Israel v. Chabra

• Decision Date: 05 August 2008
• Docket Number: Docket No. 06-1467-cv(L).,Docket No. 06-1473-cv(CON).
• Citation: 537 F.3d 86
• Parties: Michael ISRAEL and Steven Israel, Plaintiffs-Appellees, v. Surinder S. CHABRA, Defendant-Appellant, Paran Realty Corp., Defendant.<SMALL><SUP>*</SUP></SMALL>
• Court: U.S. Court of Appeals — Second Circuit

537 F.3d 86

Michael ISRAEL and Steven Israel, Plaintiffs-Appellees, v. Surinder S. CHABRA, Defendant-Appellant, Paran Realty Corp., Defendant.^*

Docket No. 06-1467-cv(L).

Docket No. 06-1473-cv(CON).

United States Court of Appeals, Second Circuit.

Argued: August 7, 2007.

Certified Question: August 5, 2008.

Susan R. Nudelman, Sklover & Donath, LLC, New York, NY, for Plaintiffs-Appellees.

Howard W. Burns, Jr., Novak, Juhase & Stern, New York, NY, for Defendant-Appellant.

Before: CALABRESI, RAGGI, HALL, Circuit Judges.

HALL, Circuit Judge:

This is an appeal from an order of the United States District Court for the Southern District of New York (Chin, J.), finding Defendant Surinder Chabra liable to Plaintiffs for debts owed them by AMC Computer Corp. pursuant to Chabra's guaranty of those debts. Because the case raises unsettled questions of New York State contract law that implicate a significant state interest, we certify a question to the Court of Appeals of the State of New York. To facilitate that court's review, we note that the issue prompting certification is discussed in detail infra at 99 to 102, and the certified question itself is noted infra at 102.

BACKGROUND

This dispute arises out of a bonus promised to Plaintiffs-Appellees Michael and Steven Israel ("Plaintiffs" or "the Israels") by AMC Computer Corp. ("AMC") as compensation for past services rendered, the payment of which was personally guaranteed by Surinder "Sonny" Chabra ("Chabra"), AMC's Chief Executive Officer. At issue is whether a subsequent agreement by AMC and the Israels to modify the bonus payment schedule discharged Chabra's obligations under the guaranty, or if instead Chabra remained liable for the obligation despite the modification. The district court granted summary judgment in favor of Plaintiffs, finding that, pursuant to the guaranty, Chabra was liable to Plaintiffs for the amount of $332,816.57 each (the amount of the bonus remaining unpaid, plus interest). The court further awarded Plaintiffs reasonable attorneys' fees in the amount of $299,890.51, to be divided between them.

I. The Contracts and Chabra's Guaranty

On May 1, 2000, the Israels entered into separate employment agreements with AMC. At around the same time, AMC, the Israels, Chabra, and AMC Investors LLC also signed a Letter of Intent. In the Letter, Chabra promised to pay each of the Israels a two million dollar bonus for past services if the LLC completed a planned investment in AMC. Chabra signed the Letter both individually and as an officer of AMC.

The parties modified these agreements on July 31, 2000 through two documents that the parties collectively refer to as the "First Amendment." The First Amendment changed the terms of the bonus payment in several ways. AMC assumed primary responsibility for paying the bonus, the bonus amount was reduced to $1.75 million for each of the Israels, and the bonus would be due upon completion of a planned merger. Payment was to be in twelve equal quarterly installments spread over three years, the first of which would be due three months after the planned merger. The merger occurred on August 30, 2000, and thus the payments were to commence on November 30, 2000 and end on August 30, 2003.

Beyond these changes to the terms of the bonus itself, the First Amendment added an additional component critical to this case. It stated that Chabra "shall guaranty the [bonus] payments" and "shall deliver a guaranty ... to each of Steven and Michael Israel." Consequently, on August 25, 2000, Chabra signed an identical guaranty ("the Guaranty") for each of the Israels' bonuses. Because the precise meaning of the Guaranty is dispositive of this action, we quote it at length:

Surinder (Sonny) Chabra ("Guarantor") hereby absolutely, unconditionally and irrevocably guarantees to Israel (i) the full, due and punctual payment, whether at stated payment dates, by acceleration or otherwise, of any amounts owed under Section 3.4 of the Employment Agreement (including interest as described therein), and (ii) the prompt reimbursement of or payment for any and all ... expenses and liabilities (including reasonable attorneys' fees) incurred by Israel in enforcing any rights under this Guaranty (collectively, the "Obligations"), and further guarantee that any such amounts shall be paid when due without presentation, demand, notice or protest of any kind with the same effect as though the Guarantor was AMC in and for the purposes of Section 3.4 of the Employment Agreement; provided, however, that Israel has given Guarantor written notice ("Notice") of AMC's failure to pay any Obligation within 60 days of the occurrence of each failure. Guarantor will then have 30 days to make such payments (or to cause AMC to make such payments) ... The liability of the Guarantor under this Guaranty shall be absolute and unconditional irrespective of ... any change in the time, manner or place of payment of, or in any other term of, all or any of such provisions or the Obligations....

