Opinion
No. 03 Civ. 4058 (CBM).
August 13, 2004
Amos Alter, Jenkens Gilchrist Parker Chapin LLP, New York, NY, For plaintiffs.
Moshe Maimon Levy Phillips Konigsberg, LLP New York, NY, For defendant.
OPINION
This case arises out of a stock repurchase agreement between plaintiffs and defendant. Plaintiffs claim that they performed their obligations under the agreement but defendant has not. Defendant claims that plaintiffs breached an implied promise in the agreement, thereby barring defendant from tendering plaintiffs the amounts allegedly due under the contract. Currently before the court is plaintiffs' motion to dismiss defendant's counterclaims and defenses and for summary judgment. For the reasons stated below, plaintiffs' motion is GRANTED IN PART, DENIED IN PART and DISMISSED WITHOUT PREJUDICE IN PART.
BACKGROUND
On January 16, 2002, plaintiffs Molly Cohen, Diane Cohen, Benjamin Cohen and the Albert Cohen Foundation (hereinafter "plaintiffs" or the "Cohens'"), defendant Elephant Wireless, Inc., (hereinafter "defendants" or "EWI") and other nonparty sellers entered into a written Stock Repurchase Agreement ("SRA") for the purchase and sale of shares of defendant and its affiliate companies. Complaint at ¶ 6; Pl.'s Rule 56.1 Stmt. at ¶ 3. In relevant part, the SRA provided that plaintiffs would sell back to defendant certain shares of defendant's common stock in consideration for $2,880,000, payments for which would be paid in monthly installments over the course of two years, and that plaintiffs would retain a share in 20% stock ownership in defendant. Complaint at ¶¶ 7, 11; Pl.'s Rule 56.1 Stmt. at ¶ 8. Plaintiffs transferred their shares as contemplated by the SRA and the defendant paid the $100,000 that was due at closing to plaintiffs and the other nonparty sellers. Complaint at ¶ 8; Pl.'s Rule 56.1 Stmt. at ¶ 5, 9; Def.'s Reply Brief, page 3. Since then, defendant has not made any of the 29 monthly payments of $100,000 called for under the contract, nor has it delivered new shares of stock to plaintiffs as the agreement provides.
At the time the SRA was executed, defendant was known as Direct Communications, Inc., ("DCI"). Thus, any and all references in the agreement or this opinion to DCI refer to defendant Elephant Wireless. Any and all references to "Sellers" in the SRA refer to plaintiffs.
Plaintiffs filed this action on June 4, 2003, charging defendant with breach of contract. Collectively, they seek their share of each of the outstanding monthly payments, totaling $48,000 per month, their portion of the 20% shares of stock in defendant's company (collectively, 10%) and all reasonable fees and expenses.
Defendant replied to plaintiffs' complaint with a series of affirmative defenses and counterclaims. Their affirmative defenses are: 1) the complaint fails to state a claim upon which relief can be granted, 2) lack of subject matter jurisdiction, 3) plaintiffs' claims are barred by the doctrines of unclean hands, setoff, and waiver and/or estoppel; 4) plaintiff breached an implied promise of cooperation and the covenant of good faith and fair dealing by failing to assist defendant in obtaining the requisite financing to enable defendant to pay plaintiffs amounts due; and 5) the damages plaintiffs seek were directly and proximately caused by the plaintiffs themselves. Further, defendant counterclaims that it is entitled to setoff payments owed to plaintiffs (if any) by payments defendant has made and continues to make on behalf of plaintiffs for automobile and health insurance costs. Defendant also seeks indemnification for all undisclosed accounts payable and costs associated with undisclosed litigations at the time the parties entered into the SRA. EWI further counterclaims on the grounds that the agreement contained an implied promise that plaintiffs would cooperate in defendant's efforts to secure financing. According to defendant, the parties understood that the financing was necessary to facilitate defendant's anticipated public offering. With the capital obtained from the offering, defendant could then pay plaintiffs the amounts due under the agreement. Because plaintiffs breached this implied promise by refusing to subordinate their interests to a lender who was allegedly willing to finance the public offering, defendant claims plaintiffs are not entitled to recover under the contract.
On August 26, 2003, plaintiffs moved for an order pursuant to Fed.R.Civ.P. 12(b)(6) dismissing defendant's counterclaims, for an order pursuant to Fed.R.Civ.P. 12(f) striking defendant's defenses, and for an order pursuant to Fed.R.Civ.P. 56 granting plaintiffs summary judgment on their complaint.
The case was transferred from Judge Batts to this court on October 15, 2003.
MOTION TO DISMISS AND MOTION TO STRIKE STANDARDS
Federal Rule of Civil Procedure 12(b)(6) allows a party to move to dismiss a complaint where the complaint fails to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6). At the motion to dismiss stage, the issue "is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims. Indeed it may appear on the face of the pleading that a recovery is very remote and unlikely but that is not the test." Phelps v. Kapnolas, 308 F.3d 180, 184-85 (2d Cir. 2002) quoting Chance v. Armstrong, 143 F.3d 698, 701 (2d Cir. 1998).
