Summary
holding defendant liable for breach of non-circumvention agreement
Summary of this case from Willow Bay Associates, LLC v. Immunomedics, Inc.Opinion
99 Civ. No. 11754 (GEL)
March 14, 2001
Christine B. Cesare, Bryan Cave LLP (Robin Kitzes Silk, of counsel), New York, New York for Plaintiff BNY Capital Markets, Inc.
John N. Iurino, Lewis Roca LLP, Tucson, Arizona (Michael Nicodema, Dreier Baritz LLP, New York, New York, of counsel), for Defendant Moltech Corporation.
OPINION AND ORDER
In this breach of contract action, BNY Capital Markets, Inc. ("BNY") seeks payment for its services as a corporate acquisitions advisor to Moltech Corporation ("Moltech"). The parties have filed cross-motions for summary judgment pursuant to Fed.R.Civ.P. 56(c). BNY contends that Moltech breached an agreement for investment banking services under which Moltech had agreed to provide substantial compensation to BNY upon the successful closing of an acquisition facilitated by BNY. In its cross-motion, Moltech argues that the parties' agreement should be rescinded, because BNY breached its fiduciary duty to Moltech by failing to take steps Moltech claims were necessary to protect it against the risk of having to pay additional fees to another financial service company.
The Court has subject matter jurisdiction over the action pursuant to 28 U.S.C. § 1332, as the parties are diverse as to both their states of incorporation and principal places of business, and the amount in controversy is greater than $75,000.
For the reasons that follow, BNY's motion for summary judgment on its claims against Moltech and on Moltech's counterclaim is granted, and Moltech's cross-motion for partial summary judgment on its breach of fiduciary duty claim is denied.
DISCUSSION
Unless specifically noted, the following facts are not explicitly controverted by the parties.
Background Dealings
Moltech is a high-tech company based in Tucson, Arizona, that is engaged in research and development to construct "a new generation" of lightweight rechargeable batteries for portable devices such as cellular phones. (Manzer Aff. ¶ 3.) In 1997, Moltech sought to raise capital to fund its research activities by contacting potential investors to purchase equity in the company. (Id. ¶ 4.) To facilitate its recruitment of investors, Moltech entered into agreements with an array of financial service firms — including C. Melchers Consulting ("Melchers"), Broadview Associates ("Broadview"), Shoreline Pacific Institutional Finance ("Shoreline") and SCM Group/Lighthouse ("SCM") — that specialized in matching sources of investment capital with start-up companies in need of financing. (Id. ¶ 4; Manzer Dep. 8-15, 37-40.)
In December 1997, Moltech signed a contract with SCM that was styled a "Non-Circumvention and Fee Agreement." (Moltech Rule 56. 1 Statement Ex. 3 at 2.) In pertinent part, this agreement stated that SCM would identify "Potential Venture Partners" that might be suitable "investors, merger candidates, venture partners or other contracting parties," and Moltech in return would pay a cash fee to SCM if Moltech were to consummate a deal by December 2000 with one of the entities that SCM had identified. (Id. at 2-3.) The agreement also contained a non-circumvention clause that prohibited Moltech from contacting any of the Potential Venture Partners "or anyone working in concert with them . . . without the written permission of SCM." (Id. at 3 emphasis added.)
Pursuant to the agreement, SCM provided Moltech with a list of Potential Venture Partners, which is not included in the evidentiary record before the Court. There is no evidence in the record that Energizer Power Systems (the company that, as will be discussed shortly, Moltech ultimately purchased) is among the entities listed as a potential partner.
Sometime in early 1998, a stockbroker named David Jordon, who was then employed by J.W. Charles Securities in New York City, phoned John Carton, an acquaintance who worked in the mergers and acquisitions division of Patricof Company Capital Corp. ("Patricof"), also based in New York City. Jordon told Carton that "he had met a . . . development-stage battery company [Moltech]" in need of equity financing for its operations. (Carton Dep. at 6, 11, 27.) Jordon apparently did not tell Carton at that time that he was in any way affiliated with SCM.
Carton testified that Jordon "periodically came across business situations that he was not in a position to assist and asked if [Carton] would be interested in seeing some of these situations." (Carton Dep. at 10.) Following one such proposal — in which an entity called NTN retained Patricof for services in furtherance of a potential merger — Carton arranged for Jordon to be paid approximately $10,000. (Id. at 12-14.)
Carton was not directly involved with Patricof's equities deals, so he arranged for a representative of a related entity, Patricof Co. Ventures, Inc. ("Patricof Ventures"), to meet with Moltech representatives to discuss prospective investment opportunities. Subsequently, on February 13, 1998, Carton and Patricia Cloherty of Patricof Ventures met with Terje Skotheim (Moltech's CEO) to discuss a possible investment by Patricof Ventures in Moltech. Jordon and Stan Mailhiot (SCM's principal) also attended, apparently with Skotheim. Cloherty later informed Moltech that Patricof Ventures had decided not to invest. (Carton Dep. at 32-37.)
Carton "was not aware that Jordon and Mailhiot had a preexisting relationship, but he did notice that Jordon, Mailhiot and Skotheim arrived at the meeting together. (Carton Dep. at 35-36.) Skotheim testified that he had been told by Mailhiot about Jordon's "working with" SCM. (Skotheim Dep. at 47-48.)
