Opinion
No. 02 Civ. 8098 (PKL).
July 25, 2005.
PAUL B. LACKEY, ESQ., Lackey Hershman, L.L.P., Dallas, Texas, Jamie R. Welton, Esq., Deborah Deitsch-Perez, Esq., Attorneys for Plaintiff.
ALVIN M. STEIN, ESQ., Troutman Sanders, L.L.P., New York, New York, Katherine C. Ash, Esq., Tyler Lenane, Esq., Attorneys for Defendants and Third-Party Plaintiffs.
JACK YOSKOWITZ, ESQ., Seward Kissel L.L.P., New York, New York, Michael J. McNamara, Esq., Attorneys for Third-Party Defendant/Third-Party Counterclaimant.
OPINION AND ORDER
Plaintiff, Highland Capital Management L.P. ("Highland"), brings this action to recover in tort and contract from the defendants, Leonard, Leslie, Scott, and Susan Schneider ("the Schneiders") for their refusal to sell certain promissory notes, valued at $69 million, to plaintiff Highland and third-party defendant/counterclaimant, RBC Capital Markets Corporation, formerly known as RBC Dominion Securities Corporation ("RBC"). RBC intended to act as a "riskless principal," purchasing the notes from the Schneiders and immediately selling them to Highland and others at a premium. Plaintiff alleges that the Schneiders refused to sell after defendants Jenkens Gilchrist Parker Chapin L.L.P. ("JGPC") supplied them with insider information that the notes would be paid in full following a merger deal involving the issuer of the notes, McNaughton Apparel Group, Inc., formerly known as Norton McNaughton, Inc. ("McNaughton") and Jones Apparel Group ("Jones"). Plaintiff thus sues for breach of contract under various theories, and tortious interference with contract and prospective business relations. The Schneiders' answer asserts claims against RBC for breach of various duties, breach of contract, breach of the implied covenant of good faith and fair dealing, and negligence, ultimately seeking indemnification and/or contribution. RBC's answer asserts counter-claims against the Schneiders for breach of the duty to negotiate, breach of the covenant of good faith and fair dealing, breach of contract, fraudulent misrepresentation, and fraudulent concealment. Discovery is complete and defendants now move for summary judgment and for judgment on the pleadings to dismiss Highland and RBC's claims against them. RBC cross-moves for summary judgment to dismiss the Schneiders' claims against it. The Court disposes of the motions below, granting, in part, defendants' motion for summary judgment against plaintiff and dismissing the entire action for want of subject matter jurisdiction.
BACKGROUND
Unless otherwise noted, the following facts are not in dispute. The facts are drawn from the parties incredibly voluminous submissions to this Court on this motion, including pleadings, motion papers, supporting affidavits, declarations, exhibits, and the parties statements of fact pursuant to Local Rule 56.1. See also Highland Capital Mgmt., L.P. v. Schneider, No. 02 Civ. 8098, 2004 U.S. Dist. LEXIS 18131 (S.D.N.Y. Sept. 9, 2004) (granting plaintiff leave to amend the Complaint and detailing the factual history of the case). Further, pursuant to the Opinion and Order issued by Magistrate Judge Gabriel W. Gorenstein granting defendants' motion to exclude Highland's proposed expert witness, Sean F. O'Shea, dated July 19, 2005, the Court did not consider the O'Shea affidavit submitted to support the instant motion. The following does not constitute findings of fact by this Court.
Plaintiff Highland is a limited partnership and registered investment advisor with its principle place of business in Dallas, Texas. (Plaintiff's Third Amended Complaint ("Complaint") ¶ 2.) Highland specializes in credit and special situation investing, managing over $9 billion dollars. (Id.)
Defendant Leonard Schneider is a Florida resident and the father of co-defendants Leslie, Susan, and Scott Schneider, all residents of New York State. The Schneiders were owners of two apparel businesses before selling them to McNaughton in return for stock and the promissory notes at issue here.
Defendant JGPC was a limited liability partnership engaged in the practice of law with its principle office in New York State. (Id. ¶ 7.)
Third-party defendant RBC is a registered broker-dealer with the Securities Exchange Commission ("SEC") and a member of the New York Stock Exchange ("NYSE"). (Defendants' 56.1 Statement ("Defs.' 56.1") ¶ 8 (unopposed).) RBC is a New York corporation with its principle place of business in New York. (Id. ¶¶ 6-7 (unopposed).)
II. Procedural History
Highland filed its original complaint against the Schneiders and RBC in Texas State Court on October 18, 2001. (Defendants' Memorandum of Law in Support of Motions for Summary Judgment ("Defs.' Mem.") Ex. 5.) On May 7, 2002, Highland and RBC entered into a tolling agreement wherein Highland and RBC agreed not to pursue claims against each other for two years from execution of the agreement or thirty days after disposition of Highland's case against the Schneiders. (Defs. Mem. Ex. 7.) Highland and RBC also agreed to cooperate to some extent in Highland's prosecution of claims against the Schneiders. On May 9, 2002, Highland submitted an amended complaint in Texas State Court which dropped RBC as a named defendant to the action. (Defs.' Mem. Ex. 164.) The case was removed to the United States District Court for the Northern District of Texas on September 27, 2002, and transferred to this Court on October 11, 2002.
After numerous amendments, the plaintiff's third amended complaint is the operative pleading for the present motion. In it, plaintiff asserts claims against the Schneiders for (1) breach of contract; (2) alternatively, breach of binding preliminary agreement; (3) alternatively, third-party beneficiary breach of contract; (4) alternatively, tortious interference with contract; and (5) alternatively, tortious interference with prospective contractual and business relations. (Compl. ¶¶ 56-79, 98-103.) Plaintiff also asserts claims against JGPC for (1) tortious interference with contract; and (2) alternatively, tortious interference with prospective contractual and business relations. (Id. ¶¶ 80-97.) Plaintiff seeks actual, consequential, and punitive damages, prejudgment interest, attorney's fees and costs. (Id. at 35.)
On October 29, 2004, the Schneiders filed a third-party complaint against RBC. (Defendants' Answer and Third-Party Complaint ("Defs.' Ans.").) The Schneiders allege that, (1) RBC breached its duty as their alleged agent by exceeding its authority to bind its principal; (2) RBC breached its contract with the Schneiders; (3) RBC breached the implied covenant of good faith and fair dealing; and, (4) RBC was negligent in performing its duties as a registered broker-dealer. (Defs.' Ans. ¶¶ 89-128.) The Schneiders seek indemnity, or alternatively, contribution if they are found liable to Highland for RBC's actions. (Id.)
RBC answered the third-party complaint on November 19, 2004, and asserted counter-claims against the Schneiders for (1) breach of the duty to negotiate; (2) breach of contract; (3) fraudulent misrepresentation; (4) fraudulent concealment; and, (5) breach of the covenant of good faith and fair dealing. (RBC's Counterclaims and Answer to the Third-Party Complaint ("RBC 3d Party Compl.") ¶¶ 134-72.) RBC requests actual, compensatory and punitive damages, along with prejudgment interest. (Id. at 26-27.) Further, on May 3, 2004, RBC received an assignment of Fidelity Management and Research Company's ("Fidelity") potential claims pursuant to the note purchase transaction at issue. (RBC's 56.1 Statement ("RBC 56.1") ¶ 115.)
Fidelity was a potential purchaser in the same posture as Highland, wishing to purchase the Schneider's notes from RBC at a slight premium following the sale to RBC. (RBC 56.1 ¶ 70.)
On April 21, 2005, Troutman Sanders L.L.P. was substituted as counsel for defendants. Previously, JGPC represented all defendants, however JGPC is no longer doing business as a law firm. The attorneys representing defendants joined Troutman Sanders following JGPC's demise, therefore, defendants' attorneys have not changed, only the firm.
III. The Promissory Notes
The Schneiders owned and operated two clothing apparel businesses, Jeri-Jo Knitwear, Inc. and Jamie Scott, Inc. (collectively "Jeri-Jo") until April 15, 1998, when the businesses were sold to a McNaughton subsidiary. Prior to the sale, Jeri-Jo was a privately owned and closely held company. Leonard Schneider left Jeri-Jo after its sale, but the Schneider children stayed on as executives, reporting directly to Peter Bonepart, McNaughton's President and Chief Executive Officer ("CEO").
The sale agreement allotted each of the Schneiders a share of the purchase price in accordance with their ownership proportion. The sale required an initial payment of $55 million, the assumption of $10.9 million in Jeri-Jo debt, plus an earn-out based on the new Jeri-Jo's next two years of profits, ending June 30, 2000. At the end of the two year period, McNaughton had the option of paying the earn-out in cash or in up to 50% of its common stock. On June 30, 2002, the Schneiders were owed approximately $190 million in earn-out profits. The parties negotiated and reached two amendments to the purchase agreement on August 3, 2000 and August 29, 2000. The amendments fixed the earn-out at $161 million and each Schneider received, in proportion to their original Jeri-Jo ownership interest, (1) $95 million in cash on August 29, 2000; (2) an additional $30 million in cash on the closing date of McNaughton's new financing; (3) $26 million in McNaughton common stock; and (3) $10 million in four, three-year promissory notes.
This first set of promissory notes was issued August 29, 2000. Leonard Schneider received a note with a face value of $4 million, Susan and Leslie Schneider each received notes with face values of $2.4 million, and Scott Schneider received a note with a face value of $1.2 million.
In the event that McNaughton could not make the $30 million payment or did not close its new financing deal, the money was to be issued as four additional three-year promissory notes, with a total face value of $59 million. The deadline for the $30 million payment was November 30, 2000. As the deadline approached, McNaughton requested an extension of time to pay until April 2001. In support of its request, on November 6, 2000, McNaughton's Chief Financial Officer ("CFO") Amanda Bokman, forwarded to the Schneiders, what Highland terms "very detailed, highly sensitive, confidential financial forecasts" for McNaughton, intimating the proposed $59 million notes would pay out at most $30 million over three-years so the Schneiders should accept the more immediate $30 million payment in April 2001. (Pl.'s Opp'n at 8-9.) Plaintiff contends this constituted material inside information. (Id. at 9.) The Schneiders declined McNaughton's request and four new three-year promissory notes were issued, with a total face value of $59 million.
