JOHN C. TATUM III and JCT CAPITAL LLC, Plaintiffs and Counterclaim Defendants, v. FAIRSTEAD AFFORDABLE LLC, FCM AFFORDABLE LLC, JD2 AFFORDABLE LLC, STUART FELDMAN, JEFFREY GOLDBERG, FSC EF&F LLC, FAIRSTEAD CAPITAL LLC, FAIRSTEAD CAPITAL MANAGEMENT LLC, JD2 REALTY MANAGEMENT LLC, FA DC LLC, FSC REALTY MANAGEMENT LLC, and SDF FUNDING LLC, Defendants and Counterclaim Plaintiffs.
C.A. No. 2022-0970-JTL
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
October 27, 2025
Date Submitted: May 23, 2025
LASTER, V.C.
Ryan D. Stottmann, Thomas P. Will, Alec F. Hoeschel, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Rollo C. Baker, Jared Ruocco, Edgar Aliferov, ELSBERG BAKER & MARURI PLLC, New York, New York; Michael B. Carlinsky, Evan Forbes, QUINN EMANUEL URQUHART & SULLIVAN, LLP, New York, New York; Attorneys for Defendants and Counterclaim Plaintiffs.
LASTER, V.C.
William Blodgett was the entrepreneur. A few years later, he recruited John Tatum to join the Fairstead team. Tatum built a new segment of the business from scratch that focused on deals using low-income housing tax credits. The group formed an LLC to serve as the vehicle for pursuing the tax credit deals. The hedge fund manager and the attorney indirectly controlled the LLC. Tatum received a 5.25% interest.
With Tatum leading the charge, the tax credit business boomed. Blodgett and Tatum came to believe that they had created significant value (they had) and deserved a substantial, even controlling equity stake in the business. They spoke with the attorney, who sympathized with their position, but told them an equity restructuring would not happen until the hedge fund manager had recovered his capital. That was several years away.
Blodgett and Tatum wanted a restructuring in the near term. They also realized that if the negotiations did not pan out, they needed an alternative.
Blodgett and Tatum came up with two plans. “Plan A” contemplated restructuring the business so that they would own the bulk of the equity and have control. “Plan B” was to leave and start their own business.
After the hard no, Tatum told the attorney that he planned to leave. He proposed that they work on a transition plan, and the attorney agreed. During the transition period, the group discussed a potential joint venture.
The attorney then saw an invoice for a “Newco Formation” that was sent to Blodgett‘s work address. The attorney concluded that Blodgett and Tatum did not intend to cooperate on a transition plan.
The hedge fund manager terminated Blodgett for cause. Tatum resigned without cause. Fairstead accepted his resignation and insisted that he work through his notice period. Tatum did and thought he left on good terms.
After his departure, the hedge fund manager and the attorney caused Fairstead to exercise its right to repurchase Tatum‘s equity interests. But instead of following the contractual valuation process, they offered him a lowball price. When Tatum rejected it, they retroactively terminated him for cause and declared that all of his equity interests were forfeited.
Meanwhile, Blodgett started his own affordable housing business. Tatum did not join him. He took a year off and then went to work in a related industry.
This post-trial opinion rules in favor of the defendants on one counterclaim. They proved that Tatum breached his employment agreement by downloading and retaining company documents. As damages, they can recover the expenses they incurred investigating Tatum‘s breach. This post-trial opinion otherwise rules in favor of Tatum.
I. FACTUAL BACKGROUND
The facts are drawn in part from findings made in a related arbitration between Blodgett and Fairstead (the “Blodgett Arbitration“).1 After Fairstead terminated Blodgett for cause, Blodgett filed an arbitration against Fairstead.2 Fairstead sued here to block the arbitration, and the court directed the parties to arbitrate the claims arising under Blodgett‘s employment agreement.3
After post-trial argument in this case, the arbitrator issued an award in the Blodgett Arbitration. Whether the findings in the Blodgett Arbitration bind Tatum
A judgment ordinarily does not bind a non-party,7 but it can if a party and the non-party are in privity. That elusive term means they have a pre-existing legal relationship, outside of the prior litigation, that is sufficient to cause the adjudication to be binding.8
Tatum was a central figure in the Blodgett Arbitration, but not a party to it, so the arbitrator‘s findings only bind Tatum if he was in privity with Blodgett.
Tatum and Blodgett formed a common law partnership and operated as joint venturers for purposes of their plan to negotiate for a controlling interest in Fairstead‘s affordable housing business and, if Fairstead refused, leave Fairstead to start a new business.12 The arbitrator made a similar finding, concluding that Tatum and Blodgett were joint venturers for those purposes.13
As a result, Tatum and Blodgett are in privity for purposes of issue preclusion for factual findings relevant to this litigation. This decision accordingly adopts the arbitrator‘s findings of fact to the extent they were (i) “actually litigated and
The facts are based on the post-trial record. Trial took place over five days. The parties submitted 2,593 exhibits, lodged twenty depositions, and reached agreement on 57 stipulations of fact. Ten witnesses testified live.15 Each party bore the burden of proving its claims by a preponderance of the evidence.
A. Fairstead‘s Origins
Blodgett, Stuart Feldman, and Jeffrey Goldberg identified a business opportunity in the affordable housing market. Each brought something to the table. Blodgett was an entrepreneur with energy and vision. Feldman was a hedge fund manager with capital. Goldberg was an attorney with legal savvy. In 2013, they founded what eventually became Fairstead.16
In substance, Fairstead was a fund complex that invested in affordable housing projects. As such, it consisted of a web of affiliated entities under the common control of the fund complex‘s principals. In 2014, Feldman, Goldberg, and Blodgett formed
Feldman, Goldberg, and Blodgett participated in management to varying degrees. Feldman was the exclusive source of capital and ultimate decision-maker but kept a low profile and did not involve himself in day-to-day operations. He preferred to communicate through Goldberg and rely on him for information.
Goldberg served as Chief Executive Officer and was nominally in charge of day-to-day operations. But Goldberg knew little about the affordable housing business and was responsible for other aspects of Feldman‘s far-flung business interests. Goldberg did not attempt to learn the business until after Blodgett and Tatum made their demands for a controlling equity stake.18
Blodgett ran the day-to-day operations. He focused initially on acquiring market rate, rent-stabilized housing units in New York City.19
B. Tatum Joins Fairstead.
In early 2016, Blodgett recruited Tatum to develop a new business line focused on deals involving low-income housing tax credits (the “Tax Credit Business“).20 In April 2016, Tatum signed an employment agreement with JD2 Realty Management LLC, a Fairstead affiliate.21
In the Employment Agreement, Tatum agreed to devote his “best efforts and time, effort and loyalty to the business of [Fairstead],” to work for Fairstead “in good faith and to the best of [his] ability,” and to “perform [his] duties in compliance with . . . [Fairstead‘s] written policies and procedures.”22 The Employment Agreement specified that Tatum could “not serve as a director, employee, consultant or advisor to any other person or entity,” nor engage in any activity that may create “an actual, potential or apparent conflict” with Fairstead‘s interests.23 Tatum further agreed that “[d]uring [his] employment, and thereafter without limitation of time,” he would “not make any negative statement or otherwise take any disparaging action . . . regarding [Fairstead], or any individual employed by [Fairstead].”24
know-how, techniques, . . . processes, strategies, . . . customer lists, customer histories, customer information, investor lists, investor histories, investor information, . . . pricing information, projects, notes, memoranda, reports, . . . budgets, plans, projections, forecasts, financial information, trading strategies, investment models or other models, . . . actual or proposed investments, assets under management, personnel, . . . forms, contracts, agreements, . . . [and] plans and proposals in whatever form.26
Tatum agreed to “not use or attempt to use any such information in any manner, except as may be required in the ordinary course of performing [his] duties as an employee of [Fairstead].”27
After Tatum came on board, Fairstead formed Fairstead Affordable LLC to serve as the vehicle for pursuing the Tax Credit Business.28 Through his personal entity JCT Capital LLC, Tatum owned a 5.25% interest in Fairstead Affordable. The balance was owned by FCM Affordable LLC (64.75%) and JD2 Affordable LLC (30%). Feldman and Goldberg indirectly controlled Fairstead Affordable through FCM
C. The Tax Credit Business
Before Tatum joined Fairstead, no one there “knew how to do a tax credit deal.”29 Tatum figured it out, and with him leading the charge, Fairstead “started doing tax credit deals, and the company just kept growing.”30
Tatum focused on acquiring properties that qualified for federal low-income housing subsidies, then using tax credits and tax-exempt bonds to finance improvements.31 The business generated multiple streams of revenue: development fees, incentive management fees, and the capital gains from an eventual sale.32
Compared to a traditionally financed real estate investment, a tax credit deal required considerably more work between signing and closing. It could take more than a year. During that time, the developer had to secure the tax credits and any tax abatements, potentially issue tax-exempt bonds, raise equity capital from limited partners (including negotiating with limited partners over the partnership agreement), obtain approval for construction plans, secure building permits, hire a
Feldman provided the capital for the tax credit deals. That included funding all pre-development costs, such as rate locks for debt financing and the fees for architects, engineers, and other professionals. Feldman also funded hard deposits that would be forfeited if the deal failed to close regardless of the reason. A soft deposit, by contrast, is refundable if specified conditions are not met, such as a failure to secure financing or tax credits. The Fairstead team believed that offering hard deposits gave them an advantage when competing for deals.
Feldman claimed at trial that he had invested over $300 million to build the affordable housing business as a whole—not just the Tax Credit Business.34 Much of that capital funded property acquisitions and financing for the traditional affordable housing business, with approximately $40 million supporting the platform at large.35 Only a relatively small portion remained committed to the Tax Credit Business, because the tax credit deals involved lining up equity and debt financing at closing that enabled Feldman to recoup the bulk of his pre-development costs.36
D. Fairstead Affordable‘s Growth
When Tatum joined in 2016, Fairstead Affordable‘s portfolio consisted primarily of several thousand units of rent-stabilized housing in New York. During Tatum‘s employment, the Tax Credit Business grew. Between 2017 and 2022, Fairstead Affordable completed deals with developer fees totaling approximately $181 million.37
Those fees should have resulted in distributions. Under Fairstead Affordable‘s operating agreement (the “Operating Agreement“), the company had to make distributions “no less frequently than quarterly or within thirty (30) days following receipt of any income or proceeds of a Deal capital transaction” if its assets exceeded liabilities.38 Yet Tatum did not receive any distributions from Fairstead Affordable.