In the investment banking business, however, successful deals sometimes arise from permutations of prior failed negotiations. The BNY/Moltech Letter of Engagement that underlies the instant action was engendered principally by Carton, who, although unsuccessful in assisting Moltech to raise capital, used the contacts formed during these negotiations to help broker Moltech's acquisition of Energizer Power Systems ("EPS") in 1999.
Carton Contacts Moltech Again
In November 1998, BNY acquired Patricof, and Carton became a Managing Director in its mergers and acquisitions division. (Carton Dep. at 5.) Some time in early 1999, Carton learned that Ralston Purina, the parent company of Eveready Battery Company, intended to sell Eveready's EPS division, which manufactured rechargeable batteries. Remembering his prior contacts with Moltech — and Moltech's need to acquire production capabilities for its battery line — Carton determined that "the assets of EPS might be useful to Moltech." (Id. at 37.) Before contacting Moltech to inquire about its interest in EPS, Carton first called Jordon. During his deposition, Carton testified that he contacted Jordon "[p]artly out of courtesy" for Jordon's having introduced him to Moltech and its executives in 1998, "but more importantly for some background research to find out any relevant information about Moltech, to see if there was anything happening that would make it inappropriate for me to call Moltech" to pitch the EPS acquisition. (Id. at 39.) Jordon told Carton that he had not had any dealings with Moltech "for a long time," and suggested that Carton should contact Moltech directly to discuss the prospective transaction. (Id. at 40.)
On April 28, 1999, Carton telephoned Skotheim, Moltech's CEO. During their telephone conversation, Carton reminded Skotheim that they had met at Patricof's offices in 1998 at Jordon's urging. (Carton Dep. at 42.) Skotheim told Carton that "he remembered that meeting very clearly." (Skotheim Dep. at 87.) Carton also informed Skotheim that Jordon had told Carton to call Moltech directly. (Carton Dep. at 42.)
Carton's conversation with Skotheim apparently piqued Moltech's interest in acquiring EPS, because shortly thereafter, Moltech furnished confidential financial information to BNY and began to engage Carton in specific discussions about, among other things, how a prospective transaction might be financed. In May 1999, BNY sent draft engagement letters to Moltech regarding BNY's potential role as a financial advisor to Moltech if Moltech were to pursue the acquisition of EPS. (Carton Dep. at 45.)
Apparently unbeknownst to Carton and BNY, Moltech had already learned that EPS was for sale. EPS, which at the time had an agreement with Moltech regarding the manufacture of certain battery components, had its investment banker (Wasserstein, Perella Co.) provide offering materials to Moltech. Moltech reviewed the materials in March 1999, but was ambivalent about pursuing the transaction. (Manzer Decl. ¶ 5, Skotheim Dep. at 85.)
The Letter of Engagement
As described above, Moltech, in its efforts to raise capital, had entered into a number of contracts with financial service companies. Some of those contracts provided for Moltech to pay "success" fees in the event of certain transactions involving Moltech, even if the particular financial service company did not have any role in facilitating or arranging the transaction. These investment banking arrangements were so numerous and potentially costly that Moltech had recently assigned Deward Manzer, its President and Chief Operating Officer, to review its agreements and put them in order. (Moltech Rule 56.1 Statement ¶ 3.)
Accordingly, as BNY and Moltech began to formulate the terms of their prospective engagement, Moltech undertook to review its prior agreements with such companies to determine if it would be contractually obligated to pay a fee to any of them should it acquire EPS. Whenever Moltech, as a consequence of its review of its contractual obligations, identified a potential conflict, it would inform BNY. Moltech would then attempt to negotiate what was termed a "carve-out," under which BNY would receive reduced fees in the event of a successful transaction that would implicate one of Moltech's prior agreements. (Moltech Rule 56.1 Statement ¶ 21, Matt Dep. at 56.)
Carton described this facet of investment banking relationships as follows: "From time to time clients will ask an investment bank to carve out a very limited array of specific investors with whom they have active discussions as a result of a prior introduction by another advisor." (Carton Dep. at 47.)
The negotiations between Moltech and BNY, which lasted approximately six weeks (Manzer Dep. at 102), were fairly arduous. Moltech wanted not to be obliged to pay duplicate fees; BNY wanted to receive what it regarded as fair compensation for its work, and resisted reducing its fees to accomodate fees that Moltech previously had agreed to pay to other firms in the event of a transaction actually arranged by BNY. During the course of the negotiations, Moltech furnished information to BNY about Moltech's prior arrangements with Lehman Brothers, Shoreline, Broadview and Melchers. Gary Matt, a Managing Director of BNY, testified that he addressed the Moltech/Lehman Brothers relationship after Moltech representatives affirmatively broached the subject with him. The parties easily concluded that there was no need to carve-out Lehman Brothers, because Moltech's letter of engagement with that firm had expired. (Matt Dep. at 43-44.) Similarly, after Moltech sought and received a written representation from Broadview that its contractual relationship with Broadview was unrelated to the subject matter of the EPS transaction, the parties again concluded that a carve-out was unnecessary. (Id. at 49, Moltech Rule 56.1 Statement Exs. 8 10.)
Gary Matt of BNY testified as follows:
What I do recall, because it took weeks and weeks and weeks, was as I said before, the incredibly detailed process of the request and negotiation regarding the carve-outs. [Moltech] presented to us who they felt they — who they requested as carve-outs. We discussed the merits of the carve-out . . . [Moltech] was asking for carve-outs and . . . the carve-out list was so extensive and . . . we fully considered the effects of giving all of these carve-outs.
