"The Secret Agreement" (July 18, 2011)

"The Secret Agreement"

By Martin J. Greenberg, Managing Member, Law Office of Martin J. Greenberg, LLC, Milwaukee, Wisconsin; Founder, National Sports Law Institute; and Adjunct Professor of Law, Marquette University Law School

& Adam Finkel, Kohn Law Firm, Milwaukee, WI

 

RON PRINCE BACKGROUND

Ron Prince (Prince) began his coaching career as a volunteer assistant coach at Dodge City Community College working with offensive tackles and tight ends.[1]  In 1993, Prince received his first full-time coaching position at Alabama A&M.[2] Following one year at Alabama A&M, Prince made multiple coaching stops at South Carolina State, James Madison, Cornell, and Virginia before getting the coaching break of his career.[3]

In late 2005 Prince was named the head football at Kansas State University (KSU).[4]  Prince inherited a team from the most successful coach in KSU history, Bill Snyder.[5] In 2006 Prince led the Wildcats to a winning record of 7-6 and a bowl game berth, and followed up that season with two successive losing seasons of 5-7, finishing with a final coaching record of 17-20.[6]  Prince was terminated by KSU after the 2008 season (effective Dec. 31, 2008), triggering litigation that would divide the university, its employees, and its supporters.[7]

 

ORIGINAL CONTRACT -- MOU: “SECRET AGREEMENT”

Prince’s original 2005 Employment Agreement made him the lowest paid coach in the Big Twelve Conference.[8]  Before Prince’s final season as KSU head football coach, Prince and KSU agreed to a five-year contract extension (Jan. 1, 2008 to Dec. 31, 2013) that included a $1.2 million buyout provision that became operative if Prince was terminated without cause: 

·The University has the right to terminate Coach’s employment under this Agreement at any time without cause, in which event the University will pay Coach:

·A sum in the gross amount of $1,200,000.00, if termination occurs prior to December 31, 2009; a sum in the gross amount of $900,000.00 if termination occurs prior to December 31, 2010; a sum in the gross amount of $600,000.00 if termination occurs prior to December 31, 2011; or a sum in the gross amount of $300,000.00 if termination occurs prior to December 31, 2012.  The sum due above shall be paid in a lump sum due within thirty (30) days from the date of the termination without cause.[9]

Unlike the 2005 Employment Agreement, however, the 2008 Employment Agreement did not state that acceptance by Prince of the amount as stated in Section 4.01 of the Employment Agreement would constitute full settlement of any claim that he might otherwise assert against the University, or any of its representatives, agents or employees.  The integration clause was also modified from the 2005 Employment Agreement, as the 2008 Employment Agreement omitted the statement that the agreement “constitutes the entire agreement between the parties hereto and may be modified only in a writing signed by the President of the University, the Athletic Director and Coach.” 

That same year, on August 7, 2008, a Memorandum of Understanding (MOU) was signed by Robert Krause (Krause), then KSU Athletic Director, on behalf of the Intercollegiate Athletic Council (IAC), and by Prince, on behalf of In Pursuit of Perfection, LLC (IPP.)[10]  Prince is the owner of IPP.  The MOU provided that, “IPP will receive lump sum distribution(s) from the Reserve (a deferred funding compensation source) if the owner of IPP is terminated by IAC without cause during the life of the owner’s current employment agreement with the IAC effective dates 1/01/08 – 12/31/12 or extensions thereof.”[11]

 

I.          IPP will receive lump sum distribution(s) from the Reserve if the owner of IPP is terminated by IAC without cause during the life of the owner’s current employment agreement with the IAC effective dates 1/01/08 – 12/31/12 or extensions thereof.

II.         The amount and date of the lump sum distributions paid to IPP by IAC from the Reserve will be determined by the date of termination without cause pursuant to section 1 above and according to the following schedule (if the life of the current owner’s contract is extended, the schedule will be adjusted accordingly):

Date of Termination               Amount to be                          Date to be

without cause                         distributed                              distributed

12/31/08                                  $   800,000                              12/31/15

                                                $   800,000                              12/31/16

                                                $1,600,000                              13/31/20

 

12/31/09                                  $   800,000                              12/31/15

                                                $   800,000                              12/31/16

                                                $   800,000                              12/31/20

 

12/31/10                                  $   800,000                              12/31/15

                                                $   800,000                              12/31/16

 

12/31/11                                  $   800,000                              12/31/15

 

On the same date that Krause signed Prince’s 2008 Employment Agreement (August 7, 2008), Krause also signed the MOU.