This second set of promissory notes was issued on December 1, 2000. Leonard Schneider received a note with a face value of $23.6 million, Susan and Leslie Schneider received one note each with face values of $14,160,000, and Scott Schneider received a note with a face value of $7,080,000.
The eight notes had a total face value of $69 million and were not payable to a generic bearer, but were made payable to the individual Schneiders. McNaughton was designated as the maker of these notes. Plaintiff characterizes these notes as "convertible subordinated debenture[s]." (Plaintiff's Memorandum of Law in Opposition to Defendants' Motion for Summary Judgment ("Pl.'s Opp'n") at 4-5.) Plaintiff proffers this legal conclusion because the notes were subordinate to senior creditors and were convertible to stock if McNaughton were to dissolve. (Id. at 6; Exs. 152-55, § 5.2.) Dissolution also granted the Schneiders the option of accelerating the principle due on the notes. (Id.) The notes on their face are denominated "subordinated promissory notes." (Id. at 1.) The notes were subject to GAAP record-keeping requirements (Id. § 8(c)) and are governed by New York State law (Id. § 10).
IV. Alleged Sale of the Notes
On November 7, 2000, the day after receiving McNaughton's financial forecast, Leonard Schneider sent a copy of one of the first set of promissory notes to Glen Rauch of Glen Rauch Securities, Inc. (collectively "GRS") via facsimile. The Schneiders and GRS had a twenty year history during which the Schneiders purchased municipal bonds worth millions of dollars. On December 10, 2000, the Schneiders forwarded GRS a copy of the second set of notes. The Schneiders all represent that they were willing to entertain bids on the notes but maintain they would not sell the notes at a substantial discount. The notes were priced at between 40-65 cents on the dollar at this time.
The parties here disagree as to the extent of the Schneider/GRS relationship. The Schneiders contend GRS was nothing more than a conduit through which they purchased municipal bonds. (Defs.' Mem. at 10 n. 11.) Plaintiff's infer from Rauch and the Schneiders' deposition testimony that "Rauch was the Schneider family's long time broker and financial advisor, having handled nearly $100 million in numerous securities transactions for the [ sic] each of the Schneiders for more than 20 years — all at the oral request of Leonard Schneider." (Pl.'s Opp'n at 10.)
On January 8, 2001, GRS entered into a Letter Agreement on behalf of the Schneiders with RBC. The Letter Agreement provided that RBC was a "possible purchaser" of some or all of the notes, and that the Schneiders, via GRS, would work with RBC exclusively for 30 business days regarding the possible sale. (Defs.' Mem. Ex. 24.) The Letter Agreement also specifically states that:
Reference is made to certain promissory notes (the "Notes") issued by a public company in the apparel business, which are held by certain of your clients.
We understand that Glen Rauch Securities, Inc. ("GRS") represents those holders in the possible resale of some or all of the Notes by those holders, for which GRS will be receiving separate compensation from those holders.
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. . . .
We [RBC and GRS] both understand that the consummation of any transaction remains in the sole discretion and satisfaction of the holders and [RBC], including without limitation with respect to price.
(Id.)
Following this agreement, RBC began marketing the notes to third parties. On January 10, 2001, Kenneth Ambrecht, the RBC trader overseeing RBC's involvement with the notes, called GRS to suggest that RBC contact McNaughton CEO Bonepart to advise him that RBC was investigating buying the notes. However, in a letter from GRS to Ambrecht and another RBC employee, Max Holmes, states: "As per our conversation, this will confirm that any prospective buyers of the McNaughton Apparel notes will not contact the company directly. I understand you cannot control this completely, however if it does occur my clients will withdraw the deal. All questions or inquiries will be directed to Glen Rauch." (Pl.'s Ex. 50.) In a recorded telephone conversation on the same day, Rauch informed Ambrecht that the Schneiders' lawyer was "vehemently opposed" to any possible buyers contacting McNaughton, that the Schneiders would "pull the deal" and give it to someone else if contact occurred, and that GRS was to be the liaison for any questions potential buyers may have. (Id. Ex. 80C, RBC 896, 1.16.01.)
RBC and Highland both assert that this conversation put GRS on notice that RBC was marketing the notes to third parties. However, a review of the tape recording of the conversation shows that Ambrecht merely stated that someone might contact McNaughton and Rauch responded, "one of your guys?" Ambrecht answered in the affirmative. (Pl.'s Opp'n Ex. 80C, RBC 895.) It is not clear to the Court whether "your guys" meant third party purchasers or RBC traders.
Plaintiff contends the letter, recorded conversation, and deposition testimony regarding RBC and Highland employees' understanding of their ability to contact the Schneiders evidence that potential buyers were also barred from contacting the Schneiders directly. (Pl.'s Opp'n 19.) A review of the evidence does not necessitate this conclusion, though it is not outside the realm of possibility.
On January 25, 2001, Rauch, Ambrecht, the Schneiders' attorney from JGPC, James Alterbaum, Esq., and Highland's attorney from Akin, Gump, Strauss, Hauer Feld LLP, Michael Kern, Esq., participated together in a conference call. A Highland employee, Michael Rich, listened in silently because Highland wished to remain anonymous until they decided whether "to do anything." (Defs.' Reply Ex. 344, RBC 896, 1.25.14.) Prior to this call, the notes were referred to as "freely tradable securities" and "assignable." (Pl.'s Opp'n Ex. 78, RBC 896, 1.25.20.)
Defendants claim that neither Rauch nor Mr. Alterbaum knew that Mr. Kern was acting as Highland's attorney on the call. RBC admitted that Highland was to be kept anonymous in its response to defendants' Rule 56.1 statement. However, Ambrecht did mention to Mr. Alterbaum that lawyers for a potential purchaser of the promissory notes would be on the conference call, but did not mention Highland by name. (Pl.'s Opp'n Ex. 80C, RBC 896, 1.25.20.)
When the Letter Agreement's exclusivity clause expired on February 8, 2001, plaintiff contends that Rauch orally informed RBC that it was the only one working on the transaction and it should continue working. (Pl.'s Opp'n at 21.) During a telephone call on February 12, 2001, Ambrecht indicated to Rauch that an RBC employee had a potential buyer who would bid on the loans at 58 cents on the dollar if he had a firm offer. Rauch gave Ambrecht a firm offer at 59 cents, with the caveat that he did not "know how you guys [RBC] are working it . . . you know the spread or whatever." (Id. Ex. 79, RBC 894, 2.12.02.) The negotiations continued with Ambrecht offering 51½ cents on the dollar for only Leonard Schneider's $23.6 million note, alternatively, 47 cents on the dollar for all of the second set of notes, with a face value of $59 million. Rauch countered on February 14, 2001, stating that if Ambrecht can get a letter of intent for the $23.6 million note, "I think we can do a trade." (Id. 2.14.14.)
It is unclear whether Rauch knew at this time that the potential buyer was actually two buyers, Highland and Fidelity. Plaintiff points to a note, made by Rauch, titled "purchase of the notes" and identifying Highland and Fidelity. (Pl.'s Ex. 23.) This note is undated but was produced in discovery on the same copy paper as a copy of a note dated February 12, 2001. The dated note is a message for Rauch, from Ambrecht, and contains the number range 58-63, followed by "offer 59." Relying on Rauch's deposition testimony, defendants contend that the two notes side by side appearance was merely an unfortunate coincidence of discovery production and does not evidence the date the Highland/Fidelity note was created. (Defs.' Reply at 15-16.)
On February 26, 2001, Rauch and Ambrecht again spoke about the status of a potential trade, with Ambrecht indicating he was waiting to hear back from his "guy," presumably a potential buyer of the McNaughton notes, and that the last bid he had was for 51½. (Id. 2.26.05.) Rauch indicated he was 85% sure he could trade the "whole thing" at 54 cents on the dollar but cautioned that he was dealing with individuals, intimating their unpredictability. (Id.) Ambrecht expressed frustration at not hearing back from a potential buyer and an unwillingness to push the buyer because of the state of the stock market. Later the same day, the pair spoke again. (Id. 2.26.08-09.) Ambrecht stated his "guy" had not moved, offering 51½ for the $26.5 million note. (Id.) Rauch said the Schneiders would not trade at that price but if the bid was 54, he could do a trade on the $23.6 million and if the potential buyer wanted the "whole piece," he could do it for 53 cents on the dollar. (Id.) Rauch recounted a conversation he had with Leonard Schneider regarding the low bids wherein Rauch had told Leonard Schneider that, if RBC bids 54 cents on the dollar for his "piece," i.e. the $23.6 million note, RBC would own it, but anything lower and Leonard Schneider would "hold on for a while." (Id. 2.26.09-10.) Rauch stated that Leonard Schneider would consider a slightly lower bid for the rest of the notes if sold as a whole package.
It is unclear whether "the whole thing" represented both sets of notes, face value $69 million, or only the second set which had been the prime subject of negotiations up to this point, face value $59 million.
The interaction between Rauch and Ambrecht caused RBC to intensify its negotiations with Highland and Fidelity. On March 9, 2001, Ambrecht informed Rauch via telephone that he had one buyer giving a firm offer of 50 cents on the dollar for the entire $69 million piece, and a second buyer offering 52 cents on the dollar for Leonard Schneider's $23.6 million note. (Pl.'s Opp'n Ex. 80C, RBC 795, 3.9.01.) Rauch stated he would prefer to trade all the notes at once, suggesting 50½ cents on the dollar, and said he would call Leonard Schneider regarding the offers. As the parties neared a deal, RBC represented that Highland was anxious to close, as were Rauch and Ambrecht.