(Matt Dep. at 56; emphasis added.)
With respect to Melchers, however, the parties concluded that, should Moltech engage BNY as exclusive financial advisor for the EPS transaction, it would risk having to pay a second fee to Melchers. Because Moltech wanted to avoid any such double obligation, BNY agreed to carve out Melchers from the draft letter of engagement that it had previously circulated to Moltech. (Manzer Dep. at 97-101.)
There were no significant issues with respect to Shoreline, because Melchers had previously reached an agreement with Shoreline to cooperate regarding any fee conflicts vis a vis their respective contracts with Moltech. (Moltech Rule 56.1 Statement Ex. 11 at 1-2.)
The carve-out provision, as it appears in the final draft of the BNY/Moltech letter of engagement, reads as follows:
In the event [Moltech] is required to pay and actually pays a success fee to Melchers in connection with the [EPS] Transaction pursuant to the agreement dated February 23, 1999, as amended on April 23, 1999 and further amended on June 1, 1999 (draft), among [Moltech], Melchers and Shorline [sic] Pacific Institutional Finance for Outside Financing provided by Allied Capital Corporation, Huff Alternative Income Fund, L.P., the parties listed in Annex II [to the BNY/Moltech Letter of Engagement], or any other parties located in Asia (the "Melcher Investors"), the amount of BNY's success on the portion of the Outside Financing from Melcher Investors will be calculated at a 3.0% fee [which would have amounted to a 50% reduction from what BNY would have otherwise been entitled to receive.]
(Complaint Ex. A at 4.) Moltech insisted on the carve-out because it was concerned about a non-circumvention provision in the Melchers letter that purported to give Melchers a period of exclusivity during which only Melchers could introduce certain prospective equity investors to Moltech. (Moltech Rule 56.1 Statement Ex. II at 2; Manzer Dep. at 96.)
The Melchers agreement, which was reviewed by BNY in the course of negotiating the Melchers carve-out, contained a general reference to Moltech's relationship with, among others,
SCM:
In addition, the Company has engaged (i) Broadview Int'l LLC ("Broadview") to conduct a search for a strategic partner or investor for the Company, (ii) Lighthouse Funding/The SCM Group ("Lighthouse") and Serendip, Inc. ("Serendip") to raise equity capital and (iii) Point Financial, Inc. ("PFI") to raise equity capital and to arrange certain equipment lease financing for [Moltech].
(Moltech Rule 56.1 Statement Ex. 11 at 2; emphasis added.) This, however, was the only reference to SCM in any materials provided by BNY during the negotiations concerning the terms of the draft letter of engagement. Moltech determined that it was unnecessary even to reveal to BNY the existence of its prior relationship with SCM — much less to seek a carve-out or discuss whether its Non-Circumvention Agreement with SCM could lead to a double-fee conflict in the event of a successful acquisition of EPS. Indeed, Deward Manzer, Moltech's President and Chief Operating Officer, testified at his deposition that he viewed the purposes of Moltech's agreement with SCM (raising equity capital) and of its prospective engagement with BNY (assisting in executing a corporate acquisition) as "completely different" and, consequently, decided not to furnish copies of the SCM contract to BNY. (Manzer Dep. at 109-110.)
In contrast to his treatment of SCM, Manzer admitted that he provided copies of materials relating to other investment banking relationships, including Moltech's contracts with Melchers and Broadview, to Gary Matt of BNY. (Manzer Dep. at 109.)
On June 7, 1999, BNY and Moltech executed a letter of engagement ("Letter of Engagement"), pursuant to which BNY agreed to act as Moltech's "exclusive financial advisor with respect to the acquisition of [EPS]. (Complaint Ex. A at 2.) The parties agreed that BNY, as consideration for its investment banking services, would initially receive a guaranteed retainer fee of $50,000. Then, if Moltech were to close successfully on a transaction to acquire EPS, BNY would receive the following: (1) the lesser of $3 million in cash or $1 million in cash plus compensation to be determined by a formula pegged to the amount of financing that BNY secured for the transaction; (2) warrants to purchase shares of Moltech common stock and (3) reimbursement for certain expenses. Also, the parties attached the following annex to the Letter of Engagement concerning expenses due to BNY in the event of litigation between the parties:
In addition to stating that BNY would provide a variety of investment banking services to Moltech, such as "providing a valuation of EPS on a stand-alone basis," BNY also agreed to "keep any . . . non-public information confidential so long as it remains non-public." (Complaint Ex. A at 1, 4.)
The number of shares was to be determined by a contractually-specified formula that, the parties apparently agree, yields 645, 639 shares. (See BNY Rule 56.1 Statement ¶ 3.)
[Moltech] shall reimburse [BNY] for all expenses (including, without limitation, fees and disbursements of counsel) as they are incurred by [BNY] in connection with investigating, preparing for or defending any Action (or enforcing the Letter Agreement or any related engagement or commitment agreement), whether or not . . . such Action is brought by BNY . . . The provisions of this [annex] shall survive any termination of the Letter Agreement or completion of BNY's Role.
(Complaint Ex. A at 6-7; emphasis added.)
