Lazard Freres & Co. v. Protective Life Ins. Co.

• Decision Date: 26 March 1997
• Docket Number: D,No. 616,616
• Citation: 108 F.3d 1531
• Parties: LAZARD FRERES & CO., Plaintiff-Counter-Defendant-Appellee, v. PROTECTIVE LIFE INSURANCE COMPANY, Defendant-Counter-Claimant-Appellant. ocket 96-7664. United States Court of Appeals,Second Circuit
• Court: U.S. Court of Appeals — Second Circuit

Page 1531

108 F.3d 1531

LAZARD FRERES & CO., Plaintiff-Counter-Defendant-Appellee, v. PROTECTIVE LIFE INSURANCE COMPANY,

Defendant-Counter-Claimant-Appellant.

No. 616, Docket 96-7664.

United States Court of Appeals,Second Circuit.

Argued Dec. 4, 1996.

Decided March 26, 1997.

J. Douglas Richards, O'Sullivan Graev & Karabell, New York City (Andrew D. Manitsky, of counsel), for Defendant-Counter-Claimant-Appellant.

Brad S. Karp, Paul, Weiss, Rifkind, Wharton & Garrison, New York City (Steven C. Herzog, of counsel), for Plaintiff-Counter-Defendant-Appellee.

Before: VAN GRAAFEILAND, JACOBS and CALABRESI, Circuit Judges.

CALABRESI, Circuit Judge:

This breach of contract action between two large and sophisticated bank debt traders involves the attempted sale of several million dollars worth of bank debt. Because it concluded, as a matter of law, that the defendant could not show fraud in the inducement or failure of a condition precedent, the district court granted the plaintiff's summary judgment motion. The district court's decision ultimately turns on two factual issues addressed only implicitly by the court: 1) the date on which the contract was formed; and 2) whether the defendant retained the right to perform a diligent review of the relevant documents up to the date of closing. We believe that facts material to each of these questions remain in genuine dispute, and we therefore vacate and remand. We note, however, that if on remand the defendant fails to convince the fact finder as to either of these

factual issues, the plaintiff must prevail as a matter of law.

BACKGROUND

Plaintiff Lazard Freres & Co. ("Lazard") is an investment bank and registered broker-dealer. Defendant Protective Life Insurance Co. ("Protective") is "one of the biggest, most successful bank debt players in the marketplace." ¹ Its subsidiary, Protective Asset Management Corp. ("PAMCO"), handles a bank debt portfolio valued at $760 million.

On the morning of January 28, 1994, Lazard agreed to purchase $10 million (face value) of bank debt issued by Maxwell Communications Corp. (the "MCC bank debt"). Lazard attempted to turn around and sell the debt immediately. Kevin Murphy, a Lazard sales representative, called a number of his customers to try to interest them in the purchase. One of the customers he called was Mark Okada, a principal of PAMCO. Murphy left an "urgent" message at Okada's office in California for Okada to call him back. At the time, Okada was in Disney World, attending a high yield bond conference. When he received the message, Okada called Murphy from a pay phone.

The telephone conversation between Murphy, Okada, and Michael Weinstock, a Lazard analyst, lasted approximately eleven minutes. During that conversation, Murphy described the MCC bank debt to Okada and explained to him that if Protective wanted to purchase the debt, it had to act fast, indeed that very day, as a letter to MCC's creditors (the "Scheme Report") describing the debt was in transit to the market and would become public very soon. According to Protective, Murphy represented that he had knowledge of the contents of the Scheme Report, and that it would verify, among other things, that twenty percent of the face amount of the debt was going to be paid in March 1994, and that there were no outstanding litigations against MCC that would reduce the value of the debt. ² If Protective were to act right away--before the Scheme Report became known in the market--Murphy allegedly told Okada, Protective could purchase the debt at an excellent price.

Okada did not immediately commit to buying the debt. Instead, he consulted with his boss, James Dondero, who was with him at the conference in Disney World. Dondero allegedly gave Okada the go-ahead to make the purchase, so long as he received oral representation from Lazard that "the 20 cents of the 41 cents we were paying [was] escrowed, bullet-proof, coming to us in March." Okada called Murphy back, and--according to Protective--orally agreed to purchase the bank debt at 41 1/2 cents on the dollar.

