Opinion
127903/02.
Decided November 17, 2005.
Bressler, Amery Ross, P.C., New York, New York, Att: Kenneth M. Moltner, Esq. Attorneys for Plaintiffs.
Menaker Herrmann LLP New York, New York, By: Richard G. Menaker, Esq. Attorneys for Defendants.
This is an action to enforce an oral agreement to invest and participate in a venture utilizing assets purchased from the bankruptcy estate of two oil and gas companies. Defendants Francesco Galesi ("Francesco") and Elysium Energy LLC ("Elysium") move for summary judgment dismissing the complaint in its entirety on the grounds that the contract is too indefinite to be enforced, and is barred by the doctrines of judicial estoppel and illegality.
The following facts are taken from the parties' statements pursuant Rule 19-a of the Rules of the Justices of the Commercial Division and the affidavits and documentary evidence submitted with the motion papers, and are undisputed except as otherwise indicated. Alma Energy Corp. ("Alma") was a holding company for oil and gas properties. Equinox Energy Company, Inc. ("Equinox") managed the properties held by Alma. Plaintiff Michael Galesi ("Michael") was the founder and chairman of both companies. He was also president and 85% shareholder of Alma, and one of two 50% shareholders of Equinox. Plaintiff Anni Berit Galesi ("Anni") is Michael's wife. Anni never had any role in the operation or management of either company.
Francesco, Michael's older brother, is an investor based in New York. During the relevant period, Elysium (previously known as East River Energy LLC) was jointly owned by Francesco, defendant Rotterdam Ventures, Inc. ("Rotterdam") (wholly owned by Francesco) and defendant Patina Oil Gas Corp. ("Patina").
In 1998, Alma and Equinox began experiencing serious financial difficulties resulting in cash flow problems. In November 1998, Michael provided the bank creditors of those companies with a $90 million personal guarantee. Thereafter, he approached other potential investors, including Francesco and Patina, to help improve his companies' finances.
However, on May 21, 1999, a group of unsecured creditors filed a petition to place Equinox in an involuntary Chapter 11 bankruptcy in Louisiana. Alma shortly thereafter filed its own petition for voluntary bankruptcy. On June 14, 1999 the bankruptcies of both entities became jointly administered.
Michael encouraged Francesco to bid for the debtor companies' assets. During the proceedings various creditors raised concerns regarding Francesco's participation, particularly the prospect that his brother Michael, an insider, might indirectly retain an equity interest in the debtor's assets to the detriment of senior creditors. In January 2000, Michael testified in a deposition taken by counsel for the unsecured creditors' committee (the "Committee") that Francesco had made no promises to him and there was no "understanding with [his] brother as to [his] future involvement with the Alma properties if a plan of reorganization [was] consummated." He testified that the same was true with respect to his wife Anni.
In February and March 2000, the debtor companies filed disclosure statements with the bankruptcy court in support of their joint plan of reorganization. Each statement set forth the following representation:
East River [later Elysium], a New Jersey corporation, has been set up as the acquirer of the Debtors' assets. The stock of East River will be held directly or indirectly by Mr. Francesco Galesi or his designees; however, there is no current agreement or understanding that any of the Old Equity Holders will be a designee. Mr. Francesco Galesi is the older brother of M.M. Michael Galesi, one of the Old Equity Holders.
The final disclosure statement, filed in July 2000, reiterated that Michael would not be a designee. On August 14, 2000, the bankruptcy court confirmed the plan reorganization, which, inter alia, authorized Francesco's company to purchase the assets out of bankruptcy and granted Michael a release of his $90 million guaranty of the debtor companies' obligations. Elysium thereby acquired substantially all of the assets for approximately $102 million, with the unsecured creditors and three banks receiving less than 100% of their respective claims. The closing of the asset purchase occurred on November 28, 2000.
Between the time of the bankruptcy court's confirmation order and the closing, Michael attempted to engage in discussions with Francesco regarding their future roles in the oil and gas business. In a letter dated November 8, 2000, Michael complained of Francesco's "aversion to discussing and finalizing our business relationship at this critical point." In a November 13, 2000 letter, he stated that "[y]ou agreed to be the front company sponsored person, provided that you would not be financially exposed and so long as you would be well compensated for your cooperation and efforts on my behalf . . . [i]t was agreed and I assured you that I would make it worth your while and said I would have to trust you by having the company pass into your ownership." A third letter, dated November 14, 2000 but apparently not sent, purported to describe "the essence of our transaction" and concluded "[t]he question is, to what should you be entitled for your role acting as the front person in this deal . . . [i]t seems that you do not grasp the essence of our business transaction, and for this reason, are not able to see what is fair between us."
