PX-71

Michael J. McNamara (MM-8378)
Jack Yoskowitz(JY-3935)
SEWARD & KISSEL LLP
One Battery Park Plaza
New York, New York 10004
Telephone: (212) 574-1200
Facsimile: (212) 480-8421
Attorneys for RBC Capital Markets Corporation
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
HIGHLAND CAPITAL MANAGEMENT, L.P.,
Plaintiff,
- againstLEONARD SCHNEIDER, LESLIE SCHNEIDER,
SCOTT SCHNEIDER, SUSAN SCHNEIDER, and
JENKENS & GILCHRIST PARKER CHAPIN LLP,
02 Civ. 8098 (PKL)
Defendants.
LEONARD SCHNEIDER, LESLIE SCHNEIDER,
SCOTT SCHNEIDER, and SUSAN SCHNEIDER,
Third-Party Plaintiffs and ThirdParty Counter-Defendants,
- againstRBC CAPITAL MARKETS CORPORATION FIKJA
RBC DOMINION SECURITIES CORPORATION
Third-Party Defendant and ThirdParty Counter-Claimant.
THIRD-PARTY DEFENDANT AND THIRD-PARTY COUNTER-CLAIMANT
RBC CAPITAL MARKETS CORPORATION'S MEMORANDUM OF LAW IN
OPPOSITION TO DEFENDANTS' RENEWED MOTION FOR JUDGMENT AS A
MATTER OF LAW OR IN THE ALTERNATIVE FOR A NEW TRIAL
EXHIBIT
PX-71
TABLE OF CONTENTS
TABLE OF AUTHORITIES ........................................................................................................ iii
PRELIMINARY STATEMENT ................................................................................................... 1
ARGUMENT ................................................................................................................................. 3
I.
II.
III.
DEFENDANTS ARE NOT ENTITLED TO JUDGMENT AS A MATIER OF
LAW UNDER RULE 50(B) .............................................................................................. 3
A.
Plaintiffs Presented Sufficient Evidence of an Oral Agreement to Sell the
Notes ...................................................................................................................... 6
B.
Plaintiffs Presented Sufficient Evidence of a Meeting of the Minds on
Essential Terms of an Oral Contract to Sell the Notes ........................................ 12
C.
Plaintiffs Demonstrated that the Oral Contract Did Not Need to Be
Reduced to Writing to Be Binding....................................................................... 13
D.
Plaintiffs Presented Sufficient Evidence that Glen Rauch had the
Authority to Bind Defendants .............................................................................. 19
DEFENDANTS ARE NOT ENTITLED TO A NEW TRIAL AS A RESULT OF
THE JURY'S DAMAGES AWARD .............................................................................. 29
A.
Damages Were Awarded in Compliance with Applicable Law and Fully
Supported by the Evidence .................................................................................. 30
B.
The Court's Jury Instructions Were Proper ......................................................... 34
C.
The Jury Properly Awarded RBC "Benefit-of-the-Bargain" Damages on
the Note Sold to Fidelity ...................................................................................... 36
D.
The Jury Properly Awarded RBC Lost Business Damages ................................. 37
THE COURT SHOULD DENY DEFENDANTS' MOTION FOR A NEW
TRIAL BECAUSE (1) THE JURORS WERE PROPERLY CHARGED; (2) THE
ADMISSION AND EXCLUSION OF EVIDENCE WAS PROPER; AND (3)
THE VERDICT FORM WAS PROPER AND JUST ..................................................... 43
A.
The Charge Properly Instructed the Jury Regarding the Burden of Proving
a Binding Oral Agreement. .................................................................................. 43
B.
The Charge Properly Instructed the Jury Regarding The Effect of An Oral
Agreement ............................................................................................................ 45
C.
The Special Verdict Properly Instructed the Jury as to the Elements of
Plaintiffs' Claims ................................................................................................. 47
D.
Taped Conversations By and Between RBC, Highland and Fidelity Were
Properly Admitted ................................................................................................ 50
E.
The Court Properly Prevented Defendants' from Introducing a Court
Decision Involving a Different Case.................................................................... 53
F.
The Admission of Gerald Guild's Custom and Practice Testimony Was
Proper ................................................................................................................... 56
G.
The Court's Charge to the Jury Regarding Actual and Apparent Authority
Were Proper ......................................................................................................... 59
CONCLUSION ............................................................................................................................ 62
11
Third-Party Defendant and Third-Party Counter-Claimant RBC Capital Markets
Corporation ('"RBC'') 1 respectfully submits this Memorandum of Law in Opposition to
Defendants' Renewed Motion for Judgment as a Matter of Law or in the Alternative for a New
Trial.
PRELIMINARY STATEMENT
Defendants' motion for judgment as a matter oflaw is nothing more than an
attempt to overrule, without basis, the well-reasoned verdict of the jury based on their own
version of the facts. It is as if, according to Defendants' version, the jury trial never happened.
Over nine days of testimony, the jury heard from twenty witnesses. Defendants would have this
Court believe that only the testimony of the Defendants themselves, and their agent Glen Rauch,
was a proper basis for the jury's determinations at trial. Yet, the opposite is true. Defendants'
credibility, and that of their agent Glen Rauch, was repeatedly called into question by their
testimony and demeanor. Leonard Schneider, for example, was impeached twice with his own
deposition testimony about his communications with his children regarding his authorization of
the Letter Agreement between RBC and Glen Rauch Securities, Inc. ("GRS"). Mr. Schneider's
deposition testimony not only contradicted his own trial testimony, but it contradicted the trial
testimony of his children as well.
In their deliberations, the jury evidently- and properly- rejected Defendants'
testimony and instead relied on the consistent and credible testimony presented by Plaintiffs
regarding the essential facts in dispute. Peter Parent, Max Holmes and Ken Ambrecht - three of
the most senior employees in the RBC High-Yield Group - each testified that Mr. Rauch
RBC is a third-party defendant and third-party counter-claimant. In keeping with the Court's suggestion of
January 31, 2008, RBC will refer to itself herein as Plaintiff and will refer to itself and plaintiff Highland
Capital Management, L.P. ("Highland") as "Plaintiffs" as they were treated at trial.
confirmed that RBC and the Schneiders had an oral agreement as to size and price of a sale of
the subordinated promissory notes issued by McNaughton Apparel Group, Inc. (the "Notes") on
a conference call on March 14, 2001. These witnesses, along with Plaintiffs' expert, Gerald
Guild, further testified that such oral agreements are common and binding in the securities
industry. Plaintiffs likewise presented significant evidence of Mr. Rauch's authority to bind
Defendants to a sale of the Notes. Together, all of this testimony provided a reasonable basis for
the jury's verdict, and Defendants' efforts to overturn that verdict must be denied.
Defendants, again misconstruing the evidence and the applicable law, further
argue for a new trial on the grounds that the jury's damages award was improper and that certain
rulings of the Court related to the jury charges and the admission of evidence were in error.
None of these grounds warrant a new trial. The jury's damages award reflects a well-considered
evaluation of Plaintiffs' damages claims and demonstrates the jury's efforts to ensure that
Defendants did not unjustly benefit from the material, non-public information they learned
during the course of negotiations for the sale of the Notes and failed to disclose to Plaintiffs.
And the Court's instructions to the jury regarding damages accurately and fairly reflected New
York law as applied to this case. Likewise, the Court's rulings on jury charges and evidentiary
matters reflected a reasoned and fair adjudication of the factual and legal issues raised by both
Plaintiffs and Defendants. Defendants have failed to identify any error in these rulings which
would merit a new trial and instead simply re-hash the arguments which have previously been
rejected by this Court and the jury.
Accordingly, their motion must be denied in all respects.
2
ARGUMENT
I.
DEFENDANTS ARE NOT ENTITLED TO JUDGMENT
AS A MATTER OF LAW UNDER RULE SO(B)
In contending that they are entitled to judgment as a matter oflaw, Defendants
repeat the very arguments and interpretations of the facts they unsuccessfully presented to the
jury at trial. Specifically, Defendants argue that there was insufficient evidence presented at trial
to establish that: (1) there was an agreement to sell the Notes; (2) there was a meeting of the
minds on the essential terms of the agreement; (3) there was an agreement to sell the Notes in
light of the failure to reduce the agreement to writing; (4) Highland was entitled to damages as
an intended third-party beneficiary of the purported oral agreement between the Schneiders and
RBC; 2 and (5) Rauch had the authority to bind any of the Defendants to a sale of the Notes.
Defendants' motion, however, consists oflittle more than their insistence that their version of the
facts was the only plausible interpretation of the evidence presented to the jury at trial. To the
contrary, there was ample evidence presented on each of these issues, and there was a significant
factual basis on which the jury could properly disregard the testimony of the principal defense
witnesses.
In claiming that there is insufficient evidence to support a verdict, Defendants try
to sidestep the voluminous evidence presented by RBC and Highland in their direct case (and
accepted by the jury in reaching its verdict) that demonstrated convincingly that (1) there was a
binding oral agreement to sell the $69 million in Notes at 51 cents par value, which reflected a
meeting of the minds as to the essential terms of that agreement, and that (2) Glen RauchDefendants' agent-had actual and apparent authority to bind Defendants to the sale of the
2
RBC respectfully refers the Court to Highland's Response to Defendants' Motion for Judgment as a Matter
of Law for a discussion ofHighland's third-party beneficiary claim.
3
Notes. Instead, Defendants now ask the Court to usurp the resounding findings of the unanimous
jury - a jury praised by the Court as "one of the more intelligent juries that l have had in my 24
years as a judge and my 25 years as a trial lawyer." Tr. at 1807. 3 Defendants' attempt to
overrule the verdict of the jurors should not be granted- especially where, as here, the evidence
overwhelmingly supported RBC's breach of contract claim.
The Legal Standard for Judgment as a Matter of Law
In deciding a motion for judgment as a matter of law, a Court should consider the
evidence in the light most favorable to the non-movant and give that party the benefit of all
reasonable inferences that the jury might have drawn in the non-movant's favor from the
evidence. Tolbert v. Queens College, 242 F.3d 58, 70 (2d Cir. 2001) (reversing district court's
grant of a Rule 50(b) motion where district court failed to view the evidence as a whole or in the
light most favorable to non-movant) (citing McCardle v. Haddad, 131 F.3d 43, 51
(2d Cir. 1997)); Smith v. Crown Lift Trucks, 2007 U.S. Dist. LEXIS 36671, at *2-3
(S.D.N.Y. May 16, 2007) (motion for judgment as a matter oflaw denied in part where it was
within the province of the jury to assess defendant's argument and reject it) (citing Affordable
Housing Foundation, Inc. v. Silva, 469 F.3d 219, 227 (2d Cir. 2006)). The burden rests with the
moving party to demonstrate the lack of factual foundation supporting the jury's verdict. Miceli
v. lnterressantskapet Sea Transport, 413 F Supp 776, 779 (S.D.N.Y. 1976) (Rule 50(b) motion
denied where there was sufficient evidence to support jury verdict). While the court should
review all admissible evidence contained in the record when it makes its evaluation, Tolbert, 242
F.3d at 70 (citing Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133 (2000)), the court
need not consider "evidence favorable to the moving party that the jury is not required to
3
Trial testimony referenced herein is attached as Exhibit 1 to the Affidavit of Michael J. McNamara in
Opposition to Defendants' Renewed Motion for Judgment as a Matter of Law or in the Alternative for a
New Trial, sworn to on April 30, 2008 ("McNamara Aff.").
4
believe." Reeves, 530 US at 150-51 (2000) (holding that respondent was not entitled to
judgment as a matter of law and reversing appellate court's decision where court substituted its
judgment regarding the weight of the evidence for that of the jury).
To decide whether judgment as a matter oflaw is warranted, the court must
decide whether the evidence is such that, without weighing the witnesses' credibility or
otherwise considering the weight of the evidence, there can only be one conclusion as to the
verdict that reasonable people could have reached. See, e.g., Hallinan v. Republic Bank & Trust
Co., 519 F. Supp. 2d 340, 351-352 (S.D.N.Y 2007) (Rule 50(b) motion denied as to liability in
breach of contract case where jury made "fact-specific" determinations and where defendant
failed to demonstrate overwhelming evidence sufficient to overturn jury's verdict). It is the
function of the jury- not of the judge - to determine credibility, to weigh the evidence presented
by the parties and to draw legitimate inferences from the facts. See Reeves, 530 U.S. at 150; see
also Tolbert, 242 F.3d at 70 ("The court cannot assess the weight of conflicting evidence, pass
on the credibility of the witnesses, or substitute its judgment for that of the jury.") (quoting Smith
v. Lightning Bolt Productions, Inc., 861F.2d363, 367 (2d Cir. 1988)); Caruolo v. John Crane,
Inc., 226 F.3d 46, 53-54 (2d Cir. 2000) (district court's decision denying judgment as a matter of
law or for a new trial affirmed where evidence sufficient to support jury's assessment of
defendant's liability); Berner v. British Commonwealth Pacific Airlines, Ltd., 346 F.2d 532 (2d
Cir. 1965) ("It is the jury, not the court, which is the fact-finding body ... The very essence of its
function is to select from among conflicting inferences and conclusions that which it considers
most reasonable.").
Thus, the court should only grant judgment as a matter oflaw where (1) there is
such a total lack of evidence supporting the verdict that the jury's findings could only have been
5
the result of sheer surmise and conjecture; or (2) there is such an overwhelming amount of
evidence in favor of the movant that reasonable and fair minded people could not arrive at a
verdict against the movant. Hallinan, 519 F. Supp. 2d at 346. Defendants utterly fail to meet
either requirement, and Defendants' motion for judgment as a matter of law should be denied.
A.
Plaintiffs Presented Sufficient Evidence of an Oral Agreement to Sell the Notes
Turning first to the issue of whether there was sufficient evidence of an oral
agreement to support the verdict, Defendants cite to the testimony of Mr. Rauch and the four
Defendants in support of their argument that there was no oral agreement with RBC to sell the
Notes. Defendants' Memorandum of Law in Support of Motion for Judgment as a Matter of
Law or in the Alternative for a New Trial, dated March 24, 2008, ("Defs.' Mem.") at 11. Yet
Defendants do not (and cannot) show that this testimony is uncontradicted, unimpeached or
otherwise from disinterested witnesses, as it must be for the Court to consider the testimony on a
motion for judgment as a matter oflaw. Reeves, 530 U.S. at 151. Indeed, Defendants' testimony
fails on each ground, as it was contradicted by the testimony of Plaintiffs' witnesses, impeached
by their own deposition testimony and clearly self-interested. 4
Defendants argue that a reasonable jury could not conclude that an agreement
took place in the untaped conversation on March 14, 2001 because of purported inconsistencies
in the testimony of Plaintiffs' witnesses. Defs.' Mem. at 12-13. Yet Defendants do not point to
any significant inconsistencies in the direct evidence presented by Plaintiffs regarding the
untaped call. Defendants fail to address the wholly consistent testimony by each of Mr. Holmes,
Mr. Parent and Mr. Ambrecht - three of the most senior and experienced employees in the RBC
4
For example, at Mr. Schneider's deposition, Mr. Schneider confirmed that he spoke with his children
before authorizing Mr. Rauch to sign the Letter Agreement. McNamara Aff. Ex. 8 (L. Schneider Nov. 19,
2003 Dep. Tr.) at 143:24-144:17. The jury heard Plaintiffs impeach Mr. Schneider with this testimony
twice after he denied speaking to his children prior to the signing of the Letter Agreement. Tr. at 822: 13823:5; 898:22-899:7.
