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Enercomp Inc. v. McCorhill Publishing Inc.

decided: April 11, 1989.

ENERCOMP, INC., STEPHEN FLAKS AND JAVID CORPORATION, PLAINTIFFS-APPELLEES,
v.
MCCORHILL PUBLISHING, INC., GERALD H. CAHILL, THE CAHILL TRUST, GEORGE MCPHILLIPS, TERENCE CORWIN, HARRIS FREEDMAN, S&H BUSINESS CONSULTANTS AND MERIDIAN PRODUCTIONS, INC., DEFENDANTS, HARRIS FREEDMAN, MCCORHILL PUBLISHING, INC., MERIDIAN PRODUCTIONS, INC., TERENCE CORWIN, GEORGE B. MCPHILLIPS AND THE CAHILL TRUST, DEFENDANTS-APPELLANTS



Appeal from judgment following jury trial entered in the United States District Court for the Southern District of New York (John M. Cannella, Judge) finding defendants-appellants liable for breach of contract and tortious interference with contract, Reversed and remanded.

Author: Raggi

Before: OAKES, Chief Judge, NEWMAN, Circuit Judge, and RAGGI, District Judge.*fn*

REENA RAGGI, UNITED STATES DISTRICT JUDGE

This case has its origin in the parties' unsuccessful 1984-85 attempt to merge Enercomp, Inc. with McCorhill Publishing, Inc. McCorhill and its individual stockholders, George B. McPhillips, Terence R. Corwin and the Cahill Trust ("McCorhill stockholders") appeal from a final judgment of $500,000 entered against them on December 11, 1987 by Judge Cannella after a jury in the Southern District of New York found them liable for breach of contract. Harris Freedman, who acted as a broker between the parties in the merger efforts, and Meridian Productions, Inc., the company with which McCorhill eventually merged, appeal from a judgment of joint and several liability in the same case for tortious interference with contract.

Appellants' arguments are myriad. They contend that the district court erred in limiting proof and precluding argument as to a $70,000 contingent liability of Enercomp that bore on that company's ability to comply with certain conditions for merger. McCorhill, its stockholders and Meridian separately argue that the district court improperly exercised pendent jurisdiction over state law contract and tort claims after it dismissed Enercomp's federal securities action at the close of plaintiffs' case. In the alternative, they argue that insufficient evidence was adduced to support a finding of a binding contract, that in any event they were justified in repudiating any merger agreement, that both the jury instructions and the interrogatories submitted to the jury were deficient, that expert testimony on damages was improperly admitted, and that damages were recovered on an impermissible theory. The McCorhill stockholders contend that, even if there was sufficient evidence of a binding contract, an indemnification clause in the merger agreement relieves them of any liability. Finally, Freedman and Meridian challenge the sufficiency of the evidence that they acted in tortious interference of any contract rights.

Because we agree with Freedman and Meridian that the evidence was insufficient to take the tortious interference claim to the jury, we direct that this claim be dismissed. Furthermore, because the limitations imposed on counsel with respect to proving and arguing the implications of the $70,000 lien unduly prejudiced appellants, we reverse and remand for a new trial on the breach of contract claim.

Factual Background

1. The Enercomp-McCorhill Merger

In the summer of 1984, Enercomp, acting through its president, Stephen Flaks, entered into negotiations with McCorhill concerning a possible merger of the two companies through an exchange of shares. At the time, Enercomp was a publicly-held shell company in the process of spinning off its only operating subsidiary, Metropolitan Compactors. McCorhill was a private company recently formed for the purpose of acquiring certain assets and property of Kraus Thomson Organization, Ltd., a specialty book publisher.

A merger was advantageous to both sides. McCorhill, through its acquisition of Kraus Thomson, would provide Enercomp with an operating business to enhance the value of its stock. Enercomp, as a public company registered with the Securities and Exchange Commission, could raise funds for McCorhill through stock offerings. Indeed, there were then outstanding stock warrants for Enercomp that could bring as much as $1.8 million into the company, particularly if public optimism over its merger with McCorhill and the latter's acquisition of Kraus Thomson drove up the market price for Enercomp's stock. Further, Enercomp had a tax loss carry forward of approximately $200,000 that could shield any initial profits derived from the Kraus business.

McCorhill, however, needed approximately $250,000 in additional funding to complete its $7.75 million transaction with Kraus Thomson. Harris Freedman, an Enercomp shareholder who was serving as a broker between Enercomp and McCorhill, proposed to Flaks and to McCorhill's Chairman, Gerald Cahill, that a number of Enercomp's current shareholders lend McCorhill $250,000. Then after McCorhill acquired Kraus Thomson, Enercomp and McCorhill would effect their own merger.

