Zissu v. Bear, Stearns & Co.

• Decision Date: 04 February 1986
• Docket Number: No. 84 Civ. 7383.,84 Civ. 7383.
• Citation: 627 F. Supp. 687
• Parties: Frederick ZISSU, Plaintiff, v. BEAR, STEARNS & CO., a New York Limited Partnership, Barry West, Carleton A. Holstrom, Encore Exploration, Inc., a Delaware corporation, Hearts Energy, Inc., a New York corporation, Gerald B. Cramer, Richard D. Segal, Edward J. Rosenthal, John Doe and Richard Roe, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

627 F. Supp. 687

Frederick ZISSU, Plaintiff, v. BEAR, STEARNS & CO., a New York Limited Partnership, Barry West, Carleton A. Holstrom, Encore Exploration, Inc., a Delaware corporation, Hearts Energy, Inc., a New York corporation, Gerald B. Cramer, Richard D. Segal, Edward J. Rosenthal, John Doe and Richard Roe, Inc., Defendants.

No. 84 Civ. 7383.

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

February 4, 1986.

COPYRIGHT MATERIAL OMITTED

Jaffe & Schlesinger, P.A., Springfield, N.J., for plaintiff; Robert H. Jaffe, Arthur Swidler, of counsel.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Bear, Stearns, defendants; Max Gitter, Robert P. Haney, of counsel.

Rosenman, Colin, Freund, Lewis & Cohen, New York City, for Encore, defendants; Gerald Walpin, Steven S. Miller, Brian G. Lustbader, Richard L. Claman, of counsel.

EDWARD WEINFELD, District Judge.

Plaintiff commenced this action upon allegations, among others, that defendants Bear, Stearns & Co. ("Bear Stearns"), Encore Exploration, Inc. ("Encore") and other defendants acting in concert had violated sections 12(2) and 15 of the Securities Act of 1933,¹ section 10(b) of the 1934 Act,² and Rule 10b-5 promulgated thereunder.³ In substance, plaintiff charged that he was induced to execute a subscription agreement to purchase ten (10) units of a limited partnership known as Encore Exploration 1981-LC, L.P. ("Encore 1981") at a total cost of $1,500,000 by untrue statements of material fact and by omissions of material facts in original and supplemental selling documents prepared by representatives of Encore and Bear Stearns. Encore 1981 was to engage in a drilling operation for oil and gas. The defendants categorically denied the plaintiff's charges and in resisting his claims, relied upon the very documents upon which plaintiff predicated his claims. After a twelve-day trial, the jury reported a verdict in favor of the defendants.

PLAINTIFF'S MOTION FOR A NEW TRIAL

The plaintiff now moves for a new trial with respect to his claims pursuant to Rule 59(a) of the Federal Rules of Civil Procedure. The application is so clearly without substance that it borders on the frivolous and does not warrant detailed discussion. Sharp issues of fact were presented which the jury decided adversely to plaintiff's contentions. Indeed, the testimony of Zissu, the plaintiff, and defense witnesses was in such conflict on material matters that the Court in its instructions to the jury suggested that the "irreconcilable difference in testimony is not inadvertence or lack of recollection."

Especially frivolous is that branch of his motion for a new trial on the ground that it was highly prejudicial in the prosecution of his claim to allow the defendants to assert before the jury their counterclaims, referred to hereafter, and that prejudicial statements were made by counsel for the Encore defendants in summation. As to the first branch of this claim, no more need be said than that at no time during the course of the litigation did plaintiff make any such contention as to the assertion of the counterclaims in this action. Moreover, the evidence plaintiff now argues prejudiced the presentation of his claims would have been admissible to rebut those claims absent the counterclaims.

Plaintiff's final contention—that a portion of Encore's counsel's summation prejudiced his right to a fair trial—considered against the totality of the evidence, the plaintiff's contradictory deposition and trial testimony, the Court's specific instruction as to these particular litigants' right to a fair determination based solely on the evidence and the law, is, to understate it, bordering on the absurd. Again, it is significant that counsel for plaintiff, who now urges this claim, offered no objection when the argument was advanced or even thereafter.⁴ Accordingly, plaintiff's motion for a new trial is denied.

