Shann v. Dunk

• Decision Date: 10 May 1996
• Docket Number: D,No. 93,93
• Citation: 84 F.3d 73
• Parties: Peter SHANN, Plaintiff-Appellant, v. John S. DUNK, Defendant-Appellee. John S. DUNK, Plaintiff-Appellee, v. Peter SHANN, Defendant-Appellant. ocket 94-9316.
• Court: U.S. Court of Appeals — Second Circuit

Page 73

84 F.3d 73

Peter SHANN, Plaintiff-Appellant, v. John S. DUNK, Defendant-Appellee.

John S. DUNK, Plaintiff-Appellee, v. Peter SHANN, Defendant-Appellant.

No. 93, Docket 94-9316.

United States Court of Appeals Second Circuit.

Argued Oct. 5, 1995.

Decided May 10, 1996.

Peter S. Herman, New York City (Craig S. Brown, McLaughlin & Stern, New York City, of Counsel), for Plaintiff-Appellant.

James H. McGowan, Syracuse, NY, (Cherundolo, Bottar & McGowan, Syracuse, NY, and Joseph Serino, Jr., Hiscock & Barclay, Syracuse, NY, of Counsel), for Defendant-Appellee.

Before: WINTER, JACOBS, and LEVAL, Circuit Judges.

LEVAL, Circuit Judge:

Peter Shann brought this suit against John S. Dunk ("Dunk") ¹ to enforce an agreement for Shann's purchase of Dunk's controlling shares in an explosives company. The agreement, which was made on November 25, 1992 (the "November 25 Agreement"), was in rough preliminary form and contemplated memorialization in a more formal contract. It provided for: a down payment of $500,000; monthly payments to Dunk totalling $2,352,000 plus interest, over five years "as [a] consultant and pursuant to a non-compete agreement" (the "consult/noncompete clause"); and a payment of $360,000, plus interest, to be made after five years to Dunk's daughter in exchange for her stock. The district court ruled after trial that the consult/noncompete clause lacked essential terms relating to compensation and scope, rendering the overall agreement void and unenforceable. The court, accordingly, ruled for defendant Dunk. We disagree with the district court's analysis. In our view, the precise terms of the consult/noncompete agreement were neither essential, nor missing. Nonetheless, we find other unresolved questions as to whether the November 25 Agreement is enforceable, and, if so, whether either of the parties breached it. Accordingly, we vacate the district court's judgment and remand for further findings.

I. Background

Shann, a British citizen and resident, is a principal in the manufacture and sale of explosives for mining, primarily in the United Kingdom. Dunk is the controlling shareholder of St. Lawrence Explosives Corp. ("SLE"), a New York corporation with its principal place of business in Adams Center, near Watertown, New York. SLE manufactures low-grade explosives, and provides drilling and blasting services. Dunk owns 242 of the 333 outstanding shares of SLE; the remainder are owned by his daughter Deborah Netto (60 shares), his son Erik (27 shares), and SLE's president, Julie Pecori (4 shares).

Dunk reached 65 years of age in 1991 and was eager to retire. Since June 1988, he had been seeking to sell his controlling shares of SLE. Prior to the events giving rise to this action, Dunk had negotiated with numerous prospective buyers, including Shann, but never reached an agreement.

In the fall of 1992, after a proposed sale fell through, Dunk's son Erik contacted Shann, proposing that Shann purchase SLE. Because of the failure of their previous negotiations, Shann insisted, before he would come to the United States to explore the sale in depth, that Dunk commit himself to an option agreement that would obligate Dunk to sell his shares. In the course of the negotiations, Shann apparently made clear to Dunk that Shann would not undertake personal responsibility for deferred payments. Shann and Dunk eventually agreed on November 6, 1992, to an option for the sale of SLE. The terms involved a down payment of $1,712,000, plus additional payments of $1,500,000 over six years, pursuant to a consult/noncompete clause. When the option contract had been agreed upon, Shann and his solicitor, Reginald Ashworth, came to Watertown to work out the sale with Dunk. However, this option arrangement failed to result in a sale of the company because of the parties' inability to secure necessary financing. The proposed lenders refused to extend credit without Shann's personal guarantee, which Shann refused to give.

Shann then departed on business, leaving Ashworth in Watertown to negotiate further with Dunk. On the evening of November 24, 1992, Dunk said to Ashworth, "I'm thinking about financing the deal for you." The next morning, November 25th, Dunk proposed the terms of an agreement which were satisfactory to Ashworth. Ashworth put the terms down on paper, and secured Shann's approval. Dunk signed the agreement; it was then faxed to Shann in England, who also signed it.

