In 2005, Stuart and Phyllis Rauch purchased a nursing home facility through an LLC they formed. Their son Eric convinced them to hire his wife, Shan Chin, as a bookkeeper. The business suffered financial losses; by 2008, its net losses exceeded $585,000.
In 2009, after losing his job at a law firm, Eric approached his father about working for his parents’ company. He began working at there in 2009, without a salary. While Eric worked at the nursing facility in 2009 and 2010, its financial condition improved dramatically.
In August 2009, Eric told his father that he and Shan wanted a 50% equity interest in the business, and threatened that he and Shan would quit if Stuart did not agree to the equity transfer within a week. Stuart agreed, and the father and son shook hands. The father and son did not discuss other employment conditions, or the length of time that Eric and Shan would stay. There was no written agreement.
In January 2010, Stuart and Phyllis told Eric that they wanted their other son to have a 25% interest in the business. Eric objected. In June 2010, Eric presented a “Director Agreement” to his parents. The Agreement identified Stuart and Phyllis as owners of the business and Eric as the director. It provided that Eric would make major business decisions, including issues of transfer of ownership, and that Eric would be compensated for his previously rendered services. The Agreement was not signed and, according to Eric, he and Shan were fired shortly thereafter.
On July 9, 2010, Stuart met with Eric and Shan. Eric secretly recorded the conversation. During the meeting, Stuart told Eric that their agreement had been “a gentleman’s agreement in principle,” and that 50% of the business would be Eric’s if he waited until Stuart executed a Last Will and Testament. Stuart told his son, “I would not have given you an agreement to give you 50% if you hadn’t coerced me that day. The entire structure was predicated on a coercion.” He continued that he did not feel he was “breaking an agreement that was a fair agreement or mutually agreed upon.”
In August 2010, Eric and Shan sued Eric’s parents and the business. They claimed: breach of contract; declaratory judgment to transfer ownership; oppression; promissory estoppel; unjust enrichment; breach of fiduciary duty; constructive trust; wrongful termination; breach of covenant of good faith and fair dealing; and fraud and conversion.
Eventually, the trial court granted, in part, the defendants’ summary judgment motion, thereby dismissing all claims except the promissory estoppel and unjust enrichment counts. Before trial on those counts, the trial court limited the testimony and evidence to that related to the reasonable value of Eric and Shan’s services for the 10-month period they worked at the facility following the alleged agreement. It then excluded plaintiffs’ expert’s testimony, rejected plaintiffs’ request to introduce Department of Labor employment statistics as evidence of the value of their services, and granted the defendants’ motion for a directed verdict, thereby dismissing the two remaining counts.
Eric and Shan appealed. They argued that the trial court had erred in dismissing the complaint because Eric and his father had intended to be bound by the agreement, and it was enforceable. The Appellate Division disagreed, and affirmed the trial court.
The Appellate Division found that the agreement was unenforceable because it lacked essential terms. The appeals court noted that a contract must be “sufficiently definite that the performance to be rendered by each party can be ascertained with reasonable certainty.” Where the parties do not agree on one or more essential terms, the agreement is unenforceable. When, as here, a plaintiff seeks equitable remedies, greater specificity of terms is required: “precise understanding of all the terms is required before performance can be enforced.” Although the promise to transfer half the equity in the company was based on Eric and his wife continuing to work at the facility, there was no firm commitment by Eric and his wife as to how long they would stay in exchange for the 50% share of the company. The Appellate Division “agree[d] with Judge Lacoste that this term was essential and its omission made sufficiently indefinite the obligation undertaken by Eric and Shan that the promise by Stuart should not be enforced as a contract.” The Appellate Division also noted that the parties had not discussed treatment of the business’s debts or liabilities, and without a discussion of assets and liabilities, “the agreement lacked terms normal to an obligation of this magnitude.”
Once the contract was deemed unenforceable, the only surviving claims were for promissory estoppel and unjust enrichment.
The appeals court focused its analysis of these claims by explaining that promissory estoppel arises “where the reliance is on a promise, and not on a misstatement of fact, so the estoppel is termed ‘promissory’ to mark the distinction.” The four elements of a promissory estoppel claim are:
(1) a clear and definite promise by the promisor; (2) the promise must be made with the expectation that the promisee will rely thereon; (3) the promisee must in fact reasonably rely on the promise, and (4) detriment of a definite and substantial nature must be incurred in reliance on the promise.
The appeals court affirmed the trial court’s ruling that, as to the fourth element, the proper measure of damages was not the expected 50% of the business (as Eric and Shan contended), but was limited to the reasonable value of Eric and Shan’s services for the ten months they worked following the alleged agreement. Because Eric and Shan’s expert had acknowledged that he could not address that issue, there was no credible proof of damages, and a directed verdict in favor of Stuart and Phyllis was appropriate.
A copy of Rauch v. Rauch can be found here – Rauch v Rauch