E. The Other Projects
During his time at Fairstead, Tatum worked on two projects outside of Fairstead Affordable. One was a legacy portfolio of 905 units that Feldman acquired before Tatum arrived (the “Legacy Portfolio“). The other was a portfolio of general partner interests in seventeen real estate deals (the “Hampstead Portfolio“).
In 2017, the Legacy Portfolio failed inspections conducted by HUD. That adverse event jeopardized Fairstead‘s ability to rent the Legacy Portfolio. The resulting cash crunch threatened Fairstead‘s entire business.
Blodgett and Goldberg asked Tatum to work on the Legacy Portfolio. Tatum accepted reluctantly, because the project took him away from the Tax Credit Business.39 As additional compensation, Tatum asked for a share of the promote on any sale of the Legacy Portfolio.40 Goldberg promised Tatum that he would work with Feldman to get him an equity interest,41 and Blodgett agreed that if necessary, he would give Tatum a portion of his own share of the promote.42 Tatum also invested his own money in the Legacy Portfolio though an entity known as FSC EF&F LLC (the “Friends and Family Entity“).
Tatum successfully renovated the Legacy Portfolio in record time so that it could pass the HUD inspections. Tatum also put together a refinancing that enabled Feldman to recapture all of his original equity investment.43
In December 2020, Feldman bought out the minority investors in the Legacy Portfolio. Tatum received $749,168 in exchange for this investment through the Friends and Family Entity.44 Tatum never received any compensation in the form of a promote.45
2. The Hampstead Portfolio
Feldman also wanted to buy the Hampstead Portfolio. Tatum oversaw the acquisition and received a 9% share of the promote.46 Goldberg received a 67% share of the promote, even though he never did any work on the project.47
In response to Blodgett and Tatum‘s inquiries about a restructuring, Feldman and Goldberg told Tatum that they wanted to concentrate everyone‘s equity ownership in one entity. To prepare for the eventual restructuring, they asked Tatum to transfer his 9% share of the Hampstead Portfolio promote to Fairstead Affordable. Tatum agreed. Tatum understood that he would receive an increased share of
Feldman and Goldberg never increased Tatum‘s ownership stake in Fairstead Affordable, whether as part of a restructuring or to account for his 9% interest in the Hampstead Portfolio promote. After disputes arose with Tatum, Feldman and Goldberg claimed that Tatum had forfeited his equity interest in Fairstead Affordable.48 As a result, Tatum lost his share of the Hampstead Portfolio promote.
F. Blodgett and Tatum Push For A Significant Equity Stake.
As time went on, Blodgett and Tatum came to believe that they had created tremendous value for Feldman and Goldberg by creating Fairstead Affordable and the Tax Credit Business (which was true). They received salaries and discretionary bonuses, but they did not have a meaningful equity stake. Blodgett and Tatum thought they deserved a significant equity stake. Blodgett and Tatum also wanted their employees to receive equity as a form of incentive-based compensation. Blodgett and Tatum wanted a restructuring that would allocate the equity in a manner they thought was fair.
Feldman was the ultimate decision-maker on any restructuring, but he liked to remain in the background. Blodgett and Tatum spoke with Goldberg about their
Blodgett and Tatum‘s preferred alternative was to restructure Fairstead Affordable so that they would hold the bulk of the equity and control the business. For them, that was “Plan A.” Tatum documented his ideas for a restructuring and shared them with others, including Blodgett and members of their team.51
When framing his proposals, Tatum envisioned a new entity— “NewCo“—that would own approximately 50% of the Fairstead Affordable business. Tatum and Blodgett would share ownership in NewCo and allocate a portion of NewCo‘s equity
Tatum shared these concepts with Goldberg, who encouraged Tatum and Blodgett to develop them. Goldberg, Tatum, and Blodgett also brainstormed other possibilities that might be part of a restructuring, including:
- creating a new real estate investment fund with outside capital;55
- obtaining capital from Blodgett‘s wealthy family;56
- pursuing a SPAC transaction;57 or
- selling Fairstead Affordable to a third party.58
Goldberg did not pass any of these ideas along to Feldman.60 At trial, Goldberg denied knowing that Tatum and Blodgett wanted substantial ownership and control, but that testimony was not credible. The contemporaneous documents show that Goldberg both knew what Blodgett and Tatum wanted and was trying to steer them toward possibilities that Feldman might find acceptable.61
During those discussions, Tatum and Blodgett argued that providing equity was necessary to secure and retain talented employees.62 Goldberg agreed. As he acknowledged in his notes in 2019, “This is an industry where senior people want to share in promote or equity.”63 But Goldberg also told Blodgett and Tatum that an
G. Blodgett and Tatum Try To Accelerate The Timeline.
Starting around March 2020, Blodgett and Tatum sought to accelerate the point when the equity restructuring would occur. Contrary to the defendants’ position, there was nothing inherently wrong with that. Blodgett and Tatum never entered into an agreement that bound them not to raise the idea of a restructuring. They could pursue an earlier restructuring and advance arguments why it was warranted. Feldman could say no. But nothing prohibited the ask. That‘s how the free market works.
More importantly for the events that led to this dispute, Blodgett and Tatum reached the conclusion that getting a near-term equity restructuring was an absolute requirement for them, to the point where they decided to leave Fairstead Affordable and start a competing firm if Feldman and Goldberg did not agree. In the abstract, there is nothing wrong with that either. Employees can leave and go into business for themselves. They are bound only by their fiduciary duties as employee-agents and the terms of any employment agreements they have signed, including lawful restrictive covenants. Nor is there anything wrong with employees being frank about their plans to leave and go into business for themselves if an employer does not give
Once Blodgett and Tatum reached the conclusion that achieving a near-term equity restructuring was a necessity, they faced the prospect of hard-nosed negotiations with Feldman and Goldberg. They needed to start planning their alternative venture so that they would be ready to leave if the negotiations did not go well. Having a meaningful plan for an alternative business venture was also essential to presenting a credible bargaining position in the negotiations with Feldman and Goldberg. And again, there is nothing wrong with that. As long as employees do not use their employer’s resources or breach any of their contractual obligations, they can make preparations to leave and go into business for themselves. That’s capitalism.
With that in mind, Tatum and Blodgett used their personal email accounts to communicate about their plans and options.65 While that was not problematic in itself, Blodgett began using his personal account to send confidential Fairstead Affordable information to his outside advisors so they could assist him in the negotiations and help him plan for his departure, if that proved necessary.66 That is not something an employee can legitimately do. To reiterate, an employee can prepare to start a new business while still employed, but the employee cannot use the
When preparing for their negotiation with Feldman and Goldberg, Blodgett and Tatum continued to pursue two alternatives. The first was a restructuring of Fairstead Affordable that would bring in NewCo as a new equity owner and result in Blodgett and Tatum controlling the business.68 The other was to start their own business if Feldman and Goldberg did not agree. This decision will refer to the former as “Restructured Fairstead” and the latter as the “Separate Company.”
Evidencing his understanding that he and Blodgett were going to have an open negotiation over a restructuring with Goldberg and (eventually) Feldman, Tatum sent Goldberg a model for Restructured Fairstead that envisioned Blodgett and Tatum gaining a majority of the business over time.69 Goldberg wrote back that he did not understand what Tatum was proposing. After they discussed the idea, Goldberg reiterated that there would not be any restructuring until 2021.70 Tatum and Blodgett regarded that timeline as unacceptable.
Meanwhile, Blodgett sought advice from Ophir Barone, the Chief Investment Officer of Caremi Partners. Blodgett’s father-in-law, Donald Sussman, is a wealthy hedge fund manager, and Caremi is the entity that operates as the Sussman family office (the “Sussman Office“). Blodgett first contacted Barone in February 2020, and their discussions ramped up over the spring. They discussed how Blodgett might achieve a negotiated outcome resulting in Restructured Fairstead. They also discussed the possibility of the Separate Company. On April 1, Blodgett forwarded Barone an “FA Business Plan” that Tatum had prepared.75 The “FA Business Plan” presented a proposal for Restructured Fairstead.
As spring turned to summer, Tatum and Blodgett retained the law firm of Rodriguez & Wright to represent them personally in the negotiations over Restructured Fairstead and advise on the Separate Company alternative.77 Evidencing that both options were in play, Rodriguez & Wright understood that the representation might “convert into a Fairstead client matter,” namely work for Restructured Fairstead.78 Tatum and Blodgett asked Rodriguez & Wright to draft a proposal for Restructured Fairstead that they could take to Goldberg.79 Tatum and Blodgett did not tell Goldberg that they had retained a law firm for advice.80
On August 24, Tatum and Blodgett met with Barone to discuss their options.84 They focused on the details of Restructured Fairstead. Tatum and Blodgett did not tell Goldberg about the meeting.
On September 3, Barone sent the proposal to Sussman, writing: “Obviously the ideal is that we would fund 100% of the capital but I think Will would like to allow Stuart to fund up to 50% if he so desires.”85 That was the essence of Restructured Fairstead. Blodgett and Tatum wanted to continue working with Feldman and Goldberg. The Separate Company option was the fallback alternative if Feldman refused.86
H. Tatum and Blodgett Prioritize The Separate Company Option.
In January 2021, Goldberg proposed a long-term incentive plan (“LTIP“) that would provide employees with equity.89 Goldberg’s efforts showed that he understood equity compensation was needed and was trying to address the issue. For their part, Blodgett and Tatum saw Goldberg’s LTIP as a signal that Restructured Fairstead was unlikely to happen, so they began focusing more on the Separate Company.
