Nuvest, S. A. v. Gulf & Western Industries, Inc.

• Decision Date: 02 June 1981
• Docket Number: No. 533,D,533
• Citation: 649 F.2d 943
• Court: U.S. Court of Appeals — Second Circuit
• Parties: NUVEST, S. A., Plaintiff-Appellee, v. GULF & WESTERN INDUSTRIES, INC., Natural Resources Group, a division of Gulf& Western Industries, Inc., Defendants-Appellants. ocket 80-7747.

Page 943

649 F.2d 943

NUVEST, S. A., Plaintiff-Appellee, v. GULF & WESTERN INDUSTRIES, INC., Natural Resources Group, a

division of Gulf& Western Industries, Inc.,

Defendants-Appellants.

No. 533, Docket 80-7747.

United States Court of Appeals,

Second Circuit.

Argued March 16, 1981.

Decided June 2, 1981.

Roy L. Reardon, New York City (Barry R. Ostrager, Dennis G. Jacobs, Nancy F. McKenna, Richard L. Mattiaccio, and Simpson, Thacher & Bartlett, New York City, on brief), for defendants-appellants.

Arthur J. Homans, New York City (Jacob Gerstein, Alexander Stone, William C. Kratenstein, New York City, on brief), for plaintiff-appellee.

Before LUMBARD and NEWMAN, Circuit Judges, and TENNEY, District Judge. ^*

TENNEY, District Judge:

Defendants, Gulf & Western Industries, Inc., and its Natural Resources Group (collectively referred to as "G & W"), appeal from a judgment entered in the Southern District of New York, John M. Cannella, Judge, following a jury verdict in favor of the plaintiff, Nuvest, S. A. ("Nuvest"). The jury awarded Nuvest $850,000 plus interest on its finder's fee contract with G & W. Defendants also appeal from Judge Cannella's denial of their motion for a judgment notwithstanding the verdict or, in the alternative, for a new trial.

This case hinges on whether a finder or broker can recover damages because of the seller's bad faith in thwarting negotiations even if the buyer and seller never reached a final meeting of the minds. Judge Cannella ruled that this theory of recovery was available to the plaintiff, and he instructed the jury that Nuvest could recover if a "meeting of the minds and the final execution of the formal contract was prevented by the defendants' bad-faith conduct." Explaining further, Judge Cannella stated that: "The question is whether there was a genuine lack of consensus or whether the defendants deliberately attempted to avoid payment of the plaintiff's commissions by maintaining an arbitrary or unreasonable position in order to cause a breakdown in negotiations." Because there was substantial evidence adduced at trial showing that G & W wilfully prevented a final agreement, the jury's finding of bad faith cannot be disturbed. It remains, however, for this court to resolve whether New York law permits a finder to recover on the basis of the seller's bad faith when an agreement on essential terms has either been reached or is imminent. We find that it does.

Background

In the fall of 1976, G & W was interested in finding a joint venturer to invest in coal properties, some of which G & W already owned and hoped to develop, and others of which were to be acquired in the future. The president of Nuvest, Nelson Camilleri, heard about G & W's plans and mentioned them to Michael Corrie, then president of Scallop Coal Corporation ("Scallop"), a member of the Royal Dutch Shell group of companies. After Corrie expressed interest in exploring a coal deal, G & W executed a finder's fee contract with Nuvest, providing in pertinent part:

We (G & W) agree, in the event that Scallop Coal Corporation or any other subsidiary or entity affiliated with or controlled by (the Royal Shell Group) (your investor) purchase(s) an interest in any coal companies or coal properties owned or acquired by us(,) to pay you a finder's fee of 5% of the cost to your investor(.)

Over the next 21 months, Scallop's president Corrie negotiated with G & W's Natural Resources Group, which was represented by its chairman and chief executive officer, Richard Hogeland, and by its chief in-house counsel, Ira Barsky. After considering a very large joint venture, covering several coal properties, the parties narrowed their discussions to one investment, the Solar Fuel Company ("Solar"), which G & W had acquired in December 1976. On February 9, 1978, Scallop executed a letter of intent to purchase a 50% interest in Solar at a price of $17 million, subject to four conditions: (1) confirmation of Solar's coal reserves, (2) receipt of a satisfactory financial report on Solar from Scallop's own auditors, (3) negotiation of formal instruments, and (4) approval by the respective boards of directors.

