Opinion
No. 298, 1998.
Submitted: January 27, 1999.
Decided: April 1, 1999.
Court Below: Court of Chancery of the State of Delaware in and for New Castle County, C.A. No. 11392.
Before WALSH, HOLLAND, and HARTNETT, Justices.
ORDER
This 1st day of April, 1999, upon consideration of the briefs and oral argument, it appears to the Court that:
(1) The defendants below/appellants, David J. Stone Co., Inc. ("DJS"), DJS Securities Ltd. ("DJS Securities"), David J. Stone and Sara G. Stone (collectively "the Stones") appeal from a June 22, 1998 Final Order and Judgment of the Court of Chancery after trial awarding approximately $13.2 million dollars in favor of plaintiffs below/appellees Barry Silverstein ("Silverstein"), Dennis McGillicuddy ("McGillicuddy"), D. Stevens McVoy ("McVoy") (collectively "the Phoenix Group"), and Charybdis, Inc. ("Charybdis"), and against DJS, DJS Securities, and the Stones, jointly and severally, for breach of two stockholders' agreements.
The judgment against DJS and the Stones totalled $12,696,828.20 constituting $7,101,717.50 damages and $5,595,110.70 prejudgment interest. The judgment against DJS Securities and the Stones is in the amount of $546,895.07, comprised of $266,725 damages and $280,170.07 prejudgment interest.
(2) The Stones contend that the Court of Chancery erred by improperly construing the termination provision of the stockholders' agreements and abused its discretion in awarding prejudgment interest for the entire litigation period, and in awarding postjudgment interest on prejudgment interest.
(3) The Stones founded DJS and DJS Securities in the late 1970's to provide investment banking and financial consulting services. The Phoenix Group met the Stones through a consulting engagement and discussions ensued concerning a business partnership. These discussions resulted in partnership and stockholders' agreements dated April 1, 1986. The parties also formed two partnerships to hold their investments, Scylla Investment Partners ("Scylla") and DJS Group. The Phoenix Group contributed approximately $1.6 million to the companies, loaned approximately another $1 million, and guaranteed a line of credit, initially at $1 million, later increased to $2 million. The Phoenix Group and the Stones each owned a 50% interest in DJS and DJS Securities.
The Stones worked full time and received salaries. The Phoenix Group provided contacts, participated in business decisions, but did not receive salaries. For over three years the business was successful and included profitable transactions, most notably, those involving buyouts of the CBS magazine division and the Steak `N Ale restaurant chain.
(4) The parties' relationship soured over a proposed tender offer for Jerrico, Inc., the operator of a chain of fast food restaurants. The Phoenix Group agreed that DJS could act as investment banker, but declined direct participation because of risk. In August, 1989, Plaintiffs learned from a public filing that the Stones had committed DJS to provide $25 million in equity for the Jerrico deal, funds which the company did not have at the time. Although the deal closed, the Phoenix Group became concerned about liability exposure.
The Jerrico transaction eventually led the Phoenix Group to terminate their relationship with the Stones. The Phoenix Group sent notice of its election to dissolve the Scylla and DJS Group partnerships on September 22, 1989. The dissolution of the partnerships triggered the termination provision in the stockholders' agreements which defined the parties' rights upon termination concerning the sharing of then accrued "investment banking and financial consulting fees." The Stones took the position that no such fees had accrued, while the plaintiffs sought recovery for fees attributable to transactions pending, but not closed, at the date of termination.
(5) The stockholders' agreements at issue here contained provisions regarding the termination of the partnerships and the purchase of the stock. Those agreements provided:
There were two stockholders' agreements, mutatis mutandis, one with respect to DJS, and the other for DJS Securities. The above quoted termination provision comes from the DJS agreement. The termination provision for DJS Securities was located at Article 2.1.
3.1 Purchase of Stock. The Stockholders are the partners through affiliated corporations of two partnerships, The DJS Group and Scylla Investment Partners (the "Partnerships") and are the sole stockholders of a sister corporation, DJS Securities Limited ("DJS Securities"). It is understood and agreed that in the event the Partnerships are terminated, for any reason, the Stones shall have the sole right to continue the investment banking and financial consulting business carried on by the Company and DJS Securities. The Stockholders recognize that it is impractical at this time to establish a value for shares of Stock of the Company at some unforeseen date when a termination of the Partnerships may occur. Accordingly, the Stockholders have agreed that on the date of the termination of the Partnerships, the Company or, at the Stones' option, the Stones, shall purchase all of the Stock then owned by Phoenix Group. The purchase price for the shares shall equal fifty percent (50%) of all investment banking and financial consulting fees then accrued by the Company or thereafter earned by the Company for projects, commitments or any other work undertaken by the Company within 120 days after the termination of the Partnerships, less the cost of earning each such fee as subsequently verified by the Company's accountants when paid. In exchange for the purchase of the shares of Stock of the Phoenix Group, the Stones shall have the right to continue the investment banking and financial consulting business under the trade names of "DJS", "The DJS Group", "David J. Stone Company" and "DJS Securities Limited".