In assessing the merits of a 12(b)(6) motion, a court is required to accept as true the factual assertions in the complaint. Charles W.V. Maul, 214 F.3d 350, 356 (2d Cir. 2000). A district court should grant such a motion only where, viewing plaintiff's allegation in the most favorable light, "it appears beyond doubt that plaintiff can prove no set of facts in support of plaintiff's claim which would entitle plaintiff to relief."See Harris v. City of New York, 186 F.3d 243, 247 (2d Cir. 1990). A court may consider documents referred to in the complaint, explicitly or by reference, matters of which judicial notice may be taken, and documents either in the plaintiff's possession or of which the plaintiff had knowledge and relied in bringing the claim. See Gregory v. Daly, 243 F.3d 687, 691 (2d Cir. 2001); Brass, 987 F.2d at 150.
Federal Rule of Civil Procedure 12(f) allows a court to strike "from any pleading any insufficient defense." Fed.R.Civ.P. 12(f). The standard that applies to a motion to strike is the "mirror image" of the standard on a 12(b)(6) motion to dismiss for failure to state a claim. See Sony Fin. Servs., LLC v. Multi Video Group, Ltd., 2003 WL 22928602, at 8 (S.D.N.Y. Dec. 12, 2003) Motions to strike are generally disfavored and courts will not strike an affirmative defense unless the defense is clearly insufficient as a matter of law. See Avent v. Solfaro, 210 F.R.D. 91, 94 (S.D.N.Y. 2002); Forschner Group, Inc. v. B-line A.G., 943 F. Supp. 287, 291 (S.D.N.Y. 1996). See also Ulla-Maija, Inc. v. Kivimaki, 2003 WL 160777, at 4 (S.D.N.Y. 2003) (motion to strike "are not favored and will not be granted unless it is clear that the allegations in question can have no possible bearing on the subject matter of the litigation"). In addition, the moving party must also show that it would be prejudiced if the defense were to remain in the pleading. See Avent, 210 F.R.D. at 94. Increased time and expense of trial may warrant a court in granting a Rule 12(f) motion and a court should strike a defense to eliminate the delay and unnecessary expense from litigating an invalid claim when it is insufficient as a matter of law. See Estee Lauder, Inc. v. The Fragrance Counter, Inc., 189 F.R.D. 269, 272 (S.D.N.Y. 1999). Notably for the purposes of this case, however, when there has been no significant discovery, courts are even more reluctant to grant a motion to strike an affirmative defense. Oneida Indian Nation of New York v. New York, 194 F. Supp.2d 104, 117 (N.D.N.Y. 2002).
ANALYSIS
The court begins its analysis by examining defendant's affirmative defenses and, where they rest upon the same allegations as its counterclaims, considering defendant's defenses and counterclaims together.
I. Failure to State a Claim
Defendant's first affirmative defense is that plaintiffs' complaint fails to state a claim upon which relief can be granted. Plaintiffs' claim is for breach of contract. A plaintiff seeking to recover for breach of contract under New York State law must prove (1) the existence of a contract, (2) plaintiff's performance, (3) breach by the defendant, and (4) damages.Terwilliger v. Terwilliger, 206 F.3d 240, 245-46 (2d Cir. 2000); Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996). Plaintiffs' complaint alleges that the parties entered into a stock redemption agreement, plaintiffs tendered their shares back to defendant, defendant has not compensated plaintiffs pursuant to the terms of the agreement, and that plaintiffs have been damaged as a result. Having alleged all of the elements of breach of contract, defendant's first affirmative defense that plaintiffs fail to state a claim is stricken under Fed.R.Civ.P. 12(f) because it is clearly insufficient as a matter of law.
II. Doctrine of Unclean Hands
Defendant's third affirmative defense is that plaintiffs' claims are barred by the doctrine of unclean hands. Unclean hands is an equitable defense and unavailable in an action seeking money damages. See e.g., Nomura Securities Intern., Inc. v. ETrade Securities, Inc. 280 F. Supp.2d 184, 196 (S.D.N.Y. 2003). Here, plaintiffs seek money damages for defendant's alleged breach. As such, the court strikes defendant's unclean hands defense as clearly insufficient as a matter of law.
Defendants withdrew their second affirmative defense that the court lacks subject matter jurisdiction.
III. Doctrine of Setoff
Defendant's fourth affirmative defense is that plaintiffs' claims are barred in whole or in part by the doctrine of setoff. In the same vein, defendant's first counterclaim avers that defendant is entitled to set off all payments it has made and continues to make on behalf of plaintiffs for certain automobiles, insurance costs, and parking violations according to the specific terms of the stock repurchase agreement, and that defendant is also entitled to set off sums it has expended for plaintiffs' payroll and health insurance. Thus, the court will consider defendant's fourth affirmative defense and first counterclaim together.
The common law doctrine of setoff "allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A."In re Malinowski, 156 F.3d 131 (2d Cir. 1998) (internal quotation marks omitted). In setoff, the debts and credits between the parties may arise from different transactions, Midland Ins. Co. v. Corcoran, 79 N.Y.2d 253, 259-60 n. 2, 590 N.E.2d 1186, 1189, 582 N.Y.S.2d 58, 61 (1992), but they must be mutual, Scherling v. Hellman Elec. Corp. (In re Westchester Structures, Inc.), 181 B.R. 730, 740 (Bankr.S.D.N.Y. 1995). "[D]ebts are mutual when they are due to and from the same persons in the same capacity." Id.; accord In re Midland Ins. Co., 79 N.Y.2d at 259, 582 N.Y.S.2d 58, 590 N.E.2d 1186. "'Capacity' means legal capacity (e.g., principal, agent, trustee, beneficiary)." Midland, 590 N.E.2d at 1192, 582 N.Y.S.2d at 64.
