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Sagamore Corp. v. Diamond West Energy Corp.

decided: December 1, 1986.


Appeal by defendants from a judgment of the Southern District of New York, Miriam G. Cedarbaum, J., ordering them to transfer stock to the plaintiff pursuant to a joint venture agreement. Appellants contend that the agreement was rendered unenforceable under New York law by the formation of a corporation to carry out a project contemplated by it. Affirmed.

Author: Mansfield

Before: MANSFIELD, MESKILL and MINER, Circuit Judges.

MANSFIELD, Circuit Judge:

In this lawsuit based on diversity jurisdiction Diamond West Energy Corporation ("Diamond West") and Howard F. Bovers ("Bovers") appeal from a judgment of the Southern District of New York, Miriam G. Cedarbaum, J., ordering them to transfer 1,985,000 shares of the stock of Diamond East Energy Corporation ("Diamond East") to plaintiff Sagamore Corp. ("Sagamore") pursuant to the terms of a written agreement between the parties. Defendants contend that the agreement is unenforceable under New York law, that enforcement was waived, and that they were excused on grounds of impracticability from performing their promise to obtain long-term financing within a specified time period. We affirm.

During the summer and fall of 1984, Richard C. Schmitz, president of Sagamore, negotiated with Bovers, chairman of Diamond West and a sophisticated investor, for the joint creation and development of plants for the generation of power to be supplied to utilities. After signing a letter of intent dated October 9, 1984, the parties, on December 12, 1984, entered into a written agreement entitled "Equity Participation Agreement" ("EPA") for promotion of the venture with respect to the first unit, called "the Project," which was expected to be constructed in New England, either off-shore or on land, and operated for the supply of power to the Boston Edison Company in Massachusetts.

Under the terms of the EPA, Sagamore was to act as manager of the Project until professional management could be obtained. The EPA provided that separate entity, to be called Diamond East Energy Corporation, would be formed to "carry out the Project" and that at the outset the equity in the Project would be owned by Sagamore with the expectation that, upon the joint approval of Sagamore and Diamond West, some equity interests would be issued to certain persons (called the "Minority Equity Holders") for their efforts in promoting and helping to manage the Project. Par. 4 further provided that Diamond West would "have an opportunity to acquire an equity participation in the Project equal to that of Sagamore after issuance of interests to the Minority Equity Holders" provided it (1) negotiated to Sagamore's satisfaction the acquisition of fuel supplies for the Project, (2) provided a non-refundable equity capital investment in the Project of not less than $1.5 million, and (3) obtained all additional financing needed for the Project. In addition, Par. 5 obligated Diamond West (1) to obtain by July 1, 1985, a written commitment from a public utility to buy the Project's powered output, to be used as the basis for obtaining financing other than the $1.5 million equity capital, and (b) to obtain, within six months after securing the commitment from a public utility, a commitment from a responsible financial institution to provide the remainder of the necessary financing, estimated at $90 million. Diamond West agreed that if it should fail to meet either of these tow requirements it would "retransfer and return, without cost or expense to Sagamore, all of its equity percentage in, and business records of, the Project free of al claims." The EPA provided that it "shall be governed and construed by the laws of the State of Connecticut."

On January 29, 1985, Diamond East was formed as a corporation under the laws of Delaware to develop and manage the prospective power generation project. On February 22, 1985, the initial meeting of the company's six directors (Bovers, Schmitz, Brandt, Pecoraro, Brown and Steinnorth) took place. Bovers was elected Chairman and Schmitz Vice Chairman. Persons who were professionals in the energy business were retained as its managers, including Helmut H. Brandt, the company's first president and in June 1985 William M. Irving, who became vice president and general manager of its construction activities and engineering. Simultaneously with the employment by Diamond East of Irving, who had been employment by Diamond East of Irving, who had been employed for 33 years by Boston Edison Co. and later by the Jacksonville Electric Authority, Bovers on May 30, 1985, acting on behalf of Diamond East, signed an agreement with Boston Edison under which it agreed to purchase $40 million per year of power from Diamond East for a period of 25 years. Bovers also negotiated an option with the Boston Sand & Gravel Co. for the acquisition of a land site for the power plant, a letter of intent from Bechtel Construction, Inc., to construct the power plant, and a letter of intent from Salomon Brothers to act as financial advisor to Diamond East in its quest for the estimated $90 million in long-term financing needed to carry out the project. Salomon Brothers, however, did not commit itself to fund the $90 million financing required for the Project.

