Herrick Co. Inc. v. SCS Communications

• Decision Date: 01 August 1999
• Docket Number: PLAINTIFFS-COUNTER-DEFENDANTS-APPELLANTS-CROSS-APPELLEES,DEFENDANTS-COUNTER-CLAIMANTS-APPELLEES-CROSS-APPELLANTS,DEFENDANTS-COUNTER-CLAIMANTS,Docket No. 99-7976
• Citation: 251 F.3d 315
• Parties: (2nd Cir. 2001) THE HERRICK COMPANY, INC. AND NORTON HERRICK,, v. SCS COMMUNICATIONS, INC. AND STEPHEN C. SWID,, VETTA SPORTS, INC., HENRY N. CHAN, RICHARD SHEINBERG AND STEPHEN D. WEINROTH,, SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLP AND MARK SMITH, DEFENDANTS. (L), 99-7996 & 99-7998(XAP)
• Court: U.S. Court of Appeals — Second Circuit

Page 315

251 F.3d 315 (2nd Cir. 2001)

THE HERRICK COMPANY, INC. AND NORTON HERRICK, PLAINTIFFS-COUNTER-DEFENDANTS-APPELLANTS-CROSS-APPELLEES, v. SCS COMMUNICATIONS, INC. AND STEPHEN C. SWID, DEFENDANTS-COUNTER-CLAIMANTS-APPELLEES-CROSS-APPELLANTS, VETTA SPORTS, INC., HENRY N. CHAN, RICHARD SHEINBERG AND STEPHEN D. WEINROTH, DEFENDANTS-COUNTER-CLAIMANTS, SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLP AND MARK SMITH, DEFENDANTS.

Docket No. 99-7976(L), 99-7996 & 99-7998(XAP)

August Term, 1999

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued August 7, 2000

Decided May 23, 2001

Appeal and cross-appeal from a grant of partial summary judgment and from a subsequent jury verdict as to those issues not decided on summary judgment. VACATED and REMANDED for further determinations concerning federal subject matter jurisdiction. [Copyrighted Material Omitted]

[Copyrighted Material Omitted] Gerald Walpin, (Joseph Zuckerman & Barry Michael Okun on the brief), Rosenman & Colin Llp, New York, N.Y. for Plaintiffs-Counter-Defendants-Appellants-Cross-Appellees.

Gregory P. Joseph, Fried, Frank, Harris, Schriver & Jacobson, New York, N.Y. (David Spears, Richards, Spears, Kibbe & Orbe, on the brief) (Einer Elhauge & David Rosenberg, of counsel, on the brief), for Defendants-Counter- Claimants-Appellees-Cross-Appellants.

Before: Calabresi, Cabranes, and Pooler, Circuit Judges.

Calabresi, Circuit Judge

The Herrick Company, Inc. and Norton Herrick (collectively "Herrick" or "plaintiffs") and SCS Communications, Inc. and its principal Stephen C. Swid (collectively "SCS/Swid") appeal and cross- appeal in this diversity suit from a judgment, entered by the United States District Court for the Southern District of New York (Patterson, J.), following a jury verdict awarding Herrick compensatory damages against SCS/Swid for breach of contract and breach of fiduciary duty. On appeal, Herrick attacks a setoff the district court granted against the jury award. SCS/Swid appeals the judgment below more generally, arguing (a) that the district court erred in deciding at summary judgment that a contract existed and therefore sending only questions of breach and damages to the jury, (b) that the jury trial on breach and damages was infected with error, and (c) that there is no federal jurisdiction over the lawsuit. Because we find an absence of federal subject matter jurisdiction over the lawsuit as presently constituted and because, as an appellate court, we cannot determine whether the defect in jurisdiction may be cured, we do not reach the merits of the parties' substantive contentions. We therefore vacate the judgment of the district court and remand the case to that court for further consideration.

I. BACKGROUND

This complicated appeal arises out of a much simpler business deal that went wrong. In that deal, Herrick and SCS/Swid planned the joint acquisition of the Orleander Group, a manufacturer of bicycle accessories. At the heart of the lawsuit is an August 16, 1993 Letter Agreement (the "Letter Agreement") executed by Herrick Company, Inc., SCS Communications, Inc., and TOG Acquisition Co. (the entity to be used as the acquisition vehicle). Plaintiffs claim that the Letter Agreement is a legally binding contract creating a joint venture to acquire the Orleander Group.

