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Failure to Comply with a Time-Limit for a Buy-Out in a Shareholders’ Agreement Was Trumped by the Overall Purpose of the Agreement—Shareholder Properly Compelled to Sell His Shares

The Third Department determined a shareholders’ agreement. although it did not address the particular problem at issue, must be read to avoid a result which would be at odds with the clear purposes of the agreement.  One of the three shareholders of the closely held corporation (the defendant) was convicted of a felony and the other shareholders terminated his employment and sought to buy his shares. The defendant sought to prohibit the buy-out by arguing it was untimely under the terms of the shareholders’ agreement.  Because the corporation distributed alcoholic beverages, if the defendant remained a shareholder the corporation would lose its distributor’s license:

A shareholders’ agreement — like any other contract — should be enforced according to its terms … . In so doing, “[t]he contract must be read as a whole to determine its purpose and intent, and it should be interpreted in a way [that] reconciles all its provisions, if possible” … . To that end, “the goal should be a practical construction of the language used so that the reasonable expectations of the parties are realized” …, and “the contract must be interpreted so as to give effect to, not nullify, its general or primary purpose” … .

Here, the shareholders’ agreement reflects “[t]he shareholders[‘] desire to establish a market value for their shares, to effectively control the management of the company, for their mutual best interests, and to protect against divisive relationships which would arise if outsiders with incompatible management philosophies gained interests in the company.” Consistent with that stated objective, the agreement further recognizes that “[t]he company is dependent upon and derives substantial benefit from the continued active interest and participation of those shareholders who participate in the management of the company.” In an attempt to preserve the closely-held nature of the corporation, the agreement provides that when a shareholder’s employment with the corporation ceases, “he or she shall be treated as though he or she were selling all of his or her shares under paragraph A of . . . [s]ection [t]wo [of the agreement],” which outlines the procedures to be followed when a shareholder, during the course of his or her lifetime, “transfer[s] any of his or her shares to anyone other than a family member.” In such case, the shareholder is to give notice of his or her intention to sell and, “[f]or a period of thirty [30] days after the notice is delivered, the [corporation] shall have an option to purchase all or any part of the offered shares on the payment terms specified in [s]ection [f]our [of the agreement].” If the corporation does not exercise such option, then the remaining shareholders are granted an additional 30-day option to purchase any or all of the available shares. * * *

…[R]eading the agreement as a whole and affording it a practical construction that is consistent with and gives proper effect to the parties’ stated intentions …, we are satisfied that Supreme Court properly granted plaintiffs’ motion to compel [defendant] to sell his shares to the corporation — even if that option to purchase was not timely exercised. To hold otherwise and permit [defendant] to retain his shares due to the asserted noncompliance with the time period set forth in the shareholders’ agreement not only would effectively rewrite the parties’ agreement and undermine its stated purpose, i.e., to retain managerial control within the closely-held family corporation, but would place the corporation at risk of losing its distributor’s license, thereby rendering its stock worthless… . A Cappione Inc v Cappione, 2014 NY Slip Op 05230, 3rd Dept 7-10-14

 

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Material Misrepresentation Justified Rescission of Policy

The Second Department determined that plaintiff’s representation to the insurance carrier that the property was a two-family dwelling, when it actually was a three-family dwelling, was a material misrepresentation justifying rescission of the policy:

“To establish the right to rescind an insurance policy, an insurer must show that its insured made a material misrepresentation of fact when he or she secured the policy” … . “A misrepresentation is material if the insurer would not have issued the policy had it known the facts misrepresented” … . “To establish materiality as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins, or rules pertaining to similar risks, that show that it would not have issued the same policy if the correct information had been disclosed in the application” … . * * *

…[T]he defendant submitted an affidavit from its underwriting manager and its “Homeowners Selection Rules,” which showed that it would not have issued the same policy if the application had disclosed that the subject premises was a three-family dwelling … . Lema v Tower Ins Co of NY, 2014 NY Slip Op 05162, 2nd Dept 7-9-14

 