Carton's Conversation with Jordon
Sometime in September 1999, shortly before the public announcement of Moltech's acquisition of EPS, Carton decided to telephone Jordon. Carton testified that he made the call because he wanted to inform Jordon that, in appreciation for Jordon's role in introducing Carton to Moltech while Carton was still employed by Patricof, BNY was prepared to pay him a $25,000 finder's fee. Carton testified that he did not specifically mention "Moltech" and "EPS" during this conversation because the deal had not yet been publicly announced. (Carton Dep. at 54.) However, after Carton informed Jordon about the financial terms of the transaction, Jordon was dismayed and demanded a larger fee. (Carton Dep. at 52-55.) Then, having correctly inferred that Moltech was one of the entities involved in the transaction, Jordon told Carton that he needed "to take care of Stan Mailhiot" (SCM's principal) who was Jordon's "buddy." Carton told Jordon that BNY did not have any "relationship" with Mailhiot, and he instructed Jordon not to discuss the details of the Moltech/EPS transaction with Mailhiot prior to the public announcement. (Id. at 55-56.)
Jordon did not heed Carton's cautionary instructions. On September 27, 1999, Mailhiot wrote Skotheim, Moltech's CEO, demanding a payment of $1.8 million in cash and warrants to acquire an unspecified amount of Moltech common stock as a consequence of Moltech's closing a transaction "brought to the [c]ompany through the efforts of individuals that we had introduced you to in New York." (Moltech Rule 56.1 Statement Ex. 12 at 2; Interpleader Complaint ¶¶ 8-9.) Mailhiot argued, in effect, that the non-circumvention clause in its contract with Moltech obligated Moltech to pay a fee to SCM. Moltech decided not to comply with SCM's fee demand and to go forward with the EPS acquisition.
If Moltech had abandoned the EPS transaction at that point, it would have been required to pay EPS $1 million. (Carton Dep. at 76.)
On October 26, 1999, BNY, in anticipation of the imminent closing of the EPS transaction, sent an invoice to Moltech for fees in the amount of $1,743,810.39. (Complaint Ex. A at 1.) On November 1, 1999, the transaction officially closed. (Complaint ¶ 11; Answer ¶ 4.) To date, however, Moltech has neither paid BNY any of the money owed on the October 26, 1999, invoice nor issued warrants for the purchase of 645, 639 shares of Moltech common stock. (BNY Rule 56.1 Statement ¶ 7.)
BNY arrived at this figure by calculating its success fee ($1,772,500.00), minus the original retainer ($50,000.00), plus out-of-pocket expenses ($1,630.82), plus amounts due on outstanding invoices ($19,679.37).
Judicial Proceedings
The demands of SCM and BNY for payment resulted in litigation in Arizona, in California, and in this Court.
A. Arizona and California Litigation
After Moltech's acquisition of EPS, SCM persisted in its demand for a fee for its putative role in facilitating the transaction. Accordingly, on November 8, 1999, Moltech commenced an interpleader action against BNY and SCM in the United States District Court for the District of Arizona on the apparent theory that the two entities were competing for the same "success fee" arising out of the EPS transaction. Moltech Corp. v. BNY Capital Markets, Inc., et al., No. CIV 99-556-TUC-FRZ (D.Az.).
The action was unsuccessful. On February 1, 2000, Magistrate Judge Glenda Edmonds issued a Report and Recommendation that, among other things, recommended that Moltech's action be dismissed for lack of subject matter jurisdiction because BNY and SCM were not truly adverse parties, as is required for an interpleader action pursuant to Fed.R.Civ.P. 22. District Judge Frank Zapata adopted the Report and Recommendation on May 2, 2000.
On June 19, 2000, Moltech brought another action against SCM in the Arizona state courts, seeking a declaratory judgment that Moltech was not required to pay SCM a fee arising out of Moltech's acquisition of EPS. SCM responded by filing a parallel action against Moltech in the California state courts on September 21, 2000, which Moltech subsequently removed to the United States District Court for the Eastern District of California. (Moltech's Reply Mem. Ex. A at 1.)
On December 22, 2000, Moltech and SCM executed a Settlement Agreement and General Release, pursuant to which the entities agreed to dismiss the lawsuits pending in Arizona and California voluntarily with prejudice. As part of the settlement, Moltech agreed to pay SCM $325,000. (Def's Reply Mem. Ex. A at 2-3.)
B. The Instant Litigation
Meanwhile, BNY had commenced this action on December 1, 1999, in which it asserts the following claims against Moltech: (1) that Moltech further breached the Letter of Engagement by failing to pay BNY a success fee in the amount of $1,743,810.39, plus interest accruing from November 1, 1999 (Count I), (2) that Moltech breached the Letter of Engagement by failing to issue warrants to purchase 645, 639 shares of Moltech common stock (Counts II and III); and (3) that BNY is owed indemnification for attorneys' fees and costs incurred as a consequence of prosecuting this action and defending itself in the Arizona federal action (Count IV). (Complaint ¶¶ 24-54.)
BNY seeks in the alternative either the market value of the warrants to purchase 645, 639 shares of common stock (Count II) or issuance of the warrants themselves (Count III). (Complaint ¶¶ 33-48.)
Moltech answered BNY's complaint on May 31, 2000, and asserted as counterclaims (1) that BNY had breached its fiduciary duty to Moltech by, among other things, failing to disclose its prior relationship with Jordon and failing to take steps to protect Moltech from exposure to double-fee liability to SCM (Count I); and (2) that BNY had engaged in misrepresentation by, among other things, failing to disclose that it had approached Jordon before contacting Moltech about the EPS transaction and that it had offered him a finder's fee in September 1999 (Count II). (Counterclaim ¶¶ 15-26.)
