Rje Corp. v. Northville Industries Corp.

• Decision Date: 25 April 2002
• Docket Number: No. 02-CV-1440 (FB).,02-CV-1440 (FB).
• Citation: 198 F.Supp.2d 249
• Parties: RJE CORP., Plaintiff, v. NORTHVILLE INDUSTRIES CORP., Defendant.
• Court: U.S. District Court — Eastern District of New York

198 F.Supp.2d 249

RJE CORP., Plaintiff, v. NORTHVILLE INDUSTRIES CORP., Defendant.

No. 02-CV-1440 (FB).

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

April 25, 2002.

COPYRIGHT MATERIAL OMITTED

John J. Kuster, Jennifer A. Demarrais, Sidley, Austin, Brown & Wood, LLP, New York City, for plaintiff.

Maria T. Vullo, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Defendant.

MEMORANDUM & ORDER

BLOCK, District Judge.

Plaintiff, RJE Corp. ("RJE"), has brought this action, invoking the Court's diversity jurisdiction, against defendant, Northville Industries Corp. ("Northville"), for a declaratory judgment and specific performance.

The parties have a joint interest in a multi-million dollar petroleum pipeline system located on Long Island (the "Pipeline System"). They have entered into a certain "Option Agreement" that provides various methods by which the parties can sever their joint interest. Pursuant to the Option Agreement, the parties currently are involved in a closed bidding process whereby the winning bidder will be obliged to buy out the losing bidder's interest in the Pipeline System. The parties disagree as to whether a certain provision in the Option Agreement (the "Abandonment Provision") calling for bids to be based on the "fair market value of the Pipeline System," contemplates a straight asset sale of the Pipeline System, or whether the fair market value must account for future costs which may be required to remediate existing environmental conditions. The resolution of this issue, which is the subject of RJE's declaratory judgment action, will affect the dollar amount of the parties' respective bids and the appropriateness of RJE's request for specific performance to compel Northville to proceed with the bidding process.

Finding for RJE, the Court declares that bids are to be based on the fair market value of the assets comprising the Pipeline System, without offset for the costs of future remediation for existing environmental liabilities, but that, provided certain conditions are met by Northville, specific performance is not warranted.

BACKGROUND

I. Procedural Posture of Litigation

RJE initiated its action by Order to Show Cause seeking a preliminary injunction to stay the bidding process pending the requested declaratory judgment. Because the likelihood of success was so inextricably linked to the Court's assessment of the disputed contract language, the Court prevailed upon the parties to convert the preliminary injunction motion to one for summary judgment since there did not appear to be any reason why the litigation should linger. Consistent with the parties' desire to reach an expeditious final resolution of their dispute, and because of certain time constraints associated with the bidding process, the Court set the matter down for an immediate evidentiary hearing to allow the parties to adduce evidence to support their respective interpretations of the relevant contract language. This extrinsic evidence would, of course, only be relevant in the event the Court were to conclude that the contract language was ambiguous, and hence not subject to the parol evidence rule.¹ The parties agreed that the bidding process would be stayed until seven days after the Court issued its declaratory judgment.²

II. Events Leading to Execution of Relevant Agreements

Prior to September 1988, all of Northville's stock was owned by two factions of the Bernstein family. The Harold Bernstein family held 55.66% of the stock; the Raymond Bernstein family held 44.34% of the stock. Disputes arose between the families that were irreconcilable; accordingly, the families resolved to have Northville buy out the Raymond Bernstein family's stock, leaving the Harold Bernstein family in sole control of Northville.³ Included amongst Northville's many holdings was the Pipeline System.

During the course of negotiations, the parties discovered two significant underground gasoline leaks from the Pipeline System. In October 1986, an 800,000 gallon leak was discovered at the Holtsville terminal; in November 1987, a 1.2 million gallon leak was discovered at the Setauket terminal. The leaks gave rise to various governmental investigations and a class action lawsuit. The environmental liabilities associated with these leaks, the extent of which were indeterminable at the time, became an impediment to the culmination of the parties' negotiations. Consideration was initially given to spinning off the Pipeline System into a separate corporation, in which the parties would retain joint ownership in proportion to their Northville stock. This proposal was rejected by both parties after being advised by counsel that the families could be exposed to personal liability because Northville's considerable assets would not be reachable to satisfy remediation claims. See Tr. at 116 (Mar. 19, 2002). Ultimately, the parties addressed the environmental problems, as well as all other matters relevant to the stock sale, in a series of agreements executed during the summer and fall of 1988, the last ones being executed on September 29, 1988. Relevant to this litigation, in addition to the Option Agreement (dated September 29, 1988), see Pl.Ex.⁴ 2, they included the underlying Stock Purchase Agreement (dated September 23, 1988), see Pl.Ex.1; a Consulting Agreement (dated July 1, 1988), see Pl.Ex. 4; and a Purchase Price Adjustment Agreement ("PPAA") (dated September 29, 1988), see Pl.Ex. 3. RJE was incorporated by the Raymond Bernstein family for the purpose of entering into these agreements. All of these agreements were drafted by RJE, except the PPAA, which was drafted by Northville.⁵

