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noting that under New York law, "indemnity contracts must be 'strictly construed' to avoid reading in duties which the parties did not intend"
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Zoltek Companies, Inc. v. Scott-Macon Ltd., No. 06-2713-cv, heard in tandem with this appeal, is also disposed of by this summary order.
October 4, 2007.
UPON DUE CONSIDERATION of this appeal of a decision of the District Court for the Southern District of New York (Mukasey, J.) it is hereby ORDERED, ADJUDGED, AND DECREED that the decision is AFFIRMED in part, VACATED in part and REVERSED in part. The case is REMANDED for further proceedings consistent with this order.
For Appellant: THOMAS E.L. DEWEY, Dewey Pegno Kramarsky LLP, New York, NY (David S. Pegno, on the brief).
For Appellee: STEWART D. AARON, Arnold Porter LLP, New York, NY (Joseph B. Shumofsky, Dorsey Whitney LLP, on the brief).
We presume the parties' familiarity with the underlying facts and procedural history, which we reference only when needed to explain our decision.
Zoltek appeals several aspects of the district court's decision. We address each in turn.
I. Whether The District Court Erred In Concluding, On Summary Judgment, That Scott-Macon Used "Reasonable Efforts" To Secure Financing For Zoltek
We are not persuaded by Zoltek's argument that the district court viewed the facts in the light most favorable to Scott-Macon, despite the fact that it was required to view the facts in the light most favorable to Zoltek as the non-moving party. See Cowan ex rel. Estate of Cooper v. Breen, 352 F.3d 756, 760 (2d Cir. 2003); Negri v. Stop and Shop Inc., 65 N.Y.2d 625, 626 (1985). The facts upon which the district court based its grant of summary judgment were undisputed by the parties.
Nor are we persuaded by Zoltek's arguments that whether a party has used "best efforts" or "reasonable efforts" is never appropriately determined on summary judgment. Summary judgment is appropriate where there exist no material issues of fact. Gorman v. Consol. Edison Corp., 488 F.3d 586, 595 (2d Cir. 2007); see Bush v. St. Clare's Hosp., 82 N.Y.2d 738, 739 (N.Y. 1993). While the question of whether a party has used reasonable or best efforts may depend on material issues of fact, such is not always the case. See MacWhinnie v. Nugent, 28 A.D.3d 431, 432 (N.Y.App.Div. 2006) (finding summary judgment appropriate on the dispositive issue of whether defendants had made "reasonable efforts" to maintain a vehicle in a safe manner where defendants presented evidence that they had indeed used reasonable efforts, and where plaintiff failed to raise a triable issue of fact in response to defendants' showing); see generally Transcare New York, Inc. v. Finkelstein, Levine Gittlesohn Partners, 23 A.D.3d 250, 251 (N.Y.App.Div. 2005) (indicating that the question of reasonable efforts may itself depend on triable issues of facts). Here, the question of whether Scott-Macon used reasonable efforts does not depend on triable issues of fact. The various factual issues that Zoltek claims precluded a finding of summary judgment were not material to the question of whether Scott-14 Macon used reasonable efforts, and the undisputed facts established that the question was appropriately resolved in Scott-Macon's favor on summary judgment.
II. Whether The District Court Erred In Holding That Zsolt Rumy's November 17, 2003 Email Did Not Immediately Terminate The Agreement
Zoltek claims Zsolt Rumy's email terminated the exclusivity of the Agreement on November 17, 2003. The Agreement states that it shall "continue for a period of nine months and thereafter until the unilateral termination of this agreement by either [Zoltek] or Scott-Macon upon at least thirty days written notice of the other party." The district court held that this provision unambiguously provides that, for nine months from the date of signing, the Agreement is not unilaterally terminable upon thirty days notice and, therefore, Rumy's email did not have any effect until the nine months expired. Zoltek claims the district court's interpretation is erroneous and, at the very least, the provision is ambiguous. Zoltek asserts that it should have been permitted to present extrinsic evidence that the Agreement was unilaterally terminable at any time by either party upon thirty days notice.
Zoltek's claimed interpretation would render the "nine months" language devoid of any meaning whatsoever. We agree with the district court; the provision could not indicate more clearly that the Agreement was to last for nine months and, " thereafter," it became unilaterally terminable upon thirty days notice by either party.
We also agree with the district court that the effect of Rumy's email was to terminate the Agreement at the end of the nine month term.
