PX-53

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
HIGHLAND CAPITAL MANAGEMENT, L.P.,
Plaintiff,
- againstLEONARD SCHNEIDER, LESLIE SCHNEIDER, SCOTT
SCHNEIDER, and SUSAN SCHNEIDER, and
JENKENS & GILCHRIST PARKER CHAPIN LLP,
02 Civ. 8098 (PKL)
CORRECTED COPY
Defendants.
LEONARD SCHNEIDER, LESLIE SCHNEIDER, SCOTT
SCHNEIDER, SUSAN SCHNEIDER,
Third-Party Plaintiffs and Third-Party
Counter-Defendants,
against RBC CAPITAL MARKETS CORPORATION FIKIA RBC
DOMINION SECURITIES CORPORATION
Third-Party Defendant and Third-Party
Counter-Claimant.
RBC CAPITAL MARKETS CORPORATION'S MEMORANDUM OF
LAW IN OPPOSITION TO THE DEFENDANTS' MOTION FOR
SUMMARY JUDGMENT AND ON THE PLEADINGS AND IN
SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT
TO DISMISS THE DEFENDANTS' THIRD-PARTY CLAIMS
SEWARD
&
KISSEL LLP
ONE BATTERY PARK PLAZA
NEW YORK, N. Y. 10004
EXHIBIT
PX-53
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ......................................................................................................... iv
PRELIMINARY STATEMENT ................................................................................................................... l
STATEMENT OF FACTS ........................................................................................................................... 4
ARGUMENT .............................................................................................................................................. 19
I.
STANDARD FOR SUMMARY JUDGMENT ................................................................................ 19
II.
THE SCHNEIDER'S MOTION TO DISMISS RBC'S FIRST AND SECOND
CLAIMS FOR BREACH OF DUTY TO NEGOTIATE AND BREACH OF
CONTRACT SHOULD BE DENIED ..............................................................................................
' III.
r9
A.
RBC HAS SUFFICIENTLY PLED A BREACH OF CONTRACT CLAIM ..................... 20
B.
RAUCH WAS THE SCHNEIDERS' AGENT AND ANY CONTRACTS HE
ENTERED INTO ON THEIR BEHALF ARE BINDING .................................................. 23
C.
A CONTRACT WAS FORMED BASED ON THE ORAL AGREEMENT ...................... 25
D.
THE LETTER AGREEMENT IS NOT A LETTER OF INTENT; THE
LANGUAGE IN THE LETTER AGREEMENT UPON WHICH
DEFENDANTS RELY DOES NOT SUPPORT THEIR ARGUMENT AND IS
AMBIGUOUS AT BEST ................................................ :................................................... 27
E.
THE STATUTE OF FRAUDS DOES NOT APPLY .......................................................... 30
1.
The Notes Are Securities under Aiiicle 8, Ai1d Therefore, the Sale is.
Exempt From the Statute ofFrauds ............................................................................ 30
2.
The New York Legislature Makes Clear That The Oral Agreement
Concerning the Notes Is A Qualified Financial Contract Exempt from the
Statute ofFrauds ......................................................................................................... 32
3.
Because The Schneiders Knew that Their Promise Would Induce RBC to
Act, The Statute of Frauds does Not Apply ............................................................... 34
IF THE COURT WERE TO FIND AN ACTUAL CONTRACT TO SELL THE
NOTES WAS NOT FORMED, THE COURT SHOULD STILL FIND THAT A
PRELIMINARY AGREEMENT WAS CREATED AND THE SCHNEIDERS
BREACHED THAT AGREEMENT ................................................................................................ 35
A.
A PRELIMINARY AGREEMENT WAS FORMED ON MARCH 14, 2001 .................... 36
1.
There Was No Express Reservation Not To Be Bound In The Absence
Of A Writing .............................................................................................................. 36
2.
RBC Partially Perfonned The Oral Agreement... ....................................................... 37
3.
All Relevant Terms Of The Oral Agreement Were Agreed To In The
March 14, 2001 Conversation Between RBC And Glen Rauch ................................. 37
4.
B.
IV.
In The Securities Industry, Oral Agreements Regarding Bond Trades Are
Regularly Enforced ...................................................................................................... 38
IF THE COURT WERE TO FIND THERE WAS NO PRELI!vUNARY
AGREEMENT, WHICH THERE WAS, IT SHOULD STILL FIND THAT A
BINDING PRELIMINARY COMMITMENT WAS FORMED ........................................ 39
1.
The Language Of The Schneiders' Oral Acceptance OfRBC's Offer On
March 14, 2001, Indicate That The Parties Intended To Be Bound By
The March 14, 20Ql Agreement ..................................................................... '. ........... 39
2.
The Other Factors of the Preliminary Binding Commitment Analysis
Also Favor RBC And Militate That the Schneiders Were Bound to
Negotiate ............................................·......................................................................... 40
RBC HAS CLEARLY MADE OUT ITS CLAIMS OF FRAUD AND
FRAUDULENT CONCEALMENT ................................................................................................. 41
A.
THE SCHNEIDERS MOTION TO DISMISS RBC'S FRAUD CLAIM
SHOULD BEDENIED .................................. :.................................................................... 41
B.
THE SCHNEIDERS' SUPERIOR KNOWLEDGE OF THE MERGER AND
THEIR CONCEALMENT OF THAT KNOWLEDGE FROM RBC MAIZES
OUT CLAIMS FOR FRAUDULENT CONCEALMENT .................................................. 42
1.
The Schneiders Were in Possession of Material Information Not Readily
Available to the Public Which They Had a Duty to Disclose .................................... 43
2.
The Schneiders Possessed the Requisite Scienter ...................................................... 44
3.
RBC Justifiably Relied on the Schneiders' Representations and Suffered
Damages as a Result of the Concealment.. ................................................................. 44
C.
RBC'SFRAUDCLAIMSARESEPARATEFROMITS BREACHOF
CONTRACT CLAIMS BECAUSE THEY CAN BE PROVED WITHOUT
EVIDENCE OF AN ORAL PROMISE .............................................................................. 45
D.
DUE TO THE SCHNEIDERS' MALICIOUS ACTIONS, RBC HAS MADE A
CASE FOR PUNITIVE DAMAGES .................................................................................. 47
V.
THE SCHNEIDERS BREACHED THE LETTER AGREEMENT AND THE
COVENANT OF GOOD FAITH AND FAIR DEALING ............................................................... 49
VI.
THE SCHNEIDERS CLAIMS AGAINST RBC SHOULD BE DISMISSED ............................... 50
A.
THE SCHNEIDERS CANNOT MAKE A CONTRIBUTION CLAIM
AGAINST RBC .......................................................................................................: ........... 51
1.
The Schneiders' Contribution Claims for Breach of Contract and Breach
of the Covenant of Good Faith and Fair Dealing Automatically Fail
Because Contribution is Only Available for Tort Claims .......................................... 51
2.
The Schneiders Cannot Seek Conh·ibution from RBC With Respect to
Highland's Tortious Interference Claims Because RBC Cannot Have
Interfered With (and Be Forced to Pay Damages) for Interference With a
Contract To Which It Was a Party ............................................................................. 52
11
B. ·
THE SCHNEIDERS CANNOT MAKE AN INDEMNIFICATION CLAIM
AGAINST RBC ................................................................................................................... 52
1.
The Letter Agreement Does Not Provide the Schneiders With a Right to
Indenmification .......................................................................................................... 53
2.
The Schneiders Do Not Have a Common Law Right to Indemnification .................. 53
C.
THE SCHNEIDERS' CLAIM FOR BREACH OF FIDUCIARY DUTY FAILS
AS A MATTER OF LAW ................................................................................................... 54
D.
THE SCHNEIDERS CANNOT MAKE A CLAIM OF BREACH OF
CONTRACT AGAINST RBC ............................................................................................. 56
E.
THE SCHNEIDERS CANNOT MAKE A CLAIM THAT RBC BREACHED
THE COVENANT OF GOOD FAITH AND FAIR DEALING ......................................... 57
F.
THE SCHNEIDERS CANNOT MAKE A NEGLIGENCE CLAIM AGAINST
RBC ...................................................................................................................................... 58
CONCL.USION ................................................................. ;......................................................................... 60
111
TABLE OF AUTHORITIES
FEDERAL CASES
AdiparLtd. v. PLDint'l Corp., 2002 U.S. Dist. LEXIS 23375 (S.D.N.Y. Dec. 5. 2002) .................... 24, 59
Adjustrite Systems, Inc. v. Gab Business Sen1ices, Inc., 145 F.3d 543 (2d Cir. 1998) ................... 35, 36, 39
All Boys Music, Ltd. V. DeGroot, 1992 U.S. Dist. LEXIS 2780 (S.D.N.Y. March 6, 1992) ...................... 29
Allegaert v. Chemical Bank, 657 F.2d 495 (2d Cir. 1980) .......................................................................... 31
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) .............................................................................. 19
Arcadian Phm,phates, Inc. v. Arcadian Corp., 884 F.2d 69 (2d Cir. 1989) .......................................... 35, 39
Bellefonte Reinsurance Company v. Argonaut Insurance Company, 757 F.2d 523 (2d Cir. 1985) ........... 55
Bellis v. The Tokio Marine and Fire Insurance Company, 2004 U.S. Dist. LEXIS 13885 (S.D.N.Y.
July 20, 2004) ............................................................................. :......................................................... 53
BNY Capital Markets, Inc. v. Moltech C01p., 2001 U.S. Dist. LEXIS 2705 (S.D.N.Y. March 14,
2001) ...................................................................................................................................................... 44
Brass v. American Film Technologies, Inc., 987 F.2d 142 (2d. Cir. 1993) .......................................... 42, 43
Brittany Dyeing & Printing C01p. v. Griseta, 2002 U.S. Dist. LEXIS 16699 (S.D.N.Y. Nov. 16,
2000) ..................................................................................................................................................... 42
Brown v. AXA RE, 2004 U.S. Dist. LEXIS 7624 (S.D.N.Y. May 3, 2004) ................................................ 48
Carvel C01p. v. Noonen, 2003 U.S. App. LEXIS 23744 (2d. Cir. Sept. 4, 2003) ..................................... .47
19
Celotex C01p. v. Catrett, 477 U.S. 317, 91 L.Ed. 2d 265, S.Ct. 2548 (1986) ..................... ;.:..................... 19
Cent111J1 Pacific, Inc. v. Hilton Hotels c01p., 2004 U.S. Dist. LEXIS 6904 (S.D.N.Y. April 20,
2004) ..................................................................................................................................................... 41
Cleveland TYrecldng Co. v. Hercules Constr. Cmp., 23 F.Supp. 2d 287 (S.D.N.Y. 1992) .................. 29, 55
Coastal Power International, Ltd. v. Transcontinental Capital C01poration, 182 F.3d 163 (2d Cir.
1999) ..................................................................................................................................................... 53
Coleman & Company Securities, Inc.; 236 F. Supp. 2d 288 (S.D.N.Y. 2002) ........................................... 59
Commonvvealth Insurance Company v. Thomas Greene & Company, Inc., 709 F. Supp. 86
(S.D.N.Y.1989) ............................................................................................................................. 52, .53
Consarc C01p. v. Marine Midland Bank N.A., 996 F.2d 568 (2d. Cir. 1992) ........................... 25, 29, 35, 38
IV
Cranston Print Works Co. v. Brockmann Int'!., 521 F.Supp. 609 (S.D.N.Y. 1981) ................................... 46
DeCiutiis v. Nynex C01p., 1996 U.S. Dist. LEXIS 13122 (S.D.N.Y. Sept. 9, 1996) .................................. 50
Dervin Cmp. v. Banco Bilbao Vizcaya Argentaria S.A., 2004 U.S. Dist. LEXIS 17406 (S.D.N.Y.
Aug. 27, 2004) ...................................................................................................................................... 46
Elma RTv. Landesmann Int'! Marketing C01p., 2000 U.S. Dist. LEXIS 11925 (S.D.N.Y. Aug. 21,
2000) ..................................................................................................................................................... 46
Ferer & Sons Ltd. V The Chase Manhattan Bank, N.A., 731 F.2d 112 (2d. Cir. 1984) ............................ 43
Fort Howard Paper Co. v. Witter, Inc., 787 F.2d 784 (2d Cir. 1986) ........................................................ 46
Gnazzo v. G.D. Searle & Co., 973 F.2d 136 (2d Cir. 1992) ....................................................................... 19
Gorodensky v. Mitsubishi Pulp Sales (MC) Inc., 92 F.Supp. 2d 249 (S.D.N.Y. 2000), aff'd 242 F.3d
365 ························································································································································ 37
Granite Partners, L.P. v. Bear, Stearns & Co., 17 F.Supp. 2d 275 (S.D.N.Y. 1998) ................................ 49
Gummo v. Village ofDepew, 75 F.3d 98 (2d Cir. 1995), cert. denied, 134 L.Ed. 2d 780, 116 S.Ct.
1678 (1996) .......................................................................................................................................... 19
Harris v. Provident Life and Accident Insurance Company, 310 F.3d 73 (2d Cir. 2002) .......................... 57
Heiko v. Federal Deposit Insurance Co1p., 1995 U.S. Dist. LEXIS 3407 (S.D.N.Y. Marc 15, 1995) ...... 33
Jewelamerica, Inc. v. Frontstep Solutions Group, 2002 U.S. Dist. LEXIS 21296 (S.D.N.Y. Oct. 31,
2002) ...................................................................................................................................................... 46
John F. Dillon & Co. LLC, v. Foremost Maritime Cmporation, 2004 U.S. Dist. LEXIS 11383,
(S.D.N.Y. June 18, 2004) ............... ;..................................................................................................... 52
Jordan v. Madison Leasing Company, 596 F. Supp. 707 (S.D.N.Y. 1984) ................................................ 54
Kafmar v. Nevv World Restaurant Group, Inc., 2004 U.S. Dist. LEXIS 24688 (S.D.N.Y. Dec. 10,
2004) ............................................................................ ;........................................................................ 58
King World Productions, Inc. v. Financial News Network, Inc., 660 F.Supp. 1381(S.D.N.Y.1987),
ajj"d, 834 F.2d 267 (2d Cir. 1987) ........................................................................................................ 24
Kinsey v. Cendant C01poration, 2004 U.S. Dist. LEXIS 23059 (S.D.N.Y. Nov. 17, 2004) ...................... 57
Kolbeck, et al. v. Lit America, Inc. et al., 923 F. Supp. 557 (S.D.N.Y. 1996) ............................................ 59
Landreth Timber Co. v. Landreth, 471 U.S. 681(1985) ............................................. , ............................... 32
Lazard Freres & Co. v. Protective Life Ins. Co., 108 F.3d 1531 (2d Cir. 1997) ...................... 25, 30, 34, 38
v
Lehman Brothers Inc. v. Canadian Imperial Bank of Commerce, 2000 U.S. Dist. LEXIS 13979
(S.D.N.Y. Sept. 27, 2000) .................................................................................................................... 33
Manley v. Ambase Cmp., 126 F.Supp. 2d 743 (S.D.N.Y. 2001) ................................................................ 45
lvJDClvf Holdings, Inc. v. Credit Suisse First Boston Cmp., 216 F.Supp. 2d 251 (S.D.N.Y. 2002) ........... 20
OneBeacon Insurance Company v. Forman International, Ltd., 2005 U.S. Dist. LEXIS (S.D.N.Y.
Jan.19,2005) .......................................... : ............................................................................................ 51
Oscar Productions, Inc. v. Zacharius, 893 F.Supp. 250 (S.D.N.Y. 1995) ···············································'· 28
Parker v. Della Rocco, 252 F.3d 663 (2d Cir. 2001 ) .................................................................................. 51
Pollackv. Laidlaw Holdings, Inc., 27 F.3d 808 (2d Cir. 1994) .................................................................. 31
Quintel Cmporation, NY v. Citibank, N.A., 1984 U.S. Dist. LEXIS 15069 (S.D.N.Y. July 10,
1984) ..................................................................................................................................................... 53
Reves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed. 2d 47 (1990).......................................... 31
Rus, Inc. v. Bay Industries, Inc., 322 F.Supp. 2d 302 (S.D.N.Y. 2003) ................................................ 49, 50
Seetransport Wiking Trader Sch{ffarhtsgesellschcift lvfBH & Co. Kommanditgesellschaft v. The
Republic ofRomania, 123 F.Supp. 2d 174 (S.D.N.Y. 2000) ............................................................... 23
Shann v. Dunk, 84 F.3d 73 (2d Cir. 1996) .................................................................................................. 37
Spencer Trask Software and Information Services LLC v. Rpost Int 'l Ltd., 2003 U.S. Dist. LEXIS
946 (S.D.N.Y. Jan. 23, 2003) ............................................................................................. 25, 29, 38, 40
Steed Finance LDC v. Laser Advisers, Inc., 258 F. Supp.2d 272 (S.D.N.Y. 2003) .................................... 58
Teacher's Ins. And Annuity Ass 'n v. Ormesa Goethermal, 791 F.Supp. 401 (S.D.N.Y. 1991) .................. 40
Teacher's Ins. And Annuity Ass 'n ofAmerica, Inc. v. Tribune Cmp., 670 F.Supp. 490 (S.D.N.Y.
1987) ................................................................................................................................................ 35, 38
Thacker v. Brown, 1998 U.S. Dist. LEXIS 15270 (S.D.N.Y. Sept. 29, 1998) ............................................ 46
The Topps Company, Inc. v. CadbwJI Stani S.A.I.C., 2004 U.S. Dist. LEXIS 25342 (S.D.N.Y. Dec.
14, 2004) ............................................................................................................................................... 48
Travelers Indemnity Co. ofIllinois v. CDL Hotels USA, Inc., 322 F.Supp. 2d 482 (S.D.N.Y. 2004) ........ 45
Trm1e/lers Int'! A.G. v. Trans World Airlines, 41F.3d1570 (2d. Cir. 1994) ....................................... 35, 50
United States ofAmerica v. Buck, 1987 U.S. Dist. LEXIS 8416 (S.D.N.Y. Sept. 10, 1987) ....................... 9
United States ofAmerica v. Chiarizio, 525 F.2d 289 (2d Cir. 1975) ............................................................ 9
Vl
_ Univer:rnl Reinsurance Co., Ltd. V. St. Paul Fire and Marine Insurance Co., 1999 U.S. Dist. LEXIS
14947 (S.D.N.Y. Sept. 28, 1999) ......................................................................................................... 29
Vacold LLCv. Cerami, 2002 U.S. Dist. LEXIS 1895 (S.D.N.Y. Feb. 6, 2002) ......................................... 37
Va/jean Manufacturing Inc. et at v. Werdiger, Inc. et al., 2004 U.S. Dist. LEXIS 17580 (S.D.N.Y
Sept. 1, 2004) ........................................................................................................................................ 54
Vento & Co. v. Metromedia Fiber Network, Inc., 1999 U.S. Dist. LEXIS 3020 (S.D.N.Y. March 17,
1998) ............................................................................................................................................... 47, 48
Viacom lnt'l Inc. v. Kearney, 212 F.3d 721, cert. denied 2000 U.S. LEXIS 8323 (2d. Cir) ...................... 51
Vtech Holdings Limited v. Lucent Technologies, Inc., 172 F.Supp. 2d 435 (S.D.N.Y. 2001) .................... 46
Ward v. Pricellular Corp., 1991 U.S. Dist. LEXIS 5000 (S.D.N.Y. April 16, 1991) ................................ 41
Weil v. Murray, 161 F.Supp. 2d 250 (S.D.N.Y. 2001) ..........,..................................................................... 24
Westerbeke v. Daihatsu Motor Corp., 304F.3d 200 (2d. Cir. 2002) .......................................................... 50
STATE CASES
Batas et al. v. Prudential Insurance Company ofAmerica et al., 281A.D.2d260, 724 N.Y.S.2d 3,
(1st Dept. 2001) .................................................................................................................................... 55
Dennenbaum v. Rotterdam Square, L.P., 6 A.D.3d 1045, 776 N.Y.S.2d 136 (3d Dep't 2004) ................. 54
Engelhard C01p. v. Research C01p.,.268 A.D.2d 358, 702 N.Y.S.2d 255 (1st Dept 2000) ....................... 58
Federal Deposit Insurance C01p. v. Herald Square Fabrics C01p., 81 A.D.2d 168, 439 N.Y.S.2d
944 (2d Dept. 1981) ........................ :..................................................................................................... 31
Gross v. Neuman, 53 A.D.2d 2, 385 N.Y.S.2d 46 (1st Dept. 1976) ........................................................... 21
Kooleraire Sen,ice and lnstallion c01p. v. Board ofEducation, 28 N.Y.2d 101, 320 N.Y.S. 2d 46,
268 N.E.2d 782 (1971) ......................................................................................................................... 21
Metropolitan Steel Industries, Inc. v. Perini Cmporation, 2004 NY Slip Op. 51698U (Sup. Ct.