Originally, Moltech moved on February 18, 2000, to dismiss this action or, in the alternative, to transfer it to the District of Arizona, where its interpleader action was already pending. BNY cross-moved on February 22, 2000, to enjoin the Arizona action. Following the dismissal of the Arizona action, the cross-motions were denied as moot on May 4, 2000.
Following a brief period of discovery, BNY moved on November 8, 2000, for summary judgment in its favor on all of the counts asserted in the complaint and in Moltech's counterclaim. Moltech cross-moved for partial summary judgment in its favor on Count I of its counterclaim on December 4, 2000. The Court heard oral arguments from the parties on February 2, 2001.
DISCUSSION
The only real issue to be resolved in this case is whether BNY breached any duty owed to Moltech. It is essentially undisputed that the parties had a valid contract which, upon the closing of the EPS transaction, entitled BNY to receive a success fee in the amount of $1,743,810.39 (plus pre-judgment interest) and warrants to purchase 645, 639 shares of Moltech common stock. Nor is it disputed that the contract requires Moltech to pay BNY's attorneys' fees and expenses incurred as a consequence of prosecuting this action and defending Moltech's unsuccessful interpleader action in Arizona.
At most, therefore, if a breach of fiduciary duty (or fraudulent misrepresentation) by BNY resulted in Moltech's paying $325,000 to SCM to settle its claims, Moltech could be entitled to a setoff of that amount against the summary judgment that would otherwise be entered in BNY's favor on its breach of contract and indemnification claims. Accordingly, the Court must address whether any of BNY's conduct during the course of its relationship with Moltech constituted either a breach of fiduciary duty or a fraudulent misrepresentation that caused Moltech to incur legally cognizable damages. As specified by the parties in their Letter of Engagement, these issues are to be determined under New York law. (Complaint Ex. A at 5.)
Moltech briefly argues that BNY's alleged breach of fiduciary duty requires rescission of a contract that BNY has already validly performed and from which Moltech benefitted by receiving valuable financial advice and services. (Moltech Mem. Opp.'n Summ. J. at 16-17.) Rescission, however, is an "extraordinary remedy" that can result from a breach of a fiduciary duty only when the breach is "'material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract.'" Croce v. Kurnit, 565 F. Supp. 884, 893 (S.D.N.Y. 1982) (quoting Callanan v. Powers, 199 N.Y. 268, 284, 92 N.E. 747, 752 (1910)); see also County of Washington v. Counties of Warren and Washington Indus. Dev. Agency, No. 93-CV-0086 (FJS), 1997 WL 152001 at *9 (N.D.N.Y. Mar. 31, 1997), aff'd, 2001 WL 96566 (2d Cir. Jan. 3, 2001). The principal object of the Letter Engagement was for BNY to provide investment banking services to Moltech related to Moltech's efforts to acquire EPS. Moltech's bid for EPS was ultimately successful, and it is undisputed that BNY's services played a substantial role in accomplishing the transaction. There is thus no basis for Moltech to assert that the putative breach frustrated the parties' contractual intent.
At this stage of the litigation, the familiar standards for summary judgment apply. Summary judgment may only be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The party opposing summary judgment "may not rest upon mere allegations or denials"; rather it must "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). To defeat a motion for summary judgment, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts."Matsushita Elec Indus Co. v Zenith Radio Corp., 475 U.S. 574, 586 (1986). "If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted."Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986).
I. Breach of Fiduciary Duty
BNY contends that its relationship with Moltech cannot be considered fiduciary in nature. (BNY Mem Supp. Summ. J. at 17-18.) However, several New York authorities have held that under various factual circumstances, a fiduciary relationship can arise within an investment banking context. See, e.g., Fyrdman Co. v. Credit Suisse First Boston Corp., 272 A.D.2d 236, 237, 708 N.Y.S.2d 77, 79 (1st Dep't 2000); Wiener v. Lazard Freres Co., 241 A.D.2d 114, 672 N.Y.S.2d 8, 14 (1st Dep't 1998). For purposes of this motion, I will assume that as an investment banker for Moltech, BNY was a fiduciary of its client, as will normally be the case in such relationships. The question, however, is whether any of BNY's actions breached any trust it held from Moltech.
Moltech argues that the following acts or omissions allegedly undertaken by BNY during the course of its relationship with Moltech constituted breaches of fiduciary duty:
• BNY failed to perform adequate due diligence concerning Moltech's relationship with SCM, which, Moltech contends, BNY should have known about because of (1) Carton's knowledge of Jordon's contacts with Stan Mailhiot and (2) a reference to it in Moltech's agreement with Melchers. (Moltech Mem. Opp'n Summ. J. at 13; Counterclaim ¶ 17.)
• BNY did not provide a carve-out for the contingency that SCM might demand a fee pursuant to the non-circumvention clause of its agreement with Moltech. (Counterclaim 17.)
• BNY failed to disclose to Moltech Carton's relationship with Jordon. (Moltech Mem. Opp'n Summ. J. at 2; Counterclaim ¶ 17.)
• BNY did not disclose that its September 1999 offer of a finder's fee to Jordon, which, apparently, triggered SCM's demands for fees from Moltech. (Counterclaim ¶ 17.)
