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June 15, 1983

INTERNATIONAL MINING CO., INC., Plaintiff, against ALLEN & CO., INC., Defendant.

The opinion of the court was delivered by: SWEET


Defendant Allen & Co., Inc. ("Allen") has moved pursuant to Fed.R.Civ.P. 56 for summary judgment dismissing the complaint of plaintiff International Mining Co., Inc. ("IMCO"). Allen has also moved pursuant to Fed.R.Civ.P. 37 to dismiss the complaint for IMCO's failure to comply with certain discovery orders issued by this court. For the reasons stated below, the motions will be granted.

 Prior Proceedings

 IMCO commenced this diversity action in July, 1980 seeking damages for tortious interference with contract. IMCO is a Pennsylvania corporation with its principal place of business in Pittsburgh, Pennsylvania. One of IMCO's business activities is the brokerage of coal. Allen, a New York corporation with its principal place of business in New York City, is engaged in the investment banking business.

 The amended complaint asserts that a contract between IMCO and a third party, Kittanning Coal Co., Inc. ("Kittanning"), was repudiated pursuant to the "directions" of Allen and that this was done without any business justification and was undertaken out of spite. IMCO seeks damages of $500,000 in lost commissions under the brokerage agreement and $1,000,000 in lost sales of coal. Punitive damages "in excess of $1,000,000" are also sought.

 Initially, Allen sought dismissal of the action for failure to state a claim for relief, as well as a stay, alleging that the same issues were before a state court in Pennsylvania in a proceeding commenced by IMCO against Kittanning in which Kittanning had asserted counterclaims and additional claims. The motion to dismiss was denied and, though the motion for a stay was also denied in the same opinion dated December 11, 1981, the parties were given one year in which to conduct discovery. After additional motion practice involving disputes over discovery and disqualification of counsel for Allen, a pretrial conference was held on January 6, 1983, and an order was entered on January 14, 1983 extending the discovery deadline to March 5, 1983, and directing the parties to file all pretrial motions by March 5, 1983.


 The agreement at issue, which was allegedly entered into on February 22, 1979, is embodied in a two-page document entitled "Exclusive Sales Agreement." The agreement states that it is entered into between IMCO, "through" Black Diamond Sales Co., and Kittanning and grants IMCO the exclusive right to act as broker for Kittanning's coal for a one-year period commencing on February 22, 1979.

 Kittanning was incorporated in November, 1978 as a shell corporation by Bally Coal Co., Inc. ("Bally") and Bally's principals Joseph Ripp ("Ripp") and Peter Fitzpatrick ("Fitzpatrick") for the purpose of acquiring and operating a coal washing plant. At that time, the plant was owned by Kitt Coal Company ("Kitt"). Fitzpatrick approached Allen sometime in November, 1978 and proposed that he and Ripp join forces with Allen as the financial backer in order to purchase and operate the plant.

 Allen and Bally entered into a shareholders agreement on March 1, 1979. Pursuant to this agreement, Bally and Allen were each to invest $250,000 in the working capital of Kittanning, and Allen was to provide a loan of $1,500,000 to finance the purchase of the coal washing facility. The acquisition was closed on March 7, 1979. Allen turned over a $1,500,000 certified check as well as a $250,000 check which was deposited in Kittanning's newly opened bank account. Fitzpatrick came to the closing with a deposit slip reflecting a deposit of $250,000 to Kittanning's new account.

 Kittanning commenced operations. At this time, Ripp and Fitzpatrick were the President and Vice President of Kittanning, respectively, in addition to being directors. The other directors, all representatives of Allen, were Robert Werbel ("Werbel"), a New York attorney whose firm was counsel to Allen, who had participated in structuring and closing the acquisition for Allen, Frank Blair ("Blair"), who acted as Chairman of the Kittanning board, and Roland Crandall ("Crandall"). Blair and Crandall were both officers of Allen. Werbel was also Kittanning's Secretary. Shortly after March 8, 1979, Allen sold a beneficial interest in certain of the Kittanning securities to Werbel, Blair, and several other persons, corporations, and trusts associated with Allen.

 Pursuant to the shareholder's agreement, Ripp and Fitzpatrick agreed to devote substantially all their time to the day-to-day operations of Kittanning. Allen, on the other hand, viewed Kittanning as an investment. The Allen designees saw their role as keeping a "weather eye" on the investment and the progress of the company.