III. Whether The District Court Erred In Finding That Scott-Macon Did Not Fraudulently Induce Zoltek To Enter The Agreement
Zoltek claims it was fraudulently induced to enter the Agreement by "Scott-Macon's failure to disclose that Scott-Macon intended to pay a `referral fee' — viz., a kickback — to CSFB." The district court granted summary judgment dismissing Zoltek's fraudulent inducement defense on two bases: (1) Zoltek failed to establish that Scott-Macon had a duty to disclose the nature of the relationship with CSFB; and (2) Zoltek did not establish why Scott-20 Macon's failure to disclose was material to Zoltek's retention of Scott-Macon.
We agree with the district court. We do not see how the referral fee could have affected Zoltek's decision to enter the Agreement. Zoltek contends that Rumy thought he was being referred to Scott-Macon because of its qualifications, not because of a referral relationship. These two bases for referral are not mutually exclusive, however. CSFB might only maintain referral relationships with placement agents in which it has confidence, to avoid the risk of losing millions in potential referral fees. Zoltek's claim that it was misled about the nature of the relationship between CSFB and Scott-Macon rests on a false premise: that CSFB only recommended Scott-Macon because of the referral arrangement, and not because of Scott-6 Macon's qualifications. There is little doubt that CSFB's arrangement with Scott-Macon only exists because of the latter's qualifications. In any event, Zoltek failed to demonstrate how Scott-8 Macon's failure to disclose the referral fee materially affected Zoltek's decision to retain Scott-9 Macon's services.
IV. Whether The District Court Erred By Awarding Scott-Macon Fees For Placements That Occurred Within The Eighteenth Month Tail
Zoltek argues that even if the district court correctly concluded that the Agreement was not terminable for nine months, and that the effect of Rumy's email was to terminate the Agreement as of June 5, 2004, Zoltek is, nevertheless, not liable for fees for Placements that took place after this date. This is so, Zoltek argues, because Scott-Macon failed to provide an Institutional Investor Contact List within thirty days of the date of termination — i.e., between June 5, 2004 and July 5, 2004 — in accordance with the Agreement. Scott-Macon asserts that it did deliver a Contact List — on January 8, 2004. Scott-Macon argues that it is content to rely on the entities disclosed in that list, and that, although the List was not delivered within thirty days of the date of termination of the agreement, Scott-Macon should be relieved of that obligation given Zoltek's prior breach of the exclusivity provision.
The district court conducted a bench trial on the issue of damages in November and December 2005. The court found that Zoltek breached the exclusivity clause of the Agreement as early as October 17, 2003, and that this breach was material. The district court also noted that Scott-Macon's service of the List on January 8 placed Zoltek on notice of which Investors Scott-4 Macon had contacted on Zoltek's behalf, and that Zoltek had no reason to believe that a list served within the June 5 to July 5 period would not include those same investors. The district court held, therefore, that Scott-Macon's delivery of the List in January was sufficient.
The List was clearly intended as a condition precedent to Scott-Macon's entitlement to collect fees from placements that Zoltek closed within eighteen months of the date of termination of the agreement. Under New York law, however, "where it becomes clear that one party will not live up to a contract, the aggrieved party is relieved from the performance of futile acts or conditions precedent." Sunshine Steak, Salad Seafood, Inc. v. W.I.M. Realty Inc., 135 A.D.2d 891, 892 (N.Y.App.Div. 1987); see also Fitzgibbons Boiler Co. v. Nat'l City Bank of New York, 287 N.Y. 326, 331 (1942) (A party "may not insist on the fulfillment of a contract . . . if it can be said to have brought about the breach of that contract."). The district court found that Zoltek was in material breach of the agreement as of October 2003, and that this breach relieved Scott-16 Macon of its obligation to supply Zoltek with an Investor Contact List within 30 days of the termination of the capital agreement, because Scott-Macon's earlier delivery of the List was sufficient to place Zoltek on notice that Scott-Macon had contacted the investors on that list. Under these circumstances, neither finding is clearly erroneous. See Design Strategy, Inc. v. Davis, 469 F.3d 284, 300 (2d Cir. 2006) ("Following a bench trial, we set aside findings of fact only when they are clearly erroneous. . . ." (internal citations and quotation marks omitted)). Accordingly, we will not upset the district court's decision that Scott-Macon was entitled to fees on placements with investors on Scott-Macon's January 8 list that occurred within the eighteen month tail.
V. With Respect To The September 30, 2005 Placement, Whether The District Court Erred In Awarding Scott-Macon Fees On The Entire $50 Million
On September 30, 2005 Zoltek entered an agreement with Omicron and Midsummer for the placement of up to $50 million in convertible debt securities. Of this amount, only $5 million closed on September 30, 2005. Another $15 million closed on December 1, 2005. The remaining amount was to be provided upon Zoltek's exercise of its option. It is unclear from the record whether any additional amounts closed within the eighteenth month tail.