Because the stock redemption agreement is incorporated by reference in the complaint, the court considers it in deciding plaintiffs' motion to dismiss. See Leonard F. v. Israel Discount Bank of New York, 199 F.3d 99, 107 (2d Cir. 1999). Section 8.4 of that agreement provides:
"Sellers . . . and/or their families are presently in possession of certain automobiles leased ("the Leases") and insured by DCI, a list of which is annexed hereto as Exhibit C. Sellers . . . and DCI agree that DCI shall continue to lease and insure these vehicles for the benefit of Sellers . . . so long as Sellers . . . agree to be responsible and indemnify DCI for all payments and obligations of DCI in connection with the lease and use of these vehicles. Sellers . . . further agree that any such sums shall be set-off against the payments due hereunder on a monthly basis."
Affidavit of G. Lewis, Ex. A., at 19 (emphasis added). Accordingly, the contract provides a legally sufficient basis for defendant's claim that it is entitled to setoff amounts due to plaintiff for costs incurred in connection with plaintiff's continued lease and use of certain vehicles made on plaintiffs' behalf.
Although the agreement does not similarly mention payroll and health insurance payments, the doctrine of setoff may apply even if the debt or credit arises from different transactions than the contract being sued upon, Midland Ins. Co., 79 N.Y.2d at 259-60, 590 N.E.2d at 1189, 582 N.Y.S.2d 58, creating the possibility that the parties entered into a different transaction that so provides. And while there may be a question as to whether plaintiffs and defendant acted in the same capacity in agreeing to setoff health insurance and payroll amounts as they acted in agreeing to setoff amounts paid for vehicle insurance, this is a question of fact necessitating discovery. Thus, defendant's fourth affirmative defense for setoff and its first counterclaim alleging the same survive plaintiff's motion to strike and to dismiss.
IV. Waiver/Estoppel
Defendant's fifth affirmative defense is that plaintiffs' claims are barred by the doctrines of waiver and/or estoppel. Citing D.S. America East v. Chromografx Imaging Systems, 873 F. Supp. 786, 798, (E.D.N.Y. 1995) and Teletronics Proprietary v. Medtronic, 687 F. Supp. 832, 841 (S.D.N.Y. 1988), plaintiffs argue that dismissal of the estoppel/waiver defense is warranted on the grounds that pleading the word "estoppel," without more, is not a sufficient state of the defense. This court, however, chooses instead to follow Cattaraugus County Project Head Start, Inc. v. Executive Risk Indemnity, Inc., 2000 WL 1737943 (W.D.N.Y. Nov. 8, 2000) rejecting that proposition on the grounds that "the affirmative defense of estoppel is akin to that of the statute of limitations; however the Second Circuit Court of Appeals has held that the identification of the particular statute of limitations is not required, and indeed the statute of limitations defense is sufficiently raised under FRCP 8 by its mere assertion."Cattaraugus, 2000 WL 1737943, at 2 (holding that pleading the word "estoppel" without more, is a sufficient statement of the defense and therefore survives the motion to strike) citing Santos v. District Council of New York City, Etc., 619 F.2d 963, 967 (2d Cir. 1980).
Equitable estoppel is "imposed by law in the interest of fairness to prevent the enforcement of rights which would work fraud or injustice upon the person against whom enforcement is sought and who, in justifiable reliance upon the opposing party's words or conduct, has been misled into acting upon the belief that such enforcement would not be sought." Nassau Trust Co. v. Montrose Concrete Prods. Corp., 56 N.Y.2d 175, 184, 451 N.Y.S.2d 663, 436 N.E.2d 1265 (1982). Thus, equitable estoppel is a principle or an affirmative defense that serves to stop another party from denying a material fact. See 57 N.Y. Jur. 2d, Estoppel § 13, at 17-18 (1986) (equitable estoppel "is the principle by which a party is absolutely precluded from denying, or asserting the contrary of, any material fact"); 28 Am.Jur.2d, Estoppel Waiver § 27, at 629 (1966) (equitable estoppel is a "rule . . . of substantive law, for the reason that it absolutely precludes a person from asserting what would otherwise be his right"). Similarly, waiver is the "voluntary and intentional abandonment of a known right which, but for the waiver, would have been enforceable." Nassau Trust Co., 56 N.Y.2d at 184, 451 N.Y.S.2d 663, 436 N.E.2d 1265.
