National Market Share, Inc. v. Sterling Nat. Bank, Docket No. 04-1206-CV.

Citation392 F.3d 520
Decision Date23 December 2004
Docket NumberDocket No. 04-1206-CV.
PartiesNATIONAL MARKET SHARE, INC., a Delaware Corporation, National Market Share, Inc., a Texas Corporation, and Campaign Tel Ltd., a Delaware Corporation, Plaintiffs-Appellants, v. STERLING NATIONAL BANK, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Gregory E. Galterio (Ira N. Glauber, Bradley A. Alperin, of counsel), Jaffe & Asher LLP, New York, N.Y., for Plaintiffs-Appellants.

Robert I. Cantor, Cantor, Epstein & Degenshein, LLP, New York, N.Y., for Defendant-Appellee.

Before: McLAUGHLIN, POOLER, and WESLEY, Circuit Judges.

MCLAUGHLIN, Circuit Judge.

There are three corporate plaintiffs: National Market Share, Inc., a Delaware corporation; National Market Share, Inc., a Texas corporation; and Campaign Tel Ltd., a Delaware corporation (collectively, "NMS" or "the Company"). All three appeal from a damages award of $1 entered after a bench trial by the United States District Court for the Southern District of New York (McKenna, J.).

The district court conceded that defendant Sterling National Bank ("Sterling") had breached the duty of good faith and fair dealing owed to plaintiffs when, after agreeing to do so, it failed to honor approximately $800,000 in payroll checks. The court found, nevertheless, it was not Sterling's breach that caused NMS to go out of business; rather, the actions of plaintiffs' principal, Steven Goldberg, were an "intervening cause" of the Company's collapse. Therefore, the court awarded plaintiffs only nominal damages.

On appeal, plaintiffs contend that the $1 award should be vacated and the case remanded to recalculate damages. Specifically, plaintiffs claim that: (1) in the first place, the district court should not have considered sua sponte the issue of "intervening cause"; (2) in any event, there was no evidence that Goldberg's actions caused NMS's damages; and (3) the district court erred in failing to award them damages equal to the value of the Company.

Because we conclude that the first two of NMS's contentions lack merit, we find the third to be moot and therefore decline to reach it. Accordingly, we affirm the judgment of the district court in its entirety.

BACKGROUND
I. The Facts

This case arose when the business relationship between NMS and Sterling soured. We assume familiarity with the underlying facts set forth by the district court, see Nat'l Mkt. Share, Inc. v. Sterling Nat'l Bank, 99 Civ. 4455 (S.D.N.Y. Feb. 17, 2004) (McKenna, J.), and we summarize the background only to the extent relevant to this appeal.

Before its collapse, NMS provided telemarketing services to corporations and political campaigns through seven call centers located across the United States. In April 1996, Sterling agreed to make loans to NMS under a revolving line of credit secured by NMS's accounts receivable. This arrangement made Sterling NMS's sole source of external financing.

In June 1998, NMS brought in Robert Stoloff as Chief Financial and Operating Officer. Stoloff discovered that NMS had been engaging in billing irregularities, and he arranged for NMS principal Steven Goldberg and himself to meet two Sterling representatives, Senior Vice President Stanley Officina and Loan Officer Jonathan Brand. In July 1998, to assure steady financing from Sterling in spite of the irregularities, Goldberg gave Sterling a mortgage on his Manhattan town house. At the time, NMS owed Sterling an outstanding balance of between $7 and $7.5 million.

By the start of November 1998, NMS's loan balance had been reduced to approximately $4.5 million. NMS was expecting to receive over $1.75 million from one of its largest clients, U.S. Satellite Broadcasting ("USSB"), in payment of a receivable generated in October 1998.

November 3, 1998 was Election Day, which was one of NMS's busiest times of the year.

On November 4, 1998, Goldberg and Stoloff met again with Officina at Sterling's offices, this time to confirm that Sterling would honor 5,000* payroll checks worth approximately $800,000 which NMS intended to distribute the next day. According to the district court, the following transpired:

Mr. Officina inquired about the forthcoming USSB check, Mr. Stoloff said he expected the check around the end of November or the beginning of December, Mr. Officina requested that Mr. Stoloff call USSB to accelerate delivery of the check, and Mr. Stoloff responded that he was concerned about upsetting plaintiffs' relationship with USSB if he were to do so. Mr. Officina did not tell Mr. Stoloff and Mr. Goldberg that he would not advance funds unless he received the USSB check.

Nat'l Mkt. Share, 99 Civ. 4455, at 12 (footnote omitted).

