Carlson v Katonah Capital, L.L.C.

[*1] Carlson v Katonah Capital, L.L.C. 2006 NY Slip Op 50103(U) [10 Misc 3d 1076(A)] Decided on January 27, 2006 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on January 27, 2006
Supreme Court, New York County

Brian C. Carlson, Joyce C. Delucca, Marion J. Golfinopoulos, Lora L. Leavenworth, Thomas C. Liu, Robert R. Perry, Nancy A. Schulman, Nicole M. Shore, Robert H. Snyder, and Andrew T. Stern, Plaintiffs,

against

Katonah Capital, L.L.C. and KOHLBERG & CO., L.L.C., Defendants.



602831/05



For Plaintiff:

PROSKAUER ROSE LLP

By: Steven M. Kayman, Esq.

Isaac Nesser, Esq.

1585 Broadway

New York, New York

For Defendant:

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

By: Marc Falcone, Esq.

Solomon N. Klein, Esq.

1285 Avenue of the Americas, New York, New York

Bernard J. Fried, J.

Plaintiffs, ten former employees of defendant Katonah Capital LLC ("Katonah")[FN1], bring this action seeking over $3 million dollars of incentive compensation that defendants allegedly failed to pay. In the complaint, plaintiffs assert four causes of action, including a claim for attorney's fees and unpaid wages under Article 6 of the Labor Law.

Katonah, an asset management firm which operates several structured investment funds, employed each of the plaintiffs during 2004. The plaintiffs held different positions, with titles ranging from "Senior Analyst" to "Chief Operating Officer" to "Portfolio Manager and Managing Principal." The responsibilities of each plaintiff were described in employment letters signed by a principal of Katonah and each employee.[FN2] These letters, and subsequent amendments, also describe the terms and conditions of the plaintiffs' compensation.

In December of 2004, Katonah awarded, by letter, certain incentive compensation to the plaintiffs, awards including specified percentages of net operating income ("operating income shares"), individual performance bonuses, and, for some of the plaintiffs, a share of certain carried interest payments received by Katonah during 2004 ("carried interest"). The award letters also noted the period of time in which payment of the incentive compensation would be made. The complaint alleges that plaintiffs terminated their employment before the incentive compensation was paid.

Katonah has not paid, and refuses to pay, any of the incentive compensation specified in the award letters of December 2004, arguing that payment of this compensation was discretionary. Plaintiffs assert that the incentive compensation awards were non-discretionary, vested, and that Katonah's failure to pay gives rise to a wage claim under Article 6 the Labor Law and allows the plaintiffs to recover attorney's fees pursuant to § 198(1-a) of Article 6. Katonah moves to dismiss the Labor Law claim pursuant to CPLR 3211(a)(1) based on documentary evidence, or pursuant to CPLR 3211(a)(7) for failure to state a cause of action.

Katonah argues that plaintiffs have no valid wage claim because documentary evidence shows that the incentive compensation fails to qualify as wages' protected by Article 6 and that the plaintiffs are executives, a class of employees excluded from Article 6. Therefore, according to Katonah, plaintiffs cannot seek attorney's fees under § 198(1-a) because such relief may be awarded only where a plaintiff prevails on a valid wage claim under Article 6.

Plaintiffs oppose, arguing that Article 6 protects the compensation at issue because it was vested, earned, and non-discretionary compensation owed to the plaintiffs. They also assert that none of the plaintiffs, except Ms. DeLucca, were executives, and, even if the plaintiffs were executives, they nevertheless have valid wage claims under certain provisions of Article 6, specifically § 193, even though rights created by other provisions, such as § 191, are denied to employees who qualify as executives.