 In May, 1979, Ripp and Fitzpatrick advised Allen that Kittanning had a cash flow problem and suggested that Bally and Allen should inject more working capital into the company. On May 23, 1979, Allen advanced Kittanning the sum of $200,000 in return for Kittanning's promissory note signed by Fitzpatrick. At the same time, Bally represented to Allen that it had also made a cash advance to Kittanning secured by a promissory note, but in the lesser sum of $100,000.

 Despite this infusion of cash, a series of events revealed serious problems. In August, 1979 Kittanning failed to make a mortgage payment due to Allen. Ripp and Fitzpatrick represented to Blair later that month that Kittanning was out of money. In September, 1979, either Werbel or Crandall received a telephone call from the accounting firm appointed to perform quarterly audits of Kittanning's financial statements to the effect that certain books and records were not at the Kittanning facility and that Ripp and Fitzpatrick and their accountant had failed to keep several appointments. Later in September, Werbel and Blair received telephone calls from a Special Agent of the Federal Bureau of Investigation ("FBI"). The agent stated that he had information from a confidential source that Ripp and Fitzpatrick were stealing from Kittanning.

 Shortly thereafter, Ripp and Fitzpatrick came to New York and stated that they still had faith in Kittanning and that they had partners who were interested in acquiring Allen's interest in the company. Ripp claimed that within a couple of weeks a partner of his called Black Diamond would be in a position to close such a transaction. However, nothing came out of this proposal.

 In early October, 1979, an article in a Florida newspaper came to the attention of Werbel, Blair, and Crandall. The article implicated both Ripp and Fitzpatrick in a scheme to defraud certain persons in Florida. The scheme allegedly involved investments in coal operations. Concerned by these events, Werbel, Blair, and Crandall by a notice dated October 11, 1979 scheduled a special meeting of the Kittanning board for October 17, 1979 in Pittsburgh.

 In the meantime, Werbel and Blair telephoned the Kittanning plant manager, H. Lee Buell ("Buell"), and requested a meeting in New York City on October 15, 1979 to review certain of Kittanning's business records. Buell had previously had a telephone conversation with Blair, Werbel, and Crandall in which he informed them that he believed that Ripp and Fitzpatrick were mismanaging Kittanning's operations.

 At the meeting in New York, Buell stated that numerous payments of Kittanning's funds had been made to persons having no business relationship with Kittanning. Buell also produced the February, 1979 brokerage agreement that is the subject of this lawsuit. Werbel testified at his deposition that this was the first time he became aware of the existence of this agreement. At the October 15 meeting with Werbel and Blair, Buell questioned the date and the bona fide nature of the IMCO brokerage agreement and pointed out some unusual aspects of the agreement. Buell told Werbel and Blair that he thought the inclusion of Black Diamond in the agreement was unusual and that the firm six percent commission provided for in the agreement was also unusual. He also stated that he had discussed the terms of a brokerage agreement with IMCO and that IMCO had agreed to an arrangement with terms more favorable to Kittanning than those reflected in the agreement.

 Buell also discussed two other matters involving IMCO. He informed Werbel that Ripp had forgiven a $10,000 debt owed to Kittanning by a firm called Energy Engineering, Inc. ("Energy Engineering") in return for an agreement by Energy Engineering to settle a lawsuit it had commenced against IMCO and others. Buell also informed Werbel that IMCO had received four checks totalling $27,000 from Kittanning on March 7 and 8, 1979 immediately following the closing of Kittanning's acquisition of the coal washing facility and prior to the commencement of business operations.Buell stated that he did not know why Kittanning would be paying IMCO this amount of money at such an early date, but he speculated that it may have been in return for a loan which IMCO may have made to Fitzpatrick in order to help finance Bally's end of the acquisition.

 Shortly before October 17, 1979, Werbel learned that Ripp and Fitzpatrick had borrowed $80,000 in Kittanning's name from Pittsburgh National Bank without authority and without the knowledge of the other board members. Also shortly before the Kittanning board meeting, Werbel learned that Bally had not made the initial $250,000 contribution to Kittanning.

 The special meeting of the Kittanning board was held as scheduled on October 17. Ripp and Fitzpatrick were ousted as officers of Kittanning and Blair was elected President. A resolution was passed rescinding all banking resolutions and authorizations and instructing that all existing bank accounts be closed.Another resolution was passed authorizing the President "to take such steps as he in his sole discretion deems necessary to secure the Company's property from Messrs. Ripp and Fitzpatrick." Neither IMCO nor the IMCO brokerage agreement was mentioned at the board meeting.