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All Ambiguities Re: Letters of Credit Resolved Against the Issuer—“Independence Principle” Applied—Beneficiaries of Letters of Credit Entitled to Payment

In a full-fledged opinion by Justice Andrias, the First Department reversed Supreme Court and determined plaintiffs were entitled to payment as beneficiaires of irrevocable standby letters of credit.  The opinion is detailed and meticulously resolved all ambiguities in the relevant documents against the issuer of the letters of credit.  The opinion includes an extended discussion of the “independence principle” in this context.  With respect to the basic analytical principles to be applied, the court wrote:

Under New York law, in order to recover on its claim that the issuer wrongfully refused to honor its request to draw down on a letter of credit, the beneficiary must prove that it strictly complied with the terms of the letter of credit … . “The corollary to the rule of strict compliance is that the requirements in letters of credit must be explicit, and that all ambiguities are construed against the [issuer]” … . The reasoning is that “[s]ince the beneficiary must comply strictly with the requirements of the letter, it must know precisely and unequivocally what those requirements are” … . “Where a letter of credit is fairly susceptible of two constructions, one of which makes it fair, customary and one which prudent men would naturally enter into, while the other makes it inequitable, the former interpretation must be preferred to the latter, and a construction rendering the contract possible of performance will be preferred to one which renders its performance impossible or meaningless” … . * * *

In November 2000, the independence principle was codified in a general revision of article 5 of the UCC. UCC 5—103(d) now provides that:

“[r]ights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are independent of the existence, performance, or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary.”

The doctrine of independent contracts, as codified in UCC article 5, allows the letter of credit to provide ” a quick, economic and trustworthy means of financing transactions for parties not willing to deal on open accounts'”… . “Only staunch recognition of this principle by the issuers and the courts will give letters of credit the continuing vitality that arises from the certainty and speed of payment under letters of credit” … .BasicNet SpA v CFP Servs Ltd, 2014 NY Slip Op 04585, 1st Dept 6-19-14

 

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General Language—“Disposition”—Limited in Scope by More Specific Words—“Sale or Transfer”

The First Department, over a dissent, determined that the rules of contract interpretation did not allow the collection of a “transaction fee” by plaintiff financial advisor with respect to the defendant’s purchase of notes in anticipation of the purchase of a mine.  When the financing for the mine fell through, the defendant sold back the notes in accordance with the purchase agreement with the seller of the notes.  The plaintiff sought a “transaction fee” for that transaction:

…[T]he motion court unreasonably construed the parties’ agreement in arriving at the conclusion that plaintiff was entitled to a “transaction fee” in connection with defendant’s aborted acquisition of a participation interest in the notes. The letter agreement provides that plaintiff is entitled to a “transaction fee” following the consummation or closing of a “transaction,” which it defines as the “sale, transfer or other disposition . . . [of] a portion of the assets, businesses or securities of [defendant].” The acquisition in question was admittedly not a “sale” or “transfer.” Nor can it be considered a “disposition,” as plaintiff contends. The term “disposition” does not appear in isolation in the agreement, but as a catch-all at the end of the phrase “sale, transfer or other disposition.” Thus, under the principle of ejusdem generis, the general language “or other disposition” must be construed as limited in scope by the more specific words “sale” and “transfer” that preceded it … . Miller Tabak + Co LLC v Senetek PLC, 2014 NY Slip Op 04418, 1st Dept 6-17-14

 

A Counteroffer Extinguishes the Initial Offer Which Cannot Be Unilaterally Revived by Subsequent Acceptance

The First Department determined that no binding contract for the sale of real property had been reached after a series of offers and counteroffers.  In the course of the decision, the court noted some of the relevant black letter law:

The record demonstrates that the parties never came to terms and instead proposed a series of offers and counteroffers to which they never mutually agreed. …To enter into a contract, a party must clearly and unequivocally accept the offeror’s terms … . If instead the offeree responds by conditioning acceptance on new or modified terms, that response constitutes both a rejection and a counteroffer which extinguishes the initial offer … . The counteroffer extinguishes the original offer, and thereafter the offeree cannot … unilaterally revive the offer by accepting it … .

