Oscar Gruss & Son, Inc. v. Hollander

• Decision Date: 23 July 2003
• Docket Number: Docket No. 02-7087.,Docket No. 02-7133.
• Citation: 337 F.3d 186
• Parties: OSCAR GRUSS & SON, INC., Plaintiff-Counter-Defendant-Appellee-Cross-Appellant, v. Yossie HOLLANDER, Defendant-Counter-Claimant-Appellant-Cross-Appellee,
• Court: U.S. Court of Appeals — Second Circuit

337 F.3d 186

OSCAR GRUSS & SON, INC., Plaintiff-Counter-Defendant-Appellee-Cross-Appellant, v. Yossie HOLLANDER, Defendant-Counter-Claimant-Appellant-Cross-Appellee,

Docket No. 02-7087.

Docket No. 02-7133.

United States Court of Appeals, Second Circuit.

Argued: March 25, 2003.

Decided: July 23, 2003.

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Robert S. Churchill, Eaton & VanWinkle LLP, New York, New York, (Brendan R. Marx on the brief) for Plaintiff-Counter-Defendant-Appellee-Cross-Appellant.

Harris N. Cogan, Blank Rome Tenzer Greenblatt LLP, New York, New York, (Mojirade A. James on the brief) for Defendant-Counter-Claimant-Appellant-Cross-Appellee.

Before: McLAUGHLIN, KATZMANN and B.D. PARKER, Jr., Circuit Judges.

McLAUGHLIN, Circuit Judge.

Yossie Hollander appeals from a judgment of the United States District Court for the Southern District of New York (Berman, J.) awarding breach of contract damages to plaintiff Oscar Gruss & Son, Inc. ("OGSI") in the amount of $482,021.60, plus attorneys' fees and interest, arising from Hollander's failure to deliver warrants pursuant to an Engagement Letter. Hollander challenges the district court's computation of damages and argues that under New York law the district court should have valued the warrants from the date of the breach. Hollander further maintains that the district court improperly awarded attorneys' fees to OGSI based on an erroneous interpretation of the third-party indemnification clause in the Engagement Letter.

Because the district court should have calculated OGSI's damages from the date of the breach and because it improperly awarded attorneys' fees to OGSI, we affirm in part, vacate in part, and remand with instructions to determine the date of breach and to recompute OGSI's breach of contract damages accordingly.

BACKGROUND

In 1983 Yossie Hollander founded Fourth Dimension Software Ltd., a private Israeli software corporation. He later renamed it New Dimension Software Ltd. ("4D"). In late 1992, 4D went public in an initial public offering (the "IPO"). After the IPO, Hollander owned about 34% of 4D's stock, while Roni Einav and Dalia Prashker-Katzman together controlled another 34%. The remaining 32% of the stock was publicly traded on the NASDAQ market.

Following the IPO, Hollander's relationship with Einav and Prashker-Katzman soured. In late 1994, Hollander resigned from 4D's Board of Directors and was terminated as Chief Executive Officer ("CEO"). He kept his 34% stock interest, however.

Hollander wanted to reacquire control of 4D. He began negotiating the terms of an engagement letter with Oscar Gruss & Son, Inc. ("OGSI"), a small New York investment banking firm. On February 3, 1995, OGSI and Hollander came to an agreement (the "Engagement Letter").

A. The Engagement Letter

The Engagement Letter provided that Hollander was hiring OGSI on an exclusive basis to render financial advisory services in connection with Hollander's attempt to acquire more shares of 4D. The letter included OGSI's obligations: (1) to provide advisory services, general business and financial analysis, transaction feasibility analysis and pricing; (2) to assist in negotiations and related strategy; (3) to act as dealer/manager in any tender offer; (4) to assist in corporate capital planning; (5) to provide a fairness opinion; and (6) to use its best efforts to raise between $20 and $25 million to reacquire 4D stock.

OGSI had initially asked for a $100,000 retainer, but Hollander balked at so large an initial cash outlay. The Engagement Letter thus provided that Hollander would pay OGSI a retainer of only $50,000 in cash but would give OGSI warrants, which "shall vest immediately upon signing this Agreement," to acquire 25,000 shares of 4D common stock held by Hollander. OGSI could not exercise the warrants before January 1, 1998, but could exercise them at a price of $4.30 per share any time thereafter.

Hollander would retain the right to buy back the warrants any time during the four-year period commencing February 5, 1995 whenever the market price of 4D stock exceeded twice the exercise price for the warrants (i.e., reached $8.60 per share). The cost to Hollander to buy back the warrants would be the current market price for 4D common stock minus the $4.30 exercise price. On January 2, 1997, 4D's common stock closed above $8.60.