Under New York law, the defense of equitable estoppel requires proof of three elements: 1) conduct which amounts to a false representation or concealment of material facts; 2) intention that such conduct will be acted upon by the other party; and 3) knowledge of the true facts. See Int'l Minerals and Resources, S.A. v. Pappas, 96 F.3d 586, 594 (2d Cir. 1996); Readco, Inc. v. Marine Midland Bank, 81 F.3d 295, 301 (2d Cir. 1996);Benincasa v. Garrubbo, 141 A.D.2d 636, 638, 529 N.Y.S.2d 797, 800 (2d Dep't 1988). In addition, the party alleging estoppel must show that it 1) lacked knowledge of the true facts, 2) relied upon the conduct of the party estopped, and 3) changed its position in a prejudicial manner. Airco Alloys Div., Airco Inc. v. Niagara Mohawk Power Corp., 76 A.D.2d 68, 81-82, 430 N.Y.S.2d 179 (4th Dep't 1980)
At this stage in the litigation, the court is not prepared to hold that there is "no question of fact which might allow the defense to succeed" or that "plaintiff would be prejudiced by the inclusion of the defense." SEC v. McCaskey, 56 F. Supp.2d 323, 326 (S.D.N.Y. 1999). During discovery, it is conceivable that defendant could gather evidence showing that plaintiffs represented that they would not enforce the contract unless and until defendant acquired the necessary financing for its public offering. The defense of waiver and/or estoppel is not clearly insufficient as a matter of law and therefore survive plaintiff's motion to strike.
V. Lack of Injury or Damages
Defendant's sixth affirmative defense is that "plaintiffs have not, nor will they, suffer injury or damages as a result of any conduct by EWI." Def.'s Amended Answer at 3.
"(I)t is a well-settled tenet of contract law that even if the breach of contract caused no loss or if the amount of loss cannot be proved with sufficient certainty, the injured party is entitled to recover as nominal damages a small sum fixed without regard to the amount of the loss, if any." Hirsch Elec. Co. v. Cmty. Servs., Inc., 145 A.D.2d 603, 605, 536 N.Y.S.2d 141, 143 (2d Dep't 1988) (citation omitted); accord Freund v. Washington Square Press, Inc., 34 N.Y.2d 379, 384, 357 N.Y.S.2d 857, 861, 314 N.E.2d 419 (1974) (plaintiff entitled to nominal damages where compensatory damages not proven with certainty; "Though these are damages in name only and not at all compensatory, they are nevertheless awarded as a formal vindication of plaintiff's legal right to compensation which has not been given a sufficiently certain monetary valuation.");Manhattan Sav. Inst. v. Gottfried Baking Co., 286 N.Y. 398, 400, 36 N.E.2d 637 (1941) (same); C.K.S. Ice Cream Co. v. Frusen Gladje Franchise, Inc., 172 A.D.2d 206, 208, 567 N.Y.S.2d 716, 718 (1st Dep't 1991) ("Even if it were shown that no actual damages have been sustained, plaintiff would seem entitled to proceed to trial at least on its contract cause of action[,] if only to vindicate its right to nominal damages.") (citations omitted); Good Karma Prods. v. Penthouse Int'l, Ltd., 88 A.D.2d 561, 450 N.Y.S.2d 486, 486-87 (1st Dep't 1982); see also Vazquez v. Salomon Smith Barney Inc., 2002 WL 10493, at 6 (S.D.N.Y. Jan. 4, 2002) (lack of damage did not defeat breach of contract claim); Mermaid Neptune Dev. Corp. v. Home Owners Warranty Corp., 1988 WL 45653, at 4 (S.D.N.Y. May 4, 1988) (same); UV Indus., Inc. v. Sharon Steel Corp., 631 F. Supp. 1219, 1221 (S.D.N.Y. 1986) (same). This is because "[w]henever there is a breach of a contract or the invasion of a legal right[,] the law infers some damage." Finley v. Atlantic Transp. Co., 220 N.Y. 249, 258, 115 N.E. 715 (1917).
If defendant breached the stock repurchase agreement as plaintiffs' complaint avers, plaintiffs have suffered some form of compensable damage. However, in order for defendant's affirmative defense to be clearly legally insufficient on the grounds that every breach of contract gives rise to damages as a matter of law, the court must first find that such a breach in fact occurred. Given that the issue of breach has yet to be determined, plaintiff's motion to strike defendant's sixth affirmative defense is denied.
VI. Implied Promise of Cooperation and the Covenant of Good Faith and Fair Dealing
A. Defendant's Claims
Defendant's seventh affirmative defense is that "plaintiff's claims are barred by the operation of an implied promise of cooperation and by the covenant of good faith and fair dealing, each of which plaintiff breached by failing to assist EWI in obtaining the requisite financing to perform under the Agreement." Def.'s Amended Answer at 3. Defendant's eighth affirmative defense appears to rest on the same allegation to the extent that it alleges that any damages plaintiffs have suffered pursuant to this transaction stem from plaintiffs' own misconduct. Id.
Similarly, defendant counterclaims on the grounds that at the time the parties entered into the agreement, the parties understood that the purpose of plaintiffs selling their shares back to defendant was to "facilitate the infusion of financing into the company from financial institutions and/or private investors." Def.'s Amended Answer, 8 at ¶ 32. "Indeed, all parties to the Agreement understood that EWI could not make the monthly payments to the counterclaim defendants . . . without the necessary financing." Id. "Accordingly, the Agreement contained an implied promise by the parties to cooperate in securing financing, including adjusting the seniority of their ownership interests in EWI to the demands of financial institutions." Id. at 8, ¶ 33. Defendant avers that after the agreement was executed, plaintiffs refused to subordinate their interests in EWI to the demands of a lender that would have provided the credit to facilitate defendant's anticipated public offering and, in turn, its ability to make monthly payments to plaintiffs as contemplated under the contract. Id. at 8, ¶ 34. Defendant therefore claims in its fourth counterclaim that plaintiffs breached the implied promise to cooperate in defendant's efforts to secure financing for the public offering.
