RECOVERY DATABASE NETWORK, INC. v. BALOGH
ORDER granting Plaintiff/Counter Defendant's 14 Motion for Judgment on the Pleadings and the court hereby declares that Balogh breached the Employment Agreement, RCA, and Separation Agreement, thereby relieving Recovery of any obligation to pay Balogh any remaining severance pay. Further, Balogh's counterclaims are each DISMISSED WITH PREJUDICE. Final Judgment shall enter accordingly. (S.O.). Signed by Judge Sarah Evans Barker on 7/20/2017. (MAC)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
RECOVERY DATABASE NETWORK, INC., )
RECOVERY DATABASE NETWORK, INC., )
ORDER ON MOTION FOR JUDGMENT ON THE PLEADINGS
This cause is before the Court on Plaintiff/Counter Defendant’s Motion for
Judgment on the Pleadings [Docket No. 14], filed on September 29, 2016. For the reasons
below, the motion is GRANTED.
Plaintiff/Counter Defendant Recovery Database Network, Incorporated
(“Recovery”) is a Delaware corporation with its principal place of business located in
Carmel, Indiana. Defendant’s Answer [Docket No. 7], ¶ 4. Defendant/Counter Plaintiff
Holly Balogh (“Balogh”) is a former employee and Chief Operations Officer at
Recovery. Id. ¶¶ 6 and 13. They are currently embroiled in a contract dispute over the
terms of an Employment Agreement and a Separation Agreement. Recovery sued Balogh
for declaratory judgment to define its rights and obligations after Balogh’s alleged breach
of those Agreements. Balogh subsequently filed a counterclaim requesting declaratory
judgment against Recovery that it be found to have breached its obligations thereby
entitling her to severance pay. She also has pled counterclaims for breach of contract and
violations of the Indiana Wage Claims statute.
The underlying facts of this dispute reveal that Recovery hired Balogh in July
2012. Id. ¶ 6. Three years later, in October 2015, she was promoted to Chief Operations
Officer in connection with which she executed an Employment Agreement, containing a
Restrictive Covenant (“RCA”). Id. ¶¶ 13, 14; Dkt 1-1, pp. 13–19. As part of the
Employment Agreement, Recovery agreed to provide Balogh a severance package in the
event of her termination without cause. That provision stated as follows:
If the Triggering Event was a Termination Without Cause, in exchange for
the Employee’s execution of a full and complete waiver and release of any
and all claims against the Company, its parent and affiliated entities, its
successors and assigns, and each of their officers, directors, agents, and
employees, the Company shall provide to the Employee a “Severance
Package” that includes as severance, an amount equal to the Employee’s
annual base salary for a one (1) year period at the rate in effect as of the
Termination Without Cause. All such severance payments shall be paid to
the Employee in accordance with the Company’s normal payroll practices,
but in no event, less frequently than twelve (12) equal monthly installments.
The Company may accelerate the payments in its sole discretion. In addition,
the Severance Package shall also provide, as followed by law and at the
Company’s expense, continued coverage for the Employee and the
Employee’s beneficiaries as then in effect for a period extending through the
earlier of (i) the date Employee begins any subsequent full-time employment
for pay or (ii) the date that is one (1) year after the date of the Termination
Without Cause, under the Company’s group health plan covering the
Employee and the Employee’s beneficiaries, provided that Employee
properly elects coverage pursuant to Title I, Part 6 of the Employee’s
Retirement Income Security Act of 1974, as amended (“Cobra”). The
Employee acknowledges and agrees that the Severance Package provided in
this section is in lieu of and exclusive of any other severance and benefits to
which Employee may be entitled.
Dkt. 1-1, Ex. A p. 3 Art. 2 § d(i).
For reasons not at issue in this litigation, Balogh’s employment with Recovery
ended on February 22, 2016. Dkt. 7, ¶ 17. On March 8, 2016, Recovery and Balogh
entered into a Separation Agreement and Voluntary Release of All Claims (“Separation
Agreement”), which contained the specific terms governing payment of Balogh’s
severance entitlements. Dkt. 1-1, Ex. B p. 2 ¶ 1. As part of the Separation Agreement,
Balogh agreed to fully comply with the terms of the RCA and conceded that any breach
of the RCA would constitute a material breach of the Separation Agreement.