Negotiations about the structure of the acquisition vehicle and about the rights and responsibilities of the parties thereto broke down on November 21, 1993, and, eight days later, on November 29, SCS and TOG Acquisition Co. proceeded, with the assistance of the law firm Skadden, Arps, Slate, Meagher & Flom ("Skadden") and one of its partners, Mark Smith, to complete the acquisition of the Orleander Group on their own. Herrick responded by bringing the lawsuit now before us, in which it claims it was improperly deprived of its half-share in the joint acquisition. Specifically, Herrick sued the businesses and businesspeople involved in the deal -- (1) SCS/Swid, (2) SCS Communications director Stephen Weinroth, (3) Vetta Sports, Inc. (as successor to TOG Acquisition Co.), and (4) TOG Acquisition Co. officers Richard Scheinberg & Henry N. Chan -- (collectively, the "business defendants") asserting causes of action, based on the Letter Agreement, for breach of contract, breach of fiduciary duty, fraudulent inducement, and knowing participation in a breach of fiduciary duty. In addition, Herrick sued the law firm and lawyer involved in the deal -- Skadden and Skadden partner Mark Smith -- asserting a variety of causes of action involving breaches of fiduciary duties allegedly created by Skadden's role as attorney to the joint venture and to Herrick as one of the joint venturers. Plaintiffs sought both compensatory and punitive damages.

The several parties all moved and cross-moved for summary judgment. In relevant part, (1) the business defendants moved for summary judgment dismissing plaintiffs' complaint on the ground (among others) that the Letter Agreement was not an enforceable contract and that it did not create a joint venture; and (2) plaintiffs cross-moved for summary judgment against all defendants on all claims, and in particular against the business defendants on the ground that the Letter Agreement was an enforceable contract creating a joint venture, which the business defendants breached.¹

The district court decided the motions for summary judgment in an Opinion and Order dated December 3, 1996. In that Opinion and Order, the district court rejected the business defendants' contention that the Letter Agreement was no more than "a classic agreement to agree which did not even create enforceable obligations let alone a joint venture," and found instead that the Letter Agreement was, as a matter of law, a valid and enforceable contract creating a joint venture to acquire the Orleander Group. At the same time, however, the district court refused to hold that the business defendants had breached the contract created by the Letter Agreement, finding that the questions of breach and damages "appear to be genuine issues of material fact for the jury to determine," and hence not appropriate for summary judgment.²

The case therefore went to trial (before a jury) on the issues of the business defendants' breach of the Letter Agreement, Skadden's breach of fiduciary duties, and damages. The trial began on January 12, 1999, and on January 15 (the fourth day of the trial), counsel for plaintiffs and for all defendants other than SCS/Swid announced in open court that they had reached a settlement agreement (whose terms were not revealed to the jury and remain sealed or redacted from the district court's unsealed orders). Consequently, all defendants other than SCS/Swid were excused from the remainder of the trial. The district court, although not until July 23, entered stipulations and orders dismissing plaintiffs' case against the settling defendants but retaining jurisdiction over any disputes relating to the settlement.

Plaintiffs continued to present their case against SCS/Swid, and, on February 10, 1999, the jury returned a verdict finding (1) SCS liable to plaintiffs for breach of contract and breach of fiduciary duty, (2) Swid, as SCS's alter ego, liable to plaintiffs for breach of contract and breach of fiduciary duty, and (3) Swid liable to plaintiffs for knowing participation in a breach of fiduciary duty. The jury awarded plaintiffs $10,549,000 in damages, and on February 25, the district court entered a judgment in the amount of $10,549,000 plus prejudgment and post-judgment interest, subject to SCS/Swid's right to a setoff due to plaintiffs' settlement with the other defendants.

Uncertainty about the amount of this setoff caused the district court to vacate entry of that judgment. On August 12, 1999, the district court entered a new judgment, (1) awarding Herrick damages in the amount of $10,549,000 plus pre-judgment interest, and (2) granting SCS/Swid's motion to amend their answers (pursuant to Fed. R. Civ. P. 15) in order (a) to claim a setoff in respect of the settlement between Herrick and the other defendants and (b) to establish the present discounted value of the settlement and hence the amount of the setoff. In addition, the district court denied several other motions made by SCS/Swid pursuant to Fed. R. Civ. P. 50 and 59, seeking judgment notwithstanding the verdict, a new trial, and alteration of the judgment.³ Most importantly, from the perspective of this appeal, the district court rejected SCS/Swid's argument, which was presented to the court only after the trial had been completed and the jury's verdict had been entered, that Skadden's presence in the lawsuit destroyed diversity and therefore deprived the federal courts of their only source of subject matter jurisdiction over the case. The district court found that even if, arguendo, Skadden and Herrick were in fact not diverse, this challenge to subject matter jurisdiction failed as a matter of law, primarily because of Skadden's settlement and SCS/Swid's delay in raising the challenge.

Both Herrick and SCS/Swid filed timely notices of appeal. Herrick seeks reversal of the district court's order that the present discounted value of the settlement should be set off against the jury verdict. Specifically, Herrick argues that the district court (1) misapplied (in several ways) New York state law governing setoffs, (2) violated Herrick's constitutional right to a jury trial, and (3) improperly credited toward the setoff settlement payments that Herrick would receive only in the future. SCS/Swid seeks reversal of "each and every portion" of the August 12 judgment, "as well as all prior decisions and orders" in the case. SCS/Swid argues (1) that the district court's finding, on summary judgment, that the August 16, 1993 Letter Agreement constituted a binding contract creating a joint venture was erroneous, (2) that the district court made several erroneous and prejudicial...