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Carco Group, Inc. v. Maconachy

United States Court of Appeals, Second Circuit

May 21, 2013

CARCO GROUP, Inc. and PONJEB V, L.L.C., Plaintiffs-Counter-Defendants-Appellees-Cross-Appellants,
v.
Drew Maconachy, Defendant-Counter-Claimant-Appellant-Cross-Appellee.

Argued: November 14, 2012

Cross-appeals from a post-remand judgment in favor of, and award of attorneys' fees, costs, and interest to, Plaintiffs-Counter-Defendants-Appellees-Cross-Appellants.

We VACATE the District Court's judgment and awards with respect to Plaintiffs' breach of contract claim and REMAND for further findings as to proximate causation. We VACATE the award of attorneys' fees and REMAND for recalculation of those fees following the District Court's determination as to whether Plaintiffs proved proximately-caused damages on the contract claim. We REVERSE the District Court's decision that attorneys' fees should be reduced by twenty percent across-the-board, and the denial of interest on the attorneys' fees awards. In all other respects, we AFFIRM.

James M. Wicks, (Franklin C. McRoberts, on the brief) Farrell Fritz, P.C., Uniondale, NY, Edward F. Cunningham, Garden City, NY, for Plaintiffs-Counter-Defendants-Appellees-Cross-Appellants.

Gary A. Ahrens, (Miriam S. Fleming, on the brief) Michael Best & Friedrich LLP, Milwaukee, WI, for Defendant-Counter-Claimant-Appellant-Cross-Appellee.

Before: Kearse, Straub, and Pooler, Circuit Judges.

Per Curiam:

This suit involving breach of contract and related claims and counterclaims returns to us on cross-appeals. Following remand from the prior appeal, the District Court (Arlene R. Lindsay, Magistrate Judge) determined that Defendant-Counter-Claimant-Appellant-Cross-Appellee Drew Maconachy's ("Maconachy") breaches of two contracts proximately caused injury to Plaintiffs-Counter-Defendants-Appellees-Cross-Appellants CARCO GROUP, Inc. and PONJEB V, L.L.C. (collectively, "Carco"), and entered judgment accordingly, awarding damages, attorneys' fees, costs, and interest. The parties now cross-appeal.

Maconachy argues principally that the District Court's findings below were erroneous because proximate causation did not exist, and that various determinations as to damages, fees, costs, and interest were derivatively, as well as independently, in error. Carco challenges certain aspects of the District Court's calculation of the attorneys' fees awarded to Carco and the denial of prejudgment interest on that award. For the reasons that follow, we VACATE the breach of contract judgment, including any resulting damages, attorneys' fees, costs, and interest awards, and REMAND for further proceedings consistent with this opinion. To the extent any costs and interest awards were based on the faithless servant cause of action, we AFFIRM. We REVERSE the District Court's twenty-percent attorneys' fees reduction and its denial of prejudgment interest on attorneys' fees. We REMAND for recalculation of the award of attorneys' fees in light of our reversal of the twenty-percent reduction and in light of findings to be made by the District Court with respect to proximate cause on the contract claim.

BACKGROUND

This is the second appeal in what is essentially a contractual dispute. Some of the background of this litigation is set forth in our prior ruling in Carco Group, Inc. v. Maconachy, 383 F.App'x 73 (2d Cir. 2010) ("Carco I"). In 2008, Magistrate Judge Lindsay, by mutual consent of the parties, pursuant to 28 U.S.C. § 636(c), presided over a bench trial on Carco's breach of contract, warranty, and faithless servant claims, as well as on Maconachy's breach of contract counterclaims. In Carco I, we affirmed in part the District Court's judgment in favor of Carco and against Maconachy, vacated the judgment in part, and remanded the case for further proceedings.

Specifically, we affirmed entirely the District Court's judgment as to the faithless servant cause of action. We also affirmed the District Court's findings that Maconachy breached both the Employment Agreement ("EA"), which governed his employment by Carco, and the Asset Purchase Agreement ("APA"), which governed Carco's acquisition of the private investigation business, Murphy & Maconachy, Inc. ("MMI"). We found error, however, in the District Court's conclusions that all of MMI's net operating losses constituted general (as opposed to consequential) damages, and in its failure to articulate the causal link between Maconachy's breaches of the contracts and the damages awarded therefor.

Thus, the case was remanded so that the District Court could "determine what damages, if any, were directly and proximately caused by Maconachy's breach[es]." Carco I, 383 F.App'x at 76. Although the District Court had stated that MMI's lack of profitability was "due almost exclusively to Maconachy's breach[es]" of the relevant agreements, we indicated that the District Court should have "engaged in a proximate cause analysis to show that the breaches caused some loss, " and "then discussed potential intervening causes that might have broken the link between Maconachy's breach[es] and any damages suffered." Id. at 77 (internal quotation marks omitted). We further instructed that the District Court must "determine which damages were general and which consequential. It may award consequential damages only where the amount of loss can be ascertained with reasonable certainty. To award general damages, the court need only be certain that some damage resulted from the breach; certainty as to the exact dollar amount is not required." Id. at 76.

In its post-remand filings in the District Court, Carco advanced three alternative measures of its damages resulting from Maconachy's breaches: "(1) damages for its total lost capital investment in MMI West (or in the alternative damages for the loss of salary paid to a disobedient employee); (2) damages for the total loss of the value of the goodwill attributed to MMI West; and (3) damages for the loss of MMI West's business opportunities from 2000 through 2005."[1] SPA-98.