The district court awarded Scott-Macon fees on the entire $50 million, regardless of whether any additional amounts closed within the eighteen month tail. The court noted that paragraph 9(b) of the Agreement states that Zoltek must pay Scott-Macon a placement fee if Zoltek "completes" a placement with an institutional investor on Scott-Macon's list within eighteen months of termination of the Agreement. According to the district court, "the date that Zoltek `completes' such a transaction [means] the date when the terms of the placement become binding, which may be before the closing date. Otherwise, the Agreement could be read to permit manipulation of closing dates so as to avoid payment of a fee that would otherwise be due."
In our view, the term "completes" in paragraph 9(b) is susceptible to at least two interpretations. "To the extent that any of [an] agreement's terms may be ambiguous, indefinite or uncertain, it is well settled that extrinsic or parol evidence is admissible to determine their meaning." Korff v. Corbett, 18 A.D.3d 248, 251 (N.Y.App.Div. 2005); see also Weiner v. Anesthesia Assocs. of W. Suffolk, P.C., 203 A.D.2d 454, 454-55 (N.Y.App.Div. 1994) ("[W]here . . . a court determines that the terms of the agreement are ambiguous and the intent of the parties becomes a matter of inquiry, parol evidence is permitted to determine that intent."). It does not appear from the record that the district court conducted any fact-finding with respect to the meaning of the term "completes" in paragraph 9(b). It merely hypothesized that because one interpretation might lead Zoltek to exploit the term in its favor, the other interpretation must be the one intended. But parties to a contract have every right to negotiate terms favorable to them. Thus, the district court erred in resolving an obvious ambiguity in the contract without examining available extrinsic evidence of the parties' intent in this regard or authorship of the ambiguous term. Moreover, Scott-Macon's post-trial memorandum claimed that Scott-Macon's entitlement to fees was limited to that portion of the $50 million deal that had already closed within the eighteen month tail. Scott-Macon did not seek fees on the entire $50 million. It could be found, then, that Scott-Macon understood paragraph 9(b) to entitle it only to fees on placements that actually closed within the eighteen month tail, not, as the district court found, on any placement that became binding within the eighteen month tail.
We therefore vacate the district court's award of $50 million to Scott-Macon for fees on placements and remand for a determination as to whether Scott-Macon is entitled to fees on placements that did not close during the eighteen month tail. The district court may consider whether Scott-Macon waived the issue by not initially seeking those fees, may consider Scott-Macon's decision not to seek those fees, and may decide whether and to what extent the consideration of additional extrinsic evidence is necessary.
We also note, however, that if the district court determines that the parties only intended Scott-Macon to receive fees for placements that closed within the eighteen month tail, then it should receive fees on all amounts of the $50 million placement that closed within the eighteen month tail, not just the $5 million that closed on September 30, 2005. While Scott-Macon's Post-Trial Memorandum only requested fees on the $5 million that closed on September 30, 2005, at the time the Memorandum was submitted only $5 million had actually closed. Since that time, however, at least an additional $15 million closed within the eighteen month tail. If the interpretation of paragraph 9(b) advanced by Zoltek on this appeal is correct, then Scott-Macon is entitled to fees on all amounts of the $50 million that closed within the eighteen month tail, not just the $5 million that closed on September 30.
VI. Whether The District Court Erred In Awarding Scott-Macon Specific Performance Of The Warrants
Under the Agreement, Scott-Macon was entitled to warrants as a portion of its compensation. The district court awarded Scott-Macon specific performance. Zoltek notes that specific performance is an extraordinary remedy, only to be granted in circumstances where the party seeking relief demonstrates that legal remedies are incomplete and inadequate. See Lucente v. IBM Corp., 310 F.3d 243, 262 (2d Cir. 2002). Zoltek claims that money damages were an adequate means of compensation and argues that the district court erred in granting Scott-Macon specific performance.
Zoltek fails to acknowledge, however, that although Judge Mukasey advised the parties that he was considering awarding the warrants, Zoltek never made any objection or claim that specific performance of the warrants was an inappropriate remedy. Quite to the contrary, Zoltek specifically invited the district court to award delivery of the warrants to Scott-Macon. In its Post-Trial Memorandum of Law Addressing Damages, Zoltek made the following statements to the district court: (1) "[I]f this Court should find that Scott-Macon is entitled to any Placement Fees at all, then such fees should be limited to the following . . . d. warrants to purchase Zoltek stock. . . ."; (2) "CONCLUSION . . . if the Court determines that any placement fees were due, then such fees be limited to $432,500 minus a credit $20,000 for the Initial and monthly retainers paid pursuant to the Agreement plus an order that Warrants as determined by Paragraph 6 of the Agreement be delivered." Zoltek's Post-Trial Memorandum Addressing Damages at 2-3. Because Zoltek failed to argue that specific performance was inappropriate to the district court, the argument is waived on appeal. See Allianz Ins. Co. v. Lerner, 416 F.3d 109, 114 (2d Cir. 2005) (citation omitted); see also Cont'l Cas. Co. v. Dominick D'Andrea, Inc., 150 F.3d 245, 252 (3d Cir. 1998) (It is improper "to sandbag the district court and the other parties by allowing or inviting the court to make an error and then springing the issue on the other party on appeal."(citation omitted)).
