Court Opinion

ID: 166809
Source: CourtListenerOpinion
Date Created: 2010-08-14 09:32:43+00
Date Added: 2024-06-11T08:09:37.638853
License: Public Domain

F I L E D
                                                                 United States Court of Appeals
                                                                         Tenth Circuit
                        UNITED STATES COURT OF APPEALS
                                                                      December 19, 2005
                                TENTH CIRCUIT
                                                                        Clerk of Court

 In re: PROFESSIONAL HOME
 HEALTH CARE, INC., a Colorado
 corporation,
                                                       No. 04-1425
           Debtor,                                (D.C. No. 03-AP-2452)
                                                        (D. Colo.)
 -------------------------

 PROFESSIONAL HOME HEALTH
 CARE, INC., a Colorado corporation,

           Appellant,

 vs.

 COMPLETE HOME HEALTH CARE,
 INC.; JUDY RUZICKA; BARBARA
 CICCONE; DIERDRA DAUGHERTY;
 HOLLY DAVIS,

           Appellees.

                             ORDER AND JUDGMENT *

Before TACHA, Chief Judge, ANDERSON, and KELLY, Circuit Judges.

       Plaintiff-Appellant Professional Home Health Care (“PHHC”) appeals from

       *
        This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. This court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
the district court’s order affirming a bankruptcy court’s judgment in an adversary

proceeding. Following a twelve day trial, the bankruptcy court entered judgment

in favor of Defendants-Appellees, Complete Home Health Care (“CHHC”), and

Judith Ruzicka, Barbara Ciccone, Dierdra Daugherty, and Holly Davis

(collectively “individual Defendants”). In its complaint, PHHC claimed that the

individual Defendants (1) breached their duty of loyalty, and (2) violated an

employee Work Agreement when they resigned from PHHC and established a

competing home health care company, Defendant CHHC. After hearing the

evidence, the bankruptcy court rejected PHHC’s claims. On appeal, PHHC argues

that the bankruptcy court erred as a matter of law in rejecting its claims. Our

jurisdiction arises under 28 U.S.C. § 1291, and we affirm.

                                    Background

      PHHC, a home health care provider, operated from six largely autonomous

branch offices throughout Colorado. Aplt. Br. at 8. Individual Defendants

Daugherty, Ciccone, and Ruzicka 1 were managers of distinct branch offices, with

duties including: (1) hiring and firing of personnel, (2) negotiating with vendors,

and (3) developing a network of agencies who referred patients to PHHC. Id. at

8-9. Defendant Davis was in charge of PHHC’s financial operations and

      1
          Defendant Ruzicka was also the Executive Director of PHHC.

                                        -2-
supervised the staff who maintained the books and records of the company. Id. at

9.

      On March 1, 2001, PHHC filed a chapter 11 petition in bankruptcy. On

March 27, 2001, PHHC filed its complaint against the Defendants, instituting this

proceeding in the bankruptcy court. According to PHHC, its longstanding,

profitable, and highly regarded home health care business was destroyed by a

conspiracy among the individual Defendants.

      First, PHHC claims that the individual Defendants violated their duty of

loyalty by resigning en masse and without notice to PHHC. Apparently, the

individual Defendants resigned on the same day and at the same time by faxing

six identical two-sentence letters of resignation. Aplt. Br. at 2. Further, PHHC

explains that this “coordinated abandonment” resulted in the “devastating

financial and administrative consequences one would expect” following the

resignations of PHHC’s branch managers. Id.

      Second, PHHC claims that the individual Defendants breached their Work

Agreements by establishing CHHC, a competing company, within three days of

resignation. PHHC explains that shortly after establishing CHHC, the Defendants

were employing most of PHHC’s former staff and that CHHC was serving

hundreds of PHHC’s former patients. Aplt. Br. at 3-4. Particularly, PHHC claims

that the Defendants violated their employment contracts by soliciting each other

                                        -3-
as co-workers and by “recruiting” PHHC’s patients. Id.

                                     Discussion

      When a federal court sits in diversity, it is required to apply the most recent

applicable substantive state law where pronounced by the state’s highest court.