No material issues of fact preclude summary judgment on these issues. The facts regarding BNY's actions are essentially undisputed; where minor discrepancies in testimony exist, the Court will assume the version most favorable to Moltech. The dispute in the case concerns the legal question of whether the agreed facts establish a breach of fiduciary duty. After evaluating all of the acts or omissions relied on by Moltech in the light most favorable to it, the Court concludes, as a matter of law, BNY did not breach any fiduciary duty to Moltech.
Under New York law, a fiduciary duty can arise when a party "has reposed trust or confidence in the integrity and fidelity of another who thereby gains a resulting superiority or influence over the first." Teachers Ins. and Annuity Ass'n. of America v. Wometco Enterprises, Inc., 833 F. Supp. 344, 349-50 (S.D.N Y 1993). However, the relationship is necessarily circumscribed. A fiduciary is only responsible to undertake reasonable diligence or "'give advice for the benefit of another upon matters within the scope of the relation.'" Sumitomo Corp. v. The Chase Manhattan Bank, 99 Civ. 4004 (JSM) and 99 Civ. 8780 (JSM), 2000 U.S. Dist. Lexis 15707, at *8 (S.D.N.Y. Oct. 30, 2000) (emphasis added) (quoting Mandelblatt v. Devon Stores, Inc., 132 A.D.2d 162, 168, 521 N.Y.S.2d 672, 676 (1st Dep't 1987)). See also Conway v. Icahn Co., Inc., 16 F.3d 504, 510 (2d Cir. 1994) ("A broker, as agent, has a duty to use reasonable efforts to give its principal information relevant to the affairs that have been entrusted to it") (emphasis added). Thus, whether BNY breached any duty to Moltech depends on the scope of the trust extended to BNY at the time of the alleged misconduct.
Moltech's contention that BNY had a fiduciary duty to undertake affirmative efforts to insulate Moltech from incurring liability under its agreement with SCM or to provide a carve-out for SCM is belied by the course of conduct between Moltech and BNY. As described above, Moltech, having entered into a variety of agreements with financial service companies to raise investment capital for its operations, was concerned that any one of those contracts could give rise to a requirement that Moltech pay an additional fee upon its acquisition of EPS. (Moltech Rule 56. 1 Statement ¶ 21; Matt Dep. at 56.) The evidentiary record demonstrates that Moltech affirmatively reviewed its files in an effort to identify those agreements that might potentially engender a double-fee conflict. (See, e.g., Matt Dep. at 56; Manzer Dep. at 110.) Indeed, Moltech admits that this was its general practice:
Moltech's chief operating officer Dewey Manzer took steps to assure that there was no conflict or overlap in Moltech's agreements. (Manzer Dep. at pp. 14-19, 43-44, 47-48, 51-55). For example, some of the investment advisors were retained solely to obtain equity financing, while others were engaged to find strategic partners. Id. In addition, as new companies were engaged, Mr. Manzer reviewed the existing relationships to avoid any possible conflict.
(Moltech Rule 56.1 Statement ¶ 3; emphasis added.)
In those instances where Moltech specifically informed BNY about potential conflicts — such as Moltech's agreement with Melchers — the parties negotiated over whether to incorporate a carve-out provision into the Letter of Engagement, thus in effect imposing the cost of the additional fee on BNY rather than Moltech. (See, e.g., Manzer Dep. at 97-101.) However, Moltech's Manzer admitted that, having reviewed the Non-Circumvention Agreement with SCM, Moltech saw no need either to disclose it to BNY or to seek a carve-out from the Letter of Engagement (as Moltech had done with respect to its other agreements). (See, e.g., Manzer Dep. at 109-110.)
This course of conduct makes clear that it was never within the scope of BNY's duties to Moltech to review Moltech's other investment banking relationships and advise Moltech how to deal with its obligations under those agreements. First, at the time of these negotiations, BNY had not yet been engaged by Moltech to do anything. The negotiations concerned precisely whether, and on what terms, BNY would agree to undertake to provide Moltech with advice in connection with the EPS acquisition. Until BNY and Moltech agreed to terms and entered a relationship, they were arm's-length commercial enterprises negotiating over fees. At this stage, BNY owed Moltech no duty to agree to reduce its fees or accept a carve-out; nor had it any obligation to identify reasons why Moltech might offer a lower fee. Second, even once the engagement was accepted, BNY contracted to provide investment banking services to Moltech in connection with its efforts to acquire EPS — not to review Moltech's other investment banking relationships or to conduct broad due diligence to determine every possible scenario under which the EPS transaction might trigger a double-fee obligation. Indeed, the parties' course of conduct demonstrates that Moltech assumed exclusive responsibilities for making such determinations. There is no genuine dispute that this duty was undertaken, both in general and in this specific instance, by Manzer, Moltech's President and COO. Even before BNY appeared on the scene, Manzer had been assigned by Moltech to undertake a review of its chaotic investment banking relationships, and it is undisputed that he took the lead in reviewing those relationships in connection with the engagement of BNY, and in providing BNY with such information as he thought necessary to negotiate appropriate carve-outs. (Moltech Rule 56.1 Statement ¶ 3; Manzer Dep. at 110.)
