Tyco International, et al v. Kozlowski

Filing 101

OPINION: Kozlowskis motions for certification for interlocutory appeal and entry of final judgment are denied. This disposes of the motion listed as document 82 on this docket. (Signed by Judge Thomas P. Griesa on 5/24/2011) (jfe)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
TYCO INTERNATIONAL, LTD., and
:
TYCO INTERNATIONAL (US), INC.,
:
:
Plaintiffs/Counterclaim
:
Defendants,
:
:
– against –
:
:
L. DENNIS KOZKOWSKI,
:
:
Defendant/Counterclaim :
Plaintiff.
:
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02 Civ. 7317 (TPG)
OPINION

Plaintiffs Tyco International, Ltd. and Tyco International, Inc.
(“Tyco”) sue on numerous claims against their former Chief Executive
Officer and Chairman, Dennis Kozlowski, including fraud, breach of
fiduciary duty, and breach of contract. On December 1, 2010, this court
issued an opinion ruling on the parties’ cross-motions for summary
judgment. Tyco Intern., Ltd. v. Kozkowski, slip. op., No. 02cv7317, 2010
WL 4903201 (S.D.N.Y. Dec. 1, 2010). The opinion dismissed essentially
all of Mr. Kozlowski’s counterclaims and granted summary judgment to
Tyco as to liability on number of its claims, including on its remedy for
disgorgement of all compensation earned by Kozlowski during his period
of disloyalty. The opinion relied on New York law rather than Bermuda
law in coming to the conclusion that the remedy of disgorgement is
appropriate. The court also applied the doctrine of collateral estoppel to

preclude Kozlowski from denying facts established by his criminal
convictions. Kozlowski now wishes to challenge the summary judgment
rulings on appeal before final judgment in the case, and to do so moves
for certification for interlocutory appeal pursuant to 28 U.S.C. § 1292(b)
and for entry of partial final judgment on his counterclaims pursuant to
Rule 54 (b) of the Federal Rules of Civil Procedure.
Kozlowski’s motions are denied.
BACKGROUND
In June 2002, Kozlowski was discharged from Tyco as he faced
imminent indictment in the state of New York for sales tax evasion. An
ensuing investigation revealed that Kozlowski had conspired with other
corporate officers to pilfer Tyco’s treasury of tens of millions of dollars.
This led to a major New York state criminal case involving various
charges.

Kozlowski was convicted on 22 felony counts involving his

stealing of money from Tyco and his efforts to hide his thefts.
Tyco brought this suit against Kozlowski for, among other things,
breach of fiduciary duty.

Based on this breach, Tyco seeks to have

Kozlowski disgorge all compensation earned during the period of his
disloyalty, amounting to several hundred million dollars. Kozlowski, in
turn, brought several counterclaims against Tyco seeking payment on
unfulfilled compensation agreements. After discovery, both sides moved
for summary judgment.
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Previous Opinion
In an opinion dated December 1, 2010, this court granted
summary judgment as to liability on six of Tyco’s 12 causes of action and
dismissed completely all but two of Kozlowski’s counterclaims, while
dismissing the remaining two only in part.

While the court assumes

knowledge of the opinion, a brief summary and explanation will be
helpful in disposing of the current motion. The undisputed facts relied
on by the court in granting summary judgment on Tyco’s causes of
action and dismissing Kozlowski’s counterclaims came in large part from
Kozlowski’s

criminal

established

that

convictions,

Kozlowski

stole

which,

via

millions

of

collateral
from

Tyco

estoppel,
through

unauthorized bonuses and other compensation and hid his thefts from
Tyco through, among other things, the falsification of documents
submitted to Tyco’s compensation committee.
The court, in its opinion, also had to make a determination as to
which law to apply to certain claims, as during much of the time
Kozlowski was stealing from and lying to Tyco the company was
incorporated in Bermuda. Kozlowski argued first that a conflict existed
between Bermuda law and New York law on the claim for constructive
fraud and the remedy of disgorgement, claiming Bermuda, unlike New
York, does not recognize the claim of constructive fraud or the remedy of
disgorgement.

Kozlowski then argued that Bermuda, as the state of

incorporation and principle place of business of Tyco, should have its law

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applied in case of conflict under the “internal affairs doctrine” and that
Bermuda, as the place of the injury and thus the locus of the tort, had a
greater interest in the case. Tyco did not dispute that Bermuda does not
recognize a claim for constructive fraud but argued that there was no
conflict as to the remedy of disgorgement and that, in any case, it was
New York’s law that should apply if any conflict exists since New York, as
the place of much of the conduct, has a greater interest in the case.
The court could not make a clear determination as to whether
Bermuda law would permit disgorgement under these circumstances and
so, for the purposes of the choice of law analysis, assumed a conflict as
to disgorgement. The court also assumed a conflict as to constructive
fraud since Tyco had not disputed Kozlowski’s contention that Bermuda
did not recognize such a claim.
The court then turned to a choice of law analysis.

