Pereira v. Cogan
| Decision Date | 25 September 2001 |
| Docket Number | No. 00 CIV. 619 RWS.,00 CIV. 619 RWS. |
| Citation | 267 BR 500 |
| Parties | John S. PEREIRA, as Trustee of Trace International Holdings, Inc. and Trace Foam Sub, Inc., Plaintiff, v. Marshall S. COGAN, Saul S. Sherman, Andrea Farace, Frederick Marcus, Robert H. Nelson, Philip Smith, Karl Winters, Tambra King Defendants. |
| Court | U.S. District Court — Southern District of New York |
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LeBoeuf, Lamb, Greene, & MacRae, L.L.P., New York City, By John P. Campo, Esq., Theodore J. Fischkin, Esq., Amy S. Zabetakis, Esq., of Counsel, for Plaintiff.
Salomon Green & Ostrow, P.C., Attorneys for Defendant Marshall S. Cogan, New York, By Chester B. Salomon, Of Counsel, Swidler Berlin Shereff Friedman, LLP, Attorneys for Defendants Andrea Farace, Saul S. Sherman, and Frederick Marcus, New York, By Shalom Jacob, Esq., Of Counsel, Piper Marbury Rudnick & Wolfe, LLP, Attorneys for Defendants Robert H. Nelson, Philip Smith, Karl Winters, and Tambra King, New York, By Robert A. Meister, Esq., Of Counsel, for Defendants.
Plaintiff John S. Pereira as Trustee (the "Trustee") of Trace International Holdings, Inc. and Trace Foam Sub, Inc. (together, "Trace") has moved for partial summary judgment, pursuant to Federal Rule of Civil Procedure 56, against defendant Marshall S. Cogan ("Cogan"), holding Cogan liable on eight separate promissory notes, in the aggregate principal amount of about $14.3 million. The motion also seeks to dismiss Cogan's two affirmative defenses asserting unrelated offset claims against the notes. For the reasons stated, the motion is granted.
Certain of the parties and prior proceedings are described in this Court's opinion of March 8, 2001, familiarity with which is presumed. Pereira v. Cogan, No. 00 Civ. 619, 2001 WL 243537 (S.D.N.Y., Mar. 8, 2001) (the "March 8, 2001 Opinion").
Trace is a Delaware corporation. Trace and its subsidiary, Trace Foam Sub., Inc., filed petitions under Chapter 11 of the Bankruptcy Code on July 21, 1999. The cases were converted to proceedings under Chapter 7 on January 24, 2000. The Trustee was appointed on January 25, 2000.
Cogan was the majority common stockholder of Trace, as well as its Chief Executive Officer and Chairman of its Board of Directors.
The instant motion was filed on April 23, 2001, and was marked fully submitted on June 6, 2001.
The following facts, which pertain to the Trustee's motion for partial summary judgment, are drawn from the parties' Rule 56.1 Statements and other submissions and, as required, are construed in the light most favorable to Cogan.
Between 1995 and 1998, Cogan engaged in a series of borrowings from Trace and executed seven promissory notes evidencing his obligation to repay these loans. Cogan denies having executed an eighth promissory note that the Trustee alleges was also executed. The first four notes, in the aggregate principal sum of $2,752,000, were executed on various dates in 1995-96 and were all due on December 31, 1999. The remaining notes had due dates of December 31 of 2001, 2002 and 2003. These notes were in the aggregate principal amount of $7,815,712.52. The disputed note, allegedly executed on May 1, 1998, was in the amount of $3,722,000, with a due date of December 31, 2003. Cogan disputes having executed the May 1, 1998 note on the grounds that it is not his signature on the form, he did not authorize anyone to sign it for him and the note was, in any event, superseded by a nonrecourse promissory note executed February 19, 1999, after the error of the May 1, 1998 note was discovered.
Under Delaware General Corporation Law, Sections 170 and 173, (8 Del. C. §§ 170, 173) Trace was permitted to pay dividends "only" out of its "surplus" (as defined in Sections 154 and 244 of the Delaware Code (8 Del. C. §§ 170, 173)) or net income. Cogan admitted in writing, shortly before execution of the nonrecourse note, that Trace lacked the requisite "surplus"; Cogan was also then in receipt of advice from a prominent law firm that Trace "would not be able to pay . . . dividends"; and had negative earnings.
The aggregate principal amount of the seven notes, exclusive of the disputed May 1, 1998 note, is $10,567,712.52.
All the notes require that, on December 31 of each year, Cogan pay interest in arrears at the rate of nine percent per annum. Under each note, a failure to make an interest payment is an event of default, affording Trace (and now its Trustee) to declare the unpaid principal immediately due and payable, subject to providing Cogan with notice and an opportunity to cure.
