Sequa Corp. v. GBJ Corp.
| Decision Date | 20 August 1998 |
| Docket Number | Nos. 97-7424,97-7692,97-7478,s. 97-7424 |
| Citation | 156 F.3d 136 |
| Parties | SEQUA CORPORATION and Sequa Capital Corporation, Plaintiffs-Appellants-Cross-Appellees, v. GBJ CORPORATION, Jeffrey J. Gelmin, and Topaz Capital Corporation, Defendants-Appellees-Cross-Appellants. GBJ CORPORATION, Jeffrey J. Gelmin, and Topaz Capital Corporation, Defendants-Appellants, v. BUTLER, FITZGERALD & POTTER, A Professional Corporation, Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
David M. Brodsky, Schulte, Roth & Zabel LLP, New York City (Brooks R. Burdette, Jennifer Trahan, Jon Gordon, on the brief), for Sequa Corp. and Sequa Capital Corp.
Charles B. Manuel, Jr. and James C. Jones, New York City, for GBJ Corp., Jeffrey J. Gelmin, and Topaz Capital Corp.
Stuart L. Potter, Butler, Fitzgerald & Potter, New York City (David J. McCarthy on the brief), for Butler, Fitzgerald & Potter.
Before: CARDAMONE, CABRANES and HEANEY, * Circuit Judges.
On March 26, 1997, final judgment was entered in the United States District Court for the Southern District of New York (Deborah A. Batts, Judge ) following a trial to the bench in this civil action involving claims for, inter alia, racketeering, fraud, and breach of fiduciary duty, counterclaims for breach of contract, and an intervening dispute over fees owed to retained counsel discharged mid-trial. The action arose from the disintegration of a contractual relationship between two corporate entities in search of means to shelter or defer tax liability and the consultant who assisted them in that effort. This appeal, cross-appeal, and consolidated appeal raise questions regarding the calculation of damages on certain of the consultant's breach of contract claims, the liability of the consultant for alleged breaches of fiduciary duty in connection with certain uses of falsely worded documents, and the propriety of certain liens granted to the consultant's attorneys following their mid-trial discharge.
Plaintiffs Sequa Corporation ("Sequa") and Sequa Capital Corporation ("SCC") 1 (collectively, the "Sequa parties" or "Sequa") filed an appeal (No. 97-7424) from (1) that portion of the judgment awarding damages to defendants GBJ Corporation ("GBJ"), Topaz Capital Corporation ("Topaz"), and Jeffrey J. Gelmin ("Gelmin") (collectively, the "Gelmin parties"), on their breach of contract counterclaims with respect to eight of the transactions at issue in this action, and (2) that portion of the judgment finding Gelmin not liable for breach of fiduciary duty with respect to five occasions on which he was involved in the submission of false documents to Sequa and/or SCC.
The Sequa parties' first challenge is to the method by which the district court calculated the breach of contract damages with respect to eight transactions; they argue principally that the district court improperly relied on estimates of certain tax effects where the parties had not had occasion to introduce evidence concerning actual tax effects. Because it is preferable to base damage awards on proof of actual data where possible, resorting to estimates if and when that proof fails, we vacate the portion of the judgment relating to the challenged damage calculations and remand with directions to afford the parties an opportunity to introduce evidence regarding actual tax effects.
The Sequa parties next challenge the district court's conclusions of law with respect to five occasions on which Gelmin caused GBJ or Topaz to employ falsely-worded documents in dealings with Sequa and SCC. The district court held that because Gelmin had acted on those occasions with the authorization of an officer of SCC, he had not breached his fiduciary duty to the Sequa parties. Because the district court apparently did not determine whether Gelmin's reliance on the apparent authority of this corporate agent was reasonable, we vacate the portion of the judgment relating to Gelmin's liability for breach of fiduciary duty on the five occasions in question and remand for reconsideration.
Gelmin, GBJ, and Topaz filed a cross-appeal (No. 97-7478) from that portion of the district court's judgment awarding damages to the Sequa parties with respect to a single occasion on which the district court held that Gelmin had breached his fiduciary duty through the use of a falsely worded document. Because we see no error in the district court's application of the "faithless servant" doctrine in calculating this damage award, we affirm the portion of the judgment that is the subject of the cross-appeal.