2004) ............................................................................................................................................... 52, 53
Onbank & Trust Co. v. James P. Burr Enters. Inc., 235 A.D.2d 799, 652 N.Y.S.2d 802 (3d Dept.
1997) ..................................................................................................................................................... 34
Orville et al. v. Newski, Inc., 155 A.D.2d 799, 547 N.Y.S.2d 913 (3d Dep't 1989) ................................... 57
People of the State ofNew York v. Batista, 183 Misc.2d 203, 703 N.Y.S.2d 885 (Sup. Ct. 2003) .............. 9
People of the State ofNew Yorio. Mercer Hicks C01p. et al., 4 Misc. 2d 55, 155 N.Y.S.2d 740
(Sup: Ct. 2002) ..................................................................................................................................... 23
Vll
Richbell I1?fo. Services, Inc. v. Jupiter Partners, L.P., 309 A.D.2d 288, 765 N.Y.S.2d 575 (1st Dept.
2003) ..................................................................................................................................................... 35
Sabo v. Delman, 3 N.Y.2d 155, 143 N.E.2d 906, 164 N.Y.S.2d 714 (1957) .............................................. 46
Shlangv. Bear's Estates Dev. of Smallwood, N.Y., Inc., 194 A.D.2d 914, 599N.Y.S.2d141, (3d
Dept. 1993) ........................................................................................................................................... 46
Smith v. General Accident Ins. Co., 91 N.Y.2d 648, 697 N.E.2d 168, 674 N.Y.S.2d 267 (1998) .............. 49
Swersky v. Dreyer & Traub, 219 A.D.2d 321, 643 N.Y.S.2d 33, (1st Dept. 1996) .................................... 47
Tf!IT Holding Corp. v. Klein, 282 A.D.2d 527, 724 N.Y.S.2d 66, (2d Dept. 2001) ................................... 55
FEDERAL STATUTES
Fed. R. Civ. P. 56(c) ................................................................................................................................... 19
28 U.S.C. § 1367 ......................................................................................................................................... 51
STATE STATUTES
New York General Obligations Law§ 5-701 ................................................................................. 32, 33, 34
New York UCC § 1-206 ............................................................................... '. ................................. 29, 32, 34
NewYorkUCC § 8-102 ............................................................................................................................. 30
Nev,r YorkUCC § 8-103 ............................................................................................................................. 30
New York UCC § 8-113 .............................................................................................................................. 30
Nev,1 York C.P.L.R. § 1401 ......................................................................................................................... 51
MISCELLANEOUS
The National Reporters Association, Key Issues - Exclusive Third-Party Contracting, at
http://www.ncraonline.org/infonews/key/contract.shtml ............................................................................ 34
Restatement (Second) of Contracts§ 139 (1981) ....................................................................................... 34
vm
Third-Party Defendant and Third-Party Counter-Claimant RBC Capital Markets
Corporation, f/k/a RBC Dominion Securities Corporation ("RBC"), by its attorneys, Seward & Kissel
LLP, respectfully submits this Memorandum of Law i) in opposition to the motion of Defendants Leonard
Schneider, Leslie Schneider, Susan Schneider and Scott Schneider (collectively, the "Schneiders" or
"Schneiders Defendants") for summary judgment and on the pleadings; and ii) in support ofRBC's
Motion for Summary Judgment pursuant to Fed. R. Civ. P. 56 dismissing the Schneiders' Third Party
Complaint.
1
PRELIMINARY STATEMENT
Defendants' approximately sixty page memorandum of law and the accompanying reams
of exhibits, scores ofrecorded conversations and multiple affidavits make one thing perfectly clear -RBC's claims should be tried. Defendants' brief is a hodgepodge of arguments and statements
inconsistent on their face and all directly contradicted by the actual factual evidence. What Defendants
seek to obfuscate, and what a jury is entitled to hear, is the following:
On March 14, 2001, after three months of negotiations, the Schneiders, through their
agent, Glen Rauch of Glen Rauch Securities, Inc. ("Glen Rauch"), agreed with employees ofRBC's
High-Yield Trading Desk to sell $69 million of 3-year promissory notes issued by McNaughton Apparel
Group, Inc. ("McNaughton") to RBC .. In tum, RBC had lined up two prospective purchasers, Highland
Capital Management, L.P. ("Highland") and Fidelity Management and Research Company ("Fidelity"),
who were interested in purchasing the Notes. RBC was to act as a "riskless principa,l" in these
transactions: i.e., it would first buy the $69 rnillion of notes from the Schneiders (the "Notes") at a price
of 51 % of par value, and then re-sell the Notes to Highland and Fidelity at a price of 52.5% of par value,
making its profit on the spread -- assmning both the purchase and resale occurred. 2 Relying on the oral
The Third Party Complaint is contained within the Schneiders' Answer with Affirmative Defenses and ThirdParty Complaint, dated October 29, 2004 (the "Third Party Complaint").
As explained in the Statement of Facts section, infra, the trading price of the Notes was substantially below par
because they were deeply subordinated to other debt issued by McNaughton and because of McNaughton's
general financial condition. They were junk bonds.
confirmation, RBC communicated that it had a transaction, subject to documentation, to Highland and
Fidelity. Under New York law as well as industry custom and practice, the oral agreement with the
Schneiders constituted a binding transaction since the material terms, price and size, were agreed upon.
The next step was simply to document the transaction.
The Schneiders, however, reneged on the trade, and Glen Rauch later denied that there
ever was any agreement. It became clear what had really happened when McNaughton announced it was
merging with Jone,s Apparel Co. ("Jones"). Under the terms of the deal, the Schneiders received the full
value of the notes, some $34 million more than they would have realized if they had gone through with
the agreement with RBC. Through discovery, RBC has confirmed that the Schneiders had received inside
information about the potential merger while their agent, Rauch, was agreeing to sell the Notes on their
behalf. Based on this material, non-public information, they reneged on the transaction. RBC's
customers, Highland and Fidelity, immediately stopped doing business with its High Yield Desk. As a
result, RBC lost more than $5 million in profits over the next few years. The Schneiders, of course,
received a $34 million windfall.
In discovery, apparently not realizing that RBC had three months of recorded
conversations, the Schneiders made statements and took positions that were flatly contradicted by those
recorded conversations and the documentary evidence produced in the litigation. In their summary
judgment papers, the Schneiders continue to make these assertions notwithstanding they have been
absolutely refuted. The Schneiders argue that there was no trade because 1) the Schneiders never
intended to sell the Notes, but were simply "pricing" them; 2) each Schneider had to agree to sell his or
her Note; 3) Rauch had no authority to act on their behalf; and 4) they did not know what Rauch was
doing. All of these arguments are contradicted by the deposition testimony of the Schneiders and Rauch,
and by the recorded conversations, but they also fail because there is no doubt that Rauch represented the
Schneiders and could bind them. The Letter Agreement says so and during the three months of
2
negotiations, Rauch made "firm" offers that were recorded and which bind the Schneiders.3 Moreover, if
the "pricing" argument were true - that the Schneiders never intended to sell the Notes -- then the
Schneiders are liable to RBC for fraud since they misrepresented their intentions to RBC which acted on
the evidence and statements to the contrary and to its detriment. 4 At most all the Schneiders have
accomplished is to place the facts in dispute and the issues should go to the jury.
Based on the evidence adduced in discovery, the taped conversations, the documents, the
depositions and affidavits of the individuals involved, and expert testimony, it is clear that there was an
oral agreement on price and size subject to final documentation. Under New York law as interpreted by
the Second Circuit, RBC is entitled to the contractual damages -- the $34 million it would have received
had the Schneiders not reneged.
RBC has, therefore, made out its claims of breach of the duty to negotiate, breach of the
oral contract to sell the Notes, breach of the Letter Agreement and the covenant of good faith and fair
dealing inherent in the Letter Agreement. Similarly, because the Schneiders made misrepresentations and
omitted material facts that they had a duty to disclose, RBC has made out its claims of fraud and
misrepresentation and fomdulent concealment. RBC is entitled to argue to a jury that it is entitled to the
$34 million in contractual damages plus $5 million in lost profits that resulted when the Schneiders, in
bad faith, and on the basis of material, non-public information, refused to proceed with the sale of the
Notes. The Schneiders' motions should be denied.
RBC, on the other hand, is entitled to summary judgment dismissing the Schneiders'
Third Party Complaint. As explained below, all of the Third-Party claims are premised on the distorted
Further evidence that Rauch was the Schneiders' agent is, as explained below, Rauch's assistance in the
dumping of Leonard Schneiders' McNaughton stock from January through March 9, 2001 while Leonard
Schneider was in possession of negative, non-public information concerning McNaughton's financial condition.
Another clear example of the Schneiders' testimony being contradicted by the recorded conversations is that the
Schneider children testified that they never heard from Rauch of any potential offers for the Notes. (See e.g.
Exh. 57 (Susan Dep.) at 308, 364). However, when confronted with taped conversations in which Rauch states
to RBC that the family was "outraged" at low bids, the Schneiders suddenly remembered hearing some low
price ranges. (Id at 392-393).
3
argument that, if a Court were to find the Schneiders liable to Highland on Highland's claims, then RBC
should be liable, through claims based on contract, contribution or indemnity. These claims are
nonsensical. First, they are all premised on the argument that RBC was the Schneiders' agent -- an
argument that the Schneiders themselves deny and which is completely refuted by all of the evidence.
Second, if this Court finds, as it should, that there was an oral agreement to sell the Notes, then RBC
would have been proven to have done nothing wrong and it cannot be liable. Third, the Schneiders can
show no damages. They argue that if a Court were to find them liable, RBC should pay Highland the
benefit of the bargain damages it is seeking. However, the Schneiders have pocketed $34 million
windfall (including the $22 million Highland is seeking) and it is simply pure greed to argue that RBC
should pay money it never received and which the Schneiders have based on their failure to abide by the
oral agreement. The Schneiders' claims should be dismissed.
STATEMENT OF FACTS
The Issuance of the Notes
The Notes in dispute in these actions were issued in connection with the sale of the
Schneiders' family business. On or about April 15, 1998, the Schneiders sold two closely-held
companies, Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. (collectively, "Jeri-Jo") to McNaughton pursuant
to the terms of a Purchase and Sale Agreement. (Yoskowitz Affidavit sworn to on February 9, 2005, Exh.
5 (April 15, 1998 Purchase and Sale Agreement in 8-K filed April 22, 1998 ("Purchase and Sale
Agreement)).
5
Jeri-Jo was a corporation that manufactured junior women's and girls' active wear clothing
through various contractors abroad, which it resold through various department stores and distributors in
the United States (Deposition Transcript of Leonard Schneider dated November 19, 2003 and November
21, 2003 ("Leonard Dep.") at 53, attached as Exh 4; Affidavit of Leonard Schneider sworn to on
December 31, 2004 ("Leonard Aff."), if 2). Under the Purchase and Sale Agreement, the Schneiders
5
Hereafter, documents attached as the Yoskowitz Affidavit will be cited as "Exh.
be preceded by "Defs."
4
" Defendants' exhibits will
received $55 million in cash and the right pursuant to an Earn-Out Provision to additional compensation
based upon the performance of the Jeri-Jo companies during the two years following the sale. (Exh. 5 at
Section 2.01 ).
Pursuant to the Earn-Out provision, McNaughton owed the Schneiders approximately
$190 million in mid-2000. Because the company could not afford to pay this amount in cash, the
Purchase and Sale Agreement was amended in August 2000 to reduce the final earn-out consideration to
$161 million, comprised of $125 million in cash, 2 million shares of McNaughton's common stock, and
$10 million in 3-year promissory notes (the "$10 Million Notes"). 6 The Purchase and Sale Agreement
was further amended on August 29, 2000 to allow McNaughton to substitute $59 million of 3-year
promissory notes (the "$59 Million Notes") for the final $30 million cash payment ifit could not make
payment on November 30, 2000. 7 Both the $10 Million Notes and the $59 Million Notes were deeply
subordinated to other McNaughton debt. 8 (Exh. 7 (McNaughton Fonn 8-K filed August 15, 2000 ("2000
8-K")); Exh. 8 (August 3, 2000 Amendment); Exh. 19 (Draft of Leonard Schneider's Notes dated Dec.
2000); Exh 40 (McNaughton Proxy Statement)).
McNaughton Gives Material, Non-Public,
FinancialProjections to the Schneiders
On October 26, 2000, Peter Boneparth ("Boneparth"), McNaughton's CEO, sent a letter
to the Schneiders. In this letter, Boneparth proposed that the Schneiders grant McNaughton an extension
of the November 301h deadline. He stated that McNaughton would be unable to raise the $30 million and
The $10 million Notes were broken into four tranches: $4 million held by Leonard Schneider, $2.4 miUion held
by Leslie Schneider, $2.4 million held by Susan Schneider, and $1.2 million held by Scott Schneider.
The $59 Million Notes.were broken into four tranches: $23.6 million held by Leonard Schneider, $14.16
million held by Leslie Schneider, $14.16 million held by Susan Schneider, and $7.08 million held by Scott
Schneider.
That the $59 million were in place of a $30 million payment is clear evidence of their discounted value.
Knowing this, the Schneiders have always refused to acknowledge that the Notes were issued in place of the
payment even in the face of the evidence. Compare Leonard Aff. '\[ 8 with Exh. 7 (2000 8-K) which clearly
states that the earn-out was discounted from $193 million to $161 million and includes reference to the
possibility that the final $30 million cash payment may be substituted by $59 million in subordinated notes.
The 8-K further states that the "Final Payment shall be reduced by $1.967 for every $1.00 in cash paid." (Exh.
8 (August 3, 2000 Amendment) Section l(c)(ii)).
5
further stated that, given McNaughton's financial model, any payments on the $59 Million Notes would .
be "minimal at best, over the next three years." (Exh. 11 (October 26, 2000 letter)).
To support his statement to the Schneiders, Boneparth had Amanda Bokman
("Bokman"), McNaughton's CFO, send the Schneiders the company's internal 3-year financial
projections. (Exh. 12.) The projections backed up Boneparth's contention in his letter of October 26th if McNaughton did not raise capital from an outside source, it would likely not be able to pay off the $59
Million Notes when they came due in 3 years. Boneparth and Bokman have stated that they believed the
information contained in these projections was material and non-public. (Deposition Transcript of
Amanda Bokman dated March 23, 2004 ("Bokman Dep.) at 64-66, attached as Exh. 13; Deposition
Transcript of Peter Boneparth dated March 25, 2004 ("Bonepmih Dep.), at 64-67, attached as Exh. 14).
The Schneiders refused to extend the November 30 deadline and the $59 Million Notes
were issued by McNaughton on December 12, 2000, dated "as of' December 1, 2000. (Exh 15).
The evidence has demonstrated that, knowing McNaughton's true financial condition, the
Schneiders immediately took steps to sell the Notes and that they turned to Glen Rauch to do so. Leonard
faxed a copy of the $10 million Note to Glen Rauch on November 7, 2000 and a copy of a draft of one of
the $59 million Notes to Rauch on December 10, 2000. Exhs. 16 and 17. 9 Glen Rauch had a long-term
relationship with the Schneiders, havingtraded and held tens of millions of dollars in securities (primarily
municipal bonds) for the Schneiders. (Leon Aff.
if 12; Exh. 4 (Leonard Dep.) at 97, 116-117).
Leonard Schneider also began dumping his McNaughton stock and sold off 702,700 of
his 800,000 shares by March 9, 2001 using Glen Rauch to do so. (Exh. 32). Needless to say, the
Schneiders did not c01mnunicate to RBC the information they had learned from McNaughton that
payment on the Notes would be "minimal at best".
Glen Rauch Contacts RBC and the Letter Agreement is Negotiated and Executed
Since the documents do not fit in with their story that they thought the Notes were worth full value and they
never intended to sell the Notes, Defendants neglected to attach to their motion papers the October 26, 2000
letter from Boneparth, the projections sent by Bokman, or the faxes tO Glen Rauch.
6
In late December 2000 or early January 2001, Glen Rauch contacted RBC's High-Yield
Trading Desk in Connecticut. Rauch spoke with Kenneth Ambrecht, a salesman on the desk. Rauch told
Ambrecht that he represented the Schneiders, and that they were interested in selling the $59 Million
Notes. (Affidavit ofKe1meth Ambrecht sworn to on Oct. 10, 2001 ("Ambrecht Aff. Oct. 10"), if l;
Affidavit ofKe1meth Ambrecht sworn to on April 22, 2002 "Ambrecht Aff. April 22"), iii! 4).
RBC required written confirmation that Rauch represented the Schneiders -- as he had
orally represented to RBC -- as well as an exclusive period to market the Notes since it was going to be
considerable effort to do so. (Deposition Transcript of Achim Maximillian Holmes dated Feb. 19, 2004
and Feb. 27, 2004 ("Holmes Dep.") at 1,77, attached as Exh. 22). Therefore, RBC prepared the original
draft of the letter agreement, dated January 2, 2001. The draft letter agreement identified the Schneiders
by name along with the amount they each held of the $59 Million Notes. Rauch provided the draft to the
Schneiders.to review, indicating in his cover letter that he was going to sign the agreement unless the
Schneiders did not want him to do so. (Exhs. 23 and 24).
The Schneiders were concerned that McNaughton would discover they intended to sell
the Notes. Therefore, James Alterbaum ("Alterbaum"), one of their attorneys at Jenkens·, prepared a
revised letter agreement that did not identify the Schneiders by name. Rauch provided this draft to RBC
on January 4, 2001 with a cover letter stating that "The Schneider's attorney finally called and said if you
could draft this letter to me, it would be fine."
(E:~h. 2~).
The draft, which the Schneiders were prepared to accept, stated "Dear Glen: As we
discussed, you have certain clients who hold certain promissory notes, which some or all of such clients
may desire to have transferred subject to applicable law." (Id.) This draft did not state an intent not to be
bound until the trade was documented fully in writing. (Id.)
RBC believed that the letter sent by Rauch on January 4, 2001 was too general and
wanted a more definitive document. Therefore, on January 5, 2001, Rauch sent Leonard Schneider a
different version of the letter agreement, drafted by RBC, which did not specifically identify the
Schneiders as holders of specific notes. (Exh. 26).
7
On January 8, Rauch, on behalf of the Schneiders, executed the Letter Agreement. (Exh.
26 (Fax to Alterbaum); Exh. 27 (Executed Letter Agreement executed January 8, 2001)).
The Letter Agreement states, in relevant part:
[RBC] understand[s] that Glen Rauch Securities, Inc. ("GRS") represents [the
Schneiders] in the possible resale of some or all of the Notes ...
Any possible resale of some or all of the Notes would be through an exemption
from registration under the securities laws of the United States and other
applicable jurisdictions. You understand that any such transaction is subject to
definitive documentation in compliance with the applicable law.
[RBC] is a possible purchaser of some or all of the Notes ...
We both u~derstand that the consummation of any transaction remains in the sole
discretion and satisfaction of[the Schneiders] and [RBC]. (Id.)