Recovery contends that it has been relieved of its obligation to pay Balogh’s
severance package because Balogh breached the provision of the RCA requiring that she
return all its property. The provision reads as follows:
Upon termination of employment for any reason, on or before the
termination date, Employee will deliver to the Company and not keep in
Employee’s possession, recreate or deliver to anyone else, any and all
devices, books, hardware, security passes, credit cards, records, data, notes,
reports, proposals, lists, correspondence, specifications, materials,
equipment, other documents or property of reproductions of such items
developed by Employee pursuant to employment with the Company or
otherwise belonging to the Company . . . Failure to comply with this
paragraph is a material breach of this Agreement and the Employment
Dkt. 1-1, Ex. A p. 8 ¶ 3.1.
Due to ongoing problems with Recovery-issued computers that began in
August 2015, Balogh performed her work for Recovery on both company-owned
and personally-owned computers. These problems continued until January 2016,
when Balogh received a new laptop from Recovery. Dkt. 13-1, Ex. A p. 2. To “get
everything in one place,” Balogh transferred files from multiple computers onto
the new Recovery-owned laptop. Id. Among the data transferred onto the new
laptop were drafts of documents, personnel documentation and recognition, old
information, and, of most concern to Balogh, a password file that included
personally sensitive password information, such as personal banking passwords.
Prior to her termination in February 2016, Balogh inserted multiple USB
drives into the Recovery-owned laptop in an attempt to find a drive containing
enough available storage to copy the entire C-drive of that laptop. Dkt. 7, ¶ 19.
Once she identified a USB with sufficient available memory, she copied the entire
C-drive from the Recovery laptop. Id. Balogh then used a data-wiping program to
remove any and all sensitive information from the Recovery-owned laptop to
maintain the privacy of her personal information before returning the laptop. Id.
Balogh alleges that her motivations for copying the C-drive were to preserve
information for the benefit of Recovery “in the off chance that [her] support was
needed in a matter that [she] was involved in during [her] tenure at RDN….” Dkt.
13-1, Ex. A p. 2.
Recovery notified Balogh by a letter dated April 26, 2016 of “Irregularities
Discovered During Forensic Review of Work Computer” and requested that
Balogh provide Recovery with the USB drives that she had inserted into the
laptop. Dkt. 13-1, Ex. A p. 2; Dkt. 7, ¶ 19. The following day Balogh sent the
requested USBs to Recovery with a letter explaining in detail the history of her
computer challenges that necessitated copying the Recovery-owned laptop’s Cdrive. Dkt. 7, ¶ 23; Dkt. 13-1, Ex. A. To the best of her knowledge, upon returning
the USBs, Balogh has returned all of Recovery’s information and property. Dkt. 7,
Balogh received letters from Recovery dated May 2 and May 25, 2016
informing her that she was in breach of her Employment Agreement and
Separation Agreement, and indicating that Recovery planned to terminate her
severance payments. Id. ¶ 26. On June 10th Recovery sued Balogh in Hamilton
Circuit Court for Declaratory Judgment, seeking a declaration of its rights and
obligations relating to Balogh’s separation of employment. Specifically, Recovery
requested a declaration that Balogh had breached the Employment Agreement,
RCA, and Separation Agreement, and that, Recovery is therefore not obligated to
pay Balogh any remaining severance pay. Dkt. 1-1, ¶ 2; Dkt. 7, ¶ 2. On July 20th
the case was removed to this court based on diversity jurisdiction. Dkt. 1, ¶ 2.
After removal, Balogh has asserted three counterclaims: (1) Breach of
Contract, based on Recovery’s refusal to pay amounts due under the Separation
Agreement; (2) a Wage Claim, pursuant to the Indiana Wage Claims Statute also
related to Recovery’s refusal to pay severance payments; and (3) a request for
Declaratory Relief seeking a ruling that Recovery breached the Separation
Agreement and must pay the severance payments, and that she is no longer bound
by the restrictive covenants. Dkt. 7, pp. 11–13.
On September 29, 2016, Recovery moved for Judgment on the Pleadings
contending that Balogh’s breach of the RCA and Separation Agreement vitiates
any obligation it may have had to pay severance payments under the Separation
Agreement. Further, Recovery has argued that Balogh’s claim under the Indiana
Wage Claims statute fails because it is not statutorily obligated to pay her
severance payments, or, in the alternative, severance payments are not “wages” as
that term appears in that statute. Dkt. 14.
