Lazard Freres & Co. v. Crown Sterling Management

• Decision Date: 02 October 1995
• Docket Number: No. 95 Civ. 2856 (MGC).,95 Civ. 2856 (MGC).
• Citation: 901 F. Supp. 133
• Parties: LAZARD FRÈRES & CO., Plaintiff, v. CROWN STERLING MANAGEMENT, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

901 F. Supp. 133

LAZARD FRÈRES & CO., Plaintiff, v. CROWN STERLING MANAGEMENT, INC., Defendant.

No. 95 Civ. 2856 (MGC).

United States District Court, S.D. New York.

October 2, 1995.

Wachtell, Lipton, Rosen & Katz by Marc Wolinsky, Michael Schwartz, Rachelle Silverberg, New York City, for Plaintiff.

Bickel & Brewer by William A. Brewer, III, Michael J. Collins, New York City, for Defendant.

OPINION

CEDARBAUM, District Judge.

Crown Sterling Management, Inc. ("Crown"), a Texas corporation with its principal place of business in California which owns, manages, licenses, and franchises hotel chains, entered into an agreement (the "Agreement") with Lazard Frères & Co. ("Lazard"), a partnership with no partners residing in either Texas or California. Pursuant to the Agreement, Lazard was to serve as "exclusive investment banker and financial advisor" to Crown and its affiliates ("the Client") and assist in the restructuring of their debts. The Agreement specifically provided that Lazard would be entitled to its fees if the Client successfully restructured their debts, even if Lazard was not responsible for the debt restructuring. The Client did restructure a portion of their debts, but refused to pay Lazard its fees. This suit followed. Crown has asserted counterclaims of breach of contract, breach of fiduciary duty, breach of the duties of good faith and fair dealing, negligence and gross negligence, fraud, and negligent misrepresentation.

Lazard moves for judgment on the pleadings to recover its fees. At oral argument, pursuant to Fed.R.Civ.P. 12(c), I converted the motion into one for summary judgment, and gave the parties an opportunity to submit any pertinent material outside the pleadings. (Tr. of Proc. Aug. 4, 1995 at 8-9.) Plaintiff also moves pursuant to Fed.R.Civ.P. 54(b) for entry of a final judgment on its claim. Plaintiff is entitled to payment under the Agreement, and because there is no just reason for delay of the entry of a judgment in its favor, the motion is granted.

Background

The terms of the relationship between Lazard and Crown were detailed in an Engagement Letter. (Letter from Lazard to Charles M. Sweeney, dated July 30, 1993, Compl., Ex. A.) The Agreement provided that Lazard was to conduct "due diligence" of the Client, analyze options for financial restructuring, prepare marketing materials, identify prospective investors and financing sources, provide written reports about prospective investors, raise capital, and provide ongoing reports and advice regarding the debt restructuring. (Id. ¶ 1.) The Agreement provided that it applied to "the various entities comprising the Crown Sterling Suites hotel chain" and that "all references to the Company shall be interpreted broadly to refer to any or all such entities, as may be applicable." (Id. at 1.) After setting out Lazard's fee structure (id. ¶ 3), the Agreement provided that:

while this Agreement is in effect, Lazard shall be entitled to receive such fees as are described and contemplated in Paragraph 3, above, in the event that any of the events described or contemplated in Paragraph 3 occurs, regardless of whether Lazard is responsible for arranging said events. If, while this Agreement is in effect, Client undertakes one or more transactions leading to the occurrence of such events, which transaction(s) Lazard did not arrange, then Lazard's fees shall be determined as if Lazard had actually arranged said transaction(s),

(id. at ¶ 4) (emphasis added). The Agreement was to remain in effect until thirty days after delivery by either party of a notice of termination, "which notice may not be delivered prior to one year from Client's acceptance." (Id.)

It is not disputed that the Client entered into four refinancing transactions after the parties entered into the Agreement. In February 1994, the Client obtained $22 million in new mortgage financing from Heller Financial, Inc., and a new $16.5 million mortgage loan from the Bank of Nova Scotia. (Compl. ¶¶ 11, 12; Answer ¶¶ 11, 12.) The Client also restructured a $22,761,272.87 mortgage loan from Mellon Bank, N.A. and a $23,893,188.61 mortgage loan from Barnett Bank of Broward County, N.A. (Compl. ¶¶ 13, 14; Answer ¶¶ 13, 14.) Finally, the Client refinanced an existing $86.2 million in mortgage loans from the Bank of Nova Scotia, extending the maturity of those loans by more than three years. (Compl. ¶ 12; Answer ¶ 12.)