In all recorded phone conversations with Rauch discussed in this section, Ambrecht refers to Highland and Fidelity generically as "guys" and never by their actual names.
Plaintiff maintains this buyer was Highland.
Plaintiff maintains this buyer was Fidelity.
On March 12, 2001, a series of telephone calls were exchanged between Rauch and RBC. In the first of these calls, Rauch represented that Leonard Schneider was willing to sell his notes for 52 cents on the dollar, but that the rest of the family would not consider sale of their notes for another week or two because they were "not acting in concert, which they can't do." (Pl.'s Opp'n Ex. 80A, RBC 3.12.03.) Ambrecht cautioned that Highland might walk away from the deal if that were the case. Rauch then stated that the family would not put any guarantees or covenants on the notes if the bid were for 51 cents on the dollar but, rather, would sell them "as is." Ambrecht did not seem to understand the necessity of guarantees or covenants on the notes, and told Rauch he would come back with a firm bid of 51 for all $69 million of the notes, which Rauch assured him would be acceptable. Later that day, Ambrecht came back with a bid of 50½, to which Rauch responded that he would speak with the Schneiders' attorney and the Schneiders themselves, with an answer expected in the morning. (Id. 3.12.09.) Shortly thereafter, Rauch informed Ambrecht that nothing would happen for at least a day and a half because he needed to talk to "the girls," presumably Leslie and Susan Schneider. (Id. 3.12.10.) The delay was ostensibly caused by Highland's low bid of 50½ when a bid of 51 or 52 was expected. Rauch repeatedly insisted that nothing would be done on the trade that day.
By the morning of March 14, 2001, Rauch still had nothing to report from the Schneiders and stated that if he were in their position, he "would have done the trade yesterday." (Id. 3.14.01-02.) In a follow up call, Rauch attempted to set up a conference call between Ambrecht, Rauch, and Mr. Alterbaum, the Schneiders' attorney. (Id. 3.14.06.) Rauch cautiously responded to Ambrecht's impatience, stating that Mr. Alterbaum was necessary even for an "oral thing," that Rauch would not "go out on a limb" regarding whether the Schneiders had decided to trade, and reemphasized that the trade would likely be "as is" without additional guarantees or covenants. Ambrecht noted that the buyer had attorneys who would draw up documentation and that RBC planned to use the law firm Cravath, Swaine Moore, L.L.P. Rauch and Ambrecht agreed that after the conference call, the parties would need to "write it down, write it all down," but Rauch forecasted that he would not hear back from Mr. Alterbaum until at least 5:00 p.m. that day. (Id. 3.14.07.) Ambrecht again expressed worry over Highland's increasing hostility.
At some point on the same day, RBC employee, identified only as Wood, spoke with a Highland employee, identified only as Ethan, prefacing the phone call by stating he did not have good news. (Id. 3.14.11-12.) Wood told Ethan that the trade was "subject to just about everything you can imagine," that the family was going to talk to their lawyers in order to determine exactly what the note represents and so that everyone was clear on exactly what was being traded. (Id.) However, Wood assured Ethan that there should be a trade on $45.4 million of the notes at 52½ cents on the dollar, and Fidelity (identified only as "the other buyer") would purchase Leonard Schneider's $23.6 million note. Consistent with Ambrect's worry, Ethan warned that if the Schneiders kept "dilly dallying, we have to go away," and that the deadline for Highland walking away from the deal was the end of the month. (Id.) Wood stated the parties were in agreement about the price, but the trade was subject to unidentified contingencies. Telephone calls from the next day evidence that RBC and Highland were circulating draft documentation regarding the deal. (Id. 3.15.02.)
Plaintiff and RBC contend that, during an unrecorded telephone conversation between Rauch and RBC on the afternoon of March 14, 2001, Rauch confirmed a sale of $45.4 million in notes to Highland for 51 cents on the dollar, and a sale of Leonard Schneider's $23.6 million note to Fidelity for 52.5 cents on the dollar. To evidence that the deal was done, Highland and RBC point to deposition testimony and affidavits of Highland and RBC employees who believed the parties had all agreed on the trade as to the price and size of the transaction. Plaintiff and RBC both claim a letter Rauch wrote to Leonard Schneider regarding compensation for Rauch's work on the deal further supports that Rauch agreed to the deal on behalf of the Schneiders. (Pl.'s Opp'n Ex. 25.) The letter is dated March 12, 2001, and sets forth possible compensations dependent on whether all $69 million in notes were traded, just $59 million in notes, or only Leonard Schneider's $23.6 million note. Rauch and the Schneiders adamantly contend that they did not agree to a deal at any time, and did not agree during an unrecorded conversation on March 14, 2001.
V. The Promissory Note Deal Falls Through
On March 9, 2001, while Rauch and Ambrecht meandered through negotiations, Brad Cost, Esq., McNaughton's General Counsel, contacted the Schneiders' lawyers at JGPC, Charles Greenman, Esq., and Mr. Alterbaum. In essence, Mr. Cost informed JGPC that McNaughton had received an unsolicited inquiry from a substantial company regarding the possible purchase of McNaughton, and that the inquiry proposed an attractive price per share. The information was passed along to JGPC as a "professional courtesy" due to McNaughton's relationship with the Schneiders, and the highly confidential nature of the discussion was stressed. (Pl.'s Opp'n Ex. 71.) JGPC left the conversation feeling that the transaction was "more likely than not" to occur. (Pl.'s Opp'n Ex. 181, at 105.) Plaintiff argues that this "tip" violated McNaughton's Regulation FD (full disclosure) Policy, which stated only the CEO or CFO could disseminate material, non-public information to McNaughton securities holders, and the information could not be used "to personal advantage or to benefit others." (Pl.'s Opp'n Ex. 84; 17 C.F.R. § 243.100 (2000).)
The parties dispute whether the Schneiders' notes are properly termed securities, with defendants arguing that the notes are not securities.
Later on March 9, 2001, JGPC informed Leonard Schneider that "something significant" had happened with McNaughton and advised him to discontinue selling his shares of McNaughton stock. (Pl.'s Opp'n Ex. 188, at 285-86.) At a meeting with JGPC and the Schneiders on March 13, 2001, JGPC informed the Schneiders that McNaughton would likely merge or be acquired by another company. JGPC advised the Schneiders that their promissory notes would then most likely be paid in full. Mr. Alterbaum then called Rauch to stop his work on the notes, leaving him a message on March 14, 2001 at approximately 6:00 p.m.
The message states only: "not sure Schneiders want him to proceed with phone calls." (Pl.'s Opp'n Ex. 26.)
Despite that phone message, on March 15, 2001, Rauch informed Ambrecht that Rauch had not heard from the Schneiders' attorney or the Schneiders despite repeated phone calls. Rauch described their silence as "suspiciously strange," but opined that the Schneiders' attorney was reviewing the documents and that Rauch would not hear anything before Monday, March 19, 2001. (Id. Ex. 79, RBC 3.15.04.)
On March 14 and 15, 2001, RBC implied to Fidelity and Highland that the trade had occurred. Specifically, RBC told Highland that they were "closer, close, to making this . . . thing happen, subject to all kinds of documentation." (Id. Ex. 80C, RBC 3.15.03.) RBC told Fidelity that they had a trade on the $23.6 million note but that he could not confirm until the following day because the trade was contingent on documentation. (Id. RBC 3.14.04.) In an internal RBC conversation, employees affirmed that the trade had occurred on all $69 million of the notes with the "legal stuff" of representations and warranties to be worked out on March 15, 2001. (Id., RBC 3.14.05.)
On March 20, 2001, RBC was forced to return to Highland and Fidelity, informing them that the Schneiders were no longer interested in trading their notes. While there is no presented memorialization of Fidelity's reaction, Highland was upset, stating that the failure to close the deal had "implications beyond this trade." (Id., RBC 3.20.03.) Highland expressed its belief that RBC had not put enough effort into closing the deal once an oral agreement on price had been reached. RBC explained that when it spoke with Highland regarding the trade, RBC qualified the trade as subject to "just about everything," including conversations between the Schneiders and their attorneys, documentation, representations, warranties, and confirmations. (Id., RBC 3.20.03-04.) The parties both expressed that, though they foresaw that settling the trade would be difficult, and possibly unachievable, they thought the trade would ultimately get done. After this unsettling conversation with Highland, RBC called Rauch to ascertain the fatal blow to the deal. First, Rauch represented he was unwilling to talk with Highland because he did not know Highland and had no obligation to speak with any of Highland's employees. (Id. 3.20.09.) Rauch explained the deal had fallen through because RBC failed to supply Rauch with a letter of intent on the bid of 51 cents on the dollar for the entire $69 million, which Rauch had repeatedly requested. RBC's Ambrecht reacted with surprise, he had thought that Rauch was only waiting for the Schneiders' attorneys to review the paperwork and get back to Rauch regarding what representations and warranties were proper. That Rauch was waiting for a letter of intent was "total news" to Ambrecht and he offered to remedy the "miscommunication" by securing a letter immediately if that would save the deal. (Id. RBC 725, 3.20.09-13.) Rauch reiterated that the letter of intent was necessary because RBC had adjusted its bid downward before, and that Rauch interpreted the absence of a letter of intent to mean that RBC had not secured a bid for the 51 cents on the dollar price.
Obviously, the Schneiders were not amenable to a letter of intent or firm bid at this late stage. The Schneiders retained their promissory notes and, on April 16, 2001, it was announced that Jones had agreed to purchase McNaughton. The notes were paid out in full on June 19, 2001, with the Schneiders receiving the full $69 million plus interest. Plaintiff instigated this litigation to recover its $22 million share of what it terms the Schneiders' $34 million windfall resulting from their refusal to consummate the trade.