Federal Rule of Civil Procedure 12(c) permits a party to move for judgment after
the pleadings are closed, but early enough not to delay trial. We review motions for
judgment on the pleadings under the same standard by which we review motions to
dismiss for failure to state a claim under Rule 12(b)(6). Buchanan-Moore v. County of
Milwaukee, 570 F.3d 824, 827 (7th Cir. 2009); Pisciotta v. Old Nat'l Bancorp, 499 F.3d
629, 633 (7th Cir. 2007). “Like Rule 12(b) motions, courts grant a Rule 12(c) motion
only if it appears beyond doubt that the plaintiff cannot prove any facts that would
support his claim for relief.” N. Indiana Gun & Outdoor Shows, Inc. v. City of South
Bend, 163 F.3d 449, 452 (7th Cir. 1998) (quoting Craigs, Inc. v. General Elec. Capital
Corp., 12 F.3d 686, 688 (7th Cir. 1993)) (internal quotations omitted). In determining the
sufficiency of a claim under this standard, the court considers all allegations in the
nonmovant’s pleading to be true and draws such reasonable inferences as required in the
nonmovant’s favor. Jacobs v. City of Chicago, 215 F.3d 758, 765 (7th Cir. 2000).
This dispute emanates from competing claims about the rights and obligations
imposed by the Agreements between Recovery and Balogh respectively. The contentions
have merged into two opposing declaratory judgment requests about which party is in
breach of their respective obligations. Balogh has added two more claims for breach of
contract and recovery under the Indiana Wage Claims statute. Balogh’s claim under the
Indiana Wage Claims statute is contingent on the court ruling in favor of Balogh on her
contract claim. For the following reasons, we GRANT Declaratory Judgment in favor of
Recovery, declaring Balogh breached the Employment Agreement, RCA, and Separation
Agreement, and, consequently, Recovery is not obligated to pay Balogh any remaining
severance payments. We DISMISS WITH PREJUDICE the counterclaims brought by
Balogh as well.
Breach of Contract
It is undisputed that Balogh entered into the Employment Agreement, which
integrates the RCA as an exhibit, and the Separation Agreement, which reaffirms her
obligations under the RCA. There is no dispute that Balogh agreed to return all of
Recovery’s property upon her termination as detailed in the RCA. The parties
unequivocally agreed that if Balogh failed to comply with the RCA, then that failure
would constitute a material breach, thereby relieving Recovery from its obligation to pay
The parties do not dispute that they agreed to the contract, so “the intent of the
parties should be determined by the language employed in the document.” Thomas v.
Thomas, 577 N.E.2d 216, 219 (Ind. 1991). And “[t]he contract must be read as a whole
when trying to ascertain the parties’ intent.” OEC-Diasonics, Inc. v. Major, 674 N.E.2d
1312, 1315 (Ind. 1996). “Where the terms of a contract are clear and unambiguous, the
terms are conclusive and we will not construe the contract or consider extrinsic evidence,
but merely apply the contractual provisions.” Jackson v. DeFabis, 553 N.E.2d 1212, 1215
(Ind. Ct. App. 1990). These foundational contract principles mean, barring a request to
blue pencil the contract that is not present here, a party simply cannot expect the Court to
selectively enforce certain provisions of the contract according to its wishes when such
action would deviate from the parties’ agreement as a whole.
The relevant contract provision in this litigation is a property-return provision that
requires the return of company property “[u]pon termination of employment for any
reason, on or before the termination date.” Dkt. 1-1, Ex. A p. 8 ¶ 3.1. Here, the relevant
company property that was not returned is the backup files stored on the USBs that
Balogh inserted into the Recovery-owned laptop before using the data-wiping program.
Recovery requested the USBs’ return by letter on April 26, 2016—more than two months
after Balogh’s employment had ended. In Balogh’s Answer, she admits that in response
to Recovery’s letter “she provided [Recovery] with the requested drives without delay.”
Dkt. 7, ¶ 23 (emphasis added). In a letter to Recovery, dated April 27, 2016, Balogh
writes “[i]ncluded with this letter are two Lexar USB drives” that have Recovery’s files
on them. Dkt. 13-1, Ex. A p. 2. Taken together, these facts make clear that Balogh’s
return of the USBs had been delayed well past the time for relinquishment as required by
the RCA. Thus, Balogh was in breach of paragraph 3.1 of the RCA for failure to return
Recovery’s property on or before her termination date and is in breach of the Employee
and Separation Agreements, negating Recovery’s obligations to pay separation payments.
Balogh, in rejecting this conclusion, rejoins: (1) that Recovery relies on complaint
allegations which she has denied, (2) that her actions were not blameworthy, and (3) that
any breach by her was immaterial. However, Balogh’s contentions are unsupported by
the text of the Agreements as well as the applicable principles of law.
Balogh argues that Recovery relies on factual allegations which she has denied in
paragraphs 15, 16, 19, 21–23, and 25–27 of her Answer [Docket No. 7], which forecloses
a motion for judgment on the pleadings. Some of her referenced denials, however, are
merely partial denials, allowing Recovery to rely on the admitted facts. Recovery has
limited its arguments to Balogh’s admissions. That said, Balogh’s denials in paragraphs
15 and 16 appear at first blush to be problematic for Recovery because Balogh has denied
being required to return the company property by the date of her separation, as provided
in the RCA, maintaining that she never “agreed to return company property upon
termination of her employment for any reasons on or before the termination date” or that
“[f]ailure to return company property is a material breach of the Employment Agreement
and RCA.” Dkt. 7, ¶¶ 15–16.
