Morgan Stanley High Yield v. Seven Circle Gaming

• Decision Date: 18 March 2003
• Docket Number: No. 01 CIV. 7266(RMB)(TH).,01 CIV. 7266(RMB)(TH).
• Citation: 269 F.Supp.2d 206
• Parties: MORGAN STANLEY HIGH YIELD SCURITIES, INC., Morgan Stanley Dean Witter High Income Advantage Trust, Morgan Stanley Dean Witter High Income Advantage Trust II, Morgan Stanley Dean Witter High Income Advantage Trust III, Morgan Stanley Variable Investment Series, Morgan Stanley Diversified Income Trust, and Morgan Stanley Select Dimensions Investment Series, Plaintiffs, v. SEVEN CIRCLE GAMING CORPRATION f/k/a Swiss Casinos of America, Inc. Defendant.
• Court: U.S. District Court — Southern District of New York

269 F.Supp.2d 206

MORGAN STANLEY HIGH YIELD SCURITIES, INC., Morgan Stanley Dean Witter High Income Advantage Trust, Morgan Stanley Dean Witter High Income Advantage Trust II, Morgan Stanley Dean Witter High Income Advantage Trust III, Morgan Stanley Variable Investment Series, Morgan Stanley Diversified Income Trust, and Morgan Stanley Select Dimensions Investment Series, Plaintiffs, v. SEVEN CIRCLE GAMING CORPRATION f/k/a Swiss Casinos of America, Inc. Defendant.

No. 01 CIV. 7266(RMB)(TH).

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

March 18, 2003.

COPYRIGHT MATERIAL OMITTED

Jean-Marie Lucien Atamian, Mayer Brown Rowe & Maw, New York, NY.

Richard A. Lafont, Mayer, Brown, Rowe & Maw, New York, NY.

Lisa Ellen Brody, Kleinbard, Bell & Brecker, L.L.P., Philadelphia, PA.

ORDER

BERMAN, District Judge.

I. Background

On March 5, 2002, plaintiffs, who are seven high-yield mutual debt funds (collectively, "Morgan Stanley" or "Plaintiffs"), filed this action against Seven Circle Gaming Corporation, formerly known as Swiss Casinos of America, Inc. ("Defendant" or "Swiss Casinos"). Plaintiffs contend that Defendant breached a Note Purchase Agreement, dated August 1, 2001 ("Agreement"), pursuant to which Defendant agreed to purchase certain notes and warrants from Morgan Stanley. On April 15, 2002, Plaintiffs filed a motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, arguing that the Agreement was a legally binding contract, that Defendant breached, and that Plaintiffs were entitled to specific performance, i.e. payment of the negotiated purchase price of $29,678,269. On May 17, 2002, Defendant filed its opposition to Plaintiffs' motion arguing, inter alia, that the Agreement was subject to a condition precedent; that money damages and not specific performance was the appropriate remedy; and that any award of damages to Plaintiffs should be reduced because of Plaintiffs' failure to mitigate.

On February 25, 2003, Magistrate Judge Theodore H. Katz, to whom this matter had been referred, issued a comprehensive and thoughtful report and recommendation ("Report"), recommending that Plaintiffs' motion be granted as to liability and denied as to damages. Report at 2. Magistrate Katz stated that "because Plaintiffs have an adequate remedy at law, specific performance is not appropriate." Report at 31. Magistrate Katz also determined that the question of whether Plaintiffs attempted to mitigate their damages could not be determined on summary judgment. Report at 32 ("Whether Plaintiffs unreasonably failed to attempt to sell the Notes and Warrants, and what price could have been secured for the Notes and Warrants at the relevant time, are questions of fact that cannot be resolved on summary judgment.").

Defendants filed objections to the Report on or about March 12, 2003. Plaintiffs have not submitted objections For the reasons set forth below, the Report is adopted in its entirety.

II. Standard of Review

A district court evaluating a Magistrate's report may adopt those portions of the report to which no "specific, written objection" is made, as long as those sections are not clearly erroneous. Fed. R.Civ.P. 72(b); Thomas v. Arn, 474 U.S. 140, 149, 106 S.Ct. 466, 88 L.Ed.2d 435 (1985); Greene v. WCI Holdings Corp., 956 F.Supp. 509, 513 (S.D.N.Y.1997). "Where a party makes a `specific written objection' within `[ten] days after being served with a copy of the [Magistrate Judge's] recommended disposition,' however, the district court is required to make a de novo determination regarding those parts of the report." Cespedes v. Coughlin, 956 F.Supp. 454, 463 (S.D.N.Y.1997) (quoting United States v. Raddatz, 447 U.S. 667, 676, 100 S.Ct. 2406, 65 L.Ed.2d 424 (1980)).