Prince was notified on November 5, 2008 that his employment as head coach was being terminated.[12]  Based on Prince’s actual date of termination in 2008, the MOU provided for payments of $800,000, $800,000, and $1,600,000, or a total of $3.2 million, to IPP.[13]  Then University President, Jon Wefald, said that he, nor anyone else at the University, knew anything about the MOU between IAC and IPP.[14]

Prince claimed that he was entitled to receive the termination amount in the extended employment contract executed as of January 1, 2008, as well as the amounts as stated in the MOU executed on August 7, 2008.[15]

 

THE LITIGATION

On May 20, 2009, KSU filed a lawsuit against Prince claiming that the MOU should be voided because it was a secret agreement between Krause and Prince and was not negotiated through University lawyers and officials.[16] The suit was filed as a declaratory judgment action in Riley County, Kansas.  The suit included allegations that in previous negotiations between KSU and Prince, Prince’s attorney, Neil Cornrich (Cornrich), was instructed that any negotiations or correspondence must be directed through Jacqueline Butler (Butler), the KSU and IAC attorney.[17]  Further, KSU argued that in later negotiations regarding Prince’s termination agreement, Cornrich engaged in an “undisclosed negotiation with Mr. Krause,” excluding Butler from the discussions.[18]  KSU also claimed that Prince was paid the amount in his employment contract for termination without cause and that the MOU was only discovered by KSU after the fact while searching for completely unrelated documents.[19]

 

KSU further argued that the MOU was void or unenforceable for multiple reasons.  First, KSU argued that the MOU lacks any consideration on behalf of IPP to IAC.[20] Second, the MOU was void or unenforceable because it was negotiated by Cornrich through “improper ex parte communications” with Krause who is not legal counsel for IAC and IAC does have known legal counsel.[21]  Third, Krause’s ability to sign the contract was limited by IAC By-laws and Cornrich knew or should have known these restrictions.[22]  KSU also argued that IPP did not exist at the time the MOU was negotiated and signed, nor did it exist at the time Prince was terminated and therefore any terms relating to the company IPP or the owner of IPP refer to nothing and no one, and that these errors constitute mistakes of fact and a failure of a meeting of the minds.[23] Finally, KSU claimed other insufficiencies in the terms of the MOU and mistakes that render the MOU void or unenforceable.[24] KSU asked the court to declare the MOU void or unenforceable, “or that if the MOU is not void, its payment provision was not triggered and the MOU is therefore of no force or effect following Prince’s termination.”[25]

Prince timely removed the case to federal court on the basis of diversity jurisdiction and then filed solely against IAC.

Prince’s Answer and Counterclaim filed August 10, 2009 denied any form of secret, undisclosed negotiations.  In fact, Prince claimed that Krause provided documentation and proof that he had actual authority as well as apparent authority to enter into the MOU.  The MOU arose as a result of a five-year extension agreement between the University and Prince.  Prince was seeking certain guarantees under and pursuant to the contract extension.  Prince claimed that for purposes of confidentiality the University would only guarantee a portion of the contract.  To maintain the desired confidentiality, Prince claimed that Krause on behalf of IAC suggested that a separate MOU be implemented between the IAC and a limited liability corporation to be formed by Prince to provide the guarantees as requested.

Prince claimed that Krause suggested that the IAC would establish a deferred compensation line item as a reserve and that Prince’s LLC, by virtue of the MOU, would receive distributions from the compensation reserve in the event he was terminated without cause.

Furthermore, Prince claimed that Butler, at Krause’s request, removed portions of the Employment Agreement that referred to it as the ‘entire agreement between the parties” and substituted language as requested by Cornrich to allow for the existence of the MOU and protect against the very types of claims such as those being made by the plaintiffs.