(Emphasis supplied).
(6) The Court of Chancery implicitly found that "investment banking fees" was ambiguous. We agree. The court's reference to a "narrower usage"of that term supports the determination that "investment banking fee" is susceptible to different interpretations and potentially has more than one meaning. Additionally, Blacks Law Dictionary's definitions for "[i]nvestment banking" and "[i]nvestment banker" supply a basis for concluding that the term may be susceptible to different interpretations. See BLACKS LAW DICTIONARY 826 (6th ed. 1990).
The stockholders' agreements do not define the term, and the termination provision generally refers to the Stones' "right to continue the investment banking and financial consulting business carried on by [DJS] and DJS securities." The Court of Chancery concluded that this provision, described DJS's business, and supported his finding that the business "clearly included investment banking in the broader as well as the narrower sense." Reasonable people in the position of the parties to the agreements might have inconsistent expectations as to the meaning of "investment banking fees." The language in the contracts might include all fees generated in the business of DJS and DJS Securities, or might only relate to services in raising capital as an agent for others. Because the term "investment banking fee" is ambiguous, the Court of Chancery properly considered extrinsic evidence.
(7) The ultimate goal of the examination of extrinsic evidence and subsequent interpretation by the court is ascertaining the intentions of the contracting parties. Eagle Indus., Inc. v. DeVilbiss Health Care, Inc., Del. Supr., 702 A.2d 1228, 1232 (1997). The Court of Chancery considered the extensive evidence offered by the parties and found that the evidence produced by the Phoenix Group was more persuasive. The court also considered the evidence of the parties' "purpose when they went into business together," as well as their "course of dealings." To the extent that the court's interpretation rests on these findings, this Court must accept those findings unless they are unsupported by the record or not the product of an orderly and logical deductive process. Sonitrol Holding Co. v. Marceau Investissements, Del. Supr., 607 A.2d 1177, 1181 (1992).
The Court of Chancery found no support "in the language of the agreement or in the extrinsic evidence" for the Stones' argument "that the intent [of the parties] was to use the narrower definition [of investment banking] when referring to fees after termination." There was sufficient support in the record, including the testimony of Silverstein and McGillicuddy as to their understanding of the agreements, and the evidence concerning the course of dealing and/or course of performance between the parties, for the Court of Chancery to conclude that the parties, at the time of contracting, intended the term "investment banking fees" to include those fees in controversy here. Because the Court of Chancery's findings based on the extrinsic evidence were supported by the record and were the product of an orderly and logical deductive process, we affirm the Court of Chancery's interpretation of "investment banking fees."
Defendants' argue that the court "rejected the only evidence . . . as to the meaning of `investment banking fees,' in the relevant industry," and "failed to give the contractual terms the meaning ascribed to them in the relevant industry. . . ." Evidence of trade usage as an aid to interpretation of a contract is used to ascertain and give effect to the intention of the parties. An agreement will be interpreted in accordance with a relevant usage if "each party knew or had reason to know of the usage." 5 CORBIN ON CONTRACTS § 24.13 (1998). (Emphasis supplied). Defendants have pointed to no evidence and none has been located demonstrating that the Phoenix Group had reason to know that at the time of contracting the narrower definition advanced by the Defendants was that intended in the contract.
(8) Next, the Stones take issue with the Court of Chancery's interpretation of "fees then accrued." That this phrase is ambiguous and reasonably susceptible of different interpretations once again finds support in dictionary definitions. See BLACKS LAW DICTIONARY 20 (6th ed. 1990); WEBSTER'S NINTH COLLEGIATE DICTIONARY 50 (1987). The Court of Chancery properly considered extrinsic evidence in its effort to interpret the phrase to ascertain the intentions of the parties.
Again, there was sufficient evidence for the court to accept the Phoenix Group's interpretation of this phrase as that which was intended by the parties at the time of contracting. The record supports a finding that the parties intended "fees then accrued" to mean net assets minus leasehold improvements, which included accumulated cash held by the companies. We affirm the Court of Chancery's interpretation of "fees then accrued."