The language "subject to documentation" upon which the Schneiders place so much
emphasis is simply evidence that the parties understood that the transaction would be a "private
placement" -- a common type of transaction where once there was an oral agreement on the material
terms, the transaction is documented with a written confirmation with standard language including, e.g.,
representations among the parties concerning the completeness, truthfulness and accuracy bf statements
made in connection with the transaction. (Exh. 22 (Holmes Dep.) at 177, 182; Deposition Transcript of
Kenneth Arnbrecht dated December 2, 2003 and December 12, 2003 ("Ambrecht Dep.") at 301-302,
attached as Exh. 3; Deposition Tran.script of Peter Parent dated January 30, 2004 ("Parent Dep."), at 21021 l, attached as Exh. 29; Exh. 4 (Leonard Dep.) at 449-450; Exh. 21 (Compilation CD) at RBC 894,
2.2.01; Exh. 20 (Expert Report of Gerald Guild dated June 30, 2004 ("Guild's Report") at 12). 10
RBC Begins Marketing the Notes to its Customers and
Negotiating with Glen Rauch on a Sale of the Notes
10
Similarly, all of Defendants' references to conversations in which the individuals involved discussed
representations and the opinion that this transaction was not "plain vanilla", are simply evidence that the
transaction was a private placement subject to documentation once an oral agreement is reached. Indeed, Max
Holmes stated in a recorded conversation on January 26, 2001 that the transaction was going to be "a private
placement .. .like, you know, the $500 billion of other private placements that are out there." (Exh. 21
(Compilation CD) at RBC 896, 1.26.08).
8
After the Letter Agreement was executed by RBC and Rauch, RBC began marketing the
$59 Million Notes in early January 2001 to clients of the RBC High-Yield Trading Desk and other
potential buyers. (Ambrecht Aff. April 22
irir 6 &
7). The conversations between Rauch and Ambrecht,
which were recorded by RBC in the normal course of its business, (Exh. 3 (Ambrecht Dep.) at 88-89;
Affidavit of Philip Day sworn to on February 9, 2005 ("Day Aff."), if 11.), make clear that Rauch was
acting as the agent of the Schneiders, and had the authority to bind them in a transaction involving the
Notes. 11
11
RBC has produced all of the recorded conversations among the individuals involved-- approximately 300
conversations that took place over a three month period. These conversations have been produced as computer
audio files on 6 CD-Roms. The specific conversations RBC references in these motion papers are compiled on
a CD-Rom and attached. The labelling of the files is by month and date. The audio files are the true evidence
of the conversations. In suppqrt of their motion, Defendants have submitted transcripts of the recorded
conversations. These transcripts are neither accurate nor complete and RBC objects to their use as admissible
evidence. They contain material errors in substance and numerous instances where the content of the statements
are nonsensical. See, e.g., Defs. Exh. 316 at 958-959 cites Mr. Wood as the speaker where it should read Mr.
Holmes. Defs. Exh. 323 at 72 is a blatant attempt by the Schneiders to avoid a damaging admission. The
transcript reads Mr. Rauch: "between me and you, they weren't treated--" instead of "between me and you, they
want to trade 'em." Defs. Exh. 323 at 74 reads "we probably could have did the trade on two thfogs" instead of
"we probably could have did the trade on Tuesday." Defs. Exhs. 38, 40, and 81 are missing pages either at the
beginning of the conversation, in the middle or at the end. These are just a few examples of numerous material
errors in the transcripts. Additionally, it should be noted that both RBC and Highiand objected to the use of
these transcripts at depositions and witnesses also contested their accuracy. (Exh. 3 (Ambrecht Dep.) at 81,
182-183, 215-216; Exh. 29 (Parent Dep.) at 208-209).
To highlight the inaccuracies of Defendants' transcripts, RBC has attached certified transcripts of certain of the
recorded conversations. Compare Defa Exhs. 323, 317, 41D with Exh. 30 (Certified Transcript ofRBC 894,
2.2.01; RBC 896, 1.26.12; RBC 725, 3.14.09). However, any questions as to the contents of the conversations
constitute material questions of fact warranting denial of the Schneiders' motion for summary judgment. See
New York v. Batista, 183 Misc. 2d 203, 207 (2000) ("Any disputes as to the actual words spoken on the tapes
are factual issues to be resolved by the jury,"); U.S. v. Buck, 1987 U.S. Dist. LEXIS 8416, *4 (S.D.N.Y. Sept.
10, 1987) ("where the defense and prosecution disagree as to the contents, the proper procedure is for the jury to
receive transcripts of both sides' versions .. :" and in such circumstances, the judge should instruct the jury that
"what they hear constitutes the evidence, rather than what the transcripts say."); U.S. v. Chiarizio, 525 F.2d 289,
293 (2d. Cir 1975) ("the submission of a transcript from tape recordings is not pem1itted when one side objects
to the content of the transcript as inaccurate."). Finally it should be noted that the transcripts provided by the
Schneiders were prepared by Barbara Bailey, who was also the court reporter hired by Defendants for various
witness depositions in this case. Ms. Bailey apparently prepared the transcripts before she ever took the
deposition ofRBC's witnesses, but that was never disclosed to RBC. This certainly appears to impinge on the
neutrality expected of court reporters. "Litigants, other participants in the judicial system and the general public
expect and demand that depositions and court proceedings be recorded by a competent, independent and neutral
court reporter who has no stake, financial or otherwise, in the outcome of the action. Prohibiting parties of
interest in litigation from having a direct contractual relationship with court reporters, as officers of the court, is
necessary to ensure the public's faith in the integrity and impartiality of the judicial system." The National
Court Reporters Association, Key Issues - Exclusive Third-Party Contracting, at
http://www.ncraonline.org/infornews/key/contract.shtml.
9
On January 10, 2001, in a recorded telephone conversation, Rauch informed Ambrecht
that the Schneiders might be willing to sell the $10 Million Notes as well as the $59 Million Notes.
Thereafter, under the terms of the Letter Agreement, RBC began marketing all of the $69 Million Notes.
(Exh. 21 (Compilation CD), at RBC 895, 1.10.01).
On January 11, 2001, in a recorded telephone conversation, Ambrecht informed Rauch
that prospective purchasers of the Notes might attempt to contact McNaughton. Id. at RBC 895, 1.11.01).
This apparently concerned the Schneiders deeply because, on January 16, 2001, Rauch sent a letter to
RBC stating that no prospective buyers of the Notes were to contact McNaughton, and if any prospective
buyers did contact McNaughton, that the Schneiders would "withdraw the deal." (Exh. 35 (January 16,
2001 letter)). The letter further states that "all questions or inquiries will be directed to Glen Rauch at
Glen Rauch Securities ... " Id. In a recorded phone conversation on January 16, 2001, Rauch explained to
Ambrecht that Alterbaum, the Schneiders' attorney, was opposed to anyone contacting McNaughton and
letting McNaughton know that the Schneiders were interested in selling the Notes. (Exh. 21 (Compilation
CD), at RBC 896, 1.16.01).
In a recorded telephone conversation on January 25, 2001, Ambrecht and Rauch
. discussed organizing a conference call among RBC, Rauch, Alterbaum (in his role representing the
Schneiders), and the law firm of Akin, Gump, Strauss, Hauer, Feld LLP (which was representing
Highland). During the above-referenced conference call, which was held on or around January 25, 2001,
Alterbaum represented to the parties that the Notes were freely assignable and transferable. 12 (Exh. 21
(Compilation CD), at RBC 896, 1.25.09, 1.25.13, 1.25.20-1.25.21, 1.26.05, 1.26.07, l.26.U8).
Ambrecht and Rauch had another recorded telephone conversation on January 30, 2001.
In this conversation, Rauch again represented that RBC was the exclusive marketer of the Notes. Rauch
further stated that he thought that in the next few days, public announcements beneficial to McNaughton
12
Alterbaum's behavior is futiher evidence that the Schneiders' intended to sell the Notes and that Rauch had
authority to do so. Alterbaum negotiated the Letter Agreement, he participated in this conference call with
potential buyers. His time sheets also reflect that a sale of the Notes were being discussed. See (Exh. 51 ).
10
would be released. Rauch went on to state that Boneparth knew that someone was trying to buy the Notes
and that Boneparth told this to the Schneiders' accountant, Bruce Madnick. (Exh. 21 (Compilation CD),
at RBC 895, 1.30.15).
In early February 2001, immediately prior to the expiration of the exclus.ivity period
provided for by the Letter Agreement, Ambrecht and Mark Kaufman, an RBC analyst, visited Rauch at
his offices in New York City. Ambrecht, on behalf of RBC, requested an extension of the exclusivity
period so that RBC could continue to market the Notes. Rauch, on behalf of the Schneiders, agreed to the
extension, and stated that RBC was the only person/firm working on the marketing of the Notes.
(Deposition Transcript of Mark Kaufinan dated February 17, 2004 ("Kaufman Dep."), at 192-193,
attached as Exh. 36; Ambrecht Aff. Oct. 10.
~
9). This was untrue. For example, the testimony has
shown that the Schneiders had asked their attorneys to also find buyers for the Notes. (Exh. 4 (Leonard
Dep.) at 251-253).
In February and March 2001, Negotiations
Continue and the Bid/Ask Differential Narrows
During February of2001, RBC's marketing efforts began to show some success. RBC
had identified Highland and Fidelity as two prospective end purchasers for the Notes. Negotiations
between Rauch, on behalf of the Schneiders, and RBC continued through February 2001. The
conversations between Rauch and Ambrecht make clear that Rauch was acting as the agent of the
Schneiders, and had authority to bind them in a transaction involving the Notes -- contrary to the
assertions made by the Schneiders and Rauch in discovery. Indeed, the recorded conversations make
clear that the parties were moving closer and closer to a sales price for the Notes -- a price somewhere
. around 50% of par value. (Exh. 21 (Compilation CD), at RBC 896, 1.19.10-1.19.11, U9.06, 1.19.07,
1.22.02; RBC 894, 2.1.06, 2.1.09, 2.1.12, 2.26.05- 2.26.07).
In one such recorded telephone conversation on February 12, 2001, Rauch made a "firm
offer" to Ambrecht that ifRBC would pay 59% of par value for the Notes, there would be a trade. (Id. at
RBC 894, 2.12.02). As RBC's expert witness has testified, pursuant to industry practice, if RBC had
11
accepted the firm offering, there would be a binding agreement, and the transaction would be submitted
for final documentation of the privately negotiated trade. (Exh. 20 (Guild's Report) at 12. Two weeks
later, Rauch had dropped the price and, in another such recorded telephone conversation, on February 26,
2001, made another firm offer, stating "at 54 you'll own them all." (Exh. 21 (Compilation CD), at RBC
894, 2.26.05-2.26.07).
Glen Rauch, on Behalf of the Schneiders, Reaches
an Agreement on Size and Price with RBC
Prior to Monday, March 12, 2001, RBC received an offer from Fidelity to purchase
Leonard Schneider's $23.6 milliori tranche of the $59 Million Notes for 53% of par value, and an offer
from Highland to purchase the remaining $59 Million Notes, and the $10 Million Notes from Highland
for 52.5% of par value. (Exh. 21 (Compilation CD), at RBC 17252, 3.12.04-3.12.07; RBC 17252, 3.12.123.12.18; Affidavit of Peter Parent sworn to on October 6, 2001 ("Parent Aff."), if 5; Ambrecht Aff. Oct.
10.
ir 11).
Based on its Customers' offers, on Monday, March 12, 2001, in a recorded telephone
conversation, Ambrecht informed Rauch that he could make an offer of 51 % of par value for the Notes.
Rauch responded "that will work" (Exh. 21 (Conipilation CD), at RBC 725, 3.12.03). The conversation
continued as follows:
Ambrecht:
IfI come back with a firm 51 bid, you think the whole thing trades here?
Rauch:
Yep.
Ambrecht:
All $69 million?
Rauch:
Yep.
Ambrecht:
Okay, I am going to come backwith that ... []I am going to make it 51
and combine the whole piece.
Rauch:
Okay, great.
12
Because he knew a sale of the Notes was imminent, by letter dated March 12, 2001 to
Leonard Schneider and Lillian Schneider, Rauch outlined how he thought he should be compensated for
his role in the transaction involving the Notes:
I guess it is time to consider the compensation for Glen Rauch Securities, Inc. for all the
work and effort put in on behalf of the Schneiders and the transactions involving
McNaughton Apparel Group ... (Exh. 64 (March 12th Letter)).
In the letter, Mr. Rauch goes on to calculate his compensation on the transaction at price
ranges near the 51 % level. In a separate recorded telephone conversation on March· 13, 2001, Rauch
stated to Ambrecht that "we are not haggling, we're done at 51 ifit gets done." (Exh. 21 (Compilation
CD), at RBC 725, 3.13.01-3.13.02).
March 14, 2001: Rauch, on Behalf of the Schneiders Agrees to Trade the Notes
Early in the next day, on March 14, 2001, Rauch and Ambrecht discussed the trade again.
Rauch stated he would not hear from the Schneiders until after noon. Ambrecht asked "You don't think
they've changed their mind do you?" and Rauch answered "No." Ambrecht responded "No?" and Rauch
replied "No, absolutely not." (Exh. 21 (Compilation CD), at RBC 725, 3.14.02).
Later that day, Rauch represented to RBC that the Schneiders had agreed to the price of
. 51 % of par value for all of the Notes. In a taped conversation, Rauch represented to RBC that he had
called the Schneiders about the transaction and now he simply had a call into the Schneiders' attorney,
Alterbaum, about the wording of the written confirmation. When Ambrecht stated "[a]nd that's going to
be for all the sixty-nine million," Rauch replied "Yeah, that's for all of them, yeah." 13 (Exh. 21
(Compilation CD), atRBC 725, 3.14.06-3.14.10).
In a third conversation, three representatives of RBC - Ambrecht, Max Holmes and Peter
Parent (Holmes and Parent were co-heads of the High Yield Desk) -- telephoned Rauch to reconfirm the
13
Defendants' transcripts have Rauch's statement in this conversation "that's for the small one" instead of "that for
all of them." Compare Def. Exh. 41D with Exh. 30 (Certified Transcript ofRBC 725, 3.14.09 and Exh. 21
(Compilation CD) at RBC 725, 3.14.09. Even Defendants' expert, William Purcell, admitted this did not make
sense since all the Notes were involved. Deposition Transcript of William Purcell dated Jan. 21, 2005 ("Purcell
Dep.") at J 24-125 attached as Exh. 47).
13
transaction. This conversation was not taped because it was in Holmes' office, who was not on the
trading desk.
14
at if 9; Day Aff.
(Affidavit of Achim Maximillian Holmes sworn to on August 30, 2001 ("Holmes Aff.")
if 11 ).
But all three individuals recollect that Rauch again made clear that there was
agreement on size and price and that he was simply waiting for the Schneiders' attorney to provide the
language that would be included in the written confirmation of the trade that RBC would execute. 15
Rauch represented that the Schneiders' attorney would forward the language by the next business day.
(Holmes Aff.
if 1O; Ambrecht Aff. Oct. 10 if 15; Parent Aff. if 8).
Based on Rauch's oral representations to RBC, RBC communicated in separate
conversations to Fidelity and Highland that a transaction would occur subject to conditions and
documentation. 16 (Parent Aff.
if 9; H?lmes Aff. if 12; Ambrecht Aff.
Oct. 10 if 16; Exh. 21 (Compilation
CD), at RBC 894, 3.14.04 RBC 725; 3.14.11-3.14.12). RBC also informed Fidelity and Highland that,
when the transaction closed, RBC would be selling the $23.6 million portion of the Notes (owned by
Leonard Schneider) to Fidelity at 52.5% of par value - the same price that Highland would be paying for
its portion of the Notes. (Exh. 21 (Compilation CD), at RBC 894, 3.14.04).
Based on industry custom and practice, RBC justifiably, reasonably, and appropriately
believed that it had a transaction with the Schneiders because it had an agreement as to size ($69 million)
and price (51 % of par value) (Exh. 20 (Guild's Report) at 1; Ambrecht Aff. Oct. 10 if 15; Exh. 3
14
Defendants argue that the failure to tape this phone call was in derogation ofRBC's Company Policy. This is
untrue. RBC's Company P9licy to record telephone calls is only applicable to sales trading and marketing
persom1el. Max Holmes did not fit into this category. (Exh. 22 (Holmes Dep.) at 144-145; Exh. 34 (RBC
Company Policy) at~ 1).
15
All four RBC individuals involved executed sworn affidavits setting forth their recollections in summer and fall
of2001 -- over a year before the Schneiders brought suit against RBC.
16
The Schneiders cite Rauch's self-serving testimony that, in the unrecorded conversation, Max Holmes stated
"Then we have nothing." (Deposition Transcript of Glen Rauch dated January 8, 2004 and January 9, 2004
("Rauch Dep.") at 452-454, attached as Exh. 18). This statement is completely at odds with the testimony of
the three RBC witnesses. Furthermore, if this were true, Peter Parent, who has over twenty years in the
securities industry, would not have communicated to his client that there was a trade. (Exh. 29 (Parent Dep.) at
248-249).
14
(Ambrecht Dep.) at 332-333; Exh. 31 (Wood Dep.) at 422-423, 430; Holmes Aff. if 10; Exh. 22 (Holmes
Dep.) at 320-321). In fact, RBC's expert, Gerald Guild, reported that
I conclude with a reasonable degree of professional certainty based on industry standards
and my forty-three years experience in the financial markets that Glen Rauch of GRS,
acting as agent for the Schneiders, accepted a firm bid by RBC for all $69 million of [the
Notes]. Guild Report at 1.
The only umesolved aspects of the transaction were the supporting documents from the
Schneiders, through their attorneys, to enable physical settlement versus payment. Id.
Based upon Rauch's representations, RBC proceeded with efforts to document its
purchase of the Notes, and to complete the transactions with Highland and Fidelity. RBC hired attorneys
to work on the documents, and began negotiating the details of the transaction(s) with Highland and
Fidelity. Highland sent draft documentation to RBC which RBC had outside counsel review. (Exhs. 38,
39.
Rauch Makes False Statements to RBC and the Schneiders Renege on the Agreement
On March 15, 2001, in a taped telephone conversation Rauch stated that Alterbaum, the
attorney for the Schneiders, was reviewing the documents in connection with the transaction. Whatever
else was going on behind the scenes, that was untrue. (Exh. 21 (Compilation CD), at RBC 725, 3.15.04).
Indeed, neither Rauch nor Alterbaum called RBC to finalize the documentation. Instead,
on March 20, 2001, the third business day following Rauch's representation that the documents would be
forthcoming, RBC called Rauch. In a taped telephone conversation, Rauch stated that the Schneiders had
decided not to complete the sale of the Notes and wanted to sell a large block of McNaughton stock
instead. (Exh. 21 (Compilation CD), at RBC 725, 3.20.02; 3.20.07-3.20.13). According to testimony by
the Schneiders in this litigation, however, this statement was untrue. (Exh. 4 (Leonard Dep.) at 491-492).
In a taped telephone conversation on March 21, 2001, Rauch stated that he had not yet
heard from the Schneiders' attorney. In this same call, RBC informed Rauch that ifthe Schneiders
wrongfully repudiated their obligations, RBC's customers (Fidelity and Highland) would likely cease
doing business with RBC, causing RBC to suffer significant business losses. (Exh. 21 (Compilation CD),
at RBC 725, 3.21.01-3.21.14).
15
The Schneiders never fulfilled their obligations to RBC with respect to the Notes. As of
March 21, 2001, both Fidelity and Highland put RBC in the "penalty box" and refused to do business
with it because of the Schneiders' actions. (Deposition Transcript ofJames Wood dated Januaiy 6, 2004,
Januaty 7, 2004, and March 12, 2004 ("Wood Dep.") at 394-397, attached as Exh. 31; Exh. 29 (Parent
Dep.) at 93-94). As a result, RBC has lost over $5 million in lost business. (Exh. 20 (Guild's Report) at
14).
The Schneiders Reneged Because They Had Received Material, Inside,
and Non-Public Information Regarding a Prospective Merger of McNaughton
Discovery in this action confirms that the Schneiders received material, non-public
information concerning a potential merger involving McNaughton and that, after receipt of that inside
information, the Schneiders reneged on the transaction that Rauch agreed to on their behalf. (Exh. 43
(March 9th Memo); Defs. Strut 85-96; Leonard Aff. ~18-20).
