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Walk-In Medical Centers Inc. v. Breuer Capital Corp.

decided: May 5, 1987.


Appeal from a judgment of the United States District Court for the Southern District of New York (Cedarbaum, J.), following a bench trial in which appellant was found to have wrongfully breached a firm commitment underwriting agreement. Affirmed.

Author: Altimari

Before: FEINBERG, Chief Judge, TIMBERS and ALTIMARI, Circuit Judges.

ALTIMARI, Circuit Judge:

In January 1984, appellant Breuer Capital Corp. ("Breuer") executed a firm commitment underwriting agreement, in which Breuer contracted to make a public offering of appellee Walk-In Medical Center's ("Walk-In") stock. Shortly thereafter, Breuer unilaterally terminated the underwriting agreement, claiming that it was justified in doing so because of "adverse market conditions." Following a four-day bench trial, Judge Miriam G. Cedarbaum held that Breuer had not been justified in breaching the underwriting agreement, and entered judgment for Walk-In in the amount of $3,298,400.55 (the contract price of the Walk-In stock plus prejudgment interest). We affirm the decision of the district court in all respects.


Walk-In Medical Centers, Inc., is a Florida corporation engaged in the business of establishing and administering out-patient centers for non-emergency medical treatment. Breuer Capital Corp., a Colorado corporation, is an investment banking firm and broker-dealer, registered with the Securities and Exchange Commission.

The president of Walk-In, George Resch, was interested in making an initial public offering of Walk-In shares, and commenced negotiations with Breuer in early 1983. On August 11, 1983, Breuer executed a letter of intent to act as the managing underwriter in connection with a proposed firm commitment public offering of 500,000 shares of Walk-In common stock.

On January 18, 1984, Breuer and Walk-In executed the firm commitment underwriting agreement. Under this agreement, Breuer agreed to purchase 500,000 shares of Walk-In common stock at $5.40 per share, with an option granted to Breuer to purchase up to an additional 75,000 shares at the same price, to cover over-allotments. Breuer agreed to make a public offering of the Walk-In stock. The closing date of the agreement was originally set for January 30, but on January 23, the parties agreed to move the closing date up to January 25, 1984.

The underwriting agreement also contained what is known in the securities trade as a "market out" clause, in para. 10(b), which provided:

You [Breuer] shall have the right to terminate this agreement at any time prior to the closing date (i) if any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, securities markets; or (ii) if trading on the New York Stock Exchange, the American Stock Exchange, or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or by order of the Commission or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a war or major hostilities; or (iv) if a banking moratorium has been declared by New York State or federal authorities; or (v) if a moratorium in foreign exchange trading by major international banks or persons has been declared; or (vi) if the company or any of its future subsidiaries shall have sustained a loss material or substantial to the Company and its subsidiaries, if any, taken as a whole by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which whether or not such loss shall have been insured, will, in your opinion, make it inadvisable to proceed with the delivery of the Shares; or (vii) if there shall have been such change in the conditions or prospects of the Company and its subsidiaries, if any, taken as a whole, or such adverse market conditions as in your judgment would make it inadvisable to proceed with the offering sale and delivery of the shares (emphasis added).

At approximately 3:00 on January 18, 1984, Walk-In's SEC registration statement became effective, and Walk-In stock began to trade, opening at $6.00 per share. Between Wednesday, January 18 through Monday, January 23, the price of Walk-In stock traded down to approximately $4.00 per share, losing almost one-third of its initial value of $6.00 per share. During the week immediately preceding the Walk-In public offering, the Dow Jones Industrial Average had fallen from a high of 1295.44 on January 10, to 1269.37 at the close of trading on January 18. By the close of trading on January 23, the Dow had fallen to 1244.45, a decline of approximately 25 points since the day of the Walk-In offering.

On the afternoon of January 23, Faye Breuer, the president of Breuer, informed George Resch that Breuer was exercising its right to terminate the underwriting pursuant to para. 10(b)(vii) of the agreement -- the "market out" based on "adverse market conditions." Breuer confirmed its termination by letter and telegram the following day.

Walk-In commenced this action against Breuer in February 1984. In November 1984, Breuer moved for summary judgment, asserting that there were no disputed issues of fact and that Breuer was entitled to judgment as a matter of law, because it had properly terminated the underwriting agreement due to adverse market conditions. Walk-In, in turn, cross-moved for summary judgment in December 1984.

On February 24, 1986, Judge Robert L. Carter denied both summary judgment motions. Judge Carter found the phrase "adverse market conditions" to be facially ambiguous, because it was susceptible of more than one reasonable interpretation. Furthermore, since the parties themselves urged radically different interpretations of the phrase, Judge Carter held that the meaning of "adverse market conditions" was a genuine issue of material fact requiring a trial.

Accordingly, the case was tried before Judge Cedarbaum, who announced her decision from the bench on December 30, 1986. After stating her ...

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