Later that same day, having apparently been assured of Sterling's cooperation, NMS sent the payroll checks to its call centers for distribution to employees. On November 4 and 5, the checks were distributed to NMS employees. On November 5, Sterling declined to fund NMS's account, and the payroll checks began to bounce.

According to the district court:

On November 5, 1998, employees of the Des Moines, Iowa, call center whose payroll checks had not been honored appeared, in an angry mood, some demanding cash, one accompanied by a police officer. Plaintiffs' director of field operations, present at the Des Moines location, heard reports of similar activities at other call centers. Mr. Goldberg told him by phone to tell employees to come back the next day when more would be known and the problem would be taken care of. After some new checks were given out on November 5, 1998, payroll managers at plaintiffs' locations were instructed by management not to give out any more checks to employees.

Nat'l Mkt. Share, 99 Civ. 4455, at 13.

At around noon or 1 p.m. on November 6, Goldberg received the critical $1.75 million check from USSB ("USSB Check"). He did not, however, notify Sterling that the USSB Check had arrived. Rather, on November 9, Goldberg flew to Minneapolis (where USSB was located) and deposited the check into his own personal bank account.

Although NMS still owed Sterling around $4.5 million, Goldberg used the USSB proceeds to pay off various corporate and personal debts; not any part of it did he give to the NMS employees whose paychecks had bounced.

On or around November 12, NMS ceased operations.

II. Procedural History

Sterling sued Goldberg in New York Supreme Court for conversion and replevin to recover the proceeds of the USSB Check. Goldberg, in turn, counterclaimed for, inter alia, breach of the duty of good faith and fair dealing.

In February 1999, while the state court litigation was pending, NMS brought the present diversity action against Sterling in the United States District Court for the Southern District of New York. See 28 U.S.C. § 1332(a)(1). NMS alleged breach of contract, breach of the duty of good faith and fair dealing, fraud, wrongful dishonor of checks, and wrongful impairment of collateral.

In January 2000, the New York Supreme Court (Ramos, J.) granted Sterling's motion for summary judgment, finding principally that Goldberg had illegally converted the proceeds of the USSB Check, in which Sterling had a secured interest. The Appellate Division, First Department, affirmed this finding and, in large part, the grant of summary judgment. Sterling Nat'l Bank v. Goldberg, 277 A.D.2d 45, 715 N.Y.S.2d 409, 411 (1st Dep't 2000). However, finding issues of fact "as to whether Sterling breached the implied covenant of good faith and fair dealing when it precipitously cut off the debtors' line of credit without notice," the Appellate Division reinstated Goldberg's counterclaim for breach of the implied covenant. Id.

In March 2001, Judge McKenna in the Southern District of New York, in turn, granted Sterling's motion for summary judgment on each of NMS's claims brought in federal court, except its claim for breach of the duty of good faith and fair dealing. See Nat'l Mkt. Share v. Sterling Nat'l Bank, 2001 WL 262589 (S.D.N.Y. Mar.14, 2001). In December 2001, Judge McKenna began an 8-day bench trial on that issue.

In February 2004, Judge McKenna rendered his decision. Applying New York law, the district court held that Sterling had acted in bad faith in dishonoring NMS's payroll checks and thus breached its duty of good faith and fair dealing. Nat'l Mkt. Share, 99 Civ. 4455, at 15-16. However, the court concluded that NMS had not demonstrated that Sterling's breach caused NMS's demise. Rather, the court found, its collapse was caused by another "intervening cause," namely, Goldberg's failure to deliver the USSB Check to Sterling on November 6. Id. at 20. In the court's view, Sterling "[could ] not be held liable for damage occurring after [] Goldberg received the USSB check." Id. Finding further that "[t]he damages that occurred on November 5 and 6, 1998," prior to Goldberg's act, were "so uncertain," the court concluded that "they, too, [could ]not be recovered." Id. at 21. Thus, the court awarded NMS only nominal damages of $1. Id. at 22.

This appeal by NMS followed.

DISCUSSION

Under New York law, a duty of good faith and fair dealing is implied in every contract. E.g., United States Fid. & Guar. Co. v. Braspetro Oil Servs. Co., 369 F.3d 34, 64 (2d Cir.2004). The duty comprises "any promises which a reasonable person in the position of the promisee would be justified in understanding were included [in the contract]." Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389, 639 N.Y.S.2d 977, 663 N.E.2d 289 (1995) (internal quotation marks omitted). Neither party disputes on appeal that Sterling breached its duty of good faith and fair dealing by failing to fund NMS's payroll checks; the only issues before us concern damages.

In New York, breach of the implied duty of good faith and fair dealing "`is merely a breach of the underlying contract.'" Fasolino Foods Co. v. Banca Nazionale del Lavoro, 961 F.2d 1052,...

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