In considering the parties' post-remand submissions on the issue of damages, the District Court stated that it had undertaken a proximate cause analysis, considered potential intervening causes that might have broken the causal link between Maconachy's breaches and the damages Carco suffered, and determined which damages were general and which were consequential.

With respect to proximate causation, the District Court stated that the trial record supported the finding (affirmed in Carco I) that Maconachy breached the EA and APA, and that Maconachy's refusal to comply with Carco's directives to, inter alia, implement sales programs—a key aspect of the valuation report Carco relied upon in its decision to acquire MMI—led directly to MMI West incurring losses.

Next, the District Court examined potential intervening factors that may have broken the causal connection between Maconachy's breaches and Carco's losses, as identified by Maconachy. The District Court rejected the notion that Carco's failure to provide introductions to new business prospects was an intervening cause, because such a conclusion lacked foundation in, and indeed was inconsistent with, evidence adduced at trial. Certain of Carco's accounting decisions regarding MMI were also deemed not to be an intervening cause because the damages sought had already been reduced to exclude the acquisition costs of MMI. With respect to external market factors, the District Court (1) rejected them as an intervening cause between Maconachy's breaches and Carco's lost capital investment damages because the declining market had been explicitly factored into Carco's acquisition costs and expectations, but (2) accepted them as an intervening cause that broke the causal chain between Maconachy's breaches and lost business opportunities and future profit damages, and (3) accepted them as an intervening cause between Maconachy's breaches and loss of goodwill and return on Carco's capital investment damages.[2]

Having determined that external market factors intervened so as to preclude the use of two of Carco's measures of damages, the District Court "stated that it 'w[ould] not consider . . . Carco's capital investment in MMI West [] except to the extent that it included salary paid to a disobedient employee[].'" SPA-106 (emphasis added). The District Court concluded, following our instruction that "[g]eneral damages seek to compensate the plaintiff for the value of the very performance promised, often determined by the market value of the good or service to be provided, " Carco I, 383 F.App'x at 75 (internal quotation marks omitted), that "[b]ecause awarding Carco the lost salary it paid Maconachy would compensate Carco for the value of the very performance promised by Maconachy but which Maconachy failed to deliver, such an award would constitute general damages." SPA-109.

The District Court found that Maconachy was in breach of the relevant agreements from November 17, 2000 until his termination on December 28, 2005. However, the District Court noted that "as a form of disgorgement under its faithless servant claim, Carco already recovered Maconachy's salary from September 26, 2003 to December 28, 2005." Id. Thus, in order to avoid double recovery, the District Court determined that, on its breach of contract claim, Carco was "entitled to an award of the salary it paid to Maconachy and which Carco lost due to Maconachy's breach from November 17, 2000 to September 25, 2003." Id. Prorating Maconachy's $200, 000 annual salary for this period yielded an award of $571, 506.85, plus mandatory statutory nine percent per annum prejudgment interest pursuant to CPLR §§ 5001, 5004.[3]

The District Court directed the parties to make further submissions regarding Carco's recovery of attorneys' fees that earlier findings of fact and conclusions of law had deemed mandatory under the EA and APA. Carco incorporated by reference its 2009 submission on attorneys' fees and costs, and submitted new documentation regarding the appeal in Carco I and briefing on remand. In total, Carco requested over $4 million in legal fees, costs, and disbursement, as well as prejudgment interest thereon, bringing the total to $5, 198, 890.07. Following the submission of opposition papers, the District Court conducted a thorough review of the documentation supporting Carco's request, and awarded attorneys' fees in the amount of $1, 499, 613.41 and costs in the amount of $327, 044.76, for a total award of $1, 826, 658.17.

In arriving at this figure, the District Court modified the components of the fees sought by Carco in numerous ways. For example, the District Court found certain fee requests vague, insufficiently connected to the instant action, or too remote in time to meet Carco's burden, as the moving party, of showing the reasonableness of the requested fees. Other requests were reduced so as to bring the hourly fees sought in line with prevailing rates in the district for substantively similar cases. Still other requests were modified or denied because the background and experience of attorneys, support staff, and consultants were inadequately documented, or the rates sought for these individuals were insufficiently justified. While the District Court found the fees request's overall level of detail, including contemporaneous time records, to be sufficient, it also found that the number of hours spent by Carco's counsel and its support staff to be "excessive and in certain instances duplicative, " and therefore reduced the number of overall hours by twenty-five percent. SPA-168–69. The District Court declined also to award costs for pre-trial expenses of Carco's consultants.

Finally, because it found that "the benefit of th[e] litigation d[id] not reach far beyond the immediate action" and there were no "transcending principles involved, " the District Court further reduced the total fees and costs award by twenty percent to "bring the fee award within the contours of the [] amount of damages awarded in this action." SPA-172–73.

The District Court declined to award prejudgment interest on fees and costs, interpreting the language of the relevant APA provision to provide for interest on damages alone.

Maconachy appealed the District Court's damages determination on October 19, 2011. Maconachy appealed the District Court's judgment as to attorneys' fees and costs on December 14, 2011. After the relevant bankruptcy stay was lifted, Carco cross-appealed the attorneys' fees and costs judgment on February 24, 2012.

On appeal, Maconachy argues that Carco failed to show that his breaches proximately caused any damage; that the District Court's damages award on remand did not properly take into account the value of the work he performed for Carco; that the District Court failed to consider the monies Carco would have had to pay him under the APA were it not for his breaches; and that even if ...


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