By February 2021, Blodgett felt the need to act. In his notes, he described himself as the “golden goose” who had made Fairstead “a lot of money” while receiving too little in compensation.90 Blodgett was “[l]everaging my name, my family’s name, my relationships etc.” while he was “getting NOTHING in return. NOTHING.”91
On February 25, Tatum and Blodgett sent Goldberg a proposal for Restructured Fairstead.93 Under their proposal, Blodgett would replace Goldberg as Chief Executive Officer and Tatum would become Chief Operating Officer. Goldberg rejected the proposal out of hand. Tatum decided that they had to pursue the Separate Company option.94 On March 1, he texted Blodgett: “Restarting is a reality. But not optimal.”95
Blodgett still hoped to convince Feldman to back Restructured Fairstead, but he began pursuing the Separate Company option more seriously. On April 9, Blodgett sent a confidential valuation that included historic financial information and projections for Fairstead Affordable to Steve Warner and Tim Cox, two executives with the Tisch Office who were responsible for investing the family’s capital.96 Blodgett asked them to keep the information confidential.97 He also reconnected with
The executives in the Sussman Office and the Tisch Office responded positively, with the chief investment officer for the Tisch Office telling Blodgett that he would “recommend [Blodgett’s proposed company] as an investment for Laurie [Tisch].”102 Blodgett downloaded other Fairstead Affordable confidential information to a folder that he labeled “Affordable Education.”103
Meanwhile, Goldberg continued giving mixed signals. On May 14, Blodgett told Tatum that Goldberg had discussed potentially selling the company.106 Tatum and Blodgett wanted to place a bid but also felt that “mentally we need to be prepared to walk.”107
The same day, Blodgett instructed two of his team members (Kreinik and Adam Sussi) to start working secretly on plans for the Separate Company.108 Kreinik
By this point, Blodgett suspected that Feldman and Goldberg were monitoring his emails.111 He was a bit early. The IT department began monitoring its servers for unusual downloading activity in June and started monitoring Blodgett’s emails in August.
I. Blodgett Asks Feldman To Restructure Fairstead Affordable.
On May 18, Blodgett met with Feldman to present his case for change.112 To convince Feldman to pursue something along the lines of Restructured Fairstead, Blodgett told Feldman that the employees disliked Goldberg, that Goldberg was not running the business competently, and that employees would depart en masse unless Feldman made major changes.113 Blodgett told Feldman, “Everyone is here because
Blodgett then told Feldman that he would leave absent a restructuring. He demanded that the restructuring make him a managing member with veto rights, 40% of the equity, and “a path to full control in 10 years.”116
Feldman did not react favorably. He viewed Blodgett’s proposal as an attempt to take over Fairstead, and he rejected it unequivocally. He also perceived Blodgett as threatening him with an employee walkout if he did not accept Blodgett’s terms. But Blodgett was not making a threat, only telling Feldman what he believed was true. Blodgett also had good reason for his belief. Blodgett, Tatum, and their team had been frustrated for years over the lack of equity compensation and Goldberg’s ineffective leadership. They believed they had built the business, were already managing it, and deserved to participate in the upside through a substantial equity stake.
Blodgett and Tatum texted about the meeting in real time.117 Later, Blodgett gave Tatum a full account, including Feldman’s unequivocal refusal. After hearing what happened, Tatum “panicked” and began downloading documents onto a USB
- 700 personal documents, such as tax forms and family real estate documents;
- One personal valuation of his interest in Fairstead Affordable;
- 230 Fairstead Affordable documents that Tatum had been instructed to keep confidential, such as employee annual reviews, payroll records, and Feldman and Goldberg’s net worth statements for tax credit applications;
- 1,450 documents from a folder called “Toolbox” that included Fairstead Affordable’s organizational documents, educational materials about tax credit deals, public information about HUD programs, and employee onboarding materials;
- 50 documents from a folder called “Strategic” that included quarterly performance memoranda for Fairstead Affordable; and
- 20 documents from a folder named “Corporate” that included the Fairstead Affordable deal pipeline, investment valuations, and publicly available audits.
Tatum testified persuasively that he subjectively believed he was entitled to keep much of the information, either because it was his personal information or because he had prepared it and it represented his work product.120 Tatum returned the USB drive without using any of the information. There is no evidence that Tatum
On June 2, Blodgett met with Feldman again.122 Blodgett pitched Restructured Fairstead under the name “Fairstead 2.0.” Under this proposal, the operations of the new Fairstead venture and guarantees backing Fairstead 2.0’s new investments would be financed from the cash flows from the existing Fairstead business platform.123 Blodgett would receive 80 to 90% of Fairstead 2.0, which he would share with key employees. Feldman would be reduced from his existing majority position to 10 to 20%, which would “sunset over time.” Goldberg would get nothing.124
That proposal was worse than what Feldman previously rejected. Not surprisingly, Feldman rejected this proposal as well. Feldman told Blodgett again that he would not give away “his company.” He pointedly told Blodgett, “You’re not my son.”125
On June 10, Tatum wrote an emotional email to Goldberg. He explained his plans to leave Fairstead Affordable. Tatum said that he had to leave because “so many promises have been made without resolution.”129 But Tatum did not want his departure to harm Fairstead Affordable. He promised Goldberg:
Every organization I have been a part of was left in a better place than when I started. Fairstead will not be any different. If you take nothing else from this email, you have my word that should things end, I will help you.130
He proposed that they work together on a transition plan.131 After receiving Tatum’s email, Goldberg instructed the IT department to begin monitoring Fairstead’s systems for any suspicious downloading activity.132
On June 16, Kreinik downloaded 2,800 files to a USB drive, including project pipeline lists and human resources information.134 On June 23, Blodgett sent the Tisch Office a model of financial projections for a new venture. Sussi and Kreinik created the model.135
J. Blodgett Meets With Feldman A Third Time.
On June 29, Blodgett met with Feldman at his home. Blodgett told Feldman that he wanted to leave Fairstead and that he thought that Tatum, Kreinik, and Sussi were also going to leave.136 Feldman told Blodgett, “[Y]ou can’t have conversations with people in the company about leaving and starting your own company,” and “you can’t take any employee to work with you including [Tatum].”137
After the meeting, Goldberg hired Jones Day to investigate Tatum and Blodgett’s conduct.138 Goldberg still wanted a smooth transition, so he prepared a
At the end of July, Blodgett, Tatum, Kreinik, and Sussi prepared their resignation letters.141 They did not send them because Goldberg was attempting to broker a smooth departure.
K. Blodgett Meets With Feldman A Fourth Time.
On August 4, Blodgett and Feldman met for a fourth time. During the meeting, they discussed Fairstead participating in a joint venture with Blodgett’s new firm.142 After the meeting, Blodgett, Tatum, Kreinik, and Sussi began following the transition plan that Goldberg prepared.143 Blodgett was optimistic about a negotiated solution.
As the summer progressed, that optimism faded. Feldman and Goldberg never clearly framed the terms on which they would allow Blodgett and his team to leave. Feldman and Goldberg also sent mixed messages. Feldman styles himself as a tough negotiator and did not want to make any concessions. Goldberg was more pragmatic and wanted to get a deal done.
On September 5, Kreinik told Goldberg that he was resigning and understood he would be released from his restrictive covenants as part of the transition plan.145 Goldberg told him there was no agreement on that point.146
On September 12, Rodriguez & Wright sent an invoice for “Newco Formation” to Blodgett’s work email.147 Blodgett correctly suspected that Feldman and Goldberg were monitoring his work emails. He contacted Tatum, who asked Rodriguez & Wright to recall the email.148 But the recall had no effect on the already-delivered electronic record, and Goldberg promptly learned about the invoice.149 Goldberg
L. Feldman Tries To Squeeze Blodgett.
On September 14, Feldman met with Blodgett and handed him a termination notice.150 The notice advised Blodgett that he had breached his employment agreement and was therefore terminated “for reason.”151 The termination notice purported to cancel Blodgett’s interests in various employment-related equity interests that he owned.
At the same time, Feldman handed Blodgett a term sheet for a joint venture that was highly favorable to Feldman.152 It was an obvious pressure tactic: Feldman was using the threat of a for-cause termination and the loss of his equity to get Blodgett to accept one-sided terms for the joint venture.153
Fairstead’s outside counsel had prepared for-cause termination letters for Tatum, Kreinik, and Sussi. The lawyers recommended that Feldman and Goldberg (i)
Because Blodgett did not immediately accept the joint venture proposal, he viewed himself as terminated. He and Feldman would spend months attempting to negotiate a resolution, including through formal mediation. They never reached agreement.156
M. Tatum Resigns.
On October 15, Tatum emailed Goldberg to confirm he was resigning.157 Tatum acknowledged that he was resigning without “Good Reason.”158 Fairstead accepted Tatum’s resignation.159 Tatum understood that Fairstead would not require 120-day
On November 3, Blodgett formed Tredway, a new affordable housing company. On November 5, Blodgett informed Fairstead that he was starting a competing venture. Early drafts of the Tredway documents identified Tatum, Kreinik, and Sussi as “founding partners.”161 Sussi and Kreinik joined Tredway. Tatum did not.162
On December 23, after Fairstead’s mediation with Blodgett failed, Fairstead sent a letter accusing Tatum of improperly retaining Fairstead documents based on a forensic examination.163 On the same day, Fairstead accused Kreinik of stealing documents.164
Tatum continued working at Fairstead Affordable through his notice period. On January 18, 2022, he turned in all of his electronic devices plus a thumb drive. He represented that he was not keeping “any confidential or Proprietary Information as defined in Section 3 of [my] Employment Agreement.”165 He only kept two categories of documents. The first consisted of valuations of units in Fairstead Affordable and
Tatum’s last day at Fairstead Affordable was February 10, 2022. When he left, Tatum planned to wait out his non-compete period. He thought he might work with Blodgett after it ran, but he also intended to explore other options.168 He ended up deciding not to work with Blodgett.
After Tatum’s departure, Fairstead exercised its right to repurchase his equity. The operative agreement called for a valuation process to determine a buyout price.
The first step in that process was for Tatum to identify the list of stabilized deals in which he held equity interests (the “Stabilized Deals“). Tatum provided his list, expecting Fairstead to follow the valuation process. Rather than doing so, Fairstead offered Tatum $1.3 million, a figure materially below his contributed capital and far less than the value of his equity as a whole. Tatum rejected the offer and asked Fairstead to comply with the valuation mechanism.