Defendant's fifth counterclaim for breach of implied covenant of fair dealing turns upon the same allegation that plaintiffs failed to "cooperate in securing financing, including adjusting the seniority of their ownership interests in EWI to the demands of a financial institution." Id. at 9, ¶ 43.
Because defendant's seventh and eight affirmative defenses and fourth and fifth counterclaims all rest upon the same allegation that plaintiff promised to cooperate in defendant's attempt to secure financing and thereafter failed to do so, the court analyzes them together.
B. Analysis
1. Implied Promise to Cooperate in Defendant's Efforts to Secure Financing and Subordinate Their Interests
It is well-settled that under New York law, implied promises in commercial agreements are enforceable. See e.g., Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917) ("A promise may be lacking, and yet the whole writing may be 'instinct with an obligation,' imperfectly expressed."). A court may not, however, "rewrite, under the guise of interpretation, a term of the contract when the term is clear and unambiguous, nor redraft a contract to accord with its instinct for the dispensation of equity upon the facts in a given case." Cruden v. Bank of New York, 957 F.2d 961, 976 (2d Cir. 1992) (citation omitted). See also Dalton v. Educational Testing Service, 87 N.Y.2d 384, 639 N.Y.S.2d 977, 663 N.E.2d 289, 291 (1995) (a court may not imply an obligation that is inconsistent with the other terms of the contractual relationship). Courts will not find an implied covenant when doing so is unnecessary to give effect to the terms of the contract. Vacuum Concrete Corp. v. Am. Machine Foundry Co., 321 F. Supp. 771, 773 (S.D.N.Y. 1971). New York law requires courts to interpret a contract "so as to give effect to the intention of the parties as expressed in the unequivocal language they have employed." Cruden, 957 F.2d at 976. Moreover, in construing a contract, court should not "suppose that one party was to be placed at the mercy of the other." Wood, supra, at 214 (citing cases).
"A familiar and eminently sensible proposition of law is that, when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms. Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally in admissible to add to or vary the writing." W.W.W. Assoc., Inc. v. Giancontieri, 77 N.Y.2d 157, 162, 566 N.E.2d 639, 642, 565 N.Y.S.2d 440, 443 (1990). This proposition is the parol evidence rule. The parol evidence rule bars the introduction and consideration of extrinsic evidence of the meaning of a complete written agreement, if the terms of the agreement are clear and unambiguous. Id. at 162-63, 566 N.E.2d at 642, 565 N.Y.S.2d at 443. If the terms of the complete written contract are unclear, ambiguous, or contradictory, however, the parol evidence rule permits the consideration of such evidence in order to ascertain the true meaning of the terms. See generally Alexander Alexander Servs., Inc., v. These Certain Underwriters at Lloyd's, London, 136 F.3d 82, 86 (2d Cir. 1998).
Application of the parol evidence rule requires a three-step inquiry: first, whether the written contract is an integrated agreement; if it is, then second, whether the language of the written contract is clear or unambiguous; and, if the language is clear, then third, applying that clear language, whether plaintiff has alleged breach of the written contract. See Investors Ins. Co. v. Dorinco Reinsurance Co., 917 F.2d 100, 103-05 (2d Cir. 1990). Unless plaintiffs can satisfy these criteria, the parol evidence rule has no application and proof of the contemporaneous agreement can be admitted. Lee v. Joseph E. Seagram Sons, Inc., 413 F. Supp. 693, 701-02 (S.D.N.Y. 1976) (citation omitted).
Turning to the first step of the inquiry, "an integrated agreement is one which represents the entire understanding of the parties to the transaction. Under New York law a contract that appears complete on its face is an integrated agreement as a matter of law." Wayland Inv. Fund, LLC v. Millennium Seacarriers, Inc., 111 F. Supp.2d 450, 454 (S.D.N.Y. 2000) (citing, inter alia, Investors Ins. Co., 917 F.2d at 104;Battery Steamship Corp. v. Refineria Panama, S.A., 513 F.2d 735, 738 n. 3 (2d Cir. 1975)) (internal quotation marks omitted). Here, the contract contains an explicit integration agreement. Section 10.3, labeled "Entire Agreement" provides: "This instrument and the Exhibits "A" through C which are hereby incorporated herein by reference, embody the entire agreement among the parties hereto with respect to the subject matter hereof, and supercede (sic) any and all prior understandings, written or oral, formal or informal." The contract, therefore, is integrated, and plaintiff has satisfied the first prong of the test to exclude parol evidence.
The second prong queries whether the language of the contract is clear or whether it is ambiguous. Investors Ins. Co., 917 F.2d at 104. "Whether or not a writing is ambiguous is a question of law to be resolved by the courts." W.W.W. Assocs., 77 N.Y.2d at 162, 566 N.E.2d at 642, 565 N.Y.S.2d at 443. An ambiguity arises if "the terms of a contract could suggest 'more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.'" Alexander Alexander Servs., 136 F.3d at 86,quoting Lightfoot v. Union Carbide Corp., 110 F.3d 898, 906 (2d Cir. 1997).