(9) The Court of Chancery recognized that the issue of whether the judgment should be "against the Stones personally as well as against the corporations" was first raised after its Memorandum Opinion. In reaching its decision, the court considered the overall partnership agreements. The court held that the Stones' were personally responsible for their "individual promises" that the Phoenix group would receive payment. The court acknowledged that additional evidence might give rise to other grounds for the Stones' personal liability, but did not consider them.
Plaintiffs on appeal argued both that Stone admitted through testimony that there was a personal obligation to purchase the stock, as well as waiver by virtue of not having raised this argument until after the court's decision following trial. See Collins v. Throckmorton, Del. Supr., 425 A.2d 146, 151 (1980). Our finding in support of the Court of Chancery obviates our need to address these arguments.
Having found the purchase of stock provision in the stockholders' agreements ambiguous, it was proper for the Court of Chancery to consider extrinsic evidence of the "overall agreement between the Stones and the Phoenix Group when they went into the investment banking business together," and to consider the "agreements' background and purpose." We must accept the Court of Chancery's findings because they find record support and are the product of an orderly and logical deductive process. Sonitrol, 607 A.2d at 1181. It is significant, in our view, that the termination agreement conferred upon the Stones the "option" to designate the purchaser of the Phoenix Group shares, as between themselves individually and the Company. Accordingly, we affirm the Court of Chancery's ruling holding the Stones jointly and severally liable with DJS and DJS Securities.
(10) Defendants next assert that the Court of Chancery abused its discretion by awarding prejudgment interest for the entire post-termination period without regard to twenty-six months during which this case lay dormant. Defendants argue that Plaintiffs are not entitled to receive "complete relief" when for more than two years they "sat on their hands and did nothing, despite defendants' suggestion to the court . . . that the case should be dismissed for failure to prosecute."
(11) The Court of Chancery concluded that prejudgment interest should be awarded. In reaching its conclusion, the court stated that: i) prejudgment interest is normally awarded for breach of contract; ii) some time passed while the parties attempted to settle the dispute; iii) some of the delay was attributable to the Stones' "resistance to discovery;" iv) the Stones had breached their duty to disclose all potentially relevant fees; v) the Stones had use of money that "should have promptly been paid" to the Phoenix Group; and vi) the Stones had received an increase in value of the PennCorp stock. The Court of Chancery then denied the Defendants' motion for reargument, and responded to defendants' claim that no evidence had been presented to support Plaintiffs' counsel's representation that a part of the delay was attributable to settlement negotiations by indicating that his decision "not to deny prejudgment interest because of delay in prosecuting the case [did] not depend on whether settlement discussions contributed to the delay." The court continued, "[c]onsidering the nature of the defendants' breach as well as their contribution to the delay by resisting discovery, I would not deny prejudgment interest in this case even if no part of the delay was attributable to settlement negotiations."
(12) This Court reviews the Court of Chancery's award of prejudgment interest for abuse of discretion. Shell Petroleum, Inc. v. Smith, Del. Supr., 606 A.2d 112, 117 (1992); Summa Corp. v. Trans World Airlines, Inc., Del. Supr., 540 A.2d 403, 409-10, cert. denied, 488 U.S. 853 (1988). A court in its discretion may deny interest to plaintiffs who have delayed prosecution of their claims. Summa, 540 A.2d at 409.
(13) The Court of Chancery supplied sufficient reasoning for its discretionary decision to award prejudgment interest for the entire period, including its desire to give the Plaintiffs "complete relief" for Defendants' breach. Defendants' seem to argue that the court was required to find that the cause of the delay must at least in part be attributable to them and argued that it was not. Defendants fail to acknowledge that the court is not required to parse out any period during the life of a case in which there has been delay attributable to the successful party when making an interest determination.
(14) Defendants next contend that the Court of Chancery's award of postjudgment interest on the entire award, including that composed of prejudgment interest, is directly contrary to this Court's holding in Summa, 540 A.2d at 410, and the policy against the compounding of prejudgment interest and, under the circumstances, was an abuse of discretion.
(15) The Court of Chancery awarded postjudgment interest "on the entire amount" of each judgment "at the legal rate set forth pursuant to 6 Del. C. § 2301 until paid." The judgments included amounts for prejudgment interest which was awarded "at the statutory rate from the date when the various elements of the purchase price were due." The Court of Chancery held that "[a]lthough compound interest generally is not allowable on a judgment, it is established that a judgment bears interest on the whole amount from its date even though the amount is in part made up of interest." (citing to 45 Am.Jur.2d Interest and Usury § 78 (1969)). Referring to this Court's opinion in Summa, the court acknowledged that "a court may exclude prejudgment interest for the purpose of calculating postjudgment interest," but then concluded that under the "circumstances of this case" postjudgment interest should be awarded on the total award, including prejudgment interest."