Rather than comply, Fairstead sent Tatum a letter claiming that he had been terminated for cause and declaring that all of his equity interests were forfeited.169 The letter retroactively set a termination date of May 6, 2021. Goldberg admitted at trial that Fairstead only decided to take this hardline position after Tatum rejected the lowball buyout offer.170 Internally, Goldberg told employees that the dispute with Tatum was over valuation, not a for-cause termination.171
O. This Litigation
On October 26, 2022, Tatum filed this lawsuit against Fairstead Affordable LLC, FCM Affordable LLC, JD2 Affordable LLC, FSC EF&F LLC, Fairstead Capital
Fairstead filed counterclaims against Tatum for breach of contract, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and tortious interference with contractual relations. It also sought a declaratory judgment that Tatum was fired for cause and a permanent injunction to prevent Tatum from using or disseminating confidential information.
Each side moved to dismiss the other side’s claims, at least in part. The court issued a series of orders addressing the motions. The claims generally survived, except that the court dismissed Fairstead’s counterclaims under the faithless servant doctrine, for breach of the implied covenant of good faith and fair dealing, for breach of contract based on Tatum allegedly working for a competitor, and for violation of his non-solicitation provision. The court also dismissed Fairstead’s claim for a declaratory judgment determining that Fairstead fired Tatum for cause. The case proceeded through trial.
Tatum sought to prove at trial that Fairstead breached the Operating Agreement by declaring forfeit all of Tatum’s equity interests, abandoning the appraisal process, making his departure as lengthy, painful, and costly as possible, and making false promises about an equity restructuring that induced him to stay at the entity. Tatum proved by a preponderance of the evidence that Fairstead breached the Operating Agreement in all these ways except the last. Tatum is entitled to damages for his successful claims.
Tatum also sought to prove at trial that Fairstead is liable for the value of his share of the Hampstead Portfolio promote under a theory of promissory estoppel and for the value of his share of the Legacy Portfolio promote under a theory of unjust enrichment. He proved both claims and is entitled to damages.
Fairstead sought to prove that Tatum breached his contractual obligations, breached his fiduciary duties, aided and abetted breaches of others’ fiduciary duties, and tortiously interfered with contractual relations. Fairstead largely failed to prove its counterclaims. Fairstead proved by a preponderance of the evidence that Tatum improperly downloaded and retained Fairstead Affordable documents in breach of his employment agreement. As damages, Fairstead can recover the expenses incurred investigating Tatum’s breach. Judgment will be entered in favor of Fairstead on this counterclaim and in favor of Tatum on the rest.
Tatum contends that Fairstead breached three provisions of the Operating Agreement. To prevail on a breach of contract claim, the claimant must prove “(i) a contractual obligation, (ii) a breach of that obligation by the defendant, and (iii) a causally related injury that warrants a remedy, such as damages.”173 When determining the scope of a contractual obligation, “the role of a court is to effectuate the parties’ intent.”174 Absent ambiguity, the court “will give priority to the parties’ intentions as reflected in the four corners of the agreement, construing the agreement as a whole and giving effect to all its provisions.”175 “Unless there is ambiguity, Delaware courts interpret contract terms according to their plain, ordinary meaning.”176
1. Tatum’s Claim For Breach Of The Vested Interest Provision
Tatum contends that Feldman and Goldberg caused Fairstead Affordable, FCM Affordable, and JD2 Affordable to declare forfeit all of Tatum’s equity interests, thereby breaching language in the Operating Agreement providing that the equity
a. Breach Of The Vested Interest Provision
The Vested Interest Provision states:
The Membership Interest held by [Tatum] as of the date hereof shall be treated as a “promote” or “carried interest” in exchange for Tatum’s services as an employee (“Employment“) to one or more Affiliates of the Company (including Employer), and shall vest (or, as the case may be, shall be forfeited) to the extent provided in, and subject to, the following terms.177
Other language in the Vested Interest Provision contemplates five ways Tatum could leave Fairstead Affordable, each with different implications: (i) resignation for good reason, (ii) resignation after a change in control, (iii) resignation without good reason, (iv) termination without cause, and (v) termination for cause. None authorizes Fairstead to declare Tatum’s equity forfeit.
Tatum resigned without good reason, and Fairstead accepted his resignation. On June 10, 2021, he told Goldberg that he would resign if conditions did not change.178 Nothing changed, and Goldberg proceeded as if Tatum had resigned. Goldberg worked with Tatum on a transition plan and asked him not to tell any third parties that he was leaving until Fairstead had a communication plan in place.179 On October 21, Tatum received notice that his resignation had been accepted and
Fairstead claims it properly forfeited Tatum’s interests based on a retroactive termination for cause, citing Metro Storage.184 There, the court held that the employer “had grounds to terminate [an employee] for cause and that they would have done so if they had known about his secret consulting work.”185 In other words, the employer found out after the fact about grounds for a for-cause termination that the employee had concealed. Here, Fairstead grounded the retroactive for-cause termination on Tatum and Blodgett’s plan to leave Fairstead and start a new company, but they
Fairstead breached the Vested Interest Provision by purporting to forfeit his interests based on a retroactive termination for cause. Tatum is entitled to damages for that breach.
b. The Remedy For Breach Of The Vested Interest Provision
Tatum proved that Fairstead had no basis to forfeit his equity. Under the Operating Agreement, Tatum was entitled to the value of the Stabilized Deals. As damages, Tatum is entitled to that amount.
i. Which Deals Were Stabilized
Tatum and Fairstead disagree about the Stabilized Deals. A deal is stabilized if (1) “substantial completion of any construction has been achieved,” (2) “the Deal is eligible for permanent financing,” and (3) “any construction or stabilization guarantees provided by any Member of the Company have been released or the conditions for release of the same have been satisfied” (the “Stabilization Test“).186
(i) Substantial Completion of Construction
Fairstead argues that two deals failed the construction prong of the Stabilization Test. The issuance of a Certificate of Substantial Completion of Construction indicates when construction is substantially complete.190
Fairstead claims the Clifton deal did not achieve substantial completion, even though its Certificate issued on December 31, 2021.191 They observe that the Certificate identified outstanding work obligations to be completed within a specified
Fairstead’s position is unpersuasive. Construction must be substantially complete, not entirely complete. Having some additional work to do comports with the definition. The lender asked for an updated certificate to confirm that the additional work was completed, not because the original certificate was issued incorrectly.194 Fairstead booked the developer fee-revenue consistent with a December 31, 2021 substantial completion date. The Clifton deal met the substantial completion test.
Fairstead also claims that the Federation Weinberg deal did not satisfy the substantial completion prong. Fairstead closed on the property in 2021, and the remaining work consisted of six limited repairs—such as replacing bathroom sinks and resurfacing countertops—scheduled to take approximately four weeks.195 Fairstead represented to HUD that this work did not constitute construction but rather fell under “capital repairs.”196 Both Tatum and Kreinik testified consistently
(ii) Eligibility For Permanent Financing
Fairstead argues that seven deals failed the permanent financing prong of the Stabilization Test.198 Tatum proved that each satisfied that element at the tax-credit closing. At that point, the loans on each project were long-term, fixed-rate, amortizing obligations consistent with the industry-standard definition of permanent financing. Fairstead’s own closing summaries referred to the loans as “permanent.”199 Fairstead’s internal trackers reported that there was “no construction loan” on those deals.200 Fairstead’s models labeled the debt as “Permanent Financing,” and third-party underwriters, lenders, and limited partners all described the loans using the same term.201 Kreinik and Tatum testified persuasively that the debt was permanent financing.202
(iii) Release of Guarantees
Fairstead argues that fourteen deals failed the guarantee prong of the Stabilization Test.204 They argue that Feldman and Goldberg had given personal guarantees that remained in place. The Operating Agreement, however, only considers guarantees from a “Member” of Fairstead Affordable—defined as JD2 Affordable, JCT Capital, or FCM Affordable. Tatum proved that there were no member guarantees on any of the properties.
Fairstead argues that the guarantee prong must extend beyond Members to affiliates of Members, thereby encompassing Feldman and Goldberg. That could make sense as a business matter, but it finds no support in the contractual text. The term “Member of the Company” excludes Feldman and Goldberg in their individual capacities. Fairstead does not argue the text is ambiguous, and it offers no alternative
Fairstead attempts to work around the plain language by pointing to Section 3.2(b), which contemplates that JD2 Affordable would ensure that “its direct or indirect principals” would provide guarantees if necessary. The Stabilization Test, however, does not pick up that provision. Feldman and Goldberg—the indirect principals—retained full control over how any guarantees would be issued. They could have given personal guarantees and had JD2 Affordable issue a guarantee in addition to theirs, or they could have guaranteed the guarantee from JD2 Affordable. They chose not to structure their affairs in a way that would prevent the Stabilization Test from being met.
This case presents the same type of interpretive issue as the Aearo Technologies case.205 There, a wholly owned subsidiary secured insurance that required the “Named Insured” to satisfy a retention before the insurer would provide coverage. The parent paid the retention, rather than the subsidiary paying it. The insurer denied coverage, contending that the policy defined the Named Insured as the subsidiary, not the parent.206 The Delaware Supreme Court agreed with the insurer, rejecting the argument that as a matter of economic substance, the economic
So too here. As in Aearo Technologies, the Operating Agreement unambiguously specified which guarantees mattered for the Stabilization Test, namely only those from a “Member of the Company.”
Fairstead points to extrinsic evidence to support its argument that guarantees from Feldman and Goldberg should count, but the contract is clear. The parties could have structured their affairs differently but chose not to.208 That was a business decision, not a basis to rewrite the agreement’s definition of “guarantee.”
Finally, Fairstead cites Tatum’s original complaint, which framed the concept of “Member Guarantees” more broadly. Tatum credibly explained that he misunderstood the legal standard before obtaining discovery in this case. Once he reviewed the actual agreements, it was clear that none of the Members remained obligated on the disputed deals.209 An early characterization, corrected during litigation, cannot override the plain meaning of the contract. Tatum proved that the fourteen deals met the guarantee prong.
