company, you have approached them about employment opportunities. You have, therefore, on your own behalf or on behalf of an entity other than CCI, recruited or solicited these staff members"(id., at 2).
In support of the allegation that Mr. Xu solicited employees of the Company, the Company adduces the letter affidavit of Judith Liu (NYSCEF Doc. No. 92) who indicates that Mr. Xu called her after the termination of his employment with the Company and asked if she would be interested in a new employment opportunity working for him at his new company.
For his part, Mr. Xu admits that Elion was established pursuant to a JV Agreement between Elion Resources and himself (Xu Aff., ¶ 39 [NYSCEF Doc. No. 77]) and that Elion was to become a commodities-trading and commodities asset-investment business (id., ¶ 41). He however alleges that Elion never got off the ground because Elion Resources failed to (i) provide Elion a $23.75 million investment which it promised to give him and (ii) assist Elion obtain a $250 million credit facility from a bank to fund operations (id., ¶¶ 44, 46). Instead, according to Mr. Xu, Elion Resources only provided short term loans to Elion, the proceeds of which Elion used to purchase construction materials to resell to another Elion Resources affiliate, which would then repay the money to Elion Resources (id., ¶¶ 48-49). In addition, although Mr. Xu did apply to a Chinese bank for a credit facility for the commodities-based business he wanted to operate through Elion, Mr. Xu indicates that his application was denied (id., ¶¶ 54-55). Ultimately, Mr. Xu indicates that he wound down Elion by the end of 2015 (id., ¶ 56) and joined another affiliate of Elion Resources as part of a joint venture that acted as a lender on finance leases for mining equipment (id., ¶ 57).
Mr. Xu sued by summons dated August 21, 2019 (NYSCEF Doc. No. 1) and filed an initial complaint dated November 21, 2019 (NYSCEF Doc. No. 2) asserting a single cause of action for a declaratory judgment that the forfeiture of his Equity Units was unlawful and that he is entitled to all rights in and to the Equity Units. He subsequently filed an amended complaint dated February 16, 2021 (NYSCEF Doc. No. 43) asserting causes of action for (i) a declaratory judgment that the forfeiture of his Equity Units was unlawful and that he is entitled to all rights in and to the Equity Units (first cause of action), (ii) breach of the Equity Agreements for failure to pay he was entitled to as a holder of the Equity Units (second cause of action), and (iii) breach of the Equity Agreements for wrongfully declaring that the Equity Units were forfeited for violations of the non-solicit and non-compete provisions of the Equity Agreements (third cause of action).
Discussion
On a motion for summary judgment, the movant must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact (Alvarez v Prospect Hosp., 68 N.Y.2d 320, 324 [1986]). Failure to make such a showing requires a denial of the motion, regardless of the sufficiency of the opposing papers (id.). Once this showing has been made, the burden shifts to the party opposing the motion to produce sufficient proof in admissible form to establish the existence of material issues of fact which require trial (id.).
As discussed above, Mr. Xu was compensated to forbear from competing with the Company for a discrete amount of time. There is nothing about this bargained for forbearance that violates public policy and there are simply no triable issues of facts that Mr. Xu "supplie[d] or propose[d] to supply any services, products or work product which have the same or similar characteristics as any services, products or work product performed by, engaged in or rendered by" the Company or any of its affiliates (id., at 8). It does not matter that he was unsuccessful. The Company is entitled to summary judgment that the Equity Units were knowingly and voluntarily forfeited by Mr. Xu when he set up Elion to compete with the Company.
For completeness, Mr. Xu's reliance on Pollard v Autotote, Ltd. 852 F.2d 67 (3d Cir 1988) does not change the analysis. In that case, the Court indicated it found no Delaware case addressing the enforceability of a forfeiture provision against an employee who was involuntarily terminated without fault and who subsequently accepted employment with a competitor (id., at 70) and indicated that the proper analysis under Delaware law was to analyze a benefits forfeiture provision in the same manner as a covenant not to compete because the Court believed that Delaware courts would apply the same test to both contractual provisions (id., at 72).
Subsequently, however, Delaware courts have analyzed forfeiture provisions and covenants not to compete differently. For example, in W.R. Berkley Corp. v Hall, 2005 WL 406348 (Del Sup Ct 2005), the Court considered a similar forfeiture provision where an employee was granted stock options for his forbearance from competing with the company for six months after leaving and began to compete two months after he resigned. The Court enforced the forfeiture clause and drew a distinction between a forfeiture provision and a restrictive covenant, holding that, because the former employee's freedom of employment was not abridged and there were no limitations on the former employee to seek any job desired, the repayment required under the forfeiture clause was simply a contractual obligation (Hall, 2005 WL 406348, at * 5). In W.R. Berkley Corp. v Dunai, 2021 WL 1751347 (D Del 2021), the Court considered a forfeiture provision with a non-compete clause that gave a company committee total decision making in determining whether the non-compete clause had been violated. After a senior vice president left the company to work for a competitor, the committee determined that the clause had been violated and the company sued for repayment of the stock options. The court held that Delaware courts in fact favor these kinds of clawback provisions because a corporation must reasonably expect to receive the contemplated benefit from the grant of options (Dunai, 2021 WL 1751347, at *2, citing Beard v Elster, 29 Del.Ch. 153, 163 [I960]). Here too, the non-compete in the Equity Agreements must be analyzed as a contractual obligation for the Equity Units Mr. Xu received. Mr. Xu elected to compete with the Company and can not now claim he is entitled to the Equity Units he was compensated with to forbear from doing the same. Thus, the Company is entitled to summary judgment and the case must be dismissed.
The Court has considered Mr. Xu's remaining arguments and finds them unavailing.
It is hereby ORDERED that the Company's motion for summary judgment (Mtn. Seq. No. 002) is granted; and it is further
ORDERED that Mr. Xu's motion for summary judgment (Mtn. Seq. No. 003) is denied