Michael also sent Francesco two proposed contracts. The first, dated as of September 7, 2000, proposed that Francesco sell Anni a 50% "membership interest" in Elysium for a price equal to one-half the capital that he contributed to that company under the agreement to purchase the assets of Alma and Equinox, payable by way of a three year promissory note at 7% interest secured by a pledge of Anni's interest in Elysium. The second draft shortened the term of the note to six months. Although Anni signed each of the proposed agreements, she did not participate in drafting them or engage in any discussions with Francesco about the transaction. Francesco did not execute either version.
In late October or early November of 2000, Michael participated in a telephone conversation with Francesco and Steven Porter ("Porter"), Francesco's counsel. In the course of the discussion, Michael stated that "I want to know [what] we're going to be doing after this thing settles, that this is not just Francesco's deal . . . [t]his has got to be worked through." In response, Porter stated that "[t]here has always been an understanding that some portion of it will be made available to you . . . [t]he issue we're talking about his how much, and under what terms."
In 2002, plaintiffs commenced the instant action for breach of contract and various torts. In it, they allege that:
Michael Galesi, Anni Berit Galesi and Francesco Galesi entered into an agreement in or about April 2000, pursuant to which Francesco Galesi would acquire the material assets of Alma/Eqinox; Anni Berit Galesi would serve as an investor and shareholder in the new venture on a pari passu basis, and Michael Galesi would provide assistance in the form of advice and consulting services, with a possible opportunity to invest new value under appropriate circumstances.
In opposing summary judgment, Michael describes the agreement as follows:
During our discussions, in or about May 2000, Francesco and I agreed that my wife, plaintiff Anni Berit Galesi, would purchase one-half of the companies' assets in whatever form that they were purchased by Francesco at one-half the price paid by Francesco.
The complaint asserts four causes of action against the Galesi defendants. The second cause of action seeks monetary damages for breach of contract, and the sixth cause of action seeks specific performance. The third cause of action alleges a conspiracy to breach a contract and deprive plaintiffs of benefits related to the agreement. The fourth cause of action alleges interference with confidentiality and non-circumvention agreement entered into with Patina by Alma and Equinox prior to the bankruptcy proceedings.
The motion to dismiss is granted. "Before a court will impose a contractual obligation based on an oral contract, the proponent must establish that a contract was made and that its terms are definite" ( Muhlstock v. Cole, 245 AD2d 55, 58 [1st Dept 1997]). Furthermore, "mutual assent with respect to a general principle is unenforceable, as a matter of contract law, on the ground of indefiniteness, as it amounts to no more than an agreement to agree" ( Charles Hyman, Inc. v. Olsen Indus., Inc., 227 AD2d 270, 276 [1st Dept 1996]; see Martin Delicatessen v. Schumacher, 52 NY2d 105). Summary judgment is appropriate where the defendant establishes the deficiency of an oral contract's terms and the plaintiff fails to raise a triable issue of fact rebutting that showing ( Ruppert v. Long Is. R.R., 281 AD2d 466 [2nd Dept 2001]; Marraccini v. Bertelsmann Music Group Inc., 221 AD2d 95 [3rd Dept 1996]), particularly where the contract is of the magnitude that "the courts would ordinarily expect the parties to embody in a formal writing" ( Allied Sheet Metal Works v. Kerby Saunders, 206 AD2d 166 [1st Dept 1994]).
The record demonstrates conclusively that the parties never reached a meeting of minds over the alleged agreement or completed the negotiation of its terms. At most, there was some general understanding that either Michael and/or Anni might participate in a new oil and gas venture. Plaintiffs have failed to rebut defendants showing of indefiniteness. To the contrary, plaintiffs have proffered several materially different versions of the contract without committing to the terms of any one of them. The first, oral agreement in April (or May) 2000 includes both Michael and Anni as parties, without specifying the method or time for payment for Anni's shares, the amount of Michael's compensation, or his duties as an advisor. The two unexecuted contracts from September 2000 (which allegedly confirm the oral agreement) omit Michael as a party altogether, refer to purchase of a "membership interest" rather than shares, and differ from one another as to the period of repayment under the promissory note. The version Michael recounts in his opposing affidavit on this motion dispenses with the requirement of a promissory note, fails to specify whether ownership would be by way of shares or a "membership interest," and again omits Michael as a party. Furthermore, that alleged agreement is ambiguous as to whether the purchase price is one-half the total price of the assets or one-half the price paid by Francesco.