The next question is the value of Tatum’s 5.25% interest in the Stabilized Deals. Tatum proved that he is entitled to $7,864,949.210
Tatum relied on Andrew Lines and Dharminder Kalsi of CohnReznick. Lines is an experienced real estate appraiser specializing in Low-Income Housing Tax Credit (“LIHTC“) properties, and he appraised the value of each project.211 Kalsi is an expert in valuing interests in tax-credit partnerships, and he used Lines’s project-level cash flow forecasts and the waterfall provisions in the operating agreements to determine the present value of Fairstead’s interest in each deal. He then multiplied that result by 5.25% to calculate the value of Tatum’s interest.212
Fairstead’s internal documents corroborate CohnReznick’s work. In March 2022, Fairstead’s Chief Financial Officer submitted a schedule to Signature Bank showing estimated fair market values for the same properties that were, on average, 12% higher than CohnReznick’s valuations.213 Fairstead’s LTIP Model, which Goldberg used for compensation decisions, used methodologies and generated outcomes that were materially consistent with CohnReznick’s valuations.214
Dunec’s criticisms of Lines’s appraisals were often unsupported. For example, he assigned Federation Towers Land a value of zero, claiming it was merely a leased parking lot, but ignoring that the lease was terminable and the land had significant redevelopment value.218 He similarly valued Federation Weinberg at only $100,000, even though it was a fully occupied apartment building producing substantial rent.219
Dunec also applied a significant additional discount for lack of marketability at the level of Tatum’s ownership, a choice that accounts for the majority of the valuation gap between the experts. That approach was inconsistent with Tatum’s contractual right to receive ongoing distributions from the deals—not merely to sell
iii. Tatum’s Argument For Vested Deals
Tatum finally argues that the court should use its equitable discretion to also award him the value of all Vested Deals. Tatum is only entitled to expectation damages for breach of the Vested Interest Provision, and that means only his share of the value of Stabilized Deals.
To claim a right to Vested Deals, Tatum contends that Feldman and Goldberg misled him by making false promises about a broader restructuring, only to secretly abandon that effort, fabricate accusations of misconduct, and frustrate his efforts to resign. Tatum maintains that had he known the truth, he would have resigned “for Good Reason” and possessed a right to the value of Vested Deals.
Just as Fairstead cannot retroactively recharacterize Tatum’s resignation as a termination for cause, Tatum cannot retroactively recharacterize his resignation as a resignation for Good Reason. Tatum resigned “without Good Reason” in October
2. Tatum’s Claim For Breach Of The Appraisal Provision
Tatum next contends that Fairstead breached a provision in the Operating Agreement that established a mechanism for appraising his interests (the “Appraisal Provision“). Tatum proved that claim and is entitled to damages.
a. Breach Of The Appraisal Provision
The Appraisal Provision states:
Upon any termination of Employment of, or by, Tatum, any Member other than [Tatum] (the “Purchasing Member“) may, or may cause its designee to, purchase from [Tatum] all of the Interests then held by [Tatum] for a purchase price equal to the Appraised Value (as defined below) of such Interests as of the date on which the notice of such election is sent to JCT.224
The Appraisal Provision establishes a mechanism under which Tatum and the Purchasing Member each designate appraisers.225
b. The Remedy For Breach Of The Appraisal Provision
A remedy for breach of contract should seek to give the non-breaching party the benefit of its bargain.230 “In Delaware, the traditional method of computing damages for a breach of contract claim is to determine the reasonable expectations of the parties.”231 “This principle of expectation damages is measured by the amount of
The Appraisal Provision provides that Tatum and Fairstead “shall pay, on a pro rata basis (according to their relative Membership Interests), the fees and expenses of the appraisers.”233 Fairstead formally elected its repurchase rights and was therefore obligated to pay 94.75% of the “fees and expenses of the appraisers.” Tatum incurred costs for an appraiser, and Fairstead never bore its share. Fairstead therefore owes Tatum 94.75% of $321,000, which equals $304,147.50.234
3. Tatum’s Claim For Breach Of The Good Faith Provision
In his final claim for breach of the Operating Agreement, Tatum contends that Feldman and Goldberg caused JD2 Affordable and FCM Affordable to breach a provision requiring that members act in good faith (the “Good Faith Provision“). Tatum proved a breach and is entitled to damages.
a. Breach Of The Good Faith Provision
The Good Faith Provision states that each member must “act honestly and in good faith in its dealings with the Company and the other Members.”235 Tatum failed to prove that Feldman and Goldberg breached the Good Faith Provision by making
i. A Contractual Obligation Versus A Fiduciary Duty
Some Delaware authorities have collapsed the difference between a contractual obligation and a fiduciary duty by asserting that “a contractual duty to refrain from ‘willful misconduct’ or ‘bad faith’ corresponds with the traditional duty of loyalty.”236 That is not accurate. When an alternative entity eliminates fiduciary duties, it has eliminated fiduciary duties. It may replace those duties with a contractual provision that uses a comparable term, but the resulting obligation is contractual, not fiduciary.237 Even if the court imbues the contractual obligation with substantive content by looking to the content of a comparable fiduciary obligation,
The Operating Agreement provides that “JCT shall owe fiduciary duties to the Company and the other Members” but eliminates fiduciary duties for the other members.240 Feldman and Goldberg‘s obligations are purely contractual. The Operating Agreement introduces a contractual requirement that each member must act in “good faith,” without any qualifier and without defining “good faith.” The court can look to fiduciary law to draw content for this contractual obligation, but the obligation remains contractual.
“When a contract governed by Delaware law calls upon a party to act or make a determination in good faith, without any qualifier, it means that the party must act
In the fiduciary context, good faith requires a partner in a limited partnership to act honestly and subjectively seek to promote the best interests of the partnership. Stated in the contrapositive, a partner acts in bad faith when acting dishonestly or with a purpose other than advancing the best interests of the partnership.244 These principles apply equally to a contractual obligation that requires members of an LLC to act in good faith.
ii. The Allegedly False Promise Of Equity
Tatum contends that Feldman and Goldberg breached the Good Faith Provision by making a false promise about an equity restructuring that induced Tatum to stay at Fairstead Affordable while preserving their own equity stakes. To
The factual record shows that Goldberg did not breach that obligation when discussing equity with Tatum. He did promise Tatum equity, but he said that an equity restructuring would not happen until 2021. Tatum and Blodgett preempted the timeline by choosing to seek an earlier equity restructuring. Nothing prohibited them from asking for an acceleration of the timeline. But their ask does not change the fact that Goldberg promised an equity restructuring in 2021.
Consistent with his promise, Goldberg began implementing the LTIP in January 2021. The LTIP was not the handover of equity and control that Tatum and Blodgett wanted, but it contemplated awards of equity. Tatum failed to prove that the promise about an equity restructuring breached the Good Faith Provision.
iii. The Departure Gauntlet
Tatum separately argues that Feldman and Goldberg breached the Good Faith Provision by making his departure as lengthy, painful, and costly as possible. The record supports Tatum‘s claim. To act in good faith, Feldman and Goldberg were required to act honestly and seek to promote the best interests of Fairstead Affordable. Instead, Feldman and Goldberg maneuvered opportunistically and sought to harm Tatum, even if it would not benefit Fairstead Affordable.
When Fairstead exercised its right to repurchase Tatum‘s equity interests, Feldman and Goldberg did not respond to Tatum‘s requests for valuation documents. They did not meet other contractual deadlines. Instead of following the valuation
After Tatum rejected the buyout offer, Feldman and Goldberg purported to retroactively assign cause to Tatum‘s termination and declared that Tatum‘s equity interests were forfeited. They grounded the retroactive for-cause termination on Tatum and Blodgett‘s plan to leave Fairstead and start a new company. That was not a good faith act. Feldman and Goldberg knew the relevant details about Tatum and Blodgett‘s plans when they accepted Tatum‘s resignation. Goldberg admitted that Fairstead only decided to take this hardline position after Tatum declined the offer. When recharacterizing Tatum‘s termination, Feldman and Goldberg sought to manufacture a dishonest reason to harm Tatum, not to act honestly and in the best interests of Fairstead Affordable.
Tatum proved that Feldman and Goldberg breached their contractual obligation to act in good faith by making him run the departure gauntlet. He is entitled to a remedy.
b. The Remedy For Breach Of The Good Faith Provision
Tatum can recover damages for Feldman and Goldberg‘s breach of the Good Faith Provision. The court has “broad latitude to exercise its equitable powers to craft
B. Tatum‘s Claim For The Legacy Portfolio
Tatum contends that Fairstead owes him a share of the promote for the Legacy Portfolio under principles of promissory estoppel. He proved that claim and is entitled to damages.
The parties agree that New York law governs this claim. Under New York law, promissory estoppel has three elements: “a clear and unambiguous promise; a
First, Tatum proved that Goldberg unambiguously promised Tatum a share of the promote for the Legacy Portfolio. Tatum and Blodgett testified credibly, and a contemporaneous document provides corroboration.250 That model calculated Tatum‘s 5.25% interest in the promote as $1,077,140.81.251
Second, Tatum reasonably and foreseeably relied on Goldberg‘s promise. Tatum did not want to work on the Legacy Portfolio. He did so only because Goldberg promised him a share of the promote.
Third, Tatum was injured. He worked on the Legacy Portfolio without any compensation. Otherwise, he would have worked on Fairstead Affordable deals for which he stood to receive equity.
Fairstead argues that Tatum cannot recover because he was obligated to work on the Legacy Portfolio under the terms of his Employment Agreement. The operative provision states:
You are being employed as a real estate director responsible for directing the acquisition and execution activities of Fairstead Affordable and to provide all other work and services assigned to you, including, but not limited to services for [JD2 Realty Management LLC], its direct or
indirect, principals, affiliates, parent or subsidiary entities, and any and all company or companies owned by or related to [JD2 Realty Management LLC] or its direct or indirect principals (“Related Entities“).252
That language contemplates work for Fairstead Affordable and its affiliates, but not for projects wholly unrelated to Fairstead Affordable, like the Legacy Portfolio. Tatum is entitled to $1,077,140.81 in damages for his share of the promote, equal to the amount that Fairstead calculated.