In his counterclaim, Prince sought damages of $3.2 million for anticipatory repudiation of the MOU, as well as damages for fraud in the event that Krause lacked legal authority to bind the IAC.  In addition, Prince sought punitive damages in the amount of $3 million for IAC’s wanton and malicious anticipatory repudiation of the contract. 

On December 8, 2009, US Senior District Judge Sam A. Crow issued a Memorandum and Order in connection with the pending litigation between KSU and Prince.[26]  The Memorandum and Order involved KSU’s objection to removal of the case to federal court and requested of the judge to return the case to the district court of Riley County, Kansas.[27] Judge Crow agreed with KSU, concluding that Prince had improperly removed the case to federal court and that the case must be remanded to the state court in which KSU originally filed the suit against Prince in May 2009.[28]  The court, in a lengthy and well-reasoned decision, did not find diversity jurisdiction and therefore concluded that the court is precluded from obtaining subject matter jurisdiction.[29]

In September 2010 the parties argued a summary judgment motion before Riley County District Court Judge David Stutzman.[30] KSU's argument focused on three major areas:  (1) the absence of former school president Jon Wefald's signature on the MOU, (2) the timing of execution of the regular contract and the MOU, KSU arguing that the regular contact supersedes all previous arrangements, and because the MOU was signed hours before the regular contract, it voids the MOU; and (3) Prince provided no consideration for the MOU.[31]

On the other hand, Prince's lawyers argued that the MOU didn't need Wefald's signature in that it was a contract between Prince, LLC and KSU's Intercollegiate Athletic Corporation, not the university.[32]  Since Krause was president and CEO of the IAC, it did not need the signature of Wefald.[33]  Also, Prince argued that the 2008 contract, unlike the 2005 version, did not include a provision stating that it was the entire agreement.[34]  Prince's lawyer further argued that this was a contract that does not involve the State except to the extent there was a collateral deal.[35]  Prince insisted upon having a fully guaranteed contract.[36]  Prince would have never signed the 2008 contract if not for the added buyout figure included in the MOU, and that signing the MOU was proof of consideration.[37] His attorney also argued that the contract and MOU were signed roughly at the same time and it made no difference which document was signed first.[38]

Riley County District Court Judge David Stutzman ultimately ruled in November 2010 that the matter needed to go to trial and the matter was set to be heard by a jury beginning June 13th in Riley County District Court.[39]

 

THE FALLOUT

Prince was not the only employee of KSU who parted ways with KSU.  Krause became the 14th athletic director at KSU in April of 2008, replacing former Athletic Director Tim Weiser (Weiser).[40]  Prior to serving as Athletic Director, Krause served as the KSU’s Vice President for Institutional Advancement.[41] Krause’s tenure as Athletic Director was brief and controversial – he gave Prince a new 5-year Employment Agreement three months before Prince was fired, a deal that reset Prince’s sliding buyout scale to $1.2 million.[42] The Prince Employment Agreement coupled with a settlement of $2 million to Weiser, who left KSU to become Deputy Commissioner of the Big 12 in February 2008, prompted Wefald to reassign Krause to a position as Director of Development for Kansas State Olathe Innovation Campus.[43]

In May 2009, the one-page MOU signed by Krause and Prince that entitled Prince to an additional $3.2 million in buyout payments was discovered.[44]   Krause resigned from his new reassigned post after a call for resignation by Wefald, on May 20, 2009.[45]

Wefald became President of KSU in July of 1986 and was KSU’s 12th president.  Wefald retired on June 14, 2009 amidst a number of alleged and questionable financial practices   The Kansas State University Board of Regents released on June 19, 2009 the results of an audit which determined that during Wefald’s tenure as president a total of thirteen undocumented payments had been made to former head football coach Bill Snyder, former athletic director Weiser, and Krause.[46]   In combination, these payments totaled $845,000.[47] Additionally, the so-called secret MOU was uncovered during the audit to funnel $3.2 million in buyout payments to Prince.[48]

Finally, employees of the National Institute for Strategic Technology Acquisition and Commercialization, an organization that facilitates the establishment of new commercial businesses based on research performed at the University, were allowed to own shares of the business that the organization spawned, a conflict of interest, and created a policy that required certain investors, including Wefald, to be repaid first if one of the businesses, Nutri Joy, had to be repaid first if Nutri Joy was sold within three years of the stipulation.[49]