DISCUSSION
Defendants here move for summary judgment dismissing plaintiff's and RBC's claims against defendants. RBC has cross-moved for summary judgment to dismiss the Schneider defendants third-party complaint against RBC. The Court dismisses the majority of plaintiff's claims on the merits and the remaining claims of all the parties for lack of subject matter jurisdiction.
I. Summary Judgment Standard
Movants are entitled to summary judgment if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Holt v. KMI-Cont'l Inc., 95 F.3d 123, 128 (2d Cir. 1996). The substantive law underlying a claim determines if a fact is material, and "[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). It is not a court's role, in considering a motion for summary judgment, to "resolve disputed issues of fact but" rather the court should "assess whether there are any factual issues to be tried." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986).
To determine whether genuine issues of material fact exist, the Court must resolve all ambiguities and draw all justifiable inferences in favor of the nonmoving party. See Anderson, 477 U.S. at 255; Holt, 95 F.3d at 129. The moving party bears the burden of demonstrating that no genuine issue of material fact exists. See Adickes v. S.H. Kress Co., 398 U.S. 144, 157 (1970); see Gallo v. Prudential Residential Serv. L.P., 22 F.3d 1219, 1223-24 (2d Cir. 1994). "[T]he movant's burden will be satisfied if he can point to an absence of evidence to support an essential element of the nonmoving party's claim." Goenaga v. March of Dimes Birth Defects Found., 51 F.3d 14, 18 (2d Cir. 1995). Once the moving party discharges its burden of demonstrating that no genuine issue of material fact exists, the burden shifts to the nonmoving party to offer specific evidence showing that a genuine issue of fact exists for trial. See Celotex, 477 U.S. at 324. The nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). "A `genuine' dispute over a material fact only arises if the evidence would allow a reasonable jury to return a verdict for the nonmoving party."Dister v. Cont'l Group, 859 F.2d 1108, 1114 (2d Cir. 1988) (citing Anderson, 477 U.S. at 248). The Second Circuit reviews a District Court's disposition of a summary judgment motion de novo. Mario v. P C Food Mkts., 313 F.3d 758, 763 (2d Cir. 2002) (quoting Morales v. Quintel Entm't, Inc., 249 F.3d 115, 121 (2d Cir. 2001)).
II. Defendants' Motion for Summary Judgment against Highland
Plaintiff presents seven claims for relief in its complaint against defendants: (1) breach of the oral contract to sell the notes between the Schneiders and Highland; (2) alternatively, breach of the binding preliminary agreement to do the same between the Schneiders and Highland; (3) alternatively, breach of the same contract between the Schneiders and RBC, with Highland acting as a third-party beneficiary; (4) the Schneiders' tortious interference with a contract between RBC and Highland to transfer the notes; (5) the Schneiders tortious interference with the prospective business relations between RBC and Highland; (6) JGPC's tortious interference with (a) the contract between the Schneiders and Highland, (b) the binding preliminary agreement between the Schneiders and Highland, and/or (c) the contract between RBC and Highland; and, (7) JGPC's tortious interference with prospective business relations between RBC and Highland.
Defendants raise a panoply of arguments in contravention to these claims. With an eye toward judicial economy, the Court disposes of each according to subject.
A. Alleged Binding Enforceable Oral Contract to Sell the Notes
Plaintiff makes several claims which depend on the existence of a valid, enforceable oral contract that the Schneiders' agreed to sell their notes to RBC. Plaintiff and RBC aver that, on the afternoon of March 14, 2001, during an unrecorded telephone conversation, the Schneiders, via their agent Rauch, entered into a binding oral contract with RBC wherein the Schneiders agreed to trade seven of their eight McNaughton promissory notes, with a face value of $45.4 million, in exchange for 51 cents on the dollar or $23,205,000. Highland promised to pay 52.5 cents on the dollar, or $23,887,500, with the balance, or "spread," of $682,500 going to RBC. Highland claims that, because the Schneiders refused to perform their obliged trade, Highland suffered $22 million in damages, the principle plus interest McNaughton paid on the notes from March 14, 2001, to June 19, 2001, and is also entitled to prejudgment interest. Defendants contend that GRS was unable to bind the Schneiders to any agreement to sell their notes, and moreover, they did not intend to be bound to a contract absent a writing, as evidenced by the record and, specifically, the letter agreement with RBC. Plaintiff claims GRS was apparently authorized, that a contract existed as to all material terms and that the parties had merely to formalize their agreement in writing.
Plaintiff's breach of contract, breach of third party beneficiary contract, and tortious interference with contract claims all fall into this category.
1. GRS's Authority to Bind the Schneiders
The parties have not raised choice of law issues, instead, the parties' briefs assumed that New York State law applies. Where the parties so assume, the Court need not address choice of law sua sponte. See In re Chateaugay Corp., 139 B.R. 598, 602 n. 3 (Bankr. S.D.N.Y. 1992) (citing Deep S. Pepsi-Cola Bottling Co. v. Pepsico, Inc., No. 88 Civ. 6243, 1989 U.S. Dist. LEXIS 4639, at *24 (S.D.N.Y. May 2, 1989)). Therefore, the Court applies New York State law in accordance with the parties' briefs.
Plaintiff and RBC contend that GRS had apparent authority to bind the Schneiders to a contract to sell their notes. Apparent authority requires that: "(1) [the] principal `was responsible for the appearance of authority in the agent to conduct the transaction in question,'" Herbert Constr. Co. v. Cont'l 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 (1973)), "and (2) the third party reasonably relied on the representations of the agent." Id. at 994 (citing Hallock v. State, 474 N.E.2d 1178, 1181, 64 N.Y.2d 224, 231 (1984)); see also Doxsee Sea Clam Co. v. Brown, 13 F.3d 550, 553-554 (2d Cir. 1994). This analysis focuses on the principal's actions, not the agent's actions.Herbert Constr., 931 F.2d at 993 ("`[T]he existence of `apparent authority' depends upon a factual showing that the third party relied upon the misrepresentations of the agent because of some misleading conduct on the part of the principal — not the agent.'") (quoting Ford, 299 N.E.2d at 664, 32 N.Y.2d at 472-73)); ITEL Containers Int'l Corp. v. Alanttrafik Express Servs., 909 F.2d 698, 702-03 (2d Cir. 1990) (differentiating between express and implied or apparent authority). Where the agent's actions do not involve an extraordinary transaction obviating reasonable reliance, the third party has no duty to inquire as to the scope of the agent's authority, as stated in Herbert Construction:
Recovery based on the doctrine of apparent authority does not require that the third party have inquired into the scope of the agent's authority . . . the duty to inquire only arises when "the facts and circumstances are such as to put him on inquiry," the transaction is "extraordinary," or the "novelty" of the transaction alerts the third party to the danger of fraud.931 F.2d at 995-96 (citations omitted).
Here, a genuine material issue of fact exists as to whether the Schneiders' actions compelled RBC and Highland's belief that GRS had the authority to bind the Schneiders. Relevantly, the Schneiders conducted all communications with RBC via GRS, the letter agreement states that GRS represents the Schneiders, and throughout negotiations with RBC, GRS entertained and offered bids on behalf of the Schneiders. Further, securities brokers are generally able to engage in highly lucrative transactions on behalf of the underlying holders of notes, bonds, and securities. Thus, the instant transaction would not be so extraordinarily out of the parameters of a broker's duties as to bar reasonable reliance on GRS's authority. That GRS repeated it could not act without the Schneiders' approval does not require summary judgment as, if GRS falsely represented the Schneiders had approved of the bid on March 14, 2001, RBC may have reasonably relied on that statement based on the Schneiders' previous actions. This, therefore, does not render moot the Schneiders' and GRS's adamant contention that they did not agree to a sale of the notes. However, should the jury find that GRS did so agree on March 14, 2001, the jury can also properly consider whether Highland, via RBC, reasonably relied on the Schneiders' actions indicating that GRS had the authority to bind the Schneiders for purposes of this transaction.
2. Existence of a Contract
In order to claim existence of a contract, there must be evidence of "a meeting of the minds, demonstrating the parties' mutual assent and mutual intent to be bound." Oscar Producs., Inc. v. Zacharius, 893 F. Supp. 250, 255 (S.D.N.Y. 1995). "[W]here the alleged contract is oral, plaintiff has a particularly heavy burden to establish objective signs of the parties' intent to be bound . . . because a primary concern for courts in such disputes is to avoid trapping parties in surprise contractual obligations that they never intended." Id. (citingArcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 72 (2d Cir. 1989); Winston v. Mediafare Entm't Corp., 777 F.2d 78, 80 (2d Cir. 1985)). However, at the summary judgment stage, whether the parties to an oral agreement intended to be bound is commonly a question of fact for the jury unless the jury could not "rationally agree" with plaintiff's characterization. Lazard Freres Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1537 (2d Cir. 1997) (collecting cases) (reversing grant of summary judgment where defendant had not obviated material facts as to whether the common custom in the banking industry was to be bound by an oral commitment prior to due diligence). Further, under New York law, "a contract need not be reduced to writing to be effective `[w]here all the substantial terms of a contract have been agreed on, and there is nothing left for future settlement.'" Totalplan Corp. of Am. v. Colborne, 14 F.3d 824, 832 (2d Cir. 1994). In determining whether a binding oral contract exists absent a writing, the court must determine if a genuine issue of material fact exists as to whether the parties reached an agreement on material terms, and the parties intended to be bound to that agreement absent a writing. Evolution Online Sys., Inc. v. Koninklijke PTT Nederland N.V., 145 F.3d 505, 508-509 (2d Cir. 1998).