The Gelmin parties also filed a separate, but subsequently consolidated, appeal (No. 97-7692) from that portion of the judgment incorporating an interlocutory order (Michael H. Dolinger, Magistrate Judge ) granting charging and retaining liens securing some $2.9 million in attorney's fees and expenses owed to the law firm of Butler, Fitzgerald & Potter ("Butler") for work performed prior to counsel's mid-trial dismissal on April 17, 1995. 2 Because we find no merit in the Gelmin parties' objections to these liens, we affirm the portion of the judgment challenged in the consolidated appeal.
The events giving rise to this protracted litigation are set out at great length in the district court's findings of fact and conclusions of law in Sequa Corp. v. Gelmin, No. 91 Civ. 8675 (S.D.N.Y. Dec. 31, 1996), available online at 1996 WL 745448 or 1996 U.S. Dist. LEXIS 19802, with which we assume familiarity. The facts and procedural history relevant to this appeal are as follows.
In the mid-1980s, Sequa anticipated significant tax liabilities relating to revenue from defense contracts, and sought ways to shelter income or defer its prospective tax liability. Sequa's vice president and treasurer, David O'Brien ("O'Brien"), suggested that Sequa engage in "tax-leveraged leasing" for this purpose. After in-house discussion and preliminary consultations with Gelmin, an individual knowledgeable in such structured leases who had previously had dealings with Sequa, Sequa formed a wholly-owned subsidiary, SCC, to serve as a vehicle for transactions that would shelter or defer Sequa's tax liability. O'Brien was appointed as SCC's president.
In its simplest form, a tax-leveraged lease involves the purchase of a capital asset which is then leased (sometimes to the very entity from which the asset is purchased) on a long-term basis. The asset's purchase commonly is "leveraged"--that is, the purchaser makes only a small equity investment and finances the balance of the purchase price. The new owner 3 receives tax benefits in the form of depreciation deductions (which are calculated based on the full value of the asset, not just the purchaser's equity stake), in addition to deductions for interest paid on the financing loans. 4 Some of the depreciation-based tax benefits may be paid back in the form of a tax "recapture" when the asset is later resold, but the purchaser will have deferred tax liability until that later date and will have enjoyed the concomitant benefit of the "time value" of the funds that it otherwise would have had to use earlier to pay its taxes. See generally Stephan L. Hodge, Note, Sale-Leasebacks: A Search for Economic Substance, 61 Ind. L.J. 721, 721, 730-31 (1985) ().
SCC entered into a consulting agreement with GBJ (of which Gelmin was president and the sole owner) whereby the latter would find, analyze, recommend, and assist in securing financing for leveraged leasing transactions to be undertaken by SCC as a tax shelter for Sequa. In return, GBJ was to receive an up-front fee of one-half percent of the purchase price of the capital asset, as well as a payment of ten percent of the "residual value" of the asset when it was eventually resold. (As explained below, the definition of "residual value" was a point of contention at trial.) Between 1985 and 1991, SCC entered into over forty leveraged lease transactions under this agreement, for which GBJ was paid some $6.6 million.
In April 1989, Topaz was formed as a vehicle through which to engage the services of two leveraged leasing specialists. Although Topaz was originally intended to be a joint venture between SCC and GBJ, and engaged in two leasing transactions apparently on that basis in mid-1989, the joint venture was subsequently dissolved and in December 1989 Gelmin became Topaz's sole shareholder. SCC paid some $4 million in "consulting fees" to Topaz through 1991, although some of these payments were not in fact for services rendered, but instead represented profit-sharing between SCC and Gelmin, or were used to "park" funds for SCC.
The district court found, and the parties do not contest, that on five occasions in 1989 and 1990 Gelmin--for reasons not fully explained in this record--caused GBJ or Topaz to submit falsely worded invoices to or enter into falsely worded agreements with SCC. On all five occasions, O'Brien--SCC's president--authorized or knew of Gelmin's use of falsely worded documentation. On a sixth occasion, the "United" transaction in 1990, Gelmin caused an advisor to a leasing transaction to submit a falsely worded invoice to SCC; there was no claim that the arrangement was authorized by or disclosed to anyone at SCC or Sequa. 5
In the fourth quarter of 1990, SCC posted losses of $59 million, O'Brien was removed from his position as president, and Sequa proceeded to reorganize SCC. By letter dated March 19, 1991, SCC exercised its right to terminate the consulting agreement with GBJ, effective May 1991. After May 1991, SCC sold various capital assets whose original purchase and lease had been arranged pursuant to the 1985 GBJ consulting agreement, but did not pay GBJ the ten percent of "residual value" provided for by that agreement.
In December 1991, GBJ--through its retained counsel, the law firm of Butler,...
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