(16) A review of the Court of Chancery's award of postjudgment interest on the prejudgment interest portions of the award in this case, when viewed in the light of pertinent Delaware authority, causes some concern.
The court awarded both post and prejudgment interest at the statutory rate and that rate has been construed as providing only simple interest. 6 Del. C. § 2301(a) ; Weinberger v. UOP, Inc., Del. Ch., 517 A.2d 653, 657 (1986). Any argument that the Court of Chancery as a court of equity is not bound by the "legal limitations of the interest statute" is undercut by the fact that the court imposed the statutory rate. See Weinberger, 517 A.2d at 657.
That statute provides that when a contract does not specify the rate "judgments entered after May 13, 1980, shall bear interest at . . . 5% over the Federal Reserve discount rate including any surcharge as of the time from which interest is due." 6 Del. C. § 2301(a).
(17) The Court of Chancery's reliance on 45 Am.Jur.2d Interest and Usury § 78 (1969) is questionable. That section, however, which states "[a]lthough compound interest generally is not allowable on a judgment, it is established that a judgment bears interest on the whole amount from its date even though the amount is in part made up of interest . . ." was rejected as applicable to the circumstances of an appraisal case in Francis I. duPont Co. v. Universal City Studios, Inc., Del. Ch., 343 A.2d 629, 633 (1975).
(18) More importantly, there does not seem to be any practical distinction between awarding interest on interest and granting compound interest, and Delaware law clearly disfavors compound interest. Trans World Airlines, Inc. v. Summa Corp., Del. Ch., C.A. No. 1607, 1987 WL 5778, 13 Del. J. Corp. L. 386 (1987), aff'd, Del. Supr., 540 A.2d 403, 410, (the "Delaware courts have traditionally disfavored the practice of compounding interest, and we see no reason to depart from that rule here"), cert. denied, 488 U.S. 853 (1988); Weinberger, 517 A.2d at 657; Cede Co. v. Technicolor, Inc., Del. Ch., C.A. No. 7129, Ord. at p. 2 n. 1 (Dec. 6, 1994) (ORDER) (stating that the Summa holding that postjudgment interest is calculated solely upon the principal amount of the award would "seem to be binding"); TV58 Limited Partnership v. Weigel Broadcasting Co., Del. Ch., C.A. No. 10798, 1993 WL 285850 at *8 (July 22, 1993) (finding that compound interest is not encouraged and generally not favored as a remedy); Kirkpatrick v. Caines Landing Wildlife Preserve Assoc., Del. Ch., C.A. No. 11833, 1992 WL 383382 at *1 (Dec. 15, 1992) (stating "[o]ur courts disfavor the practice of compounding interest"); Pierce Associates, Inc. v. The Nemours Foundation, 3d Cir., 865 F.2d 530, 547 (1988), cert. denied, 492 U.S. 907 (1989) (recognizing in dicta that Delaware as a matter of law may not permit an award of postjudgment interest on prejudgment interest).
(19) Plaintiffs' reliance upon the "recent trend" of awarding compound interest in appraisal cases is unpersuasive. The appraisal statute, 8 Del. C. § 262(i), specifically allows for an award of compound interest in the discretion of the court. Plaintiffs' citation to statutes in other jurisdictions is equally unpersuasive. There is no such statute here, and as noted above, the interest statute contemplates simple interest.
(20) Notwithstanding the discretion accorded the Court of Chancery in the fixing of interest, an award of "interest on interest" is the exception under settled Delaware law. If the Court of Chancery deviates from the norm it should rest its holding on explicit grounds, not simply "the circumstances of this case." Therefore we find it necessary to remand to the Court of Chancery for a supplemental determination of the specific David J. Stone Co., Inc. et al. v. Barry Silverstein, et al., No. 298, 1998, Order Dated April 1, 1999, Corrected page, May 7, 1999.
circumstances upon which it relied to award postjudgment interest on the prejudgment interest portions of the award.
NOW, THEREFORE, IT IS ORDERED that the judgment of the Court of Chancery be, and the same hereby is AFFIRMED IN PART, and pursuant to Supreme Court Rule 19(c) that this matter be and it hereby is REMANDED to the Court of Chancery for a supplemental decision in clarification of the decision on appeal. Jurisdiction is retained.
BY THE COURT:
/s/ Joseph T. Walsh Justice