However, Balogh has admitted that she signed the RCA, id. at ¶ 14, and has
incorporated the Employment Agreement and Separation Agreement into her
counterclaim, which underpin her legal claims. Def.’s Countercl. ¶¶ 7–12. As we have
previously noted, the Employment Agreement incorporates the RCA, and the Separation
Agreement reaffirms Balogh’s “duties, obligations and restriction under Exhibit A to her
Employment Agreement, entitled ‘Restrictive Covenant Agreement’ (‘RCA’)….” Dkt. 11, Ex. B ¶ 14. Further, the Separation Agreement states “that full compliance with the
terms and conditions of the RCA are [sic] a material part of this [Separation] Agreement,
and any breach of the RCA by Employee constitutes a material breach of this
Agreement….” Id. ¶ 15. Balogh’s agreeing to the Employment and Separation
Agreements includes her agreement with the terms of the RCA. Thus, the pleadings
clearly defeat Balogh’s entitlement to relief.
“[W]here the allegations of a pleading are inconsistent with the terms of a written
contract attached as an exhibit, the terms of the latter, fairly construed, must prevail over
the averments differing therefrom.” Foshee v. Daoust Const. Co., 185 F.2d 23, 25 (7th
Cir. 1950) (citations omitted) (affirming a motion to dismiss). A plaintiff pleads herself
out of court “in contract disputes in which a plaintiff attaches a contract to the complaint
and makes an allegation that the contract on its face clearly disputes.” N. Indiana Gun &
Outdoor Shows, Inc., 163 F.3d at 456. Given the apparent conflict between Balogh’s
allegations and the language of the contract that she agreed to and regards as binding and
relies upon for her claims, we are obligated to enforce the contract.
Balogh next maintains that she did nothing wrong in terms of retaining
Recovery’s property since in fact she had kept it for the benefit of Recovery. She
maintains that she had no malicious intent when she committed this breach. These
arguments are unavailing: “if the promisor fails to perform as agreed, he has broken his
contract even though failure may have been … in no way blameworthy.” Patton v. MidContinent Systems, Inc., 841 F.2d 742, 750 (7th Cir. 1988) (applying Indiana law)
(emphasis added). Balogh’s intentions, benevolent as they might have been, are beside
the point in light of her breach of paragraph 3.1 of the RCA, which occurred the moment
she failed to return the USBs upon the date of her termination.
Balogh also contends that her breach was not material. Her argument here is
twofold; the breach did not go to the “heart of the contract” and the relatively small
liquidated damages provision demonstrates that the breach was not material. Thus, she is
still entitled to the benefits flowing from Recovery’s performance. Balogh relies on State
v. Int’l Bus. Machines Corp., 51 N.E.3d 150 (Ind. 2016) for the proposition that “the
‘breach’ must still go to the ‘heart of the contract’ for it to be material,” even though “the
parties’ contract may provide the standard for what constitutes a material breach.” Dkt.
20, p. 3 (quoting Int’l Bus. Machines Corp. at 158–59).
This is an incorrect reading of Int’l Bus. Machines Corp. The Indiana Supreme
Court explicitly held in that case “that where a contract itself provides the standard for
what constitutes a material breach, this is the standard that governs. The common law
standard only applies in the absence of a contractual provision regarding what constitutes
a material breach.” 51 N.E.3d at 161. The parties defined a material breach in their
Separation Agreement, quoted above, as well as in the RCA. Specifically, the parties
agreed that Balogh’s compliance with the RCA was a material part of the Separation
Agreement and any breach of the RCA is a material breach of the Separation Agreement.
The RCA also explicitly states that a failure to return all of Recovery’s property “is a
material breach of the [RCA] and the Employment Agreement.” Dkt. 1-1, Ex. A p. 8 ¶
3.1. Balogh’s failure to return Recovery’s property (the copy of the Recovery laptop’s Cdrive) before or upon the date of her separation, was a material breach of the Separation
Agreement, relieving Recovery of its obligations to pay Balogh severance.
