Appeal from a judgment of the United States District Court for the Southern District of New York (Sweet, J.), awarding plaintiffs $1,062,000 in damages for breach of contract. Cross-appeal from that part of the judgment that dismissed related claims based on promissory estoppel and securities fraud. Appeal reversed; cross-appeal affirmed.
Kaufman, Pratt and Gibson,*fn* Circuit Judges.
Defendant SCM Corporation appeals from a judgment of the United States District Court for the Southern District of New York, Robert W. Sweet, Judge, awarding $1,062,000 in damages to plaintiffs Reprosystem, B.V., a Netherlands corporation, and N. Norman Muller, a New York resident. 565 F. Supp. 4. The trial court found that SCM was contractually obligated to sell its six foreign subsidiaries to plaintiffs, that SCM breached the claimed contract of sale, and that even though plaintiffs would not have been able to perform the contract they were nevertheless entitled to breach-of-contract damages measured by SCM's "unjust enrichment" in the form of profits received from the subsidiaries during the period of negotiations between the parties. On appeal, SCM contends that there was no contract because the parties intended not to be bound unless and until a formal written contract was executed, and that none ever was. SCM further contends that there was no basis, legal or equitable, for an award of damages. Plaintiffs have cross-appealed, claiming that the district court's finding that plaintiffs were unable to perform the contract was clearly erroneous, and therefore, that they are entitled to the entire profit SCM received from its subsequent sale of the subsidiaries to others. Plaintiffs also challenge Judge Sweet's dismissal of their securities fraud and promissory estoppel claims. On the main appeal we reverse the district court's conclusions that the parties were bound by a contract and that SCM was enriched unjustly; on the cross-appeal, we affirm its dismissal of the promissory estoppel and securities fraud counts.
We first review the facts pertinent to our resolution of the appeal and cross-appeal. A more extensive exposition of the facts can be found in the district court's opinion, 522 F. Supp. 1257 (S.D.N.Y. 1981).
Plaintiff Reprosystem B.V. was incorporated by plaintiff N. Norman Muller to hold the shares and assets he sought to purchase from SCM's foreign subsidiaries.
Defendant SCM is a multinational enterprise that manufactures and distributes a variety of products. In 1976 the part of its business that consisted of marketing, leasing, and servicing copy machines in Europe, Africa, and the Middle East, was conducted by SCM's International Business Equipment Division through six wholly owned subsidiaries incorporated under the laws of five foreign countries. During fiscal year 1976, the six subsidiaries together generated annual sales exceeding $40 million and profits exceeding $4 million, and had approximately one thousand employees.
In late 1975 Paul Elicker, who was president, chief executive officer, and chairman of the board of SCM, and Herbert Elgi, the vice president of finance, decided that SCM should dispose of its European copier subsidiaries. At Elicker's direction, Frank De Maio, who was vice president and general manager of the International Division, began to seek out potential purchasers.
Consistent with its decision to get out of the overseas copying business, SCM sought to minimize its commitment to any new products in that copier market. However, De Maio and William Rodich, the president of SCM's Business Equipment Division which included the International Division, recognized that SCM's zinc oxide paper process was outdated, and they concluded that regardless of ownership, the business would have to make available a plain paper copier. During the spring of 1976, therefore, De Maio traveled to Japan and reached a preliminary understanding with Mita, a Japanese manufacturer, to supply SCM with approximately 3,000 plain paper copiers.
Muller became interested in the proposed sale of the subsidiaries. He met in April 1976 with both Elicker and De Maio, and in May 1976 with Elicker and Rodich. During the May meeting Muller was provided with unaudited statements of the subsidiaries showing an asset value of approximately $16.8 million as of March 31, 1976, and a nine-month profit of approximately $3 million.
In a letter prepared without assistance of counsel Muller, on May 7, 1976, offered to pay $9 million for the SCM subsidiaries, subject to two conditions: (1) a satisfactory audit by Muller's accountants, and (2) execution of a formal agreement, satisfactory to both SCM and Muller. Rodich informed Muller that the letter provided a basis for negotiations, but that discussions would have to be suspended during a securities offering by SCM.
When negotiations resumed in August 1976, Rodich presented Muller with a list of nine points that SCM considered to be nonnegotiable. These nine points, supplemented by four more in September, became the basis for an "agreement in principle" between Muller and SCM. One provision of the "agreement in principle" was that during negotiations the companies would be operated by SCM for the benefit of Muller, so that any profits or losses occurring after August 1, 1976 would be used to adjust the purchase price. SCM issued a press release on September 28, 1976 announcing the "agreement in principle", but stating also that "the proposed sale is subject to a definitive agreement expected to be reached soon." SCM's 10-K report, filed with the SEC on September 30, 1976, also stated that SCM made "no assurance that the transaction would be completed."
The parties contemplated that the transaction would be developed in a "Global Agreement" setting out the general terms of the transaction, plus six separate agreements covering the respective details for the sales of the six subsidiary corporations. Using the "agreement in principle" as a starting point, general counsel for SCM prepared a draft model agreement for sale of one of the subsidiaries. After Muller's attorneys, Hardee, Barovick, Konecky & Braun, reviewed the draft and found it incomplete, SCM retained the firm of Sullivan & Cromwell to assist in negotiating and drafting all of the agreements.
Concentrating on the Global Agreement and a model agreement for one of the subsidiaries, Sullivan & Cromwell generated more than fifteen drafts by mid-December, each of which was reviewed by the Hardee, Barovick firm and returned for revision. Consistent with the proviso in Muller's initial offer that conditioned the contemplated transaction on execution of a formal agreement, each draft of the Global Agreement prepared by Sullivan & Cromwell provided that the obligations of each party were subject to a condition precedent that it shall have been provided with an opinion from counsel for the other party that "this [Global] Agreement and each of the Purchase Agreements has been duly authorized, executed and delivered by [the other party]".
On December 15 and 16, 1976 the parties and their attorneys met to resolve all outstanding issues. At this meeting the drafts prepared by Sullivan & Cromwell were reviewed paragraph by paragraph, including the paragraphs that required formal execution as a prerequisite to binding effect. After two days of negotiations no problems remained, the parties exchanged congratulations, and Rodich ...