During the first quarter of 2001, Boneparth had been in negotiations with Jones to sell
McNaughton to Jones. On or about March 8, 2001, Boneparth, Bokman, and Brad Cost, both a part~er at
the law firm ofTorys LLP and the general counsel of McNaughton, had a private meeting. (Exh. 43 _
(March 9th Memo)). Boneparth was worried that Leonard Schneider, one of the largest shareholders of
McNaughton, was actively selling his stock. (Exh. 14 (Boneparth Dep.) at 129-130). In fact, after
learning of McNaughton's financial condition from the materials sent by Bokman in November 2000,
Leonard Schneider had begun selling his McNaughton stock on January 17, 2001 and by March.9, 2001
had sold 702, 700 shares (out of a total of 800,000 shares he owned). (Leonard Aff.
at~
17). Glen Rauch
was assisting Leonard Schneider in this sell off. (Id.)
Boneparth was w_orried this would hurt the prospects for a merger by depressing the price
of McNaughton's stock. (Exh. 14 (Boneparth Dep.) at 129-130). Therefore, Boneparth instructed Cost to
contact the Schneiders' attorneys and apprise them of the fact that McNaughton was contemplating
merging with a larger corporate entity. (Id. at 82-83).
16
On Friday, March 9, 2001, Cost had two discussions with Jim Alterbaum and Charles
Greenman, attorneys at Jenkens who represented the Schneiders. He memorialized these conversations in
a memorandum he wrote that same day. Exh 43. In the memorandum, Cost stated that he advised
Alterbaum and Greenman that McNaughton had received an unsolicited inquiry from a substantial.
company regarding whether McNaughton would be interested in a sale transaction, and that the
preliminary discussions between McNaughton and this potential purchaser were at an attractive price per
share. (Jd.) Cost justified McNaughton passing this information along "as a courtesy to its business
partners" and he noted that McNaughton would not be making a public announcement given the
preliminary nature of the discussions. (/d.)
After the two discussions with Cost, Alterbaum and Greenman contacted Leonard
Schneider and told him of the information they had received. (Leonard Aff.
~
18 -19). Leonard then
contacted Leslie, Scott, and Susan Schneider to convey to them the inside information. (Leonard Aff.
~19).
On or about.March 9, 2001, Lillian Schneider requested that Jenkens provide advice as to
whether Leonard Schneider could keep selling stock. (Exh. 4 (Leonard Dep.) at 393-394). Therefore,
over the weekend of March 10-11, 2001 Jenkens produced two memoranda analyzing this issue and .
concluded that, on balance, Leonard Schneider could not sell his stock. (Exh. 44 (Legal Memoranda).
The memoranda did not discuss the Notes. At no point during this time period did Jenkens or the
Schneiders instruct Glen Rauch to stop his attempts to sell the Notes.
On Tuesday, March 13, 2001, the Schneiders, along with Lillian Schneider, met with
Alterbaum and Greenman at the offices of Jenkens in New York. At this meeting, Alterbaum and
Greenman recommended that Leonard Schneider stop selling stock. Further, Alterbaum and Greenman
recommended that the Schneiders not proceed with a sale of the Notes, as any sale or merger of
McNaughton would trigger a "change of control" clause within the Notes, and the Notes would
immediately mature. Any sale or merger of McNaughton therefore, would require that the Notes be paid
out in full, at their face value, before any merger or sale could take place. (Leonard Aff. at ~20; Affidavit
17
of Leslie Schneider sworn to on January 6, 2005 ("Leslie Aff. ") at~. 12; Affidavit of Susan Schneider
sworn to on December 31, 2004 ("Susan Aff."), at 10; Affidavit of Scott Schneider sworn to on January
4, 2005 ("Scott Aff."), at ~l 0). Rauch was aware that this meeting was occurring and informed Ambrecht
that the children were meeting to discuss the Note transaction. (Exh. 21 (Compilation CD), at RBC 725,
3.13.01).
The Schneiders testified that, at this meeting, it was agreed that Alterbaum would contact
Glen Rauch and instruct him to not proceed with any transaction regarding the Notes. (Leonard Aff.
at~
23). However, Alterbaum did not contact Glen Rauch until 6:00PM on March 14th, the following day -after Glen Rauch, as agent for the Schneiders, had agreed to a sale of the Notes with RBC. (Exh. 46) At
that time, Alterbaum called Glen Rauch and left a message with Rauch's secretary. (Id.) The message 1s
ambiguous, at best. The message slip states:
not sure Schneiders want him to proceed with phone calls. Before he spins his wheel.
Call Schneiders first. He will call them also." (Id.)
Glen Rauch never communicated such a message to RBC. In fact, Rauch testified that,
after receiving the message, he spoke to Alterbaum who did not tell him to stop selling the Notes, but
only that he (Alterbaum) was reviewing the Notes. (Exh. 18 (Rauch Dep.) a.t 472). Rauch communicated
this to RBC, stating that he was waiting for Mr. Alterbaum to review the Notes and get back to him with
the correct language to insert in the written confirmation. (Exh. 21 (Compilation CD), at RBC 725,
3.14.06-3.14.10; 3.15.04-3.15.09). At no point did Rauch or the Schneiders state to RBC that the
Schneiders had received inside information. (Defs. Mem. at 54-55).
On April 16, 2001, a merger between Jones and McNaughton was annou~ced in the Wall
Street Journal. As a result of the merger, the maturity of the Notes was accelerated, and the Schneiders
were paid the face value of the Notes on or about July, 2001. (Exh.40 (McNaughton Proxy Statement);
Exh. 41 (June 30th Letter from Melissa Beck); Exh. 42 (Friedman Apren & Green LLP Memo; Def. Mem.
at 2).
18
ARGUMENT
I.
STANDARD FOR SUMMARY JUDGMENT
Summary judgment is appropriate where "the pleadings, depositions, answers to
intenogatories, and admissions on file, together with the affidavits ... show that there is no genuine issue
as to any material fact and that the moving party is entitled to judgment as a matter oflaw." FED. R. Crv.
P. 56(c); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986) ("Summary judgment will not lie
ifthe dispute about a material fact is 'genuine'"). In resolving the motion, all reasonable inferences are
drawn in favor of the non-mo\'.ing party. Anderson, 477 U.S. at 255. To survive a summary judgment
motion, the non-moving party must set out only specific facts indicating that there is a genuine issue for
trial. Gnazzo v. G.D. Searle & Co., 973 F.2d 136, 138 (2d Cir. 1992). Thus, "if, as to the issue on which
summary judgment is sought, there is any evidence in the record from which a reaso:µable inference could
be drawn in favor of the opposing party, summary judgment is improper." Gummo v. Village ofDepew,
75 F.3d 98, 107 (2d. Cir. 1995), cert. denied, 134 L.Ed. 2d 780, 116.S.Ct. 1678 (1996). The party who
seeks summary judgment bears the burden of proof demonstrating that there record is absent of any
genuine factual dispute. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 91 L.Ed. 2d 265, 206 S. Ct. 2548
(1986).
II.
THE SCHNEIDER'S MOTION TO DISMISS
RBC'S FIRST AND SECOND CLAIMS FOR BREACH OF DUTY
TO NEGOTIATE AND BREACH OF CONTRACT SHOULD BE DENIED
On March 14, 2001, the Schneiders, through their agent Glen Rauch, agreed to a sale of
the Notes. The Schneiders agreed to the material terms of the sale: size ($69 million) and p1ice (51
percent of par value). Under New York law and industry practice, a contract was created at that time.
Therefore, RBC can prove its First and Second Counterclaims for breach of the duty to negotiate the oral
agreement and for actual breach of that agreement, and the Schneiders' motion for summary judgment
should be denied.
19
A.
RBC HAS SUFFICIENTLY PLED A BREACH OF CONTRACT CLAIM
Under New York law, to establish a breach of contract a party must prove: (i) the
existence of a contract; (ii) performance by the complaining party; (iii) breach by the other party; and (iv)
damages suffered as a result of the breach. MDCM Holdings, Inc. v. Credit Suisse First Boston C01p.,
216 F. Supp. 2d 251, 260 (S.D.N.Y. 2002). In this case, RBC can prove all of the elements ofa breach of
contract claim.
First, the evidence is clear that there was an oral agreement to sell the Notes on March
14, 2001. Second, with respect to the second element, .RBC did in fact perform and begin to carry out Its
obligations: it hired attorneys to document the transaction and it informed its customers, Highland and
Fidelity, that the transaction would occur, subject to
documentat~on
(Exh. 21 (Compilation CD) at RBC
894, 3.14.04; RBC 725, 3.14.11-3.14.12; Exh. 38 (Richards Spears Kibbe & Orbe Con-espondence), Exh.
39 (Draft Confinnation sent by Highland)). Finally, RBC has shown that it has been damaged. Had the
Schneiders fulfilled their obligations, RBC would have held the Notes and received the $34 million in
profit when the Notes were paid out in full value.
-In response, Defendants have asserted a myriad of conflicting arguments -- all of which
are refuted by the evidence and, at best, point to factual disputes. Defendants argue that RBC failed to
perform under the agreement and that "RBC understood that no agreement had been reached for the sale
of Notes" (Def. Mem. 27), because there was no trade ticket or document prepared. However, the lack of
documentation does not affect the oral agreement. Nor is it compelling. First, the transaction was one
where an oral agreement would be reached first, and then it would be documented. Second, RBC's
witnesses have testified that, in transactions similar to the one at issue, it would not be unusual for RBC to
wait for the transaction to close before writing a trade or order ticket since in private placements, it takes a
longer period of time for the trade to close due to the need for documentation. (Exh. 3 (Ambrecht Dep.)
at 301-302). For example, RBC typically waits until the end of the documentation period before booking
20
the tradeinto their profits and loss (P&L). (See Day Aff.
'i! 9), Exh. 29 (Parent Dep.) at 210-211). 17
Moreover, after discussing the lack of documentation, the Schneiders do discuss the fact that Highland
had sent draft trade confirms which RB C's outside counsel reviewed and revised. The significance of the
absence of any documentation is, at best, a question of fact, which should not be decided on this motion.
18
RBC's only other obligation under the agreement would have been to pay the agreed
price upon delivery of the Notes. However, Rauch and the Schneiders informed RBC that they would not
perform under the agreement and did not deliver the Notes, thus relieving RBC of its duty to pay. It is
black letter law that "a party to a contract cannot rely on the failure of another to perform a condition
precedent where he has frustrated or prevented the occurrence of the condition." Kooleraire Service and
Installion Corp. v. Board of Education, 28 N.Y.2d 101, 106, 320 N.Y.S.2d. 46, 48, 268 N.E.2d 782, 784
( 1971) (reversing order dismissing breach of contract claim holding that the defendant could not take
advantage of a condition precedent to the contract because it frustrated the condition precedent); Gross v.
Neuman, 53 A.D.2d 2, 7, 385 N.Y.S.2d 46, 48 (1st Dept. 1976).
17
The Schneiders claim that the conversation between Parent and his superior, Andrew Pringle, on March 14,
2001 where Parent was told not to "put a penny through" on the transaction is indicative of the fact that RBC
knew there was no firm agreement between the parties. This is simply untrue. In the same conversation, Parent
states "And we just traded the Nortons." Pringle C;llso congratulates Parent on the P&L earned on the trade.
Parent also states that they are going to go through the "le gal stuff tomorrow and reps and warranties and
everything else." (Exh. 21 (Compilation CD), at RBC 894, 3.14.05). Defendants also cite to Holmes'
deposition where he was unsure.at the time of the deposition whether it was $59 or $69 million in Notes that
traded. However, the more contemporaneous affidavit Mr. Holmes executed in 2001 (two years prior to his
deposition) makes clear he understood it was $69 million. (Holmes Aff. ii 2). Similarly, the citation to Mark
Kaufman's testimony is also unavailing. Mr. Kaufman, like Mr. Holmes, was not involved in the actual
negotiations. The recorded conversations make clear the entire $69 million was being traded.
18
Defendants also cite a letter by RBC's counsel sent to Highland's counsel, after the Schneiders reneged, and
while Highland was threatening litigation, in which it is stated that the transaction between RBC and Highland
for the purchase of the Notes was subject to many conditions including documentation. (Defs. Mem. at n.16).
Besides concerr:ting only the RBC/Highland transaction -- and not the REC/Schneider transaction -- this letter is
utterly consistent with RB C's position that once there was an oral agreement, the trade would be. documented.
This is to be contrasted with a letter from Jenkens in October 2001 to RBC's counsel in which it is stated that
"Rauch clearly informed [RBC] that the Schneider family would not accept an offer as low as 51 cents on the
dollar." (Exh. 49 (Letter from Greenman to McNamara dated Nov. 2, 2001 ). This is simply untrue as
evidenced by a recorded conversation of March 12, 2001 in which RBC asks Rauch "If [RBC] comes back with
a firm 51 bid, you think the whole thing trades here?" and Rauch replies "Yep." (Exh. 2 I (Compilation CD), at
RBC 725, 3.12.03).
21
With respect to damages, the Schneiders have argued in the past that RBC has pled that it
was acting as a riskless principal and would have sold the Notes to Highland and Fidelity. This is true,
but all that it means was that RBC was attempting to limit its market risk by lining up buyers and sellers.
Exh. 66 (Day Dep. at 352); Exh. 22 (Holmes Dep.) at 95-97). RBC was still at risk while it held the
Notes -- it does not matter if it was for an hour, a day or a week. Moreover, RBC was at risk if, as
actually happened, one of the transactions fell through. (Exh. 20 (Guild Report at 9, 10)). The fact of the matter
is that the oral agreement was between RBC and the Schneiders and RBC is entitled to the contractual
damages.
Furthermore, on May 3, ·2004, RBC received an assignment of Fidelity's claim on the
Note Purchase Transaction. (Exh. 53 (Assigmnent o.fFidelity's Claims)). Therefore, not only is RBC
entitled to the entire contractual damages because the oral agreement was between RBC and the
Schneiders, but RBC also owns the claim for the purchase of Leonard's Note of $23.6 million at 51 cents
of value.
In fact, whatever factual disputes the Schneiders attempt to cite to with respect to the
Schneider's children desire to sell their Notes - none of which is borne out by the evidence - they can
point to none with respect to Leonard. The evidence is clear that Leonard wanted to sell his note. In fact,
he testified that "If the price and terms were right, I was prepared to sell my notes for me." (Exh. 4
(Leonard Dep.) at 473). Moreover, Rauch spoke with Leonard every day, usually more than once. (Id. at
323; Exh. 21 (Compllation CD), at 725, 3.12.06). On the Fidelity side of the transaction, the Schneiders
do not even attempt to show, because they cannot, that Fidelity had put any representations and warranties
on the transaction. Clearly, there is no dispute that on March 14, 2001, Leonard sold his $23.6 million
Note to RBC for 51 cents of par value who would then sold it to Fidelity for 52.5 cents of par value. The
profit on that transaction would have been approximately $11.6 million.
22
B.
RAUCH WAS THE SCHNEIDERS' AGENT AND ANY CONTRACTS HE ENTERED
INTO ON THEIR BEHALF ARE BINDING.
The Schneiders argue that there was no trade because 1) the Schneiders never intended to
sell the Notes; 2) each Schneider had to agree to sell his or her Note; 3) Rauch had no authority to act on
their behalf; and 4) they did not know what Rauch was doing. All of these arguments are contracted by
the deposition testimony of the Schneiders and Rauch, and by the recorded conversations. At most, all of
the S.chneiders have accomplished is to place the facts in dispute and the issues should go to the jury. But
there is no doubt that Rauch represented the Schneiders and could bind them. The Letter Agreement says
so and during the three months of negotiations, Rauch made "firm" offers that were recorded and which
bind the Schneiders. RBC was informed that they could only talk to Rauch and not to the Schneiders
directly. Leonard Schneider als.o testified that RBC would have needed Rauch's permission to contact
Leonard directly. (Exh. 4 (Leonard Dep.) at 451 ). There is no doubt that, under New York Law, Rauch
had authority to act for the Schneiders and bound them to the oral agreement. "It is axiomatic that agents
with proper authority can enter into contracts with third persons on behalf of their principals." Peterson
v. Beale, 1995 U.S. Dist. LEXIS 11580, *23-24 (S.D.N.Y. Aug. 10, 1995). Authority is established
"from all the facts and circumstances of the case, in view of the object which the agent is appointed to
accomplish." Id. Seetransport Wildng Trader Schiffarhtsgesellschaft MBH & Co.
Kommanditgesellschajt v. The Republic ofRomania, 123 F.Supp. 2d 174, 185-186 (S.D.N.Y. 2000) (in
finding authority to execute and bind the defendant to the contracts at issue, the Court held that "scope of
agent's actual authority may be explicitly stated or, alternatively, inferred from all circumstances
including business customs, subject matter, fonnal agreements between the parties, any facts known to be
both parties, or omissions by the principal.") (internal citations omitted). In addition to the actual
evidence, Rauch, through his stockbroker-customer relationship with the Schneiders, had implied
authority to act on their behalf with respect to the sale of the Notes. The law is clear that a stockbrokercustomer relationship, without more, is sufficient to create an agency relationship. People of the State of
New York v. Mercer Hicks Corp. et al., 4 Misc. 2d 55, 58, 155 N.Y.S.2d 740, 744 (Sup. Ct. 2002) ("It is
23
established that the relation between a customer and his stockbroker is that of principal and agent.") The
nature of the security industry is one in which transactions are conducted daily through agents, and
brokers are assumed to have authority from their clients for whom they are negotiating a transaction. This
legal presumption of an agency relationship between Rauch and the Schneiders is supported by the
Schneiders' own testimony that for several years Rauch bought and sold municipal bonds on their behalf
based on oral instructions. For example, Lillian Schneider testified that Rauch usually worked within
certain "parameters" and as long as he worked in those parameters, he had authority. (Deposition
Transcript of Lillian Schneider dated June 26, 2003 ("Lillian ~ep.") at 16, attached as Exh. 28). Rauch
also testified that the Schneiders would not do anything without going through him first, (Exh. 21
(Compilation CD), at RBC 895, 1.30.15), and that RBC was "supposed to deliver the bid to me." Exh. 18
(Rauch Dep.) at 256, 245-246). The Schneiders' expert, William Purcell, also testified that an acceptance by
the Schneiders would be communicated by Rauch, not the Schneiders directly. (Deposition Transcript of
Williani Purcell dated January 21, 2005 ("Purcell Dep."), at 90, attached as Exh. 47). 19
Once an agency relationship is established, the principal is responsible for any acts
conducted by the agent which are within the agent's scope of authority. FVeil v. Murray, 161 F.Supp. 2d
250, 258 (S.D.N.Y. 2001) (denying summary judgment when genuine issues of material fact existed as to
whether the defendant was acting as an authorized agent when he signed the written agreement in issue).
Finally, as in the present case, in situations where it is reasonable for a third party to
believe the agent was acting within the scope of his authority, "and changes his position in reliance on the
agent's acts, the principal is estopped to deny that the agent's act was not authorized." Adipar Ltd. v.
PLD Int'/ C01p., 2002 U.S. Dist. LEXIS 23375, *29-30 (S.D.N.Y. Dec. 5, 2002). Thus, the Schneiders
are estopped from denying that Rauch had the authority to enter into a transaction on the Notes. See King
19
For example, on February 12, 2001, Rauch stated to RBC "59 and you own it." (Exh. 21 (Compilation CD), at
RBC 894, 2.12.02). On Febuary 26, Rauch made another offer when he stated "at 54 you'll own them all." (Id.
at RBC 894, 2.26.06). On March 12, when asked if 51 will be an acceptable price, Rauch stated "that will do
it." Later that same day, Rauch stated "we're not haggling we're done at fifty-one if it gets done." (Id. at RBC
725, 3.13.02).