A motion to dismiss may be granted on documentary evidence so long as the documents alone "definitively dispose of plaintiff's claim." (E.g., Bronxville Knolls, Inc. v. Webster Town [*2]Center Partnership, 221 AD2d 248 [1st Dep't 1995]). The movant may not rely on affidavits or depositions to support a motion to dismiss pursuant to CPLR § 3211(a)(1). (See Seigel, Practice Commentaries, McKinney's Cons Laws of NY, CPLR § 3211[a] [1]; see generally Juliano v McEntee, 150 AD2d 524, 525 [2nd Dep't 1989]; Demas v. 325 West End Ave. Corp., 127 AD2d 476, 477 [1st Dep't 1987]). Documentary evidence on this issue includes letters of employment for most of the plaintiffs, subsequent letters amending the letters of employment, and copies of the 2004 award letters, except for Ms. DeLucca. Most of the award letters discuss the plaintiffs' performance of their respective duties.

Article 6 allows an employee to recover attorney's fees, and in certain circumstances liquidated damages, if the employee prevails on a wage claim made pursuant to one of the substantive provisions of Article 6. (Labor Law § 198[1-a]; Gottlieb v. Kenneth D. Laub & Company, 82 NY2d 457, 464 [1993]). Here, plaintiffs contend that § 193 provides them, as employees, with a wage claim for the improper deduction of the 2004 incentive compensation from their earned wages.

Plaintiffs' wage claim depends first on whether the incentive compensation falls under the Article 6 definition of earned wages and, second, on whether they qualify as a class protected under Article 6. Article 6 defines wages as the "earnings of an employee for . . . services rendered, regardless of whether the amount of earnings is determined on a time, piece, commission or other basis." (Labor Law § 190[1]). Typically, the term wages includes bonuses, profit-sharing, and other forms of incentive compensation only when the incentive compensation is earned by the employee. (See Truelove v. Northeast Capital & Advisory, Inc., 95 NY2d 220, 223-24 [2000]; Dean Witter Reynolds, Inc. v. Ross, 75 AD2d 373, 381 [1st Dep't 1980]). Factors to be considered in determining whether incentive compensation has become earned are whether the incentive compensation is directly tied to the employee's performance, and whether it is dependent upon some condition or the discretion of the employer. (Truelove, 95 NY2d at 223-24).

An employee's incentive compensation may become earned when the employee acquires a vested interest in the incentive compensation and its payment is not conditioned upon some occurrence or left to the discretion of the employer. (See id.; Mirchel v. RMJ Securities Corp., 205 AD2d 388, 389-90 [1st Dep't 1994]; Westheim v. Elkay Industries, Inc., 166 AD2d 318, 318-19 [1st Dep't 1990]; Dean Witter Reynolds, Inc. v. Ross, 75 AD2d 373, 381 [1st Dep't 1980]). Bonuses and similar incentive compensation become vested either by contract or when an employer otherwise awards a specified amount of compensation to the employee. (See Truelove, 95 NY2d at 223-24; Mirchel v. RMJ Securities Corp., 205 AD2d 388, 389-90 [1st Dep't 1994]; Westheim v. Elkay Industries, Inc., 166 AD2d 318, 318-19 [1st Dep't 1990]; Dean Witter Reynolds, Inc. v. Ross, 75 AD2d 373, 381 [1st Dep't 1980]).

Turning to the documentary evidence in this case, it is clear that some of the incentive compensation fails to qualify as earned wages. Although the 2004 award letters award each plaintiff a bonus and an amount of carried interest, causing those forms of incentive compensation to vest in each employee, the employment letters specify the terms governing payment of those forms of compensation. Each employment letter states, in the Termination and Severance clause, that no bonus will be paid if the employee voluntarily terminates employment at any time. Payment of carried interest is also conditioned upon the plaintiffs' continuous employment with Katonah. The complaint makes clear that all the plaintiffs voluntarily terminated their employment when it alleges that "Plaintiff DeLucca . . . resign[ed] in January 2005," that the other plaintiffs "le[ft] Katonah," [*3]that they "joined [DeLucca ] in a new business enterprise," and that "they had the unquestioned right to do so." The termination of plaintiffs' employment occurred before payment of either the bonuses or the carried interest. Neither the bonuses, nor the carried interest, qualify as wages because their payment was conditioned upon the non-existence of a voluntary termination of employment, a condition not met by the plaintiffs.