 

OUTCOME

In May of 2011, prior to the case going to trial on June 13, 2011, the parties reached a settlement, following the well-traveled path of letting the dirty laundry of college athletics be settled in the backroom rather than the courtroom.[50]  KSU agreed to pay $1.65 million in lump sum to Prince.[51] Cornrich contends that the settlement is a significant financial advantage for Prince compared to the $3.2 million buyout.[52]  Those payment were not scheduled to start for almost five years and would not be fully paid until Dec. 31, 2020.[53]  "Discounted to prevent value, the $1.65 million settlement figure essentially represents an agreement to pay Coach Prince almost the entire $3.2 million termination payment," Cornrich said.[54] "Coach Prince will receive these funds upfront and almost nine years earlier than they were originally due."[55]

Prince did already receive $1.2 million in buyout money from his regular contract with KSU.[56]  KSU's current athletic director, John Currie, said the settlement would be paid from conference and NCAA revenues and that no individual donations or ticket revenue would be used.[57]  The department will specifically earmark K-State's share of the withdrawal fees to be paid by Nebraska and Colorado to the Big 12 Conference toward fulfilling the settlement.[58]

K-State Athletics Department incurred approximately $395,000 in outside legal fees during the lawsuit.[59] Part of the settlement agreement includes a statement by the University that clears Prince from any wrongdoing.[60]  "Neither the University nor K-State Athletics contends or believe that in negotiating his employment agreement or the MOU, Coach Prince engaged in any wrongful or unethical conduct.[61]  Discovery has demonstrated that this situation was not of Coach Prince's making."[62]  Prince now is an assistant offensive line coach for the Indianapolis Colts.[63]

 

LESSONS TO BE LEARNED FROM THE PRINCE CASE

There are lessons to be learned from the KSU - Prince affair:

1. Open Records.  If you are a public institution, all terms of an employment agreement are open to the public.  Any document trying to shield from disclosure to the public will not be upheld and goes against the purpose of open records.

2.  Authority.  Employment Agreements should state who or what officer has authority to amend and/or renegotiate any new or subsidiary agreements and who are the signors on all subsequent agreements.  Employment Agreements need to contain representations and warranties that the party executing the agreement has full authority to do so, the agreement is fully binding, and such authority needs to be documented. 

3. Inner Workings of an Athletic Department.  The KSU - Prince lawsuit matters because the inner workings of an athletic department were being examined in a public forum, the kind of thing that only happens when people are under oath.  College sports are big business, but few of us understand how that business works.  The KSU - Prince lawsuit provides a glimpse.

4.  Inter-relationships between Public Universities and Private Athletic Corporations to Complement University Athletics.  The case looks at relationship between an academic institution (KSU) and its Inter-collegiate Athletic Council, a private corporation, now known as K-State Athletics, Inc.  The judge in the summary judgment hearing asked the obvious question:  Why does the University need its athletic department to function as a separate corporation?  What makes the athletic department different from the history department or any other department on campus?  In many instances the private corporation generates millions of dollars and can be hamstrung by state statutes.  Which contract had priority?  Did the University contract supersede the memorandum, therefore making the memorandum void?  In the 2008 contract there was no provision stating that it was the entire contract, leaving one to wonder if that was done purposely so that the memorandum would not be excluded. 

5.  Reputation.  Reputation is the key to an educational institution as much as its athletic department.  Each move made is done so under a very fine microscope in today's world of college sports.  Controversy can set an athletic program back years, as well as a university as a whole due to the impact these controversies can have on the public and future college students.  This isn't on the level of the death penalty and SMU in the early 1980s, but it certainly will set KSU back in the Big 12 for the foreseeable future.

{© Copyright, July 18, 2011, Martin J. Greenberg, all rights reserved}

 

A special thank-you to Daniel Friedman and Erica Menze, Marquette University Law School students, who were helpful with the research and editing of this article.




[1] Biography, KStateSports.com, available at http://www.kstatesports.com/ViewArticle.dbml?DB_OEM_ID=400&ATCLID=220015 (last visited Sept. 23, 2009).

