Consolidated Edison, Inc. v. Northeast Utilities

• Decision Date: 15 May 2004
• Docket Number: No. 01 Civ. 1893(JGK).,01 Civ. 1893(JGK).
• Citation: 318 F.Supp.2d 181
• Parties: CONSOLIDATED EDISON, INC., Plaintiff/Counterclaim Defendant v. NORTHEAST UTILITIES, Defendant/Counterclaim Plaintiff/Crossclaim Plaintiff, and Robert Rimkoski, individually and on behalf of all others similarly situated, Intervenor Defendant/Counterclaim Plaintiff/Crossclaim Defendant.
• Court: U.S. District Court — Southern District of New York

318 F.Supp.2d 181

CONSOLIDATED EDISON, INC., Plaintiff/Counterclaim Defendant v. NORTHEAST UTILITIES, Defendant/Counterclaim Plaintiff/Crossclaim Plaintiff, and Robert Rimkoski, individually and on behalf of all others similarly situated, Intervenor Defendant/Counterclaim Plaintiff/Crossclaim Defendant.

No. 01 Civ. 1893(JGK).

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

May 15, 2004.

Counsel: For Martin Siegel, Movant: Richard B. Brualdi, Law Offices of Richard B. Brualdi, New York, NY.

For Consolidated Edison, Inc., a New York corporation, Plaintiff: John Gueli, Shearman & Sterling LLP (New York), New York, NY. Kenneth M. Kramer, Shearman & Sterling, L.L.P., New York, NY. Stuart J. Baskin, Shearman & Sterling, L.L.P., New York, NY.

For Northeast Utilities, A Massachusetts business trust, Defendant: Douglas M. Kraus, Skadden, Arps, Slate, Meagher & Flom, L.L.P., New York, NY. Joseoh N. Sacca, Skadden, Arps, Slate, Meagher & Flom, LLP, New York, NY. John Gueli, Shearman & Sterling LLP (New York), New York, NY. Kenneth M. Kramer, Shearman & Sterling, L.L.P., New York, NY. Stuart J. Baskin, Shearman & Sterling LLP (New York), New York, NY.

For Northeast Utilities, Counter Claimant: Douglas M. Kraus, Skadden, Arps, Slate, Meagher & Flom, L.L.P., New York, NY. Joseph N. Sacca, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY.

For Consolidated Edison, Inc., Counter Defendant: John Gueli, Shearman & Sterling LLP (New York), New York, NY. Kenneth M. Kramer, Shearman & Sterling, L.L.P., New York, NY. Stuart J. Baskin, Shearman & Sterling, L.L.P., New York, NY.

For Robert Rimkoski, Movant: Ira A. Schochet, Goodkind, Labaton, Rudoff & Sucharow, L.L.P., New York, NY. Lawrence A. Sucharow, Goodkind Labaton Rudoff & Sucharow LLP, New york, NY. Lisa Buckser-Schulz, Goodkind Labaton Rudoff & Sucharow LLP, New York, NY.

For Northeast Utilities, A Massachusetts business trust, Cross Claimant: Joseph N. Sacca, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY. Douglas M. Kraus, Skadden, Arps, Slate, Meagher & Flom (DC), Washington, DC.

For Robert Rimkoski, Cross Defendant: Lisa Buckser-Schulz, Goodkind Labaton Rudoff & Sucharow LLP, New York, NY. Ira A. Schochet, Goodkind, Labaton, Rudoff

& Sucharow, L.L.P., New York, NY. John Gueli, Shearman & Sterling LLP (New York), New York, NY. Kenneth M. Kramer, Shearman & Sterling, L.L.P., New York, NY. Lawrence A. Sucharow, Goodkind Labaton Rudoff & Sucharow LLP, New York, NY. Stuart J. Baskin, Shearman & Sterling LLP (New York), New York, NY.

OPINION and ORDER

KOELTL, District Judge.

This case arises out of the failed multi-billion dollar merger between Consolidated Edison, Inc. ("Con Ed") and Northeast Utilities ("NU") that has been the subject of two prior opinions by this Court. See Consol. Edison, Inc. v. Northeast Utils., 249 F.Supp.2d 387 (S.D.N.Y.2003); Consol. Edison, Inc. v. Northeast Utils., No. 01 Civ. 1893, 2004 WL 35445 (S.D.N.Y. Jan.7, 2004). As part of the agreement between Con Ed and NU, Con Ed agreed to purchase all outstanding NU shares at a substantial premium over the market price, but shortly before the merger was to be completed, Con Ed announced that it would not proceed. Con Ed then brought this action, in which it seeks a declaratory judgment that it has no obligations under the Merger Agreement.

NU has counterclaimed arguing that Con Ed repudiated and breached the Agreement. While seeking certain expenses on behalf of itself as a corporation, NU is also pursuing a so-called "lost premium" on behalf of its current and future shareholders as third-party beneficiaries of the Merger Agreement. Robert Rimkoski ("Rimkoski") has intervened as a defendant and is also suing Con Ed for breach of contract. See Consol. Edison, 2004 WL 35445. Rimkoski claims that he is entitled to damages because he was an NU shareholder on March 5, 2001, the date of Con Ed's alleged breach of the Merger Agreement. He also seeks to represent a class of similarly situated individuals who owned NU shares on March 5, 2001.¹ While the Court has previously ruled that NU shareholders are third-party beneficiaries under the Merger Agreement, see Consol. Edison, 249 F.Supp.2d at 416-17, it has not yet determined which shareholder class has the right to pursue the third-party beneficiary claim based on the merger premium.

