Lazard Middle Mkt. LLC v. Gander Mountain Co.

Full title: LAZARD MIDDLE MARKET LLC, Plaintiff, v. GANDER MOUNTAIN COMPANY, Defendant.

Court: SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK : IAS PART 12

Date published: Jan 6, 2014

2014 N.Y. Slip Op. 30027 (N.Y. Sup. Ct. 2014)

Opinion

Index No. 651318/10 Mot. seq. no. 003

01-06-2014

LAZARD MIDDLE MARKET LLC, Plaintiff, v. GANDER MOUNTAIN COMPANY, Defendant.

For plaintiff: Kenneth E. Lee, Esq. Levine Lee, LLP For defendant: Richard Bakalor, Esq. Quirk and Bakalor P.C. Dudley W. Von Holt, Esq., Pro Hac Vice Thompson Coburn, LLP

Barbara Jaffe

DECISION AND ORDER

BARBARA JAFFE, J.

For plaintiff:

Kenneth E. Lee, Esq.

Levine Lee, LLP

For defendant:

Richard Bakalor, Esq.

Quirk and Bakalor P.C.

Dudley W. Von Holt, Esq.,

Pro Hac Vice

Thompson Coburn, LLP

Plaintiff moves and defendant cross moves pursuant to CPLR 3212 for orders granting them summary judgment. They each oppose their adversaries' motions.

I. FACTUAL BACKGROUND

On or about March 13, 2008, defendant, then a publicly traded corporation, retained plaintiff as its financial advisor to assist it in evaluating certain corporate actions. (NYSCEF 32). Their engagement agreement provides, in pertinent part, for plaintiff to receive a monthly consulting fee of $20,000, as well as an accomplishment fee of $700,000 if defendant closes on a "go-private transaction."

Pursuant to the agreement, a "go-private transaction" results when: 1) consideration is paid to substantially all of defendant's non-affiliate shareholders in exchange for their shares; 2) at least one shareholder owning more than five percent of defendant's shares who is also an affiliate remains as a shareholder following the exchange, and 3) defendant thereafter ceases to report pursuant to the Securities and Exchange Act. And upon defendant's consummation of a go-private transaction during the term of the agreement or within 12 months following its termination, plaintiff would be paid the accomplishment fee, provided the transaction closes within an "equitable protection period" of six months after the expiration of the 12-month period. Either party may terminate the engagement at any time on 10 days' written notice. (Id.).

Pursuant to "process guidelines" set forth in the agreement, plaintiff also agreed that, as necessary and reasonably requested by defendant, it would familiarize itself with defendant's financial condition, assist defendant in formulating strategies for completing a transaction, search for and cultivate a relationship with potential buyers, present findings to defendant's board of directors and committees, and participate in negotiations to facilitate a transaction. On its part, defendant agreed to indemnify plaintiff from losses incurred in connection with the agreement and pay interest on any unpaid portion of the fees. The parties included in the agreement a provision "incorporat[ing] the entire understanding of the parties . . . and superseding] all previous agreements or understandings regarding the same, whether written or oral." (Id.).

Thereafter, plaintiff, working with defendant's board of directors and committee formed for the purpose of evaluating potential transactions, approached and met with more than 100 potential investors, solicited non-binding indications of interest, and prepared memoranda. Plaintiff met separately with the chief operating officers of defendant's two largest shareholder groups, David Pratt of the Gratco Group, and Ronald Erickson of the Holiday Group; each declined to sell his respective ownership interest or fund a go-private transaction, preferring that a third party invest in defendant. (NYSCEF 27, Exh. B).

By email dated October 31, 2008, at defendant's request, plaintiff sent it a process summary document, wherein it described the "final outcome of the transaction process," acknowledging that it did not succeed in attracting offers from any investor and welcoming questions and comments. (NYSCEF 33). Thereafter, plaintiff ceased sending defendant invoices for monthly consulting fees. (NYSCEF 30).

In April 2009, Gratco and Holiday agreed to fund a reverse/forward stock split which would allow defendant to become a private entity. On September 27, 2009, defendant's board of directors approved amendments to defendant's articles of incorporation to authorize the transaction and entered into agreements with Holiday and Gratco, who would fund the amount required to buy out the fractional shares arising from the stock split. In compliance with rules promulgated by the Securities and Exchange Commission (SEC) governing going-private transactions, defendant informed its shareholders of the upcoming stock split by information statement dated December 23, 2009. (NYSCEF 27, Exh. B).

On January 14, 2010, defendant board effected a l-for-30,000 reverse stock split followed by a 30,000-for-l forward stock split, and as a result, shareholders owning less than 30,000 shares immediately before the transaction were paid $5.15 per share, and ceased being shareholders. Also as a result, Holiday and Gratco, who before the split maintained, respectively, a 34.2 percent and 42 percent ownership interests, immediately increased their interests to 47.7 percent each. (Id., Exh. B). Defendant announced the transaction by press release later that day. (Id., Exh. C).