Lazard prepared a final written contract (the "Written Confirmation") that afternoon, dated it January 28, 1994, and immediately sent it to Protective to be signed. Four days later, Lazard sent a copy of the Scheme Report by overnight mail, and that document was duly received by Protective on February 2. On February 8, Protective signed the Written Confirmation. Although the Scheme Report was in Protective's possession for the six days prior to its signing of the Written Confirmation, and although Protective claimed to be relying on Lazard's characterization of what was contained in that Report, Protective failed to read the Report before signing the Written Confirmation.

Both the oral and written agreements had been "conditioned upon the preparation, review and execution of documentation acceptable to Lazard and Protective" prior to closing, as was the custom for these deals. In late February 1994, Okada, in the course of going over the closing documents, finally read the Scheme Report. He immediately became convinced that Lazard had misrepresented its contents. Apparently, the Scheme Report did not guarantee, as Lazard had supposedly alleged, that twenty percent of the debt would be paid in March and that there were no significant outstanding litigations Believing that it had been misled, Protective refused to negotiate the final closing documentation needed to complete the purchase of the bank debt. In March 1994, the price of the MCC bank debt dropped substantially. Unable to close its deal with the recalcitrant Protective, Lazard was forced to sell the debt to another purchaser at a much lower price.

against MCC that could reduce the value of the debt.

Lazard brought suit in the New York State Supreme Court in April 1994, alleging breach of contract on the part of Protective and seeking $538,210.53 in damages to cover its loss. Protective removed the action to the federal district court. In its response, Protective asserted two affirmative defenses: 1) fraud in the inducement (and justifiable reliance thereon); and 2) failure of a condition precedent (the finalization of closing documents). Protective conceded that the failure to finalize the closing was due to its own refusal to negotiate, but it argued that this was wholly justified by Lazard's misrepresentations and by a provision in the contract that Protective alleges gave it the right to void the deal upon review of the Scheme Report up to the time of closing.

On May 3, 1996, the district court granted Lazard's motion for summary judgment. See Lazard Freres & Co. v. Protective Life Ins. Co., No. 94 Civ. 3959, 1996 WL 223975 (S.D.N.Y. May 3, 1996). Noting that the parties disagreed as to whether New York, California, or Alabama law should be used to determine Protective's defense of justifiable reliance, Judge Knapp chose not to decide that question. Instead, he concluded that even under Alabama law, which both parties conceded was most favorable to Protective, Protective, as a sophisticated and major player in the bank debt market, was not justified in relying on Lazard's characterization of the contents of the Scheme Report. Since it had the Report in its possession, Protective was duty bound to read it before signing the Confirmation. As to Protective's condition precedent argument, Judge Knapp held that

a person who refuses to read a document that has been in its possession for six days can[not], as a matter or law, justifiably contend that it was defrauded by misrepresentations as to the contents thereof. Therefore, Protective failed as a matter of law to negotiate in good faith, and such conduct excused the failure of the condition precedent.

Id.

at * 3. The district court did not address Protective's claim that it had the right under the contract to void the agreement, upon review of the Scheme Report, at any time prior to closing.

This appeal followed.

DISCUSSION

We review a grant of summary judgment de novo, drawing all factual inferences and resolving all ambiguities in favor of the nonmoving party. See, e.g., Gummo v. Village of Depew, 75 F.3d 98, 107 (2d Cir.), cert. denied, --- U.S. ----, 116 S.Ct. 1678, 134 L.Ed.2d 780 (1996). A dispute regarding a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the non moving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). Thus, "[i]f, as to the issue on which summary judgment is sought, there is any evidence in the record from which a reasonable inference could be drawn in favor of the opposing party, summary judgment is improper." Gummo, 75 F.3d at 107. The party seeking summary judgment bears the burden of demonstrating the absence of any genuine factual dispute. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986).

I. The date on which Protective became bound to purchase the MCC bank debt from Lazard

The district court's opinion was premised on the assumption that the purchase of the MCC bank debt did not occur until Protective signed the Written Confirmation. At that point, said Judge Knapp, Protective was not justified in relying on Lazard's representations concerning the contents of the Scheme Report, since Protective had, for six full days, been in possession of that Report without reading it. On appeal, Protective Since Protective made its commitment to purchase the [MCC bank] debt on January 28, 1994, and since those on both sides of the transaction regarded the subsequent written confirmation as a mere confirmation of the earlier oral agreement, the District Court erred, and improperly gave the benefit of strained inferences to the movant on summary judgment, by viewing Protective's mere signature to the written confirmation of a pre-existing commitment as a necessary occasion for Protective to revisit its prior decision.......