... The Guarantor hereby waives promptness, diligence, dishonor, default, forbearance, notice of acceptance and any other notice with respect to any of the Obligations and this Guaranty, except the Notice.

... References to the Employment Agreement shall mean the Employment Agreement immediately after the execution of Amendment No. 1 and shall not be affected by subsequent amendments to the Employment Agreement unless Guarantor has agreed in writing to such amendments.

(App. at 171, 174 (underscore in original).)

Over the next two and one-half years, AMC failed to make all of the scheduled installment payments. On February 26, 2003, March 5, 2003, and March 17, 2003, Plaintiffs sent notices of default to AMC and copied Chabra in his individual and corporate capacities. Israel v. Chabra (Israel I), 418 F.Supp.2d 509, 513 (S.D.N.Y. 2006). To avoid litigation or arbitration over the missed payments, AMC and the Israels signed a modified payment schedule, entitled "Second Amendment to Employment Agreement," on April 30, 2003. The Second Amendment restated the amount remaining due on the bonuses and established a new payment schedule that was to start on April 20, 2003 and end with a final payment on December 5, 2003. It further stated that "[i]t is the intention of the parties that the guaranty agreement by and among Employee and Surinder (Sonny) Chabra shall continue in full force and effect until the Employer has made all payments." Chabra signed the Second Amendment under a heading reading "Employer: AMC Computer Corp." and above a caption containing his name and the title "President."

AMC made its last payment on February 15, 2004.¹ The Israels sent both AMC and Chabra several notices of default starting on March 31. When Chabra failed to respond to these notices, the Israels brought legal actions against AMC and Chabra.

II. Procedural History

Because the original employment agreement contained an arbitration clause, on May 18, 2004 Plaintiffs commenced arbitration proceedings against AMC to recover the unpaid portion of the bonus. Israel I, 418 F.Supp.2d at 514. They filed parallel actions against Chabra, in his individual capacity, in the Southern District of New York in June 2004 and July 2004. Id. In these two actions, Plaintiffs, acting individually, each sought a declaratory judgment that Chabra had breached his obligations under the Guaranty and money damages for that breach. (Compl. at 1-2, Israel v. Chabra, No. 04 Civ. 4599 (S.D.N.Y. June 18, 2004); Compl. at 1-2, Israel v. Chabra, No. 04 Civ. 5859 (S.D.N.Y. July 28, 2004).) Plaintiffs commenced these actions in federal district court, rather than in arbitration, because the Guaranty stated that Chabra "irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the federal and New York State courts located in the City of New York for any action, suit or proceeding instituted by [the Israels] to enforce this Guaranty." Chabra, nonetheless, moved to compel arbitration of the claims, and in March 2005 the district court (Chin, J.) granted the motion and dismissed the complaints without prejudice. Israel I, 418 F.Supp.2d at 514-15.

Plaintiffs thereafter commenced arbitration proceedings against Chabra in which they sought to enforce the Guaranty. Chabra then filed a petition in the New York Supreme Court, New York County, seeking to disqualify Plaintiffs' counsel from the arbitration proceeding and to stay the arbitration pending resolution of the disqualification petition. Id. at 515. The state court denied the disqualification petition in June 2005, noting that Chabra had waited over one year after arbitration began to challenge opposing counsel's qualifications. Id. Chabra and AMC then refused to pay their share of the arbitration fees and expenses, and the arbitration panel therefore dismissed the proceedings in October 2005. Id. at 515-16. After Plaintiffs notified the district court of that dismissal, the district court reinstated the instant action. Id. at 516. Jurisdiction lay in diversity, id. at 511; New York law controlled by operation of choice of law clauses in the Employment Agreements and the Guaranty, id. at 518 n. 9.

Plaintiffs moved for summary judgment in December 2005, and the district court granted summary judgment in their favor in February 2006. Id. at 516. In granting summary judgment, the district court held that Chabra remained bound by the Guaranty despite the subsequent modifications in the payment schedule contained in the Second Amendment. The court first found that Chabra had consented to the Second Amendment by signing it. It dismissed Chabra's argument that he had signed the Second Amendment only in his corporate capacity because it found that argument "elevate[d] form over substance." Id. at 523.

The court also held that even if Chabra had not consented to the Second Amendment, the payment schedule did not discharge the Guaranty because the...