Enercomp shareholders did eventually lend McCorhill $250,000, although apparently not in time for the July 1984 closing on Kraus Thomson. The monies for this deal were obtained elsewhere. Nevertheless, McCorhill insisted upon the loan as evidence of Enercomp's commitment to the merger. As an inducement to its shareholders to make the loan to McCorhill, Enercomp issued them 400,000 shares of stock for $.10 per share, thereby increasing their equity interest.

Optimistic about a joint future, the presidents of Enercomp and McCorhill and the McCorhill stockholders executed a 26-page "Agreement" in August of 1984. The agreement, drafted by Enercomp's attorney, provided that all of McCorhill's stock would be exchanged for 5,896,224 shares of Enercomp common stock, such amount to total 51% of Enercomp's outstanding shares after all warrants had been exercised and certain shares issued to Freedman for his role in the merger. The agreement did not fix a closing date for the merger, although it was apparently understood that closing would take place after McCorhill completed the Kraus Thomson acquisition. Indeed, this acquisition was expressly contingent upon the Enercomp-McCorhill merger. Until closing, both companies agreed not to take certain actions with respect to their stock and not to make any capital expenditure exceeding $1,000 except by mutual consent. Although current financial statements were called for in the agreement, none was in fact attached, presumably because Enercomp, still affiliated with Metropolitan Compactors, was not able to provide an independent statement. Section 5(i) of the agreement, however, expressly provided that Enercomp was to have "no substantial liabilities" not disclosed in its final balance sheet. The parties also agreed that their merger was "subject to approval by any qualified experts Enercomp may wish to engage to evaluate McCorhill and the business of Kraus it seeks to acquire." No reciprocal clause provided for a McCorhill expert to evaluate Enercomp.

In April 1985, McCorhill repaid with interest the loan made by Enercomp's shareholders. On April 9, 1985, Enercomp publicly announced the plan to merge with McCorhill, the exchange of shares to be completed on April 16, 1985. In fact, no closing took place on that date, due at least in part to Enercomp's failure to provide a balance sheet independent of its subsidiary, Metropolitan Compactors, as required by the merger agreement.

Concerned about Enercomp's financial status, Gerald Cahill employed a certified public accountant to audit Enercomp. In the summer of 1985, Cahill learned that Enercomp had an outstanding printer's bill of $61,000 from a previous public offering. Cahill demanded that at the time of merger Enercomp be a "clean shell" with no outstanding liabilities and with $20,000 in assets to meet attorneys' fees incurred in the merger. Flaks sought to assure him that the printer's bill would be covered by the assignment to Enercomp of a performance bond due Metropolitan Compactors. It was soon discovered, however, that this bond was tied up in an unrelated bankruptcy proceeding. Nevertheless, by August 1985, Enercomp had reduced its printer's bill to $35,000. A subsequent proposal provided for five Enercomp shareholders, including Flaks and Freedman, to sign personal guarantees of $7,000 each to cover this outstanding liability. The parties set a closing date, scheduled a pre-closing meeting and prepared a list of documents needed for closing. Ultimately, however, the personal guarantees on the $35,000 liability were not signed and the merger never took place.

At trial, the parties sharply disputed the reasons for the termination of their relationship. Defendants contended that Flaks refused to sign the $7,000 personal guarantee, the last in a series of acts that had undermined their confidence in the financial condition of Enercomp. Flaks, on the other hand, testified that he was always willing to sign the guarantee, provided the other shareholders did so as well. Indeed, he recalled agreeing to a number of additional demands communicated to him by Freedman in 1985 that went beyond the terms of the original 1984 agreement, including "locking up" certain of his Enercomp stock and putting other shares in escrow. Only when Freedman told Flaks that Cahill wanted him to give back 200,000 of his Enercomp shares did Flaks refuse. Shortly thereafter, in a letter dated September 20, 1985, McCorhill advised Enercomp's attorney that it was terminating the companies' relationship.

On October 4, 1985, McCorhill signed a letter of intent to merge with defendant Meridian, the company of which Freedman was president and a major shareholder. Meridian and McCorhill completed their merger on November 15, 1985.