24
World Productions, Inc. v. Financial News Network, Inc., 660 F. Supp. 1381, 1383-86 (S.D.N.Y.), ciffd,
834 F.2d 267 (2d Cir. 1987) (individual has agency status and thus the power to bind a principal in
contract ifhe has actual or apparent authority). 20
C.
A CONTRACT WAS FORMED BASED ON THE ORAL AGREEMENT
Under New York law, "parties may enter into a contract orally, even though they
contemplate later memorializing their agreement in writing." Spencer Trask Software and Information
Services LLCv. RPost Int'/ Ltd., 2003 U.S. Dist. LEXIS 946, *15-16 (S.D.N,Y. Jan. 23, 2003). As this
Court noted in that case:
In such a case, the mere intention to commit the agreement to writing will not prevent
contract formation prior to the execution of that writing. [Consarc C01p. v. Marine
Midland Bank, 996 F.2d 568, 574 (2d. Cir. 1992)]. ("Simply because the parties
contemplate memorializing their agreement in a formal document does not prevent their
agreement from coming into effect before written documents are drawn up. That is, if the
parties have settled on the contract's substantial terms, a binding contract will have been
created, even though they also intended to memorialize it in a writing.") (Id. at* 16).
Here, the sale of the Notes was agreed upon at the point when Rauch, on behalf of the
Schneiders, agreed to the material tenns of size and price, consistent with the custom and practice of the
debt-trading industry. RBC's expert witness, Gerry Guild, who has forty three years experience on a
trading desk has so testified. (Exh. 20 (Guild Report) at 1, 12). 21
Under similar circumstances, the Second Circuit vacated an order granting summary
judgment to the defendants on a breach of contract claim. Lazard Freres & Co. v. Protective Life Ins.
Co., 108 F.3d 1531, 1538 (2d Cir. 1997). In that case, the Court reasoned that the mere fact that the
parties contemplate memorializing their agreement in a f01mal document does not prevent their informal
oral agreement from taking effect prior to that event, citing among other factors, industly custom. Id.
20
If Defendants are now claiming that Rauch did not have authority to bind them, this is an issue of fact, which
warrants denial of their motion. Adipar Limited, 2002 U.S. Dist. LEXIS 23375 at *27. ("Under New York law,
the question of the existence and scope of an agency relationship is a factual issue that cannot be adjudicated on
the pleadings.")
21
In response, the Schneiders have submitted the reports of two experts who do not have any trading experience.
25
Further, as the Schneiders concede, a determinative factor is the intent of the parties when
entering into the oral agreement. (Defs. Mem. at 25-26). However, contrary to the Schneiders' belief and
the cases they cite, in this case it is not clear from the communications between the parties that the
Defendants did not intend to be bound absenta formal writing. (Exh. 21 (Compilation CD), at RBC 725,
3.14.06-3.14.10; 3.15.04-3.15.09). Here, Rauch's statements, recorded by RBC, were reasonably
interpreted by RBC as an agreement between the parties to sell the Notes. Rauch made numerous offers
and counteroffers throughout the negotiations -for example, making a firm offer at 59 cents on February
12, 2001 and another at 54 cents on February 26, 2001. (Jd. at RBC, 894, 2.12.02, 2.26.05 - 2.26.07).
With regard to the oral agreement, the conversations between March 12, 2001 and March 14, 2001 clearly
point to an oral agreement. See Statement of Facts at 12-15. In fact, under similar circumstances, the
Second Circuit in Lazard Freres held that the type of language in the conversations between Rauch and
Ambrecht was understood in the industry as indicative of a contract.
Protective provides ample evidence to support its theory. Witnesses for both sides
testified that Okada stated "We're done" upon reaching agreement on January 28, and
that that statement meant: "I own that - I own that bank debt at 41 and a half." Protective
alleges that "we're done" is the statement customarily understood in the bank debt
community to indicate that a contract has been reached. [Lazard Freres, 10 8 F .3 d at
1536].
Therefore, all of the Schneiders' arguments that they never intended to enter into a
transaction are factual disputes that must be decided by the fact-finder. As the Second Circuit went on to
say "[u]nder traditional principles of contract law, questions as to what the parties said, what they
intended, and how a statement by one party was understood by the other are questions of fact ... " Id.
Moreover, the Schneiders' testimony about their lack of intent is simply contradicted by
the recorded conversations, the documentary evidence, and their own deposition testimony. For example,
the Schneider children testified that they never heard from Rauch of any potential offers for the Notes.
(See e.g. Deposition Transcript of Susan Schneider dated June 25, 2003 ("Susan Dep.") at 308, 364,
attached as Exh. 57). However, when confronted with taped conversations in which Rauch states to RBC
that the family was "outraged" at bids in the 40s, the Schneiders suddenly remembered hearing "pricing"
26
in that range. (Id. at 392-393). Another example is the testimony that Leonard Schneider informed Glen
Rauch that an offer of 51 % was unacceptable. (Exh. 4 (Leonard Dep.) at 402-403). Besides being
contradicted by the recorded conversations, Glen Rauch at his deposition denied such a conversation took
place; Exh. 18 (Rauch Dep.) at 424-425).
Finally, the Schneiders argue that they would never have agreed to the sale of their Notes
once they learned of the pending merger. However, the evidence certainly points to the fact that they
simply reached Glen Rauch too late. As Lillian Schneider testified, Rauch worked under certain
parameters. (Exh. 28 (Lillian Dep.) at 16). He was obviously given the go ahead on a 51 % offer andthen
the Schneiders reneged. Jim Alterbaum did not tell Rauch to stop selling the Notes until several hours
after Rauch had already done so - indeed, if Alterbaum told Rauch at all. (Exh. 46 (March 14111 Message
Slip). Alternatively, the Schneiders may have wanted to continue with the Note transaction until they
found out how real the merger offer was since they would have received $35 million immediately rather
than waiting for the possibility of the merger. It is clear from the evidence that their relationship with
Boneparth was hostile and that they may not have believed him and would have hedged their bets by
keeping their McNaughton stock until the merger occurred, but selling the· Notes and receiving $5 million
more than they should have under the original McNaughton purchase and sale agreement. (Exh. 14
(Boneparth Dep.) at 24-25, 41-42, 83). Either way, RBC can show a jury that the Schneiders intended to
enter into the Note transaction and then reneged.
D.
THE LETTER AGREEMENT IS NOT A LETTER OF INTENT; THE LANGUAGE
IN THE LETTER AGREEMENT UPON WHICH DEFENDANTS RELY DOES NOT
SUPPORT THEIR ARGUMENT AND IS AMBIGUOUS AT BEST
The Schneiders' heavy reliance on the Letter Agreement for their argument that there was
an intent not to be bound until the execution of written documents is unavailing. The Letter Agreement is
not a "Letter of Intent" on the note transaction. It was a marketing agreement executed three months
before the oral agreement was reached. Therefore, with respect to RBC's breach of contract claims, the
Letter Agreement is simply evidence that a sale would take place and that Rauch was the Schneiders'
agent.
27
Indeed, Max Holmes, the only individual with actual knowledge of the intent of the
Letter Agreement, testified that his intention in drafting the Letter Agreement was that
[REC] wanted a representation from [Rauch] that he in fact did represent the Schneiders,
we wanted him to know that the Schneiders would be paying him and not us. We wanted
an exclusive period on which we could market the [N]otes since it was going to be
considerable effort and we didn't want him to go to some other brokerage firm. And we
wanted him to be aware that upon any transaction the sellers were going to have to make
representations and warranties with regard to the sale. They were going to have to
comply with the securities laws of the United States of America. (Exh. 22 (Holmes Dep.)
at 177).
With respect to those representation and wa1nnties, Mr. Holmes testified that
I believe I told [Rauch] that we need a representation that the Schneiders in fact owned
the [N]otes, that they had not been placed to someone else, that they were free to transfer
them with regard to any agreements they might have with [McNaughton],· and that they
were free to transfer them based on the securi.ties laws of the United States of America.
(Id. at 182). 22
· Therefore, the language in the Letter Agreement that "any transaction is subject to
definitive documentation in compliance with the applicable law" reflects the custom in the industry that
once the material terms of price and quantity are reached orally, the parties document the transaction.
(Exh. 3 (Ambrecht Dep.) at 332; Exh. 31 (Wood Dep.) at 421-423, 430). The Letter Agreement's
. recognition that REC was protecting itself in ensuring that it would receive appropriate documentation
does not mean that Rauch's clients were not bound at the point where, after substantial discussion, they
had agreed to price and quantity. If such a clause had been intended by the Schneiders, it could have been
included, but it was not. At best, this language is ambiguous.
The indefiniteness of the Letter, however, does not require that the Court conclude that
any oral agreement reached between the parties must be viewed as an unenforceable agreement to agree.
To the contrary, in Oscar Productions, Inc. v. Zacharius, 893 F. Supp. 250, fn.6 (S.D.N.Y. 1995), this
Court denied summary judgment where a question of intention was not detenninable by written
agreements. In that case, the parties disagreed as to whether a letter memorialized an oral agreement that
22
·
Holmes' testimony makes clear that the Schneiders' argument that representations and warranties would have
had to be negotiated is unavailing. The Schneiders can point to no material representation or warranty that was
at issue on March 14, 2001.
28
had been reached between the parties at a prior meeting. Defendants contended that the letter indicated
that no such agreement had been reached. Id. at 254. The Court had to assess whether material issues of
fact existed concerning the contract allegedly entered into at the meeting and memorialized by the letter.
Id. at 255. The Court stated:
Absent an expressed intent that no contract shall exist, mutual assent between the parties,
even though oral or informal, to exchange acts or promises is sufficient to create a
binding contract...to avoid the obligation of a binding contract, at least one of the parties
must express an intention not to be bound until a writing is executed. Id. at 256. (citing
Consarc Cmp., 996 F.2d at 570.)
Given the indefiniteness of the letter and viewing the facts in the light most favorable to the plaintiffs, the
Court. could not conclude as a matter oflaw that the parties did not enter into an oral contract. Simply
stated, one party testified that an agreement was reached, and one party averred that no such deal was
struck. Id. Thus, leaving the Court with a question of fact. Id.
Similarly, as this Court has noted: "[i]n cases where the intent to be bound is not
conclusively determinable based on the facts alleged in the complaint and the documents incorporated by
reference, the issue of whether and when the parties intended to be bound is a factual issue that should
[be] submitted to the jury." Spencer Trask, 2003 U.S. Dist. LEXIS 946 at *15 (internal citation omitted).
Therefore, to grant a motion for summary judgement dismissing RBC's breach of contract claims based
on Defendants' disputed characterization of the intent of the parties would be inappropriate. 23
23
Similarly, the cases cited by the Schneiders involve actual letters intent and situations where written agreements
between the parties included clear language reserving the right not to be bound until execution of written
documents. In Universal Reinsurance Co., Ltd. v. St. Paul Fire and lvlarine Insurance Co., 1999 U.S. Dist.
LEXIS 14947 (S.D.N.Y. Sept. 28, 1999), the letter of intent stated that it did "not constitute a legally binding
obligation" but rather was solely an expression of the "current intention of the parties" and was subject to "the
execution of a definitive stock purchase agreement." Id. at *3. Furthermore, the alleged oral agreement was
superceded by subsequent addenda which specifically required closing documents. In All Boys Music, Ltd. v.
DeGroot, 1992 U.S. Dist. LEXIS 2780 (S.D.N.Y. March 6, 1992), defendant reserved the right not to be bound
absent formal documentation in a letter which stated "I presume that you will draw up a fom1al agreement to its
effect-by which time I will have made a firm decision." Id. at *8. Similarly Cleveland Wrecking Co. v.
Hercules Constr. Corp., 23 F. Supp.2d 287 (S.D.N.Y. 1998), is easily distinguishable from the current dispute.
Contrary to the Schneiders' memorandum of law, in detem1ining that an oral contract did not exist, this Court
found there was not a meeting of the minds on the essential price element. Id. at 292-94.
29
E.
THE STATUTE OF FRAUDS DOES NOT APPLY
The Schneiders argue that New York U.C.C. § 1-206(1), which bars the enforcement of
oral agreements for the sale of personal property in excess of $5 ,000, unless memorialized by a writing, is
applicable in this case, and bars enforcement of the agreement to sell the Notes. However, as the Second
Circuit has stated: "[t]he applicability of the statute of frauds is complex and often fact dependent."
Lazard Freres & Co., 108 F.3d at 1538 n.4. Therefore, RBC must have an opportunity in court to
establish the factual basis relevant to counter the Schneiders' statute of frauds defense; on this basis
dismissal ofRBC's counterclaims is improper.
The Schneiders' argument fails for at least two additional reasons: the trading of
promissory notes in the secondary market is exempt from the Statue of Frauds; and the Schneiders should
have expected that their promise would have induced reliance and action on the part of RBC.
l.
The Notes Are Securities under Article 8, And
Therefore, the Sale is Exempt From the Statute of Frauds
Under Article 8 ofNew York's Uniform Commercial Code ("NYUCC"), the Statute of Frauds is
generally inapplicable to "a contract for the sale or purchase of a security." NYUCC § 8-113. A "security" is
defined inNYUCC Section 8-102 as:
an obligation of an issuer or a share, participation, or other interest in an
issuer or in property or an enterprise of an issuer:
(i)
which is represented by a security certificate in bearer or
registered form, or the transfer of wh1ch may be registered
upon books maintained for that purpose by or on behalf of
the issuer;
(ii)
which is one of a claim or series or by its terms is divisible
into a claim or series of shares, participations, interests or
obligations; and
(iii)
which (a) is or is a type dealt or traded in securities
exchanges or securities markets; or (b) is a medium for
investment and by its terms expressly provides that it is a
security governed by the Article.
30
NYUCC § 8-102(15). These rules are intended to be "sufficiently comprehensive and flexible to cover
the variety of investment products that now exist or may develop." N,Y.U.C.C. § 8-103, Official
Comment.
Under this analysis, the Notes qualify as securities. 24 First, the notes are represented by a
certificate in register form and the transfer of the Notes would be registered on McNaughton's books,
satisfying the first aspect of a security. (Exh. 13 (Bokman Dep.) at 84-85). Second, since multiple notes
were issued -- both the August and December Notes were issued to Leonard, Leslie, Susan and Scott
Schneider individually -- the Notes are part of a series of obligations issued in satisfaction of
McNaughton's acquisition of Jeri-Jo. Allegaert v. Chemical Bank, 657 F.2d 495, 507 (2d Cir. 1980)
("Since two DGF Debentures were issued, one having been pledged to BOA and another to Chemical
Bank, the 'series or class' requirement is met: 'minimum compliance with this formality requires that
there be at least two instruments in a specified class or series, or that the single instrument be divisible
into at least one additional instrument."') Finally, the Notes are clearly of the type traded in securities
exchanges and over-the-counter markets. In fact, the Securities Act is referenced in the legend on the first
page of Each Note, (see ?.g., Exh. 15), 25 and the Letter Agreement contemplates the need for an
exemption under the securities laws. (Exh. 27 (Executed Letter Agreement)). 26
The Notes would also be securities under the federal securities law, and, therefore fit
within the securities exception to the Statute of Frauds. As the United States Supreme Court held in
Reves v. Ernst & Young, 494 U.S. 56, 65, 110 S.Ct.945, 951 108 L.Ed. 2d 47, 60 (1990), "because the
24
The Schneiders cite to Federal Deposit Insurance C01p. v. Herald Square Fabrics C01p., 81A.D.2d168, 178179, 439N.Y.S.2d 944, 950-951 (2d Dept. 1981) for the proposition thatNYUCC § 1-206 is applicable to the
sale of promissory notes. However, the Defendants use of this case is incorrect. The court held that the chattel
paper consisting of the promissory notes combined with the security agreement, was governed by NYUCC § 1206(1 ). Id. at 177-178. Here, there was no security agreement. Furthermore, Federal Deposit Insurance Corp.
was decided prior to the amendment of§ 1-206(1) allowing an exception for securities.
25
The Notes include a restrictive legend typically attached as restricted securities, thus indicating that they are in
fact securities subject to federal and state securities laws.
26
The caselaw on both the "securities" and "qualified financial contract" exceptions to the Statute of Frauds is
limited.
31
Securities Acts define security to include 'any note,' we begin with a presumption that eve1y note is a
security." (emphasis added); see also Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 811-15 (2d Cir.
1994) (applying the "family resemblance" test outlined in Reves in holding that mortgage participations
were securities). Moreover, because the Notes were issued for the sale of a business, along with the
payment of cash and stock, they may also be considered securities. See Landret/1 Timber Co. v. Landreth,
471 U.S. 681, 692, 105 S.Ct. 2297, 2305, 85 L.Ed.2d 692, 701 (1985) (rejecting sale ofbusiness
exception to securities laws).
2.
The New York Legislature Makes Clear That The
Oral Agreement Concerning the Notes Is A Qualified
Financial Contract Exempt from the Statute of Frauds
As Defendants admit, the NYUCC's Statute of Frauds does not apply to oral agreements that are
"qualified financial contracts" under N.Y. G.O.L. § 5-701(b), 27 which provides, in relevant part, that
An agreement ... which is valid in other respects and is otherwise
enforceable, is not void for a lack of a note, memorandum or other
writing and is enforceable by way of action or defense provided that such
agreement ... is a qualified financial contract .... and (a) there is, as
provided in paragraph three of this subdivision, sufficient evidence to
indicate that a contract has been made, or (b) the parties thereto, by
means of a prior or subsequent written contract, have agreed to be bound
by the terms of such qualified financial contract from the time they reach
the agreement (by telephone, by exchange of electronic messages, or.
otherwis_e) on those terms.
N.Y. G.O.L. 5-70l(b)(l). A "qualified financial contract" is defined as "an agreement to which each
party thereto is other than a natural person and which is ... (i) for the assignment, sale, trade, participation
or exchange of indebtedness or claims relating thereto arising in the collrse of the claimant's business or
profession ... " N.Y. G.O.L. § 5-701(b)(2).
The New York Legislature amended Section 5-701 (effective October 5, 2002) to make
clear that exchanges of indebtedness such as the oral agreement on the Notes fall within the "qualified
financial contract" exception. The legislative history to this Amendment states:
27
NY UCC Section 1-206(3) provides, that "Subsection one of this section does not apply to a qualified financial
contract as that term is defined in paragraph two of subdivision b of section [N.Y.G.OL. 5-701] ... "
32
As a matter of custom and practice, parties to a trade of an interest in a commercial loan
generally intend to be legally bound by the terms of each such transaetion from the
moment they reach agreement on such terms, whether orally or otherwise. . .. This is a
modest extension to existing law that would bring New York commercial law into
conformity with market practice involving the sale of assignments and participations of
commercial indebtedness ... The amendment would cement the legal enforceability of
transaction involving interest in indebtedness in manner in which financial markets have
adopted, understand and have shown an ability to work with. (See Exh. 65 (New York
Senate Memorandum)).
Although the amendment came after the trade in question, it simply codified the prior
understanding in the marketplace and should be applied here. See, e.g., Lehman Brothers Inc. v.
Canadian Imperial Bank of Commerce, 2000 U.S. Dist. LEXIS 13979, *39 (S.D.N.Y. Sept. 27, 2000)
(court found agreement to transfer U.S. Treasury Notes in exchange for payment and simultaneous
repurchase was a qualified financial contract).28
The Schneiders argue that the oral agreement concerning the Notes is not one which
"each party thereto is other than a natural person." This is simply not true. The actual oral agreement
was between Glen Rauch Securities, as agent for the Schneiders, and RBC. Neither is a natural person.
