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PHILO SMITH & CO. v. USLIFE CORP.

September 24, 1976

PHILO SMITH & COMPANY, INC. and James E. Rutherford, Plaintiffs,
v.
USLIFE CORPORATION, Defendant


Tenney, District Judge.


The opinion of the court was delivered by: TENNEY

TENNEY, District Judge.

This is an action for the recovery of a finder's fee brought under this Court's diversity jurisdiction, 28 U.S.C. § 1332. In an earlier memorandum opinion, dated December 20, 1974, the Court sustained the complaint insofar as it supported recovery based on the doctrine of promissory estoppel but dismissed the plaintiffs' other claims, based on two written finder's fee agreements and on the theory of quantum meruit, as barred by the statute of frauds, New York General Obligations Law § 5-701(10), and by the parol evidence rule. Trial was had on the one remaining claim before a jury, and the defendant moved for a directed verdict at the close of the plaintiffs' case. For the reasons stated below, the defendant's motion is granted and judgment is entered in favor of the defendant.

 FACTS

 The involvement of the plaintiffs with the subject matter of this action began in 1968 *fn1" when plaintiff James E. Rutherford ("Rutherford"), an individual with long experience in the insurance field, first began thinking about and working toward an eventual acquisition of All American Life & Financial Corporation ("All American"), a Chicago-based insurance company, by the defendant USLIFE Corporation ("USLIFE"), a larger insurance company which had begun an active acquisitions policy several years earlier. Rutherford was working at that time as a "finder," one who introduces target companies to acquiring companies. He was a personal friend of E. E. Ballard ("Ballard"), at that time chief executive officer of All American, and also knew Gordon Crosby ("Crosby"), chief executive officer of USLIFE.

 In the Spring of 1971, plaintiff Philo Smith & Co. ("PSCO"), through the head of its finding department, Rodney Hawes ("Hawes"), approached All American with an offer of assistance in finding a company which might acquire All American or which All American might acquire. On June 8, 1971 Hawes called Crosby, stated that he knew Ballard and said that he could arrange a meeting between Ballard and Crosby. Crosby asked Hawes to get a letter from Ballard stating that a meeting could be arranged. When Hawes asked about a fee, Crosby said that that could be arranged if Hawes got the letter. Hawes had learned of Rutherford's history of involvement with Ballard and Crosby and met with him to ask him to request the letter from Ballard. Hawes, on the part of PSCO, and Rutherford agreed that they would be partners in any fee paid on the All American acquisition.

 On July 8, 1971, Hawes met with Crosby at the USLIFE offices in New York. Hawes gave Crosby the requested letter from Ballard. Crosby asked Hawes to set up the meeting with Ballard, and Hawes agreed to do so. They then discussed possible fee arrangements. Hawes proposed the "Lehman" formula which Crosby rejected as resulting in too large a fee. Hawes then proposed a second formula which Crosby agreed to. Crosby called in his staff counsel, who prepared a draft of a fee agreement which stated that the agreement would terminate unless an agreement in principle looking toward an acquisition was made before December 31, 1971. Hawes objected, telling Crosby that it would be impossible to complete an agreement in principle by that time. Crosby then agreed to extend the termination date an additional six months to June 30, 1972. Hawes stated that he was still concerned about the termination date, and Crosby responded, "If we're still interested in the acquisition at the time of the termination date, we'll be very happy to extend it." Crosby and Hawes then signed the agreement on behalf of USLIFE and PSCO respectively. *fn2"

 The next day Hawes sent Rutherford a letter enclosing the fee agreement and agreeing to share equally with Rutherford any fee which PSCO would receive from USLIFE under the agreement. Thereafter, Hawes and Rutherford arranged a meeting between Crosby and Ballard which took place in Chicago on September 3, 1971. Jack Gardiner ("Gardiner"), who became President of All American in February of 1972, also attended a part of that meeting. At a meeting in Chicago on September 23, 1971, Crosby, accompanied by another officer of USLIFE and an officer of First Boston Corporation, advisors to USLIFE made an acquisition offer to Ballard, which Ballard rejected categorically. Following his return to New York, Crosby told Hawes that the offer had been rejected. Hawes suggested that Crosby should have met with Gardiner instead of Ballard, and that perhaps Hawes should now meet with Gardiner. Crosby agreed, and Hawes flew to Chicago and met with Gardiner on October 1, 1971. During that meeting Gardiner agreed to meet with Crosby and did actually meet with him in Chicago on October 5. Later in the same month Hawes assisted Crosby in setting up another meeting with Gardiner. Following that meeting, Hawes took no part in arranging meetings between USLIFE and All American and performed no further acts in aid of the transaction. At that time, the written fee agreement had approximately eight months to run. Hawes continued to meet with Gardiner, however, discussing other companies which might acquire All American and which All American might itself acquire. One such acquisition by All American was announced in December of 1971 and finally consummated in April of 1973. PSCO received a fee of approximately $275,000 for acting as finder on that transaction.

