Kaufman v. Diversified Industries, Inc.

• Court: U.S. Court of Appeals — Second Circuit
• Writing for the Court: KAUFMAN, ANDERSON and MANSFIELD, Circuit
• Citation: Kaufman v. Diversified Industries, Inc., 460 F.2d 1331 (2nd Cir. 1972)
• Decision Date: 22 May 1972
• Docket Number: No. 669,Docket 71-1859.,669
• Parties: Aubrey KAUFMAN, Plaintiff-Appellee, v. DIVERSIFIED INDUSTRIES, INC., Defendant-Appellant.

460 F.2d 1331 (1972)

Aubrey KAUFMAN, Plaintiff-Appellee, v. DIVERSIFIED INDUSTRIES, INC., Defendant-Appellant.

No. 669, Docket 71-1859.

United States Court of Appeals, Second Circuit.

Argued May 3, 1972.

Decided May 22, 1972.

Robert M. Trien, New York City (Philip Handelman, New York City and Halpin, Keogh & St. John, New York City, of counsel), for plaintiff-appellee.

Lawrence M. Powers, New York City (Steven E. Gross, New York City, and Powers & Gross, New York City, of counsel), for defendant-appellant.

Before KAUFMAN, ANDERSON and MANSFIELD, Circuit Judges.

IRVING R. KAUFMAN, Circuit Judge:

In the main, this appeal presents a narrow and highly technical question of contract damages. The law of damages, however, does not lend itself to easy application or simplistic formulations, as our discussion will reveal, and an exposition of the complexities in this difficult case does not make for light reading.

In May 1968, Aubrey Kaufman and the five other shareholders of Datatron Processing, Inc. ("Datatron") sold their Datatron shares to Diversified Industries, Inc.¹ ("Diversified") in exchange for Diversified shares, some to be delivered immediately, some contingent on Datatron's future performance. Kaufman commenced this action in the Supreme Court, New York County (subsequently removed by Diversified to the District Court for the Southern District of New York because of diversity of citizenship), alleging that Diversified had breached its agreement to deliver conditional shares. Judge Levet determined as a matter of law that Diversified had breached the contract, and after the jury ruled in favor of Kaufman on Diversified's estoppel defense,² the parties stipulated to try the damage issue before the court. The total damages calculated by Judge Levet were $152,885.40—$100,759.95 for the breach itself, $34,438.65 for reasonable costs of the litigation reimbursable under an indemnity provision of the contract and the remainder for prejudgment interest. Diversified contends on appeal that the court erred in directing a verdict on liability and, in any event, erred in computing damages. We affirm the directed verdict on liability, but reverse and remand on the issue of damages.

A statement of the facts leading to the breach will aid in clarifying our resolution of the issues. Kaufman owned 171/2% of the shares of Datatron when, on May 9, 1968, he and the five other Datatron shareholders contracted to sell all of the stock in Datatron to Diversified solely in exchange for Diversified shares. Pursuant to the contract of sale, Diversified initially delivered 45,800 Diversified shares to the six Datatron stockholders, of which Kaufman received 8,015. The agreement also provided that the selling shareholders would receive an additional sum of Diversified shares contingent on and varying with the performance of Datatron for the year ending December 31, 1968. The crucial provisions, which determined at what date and in what manner the number of shares due as additional compensation were to be computed, are subdivisions ii and iii of section 3(c) which follow:

(ii) If for the calendar year ended December 31, 1968, the business of the Company and its subsidiaries has Net Income After Taxes as set forth in section 3(b) (i) which is in excess of $125,000, the Stockholders shall be entitled to receive shares of Diversified Stock having a then market value equal to four times the amount of the Net Income After Taxes in excess of $125,000. For example, if Net Income After Taxes for the year ended December 31, 1968 is $200,000, the Stockholders shall receive four times $75,000, i. e. $300,000 in value of Diversified shares.

(iii) Diversified shall deliver additional shares payable hereunder within 30 days after receipt of the financial statement, together with written approval by Stockholders, from which it appears that the earnings of the Company and its subsidiaries were such as to require a payment of additional shares hereunder. The shares of Diversified Stock deliverable shall be deemed to have a then market value per share equal to the average closing price per share of Diversified Common Stock, on the Stock Exchange where it is traded for the twenty day period next preceding delivery of the shares. The market value in shares payable shall be divided by the then market value per share of Diversified Stock for determining the number of shares deliverable to the Stockholders.

