NY Court Rules Against Breach Of Contract Claim

NY Court Rules Against Employee's Breach of Contract Claim

Occasionally employers are faced with situations where they send an offer letter to a prospective employee and, for whatever reason, decide to terminate the offer after the employee has accepted it but before the person starts work.  This may arise when a disqualifying fact, such as ineligibility to work in the United States, or a falsified job application, comes to light after an employer has already made a job offer.  In at-will states like New York and California, absent a contract that says otherwise, employers are free to terminate an at-will employment relationship at any time, without cause or notice (as long as the reason is not an unlawful one).

In Mary Annette Ortegon v. James W. Giddens, Ortegon had received an offer to work for an investment bank, Lehman Brothers, outlining a compensation package that must have seemed like a dream-come-true.  Alas, the day before she was set to start work in January 2007, Lehman Brothers first postponed, and then terminated, Ortegon’s job offer.  The stated reason was that Ortegon had failed to disclose her enrollment in an executive MBA program.  Ortegon suspected that Lehman Brothers had fired her because it learned that she had filed gender discrimination claims against two previous employers.

As fate would have it, Lehman Brothers was at the brink of collapse at the height of the financial crisis.  Lehman Brothers later filed for bankruptcy, the largest in U.S. history.

Ortegon brought a breach of contract claim against Lehman Brothers in the bankruptcy court for an unpaid $350,000 bonus that was in her offer letter.  According to the offer letter, Ortegon would receive the $350,000 for “performance year” 2007, unless Ortegon had been terminated from Lehman Brothers for certain causes or had resigned when the bonus was due to be paid out. The bonus was payable at the time of that year’s annual bonus distribution.  The offer letter included a specific start date.  Other than the for-cause bonus divestiture provision, the contract was for at-will employment.

Ortegon had counter-signed the Lehman Brothers offer letter, which the court agreed, created a binding contract.  However, the day before the specified start date in the offer letter, Ortegon was notified that her start date had been postponed indefinitely.  Two days later, Ortegon received a letter stating that Lehman Brothers had rescinded its job offer.  She never performed any work for Lehman Brothers, but had performed some pre-employment requirements described in the letter.

The liquidation trustee moved for summary judgment in the bankruptcy court on Ortegon’s claim on the grounds that Lehman terminated the contractual relationship with Ortegon before she began any work and before the specified start date given in the offer, and therefore she was not entitled to the bonus.  The bankruptcy trustee denied that allegation that her termination was for an unlawful reason, and argued that the bank had the right to rescind its employment offer at any time and for any reason. Ortegon, however, tried to characterize her $350,000 bonus as a guaranteed signing bonus and claimed that she had become an employee at the moment when she signed the letter.  She also argued that she was “ready and willing” to perform work, and was prevented from doing so by Lehman Brothers.

The Court looked at the offer letter to determine whether, on its face, the contract was ambiguous about payment of the bonus.  It was not, and therefore, extrinsic evidence was not admissible, and the bankruptcy judge granted the trustee’s motion, denying that Ortegon became entitled to the bonus merely by signing the contract.

The Manhattan federal district judge who reviewed the bankruptcy court’s decision last year, affirmed.  The District Court for the Southern District of New York agreed.  In its January 12, 2016 decision, the Second Circuit Court noted that the offer letter was a binding contract, and Ortegon never became an “employee” for purposes of the contract.  Instead, her “employment” was to commence on her start date, which would have been the beginning of her performance of actual work.  The Court was not persuaded by the argument that Ortegon was “ready and willing” to perform but was prevented by Lehman Brothers.

Notably, the Court stated that even if the reason for her termination was unlawful (Ortegon had filed a companion EEOC charge claiming that the reason the job offer was rescinded was that it had learned she had previously accused two former employers of gender discrimination), she had not made such a claim in the bankruptcy court proceedings and therefore, the reason for her termination was immaterial to the Court’s analysis.

The takeaway for employers, regardless of location of the employer is that offer letters form contracts and set the expectations of prospective employees.  Therefore, offer letters – especially with respect to key terms like start dates, compensation, the character of bonuses or other incentives, and how they will be earned should be carefully and clearly worded.
Contributor:  Shauna N. Correia, Of Counsel | Weintraub Tobin