The court

rejected automatic application of Bermuda law based on internal affairs
doctrine, finding that the place of incorporation is just one of many
factors that must be considered in determining which state has greater
interest in having its law applied in a case. The court also determined
that in a case such as this, involving a multinational corporation and
conduct in multiple jurisdictions, determining the locus of the tort is very
difficult.

The court thus centered its choice of law analysis on the

conduct of Kozlowski. This analysis involved a consideration of all the
facts of the case.

For example, the court took additional note of

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Kozlowski’s New York criminal convictions because, as the judge in the
criminal case instructed to the jury, for each conviction the jury must
have found that Kozlowski or “another for which he is legally
accountable” engaged in conduct in New York “sufficient to establish
either an element of such offense or an attempt to commit such offense.”
In other words, for 22 different criminal acts against Tyco, Kozlowski’s
conduct in some way touched New York. Although not dispositive, this
fact was certainly important to the court’s analysis.

The court also

noted, for example, Kozlowski’s use of the New York relocation program
to steal money from Tyco and his use of stolen funds to purchase
artwork in New York. These and other facts made it clear to the court
that New York was an important locus of Kozlowski’s conduct in this
case.
It was the large amount of conduct that occurred in New York that
underlay the court’s determination that, in this case, New York’s interest
in deterring such conduct predominated over Bermuda’s interest in
governing the conduct of officers of corporations incorporated in its
territory. As the court said:
While New York has a clear interest in deterring fraud and
theft within its borders, an interest that would be thwarted
by applying Bermuda’s arguably more lenient standards to
Kozlowski’s conduct, Bermuda has no corresponding interest
in applying those more lenient standards to foreign
defendants who cause injury to plaintiffs domiciled in
Bermuda.

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Kozlowski, 2010 WL 4903201 at *5. With this determination, the court
applied New York law and held that Kozlowski may be liable for
constructive fraud and that Tyco is entitled to have Kozlowski disgorge
all compensation earned during his period of disloyalty to the company.
His forfeiture of compensation was also a factor in dismissing many of
his counterclaims, which sought payment of unpaid benefits accrued
after the beginning of his disloyalty.

Thus the choice of law

determination was a major part of the disposition of the parties’
summary judgment motions.
The Current Motion
Kozlowski now seeks to challenge the court’s choice of law and
collateral estoppel determinations via two different avenues: interlocutory
appeal under 28 U.S.C. 1292(b) and entry of final judgment as to his
counterclaims under Fed. R. Civ. Pro. 54(b).
As to the request for interlocutory appeal, Kozlowski claims that
the court made a significant error in its choice of law analysis by not
using a “center of gravity” approach to determine which jurisdiction had
the most contacts with the case--and thus the greater interest in the
case--and then applying that jurisdiction’s law. Kozlowski accuses the
court of instead of overreliance on Kozlowski’s criminal convictions and
improperly equating “the presence of criminal jurisdiction in New York
with a legal presumption that the substantive law of New York should
govern civil claims in a related lawsuit.”

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Kozlowski seeks to have the

Court of Appeals rule on the propriety of such an assumption before this
case moves forward because absent “an immediate appeal of the Opinion,
the Court and the parties will be forced to proceed with an expensive trial
on the relatively inconsequential issues remaining after the Opinion.”
As to his request for entry of final judgment, Kozlowski argues that
since the court dismissed all of his claims based on unpaid benefits
accrued after September 1995, the disposition as to those claims is final
and there no just reason for delay because judicial efficiency is best
served by an immediate appeal.
Tyco opposes both the request for leave to file an interlocutory
appeal and the request for entry of final judgment.

Tyco argues that

both requests will, in fact, delay, not advance, termination of this
litigation and that Kozlowski has failed in all respects to meet the burden
needed to invoke these exceptions to the general rule that appeals will be
heard only after an entire case is concluded. Tyco has also separately
moved for summary judgment on certain of its damages claims, which
may be dispositive of its right to recovery.
DISCUSSION
Interlocutory Appeal
The availability of interlocutory appeals is an exception to the
general rule that federal appeals courts have jurisdiction only over
appeals from final decisions. This exception is used only in “exceptional
cases” where early appellate review might “avoid protracted and

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expensive litigation.”

Telectronics Proprietary, Ltd. v. Medtronic, Inc.,

690 F. Supp. 170, 172 (S.D.N.Y. 1987). A court may grant leave to file
an interlocutory appeal only if it finds that three conditions have been
met: first, that ruling on which the appeal is sought involves a controlling
question of law; second, that there is substantial ground for a difference
of opinion as to that controlling question of law; and, third, that an
immediate appeal will materially advance the litigation.