Defendant points to language in Section 1.2 of the SRA as establishing an ambiguity in the agreement. That section is entitled "Redemption of Shares of DCI." It states:
"Upon the terms and subject to the conditions contained herein, Sellers shall sell, transfer and deliver to the DCI, and DCI shall redeem and acquire from the Sellers the Shares, which Shares shall be free of any adverse claim or encumbrance. The number of Shares to be redeemed by DCI from the Sellers . . . is such that upon consummation of the transaction, contemplated by this Agreement the Sellers as a group in such proportion between themselves as they deem proper and appropriate shall retain a 20% interest in DCI . . . It is understood between the parties that a third party will in the near term acquire a stock interest in DCI. If there is no third party investor Sellers may cancel this Agreement upon the return of any money paid to them hereunder, at which time all shares redeemed shall be returned to Sellers . . . The DCI stock to be sold, transferred or conveyed in the first subsequent investment shall occur in such a way that at the conclusion of this first subsequent investment into DCI the Sellers proportionate interest in DCI shall still be 20% of the then issued and outstanding shares in existence, Sellers understand that their interest(s) will be proportionately diluted in any subsequent investments or transactions."
Affidavit. of G. Lewis, Ex. A., at 2-3.
This language does not suggest more than one meaning when viewed objectively by a reasonably intelligent person. Alexander Alexander Servs., 136 F.3d at 86. It simply means what it says: plaintiff sellers were to maintain a 20% stock interest in defendant, with the understanding that subsequent investors may acquire an interest in the corporation thereafter. There is nothing in this language to even remotely suggest that plaintiffs were to play a role in securing the third party investment mentioned in the agreement.
Defendants next point to Section 7.2 as establishing an ambiguity in the SRA. It provides:
"Sellers . . . shall not voluntarily undertake any course of action inconsistent with the satisfaction of the requirements of the conditions applicable to him or her set forth in this Agreement, and each Seller . . . shall promptly do all such acts and take all such measures as may be appropriate to enable them to perform as early as possible the obligations herein provided to be performed by them."
Affidavit of G. Lewis, Ex. A., at 17. Defendants suggest that this language is amenable to the interpretation that under the SRA, plaintiffs had an obligation to assist defendants in securing financing by agreeing to subordinate their interests to a future lender. This argument is circular. The language cited above does not lend itself to a possible meaning that plaintiffs were to help defendants secure financing; it merely states that the parties shall perform their obligations under the agreement. Thus, the quoted language does not create an ambiguity because it is not reasonably susceptible to differing interpretations.Seiden v. Assocs. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992).
Turning to the third and final prong to the inquiry, the question is whether defendant breached the SRA. Defendant does not dispute that it has not tendered plaintiffs the amounts owing under the agreement or a 20% stock ownership interest in defendant. It is therefore reasonable to conclude that if the SRA is a legally operative contract, then defendant was in breach. Therefore, plaintiffs have satisfied the criteria necessary to apply the parol evidence rule to the agreement.
Having concluded that the parol evidence rule applies, the court must nevertheless consider whether the rule bars admission of the evidence proffered by defendant. Defendant appears to aver that its performance was subject to a condition precedent, namely, the ability of defendant to secure financing for its public offering with the cooperation of plaintiffs. "The applicable law is clear, the relevant principles settled. Parol testimony is admissible to prove a condition precedent to the legal effectiveness of a written agreement if the condition does not contradict the express terms of such written agreement."Morgan Stanley High Yield Securities, Inc. v. Seven Circle Gaming Corp., 269 F. Supp.2d 206, 216 (S.D.N.Y. 2003) citing Hicks v. Bush, 10 N.Y.2d 488, 225 N.Y.S.2d 34, 180 N.E.2d 425 (1962).
Here, section 4.2 of the SRA specifically identifies conditions precedent to the agreement's execution, with no mention of defendant's ability to securing financing or plaintiffs' cooperation therein. Article 6 specifically identifies conditions precedent to plaintiffs' obligations to perform, but there is no comparable section to the Agreement delineating conditions precedent to defendant's performance. Even more important, section 10.12 provides that no modifications shall be legally effective unless made in writing and signed. Section 10.13 provides that subject to IRS approval of plaintiffs as proper shareholders as an S corporation prior to closing, "this Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and permitted assigns." Article 3 similarly states: "This Agreement has been duly authorized, executed, and delivered by and constitutes the valid and legally binding obligation of, DCI." Affidavit of G. Lewis, Ex. A., at 10-11.
