Enercomp, Inc. v. McCorhill Pub., Inc.

• Citation: 873 F.2d 536
• Decision Date: 11 April 1989
• Docket Number: 83,Nos. 82,D,108 and 109,s. 82
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
• Parties: 27 Fed. R. Evid. Serv. 1177 ENERCOMP, INC., Stephen Flaks and Javid Corporation, Plaintiffs-Appellees, v. McCORHILL PUBLISHING, INC., Gerald H. Cahill, the Cahill Trust, George McPhillips, Terence Corwin, Harris Freedman, S & H Business Consultants and Meridian Productions, Inc., Defendants. Appeal of Harris FREEDMAN, McCorhill Publishing, Inc., Meridian Productions, Inc., Terence Corwin, George B. McPhillips and the Cahill Trust, Defendants-Appellants. ockets 88-7323, 88-7349, 88-7353 and 88-7357.

Page 536

873 F.2d 536

27 Fed. R. Evid. Serv. 1177

ENERCOMP, INC., Stephen Flaks and Javid Corporation Plaintiffs-Appellees, v. McCORHILL PUBLISHING, INC., Gerald H. Cahill, the Cahill Trust, George McPhillips, Terence Corwin, Harris Freedman, S & H Business Consultants and Meridian Productions, Inc. Defendants Appeal of Harris FREEDMAN, McCorhill Publishing, Inc. Meridian Productions, Inc., Terence Corwin, George B. McPhillips and the Cahill Trust, Defendants-Appellants.

Nos. 82, 83, 108 and 109, Dockets 88-7323, 88-7349, 88-7353

and 88-7357.

United States Court of Appeals, Second Circuit.

Argued Oct. 31, 1988.

Decided April 11, 1989.

Paul Chernis, New York City (Richard Feiner, Nina Hutchison, Lowy & Chernis, P.C., New York City, of counsel), for defendants-appellants McCorhill Pub., Inc. and Meridian Productions, Inc.

Joseph Stim, Huntington, N.Y. (Stim & Warmuth, P.C., Huntington, N.Y., of counsel), for defendant-appellant Harris Freedman.

Linda B. Cahill, New York City (George B. McPhillips, McPhillips & Brady, P.C., Mineola, N.Y., of counsel), for defendants-appellants Terence Corwin, George B. McPhillips and The Cahill Trust.

William B. Gazi, Iselin, N.J. (Foley, Gazi & Jorgenson, Iselin, N.J.), for plaintiffs-appellees Enercomp, Inc., Stephen Flaks and Javid Corp.

Before OAKES, Chief Judge, NEWMAN, Circuit Judge, and REENA RAGGI, District Judge. ^*

REENA RAGGI, District Judge:

This case has its origin in the parties' unsuccessful 1984-85 attempt to merge Enercomp, Inc. with McCorhill Publishing, Inc. McCorhill and its individual stockholders, George B. McPhillips, Terence R. Corwin and the Cahill Trust ("McCorhill stockholders") appeal from a final judgment of $500,000 entered against them on December 11, 1987 by Judge Cannella after a jury in the Southern District of New York found them liable for breach of contract. Harris Freedman, who acted as a broker between the parties in the merger efforts, and Meridian Productions, Inc., the company with which McCorhill eventually merged, appeal from a judgment of joint and several liability in the same case for tortious interference with contract.

Appellants' arguments are myriad. They contend that the district court erred in limiting proof and precluding argument as to a $70,000 contingent liability of Enercomp that bore on that company's ability to comply with certain conditions for merger. McCorhill, its stockholders and Meridian separately argue that the district court improperly exercised pendent jurisdiction over state law contract and tort claims after it dismissed Enercomp's federal securities action at the close of plaintiffs' case. In the alternative, they argue that insufficient evidence was adduced to support a finding of a binding contract, that in any event they were justified in repudiating any merger agreement, that both the jury instructions and the interrogatories submitted to the jury were deficient, that expert testimony on damages was improperly admitted, and that damages were recovered on an impermissible theory. The McCorhill stockholders contend that, even if there was sufficient evidence of a binding contract, an indemnification clause in the merger agreement relieves them of any liability. Finally, Freedman and Meridian challenge the sufficiency of the evidence that they acted in tortious interference of any contract rights.

Because we agree with Freedman and Meridian that the evidence was insufficient to take the tortious interference claim to the jury, we direct that this claim be dismissed. Furthermore, because the limitations imposed on counsel with respect to proving and arguing the implications of the $70,000 lien unduly prejudiced appellants, we reverse and remand for a new trial on the breach of contract claim.

Factual Background

1. The Enercomp-McCorhill Merger

In the summer of 1984, Enercomp, acting through its president, Stephen Flaks, entered into negotiations with McCorhill concerning a possible merger of the two companies through an exchange of shares. At the time, Enercomp was a publicly-held shell company in the process of spinning off its only operating subsidiary, Metropolitan Compactors. McCorhill was a private company recently formed for the purpose of acquiring certain assets and property of Kraus Thomson Organization, Ltd., a specialty book publisher.