Moreover, the "natural person" exemption is to protect the sale of such individual debt as credit card and
mortgage debt. (Exh. 65 (NY Senate Memo) ("The amendment has no bearing on trading of indebtedness
of individuals, such as credit card and mortgage debt.")) Here, the Schneiders are highly sophisticated,
former owners of a business who received $69 million in issuer debt. 29
Finally, the agreement meets the requirements of section 5-701 (b )(1) which requires
"sufficient evidence that a contract has been made." Pursuant to Section 5-70l(b)(3), sufficient evidence
may be "evidence of electronic communication (including, without limitation, the recording of a
28
Courts have also held, in other contexts, that a qualified financial contract specifically refers to secondary
market trading or sales. See, e.g., Heiko v. Federal Deposit Insurance Cmp., 1995 U.S. Dist. LEXIS 3407, *1618 (S.D.N.Y. March 15, 1995) (interpreting the term "qualified financial contract" under the Financial
Institutions Reform, Recovery & Enforcement Act, and holding that a straight loan agreement is not a qualified
financial contract, but a loan agreement in the secondary market for mortgage obligations is.)
29
Defendants mistakenly refer to New York G.O.L. § 5-701 (b )(2) subsection (j) as the provision referring to sales
of indebtedness. In fact, subsection (i) provides that the sale of"indebtedness or claims relating thereto arising
in the course of the claimant's business or profession" are qualified financial contracts, not "indebtedness
arising in the course of claimant's business" as the Defendants recite. N.Y. G.O.L. § 5-70 l(b )(2)(i).
33
telephone call ... )" The evidence shows such a telephone call exists. Exh. 21 (Compilation CD), at
RBC 725, 3.14.06-3.14.10; Ambrecht Aff.
~
15; ParentAff.
~
8; Holmes Aff.
~
10; Exh. 22 (Holmes
Dep.) at 320-321). Section 5-70l(b)(3) also states that a party may prove the existence of the contract by
the admission of the other party in "pleading, testimony or otherwise in comi that a contract was made."
RBC is entitled an opportunity to prove the existence of the contract before a jury.
Since the agreement to sell the Notes is a qualified financial contract under N.Y. G.O.L. §
5-70l(b)(2), the Statute of Frauds, NYUCC 1-206, by its own terms, is inapplicable in this case.
3.
Because The Schneiders Knew that Their Promise Would
Induce RBC to Act, The Statute of Frauds does Not Apply
Even ifthe oral agreement is not considered a qualified financial contract or the Notes are
not securities, a promise which the promisor should reasonably expect to induce action on the part of the
promisee, and which does induce the action is enforceable notwithstanding the Statute of Frauds "if
injustice can be avoided only by enforcement of the promise." Restatement (Second) of Contracts § 139
(1979); see also, Lazard Freres & Co., 108 F.3d at 1538, n.4 ("[o]r Lazard may have been able to show
that, in reliance on Protective's promise, it completed the purchase of the MCC .bank debt and ceased its
attempt to sell the debt to other brokers."); Onbank & Trust Co. v. James P. Burr Enters. Inc., 235 A.D.2d
799, 801, 652 N.Y.S.2d 802, 804 (3d Dept. 1997) (finding summary judgment inappropriate and that the
defendant was estopped from invoking the Statute of Frauds to avoid performance of its obligations
because the plaintiff had alleged facts showing plaintiff changed its position in reliance upon the contract
and actions by the defendant). This is certainly the case here. RBC reasonably relied on the Schneiders'
promise to sell the Notes, communicating to its customers that an agreement had been reached and hiring
attorneys to document the transaction. (Exh. 21 (Compilation CD), atRBC 894, 3.14.04; RBC 725,
3.14.12; Exh. 38 (Attorney File); Exh. 39 (Draft Highland confirm). RBC would not have done so
without first reaching an agreement, and unjustifiable harm to RBC is the direct result of the Schneiders'
broken promises. Therefore, the Statute of Frauds does not apply.
34
III.
IF THE COURT WERE TO FIND AN ACTUAL CONTRACT
TO SELL THE NOTES WAS NOT FORMED, THE COURT SHOULD
STILL FIND THAT A PRELIMINARY AGREEMENT WAS
CREATED AND THE SCHNEIDERS BREACHED THAT AGREEMENT
Even if the oral agreement to sell the Notes did not create a full-fledged contract, the law
makes clear that a preliminary agreement was created, which gave the Schneiders a duty to negotiate in
good faith - a duty they flatly vitiated in bad faith, apparently when they learned a $34 million profit
might be had.
Jn the securities illdustry, purchase and sale transactions regularly, practically uniformly,
are established through oral commitments which afterwards are memorialized in writing. See Lazard
Freres & Co., 108 F.3d at 1536. Indeed, courts have recognized that the contemporary commercial
marketplace demands that oral contracts be enforced. See Consarc Cmp. v. Marine Midland Bank, NA.,
996 F.2d 568, 570 (2d Cir. 1993) (reversing order granting summary judgment and finding that "[m]any
modern business transactions could not be carried out unless the parties were able to rely on oral
promises. ").
30
In an influential decision in this area, then-District Court Judge Pierre N. Leval, outlined
two categories of instances under New York law where a court may enforce a preliminary agreement. See
Teacher's Ins. And Annuifcy Ass'n ofAmerica, Inc. v. Tribune Cmp., 670 F. Supp. 491, 498 (S.D.N.Y.
1987). The categories are known as: (1) "binding preliminary agreements," or "Type I Agreements," and
(2) "binding preliminary commitments" or "Type II Agreements." Judge Leval's persuasive analysis was
adopted by the Second Circuit in Arcadian Phosphates, Inc. v. Arcadian Cmp., 884 F.2d 69, 72-73 (2d
Cir. 1989), and was later refined inA4Justrite Systems, Inc. v. Gab Business Services, Inc., 145 F.3d 543,
30
Indeed, the Schneiders' argument that they had no duty to RBC to act in a commercially reasonable manner is
inconsistent with New York law that that "even an explicitly discretionary contract right may not be exercised
in bad faith so as to frustrate the other party's right to the benefit under the agreement" Richbell Info. Services,
Inc. v. Jupiter Partne1:~, L.P., 309 A.D.2d 288, 302, 765 N.Y.S.2d 575, 587 (l st Dept. 2003) (There is a "duty to
eschew this type of bad faith targeted malevolence in the guise of business dealings."). See also Travellers Int'!
A.G. v. Trans World Airlines, 41F.3d1570, 1575 (2d. Cir. 1994) ("[e]ven when a contract confers decisionmaking power on a single party, the resulting discretion is nevertheless subject to an obligation that it be
exercised in good faith.").
35
548-51 (2d Cir. 1998). Since the evidence reflects that there was a binding agreement, the Schneiders'
summary judgment motion must be denied.
A.
A PRELIMINARY AGREEMENT WAS FORMED ON MARCH 14, 2001 31
As refined in Acijustrite, the Second Circuit established a four-part balancing test to
determine if a binding preliminary agreement exists: (1) whether there has been an express reservation of
the right not to be bound in the absence of a writing; (2) whether there has been partial perfonnance of the
contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the
agreement at issue is the type of contract that is usually committed to writing. 145 F.3d at 549. Applying
that test to the oral agreement here, it is clear that a preliminary agreement was created.
1.
There Was No Express Reservation
Not To Be Bound In The Absence Of A Writing.
The Letter Agreement does not, as the Schneiders contend, demonstrate an intent not to
be bound absent a written agreement (Defs. Mem. at 25-28). To the contrary, the Letter Agreement
simply refers to the standard documentation that is executed after an oral agreement is reached.
As set forth in Part II C, supra, the language about "definitive documentation" was
designed to protect RBC's rights to obtain appropriate documentation, and not to imply that Defendants
would not be bound once there was an oral agreement on price and size. Additionally, this language
merely reflects industry custom and practice that after an oral agreement for the purchase or sale of
securities the transaction is documented in writing. However, such writing solely memorializes an
already enforceable agreement. (Exh. 3 (Ambrecht Dep.) at 301-302, 332-333; Exh. 31 (Wood Dep.) at,
421-423, 430-431; Deposition Transcript of Michael Stupay dated Jan. 20, 2005 ("Stupay Dep." at 45,
attached as Exh. 56)). Furthermore, it should be noted that this language was not included in a draft of
31
Defendants do not address whether there was a binding preliminary agreement between RBC and the
Schneiders, only whether there was a Type II binding preliminary commitment. Defendants do not argue,
because they cannot, that RBC has not pled the elements of a binding preliminary agreement. See RBC ThirdParty Counterclaims at Claims 1 and 2. Also, RBC briefed the relevant law in its opposition to the Schneiders'
motion to dismiss. Moreover, the Schneiders incorrectly state that RBC would only be entitled to out of pocket
damages. Under the law, RB C's is entitled to the $34 million in benefit of the bargain damages.
36
the Letter Agreement, acceptable to the Schneiders, sent by GRS to RBC. (See Exh. 25). The language
was added by RBC in the final version. The Schneiders are simply now trying to use this language as a ·
means for escaping liability for their breach of the <j.greement. At best, the language is ambiguous and the
issue should not be decided on this motion.
Consequently, this factor of the preliminary agreement test favors RBC.
2.
RBC Partially Performed The Oral Agreement.
Partial performance requires that the non-breaching parties show "some actual
performance of the contract." Gorodensky v. Mitsubishi Pulp Sales (MC) Inc., 92 F.Supp.2d 249, 2000
U.S. Dist. LEXIS 4043 at *18 (S.D.N.Y. March 31, 2000) (granting summary judgment because the
language of the letter of intent clearly showed that neither party intended to be bound), aff'd, 242 F.3d
365. In the present case, once the Schneiders communicated their acceptance ofRBC's offer, RBC hired
attorneys to draft the closing documents for the agreed-upon transaction with the Schneiders. Further, in
good faith, RBC contacted its customers. These actions place the partial performance factor of the
applicable balancing test in RBC's favor.
3,
All Relevant Terms Of The Oral Agreement Were Agreed To In
The March 14, 2001 Conversation Between RBC And Glen Rauch.
The Schneiders had agreed to size and price -- the essential terms of the transaction. In
analyzing the "relevant terms" factor of the balancing test, the Second Circuit has examined whether or
not all "essential" terms have been agreed upon. See Shann v. Dunk, 84 F.3d 73, 79-80 (2d Cir. 1996)
(vacating and remanding judgment finding an agreement regarding essential term ambiguous). The fact
that the parties to an agreement intend on later adding "boilerplate" language does not render an
agreement unenforceable, since boilerplate language is not an essential term of an agreement. Id. In the
present case, the transaction confirmation documents, which the Letter Agreement termed "definitive
documentation in compliance with applicable law," are industry contracts used for such transaction and
may fairly be regarded as boilerplate language. See Vacold LLC v. Cerami, 2002 U.S. Dist. LEXIS 1895,
*16 (S.D.N.Y 2002) (court held that, with regard to the trading of securities, having agreed-upon amounts
37
for price and quantity of the securities, inter alia, weighs in favor or finding that the essential terms of the
contract were agreed to by the parties).
4.
In The Securities Industry, Oral Agreements
Regarding Bond Trades Are Regularly Enforced.
With regard to the fourth factor of the balancing test, the question is whether the
customary practices of the relevant financial community include according binding force to the form of
the preliminary agreement reached by the parties. See Tribune, 670 F. Supp. at 503.
In the present case, RBC has alleged, and it is unquestionably true, that the securities
industry accords great weight to oral agreements. All of the relevant witnesses have so testified (Exh. 3
(Arnbrecht Dep.) at 301-302, 332; Exh. 31 (Wood Dep.) at 422-423; Deposition Transcript of Jim
Dondero dated Feb. 13, 2004 ("Dondero Dep.") at 133-134, attached as Exh. 54; Deposition Transcript of
Michael Rich dated Feb. 9, 2004 ("Rich Dep." at 54), attached as Exh. 55). Gerry Guild, RBC's expert,
has also opined that the parties could be bound by their oral agreement. (Exh. 20 (Guild Report at 12)).
Even the Schneiders' expert have agreed. (Exh. 56 (Stupay Dep.) at 45). The Second Circuit has also
held that such oral agreement could be binding. See generally Lazard Freres, 108 F.3d at 1536 (holding
that where one party presented evidence that in the "bank debt community" oral agreements were
considered final and binding, it was inappropriate for the district court to grant summary judgment against
that party based upon this issue). Indeed, the Second Circuit has specifically noted that stock market
transactions by verbal binder are considered to be enforceable preliminary agreements. See Consarc, 996
F.2d at 570.
Because all four factors. weigh in favor ofRBC, RBC has sufficiently alleged, and can
prove, that a preliminary agreement was fanned, the Schneiders' summary judgment motion to dismiss
the contractual claims on the oral agreement should be denied. 32
32
The facts here are distinguishable from those in Spencer Trask where this Court dismissed plaintiff's claim that
there was a Type I agreement, although denied the motion to dismiss the claim that there was a Type II
Agreement. There, the Court found that the parties had an express reservation not to be bound (2003 U.S. Dist.
LEXIS 946 at *22), there was no agreement on all the material terms (Id. at **30-31), and the transaction was a
38
B.
IF THE COURT WERE TO FIND THERE WAS NO PRELIMINARY AGREEMENT,
WHICH THERE WAS, IT SHOULD STILL FIND THAT A BINDING PRELIMINARY
COMMITMENT WAS FORMED
Even if the Court were to determine that RBC has not successfully pled a binding
preliminary agreement, at a minimum there existed a binding preliminary commitment, as delineated in
Acijustrite. A binding preliminary commitment, or "Type II agreement" occurs when parties to an
agreement decide on certain major terms but leave other terms open for future negotiation. In these
instances, the parties "accept a mutual commitment to negotiate together in good faith in an effort to reach
final agreement.'' Id. at 548. The Second Circuit has outlined a 5-:-part test in order to determine whether
a preliminary agreement is enforceable as a binding preliminary commitment. The factors to be
considered are: (1) the language of the agreement; (2) the context of the negotiations; (3.) the existence of
open terms; (4) partial performance; and (5) the necessity of putting the agreement in final form, as
indicated by the customary form of such transactions. See Arcadian Phosphates, Inc., 884 F.2d 69, 72
(2d Cir. 1989).
l.
The Language Of The Schneiders' Oral Acceptance Of
RBC' s Offer On March 14, 2001, Indicate That The Parties
Intended To Be Bound By The March 14, 2001 Agreement.
Whether a provision in a preliminary agreement to negotiate in good faith is binding is
dependent upon the specific facts presented. In this case, the Schneiders, through their agent Glen Rauch,
specifically accepted RBC's offer to buy the $69 million in Notes at 51 % of par value. In their
memorandum of law, the Schneiders attempt to argue that there is no evidence that the Schneiders made
an agreement with RBC as to the fundamental terms of any agreement to sell their Notes to RBC. (Defs.
Mem. at 36). This is simply untrue. The telephone conversations between RBC and GRS indicate that
the Schneiders, through their agent, Glen Rauch, agreed to sell all $69 million of their Notes to RBC at 51
cents of par value. The conversations also indicate that the parties had progressed onto the next stage of
the negotiations, documentation. (Exh. 21 (Compilation CD), at RBC 725, 3.14.06-3.14.10, 3.15.04-
"complex, multi-stage package deal" involving a series of financing subject to extensive due diligence which
would normally be documented (Id. at **31-32).
39
3.15.09). As such, the Schneiders had a duty to negotiate the terms of the documentation based upon the
agreement reached on March 14, 2001, which they breached. In addition, the statement by Glen Rauch,
that he would have the Schneiders' attorney forward the language to be included in the closing documents
clearly indicates that the parties intended to proceed in good faith. Even if the Schneiders were correct in
their claim that Glen Rauch' s statement meant that they would not be bound regarding the transaction
until the closing documents were executed -- which they are not -~ as this Court recently noted in Spencer
Trask, 2003 U.S. Dist. LEXIS 946 at *36, an oral agreement with reserved rights of approval and
established condition may still constitute a binding preliminary commitment.
2.
The Other Factors of the Preliminary Binding Commitment Analysis
Also Favor RBC And Militate That the Schneiders Were Bound to Negotiate
The remaining factors of the binding preliminary commitment analysis are 1) the context
of the negotiations; 2) the existence of open terms; 3) partial performance; and 4) the necessity of putting
the agreement in final form. All of these point towards the creation of such an agreement.
The context of the negotiations clearly reflects that the parties intended to be bound by
the agreement reached on March 14, 2001. RBC proceeded to inform its customers, and hired lawyers to
draft the appropriate closing documents for the transaction. In addition, the Schneiders, through their
agent Glen Rauch, knew that RBC was relying on their acceptance ofRBC's offer, and had to expect that
RBC would proceed with the transactions to resell the Notes to its customers. 33
With respect to the existence of open terms, if the relevant terms have been agreed upon,
then the absence of non-critical/non-material terms from a binding preliminary commitment shall not
impinge upon its enforceability. See Teachers Ins. &Annuity Ass'n v. Ormesa Geothermal, 791 F.Supp.
33
The Schneiders insist they did not know RBC was marketing the Notes to its clients. However, this is contrary
to the evidence. Rauch and Ambrecht referenced RBC's clients in numerous conversations and even discussed
RBC's compensation. (Exh. 21 (Compilation CD), at RBC 896, 1.25.04-1.25.05; 1.25.03; RBC 725, 3.12.02;
3.12.04). Furthermore, Leonard Schneider was clearly aware that RBC was contacting third parties as stated in
his letter to his attorneys and accountant, "As you successfully got a fair discount on the Norton stock it seems
to me that we should do the same for the (total Notes) $69,000,000 Notes as Glen Rauch and others contacted at
lease (sic.) 80 potential buyers and most of the responses were from 35 to 40% or discounts from 60% to 65%."
(Exh. 37 (March 4 111 Letter)).
40
401, 414-15 (S.D.N.Y. 1991); Wardv. Pricellular C01p., 1991 U.S. Dist. LEXIS 5000, *16 (S.D.N.Y.
April 16, 1991). Indeed, the entire purpose of a binding preliminary commitment is to give the parties an
assurance that all outstanding non-criticaVnon-material terms will be negotiated in good faith. Adjustrite,
145 F.3d at 548. Once RBC and the Schneiders agreed upon the quantity and price of the Notes in the
transaction, only non-critical outstanding terms remained to be negotiated.
Finally, RBC has already addressed the fact that it partially performed and that the
custom of the securities industry is to enforce oral agreements even if they have not yet been put into final
form. See supra Part IIl.A.2 and 4.
Even if the Court were to determine that the oral agreement was neither an actual contract
nor a binding preliminary agreement, at minimum the parties had entered into a binding preliminary
commitment.
IV.
RBC HAS CLEARLY MADE OUT ITS CLAIMS OF
FRAUD AND FRAUDULENT CONCEALMENT
A.
THE SCHNEIDERS MOTION TO DISMISS RBC'S
FRAUD CLAIM SHOULD BE DENIED
"To recover for common law fraud in New York, plaintiffs must demonstrate: (1) a
misrepresentation of material fact made with knowledge of falsity; (2) justifiable reliance on such
misrepresentation; and (3) resulting harm." Centwy Pacific, Inc. v. Hilton Hotels C01p., 2004 U.S. Dist.
LEXIS 6904, *17-18 (S.D.N.Y. 2004) (denying motion to dismiss).
RBC can prove each of these elements. As alleged, the facts give rise to a strong
inference of the Schneiders' intent to defraud or, at least, a reckless disregard for the truth. The
Schneiders had received material inside information from McNaughton, including financial projections
indicating that any payment on the Notes would "be minimal at best." This infonnation led the Schneiders
to want to dump their Notes and they contacted Glen Rauch to do so. On behalf of the Schneiders, Rauch
contacted RBC and attempted to sell the Notes at a high value, without disclosing the infonnation they
had learned that the Notes would probably not be paid. They further let RBC contact its customers to
41
market the Notes. Three months later, after learning of the potential merger, the Schneiders did not
immediately inform RBC, but stringed along the negotiations, knowing that they would renege.
In response, the Schneiders argue that they never intended to sell their Notes, but
misrepresented to RBC their intentions for months, knowing that RBC would not agree to spend three
months of its time solely searching for a "price" for the Notes. Instead, they allowed their agent, Rauch,
to make firm offers and counteroffers to RBC misleading RBC as to their interest in selling the Notes.