6
high-yield group as of March 14, 2001 - regarding the substance of the March 14, 2001 untaped
call.
Specifically, the jury first heard from Peter Parent- Co-Head ofRBC's HighYield Group and Head of High-Yield Sales-who testified that Mr. Rauch, on behalf of
Defendants, confirmed that RBC had an agreement on size and price to purchase the $69 million
of McNaughton Notes at 51 cents on the dollar.
Q.
And tell me everything you remember about that conference call.
A.
I remember where I was sitting in the office. I remember where
Kenny was sitting, where Max was sitting, and that Glen
confirmed size and price with us, 69 million at 51, which means
that we had a transaction.
*
*
*
Q.
What was your understanding at the end of that phone call,
Mr. Parent?
A.
That we were done on the trade, that we could buy the
securities at 51.
Tr. at 151 :5-10, 22-25.
The jury next heard from Ken Ambrecht, who confirmed that he understood that
RBC had reached an agreement on size and price with Defendants, through Mr. Rauch, based on
the untaped telephone call.
Q.
Mr. Ambrecht, can you generally tell me what happened on that call?
A.
We got in the room, and we got Glen on the phone just to go over the
specifics of the trade, and he also told us that he had to get his attorney,
Alterbaum, on the phone to discuss how that he lays out the transaction to
us.
Q.
And based on that phone call, did you also have an understanding that you
had an agreement on size and price?
A.
Yes, I did.
7
Tr. at 269:25-270:8. 5
Finally, the jury heard from Max Holmes, the other Co-Head ofRBC's HighYield Group, who also explained that Mr. Rauch confirmed on the untaped call that RBC would
be purchasing the $69 million in Notes from Defendants at 51 cents on the dollar.
Q.
Please tell us everything you remember about that call.
A.
We got on the phone with Glen Rauch. At this point we had been working
for two and a half months on this project. We had found purchasers for
the notes. We had a discussion that we would be purchasing the entirety
of the notes, which at this point was the original $59 million face amount
of notes, plus there were an additional 10 million of notes which the
family also owned. So at this point we were going to be purchasing the
entirety of the notes which was $69 million in face amount.
We discussed that the purchase price would be 51 cents on the dollar. We
then had a discussion about the requirement that we would need to have
documentation with respect to the trade.
Tr. at 375:14-24. 6
If the jury found this testimony alone to be credible- as it evidently did- then a
reasonable jury could find there was a binding oral agreement between RBC and Defendants.
Defendants ignore the constraints of a Rule 50(b) motion and instead assert that Plaintiffs'
testimony- "weighed against all of the other testimony and evidence in this case"- namely, the
testimony of Defendants and their agent Glen Rauch - does not provide a legally sufficient basis
for the jury's finding. Defs.' Mem. at 13. Under Rule 50(b)' s strict standard, however, it is left
Defendants claim that Mr. Ambrecht's testimony regarding the last taped call somehow renders his
testimony regarding the untaped call incredible (Defs.' Mem. at 12-13), yet Defendants fail to address how
Mr. Ambrecht's personal understanding that he had reached an agreement as to the size and price of the
Notes to be sold with Mr. Rauch at the end of the last March 14, 2001 taped call (Tr. at 266:24-267:2) is in
any way inconsistent with his testimony that he understood there was an agreement as to size and price
after the March 14, 2001 taped call.
6
Defendants misleadingly point to Mr. Holmes' testimony that RBC "would have to wait until tomorrow for
Mr. Rauch to call us back" as evidence that there was no agreement on the March 14, 2001 call. Defs.'
Mem. at 13. Defendants ignore Mr. Holmes' uncontroverted testimony that RBC was waiting for Mr.
Rauch to provide specific language for representations and warranties to be inserted into the confirmation
of the parties' oral agreement. Tr. at 376:8-20.
8
to the jury to draw inferences; and the court may not re-weigh the evidence and set aside a
verdict on the grounds that the jury could have drawn different inferences or conclusions, or
because the court feels that other results are more reasonable. See, e.g., Hallinan, 519 F. Supp.
2d at 346; Zavala v Citicorp Services, Inc., 426 F Supp 241, 243 (S.D.N.Y. 1976) (jury's finding
of oral agreement upheld on Rule 50 motion). Rather, there must be a complete lack of
probative facts to support the reversal of the jury's verdict. Id. at 243-44. The jury has already
undertaken its duty to weigh the evidence and found in favor of Plaintiffs, and Defendants'
suggestion that the Court re-weigh such evidence is unfounded.
Defendants next argue that evidence presented by Plaintiffs regarding an untaped
ca11 on March 14, 2001 is insufficient to support a finding that RBC and Defendants, through
their agent Glen Rauch, entered into an oral agreement on the ground that Plaintiffs' testimony
concerning the untaped call is inconsistent with the evidence concerning the last taped call on
that day. Defs.' Mem. at 11-12. To the contrary, however, nothing in the taped conversations
precludes a finding that the parties had reached an oral agreement to sell the Notes, and the
evidence presented by Plaintiffs was clear that the parties had entered into such an agreement. 7
As proof that Mr. Rauch would not have reached an agreement as to the sale of the Notes in an
untaped call, Defendants rely on Mr. Rauch's statement in the last March 14, 2001 taped call that
he did not "want to go out on a limb because uh I don't know how he's going to tell me, how this
7
Defendants argue that RBC must rely on the testimony regarding the March 14, 2001 untaped call as
evidence of the parties' oral agreement as a result of the Court's 2005 ruling on whether RBC and Highland
satisfied an exception to the statute of frauds in Highland Capital Mgmt., L.P. v. Schneider, 2005 U.S. Dist.
LEXIS 14912, at *53 (S.D.N.Y. July 25, 2005) ("2005 Opinion and Order"), Defs'. Mem at 11. While
RBC disagrees that the 2005 Opinion and Order precludes the possibility that RBC and Mr. Rauch entered
into an oral agreement on any of the taped cans, RBC notes that, as discussed above, the evidence
presented at trial regarding the untaped can was sufficient for a jury to find that the parties had entered into
a binding oral agreement and is not inconsistent with the recorded conversations.
9
goes, you know. I mean at that price I told you what I was concerned about." Defs.' Mem. at 1112; Pls. Ex. 80: CD 725, 3.14.06-3.14.10. 8
Yet Defendants ignore Mr. Rauch's subsequent statement on that same call in
which Mr. Rauch confirmed to Mr. Ambrecht that the transaction would be for all $69 million of
the Notes:
Mr. Ambrecht: And that's going to be for all the sixty-nine million?
Mr. Rauch:
Yeah, that's for all of them, yeah.
See Pls. Ex. 80: CD RBC 725, 3.14.06-3.14.10. Defendants likewise ignore Mr. Rauch's
statement on March 13, 2001, that any deal would be at 51 cents on the dollar:
Mr. Rauch: You know we're not haggling we're done at
fifty-one if it gets done and it will probably be tomorrow
mommg.
See Pls. Ex. 80: CD RBC 725, 3.13.01-3.13.02.
Put into context, Mr. Rauch's acknowledgement that the transaction would be for
all $69 million of the Notes - subject to the language to be provided by Defendants' lawyers - is
in no way inconsistent with the testimony adduced by Plaintiffs that Mr. Rauch, on behalf of
Defendants, confirmed an oral agreement as to size and price on the March 14, 2001 untaped
call. 9
8
A copy of the audio files admitted into evidence at trial as Plaintiffs' Exhibits 63, 79, 80 and 365 are
attached as Exhibit 2 to the McNamara Af£
9
Indeed, as this Court recognized in its 2005 Opinion and Order, a rational juror could find that there was an
oral agreement on the untaped call if the jury found Plaintiffs' witnesses more credible than Defendants:
Based on the present record, a rational juror could find that the purported oral agreement
encompassed all material terms between the Schneiders I GRS and RBC. Plaintiff and
RBC both contend that an agreement had been reached as to the price (51 % of value) and
size ($ 69 million value) for sale of the notes. These numbers are certainly where the
parties left their negotiations on the last recorded conversation. Thus, if a jury finds
Highland and RBC's witnesses more credible than defendants, a jury could also find that
these were the terms of the agreement.
Highland, 2005 U.S. Dist. LEXIS 14912, at *38.
10
Finally, Defendants argue that the absence of an entry in RBC' s books and
records reinforces the conclusion that no agreement had been reached between RBC and
Defendants, again suggesting that RBC would have violated applicable policies and procedures
had an agreement been reached. Defs.' Mem. at 13. As a threshold matter, this argument was
repeatedly made to, and rejected by, the jury. Defendants fail to explain how such a rejection
was unreasonable. Moreover, Defendants ignore Plaintiffs' testimony that the actions taken by
RBC after the untaped call were consistent with its understanding that an agreement had been
reached and explain why RBC did not document the transaction. For example, Mr. Holmes
testified that he was waiting for Mr. Rauch to provide the language for the trade confirmation
before RBC sent the confirmation to Mr. Rauch. Tr. at 376:8-20. Defendants likewise ignore
Mr. Parent's testimony that he reported the trade - in a recorded conversation - to his immediate
supervisor Andrew Pringle after the untaped call on March 14, 2001. Tr. at 156:5-158:3; Pis.'
Ex. 79: CD RBC 894, 3.14.05. Further, there was ample evidence that RBC contacted its
customers Highland and Fidelity to inform them that an agreement had been reached for the sale
of the Notes. Tr. at 152, 1193; Pls.' Ex. 80: CD RBC 725, 3.14.11-.12; Pis.' Ex. 79: RBC 894,
3.14.04. As the testimony made clear, it would have defied common sense for RBC to have
contacted its customers had it not thought that it had a deal with Defendants. Tr. at 163-64,
1370. Taking this evidence into account, the effect of the failure to document the oral agreement
was clearly within the purview of the jury and the jury reasonably accepted RBC's explanation
of the post-trade events.
Accordingly, Defendants have failed to demonstrate that there is insufficient
evidence to support the jury's finding that there was an oral agreement between RBC and
Defendants to sell the Notes, and Defendants' motion should be denied.
11
B.
Plaintiffs Presented Sufficient Evidence of a Meeting of the Minds on Essential
Terms of an Oral Contract to Sell the Notes
Defendants next contend that there was insufficient evidence of a meeting of the
minds on essential terms necessary for an oral agreement because of the absence of an agreement
on the representations and warranties to be included in the sale of the Notes. Defs.' Mem. at 14.
Conveniently, Defendants disregard the testimony presented to the jury that these representations
and warranties were not essential to a binding oral agreement to sell the Notes. In fact, Plaintiffs
proffered evidence sufficient to support a finding that, in this transaction, "size and price" were
the essential terms of the agreement to sell the Notes. 10 Mr. Parent testified that RBC and
Defendants had a transaction once there was an agreement on size and price. Tr. at 151. Mr.
Parent further testified that in his 24 years of experience trading billions of dollars of high-yield
debt, not a single transaction had failed once there was an agreement as to size and prize. Tr. at
112:12-18. Mr. Ambrecht similarly testified that "maybe one" of the hundreds of millions of
dollars of trades he conducted by oral agreements failed to close after reaching the
documentation stage. Tr. at 229: 10-20. The jury was fully capable of weighing the testimony
proffered by Plaintiffs against that of Defendants regarding the essential terms of the contract.
This Court should not upset the weight given by the jury to the parties' testimony in determining
what terms were essential to the parties' oral agreement. See Hallinan, 519 F. Supp. 2d at 346. 11
10
As Mr. Wood, a salesmen on RBC's high-yield desk, testified: "size and price" are the essential terms of
any securities trade. See Tr. at 1291:
Q. What were the essential terms to this trade?
*
*
*
A. In every trade? Price and principal. Subject to documentation, in this case, but price and principal.
II
Defendants further argue that, "as a matter of logic and practice," RBC would not have bound itself to an
agreement with Defendants without simultaneously reaching an agreement with Highland and Fidelity.
Defs.' Mem. at 14. Again, Defendants ignore the evidence that RBC had reached an agreement as to size
and price with Highland as of March 14, 2001 following the conversation with Defendants' agent. See,
e.g., Pis.' Ex. 80: CD RBC 725, 3.14.12. Defendants further ignore the testimony ofRBC's expert Gerald
Guild that there were factors in evidence suggesting that RBC would have been required to purchase
12
And as discussed above at Section I.A., Plaintiffs submitted evidence sufficient to support a
finding that RBC and Defendants reached an oral agreement on size and price on March 14,
2001. Tr. at 151:5-10, 22-25, 375:14-24.
Accordingly, Defendants have failed to demonstrate that they are entitled to
judgment as a matter oflaw with respect to the parties' meeting of the minds on the essential
terms of the parties' oral agreement.
C.
Plaintiffs Demonstrated that the Oral Contract Did Not Need to Be Reduced to
Writing to Be Binding
Third, Defendants argue that there was insufficient evidence of an agreement for
the sale of the Notes because the agreement was never reduced to writing. Defs.' Mem. at 15-19.
Defendants contend that the testimony of Defendants that they did not intend to be bound to an
agreement absent a writing and the terms of the Letter Agreement precluded the jury from
finding that an oral agreement would be binding. Defs.' Mem. at 15. Defendants, however,
misstate the language of the Letter Agreement and ignore the evidence presented by Plaintiffs at
trial that the parties intended to be bound to an oral agreement and that the custom and practice
in the securities industry is for parties to be bound to oral agreements prior to documenting those
agreements in writing.
In determining whether parties may be bound to an oral contract in the absence of
a writing, this Court has looked to the factors enumerated by the Second Circuit in Winston v.
Mediafare Entm 't. Corp., 777 F.2d 78 (2d Cir. 1985). See Highland, 2005 U.S. Dist. LEXIS
14912 at *39-40. These factors include "(1) whether the parties have expressly reserved the right
not to be bound without a written contract; (2) whether there has been partial performance of the
contract; (3) whether the parties have agreed to all of the terms of the alleged contract; (4)
Defendants' Notes "as is" regardless of the status of its agreements with Highland and Fidelity. Tr. at
621:4-13; 622:23-623:9.
13
whether the alleged agreement is the type that is usually committed to writing." Id. at 40
(quoting Evolution Online Sys., Inc. v. Koninklijke PTT Netherland N. V., 145 F.3d 505, 509 (2d
Cir. 1998) (citing Winston, 777 F.2d 78)). While no single factor is determinative, each factor
provides significant guidance to the court in determining whether the parties may be bound to an
oral agreement. Power v. Tyco Int'! (US), Inc., 2006 U.S. Dist. LEXIS 96188, *48 (S.D.N.Y.
May 29, 2006) (Parties to an oral agreement may contemplate or even desire a writing, but 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.).
