WASHINGTON – A federal judge has refused to dismiss breach of contract and breach of fiduciary duties charges by Royal Ahold against James L. Miller, the former head of its U.S. Foodservice subsidiary who resigned after an accounting scandal.
But U.S. District Judge Catherine Blake did dismiss unjust enrichment and corporate waste claims against Miller, who is being countersued in response to his claim that his former employer failed to pay severance benefits he was promised when he stepped down in 2003.
Miller, who was president and CEO of Maryland-based U.S. Foodservice, is seeking at least $10 million in compensatory damages. He was also a member of the executive board at Royal Ahold, the Dutch company that owns U.S. Foodservice.
But in 2003, “accounting irregularities” came to light at U.S. Foodservice, spanning fiscal years 2000, 2001 and 2002. The irregularities involved an overstatement of income from “promotional allowances,” which are payments that a company receives from a vendor to promote that vendor’s goods.
The company overstated nearly $900 million in income and was forced to restate its earnings to the Securities and Exchange Commission.
At the request of Royal Ahold executives, Miller announced in May 2003 that he was stepping down. In exchange for his resignation, which took effect Oct. 1, 2003, Miller said the company promised him a severance payment and full retirement benefits.
But in late 2003 and early 2004, U.S. Foodservice and Royal Ahold told Miller that they would cut or halt his benefits. Miller sued in Baltimore County Circuit Court, but the case has since been moved to federal district court.
Miller claims that had “absolutely no involvement in the purported wrongful conduct,” and that he is being used a scapegoat for the misconduct.
Ahold and U.S. Foodservice responded to his suit by countersuing on a number of claims, including breach of contract, corporate waste and unjust enrichment. The companies sought restitution from Miller for his breach of contract and fiduciary duties of due care, good faith and loyalty.
Miller argued that he was acting in good faith as a director of the company and should be protected under the business judgment rule.
Neither attorneys for Miller nor the companies returned calls seeking comment Thursday on the ruling.
Blake ruled Wednesday that the question of Miller’s good faith or his breach of fiduciary duties should be answered at trial. The breach of contract claims would depend on the disposition of those questions, she said.
But she rejected the companies’ claim that personal expenses Miller charged to U.S. Foodservice were not business-related and constituted corporate waste.
These included $130,000 of expenses not covered in his employment agreement, of which almost $60,000 was submitted and reimbursed without receipts; membership fees and expenses at four country clubs; and $236,000 in benefits that included home improvement and a Mercedes S-Class sedan.
Blake said that since U.S. Foodservice had reviewed and acquiesced the requests, the court had no reason to “evaluate the wisdom of the bargain,” dismissing the corporate waste claim.
U.S. Foodservice is the second-largest food service distribution company in the United States, and Royal Ahold is the world’s largest food distribution company, according to Hoover’s Inc., a business information service.
-30- CNS 03-24-05