 The meeting was adjourned, at which time Ripp and Fitzpatrick remained and were questioned extensively concerning their operation of Kittanning. The questioning was conducted by Daniel Shapira, an attorney retained by Blair, Werbel, and Crandall. Neither IMCO nor the IMCO brokerage agreement was mentioned during the questioning.

 Later that same day, Werbel drafted letters for signature by Blair as Kittanning's President to several parties who had dealt with Ripp and Fitzpatrick, informing them that these men had been removed as officers of Kittanning and were not authorized to engage in any transactions on its behalf. The letters were sent, inter alia, to various hotels, to a travel agency, and to the Pittsburgh National Bank.

 One of these letters was sent to IMCO. The IMCO letter stated in part:

 In addition, it has recently come to our attention that the Company may have entered into an "Exclusive Sales Agreement" with you, dated February 22, 1979.This is to advise you that any such agreement was never duly authorized by the Company and, accordingly, the Company considers that agreement to be null and void. Moreover, because of the foregoing, we hearby demand return of all funds received by you and arising out of such agreement.

 Blair testified at his deposition in this lawsuit that he first heard of the IMCO agreement at the October 17 board meeting and that he disavowed the agreement for the sole reason that it was never authorized by the Kittanning board. Crandall testified at his deposition that prior to this lawsuit he had never heard of IMCO. IMCO was replaced as Kittanning's broker by Courtney Foos Coal Co., Inc. ("Foos"). *fn1"

 The Motion for Summary Judgment

 Preliminarily, this court notes that IMCO's papers submitted in opposition to this motion are seriously deficient. First, it has not complied with S.D.N.Y. Civil Rule 3(g), which requires a party opposing summary judgment to submit a "short and concise statement of the material facts as to which it is contended that there exists a genuine issue to be tried." Second, the only affidavits it has submitted are attorney's affidavits, but Rule 56(e) requires that affidavits be made on personal knowledge.Third, the affidavits submitted by IMCO make many factual allegations without even citing to the record, let alone attaching copies of the papers referred to as required by Rule 56(e). This court is left, therefore, to wade through a voluminous record to seek substantiation for IMCO's position. These deficiencies are sufficient in themselves to justify granting Allen's motion for summary judgment. See SEC v. Research Automation Corp., 585 F.2d 31, 34 (2d Cir. 1978); Jecies v. Matsuda, 503 F. Supp. 580, 586 (S.D.N.Y. 1980) (failure of plaintiff to submit Civil Rule 3(g) [formerly 9(g)] statement is sufficient ground to grant defendants' motion for summary judgment). Nevertheless, despite IMCO's dereliction in this regard, an effort has been made to divine IMCO's position and to address its arguments.

 A threshold question exists as to the appropriate legal standard to be applied to IMCO's claim of tortious interference with contract. The parties have not on this motion briefed the question whether New York's choice of law rules require the application of New York or Pennsylvania substantive law. In an earlier opinion denying Allen's motion to dismiss, pursuant to Fed.R.Civ.P. 12(b)(6), this court stated that both New York and Pennsylvania recognized the same elements of the tort.International Mining Co. v. Allen & Co., No. 81 Civ. 3750 (S.D.N.Y. Dec. 11, 1981) (citing Ebasco Servs., Inc. v. Pennsylvania Power & Light Co., 402 F. Supp. 421, 452 (E.D.Pa. 1975)). Both states have, in fact, approved the interpretation of the tort contained in the Second Restatement, which defines the elements as (1) an intentional act, (2) improperly done, which (3) interferes with the performance of a contract. Restatement (Second) Torts ยง 766 (1977). See Adler, Barish, Daniels, Levin & Creskoff v. Epstein, 482 Pa. 416, 431, 393 A.2d 1175, 1183 (1978), appeal dismissed, 442 U.S. 907, 61 L. Ed. 2d 272, 99 S. Ct. 2817 (1979); Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., 50 N.Y.2d 183, 194, 428 N.Y.S.2d 628, 634, 406 N.E.2d 445 (1980). The New York and Pennsylvania cases also recognize that a so-called "privilege" attaches when the interference with contractual relations is done in order to further a legitimate interest. See Glenn v. Point Park College, 441 Pa. 474, 482, 272 A.2d 895, 899 (1971); Felsen v. Sol Cafe Mfg. Co., 24 N.Y.2d 682, 687, 301 N.Y.S.2d 610, 613, 249 N.E.2d 459, 461 (1969). See also DuSesoi v. ...

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