At a meeting on May 13, 1985, of Bovers, Schmitz, David Brown (Sagamore's attorney), Ledo Arnaboldi (Diamond West's attorney) and Charles Frank of Salomon Brothers, it was agreed that Diamond East stock should be issued by it and on June 11, 1985, its board of directors voted to issue 1,985,000 shares each to Sagamore and Diamond West, which would give each 50% of the shares outstanding except for small amounts to be issued to certain directors.*fn1 Thereafter these shares were issued, including 1,985,000 shares to Diamond West. The district court found that the issuance of shares to Diamond West was not intended as a modification of Par. 5 of the EPA.

During the summer and fall of 1985, the relations between Schmitz and Bovers deteriorated, with disputes arising between them over Bovers' failure to make the investment of up to $1.5 million in the capital of Diamond East and allegations that Bovers and others were attempting to acquire the project site for themselves, to siphon off some of Diamond East's limited funds, to privately pursue Diamond East's project for themselves, and to seize control of Diamond East. In the meantime Diamond West did not carry out its commitment to make the investment in Diamond East and did not succeed in obtaining the $90 million long-term financing within 6 months after May 30, 1985, as required by Par. 5(b) of the EPA. One difficulty faced by Diamond West in seeking the $90 million financing within the agreed-upon six-month period was the inability to obtain environmental permits for the project within that time-span and the fact that no responsible lender would provide the funds until permitting was completed. However, Diamond West never asked Sagamore for an extension of time to secure the permits. Nor is there any evidence that a financial institution would not have been willing to commit itself, subject to permitting, to lending the $90 million.

By September 30, 1985, Diamond East, because of lack of capital, was unable to meet its bills as they became due. Yet Diamond West did not honor its commitment to invest $1.5 million in the venture. As a result, in December 1985 the Braintree office of Diamond East was closed.

On December 1, 1985, Sagamore demanded the return and transfer by Diamond West to Sagamore of the 1,985,000 shares of Diamond East that had been issued to Diamond West. When Diamond West failed to comply, Sagamore, on December 27, 1985, commenced the present action against Diamond West and Bovers. The complaint sought, among other things, (1) $20 million damages based on Diamond West's conversion of the 1,985,000 shares of Diamond East, which prevented Diamond West from accepting offers by others to purchase the outstanding shares of Diamond East for that amount, (2) specific performance of the EPA, (3) an order enjoining the defendants from disclosing to any third-party confidential information that had been furnished by Sagamore or obtained by the defendants in the course of their involvement in the project, and (4) punitive damages. The defendants, denying the material allegations of the complaint, asserted various affirmative defenses and counter-claimed for a declaratory judgment (1) that the EPA was void, (2) that Diamond West was entitled to the 1,985,000 shares of Diamond East issued to is, and (3) that Diamond West should be excused by reason of the plaintiff's wrongful conduct from performance of certain obligations under the EPA. In addition, Diamond West counterclaimed for the return by the plaintiff and Schmitz of books and records of Diamond East and for $20 million damages based on the claim that plaintiff wrongfully prevented Diamond East from completing the Boston Edison project.

The parties agreed to consolidate plaintiff's application for preliminary and permanent injunctive relief for trial before Judge Cedarbaum on the understanding that the plaintiff waived its right to a jury trial as to liability issues determined by the court but retained its right to a jury trial with respect to damages, which would take place if the plaintiff prevailed. After a trial in May 1986, Judge Cedarbaum on June 5, 1986, rendered her decision to the effect that Sagamore was entitled to a permanent injunction ordering Diamond West to transfer to Sagamore the 1,985,000 shares of Diamond East that had been issued to Diamond West and that the defendants' counterclaims should be dismissed.

After observing defendant Bovers' demeanor on the stand and listening to his testimony, Judge Cedarbaum found that he "was not a credible witness and I do not accept his version of the facts." She rejected the defendants' contention that the EPA was extinguished under New York law upon the parties' formation of Diamond East as a corporation to carry out the project. She further found that Par. 5 of the EPA required Diamond West, and its officers, when they became unable to fulfill its obligation to obtain the $90 million long-term financing for Diamond East, to return the 1,985,000 shares issued to it, that there had been no waiver, modification, or other basis for excusing it from performance of that obligation, and that there was no adequate remedy other than specific performance. The court, however, denied the plaintiff's request for an order enjoining the defendants from disclosing to third parties alleged confidential data or information furnished by it to them in connection with the Project or from their engaging in ...

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