Opinion
Nos. 03 Civ. 2609 (TPG), 04 Civ. 2670 (TPG).
October 30, 2006
OPINION
These cases concern a failed business arrangement to finance the production of motion pictures. Dr. Salem Habal and his wife Sandra Habal, through Sofinor Finance LLC ("SFL"), a company they own with another couple, invested money with Hagedorn Company in connection with the venture. In the first case, Hagedorn requests, in the first cause of action, a declaratory judgment. The second and third causes of action are for damages. In the second case the Habals and SFL assert four causes of action for damages.
Both sides are moving for partial summary judgment. In the first case Hagedorn seeks summary judgment allowing it to recover on the second and third causes of action. The Habals and SFL seek summary judgment dismissing the second and third causes of action. In the second case Hagedorn seeks summary judgment dismissing all four causes of action.
The cross-motions in the first case are denied. Hagedorn's motion in the second case is granted.
Facts
Hagedorn Company is an insurance and investment concern in New York.
Dr. Salem Habal and his wife, Sandra Habal, are Florida residents. SFL is a Florida limited liability company formed by the Habals and another couple, Dr. R.J. Bonneau and Mrs. Tonina Bonneau. SFL was formed in July 2002 as a vehicle for the Habals and Bonneaus to make investments together. The Habals and the Bonneaus are each 50% owners of SFL.
On August 22, 2002, Dr. Habal and Dr. Bonneau traveled to New York City to attend a meeting at Hagedorn's offices. They met with Philip Lian, an officer at Hagedorn. The purpose of the meeting was to discuss the possibility of SFL making an investment in a transaction relating to the financing of motion pictures.
At the conclusion of the meeting, SFL and Hagedorn signed an Agreement, under which SFL would make an investment of $500,000 into a "structured transaction." The nature of the transaction was that a new entity would be formed (and managed) by Hagedorn for the purpose of raising money to finance the production and distribution of major motion pictures. The new entity would raise that money by issuing debt notes. SFL's investment would be the new entity's seed money. Specifically, the Agreement stated that the $500,000 investment would "defray the initial costs of structuring and issuing the [debt]," and would cover "Legal Fees, Setup Costs, Registration on the Notes, Rating on the Notes and any and all other miscellaneous costs." The total debt facility was to total $300 million.
In return for its investment, SFL would receive $2.5 million (including its original investment) from Hagedorn. The Agreement set the following timetable:
"SFL" is due the total US $2.5 Million return within 16 to 24 months from the date of the initial transfer of funds by "SFL" as follows:
"Hagedorn" will provide from its returns from the transaction, an amount of US $1.0 Million, in cash, to "SFL", immediately upon the closing of the [debt offering], which will occur no later than 90 days, from the date of the deposit of the US $500,000 investment. And the remaining US $1.5 Million, will be due 21 months from the bond closing date.
In a subsequent section entitled "The Risks," the Agreement states:
Both Parties understand that "SFL" is a Professional investor and understands that there may be certain risks inherent to the transaction, such as the proposed structured notes not receiving a significant rating from either of the rating agencies (Moody's, Standard and Poor's), or only a partial amount of the proposed notes being sold, or any other risks as may be inherent with such transactions.
As such, "Hagedorn's" Liability is limited to providing "SFL" with the aforesaid returns totaling US $2.5 Million and subject to the successful completion of the bond offering. It is understood by both parties that future underwriting will be available to "SFL," or its affiliates, when the necessary investment amounts are ready to be provided to "Hagedorn".
After the August 22, 2002 Agreement was signed, Drs. Habal and Bonneau gave Lian a check for $500,000 drawn on the Habals' bank account.
It should be noted that Hagedorn's Amended Complaint in the first case alleged that in addition to the written Agreement of August 22, 2002, there were oral terms agreed upon, as alleged in paragraphs 18-23 of the Amended Complaint. According to the latter paragraphs, SFL was warned that the transaction was "a high risk transaction," and that there were certain conditions precedent to SFL's receiving any return on its investment, including the necessity to find an investment banking firm that would be able to successfully complete the raising of $300 million under existing marketing conditions and that there would need to be a slate of "A" grade motion pictures and that the motion pictures would need to appeal to the investing public. According to these paragraphs in the Amended Complaint, it was represented to SFL that there were absolutely no assurances that these conditions would be fulfilled, but that SFL accepted these conditions and accepted the speculative risks involved in connection with SFL's $500,000 investment. In their answer to the Amended Complaint, the Habals and SFL deny the allegations of paragraphs 18-23.