III. Analysis

The Court has conducted a de novo review of the record herein, including, among other things the Report, the record, applicable legal authorities, and Defendant's objections.¹ None of the objections provide a basis for departing from the Report. The Court concludes that Magistrate Katz' factual and legal determinations are supported by the record and the law in all material respects.²

In particular, the Court finds that Magistrate Katz correctly determined that the parole evidence offered by Defendant, i.e. the existence of an oral condition precedent, contradicted the express terms of the Agreement. See, e.g., Bank Leumi Trust Co. v. Wulkan, 735 F.Supp. 72, 76 (S.D.N.Y.1990) ("Wulkans contention that Bank Leumi orally agreed that the effectiveness of the Guaranty was conditioned upon Wulkan obtaining the requisite authority from the Israeli government obviously varies the express written terms of the Guaranty, which states that he `irrevocably and unconditionally' undertook to guarantee Dumax's liabilities to Bank Leumi, and that `no modifications or amendment of the guaranty shall be deemed to be made unless the same shall be in writing.' "); Meadow Brook National Bank v. Bzura, 20 A.D.2d 287, 246 N.Y.S.2d 787 (1st Dep't 1964) ("The alleged oral condition precedent asserted in this case ... contradicts the description of the guarantor's obligation as unconditional.")

IV. Conclusion and Order

For the reasons stated herein and therein, the Court adopts Magistrate Judge Katz' Report in its entirety and grants Plaintiffs' motion for summary judgment [19] in part (as to liability) and denies it in part (as to damages).

The parties (principals and counsel) are directed to participate in a settlement and status conference with the Court on April 7, 2003 at 10:00 a.m., in Courtroom 706 of the Thurgood Marshall Courthouse, 40 Centre Street, New York, New York. The parties are directed to engage in good faith settlement negotiations prior to the conference.

REPORT AND RECOMMENDATION

KATZ, United States Magistrate Judge.

Plaintiffs (collectively, "Morgan Stanley" or "Plaintiffs"), bring this action against Seven Circle Gaming Corp. f/k/a Swiss Casinos of America ("Swiss Casinos" or "Defendant"). Plaintiffs allege breach of contract by Defendant in connection with a Note Purchase Agreement ("the Agreement") executed by the parties, in which Defendant allegedly agreed, but later refused, to purchase from Plaintiffs notes and warrants ("the Notes and Warrants") issued by The Resort at Summerlin, Inc., for $29,678,269.00 ("the Purchase Price").

Plaintiffs have moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, claiming that, as a matter of law, the Agreement was a legally binding contract that Defendant breached. Plaintiffs additionally contend that they are entitled to specific performance, namely, delivery by Defendant of the Purchase Price. Defendant opposes the motion, arguing that the Agreement never became effective because it was subject to an oral condition precedent that was not satisfied. Furthermore, Defendant claims that Plaintiffs are estopped from denying the existence of a condition precedent. Defendant contends that even if this Court grants summary judgment as to liability, Plaintiffs have failed to satisfy the elements required for specific performance, and that money damages are the appropriate remedy. Defendant further contends that, if it is found to be in breach, Plaintiffs' damages should be reduced because they failed to mitigate their damages.

Plaintiffs' motion for summary judgment has been referred to this Court for a Report and Recommendation, pursuant to 28 U.S.C. §§ 636(b)(1)(B) and (C) and Rule 72.1(a) of the Local Civil Rules of the Southern District of New York. For the reasons set forth below, this Court respectfully recommends that Plaintiffs' motion for summary judgment be granted as to liability and denied as to damages.

BACKGROUND

Plaintiffs are seven high-yield debt mutual funds. Defendant is a wholly-owned subsidiary of Swiss Leisure Group ("Swiss Parent"). See Deposition of John Tipton ("Tipton Dep.") at 20. The Swiss Parent is principally owned by J.P.C. Holding, which, in turn, is principally owned by Hans Jecklin. Id. at 19. Jecklin, his wife, and John Tipton ("Tipton"), constitute Defendant's board of directors. Id at 19-20. The Notes and Warrants were issued by The Resort at Summerlin, Inc., a whollyowned subsidiary of Defendant, Id. at 11, and The Resort at Summerlin, L.P., a partnership in which Defendant had a one percent interest in the general partnership and approximately a 70 percent interest in the limited partnership. Id. at 11-12. The Notes and Warrants were issued to fund construction of an "off the strip" golf resort, spa, and casino in Las Vegas, Nevada.

In or around 1997, Morgan Stanley acquired the Notes and Warrants for approximately $39 million. See Deposition of Peter Avelar ("Avelar Dep.") at 23. Plaintiffs subsequently decided to attempt to sell their Notes and Warrants to Defendant. See id. at 29-31. Plaintiffs' principal negotiator was Matthew Shulkin ("Shulkin"), a junior analyst at Morgan Stanley. See Deposition of Matthew Shulkin ("Shulkin Dep.") at 36. Peter Avelar ("Avelar"), a portfolio manager and Shulkin's supervisor, reviewed and executed the agreement. See Avelar Dep. at 42-44. Tipton negotiated on behalf of Defendant. See Affidavit of John Tipton, appended to Affidavit of Eric J. Schreiner ("Tipton Aff.") ¶ 2; Tipton Dep. at 111.

After protracted negotiations, a contract was drafted by the parties over a period of several months. In June 2000, Shulkin and Tipton began the negotiations. See Tipton Dep. at 111; Shulkin Dep. at 36. Defendant contends that, from the outset of the discussions, Tipton advised Shulkin that Defendant's purchase of the Notes and Warrants was conditioned on its obtaining funding from an outside investor. See Tipton Dep. at 92. Indeed, according to Defendant, Tipton repeatedly advised Shulkin that Defendant was looking for outside investors, and he specifically told Shulkin of an investor with whom Defendant was negotiating to obtain funding— Gerd Schulte ("Schulte")...