However, the incentive compensation comprising operating income shares does qualify as earned wages. Although the employment letters, and subsequent letters of amendment, state that shares of operating income will be awarded to each employee "[a]t the sole discretion of Katonah and subject to [the employee's] performance," this form of compensation vested in each plaintiff when Katonah elected, in its 2004 award letters, to award each plaintiff a specified amount of operating income for 2004. (See Truelove, 95 NY2d at 223-24; Mirchel v. RMJ Securities Corp., 205 AD2d 388, 389-90 [1st Dep't 1994]; Westheim v. Elkay Industries, Inc., 166 AD2d 318, 318-19 [1st Dep't 1990]; Dean Witter Reynolds, Inc. v. Ross, 75 AD2d 373, 381 [1st Dep't 1980]).

Only two conditions restrict payment of the operating income shares: Katonah reserved the right to determine the time when the shares will be paid and to not pay "any Operating Income share for the year" in which an employee voluntarily terminates employment. The first does not apply here because, in the award letters, Katonah clearly designated the time when the Operating Income will be payable sometime during the first quarter of 2005. Moreover, the second condition does not apply to the 2004 operating income shares designated in the award letters. Each of the plaintiffs terminated their employment in 2005, a year for which the plaintiffs do not seek payment of operating income shares. Thus, the documentary evidence shows that the operating income shares awarded by Katonah qualify as earned wages for the purposes of wage claims made pursuant to Article 6 of the Labor Law because this form of incentive compensation became vested in each plaintiff and there are no conditions that prevented payment.

Even though there are earned wages here, I must also determine whether the plaintiffs legally qualify to assert a wage claim under any of the substantive provisions of Article 6, specifically § 193. The answer to this question depends on whether plaintiffs are employees under this Article.

Sections 190 and 191-a define several terms used throughout Article 6, including the classes of persons to whom the substantive provisions provide rights. Section 190 defines a general class of persons identified as "Employee[s]," which includes "any person employed for hire by an employer in any employment." (Labor Law § 190[2]). Section 190 defines other, more limited classes, such as "Manual Workers," "Railroad Workers," "Commission Salesman," and the "Clerical and other worker" category that includes all employees that do not qualify as either manual workers, railroad workers, or commission salesman, excluding "executive[s], administrat[ors], and professional[s] . . . ." (Labor Law § 190[7]).

The provisions of Article 6 that grant rights, the provisions that are called substantive in the case law, specify the classes of persons to which each provision applies. For example, § 191 specifies that its terms apply only to manual workers, railroad workers, commission salesman, and clerical or other workers. Section 191-b applies only to sales representatives. Other substantive provisions, such as section 193, apply to the general "Employee" category, seemingly granting rights to any person in an employer-employee relationship.

However, the Appellate Division, First Department, relying on Gottlieb v. Kenneth D. Laub & Company, 82 NY2d 457, has made clear that executives do not qualify as employees for the [*4]purposes of asserting wage claims under Article 6.[FN3] (Taylor v. Blaylock & Partners, 240 AD2d 289, 292 [1st Dep't 1997]; Cohen v. Fox-Knapp, Inc., 226 AD2d 207, 207-08 [1st Dep't 1996])(See also Cantor Fitzgerald Associates, L.P. v. Mines, 2003 WL 23109714, at *2 [NY Sup. Ct., Oct. 13, 2003]). As these cases make clear, certainly employees who qualify as executives cannot assert wage claims under any substantive provision of Article 6, including § 193.[FN4]

This requires that I turn to the question of whether the plaintiffs qualify as executives. Here, the parties agree, and the documentary evidence shows, that Ms. DeLucca was an executive when employed by Katonah. But, they dispute the executive status of the other nine plaintiffs.