2. The Trial

Enercomp, Stephen Flaks and his consulting company, Javid Corporation, pursued six causes of action at trial. The sole basis for federal jurisdiction was an alleged violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1988). Five days prior to the scheduled commencement of trial, defendants moved to dismiss this claim. The district court denied the motion in a memorandum and order dated November 6, 1986. The remaining claims, all based on state law, alleged: (1) common law fraud, (2) breach of contract, (3) breach of fiduciary duty by Freedman and his consulting company, S & H Business Consultants, (4) tortious interference with contract by Freedman and Meridian, and (5) breach by McCorhill and Gerald Cahill of a separate consulting agreement, whereby Flaks and Javid were to be retained as consultants for two years by the surviving merged company at the rate of $1,500 per month.

At the close of plaintiffs' case, the district court dismissed the securities and common law fraud claims. Although no reasons are expressly stated, a review of the record indicates that plaintiffs were unable to adduce evidence that defendants acted fraudulently in connection with any purchase or sale of securities. As to the remaining claims, the jury found McCorhill, Gerald Cahill and the McCorhill stockholders jointly and severally liable in the amount of $1,161,000 for breach of contract, and Freedman and Meridian jointly and severally liable in the same amount for tortious interference with contract. It found Freedman and S & H Business Consultants liable in the amount of $216,000 for breach of fiduciary duty. It exonerated Gerald Cahill on the claim of breach of a separate consulting contract, but held McCorhill liable for $36,000 damages on this claim.

3. Post-Trial Motions

In considering defendants' post-trial motions for judgment notwithstanding the verdict or, in the alternative, for a new trial, the district court, in a carefully-reasoned memorandum and order dated August 27, 1987, set aside the breach of contract verdict against Gerald Cahill and the breach of fiduciary duty verdict against Freedman and S & H Business Consultants. The motions were denied in all other respects on conditions that plaintiffs accept a remittitur to $500,000. This was agreed upon, and judgment was entered in that amount.

Discussion

I. Tortious Interference

To recover for tortious interference with a contract under New York law, a complainant must prove the existence of a valid contract between the plaintiff and a third party, the defendants' knowledge of that contract, and defendants' improper intentional interference with its performance. Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., 50 N.Y.2d 183, 189-91, 428 N.Y.S.2d 628, 631-32, 406 N.E.2d 445 (1980); S & H Hotel Ventures Ltd. Partnership v. 777 S.H. Corp., 108 A.D.2d 351, 354, 489 N.Y.S.2d 478, 480 (1st Dep't 1985); see also Universal City Studios, Inc. v. Nintendo Co., 797 F.2d 70, 75 (2d Cir.), cert. denied, 479 U.S. 987, 93 L. Ed. 2d 581, 107 S. Ct. 578 (1986). Improper intentional interference is generally evidenced by a tortfeasor "inducing or otherwise causing [a] third person not to perform" his contractual obligations to plaintiff. Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., 50 N.Y.2d at 189, 428 N.Y.S.2d at 131 (quoting Restatement (Second) of Torts § 766 (1977)).

Freedman and Meridian argue that no evidence was presented to support a finding that they induced McCorhill's repudiation of its agreement with Enercomp. In reviewing the district court's denial of defendants' motion for judgment notwithstanding the jury's verdict finding tortious interference, we must apply the same standard of review as the district court, i.e., the jury's verdict cannot be disturbed unless we can say, without considering either the credibility of witnesses or the weight their testimony deserves, that the only conclusion a reasonable factfinder could have reached is one favoring defendants. Smith v. Lightning Bolt Productions, Inc., 861 F.2d 363, 367 (2d Cir. 1988); Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966, 970 (2d Cir. 1987); Mattivi v. South African Marine Corp., 618 F.2d 163, 167 (2d Cir. 1980). In this case, we find that the only reasonable verdict in light of the evidence would have been one in favor of Freedman and Meridian.

The uncontradicted testimony of various McCorhill officials was that Freedman did nothing to encourage McCorhill to abandon the merger. To the contrary, up until September 20, 1985, all Freedman's efforts were directed toward holding the Enercomp-McCorhill deal together. Of course it was Freedman who conveyed to Flaks the increasing demands of Gerald Cahill--not reflected in the 1984 merger agreement--to effect a closing. It was Flaks' refusal to agree to these demands that ultimately led Cahill, on behalf of McCorhill, to abandon the merger. To this extent, Freedman was not simply a bystander in the events that led to McCorhill's repudiation of the agreement. But implicit in tort is the notion of some wrongful or improper conduct. Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., supra. The accurate communication of one person's position to another does not constitute improper conduct, at least in a case like this where Freedman, as Enercomp's broker, had a duty to keep his client apprised of any changes--however unwelcome--in the position of its ...


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