During the final months of 2002, Lian pursued an investment banking partner to assist with the transaction. Ninety days after the agreement was signed, however, no bond had been issued and no monies paid to SFL.
After the Habals inquired about the lack of a payment to SFL, Lian wrote SFL a letter on January 14, 2003 reviewing the progress that Hagedorn had made to that point. The letter also underlined Lian and Hagedorn's position that the $2.5 million return promised to SFL was "subject to the successful completion of the bond offering," and that the bond offering might never occur. Lian also informed SFL that it had already spent $150,000 of SFL's $500,000 investment on the project and that it expected that additional expenditures would arise. Finally, Hagedorn noted that it was in talks with the Provident Group, an investment banking firm, to handle the bond offering portion.
Lian followed up the January 14 letter with two more letters in January to confirm Hagedorn's efforts with Provident Group. On February 3, 2003, Lian sent Drs. Habal and Bonneau a draft copy of a letter from Provident to Hagedorn in which Provident detailed the services it would perform and the fees it would be due if it were hired to raise $300 million in debt through a bond offering, as contemplated by SFL and Hagedorn.
After some additional correspondence, the parties met in New York on February 27, 2003. Dr. Habal and his attorney, Michael McNerney, represented SFL. Lian represented Hagedorn and representatives from Provident were present as well. The parties agree that the first portion of the meeting consisted of various presentations of the parties' progress on the transaction.
The parties disagree on what transpired after these presentations. Hagedorn claims that SFL directed Lian to continue his negotiations with Provident and to work out a deal whereby Hagedorn would not spend more than the $350,000 remaining from SFL's original investment. Hagedorn characterizes these instructions as adding "material new terms" to their preexisting agreement. SFL disagrees, claiming that it merely agreed to review any proposal Hagedorn and Provident might want to make. SFL also claims that the parties specifically agreed not to spend any more of the original investment until SFL had decided whether to act on Hagedorn and Provident's proposal.
Hagedorn, in its Amended Complaint in the first case, does not literally claim that the Agreement of August 22, 2002 was amended at the February 27, 2003 meeting. However, in its motion briefs Hagedorn asserts that the original agreement was amended on February 27 in several material ways. These briefs do not specifically list "several ways in which the agreement was amended," but they do describe one. It is asserted that on February 27, 2003 SFL agreed to leave the remaining $350,000 on deposit with Hagedorn for an indefinite period of time in order to pay Provident's fees. An affidavit of Lian dated April 7, 2005 supports this contention.
On March 10, 2003, Richard Wolff, attorney for Hagedorn, sent McNerney several draft documents, including a draft fee schedule from Provident to Hagedorn and drafts of documents associated with the proposed $300 million debt offering. On April 4, representatives from Provident and Hagedorn agreed on the principal terms of an agreement under which Provident would run the debt offering. The full and final terms of the agreement, including final approval from Hagedorn, were not yet set.
On April 9, 2003 McNerney sent Wolff a letter. The letter asserted that no information had been received since Wolff's letter of March 10. The April 9 letter charged Hagedorn with various misrepresentations. It was said that the Habals were misled as to the risks involved in the investment, the timing when the investment would come to fruition, and "the very nature of the proposal." The letter recalled that the agreement provided that the closing of "the bond" would be no later than 90 days from the date of the payment of the $500,000, and as of the date of the April 9 letter, there was still no firm agreement in place with an entity to raise the funds. The letter stated that Hagedorn would return the $500,000 with interest and the Habals would not pursue available legal remedies.
Hagedorn, through Wolff, responded by letter on April 10, 2003. Hagedorn rejected any charges that it had misled or defrauded the Habals in any way. Hagedorn also expressed dismay at not having the opportunity to update the Habals on its progress with Provident, and attached correspondence between Hagedorn and Provident demonstrating that they were close to signing a final agreement settling the matter. Most importantly, Hagedorn offered to return to SFL the unexpended portion of SFL's $500,000 investment if the parties could enter into a written agreement, presumably to end any controversy. Hagedorn estimated the unexpended portion of the investment to be about $350,000. No such agreement was entered into, but on April 14, 2003, Hagedorn sent SFL a check for $300,000, which was said to represent the unused portion of SFL's original investment.
