Health-Chem Corp. v. Baker, 88 Civ. 5605 (KTD).

• Decision Date: 26 February 1990
• Docket Number: No. 88 Civ. 5605 (KTD).,88 Civ. 5605 (KTD).
• Citation: 737 F. Supp. 770
• Parties: HEALTH-CHEM CORPORATION, Plaintiff, v. Leon C. BAKER, Defendant and Counterclaim Plaintiff, v. HEALTH-CHEM CORPORATION, Counterclaim Defendant, and Marvin M. Speiser and The Bank of New York Co., Inc., Additional Defendants On Counterclaims.
• Court: U.S. District Court — Southern District of New York

737 F. Supp. 770

HEALTH-CHEM CORPORATION, Plaintiff, v. Leon C. BAKER, Defendant and Counterclaim Plaintiff, v. HEALTH-CHEM CORPORATION, Counterclaim Defendant, and Marvin M. Speiser and The Bank of New York Co., Inc., Additional Defendants On Counterclaims.

No. 88 Civ. 5605 (KTD).

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

February 26, 1990.

Fried, Frank, Harris, Shriver & Jacobson, New York City, for plaintiff; Allen Kezsbom, of counsel.

Keck Mahin Cate & Koether, New York City, for defendant and counterclaim plaintiff Leon C. Baker; Mathew E. Hoffman, of counsel.

Shea & Gould, New York City, for additional defendants on counterclaims Marvin M. Speiser and The Bank of New York Co., Inc.; Mitchell J. Geller, of counsel.

MEMORANDUM AND ORDER

KEVIN THOMAS DUFFY, District Judge:

Rifts among directors of a corporation are not infrequent. Nor is it uncommon for such disputes to lead to protracted, often vitriolic, legal proceedings. As such, this action, which arises out of a written "Settlement Agreement" purporting to resolve differences between bickering directors of the plaintiff Health-Chem Corporation ("Health-Chem"), is not unusual. What distinguishes it from similar cases is that it reflects, in microcosm, the staggering effects of "Black Monday", October 19, 1987. On that date, the stock market saw a precipitous fall in the Dow Jones industrial average of over 500 points — its worst drop ever. The effects of that drop, which saw a concomitant fall in price of Health-Chem stock, led Health-Chem to bring this action seeking a declaration that the Settlement Agreement between the parties is invalid and must be renegotiated.

Defendant and counterclaim plaintiff Leon C. Baker moves pursuant to Fed.R. Civ.P. 56 for summary judgment dismissing the complaint and granting Baker's counterclaims against Health-Chem and counterclaim defendant Marvin M. Speiser. Health-Chem opposes the summary judgment motion and moves to amend its complaint pursuant to Fed.R.Civ.P. 15. Speiser cross-moves pursuant to Fed.R.Civ.P. 56 for summary judgment dismissing Baker's fourth counterclaim as against Speiser individually.

FACTS

Health-Chem is a public company whose shares are traded on the American Stock Exchange. Baker is a former general counsel and director of Health-Chem, and directly or indirectly holds over one million of Health-Chem's common shares. Speiser is the Chairman of the Board of Directors and President of Health-Chem. Baker and Speiser are the two largest individual stockholders of Health-Chem.

On March 29, 1987, Health-Chem, Speiser, and Baker entered into an Outline of Settlement (the "Outline") that settled ongoing litigation between them. The Outline provided that it "will be incorporated into a definitive agreement to be negotiated and executed among the parties as soon as possible." Baker Affid. in Support of Summary Judgment, Exh. B. Under the Outline, Baker agreed to sever his relationship with Health-Chem and, among other things, to the sale of all of his Health-Chem common shares and the liquidation of Health-Med Corporation, a subsidiary of Health-Chem in which Baker had a minority interest. Outline of Settlement, Baker Affid. in Support of Summary Judgment, Exh. B ¶¶ 1, 2.¹ Health-Chem was given the right to sell Baker's shares any time after August 1, 1987, and throughout the 13-month sale period ending August 31, 1988. Health-Chem also agreed to deliver to Baker a bank letter of credit for $16,303,849, providing that upon Baker's demand the bank would pay Baker any deficiency between the net proceeds actually received by Baker in connection with the sale of his shares and $16,303,869. Outline ¶ 1. The amount of $16,303,869 was arrived at by multiplying Baker's 1,207,694 shares by a price of $13.50 per share, the closing price on Health-Chem stock on the last trading day before the Outline was executed. The letter of credit was never delivered.

On July 7, 1987, Health-Chem, Speiser, and Baker entered into a "Settlement Agreement" which detailed and finalized the matters the parties had agreed to in the Outline.² See Settlement Agreement, Baker Affid. in Support of Summary Judgment Exh. A.³ Health-Chem again agreed to pay Baker the difference between the aggregate sales price of his stock and $16,303,869. Settlement Agreement ¶ 1.4(a). The Settlement Agreement further provides for substitution of an escrow of government securities for the letter of credit provided for in the Outline. Settlement Agreement § 1.4(d). An escrow agreement between Health-Chem, Baker, and the Bank of New York, as escrowee,⁴ was executed simultaneously with the Settlement Agreement. Pursuant to the escrow agreement, Health-Chem deposited securities with an aggregate market value of not less than $16 million into an escrow fund with the Bank of New York. See Escrow Agreement, annexed to Settlement Agreement, Exh. B.

