Opinion
97 Civ. 4641 (MGC),
September, 2000
Robert J. Rubin, Esq., LAW OFFICES OF ROBERT J. RUBIN, Rockport, Maine, and Theodore J. Low, Esq., ALTHEIMER GRAY, Chicago, Illinois, and Andrew Eckstein, Esq., TENZER GREENBLATT, LLP, New York, New York, Attorneys for Defendants.
Laurence J. Kaiser, Esq., Karen M. Klein, Esq., FISHER, FISHER BERGER, New York, New York, Attorneys for Debtor.
Arthur M. Handler, Esq., BURNS, HANDLER BURNS LLP, New York, New York, Attorneys for Third-Party Plaintiffs.
OPINION
This case arises from the Chapter 11 bankruptcy proceeding that was voluntarily initiated by 131 Liquidating Corp. fka/fdba Alexander Doll Company, Inc. (the "Debtor") on April 14, 1995. LaSalle Capital Group, Inc. ("LaSalle") filed a proof of claim in the bankruptcy court. The Debtor filed an objection to the proof of claim jointly with Jeffrey Chodorow, Linda Chodorow, Jack Polsenberg, Gerald Broker, and Sydell Smith ("Alexander Shareholders"), all of whom were shareholders of Alexander Doll Company, Inc. The Debtor asserted three counterclaims in the amended joint objection, two against LaSalle and one against Charles S. Meyer and William V. Glastris, Jr., principals of LaSalle, and Arthur M. Peisner, a potential investor in the contemplated deal between LaSalle and the Debtor ("Individual LaSalle Defendants"). The Alexander Shareholders asserted three third-party claims in the amended joint objection which mirrored those of the Debtor, two against LaSalle and one against the Individual LaSalle Defendants.
LaSalle and the Individual LaSalle Defendants have moved for summary judgment on the three counterclaims of the Debtor and the three third-party claims of the Alexander Shareholders. In open court on December 3, 1999, I denied LaSalle's motion for summary judgment on the Debtor's breach of contract counterclaim. See Record of Proceedings at 50. For the reasons discussed below, the motion for summary judgment is granted on the Debtor's remaining counterclaims and on the third-party claims of the Alexander Shareholders.
UNDISPUTED FACTS
In 1994, the Debtor owed nearly $26 million to National Westminster Bank, USA ("NatWest") and was seeking a transaction to help refinance this debt. The Debtor negotiated an option to repurchase the debt from NatWest, and, after agreeing to several extensions, NatWest set April 14, 1995 as the last date on which the Debtor could exercise the option.
LaSalle recapitalizes and acquires private small to mid-sized companies. In late 1994, the Debtor and LaSalle discussed a potential transaction to refinance the NatWest debt. The Debtor alleges that during these negotiations LaSalle represented that it was an experienced financing company with significant ties to capital providers and that it could close a transaction for an amount sufficient to allow the Debtor to exercise its option with NatWest. (Am. Joint Objection ¶¶ 55, 57.) On January 24, 1995, LaSalle and the Debtor executed a Letter of Intent which outlined a potential transaction between the parties, and provided that "the parties shall not be deemed to have entered into a legally binding contract by signing this letter, with the exception of the binding agreements of the parties in the `Exclusivity' and `public Disclosure' sections herein." (Rubin Aff. Ex. 1.)
In the Letter of Intent, the parties agreed to "work together in good faith to complete the proposed transaction." (Rubin Aff. Ex. 1.) The Debtor also agreed to negotiate exclusively with LaSalle unless LaSalle did not "produce written financing term sheets for the Subordinated financing within 21 days of the execution date of the [Letter of Intent] and for the Senior financing within 30 days of the execution date of the [Letter of Intent]." (Id.) The parties also promised "to use their best efforts to . . . close the transaction prior to . . . the expiration of the agreement with NatWest Bank USA." (Id.)
In another agreement, also dated January 24, 1995, the Debtor retained Chicago Capital Advisors, Inc. ("Chicago Capital") to solicit potential investors to refinance the company. (Rubin Aff. Ex. 4.) Chicago Capital contacted potential investors on January 26, January 28, January 30, January 31, February 3, and February 8, 1995. The January 28 call was made to Gefinor Acquisition Partners ("Gefinor") and resulted in a meeting between Gefinor and the Debtor. (Rubin Aff. Ex. 5.) Gefinor executives met with the Debtor's executives before February 17, 1995 (the last day of the twenty-one day exclusivity period) and discussed the possibility of closing a deal. (Beckett Dep. Ex. 6 at 38, 46.) On February 8, 1995, Gefinor sent the Debtor a letter of intent outlining a proposed transaction. (Rubin Aff. Ex. 8.) Gefinor sent a final term sheet to the Debtor on March 10, 1995. (Rubin Aff. Ex. 7.) By letter dated March 10, 1995, the Debtor terminated negotiations with LaSalle. (Rubin Aff. Ex. 2.)