On January 15, 2010, defendant notified the SEC that it was delisting its common stock, and on January 25, 2010, formally deregistered it. (Id., Exhs. D & E). On January 25, plaintiff sent defendant an invoice for an accomplishment fee of $560,000. (Id., Exh. J).

II. PERTINENT PROCEDURAL BACKGROUND

On or about August 18, 2010, plaintiff commenced this action, alleging that the stock split entitled it to the accomplishment fee. (NYSCEF 1, 3). In its answer, defendant alleges it was fraudulently induced into the engagement by plaintiff's representation that its CEO David Solomon would personally provide services. (NYSCEF 6).

III. CONTENTIONS

Plaintiff argues that the stock split qualifies as a go-private transaction and that the agreement entitles it to interest and indemnification. It relies on the merger clause and absence of any reference to Solomon in the process guidelines as barring defendant's fraudulent inducement claim. (NYSCEF 25). In support, it offers Solomon's affidavit dated November 12, 2012, in which he defends his performance as consistent with the representations he made before the engagement with defendant, and asserts that he was heavily involved in the project. He denies having admitted to Pratt that he was not heavily involved with the project or that the October 2008 email constitutes a termination of the engagement, as plaintiff continued to work on the project. As evidence of plaintiff's ongoing work on the project, Solomon relies on an internal email dated March 24, 2009, wherein his associates discuss a possible conflict of interest arising from plaintiff's engagement with one of defendant's competitors. Solomon also explains that, consistent with common practice, plaintiff ceased seeking monthly consulting fees when the project slowed down, and that defendant would have been credited with ensuing consulting fees in the accomplishment fee, thereby obviating any need to invoice. (NYSCEF 40, 41).

Defendant contends that the parties understood, and the agreement makes clear, that a go-private transaction necessarily entails third-party involvement, and that the term "potential buyers" refers only to outside parties and cannot, by any reasonable interpretation, encompass defendant's shareholders. Consequently, it denies that the reverse/forward stock split funded by defendant's shareholders, including a group headed by Pratt, the individual who engaged plaintiff on behalf of defendant, constitutes a transaction within the scope of the agreement, and maintains that deeming it such a transaction would compensate plaintiff for work it did not perform and an outcome not contemplated by the parties.

Defendant alternatively argues that the definition in the agreement of a go-private transaction is ambiguous, thereby presenting a triable issue, that plaintiff's October 2008 email constitutes a termination of the engagement, and that the equitable protection period thus expired six months later, on April 30, 2010. Consequently, it contends that its January 2011 buyout of substantially all of its non-affiliate shareholders occurred after the expiration of the engagement. (NYSCEF 36, 42).

Moreover, characterizing the merger clause as general, defendant argues that it does not bar its fraudulent inducement defense. (Id.). In support, defendant offers Pratt's affidavit dated October 17, 2012, whereby Pratt, now defendant's CEO and chairman of the board of directors, alleges that on January 22 and 23, 2008, he met with Solomon to discuss the parties' potential engagement and that Solomon promised to direct the project personally, and that during an October 2009 telephone conversation, Solomon admitted having attended only one committee meeting and failing to participate in the project on a daily basis. According to Pratt, plaintiff performed no work on the project following the October 2008 email, and defendant thereafter worked with other advisors in its attempt to go private. He believes that as of January 30, 2010 there were up to 2,185,500 shares of stock held by shareholders unaffiliated with Gratco and Holiday, and that by January 2, 2011, there were more than 456,000 such shares, which required that defendant effectuate a second stock split that month to remove remaining non-affiliated shareholders. (NYSCEF 30). Defendant also maintains that the agreement provides plaintiff indemnity only from losses associated with work performed under the engagement, not for losses arising from a lawsuit brought against it. (NYSCEF 30, 42).

In reply, plaintiff reiterates its denial that the October 2008 email constitutes a termination, adding that even if it did, it is nonetheless entitled to the fee because all of the elements of the go-private transaction were satisfied in January 2010, before the equitable protection period expired. It alleges that Pratt's belief that defendant bought out substantially all of the shareholders in 2011 does not rebut defendant's public statements that it successfully went private in January 2010, particularly when any evidence supporting his belief is in defendant's sole possession. (NYSCEF 40).