Accordingly, there is a conflict between defendant's allegation that its performance was subject to a condition precedent and the explicit language requiring modifications to be in writing. See Mizuna, Ltd. v. Crossland Fed. Sav. Bank, 90 F.3d 650, 659-60 (2d Cir. 1996) (alleged oral condition precedent inconsistent with clause prohibiting amendment except by written agreement);Bank Leumi Trust Co. of New York v. Wulkan, 735 F. Supp. 72, 76 (S.D.N.Y. 1990) (alleged oral condition precedent inconsistent with the provision that no modifications shall be deemed to be made unless the same shall be in writing); Hicks, 10 N.Y.2d at 492, 225 N.Y.S.2d at 37, 180 N.E.2d 425 (alleged oral condition precedent inconsistent with the contractual term stating that no oral modifications would be binding on the parties). Moreover, the SRA is clear that it represents a binding obligation upon the parties. The court can think of nothing more inconsistent with that express contractual language and any assertion that the SRA never became a valid, binding obligation requiring defendant to perform. See Morgan Stanley, 269 F. Supp.2d at 220 ("It simply defies logic to contend that a condition precedent, which would be introduced for the purpose of proving that the Agreement never became a legally valid and binding document, would not contradict a term, agreed to by both parties, stating that 'this Agreement is [the signing party's] legal, valid and binding obligation enforceable in accordance with its terms.'"). See also Bank Leumi Trust Co., 735 F. Supp. at 76 ("Wulkan's contention that Bank Leumi orally agreed that the effectiveness of the Guaranty was conditioned upon Wulkan obtaining the requisite authority from the Israeli government obviously varies the express written terms of the Guaranty, which states that he 'irrevocably and unconditionally' undertook to guarantee Dumax's liabilities to Bank Leumi, and that 'no modifications or amendment of the guaranty shall be deemed to be made unless the same shall be in writing.'").
Because the parol evidence rule bars the introduction of extrinsic evidence to show that plaintiffs promised to assist defendant in securing financing for its anticipated public offering by subordinating their interests to a potential lender, there are no facts upon which defendant can show that the contract contained such an implied promise or condition precedent. Defendant's seventh and eight affirmative defenses are stricken and fourth and fifth counterclaims are dismissed as being clearly legally insufficient as a matter of law.
1. Good Faith and Fair Dealing
Defendant's seventh affirmative defense and fifth counterclaim also include an allegation that plaintiff breached the implied covenant of good faith and fair dealing by failing to cooperate in defendant's efforts to procure financing for the planned public offering.
Under New York law, every contract includes an implied covenant of good faith and fair dealing. Travellers Intern., A.G., v. Trans World Airlines, 41 F.3d 1570, 1575 (S.D.N.Y. 2003). At the same time, the covenant cannot be used to create new contractual rights between the parties. In re Houbigant, 914 F. Supp. 964, 995 (S.D.N.Y. 1995). Because breach of the covenant is "merely a breach of the underlying contract," Fasolino Foods Co. v. Banca Nazionale del Lavoro, 961 F.2d 1052, 1056 (2d Cir. 1992), "as a general rule, the cause of action alleging breach of the implied covenant is duplicative of a cause of action alleging breach of contract." OHM Remediation Servs. Corp. v. Hughes Envntl. Sys., Inc., 952 F. Supp. 120, 124 (S.D.N.Y. 1997) (citation and internal citations omitted). To the extent that defendant's seventh affirmative defense and fifth counterclaim charging breach of the implied covenant of good faith and fair dealing rests upon plaintiffs' alleged breach of the implied promise to assist defendant in obtaining financing, they are duplicative and therefore dismissed. See MDC Corp., Inc. v. John Harland Co., 228 F. Supp.2d 387, 395 (S.D.N.Y. 2002).
For the reasons stated above, plaintiffs' motion to strike defendant's seventh and eighth affirmative defenses and to dismiss its fourth and fifth counterclaims is granted.
VII. Indemnification
Defendant's second counterclaim is for indemnification for undisclosed accounts payable. Defendant's third counterclaim is for indemnification for indemnification for undisclosed litigations. In New York, indemnification claims must be grounded in contract either express or implied. McDermott v. City of New York, 50 N.Y.2d 211, 216, 428 N.Y.S.2d 643, 406 N.E.2d 460 (1980) ("The right to indemnity . . . springs from a contract, express or implied, and full, not partial, reimbursement is sought") (internal quotations omitted).
Under the heading "Representation and Warranties of Sellers," Section 2.5 of the SRA provides:
"Exhibit D to this Agreement sets forth the unaudited Financial Statements for DCI, each of the Affiliated Companies, and Anything Wireless, Inc., at September 30, 2001, except that accounts payable are set forth as of November 30, 2001, fairly present the financial position of DCI, each of the Affiliated Companies, and Anything Wireless, Inc., at the balance sheet dates and the result of operations for the period covered thereby. To Sellers' knowledge current the books and records of DCI, each of the Affiliated Companies, and Anything Wireless, Inc. fully and fairly reflect all of its transactions, properties, assets and liabilities [sic]. Except as set forth in the Financial Statements there are no special or non-recurring items of income or expense during the periods covered by the Financial Statements, and except as set forth in the Financial Statements, the balance sheets included in the Financial Statements do not reflect any write-up or revaluation increasing the book value of any assets. There are no material changes in the Financial Statements since September 30, 2001 and there are no other liabilities, contingent or other, other than in the ordinary course of business. The Financial Statements reflect all adjustments necessary for a fair representation of the financial information contained therein . . ."
Affidavit of G. Lewis, Ex. A, at 7. Similarly, Section 2.8 of the SRA includes a representation by plaintiffs that at the time of the execution of the agreement, there were no undisclosed litigations or suits pending against plaintiffs or defendant, nor any facts known to plaintiffs that might result in such litigation. Id. at 8.
Under section 8.2, entitled "indemnification," plaintiffs agreed to "indemnify and hold DCI harmless from any damage, loss, claim, liability, deficiency or expense, inclusive of reasonable attorneys' and accountants' fees, arising out of or relating to the breach of any representation or warranty of" plaintiffs.Id. at 18.