Cogan is in default on all of the notes. On the first four notes, Cogan defaulted by failing to pay the principal sums due December 31, 1999 (as well as all interest installments due since December 31, 1998). On the remaining notes, Cogan's obligations have been accelerated, since Cogan defaulted in paying the interest installments due December 31, 1998 and 1999 and did not cure this default after notice given by the Trustee.
Cogan contends that he is entitled to a $4.7 million offset, based on compensation allegedly due to him under a 1987 employment agreement (the "1987 Agreement"), as renewed in 1997. Of this sum, $3.6 million relates to contractual severance allegedly due because of the termination of his employment by reason of Trace's bankruptcy, and $1.1 million relating to the reduction of his contractual compensation prior to Trace's Chapter 11 filing. This overall claim presumes the validity of the 1997 renewal of the 1987 Agreement.
The 1987 agreement, as originally executed, August 5, 1987, provided for Cogan's employment as Chairman and CEO for a 10-year "Initial Term" through August 4, 1997. During such initial term, Cogan's annual compensation, pursuant to the agreement, consisted of (a) a minimum base annual salary of $2.4 million "or such higher amount as the Board may from time to time determine" and (b) an annual bonus "in such cash amount as the Board may from time to time determine."
The 1987 Agreement provided for four additional 10-year "Renewal Terms," spanning the period from August 4, 1997 to August 4, 2037. Under the 1987 Agreement, each of these Renewal Terms would occur automatically unless the Board, by a three-quarters vote of its entire membership, affirmatively declined to renew the Agreement or Cogan himself elected not to renew the Agreement.
When the 1987 Agreement was first up for renewal in 1997, the Board, controlled by Cogan according to the Trustee, did not address the propriety of continuing this agreement; nor did Cogan elect not to renew the agreement. Accordingly, it was automatically renewed for another 10-year period term through August 4, 2007.
Once the 1997-2007 Renewal Term began, the Agreement severely penalized Trace in the event of early termination or other diminution of Cogan's privileges, irrespective of whether such actions were justified. For example, if the Board terminated Cogan for cause, the Agreement guaranteed that he would continue to receive his salary for another 5 years. Since Cogan's annual salary had risen to $3.6 million, the Agreement obligated Trace to pay Cogan $18 million even if he was terminated for cause. If Cogan terminated the Agreement for "Good Reason," he would be entitled, inter alia, to the greater of (a) the present value of his salary — $3.6 million — for the remainder of the Renewal Term or the present value of 5 years' salary. Among other things, "Good Reason," under the Agreement, included (i) any failure to re-elect Cogan to the Board; (ii) any reduction in his base salary or the failure to increase it each year on a percentage basis comparable to that applied to other executive officers; (iii) any significant change in the nature or scope of his authorities, powers, functions or duties, or the assignment to Cogan of any duties "inconsistent with his . . . status," or any removal or failure to reelect him to office.
In view of the financial penalties and the terms of the "Good Reason" standard, Cogan's renewal of the Agreement effectively immunized himself from any disciplinary or supervisory oversight by the Board during the next ten years, irrespective of performance.
Cogan's total compensation in 1997 and 1998 from Trace and its affiliates was $5.6 million and $5.8 million, respectively.
The 1987 Agreement contained the following merger clause canceling and superseding all prior agreements relating to the same "subject matter":
27. Prior Agreements. Any and all agreements relating to the subject matter hereof previously entered into between the Corporation and Mr. Cogan are hereby mutually terminated and canceled, and each of the parties mutually releases and discharges the other from any and all obligations and liabilities whatsoever existing under it by reason of any such agreements, it being the intention of the Corporation and Mr. Cogan that this Agreement shall supersede and be in place of any and all prior agreements or understandings between them.
However, Cogan claims a $12 million offset, for alleged severance, retirement and death benefits, under a 1985 Defined Benefit Deferred Compensation and Salary Continuation Agreement (the "1985 Agreement").
The Trustee does not seek a determination of $9.8 million in additional offsets asserted by Cogan in his Answer.
Rule 56(c) of the Federal Rules of Civil Procedure provides that a motion for summary judgment may be granted when "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Summary judgment "is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed `to secure the just, speedy and inexpensive...
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...to the non-movant, there is no genuine issue of material fact, then the entry of summary judgment is appropriate." Pereira v. Cogan, 267 B.R. 500, 506 (S.D.N.Y.2001) ; see Burrell, 894 F.Supp. at 758 (citing Binder v. Long Island Lighting Co ., 933 F.2d 187, 191 (2d Cir.1991) ); see also In......