With respect to the first factor, Defendants disingenuously argue that the "subject
to definitive documentation" provision in the Letter Agreement and the testimony adduced at
trial showed that the parties did not intend that an agreement would be reached until it was put
into in writing. Defs.' Mem. at 15-17. As this Court found in its 2005 Opinion and Order,
however, the phrase "subject to definite documentation" in the Letter Agreement is not on its
face an expression of the parties' purported intent to be bound only upon the execution of a
written agreement:
It is unclear that the letter agreement is an express reservation of this right.
The applicable paragraph of the letter agreement states: "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 [GRS] understand that any such transaction
is subject to definitive documentation in compliance with applicable law."
It is not sufficiently obvious for purposes of a motion for summary
judgment that the "definitive documentation" language is applicable to
defendants' intention to be bound to an oral agreement. The language does
not speak to the point at which the parties would be bound but rather only
requires that their agreement be memorialized in writing before the
transfer would be complete.
Highland Capital Mgmt., L.P. v. Schneider, 2005 U.S. Dist. LEXIS 14912 at *40-42 (S.D.N.Y.
July 25, 2005); see also Fairbrook Leasing, Inc. v. Mesaba Aviation, Inc., 408 F.3d 460 (8th Cir.
14
2005) (holding that provision referring to definitive documentation did not necessarily "indicate
a qualification or hesitation concerning the existence of an agreement; it merely indicates that
scrivener work-' definitive documentation' -remains to be done") (applying New York law).
Indeed, the Letter Agreement nowhere states that the parties will not be bound to an oral
agreement to sell the Notes prior to the execution of a writing (see Pls.' Ex. 20, attached to
McNamara Aff. as Exhibit 3), and a jury could have reasonably found that the Letter Agreement
simply required that the representations and warranties be documented after a binding oral
agreement had been reached. 12
This interpretation of "subject to definitive documentation" was affirmed by the
testimony at trial of Max Holmes, the author of the "subject to definitive documentation"
provision in the Letter Agreement, that he included this provision in the Letter Agreement to
make Defendants aware that a writing would be required before the transfer would be complete:
12
Q.
The next sentence says: You understand that any such transaction is
subject to definitive documentation, including without limitation, certain
representations and warranties and opinions of counsel that would be
required of the Schneiders. Why did you include that language?
A.
There were two reasons. The first was I wanted to make clear to Mr.
Rauch and to the Schneiders that this trade, if it occurred, was going to
require documentation, and I wanted to give them some description of
what that documentation was. One piece of it was so the Schneiders
themselves at the very top required an opinion of counsel in order for
transfer, and so I wanted to alert them to that. The second was that this
was a highly unusual circumstance because at least two of the four holders
of these notes were employees of the company at Norton McNaughton at
the very time that they were trying to sell securities issued by the
Defendants misleadingly cite this Court's decision in Jn re Mizlou Comms. Co., Inc., 1993 U.S. Dist.
LEXIS 1454, at *17 (S.D.N.Y. Feb. 10, 1993) (Leisure, J.) for the proposition that the phrase "definitive
documentation" alone is sufficient to express an intent not to be bound to an agreement absent a writing.
Defs.' Mem. at 17. Notably, however, Defendants omit the explicit reservation of rights in the term sheet
which was the subject of the Court's ruling inMizlou. See Mizlou, 1993 U.S. Dist. LEXIS 1454, at *17
("In this case, the term sheet for the transaction explicitly stated that 'the terms hereof shall have no force
and effect until definitive documentation containing such terms is executed."'). No such reservation was
included in the Letter Agreement. See Pls.' Ex. 20.
15
company.
That was an unusual circumstance and would require
representations and warranties on the part of those people; that they were
not in possession of material nonpublic information, and I wanted to alert
them at the front end that they would be required to make representations
and warranties with regard to any transfer.
Tr. at 363:21-364:14. Notably, Mr. Holmes did not testify that the provision required a writing
before the parties entered into a binding agreement on size and price.
Mr. Holmes' interpretation of the "definitive documentation" provision was
further buttressed by (1) the absence of any testimony by Defendants that they informed RBC of
their purported intent not to be bound absent a writing and (2) the affirmative testimony of
former RBC personnel at trial that they understood that the parties had reached a binding oral
agreement. In fact, the draft of the Letter Agreement prepared by Defendants' counsel and sent
to RBC omitted the "definitive documentation" provision and made no reference to any writing
being required. See Pls. Ex. 62 (Attached to McNamara Aff. as Exhibit 5); Tr. at 367-68.
As discussed above at Section I.A., after their March 14, 2001 call with Mr.
Rauch, each of Mr. Parent, Mr. Ambrecht and Mr. Holmes understood that RBC had reached a
binding agreement for the sale of the Notes when Rauch, on behalf of Defendants, orally agreed
to the size and price of the Notes to be sold. Tr. at 150: 16-151: 17, 151 :22-25, 269:25-270: 16,
375:14-377:8. As Mr. Parent testified, every securities transaction is subject to documentation.
Tr. at 219:23-224, 220:3. The jury could have reasonably found that the sale of the Notes was
not any different in that regard.
Defendants also point unpersuasively to testimony by representatives ofRBC in
which these representatives acknowledged that the transaction would require representations and
warranties memorialized in writing as further proof that the parties did not intend to be bound
absent a writing. Defs.' Mem. at 17. Yet, again, Defendants fail to identify any conversation or
testimony in which any representative ofRBC, either internally or with customers ofRBC, ever
16
indicated that a writing setting forth the representations and warranties would be required before
the sale of the Notes would become binding. As the Second Circuit has made clear:
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.
Consarc Corp. v. Marine Midland Bank, N.A., 996 F.2d 568, 574 (2d Cir 1993) (summary
judgment reversed where facts did not demonstrate uncontradicted objective signs by a party not
to be bound) (citing V'Soske v. Barwick, 404 F.2d 495, 499 (2d Cir. 1968) ("The mere fact that
the parties contemplate memorializing their agreement in a formal document does not prevent
their informal agreement from taking effect prior to that event."). 13
With respect to the second Winston factor - partial performance - Defendants
assert that it weighs in favor of finding that the parties did not intend to be bound because there
had been no performance of the contract. Defs.' Mem. at 18. This assertion is mistaken as a
factual and legal matter. RBC did in fact perform under its agreement to purchase the Notes
when it took steps to complete the transaction after it reached an agreement with Defendants.
See, e.g., Tr. at 158:12-18, 427:3-16. It was Rauch who told RBC that the Defendants' attorneys
were reviewing the transaction, and RBC was waiting to receive language from Defendants'
attorneys prior to sending a trade confirmation. Tr. at 376:8-20. And once Defendants
repudiated their obligations under the oral agreement to sell the Notes, RBC had no duty to
13
To the extent the parties were continuing to negotiate the terms of the representations and warranties to be
included in the documentation, such open terms would go to the third Winston factor which Defendants do
not address. As the testimony at trial made clear, however, a party reneging on a transaction at the
documentation stage is a rare occurrence in the securities industry. Tr. at 112:12-18; 229:10-20.
17
perform further under the contract. See Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d
171 (2d Cir. 2007).
Finally, with respect to the fourth Winston factor, Defendants contend that the
agreement for the sale of the Notes was of a type usually committed to writing. Defs.' Mem. at
18-19.
14
That is simply not true in the securities industry. As RBC's expert Gerald Guild and
RBC's former employees clearly testified, in the securities industry it is the normal practice for
trades to be executed orally followed by written documentation of the oral agreement. See, e.g.,
Tr. at 249:19-250:12, 607: 8- 608:24. Further, the evidence reflected that Defendants' agent
Glen Rauch was an active participant in the securities industry, knew the applicable rules and
understood that his word was "his bond." Tr. at 484:13-485:1. Defendants cannot avoid those
rules and obtain judgment as a matter of law by relying on Mr. Rauch's self-serving testimony
that any trade would be by way of a "formal written contract" as a result of the Letter
Agreement. Defs.' Mem. at 18. The Letter Agreement says no such thing. See Pls.' Ex. 20
(McNamara Aff. Ex. 3). And Mr. Rauch's testimony should have been- and apparently wasgiven little credence given his interest in the proceedings and credibility issues. See, e.g. Reeves,
530 US 133, 150-51 (2000) ("That is, the court should give credence to the evidence favoring the
nonmovant as well as that evidence supporting the moving party that is uncontradicted and
unimpeached, at least to the extent that that evidence comes from disinterested witnesses."). 15
14
Defendants point to language in the Court's 2005 Opinion in which the Court stated that "[i]n defendant's
favor, this contract does seem the type that would be reduced to writing prior to binding the parties."
Defs.' Mem. at 18 (citing Highland, 2005 U.S. Dist. LEXIS 14912 at *41). Defendants' argument is
misleading, for the Court's 2005 opinion preceded by almost two years the decision by the New York
Court of Appeals holding that the Notes are "securities" under New York law and therefore not subject to
the requirement that the sale of the Notes be in writing. See Highland Capital Management, L.P. v.
Schneider, 8 N.Y.3d 406, 416 (2007).
15
Indeed, even Defendants called Mr. Rauch's credibility into question. As Leonard Schneider testified:
Q. So, your family representative was lying to RBC in this exchange, isn't that right?
18
As discussed supra at Section J.C., nothing in the Letter Agreement required that the transaction
be in writing before it could be binding, and a jury could reasonably have found that the custom
and practices applicable to the securities generally applied to the private sale of the Notes.
Accordingly, because Defendants have failed to satisfy their burden of
demonstrating that no reasonable jury could find that a binding agreement to sell the Notes could
be made orally - and indeed, a rational and fair-minded jury could and did find that an oral
agreement for the sale of Defendants' notes was binding- Defendants' motion should be denied.
D.
Plaintiffs Presented Sufficient Evidence that Glen Rauch had the Authority to Bind
Defendants
Finally, Defendants claim that there was insufficient evidence presented at trial to
support a finding that Glen Rauch had the authority to bind any of the Defendants to a sale of the
Notes. Defs.' Mem. at 22-26. Specifically, Defendants contend that Plaintiffs did not establish
(1) that Mr. Rauch had either actual or apparent authority to commit Defendants to a sale of the
Notes or (2) that Leonard Schneider had actual or apparent authority to commit his children to a
sale of the Notes. Defendants further argue that any purported reliance by Plaintiffs on Mr.
Rauch or Leonard Schneider's authority was unreasonable. Defs.' Mem. at 22-23. Defendants
again rely almost exclusively on their own testimony as well as that of their agent Glen Rauch.
Defendants do not address any of the voluminous evidence proffered by Plaintiffs providing a
basis to support the jury's finding of actual and apparent authority and fail to apply the
applicable law to the evidence adduced at trial.
Actual authority may be created explicitly (including by the principal's conduct)
or implicitly from all circumstances, including business customs and the subject matter of the
A. Let's not call it lying. But he was not telling the truth.
Tr. at 842.
19
relationship. Seetransport Wiking Trader Schiffarhtsgesellschafi MBH & Co.
Kommanditgesellschafi v. Republic ofRomania, 123 F. Supp. 2d 174, 185-86 (S.D.N.Y. 2000);
Hidden Brook Air, Inc. v. Thabet Aviation Int'!, Inc., 241 F. Supp. 2d 246, 261 (S.D.N.Y. 2002).
With regard to implied actual authority, an agent who is employed to perform an act is
authorized to do it in the manner in which it is usually performed or which is inherent or
incidental to the ordinary scope of authority associated with his position. Seetransport, 123 F.
Supp. 2d at 185; Masuda v. Kawasaki Dockyard Co., 328 F.2d 662, 665 (2d Cir. 1964). That is,
an agent's actual authority may be inferred solely from the principal' s designation of the agent to
a position that ordinarily possesses certain powers. Seetransport, 123 F. Supp. 2d at 185-86;
King World Prods., Inc v. Financial News Network, Inc., 660 F. Supp 1381, 1383-84 (S.D.N.Y.
1987); Masuda, 328 F.2d at 664-65. In this case, the evidence demonstrated that Defendants'
agent Glen Rauch was a securities broker who engaged in millions of dollars of trades on
Defendants' behalf. Tr. at 464:24-465:25. It is securities industry practice for a broker to "act[]
as an intermediary between a buyer and seller [and] as agent" and to "conduct[] securities
transactions for the accounts of others." Downes & Goodman, DICTIONARY OF FINANCE AND
INVESTMENT TERMS, p. 79 (6th ed. 2003); BLACK'S LAW DICTIONARY, p. 187 (7th ed. 1999).
Where an agent's customary duties and scope of authority are prescribed by industry practice, it
is the duty of the principal to inform third parties of any unexpected limitations on the agent's
authority. Seetransport, 123 F. Supp. 2d at 186.
To demonstrate apparent authority, a party must show that: "(l) [the] principal
'was responsible for the appearance of authority in the agent to conduct the transaction in
question,"' Herbert Constr. Co. v. Cont'! Ins. Co., 931 F.2d 989, 993-94 (2d Cir. 1991) (quoting
Ford v. Unity Hosp., 299 N.E.2d 659, 664, 32 N.Y.2d 464, 473, 346 N.Y.S.2d 238 (1973)), "and
20
(2) the third party reasonably relied on the representations of the agent." Id. at 994 (citing
Hallockv. State, 474 N.E.2d 1178, 1181, 64 N.Y.2d 224, 231, 485 N.Y.S.2d 510 (1984)); see
also Doxsee Sea Clam Co. v. Brown, 13 F.3d 550, 553-554 (2d Cir. 1994). The emphasis is on
the actions of the principal, not the agent. Herbert Constr., 931 F.2d at 993.
As the Court properly charged, while apparent authority is based on the
principal's representations or conduct toward a third-party, it does not require actual contact
between the principal and third-party. Jury Charge (attached to McNamara Aff. as Exhibit 4) at
36; Hidden Brook Air, Inc. v. Thabet Aviation Int'/, Inc., 241 F. Supp. 2d 246, 261 (S.D.N.Y.
2002); Chemical Bank v. Affiliated FM Ins. Co., 169 F.3d 121, 130 (2d Cir. 1999); Gen. Motors
Acceptance Corp. v. Finnegan, 156 Misc. 2d 253, 255, 592 N.Y.S.2d 570, 572 (Sup. Ct. Orange
County 1992). Indeed, apparent authority sufficient to bind a principal can arise where the
principal appoints a person to a position with generally recognized duties, or where a person of
ordinary prudence who is conversant with business usages and the nature of the particular
business is justified in assuming that such an agent has authority to perform a particular act.
Prop. Advisory Group, Inc. v. Bevona, 718 F. Supp. 209, 211(S.D.N.Y.1989); Gen. Motors
Acceptance Corp. v. Finnegan, 156 Misc. 2d 253, 255, 592 N.Y.S.2d 570, 572 (Sup. Ct. Orange
County 1992); Graffman v. Delecea, 1997 U.S. Dist. LEXIS 15525 at *12 (S.D.N.Y. 1997). In
other words, the custom in an industry usually dictates the existence and scope of an agent's
apparent authority in that industry. Prop. Advisory Group, 718 F. Supp. at 211. Special or secret
limitations upon the authority of agent, whose powers would otherwise be coextensive with the
business entrusted to him, must be communicated to the party with whom he deals, or the
principal will be bound to the same extent as if the limitations were not given. Prop. Advisory
21
Group, 718 F. Supp. at 213 (citing N.Y. Jur. 2d, Agency§ 88 (2d ed. 1979); 16 Columbia Broad.