Mincin v. Vail Holdings, Inc., 308 F.3d 1105, 1108 (10th Cir. 2002). In this case

we are required to apply Colorado law. When reviewing challenges to bankruptcy

court decisions, we utilize the same standard of review as the district court. In re

Hodes, 402 F.3d 1005, 1008 (10th Cir. 2005). We evaluate issues of state law de

novo, without deference. Salve Regina College v. Russell, 499 U.S. 225, 238-39

(1991); Roberts v. Printup, 422 F.3d 1211, 1215 (10th Cir. 2005). Therefore, we

review a bankruptcy court’s conclusions of law de novo, and that court’s findings

of fact are subject to a clearly erroneous standard. In re Hodes, 402 F.3d at 1008.

A.    Breach of Loyalty

      PHHC first claims that the individual Defendants breached their duty of

loyalty by “recruiting” each other to leave the company and thereafter forming

Defendant CHHC as a direct competitor. The individual Defendants, on the other

hand, argue that they were protected by a legal privilege to prepare and make

arrangements to depart while still employed by PHHC.

      Under Colorado law, an employee breaches her duty of loyalty if she

                                         -4-
solicits other employees to terminate their employment. Jet Courier Service, Inc.

v. Mulei, 771 P.2d 486, 497 (Colo. 1989). In Jet Courier, the Colorado Supreme

Court adopted the Restatement (Second) of Agency’s test for determining when a

breach of loyalty arises. See id.; see also Restatement (Second) Agency § 393.

As such, courts should focus on the following factors in determining whether an

employee’s actions rise to the level of a breach of loyalty: (1) the nature of the

employment relationship; (2) the impact or potential impact of the employee’s

actions on the employer’s operations; and (3) the extent of any benefits promised

or inducements made to co-workers to obtain their services in the competing

business. Jet Courier, 771 P.2d at 497. No single factor is outcome

determinative. Id. In applying the test, courts must analyze the “nature of an

employee’s preparations to compete to determine if they amount to impermissible

solicitation.” Id. The solicitation’s effectiveness is irrelevant. Id.

      Employees do enjoy a privilege which enables them to prepare or make

arrangements to compete prior to leaving the employ of their future competitors.

See id. at 493, 497 n.13 (quoting Restatement (Second) Agency § 393, cmt. e).

The nature of such preparations is crucial in determining whether a breach of

loyalty has occurred. Id. at 497; see also Koontz v. Rosener, 787 P.2d 192, 195-

96 (Colo. Ct. App. 1989). In fact, the Colorado Supreme Court has held that this

approach should be applied flexibly, because certain traditional actions taken by

                                         -5-
departing employees (e.g., an executive leaving with a secretary, a mechanic

leaving with an apprentice, a firm partner leaving with associates) are not

considered sufficient to constitute a breach of the duty of loyalty, absent an intent

to injure the employer. Jet Courier, 771 P.2d at 497 n.13. A breach of the duty of

loyalty requires more – and would only occur where the nature and extent of any

solicitations compel such a conclusion. Id.

      The Restatement provides that “a court may find that it is a breach of duty

for a number of the key officers or employees to agree to leave their employment

simultaneously and without giving the employer an opportunity to hire and train

replacements.” Restatement (Second) Agency § 393, cmt. e. A court must

balance these factors, and the two competing public policies undergirding them, 2

in order to determine whether a breach of loyalty lies against the former

employee.

      According to PHHC, the bankruptcy court erred in finding that the

individual Defendants breached their duties of loyalty in three ways: (1) the

bankruptcy court did not understand that PHHC was claiming that individual

Defendants solicited each other improperly; (2) the bankruptcy court did not

understand that the effect of the en masse resignation severely damaged its

      2
       The Jet Courier court noted the conflicting policies of requiring honesty
and fair dealing between employee and employer, as well as that of promoting
free and vigorous competition. Jet Courier, 771 P.2d at 493.

                                         -6-
economic viability, and therefore, constituted a paradigmatic instance of breach of

loyalty; and (3) the bankruptcy court took into account irrelevant facts in arriving

at its decision. Aplt. Br. at 16-27. We address each argument in turn.

      With regard to the first argument, PHHC is simply wrong that the

bankruptcy court erred by failing to take into account its claim that the individual

Defendants breached their duties of loyalty by soliciting each other. In reality,

after considering the evidence, the court found that the individual Defendants did

not improperly solicit each other because they were protected by the legal

privilege entitling them to make career preparations after departure from PHHC.

Further, the bankruptcy court found no evidence whatsoever that any other PHHC

employees were offered anything by the Defendants as an inducement.

