Freedom Mortgage Corporation v. Tschernia

Background

Richard Tschernia and his business partners sold substantially all of Continental Home Loans, Inc.’s assets to Freedom Mortgage Corporation in 2014. The sale included intangible assets and goodwill. Tschernia received 5% of the purchase price and continued working for Freedom under a separate employment agreement. The agreements included restrictions on competition and customer solicitation.

Freedom did not renew Tschernia’s employment contract in September 2018. Freedom later alleged that Tschernia retained control of two telephone numbers used in Continental’s and Freedom’s advertising, forwarded the numbers to CrossCountry, a Freedom competitor, and directed some of Freedom’s union clients to contact him at his new employer. Freedom also alleged that some loans acquired from Continental were defective, but it did not identify the loans, explain the alleged defects, or identify the specific warranties that were breached.

Tschernia moved to dismiss the amended complaint. On such a motion, the court generally assumes the complaint’s factual allegations are true and asks whether they state a legally plausible claim.

Asset Purchase Agreement

The court denied the motion as to Freedom’s claim that Tschernia breached the asset purchase provisions by retaining the telephone numbers. The agreement defined purchased assets broadly as all assets related to or necessary for operating the business, except excluded assets, and used the word “including” before listing categories of assets. Because the telephone numbers were used in the business and appeared in advertisements, Freedom plausibly alleged that they were included in the sale. At minimum, the court found the contract ambiguous, so the agreement did not unambiguously defeat Freedom’s claim at the dismissal stage.

Restrictive Covenants

The court granted the motion as to Freedom’s claim that Tschernia breached the restrictive covenants. The asset purchase agreement barred competition for five years after the May 2014 sale, but Tschernia began working for CrossCountry in December 2019, after that period had ended.

The employment agreement imposed a separate two-year restriction after Tschernia’s employment ended. The court concluded that this restriction was unenforceable under either the standard for a business-sale covenant or the stricter standard for an employment covenant. It applied nationwide, barred even remote affiliation with companies involved in commercial or residential mortgage business, and was not sufficiently connected to the interests protected by the purchase of Continental. The court also noted that New York law generally does not enforce a noncompetition provision when the employer involuntarily ends the employee’s employment, and Freedom had chosen not to renew Tschernia’s contract.

Indemnity Provisions

The court granted the motion as to Freedom’s claim for indemnification relating to defective loans. Freedom alleged only generally that multiple loans failed underwriting requirements or violated contractual representations. It did not identify particular loans, state how many were involved, explain how they were defective, or identify the specific loan warranties that were allegedly breached. The court therefore found that Freedom had not pleaded enough facts to state a claim.

The court expressed serious doubts about a release provision that could have conditioned Tschernia’s release benefits on accepting the restrictive covenants. It did not decide whether that provision was enforceable because the indemnification claim was inadequately pleaded.

Unjust Enrichment

The court granted the motion as to unjust enrichment. Freedom’s two theories were based on the same facts as its contract claims: that Tschernia retained telephone numbers included in the sale and that he earned commissions while violating the employment restrictions. Because the unjust-enrichment theories duplicated the contract claims and could not provide recovery if those contract claims failed, the court dismissed the claim.

Conversion and Fraud

The court granted the motion as to conversion. Although New York law can recognize conversion of intangible property, Freedom alleged that Tschernia failed to deliver the telephone numbers as required by the purchase agreement. Freedom did not allege that it already had the necessary ownership or possessory interest in the numbers. The court held that the alleged failure to deliver property purchased under a contract was a contract matter, not conversion.

The court also granted the motion as to fraud. Freedom alleged that Tschernia falsely promised to comply with the noncompetition provisions and intended to keep and use the telephone numbers and goodwill. The court held that these allegations concerned only an alleged intent not to perform contractual promises. Under New York law, those allegations did not support a separate fraud claim.

Unfair Competition

The court denied the motion as to unfair competition. Freedom alleged that it paid for advertising using the telephone numbers, gained a competitive advantage from customers’ familiarity with them, and lost calls to CrossCountry after Tschernia used the numbers there. The court found that these allegations plausibly described misappropriation of Freedom’s goodwill and were not merely duplicative of the contract claims because the unfair-competition theory could apply whether or not the purchase agreement included the telephone numbers.

Disposition

The court granted in part and denied in part Tschernia’s motion to dismiss. It granted the motion as to claims for breach of the restrictive covenants, breach of the indemnity provisions, unjust enrichment, conversion, and fraud. It denied the motion as to claims for breach of the asset purchase provisions and unfair competition. The court denied as moot Tschernia’s earlier motion to dismiss, which had been filed before Freedom amended its complaint, and stated that it would set a status conference by separate order.