Sys. Inc. v. Stokely-Van Camp, Inc., 522 F.2d 369 n.16 (2d Cir. 1975).
Reviewing the evidence presented by Plaintiffs in light of these legal standards, it
is clear that Plaintiffs put forth sufficient evidence to support the jury's agency findings. While
Defendants contend that Plaintiffs failed to meet their burden of producing any evidence which
contradicted Defendants and Mr. Rauch's self-serving testimony that Mr. Rauch did not have
actual authority to sell the Notes (Defs. Mem. at 24-25), Defendants do not address the
evidentiary record regarding (1) Mr. Rauch' s role as a broker in the securities industry; (2) the
drafting and execution of the Letter Agreement; and (3) Mr. Ranch's course of dealing with
RBC.
Defendants do not contest that there was sufficient evidence for the jury to find
that Glen Rauch, the Defendants' broker, had the authority to negotiate on their behalf. Instead,
Defendants assert that the evidence reflected that Rauch's authority was limited to negotiations
and he could not bind Defendants to a transaction. Defs.' Mem. at 24. Defendants' assertion is
belied by the evidence presented by Plaintiffs at trial regarding Mr. Rauch's acknowledged role
as a securities broker. Tr. at 464:24-465:25.
As this Court acknowledged in its 2005 Opinion and Order, "securities brokers
are generally able to engage in highly lucrative transactions on behalf of the underlying holders
of notes, bonds, and securities." Highland, 2005 US Dist LEXIS 14912 at *35-36. As RBC's
expert Gerald Guild testified, there was ample evidence in the record indicating to him that Mr.
Rauch was Defendants' agent as that term is applied in the securities industry. Tr. at 614: 17616:3. Mr. Guild enumerated the specific factors as follows:
16
This section is now at 2A N.Y. Jur. 2d, Agency§ 101 (3d ed.1998).
22
Q.
Can you list other factors that indicated to you that Rauch was the
Schneiders' agent, as that term is used in the securities industry?
A.
Yes, in several ways. Of course, the phone calls indicated that to me.
Further, the letter which in essence said that everything had to go through
Glen Rauch and Rauch Securities indicated that to me. Those were the
primary things, including the fact that RBC gave all bids to Glen Rauch
and Glen Rauch reflected offerings back to RBC all indicated to me that
he was acting as their agent in the Wall Street parlance.
Tr. at 615:19-616:3. As noted below, Plaintiffs put forth evidence as to each of these factorswhich Defendants ignore - and, based on this evidence, it is not unreasonable for a jury to have
found that Mr. Rauch had the powers normally associated with those of a securities broker for
purposes of Mr. Rauch's actual and apparent authority. See Seetransport, 123 F. Supp. 2d at
185-86; Prop. Advisory Group, 718 F. Supp. at 211; see also Downes & Goodman, DICTIONARY
OF FINANCE AND INVESTMENT TERMS, p. 79 (6th ed. 2003) (It is securities industry practice for a
broker to "act[] as an intermediary between a buyer and seller [and] as agent" and to ''conduct[]
securities transactions for the accounts of others."). Moreover, Defendants do not identify any
evidence that Defendants ever communicated to RBC any limitations on the scope ofRauch's
authority as a securities broker.
Indeed, contrary to Defendants' claim, the text of the Letter Agreement did not
preclude the jury from having found that Rauch was authorized to bind Defendants to a sale of
the Notes. Defendants point to the phrase "the consummation of any transactions remains in the
sole discretion and satisfaction of the holders and [RBC]" (Pls.' Ex. 20 (McNamara Aff. Ex. 3))
as evidence that Rauch's authority was limited. Defs. Mem. at 25. Yet Defendants do not
explain how their proffered interpretation is a plausible meaning, much less the only plausible
meaning, of this phrase. Moreover, the record reflected that the draft of the Letter Agreement
prepared by Defendants' attorney did not contain this or any other language which would have
prevented Mr. Rauch from binding the Defendants to a sale of the Notes. See Pls.' Ex. 62,
23
(McNamara Aff Ex. 5). Instead, as Mr. Rauch informed Mr. Ambrecht, Defendants' draft
reflected their overriding concern to avoid being construed as "working in concert." Pls.' Ex 63:
RBC 895, 1.5.01. With regard to the text of the final Letter Agreement, Mr. Holmes - the drafter
of the Letter Agreement - testified that he understood the phrase to have been included for a
wholly different reason:
At this point in the discussion, the Schneiders had not given us a firm
price at which they would sell the notes, and so I wanted to make clear to
them that although we were going to expend significant resources to assist
them, and, again, we wanted a certain time period in order to do this, they
would have the final decision as to whether they liked the price that we
came up with to sell their notes.
Tr. at 365:11-22. Nothing in this provision foreclosed Mr. Rauch from conveying Defendants'
decision to sell the Notes to RBC or foreclose the possibility that Mr. Rauch had authority to
bind Defendants to a sale of the Notes. In fact, it is Defendants' explanation which defies
credulity. As the testimony presented by Plaintiffs made clear, it would have been unusual under
securities industry custom and practice for Mr. Rauch to have not communicated the decision to
sell the Notes on his clients' behalf to RBC. Tr. at 615:2-5. And Defendants cannot point to any
provision in the Letter Agreement which would have prevented Mr. Rauch from making such a
communication. See Pls.' Ex. 20 (McNamara Aff Ex. 3). To the contrary, Defendants, through
Mr. Rauch, informed RBC that all questions or inquiries regarding the sale of the Notes were to
be made through Mr. Rauch. See Pls.' Ex. 50 (attached to McNamara Aff as Exhibit 6).
Similarly, Defendants do not explain how the Letter Agreement's reference to a
sale of"some or all" of the Notes precludes a finding by the jury that Rauch had the authority to
bind Defendants to a sale of the Notes. Again, there is evidence sufficient for a jury to have
found that any decision to purchase the Notes would have been communicated through Glen
Rauch regardless of who made the decision to sell the Notes. Tr. at 399:5-7, 13-15. Mr. Rauch
24
himself acknowledged that the provision did not require that Defendants contact RBC directly to
effect a trade. Tr. at 557:8-16. And the provision on which Defendants now relYwas included
by RBC, in part, to ensure that it was clear that Mr. Rauch was representing each of the
Defendants:
Q.
The next paragraph in the letter says: We understand that Glen Rauch
Securities, Inc. ("GRS") represents the Schneiders in a possible resale of
some or all of the notes by the Schneiders for which GRS will be receiving
separate compensation from the Schneiders. Why did you include that
language?
A.
I included this for two reasons: Again, this entire project was going to
require significant resources on the part of RBC to try and resell these
notes because this was a difficult project. And so I put this in here for two
reasons. One is I wanted it to be crystal clear that Mr. Rauch was in fact
representing the family; that this was not a fishing expedition. And then
the second thing I wanted to make sure was that it was crystal clear on the
.front end that Mr. Rauch was going to be paid by the family, not by us, so
that he would not resurface later when we had found some purchasers and
ask us for money later. So I wanted to make both of those things clear
which we did in this paragraph.
Tr. at 362:11-363:3. Where, as here, there is evidence that Defendants were aware that Mr.
Rauch was signing the Letter Agreement and that Defendants authorized the signing of the
Agreement (Tr. at 498:23-499:7), Defendants' claim that this language precludes the jury's
finding that Mr. Rauch could bind each of the Defendants is at odds with the evidentiary
record. 17
Rauch' s conduct subsequent to the signing of the Letter Agreement further
confirms that he was authorized to bind Defendants to an agreement to sell the Notes and that
Rauch acted in accordance with industry custom and practice in his dealings with RBC. The
evidence is undisputed that, as per the terms of the Letter Agreement and industry custom and
17
Indeed, RBC's inclusion of this provision and Defendants' authorization of the signing of the Letter
Agreements makes clear that a jury could find that RBC's reliance on Ranch's authority- actual or
apparent- was reasonable.
25
practice, all ofRBC's communications with Defendants occurred via Mr. Rauch and Glen Rauch
Securities. Mr. Rauch would then communicate all of the bids he received from RBC to Leonard
Schneider. Tr. at 527:16-21. There is also ample evidence in the record that Mr. Rauch made
"firm" offers for the sale of the Notes to RBC in February and March of2001. See, e.g., Tr. at
516:13-16, 521 :5-19, 525:4-7, 529:1-23; see also, e.g., Pls.' Ex. 79 CD RBC 894, 2.12.02; Pis.'
Ex. 80, CD RBC 725, 3.12.03. 18 Yet despite the fact that Mr. Rauch was communicating firm
offers to RBC the week of March 12, 2001, Mr. Schneider never told Mr. Rauch to stop talking
to RBC before the oral agreement was made on March 14, 2001. Tr. at 898:3-18. 19
Taking into account all of the evidence of Mr. Rauch's conduct and the
circumstances of the Letter Agreement, along with Mr. Rauch' s position as a securities broker,
there is ample evidence upon which the jury could have reasonably found that Mr. Rauch had the
authority to bind Defendants to a sale of the Notes and to disregard Defendants' self-serving
testimony. See Seetransport, 123 F. Supp. 2d at 185-86; Prop. Advisory Group, 718 F. Supp. at
211.
Defendants also claim that there was insufficient evidence for a reasonable juror
to conclude that Leonard Schneider had the authority to act on behalf of his children and that the
judgment should be set aside with respect to Leslie, Susan and Scott Schneider. Defs.' Mem. at
25-26. Defendants' claim, however, ignores the ample evidence presented by Plaintiffs which is
sufficient to support a finding that Leonard Schneider was the agent of his three children. Mr.
Rauch himself testified that, when making millions of dollars of trades on behalf of Leslie, Susan
18
As Mr. Guild explained, these "firm" offers in the securities industry are binding and result in a trade of the
security if accepted. Tr. 607:14-608:1.
19
As the record reflects, Mr. Rauch did not learn that Defendants' attorney had left a message advising Mr.
Rauch that he was "[n]ot sure Schneiders want him to proceed with phone calls" (Pis.' Ex. 26A attached to
McNamara Affidavit as Exhibit 7) until the morning ofMarch 15, 2001. Tr. at 541:19-542:5.
26
and Schott Schneider, he communicated almost exclusively with Leonard Schneider without
speaking to the children. Tr. at 466: 1-10. Mr. Rauch further testified that he understood that
Leonard Schneider had the permission of his children to make trades on their behalf. Tr. at
466:11-16.
With respect to the sale of the Notes, Leonard Schneider testified that Mr.
Alterbaum approved the final version of the letter agreement on behalf of each of Defendants
and that he personally authorized Glen Rauch to sign the final Letter Agreement. Tr. at 821 :22822:2. Likewise, Mr. Rauch knew that Mr. Alterbaum represented each of the Schneider
children when Mr. Alterbaum approved the Letter Agreement and understood that the Schneiders
were aware that he was signing the Letter Agreement with RBC. Tr. at 476:6-9, 498:23-499:7.
While Defendants point to the testimony of Mr. Rauch in which he claimed that
Leonard Schneider never told him that Mr. Schneider was acting on behalf of his children (Defs.'
Mem. at 25-26), the jury properly weighed the testimony proffered by Defendants against Mr.
Rauch's testimony making clear that he understood that Mr. Schneider was acting on Leslie,
Susan and Scott Schneider's behalf in authorizing him to sign the Letter Agreement. For
example, when asked whether he understood that he had been authorized by each of the
Defendants to sign the Letter Agreement, Mr. Rauch confirmed that this was the case:
Q.
And you understood that each of the Schneiders -- Leonard, Leslie, Susan
and Scott -- authorized you to sign the letter agreement with RBC, is that
right?
A.
Lenny told me and, yes, the answer is correct, he did.
Tr. at 499:4-7.
Similarly, Mr. Rauch acknowledged that he understood that he was authorized to
get a bid for all of the Notes and that Mr. Schneider was authorized by his children to obtain such
27
a bid for their Notes. Tr. at 490: 16-491: 10. Again, this understanding was based on Mr. Rauch' s
prior dealings with the Schneider children through Leonard Schneider:
Q.
And you understood that Mr. Schneider had the permission of his children
to obtain a bid for their notes?
A.
I believe I did, yes.
THE COURT:
How did you receive that? Is that based on previous
dealings with him or did he actually indicate that to you?
THE WITNESS:
Previously dealing with Lenny Schneider. He usually spoke
for his children. Yes.
Tr. at 491:3-10. It is certainly reasonable for the jury to have found that, consistent with the
parties' prior dealings, Leonard Schneider had the authority to bind his children to a sale of the
Notes through Mr. Rauch.
Indeed, as noted above, Mr. Schneider confirmed at his deposition that he had
spoken with his children prior to authorizing Mr. Rauch to sign the Letter Agreement. See L.
Schneider Nov. 19, 2003 Dep. Tr. at 143:24-144:17 (attached to McNamara Aff. as Exhibit 8).
Yet, when before the jury, Mr. Schneider twice denied having spoken to his children and was
impeached with his deposition testimony each time. Tr. at 822:13-823:5, 898:22-899:7. Despite
having been present to witness the impeachment of their father, his children likewise denied
having spoken to their father prior to his authorization of the Letter Agreement. (See, e.g., Tr. at
967, 1018, 1065. And although Leonard Schneider's children admitted being aware that Mr.
Schneider was communicating with Mr. Rauch about their Notes (see, e.g., Tr. at 925: 15-17),
Leonard Schneider did not recall ever having been told by his children to tell Mr. Rauch to cease
any efforts on their behalf (Tr. at 823 :6-9). Defendants did not present any evidence to the
contrary.
28
Given Mr. Rauch's testimony that Leonard Schneiders had been conducting
business trades on his children's behalf for years and had done so without their interacting with
Rauch, and the families' testimony regarding the Notes transaction itself, it is certainly
reasonable for a jury to have concluded that Leonard Schneider had the actual authority to act on
his children's behalf and direct Glen Rauch in the sale of the Notes.
Viewing all of the evidence in Plaintiffs' favor without re-weighing the evidence
presented at trial, as the Court must for purposes of Defendants' Rule 50(b) motion, it is apparent
that Plaintiffs put forth evidence sufficient for the jury to discredit the testimony of Defendants
and find that Mr. Rauch had actual and apparent authority to bind Defendants and that Leonard
Schneider had actual authority to bind Leslie, Susan and Scott Schneider to a sale of the Notes.
*
*
*
Accordingly, because Defendants' are unable to demonstrate an overwhelming
lack of evidence supporting the jury's findings and the record instead reflects significant
evidence supporting Plaintiffs' claims, Defendants' motion for judgment as a matter oflaw must
be denied.
II.
DEFENDANTS ARE NOT ENTITLED TO A NEW TRIAL AS A RESULT OF THE
JURY'S DAMAGES A WARD
Defendants contend that they are entitled to a new trial as a result of the jury's
damages award on the grounds that it was inconsistent with controlling law, unsupported by the
evidence, resulted from error in the jury charge and was clearly excessive. Defs.' Mem. at 28.
Defendants again misconstrue the law applicable to this case and present a version of the facts
that assumes the jury trial never took place. The jury's damages award reflected a well-
29
considered adjudication of the legal and factual issues posed to the jury, and Defendants' motion
should be denied.