Based on the present record, a rational juror could find that the purported oral agreement encompassed all material terms between the Schneiders/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. Defendants counter that this agreement did not contain the required representations and warranties regarding the notes. However, these representations and warranties may simply be standard, boiler-plate legalese tacked on to any agreement to sell individual notes. See Cinema N. Corp. v. Plaza at Latham Assoc. Hoyt's Cinema, 867 F.2d 135, 140 (2d Cir. 1989) (holding that, where not apparent that missing terms were deemed material by the parties, whether those terms were material is a question of fact for the jury). If so, then all substantive terms were agreed upon and the representations and warranties did not necessarily require further negotiations. It is equally plain to the Court that defendants have demonstrated there is insufficient support for Highland's contention that the Schneiders had knowledge, and thereby agreed, to the portion of the purported contract wherein Highland promised to pay 52.5 cents on the dollar. RBC is explicit in recorded telephone conversations that the details of the Highland side of the deal were to be kept secret from the Schneiders and GRS. Neither plaintiff nor RBC have raised a material issue of fact as to this obfuscation.
In determining whether the parties intended to be bound absent a written agreement, the Court must analyze the record in light of four factors: "(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) whether the alleged agreement is the type that is usually committed to writing." Evolution Online, 145 F.3d at 509 (citing Winston v. Mediafare Enter. Corp., 777 F.2d 78 (2d Cir. 1986)).
Defendants argue that they expressly reserved the right not to be bound absent a writing in their letter agreement with RBC. 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. Just as in Lazard Freres, 108 F.3d at 1537, the parties can be held to their bargain even if that bargain was subject to future written memorialization or due diligence. The other factors also do not sway the determination decidedly to defendants' camp. Though there was no performance on the contract, in plaintiff's rendition of the facts, the parties had agreed to all material terms. In defendants' favor, this contract does seem the type that would be reduced to writing prior to binding the parties. See infra Discussion Part II.A. (finding the purported oral agreement falls within New York's statute of frauds); Lazard Freres, 108 F.3d at 1538 n. 4 (Defendant "may be able to use the statute of frauds as an indication of the parties' intent not to be bound by the oral agreement."). However, as no Winston factor is dispositive, Evolution Online, 145 F.3d at 509, and as plaintiff and RBC have proffered evidence that brokers are routinely bound by oral representations, this factor alone would not necessarily preclude a rational juror from finding that the parties intended to be bound absent a writing.
3. Whether the Purported Oral Agreement to Sell the Notes Falls Within the Statute of Frauds
The New York Uniform Commercial Code bars enforcement of purported oral agreements to sell personal property in excess of $5000, unless the agreement is memorialized by a writing (1) evidencing that a contract for sale has been entered into by the parties, (2) identifying the property sold and the price, and (3) signed by the party against whom enforcement is sought. N.Y.U.C.C. § 1-206(1). This statutory bar does not apply to the sale of, inter alia, securities. N.Y.U.C.C. § 8-113 ("[A] contract or modification of a contract for the sale or purchase of a security is enforceable whether or not there is a writing signed or record authenticated by a party against whom enforcement is sought, even if the contract or modification is not capable of performance within one year of its making."); see also The Wharf (Holdings) Ltd. v. United Int'l Holdings, Inc., 532 U.S. 588, 595 (2001) ("Oral contracts for the sale of securities are sufficiently common that the Uniform Commercial Code and statutes of frauds in every State now consider them enforceable."). Highland alleges that the notes are securities, or alternatively, that defendants are promissorily estopped from asserting the statute of frauds as a defense. A security is defined as:
an obligation of an issuer or a share, participation, or other interest in an issuer or in property or an enterprise of an issuer:
(i) which is represented by a security certificate in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer;
(ii) which is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests or obligations; and
(iii) which (a) is, or is of a type, dealt in or traded in securities exchanges or securities markets; or (b) is a medium for investment and by its terms expressly provides that it is a security governed by this Article. N.Y.U.C.C. § 8-102(a)(15). A purported security must meet all three of these criteria in order to be considered a security for statute of frauds purposes. Id. official cmt. 15.
The Court finds that promissory notes are not securities under this definition as a matter of law because there is no genuine issue of material fact that the promissory notes meet the first prong of the above tripartite test. The promissory notes are not represented by a certificate, but rather are signed by the maker, McNaughton, and represented as a note of payment due. They are clearly not bearer notes as each note is payable only to the individual Schneider named as payee. N.Y.U.C.C. § 802(2), official cmt. 2. Nor are they registered notes as the notes specifically state that "this note has not been registered." (Defs.' Mem. Exs. 290-97.)
Further, though transfer of the note requires registration under the securities laws absent counsel's advice to the contrary, there is no evidence that the transfer is registered on "books maintained for that purpose by or on behalf of the issuer." First, the notes themselves do not reference the procedure for transfer, only stating that the notes must be registered under the federal securities laws absent "an opinion of counsel to the maker that such registration is not required." (Id., heading of each.) Plaintiff claims that the notes were recorded on McNaughton's books, however, those books were not of the kind maintained for the purpose of recording transfers of this so-called "series" of purported securities, but rather were McNaughton's general books, as evidenced on the face of the notes in Section 8(c). That Section outlines general affirmative covenants wherein McNaughton promises to comply with tax laws (id. § 8(a)), preserve its existence (id. § 8(b)), keep records and books of account in accordance with generally accepted accounting principles ("GAAP") (id. § 8(c)), and properly insure the company (id. § 8(d)). As a whole, this section merely requires McNaughton to operate as a proper company in accordance with the laws of the United States in order to maintain its good standing while the promissory notes are viable.Cf. Sure-Trip, Inc. v. Westinghouse Eng'g Instrumentation Servs. Div., 47 F.3d 526, 533 (2d Cir. 1995) (When interpreting a contract, "[n]ot only should the entire contract be considered, but its parts must be reconciled. . . ."). The GAAP requirement does not impose on McNaughton a duty to maintain records of any transfer of the promissory notes and cannot conceivably be construed as such. Thus, defendants have demonstrated that there is no material fact in question on this point and plaintiff has failed to illuminate a genuine issue for the Court.
Plaintiff touts the testimony of McNaughton's CFO Amanda Bokman as supporting plaintiff's position, however, that testimony is irrelevant to this point as it solely affirmed that McNaughton kept records in accordance with GAAP on which promissory notes were included as a company liability, and does not reference whether ownership or transfer of ownership was recorded. Further, plaintiff conclusively states that transfer of the notes would necessarily be registered on McNaughton's books and records but points to no facts or law supporting its conclusion.
The Court's determination that the promissory notes are not securities is in line with the scant caselaw on the subject. Plaintiff and RBC point to federal definitions of securities under the federal securities laws, however those definitions do not control whether a note is a security for statute of frauds purposes under the N.Y.U.C.C. The federal statutes and the statute of frauds are differently purposed. The former defines securities in an effort to regulate the markets and exchanges. The latter is meant to "guard against the peril of perjury; to prevent the enforcement of unfounded fraudulent claims." Morris Cohon Co. v. Russell, 245 N.E.2d 712, 715, 23 N.Y.2d 569, 574 (1969). Moreover, New York law is not consistent with itself, as different statutes define securities more narrowly or more broadly, presumably because the definitions support different legislative intents. See ALH Props. Ten v. 306-100th St. Owners Corp., 191 A.D.2d 1, 8-9 (App.Div. 1993) (discussing the alternate definitions of securities in the N.Y.U.C.C. and the N.Y. General Obligations Law ("N.Y.G.O.L.")).
New York courts have generally expanded the definition of securities under the statute of frauds where the instruments alleged to be securities represent an investment in the issuing company. See id. at 10 (including shares of stock in cooperative corporations in the definition of securities where "it is clear that the subject shares were purchased and used for no other purpose than investment"); Cohn, Ivers Co. v. Gross, 56 Misc. 2d 491, 493-94, 289 N.Y.S.2d 301, 304 (App.Div. 1968) (defining securities as, alternatively (1) an instrument for the payment of money "for the purpose of financing and investment," (2) representing "title or equity," (3) financing an enterprise, or (4) designed for investment, and finding that a "call" stock agreement did not meet the criteria). The promissory notes here do not fit any of these categories. Rather, the notes purely evidence a debt resulting from McNaughton's purchase of the Schneiders' family business, a debt which did not finance McNaughton's company analogous to a stock share, the quintessential security under the N.Y.U.C.C. § 8-103(a), entitled "Rules for Determining Whether Certain Obligations and Interests are Securities or Financial Assets." That the debt is payable primarily in cash, or if McNaughton is unable to pay in cash, in stock, does not remove the purported oral agreement to transfer $69 million in promissory notes from the statute of frauds. See, e.g., Cohn, Ivers Co., 56 Misc. 2d at 495, 289 N.Y.S.2d at 305 ("While it is a contract or chose in action concerning a security, it is not the security itself" and thus the purported contract is not excepted from the statute of frauds as a security). High yield debt instruments made payable to individuals for the sole purpose of purchasing an asset rather than financing a company have not been deemed securities under New York law and this Court is not inclined to so expand the definition regardless of the subjective understanding of securities brokers. (See Pl.'s Opp'n at 54 (arguing the Court's decision "would derail the customary practice in the bank and bond debt trading industry).)
Indeed, plaintiff's own case citation supports the Court's finding that these promissory notes are not analogous to subordinated debenture securities for they were not made for the purpose of financing and investment. (See Pl.'s Opp'n at 55 (quoting Allegaert v. Chemical Bank, 657 F.2d 495, 507 (2d Cir. 1980) ("[S]ubordinated debentures are `commonly dealt in for the purpose of financing and investment.").
Notably, the recorded conversations indicate that GRS, RBC and Highland understood that they were in a rare situation because the transaction was between the Schneiders, as individuals, and commercial entities. There are several statements to the effect that trade negotiations with individuals are more tenuous, riskier, and that individuals' decisions are not governed by brokers' mores.
