Terwilliger v. Terwilliger

• Decision Date: 01 August 1999
• Docket Number: Docket Nos. 99-7327,99-7383
• Citation: 206 F.3d 240
• Parties: (2nd Cir. 2000) DONALD L. TERWILLIGER, JR., Plaintiff-Appellee-Cross-Appellant, v. DONALD L. TERWILLIGER, III AND JOHN TERWILLIGER, Defendants-Appellants-Cross- Appellees
• Court: U.S. Court of Appeals — Second Circuit

Page 240

206 F.3d 240 (2nd Cir. 2000)

DONALD L. TERWILLIGER, JR., Plaintiff-Appellee-Cross-Appellant, v. DONALD L. TERWILLIGER, III AND JOHN TERWILLIGER, Defendants-Appellants-Cross- Appellees.

Docket Nos. 99-7327, 99-7383

August Term, 1999

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: October 29, 1999

Decided: March 14, 2000

Appeal from a summary judgment in the sum of $351,586.74 in favor of plaintiff entered in the United States District Court for the Southern District of New York (Casey, J.), the court having found that (1) the defendants entered into an agreement obligating them as guarantors of their company's promissory note, (2) the plaintiff was not a third-party beneficiary under the agreement, and (3) a prior stipulation in a bankruptcy proceeding settling the plaintiff's claims against the company on the promissory note did not preclude the plaintiff's claims against the defendants. Plaintiff cross-appeals from so much of the judgment as denied him prejudgment interest.

Summary judgment affirmed on the issue of liability on different grounds; judgment vacated as to damages; remanded for reassessment of damages and the computation of prejudgment interest.

DANIEL GILDIN Kaufmann, Feiner, Yamin, Gildin & Robbins LLP New York, NY for Defendants-Appellants- Cross-Appellees.

THOMAS J. FLEMING Olshan Grundman Frome Rosenzweig & Wolosky LLP New York, NY for Plaintiff-Appellee-Cross-Appellant.

Before: FEINBERG, MINER, and SACK, Circuit Judges.

MINER, Circuit Judge:

Defendants-Appellants-Cross-Appellees Donald L. Terwilliger, III ("Donald") and John Terwilliger ("John") (collectively "the Sons") appeal from so much of a summary judgment as awards payment in the sum of $351,586.74, entered in the United States District Court for the Southern District of New York (Casey, J.) on the motion of their father, plaintiff-appellee-cross-appellant Donald L. Terwilliger, Jr. ("Terwilliger"). Terwilliger cross-appeals from so much of the judgment as denied him prejudgment interest. Terwilliger sued the Sons for breach of contract, alleging that the Sons failed to fulfill their obligations under a stock redemption agreement ("Agreement") entered into by Terwilliger, the Sons, and D.L. Terwilliger Company, Inc. ("Company"). Terwilliger contended that the Sons were liable for monies due under a promissory note ("Note") issued by the Company as consideration for his controlling shares in the Company, either on the theory that (1) the Agreement constituted a direct contract between the Sons and himself, rendering the Sons personally liable to him for the Company's default on the Note or (2) the Agreement included the Sons' guaranty of the Company's obligations under the Note. The Sons contended that Terwilliger's only remedy was against the Company, which is now bankrupt. The district court held that (1) the Sons were liable, pursuant to the Agreement, as guarantors of the Note, (2) Terwilliger was not a third-party beneficiary under the Agreement, (3) a stipulation ("Stipulation") entered into by the Company and Terwilliger, in settlement of his claims against the Company in the bankruptcy proceeding, did not preclude recovery against the Sons, and (4) Terwilliger's recovery should not include prejudgment interest.

For the reasons that follow, we affirm the summary judgment in plaintiff's favor on the issue of liability on alternative grounds, vacate so much of the judgment as awards damages and remand for the reassessment of damages and the computation of prejudgment interest.

BACKGROUND

Terwilliger is the former president and majority shareholder of the Company, a New York printing corporation founded by his father in 1948. Terwilliger's father was the sole shareholder of the corporation until he transferred his stock, as gifts, to Terwilliger, John, and Donald. As a result of these gifts, Terwilliger obtained a controlling interest in the Company while John and Donald obtained minority shares.