Nor is this a case in which a fiduciary duty arises from the fiduciary's greater knowledge, on which the beneficiary relies. On the contrary, Moltech knew all of the details of its arrangement with SCM, and made a deliberate decision not to provide a copy of the relevant agreement to BNY, or to seek a carve-out, because Manzer quite reasonably did not think it was relevant to BNY's engagement.
In contrast to Moltech's full knowledge, Moltech now argues that BNY should have inferred a problem from a brief reference to SCM, along with a number of other firms, in the Melchers agreement, which was provided to BNY's Matt for an entirely different purpose, coupled with Carton's knowledge that Mailhiot had attended the abortive Patricof meeting in the company of Jordon and Skotheim. To the extent that these scraps of information are meaningful at all, Moltech was in a far better position than BNY to evaluate their significance. BNY's failure to inquire about the SCM Non-Circumvention Agreement — an agreement it knew nothing about, nor had any reason to know anything about — does not, as a matter of New York law, constitute a breach of fiduciary duty.
Moltech's other claims of breach fare no better. The argument that BNY failed to disclose Carton's prior relationship with Jordon is flatly contradicted by the evidence. Skotheim, Moltech's CEO, admitted at his deposition that during his initial telephone conversation with Carton, on April 28, 1999, Carton reminded Skotheim about their 1998 meeting. (Skotheim Dep. at 87.) Skotheim testified that "he remembered [the 1998] meeting very clearly." (14.) Carton testified, without contradiction, that he told Skotheim that he had decided to contact Moltech directly after Jordon urged him to do so. (Carton Dep. at 42.) Given this evidence, it is clear that Moltech had ample information from which to infer that Jordon not only had a preexisting relationship with Carton, but also might have been affiliated with SCM in some capacity. Indeed, Moltech had more reason to know of Jordon's affiliation than BNY. Neither Carton nor BNY had been told that Jordon had anything to do with SCM. Skotheim, in contrast, attended the 1998 meeting along with Mailhiot and Jordon, and had apparently been advised by Mailhiot that SCM, through Jordon, had been responsible for the contact with Patricof Ventures.
See note 4 above.
Moltech's final contention — that BNY breached its fiduciary duty by failing to disclose that it had offered to pay Jordon a finder's fee in September 1999, prior to the closing of the EPS transaction — also fails, because Moltech cannot possibly demonstrate that such a putative breach caused any harm. Under New York law, a party claiming that it has been damaged by actions of its fiduciary must prove not only that the breach was the "but for" cause of the damage, but also that it constituted proximate causation. LNC Investments v. First Fidelity Bank, N.A. New Jersey, 173 F.3d 454, 465 (2d Cir. 1999) ("'Where . . . the remedy sought is damages to compensate for a claimant's loss, the usual damages-causation rule for tort and contract breach cases is appropriate") (quoting American Fed. Group, Ltd. v. Rothenberg, 136 F.3d 897, 907 n. 7 (2d Cir. 1998)).
Moltech admits that if it were liable under the SCM agreement as a consequence of the EPS acquisition (which is a debatable proposition at best), the sole basis for that liability would be the agreement's non-circumvention clause, which stated that Moltech was prohibited from contacting a Potential Venture Partner (which might include EPS) "or anyone working in concert with them" (which might include BNY) without first obtaining SCM's written permission. (Moltech Rule 56.1 Statement Ex. 3 at 3.) Although the record in unclear as to when Moltech first made contact with EPS regarding a potential acquisition, it is undisputed that, at the very least, it began to negotiate with EPS shortly after executing the Letter of Engagement with BNY on June 7, 1999, and that, by the time of Carton's conversation with Jordon, the transaction was nearing completion. Accordingly, if liability did indeed attach under the SCM Non-Circumvention Agreement, it did so well in advance of the September 1999 phone conversation between Carton and Jordon. Thus, although Carton's conversation with Jordon was perhaps inappropriate, it did not cause Moltech to sustain any damages.
Given the language of the non-circumvention clause, it is difficult to surmise how the September 1999 telephone conversation could possibly have caused liability to attach under the SCM agreement. Jordon's subsequent communications with Mailhiot had the sole practical effect of alerting SCM about Moltech's prospective acquisition just before the transaction was to be announced publicly. Moltech does not point to any evidence that SCM would not have learned about the publicly-announced EPS acquisition without Jordon's tip.
In its opposition/cross-motion papers, Moltech briefly contends that it was also damaged by BNY's actions because Moltech and BNY, concerned about the viability of SCM's claim, decided not to consummate an oral understanding that BNY would assist Moltech in raising $15-30 million of post-acquisition capital. (Moltech Mem. Opp'n Summ. J. at 16 see also Moltech Rule 56.1 Statement ¶ 40.) But this is not a legally cognizable harm. It is entirely speculative whether BNY would have undertaken this additional agreement, and Moltech does not even attempt to argue that any efforts BNY might have undertaken would have resulted in tangible benefits to Moltech greater than were in fact achieved without BNY's help.
Consequently, because Moltech has failed to demonstrate that there are any triable issues of fact concerning BNY's alleged breach of its fiduciary duty, BNY is entitled to summary judgment in its favor on this claim.
II. Misrepresentation
BNY also moves for summary judgment on what Moltech styles in its counterclaim as a count of "misrepresentation." Distilled to its essence, Moltech claim is essentially a restatement under a different legal theory of its allegations regarding BNY's failure to disclose facts about Carton's dealings with Jordon and BNY's failure to offer a carve-out to insulate Moltech from having to pay a fee to SCM.