RBC argues that the oral agreement is a qualified financial contract under New York General Obligation Law § 5-701(b), and thus exempted from the statute of frauds. See N.Y.U.C.C. § 1-206(3) (exempting qualified financial contracts from the statute of frauds). A "qualified financial contract" is an agreement between parties who are not natural persons and the agreement is, relevantly: "for the assignment, sale, trade, participation or exchange of indebtedness or claims relating thereto arising in the course of the claimant's business or profession (including but not limited to commercial and/or bank loans, choses in action arising under or in connection with loan agreements and private notes, and including forward sales)."Id. (b)(2)(i). RBC concedes that this exception did not come into effect until October 5, 2002, well after the alleged oral contract was entered into, on or about March 14, 2001. In support of its plea for retroactive application of the statute, RBC cites one case finding that a "repo" agreement, one where a seller agrees to transfer specified securities to a buyer for payment and simultaneously agrees "to repurchase the securities at the original price" plus interest on a future date, for the transfer of United States Treasury Notes, was a qualified financial contract. See Lehman Bros. Inc. v. Canadian Imperial Bank of Commerce, 97 Civ. 8226, 2000 U.S. Dist. LEXIS 13979, at *3-4 (S.D.N.Y. Sept. 27, 2000). The Court is at a loss as to howLehman is applicable to the case at hand where there was no simultaneous repurchase agreement between the Schneiders or GRS and RBC, Lehman did not involve the sale of promissory notes payable to individuals which require representations and warranties of the legitimacy of the transfer, and the parties in Lehman disputed the terms of their agreement, not whether one existed. See generally id. Notably, the statutes' case notes indicate no incident of retroactive application of amendments. N.Y.G.O.L. § 1-507(b), case note 2. Nor does RBC's contention that "[a]lthough the amendment [including trades on commercial promissory notes as qualified financial contracts] came after the trade in question, it simply codified the prior understanding in the marketplace and should be applied here," support retroactive application. (RBC's Mem. at 33.) The statute in effect at the time of the transaction is the one that guided the parties' understanding of their obligations during the negotiations. However, the Court need not reach a definitive decision on the retroactive application argument because the record does not sufficiently evidence the oral contract as required by the statute.
In order to be exempt from the statute of frauds, a qualified financial contract must be sufficiently evidenced by, applicably, either "electronic communication (including, without limitation, the recording of a telephone call or the tangible written text produced by computer retrieval), admissible in evidence under the laws of this state, sufficient to indicate that in such communication a contract was made between the parties," or an admission by the party against whom enforcement is sought in a "pleading, testimony or otherwise in court that a contract was made." Id. (b)(3)(a), (c). RBC points to no recorded telephone conversation between GRS and RBC "to indicate that in such communication a contract was made between the parties," as required by Section 5-701 (b)(3)(a), nor any admission by the Schneiders, their purported agent GRS, or their attorneys JGPC, on the fully developed record at the close of discovery, that a contract was made. All recorded communications between GRS and RBC prior to the alleged agreement demonstrate only that the parties were negotiating a price, while the conversations afterwards demonstrate that GRS did not enter into an agreement because it never received a letter of intent. Cf. Lehman, 2000 U.S. Dist. LEXIS 13979, at *39 (finding for plaintiff where defendants' employee's telephonic admission of his understanding of the purported agreement aligned with plaintiff's understanding); Ferrer v. Samuel, 192 Misc. 2d 533, 535, 746 N.Y.S.2d 242, 244 (1st Dist. 2002) (finding sufficient evidence of a loan agreement where defendant admitted he owed money to plaintiff). Moreover, defendants and their supposed agent have remained steadfast in their denial that any contract was made, thus, there is no genuine issue of material fact that the defendants or their alleged agent made or would make an admission as to the purported contract's existence. See, e.g., Khreativity Unlimited v. Mattel, Inc., 101 F. Supp. 2d 177, 182 (S.D.N.Y. 2000) (granting summary judgment because the affidavits and stipulations on the record did not qualify as judicial admissions) (citing Am. Steel Erectors, Inc. v. Lehrer McGovern Bovis, Inc., No. 94 Civ. 6253, 1997 U.S. Dist. LEXIS 2990, at *14 n. 7 (S.D.N.Y. Mar. 18, 1997) ("A judicial admission of the existence of a contract must be clear and unequivocal to take the contract out of the statute of frauds.")).
The Court notes also that RBC's argument appears to defy the spirit of the law, for, although the purported agreement was between two non-natural persons, namely GRS and RBC, the underlying indebtedness to be transferred was owed to four private citizens and plaintiff and RBC argue GRS was acting on the Schneiders' behalf.
Accordingly, unless plaintiff and RBC's claim that defendants are promissorily estopped from asserting a statute of frauds defense, enforcement of the purported oral contract beyond $5000 is barred by N.Y.U.C.C. § 1-206. See Lazard Freres, 108 F.3d at 1538 (unwilling to entertain a statute of frauds defense raised for the first time at oral argument on appeal, because plaintiff had no opportunity to rebut, present a promissory estoppel argument, and, "the contract would have been enforceable up to $5,000") (citing Grappo v. Alitalia Linee Aeree Italiane, S.p.A., 56 F.3d 427, 431 (2d Cir. 1995)).
4. Promissory Estoppel and the Statute of Frauds
New York recognizes an exception to the statute of frauds defense where imposition of the statute will contravene its own purpose by affecting a fraud. "It would be quite antagonistic to the spirit of a statute designed to prevent fraud, if it might be availed of to cover fraud." Messner Vetere Berger McNamee Schmetterer Euro RSCG v. Aegis Group PLC, 150 F.3d 194, 196 (2d Cir. 1998) (quoting McKinley v. Hessen, 202 N.Y. 24, 30, 95 N.E. 32, 34 (1911)). In this respect, plaintiff and RBC argue that defendants are promissorily estopped from shielding themselves with the statute because JGPC referred to the notes as securities, and the Schneiders hired securities brokers GRS and RBC to sell the notes expecting that RBC would act toward that end. Highland claims it suffered the detriment of losing a lucrative high-yield investment, while RBC claims that it suffered the detriment of lost customer relationships with Highland and Fidelity.
In order to estop defendants from asserting a statute of frauds defense, there must be an "indication that [defendants] caused [plaintiff and RBC] `to irremediably alter [their] situation' such that `the interposition of the statute against performance [would constitute] a fraud.'" Grappo, 56 F.3d at 433 (quotingWoolley v. Stewart, 118 N.E. 847, 848, 222 N.Y. 347, 350-51 (1918)). "`The strongly held public policy reflected in New York's Statute of Frauds would be severely undermined,' however, `if a party could be estopped from asserting it every time a court found that some unfairness would otherwise result.'" Id. This is plainly not a case where application of the statute of frauds would be unconscionable, as the detriment cited does not rise to the level of irremediable harm. See id.; Philo Smith Co. v. USLIFE Corp., 554 F.2d 34, 36 (2d Cir. 1977) (requiring that the claimed detriment be irreversible and that use of the statute of frauds defense would itself constitute a fraud) (quoting Woolley, 118 N.E. at 848, 222 N.Y. at 350-51)); Four Star Capital Corp. v. Nynex Corp., 183 F.R.D. 91, 103 (S.D.N.Y. 1997). Like in Philo Smith, the detriment here claimed is that which logically followed defendants' justified refusal to honor a void purported oral contract, as is their right under the statute of frauds. It cannot be defendants' undoing that RBC misrepresented the validity of the oral agreement to Highland, nor does defendants' vague knowledge of the McNaughton-Jones merger affect either the validity of this contract under the statute or the relatively benign nature of Highland and RBC's claimed detriment. See id.
5. Conclusion
According to the above reasoning, the purported oral contract falls within New York's statute of frauds, N.Y.U.C.C. § 1-206, and is therefore only enforceable up to $5000. Plaintiff and RBC are thus limited to recovery up to that amount on all claims relying on the validity of the oral contract.
B. Plaintiff's Claim the Schneiders Breached a Contract with Highland
In this permutation of plaintiff's claim, Highland argues that both GRS and RBC acted as the Schneiders agents in binding the Schneiders to a contract with Highland to sell the notes. First, the Court notes that because the underlying contract falls within N.Y.U.C.C. § 1-206, as stated supra Discussion Part II.A., Highland's recovery is limited to $5000 under this claim.
Defendants aver that this Court should not recognize plaintiff's claim because (1) the letter agreement evidences that the parties did not intend to be bound absent a writing; (2) there is no privity of contract between the Schneiders and Highland; and (3) the trade did not occur as neither the Schneiders nor GRS agreed to the 51 cent bid. Because the Court finds that there is no evidence supporting plaintiff's theory that RBC acted as an agent with the authority to bind the Schneiders to a contract with Highland, and therefore privity between plaintiff and defendants is lacking, the Court limits its discussion to that aspect of defendants' argument.
Non-performance of a contractual duty constitutes a breach of contract. Restatement (Second) of Contracts § 235 (1981). To maintain a breach of contract claim in New York, complainant must show by a preponderance of the evidence: (1) the existence of a contract; (2) the complainant's performance; (3) breach by defendants; and, (4) damages. First Investors Corp. v. Liberty Mut. Ins. Co., 152 F.3d 162, 168 (2d Cir. 1998); Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996). The issue here is the existence of a valid contract. In order to state a claim for the existence of a valid contract, plaintiff must plead facts supporting the finding of an offer, acceptance, and "a meeting of the minds demonstrating the parties' mutual assent and intent to be bound." Oscar Prods., 893 F. Supp. at 255. Further, plaintiff can only assert a breach of contract claim against defendants if the parties were in privity of contract. See Morese/Diesel, Inc. v. Trinity Indus., Inc., 859 F.2d 242, 247 (2d Cir. 1988) (quoting Widett v. U.S. Fid. Guar. Co., 815 F.2d 885, 886 (1987)) ("[I]n New York, . . . professionals are not liable either in tort or contract absent privity.").
The exception to this rule is if plaintiff is an intended third party beneficiary to the contract. See infra Discussion Part II.D; Flickinger v. Harold C. Brown Co., 947 F.2d 595, 600 (2d Cir. 1991).