…[O]ral acceptance of a written offer can form a binding contract for the sale of real property * * *. Thor Props LLC v Willspring Holdings LLC, 2014 NY Slip Op 04237, 1st Dept 6-12-14

 

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In the Absence of an Express Agreement that the Plaintiff Was Entitled to a Commission Upon the Sale of Assets by the Principal, the Agreement Created an Exclusive Agency, which Merely Precluded the Principal from Hiring Another Agent, but Did Not Create, in the Agent, an Exclusive Right to Sell

The Court of Appeals, in a full-fledged opinion by Judge Lippman, over a dissent, in another case arising from the “toxic debts” crisis, determined that the plaintiff was an exclusive agent for the sale of assets, and was not granted an exclusive right to sell the assets. If plaintiff had been granted an exclusive right to sell, it may have been entitled to a commission when the assets were sold by the principal.  But, since the contract was silent about the plaintiff's right to a commission when the principal sells the assets, plaintiff was granted only an exclusive agency for the sale of the assets and the principal could sell the assets without any obligation to pay a commission to the plaintiff.  The exclusive agency agreement only precluded the principal from hiring another agent:

The distinction between an exclusive agency and an exclusive right to sell is well established in a body of Appellate Division case law … . As stated nearly a century ago, “The general rule is that where an exclusive right of sale is given a broker, the principal cannot make a sale [herself] without becoming liable for the commissions. But where the contract is merely to make the broker the sole agent, the principal may make a sale [herself] without the broker's aid, if such sale is made in good faith and to some purchaser not procured by the broker”… .

Put differently, “[a] broker is entitled to a commission upon the sale of the property by the owner only where the broker has been given the exclusive right to sell; an exclusive agency merely precludes the owner from retaining another broker in the making of the sale” … . We have endorsed this dichotomy implicitly in the past …, and now do so explicitly.

Furthermore, we agree with the case law of the lower courts holding that a contract giving rise to an exclusive right of sale must “clearly and expressly provide[] that a commission is due upon sale by the owner or exclude[] the owner from independently negotiating a sale” … . Requiring an affirmative and unequivocal statement to establish a broker's exclusive right to sell is consistent with the general principle that an owner's freedom to dispose of her own property should not be infringed upon by mere implication. Morpheus Capital Advisors LLC v UBS AG, 2014 NY Slip Op 04112, CtApp 6-10-14

 

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“No Action” Clause In a Trust Indenture Interpreted Narrowly Under Established Principles of Contract Interpretation—The Clause Did Not Preclude Suit By Securityholders Based Upon Their Common Law and Statutory Rights In an Action Stemming from the “Credit Default Swap” Crisis

In an action arising out of the credit default swap crisis, the Court of Appeals, in a full-fledged opinion by Judge Rivera, determined that a “no action” clause, which imposed restrictions on actions brought by securityholders, must be construed narrowly according to its terms.  The “no action” clause stated in pertinent part:  “Limitations on Suits by Securityholder. No holder of any Security shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture… .”  The “Indentures” were agreements entered into with trustees who served as third party administrators of the issuance of securities.  The Court of Appeals held that the clause related solely to actions “with respect to this Indenture” and did not affect the common law and statutory actions brought by securityholders to enforce their rights:

A trust indenture is a contract, and under New York law “[i]nterpretation of indenture provisions is a matter of basic contract law” … .

In construing a contract we look to its language, for “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms” … . As the case law further establishes, we read a no-action clause to give effect to the precise words and language used, for the clause must be “strictly construed” … .