Moltech also refers to this claim as "fraud" and "fraudulent concealment." (Mem. Opp'n Summ. J. at 17-18.) Considering that under New York law, omissions made in an effort to perpetrate a fraud can give rise to a claim for "fraudulent omission," Allen v. Westpoint Pepperell, Inc., 11 F. Supp.2d 277, 288 (S.D.N.Y. 1997), vacated in part on other grounds, 143 F.3d 71 (2d Cir. 1998), the Court will evaluate Moltech's claim as if it were pleaded under such a theory.
Under New York law, a party alleging a claim for fraudulent omission or fraudulent concealment must prove the following elements: (1) that a party failed to disclose material information that it had a duty to disclose; (2) the party intended to defraud another by making the omission; (3) the defrauded party reasonably relied upon the representation made to it; and (4) the defrauded party sustained damage as a consequence of relying on the representation. Bermuda Container Line, Ltd. v. International Longshoreman's Ass'n, AFL-CIO, 192 F.3d 250, 258 2d 22 Cir. 1999). To satisfy the scienter requirement for a fraudulent omission claim, a party must prove by clear and convincing evidence that the defrauding party "knowingly or recklessly disregarded the risk of omitting material facts."Allen v. Westpoint-Pepperell, Inc., 11 F. Supp.2d 277, 288-89 (S.D.N.Y. 1997).
As is demonstrated above, BNY did not have a duty to take affirmative steps to protect Moltech from exposure to SCM as a consequence of Moltech's entering into negotiations to purchase EPS. And with regard to its dealings with Jordon, BNY actually disclosed that one of its officers not only learned about Moltech as a result of an introduction by Jordon, but also contacted Jordon before inquiring as to whether Moltech would be interested in acquiring EPS. While BNY did not disclose the September 1999 telephone conversation between Carton and Jordon, that non-disclosure, as a matter of law, did not cause Moltech to become liable to SCM under the non-circumvention clause of their agreement. Moreover, on the entire record in this case, no reasonable juror could find that BNY acted with a culpable intention to defraud Moltech.
Consequently, because Moltech cannot demonstrate that there are any triable issues of fact concerning its claim of misrepresentation, BNY is also entitled to summary judgment on this claim.
III. Warrants and Other Relief
For the foregoing reasons, BNY has demonstrated that it is entitled to summary judgment on its claims against Moltech, as well as on Moltech's counterclaims for breach of fiduciary duty and misrepresentation. Accordingly, BNY should receive (1) a success fee resulting from Moltech's acquisition of EPS, (2) reimbursement for expenses that it incurred in connection with rendering investment banking services to Moltech, and (3) indemnification for attorneys' fees, expenses and costs that BNY incurred as a consequence of prosecuting this action and defending itself in an interpleader action commenced in the United States District Court for the District of Arizona. With regard to its breach of contract claim (Count I), it is undisputed that the amount due to BNY is $1,743,810.39 (plus pre-judgment interest of 9% per annum, as is provided for under New York law).
See, e.g., N.Y. CPLR §§ 5001, 5004; Commonwealth Associates v. Palomar Med. Technologies, Inc., 982 F. Supp. 205, 213 (S.D.N.Y. 1997).
At this time, however, the Court is not in a position to enter a final judgment in favor of BNY on Counts II and III. BNY has pleaded in the alternative for either "an amount equal to the value" of the warrants or the issuance of the warrants themselves. (Complaint at p. 8.) Under New York law, a party is entitled to specific performance where there is no adequate remedy at law, such as monetary damages, that will make it whole.See, e.g., Demilo Corp. v. E.K. Constr. Co., Inc., 207 A.D.2d 480, 616 N.Y.S.2d 240 (2d Dep't 1994). However, a court cannot award monetary damages if it is uncertain as to how it should value the breach. Van Wagner Adver. Corp. v. S M Enterprises, 67 N.Y.2d 186, 193, 501 N.Y.S.2d 628, 632, 492 N.E.2d 756, 760 (1986).
The Letter of Engagement specifies that the warrants would allow BNY to acquire a certain number of shares (which the parties apparently agree is 645, 639 shares) "at the effective per share price paid by the Investors." (Complaint Ex. A at 4.) However, while is entirely possible that a fair market value of warrants for Moltech common stock can be ascertained with specificity, there is no evidence in the record that would allow the Court to make such a determination. For example, there is no evidence in the record of the market value of Moltech warrants (either in November 1999 or today) or the value of Moltech common stock (or even whether that stock is publicly traded). Accordingly, the case will be referred to Magistrate Judge James Francis for a Report and Recommendation as to how the Court should value the warrants to which BNY is entitled, or, if the value cannot be determined with any reasonable degree of certainty, whether specific performance should be required.
Finally, as to Count IV (indemnification of litigation expenses), the Court lacks evidence concerning BNY's expenses (including attorneys' fees and disbursements) in prosecuting this action and defending itself in the Arizona action. The determination of this amount will also be referred to Magistrate Judge Francis.
Of course, the parties are free to stipulate to the value of the warrants and amount of indemnification, if they can reach agreement on the amounts, and thereby obviate the reference.
CONCLUSION
BNY's motion for summary judgment is granted. Moltech's motion for partial summary judgment on its counterclaim is denied. The matter is referred to Magistrate Judge Francis for calculation of the precise amount of judgment, in accordance with this opinion.
SO ORDERED.