Plaintiff attempts to overcome the glaring problem that neither Highland nor the Schneiders were a direct party to the note negotiations by stating that Rauch was authorized to bind the Schneiders as their agent to a sale of the notes to RBC, and that RBC, in turn, was authorized by Rauch to act as the Schneiders' agent to bind them to a sale of their notes to Highland. Plaintiff boldly claims that RBC's role as a riskless principal, buying the notes from the Schneiders and immediately selling them to Highland at a profit or 1½ cents on the dollar, is akin to acting as the Schneiders' agent during this transaction. Notably, defendants and RBC vehemently deny that RBC acted as the Schneiders' agent during this transaction.
"Agency is a legal concept which depends upon the existence of required factual elements: the manifestation by the principal that the agent shall act for him, the agent's acceptance of the undertaking and the understanding of the parties that the principal is to be in control of the undertaking." Restatement (Second) of Agency § 1 cmt. b (1958). An express agency relationship is created "by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal's account." Itel Containers Int'l Corp v. Atlanttrafik Express Serv. Ltd., 909 F.2d 698, 703 (2d Cir. 1990) (quoting Restatement (Second) of Agency § 26 (1958)). That defendants and RBC both deny any agency relationship evidences that this standard is not met. Plaintiff claims that RBC's denial is specious based on its internal conversations defining itself as a representative of the Schneiders. (See Pl.'s Opp'n Ex. 78, RBC 896, 1.25.26.) However, during this twelve minute conversation between Wood and Ambrecht of RBC, the men emphasize that RBC is a principal buying the bonds from the Schneiders and selling them to Highland. Further, the men strategize as to how best disguise from the Schneiders that RBC is receiving a 1½ cent on the dollar profit from this transaction. This conversation belies plaintiff's conclusion that an agency relationship existed as RBC was not acting "on behalf, at the behest, or for the benefit" of the Schneiders but rather was acting for its own benefit. See Cabrera v. Jakabovitz, 24 F.3d 372 (2d Cir. 1994).
Plaintiff also points to the letter agreement, supra Background Part IV, as establishing that RBC was authorized to bind the Schneiders to a sale of their notes. The letter agreement does not support Highland's contention as it merely states that Rauch represents the Schneiders as to the possible resale of their notes; nowhere is RBC authorized to sell the notes. Nor is plaintiff's argument that a "riskless principal" is equal to an agent tenable. In support of this argument, plaintiff cites law review and other trade journal articles which analogize the riskless principal relationship to that of an agent as the riskless principal also "assumes no market risk" in the transaction between the seller, here the Schneiders, and the secondary buyer, here Highland. An analogy is not a legal equivalent, however, and RBC's ability to hold Highland to an assumed firm bid to buy had Highland reneged does not create a contract between Highland and the Schneiders.
A theory, though not pled in so many words, of apparent authority, also fails because there is no evidence that the Schneiders or Rauch conducted themselves in a way that misrepresented RBC's role in this arrangement. See Ford v. Unity Hosp. 32 N.Y.2d 464, 472-73, 299 N.E.2d 659, 664 (1973);see also Intel Containers, 909 F.2d at 703 ("[I]in order to determine whether there was implied authority, the court must focus on the acts of the principal in relation to the third party."). Plaintiff artfully crafts a legal theory wherein Rauch assumes the role of the principal conducting himself in a way that would mislead Highland with respect to RBC's role. However, this theory is to no avail when imposed on the facts of this case for, even if the Court assumes that Rauch knew of Highland's presence in this transaction, Rauch did not conduct himself in a way that would show RBC to be the Schneiders' agent. On the contrary, Rauch at all times acted as RBC's adversary engaged in negotiations regarding the price of the notes and constantly reiterated his need to return to the Schneiders for approval of any bids. Also, RBC's conversations with Highland necessarily put Highland on notice that RBC did not have the authority to bind the Schneiders. Thus, if Highland did rely on RBC's alleged role as the Schneiders' agent as deputized by Rauch, such reliance was manifestly unreasonable. See Herbert Constr., 931 F.2d at 995-96.
As the above are the only links plaintiff points to between the Schneiders and Highland, a claim for breach of contract cannot lie as a matter of law. Therefore, the Court grants defendants' motion for summary judgment dismissing plaintiff's claim for breach of contract between the Schneiders and Highland on the merits.
C. Plaintiff's Claim the Schneiders Breached a Binding Preliminary Agreement with Highland
Alternatively, plaintiff asserts upon the same theory as its breach of contract claim, that the Schneiders' refusal to consummate the trade of their notes with Highland breached a binding preliminary agreement. "Ordinarily, where the parties contemplate further negotiations and the execution of a formal instrument, a preliminary agreement does not create a binding contract." Adjustrite Sys., Inc. v. GAB Bus. Servs., Inc., 145 F.3d 543, 548 (2d Cir. 1998). New York state law does provide for two exceptions to this general rule, a binding preliminary agreement and a binding preliminary commitment. A binding preliminary agreement exists where the parties agreed on "all the points that require negotiation but agree to memorialize their agreement in a more formal document." Id. A binding preliminary commitment exists where the parties "agree on certain major terms but leave other terms open for further negotiation" and manifest an intent to be bound to the preliminary commitment to negotiate in good faith. Id. However, the Schneiders cannot be held liable to Highland under either theory because, as demonstrated above, supra Discussion Part II.B., the Schneiders were not parties to any alleged agreement with Highland. Therefore, plaintiff's claim for breach of preliminary agreement as to the Schneiders and Highland cannot stand as a matter of law and is dismissed on the merits.
D. Plaintiff's Claim as Third Party Beneficiary to a Schneider/RBC Contract
Alternatively, plaintiff claims that it was an intended third party beneficiary to the purported oral agreement between the Schneiders and RBC. Like the underlying contract, plaintiff's ability to recover under this theory is limited to $5000 pursuant to N.Y.U.C.C. § 1-206. BAII Banking Corp v. UPG, Inc., 985 F.2d 685, 697 (2d Cir. 1993) (finding that a third party beneficiary has "no greater right to enforce a contract than the actual parties to the contract"). In order to claim third party beneficiary status, plaintiff must allege: "`(1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for his benefit and (3) that the benefit to him is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate him if the benefit is lost.'" State of Cal. Publ. Employees' Ret. Sys. v. Sherman Sterling, 95 N.Y.2d 427, 434-35, 741 N.E.2d 101, 104 (2000) (quoting Burns Jackson Miller Summit Spitzer v. Lindner, 59 N.Y.2d 314, 451 N.E.2d 459 (1983)); Mortise v. United States, 102 F.3d 693, 697 (2d Cir. 1996). The Restatement (Second) of Contracts further guides New York courts, stating that a third party is an intended beneficiary if: "recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and . . . the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance." Restatement (Second) of Contracts § 302(b) (1981) (adopted in Fourth Ocean Putnam Corp. v. Interstate Wrecking Co., 66 N.Y.2d 38, 45 (1985)). Finally, the identity of an intended third party beneficiary need not be expressed in the contract, Trans-Orient Marine Corp. v. Star Trading Marine, Inc., 925 F.2d 566, 573 (2d Cir. 1991); however, "the parties' intent to benefit a third party must be shown on the face of the agreement," In re Gulf Oil/Cities Serv. Tender Offer Litig., 725 F. Supp. 712, 733 (S.D.N.Y. 1989). Absent any facts to this effect, plaintiff may, at best, be deemed an incidental beneficiary with no enforceable rights under the alleged contract. See McPheeters v. McGinn, Smith Co., Inc., 953 F.2d 771, 773 (2d Cir. 1992) ("A third-party beneficiary exists, however, `only if the parties to that contract intended to confer a benefit on him when contracting; it is not enough that some benefit incidental to the performance of the contract may accrue to him.") (quoting Kyung Sup Ahn v. Rooney Pace, Inc., 624 F. Supp. 368, 371 (S.D.N.Y. 1985)).
Defendants argue that Highland could not have been an intended third party beneficiary because neither the Schneiders nor GRS knew of Highland's existence prior to the time the purported contract was effective. Further, defendants contend that RBC was acting for its own benefit and therefore Highland is not the only party with recovery rights under the contract. Plaintiff counters that a material issue of fact exists as to whether Highland's existence was known and that GRS and RBC intended that the contract benefit Highland.
The Court finds that a material issue of fact exists as to whether Highland was an intended third party beneficiary if the contract is found to exist. New York has "emphasized when upholding the third party's right to enforce the contract that no one other than the third party can recover if the promisor breaches the contract," "or that the language of the contract otherwise clearly evidences an intent to permit enforcement by the third party as by fixing the rate or price at which the third party can obtain services or goods," Fourth Ocean Putnam, 66 N.Y.2d at 45 (citations omitted). Here, both RBC and Highland can potentially recover under the contract. Further, the language of the purported contract specifically obscures the details of Highland's enforcement right as the telephone calls make clear that RBC sought to veil its price agreement with Highland from GRS and the Schneiders.
However, the oral agreement was prefaced on RBC's status as a "riskless principal," purchasing the notes in order to immediately sell them to an unidentified third party. That either GRS or the Schneiders directly were aware of RBC's status is evidenced by the many recorded conversations between GRS and RBC wherein the parties reference RBC's "guy," indicating that there was a second purchaser RBC was negotiating with in order to off-load the notes as soon as RBC consummated the deal. Though GRS and the Schneiders may not have known Highland by name nor the terms of the benefit to Highland, the telephone conversations raise a factual issue as to whether defendants or their agent were aware and intended that the transaction would ultimately confer the benefit of ownership of the notes to a third party. The immediacy of the anticipated transfer of ownership from RBC to Highland satisfies the third prong of the above test for intended third party beneficiary status.