RBC justifiably relied on these misrepresentations in spending months marketing the
Notes. In the trading industry, a person's word is his bond and people are obligated to honor their oral
agreements. Without such a "gold standard" the trading industry would be crippled. (Exh. 3 (Ambrecht
Dep.) at 301-302, 332-333; Exh. 31 (Wood Dep.) at 421-423). Because of the misrepresentations, RBC
put its own reputation at risk. As a result, RBC suffered injury in the form of lost business from two of its
main high yield clients -- the evidence shows that RBC lost approximately $5 million in lost business.
(Exh. 20 (Gbild Report at 14)).
To put it clearly, either, ifthe Schneiders are to be believed, they were making
misrepresentations to RBC for three months on their intent to sell the Notes, and RBC was damaged; or,
they misrepresented to RBC their intentions on and after March 14, 2001, and RBC was damaged.
B.
THE SCHNEIDERS' SUPERIOR KNOWLEDGE OF THE MERGER
AND THEIR CONCEALMENT OF THAT KNOWLEDGE FROM RBC
MAKESOUTCLAIMSFORFRAUDULENTCONCEALMENT
Under New York law, to succeed on a claim for :fraudulent concealment, a plaintiff must
show: (1) that the defendant had a duty to disclose and failed to meet that duty; (2) scienter; (3) reliance
by the plaintiff; and (4) damages. Brittany Dyeing & Printing Corp. v. Griseta, 2000 U.S. Dist. LEXIS
16699, *12 (S.D.N.Y. Nov. 16, 2000) (granting Plaintiffs motion for summary judgment for fraudulent
concealment); Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d. Cir. 1993) (reversing
dismissal of fraud claim holding that the defendant had a duty to disclose superior knowledge).
42
1.
The Schneiders Were in Possession of Material Information
Not Readily Available to the Public Which They Had a Duty to Disclose.
The Schneiders entered into the Letter Agreement and discussed a sale of the Notes with
RBC for a period of three months, all the while knowing, but not disclosing, that McNaughton projected
that payment on the principal of the Notes was unlikely. Three months later, the Schneiders learned that a
merger of McNaughton with another larger corporate entity might take place. In both instances, the
Schneiders had a duty to.disclose their superior knowledge to RBC.
The Schneiders had a duty to speak for two separate reasons under New York law. First,
"where a party has made a partial or ambiguous statement;" that party has a duty to correct that statement.
Brass, 987 F.2d at 150. According to the Schneiders' contentions in this litigation, they never intended to
sell the Notes at a discount. However, the Schneiders' agent made numerous representations to RBC that
led RBC to reasonably believe the Schneiders intended on taking the transaction a step further - that they
intended to sell their Notes. Therefore, the statements made on the Schneiders' behalf, to RBC, were
half-truths. The Court in Brass stated that the theory behind the duty to disclose arising in situations
where one party has made a partial or ambiguous statement is "that once a party has undertaken to
mention a relevant fact to the other party, it cannot give only half of the truth." Brass, 987 F.2d at 150.
Thus, the Schneiders had a duty to inform RBC that they were only "pricing" the Notes.
Second, "where one party possesses superior knowledge, not readily available to the
other, and knows that the other is acting on the basis of mistaken knowledge", the party has a duty inform
the second party. Brass, 987 F.2d at 150. The Schneiders are liable for fraudulent concealment because
they possessed superior knowledge not readily available to RBC. Boneparth's letter to the Schneiders and
the projections sent by Bokman, clearly contained material non-public information. (Exh. 13 (Bokman
Dep.) at 64-66; Exh. 14 (Boneparth Dep.) at 64, 66). The merger of McNaughton was also not public in
March 2001. See Aaron Ferer & Sons Ltd. v. The Chase Manhattan Bank, NA., 731F.2d112, 123 (2d.
Cir. 1984) (information is readily available if it was a matter of public record or disclosed at least in part).
Furthermore, in determining what is considered "readily available," the court in Btass stated, "a purchaser
43
of a note from one who is not the maker is not expected to uncover facts showing the worthlessness of the
paper on account of its maker's insolvency or because it has been paid." Brass, 987 F.2d at 151. Thus,
the Schneiders had at a minimum, a duty to inform RBC of the material non-public information they
possessed relating to the Notes.
2.
The Schneiders Possessed the Requisite Scienter
RBC has met its burden of showing scienter. "To satisfy the scienter requirement...a
party must prove by clear and convincing evidence that the defrauding party knowingly or recklessly
disregarded the risk of omitting material facts." BNY Capital Markets, Inc. v. Mo/tech Co1p., 2001 U.S.
Dist. LEXIS 2705, *37 (S.D.N.Y. March 14, 2001) (granting summary judgment for plaintiff with respect
to its fraudulent concealment claim). It is clear that the Schneiders deliberately withheld the information
about McNaughton's financial condition that they had learned in December 2000 because they knew they
would not receive the price they wanted for the Notes if the information was disclosed. Similarly, the
Schneiders withheld the information concerning the McNaughton-Jones merger, while reneging ori the
Note transaction. Finally, if the Schneiders are to be believed that they were only "pricing" the Notes,
then they certainly knowingly withheld that information from RBC so that RBC would market the
Notes. 34
3.
RBC Justifiably Relied on the Schneiders' Representations
and Suffered Damages as a Result of the Concealment.
The Schneiders failed to disclose material information not readily available to the public
and intentionally misled RBC. RBC reasonably relied upon the Schneiders misrepresentations. The
Schneiders claim that RBC's reliance was riot justifiable. This is simply untrue. As stated above, in the
trading industry, the gold standard is that a person's word is his bond and verbal agreements are binding.
34
There are other reasons as well the Schneiders may have been stringing RBC along. For example, they may
have wanted McNaughton to believe they were attempting to sell the Notes to an outsider who would take
control of McNaughton in an attempt to get McNaughton to buy back the Notes or seek a merger partner.
Section 9 of each Note provides that, in the event of default, McNaughton would, on demand, have to issue to
the holder shares of stock - the amount of which is dependent on the market price and which could be
substantial. (Exh. 15 (Notes)).
44
Additionally, the information concealed from RBC relating to the value of the Notes (the McNaughton
financial projections and merger discussions) was not readily available to RBC. 35 Furthermore, contrary
to the Schneiders' proposition, RBC was not put on notice by the Letter Agreement that Rauch was
unable to bind the Schneiders. Contrarily, the Letter Agreement clearly indicated that Rauch was the
Schneiders' representative and as such could act on their behalf. As discussed above, as a result ofRBC's
justifiable reliance, it suffered lost business damages exceeding $5 million. Thus, summary judgment is
inappropriate on RBC's fraud claims.
C.
RBC'S FRAUD CLAIMS ARE SEPARATE FROM ITS
BREACH OF CONTRACT CLAIMS BECAUSE
THEY CAN BE PROVED WITHOUT EVIDENCE
OF AN ORAL PROMISE
The Schneiders move to dismiss RBC's Third and Fourth Counterclaims of Fraud and
Fraudulent Concealment, claiming that they are identical to RBC's breach of contract claims. The
argument is meritless. First, as previously detailed, the claims are completely separate. RBC's fraud and
fraudulent concealment claims are based on the evidence that the Schneiders made misrepresentations and
omissions over the three month period which have nothing to do with either the oral agreement
concerning the Notes. They induced RBC to go out and market these Notes to its customers,
misrepresenting, according to their testimony, their intentions and withholding critical information about
the Notes on two separate occasions.
Second, even to the extent, the fraud claims may relate to that transaction, in New York,
fraud claims that are related to a failure to honor a contractual agreement, are valid if the plaintiff:
(i) demonstrates a legal duty separate from the duty to perform under the contract; or (ii) demonstrates a
35
This case is distinguishable from the cases cited by the Schneiders to support the proposition that RBC cannot
prove reliance. The financial projections and information relating to the merger was not part of SEC filings or
other public information. Contrary to the Defendants' assertions, the information concealed from RBC was not
readily available to RBC through reasonable inquiry and therefore, RBC did not assume a business risk. Contra
Travelers Idemni~v Co. ofIllinois v. CDL Hotels USA, Inc., 322 F. Supp.2d 482, 504 (S.D.N.Y. 2004).
Similarly, the Schneiders and RBC did not enter into a business relationship after a history of contentious
litigation, also premised around allegations of fraud. See contra FVaksman v. Cohen, 2002 U.S. Dist. LEXIS
21209 at *11-12 (S.D.N.Y.); Manley v. Ambase C01p., 126 F.Supp. 2d 743, 757 (S.D.N.Y. 2001 ).
45
fraudulent misrepresentation collateral or extraneous to the contract; or (iii) seeks special damages that
are caused by the misrepresentation and unrecoverable as contract damages. VTech Holdings Limited v.
Lucent Technologies, Inc., 172 F. Supp. 2d 435, 440 (S.D.N.Y. 2001) (denying motion to dismiss). While
a fraud claim which is merely duplicative of a breach of contract claim will be dismissed under New York
law, the facts that give rise to a breach of contract claim may also constitute fraud if the party
misrepresents presently existing facts during the formation of the agreement. Id.; See also Sabo v.
Delman, 3 N.Y.2d 155, 160, 143 N.E.2d 906, 907, 164 N.Y.S.2d 714, 715 (1957) (reversing dismissal of
complaint -- while mere promissory statements as to future obligations are not actionable, a promise made
with the preconceived and undisclosed intention of not performing "constitutes a misrepresentation of a
'material existing fact'"); Shlangv. Bear's Estates Dev. of Smallwood, NY, Inc., 194 A.D.2d 914, 915,
599 N.Y.S.2d 141, 142-43 (3d Dept. 1993); Elma RTv. Landesmann Int'! Marketing C01p., 2000 U.S.
Dist. LEXIS 11925, at *6 (S.D.N.Y. Aug. 21, 2000) (motion to dismiss fraud claims denied). 36
Here, RBC's allegations of fraudulent misrepresentation and fraudulent concealment
reach beyond the allegation that the Schneiders and Rauch never intended to perform under the
agreement. As discussed above, RBC has pled that the Schneiders misrepresented and failed to reveal
material facts collateral and extraneous to the Schneiders' duties under the agreement to sell the Notes,
rather than an allegation of the future intent not to perform the contractual obligations themselves.
Simply, the Schneiders possessed non-public information regarding the value of the Notes that any
reasonable investor would have found material in deciding whether or not to purchase the Notes.
Furthermore, RBC has alleged that it suffered damages as result of losing one of its largest clients. Such
36
Defendants' caselaw states nothing different. See, e.g., Dervin Corp. \'.Banco Bilbao. Vizcaya Argentaria S.A.,
2004 U.S. Dist. LEXIS 17406at*19 (S.D.N.Y. Aug. 27, 2004) (the misrepresentation claim solely reiterated
the breach of contract claim); Jewelamerica, Inc. v. Frontstep Solutions Group, 2002 U.S. Dist. LEXIS 21296,
*6 (S.D.N.Y. Oct. 31, 2002) (alleged misrepresentations were merely the terms of the agreement between the
parties); Cranston Print Works Co. v. Brockmann Int'!., 521 F.Supp. 609 (S.D.N.Y. 1981 ); Thacker v. Brown,
1998 U.S. Dist. LEXIS 15270 (S.D.N.Y. Sept. 29, 1998).
46
business damages are special damages and are not benefit of the bargain damages recoverable under a
breach of contract claim. 37 As such, summary judgment is not appropriate.
D.
DUE TO THE SCHNEIDERS' MALICIOUS ACTIONS,
RBC HAS MADE A CASE FOR PUNITIVE DAMAGES
The Schneiders' argument that RBC is not entitled to punitive damages is, like the rest of
their motion, incorrect based on the facts and law. RBC has asserted fraud claims and, therefore, is
entitled to prove punitive damages. Under New York law, a party may recover punitive damages in a tort
action where "the wrongdoing is intentional or deliberate, has circumstances of aggravation or outrage,
has a fraudulent or evil motive, or is in such conscious disregard of the rights of another that it is deemed
willful and wanton." Swersky v. Dreyer & Traub, 219 A.D.2d 321, 328, 643 N.Y.S.2d 33, 38 (1st Dept.
1996) (reversing dismissal of punitive damages claim in connection with fraudulent concealment); see
also Vento & Co. v. Metromedia Fiber Network, Inc., 1999 U.S. Dist LEXIS 3020, *47-48 (S.D.N.Y.
March 17, 1998) ("Under New York law, punitive damages are permitted for tortious conduct in cases
involving 'gross, wanton, or willful fraud or other morally culpable conduct.'")
Defendants argue that in order for RBC to recover punitive damages, it must allege a
public wrong. This is simply not true. Punitive damages are pennitted even if there has been no public
wrong. Vento & Co., 1999 U.S. Dist. LEXIS 3020 at *47-48. The Second Circuit in Carvel Cmp. v.
Noonen, 2003 U.S. App. LEXIS 23744 (2d. Cir. Sep. 4, 2003) stated:
The suggestion "that punitive damages may not be awarded under New York law unless the
alleged tortious conduct is aimed at the general public and not solely a private party .. .is flatly
wrong and a misreading of the relevant case law. Such a limitation on punitive damages applies
in breach of contract cases, but not in tort." Id. at *53 n.11 (citations omitted).
Furthermore, plaintiffs "may sometimes obtain punitive damages in actions presenting
mixed issues of contract and tort." Id. at *51. It is only when a party alleges a tort arising out of the
37
The Schneiders also argue the damages sought by RBC for its fraud claims indicates they are duplicative of the
breach of contract claims. However, the Court in Fort Howard Paper Co. v. vVitter. Inc., 787 F.2d 784, 792
(2d. Cir. 1986) held that a fraud claim should not be dismissed as duplicative of a breach of contract claim
solely because a party's demand for relief is too high. The damages due to the Schneiders' fraud are the $5
million in lost business from Fidelity and Highland plus punitive damages.
47
contractual relationship that the party will be required to demonstrate a public wrong. "If the tort does not
arise from the contractual relationship, a Court may award punitive damages on a fraud claim if plaintiff
has established that defendant committed "gross, wanton or willful fraud or other morally culpable
conduct." The Topps Company, Inc. v. Cadbwy Stant S.A.1. C., 2004 U.S. Dist. LEXIS 25342, *IO
(S.D.N.Y. Dec. 14, 2004) (court requesting oral argument to help decide critical issues for summary
judgment motion); Brown v. AXA RE, 2004 U.S. Dist. LEXIS 7624, *26 (S.D.N.Y. May 3, 2004)
(denying motion to dismiss plaintiffs punitive damages claims because punitive damages are recoverable
in tort cases "even if there is no harm aimed at the general public 'so long as the very high threshold or
moral culpability is satisfied.'") While a fraudulent inducement claim may be connected or related to the
contractual relationship, it is not clear that such claim "arises from" or "has its genesis" in the contractual
relationship. The Topps Company, Inc. 2004 U.S. Dist. LEXIS 25342 at 10. "In fact, it could be argued
that the events relevant to reaching judgment on a properly-pled fraudulent inducement claim occur prior
to performance ve! non of the contract." Id.
RBC has alleged the requisite intent on the part of the Schneiders. It has alleged that they
knew about the merger between Jones and McNaughton, but hid that in the negotiation of a commercial
transaction. RBC has also alleged that the Schneiders maliciously used RBC and never intended to enter
into the transaction at all. Further, dismissing the punitive damages claim would be premature, since
there are issues of fact yet to be determined concerning the Schneiders' fraudulent intent in this case.
Vento, 1999 U.S. Dist LEXIS 3020 at *48.
48
v.
THE SCHNEIDERS BREACHED THE LETTER AGREEMENT
AND THE COVENANT OF GOOD FAITH AND FAIR DEALING
RBC's fifth and sixth counterclaims are for breach of the Letter Agreement and breach of
the covenant of good faith and fair dealing inherent in that agreement. "When one party is ready and able
to perform the contract, but the other refuses to do so, it has breached the contract, unless its performance
was excused." Rus, Inc. v. Bay Industries, Inc., 322 F.Supp. 2d 302, 310 (S.D.N.Y. 2003) (denying
summary judgment to both parties because material questions of fact existed as to whether conditions
precedent to performance were met or performance was excused). Here, RBC was willing and able to
perform its obligations under the Letter Agreement. Not only did RBC use good faith efforts in
marketing the Notes, RBC did in fact find two purchasers for the Notes. After an agreement on size and
price was reached on March 14, 2001, RBC hired attorneys to finalize the transaction and to review draft
confirmations prepared by Highland. (Exh. 38). However, the Schneiders, after learning that
McNaughton was in merger negotiations, reneged on the agreement and refused to negotiate the terms of
the documentation in good faith. Their performance was not excused and they are therefore liable for
breaching the terms of the Letter Agreement for failing to complete the transaction.
Further, a covenant of good faith and fair dealing is implied in all contracts under New
York law. See, e.g., Smith v. General Accident Ins. Co., 91 N.Y.2d 648, 653, 697 N.E.2d 168, 170, 674
N.Y.S.2d 267, 269 (1998). The covenant of good faith and fair dealing prohibits either party from acting
in a manner "which will have the effect of destroying or injuring the right of the other party to receive the
fruits of the contract." Granite Partners, L.P. v. Bear, Steams & Co., 17 F. Supp. 2d 275, 305 (S.D.N.Y.
1998) (motion to dismiss granted in part and denied in part.)
Defendants argue that because the possibility that the Schneiders would not sell the Notes
was contemplated under the Letter Agreement, no breach of the covenant of good faith and fair dealing
could have occurred in their failure to do so. However, "[ e]ven when a contract confers decision-making
power on a single party, the resulting discretion is nevertheless subject to an obligation that it be exercised
49
in good faith." Travellers Int'! A.G. v. Trans World Airlines, 41F.3d1570, 1575 (2d. Cir. 1994)
(affirming award oflostprofits damages); deCiutiis v. Nynex Co1p., 1996 U.S. Dist. LEXIS 13122, at
*11-12 (S.D.N.Y. Sept. 9, 1996) (denying motion to dismiss breach of implied covenant of good faith).
See, e.g., Westerbeke v. Daihatsu Motor Cmp., 304 F.3d 200, 212 (2d. Cir. 2002) (reversing vacatur of
arbitration award with instructions to confirm) ("[t]he arbitrator could have concluded that, by refusing to
negotiate for terms, Daihatsu had breached its obligation to help bring about the occurrence of the
relevant condition -- agreement on proposed, acceptable terms -- and therefore thwarted the formation of
the contract.")
In Rus, Inc., the parties entered into a written agreement for the purchase of stock of the
plaintiffs corporation. 322 F.Supp. 2d at 305. The defendant refused to ciose the transaction claiming
the condition precedent, delivery of a satisfactory environmental assessment, was not met. Id. at 307.
Plaintiffs alleged that the defendants reneged on the agreement after a downturn in profits made the
acquisition less attractive. Id. at 306. The plaintiffs further alleged that the defendant continued to
represent to them an intention to close even after defendant had decided not to consummate the
transaction. Id. at 315. The court denied summary judgment to both parties holding that there was a
question of material fact as to whether defendants violated its duty of good faith and fair dealing. The
court held that ifthe defendant did not intend for its negotiations to result in the closing of the transaction,
then it would be liable for acting in bad faith. Id. Similarly, here, if the Schneiders never intended to
reach an agreement as to size and price for the Notes, they acted in bad faith and RBC has proven its
claim that they breached the covenant of good faith and fair dealing.
VI.
THE SCHNEIDERS CLAIMS AGAINST
RBC SHOULD BE DISMISSED
In their Third Party Complaint the Schneiders have alleged claims against RBC for
breach of contract, breach of the covenant of good faith and fair dealing, and negligence. These claims
are a red herring. The Schneiders, in their own motion for summary judgment, admit that the real purpose
50
of their Third Party Complaint is to get RBC to contribute to or indemnify the Schneiders for their own
unlawful activities. (Defs. Mero.at p.6, fn. 6 ("The Schneiders also filed an amended Third-Party
Complaint against RBC, in which they asserted indemnification and contribution claims")). 38
A.
THE SCHNEIDERS CANNOT MAKE A CONTRIBUTION CLAIM AGAINST RBC
1.