A merger was advantageous to both sides. McCorhill, through its acquisition of Kraus Thomson, would provide Enercomp with an operating business to enhance the value of its stock. Enercomp, as a public company registered with the Securities and Exchange Commission, could raise funds for McCorhill through stock offerings. Indeed, there were then outstanding stock warrants for Enercomp that could bring as much as $1.8 million into the company, particularly if public optimism over its merger with McCorhill and the latter's acquisition of Kraus Thomson drove up the market price for Enercomp's stock. Further, Enercomp had a tax loss carry forward of approximately $200,000 that could shield any initial profits derived from the Kraus business.

McCorhill, however, needed approximately $250,000 in additional funding to complete its $7.75 million transaction with Kraus Thomson. Harris Freedman, an Enercomp shareholder who was serving as a broker between Enercomp and McCorhill, proposed to Flaks and to McCorhill's Chairman, Gerald Cahill, that a number of Enercomp's current shareholders lend McCorhill $250,000. Then after McCorhill acquired Kraus Thomson, Enercomp and McCorhill would effect their own merger.

Enercomp shareholders did eventually lend McCorhill $250,000, although apparently not in time for the July 1984 closing on Kraus Thomson. The monies for this deal were obtained elsewhere. Nevertheless, McCorhill insisted upon the loan as evidence of Enercomp's commitment to the merger. As an inducement to its shareholders to make the loan to McCorhill, Enercomp issued them 400,000 shares of stock for $.10 per share, thereby increasing their equity interest.

Optimistic about a joint future, the presidents of Enercomp and McCorhill and the McCorhill stockholders executed a 26-page "Agreement" in August of 1984. The agreement, drafted by Enercomp's attorney, provided that all of McCorhill's stock would be exchanged for 5,896,224 shares of Enercomp common stock, such amount to total 51% of Enercomp's outstanding shares after all warrants had been exercised and certain shares issued to Freedman for his role in the merger. The agreement did not fix a closing date for the merger, although it was apparently understood that closing would take place after McCorhill completed the Kraus Thomson acquisition. Indeed, this acquisition was expressly a condition precedent to the Enercomp-McCorhill merger. Until closing, both companies agreed not to take certain actions with respect to their stock and not to make any capital expenditure exceeding $1,000 except by mutual consent. Although current financial statements were called for in the agreement, none was in fact attached, presumably because Enercomp, still affiliated with Metropolitan Compactors, was not able to provide an independent statement. Section 5(i) of the agreement, however, expressly provided that Enercomp was to have "no substantial liabilities" not disclosed in its final balance sheet. The parties also agreed that their merger was "subject to approval by any qualified experts Enercomp may wish to engage to evaluate McCorhill and the business of Kraus it seeks to acquire." No reciprocal clause provided for a McCorhill expert to evaluate Enercomp.

In April 1985, McCorhill repaid with interest the loan made by Enercomp's shareholders. On April 9, 1985, Enercomp publicly announced the plan to merge with McCorhill, the exchange of shares to be completed on April 16, 1985. In fact, no closing took place on that date, due at least in part to Enercomp's failure to provide a balance sheet independent of its subsidiary, Metropolitan Compactors, as required by the merger agreement.

Concerned about Enercomp's financial status, Gerald Cahill employed a certified public accountant to audit Enercomp. In the summer of 1985, Cahill learned that Enercomp had an outstanding printer's bill of $61,000 from a previous public offering. Cahill demanded that at the time of merger Enercomp be a "clean shell" with no outstanding liabilities and with $20,000 in assets to meet attorneys' fees incurred in the merger. Flaks sought to assure him that the printer's bill would be covered by the assignment to Enercomp of a performance bond due Metropolitan Compactors. It was soon discovered, however, that this bond was tied up in an unrelated bankruptcy proceeding. Nevertheless, by August 1985, Enercomp had reduced its printer's bill to $35,000. A subsequent proposal provided for five Enercomp shareholders, including Flaks and Freedman, to sign personal guarantees of $7,000 each to cover this outstanding liability. The parties set a closing date, scheduled a pre-closing meeting and prepared a list of documents needed for closing. Ultimately, however, the personal guarantees on the $35,000 liability were not signed and the merger never took place.

At trial, the parties sharply disputed the reasons for the termination of their relationship. Defendants contended that Flaks refused to sign the $7,000 personal guarantee, the last in a series of acts that had undermined their confidence in the financial condition of Enercomp. Flaks, on the other hand, testified that he was always willing to sign the guarantee, provided the other shareholders did so as well. Indeed, he recalled agreeing to a number of additional demands communicated to him by Freedman in 1985 that went beyond the terms of the original 1984 agreement, including "locking up" certain of his Enercomp stock and putting other shares in escrow. Only when Freedman told Flaks that Cahill wanted him to give back 200,000 of his Enercomp shares did Flaks refuse. Shortly...