Lian, in an affidavit of June 8, 2005, stated that Hagedorn considered the threat of a lawsuit, contained in McNerney's April 9 letter, to be very serious and that such a threat made it unreasonable to attempt to continue with the Provident arrangement, with the possibility that it could be "stopped dead in its tracks upon service of the lawsuit." An affidavit of Pablos Mavrides, dated April 7, 2003, states that Provident was ready, willing and able to enter into the arrangement under discussion until Lian advised Provident of the letter received from McNerney, which caused the transaction to come to a halt.
The Litigation
On April 15, 2003 Hagedorn sued the Habals and SFL in this District. This is the first of the cases appearing in the caption in this opinion. The main purport of the complaint was to seek a declaratory judgment. This was obviously an attempt to anticipate a lawsuit by the Habals and SFL.The latter parties did indeed commence an action against Hagedorn on May 23, 2003 in the United States District Court for the Southern District of Florida. This action was transferred to the Southern District of New York in March 2004. This is the second of the cases appearing in the caption in this opinion. The complaint asserts four causes of action.
On April 15, 2003, Hagedorn sued the Habals and SFL in this District. Hagedorn seeks a judgment declaring that (i) the Agreement pursuant to which SFL invested $500,000 was solely between Hagedorn and SFL; (ii) the Habals have no standing to sue Hagedorn in connection with any aspect of that Agreement; (iii) neither Hagedorn nor Lian acted fraudulently or otherwise unlawfully toward SFL or the Habals in connection with SFL's investment; and (iv) neither SFL, the Habals, nor anyone else is entitled to receive any further payments or money from Hagedorn in connection with the $500,000 investment. The complaint also sought $3,000,000 in damages for the defendants' "malicious and intentional" conduct.
Hagedorn amended the complaint in its action in March 2004 to add two additional causes of action. The first cause of action is carried over from the original complaint and seeks a declaratory judgment. The second cause of action is against SFL and is for breach of contract. As described earlier in this opinion, Hagedorn claims that the original contract of August 2002 embraced not only the terms of the written Agreement, but also certain oral terms. Hagedorn also contends that the original contract was amended in February 2003. Hagedorn contends that SFL breached the original contract as amended. The third cause of action is against the Habals and alleges that they tortiously interfered with contractual relations in that they procured SFL's breach of contract. Hagedorn seeks damages under the second and third causes of action.
In the action brought by the Habals and SFL, the four causes of action are as follows. The first cause of action is for breach of contract. The Habals and SFL claim that Hagedorn breached the Agreement when it failed to deliver the returns that were promised to SFL. They seek $700,000 in damages on this count. The first cause of action relies specifically on the following language in the August 22, 2002 Agreement:
"Hagedorn" will provide from its returns from the transaction, an amount of US $1.0 Million, in cash, to "SFL", immediately upon the closing of the [debt offering], which will occur no later than 90 days, from the date of the deposit of the US $500,000 investment. And the remaining US $1.5 Million, will be due 21 months from the bond closing date.
The first cause of action omits any mention of the remaining $1.5 million, which is referred to in the sentence following the language just quoted. It is clear that the basis for the first cause of action is solely the alleged breach of an agreement to pay the $1 million. It was explained at the oral argument that the claim for $700,000 in damages is calculated by subtracting the $300,000 refund from the $1 million.
The second cause of action is brought by the Habals and is for securities fraud under Florida Law and the third cause of action is for "common law fraud". The Habals and SFL claim that Hagedorn committed securities fraud and common law fraud in violation of Florida law because it made material misrepresentations of fact when it (a) promised that the bond would close within 90 days of signing the Agreement with SFL, (b) failed to disclose all of the risks of the transaction, and (c) failed to disclose that certain portions of SFL's investment would be used to make payments to third parties in return for bringing SFL to Hagedorn. They seek $200,000 in damages on each count. The fourth cause of action is for conversion. The Habals and SFL claim that Hagedorn converted $200,000 of their investment money for its own use and seek damages in that amount.
Discussion
The Cross-Motions in the First Case
As described earlier, there are cross-motions as to the second and third causes of action in the first case. Hagedorn argues that it is entitled to summary judgment holding SFL liable for breach of contract and holding the Habals liable for tortious interference. SFL and the Habals argue that they are entitled to summary judgment dismissing the causes of action.
The analysis must start with the fact that the only obligation of SFL (the contracting party used by the Habals) was to provide the $500,000. SFL did so. The remaining obligations under the contract were those of Hagedorn.
Although there is a dispute as to exactly what occurred in February 2003, there is surely evidence to support Hagedorn's claim that SFL and the Habals agreed to give Hagedorn additional time (beyond the 90 days referred to in the August 2002 agreement) in which to have an investment company raise the $300 million.
