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Korvettes Inc. v. Brous

decided: April 1, 1980.



Before Seitz, Chief Judge, and Rosenn and Higginbotham, Circuit Judges.

Author: Per Curiam


This lawsuit involves a contractual dispute between Korvettes, Inc., and its former chief executive officer, David B. Brous. The dispute primarily concerns events surrounding the transfer of 100% of the shares of Korvettes from Arlen Realty and Development Corporation (Arlen) to Galaries Anspach (New York), Inc., (GANY).

Brous became president and chief executive officer of Korvettes in 1972. On September 1, 1975, he signed a contract, the validity of which Korvettes now disputes, setting forth the terms of his employment through February 29, 1980. The contract provided for compensation in two forms: a regular salary at a fixed annual rate and additional compensation to be calculated by applying a formula to Korvettes's net annual earnings. The contract also provided for compensation to be paid in the event of Brous's termination.

On March 13, 1979, during the negotiations between Arlen, the 100% owner of Korvettes, and GANY over the sale of the corporation, Brous and Korvettes executed an amendment to the 1975 contract. This 1979 amendment set the amount of additional compensation that Brous would receive for the year ending February 28, 1979, at $150,000 rather than at the amount that the formula in the 1975 contract would yield. Korvettes also disputes the validity of the amendment.

GANY gained control of Korvettes on April 4, 1979. On April 6, the new board of directors formally discharged Brous from his responsibilities as president and chief executive officer and replaced him with a representative of GANY. The following week, counsel for GANY and Brous began to negotiate the details of the termination of Brous's employment.

During these negotiations, counsel for Brous asserted claims to several items of compensation, including: the $150,000 additional compensation for the year ending February 28, 1979, as provided in the 1979 amendment; salary and additional compensation for the year ending February 29, 1980, as provided in the 1975 contract; and severance pay under the 1975 contract. GANY denied contractual liability for any of these items.

The present suit followed. The plaintiffs, Korvettes and GANY, seek an order declaring that the 1979 amendment and the 1975 contract are void and unenforceable. They assert that Korvettes's representatives in the negotiation of each of the two agreements lacked authority to act on behalf of the corporation. They further assert that the agreements are unenforceable because Brous breached duties owed to Korvettes under the 1975 contract and the common law. Finally, with regard to the 1979 amendment, they claim that the agreement lacked consideration and that it was conditioned upon GANY's approval, which never was received. Jurisdiction in the district court was based upon diversity of citizenship. 28 U.S.C. § 1332 (1976).

Shortly after the filing of the suit, Brous received a letter from Arlen concerning the 1979 amendment. Stating a desire "to avoid a further issue" over the amendment, Arlen promised to pay Brous the difference between the $150,000 promised in the amendment and the amount of additional compensation that Brous would have received under the 1975 contract. Thereupon, Brous withdrew his claim to payment under the 1979 amendment.

Brous moved to dismiss the complaint. The district court granted the motion. It found that the Arlen letter mooted any controversy that might have existed over the 1979 amendment. With regard to the 1975 contract, the court found that "no cause of action exists between the parties." It explained that GANY lacked standing to raise a challenge to the contract because it was not a shareholder of Korvettes at the time of the contract's execution. The court dismissed the complaint "without prejudice." GANY and Korvettes appeal the dismissal. Brous cross-appeals, arguing that the district court should have dismissed the complaint "with prejudice."

The Declaratory Judgments Act sets as a prerequisite to declaratory relief that a "case of actual controversy" exist between the parties. 28 U.S.C. § 2201 (1976). At the initiation of this lawsuit, an actual controversy was present in the plaintiffs' challenge to each of the two agreements. The dispute between the parties was definite and concrete: the parties took directly adverse positions on the validity and enforceability of specific contractual obligations. The dispute was real and ripe for judicial review: the parties were engaged in negotiations over the termination of Brous's employment which could not proceed without resolution of the issues in dispute. See Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240-41, 57 S. Ct. 461, 463-64, 81 L. Ed. 617 (1937); Motor Terminals, Inc. v. National Car Co., 182 F.2d 732 (3d Cir. 1950).

However, litigants will not satisfy the "actual controversy" requirement when their dispute becomes moot prior to judicial resolution. Golden v. Zwickler, 394 U.S. 103, 89 S. Ct. 956, 22 L. Ed. 2d 113 (1969). Because of Arlen's promise to satisfy any additional obligations that the 1979 amendment might have imposed on Korvettes, Brous no longer presses any demands under that agreement. There is no reason to believe that he will renew his demands against Korvettes unless Arlen either refutes its promise or becomes insolvent. Nothing in the record indicates that either contingency is likely. Therefore, the district court correctly ruled that appellants' challenge to the 1979 amendment is moot.

However, Arlen's promise did not extend to obligations imposed by the 1975 contract. Appellants' challenge to that agreement ...

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