Next, Balogh argues that her failure to return Recovery’s property after her
termination could not possibly be a material breach because the parties agreed to a $1000
liquidated damages amount in the event of such a breach:
In the event that Employee fails to timely return or delete all Company
property in Employee’s custody or control, in addition to any other remedies
and damages available, Employee will pay Company a sum of $1,000.00
(“Damages Payment”). Employee acknowledges that the costs and damages
that Company will incur in order to replace or reproduce Company’s tangible
property and to prevent or remedy the disclosure or effect of disclosure of
Company’s Confidential Information that employee failed to return or delete
are not readily ascertainable and are difficult to predict or calculate at this
time. Therefore, Employee agrees that the Damages payment is a reasonable
estimate of Company’s damages for Employee’s failure to return to
Company or delete from any personal device or computer any Company
property in Employee’s custody or control.
Dkt. 1-1, Ex. A p. 8, ¶ 3.2. According to Balogh, the RCA “has a built-in, admittedly
adequate remedy for any diminished benefit of its bargain” and if her contractuallymandated return of Recovery’s property “were at the heart of the RCA…the Damages
Payment would have been more material than a $1000 payment.” Dkt. 20, pp. 6–7.
Balogh’s argument again misses the mark. As discussed above, the parties agreed
that any failure to return company property by the date of separation would be a material
breach. Rather than serving as the sole remedy, the $1000 liquidated damages payment is
“in addition to any other remedies and damages available.” Dkt. 1-1, Ex. A p. 8, ¶ 3.2. In
Int’l Bus. Machines Corp., the Supreme Court of Indiana found that a state trial court
erred by ignoring such a reservation of rights. 51 N.E.3d at 163–64 (holding “the
liquidated damages does not excuse IBM’s breach”). We have no difficulty in finding
that Balogh’s breach was material.
The Parties agreed that if Balogh failed to return Recovery’s property, before or
upon separation, she would be in material breach of the Employment Agreement, the
RCA, and the Separation Agreement. Balogh has admitted that she did in fact fail to
return the property before or upon separation, and thus was in material breach. Because
Balogh materially breached the Agreements, Recovery is excused from paying the
remaining severance payments. We withhold comment as to the fairness of this outcome
“recogniz[ing] the freedom of parties to enter into contracts and, indeed, presume that
contracts represent the freely bargained agreement of the parties. … [I]t is in the best
interest of the public not to restrict unnecessarily persons’ freedom of contract.” Fresh
Cut, Inc. v. Fazli, 650 N.E.2d 1126, 1129 (Ind. 1995) (citations omitted).
Balogh is unable to show that she is entitled to proceed with her claims of relief or
to defeat Recovery’s claim. Having determined that she was in material breach of the
Agreements, her counterclaims for Breach of Contract and Declaratory Relief necessarily
fail. 1 Accordingly, Recovery’s Motion for Judgment on the Pleadings is GRANTED and
we declare that Balogh breached the Employment Agreement, RCA, and Separation
Agreement, and that Recovery is not obligated to pay Balogh any remaining severance
pay. Also, Balogh’s request for declaratory judgment and breach of contract
counterclaims are DISMISSED WITH PREJUDICE.
Indiana Wage Claims Statute Claim
Balogh’s counterclaim alleges that Recovery’s cessation of severance payments
has deprived her of wages under the Indiana Wage Claims statute. Ind. Code § 22-2-9-2.
She contends that “severance pay” fits the statutory definition of wages, thus entitling her
to damages. Having found that Balogh is not entitled to severance pay based on her
material breach of the Agreements, we need not resolve the issue of whether her
severance pay qualifies as wages under the Indiana Wages Claims statute. Balogh’s claim
for wages under the Indiana Wage Claims statute is also dismissed.
For the reasons explained above, Plaintiff/Counter Defendant’s Motion for
Judgment on the Pleadings is GRANTED, and the court hereby declares that Balogh
breached the Employment Agreement, RCA, and Separation Agreement, thereby
relieving Recovery of any obligation to pay Balogh any remaining severance pay.
If a party is in material breach, then it cannot “maintain an action against or recover damages from the
other party to the contract.” Ream v. Yankee Park Homeowner’s Ass’n, Inc., 915 N.E.2d 536, 547 (Ind.
Ct. App. 2009).
Further, Balogh’s counterclaims are each DISMISSED WITH PREJUDICE. Final
Judgment shall enter accordingly.
IT IS SO ORDERED.
SARAH EVANS BARKER, JUDGE
United States District Court
Southern District of Indiana
Andrew M. McNeil
BOSE MCKINNEY & EVANS, LLP
BOSE MCKINNEY & EVANS, LLP
Robert F. Seidler
OGLETREE, DEAKINS, NASH, SMOAK & STEWART PC (Indianapolis)
Theresa Renee Parish
OGLETREE, DEAKINS, NASH, SMOAK & STEWART PC (Indianapolis)
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