C. Tatum‘s Claim For The Hampstead Portfolio
Tatum separately contends that Fairstead owes him a share of the promote for the Hampstead Portfolio under principles of unjust enrichment. He proved that claim and is entitled to damages.
“To prevail on a claim of unjust enrichment, a plaintiff must prove that the defendant received a benefit at plaintiff‘s expense and that retention of that benefit would be unjust.”253 Tatum proved both elements of unjust enrichment.
Tatum brokered the acquisition of the Hampstead Portfolio and received a 9% share of the promote.254 Feldman and Goldberg told Tatum that they wanted to restructure Fairstead Affordable so that all of his equity compensation would be tied
Feldman and Goldberg never increased Tatum‘s interest in Fairstead Affordable to reflect the transfer. He went from having a 100% interest in 9% of the promote to only having a 5.25% interest in 9% of the promote.
The transfer enriched Feldman and Goldberg because it gave them a 94.75% interest in an asset—the 9% interest in the promote—where they previously had zero interest. Tatum was impoverished by the same amount. Feldman and Goldberg promised that they would account for the transfer of the 9% interest as part of the overall equity restructuring, but that never happened. Their retention of these benefits would be unjust. They induced Tatum to roll over his interest in the Hampstead Portfolio promote to Fairstead Affordable, but he received nothing in return.
Tatum is entitled to the value of his 5.25% interest in the Hampstead Portfolio promote. Fairstead‘s contemporaneous records valued the Hampstead Portfolio promote at $9,853,038.255 Tatum is entitled to damages of $517,284.
D. The Counterclaim For Breach Of The Employment Agreement
In its first counterclaim, Fairstead asserts that Tatum breached his Employment Agreement by secretly partnering with Blodgett to take control of
The Employment Agreement contains a choice-of-law provision selecting New York law.256 To prevail on a breach of contract claim under New York law, the claimant “must establish the existence of a contract, the party‘s own performance under the contract, the other party‘s breach of its contractual obligations, and damages resulting from the breach.”257 “The fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties’ intent.”258 “The best evidence of what parties to a written agreement intend is what they say in their writing.”259 Thus, “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.”260
The Employment Agreement required that Tatum “devote [his] best efforts and time, effort and loyalty” to his employer and “discharge all of [his] duties . . . in good faith” (the “Best Efforts Provision“).261 It also required that Tatum refrain from
1. Fairstead‘s Claim For Breach Of The Best Efforts Provision
Fairstead contends that Tatum breached the Best Efforts Provision by secretly partnering with Blodgett to take control of Fairstead or launch a competing company. Fairstead failed to prove that Tatum breached the Best Efforts Provision.
The Best Efforts Provision states:
As an employee of the Firm, you agree to (a) devote your best efforts and time, effort and loyalty to the business of the Firm, the Related Entities and its affiliates; (b) discharge all of your duties and responsibilities that are or may be assigned to you by the Firm or any Related Entities conscientiously, in good faith and to the best of your ability, giving the Firm and the Related Entities the full benefit of your knowledge, expertise, skill and judgment . . . .264
The Best Efforts Provision required Tatum to devote his “best efforts” to his duties and responsibilities as a Fairstead employee. It essentially required Tatum to do his best to advance Fairstead‘s business.
Tatum‘s efforts to develop the plans for Restructured Fairstead and the Separate Company did not translate into a lack of his best efforts as a Fairstead employee. Fairstead did not point to any credible evidence suggesting a decline in Tatum‘s productivity as an employee. Tatum continued to do his job and do it well.
Subjectively, Tatum always preferred the option of continuing to work at Fairstead. He and Blodgett only developed their plan for the Separate Company as a backup if Feldman and Goldberg refused to restructure Fairstead Affordable. Tatum did not breach the Best Efforts Provision by making fallback plans to leave as long as he continued to devote his best efforts to Fairstead Affordable. While Tatum was discussing options with Blodgett, Tatum continued to do that.
For these reasons, Fairstead failed to prove that Tatum breached his contractual duties under the Best Efforts Provision.
2. Fairstead‘s Claim For Breach Of The No Conflict Provision
Fairstead next contends that Tatum breached the No Conflict Provision. Fairstead points to the same underlying conduct and contends that Tatum put himself in conflict with Fairstead by exploring the possibilities of Restructured Fairstead and the Separate Company. Fairstead again failed to prove a breach.
The No Conflict Provision states:
As an employee of the Firm, you agree to . . . (f) not engage in any conduct that creates an actual, potential or apparent conflict between your personal interests and the Firm‘s interests or any Related Entities interests, or which otherwise may adversely affect your judgment or ability to interact in the best interests of the Firm or any Related Entities.265
If read as broadly as Fairstead seeks, the No Conflict Provision would preclude a wide range of permissible conduct. An employee could not ask for a raise, because that request would put the employee‘s personal interest (gaining higher compensation) at odds with the company‘s interest (keeping costs lean). An employee could not ask for additional time off, because doing so would put the employee‘s personal interest (time off) at odds with the company‘s interest (having the employee work as much as possible). And the provision would prevent an employee from doing anything to look for a new job, even if the employee‘s efforts did nothing to harm the company or interfere with the employee‘s duties. Such an interpretation would constitute a radical restriction on personal freedom. It is hard to imagine public policy allowing such a restriction, much less a court of equity enforcing it.
The No Conflict Provision does not sweep so broadly. It seeks to address standard employee conflicts of interest, like contracting with a more expensive supplier who gives the employee baseball tickets rather than a cheaper supplier who doesn‘t. The restriction does not go further and bar the employee from making legitimate preparations to compete.
Fairstead failed to prove that Tatum put himself in an actual, potential, or apparent conflict with Fairstead by working on a potential restructuring or considering a new venture with Blodgett. As with the analysis of the Best Efforts
3. Fairstead‘s Claim For Breach Of The Confidentiality Provision
Fairstead last contends that Tatum breached the Confidentiality Provision. Fairstead proved that Tatum breached the provision by downloading and retaining documents but failed to prove any compensable damages beyond the cost of the forensic investigation.
a. Breach Of The Confidentiality Provision
Fairstead contends that Tatum breached the Confidentiality Provision by downloading and retaining documents. He did, and that constituted a breach.
The Confidentiality Provision states:
At all times, both during your employment and after its termination, you agree that you will not reveal to any person or entity any of the trade secrets or proprietary or confidential information of the Firm or any Related Entities or any third party . . . and you shall keep secret all matters entrusted to you and shall not use or attempt to use any such information in any manner, except as may be required in the ordinary course of performing your duties as an employee of the Firm.266
The same provision later states:
While you are an employee of the Firm, you shall not take from the premises of the Firm or from any of the Related Entities, use or permit to be used any Proprietary Information other than for the benefit of the Firm. You shall not, after the termination of your employment with the Firm, use or permit to be used any Proprietary Information, notes, memoranda, files, letters, lists, emails, reports, lists, records, specifications, software programs, data, documentation or other written, photographic, electronic or other tangible materials containing Proprietary Information, it being agreed that all of the foregoing will be
and remain the sole and exclusive property of the Firm and such Related Entities and that immediately upon the termination of your employment with the Firm for any reason, you will deliver all of the foregoing, and all copies thereof, to the Firm at its main office. After such delivery, you shall not retain any such records or copies thereof or any such tangible property.267
Tatum admits that after Blodgett‘s meeting with Feldman went poorly, he “panicked” and downloaded Fairstead documents.268 That act breached the Confidentiality Provision.
b. The Remedy For Breach Of The Confidentiality Provision
Although Tatum‘s downloading breached the Confidentiality Provision, Fairstead failed to prove any damages other than the costs incurred investigating Tatum‘s actions. The nature of the documents and Tatum‘s decision to return them without using them defeats any more significant award.
Tatum first downloaded a large volume of documents on May 8, 2021. Those documents related overwhelmingly to diligence materials for deals, with only nine documents addressing other matters.269 Tatum next downloaded documents on May 18. He accessed a folder that predominantly contained personal documents, but also contained some Fairstead documents that Tatum kept there so they remained confidential. Tatum downloaded more documents on June 29, but they were solely personal documents.
There is no evidence that Tatum used any of the materials for any purpose other than this litigation. There is no evidence that Tatum‘s retention and use of the documents harmed Fairstead. At trial, Tatum‘s counsel asked the Fairstead witnesses to identify competitively sensitive documents that Tatum improperly retains today. They pointed to only a single item: a photograph of the first page of a document titled “FA Process.”270 That photograph is not significant.
Fairstead also failed to prove that Tatum misused any of the Fairstead documents that he did not retain. The record at trial showed that much of the information is publicly available. LIHTC general partners are effectively government contractors. As a result, LIHTC underwriting models are publicly available.271 Information about Feldman and Goldberg‘s net worth is also publicly available. Many
The expert testimony does not support the assertion that Tatum used or disclosed any documents. Tatum‘s expert opined that he had not.273 Fairstead‘s expert agreed that the last accessed date for most of the documents was when they were downloaded onto the USB.274 Fairstead‘s expert offered no opinion about whether Tatum transferred the documents to another device. While it is theoretically possible that Tatum did this, Tatum credibly denied it, and Fairstead offered no proof.
Fairstead‘s contemporaneous actions also evidence the lack of any significance to the breach. On June 24, 2021, Fairstead learned about Tatum‘s downloading activity.275 On June 30, Fairstead‘s principals strategized about how to use that in the “NewCo” negotiations.276 They did not ask Tatum about his downloading activity, preferring for “business reasons” to investigate first.277 In August, Fairstead‘s outside
Fairstead therefore failed to prove that Tatum‘s downloading and retention of documents caused Fairstead any material harm. But Tatum‘s breach did warrant a forensic investigation, and Fairstead spent $155,384.73 conducting it.281 Tatum must bear that cost.