Accordingly, plaintiff's claim for breach of contract as a third party beneficiary to the alleged contract between the Schneiders and RBC survives because a genuine issue of material fact exists as to whether the parties intended to benefit Highland when entering into the contract.
E. Schneiders and JGPC Alleged Tortious Interference with Contract Between RBC and Highland
In New York State, in order to recover for tortious interference with a contract, "a complainant must prove the existence of a valid and enforceable contract between plaintiff and a third party, the defendants' knowledge of that contract, and defendants' improper intentional interference with its performance," Enercomp, Inc. v. McCorhill Publ'g, Inc., 873 F.2d 536, 541 (2d Cir. 1989), "without reasonable justification."Jews for Jesus, Inc. v. Jewish Cmty. Relations Council of N.Y, 968 F.2d 286, 292 (2d Cir. 1992); see Int'l Minerals Res., S.A. v. Pappas, 96 F.3d 586, 595 (2d Cir. 1996) (citing, inter alia, Kronos, Inc. v. AVX Corp., 612 N.E.2d 289, 292, 81 N.Y.2d 90, 94 (1993), as stating New York State law's four elements for tortious interference with contract).
Plaintiff's claim here fails because there is no issue as to defendants' knowledge of a valid and enforceable Highland/RBC contract. First, the Court notes that any contract for the sale of the notes is limited by the statute of frauds, N.Y.U.C.C. § 1-206, and thus, any recovery for tortious interference with that contract is similarly limited. See Nifty Foods Corp. v. The Great Atl. Pac. Tea Co., 614 F.2d 832, 837-388 (2d Cir. 1980). Second, Highland points to no contract between itself and RBC of which the Schneiders, GRS, or JGPC had knowledge. As statedsupra, Discussion Parts II.A.2., II.B., RBC was decidedly coy regarding the details of its relationship with the buyer on whose behalf RBC acted as a riskless principal. Though the Court finds above that a material issue exists concerning whether the Schneiders and RBC intended their own alleged contract ultimately to benefit Highland, the Court finds there is no evidence that either the Schneiders, GRS, or JGPC knew RBC and Highland had entered into a separate binding contract. Highland attempts to leap this hurdle by pointing to the testimony of RBC and Highland employees regarding their belief that a contract existed, however, those employees' subjective understanding does not impute knowledge of a contract to the Schneiders, GRS, or JGPC.
Therefore, the Court dismisses plaintiff's claim for tortious interference with a purported contract between Highland and RBC as to all defendants on the merits.
F. Schneiders and JGPC Alleged Tortious Interference with Prospective Business Relationship Between RBC and Highland
To establish a claim for tortious interference with prospective business advantage, plaintiff must prove that: (1) there was a business relationship with a third party; (2) defendants "knew of that relationship and intentionally interfered with it"; (3) defendants either acted "solely out of malice" or used wrongful means; and, (4) defendants' "interference caused injury to the relationship" with the third-party. See Carvel Corp. v. Noonan, 350 F.3d 6, 17 (2d Cir. 2003); see also Lombard v. Booz-Allen Hamilton, Inc., 280 F.3d 209, 214 (2d Cir. 2002); Purgess v. Sharrock, 33 F.3d 134, 141 (2d Cir. 1994). This cause of action has a "limited scope." Piccoli A/S v. Calvin Klein Jeanswear Co., 19 F. Supp. 2d 157, 168 (S.D.N.Y. 1998).
This tort must be supported by evidence of plaintiff's relationships with specific third parties with which defendants interfered. See Four Finger Art Factory, Inc. v. DiNicola, No. 99 Civ. 1259, 2000 U.S. Dist. LEXIS 1221, at *23-24 (S.D.N.Y. Feb. 9, 2000); Minnesota Mining Mfg. Co. v. Graham-Field, Inc., No. 96 Civ. 3839, 1997 U.S. Dist. LEXIS 4457, at *23 (S.D.N.Y. Apr. 9, 1997); Winner Int'l v. Kryptonite Corp., No. 95 Civ. 247, 1996 U.S. Dist. LEXIS 2182, at *10 (S.D.N.Y. Feb. 27, 1996) ("As Winner does not allege that Kryptonite's conduct interfered with its business relationship with any specific party, it cannot establish the elements necessary for this tort. . . ."). Further, the relationship must be in existence at the time of the interference. See Minnesota Mining, 1997 U.S. Dist. LEXIS 4457, at *23 ("A claim for interference with advantageous business relationships must specify some particular, existing business relationship through which plaintiff would have done business but for the allegedly tortious behavior.") (citations omitted).
That interference must be "direct interference with a third party, that is, `the defendant must direct some activities towards the third party and convince the third party not to enter into a business relationship with the plaintiff.'" Black Radio Network, Inc. v. NYNEX Corp., No. 96 Civ. 4138, 2000 U.S. Dist. LEXIS 594, at *13-14 (S.D.N.Y. Jan. 25, 2000) (quoting Fonar Corp. v. Magnetic Resonance Plus, Inc., 957 F. Supp. 477, 482 (S.D.N.Y. 1997) (citing G.K.A. Beverage Corp. v. Honickman, 55 F.3d 762 (2d Cir.), cert. denied, 516 U.S. 944 (1995)); see also Piccoli, 19 F. Supp. 2d at 167-68. Moreover, "as a general rule, the defendant's conduct must amount to a crime or an independent tort" because "[c]onduct that is not criminal or tortious will generally be `lawful' and thus insufficiently `culpable' to create liability for interference with prospective contracts or other non-binding economic relations." Carvel Corp. v. Noonan, 3 N.Y.3d 182, 190, 818 N.E.2d 1100, 1103 (2004); see also Treppel v. Biovail Corp., No. 03 Civ. 3002, 2005 U.S. Dist. LEXIS 2737, at *14 (S.D.N.Y. Feb. 22, 2005 (Leisure, J.); (noting that the general rule following Carvel is that defendant's conduct must amount to a crime or an independent tort); Rome Ambulatory Surgical Ctr., LLC v. Rome Mem'l Hosp., Inc., 349 F. Supp. 2d 389, 423 (N.D.N.Y. 2004) (same). The only recognized exception to the rule applies where a defendant engages in conduct "for the sole purpose of inflicting intentional harm on plaintiffs." Carvel, 3 N.Y.3d at 190, 818 N.E.2d at 1103 (quotation omitted); see also Carvel, 350 F.3d at 17-19 (providing that plaintiff may establish this element of the tort by showing either that defendant used "wrongful means" or acted "solely out of malice").
Here, plaintiff cannot claim tortious interference with its relationship with RBC because defendants' alleged tortious action directed toward the third party, RBC, did not convince RBC to avoid business relationships with plaintiff; RBC very much wished to continue its relationship with plaintiff. Rather, it was plaintiff who refused to engage in future transactions with RBC. Defendants cannot be held responsible for plaintiff's decision to terminate its relationship with RBC. Plaintiff attempt to warp the law to suit its particular case is of no avail and its claim must be summarily dismissed with prejudice.
III. Jurisdiction
Based on the above, the only issue of material fact as to plaintiff's claims resides in whether the Schneiders and RBC intended that Highland be a third party beneficiary to the alleged Schneider/RBC oral contract. All of plaintiff's other claims are dismissed on the merits, with prejudice. Moreover, because the underlying contract falls within the statute of frauds, plaintiff's remaining claim as third party beneficiary is only enforceable up to $5000. See N.Y.U.C.C. § 1-206. Thus, plaintiff's claim does not satisfy the $75,000 statutory requirement for diversity jurisdiction and this Court is required to sua sponte dismiss the action. 28 U.S.C. § 1332(a); Fed.R.Civ.P. 12(h)(3); see Scherer v. Equitable Life Assur. Soc'y of the United States, 347 F.3d 394, 397 (2d Cir. 2003).
Because the Schneiders and RBC are not completely diverse parties, the Court cannot exercise original jurisdiction over the remaining third party complaint and counter-claims. 28 U.S.C. § 1332(a). Without jurisdiction over the original claim, the Court may decline to exercise supplemental jurisdiction over the third-party complaint. 28 U.S.C. § 1367(c)(3). In exercising its discretion, the Court should not exercise supplemental jurisdiction where the original claims are dismissed for lack of jurisdiction. See Nowak v. Ironworkers Local 6 Pension Fund, 81 F.3d 1182, 1187-88 (2d Cir. 1996) (dealing with a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)). Here, the claims are dismissed both on the merits and for want of jurisdiction, a scenario not wholly encompassed byNowak. There, the district court premised its decision to retain supplemental jurisdiction over the state claims rather than remand to state court on judicial economy by stating: "to now require much of this court's efforts in acquainting itself with the facts and issues of the case to be substantially replicated in state court would not serve the interests of judicial economy, convenience, and fairness that are central to the exercise of supplemental jurisdiction." Id. at 1187. This Court is not faced with such a dilemma here, and it is not foregone that RBC and the Schneiders would pursue their third party claims after this Court dismisses plaintiff's action. While this Court is well-steeped in the facts of the case, the third-party claims are, for the most part, legally divergent and would require assessments independent of those engaged in above. Therefore, the Court finds that the best exercise of judicial discretion here is to dismiss the remaining action for want of jurisdiction.
Leonard Schneider is a resident of Florida, while Leslie, Scott and Susan Schneider are residents of New York. RBC is a New York corporation. Supra, Background Part I.
CONCLUSION
For the reasons stated above, plaintiff's complaint counts one through six are dismissed on the merits pursuant to Federal Rules of Civil Procedure 12(c) and 56. Plaintiff's complaint count seven is dismissed for want of subject matter jurisdiction pursuant to 28 U.S.C. § 1332(a) and Federal Rule of Civil Procedure 12(b)(1). The Court declines to exercise supplemental jurisdiction over the third-party complaints of the Schneiders and RBC, pursuant to 28 U.S.C. § 1367(c)(3). Accordingly, the entire above-captioned action is dismissed as to all parties.
SO ORDERED.