In response, LaSalle sued the Debtor in Illinois state court for breach of the exclusivity provision of the Letter of Intent. The Debtor removed the action to the United States District Court for the Northern District of Illinois, which issued a temporary restraining order requiring the Debtor to negotiate exclusively with LaSalle. The parties then resumed negotiations. On April 6, 1995, LaSalle notified the Debtor that its mezzanine lender would not be able to fund a transaction for 20 days, well after the April 14, 1995 deadline imposed by NatWest. The district court lifted the temporary restraining order, but the Debtor was unable to obtain financing from another party.
On April 14, 1995, the Debtor filed a voluntary petition for bankruptcy in the Southern District of New York for relief under Chapter 11 of the bankruptcy code. On August 29, 1995, LaSalle filed a proof of claim in the bankruptcy court. LaSalle alleged that the Debtor had breached the exclusivity provision of the Letter of Intent. The Debtor filed an objection to the proof of claim jointly with the Alexander Shareholders. In the joint objection, as amended, the Debtor asserted two counterclaims against LaSalle, for breach of contract and fraud, and one counterclaim against the Individual LaSalle Defendants for fraud.
The Alexander Shareholders asserted three claims as third-party plaintiffs in the amended joint objection. Two of the third-party claims were against LaSalle, for breach of contract and for fraud. The third was against the Individual LaSalle Defendants for fraud. On motion by LaSalle and the Individual LaSalle Defendants, I withdrew the reference of the bankruptcy petition and the associated adversary proceeding from the bankruptcy court by opinion dated March 31, 1998.
DISCUSSION SUMMARY JUDGMENT STANDARD
A motion for summary judgment should 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 a judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). The judge's role in summary judgment is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). In deciding whether a genuine issue exists, a court must "examine the evidence in the light most favorable to the party opposing the motion, and resolve ambiguities and draw reasonable inferences against the moving party." In re Chateaugay Corp., 10 F.3d 944, 957 (2d Cir. 1993).
Nonetheless, "Rule 56(c) mandates the entry of summary judgment . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322, 106 S. Ct. at 2552.
THE DEBTOR'S FRAUD COUNTERCLAIMS
The Debtor alleges that LaSalle knew or should have known that several representations made by Glastris and Meyer on behalf of LaSalle were false when made and were intended to mislead the Debtor and its shareholders. The Debtor makes the same claims against Glastris, Meyer, and Peisner individually. The representations that the Debtor complains of are those regarding "LaSalle's financial ability, the financial ability of LaSalle's financing sources, the close relationship between LaSalle and its financing sources and the ability to close on time." (Am. Joint Objection ¶ 81.)
More specifically, the Debtor contends that Glastris represented that "LaSalle had close relationships with senior and mezzanine lenders;" and that LaSalle "would be able to arrange at least $16 million in financing for the Debtor in timely fashion so as to satisfy the requirements of and enable Debtor to obtain the benefits of the Redemption Right." (Id. ¶ 55.) The Debtor also contends that Glastris and Meyer represented that:
(a) LaSalle was a company of substance which had completed transactions involving 25 or more companies worth $3 to $100 million; (b) LaSalle had experience in transactions of the type contemplated; (c) LaSalle had excellent relationships with prospective sources of senior and subordinated debt, including in particular [William Blair Mezzanine Capital Partners], with whom it had a long-standing and close relationship; (d) LaSalle knew its potential sources of financing very well and was familiar with their needs and abilities to close a deal; and, (e) LaSalle would be able to close a restructuring transaction within the time constraints imposed by NatWest for exercise of the Redemption Right.
(Id. ¶ 57.)
These representations do not support a claim for fraud. An allegation that the promisor did not intend to perform when he made a contractual promise is not sufficient under New York law to sustain both a breach of contract claim and a fraud claim.
Papa's — June Music, Inc. v. McLean, 921 F. Supp. 1154, 1160-61 (S.D.N.Y. 1996); see also Metropolitan Transp. Auth. v. Triumph Adver. Prods., Inc., 497 N.Y.S.2d 673, 675 (1st Dep't 1986) ("[A] cause of action for fraud does not arise when the only alleged fraud relates to a breach of contract."). In order to maintain a separate claim for fraud, a plaintiff must allege: (1) a legal duty separate from the contractual duty to perform, see Strasser v. Prudential Sec., Inc., 630 N.Y.S.2d 80, 82 (1st Dep't 1995); (2) a fraudulent misrepresentation collateral to or extraneous to the contract, see Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956 (1986); or "special damages that are caused by the misrepresentation and unrecoverable as contract damages." Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 20 (2d Cir. 1996).