IV. ANALYSIS

A party seeking summary judgment must demonstrate, prima facie, that it is entitled to judgment as a matter of law by presenting sufficient evidence to negate any material issues of fact. (Forrest v Jewish Guild for the Blind, 3 NY3d 295, 314 [2004]; Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985]). If the movant meets this burden, the opponent must offer evidence in admissible form to demonstrate the existence of factual issues that require a trial, as "mere conclusions, expressions of hope, or unsubstantiated allegations or assertions are insufficient." (Zuckerman v City of New York, 49 NY2d 557, 562 [1980]). If the movant does not meet this burden, the motion must be denied, regardless of the sufficiency of the opposition. (Winegrad, 64 NY2d at 853).

It is well settled that a court must enforce a written agreement that is complete and clear according to the plain meaning of its terms (Greenfield v Philles Records, Inc., 98 NY2d 562, 569 [2002]), and that extrinsic evidence may not be considered (R/S Assocs. v New York Dev. Auth., 98 NY2d 29, 33 [2002]; 1701 Rest. on Second, Inc. v Armato Props., Inc., 83 AD3d 526 [1^st Dept 2011]). Thus, a court may interpret a contract only if it is ambiguous. (South Rd. Assocs., LLC v Intern. Bus. Machines Corp., 4 NY3d 272, 278 [2005]; 239 E. 79th Owners Corp. v Lamb 79 & 2 Corp., 30 AD3d 167, 168 [1^st Dept 2006]). A contract is ambiguous if it is reasonably susceptible of more than one interpretation, in which case extrinsic evidence may be considered and summary judgment may be inappropriate. (Chimart Assoc. v Paul, 66 NY2d 570, 573 [1986]).

By the same token, a court interpreting a written agreement should give utmost consideration to the parties' intent in entering into it and may supply additional words or entirely reject those set forth therein to clarify its meaning. (Reape v New York News, Inc., 122 AD2d 29, 30 [2d Dept 1986], lv denied 68 NY2d 610). Consequently, a court should construe a writing to effectuate the parties' reasonable expectations and should refrain from endorsing a literal interpretation that would give rise to an absurd or commercially unreasonable result or otherwise defeat the purpose of the agreement. (Fox Ridge Motor Inn, Inc. v Town of Southeast, 85 AD3d 785, 786 [2d Dept 2011]; Greenwich Capital Fin. Products, Inc. v Negrin, 74 AD3d 413, 415 [1^st Dept 2010]).

It is also well established that in the event of inconsistent contractual provisions, the specific governs the general. (See Muzak Corp. v Hotel Taft Corp., 1 NY2d 42, 46 [1956]; DeWitt v DeWitt, 62 AD3d 744, 745 [2d Dept 2009]; Waldman v New Phone Dimensions, Inc., 109 AD2d 702, 704 [1^st Dept 1985], lv denied 65 NY2d 784). Consequently, courts should refrain from construing a contract that, while giving meaning to general terms, renders a specific provision meaningless. (22 NY Jur 2d, Contracts § 251 [2013]).

A. Does the stock split qualify as a go-private transaction?

Here, it is undisputed, and evident from defendant's own public statements, that: 1) on January 14, 2010, defendant's board of directors approved a stock split by which shareholders owning less than 30,000 shares were bought out, 2) the beneficial ownership of defendant affiliates Holiday and Gratco, who before the split maintained ownership interests of 34.2 percent and 42 percent, respectively, thereafter maintained ownership interests of nearly 50 percent, and 3) defendant subsequently ceased listing its common stock and no longer filed periodic reports with the SEC. Additionally, Pratt's claim that substantially all of the shareholders were not eliminated until January 2011, which pertains to whether defendant closed within the equitable protection period (see infra, III.C), constitutes an admission that consideration was paid to substantially all of defendant's non-affiliate shareholders in exchange for their shares.

Moreover, nowhere do the parties exclude in their agreement shareholder-funded transactions, and the process guidelines neither contradict nor alter the definition of a go-private transaction. Rather, the breadth of the term "potential buyers," absent any further qualification, disproves defendant's position. Had the parties intended otherwise, they would have so provided. (See Marathon Private Equity Fund I, LLC v Questor Mgt. Co., LLC, 20 Misc 3d 1123(A), 2008 NY Slip Op 51586[U], *5 [Sup Ct, New York County 2008] [had sophisticated parties intended a result contrary to plain meaning of writing, they would have provided accordingly]). Indeed, plaintiff approached shareholder groups Gratco and Holiday and did so without interference from defendant. To compensate plaintiff in these circumstances is not plainly absurd, and defendant proffers no authority to the contrary.

Plaintiff has therefore established, prima facie, that defendants effectuated a go-private transaction, a term susceptible of only one reasonable interpretation within the plain meaning of the agreement. (See, e.g., Iconoclast Advisers LLC v Petro-Suisse Ltd., 27 Misc 3d 1230[A], 2010 NY Slip Op 50972[U], *5 [Sup Ct, NY County 2010] [definition of "transaction" in engagement agreement reasonably understood and thus unambiguous]).