Hagedorn contends that the April 9, 2003 letter of counsel for SFL and the Habals constituted an anticipatory breach of contract in that "SFL expressed its unequivocal intention not to further perform its obligations pursuant to the Contract" (Am. Compl. ¶ 27). Of course, the only obligation that SFL had under the August 2002 Agreement was to pay the $500,000, and that had been done. However, Hagedorn makes a plausible claim that the provision in the Agreement about the 90-day period was amended in February 2003 to remove any definite deadline and to allow Hagedorn to continue its negotiations with Provident until an arrangement was reached. At least, for purposes of a summary judgment motion, there are issues of fact regarding whether such an amendment occurred.
If there was such an amendment, the April 9 letter was directly contrary to what SFL committed to in that amendment. The April 9 letter took the position that the Habals' participation in the proposed transaction was at an end. The letter made accusations against Hagedorn. The Habals demanded their $500,000 back, and threatened a lawsuit if the funds were not immediately returned. This was a repudiation of the February agreement, if indeed there was such an agreement.
The Habals and SFL contend, of course, that the Agreement was not amended. But, according to the Habals and SFL, even if there was such an amendment, Hagedorn cannot recover upon it because, after receiving the April 9 letter, Hagedorn made no move to insist upon the carrying out of the amended agreement, but acquiesced almost immediately in the termination of the arrangement. Hagedorn's response to this argument is that the April 9 letter, with its threat of a lawsuit, made it impossible to pursue the transaction further.
The court concludes that there are issues of fact about whether there was an amended agreement in February, and about whether the events of April do or do not form the basis for recovery by Hagedorn for breach of contract. This means that the court must deny the motion of the Habals and SFL for summary judgment dismissing Hagedorn's claim against SFL for breach of contract and Hagedorn's motion against the Habals for inducing the breach. At the same time, the court must deny Hagedorn's attempt to obtain summary judgment in its favor on those claims. This means that the motions for summary judgment on the second and third causes of action in the first case are denied.
Hagedorn's Motion In the Second Case
Hagedorn moves for summary judgment dismissing all four causes of action in the suit brought by the Habals and SFL in the second case.
As to the cause of action for breach of contract, the Habals and SFL contend that there was an absolute, unconditional agreement that the closing of the debt offering would occur no later than 90 days from the date of the deposit of the $500,000, and that there was an absolute and unconditional agreement to pay $1 million to SFL immediately upon that closing.
As a matter of contract interpretation, this position is surely questionable in view of the other portions of the Agreement making it quite clear that there was in fact no absolute assurance that the financing could occur in 90 days or ever. However, the conclusive refutation to the breach of contract claim lies in the conduct of the Habals themselves. When the 90-day period had passed, the Habals made no demand, and took no action, consistent with any idea that there was a breach of contract because the closing of the financing had not occurred as of that time, and the $1 million had not been paid at that time. Indeed, it is conclusively shown that the Habals acquiesced in a continued effort by Hagedorn to obtain the financing, which effort was going on well past the 90 days. Indeed, the record shows that many months after the deposit of the $500,000, in the early part of the following year, the Habals encouraged Hagedorn in its efforts to arrange for the financing and for other matters involved in the consummation of the transaction. Then, in the April 9, 2003 letter the Habals suddenly reversed their course, claimed misrepresentations, and demanded the immediate return of the $500,000. However, it is surely clear that the conduct of the Habals prior to the April 9 letter is completely inconsistent with their claim of breach of contract in the first cause of action, (i.e., the claim that there was an unconditional agreement to close the debt offering and pay $1 million within 90 days of the deposit of the $500,000) and bars recovery on such claim. The belated assertions in the April 9 letter do not affect this conclusion.
These same considerations prevent the Habals and SFL from recovering on their claims of fraud and conversion. Their conduct was completely inconsistent with any theory that they had been deceived, as they now allege, or that the $500,000 was converted. The Habals and SFL claim that they were not apprised sufficiently of the risks involved in the transaction. The transaction was destroyed by the Habals and SFL not by some other factor alleged to involve an undisclosed risk.
Hagedorn is entitled to summary judgment dismissing the complaint of the Habals and SFL in the second action.
Conclusion
In the first case, the court denies the cross-motions for summary judgment with regard to the second and third causes of action. In the second case the court grants Hagedorn's motion for summary judgment dismissing all causes of action that case.
SO ORDERED.