The Debtor contends that the alleged statements are fraudulent misrepresentations collateral to or extraneous to the binding provisions of the Letter of Intent and, therefore, are actionable as a claim for fraudulent inducement to contract.
The Debtor relies on Coolite Corp. v. American Cyanamid Co., 384 N.Y.S.2d 808, 810 (1st Dep't 1976), for the proposition that representations of fact about the promisor as distinguished from mere "promises of future action" are actionable in fraud. Coolite does not govern this case. Coolite involved a distributorship agreement and representations about the state of research and testing of the product to be distributed. These representations were distinct from the agreement about the product's distribution. In contrast, the representations the Debtor points to are essentially representations about LaSalle's ability to complete the transaction on the proposed terms. These representations are not collateral to or extraneous to the Letter of Intent because they are intrinsic to LaSalle's promises to proceed in good faith and to use its best efforts to close a deal on the terms proposed in the Letter of Intent. The Debtor's argument is really that LaSalle knew it could not complete the transaction on the proposed terms when it agreed to use its best efforts to do so. This argument is the same as an argument that LaSalle breached its promise to proceed in good faith and is, therefore, a contract claim. See Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737, 747 (2d Cir. 1979) (distinguishing between fraud in the inducement, that is, fraud that is extraneous to the contract, which can be claimed along with breach of contract, and "fraudulent non-performance of the contract itself" which cannot).
Moreover, the Debtor has not offered admissible evidence with respect to any alleged representation as Fed.R.Civ.P. 56 requires. The Debtor cites to its pleading in this case, the Amended Joint Objection, which was made "on information and belief." No sworn statement or evidence of any kind has been provided in support of the allegation that the representations were made. The Debtor has the burden of proof on its counterclaims. At summary judgment, the Debtor must proffer evidence of the essential elements of its claim. Celotex, 477 U.S. at 322, 106 S.Ct. at 2552. The Debtor has not met this burden with respect to its fraud claims against LaSalle and the Individual LaSalle Defendants.
THIRD-PARTY PLAINTIFFS' CLAIMS
The third-party plaintiffs were shareholders of the Debtor. They allege three claims that mirror the Debtor's claims. The first and second are against LaSalle for breach of contract and fraud, respectively. The third is against the Individual LaSalle Defendants for fraud. LaSalle and the Individual LaSalle Defendants move for summary judgment on these claims on the ground that the Alexander Shareholders lack standing to assert them.
The Breach of Contract Claim Against LaSalle
The Alexander Shareholders contend that LaSalle is liable to them for breach of the Letter of Intent because they are third-party beneficiaries of the Letter of Intent. New York follows the approach of the Restatement (Second) of Contracts to claims by third-party beneficiaries. Septembertide Publ'g, B.V. v. Stein and Day, Inc., 884 F.2d 675, 679 (2d Cir. 1989); see also Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., 495 N.Y.S.2d 1 (1985). Only an "intended beneficiary" may sue to enforce an agreement to which he is not a party. Restatement (Second) of Contracts § 304. The Letter of Intent was executed with the Debtor, not its shareholders. The Alexander Shareholders may be intended beneficiaries of the Letter of Intent only if "the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance." Restatement (Second) Contracts § 302(1)(b).
The Alexander Shareholders are not the intended beneficiaries of the Letter of Intent. One proposed term stated that at the close of the transaction, the Debtor "may distribute" a percentage of its cash on hand to the Alexander Shareholders.
However, this term was not binding. The Letter of Intent did not bind the parties to close a deal or to close a deal on the terms outlined in the Letter of Intent. The promised performance was intended to benefit the corporation, the Debtor.
The Fraud Claims Against LaSalle and the Individual
LaSalle Defendants The Alexander Shareholders' fraud claims are the same as those alleged by the Debtor. The flaw in these claims is that the Alexander Shareholders lack standing to assert the claims.
The Alexander Shareholders did not take any action as individuals in reliance on the alleged misrepresentations of LaSalle and the individual defendants. The corporation, the Debtor, executed the Letter of Intent. The damages allegedly caused by LaSalle's misrepresentations all result from the Debtor's execution of the Letter of Intent. This was a corporate action, and the corporation has sued for damages stemming from its execution of the Letter of Intent. The Alexander Shareholders cannot maintain a separate action on their own behalf for misrepresentations made to the corporation.
CONCLUSION
For the foregoing reasons, LaSalle's motion for summary judgment on the Debtor's fraud counterclaim and the Alexander Shareholders' contract and fraud claims is granted, and the Individual LaSalle Defendants' motion for summary judgment on the Debtor's fraud counterclaim and the Alexander Shareholders' fraud claim is granted.
SO ORDERED.