III. Relevant Provisions of Agreements

A. Stock Purchase Agreement

The Stock Purchase Agreement provided that Northville would purchase all of RJE's Northville stock. Prior to the discovery of the leaks, the parties had come to a joint understanding that the entire value of Northville's stock was $57.5 million,⁶ plus various other consideration not relevant to this litigation. See Tr. at 100 (Mar. 19, 2002) After discovery of the leaks, the parties reduced this value by $30 million. See Tr. at 108; Def. Ex.⁷ C. Accordingly, the agreement provided that the purchase price for RJE's stock would be approximately $27.5 million, plus the various other consideration. See Tr. at 108, 150 (Mar. 19, 2002). Under the agreement, Northville was to maintain and operate the Pipeline System.

B. Consulting Agreement

The Consulting Agreement was signed relatively early in the negotiations. As best the Court can glean from this agreement, it was executed prior to the other agreements so that the Raymond Bernstein family members would leave their management positions at Northville, thereby allowing Northville to negotiate directly on behalf of the Harold Bernstein family. This was presumably done with the recognition that the negotiations underway would result in the Harold Bernstein family's sole control of Northville.

The Consulting Agreement required Northville to provide RJE with an annual "consulting fee" of $840,000, in return for which RJE was obligated to furnish up to twenty hours a month of "consulting and advisory services" upon Northville's request. Consulting Agreement § 3 ("Extent of Services"). In practice, as Northville's attorney explained, RJE received the "consulting fee without providing any services or any benefit." Tr. at 173-74 (Mar. 19, 2002). Northville's obligation to pay the consulting fee was terminable only upon severance of the parties' joint interest in the Pipeline System pursuant to the Option Agreement. See Consulting Agreement § 5 ("Termination Provision").

C. Option Agreement

The Option Agreement provided for five methods by which the parties could sever their joint interest in the Pipeline System: (1) Sale Provision; (2) Right of First Refusal Provision; (3) Purchase Option Provision; (4) Purchase Option Termination Provision, and (5) Abandonment Provision.

The Pipeline System is defined in the preamble of the Option Agreement:

[T]he properties and assets of every kind, nature and description, real, personal and mixed, tangible or intangible, including the rights to use properties or assets of another person, which constitute a network of terminals and pipelines on Long Island, New York (the "Pipeline System") ... all of which properties and assets being more particularly described on Annex A hereto (the "Pipeline Assets").

Option Agreement at 1. Annex A includes a detailed list of the assets comprising the Pipeline System including, inter alia, land, buildings and other structures, fuel storage tanks, docks, piers, appliances, equipment, machinery, pipes, automobiles, trucks, furniture, and supplies. See Option Agreement at Annex A.⁸

Sale Provision & Right of First Refusal Provision: Under the Sale Provision, Northville could sell to a third party at any time, except during a 180-day period "beginning with the anniversary of five years from the date [of execution of the Option Agreement.]" Option Agreement § 1.01; see Option Agreement § 2.02 ("Sale Provision") (incorporating 180-day period defined in Option Agreement § 1.01). Under the Right of First Refusal Provision, before Northville could sell to a third party, RJE had the option to buy the Pipeline System "at a price equal to the price offered [by the third-party] upon the same terms and conditions [offered by the third-party]." Option Agreement § 2.01 ("Right of First Refusal Provision"). If Northville sold the Pipeline System to a third party, RJE would receive "44.34% of [ ] sale proceeds or other consideration," subject to adjustments for tax liabilities and insurance proceeds. Option Agreement § 2.02.

Purchase Option Provision: If Northville did not sell the Pipeline System during the first five years, RJE had the right under the Purchase Option Provision to purchase the Pipeline System during the ensuing 180-day period for $16.7 million,⁹ subject to...