In light of these express provisions in the SRA, defendant's claim for indemnification for undisclosed amounts payable and undisclosed litigations is grounded in contract. Although both parties concede that "Exhibit D" that allegedly sets forth the "financial statements" is not annexed to the contract, its absence and the explanation therefor should be explored during discovery. As such, defendant's counterclaims for indemnification survive plaintiffs' motion to dismiss; they are not clearly legally insufficient as a matter of law.
SUMMARY JUDGMENT STANDARD
In addition to moving to dismiss defendant's counterclaims and to strike defendant's affirmative defenses, plaintiffs move the court for summary judgment in their favor on all of the claims set forth in their complaint. Defendants object to any ruling on the merits of a summary judgment motion given that the case has yet to proceed with discovery.
Under Fed.R.Civ.P. 56(c), summary judgment "shall be rendered forthwith" if it is shown that "there is no genuine issue of material fact and that the moving party is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 323 n. 4, 106 S.Ct. 2548, 2552 n. 4 (1986). "[G]enuineness runs to whether disputed factual issues can reasonably be resolved in favor of either party, [while] materiality runs to whether the dispute matters, i.e., whether it concerns facts that can affect the outcome under the applicable substantive law." Mitchell v. Washingtonville Cent. Sch. Dist., 190 F.3d 1, 5 (2d Cir. 1999) (internal quotations and citations omitted). In order to prove that a genuine issue of material fact exists, a plaintiff "may not rest upon the mere allegations or denials of the pleading[s]," but must by affidavit or otherwise "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). "Conclusory statements, conjecture or speculation by the party resisting the motion will not defeat summary judgment." Kulak v. City of New York, 88 F. 3d 63, 71 (2d Cir. 1996).
Courts must resolve all ambiguities and draw all reasonable factual inferences in favor of the non-moving party. See Nora Beverages, Inc. v. Perrier Group of Am., Inc., 164 F.3d 736, 742 (2d Cir. 1998). The moving party bears the initial burden of demonstrating an absence of genuine issues of material fact.See Schwapp v. Town of Avon, 118 F.3d 106, 110 (2d Cir. 1997). If the initial burden is met, the non-moving party "must produce specific facts indicating that a genuine issue of fact exists. If the evidence [presented by the non-moving party] is merely colorable, or is not significantly probative, summary judgment may be granted." Scotto Almenas, 143 F.3d 105, 114 (2d Cir. 1998) (internal quotations and citations omitted) (alteration in original).
ANALYSIS
Given the court's conclusions above sustaining defendant's fourth, fifth, and sixth affirmative defenses and first, second, and third counterclaims over plaintiffs' motion to dismiss, there are genuine issues of fact necessitating further evidentiary support before the court can enter judgment as a matter of law on plaintiff's complaint. "Only in the rarest of cases may summary judgment be granted against a [party] who has not been afforded the opportunity to conduct discovery." Hellstrom v. U.S. Dep't of Veterans Affairs, 201 F.3d 94, 97 (2d Cir. 2000). The Second Circuit has denied motions for summary judgment as premature in cases where the nonmoving party did not have a "fully adequate opportunity for discovery" at the time the moving party sought summary judgment. Trebor Sportswear Co. v. The Limited Stores, Inc., 865 F.2d 506, 511 (2d Cir. 1989. See Hellstrom, 201 F.3d at 97; Berger v. United States, 87 F.3d 60, 65 (2d Cir. 1996); Sutera v. Schering Corp., 73 F.3d 13, 18 (2d Cir. 1995) (reversing summary judgment granted before any discovery had taken place); see also Crystalline H2O Inc., v. D. Orminski, 105 F. Supp.2d 3 (N.D.N.Y. 2000) (declining to hear motion for summary judgment on the merits in a contract case before the discovery phase); Ammcon, Inc. v. Kemp, 826 F. Supp. 639, 647 (E.D.N.Y. 1993); Wright v. Eger, 224 A.D.2d 795, 637 N.Y.S.2d 514, 514-15 (3d Dep't 1996); cf. Trebor Sportswear Co., 865 F.2d at 511 ("The nonmoving party should not be 'railroaded' into his offer of proof in opposition to summary judgment. The nonmoving party must have had the opportunity to discovery information that is essential to his opposition to the motion for summary judgment. But the trial court may property deny further discovery if the nonmoving party has had a fully adequate opportunity for discovery.") (quotations and internal citations omitted) (emphasis added).
Accordingly, at the very least, a resolution of the issues before the court requires that defendant have the opportunity to conduct limited discovery with respect to its claims of waiver/estoppel, setoff and indemnification. Thus, plaintiffs' motion for summary judgment is premature and is dismissed without prejudice.
CONCLUSION
Plaintiffs' motion to strike defendant's first, third, seventh and eighth affirmative defenses is GRANTED. Plaintiffs' motion to strike defendant's fourth and fifth affirmative defenses is DENIED. Plaintiffs' motion to dismiss defendant's fourth and fifth counterclaims is GRANTED. Plaintiff's motion to dismiss defendant's first, second, and third counterclaims is DENIED. Plaintiff's motion for summary judgment is DISMISSED WITHOUT PREJUDICE.