Court Holds Defendants Jointly and Severally Liable After Non-Jury Trial For Nearly $1.3 Million

On December 29, 2023, Justice Joel M. Cohen found in favor of Plaintiff Brad Kruchten against Defendants Eastman Kodak Company Computershare, Inc., and Computershare Trust Company, N.A. in the amount of $1,293,916.88 on claims for damages Kruchten incurred when he was unable to exercise his Kodak stock options due to corporate errors. In its Decision after Non-Jury Trial, in Kruchten v. Eastman Kodak Co. et al., Index No. 656302/2020, the Court explained:

Mr. Kruchten sought to capitalize on a significant - though as it turned out fleeting- uptick in Kodak's stock price in July 2020 to exercise stock options that had long been under water (i.e., the option exercise price had been higher than Kodak's stock price). He contacted Kodak's agent Defendant Computershare, Inc., to whom he had specifically been directed by Kodak, to exercise all of his available options. During the course of a lengthy telephone call, Mr. Kruchten was repeatedly told by Computershare (and by extension Kodak) that he had 21,978 options available for exercise and that all of his other options had been terminated or had expired. Although Mr. Kruchten politely pushed back that the number of options appeared to be low (given his seniority at the company), the Computershare representative held firm that the corporate records were clear on the point. Ultimately, he accepted Computershare's representation and exercised the 21,978 options.

Unfortunately, the representations made by Computershare (and by extension Kodak) during that call were inaccurate. In fact, because of a mistake made by Kodak and Computershare employees shortly after Mr. Kruchten retired in 2018, Computershare (and Kodak) had it exactly backwards. As it turned out, the 21,978 options he was told he could exercise in 2020 were unvested and should have been cancelled upon retirement, while the lion's share of his options (exercisable for 125,695 shares) became fully vested upon retirement and should have been available for exercise in 2020. If he had been provided accurate information, Mr. Kruchten would have been entitled to a pre-tax payment of over $1.6 million for exercising the 125,695 options, rather than the pre-tax amount of about $386,000 he in fact was credited for exercising the 21,978 options. By the time these facts came to light, however, and as Kodak began unraveling a large number of other mistakes in connection with its options program, Kodak's stock price had dropped below the option exercise price and Mr. Kruchten' s vested options were, again, under water and without value.

. . .

In essence, Defendants' own actions and policies rendered Plaintiff's ability to comply with their reading of Section 6.4 of the Omnibus Plan impossible. As a result, when Plaintiff directed the Computershare' s representative to exercise his options and sell "all of it," Plaintiff gave notice of his intent to exercise his NSQOs in accordance with the Award Agreement and Omnibus Plan (DX A at 25:7-9). Despite Plaintiff's lack of knowledge as to exactly how many vested options he held (see Tr. 186:21-187:3), Defendants' improper accounting and resultant inability to execute the cashless exercise for the 125,695 vested options actually owed to Plaintiff resulted in a breach of those agreements (see Mathias v Jacobs, 167 F Supp2d 606 [SDNY 2001].

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While "[g]enerally, a nonparty cannot impose tort liability upon a party to a contract for breach thereof' (Aiello v Burns Intl. Sec. Servs. Corp., 110 AD3d 234,246 [1st Dept 2013]), the Court of Appeals has permitted actions sounding in negligence "despite the absence of a contract between the parties, [where] the plaintiff's intended reliance, on the information directly transmitted by [the other party], created a bond so closely approaching privity that it was, in practical effect, virtually indistinguishable therefrom" (Credit Alliance Corp. v Arthur Andersen & Co., 65 NY2d 536, 645-46 [1985] [citing Glanzer v Shepard, 233 NY 236 [1922]). Accordingly, Plaintiff's claim that Computershare owed a duty to use reasonable care to ensure that Plaintiff's options were accurately recorded under the Agency Services Agreement, and failed to do so can stand where, as here, "[Plaintiff's] use of [the information provided by Computershare] was not an indirect or collateral consequence of [Computershare' s actions]" but rather "was a consequence which to [Computershare's] knowledge, was the end and aim of the [Agency Services Agreement]" (Glanzer, 233 NY at 238-239 [1922]).

. . .

The evidence adduced at trial establishes that Computershare negligently failed to accurately record and account for Plaintiff's NSQOs and that Plaintiff detrimentally relied on the "information directly transmitted by [Computershare]" (Credit Alliance Corp., 65 NY 2d at 545) when Plaintiff exercised his options on the July 30, 2020 phone call. Accordingly, Computershare breached its duty of care owed to Plaintiff that his options were accurately recorded, and Plaintiff was injured as a result.

Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning breach of contract or negligence.