There are now two motions pending before this Court that concern the same issue: Does the third-party beneficiary claim belong to those who held NU shares at the time of Con Ed's alleged breach on March 5, 2001 (the "proposed March 5 Class" that Rimkoski seeks to represent), or to those who are holding NU shares at the time that a judgment against Con Ed is entered, collected, or distributed (the "Judgment Class"² that NU seeks to represent)? The legal question presented by these motions is one of first impression and is essentially this: Where shareholders are third-party beneficiaries of a contract between the corporate issuer of the stock and a third party, is the right to sue that third party for breach of the contract automatically transferred to a subsequent purchaser of the stock?

After filing a crossclaim for declaratory judgment against Rimkoski, NU has moved pursuant to Federal Rule of Civil Procedure 56(i) for summary judgment in its favor on the crossclaim on the grounds that Rimkoski, a former shareholder, assigned his rights to pursue a claim against Con Ed when he sold his shares. Pursuant to Rules 12(b)(6) and 12(c), Con Ed has renewed a motion to dismiss NU's counterclaim against it for the "lost premium," agreeing with Rimkoski that only those who held NU shares at the time of the alleged breach should have the right to sue Con Ed for such damages.

I.

While the two motions are a motion to dismiss and a motion for summary judgment, the parties agree that no material facts are in dispute, and both motions turn solely on the same legal question of whether the right to sue Con Ed was automatically transferred from Rimkoski and those shareholders who owned NU stock on March 5, 2001 to subsequent purchasers of the NU shares whom NU seeks to represent.³ While familiarity with the prior decisions is assumed, the facts and procedural history are presented to the extent necessary for the current motions. As explained in the prior decisions, the basis for jurisdiction in this case is diversity pursuant to 28 U.S.C. § 1332, and there is no dispute that New York state law applies. See Consol. Edison, 249 F.Supp.2d at 391, 399.

On October 13, 1999, Con Ed and NU executed the Merger Agreement whereby Con Ed would purchase all outstanding NU shares for an expected price of $26.50 per share. See id. at 395; (NU's Local Rule 56.1 Statement of Material Facts Not in Dispute ("NU Rule 56.1 Stmt.") ¶ 1.).⁴ The anticipated merger price represented a premium of more than forty percent over the "unaffected" price of $18.56 per share at which NU shares were trading before rumors of the merger began circulating in the market. See Consol. Edison, 249 F.Supp.2d at 395. The aggregated premium constituted more than $1 billion of the total $3.6 billion that Con Ed expected to pay for NU's 137 million then-outstanding shares. Id. Under the Merger Agreement, Con Ed was to pay NU shareholders the merger price at the "Effective Time" — namely, the closing — in exchange for the surrender of their NU common stock certificates. (See NU Rule 56.1 Stmt. ¶ 3 (citing Merger Agreement §§ 2.01, 2.04).) Because NU and Con Ed needed to obtain approval from numerous state and federal regulatory agencies, the closing was not expected to occur until Spring 2001. (See id. ¶ 2.)

On March 5, 2001, shortly before the merger was expected to close, Con Ed announced that it would not proceed with the merger. Con Ed then filed this lawsuit for a declaratory judgment relieving it of obligations under the Agreement. The complaint asserted, among other things, that NU fraudulently induced Con Ed to enter into the Merger Agreement, that NU breached various provisions of the Agreement, and that certain conditions precedent had failed. NU counterclaimed for breach of contract seeking to recover approximately $27 million expended to obtain various regulatory permits necessary for the merger. In addition, NU sought to recover $1.2 billion based on the "lost premium" that would have been paid to NU shareholders.

Con Ed and NU filed cross-motions for partial summary judgment, and in an Opinion and Order dated March 21, 2003, this Court denied Con Ed's motion and granted NU's motion in part, thereby dismissing some of the claims against NU. See generally Consol. Edison, 249 F.Supp.2d 387. In that decision, the Court ruled that NU shareholders were intended third-party beneficiaries under Section 8.06 of the Merger Agreement, and that NU, as a promisee, had standing to sue on behalf of its shareholders. Id. at 416-17. The decision, however, did not address whether current or former shareholders were the appropriate third-party beneficiaries.

Following that decision, Con Ed filed a motion to dismiss arguing that only NU shareholders at the time of the alleged breach had the right to sue Con Ed for damages and that NU had no standing to sue on behalf those shareholders. While that motion was being briefed, a motion to intervene was filed by Rimkoski, who had held NU shares on March 5, 2001, the date of the alleged breach, and sold most of them shortly thereafter. Prior to seeking intervention, Rimkoski had filed a suit in the New York State Supreme Court, New York County against Con Ed on behalf of a prospective March 5 Class. See Rimkoski v. Consol. Edison, Inc., No. 03/109095 (N.Y. Sup.Ct. filed May 16, 2003); (NU Rule 56.1 Stmt. ¶¶ 9-11.) NU opposed the motion to intervene on the grounds that Rimkoski, as a former shareholder, had no standing because the right to sue for breach contract passed with the NU stock to subsequent purchasers. Con Ed's motion to dismiss and Rimkoski's motion to...