In 1995 and 1996 OGSI conveyed most of its interest (88.47%) in the warrants to six (6) present and former employees of OGSI. Significantly, OGSI retained an 11.53% interest in the warrants.

The Engagement Letter also provided that OGSI was entitled to reimbursement from Hollander for OGSI's reasonable expenses in connection with its services — up to a maximum of $10,000. In 1995, OGSI billed Hollander $5,454.04 for expenses, but was never paid.

The district court found that OGSI performed its obligation under the Engagement Letter. Specifically, OGSI had introduced Hollander to potential investors and sources of financing, had created and distributed an "investor memorandum" to potential investors, and had met with Einav and Prashker-Katzman.

B. Hollander's Failure to Deliver Warrants

Hollander did pay OGSI the $50,000 retainer fee in cash, but he never delivered the warrants to OGSI. In February 1997, OGSI demanded delivery of the warrants. Hollander responded that "[w]hile you may believe that payment was not dependent upon the successful completion of the transaction for which I engaged the services of OGSI, it is undeniable that payment for such services was indeed dependent upon such services being rendered." (emphasis added). In March 1997, OGSI threatened litigation.

C. BMC Tender Offer

OGSI was unsuccessful in its efforts to assist Hollander in reacquiring control of 4D. Then, in 1999, BMC Software, Ltd. ("BMC") made a tender offer for 4D's shares. BMC was successful and acquired all the outstanding shares of 4D common stock (including Hollander's) at a price of $52.50 per share.

D. Procedural History

Because of Hollander's refusal to deliver the warrants, OGSI sued for breach of contract in the United States District Court for the Southern District of New York (Berman, J.). Diversity jurisdiction was alleged. Hollander disputed diversity, alleging that a non-diverse necessary co-plaintiff had not been joined. Hollander also counterclaimed for breach of contract, breach of the implied covenant of good faith and fair dealing, fraudulent inducement, negligent misrepresentation, and breach of fiduciary duty.

The district court determined that it had subject matter jurisdiction under 28 U.S.C. § 1332(a) because the parties were diverse. Hollander had argued that diversity jurisdiction was destroyed because one of the six (6) former employees to whom OGSI assigned an interest in the 4D warrants was, like Hollander himself, a citizen of Israel throughout the course of the litigation. Rejecting Hollander's contention, the district court found that all six (6) employees signed a Letter Agreement, dated July 23, 1998 ("Letter Agreement"), vesting OGSI with authority to commence litigation and to make all decisions relating to enforcement of the Engagement Letter. Diversity jurisdiction was therefore proper.

After discovery, plaintiff OGSI moved for summary judgment. Defendant Hollander opposed the motion and cross-moved for partial summary judgment. The district court granted OGSI's motion, finding that the Engagement Letter required Hollander to deliver the warrants to OGSI "shortly after the execution of the Engagement Letter." As a result of his failure to do so, the district court concluded that Hollander "unequivocally" breached the Engagement Letter.

The district court also dismissed Hollander's counterclaims for breach of contract and breach of the implied covenant of good faith and fair dealing. It reserved for trial the issue of damages and three of Hollander's counterclaims: fraudulent inducement, negligent misrepresentation, and breach of fiduciary duty.

A bench trial was then held to determine OGSI's damages and to rule on Hollander's surviving counterclaims. Based upon documentary evidence and witness testimony, the district court dismissed all of Hollander's counterclaims.

E. Value of the Warrants

In valuing the warrants, the district court also made a determination as to how long OGSI would have held the warrants before exercising them. The court noted that since April 1996, Michael Shaoul, OGSI's Chief Operating Officer, was primarily responsible for implementing OGSI's warrants practices. Shaoul testified that he closely followed 4D stock from the day he was employed by OGSI until the BMC tender offer was consummated in April 1999. Shaoul also stated that OGSI would have held the 4D warrants for at least fourteen (14) months after the initial exercise date of January 1, 1998 — just about the time of the BMC tender offer. The district court credited Shaoul's conclusion that the 4D warrants were "a particularly suitable security to hold for long term appreciation."

Based largely on the testimony of Michael Shaoul, the district court concluded that OGSI would have held the warrants for the longest term possible. The district court determined that April 9, 1999 was "[t]he appropriate date to fix the value of OGSI's 11.53% share of the warrants [because this date] is the most likely date on which OGSI would have exercised the warrants." On April 9, 1999, the date of the BMC tender offer, the warrants were valued at $52.50. Thus, the district court determined the value of OGSI's 11.53% interest to be $151,357.50.

As to the remaining 88.47% interest in the warrants, the district court determined that there was "little or no evidence" as to when any of the individual assignees would have sought to exercise their warrants. The court set the date for determining the value of the remaining 88.47% of the warrants at the "reasonable `intermediate' date" of January 1, 1998 — the first date...