The decision to grant or deny a motion for a new trial pursuant to Rule 59 is
within the sound discretion of the trial judge. Hallinan, 519 F. Supp. at 347. It is only in the
most extraordinary circumstances, however, that such discretion should be exercised. Id. The
moving party bears the burden of showing that it is entitled to a new trial. Schwartz v. Fortune
Magazine, 193 F.R.D. 144, 145-46 (S.D.N.Y. 2000) (motion for new trial denied where
evidentiary issues properly applied to breach of contract claim and special verdict form was fair).
A motion for a new trial generally should not be granted unless the court is convinced that (1) the
jury has reached a seriously erroneous result or (2) the verdict is a miscarriage of justice. Smith
v. Lightning Bolt Prods., 861F.2d363, 370 (2d Cir. 1988) (damages award upheld and motion
for new trial denied); Hallinan, 519 F. Supp. 2d at 347. Lorme v. Delta Air Lines, Inc., 2005
U.S. Dist. LEXIS 14113, at *7 (S.D.N.Y. July 13, 2005) (motion for new trial denied). In order
for the Court to disregard a jury's verdict, the moving party must show that the verdict is so
egregious that it warrants a new trial. Id. at *7-8. No such showing has or can be made here.
A.
Damages Were Awarded in Compliance with Applicable Law and Fully Supported
by the Evidence
After being presented with extensive evidence and well-reasoned legal
guidelines, the jurors properly awarded RBC its "benefit-of-the-bargain" damages of
$12,710,817.33. Verdict Form (attached to McNamara Aff. as Exhibit 9) at 2. This award
should not be disturbed. It is well-settled in New York that the calculation of damages is the
province of the jury. Hallinan, 519 F. Supp. at 353. The Court should not overturn the jury's
award of damages where an adequate basis exists to support it, id., for it is always the breaching
party who must shoulder the burden of the uncertainty regarding the amount of damages. Boyce
30
v. Soundview Tech. Group, Inc., 464 F.3d 376, 41-42 (2d Cir. 2006) ("Our case law is clear that a
plaintiff need only demonstrate a 'stable foundation for a reasonable estimate,' as to damages.")
(citations omitted).
It is a basic feature of benefit-of-the-bargain damages in a contract action that
they are meant to leave the injured party in the same economic position as he or she would have
been had the contract been fully performed. Contemporary Mission, Inc. v. Bonded Mailings,
Inc., 671 F.2d 81, 84-85 (2d Cir. 1982) (upholding jury verdict of compensatory profit damages
where evidence provided basis for reasonable assessment of damages.). As the Court properly
instructed the jury, damages should be the difference between the contract price the parties
agreed to and the value of the Notes at the time of the breach. Jury Charge (McNamara Aff Ex.
4) at 55. According to Defendants, the day of the breach was, at the latest, March 20, 2001.
Defendants' analysis, which in effect posits that they should benefit by breaching their
agreement with RBC, neglects to address the fact that they were in possession of material nonpublic information at the time of the breach concerning the acquisition of McNaughton by Jones
Apparel Group. Not surprisingly, not a single case cited by Defendants deals with this critical
issue.
Defendants claim that the only evidence on the record indicates that the value of
the notes at the time of the breach was 52 Yi cents on the dollar. This is incorrect. The 52 Yi cent
price Highland and Fidelity agreed to pay RBC was based on known facts and risks. Tr. at 35960, 1309. Defendants, however, possessed far greater information than the facts and risks known
to the "market," which is precisely why Defendants breached their agreement to sell the Notes.
The testimony at trial demonstrated that Defendants knew on March 13, 2001 that there was to
reason to believe that the Notes would be paid in full and failed to disclose this information to
31
RBC or their agent Glen Rauch. Tr. at 894-95, 856. If the Schneiders had performed under the
contract, RBC and Highland would be holding the notes at the time of the merger in June 2001
and would thereby been paid in full. Tr. at 1392-93.
"When determining a stock's fair market value, one must consider the viewpoint
of both the buyer and the seller. The opinion of fair market value must represent not only the
seller's viewpoint, but also the buyer's, since value in the market place reflects both influences."
Boyce, 464 F .3d at 388. The "willing buyer-willing seller" suggested by Defendants provides
that the value or fair market value is "the price at which the property would change hands
between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell
and both having reasonable knowledge ofrelevant facts." In Re Auction Houses Antitrust
Litigation, 2001 U.S. Dist. LEXIS 1713, *42 (S.D.N.Y. Feb. 22, 2001) (emphasis added) {"The
term 'fair market value' has a well understood and long established meaning."). In this case,
only one party had reasonable knowledge of relevant facts - the seller Defendants. In contrast to
the general public and most other high level employees, Defendants knew of the likelihood of a
merger between McNaughton and Jones. Tr. at 671. As a factual issue, the jury could have
estimated the value of the Notes at the time of the breach in March 2001, in light of this material
inside information, to be one hundred cents on the dollar, given Defendants' knowledge and the
status of the negotiations to acquire McNaughton. Tr. at 704. Specifically, the parties had
executed a term sheet; McNaughton had engaged Merrill Lynch as an advisor; and McNaughton
had held extensive board meetings to discuss the proposed merger. Tr. at 670, Pls.' Ex. 127
(attached to McNamara Aff as Exhibit 10). It is not surprising that the jury found that at the
time of the breach, the Notes were worth their full face value. As such, the jury's award of
damages should not be overturned by granting Defendants a new trial.
32
Moreover, the willing buyer-willing seller test is not the only evidence of fair
market value. Boyce, 464 F.3d at 387. Determining value is a factual inquiry. Id. "A valuation
determination is one that is entitled to be made on all the elements of the particular case.
Valuation is necessarily an approximation." Id.; see also, Kaminsky v. Segura, 4 Misc. 3d
1019A, 798 N.Y.S.2d 345, 2004 WL 1945007, at *5 n. 4 (N.Y. Sup. Ct. 2004) (noting that "in
certain limited circumstances, where a rigid application of this rule would lead to an inequitable
result or deny plaintiff of the benefit-of-the-bargain, the pertinent measuring period may be
extended to a 'reasonable period of time' after the time of breach."). When dealing with
securities that are not publicly traded, such as the Notes, the calculation of value is less
straightforward. Boyce, 464 F.3d at 385; Silverman v. Commissioner, 538 F.2d 927, n.7 (2d Cir.
1976). Hence, a jury's value determination which takes into consideration post-breach events
does not necessarily violate the rule on considering evidence in hindsight. Id. at 389.
As the testimony demonstrated, the Notes were not a publicly traded security.
Tr. at 318-19, 1165. Simply applying the price Highland would have paid for the Notes to the
damages instead of examining all relevant circumstances - including the Defendants' material
non-public information - would fail to take into account "all the elements of the particular case."
The jurors were entitled to value the Notes at their full face value in light of the extensive
evidence supporting this valuation. And Defendants' proffered damages theory would produce
an absurd result. Defendants breached because of material, non-public information, but
Defendants would be able to keep the benefit of that information despite having breached an
agreement to sell the Notes.
Here, given the testimony that Defendants were aware that the non-public Notes
could be paid in full and that McNaughton's outside counsel expect that the Notes would be paid
33
in full (Tr. at 748-50, 939, 943), the jury properly took into account post-breach events in
determining damages. Boyce, 464 F.3d at 389. As Plaintiffs' testimony demonstrated, had
Defendants satisfied their obligations under the contract to sell the Notes to RBC, RBC would
have then sold the Notes to Highland and Fidelity at a profit, or in the alternative, RBC would
have held some or all of the Notes when they were paid out in full value. Tr. at 149, 1193; RBC
725, file 3.14.11-.12; RBC 894, file 3.14.04; RBC 725 file 3.14.06-.10. By breaching the
contract and refusing to sell the Notes at 51 % of face value for all 8 Notes with an aggregate face
value of$69 million, Plaintiffs together suffered damages of $33,810,000 in benefit-of-thebargain damages, which is the total of 49% of Leonard Schneider December $23,600,000 Note
($11,564,000) plus 49% of the other seven Notes totaling $45,400,000 ($22,246,000). Tr. at
1392-93. Plaintiffs would also have received the interest paid on the Notes by McNaughton
Apparel Group, Inc. from March 15, 2001 to June 19, 2001, when the Notes were paid out in
full. Jd. 20 The jury, taking all of this evidence into account, properly awarded RBC its portion of
the benefit-of-the-bargain damages on Leonard Schneider's December Note and the '"spread" on
the Notes to be sold to Highland. Tr. at 1802-06; Verdict Form (McNamara Aff. Ex. 9) at 2.
The damages award should therefore be upheld and Defendants' motion for a
new trial denied.
B.
The Court's Jury Instructions Were Proper
The Court properly instructed the jury on damages for breach of contract. The
Court is entitled to considerable discretion in the style and wording of jury instructions, as long
as the instructions, taken as a whole, do not mislead the jury as to the proper legal standard or
inadequately inform the jury of the law. Hallinan, 519 F. Supp. 2d at 358. The Court instructed
20
The undisputed interest paid on Leonard Schneider's December Note was $465,817 .33 and the undisputed
actual interest on the other seven Notes was $891,757.50, for a total accumulated interest of$1,357,574.83.
Joint Pre-Trial Order, dated November 20, 2007 (attached to McNamara Aff. as Exhibit 11) at§ 3(zz).
34
the jury that they should "calculate damages by determining the difference between the contract
price for the Notes that the parties agreed to and the value of the Notes at the time of the breach."
Jury Charge (McNamara Aff. Ex. 4) at 55. According to Defendants, the damages instruction
should have directed the jury to (1) measure damages as the difference between the contract
price and the market value of the Notes at the time of the breach and (2) not ascertain damages at
some future time. Defs.' Mem. at 41. The decision by the Court to reject Defendants' proposed
charge was a proper exercise of the Court's discretion.
First, the Court's instruction clearly informed the jury that it was to calculate
damages at the time of the breach. As discussed above at Section II.A., the Court's instruction
was consistent with Second Circuit case law. It could not be said, as a matter oflaw, that the
value of the Notes at the time of the breach was dictated by Defendants' interpretation of "fair
market value." Boyce, 464 F.3d at 387-88 ("'Certain sales lack the elements of an arm's length
transaction, making reliance on such sales [to determine value] questionable."). Again,
determining value is a factual inquiry for the jury. The jury was entitled to an instruction that
allowed them to consider all facts - including the facts that there was no "market" for the Notes
and that Defendants were in possession of material non-public information - and arrive at an
award that restored the Plaintiffs to the position they would have been in if Defendants had
performed. Contemporary Mission, 671 F.2d at 84-85.
In addition to proper jury instructions, the parties had the opportunity to present
arguments to the jury during their closing arguments regarding their theory on the value of
damages. After RBC argued that the jury should enter an award of $33,810,000 for Plaintiffs
taking into account Defendants' possession of material non-public information, Defendants were
35
provided with the opportunity to present their own damages theory directly to the jury before
making their closing arguments:
MR. STEIN: Ladies and gentlemen of the jury, with respect to the
damage issue, if you reach the damage issue, I believe that the measure of
damages is to be determined at the time of the breach, March 14, 2001.
However, in Mr. McNamara's closing, and I assume Highland's attorneys
will do the same, they're asking you to compute damages as of June 15,
2001, months after the time of the alleged breach. And so that if you
reach the issue of damages, you must focus only on the value at the time
of the breach, which is March 14, 2001. Thank you.
RBC responded:
MR. McNAMARA: The judge will charge you today on what the
appropriate measure of damages is, but just to be clear, from our
perspective, we believe that there's evidence in the record, especially given
the material nonpublic information that the defendants admittedly had at
the time they refused to honor the agreement, on which you could enter an
award of$33,810,000 plus.
Tr. at 1701-02. The jury chose between these two arguments and found for the Plaintiffs. This
verdict should not be disturbed.
C.
The Jury Properly Awarded RBC "Benefit-of-the-Bargain" Damages on the Note
Sold to Fidelity
Defendants claim that RBC improperly recovered damages on Leonard
Schneider's $23.6 million note because this claim arose out of the "'Fidelity Assignment." Defs.'
Mem. at .42-43 This claim is wholly without merit and reflects a continuing lack of
comprehension ofRBC's claim in this action. As this Court recognized, RBC brought its
contract claim in connection with all $69 million of Notes. Highland Capital Mgmt., L.P. v.
Schneider, 2008 U.S. Dist. LEXIS 7019, *59-60 (S.D.N.Y. Jan. 31, 2008). Contrary to
Defendants' improper assertions, RBC did not add a new claim by seeking damages on Leonard
Schneider's note. RBC has always sought recovery based on the Defendants' breach on the sale
of all $69 million in Notes, irrespective of any claims any third parties had on the Notes. Answer
36
and Counterclaims to Defendants' Third-Party Complaint, (attached to McNamara Aff. as
Exhibit 12). This claim is wholly separate from any claim based on the Fidelity Assignment.
Defendants are simply attempting to revive the unsuccessful argument in their
motion in limine (No. 5) that RBC was not the real party in interest for its contract claims. In its
January 31, 2008 decision, the Court expressly rejected Defendants' argument and held that
RBC was the real party in interest for its contract claims. Highland Capital Management, L.P. v.
Leonard Schneider, 2008 U.S. Dist. LEXIS 7019, * 59 (S.D.N.Y. Jan. 31, 2008). The Court
continued:
It is worth noting that the Schneiders' position does not appear to be
tenable. '[T]he modem function of the rule in its negative aspect is simply
to protect the defendant against a subsequent action by the party actually
entitled to recover, and to insure generally that the judgment will have its
proper effect as res judicata.' Fed. R. Civ. P. 17 advisory committee's note
to the 1966 amendment. Here, because the entire action hinges upon an
alleged oral contract between RBC and the Schneiders, it seems axiomatic
that RBC would be entitled to recover from the Schneiders.
Highland, 2008 U.S. Dist. LEXIS 7019, at *60-63 n.13. As the party in interest to its contract
claims, RBC's claim did not rely on or require any evidence of the Fidelity Assignment. Id. at
60. The jury found that RBC successfully proved the breach of an agreement between RBC and
Leonard Schneider and there was no error committed in the awarding of damages as a result of
that breach. Defendants are not entitled to a new trial based on this issue.
D.
The Jury Properly Awarded RBC Lost Business Damages
Defendants contend that the jury's award for RBC's lost business was improper
because (1) RBC's loss of future business was not within the contemplation of Defendants at the
time of the agreement and (2) any damages award was not supported by reliable evidence.
Defs.' Mem. at 43. Both contentions are wholly without merit. Trial testimony, taped
conversations and industry norms indicate not only that Defendants' agent Glen Rauch- and
37
therefore Defendants - was aware that RBC was negotiating with third parties but that
Defendants were also aware that the breach of any agreement with RBC by Defendants would
invariably lead to the loss of future business with those third parties. Likewise, RBC presented
the jury with Mr. Guild's reasonable, conservative estimate ofRBC's lost business. Mr. Guild's
testimony provided a sufficient basis to support the jury's lost business damages award.