      With regard to the second argument, the bankruptcy court directly

addressed the en masse nature of this resignation, and found that the individual

Defendants were at-will employees, who were not motivated by any ill-will

towards PHHC, and who believed that their “tasks could be assumed by

subordinates who were positioned to take over.” Aplt. App. at 69.

      This finding is amply supported by the record. In an official written

response to a governmental agency’s set of sanctions, Ms. Bellinger (PHHC’s

principal) stated that, except for two employees, “all of the staff who resigned . . .

were replaced within two or three weeks.” See Aplt. Supp. App. at 1591.

                                         -7-
PHHC’s internal documents suggested that those directly below the departed

managers assumed their responsibilities and performed excellently. Id. at 1590-

91. Lastly, according to a former PHHC employee who testified at trial, Ms.

Bellinger herself called the individual Defendants’ resignations a “gift” to PHHC

– as the corporation had been contemplating discharging some employees for

financial reasons. Aplt. Supp. App. at 3683. The bankruptcy court was not

required to adopt PHHC’s contrary view of the facts.

      Third, PHHC argues that the bankruptcy court took into account “irrelevant

facts” in arriving at its conclusion that the duty of loyalty had not been breached.

For example, PHHC faults the bankruptcy court for considering the reasons

advanced by the individual Defendants for resigning including PHHC’s financial

condition and regulatory problems. In this same vein, PHHC also argues that (1)

the motives of the Defendants were irrelevant, (2) the Defendants’ beliefs that

other PHHC employees would take over their resigned duties were irrelevant, and

(3) the en masse nature of the resignation was not justified based on the fact that

the Defendants were at-will employees.

      We think that the bankruptcy court could consider these matters under Jet

Courier’s flexible approach, and we do not read the bankruptcy court’s decision

as holding that a breach of the duty of loyalty requires a finding that the departing

employees acted with a bad motive. Rather, the bankruptcy court heard the

                                         -8-
evidence and obviously credited the individual Defendants’ view of the situation.

The bankruptcy court recognized that PHHC had a strong case before its

principal, Ms. Bellinger, was cross-examined and the individual Defendants

explained their actions and PHHC’s operations. After that, however, the

bankruptcy court chose to believe the explanation advanced by the individual

Defendants and apply the Jet Courier factors. This is a perfectly permissible

exercise of the fact-finding function. The district court’s legal conclusions flow

from its factual findings.

B.    Violation of Work Agreement

      PHHC argues that the individual Defendants breached their Work

Agreements by recruiting patients to the new company, CHHC. In addition,

PHHC disputes the bankruptcy court’s conclusion that the provision of the Work

Agreement allegedly breached by the individual Defendants was ambiguous.

Aplt. Br. at 27-32. According to PHHC, the bankruptcy court incorrectly

accepted parol evidence to aid in the determination of the contractual provision’s

meaning. Id. The individual Defendants, on the other hand, argue that the

contractual language restricts employees during employment and for 180 days

thereafter from only a single pattern of conduct – soliciting a PHHC client into

leaving PHHC and then going to work privately for the client.

      The interpretation of a contract under Colorado law is a legal question.

                                        -9-
Grant v. Pharmacia & Upjohn Co., 314 F.3d 488, 491 (10th Cir. 2002); Fibreglas

Fabricators, Inc. v. Kylberg, 799 P.2d 371, 374 (Colo. 1990). Whether a

contractual term is ambiguous is also a question of law. Grant, 314 F.3d at 491;

Pepcol Mfg. Co. v. Denver Union Corp., 687 P.2d 1310, 1314 (Colo. 1984). If a

contract is ambiguous, thus allowing the introduction of external evidence to

determine the contract’s meaning, “then interpretation of the contract becomes a

question of fact.” Stegall v. Little Johnson Assocs., Ltd., 996 F.2d 1043, 1048

(10th Cir. 1993).

      The individual Defendants signed an employment agreement while working

for PHHC. This agreement contained a limitation on the scope of work they

could undertake both while employed and for 180 days following separation from

PHHC. The Work Agreement provides, in pertinent part:

      In consideration for [PHHC’s investment in me as an employee] I agree
      during my employment, and during the 180-day period of time after my
      employment ends with [PHHC]
            •      to not recruit clients to leave this agency, and
            •      to not work privately for the agency’s clients.

      Aplt. App. at 254.