Health-Chem has not arranged a sale of nor purchased any of Baker's Health-Chem shares. Following the October 19, 1987 stock market crash, Health-Chem stock fell to the range of approximately $4 per share and never returned to its former level. At that price, the deficiency that Health-Chem would have to pay Baker between the aggregate sales price and the guaranteed amount exceeds $11 million.

By this action Health-Chem essentially seeks: (a) a declaratory judgment that Baker is obligated to renegotiate the terms of the Settlement Agreement; (b) to enjoin Baker from forcing Health-Chem to sell to the public or repurchase Baker's shares; and (c) to enjoin Baker from requiring Health-Chem to pay Baker the monies due under the Settlement Agreement.

DISCUSSION

Health-Chem's arguments against enforcement of the Settlement Agreement center on the terms of a restrictive covenant included in an Indenture executed by Health-Chem in April 1981. Pursuant to that Indenture, Health-Chem authorized and issued $20,000,000 in principal amount of Health-Chem debentures. See Indenture, Baker Affidavit in Support of Motion for Summary Judgment, Exh. C. Section 7.06 of the Indenture throws Health-Chem into default on the debentures if it were to "make any distribution on its Capital Stock or to its stockholders ... or purchase, redeem or otherwise acquire or retire for value any Capital Stock" in excess of the "Available Amount." The Available Amount is defined in § 7.06(b) of the Indenture as fifty percent of Health-Chem's net earnings since 1980 plus any amount Health-Chem has received from the sale of its shares since 1980.

A. The Effect of the Indenture's Restrictive Covenant

Health-Chem contends that if it sells Baker's shares to a third party for less than $13.50 per share, the deficiency it must pay to Baker in return for his stock constitutes an indirect "distribution" under § 7.06. As such, the argument continues, the restrictive covenant in the Indenture bars Health-Chem from making the deficiency payment to Baker in excess of the Available Amount. As of June 30, 1988, the Available Amount totalled $3,474,206. Baker's 3(g) Statement ¶ 26. A "distribution" of more than the Available Amount would effect a default under § 7.06 of the Indenture, thereby resulting in an acceleration of payment of the $20 million principal outstanding debt.

Health-Chem's interpretation of "distribution" relies on the admission of extrinsic evidence in order to determine the meaning to be given § 7.06. Admission of such evidence, however, is not warranted by the unambiguous provision of the Indenture nor supported by the law. Contract terms must be construed so as to give effect to the intent of the parties as indicated by the language of the contract. Curry Road Ltd. v. K Mart Corp., 893 F.2d 509, 511 (2d Cir.1990). Extrinsic evidence of the contracting parties' intent is admissible only when the language of the contract is ambiguous. Id. Whether a contract term is ambiguous is a question of law. Id. Walk-In Medical Centers, Inc. v. Breuer Capital Corp., 818 F.2d 260, 263 (2d Cir.1987). Contract language is not ambiguous when it has "`a definite and precise meaning, unattended by danger of misconception in the purport of the contract itself, and concerning which there is no reasonable basis for a difference of opinion.'" Hunt Ltd. v. Lifschultz Fast Freight, Inc., 889 F.2d 1274, 1277 (2d Cir. 1989) (quoting Breed v. Insurance Co. of North America, 46 N.Y.2d 351, 355, 385 N.E.2d 1280, 1282, 413 N.Y.S.2d 352, 355 (1978)). Conversely, a term is ambiguous when it is "`capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business." Walk-In Medical, 818 F.2d at 263 (quoting Eskimo Pie Corp. v. Whitelawn Dairies, Inc., 284 F.Supp. 987, 994 (S.D.N.Y.1968)).

That the parties disagree as to the definition of the term "distribution" in § 7.06 does not in itself create a question of fact. See Wards Co. Inc. v. Stamford Ridgeway Assocs., 761 F.2d 117, 120 (2d Cir.1985) ("words do not become ambiguous simply because lawyers or laymen contend for different meaning"). Health Chem's broad, not to say tortured, reading of "distribution" cannot, in any practical sense, be supported. Section 7.06 provides no more than that Health-Chem may not "make any distribution on its Capital Stock or to its stockholders ... or purchase, redeem or otherwise acquire or retire for value any Capital Stock" in excess of the "Available Amount." Under the Settlement Agreement Health-Chem did not obligate itself to redeem any shares, either directly or indirectly; Baker's shares could be sold to third parties, and need not be returned to the company. As such, the payment of the deficiency to Baker would not result in any of the consequences of a "distribution" on stock as that term is commonly understood in a business context. A...