Under New York law, a party is entitled to recover consequential damages oflost
profits if: ( 1) it is shown with certainty that the damages have been caused by the breach, (2) the
extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the
damages were fairly within the contemplation of the parties. Tech. Express, Inc. v. FTF Bus.
Sys. Corp., 2001 U.S. Dist. LEXIS 5740, *3 (S.D.N.Y. 2001) (court recommended award oflost
profits to plaintiff where plaintiff deprived of opportunity to profit from resale of goods.). The
breaching party is liable for those risks foreseen or which should have been foreseen at the time
the contract was made. Id. at *4 (citations omitted.) When a contract does not speak on the
issue, the Court must take a "'common sense' approach, and determine what the parties intended
by considering 'the nature, purpose and particular circumstances of the contract known by the
parties ... as well as what liability the defendant fairly maybe supposed to have assumed
consciously."' Id. (finding defendant's knowledge of plaintiff's business would have given him
warning that damages as a result of a breach would include spread.).
At trial, the damages RBC recovered for its lost business were demonstrated to
have been caused by Defendants' breach. On March 20, 2001, after RBC told Fidelity that
Defendants may be reneging on the trade, Fidelity told RBC on a taped conversation, "You're
f**ked if this doesn't get done. OFB [Out ofF**king Business] forever." RBC 894, file
38
3.20.01. See also RBC 725, file 3.20.03; RBC 725, file 3.20.04; RBC 725, file 3.20.16; RBC
725, 3.21.16. FormerRBC employee, Peter Parent, testified:
A.
This was out of F'ing business, which means I was shut off from
doing business with Fidelity in perpetuity.
Q.
Just to be clear, why were they shuting [sic.] you out of business,
was your understanding?
A.
Because we had transacted a trade, we were done on a trade, and I
was unable to complete that transaction at that point.
Q.
You understand what Mr. Connelly meant by privates are privates?
A.
Yes. That this was standard nomenclature in our business and
done was done and you always got through the settlement process.
Q.
Have you ever had, other than this one, a trade not settle at the
settlement process?
A.
Never in my 28 years.
Q.
Did Fidelity follow through with its threat to shut RBC's business
off?
A.
Yes, it did.
Q.
When did they do that?
A.
Right at about that date, right around the 21st, I believe.
Tr. at 160-61. Indeed, Fidelity ceased doing business in the High Yield area . Tr. at 624.
Highland temporarily ceased its business with RBC putting RBC in the "penalty box" for three
months. Id. Highland CIO Mark Okada testified how he refused to do business with RBC
during the period following Defendants' breach. "We, from our standpoint, we put them in the
box, which means we stopped all of our trading activity with them." Tr. at 1377-78. The
testimony at trial indicated that as a direct result ofRBC's inability to complete the transaction,
due to Defendants' breach, RBC was unable to earn business revenue from Fidelity and
Highland. As a result, RBC lost over $5 million worth of business from two major high-yield
39
clients. In light of the extensive testimony and documentary evidence, RBC demonstrated to the
jury that Defendants caused RBC' s lost business.
Second, the extent oflost profits to RBC was proven with reasonable certainty.
The law does not require a plaintiff to prove its lost business damages with mathematical
prec1s1on. Tech. Express, 2001 U.S. Dist. LEXIS at *5. Fidelity was RBC's largest high-yield
customer. Tr. at 109. RBC Expert Gerald Guild discussed the lost profit damages extensively.
Tr. at 624-792, 1394-1398; Pl. Ex. 373, 374 (attached to McNamaraAff. as Exhibits 13and14,
respectively). He explained to the jury, in a simplified format, that he computed the lost business
damages in the following manner:
In the case of Highland, they were doing business at approximately a
$311,000 annual rate, and they were - they didn't do business with RBC
for three months. So I divided that number by four and calculated that the
lost business to RBC Dominion was $77,000. It was actually a little bit
more than that, but that's close enough for this. Fidelity is, as you would
expect, a much larger account, and a much more important account, and
their annual rate at $5 a bond was 1,600,000 plus, so that over the three
years, that would have translated to a loss in business of a little under $5
million. I think it was $4 million 960-ish, so that the combined loss of
business to RBC Dominion was over $5 million.
Tr. at 634-35. In preparing his calculation, Mr. Guild reasonably relied on data regarding actual
transactions between RBC and each of Highland and Fidelity. Tr. at 624-25. Guild provided a
demonstrative for the jury and laid out his specific calculations, testifying:
A.
The amount of commissions lost based on the principal value, the
left-hand side, was $4,968,718.92 in regard to Fidelity which was
merely tripling the annualized amount just above that, the second
row in red $1,656,238.97 .. .I took the total amount of commissions
lost of 2 million 2 and annualized it to 1 million 656.
Q.
Can you remind us why the number increased from 1.6 to 2.2?
A.
Yes. I used, as I mentioned, the most conservative method that I
could conceive of to make these calculations, and I was criticized
in Mr. Stupay's report stating that what I should do -- what I should
have done was to use face amount, not principal value. And in one
40
sentence, principal value is face times price. So if I had used the
face amount, it would have been 2 million 2 annualized or 6.6
million. To be exact, 6,643,968.75 lost business with Fidelity.
Q.
Then you added on the Highland calculation based on the three
months oflost business?
A.
Exactly. That was a much lesser number 77,000 -- almost 78 to
bring the total under principal value to just over 5,046,611.26.
And, again, that Highland number is the most conservative one.
Tr. at 1395. The computation was done by an extremely experienced and competent expert
witness with forty years in the securities industry and was based on industry practice and a
history of business between RBC and Highland and Fidelity. As an added protection, the Court
instructed the jury:
Damages must not be based on sympathy or speculation. Rather, damages
must be reasonably certain. You shall award damages only for injuries
that the plaintiffs have proven by a preponderance of the
evidence ... Computing damages may be difficult, but you should not let
that difficulty lead you to engage in arbitrary guesswork.
Jury Charge (McNamara Aff. Ex. 4) at 53. The evidence demonstrates to at least a reasonable
certainty what RBC lost as a result of Defendants' breach.
Finally, consequential damages were a foreseeable result of Defendants' actions.
Defendants cannot persuasively argue that the consequential damages RBC suffered were not
within the contemplation of the parties. Schneiders' agent knew about RBC's intended resale to
a third party. See, e.g., RBC 894, file 2.13.07-.11, RBC 894, file 2.15.01-.02, RBC 894, file
2.20.01, RBC 894, file 2.26.08-10, RBC 894, file 2.27.06. As far back as February 13, 2001,
Ken Ambrecht told Rauch on a phone call that "The bigger bid, you know, is still for the whole
piece, I, it's, and like I said out of maybe 200 [unintelligible] response like 2, I have two guys
that are somewhat alive on this thing right now." RBC 894, File 2.13.11. In countless
conversations, Ambrecht referenced his negotiations with other potential buyers. RBC 894, file
41
2.13.07-.11, RBC 894, file 2.15.01-.02, RBC 894, file 2.20.01, RBC 894, file 2.26.08-10, RBC
894, file 2.27.06.
Defendants were also aware of the harm that any breach of a contract with RBC
would cause to RBC's business. RBC would invariably lose business due to an inability to
complete a transaction. Tr. at 169. In the securities industry, your word is your bond. Tr. at
169, 250, 259, 1310, 1342. And if you do not honor your word, you are put out of business. Tr.
at 169. Highland's Mike Rich testified that in the industry, "your reputation is what you live and
die by." Tr. at 1310. Mr. Rauch, an experienced securities industry professional with over thirty
five years in the industry (Tr. at 464), was fully aware of this precept. He testified that he knew
that in the securities industry, a trader's word is his bond. Tr. at 484. And on March 20, 2001,
Mr. Parent informed Mr. Rauch that RBC's high-yield group was in danger oflosing its two
largest customers as a result of Defendants' failure to complete the sale of the Notes and Mr.
Rauch acknowledged his understanding of the situation and the possibility of RBC' s lost
business. Pls.' Ex. 80, RBC 725, file 3.20.09-14.
Defendants elected to engage in the securities industry, through Mr. Rauch, when
they agreed to and then breached the sale of Notes. The ensuing consequences were exactly in
keeping with the industry norm - the parties involved in the trade stopped doing business with
RBC. As former RBC employee Peter Parent testified, "[i]t would be career suicide to confirm a
trade of that magnitude without knowing that you had a trade." Tr. at 163-64. The lost profits
were a foreseeable and inevitable result of Defendants' failure to honor their word. Accordingly,
the jury's lost business damages award was supported by the evidence and does not warrant a
new trial. 21
21
Defendants argue that RBC's judgment should be reduced by the settlement between RBC and Glen Rauch
Securities, Inc. (Defs.' Mem. at 49.) This issue was not raised by Defendants at trial and is improperly
42
III.
THE COURT SHOULD DENY DEFENDANTS' MOTION FOR A NEW TRIAL
BECAUSE (1) THE JURORS WERE PROPERLY CHARGED; (2) THE ADMISSION
AND EXCLUSION OF EVIDENCE WAS PROPER; AND (3) THE VERDICT FORM
WAS PROPER AND JUST
As discussed above, a motion for a new trial generally should not be granted
unless the court is convinced that (1) the jury has reached a seriously erroneous result or (2) the
verdict is a miscarriage of justice. See Section II. To be entitled to a new trial on evidentiary
issues and jury rulings, it must be shown that the district court committed errors that were a clear
abuse of discretion and clearly prejudicial to the outcome of the trial. Marcie v. Reinauer
Transp. Cos., 397 F.3d 120, 124 (2d Cir. 2005) (evidence properly excluded and motion for new
tried denied). Defendants have made no such showing here.
A.
The Charge Properly Instructed the Jury Regarding the Burden of Proving a
Binding Oral Agreement
Defendants assert that the Court failed to instruct the jury on the burden
of proof that a binding oral agreement had been reached. Defs.' Mem. At 50. To the
contrary, the Court provided ample guidance to the jury concerning the proof necessary
to prove a binding oral agreement. The Court is entitled to considerable discretion in the
style and wording of jury instructions, as long as the instructions, taken as a whole, do
not mislead the jury as to the proper legal standard or inadequately inform the jury of the
law. Hallinan, 519 F. Supp. 2d at 358. It is well-settled that "a jury charge should be
examined in its entirety, not scrutinized strand-by-strand, and reversal is required only in
situations where a court determines based on a review of the record as a whole, that the
error was prejudicial or the charge was highly confusing." Weiss v. La Suisse, 2005 U.S.
raised on this motion. See, e.g., Creative Waste Mgmt. v. Capitol Envtl. Servs., 495 F. Supp. 2d 353
(S.D.N.Y. 2007).
43
App. LEXIS 15050, *3 (2d Cir. July 22, 2005) (citations omitted); Warren v. Dwyer, 906
F.2d 70, 73 (2d Cir. 1990) Gudgment affirmed where considered as a whole, charge did
not confuse jury). With regard to the existence of an oral contract, the Court instructed
the jury as follows:
First, RBC must prove the existence of an oral contract between RBC and
the Schneiders. You should only reach this question if you determine,
based upon the law I previously provided, that Rauch was authorized to
act on the Schneiders' behalf. If you determine that he was so authorized,
RBC must show that there was a meeting of the minds between Rauch and
RBC on the essential terms of the contract, demonstrating mutual assent
and a mutual intent to be bound. The absence of non-essential terms will
not render an agreement unenforceable. An oral agreement can be
binding, even if the parties contemplate memorializing their contract in a
formal document. On the other hand, if the parties contemplate a formal
written contract and that they will not be bound until such contract is
signed, there is no binding agreement absent such contract. The
promissory notes at issue in this case are securities. If you find that there
was an oral agreement, then such an oral agreement for the sale of
securities is binding and enforceable under New York law.
Jury Charge (McNamara Aff. Ex. 4) at 40-41. This is substantially similar to
Defendants' requested jury verdict on proving a binding oral agreement. Defs.' Mem. at
50. Defendants' argue, however, that the Court should also have directed the jury that
there was a heightened burden that Plaintiffs were required to meet because the
agreement was oral. Defendants cite to two cases for this proposition - both of which are
inapposite to this argument.
Defendants cite Oscar Productions v. Zacharius, 893 F. Supp. 250
(S.D.N.Y. 1995) and Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69 (2d Cir.
1989) as proof that RBC had a heavier burden to prove the existence of an agreement
because it was not in writing. Oscar, however, dealt with an alleged oral agreement by
the plaintiff to author a series of novels. Arcadian dealt with an alleged agreement to sell
a fertilizer company. Neither case involved the sale of securities.
44
Defendants fail to recognize the unique nature of the securities industry in
terms of contract formation. Oral agreements of securities are of such a unique nature
that the New York Uniform Commercial Code makes them exempt from the Statute of
Frauds. N.Y. U.C.C. § 8-113. New York has explicitly recognized that oral agreements
for securities are not subject to the same burden as other oral agreements. As the
comment to N.Y. U.C.C. § 8-113 states, "[f]or securities transactions, whatever benefits a
statute of frauds may play in filtering out fraudulent claims are outweighed by the
obstacles it places in the development of modem commercial practices in the securities
business." Therefore, in this context, the fact that the agreement was an oral agreement is
of no moment. The particular holdings in Oscar and Arcadian requiring a heightened
burden of proof for oral agreements do not apply to an oral agreement to sell securities.
In any case, Defendants have not demonstrated that they were harmed by
the Court's instructions. As discussed above at Sections I.A.-I.C., Plaintiffs presented
extensive evidence that the parties intended to be bound to an oral agreement and that, in
the securities industry, brokers are bound by their oral representations. It is evident from
the jury's verdict that it accepted RBC's version of the facts and properly rejected
Defendants' testimony and evidence on this subject. Defendants' attempt to overturn that
verdict must therefore fail.
B.
The Charge Properly Instructed the Jury Regarding The Effect of An Oral
Agreement
Defendants also complain that the Court's jury charges failed to frame the issue of
whether the parties intended to be bound absent a written agreement. Defs.' Mem. at 51. As
explained above at Section III.A., the Court is entitled to considerable discretion in the style and
wording of jury instructions, as long as the instructions, taken as a whole, do not mislead the jury
45
as to the proper legal standard or inadequately inform the jury of the law. Hallinan, 519 F. Supp.
2d at 358. Defendants fail to demonstrate that the Court's instructions rose to this level. As
Defendants themselves acknowledge, the Court's charge specifically included an instruction that
an oral agreement would not be binding if the jury found that the parties contemplated the
execution of a formal written contract before being bound to an agreement. The Court provided
the jury with the following charge:
An oral agreement can be binding, even if the parties contemplate
memorializing their contract in a formal document. On the other hand, if
the parties contemplate a formal written contract and that they will not be
bound until such contract is signed, there is no binding agreement absent
such contract. The promissory notes at issue in this case are securities. If
you find that there was an oral agreement, then such an oral agreement for
the sale of securities is binding and enforceable under New York law.