An employee qualifies as an executive if he or she "exercises independent judgment" in performing his or her duties. (See Dean Witter Reynolds, Inc., 75 AD2d at 380 [citations omitted]; Cantor Fitzgerald Associates v. Mines, 2003 WL 23109714, at *2 [NY Sup. Ct., Oct. 12, 2003]). Based on the employment letters and the 2004 award letters, it is clear that eight of the nine remaining plaintiffs acted as executives during their employment: Nancy A. Schulman, as Katonah's Chief Operating Office, acted in an executive role because she performed many executive level and administrative duties, duties requiring her to exercise independent judgment during her employment. Although the remaining plaintiffs possessed lesser supervisory authority, the documentary evidence shows that all of them, except Nicole M. Shore, possessed at least the authority to "exercise independent judgment" with regard to Katonah's investments or the administration of the company, and, therefore, they qualify as executives. (See Cantor Fitzgerald Associates v. Mines, 2003 WL 23109714, at *2 [NY Sup. Ct., Oct. 12, 2003]). The documents relating to Ms. Shore contain insufficient detail to determine whether she exercised the independent judgment of an executive.

For these reasons, the first cause of action, under Article 6 of the Labor Law, must be dismissed as to all plaintiffs, except Nicole M. Shore.

With regard to Katonah's argument that dismissal is warranted because there has been a failure to state a cause of action, I need only consider the validity of Nicole M. Shore's Article 6 claim.

When deciding a motion to dismiss pursuant to CPLR 3211(a)(7), the facts as alleged in the complaint must be accepted as true. A court must accord the plaintiff "the benefit of every possible favorable inference and determine only whether the facts as alleged fit within any cognizable legal theory." (E.g, Sokoloff v. Harriman Estates Development Corp., 96 NY2d 409, 414 [2001]; Leon v. Martinez, 84 NY2d 83, 87-88 [1994] ). "The motion must be denied, if from the pleadings' four [*5]corners, 'factual allegations are discerned which taken together manifest any cause of action cognizable at law.'" (Richbell Information Services, Inc. v. Jupiter Partners, L.P., 309 AD2d 288, 289 [1st Dep't 2003]).

Assuming the truth of the allegations of the complaint, the Operating Income Share awarded to Nicole M. Shore in her 2004 award letter qualifies as wages for the reasons stated above. In addition, the complaint alleges that Katonah refuses to pay the Operating Income Share it awarded to Ms. Shore and that Ms. Shore was an employee of Katonah, a class of persons entitled to assert wage claims under § 193. (See Labor Law §§ 190, 193). Even though Katonah argues that Ms. Shore was an executive, that assertion does not justify dismissal for failure to state a cause of action, it merely makes the question of Ms. Shore's status as an executive a question of fact not to be decided on a motion to dismiss. The complaint states a valid cause of action with respect to Ms. Shore.

Accordingly, it is

ORDERED that the first cause of action is dismissed as to all plaintiffs, except Nicole M. Shore.

Dated: January 27, 2006

ENTER:

_________________________

J.S.C. Footnotes

Footnote 1: The second defendant, Kohlberg & Co., L.L.C., is a majority owner of Katonah. For the purposes of this motion, the defendants will collectively be referred to as "Katonah."

Footnote 2: All of the employment letters were signed by Ms. DeLucca, on behalf of Katonah, except her own employment letter. Ms. DeLucca is a plaintiff in this action.

Footnote 3: In Gottlieb the Court of Appeals stated, in dicta, that § 191, a substantive provision of Article 6, provides no protection to executives. (82 NY2d at 461).

Footnote 4: Although plaintiffs cite federal cases that interpret Article 6 as allowing executives to assert substantive wage claims under Article 6, e.g. Miteva v. Third Point Mgmt. Co., 323 F. Supp. 2d 573 (S.D.NY 2004); Pachter v. Bernard Hodes Group, Inc., 2005 WL 2063838 (S.D.NY Aug. 25, 2005), such cases are not binding upon New York trial courts, but can only be considered as persuasive authorities. (See Mayer Bros. Poultry Farms v. Meltzer, 274 A.D. 169, 177 [1st Dep't 1948]; Marsich v. Eastman Kodak Co., 244 A.D. 295, 296 [2d Dep't 1935], aff. 269 NY 621 [1936]). Notwithstanding the rationale of those decisions, as a trial court in the First Department, I am bound by its clear and unequivocal decisions.