Magruder Constr. Co. v. Gali, 4:18-CV-00286 JAR

MAGRUDER CONSTRUCTION CO., INC., Plaintiff, v. PHILIP GALI, Defendant.

No. 4:18-CV-00286 JAR

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MISSOURI EASTERN DIVISION

March 30, 2020

MEMORANDUM AND ORDER

This matter is before the Court on Plaintiff Magruder Construction Co., Inc. ("Magruder")'s Motion for Summary Judgment on Count I of the Complaint and First Claim for Relief in the Counterclaim and Partial Summary Judgment on Count II of the Complaint. (Doc. No. 28). The motion is fully briefed and ready for disposition. For the following reasons, the motion will be granted.

I. Background

Magruder is a construction company with its principal place of business in Pike County, Missouri. On December 28, 2012, Defendant Philip Gali ("Gali") acquired control of Magruder and assumed the positions of Chief Executive Officer, President, Secretary, and Treasurer, as well as sole Director of the Board of Directors and sole Trustee of the Employee Stock Ownership Trust ("ESOT"). Under Gali's direction, Magruder adopted the Magruder Construction Co., Inc. Deferred Compensation Plan ("the Plan"), effective January 1, 2013. The plan is an unfunded deferred compensation plan, the purpose of which is "to provide a select group of key management or highly compensated employees ... of the Company who contribute significantly to the future business success of the Company with supplemental retirement income benefits through discretionary Company contributions." (Plan at Sections 1-2.)

The Plan is administered by Magruder, through its Board of Directors. (Plan at Section 9.1). The Board has the authority to "construe and interpret the Plan and apply its provisions," "interpret, administer, reconcile any inconsistency in, correct any defect in and/or supply any omission in the Plan," and "exercise discretion to make any and all other determinations which it determines to be necessary or advisable for the administration of the Plan." (Plan at Sections 9.1(a), (g), (h)). The Plan further provides that "all decisions made by the Board pursuant to the provisions of the Plan shall be final and binding on the Company and the Participants, unless such decisions are determined by a court having jurisdiction to be arbitrary and capricious." (Plan at Section 9.3).

The Plan provides that a participant's account shall become vested upon, inter alia, a "Change in Control." (Plan at Sections 3, 7.1(a)). According to the Plan, a "Change in Control" occurs, for example, when "a majority of the members of the Board are replaced during any twelve (12) month period by directors whose appointment or election is not endorsed by a majority of the Board before the date of the appointment or election." (Plan at Sections 3, 7.1(a)). If a Participant terminates employment prior to a Change in Control, he or she forfeits the balance in his or her Account balance. (Plan at Section 7.1(a), 7.2).

On July 2, 2013, Gali, acting as the sole Director of the Board, issued a discretionary contribution under the Plan in the amount of $286,490 to himself for his performance from December 28, 2012 to March 31, 2013 to be credited to his account.

On April 28, 2014, Bank of America, N.A. ("BOA") filed a lawsuit against Magruder in this Court, Bank of America, N.A. v. Magruder Construction Co., Inc., Case No. 4:14-CV-809 JAR (E.D. Mo.) (the "BOA Lawsuit"), alleging that Magruder had defaulted on a $3,400,000 loan(the "BOA Lawsuit").¹ In the BOA Lawsuit, the Receiver and BOA accused Gali of mismanagement and improper business practices, including depositing approximately $70,000 in checks made payable to himself as "back pay." (Ex. 4, BOA Lawsuit Court File, at Doc #69 at 1-3, Doc. #79 at 2-3, Doc #116 at 6-8)

On July 21, 2014, the Court appointed a Receiver to take control of, operate, and/or liquidate Magruder's collateral. On August 11, 2014, due to Gali's failure to comply with the Receiver's instructions, the Receiver terminated Gali as an employee and officer of the Company effective immediately. On September 23, 2014, Magruder, under Gali's direction, asked the Court in the BOA Lawsuit to enter an order directing the Receiver to rescind the termination of Gali. The Court denied this request.

The previous owners/note holders of Magruder ("Note Holders"), as well as the Employee Stock Ownership Plan participants ("ESPO Participants"), subsequently intervened in the BOA Lawsuit to protect their respective interests. In November 2014, Magruder, Gali, the Note Holders, and the ESOP Participants engaged in extensive settlement negotiations. Counsel for Magruder represented Gali's interests during these settlement negotiations.