Because we decide that specific performance of the warrants was appropriate, we need not decide the value of the warrants. The value of the warrants would only have been relevant if we had decided that money damages, not delivery of the warrants themselves, was the appropriate remedy.
VII. Whether The District Court Erred In Awarding Scott-Macon Attorneys' Fees
In the proceeding below, Scott-Macon sought attorneys' fees and costs incurred in defending the action brought by Zoltek in the United States District Court for the Eastern District of Missouri, which was subsequently transferred to the Southern District of New York. Annex A to the Agreement contains indemnification provisions that direct Zoltek to indemnify Scott-4 Macon for:
[A]ny and all losses . . . to which [Scott-Macon] may become subject in connection with or arising out of or relating to, directly or indirectly, the engagement of Scott-Macon under the letter agreement . . . and to reimburse [Scott-Macon] promptly upon demand for reasonable costs and expenses . . . in connection with the . . . defense of . . . any action . . . (including . . . any action . . . brought by or in the right of [Zoltek]). . . .
Zoltek challenges the district court's award of attorneys' fees on the ground that the Agreement did not contemplate indemnification for legal disputes between the parties. At trial, Scott-Macon presented testimonial and documentary evidence that the Agreement provided that Scott-Macon is entitled to indemnification for defending the action that Zoltek filed against it in Missouri. Zoltek offered no evidence in response to this claim. Scott-Macon argues that, therefore, Zoltek waived its right to contest the attorneys' fees issue. Scott-Macon is incorrect. In its Post-Trial Memorandum, Zoltek argued that Scott-Macon had not met its burden that it was entitled to attorneys' fees. Moreover, it was perfectly appropriate for Zoltek to simply rely on the express language of the contract, and the effect of that language under New York law, as its defense.
This Court previously has stated that, under New York law, an indemnification agreement must be "unmistakably clear regarding whether the parties to the agreement intend provisions of attorneys' fees to apply to disputes among themselves." Coastal Power Int'l, Ltd. v. Transcon. Capital Corp., 182 F.3d 163, 165 (2d Cir. 1999) (internal citations and quotation marks omitted) (emphasis added). Moreover, in Hooper Associates v. AGS Computers, Inc., 74 N.Y.2d 487, 491 (1989), the New York Court of Appeals held that indemnity contracts must be "strictly construed" to avoid reading in duties which the parties did not intend:
The indemnification clause at issue in Transcontinental, which this Court found did not indemnify the losing party for attorneys' fees in an action between the parties, used similar language to the provision at issue here:
Each Party . . . hereby agrees to . . . indemnify . . . each Person to whom a representation, warranty, covenant and agreement is made hereunder . . . in respect of any and all Claims it shall incur or suffer, which arise, result from or relate to any breach of, or failure by an Indemnifying Party to perform, any of its representations, warranties, covenants or agreements contained in this Agreement. . . .
182 F.3d at 165 (emphasis added).
The promise should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances . . . . Inasmuch as a promise by one party to a contract to indemnify the other for attorney's fees incurred in litigation between them is contrary to the well-understood rule that parties are responsible for their own attorney's fees, the court should not infer a party's intention to waive the benefit of the rule unless the intention to do so is unmistakably clear from the language of the promise.
Id., at 491-92.
It is not "unmistakably clear" from the language of the Agreement that the parties intended that Zoltek indemnify Scott-Macon for disputes between the parties themselves. Therefore, the district court's award of attorneys' fees was error and is reversed.
* * * * *
Those portions of the district court's decision holding that (1) Scott-Macon used "reasonable efforts" to secure financing for Zoltek, (2) the November 17, 2003 email did not terminate the Agreement until the expiration of the nine month term, (3) Scott-Macon did not fraudulently induce Zoltek to enter the Agreement, (4) Scott-Macon was entitled to fees for placements that closed within the eighteen month tail, and (5) Scott-Macon was entitled to specific performance of the warrants, are AFFIRMED. The district court's award of attorneys' fees to Scott-Macon is REVERSED. With respect to that portion of the district court's decision granting Scott-Macon fees for placements completed within the eighteen month tail, we VACATE and REMAND for further proceedings consistent with this opinion.