E. The Counterclaim For Breach Of The Operating Agreement
In its next counterclaim, Fairstead asserts that Tatum breached two provisions of the Operating Agreement. Fairstead asserts that Tatum breached the Good Faith Provision by secretly working with Blodgett to gain control of Fairstead or start a competing business using Fairstead‘s resources, by soliciting other Fairstead employees to leave the company and join his new venture with Blodgett, and by misappropriating Fairstead‘s confidential information. Fairstead also asserts that Tatum breached the confidentiality provision in the Operating Agreement by
1. Fairstead‘s Claim For Breach Of The Good Faith Provision
To act in good faith, Tatum was required to seek to promote the best interests of Fairstead Affordable and its members. Fairstead failed to prove that Tatum breached that contractual obligation.
a. Restructured Fairstead And The Separate Company
Fairstead contends that Tatum and Blodgett used “fearmongering” and “threats” to attempt a “hostile takeover,” and if that failed, they planned to launch a competing business. Tatum did not attempt a “hostile takeover” of Fairstead. Tatum‘s written proposals show what he hoped to accomplish. “Plan A” was an equity restructuring resulting in Restructured Fairstead. “Plan B” was to start a new Separate Company with Blodgett. He wanted to continue working with Fairstead, even in the new venture. Fairstead failed to prove that Tatum breached the Good Faith Provision by exploring “Plan A” and “Plan B.”
Tatum did not act dishonestly or in bad faith when exploring “Plan A” and “Plan B.” His main contribution was to prepare some documents to help Blodgett raise funds.282 He also scheduled a meeting with the Tisch Office using his Fairstead email account and with assistance from Blodgett‘s executive assistant.283 Those
Tatum also did not actually start a competing company. In spring 2021, Tatum and Blodgett discussed leaving Fairstead. After Feldman rejected Blodgett‘s proposal on June 2, 2021, Tatum and Blodgett discussed working together once any non-compete periods expired. But Tatum never joined Blodgett‘s new venture. Tatum did not breach his contractual obligation to act in good faith toward Fairstead Affordable and its members by exploring the possibility of a separate company.
Fairstead observes that in September 2021, Tatum met with a potential investor.287 That meeting was not a violation of the Good Faith Provision either. At the time, Tatum and Blodgett believed they were on the verge of reaching agreement on a joint venture with Feldman and Goldberg.
Fairstead failed to prove that Tatum‘s actions breached the Good Faith Provision.
b. The Alleged Solicitation Of Fairstead Employees
Fairstead next contends that Tatum breached the Good Faith Provision by inducing Kreinik and Sussi to leave. To the contrary, Tatum tried to warn Goldberg that employees were unhappy and on the verge of leaving.289
Kreinik joined Fairstead “at the word of Jeff Goldberg,” who said that Kreinik would be given equity as a part of his compensation. Years later, by the time of Kreinik‘s resignation, Kreinik had been promised “significant equity” “multiple times” and these promises “weren‘t delivered.”290 Kreinik resigned because these promises remained unfulfilled and “it didn‘t seem like there was a path forward.”291
Sussi‘s experience was similar. Goldberg told Sussi that he would receive equity compensation,293 and Sussi felt that he was unfairly compensated.294 He left because he felt Goldberg did not fulfill his promises.
Fairstead did not prove that Tatum caused Kreinik or Sussi to leave Fairstead. The evidence showed instead that Feldman and Goldberg caused their own employees to leave by failing to give them equity compensation and treating them poorly. Since 2022, every Fairstead executive has left, except for Feldman, Goldberg, and Hoffman. The departures include Tatum‘s two successors as the head of acquisitions and development, two Chief Financial Officers, and the leaders of Construction, Capital Markets, Property Management, Marketing, and Human Resources.295
To prove a breach of contract, a plaintiff must prove that the breach caused compensable harm. Fairstead failed to prove a breach. Fairstead also failed to prove causation. Kreinik and Sussi were going to leave no matter what Tatum did.
c. The Alleged Misappropriation Of Confidential Information
Fairstead failed to prove that Tatum breached the Good Faith Provision by misappropriating confidential information. Because the Confidentiality Provision in the Employment Agreement directly addresses this topic, this decision has used that provision to analyze Tatum‘s downloading of information. As discussed in that context, Tatum downloaded and retained documents, but he did not misuse any of the information. Fairstead also failed to prove that Tatum used or disclosed any of the confidential information that Blodgett and Kreinik separately downloaded. The Good Faith Provision did not impose any obligations beyond the obligations that the Confidentiality Provision imposed. At best, assuming breach, Fairstead would be entitled to the expenses it incurred investigating Tatum‘s actions, which this decision has already awarded. No further relief is warranted.
2. Fairstead‘s Claim For Breach Of The Confidentiality Provision
Fairstead separately asserts a breach of a more general confidentiality provision that appears in the Operating Agreement. That provision states, subject to exceptions, that “no Member or any of its affiliates shall disclose or use any confidential information of or with respect to the Company or its business.”296
This decision previously used the Confidentiality Provision in the Employment Agreement to analyze Tatum‘s conduct. The provision in the Operating Agreement is more general and requires that a party “disclose or use” confidential information. As discussed, that did not happen. Fairstead did not prove any breach of the general confidentiality obligation in the Operating Agreement.
F. The Counterclaim For Tortious Interference
In a final contract-related claim, Fairstead sought to prove that Tatum tortiously interfered with Kreinik‘s employment agreement. Fairstead failed to prove this claim.
Delaware follows the Restatement (Second) of Torts when analyzing a claim for tortious interference with contract.297 Generally, “[o]ne who intentionally and improperly interferes with the performance of a contract . . . between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other.”298 Reframed as elements, a plaintiff must plead: (1) a contract, (2) the defendant‘s knowledge of it, and (3) an intentional act that is a significant factor in causing a breach of the contract, (4) done without
The intentional act causing the breach need not be tortious, only intentional.301 An independently tortious method of interference makes a finding of improper interference more likely, so “the nature of [the] conduct is an important factor,” but a tortious method of interference is not required.302
Fairstead contends that Kreinik breached his employment agreement in two ways. First, Fairstead contends that Kreinik competed with the company by working on Restructured Fairstead. Second, Fairstead contends that Kreinik used its confidential information when preparing financial models for Restructured Fairstead. Fairstead contends that Tatum caused Kreinik to breach his employment agreement by directing and supervising Kreinik‘s work on Restructured Fairstead.
The first two elements of the tortious interference claim are easily satisfied. The contract was Kreinik‘s employment agreement,303 and Tatum knew it existed.304
But Fairstead failed to prove that Tatum engaged in any intentional acts that were
1. Kreinik‘s Alleged Breach Of The Competition Restriction
Fairstead contends that Tatum induced Kreinik to breach the competition restriction in his employment agreement by working on Restructured Fairstead. The non-solicitation provision in Kreinik‘s employment agreement contains language that prohibits him from “work[ing] for, [or] provid[ing] services to . . . a Restricted Entity.” The agreement defines a “Restricted Entity” as
any entity, sole proprietorship, partnership, limited liability company, corporation, joint venture, or individual (collectively, an “Entity“) that is in the business of purchasing real estate and one or more persons that worked at a Related Entities in the twelve months prior to your cessation of employment with the Company, are employed by, compensated by, or provide services to the Entity at the time you seek to join the Entity.305
Kreinik was bound by this restriction during his employment and for a year after his employment ceased. The restriction did not prohibit Kreinik from working on plans for a potential business.
Restructured Fairstead was not a competing business. It was a proposal for a restructured business. Blodgett pitched it to Feldman.306 The Separate Company would have been a competing business, but in the spring and summer of 2021, the
Kreinik joined Tredway, Blodgett‘s new affordable housing business, in late 2021. Kreinik‘s employment agreement prohibited him from working at Tredway. But the record does not show that Tatum had any role in Kreinik joining Tredway. Tatum did not join Tredway himself.
Fairstead failed to prove that Tatum engaged in any intentional acts inducing Kreinik to breach the competition restriction in his employment agreement.
2. Kreinik‘s Alleged Breach Of The Confidentiality Restriction
Kreinik‘s employment agreement also prohibited him from “us[ing] or attempt[ing] to use any [confidential] information in any manner,” except on work for Fairstead.308 Fairstead contends that Krenik breached this provision by downloading Fairstead‘s confidential information and using it in modeling for Restructured Fairstead. Fairstead contends that Tatum directed Kreinik‘s work on the Restructured Fairstead model.
Kreinik downloaded Fairstead files to a USB drive,309 but Tatum never coordinated or discussed downloading Fairstead files with Kreinik.310 That leaves the
Tatum did not cause Kreinik to breach either the competition or confidentiality restrictions in his employment agreement. Because Fairstead failed to prove the third element of a tortious interference claim, the claim fails.
G. The Counterclaim For Breach Of Fiduciary Duty
Shifting from contract to tort, Fairstead sought to prove that Tatum breached the fiduciary duties he owed as an employee of Fairstead and as a member of Fairstead Affordable. A claim for breach of fiduciary duty is an equitable tort.313 The claim has only two formal elements: (i) the existence of a fiduciary duty that the defendant owes to the plaintiff and (ii) breach of that duty.314
1. The Good Faith Provision
Fairstead first frames its fiduciary duty claim in terms of the Good Faith Provision in the Operating Agreement. As discussed, that provision does not impose fiduciary duties. It is a contractual obligation that requires good faith. For that reason, this decision analyzed the Good Faith Provision as part of the alleged breaches of the Operating Agreement. But that does not end the fiduciary duty analysis.
2. The Fiduciary Duty Provision In The Operating Agreement
Although the Good Faith Provision in the Operating Agreement did not impose fiduciary duties on Tatum, a different provision did. The Delaware Limited Liability Company Act (the “LLC Act“), like Delaware‘s other alternative entity statutes, permit an entity‘s governing agreement to “expand[] or restrict[] or eliminate[]” fiduciary duties.315 Drafters of entity agreements almost invariably use that authority to restrict or eliminate fiduciary duties.316 Before this case, I do not think I
The Operating Agreement provides that Fairstead Affordable is managed by a “Majority in Interest.”317 Only one member—FCM Affordable—owns a “Majority in Interest” (its 64.75% membership interest).318 FCM Affordable was therefore the sole member with manager rights, making Fairstead Affordable a manager-managed entity.319
In a manager-managed entity, the manager owes default fiduciary duties to the LLC and its members; the members do not.320 Tatum therefore did not owe default
It is frankly unclear what this structure envisions. How does a non-managing member owe fiduciary duties qua member when that member has no ability to take action as a member? What would the resulting duties be? The parties have not paid any meaningful attention to this topic.