28 U.S.C. §

1292(b).
Controlling Question of Law
“A question of law is controlling if reversal of the district court's
order would terminate the action” or “if it substantially affects a large
number of cases.” In re Payroll Exp. Corp., 921 F. Supp. 1121, 1126
(S.D.N.Y. 1996).
While the court’s determination that New York’s, rather than
Bermuda’s, law applied in this case was quite important, it was not
controlling.

If reversed, and Bermuda law were applied, the reversal

would not terminate the action, and in fact would leave the court in
precisely the same position it currently finds itself.

If the Court of

Appeals determines that Bermuda’s law applies and then this court
determines that Bermuda’s faithless service doctrine did not cover
Kozlowski’s activity, Kozlowski’s counterclaims would still be dismissed
on the alternative theories discussed by the court in its previous opinion:
fraudulent inducement, ERISA forfeiture, and unclean hands.

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As to

Tyco’s remedy, if Bermuda’s faithless service doctrine is held not to
apply, the court would be in the same position of having to inquire into
the extent of damages, only the tool of measurement would be affected by
a reversal.
A reversal would also not affect a large number of cases.
Kozlowski attempts in his description of the court’s opinion--particularly
his claim that court utilized a presumption that criminal jurisdiction
equates to a center of gravity--to give the opinion a broader scope than it
actually has. But Kozlowski’s description of the previous opinion distorts
the court’s reasoning.

The court invoked no presumptions as to the

relationship between criminal jurisdiction and choice of law analysis-nowhere is such a presumption even contemplated.

Rather than

presume anything, the court engaged in a detailed factual analysis and
then compared the interests of New York to the interests of Bermuda
based on that analysis.

The proper framing of the question of law

involving this court’s choice of analysis is whether the conduct of
Kozlowski connected to New York gives New York an interest that
outweighs Bermuda’s interest, which is based on Tyco’s previous
incorporation there, which underlies both Kozlowski’s internal affairs
argument, and his argument that Bermuda is the place of the injury.
This question of law, properly framed, is fact-specific and therefore the
answer to it would in no way affect a large number of cases.

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Substantial Ground for Difference of Opinion
In deciding whether to grant interlocutory appeal, substantial
ground for difference of opinion exists when there is conflicting authority
on the question, or the question is particularly difficult and of first
impression for the circuit. In re Citigroup Pension Plan Erisa Litigation,
No. 05cv5296, slip op., 2007 WL 1074912, at *2 (S.D.N.Y. 2007).
Kozlowski adds to his mischaracterization of this court’s reasoning by
misinterpreting New York’s choice of law rules and thereby fails to
demonstrate that there is any substantial ground for difference of
opinion on the court’s fact-specific finding that New York, rather than
Bermuda, has the greater interest in this case.
Throughout his most recent motion, Kozlowski relies on the “center
of gravity” approach developed in New York in the 1960s as an
alternative to the lex loci approach of the First Restatement. To this end,
Kozlowski cited, as evidence of the controlling law in this case, Babcock
v. Jackson, 12 N.Y.2d 473 (1963). The “center of gravity” approach
developed in Babcock, however, went out of style with respect to torts
almost as soon as it emerged, and was replaced by an interest analysis.
Miller v. Miller, 22 N.Y.2d 12, 15-16 (1968) (“[T]he rule which has evolved
clearly in our most recent decisions is that the law of the jurisdiction
having the greatest interest in the litigation will be applied. . . .”). Later,
in one of the most cited choice of law cases, not just in New York, but in
the country, the New York Court of Appeals does not mention “center of

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gravity” once, and instead focuses its inquiry on the “relative interests” of
the opposing jurisdictions “in having their laws apply.” Schultz v. Boy
Scouts of America, Inc., 65 N.Y.2d 189, 198 (1985). Importantly for this
case, the Court of Appeals goes on to note the importance of a
jurisdiction’s interest in the deterrent effect application of a law will have
on future tort-feasors. Id. at 200. Furthermore, the New York Court of
Appeals has recognized that the locus of an injury causing economic
harm, as is present in the instant case, “is not as readily identifiable as it
is in torts causing physical harm.” Sybron v. Wetzel, 46 N.Y.2d 197, 205
(1978).
Following the parameters set by these cases, the court, in its
previous opinion, analyzed the facts of the case and compared the
interests of New York and Bermuda. While the court found New York’s
interest in maximizing the deterrent effect its laws on those who operate
within its borders to be controlling in this case, reasonable minds could
certainly differ. Instead of playing on the same field, however, Kozlowski
in his motion merely points to Tyco’s incorporation in Bermuda and the
occurrence of board meetings there. Kozlowski makes no argument as
what this means for Bermuda’s interest in this case or how Bermuda’s
interest compares to New York’s, instead Kozlowski merely asserts
Bermuda’s controlling interest as if the just-mentioned facts were
conclusive, which they may have been under a “center of gravity”
approach, but for which they are not in a proper interest analysis.