Applying these well established principles of contract interpretation, and with the understanding that no-action clauses are to be construed strictly and thus read narrowly, we turn to the language of the no-action clause presented by the certified question. The no-action clause here states that no securityholder “shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture . . .”. The clear and unambiguous text of this no-action clause, with its specific reference to the indenture, on its face limits the clause to the contract rights recognized by the indenture agreement itself. Further supporting this construction of the clause is the sole textual reference to securities, which is contained in the clause's provision for a Trustee-initiated suit for a continuing “default in respect of the series of Securities.”[FN11] This part of the no-action clause permits the trustee to sue in its name, after notice by a securityholder of a continuing default and upon approval of the suit by a majority of securityholders. Thus, the clear import of the no-action clause is to leave a securityholder free to [*10]pursue independent claims involving rights not arising from the indenture agreement. Quadrant Structured Prods Co Ltd v Vertin, 2014 NY Slip Op 04114, CtApp 6-10-14

 

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Conclusory Allegations of Bad Faith in Negotiations Pursuant to a Settlement Agreement Did Not State a Cause of Action

The Court of Appeals, in a full-fledged opinion by Judge Read, over a dissent, determined the parties failure to come to an agreement did not give rise to a cause of action.  The negotiations, pursuant to a prior settlement agreement, had come to an impasse which, the Court of Appeals concluded, was not actionable:

It is true, as the concurring Justices in the Appellate Division pointed out, that courts normally give a generous reading to pleadings that are attacked as insufficient on their face. But it is not too much to ask that a pleading filed after more than a decade of back and forth between the parties contain some specific facts supporting the claim of bad faith — not just the bald conclusions, contradicted by the only relevant document referred to, that [defendant] insisted “on terms that conflicted with the Settlement Agreement” and “made a definite and final communication” of its intent to violate its obligations. IDT Corp v Tyco Group SARI, 2014 NY Slip Op 04044, CtApp 6-5-14

 

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Writing Which Omitted Certain Crucial Terms Was an “Agreement to Agree,” Not an Enforceable Real Estate Sales Contract

The First Department determined that a writing [the September 14 letter] which included some terms of the sale of church property for $15 million constituted an “agreement to agree” and not an enforceable real estate sales contract.  The writing identified the parties, the property, the amount of the downpayment and the price of the property.  At some point after the writing was signed, the defendant property owner told the plaintiff it was negotiating the sale of the property to another and, if the plaintiff wanted to buy, the price would be $17.5 million.  The plaintiff then sued for breach of contract and specific performance.  In finding the writing was not an enforceable real estate sales contract, the court noted that several crucial terms were missing, including the failure to mention the required court-approval of the sale of church property pursuant to the not-for-profit corporation law, and the failure to include details of the escrow agreement:

…[W]e agree with defendant that the September 14 letter did not contain all of the material terms which one would reasonably have expected to be included under the circumstances, rendering the September 14 letter unenforceable. For example, while the September 14 letter contemplated that the down payment would be held in escrow, it failed to identify who the escrow agent would be and left to future negotiations “a reasonably acceptable escrow agreement.” Since “[n];o contract for the sale of real property can be created when a material element of the contemplated bargain has been left for further negotiations,” …, and the details of an escrow arrangement are certainly material, this alone warranted the motion court’s conclusion that the letter was not a contract.

Further, the contemplated transaction was unique, insofar as it was contingent on approval by the court and the Attorney General. While we do not question that defendant was entitled to agree to a sale of the property prior to seeking such approval …, one would expect that an agreement would have contained such material terms as defendant’s duty to seek approval in a diligent manner, and the consequences of a failure to secure such approval. Indeed, it has been held that the contingency created by a condominium association’s right of first refusal is material to an agreement to sell an individual condominium apartment … .  Argent Acquisitions LLC v First Church of Religious Science, 2014 NY Slip Op 04048, 1st Dept 6-5-14

 

Criteria for Setting Aside a Stipulation of Settlement Explained

In finding plaintiff’s motion to vacate a stipulation of settlement was properly denied, the Second Department explained the operative principles:

“Stipulations of settlement are judicially favored, will not lightly be set aside, and are to be enforced with rigor and without a searching examination into their substance’ as long as they are clear, final and the product of mutual accord'” … . A stipulation of settlement may not be set aside except on a showing of fraud, collusion, mistake, or accident … . Yan Ping Liang v Wei Xuan Gao, 2014 NY Slip Op 04003, 2nd Dept 6-4-14

 

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