An independent accountant, Lybrand, Ross Bros. & Montgomery, made the initial determination of the net income attributable to Datatron, which was subsequently approved by the former Datatron shareholders on April 29, 1969. It was stipulated in a Pre-Trial Order that the former shareholders, pursuant to section 3(c) (ii), were "entitled to receive shares of Diversified stock having a market value of $2,779,300, plaintiff's pro-rata share thereof being the amount of $486,377.50."

In its May 5 letter (signed by George Moll, President), acknowledging receipt of the approved income statement, Diversified calculated the number of shares due the former Datatron shareholders purportedly under section 3(c) (iii), by using the average market price per share for the twenty business days preceding May 5 ($36.93). The letter stated that "instructions will be entered to issue certificates in the following names and amounts: . . . Aubrey Kaufman—13,170."

The price of Diversified shares began dropping in May 1969. On June 4, thirty days after acknowledgment of the approved financial statement, the closing price as well as the twenty-day average price of Diversified was $33. As yet, no shares had been delivered to Kaufman. It was not until August 1, 1969, that Kaufman received 13,170 shares of Diversified stock, the amount determined in the May 5 letter. The twenty-day average price as of August 1 was $23.24, and the August 1 closing price was $21.63.

Kaufman signed a receipt for the 13,170 shares on August 1 and forwarded a registered letter to Moll, which read in full:

I hereby acknowledge receipt of 13,170 shares of Diversified Metals Corporation Stock. However, it is my understanding that the per share value was to be computed on an average price per share twenty days preceding issuance of the shares.

Please examine your records as I believe Diversified Metals Corporation is in error.

This lawsuit followed.³

I. Breach

The threshold question is whether, as a matter of law, Diversified breached its contractual obligations. There is no dispute that physical delivery of shares did not occur until August 1. Diversified contends that the May 5 letter and other actions it took in preparation for physical delivery constituted "delivery" of shares for purposes of the agreement. Judge Levet, however, excluded evidence that Diversified took immediate steps to perform including evidence that it notified the New York Stock Exchange (with whom a listing was pending) that additional shares had been reserved for issuance to the former Datatron shareholders.

None of the excluded evidence, however, would have turned the issue of delivery into a jury question. Section 1-201 of the Uniform Commercial Code (McKinney 1964)⁴, the general definitional section, defines delivery with respect to securities as "voluntary transfer of possession." More specifically, § 8-313(1) (a) provides that delivery occurs when a person acquires possession of a security. Although § 8-313(1) (d), relied upon by Diversified, broadens delivery to include possession by a third person for the account of another, that is obviously not the case here, It was conceded that on May 5 there were insufficient authorized shares to pay Kaufman and the other Datatron sellers. It would be straining the meaning of "possession" to hold that possession passed where the shares allegedly possessed are not even in existence.

II. Damages

A. Date for Valuation of Shares

In directing a verdict on the issue of breach, Judge Levet found that the delivery of shares did not take place within thirty days of receipt of the approved financial statement. All now agree that delivery should have occurred on or before June 4, 1969.

Once the parties stipulated that the court could fix damages, the court's initial task was to fix the date to be used in valuing the shares. The number of shares to be delivered to Kaufman to fulfill the contractual requirement that their market value total $486,377.50 then could be calculated. The date opted for by Kaufman was August 1. A literal and superficial reading of the contract lends some support to this contention, since August 1 was the date of delivery. Under this theory, because the twenty-day average price as of August 1 was $23.24, Kaufman should have received 20,931 shares—7,761 more than he actually received. His damages would be the August 1 value of these shares. This interpretation, seemingly correct at first blush, cannot withstand scrutiny. If the price of Diversified shares had been rising, Diversified could have delayed delivery indefinitely, and, with each price increase, it would in theory owe Kaufman fewer shares.⁵ The obvious expectation of the parties was that the price of Diversified shares would continue to increase, since the market price had risen so remarkably from the date the Diversified stock was issued to the public in 1966 until the May 9, 1968, contract date. The purpose of requiring delivery within thirty days of receipt of the approved financial statement was to prevent Diversified from benefiting by extended delay in performance. To give any meaning to the thirty-day limit the contract must be interpreted so that it specifies not only the date for latest delivery within its terms, but also the date for computing the number of shares payable. Thus, whether or not any shares were actually delivered on June 4, the contract fixed the number of shares due Kaufman on that date. This is what Judge Levet concluded, and the parties have not disputed this...