Although Michael relies on his November 2000 conversation with Porter as evidence of an "understanding," that discussion only confirms that no contract had been reached. Porter expressly noted that the amount of Michael's "portion," and the terms of the transaction, had yet to be determined. Furthermore, as noted, none of the conflicting versions that Michael proffers provide him with any "portion" of the new venture. Rather, only Anni is identified as a shareholder or member, with Michael assigned an advisory role in one version and omitted entirely from the rest. The letters sent by Michael also reflect the fact that no agreement had been finalized and that the brothers' respective roles in the venture were yet to be negotiated.
Plaintiffs' contract claims are also barred under the doctrine of judicial estoppel. "[T]he doctrine of judicial estoppel is intended to prevent abuses of the judicial system by which a party obtains relief by maintaining one position, and later, in a different action, maintains a contrary position" ( D L Holdings, LLC v. RCG Goldman Co., LLC, 287 AD2d 65, 71 [1st Dept 2001]). After testifying in the bankruptcy proceeding that he had no intention to be involved in Francesco's business after the plan was confirmed, Michael authorized representations, in several disclosure statements filed with the court, that he had entered into no agreements to acquire an interest in the new entities. Michael never expressed a contrary intention to the court, and at least one of the disclosure statements was filed in July 2000, several months after he alleges the oral agreement with Francesco was made. He is therefore precluded from relying on the terms of that undisclosed contract.
Michael asserts that judicial estoppel in inapplicable because he was not a party to the bankruptcy case and did not make the representations to obtain relief on his own behalf. However, apart from being a principal of the debtor companies that received a discharge, Michael filed formal claims with the court on his own behalf and received the release of a $90 million guarantee. The broad purpose of the estoppel rule is to prevent litigants from playing "fast and loose" with the courts ( Environmental Concern, Inc. v. Larchwood Constr. Corp., 101 AD2d 591, 594 [2nd Dept 1984]). Accordingly, where a party obtains substantially the relief sought by virtue of his representations, the doctrine will apply even in the absence of a judgment in his favor (see D L Holdings, supra at 72) (applying judicial estoppel even thought bankruptcy petition had been dismissed).
Additionally, the absolute priority rule bars the contract claims. Under 11 U.S.C. § 1129(b)(2)(B)(ii) of the Bankruptcy Code, "[t]he holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property." The statute precludes junior creditors from receiving property from the estate of the debtor when, as here, the senior classes have not been paid in full ( see, Troy Savings Bank v. Travelers Motor Inn, Inc., 215 BR 485 [NDNY 1997]; BT/SAP Pool C Assoc. LP. v. Coltex Loop Central Three Partners, 138 F3d 39 [2d Cir 1998]). Plaintiffs' position that the rule only applies where the plan is effected through the section 1292(b) "cram down" procedure is without merit, and in any event the bankruptcy court specifically referenced that provision in approving the reorganization. And although plaintiffs assert that their acquisition of a stock interest in the new company which acquired the debtors' assets would not be "on account of" Michael's status as a junior creditor, their failure to disclose the details of the alleged agreement and seek approval from the Bankruptcy court precludes them from arguing otherwise now. As noted, the Bankruptcy court was specifically assured that Michael would not receive any equity interest in the new venture. If he intended to circumvent that promise through an alternate method of acquisition, that plan should have been submitted for scrutiny by the creditors and the court.
Plaintiffs' remaining causes of action are not seriously defended, and are dismissed for substantially the same reasons discussed above. The third cause of action, for conspiracy to breach the allege agreement, fails in the absence of a viable agreement and because there is no independent civil cause of action for conspiracy to breach a contract ( Bereswill v. Yablon, 6 NY2d 301) or commit a tort Alexander Alexander of New York, Inc. v. Fritzen, 68 NY2d 968). Moreover, to the extent plaintiffs allege that defendants arrogated various benefits for themselves through the bankruptcy proceedings, they are barred by from litigating here matters that were necessarily considered by the Bankruptcy court in confirming the reorganization plan ( see, Loving v. Abbruzzese, 298 AD2d 749 [3rd Dept 2002]). Finally, the fourth cause of action for interference with the confidentiality and non-circumvention agreements with Patina are barred by the absolute priority rule. Those contracts were executed on behalf of Alma and Equinox, and any rights Michael could assert under them would be derivative of has status as shareholder.
Accordingly, it is
ORDERED, that the motion of defendants Francesco Galesi and Elysium Energy LLC for summary judgment is granted, and it is further
ORDERED, that the claims against those defendants are severed and dismissed, with costs and disbursements to defendants as taxed by the Clerk of the Court, and it is further
ORDERED, that the Clerk shall enter judgment accordingly, as it is further
ORDERED, that the remainder of the action shall continue.