On December 15, 2014, Magruder, Gali, and the ESOP Participants entered into a written Mutual Release and Settlement Agreement (the "Settlement Agreement"). (Doc. No. 31-1). The Settlement Agreement states in relevant part that "since the filing of the [BOA Lawsuit], disputes have arisen between the Parties relating to the management of the Company and the ESOT as wellas the selection of the appropriate refinancing alternatives available to the Company to pay the Bank in full, obtain the discharge of the Receiver and to have the Lawsuit dismissed"; that "a commitment for a loan from Heartland Bank has been obtained to fund the full repayment to BOA as well as additional sums for use by the Company (the "New Loan"), which Loan is scheduled to close on or before December 22, 2014 (the "Closing Date")"; that in connection with the New Loan, certain management changes at the Company and for the ESOT shall occur, including the naming of successors to Gali as an officer, director CEO and as Trustee of the ESOT and a payment by the Company to Gali of $350,000.00 and that the Parties are desirous of resolving all disputes between them and are entering into this Mutual Release and Settlement Agreement to memorialize that resolution."

Under the Settlement Agreement, Gali agreed to "execute a resignation effectively immediately as Director of the Board of Directors of the Company and as Trustee of the ESOT and thereafter shall take whatever actions as may be necessary to fully cooperate in the appointment of one or more successor directors of the Board of Directors and to fully cooperate in connection with the appointment of one or more successor trustees of the ESOT." Gali also agreed to relinquish his vested and unvested ESOP shares and take whatever actions may be necessary to fully redeem his ESOP share holdings. As consideration for his agreement to resign and voluntarily relinquish his ESOP shares, Gali was paid the total sum of $350,000 (the "Settlement Payment").

Paragraph 6 of the Settlement Agreement states:

As a material provision to this Agreement, to the best of Gali's knowledge, all actual or potential liabilities of the Company resulting from company operations from December 1, 2012 and all actual and potential liabilities of the ESOP or ESOT, have been disclosed by Gali, which are either known to him or with diligence could have been known, and there are no other such known claims or debts that were incurred during the period that Gali held the position as Chief Executive Officer, President, Secretary, and/or Treasurer of the Company, and/or Director of the Board of Directors of the Company.

Paragraph 7 of the Settlement Agreement provides that the parties will not maintain or cause to be maintained "any demands, actions, lawsuits, arbitrations, or any other proceedings against the other in any capacity whatsoever as a result of or pertaining to the claims released and discharged herein."

The Settlement Agreement contains a mutual release, which was signed by Gali on December 30, 2014. In this mutual release, Gali released and discharged Magruder and the ESOP Participants from:

all known and unknown charges, complaints, claims, grievances, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts, penalties, fees, expenses (including attorneys' fees and costs actually incurred), and punitive damages, of any nature whatsoever, which arise from or relate to the general operations and/or management of Magruder Construction Co., Inc., from December 1, 2012 through and including the date of execution hereof, and Gali's services as Trustee of the ESOT, from April 1, 2012 through and including the date of execution hereof. This mutual release specifically excepts the obligations undertaken by each party pursuant to this Agreement.

The Settlement Agreement further provides that in the event it is necessary for a party or its authorized representative to hire an attorney to resolve any dispute hereunder, including but not limited to the institution of a lawsuit, the party which hired such an attorney and prevails shall be entitled to reimbursement of its full reasonable costs, expenses, and attorneys' fees incurred.

On December 22, 2014, the Receiver filed a consent motion requesting the authority to appoint new corporate directors and for the new corporate directors to execute the refinancing documents. Counsel for Magruder signed this motion, consenting to its entry and agreeing to be bound by the terms of the order. This Court granted the motion the same day.

By letter to Magruder's Board of Directors dated August 14, 2017, Gali, represented by new counsel, demanded $289,490 in deferred compensation benefits under the Plan and another $118,725.61 for his outstanding salary and benefits accrued between August 3, 2014 andDecember 30, 2014, for a total of $405,214.61. Magruder denied Gali's claims on September 1, 2017, and informed Gali's new counsel of the BOA Lawsuit, the Settlement Agreement, and the Receiver's termination of Gali's employment. By letter dated October 21, 2017, Gali requested a formal Notice of Denial letter under Paragraph 12.3 of the Plan.

On November 10, 2017, Magruder issued its formal Notice of Denial setting forth in detail the basis of its...