Jury Charge (McNamara Aff. Ex. 4) at 40-41 (emphasis added). Defendants contend that this
instruction gave "little if any meaningful guidance to the jury." Defs.' Mem. at 52. Specifically,
Defendants complain about the lack oflanguage stating "parties may between themselves agree
that no agreement may be binding absent a written agreement." Id. Yet Defendants fail to
explain how any harm was caused when the Court itself charged that "if the parties contemplate
a formal written contract and that they will not be bound until such contract is signed, there is no
binding agreement absent such contract." Jury Charge (McNamara Aff. Ex. 4) at 40-41. The
distinction between the Court's language and Defendants' addition is negligible and therefore
could not have caused the Defendants harm.
Defendants also take issue with the addition of the language that oral
agreements for securities are binding. This instruction is a proper recitation of the law
and its inclusion is not misleading. N.Y.U.C.C. § 8-113; Highland Capital Management,
LP v. Schneider, 8 N .Y .3d 406; 866 N .E.2d 1020 (2007). According to the Defendants, a
reasonable jury "could have" thought that the language contradicted the portion stating
46
that parties may intend not to be bound absent a written agreement. Defs.' Mem. at 5253. What a jury "could have" thought, however, is not the standard for a new trial.
Defendants have failed to show that this instruction was so confusing as to warrant a new
trial.
Defendants also claim that the charge did nothing to instruct jurors in light of the
January 5, 2001 Letter Agreement language. The Court had no obligation to discuss the issue of
the letter because "singling out a particular piece of evidence in a jury charge is highly
discretionary." Caruolo, 226 F.3d at 56. Furthermore, there was no evidence that RBC
understood this language to mean there had to be a written document before they could be
bound. The fact that parties intend to memorialize their agreement in writing, at some point in
time, does not thereby prevent their agreement from coming into effect prior to the drawing up of
documentation. Consarc Corp. v. Marine Midland Bank, NA., 996 F.2d 568, 574 (2d Cir. 1993)
("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.").
The jury charge was completely proper and instructed the jury appropriately
about New York law.
C.
The Special Verdict Properly Instructed the Jury as to the Elements of Plaintiffs'
Claims
Defendants contend that the first question in the special verdict form improperly
assumed that Plaintiffs had entered into contracts to purchase the Notes. Defs.' Mem. at 54.
This contention is without merit.
The particular language to be used in written questions put to the jury for a special
verdict lies within the discretion of the trial court. McGuire v. Russell Miller, Inc., 1 F.3d 1306
(2d Cir. 1993) (damages award upheld on challenge to special verdict form); Smith v. Lightning
47
Bolt Prods., 861 F.2d 363, 370 (2d Cir. N.Y. 1988). As framed by the Court, the first question in
the verdict form read as follows: "Do you find that plaintiff REC is entitled to recover damages
from defendants for breach of contract?" Verdict Form (McNamara Aff Ex. 9) at 2. Examining
the special verdict question in conjunction with the extensive law provided to the jury in the
Court's Jury Charge, it is clearthat Defendants were not prejudiced by the special verdict form
and have failed to demonstrate that the Court's rejection of Defendants' proposed charge was an
abuse of discretion. The motion for a new trial should, therefore, be denied.
Contrary to Defendants' contention, the question posed by the Court did not
assume the breach of contract. It was instead a compound question that properly presented the
jury with the two hurdles Plaintiffs needed to satisfy- breach of a contract and damages
resulting from that breach - to obtain a verdict against Defendants. Further, prior to providing
the jury with a copy of the special verdict form, the Court extensively instructed the jury
regarding the proof necessary to demonstrate a breach of contract claim and the Schneiders'
alleged defenses to that claim. Jury Charge (McNamara Aff. Ex. 4) at 39-40. In the Court's
extensive section on damages, the Court instructed:
I do not know how you will decide the issue ofliability, so I must explain
to you the law of damages. Instructions as to the measure of damages are
given to you for your guidance in the event that you find in favor of
Plaintiffs on the question of the Defendants' liability. If you decide that
the Defendants are not liable, then you need go no further. Only if you
decide that the Defendants are liable will you consider the measure of
damages. The fact that I instruct you as to the proper measure of damages
should not be considered as suggesting any view of mine as to which party
is entitled to prevail. It is for you to decide, based upon the evidence
presented and the rules of law that I give you, whether the Plaintiffs are
entitled to recover from the Defendants.
Jury Charge (McNamara Aff. Ex. 4) at 51. The jury undoubtedly could gather from these clear
instructions that they were to decide the issue ofliability - whether or not there was a contract
48
for which Defendants could be liable - before deciding the issues of damages resulting from any
breach of contract.
Defendants' discussion regarding Romanov. Howarth is inapposite. 998 F.2d
101 (2d Cir. 1993) (reversing judgment of district court and remanding for new trial where it was
"apparent that the jury was utterly confused" by the verdict form and jury charges). In Romano,
the major failure of the district court was in the instructions given to the jury and in the ensuing
special instructions and revised special instructions. Id. at 107. One set of special
interrogatories, read in conjunction with the instructions, failed to include all but one essential
factor of the cause of action. Id. at 106-07. In a different set of special interrogatories, the court
vaguely asked if the jurors accepted a party's "testimony" without defining it in space or time.
Id. at 107. The jury also manifested their confusion to this special interrogatory by sending a
note to the court, asking for clarification. Romano stands in stark contract to the present case,
where there is no evidence of juror confusion. The only request made by the jurors was to seek a
copy of the jury charges as a whole. Tr. at 1801. And in rendering its judgment, the jury clearly
intended to award - and did in fact award - 100% of the benefit-of-the-bargain damages, without
duplication of judgment amounts, to the Plaintiffs, along with $5 million in lost business
damages to RBC. Verdict Form (McNamara Aff. Ex. 9) at 2.
Nor does Defendants' citation to Moore's Federal Practice save their argument.
As the section cited by Defendants makes clear, "a single question may combine elements of one
claim, provided that 'the question is fair and does not combine two issues disjunctively."
Moore's Federal Practice-Civil§ 49.11[2][b]. Here, the question posed by the Court was on its
face a conjunctive - not a disjunctive - question, which was properly combined the elements of
RBC's claim against Defendants.
49
Because Defendants do not identify any actual prejudice that resulted from the
Court's special verdict form or how the Court abused its discretion by denying Defendants'
objection to the verdict form, this portion of Defendants' motion for a new trial should be denied.
D.
Taped Conversations By and Between RBC, Highland and Fidelity Were Properly
Admitted
Defendants contend that the admission of tapes of conversations between RBC
and Highland, RBC and Fidelity and among RBC personnel was improper because these tapes
were irrelevant and prejudicial to Defendants. Defs.' Mem. at 56. To the contrary, the tapes of
conversations between employees at RBC and between RBC and Highland or Fidelity were
properly admitted at trial to demonstrate that RBC understood that a trade had taken place. The
conversations are highly relevant and reflect the state of mind ofRBC at the time of the trade as
well as RBC' s understanding of the agreement. It was Defendants who made RBC' s
understanding of the agreement an issue for the jury and admission of the taped calls was
allowed. These taped conversations were properly admitted to rebut Defendants' contention that
RBC acted in a manner inconsistent with an understanding that it had reached an oral agreement
with Defendants.
District court judges enjoy wide latitude in determining whether evidence is
admissible at trial. Caruolo, 226 F.3d at 54. In evaluating whether a district court's evidentiary
ruling was so erroneous as to constitute a reversible error, a substantial right of the party must be
affected. LNC, 126 F.Supp.2d at 787 (citing 1 Weinstein's Federal Evidence§ 103.41[1] pp.
103-47-48.1 (Matthew Bender 2d ed.)); Fed. R. Evid. 103(a). The Court's error must not only be
erroneous, but be truly harmful to the movant's case. Id. (citing 11 Wright, Miller & Kane,
Federal Practice and Procedure§ 2885 pp. 453-54 (West 2d ed. 1995) (footnotes omitted)).
50
"No error in either the admission or the exclusion of evidence is ground for
granting a new trial or for setting aside a verdict unless refusal to take such action appears to the
court inconsistent with substantial justice." SR Int'! Bus. Ins. Co. v. World Trade Ctr. Props.,
LLC, 467 F.3d 107 (2d Cir. 2006) (Court of Appeals affirmed lower court's denial of new trial as
admission and exclusion of evidence did not affect parties' substantial rights.). The admission of
the taped conversations was not inconsistent with substantial justice. Instead, their admission
was a proper exercise of the Court's discretion to permit state of mind evidence. Fed. R. Evid.
803. To be used for state of mind evidence rather than the truth of the matters asserted was a
permissible use under the hearsay rules. See, e.g., US. v. Martinez, 1998 U.S. App. LEXIS
22300 at *7 (2d Cir. 1998) (evidence not inadmissible hearsay when offered to show the
circumstances surrounding the events); US. v. Pedroza, 750 F.2d 187, 200 (2d Cir. 1984)
("When statements by an out-of-court declarant are admitted as background, they are properly so
admitted not as proof of the truth of the matters asserted but rather to show the circumstances
surrounding the events, providing explanation for such matters as the understanding or intent
with which certain acts were performed.").
It is also important that the hearsay rules are implemented with concerns for
judicial fairness in mind. Fed. R. Evid. 102.22 In that regard, it is worth noting that Defendants
also put state of mind evidence in issue in this case. The Defendants submitted contentions to
the Court stating that (1) RBC understood that there could be no oral contract to sell any of the
Notes and that any contract to sell the Notes would involve a negotiated written agreement
setting forth all material terms; and (2) RBC understood that neither RBC nor the individual
defendants would be bound unless and until a written, fully negotiated agreement had been
22
Rule 102 provides that "shall be construed to secure fairness in administration, elimination of unjustifiable
expense and delay, and promotion of growth and development of the law of evidence to the end that the
truth may be ascertained and proceedings justly determined." Id.
51
executed. Joint Pre-Trial Order (McNamara Aff. Ex. 11) § 4b(14)-(15). Similarly, Defendants
presented evidence and argued that the purported lack of documentation was proof that RBC did
not understand that it had an agreement to purchase the Notes from Defendants. Tr. at 1555-56.
At the very least, Defendants "opened the door" on this subject.
Defendants' objection goes to the very evidence that addresses these allegations.
Defendants cannot fairly argue that such "state of mind" evidence is only permissible when it
suits their purposes. As a proper exercise of judicial discretion, both parties were entitled to
admit state of mind evidence.
Moreover, any concerns about prejudice to the Defendants were duly cured by
numerous instructions and comments to the jury. The Court issued the following instruction to
the jury:
It is a good time, ladies and gentlemen of the jury, to consider another
limiting instruction, which was brought to the attention of the court
because of the objections of the Schneiders' attorney, Mr. Stein. Because
necessarily the witness is testifying in part about hearsay matters which
the court has indicated it will permit as long as the jury's considering it for
the state of mind of the witness and not for the truth of the considerations
presented. So I appreciate the way Mr. Stein has gone about this, but he
also is concerned, in case the jury were to forget, that he has a standing
objection with respect to the testimony of this witness, and he may well
renew it with respect to others. So let me give you one limiting instruction
which applies throughout the entire testimony of the witness. When a
person states as fact matters about which the speaker has no personal
knowledge, the speaker is either relaying what the speaker heard from
someone else, what we call hearsay, or the speaker is speculating, or both.
This is not evidence of the truth of what the witness is reciting as facts. I
am allowing you to hear such testimony only insofar as it may reflect on
the state of mind of either the speaker or the listener, but you may not
consider it as proof of the truth of the facts recited. Now both sides, as
you gather as you sit there, based on the opening statements, have
different versions of what transpired in this matter, and I want each side to
be able to present to you its respective version through the witnesses so
that you know what it is. You will be making a decision on where the
truth lies and what the verdict will be. So it becomes very important for
52
you to be sensitive to the consideration of hearsay where it is not
presented as evidence of the truth.
Tr. at 137-38. The Court reminded the jury several times about the effect of the limiting
instruction throughout the course of trial. See, e.g., Tr. at 129, 241, 243. The Court made clear
to the jury that the evidence was admitted for the limited purpose of the state of mind exception
andwasnotofferedforthetruthofthematter. Tr.at412, 1202, 1204, 1319-20, 1339. The
Court also included the following instruction in the Jury Charge:
On a number of occasions throughout the trial, I allowed the playing of
tapes and the admission of testimony subject to a limiting instruction.
Allow me to repeat this instruction again now, which applies to all such
evidence and testimony received subject to the limiting instruction. When
a person states as fact matters about which the speaker has no personal
knowledge, the speaker is either relaying what the speaker heard from
someone else - what we call hearsay - or the speaker is speculating, or
both. This is not evidence of the truth of what the witness is reciting as
facts. I allowed you to hear such testimony only insofar as it may reflect
the state of mind of either the speaker or the listener.
Jury Charge (McNamara Aff. Ex. 4) at 19. In conjunction with the extensive
precautionary measures the Court made, the taped conversations were properly admitted
into evidence to demonstrate the parties' states of mind and their admission dos not serve
as grounds to grant Defendants a new trial.
E.
The Court Properly Prevented Defendants' from Introducing a Court Decision
Involving a Different Case
Defendants implausibly assert that the Court's refusal to admit Judge Cabranes'
decision in S.N. Phelps & Co. v. Prudential Insurance Co., No. 5:91CV00451 (D. Conn. 1991)
(Cabranes, J .) (the "Phelps Decision") constitutes a sufficient basis for the grant of a new trial.
(Defs.' Mem. at 62.) In moving to exclude the Phelps Decision, RBC argued that exclusion of
the Phelps Decision was warranted because (I) the Phelps Decision was inadmissible hearsay;
(2) the Phelps Decision was of no relevance to the instant case; and (3) there was a substantial
53
risk of unfair prejudice to RBC if the Phelps Decision were admitted. The Court granted RBC's
motion. Tr. at 479-80. As this Court recognized, Defendants' attempt to proffer a legal opinion
as evidence at trial was "a waste of time" for the parties and the Court. Tr. at 311-12. As a
result, the Court properly granted Plaintiffs' motion to exclude evidence of the Phelps Decision,
and Defendants do not identify a single case for the proposition that exclusion of the Phelps
Decision was error, much less substantial error sufficient for the Court to grant a new trial.
To the contrary, exclusion of the Phelps Decision was clearly warranted, as
"[j]udicial findings in other cases proffered as evidence are generally characterized as
inadmissible hearsay." Blue Cross and Blue Shield ofNew Jersey, Inc. v. Philip Morris, Inc.,
141 F. Supp. 2d 320, 323 (E.D.N.Y. 2001) (citing McCormick on Evidence 318, at p. 894 (3d
ed. 1984)); see also L-3 Comms. Corp. v. OSI Systems, Inc., 2006 U.S. Dist. LEXIS 19686, *l 011 (S.D.N.Y. Apr. 13, 2006). Defendants failed to identify any exception to the hearsay rules
which would justify the admission of the Phelps Decision.