By the late spring of 1978, the parties' disagreements centered on the first and third of the conditions listed above. Scallop's own geological survey of Solar's property showed that the coal reserves were not as substantial as the parties had originally thought them to be. Accordingly, Scallop wanted a reduction in the price. Hogeland testified that he "did get a report from my geologists who said (Scallop's) geologists were correct," but he nonetheless tried to negotiate for a price of $17 million as originally contemplated. Both Corrie and Hogeland testified, however, that their differences over price were not irreconcilable. The jury implicitly accepted this testimony and found that Scallop would have signed a contract containing a price term of $17 million. The jury was instructed to calculate damages by applying Nuvest's finder's fee of 5% to the price the parties would have included in their final agreement. The jury's award of $850,000 is 5% of $17 million.

The negotiations were ultimately terminated by G & W's refusal to give Scallop certain unqualified warranties that were included in Scallop's first draft of the final agreement. Prior to its receipt of the draft contract, the Natural Resources Group had confirmed G & W's willingness to give Scallop unqualified warranties. After reviewing the draft, Hogeland informed Nuvest's president that it conformed to the parties' understanding, and advised David N. Judelson, G & W's president, that it correctly reflected the parties' intent. In its return draft, however, G & W proposed to qualify or eliminate many of these warranties. In particular, G & W objected to five primary warranties: (1) a warranty of good title on the many properties held by Solar, to which G & W suggested that Scallop should rely on title insurance; (2) a blanket warranty that Solar's business violated no laws, to which G & W suggested a "best of its knowledge" warranty; (3) a warranty that G & W would bear the full expense of any contingent royalty fees owed to Solar's prior owner, to which G & W suggested that the joint venturers share the risk equally; (4) a warranty that G & W would bear all liabilities incurred between a freeze date on the balance sheet and the closing, to which G & W suggested that the parties share the liabilities equally; and (5) a warranty that G & W would establish an escrow account to cover any liabilities, to which G & W suggested that the escrow account be eliminated.

Both sides sought to characterize these warranties at the trial and on appeal. For example, in cross-examining Hogeland, G & W brought out that "Royal Dutch and Scallop's attorneys drafted the tightest agreement that it could containing the most favorable provisions that they could find for their client." Hogeland responded, "Of course, and then when I sat down with Corrie, we started to take those things apart, of course." Nuvest, on the other hand, elicited testimony from Corrie and Hogeland that unqualified warranties are "customary" and that "best knowledge" warranties are "not normal." In addition, Nuvest offered as exhibits several documents executed in connection with G & W's acquisition of Solar in December 1976. In a letter of intent, G & W requested "such covenants, representations and warranties as are customary in transactions of this type," and in the formal contract, G & W received unqualified warranties of the type Scallop wanted.

Besides discussing the terms of the warranties themselves, Nuvest presented substantial additional evidence to show that Judelson purposely effected an impasse by qualifying the previously contemplated warranty terms in order to avoid paying a finder's fee. The plaintiff's version of the events begins with a meeting in mid-June between Hogeland and Judelson. When Judelson learned of Nuvest's 5% fee, he was "outraged (and) walked out of the room for a couple of minutes to calm down." According to Judelson's own recollection, he said to Hogeland, "Why do you need a broker to call Scallop? My own son, who is ten years old, knows who the Shell Company is. It is not like you are looking for a needle in a haystack. You could have called them directly." Hogeland testified that Judelson told him, "I will show you how to sell a company without having anyone in between " The plaintiff argued that from mid-June through August 1, when Judelson met with Scallop's president Corrie, Judelson deliberately prevented a final agreement by taking control away from Hogeland, by shifting legal work from the Resources Group's counsel to G & W staff counsel, and ultimately by qualifying the warranties previously deemed acceptable by Hogeland and the Resources Group staff.

G & W, of course, argues that Judelson's outrage at Nuvest's 5% fee did not foreclose vigorous negotiations. Judelson testified that he was "very disturbed but nothing (was) going to get in the way of my doing the Scallop deal because Gulf & Western need(ed) them as a partner." Describing Scallop's proposed draft, he said counsel reported that "we had never been presented with a document that was this rigid with our assuming all representations, warranties and guarantees, known or unknown, ever before." And even if G & W was already negotiating with other purchasers during the last months of discussions with Scallop, that was a permissible business backup in case the Scallop deal fell through.

All this evidence is pertinent to the plaintiff's claim which, in the absence of a final agreement, rests on an allegation of bad faith. Because there was ample evidence from which the jury could have inferred G & W's bad faith, the question on this appeal is whether a seller's bad faith warrants recovery on a finder's fee contract, even though there was no sale, if agreement on the essential terms of the sale had...