[2] Id.

[3] Id.

[4] Id.

[5] Snyder Agrees to 5-Year Contract With Kansas State, USAToday.com, Sept. 12, 2009, http://www.usatoday.com/sports/college/football/big12/2009-09-11-bill-snyder-contract_N.htm.

[6] See generally supra note 1; see also Blair Kerkhoff, Former K-State Coach Prince Seeks $3 Million in Punitive Damages, KansasCity.com, Aug. 10, 2009, http://www.kansascity.com/165/story/1374999.html (last visited Sept. 18, 2009).

[7] Kerkhoff, supra note 6.

[8] John Hillman, K-State’s Prince Gains Little Time From Contract Extension, Aug. 11, 2008,http://www.realfootball365.com/articles/kansasstate/12330.

[9] Kansas State University Head Football Coach Employment Agreement, art. IV.

[10] Memorandum Of Understanding signed by Robert Krause, Athletic Dir., Kansas State Univ. and Ron Prince, former head football coach, Kansas State Univ. (Aug. 7, 2008) (on file with author) (hereinafter “MOU”).

[11] Id.

[12] Tim Griffin, KSU Won’t Pay ‘Secret Agreement,’ ESPN.com, May 20, 2009,http://sports.espn.go.com/ncf/news/story?id=4187833.

[13] MOU, supra note 10.

[14] Kerkhoff, supra note 6.

[15] See generally, Defendants’ Answer and Counterclaims, Kansas State Univ. v. Prince, 2009 U.S. LEXIS 81439 (D. Kan. Sept. 8, 2009).

[16] Kerkhoff, supra note 6. 

[17] See generally, Plaintiffs’ Petition, Kansas State Univ., 2009 U.S. LEXIS 81439, 14.

[18] Id. ¶ 17.

[19] Id. ¶ 28, 30.

[20] Id. ¶ 32.

[21] Id. ¶ 33.

[22] Id. ¶ 35.

[23] Id. ¶ 36.

[24] Id. ¶ 37-42.

[25] Id. ¶ 43.

[26] Memorandum and Order, 09-4112-SAC (US Dist. Ct. Kan. 2009).

[27] Id.

[28] Id. at 43.

[29] Id.

[30] Kellis Robinett, K-State notebook: Ron Prince trial date set; Willie Reed headed back to Saint Louis, KANSASCITY.com, January 6, 2011, http://www.kansascity.com/2011/01/05/2564023/k-state-notebook-ron-prince....

[31] Kellis Robinett, Judge makes no decision yet in Kansas State-Ron Prince lawsuit, KANSASCITY.com, January 6, 2011, http://www.kansascity.com/2010/09/10/2214457/judge-makes-no-decision-yet....

[32] Id.

[33] Id.

[34] Id.

[35] Id.

[36] Id.

[37] Id.

[38] Id.

[39] Robinett, supra note30.

[40] News Release, Krause Named KSU Athletic Director, KAKE.com, July 11, 2011, http://www.kake.com/sports/headlines/17298139.html.

[41] Id.

[42] Austin Meek, K-State suing in Krause-Prince secret deal, cjonline.com, July 11, 2011, http://cjonline.com/sports/football/2009-05-20/k_state_suing_in_krause_p....

[43] Id.

[44] Id.

[45] Id.

[46] Associated Press, Snyder Angry over Release of KSU Audit, KAKE.com, July 11, 2011, http://www.kake.com/home/headlines/51996452.html?FORM=ZZNR10.

 

[47] Id.

[48] MOU, supra note 10.

[49] KSU Audit.  Prepared by Grant Thornton LLP, April 27, 2009.

[50] Kellis Robinett, K-State settles with Ron Prince for $1.65 million, KANSASCITY.com, June 2, 2011, http://www.kansascity.com/2011/05/06/2855665/k-state-settles-with-ron-pr....

[51] Id.

[52] Id.

[53] Id.

[54] Id.

[55] Id.

[56] Id.

[57] Id.

[58] Id.

[59] Id.

[60] Id.

[61] Id.

[62] Id.

[63] Id.