Kahlon v. Project Verte Inc.

Background

Project Verte, a technology start-up, employed Julian Kahlon as its chief executive officer. Kahlon also owned TNJ Holdings, Inc., one of Project Verte’s initial investors. The company’s board included directors appointed by the initial investors, including members of the AJ Group and, initially, Kahlon. Kahlon later resigned from the board, and TNJ appointed his father, Jossef Kahlon, as his replacement.

In February 2020, Project Verte’s board determined that the company needed emergency financing. The board approved convertible notes—debt instruments that could give the noteholders equity in the company—and instructed Kahlon to sign them as chief executive officer. Kahlon did not sign. He said he wanted more information about the documents, questioned whether the instruction was reasonable, and expressed concern about a possible conflict of interest. The board authorized another officer or director to sign the notes and then terminated Kahlon for cause based on his alleged failure to follow the board’s directives.

The employment agreement stated that Kahlon was subject to the board’s direction, assigned him duties that the board could reasonably give him, and defined cause to include a repeated or substantial refusal, failure, or inability to perform his duties. It also addressed notice, compensation, and an opportunity to correct conduct supporting termination for cause.

Claims and Motions

Kahlon sued Project Verte for breach of the employment agreement, violations of New York Labor Law Sections 193 and 198, a declaratory judgment, breach of the duty of good faith and fair dealing, and failure to provide notice of continued health coverage under the Consolidated Omnibus Budget Reconciliation Act, a federal benefits-notice law. Project Verte counterclaimed that Kahlon breached the employment agreement. The parties filed cross-motions for summary judgment, meaning motions asking the court to rule because no genuine dispute of important fact allegedly remained. Project Verte also moved to keep certain emails under seal.

Rulings

The court denied Project Verte’s motion for summary judgment on Kahlon’s breach-of-employment-agreement claim. The court identified a factual dispute about whether Kahlon actually refused to sign the convertible notes or was trying to understand his obligations before signing. It also concluded that the agreement was not completely clear about whether Kahlon had to follow every board instruction or only reasonable instructions. Finally, because the financing had already been funded before the notes were executed, the court found a factual dispute about whether Kahlon had the ability to correct the conduct and should have been allowed to do so. The claim therefore survived summary judgment.

The court granted Project Verte’s motion for summary judgment on Kahlon’s claim concerning notice of continued health coverage. Kahlon conceded dismissal, and the record showed that the termination notice referred to the benefits notice and that notice was later sent to him.

The court dismissed Kahlon’s declaratory-judgment claim as duplicative because his breach-of-contract claim would resolve the same issues. It also dismissed his separately pleaded claim for breach of the duty of good faith and fair dealing as duplicative of the contract claim because both were based on the same facts.

The court dismissed Kahlon’s New York Labor Law claims under Sections 193 and 198. It stated that, as an executive earning more than $900 per week, Kahlon could not recover under Section 198-c(3), and that Section 193 addresses unlawful wage deductions rather than a failure to pay wages altogether.

The court denied Kahlon’s motion for summary judgment on Project Verte’s counterclaim. It rejected Kahlon’s argument that his alleged at-will status meant there was no employment contract, noting that the employment agreement bound both parties. Although the court rejected Project Verte’s position that the absence of an approved annual budget made all of Kahlon’s actions unauthorized, it found unresolved factual and contract-interpretation issues concerning, among other things, Kahlon’s hiring of his father under a related-party agreement.

The court also denied Project Verte’s motion to seal emails involving business negotiations with Geodis. The court found that the emails were from before Geodis filed its lawsuit, reflected business negotiations rather than settlement communications, and did not contain sensitive information that outweighed the public’s strong right of access to judicial documents.

Disposition

Project Verte’s motion for summary judgment was denied in part and granted in part: it was denied as to Kahlon’s breach-of-employment-agreement claim and granted as to all other claims. Kahlon’s motion for summary judgment on Project Verte’s counterclaim was denied. Project Verte’s motion to seal was denied.