On April 22, 1994, Crown sent a "disengagement" letter to Lazard. (See Letter from Robert E. Woolley to Peter Cyrus, Rosenbaum Aff. dated Aug. 9, 1995, Ex. C.) In it, Crown stated that "while some progress toward our mutual goals, as expressed in our discussions and the Letters of Engagement, have sic been made, we feel that our overall purposes have been, for whatever reason, unfulfilled." (Id. at 1.) On May 19, 1994, Lazard sent an invoice to Crown, seeking its fees for the four transactions in the amount of $1,741,970, plus out-of-pocket disbursements, (Agreement at ¶ 5), attorney's fees, (id. at ¶ 9), and statutory prejudgment interest. N.Y.Civ.Prac.L. & R. § 5004 (McKinney 1992).

Discussion

I. Summary Judgment

Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A party opposing a properly supported summary judgment motion must establish a genuine issue of material fact in order to preclude summary judgment. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86, 106 S.Ct. 1348, 1355-56, 89 L.Ed.2d 538 (1986). In deciding whether a genuine issue exists, the court must "examine the evidence in the light most favorable to the party opposing the motion, and resolve ambiguities and draw reasonable inferences against the moving party." In re Chateaugay Corp., 10 F.3d 944, 957 (2d Cir.1993).

Two conditions are necessary for Lazard to recover its fees for the February 1994 debt restructuring — (1) the Agreement must have been in effect in February 1994; and (2) the debt restructuring must have been an "event" within the meaning of the Agreement. It is undisputed that the second condition is satisfied.

A. Was the Agreement in effect in February 1994?

The Agreement provided that it was to remain in effect until "thirty (30) days after the delivery by either party to the other of a written notice of termination." (Agreement ¶ 4.) Assuming that Crown validly terminated the Agreement (the Agreement provided that neither side could terminate prior to one year), cf. Filmline (Cross-Country) Prods., Inc. v. United Artists Corp., 865 F.2d 513, 518 (2d Cir.1989) (under New York law, failure to comply with contractual notice of termination provision is ineffective to terminate contract), its letter was dated April 22, 1994. Nevertheless, defendant alleges that plaintiff breached the contract by its "utter failure to perform." (Answer, counterclaims ¶ 21.) In essence, defendant contends that plaintiff's prior material breach relieves it of all of its obligations under the Agreement, including the obligation to pay Lazard's fees. See Septembertide Publishing, B.V. v. Stein & Day, Inc., 884 F.2d 675, 678 (2d Cir.1989) (rescission of contract appropriate under New York law where breach is "material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract") (quoting Callanan v. Powers, 199 N.Y. 268, 284, 92 N.E. 747 (1910)).

Plaintiff has provided both direct and circumstantial evidence that it performed some of its obligations under the Agreement. Two affidavits by David Rosenbaum, a Lazard associate who worked on the Crown engagement, along with travel logs and other documents, show numerous meetings between representatives of Lazard and the Client and existing and prospective lenders to and investors in the Client. These include meetings with representatives of Barnett Bank, Bank of Nova Scotia, Mellon, and Heller Financial — the banks involved in the February 1994 debt restructuring. (See Rosenbaum Aff. dated August 9, 1995, Ex. B; Rosenbaum Aff. dated August 25, 1995, Ex. A.) Lazard also points to the "disengagement" letter written by defendant, in which Crown acknowledged that Lazard had partially performed. In the letter, Crown stated that Lazard provided "limited assistance and advice with reference to refinancing or restructuring the mortgage indebtedness," (Letter from Robert E. Woolley to Peter Cyrus, Rosenbaum Aff. dated Aug. 9, 1995, Ex. C. at 2), and "some assistance in negotiations with prospective lenders and investors," (id. at 3).

In opposition, defendant presents affidavits by Charles M. Sweeney, the President of Crown, and Jack Roberts, its Vice-President and Secretary. In identical language, they assert that "Lazard did not undertake any of the tasks or activities required in the Engagement Letter during 1993," including conducting a due diligence evaluation, preparing a report evaluating the Client's value and prospects, advising the Client with respect to restructuring or repurchasing limited partnership interests, contacting prospective investors or purchasers of the Client, assisting the Client in using public offerings, or providing periodic reports. (See Sweeney Aff., ¶ 15; Roberts Aff., ¶ 10.)

Neither affiant states that he or any other representative of Crown considered Lazard in default as of February 1994, nor does Crown indicate that it communicated to Lazard its dissatisfaction prior to the "disengagement" letter of April 1994. This omission is significant, since under New York law (which the Agreement provided shall apply, see ¶ 13), "the power to terminate a continuing contract because of a particular breach of that contract is a power of election." Apex Pool Equip. Corp. v. Lee, 419...