The Schneiders' Contribution Claims for Breach of Contract
and Breach of the Covenant of Good Faith and Fair Dealing
Automatically Fail Because Contribution is Only Available for Tort Claims
The Schneiders' claims for contribution with respect to the breach of contract and
implied covenant of good faith and fair dealing automatically fail as a matter of law because contribution
is only available for tort-based claims. N.Y. C.P.L.R. § 1401; OneBeacon Insurance Company v. Forman
International, Ltd., 2005 U.S. Dist. LEXIS at *14-15 (S.D.N.Y. Jan. 19, 2005) (granting defendants'
motion to dismiss contribution claims because all tort-based claims had already been dismissed from
lawsuit). On their face, all claims for which the Schneiders seek contribution sound in contract. The
Schneiders cannot seek contribution from RBC for Highland's claims oftortious interference with
contractual relations or prospective contractual relations because, since the claims involve purely
economic loss, they must be considered breach of contract claims for the purposes of contribution.
CPLR § 1401 provides that "two or more persons who are subject to liability for damages
for the same personal injury, injury to property or wrongful death, may claim contribution among them
whether or not an action has been brought or a judgment has been rendered against the person from whom
contribution is sought." N.Y. C.P.L.R § 1401. However, New York law is clear that purely economic
loss resulting from a breach of contract does not constitute injury to property within the meaning of CPLR
38
If the Court grants RBC's motion to dismiss the Schneiders' third party claims against it, the Court may exercise
supplemental jurisdiction over RBC's counter-claims against the Schneiders pursuant to 28 U.S.C. § 1367(a).
Parker v. Della Rocco, 252 F.3d 663, 666 (2d Cir. 2001) (internal citation omitted) ("[T]he district court may, at
its discretion, exercise supplemental jurisdiction over state law claims even where it has dismissed all claims
over which it had original jurisdiction.") Section l 367(b ), prohibiting the exercise of supplemental jurisdiction
in certain instances, does not apply to RBC's claims against the Schneiders because RBC is not a "plaintiff"
within the meaning of§ 1367(b). See Viacom International Inc. v. Kearney, 212 F.3d 721, cert. denied 2000
U.S. LEXIS 8323 (2d Cir. 2000)(holding § 1367(b) is directed only at original plaintiffs, not defendants or third
parties).
51
§ 1401 and therefore cannot serve as the basis for a contribution claim. Metropolitan Steel Industries .
Inc.
v. Perini C01poration, 2004 NY Slip Op. at *15 (Sup. Ct. 2004) (citing cases dismissing contribution
claims for torts that were the equivalent of breach of contract claims). The determining factor for the
availability of contribution is the measure of damages sought rather than the the01y of the underlying
claim. Id. (internal citations omitted). Since Highland's claims seek only the benefit of its bargain,
contribution is unavailable even though its claims are styled in tort. Id.
2.
The Schneiders Cannot Seek Contribution from RBC With Respect to Highland's
Tortious Interference Claims Because RBC Cannot Have Interfered With (and Be Forced
to Pay Damages) for Interference With a Contract To Which It Was a Party
As a matter oflaw, the Schneiders cannot seek contribution for Highland's claims of
tortious interference with actual and prospective contractual relations because RBC was party to the
contract that Highland alleges was interfered with by the Schneiders. And, it is black-letter law that a
party to a contract or prospective contractual relationship cannot be found to have interfered with that
relationship. John F. Dillon & Co. LLC, v. Foremost Maritime Co1poration, 2004 U.S. Dist. LEXIS
11383, at* 32 (internal citation omitted) (granting defendants' motion for summary judgment on tortious
interference claim because "a party cannot tortiously interfere with its own contract"). Since, as a matter
of law, RBC could not have interfered with the contractual or prospective relationship, it likewise cannot
be liable for contribution since the basic requirement for a contribution claim is the shared responsibility
for an injury. Commonvvealth Insurance· Company v. Thomas Greene & Company, Inc., 709 F. Supp. 86
(S.D.N.Y. 1989) (internal citations omitted) (granting motion to dismiss third party complaint for
contribution, holding that "[t]he essential requirement of [a contribution claim] is that both the third-party
plaintiff and the third-party defendant share responsibility for an injury in violation of duties they
respectively owe the injured person.")
B.
THE SCHNEIDERS CANNOT MAKE AN INDEMNIFICATION CLAIM AGAINST RBC
The Sclmeiders' third party claim for indenmification against RBC fails as a matter of
law because the Letter Agreement does not provide for indemnification and the Schneiders do not have a
common law right to indemnification.
52
1.
The Letter Agreement Does Not Provide the
Schneiders With a Right to Indemnification
The Schneiders' claim for indemnification fails as a matter oflaw because the Letter
Agreement clearly does not provide for indemnification to the Schneiders and, in the absence of explicit
language, courts will not imply such an obligation. Coastal Power International, Ltd. v. Transcontinental
Capital Cmporation, 182 F.3d 163, 165 (2d Cir. 1999) (internal citations omitted) (affirming dismissal of
indemnity claim, holding that "[u]nless the intention to indemnify is unmistakably clear from the
language of the agreement, the Court will not read into an agreement a legal duty the parties did not
clearly intend"); Bellis v. The Tokio Marine and Fire Insurance Company, 2004 U.S. Dist. LEXIS 13885,
at *7 (S.D.N. Y. July 20, 2004) (granting summary judgment in favor of third party defendants).
2.
The Schneiders Do Not Have a Common Law Right to Indemnification
In the absence of a contractual right to indemnification, the Schneiders may argue that
they have a common law right to indemnification. However, this claim also fails as matter oflaw
because: (1) The Schneiders are independently (and not vicariously) liable for any damages sustained by
Highland; (2) RBC did not owe the Schneiders a fiduciary duty.
First, New York case law is clear that indemnification is only available where the party
seeking indemnification is not alleged to have personal fault and is merely legally responsible for the
conduct of another. Quintel Cmporation, N. V. v. Citibank, N.A., 1984 U.S. Dist. LEXIS 15069 at *12
(S.D.N.Y. July 10, 1984) (internal citations omitted) (granting motion to dismiss counterclaims for
indemnity, holding that "[I]mplied indemnification ... exists only where one party is vicariously liable for
another party's acts or omissions, such as the employer of a negligent employee, the owner of a motor
vehicle operated by a negligent driver, or the owner of a buildir1g who contracts with an independent
contractor").
New York courts reject claims for indemnification where parties such as the Schneiders
are being sued for their own specific actions yet seek to compel a third party to indemnify them.
Commonwealth Insurance Company v. Thomas A Green & Company, Inc., 709 F. Supp. 86, 89-90
53
(S.D.N.Y. 1989) (granting third party defendants' motion to dismiss third party complaint, holding that
third party plaintiff was being sued for his own negligence, breach of contract and breach of fiduciary
duties, rather than for actions of the third party defendant); Metropolitan Steel Industries, Inc., 2004 NY
Slip Op. at* 13 (noting that "actions in which indemnity claims have been dismissed because the
underlying complaint asserted claims solely against the defendant/third-party plaintiff are legion");
Jordan v. Madison Leasing Company, 596 F. Supp. 707, 709 (S.D.N.Y. 1984) (internal citations omitted)
(granting third party defendants' motion to dismiss indemnification and contribution claims). Since all of
Highland's claims against the Schneiders are based on the Schneiders' own conduct, r;:lther than its
vicarious liability for actions of RBC, the Schneiders' claims for indemnification fail as a matter oflaw.
Second·, the Schneiders' claim for common law indemnification fails as a matter oflaw
because, as discussed in sections VI. C, F, RBC did not have a fiduciary relationship with the Schneiders
and therefore did not owe the Schneiders a fiduciary duty. It is black-letter law that indemnification
cannot be imposed unless the third party defendant owes a duty to the third party plaintiff. Dennenbaum
v. Rotterdam Square, L.P., 6 A.D.3d 1045,1047 (3d Dep't 2004) (granting third party defendant's motion
for summary judgment on common law indemnification claim where third party defendant did not owe a
duty of care to third party plaintiff). In order to prove their claim of common law indemnification, the
Schneiders must show that RBC owed them a duty and breached that duty. As discussed in sections VI.
C, F, RBC did not owe the Schneiders a duty of care, let alone breached such a duty.
C.
THE SCHNEIDERS' CLAIM FOR BREACH OF FIDUCIARY DUTY FAILS AS A
MATTER OF LAW
The Schneiders' third party claim against RBC for breach of fiduciary duty fails as a
matter of law because RBC cannot have breached a duty that never existed. The relationship between the
Schneiders and RBC was an arms-length contractual relationship pursuant to which RBC could not have
owed the Schneiders a fiduciary duty. New York Courts have expressly rejected the proposition that a
fiduciary relationship can arise between mere parties to a business transaction. Valjean Manufacturing
Inc. et al. v. Werdiger, Inc, et al., 2004 U.S. Dist. LEXIS 17580 at *11-12 (S.DN.Y. Sept. 1, 2004)
54
(granting defendant's motion to dismiss); WIT Holding Corp. v. Klein, et al., 282 A.D.2d 527, 529, 724
N.Y.S.2d 66, 67 (2dDep't 2001) (internal citations omitted) (lower court erred in denying defendant's
motion to dismiss breach of fiduciary claim "where the parties were involved in an arm's-length business
transaction involving the transfer of stocks, and where all were sophisticated business people."); Batast v.
Prudential Ins. Co. ofAmer., 281A.D.2d260, 264, 724 N.Y.S.2d 3, 7 (1st Dep't 2001).
The Schneiders themselves acknowledge that a special relationship is required for a
successful fiduciary duty claim. They admit that in order to prevail, the trier of fact must find that RBC
was an agent or a broker for one or more of the Schneiders. (Schneiders' Answer with Affirmative
Defenses and Third-Party Complaint at if 95). However, in their Answer the Schneiders actually deny
that RBC was their agent, and they have testified repeatedly that they had no contact with-emphasizing
the arms-length nature of the Notes transaction. 39 For exa~ple:
39
•
"The Schneiders have denied that RBC was an agent or broker for them." (ThirdParty Complaint, if 94).
•
Q: Was RBC your agent?
A: You.know they weren't. My answer is, no, they were not my agent.
Q: Were they any member of your family's agent?
A: (no response)
Q: Leslie, SusanA: No, of course not.
(Exh. 4 (Leonard Dep.) at 470).
•
Q: To your knowledge has your family ever authorized RBC to do anything on their
behalf?
A:No.
Q: Would it be fair to say that RBC is not your family's agent?
A: They are not our agent? They are not our agent, no.
This Court should not consider the Schneiders' claims against RBC which are based on the hypothesis that RBC
was the Schneiders' agent. The Schneiders themselves have already asserted in their Third Party Complaint
(and testified under oath) that RBC was not their agent and did not represent them. This assertion of fact is a
judicial admission that the Schneiders are bound to for the duration of the proceeding and they should not be
able to assert claims that flatly contradict that admission. Cleveland v. Policy Management Systems
Co17Joration et al., 526 U.S. 795, 806, 119 S. Ct. 1597, 1603, 143 L.Ed.2d 966, 976 (1999) ("[A] party cannot
create a genuine issue of fact sufficient to survive summary judgment simply by contradicting his or her own
previous sworn statement (by, say, filing a later affidavit that flatly contracts that party's earlier sworn
deposition) without explaining the contradiction or attempting to resolve the disparity."); Bellefonte
Reinsurance Company v. Argonaut Insurance Company, 757 F.2d 523, 528-29 (2d Cir. 1985) (rejecting
affidavit in which party sought to contradict its own pleading).
55
(Exh. 58 (Leslie Dep.) at 341-342).
•
Scott Schneider testified that he had never heard of RBC, that he did not know who
they were, and that he had no relationship with RBC. (Exh. 59 (Scott Dep.) at 411,
425-426, 428).
•
Q: Okay. And [RBC does] not act on your family's behalf in anyway; is that right?
· A: They do not, they have not-um, that's correct. They have never acted on our
behalf anyway, and I did not know them.
Q: So, you would not consider them your family's agent?
A: Most definitely not.
(Exh. 57 (Susan Dep.) at 381).
Highland also understood that RBC's role in the transaction was as a broker-dealer-not
as the Schneiders' agent. (See e.g., Exh. 55 (Rich Dep. at 216-217 "RBC' s role was to put buyers and
sellers together;" Deposition Transcript ofMaf"k Okada dated Feb. 12, 2004 ("2/12/04 Okada Dep.") at
320, attached as Exh. 60; Deposition Transcript of Mark Okada dated May 25, 2004 ("5125104 Okada
Dep.") at 217, attached as Exh. 61 testifying that "RBC's role in the transaction was as a broker-dealer.")
Therefore, there is absolutely no dispute among all the parties that RBC was not the Schneiders' agent.)
D.
THE SCHNEIDERS CANNOT MAKE A CLAIM OF BREACH OF CONTRACT
AGAINSTRBC
The Schneiders allege that if it is determined that there was a binding agreement or
binding preliminary agreement, then such agreement would be the result ofRBC's violation of the Letter.
Agreement because (1) RBC failed to obtain the Schneiders' consent to or approval of the sale of the
Notes as required by the Letter Agreement; and (2) because RBC caused the Schneiders to be bound to an
agreement in the absence of written documentation required by the Letter Agreement. (Third Party
Complaint, if if 108-117).
This argument is senseless. Like all of the Schneiders' claims, it is pled in the
altemative-i.e., there's no contract, but if there was, then it's RBC'sfau!t. RBC cannot be liable to the
Schneiders for breach of contract under any theory because the evidence-that there was an oral
agreement subject to documentation-is perfectly consistent with the te1111s of the Letter Agreement.
Notwithstanding that, the Schneiders argue that RBC should pay Highland the $22M benefit of the
bargain-ignoring the reality that the Schneiders have pocketed that money.
56
The Schneiders' breach of contract claim must be dismissed as a matter of law because
(1) RBC received the Schneiders' consent to the sale of the Notes through Rauch, the Schneiders' duly
authorized agent; (2) the deal was conducted pursuant to industry standards-a binding contract was in
place at the time the parties orally agreed to the material terms of the transaction; and (3) the Schneiders
did not sustain any damages as a result of RBC's alleged breach of the Letter Agreement.
Nor can the Schneiders show any damages from RBC's alleged breach of the Letter
Agreement. On;ille v. Newski, Inc., 155 A.D.2d 799, 547 N.Y.S.2d 913, 914 (3d Dep't 1989) (lower
court erred in denying defendant's motion for summary judgment on breach of contract claim because
plaintiffs did not sustain any damages as a result of defendant's alleged breach). The only potential
damages the Schneiders could have is the $22M they may owe to Highland as a result of their own breach
of contract-an amount that the Schneiders have already collected from the acceleration of the Notes and
which they are barred from collecting from RBC under theories of contribution or indemnity. See
sections VI A, B.
E.
THE SCHNEIDERS CANNOT MAKE A CLAIM THAT RBC BREACHED THE
COVENANT OF GOOD FAITH AND FAIR DEALING
The Schneiders allegation that RBC breached the implied covenant of good faith and fair
dealing fails as a matter of law because it is based on the same alleged facts as their breach of contract
claim. In fact, paragraphs 114 and 120 of the Third Party Complaint, alleging the basis of each claim
respectively, are identical.
Compare~
114 and 120, Schneiders' Answer with Affirmative Defenses and
Third-Party Complaint, dated October 29, 2004. New York law does not recognize a separate cause of
action for breach of the implied covenant of good faith and fair dealing where, as here, breach of contract
has been pled based on the same facts. HwTis v. Provident Life and Accident Ins. Co., 310 F.3d 73, 81
(2d Cir. 2002) (affinning grant of summary judgment to defendant with respect to breach of the covenant
of good faith and fair dealing claim); Kinsey v. Cendant C01p., 2004 U.S. Dist. LEXIS 23059, *46-47
(S.D.N.Y. Nov. 17, 2004) (same) citing Engelhard Corp. v. Research C01p., 268 A.D.2d 358, 358-59,
702 N.Y.S.2d 255, 256 (1st Dept 2000) (affirming granting of defendant's motion to dismiss covenant of
57
good faith and fair dealing claim as duplicative of plaintiffs breach of contract claim); Kafinar v. Ne·w
·world Restaurant Group, Inc., 2004 U.S. Dist. LEXIS 24688, *31 (S.D.N.Y. Dec. 10, 2004) (internal
citations omitted) (granting defendant's motion for summary judgment, holding that "[a claim for breach
of the covenant of good faith and fair dealing ] will be dismissed as redundant where the conduct
allegedly violating the implied covenant is a predicate also for a claim for breach of an express provision
of a contract").
F.
THE SCHNEIDERS CANNOT MAKE A NEGLIGENCE CLAIM AGAINST RBC
The Schneiders allege that RBC was negligent by breaching its duty as a registered
broker-dealer "to its customers, to the Schneiders, and to the public." (Third-Party Complaint, at~ 125).
However, any claim asserting that RBC owed the Schneiders a duty of care must fail as a matter of law
because: (1) as discussed in Section VI A, supra, RBC could not have owed the Schneiders a fiduciary
duty since the two were merely counter-parties in an arms-length business transaction and the Schneiders
admit that RBC never acted as their agent; (2) RBC did not owe a duty of care to the Schneiders by virtue
of its position as broker-dealer of the Notes; and (3) RBC did not owe a duty of care to other customers or
the general public with respect to its agreement with the Schneiders.
The Schneiders' own testimony precludes them from asserting that RBC owed them a
fiduciary duty or duty of care with respect to its position as broker-dealer. In the broker-customer
context, New York courts have held that "the fiduciary obligation under New York law is limited to
affairs entrusted to the broker, thus, in the absence of discretionary trading authority delegated by the
customer to the broker ... a broker does not owe a general fiduciary duty to his client." Steed Finance
LDC v. Laser Advisers, Inc., 258 F. Supp.2d 272, 283 (S.D.N.Y. 2003) (granting defendants' motion to
dismiss third party complaint for contribution because broker had no duty to customer). 40 The Schneiders
40
In Steed Finance, the district court held that the broker did not owe a fiduciary duty to his customer because the
broker, like RBC, did not have ongoing discretionary authority to act on the customer's behalf. However,
where there is such "discretionary trading authority" given by the customer to the broker, as there was with the
Schneiders to Rauch, an agency relationship is imputed by law. (Exh. 28 (Lillian Dep.) at 16-17). Similarly,
while whether Rauch is the Schneiders' agent is at worst, an issue of fact, seen. 20, supra, and Adipar Limited,
58
have each testified that they never heard of RBC and never spoke directly with RBC. Given that, the
Schneiders cannot assert for the purposes of this claim that they imbued RBC with the "discretionary
trading authority" that would be required to generate a duty of care.
Similarly, the Schneiders' vague allegation that RBC violated a duty of care to "its
customers" and "the public" fails because it is black letter law that that "[s]ecurities brokers do not owe a
general duty of care or disclosure to the public simply because they are market professionals. Coleman &
Company Securities, Inc., 236 F. Supp. 2d 288, 304 (S.D.N.Y. 2002) (internal citations omitted) (granting
defendant broker's motion for summary judgment, holding that securities brokers do not owe a general
duty of care or disclosure to the public); Kolbeck, et al. v. Lit America, Inc. et al., 923 F. Supp. 557, 57172 (S.D.N.Y. 1996) (granting defendants' motion to dismiss negligence claim).
cited therein, with respect to RBC, there is no factual dispute - all of the parties, the Schneiders, Highland and
RBC agree that RBC is not the Schneiders' agent and there is no contrary evidence.
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1
HYATT BOSTON
CONCLUSlON
For all of the foregoing reasons, RBC respectfhlly requests 1.hat the Court deny the
ScJmeidcrs' motion for summary judgment in all respects and should grant RBC's motion for an order
putsuant to Fed. R. Civ. P. 56 disrnissing the Third Party Complaint and for such other and furtherre)jef
as it deems just and proper.
New York, New York
March 3, 2.005
Attorneys for Third-Party
JJefendant and Third~Party CounterClaima11t RJJC Capital Markets Corporation
19300-0104 #549938
60
141002