Moreover, the Phelps Decision involved a different transaction and different facts
so there was no relevance but any arguable probative value that Defendants claim the Phelps
Decision had as a result of Mr. Holmes' involvement in the facts underlying the Phelps Decision
and the instant action (Defs.' Mem. at 62-63) was substantially outweighed by the high risk of
unfair prejudice to Plaintiffs and its propensity to confuse the jury. First, Judge Cabranes
commented on the persuasiveness of Mr. Holmes' testimony. See Phelps Decision at 10 ("'To the
extent the testimony of Phelps and Holmes contradicts these findings, the court finds their
testimony generally unpersuasive."). The risk that Defendants' use of the Phelps Decision would
have improperly called Mr. Holmes' credibility into question was high. See, e.g., Tr. at 479;
Blue Cross, 141 F. Supp. 2d at 323 (citing Quercia v. United States, 289 U.S. 466, 469 (1933)
54
(The "difficulty in assessing the probative force of comments by a judge on the credibility of a
witness is especially great for a jury, which may give exaggerated weight to a judge's supposed
expertise on such matters.").
Second, in holding that the alleged oral agreement on size and price was
unenforceable, Judge Cabranes relied on N.Y. U.C.C. § 8-319, the statute of frauds governing
the sale of securities in 1991. As the Second Circuit has noted, however, oral agreements for
securities previously unenforceable under N.Y. U.C.C. § 8-319 are now enforceable under N.Y.
U .C.C. § 8-113 and exempted from the statute of frauds. Highland Capital Management, LP v.
Schneider, 460 F .3d 308, 318 (2d Cir. 2006). Admission of the Phelps Decision would have
presented the jury with an obsolete standard for deciding the very issue critical to the Highland
case - the enforceability of an oral agreement as to size and price in the sale of securities; and the
danger of unfair prejudice was substantial. See United States v. Awadallah, 401 F. Supp. 2d 308,
318-19 (S.D.N.Y. 2005) (finding that the danger of prejudice would be heightened where the
proposed evidence went to the ultimate issue in the case).
Finally, exclusion of the Phelps Decision did not foreclose Defendants from
questioning Mr. Holmes' about his understanding of the transaction at issue in this action. As
the Court advised Defendants: "Based on the court's prior rulings in this case, the Schneiders
could inquire as to Holmes' state of mind regarding an oral agreement for the sale of the notes at
issue in this case and/or the requirement of documentation for the sale of the notes at issue in this
case without any reference to Phelps." Tr. at 479-480. Defendants had every opportunity to
challenge Holmes' testimony and credibility and inquire into his state of mind using other
means. No error lies with the Court's sound exclusion of the Phelps Decision at trial, and
Defendants' motion for a new trial should be denied.
55
F.
The Admission of Gerald Guild's Custom and Practice Testimony Was Proper
Defendants repeat the arguments they made in their motion in limine to exclude
the testimony of Mr. Guild and contend that the admission of Mr. Guild's testimony as to the
customs and practices in the securities was improper because this testimony was neither relevant
to, nor probative of, any facts at dispute in this action. Defs.' Mem. at 63-65. These arguments
again reflect a misunderstanding of the legal issues at the heart of this case and the evidence
presented by Plaintiffs. As the Court has already ruled,
Industry custom and practice is relevant to the issues remaining in this
case. Therefore, this testimony is admissible and helpful to the jury. The
Court [*14] notes that "'[v]igorous cross-examination, presentation of
contrary evidence, and careful instruction on the burden of proof are the
traditional and appropriate means' of attack." In re Blech Sec. Litig., No.
94 Civ. 7696, 2003 WL 1610775 at *25, 2003 U.S. Dist. LEXIS 4650 at
*69-70 (S.D.N.Y. Mar. 26, 2003) (Sweet, J.) (quoting Daubert, 509 U.S. at
596). This may include attack on what is the relevant industry, or what are
the relevant customs and practices, for a transaction that the Schneiders
assert concerns "a limited number of unusual instruments." (Defs.' Mot.
No. I at. 26-27.) Therefore, these "'conventional devices, rather than
wholesale exclusion' are 'the appropriate safeguards,"' for the Schneiders
to attack [the expert's] testimony. Blech Sec. Litig., 2003 WL 1610775, at
*25, 2003 U.S. Dist. LEXIS 4650, at *70 (quoting Daubert, 509 U.S. at
596). "[T]he jury can best form a judgment when presented with . . .
experts' competing theories." [WL] at *20, 2003 U.S. Dist. LEXIS 4650 at
*55.
Highland, 2008 U.S. Dist. LEXIS 7019 at *13-14. Expert testimony regarding industry custom
and practice is regularly admitted into evidence as both relevant and helpful. See e.g., SEC v.
U.S. Envtl., Inc., 2002 U.S. Dist. LEXIS 19701 at *7 (S.D.N.Y. October 16, 2001) ("In securities
cases, federal courts have admitted expert testimony to assist the trier of fact in understanding
trading patterns, securities industry regulations and complicated terms and concepts inherent in
the practice of the securities industry."); U.S. v. Bilzerian, 926 F.2d 1285, 1294 (2d Cir. 1991)
("Particularly in complex cases involving the securities industry, expert testimony may help a
jury understand unfamiliar terms and concepts."); Marx & Co. v. Diners' Club, Inc., 550 F.2d
56
505, 511 (2d Cir. 1977), cert. denied, 434 U.S. 861, 54 L. Ed. 2d 134, 98 S. Ct. 188 (1977) (an
expert "may testify to an ultimate fact, and to the practices and usages of a trade");
Marketing/Trademark Consultants, Inc. v. Caterpillar, Inc., 2000 U.S. Dist. LEXIS 7952 at *2
(S.D.N.Y. 2000) (expert testimony on custom and practice "is received to assist the trier of fact
in evaluating the effect or propriety of ... [the] conduct").
Furthermore, industry custom and practice have been extremely significant
concerns in this case. The Southern District, the Second Circuit and the New York Court of
Appeals have all reviewed and explored at length the custom and practice in the securities
industry to examine, among other things, the nature of the McNaughton Notes under the
securities laws. Highland, 2005 U.S. Dist. LEXIS 14912, *37-38, *49; 379 F. Supp. 2d 461,
471-72 (S.D.N.Y. 2005); 460 F.3d 308, 311-12, 319-21 (2d Cir. 2006); 485 F.3d 690, 692 (2d
Cir. 2007); 8 N.Y.3d 406, 410, 415-16, 419, 420, 834 N.Y.S.2d 692 (N.Y. 2007). Industry
custom and practice were particularly relevant here because they are an explicit element of two
claims against Defendants and are also relevant to the concepts of agency and apparent authority.
For example, the fourth element in the analysis to determine whether the oral agreement needed
to be in writing asks whether the alleged agreement is the type that is usually committed to
writing in the particular industry. Winston, 777 F.2d at 80.
In addition, industry custom can inform a fact finder regarding the existence and
scope of an agent's authority in that industry. See, e.g., Prop. Advisory Group, Inc. v. Bevona,
718 F. Supp. 209, 211(S.D.N.Y.1989); Gen. Motors Acceptance Corp. v. Finnegan, 156 Misc.
2d 253, 255, 592 N.Y.S.2d 570, 572 (Sup. Ct. Orange County 1992); Graffman v. Delecea, 1997
U.S. Dist. LEXIS 15525, *12 (S.D.N.Y. 1997). Defendants, through their agent, were acting
within this industry and were required to play according to its rules. Thus, Mr. Guild's expert
57
testimony regarding industry custom and practice was necessary to the trial of this case. See Fed.
R. Evid. 702. Defendants are not entitled to a new trial as a result of this testimony.
Defendants, without citing any testimony, also baldly assert that Mr. Guild opined
as to ultimate legal conclusions - i.e., whether or not there was an oral agreement for the sale of
note. Defs.' Mem. at 65. As the record reflects, Mr. Guild testified as to the nature of oral
agreements and the presence of factors indicating to him that an oral agreement had taken place.
See, e.g., Tr. at 608.23 Similarly, Mr. Guild did not testify that Mr. Rauch was Defendants' agent
but instead provided the jury with the factors indicating to him that Mr. Rauch was Defendants'
agent as that term is used in the securities industry:
Q. Can you list the factors, can you point to those factors, whether or not
there was an indication to you that Glen Rauch was the Schneiders' agent,
as that term is used in the securities industry?
A. Essentially, only brokerage firms transact with each other. So
therefore, any individual client, whether it be an individual investor or an
institution, is using a brokerage firm as an intermediary, and, therefore,
that brokerage firm is acting in the industry, Wall Street, custom and
usage, as a representative or agent for that client The Court explained this
distinction to the parties and Defendants.
Tr. at 614-16. The Court also instructed the jury regarding the role of the experts'
testimony, thereby reducing any harm Defendants' allege:
You're going to hear the Court instruct you on the law, and you, the jury,
are going to make determinations on the facts based on all the evidence in
the case. So that's the reason I limited the expert's testimony. They
shouldn't be telling you what it is you should decide and tell you what it is.
So, let's have that in mind. Please continue.
Tr. at 1485; See also Tr. at 610-12 ('"If the testimony of these witnesses is in conflict, you must
remember that you are the sole trier of facts.") In light of the Court's limiting instructions, any
alleged harm - there was none- created by Mr. Guild's testimony was cured. Hygh v. Jacobs,
23
Mr. Guild's testimony can be viewed in stark contrast to that of Defendants' expert William Purce11, who
improperly attempted to testify on ultimate issues oflaw and fact. (Tr. at 1483-85.)
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961 F.2d 359 (2d Cir. 1992) (expert testimony on ultimate conclusion was harmless error where
cured by jury instruction and judgment supported by the evidence); United States v. Paquin, 216
Fed. Appx. 46, 48 (2d Cir. 2007); citing United States v. Snype, 441F.3d119, 129 (2d Cir. 2006)
("[T]he law recognizes a strong presumption that juries follow limiting instructions."). The
expert testimony of Mr. Guild was properly admitted, and its admission should not serve as
grounds for a new trial.
G.
The Court's Charge to the Jury Regarding Actual and Apparent Authority Were
Pro er
Defendants argue there was insufficient evidence of actual authority to warrant
the inclusion of a charge of actual authority and that the Court's charges on actual and apparent
authority were improper. Defs. Mem. at 65-69.
First, there was significant evidence of actual authority at trial to merit the
inclusion of actual authority in the Jury Charge. For the jury to be charged on an issue, it does
not matter if evidence is minimal or presented in a piecemeal fashion. "All that is necessary is
that there be some evidence supporting a party's theory of the case." Hilord Chemical Corp. v.
Ricoh Electronics, Inc., 875 F.2d 32 (2d Cir. 1989). As discussed above at Section I.D.,
Plaintiffs submitted evidence indicating that Rauch had the actual authority to bind Defendants
to a sale of the Notes. As aforementioned, all ofRBC's communications with Defendants
occurred via Rauch and Glen Rauch Securities. The Letter Agreement states that RBC
"understand[s] that Glen Rauch Securities, Inc. ('GRS') represents those holders [i.e., the
Schneiders] in the possible resale of some or all of the Notes by those holders." Pl. Ex. 20
(McNamara Aff. Ex. 3). Rauch sent a letter to RBC telling it that it should direct all inquiries
about the Notes through Rauch, not the Schneiders. Pl. Ex. 50 (McNamara Aff. Ex. 6). Rauch
relayed all bids and offers between RBC and the Schneiders. Leonard Schneider testified Rauch
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was the representative of the family. Tr. at 827. The Schneiders' attorneys corroborated
Rauch's representations by meeting with RBC. Tr. at 237-38, 1214; Pls.' Ex. 78: CD RBC 896,
file 1.25.20.
In addition, Glen Rauch was the family's securities broker for over twenty years
at the time of the breach. Tr. at 465. He executed almost seventy million dollars in trades for the
children alone - taking orders for the children almost exclusively through their father, Leonard.
Tr. at 465-66. The authority of Rauch to sell the Notes was sufficiently demonstrated to warrant
the inclusion of an instruction on actual authority.
Second, it was unnecessary for the Court to use Defendants' proposed instruction
that actual authority to bind a principal to a sale may not be implied where a broker has been
authorized to negotiate on the principal's behalf. Defs.' Mem. at 66. The Charge, as written,
properly stated,
If an agent has implied actual authority, the agent is authorized to act in a
manner in which the act is ordinarily performed or which is inherent or
incidental to the ordinary scope of authority associated with the agent's
position, unless the principal informs the third party of a specific
limitation on the agent's authority.
Jury Charge (McNamara Aff. Ex. 4) at 35. This charge is consistent with the New York law on
agency. Seetransport, 123 F. Supp. 2d at 185-86 (burden on principal to inform third-parties of
unexpected limits on agent's authority where agent possesses authority "incidental" or "inherent"
to ordinary scope of authority associated with agent's position); Masuda, 328 F.2d at 665. The
cases Defendants cite to the contrary are inapposite. For example, in Economist's Advocate v.
Cognitive Arts Corp., 2004 U.S. Dist. LEXIS 5649, at *17 (S.D.N.Y. Apr. 6, 2004), a party was
held not to have authority to bind the principal where all the numerous transaction documents
transmitted among the parties during negotiations required the signature of the principal. Such a
situation in no way compares to the case at bar where the parties acted within securities industry
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norms, and there was nothing in the Letter Agreement that required that any sale of the Notes be
in writing. 24
Finally, it is unclear why Defendants argue that the Court did not properly instruct
the jurors regarding the two levels of agency that needed to be established as to the Schneider
children. Defs.' Mem. at 68. This was completely and adequately addressed by the Court. The
Court prefaced the text Defendants challenge with the following language:
RBC and Highland allege that Glen Rauch of Glen Rauch Securities, Inc.
was the agent of the Schneiders and possessed the authority to negotiate
and sell, on behalf of the Schneiders, the notes at issue. In addition, RBC
alleges that Leonard Schneider was the agent of his children, Leslie,
Susan, and Scott Schneider, and had the authority to hire and direct Rauch
to negotiate and sell, on behalf of the Schneiders, the promissory notes at
issue. The Schneiders deny that Rauch had the authority to sell, on behalf
of the Schneiders, the notes at issue. The Schneiders also deny that
Leonard Schneider had the authority to hire and direct Rauch to negotiate
and sell the notes on behalf of Leslie, Susan and Scott Schneider.
Jury Charge (McNamara Aff. Ex. 4) at 33. As noted above, the Court is entitled to considerable
discretion in the style and wording of jury instructions, as long as the instructions, taken as a
whole, do not mislead the jury as to the proper legal standard or inadequately inform the jury of
the law. Hallinan, 519 F. Supp. 2d at 358. The two layers of agency Plaintiffs were required to
prove- and Defendants' objections thereto - were explicitly articulated in the detailed
instruction and there is nothing confusing about the charge. Id. Defendants are not entitled to a
new trial on this issue.
24
Likewise unhelpful, Defendants' only other citation to a decision in this jurisdiction dealt with the issue of
apparent authority -- not implied actual authority- and is irrelevant to the question of implied actual
authority. E.F. Hutton v. First Fla. Sec.s, 654 F. Supp. 1132 (S.D.N.Y. 1987).
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CONCLUSION
For all of the foregoing reasons, RBC respectfully requests that the Court (1) deny
Defendants' renewed motion for judgment as a matter oflaw or in the alternative for a new trial
and (2) grant such other relief as the Court deems just and proper.
New York, New York
April 30, 2008
Respectfully submitted,
One Battery Park Plaza
New York, New York 10004
Tel.: (212) 574-1200
Fax: (212) 480-8421
ATTORNEYS FOR RBC CAPITAL MARKETS
CORPORATION
SK 19300 0104 878164
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