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Furthermore, a case in this district, cited by the court in its
previous opinion, with similar facts to this case, came to a similar result.
University of Montreal Pension Plan v. Banc of America Securities, LLC,
446 F. Supp. 2d 163 (S.D.N.Y. 2006). In that case the court rejected
application of the laws of the state of incorporation and applied New York
law, when, as here, the state of incorporation had “only limited
connection to the conduct at issue,” id. at 193, and where, as here, the
breach of fiduciary duty related to conduct that occurred in New York.
Id. at 194-95.
Thus Kozlowski has not shown any conflicting authority on the
question he seeks to appeal on or even that this question is a particularly
difficult one to answer.
Materially Advance the Litigation
Immediate

appeal

is

considered

to

“advance

the

ultimate

termination of the litigation,” if that appeal promises to advance the time
for trial or shorten the time required for trial. Consub Delaware LLC v.
Schahin Engenharia Limitada, 476 F. Supp. 2d 305, 310 (S.D.N.Y.
2007).

In addition, the efficiency of both the district court and the

appellate court are to be weighed in determining whether an immediate
appeal warranted, and the benefit to the district court of avoiding
unnecessary trial must be weighed against the inefficiency of having the
Court of Appeals hear multiple appeals of the same case.
Svenska AB v. Harris Corp., 947 F.2d 627, 631 (2d Cir. 1991).

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Harriscom

The previous opinion determined issues of liability that would be
unaffected by a reversal on its choice of law determination.

Thus, as

noted above, any reversal would leave the parties and the court in the
same position it is currently. In addition, based on the previous opinion,
Tyco now seeks summary judgment on damages, which may resolve all
outstanding issues. Thus a case that has been pending for more than 8
years is finally nearing completion. Any interlocutory appeal at this time
would delay, not advance, that completion.
Furthermore, even if the case ultimately goes to trial on damages,
such a trial might raise additional appealable issues. Therefore, it would
be more efficient for this court to proceed to trial and gather all
information as to various damage measurements so that any ultimate
appeal could be finally disposed of by Court of Appeals, whatever choice
of law is approved. See Foster v. Maldonado, 433 F.2d 348, 348-49 (3d
Cir. 1970).
For the reasons stated, Kozlowski’s motion for certification for
interlocutory appeal is denied.
Entry of Final Judgment
The Federal Rules of Civil Procedure give the court discretion to
enter a final judgment as to less than all the claims in an action, if it
decides that the ends of justice so require. Fed. R. Civ. Pro. 54(b). Three
requirements must be met before this discretion may be exercised. First,
multiple claims must be involved. Second, at least one of those claims

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must be finally decided. Third, the court must find that there is no just
reason for delaying an appeal. As described by the Supreme Court, “the
District Court is used as a ‘dispatcher.’ It is permitted to determine, in
the first instance, the appropriate time when each ‘final decision’ upon
‘one or more but less than all’ of the claims in a multiple claims action is
ready for appeal.” Sears, Roebuck & Co. v. Mackey, 351 U.S. 427, 435
(1956).
Although the first two requirements are obviously met in this case-12 of Kozlowski’s 14 counterclaims were dismissed completely--the third
requirement is not met.

As discussed above regarding interlocutory

appeal, any appeal at this time will have the undesirable effect of
delaying the trial of the unadjudicated matters without gaining any
offsetting advantage in terms of the simplification and facilitation of that
trial. See Campbell v. Westmoreland Farm, Inc., 403 F.2d 939, 942 (2d
Cir. 1968). After more than 8 years, we are nearing the end of this case-whether through a trial on damages or further motion practice. At the
end of this upcoming process, there will likely be additional issues on
which Kozlowski, and maybe even Tyco, would like to appeal. Allowing
an appeal of some issues at this point would have the unwelcome result
of producing parallel, piecemeal appeals. This is something that should
be avoided.

Furthermore, Kozlowski can show no serious prejudice--

economic or otherwise--that will caused by delaying his appeal until this

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case is finally decided, hopefully in near the future. See Curtiss-Wright
Corp. v. General Elec. Co., 446 U.S. 1, 11-12 (1980).
For these reasons, Kozlowski’s motion for entry of final judgment is
denied.
CONCLUSION
Kozlowski’s motions for certification for interlocutory appeal and
entry of final judgment are denied.
This disposes of the motion listed as document 82 on this docket.

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SO ORDERED.

Dated: New York, New York
May 24, 2011

Thomas P. Griesa
U.S.D.J.

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