The core fiduciary principle is the duty of loyalty.323 The duty of loyalty generally requires that a fiduciary for an entity act in subjective pursuit of the best interests of the entity and avoid any conflicts of interest that could cause even a person acting in subjective good faith to act disloyally.324 By imposing fiduciary duties on a minority member, the Operating Agreement seems to have intended to require
a. Restructured Fairstead And The Separate Company
Fairstead first argues that Tatum breached his fiduciary duties by secretly working with Blodgett to gain control of Fairstead or start a competing business using Fairstead‘s resources. Fairstead failed to prove that claim.
Tatum‘s efforts regarding Restructured Fairstead (“Plan A“) and the Separate Company (“Plan B“) were acts he took as an employee. He did not take those actions as a holder of a minority equity interest in Fairstead Affordable. Fairstead cannot use the Minority Member Duty Provision to claim a breach of the duty of loyalty based on this conduct.
Assuming for the sake of argument that the Minority Member Duty Provision could extend to this conduct, Delaware courts recognize a “privilege” for departing employees to “prepare or make arrangements to compete with their employers prior to leaving . . . without fear of incurring liability for breach of their fiduciary duty of loyalty.”325 Exceptions to this privilege include situations “where the employee has committed some fraudulent, unfair or wrongful act.”326 Examples of misconduct that
The Court of Chancery has found that it does not constitute a breach of duty for employees to threaten to resign if their demands are not met, even if they warn that their resignations could ruin the business.328 In Lazard, a fund sued former employees and accused them of organizing a “lift-out scheme.”329 The court rejected the idea that employees breached their fiduciary duties by leveraging their key man status, reasoning that “[a]ny damages suffered . . . flowed not from unlawful conduct of [the employees] but from the failure of Lazard . . . to plan for the contingency that their key human capital might exercise its right to depart.”330
Tatum‘s conduct did not reach the level of a “fraudulent, unfair or wrongful act.”331 Instead, Goldberg encouraged Blodgett and Tatum to develop a restructuring plan that might be acceptable to Feldman. Tatum was not disloyal to Fairstead
Tatum also did not breach his fiduciary duties under Delaware law by working on the backup plan known as “Plan B.” Tatum did not do anything that harmed Fairstead Affordable. He did not misuse Fairstead‘s confidential information or conspire to bring about a mass resignation of Fairstead‘s key employees. And Tatum never joined Blodgett‘s new venture. Tatum was entitled to tell Feldman and Goldberg that he planned to leave because he was unhappy. He was also entitled to prepare to compete without fear of incurring liability for a breach of his duty of loyalty, as long as his efforts did not impair his work. The record shows that Tatum performed exemplary work throughout his tenure at Fairstead Affordable.
b. The Alleged Solicitation Of Fairstead Employees
Fairstead next argues that Tatum breached the duty of loyalty imposed by the Minority Member Duty Provision by soliciting other Fairstead employees to leave and join a new venture with Blodgett. Fairstead again failed to prove a breach.
As with the prior discussion, Tatum‘s interactions with other employees were acts he took as an employee. He did not take those actions as a holder of a minority equity interest, so Fairstead cannot use the Minority Member Duty Provision to claim a breach of the duty of loyalty based on this conduct.
Assuming for the sake of argument that the Minority Member Duty Provision could encompass this conduct, Tatum did not breach his duty of loyalty. Under Delaware law, mere solicitation of a colleague is not a fiduciary breach; rather, an
c. The Alleged Misappropriation Of Confidential Information
Fairstead last contends that Tatum breached the duty of loyalty imposed by the Minority Member Duty Provision by misappropriating confidential information. Fairstead failed to prove a breach.
For starters, the same reasoning about the inapplicability of the Minority Member Duty Provision applies. Tatum downloaded information as an employee, not as a minority member.
Assuming the duty did apply, then Fairstead would be on stronger footing. “Most basically, the duty of loyalty proscribes a fiduciary from any means of misappropriation of assets entrusted to his management and supervision.”333 Delaware courts have also found that downloading documents for one‘s “own purpose”
Tatum‘s initial downloading was improper, but he did not go any further. He did not disclose any confidential information to third parties or use any of it to compete with Fairstead. Tatum admitted that the downloading was a mistake, and that‘s exactly what it was: a mistake. He promptly remedied his mistake. His conduct does not rise to the level of a breach of the duty of loyalty.
3. Fairstead‘s Claim For Breach Of Fiduciary Duties Under New York Law
Fairstead next points to Tatum‘s fiduciary duties as an employee and agent of Fairstead, which are governed by New York law. Fairstead argues that the same underlying conduct constituted a breach of those duties.
As an employee and agent under New York law, Tatum owed duties of good faith and loyalty to his employer.335 New York law prohibits an employee “from acting in any manner inconsistent with his agency or trust,” and the employee “is at all times bound to exercise the utmost good faith and loyalty in the performance of his
Fairstead again relies on the same conduct, but this time cites what it portrays as a winning precedent in Duane Jones.338 In that decision from 1954, the New York Court of Appeals found that a group of employees breached their fiduciary duties by threatening to resign en masse if their employer did not agree to sell them a controlling interest in the company.339 That aspect of Duane Jones seems like strong authority for Fairstead, but there was more to the decision. The employees also “presold” the company‘s customers to their competing business, poached 90% of the company‘s skilled employees and the majority of its working force, and acquired upwards of 50% of the company‘s business overnight.340 Duane Jones was a perfect storm for employees facing a breach of duty claim.
Over the ensuing seven decades, New York courts have recognized the extreme facts that resulted in the Duane Jones ruling. As one decision noted, “The dominating purpose in the Duane Jones case was to damage and paralyze the plaintiff corporation
Like Delaware courts, New York decisions recognize that “[t]aking preparatory steps, while still in the employer‘s employ, to enter into a competing business is not a breach of an employee‘s duty of loyalty as long as the employee does not use the employer‘s time or resources to do so.”344 Creating a “commercial strategy” for a future company does not breach the duty of loyalty.345 Talking to a fellow employee about leaving is not a breach of duty, although New York decisions have found that
With this deeper understanding of Duane Jones and New York law, the operative legal principles do not differ materially from Delaware law. For the same reasons this decision has already discussed, Tatum did not breach his fiduciary duties.
H. The Counterclaim For Secondary Liability For Breaches of Fiduciary Duty
Fairstead next contends that Tatum should be held secondarily liable for Blodgett‘s breaches of fiduciary duty. Fairstead invokes two theories of secondary liability: (1) aiding and abetting and (2) conspiracy.
To prevail on their aiding and abetting claim, Fairstead must prove: “(1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) that plaintiff suffered damage as a
In the arbitration, Fairstead sought to prove that Blodgett breached his fiduciary duties by improperly soliciting Fairstead employees, misappropriating confidential information, attempting to usurp Fairstead‘s business opportunities, and attempting to wrest control of Fairstead. The arbitrator found that Blodgett breached his fiduciary duties by trying to solicit Fairstead employees and misusing Fairstead‘s proprietary information.351 But the arbitrator found that Fairstead failed to prove Blodgett attempted to usurp Fairstead‘s business opportunities and to wrest control of Fairstead, “particularly in light of the tactics employed by Feldman in connection with Blodgett‘s termination.”352 The arbitrator also found that Blodgett did not
While Tatum could be vicariously liable for Blodgett‘s tortious actions, Blodgett‘s conduct is not dispositive in proving Fairstead‘s claims against Tatum.353 Blodgett and Tatum may have been “attached at the hip,”354 and they did form a common law partnership for purposes of negotiating for a controlling equity interest in Fairstead‘s affordable housing business or starting their own business, but their conduct diverged at critical points.
The record does not show that Tatum knowingly induced or participated in either breach. Tatum did not coordinate with Blodgett to download Fairstead‘s confidential information. Tatum was not aware that Blodgett was sharing confidential information with the Sussman Office or the Tisch Office. The record also does not show that Tatum substantially assisted Blodgett in soliciting Kreinik and Sussi for a rival business. And Tatum did not join Tredway.
The conspiracy claim fares no better. “In the fiduciary duty context, conspiracy is treated essentially as coterminous with aiding and abetting.”355 Consequently, “the confederation requirement includes ‘knowing participation’ in the conspiracy.”356 The conspiracy analysis falls short for the same reasons as the aiding and abetting claim.
I. Fee Shifting
Both sides seek expenses (including attorneys’ fees). Sometimes parties will “argue their merits arguments in their trial briefs and then conclude their brief by presenting an argument why, if they win on the merits, they are entitled to attorneys’ fees.”357 But that is not the required procedure. It can be easier for the court to evaluate the merits of any fee-shifting arguments after finding facts determining liability. The parties should think hard about whether they have grounds to shift attorneys’ fees. If they think they do, they should confer and propose a briefing schedule. The parties may not use any motions for attorneys’ fees to reargue the court‘s factual findings or legal rulings.
Judgment will be entered against the defendants and in favor of Tatum for the amounts identified in this opinion. Judgment will be entered against Tatum and in favor of the defendants for the expenses they incurred investigating Tatum‘s taking of confidential information.
Tatum and the defendants are entitled to pre- and post-judgment interest in connection with their successful claims. Interest will accrue at the legal rate, compounded quarterly, with the interest rate changing with changes in the reference rate.
Within thirty days, the parties must submit a form of order to implement this decision. The parties should attempt to agree on the date when pre-judgment interest will begin to run. If disputes over that issue or other matters need to be addressed before a final judgment can be entered, then the parties must submit a joint letter identifying those issues and proposing a path forward. That instruction enlists the parties’ assistance in ensuring that no issues have been overlooked. It is not an invitation to raise new issues or seek a do-over.