In early 1993, Terwilliger decided to retire from the Company. Accordingly, he decided to sell his majority interest in the Company to his two sons, who had worked there for several years and who had been running the business along with their father. However, Terwilliger did not directly transfer the stock to the Sons. Instead, on April 1, 1993, he entered into the Agreement, pursuant to which he agreed to sell his stake, constituting 55% of the outstanding shares back to the Company in return for a $450,000 Note and an immediate payment of $50,000. The Agreement was executed by Terwilliger, by Donald on behalf of the Company, and by John and Donald individually. The Note obligated the Company to pay Terwilliger $8,910 per month for 60 months. The installments included 7% interest, compounded monthly. Under the Agreement, Terwilliger relinquished any right to be an officer or director of the Company. The Agreement also provided for him to receive $8,500 per month for 61/2 years in consideration for his agreement not to compete with the Company. After the Agreement was executed, the Sons obtained total control of the Company.¹ The most pertinent section of the Agreement for our purposes, and the one discussed at length by all of the parties, is Section 6, which reads as follows:

CREATION OF SURPLUS. If the Corporation shall not have sufficient surplus out of which to make any payment of the promissory note referred to in paragraph 2(b) at its due date, Donald Terwilliger III, John S. Terwilliger and the Corporation shall promptly take all required action to enable the Corporation to make such payment out of surplus. Such action shall include, but not be limited to, recapitalization of the Corporation so as to reduce its capital and increase its surplus, or a reappraisal of the Corporation's assets to reflect their market value if such value should exceed the asset[s'] book value. If the Corporation's surplus at the time such action is required to be taken hereunder is not, for any reason, sufficient to make any payment on such promissory note then, within ten days prior to the due date of such payment, Donald Terwilliger III, and John S. Terwilliger shall contribute to the Corporation, in proportion to their respective shareholdings, cash amounts sufficient to create a surplus in an amount at least equal to the amount of such payment.

This language forms the heart of the dispute in this case. Additionally, Section 20 of the Agreement states that it "shall be construed in accordance with and governed by the laws of the State of New York," and Section 4 of the Agreement provides that upon the Company's default on the Note, Terwilliger could, at his election, demand a public sale of the shares held in escrow. However, the Agreement did not permit him to purchase the shares at any such public sale.

Following execution of the Agreement, the Company made 15 payments on the Note, the last of which was in August 1994.² The failure of the Company to make any further Note payments left a balance due Terwilliger on the Note in the sum of $351,586.74, exclusive of interest. The Sons failed to fund the surplus so as to permit payment on the Note in accordance with the Agreement, either before or after the Company's default.

The Related Litigation

The 1993 transfer of control over the Company, via the Agreement, spawned several suits. In September 1994, the Sons and the Company sued Terwilliger and the Agreement's escrow agent, who was also the Company's accountant, in the Supreme Court, New York County. They sought rescission of the Agreement, asserting that Terwilliger and the accountant had secretly looted the Company of its assets and that the Company and the Sons did not discover this until August 1994. In April 1995, the Supreme Court (Shainswit, J.) dismissed the complaint with prejudice, concluding that the Sons had executed a clear and unambiguous release in the Agreement that barred their claims, and that no action for fraud could be maintained. Then, in June 1995, Terwilliger commenced a separate action in state court, seeking to recover damages from his Sons and the Company arising out of the Company's and the Sons' alleged breach of the Agreement and default on their obligations under the Note.³ Terwilliger later dismissed this action without prejudice.

In September 1995, the Company filed for Chapter 11 bankruptcy. Shortly thereafter, it became clear the Company would have to liquidate. Under the Company's liquidation plan, it was forecast that the Company would only be able to pay unsecured general creditors, such as Terwilliger, thirteen to twenty-five cents on the dollar. Terwilliger filed a notice of claim in the bankruptcy proceeding, seeking to collect sums allegedly owed to him under the Note as well as the amounts due pursuant to the Agreement's non-compete clause.⁴ A duly authorized committee of unsecured creditors (the "Committee") challenged Terwilliger's claims, disputing, inter alia, the priority of his claims, and asserting that he may have fraudulently received sums from the Company. The Committee and Terwilliger settled this dispute pursuant to a Stipulation. The Stipulation recognized Terwilliger as a general unsecured creditor in the amount of $237,500 and authorized payment of that amount in "full satisfaction of any/all the [Company's] obligations to [Terwilliger]."

The Present Action

On January 14, 1998, Terwilliger commenced the present action, asserting that the Sons had breached the Agreement and owed him the balance due on the Note at the time of the Company's default, plus interest and costs. On May 15, 1998, the Sons filed a motion to compel arbitration. Terwilliger then moved for summary judgment. The district court (Sotomayor, J.) held a hearing to address both motions on June 3, 1998. The court denied the motion to compel arbitration and denied the motion for summary judgment with leave to renew. The court stated that it would reconsider the summary judgment...