      According to the bankruptcy court, regardless of whether the meaning of

the provision was interpreted according to PHHC’s view (i.e., that any solicitation

of PHHC clients was restricted for 180 days after termination of employment), or

according to the individual Defendants’ view (i.e., that it restricted client

                                         - 10 -
solicitation only in connection with private pay work while still employed by

PHHC), PHHC failed to provide direct evidence of a breach of the contract by the

Defendants. Aplt. App. at 71-72. We agree.

      PHHC argues that the bankruptcy and district courts adopted a meaning of

“recruit” that was overly narrow. Aplt. Br. at 32-36. According to PHHC,

recruitment can be either direct or indirect. PHHC cites numerous cases for this

proposition, although rather peculiarly, none apply Colorado law. Aplt. Br. at 34

n.12. The individual Defendants, meanwhile, argue that under Colorado law,

recruit implies “actively initiated contact.” Atmel Corp. v. Vitesse

Semiconductor Corp., 30 P.3d 789, 793 (Colo. App. 2001). The dictionary

definition of “recruit” means “to secure the services of . . . [or to] enlist new

members.” Webster’s Collegiate Dictionary 985 (9th ed. 1991). As such, the

construction of “recruit” most likely correct under Colorado law requires a direct

request or plea. Atmel, 30 P.3d at 793.

      Regardless of whether “recruiting” can be indirect as well as direct, though,

PHHC simply did not provide evidence that the individual Defendants violated

the Work Agreement by recruiting PHHC’s patients to CHHC. PHHC argues that

it presented “direct evidence that defendants had recruited at least 47 specifically-

identified patients among the hundreds of PHHC patients who transferred their

                                          - 11 -
care to CHHC.” 3 Aplt Br. at 33. PHHC argues that due to the nature of the

relationship between the individual care provider and the patient, the recruitment

of PHHC individual health providers resulted in the indirect recruitment of

PHHC’s patients, because if the provider left PHHC to go to CHHC, so would the

patient. Aplt. Br. at 35. In essence, PHHC argues that it defies logic to claim

that the spontaneous migration of so many PHHC clients to CHHC could occur

absent recruitment. Unfortunately for PHHC, this logic cuts both ways.

      First, PHHC had serious financial and regulatory difficulties, some of

which precipitated the individual Defendants’ very departure. Second, in the time

following the individual Defendants’ resignations, PHHC was struggling to retain

patients and employees. As PHHC has argued, the relationship between the

individual care provider and the patient is much stronger than that between the

      3
        While PHHC contends the bankruptcy court ignored this “evidence,” our
independent review of those citations identified by PHHC as providing “direct
evidence” of CHHC’s recruitment of PHHC patients has not revealed anything
more than the names of patients who transferred from PHHC to CHHC and the
fact that those patients had nurses at PHHC who transferred to CHHC. See Aplt.
App. 797-865. PHHC does not point to testimony indicating that former PHHC
employees recruited those patients to come to CHHC. Indeed, all three of the
former employees – two nurses and one personal care coordinator – that PHHC
relies upon to support its theory actually testified to the contrary. Aplt. Supp.
App. at 3693, 4301, 4360-61. Further, PHHC’s characterization of this situation,
viz., that these nurses worked only for PHHC and then began working solely for
CHHC, completely misstates the record. Both nurses explicitly testified that they
were working for multiple agencies the entire time, which makes sense when we
realize that they were temporary employees. Aplt. Supp. App. at 4295, 4355-56.

                                       - 12 -
home health care provider and the patient. As such, it makes perfect sense why

the patients departed with their individual care providers, some to CHHC and

some elsewhere. Indeed, as the bankruptcy court noted, the fact that PHHC is

unable to come forward with any direct evidence contradicting the individual

Defendants’ testimony that they did not solicit PHHC’s patients fully supports its

finding that PHHC failed to prove any recruitment – direct or indirect. As such,

PHHC’s argument to the contrary is without merit. 4

      AFFIRMED.

                                      Entered for the Court

                                      Paul J. Kelly, Jr.
                                      Circuit Judge

      4
       Therefore, the questions of (1) whether the contractual provision is
ambiguous or not, (2) whether the contractual provision proscribes direct and/or
indirect recruitment, or (3) how, absent recruitment, so many former PHHC
patients ended up at CHHC, need not be addressed because the lack of any
evidence that the individual Defendants recruited any of PHHC’s employees or
patients leads to the conclusion that there was no breach of the Work Agreement.

                                       - 13 -