 In June of 1972 the first fee agreement was about to expire. Crosby and Hawes met at the beginning of that month. Crosby told Hawes that he still had an interest in acquiring All American. Subsequently, Crosby sent Hawes a copy of a new fee agreement which included Rutherford as a partner with PSCO, extended the expiration date to December 31, 1972, and gave USLIFE the option of paying the fee in stock or in cash. After discussing the new agreement with Rutherford, Hawes called Crosby and objected to the new payment option and to the shortness of the extension of the termination date. Crosby agreed to reconsider the payment situation but stated, as he had the year before, that the termination date would be reexamined at the end of the agreement and extended if USLIFE still had an interest in acquiring All American. Crosby sent a revised agreement to Hawes which stated that PSCO and Rutherford would be paid in cash but which retained the December 31, 1972, termination date. Hawes and Rutherford signed this agreement. *fn3" Hawes subsequently told Rutherford about Crosby's oral promise to review the termination date at the end of the agreement.

 Hawes left his job with PSCO in September of 1972 but had an agreement with PSCO to continue to be involved with the All American/USLIFE transaction. Hawes met with Crosby on October 24, 1972. After discussing the possibilities of an All American/USLIFE transaction being consummated before the end of 1972, Hawes suggested that the fee agreement be extended. Crosby replied, "We'll take care of the paper work if we get anything going after the first of the year." Three days later Crosby met with Philo Smith of PSCO and stated that he was disenchanted with the performance of Hawes and that he had no intention of entering into another agreement with PSCO after the current one expired on December 31, 1972.

 During the period of the two fee agreements, and, indeed, continuously throughout the period from 1968 until 1974, Rutherford was working to bring about an acquisition of All American by USLIFE, particularly in his regular meetings with Ballard. Over the Memorial Day weekend, 1973, some five months after the fee agreement had expired and at a time when Crosby, despite an interest in acquiring All American, thought the acquisition could not be accomplished, Gardiner's office called Crosby at his vacation home and asked for a meeting. Crosby then called Rutherford and told him that he thought he had a proposal that All American would buy and that he wanted Rutherford to set up a meeting with Ballard. Rutherford agreed to do so, but told Crosby that the fee letter should be brought up to date. Crosby responded, "No problem, no problem."

 On June 18, 1973, USLIFE and All American entered into an agreement in principle for the acquisition. That agreement was withdrawn by USLIFE on August 10, 1973, and another proposal was made which was rejected by the All American board of directors on August 15. A second agreement in principle was entered into on October 15, 1973, and the acquisition was consummated under the terms of that agreement on February 25, 1974. Throughout this period Rutherford was actively working for the acquisition, talking with shareholders, directors and investment bankers.

 STATUTE OF FRAUDS AND PAROL EVIDENCE RULE

 As this Court made clear in its earlier opinion, the plaintiffs' claim for recovery of a finder's fee in this case must confront and overcome the serious obstacles posed by two basic legal doctrines: the statute of frauds and the parol evidence rule. *fn4" Section 5-701(10) of the New York General Obligations Law was amended in 1964 to make it absolutely clear that all contracts to pay compensation for the services rendered by a finder were void unless in a signed writing. See Minichiello v. Royal Business Funds Corp., 18 N.Y.2d 521, 277 N.Y.S.2d 268, 223 N.E.2d 793 (1966). The New York Court of Appeals has stated that the statute serves the policy of protecting "the principals in the sale of a business from . . . a claim for a . . . finder's fee not supported by the written evidence." Intercontinental Planning, Ltd. v. Daystrom, Inc., 24 N.Y.2d 372, 383, 300 N.Y.S.2d 817, 826, 248 N.E.2d 576, 582 (1969). To allow the statute to be avoided easily would be to open the door "wide to possible frauds -- the very thing which the statute was designed to prevent." Bright Radio Laboratories v. Coastal Commercial Corp., 4 A.D.2d 491, 494, 166 N.Y.S.2d 906, 909 (1st Dep't 1957), aff'd, 4 N.Y.2d 1021, 177 N.Y.S.2d 526, 152 N.E.2d 543 (1958). The impact of the statute of frauds on this case is strengthened by the effect of the parol evidence rule. The ...


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