PLAINTIFF'S MOTION FOR JUDGMENT N.O.V. PURSUANT TO FED.R.CIV.P. 50(b)

Plaintiff, a senior partner in a New York City law firm, has engaged extensively in securities transactions. In addition to his legal partnership, he is the chief executive of a company whose shares are traded on the New York Stock Exchange, and also is the chief executive of another company whose shares are traded on the American Stock Exchange. In late 1981, aware that his taxable income was in excess of $600,000, he sought to obtain the benefit of a tax shelter and with that objective purchased the ten shares of the Encore limited partnership pursuant to a Private Offering Memorandum ("POM"). Plaintiff executed a series of documents in which, among other matters, he set forth his experience in making such purchases; represented that he has "such knowledge and experience in financial and business matters" that he is "capable of evaluating the merits and risks of an investment in Encore 1981" and that he was "able to bear the substantial economic risks of my investment." Plaintiff further warranted that he was informed that his investment was a "speculative one and involves a high degree of risk," and that he understood that Encore 1981 was "newly organized, has no financial or operating history and is a speculative venture."

Based on the foregoing representations and an indemnity provision referred to hereafter, the defendants Encore and Bear Stearns each asserted a counterclaim that it had sustained damages for legal fees and other costs in defending against the claims asserted by plaintiff. The jury reported a verdict in favor of each defendant upon its counterclaim for breach of warranty, but found in favor of plaintiff on Encore's additional counterclaim, charging him with fraud in inducing the sale of the Encore shares. Upon consent of the parties, the issue of damages was tried to the Court, but before the conclusion of this branch of the trial they stipulated the amount of damages incurred in defending against plaintiff's suit, to wit, the sum of $235,000 by Bear Stearns and the sum of $320,000 by Encore, without prejudice to the right of plaintiff to challenge the award.

The plaintiff's motion for an n.o.v. order is based upon contentions that as a matter of contract law the defendants are barred from recovering damages for attorneys' fees and costs incurred in defending against plaintiff's securities fraud claims; that the counterclaims are prohibited by section 14 of the 1933 Act and section 29 of the 1934 Act; and that the indemnity agreement is against public policy.

We consider each of these contentions separately.

A. Contract Principles

Paragraph 8 of the Subscription Agreement provides:

I understand the meaning and legal consequences of the representations and warranties contained in paragraph 2 hereof, and I agree to indemnify and hold harmless the Partnership and each general and limited partner thereof from and against any and all loss, damage or liability due to or arising out of a breach of any representation or warranty of mine, whether contained in the Partnership Agreement or this Subscription Agreement. Notwithstanding any of the representations, warranties, acknowledgments or agreements made herein by me, I do not thereby or in any other manner waive any rights granted to me under federal or state securities laws.

Plaintiff, in the assertion and prosecution of his claims leading to the trial and in his deposition and trial testimony, made statements at variance with the warranties contained in the Subscription Agreement. Zissu first argues, even assuming the validity of the foregoing indemnification provision, it does not expressly mention attorneys' fees and costs in defending a suit brought by an investor and since a contract must be strongly construed against the party who prepared it (the defendants), they are not entitled to indemnity for attorneys' fees and costs as a matter of contract law.

It is correct that under New York law, contracts are strictly construed against the drafter if there is doubt or ambiguity as to the meaning of the contract's terms.⁵ This particular rule of construction is to be used only as a last resort, when all other rules of construction fail.⁶ While the above quoted indemnity provision does not expressly specify attorneys' fees, New York courts have held that broad indemnification provisions should be interpreted to extend to such fees.⁷ The all inclusive language of the clause "to indemnify and hold harmless the Partnership and each general partner ... from and against any and all loss, damage or liability ..." is not ambiguous and is sufficiently comprehensive to include loss or damage for payment of attorneys' fees and costs incurred by plaintiff's breach of the warranties.

Plaintiff's additional contention that the indemnity provision in effect overcomes the American rule that each litigant pays his own legal fees referred to in Alyeska Pipeline Service Co. v. Wilderness Society,⁸ is equally without merit. Alyeska specifically noted that imposition of legal fees and costs in a litigation upon a losing litigant is not foreclosed when there is an "enforceable contract."⁹ Here there was such an express undertaking by plaintiff in the event of a breach of his warranty and representations.

Zissu further argues that the provision in paragraph 8 which states that the representations, warranties and agreements referred to therein do not constitute a waiver of any rights under the securities laws conflicts with the first sentence—the indemnification provision. The argument proceeds that since the second is more specific than the first, it should be read as an exception to the indemnification clause precluding holding Zissu liable for defendants' attorneys' fees. However, the two sentences are not in conflict; they do not modify or limit each other. Defendants did not seek to hold Zissu liable for the exercise of his rights under the securities laws, but rather for his breaches of the representations he made in the Agreement. Zissu retained his...