B. Defendant's fraudulent inducement claim

Although inadmissible to construe an unambiguous contract (supra, III.), parol evidence is admissible when a party alleges fraud (Sabo v Delman, 3 NY2d 155, 161 [1957]; Rosenblum v Glogoff 96 AD3d 514, 515 [1^st Dept 2012]), except where parties include in their contract a specific disclaimer of reliance on a particular prior representation (Danann Realty Corp. v Harris, 5 NY2d 317, 323 [1959]).

Subsequent to its opinion in Danann, the Court observed that where a contract is the product of "extended negotiations between sophisticated business people," it would be "unrealistic" to disclaim in the contract reliance on a specific prior oral agreement, having provided that the obligation set forth therein is "absolute and unconditional." (Citibank, N.A. v Plapinger, 66 NY2d 90, 95 [1985]; see also Lucas v Oxigene, Inc., 1995 WL 520752, *4 [SD NY 1995], affd 101 F3d 109 [1996]). Thus, although the defendants in Plapinger were "not relying on any representations as to the very matter" of the alleged fraud, because the merger clause went beyond "generalized boilerplate" and had been extensively negotiated, the exception set forth in Danann was expanded. (Id.; see also Mahn Real Estate Corp v. Shapolsky, 178 AD2d 383, 384 [1^st Dept 1991] [as sophisticated real estate investors specifically disclaimed reliance on prior representations regarding subject property after extensive negotiations with aid of counsel, claim of fraud in the inducement barred]; Marine Midland Bank, N.A. v CES/Compu-Tech, Inc., 147 AD2d 396, amended 149 AD2d 341 [1^st Dept 1989] [fraudulent inducement defense barred where disclaimer in loan assignment agreement stating that parties' entire understanding set forth therein sufficiently specific]).

Here, the parties included in their negotiated engagement agreement a clause whereby they acknowledge that the agreement encompasses their entire understanding and that no party relies on oral representations. If Solomon's involvement in the project was material enough to induce defendant to contract with plaintiff, then he would have been named in the agreement. Thus, defendant's fraud claim is foreclosed. (See also Gen. Bank v Mark II Imports, 293 AD2d 328 [1^st Dept 2002] [where parties provided that written agreement constituted entire understanding, fraud defense barred]; JPMorgan Chase Bank v Liberty Mut. Ins. Co., 189 F Supp 2d 24, 26 [SD NY 2002] [New York law does not permit sophisticated party who has expressly disclaimed reliance on oral representations to evade its contractual obligations by claiming fraud]).

C. Did defendant close within the equitable protection period?

1. When were substantially all of defendant's shareholders bought out?

Although it is not disputed that defendant paid substantially all of its non-affiliate shareholders in exchange for stock (supra, III.A.), the parties dispute when they were paid.

Defendant's January 2010 information statement, press release, and SEC filings do not constitute evidence that defendant paid substantially all of its shareholders within the equitable protection period. Consequently, plaintiff has not satisfied its prima facie burden of proving when the transaction closed. And, as Pratt's belief that substantially all of the shareholders were bought out in January 2011 is unsupported, defendant too has not satisfied its burden of demonstrating when the transaction closed. (See Zuckerman, 29 NY2d at 562 [unsubstantiated assertions insufficient on a motion for summary judgment]).

2. When, if ever, did the engagement terminate?

Notwithstanding plaintiff's failure to identify the closing date (supra, III.C.1.), the accomplishment fee is payable if plaintiff demonstrates that the engagement never terminated.

It is well-settled that the cancellation or termination of a contract must be clearly expressed. (22A NY Jur 2d, Contracts § 497 [2013]; Frank Assoc., Inc. v John J. Ryan & Sons, Inc., 281 AD 665 [1^st Dept 1952]). Here, there is no clear expression. That one may reasonably infer that the outcome was final from plaintiff's October email and its conduct in ceasing to invoice defendant, does not, as a matter of law, constitute a termination, even absent any specific words in the engagement agreement to effectuate same. Thus, whether plaintiff terminated the engagement may not be resolved by summary judgment. (Frank Assoc., Inc., 281 AD 665 [parties' ambiguous conduct regarding alleged cancellation raised factual question for jury]).

D. Indemnification and interest

Given the above result, I need not address indemnification and interest.

IV. CONCLUSION

Accordingly, it is hereby

ORDERED, that plaintiff Lazard Middle Market LLC's motion for summary judgment as to its first cause of action in the amended complaint is denied; and it is further

ORDERED, that defendant Gander Mountain Company's motion for summary judgment to dismiss the first cause of action is denied.

ENTER:

________________

Barbara Jaffe, JSC
DATED:January 6, 2014
New York, New York