The November 25 Agreement provided that Dunk would sell Shann his 242 shares of SLE and also procure his daughter's 60 shares for sale to Shann. The payment terms read as follows:

3) A deposit of 50,000 U.S.D. shall be paid to ... the seller within 14 days....

4) The sum of 450,000 U.S.D. shall be paid by the buyer to the seller at closing....

5) In addition seller shall be paid as consultant and pursuant to a non-compete agreement the following sums:

a) the sum of 2,352,000 U.S.D.

b) a sum equivalent to interest calculated monthly in the amount from time to time outstanding at the rate of prime plus 7% subject to a minimum rate of 10% and a maximum rate of 15 %....

6) In addition Deborah will be paid the following sums by the company:

a) the sum of 360,000 U.S.D. 60 months after closing or earlier by agreement.

b) a monthly sum equivalent to interest calculated in accordance with clause 5(b) the first payment to be made one month after closing.

Paragraph 10 of the Agreement provided that "Buyer will present to Seller a purchase agreement basically including [the terms and conditions of the November 25 Agreement and] a pledge of all shares acquired to seller as security to the seller for fulfillment of the agreement...." ² Both sides agreed that they considered the November 25 agreement to be binding, notwithstanding its expected replacement by a more elaborate, formal contract.

Dunk and Shann then engaged counsel to draft the final stock purchase agreement. Around December 2, 1992, Shann wired the $50,000 deposit to Dunk in accordance with the November 25 Agreement.

Soon thereafter, Dunk's attorney, William Kissel, argued to Shann's attorney, Hartley Chazen, that the allocation of $500,000 to the stock purchase and $2,352,000 to the consult/noncompete clause was inappropriate and, for tax reasons, unfair to Dunk, as it would cause him to be taxed at the higher ordinary income rates (instead of capital gain rates) for the major part of the proceeds. Ashworth authorized Chazen to change the allocation.

On December 17 and 18, Chazen sent memos to Kissel outlining the structure of the contract he was drafting. The proposal described in these memos differed in certain respects from the November 25 Agreement. For example, it included Shann's purchase of Erik Dunk's stock, which had not been mentioned in the November 25 Agreement. It stated that the shares of SLE would be purchased by a newly formed New York corporation, to be named Lebon II, Inc. And, in response to Kissel's complaint about the unfair allocation as between purchase price and consult/noncompete, Chazen's memo assigned $1,500,000 to the "employment contract," apparently without interest.

On December 22, 1992, shortly after receiving this memo, Dunk met with his advisers. They took exception to changes suggested in Chazen's memo and expressed the view that the deal did not give Dunk sufficient security. They urged Dunk not to go through with the transaction. After the meeting, Kissel wrote to Dunk saying that the meeting had been "extremely productive and helpful [and that] .... hopefully we can get this sale done for you, one way or another, with or without Peter [Shann]!"

On December 24, Dunk faxed a letter to Shann. The central message of the letter was that Dunk required Shann's guarantee of the deferred payments, or some other form of security. He wrote, "I need more comfort than your words .... I must have your personal guarantee, or posted Bonds.... I trust you can relieve my concerns, and come up with the Security I need to bring this deal to fruition."

At the same time, Dunk sent to Shann (and Kissel sent to Chazen) a letter drafted by Kissel, asserting that "several aspects of the transaction as outlined [in Chazen's memo] are not acceptable to my client and I am writing to outline the transaction as it would be acceptable to my client." The transaction that "would be acceptable" to Dunk was in numerous respects very different from the November 25 Agreement. For example, it called for payment of $1,452,000 at closing (instead of $500,000), interest of 15% (instead of 7 percentage points over prime, which at the time came to 13%), and payment to Dunk's daughter spread over five years (instead of deferred to the end of five years). Kissel's letter required that Shann personally guarantee all the purchase obligations.

Shann sent Dunk proposed closing documents, along with a bank check for $450,000. Dunk refused to sign, saying both that the closing documents departed from the terms of the November 25 Agreement and that he would not do the deal without Shann's guarantee. Dunk did not cash Shann's check. Shann then sent Ashworth from England to Watertown to attempt to salvage the deal. Ashworth offered to eliminate any terms from the closing documents that were at variance with the November 25 Agreement--offering essentially to close on the November 25 Agreement, which Shann and Ashworth insisted did not include a personal guarantee by Shann of the deferred payments. Dunk refused, continuing to insist on Shann's guarantee.

On February 1, 1993, Dunk filed suit in New York state court seeking a declaration that the November 25 Agreement was unenforceable or, in the alternative, that Shann had breached the agreement. Shann then commenced suit in federal district court alleging that Dunk had breached the contract. Shann removed Dunk's state court action to federal court, and the two cases were consolidated.

A five-day bench trial was held in August 1994,...