Appeal from judgment entered after a jury trial in the United States District Court for the Southern District of New York, Robert L. Carter, Judge, in favor of plaintiffs Lamborn, Maringer, and Lamar Commodities. Reversed and remanded.
Before: PIERCE and PRATT, Circuit Judges, and KENNETH CONBOY, District Judge for the Southern District of New York (sitting by designation).
KENNETH CONBOY, UNITED STATES DISTRICT JUDGE:
Plaintiff Thomas H. Dittmer ("Dittmer") appeals from a judgment entered against him after a jury trial held before District Judge Robert L. Carter. The jury found that Dittmer wrongfully terminated a partnership between plaintiffs and himself and awarded plaintiffs $30 million, which represented half of the value of the partnership's business at the time of trial. On appeal, Dittmer contends principally (1) that plaintiffs were improperly permitted to argue and present evidence on a theory of liability that was not disclosed until the eve of trial, (2) that it was error for the judge to deny defendants' motion for summary judgment and judgment notwithstanding the verdict, (3) that the judge erred by refusing to let defendants' counsel call one of plaintiff's lawyers, Herbert Stoller, as a witness, and (4) that the evidence was insufficient to support the jury's damage award. Because we find that the judge should have allowed Dittmer's counsel to call Stoller as a witness, we reverse.
In 1981, defendant-appellant Dittmer was the majority shareholder of Refco, Inc. ("Refco"), a commodity futures commission merchant and clearing firm. Refco was a large, prominent, and diverse corporation which, before the trial, was capitalized with $150,000,000. In the words of one witness, Refco was a "Cadillac of the industry."
Despite its size and standing domestically, Refco had, in 1981, virtually no presence in the international commodities market, a situation Dittmer sought to change. To do so, he contacted plaintiff-appellee George Lamborn, then working as an independent commodities broker in Connecticut. Initially, Dittmer offered Lamborn a position as an employee of Refco but he eventually agreed to consider developing some form of independent venture to be jointly owned by Lamborn. After Lamborn convinced Dittmer that it would be necessary to involve a third principal, Lamborn's friend and business associate Henry Maringer, then the president of a commodities company called ACLI, was invited into the negotiations. During their discussions, each party was represented by counsel: Dittmer by Tone Grant, Lamborn by Martin Honig, and Maringer by Herbert Stoller.*fn1
In November 1981, the parties executed a letter agreement to form a joint venture, the primary purpose of which would be the establishment of an international sales agent that would clear its business through Refco. The letter anticipated a more comprehensive contract and in December 1981, Dittmer entered into a partnership agreement with Lamar Commodities, itself a partnership comprised of Lamborn and Maringer, to form an international commodities sales agent. The partnership would be conducted under the name Refco International Futures ("RIF" or "the partnership").
The partnership agreement provided that Dittmer would capitalize the business with a minimum of $3 million. Lamar's (Lamborn and Maringer's) responsibility was to build and manage the partnership's business for which it would receive a $600,000 annual fee. Furthermore, under Section 5.1 of the agreement, 40% of the partnership's net profits and losses were to be allocated to Lamar.*fn2
The agreement provided for a 30-year term but the partnership could be terminated by Dittmer at an earlier date under the following conditions:
9.1 Dittmer's Right to Cause the Dissolution of the Partnership. If at any time the cumulative net losses of the Partnership equal or exceed $600,000, including as expenses for the purposes hereof the management fee provided for in Section 7.5 hereof, Dittmer shall have the right to cause the dissolution of the Partnership without being in contravention of the Agreement, provided, however, that within thirty days after receipt of written notice thereof from Dittmer, Lamar may purchase Dittmer's interest in the Partnership at a price computed as in Section 8.1(a)(ii) hereof.
If Dittmer properly exercised his rights under Section 9.1, he also had the right to continue the business:
10.1 Upon dissolution of the Partnership for any reason whatsoever . . . Dittmer shall be entitled to continue the business and operations of the Partnership at this discretion and in any form he may choose.
Early on, the partners decided to run the partnership's business through a corporation, principally to insulate themselves from liability to third parties. For this purpose they formed RIF New York, Inc. ("RIF-NY" or "the corporation"), a wholly owned subsidiary of Refco International Futures, Inc., which was in turn owned by the partnership. From the business' inception, it appears that the partnership agreement was performed through RIF-NY. Specifically, Dittmer made his obligatory capital contributions directly to and Lamar took its management fees directly from the corporation.
In performing their end of the agreement, plaintiffs were fairly successful at establishing the partnership's presence in the international commodities market. Among other things, they entered the precious metals market and started a foreign exchange trading business, they became the first American company to obtain full membership of the London Sugar Exchange, they joined the Sydney, Australia futures exchange through their participation in a joint venture with another company, and they developed markets in Hong Kong and Germany. At a Refco conference in May of 1982, Dittmer complemented plaintiffs for putting Refco "on the globe internationally."
Nonetheless, the business lost money from its inception and continued to do so until about February 1983. By March of 1982, three months into RIF's existence, losses exceeded $600,000. In October 1982, despite substantial losses, Dittmer loaned an additional*fn3 $2.2 million to the business after plaintiffs agreed to reduce their management fees. By February 1983, Dittmer had contributed a total of $4.7 million to the business yet RIF-NY was $2.8 million in the red. On March 7, 1983, Dittmer told Lamborn and Maringer that he was terminating the partnership. At the same time he was taking steps to salvage the business--or to steal it according to plaintiffs--sending representatives to speak with RIF's brokers in London and New York. Eventually, 10 of RIF's brokers joined other sales agents associated with Refco.
Soon thereafter, plaintiffs filed a complaint against Dittmer alleging that he had dissolved the partnership in violation of his fiduciary duties and in contravention of the partnership agreement so that he could obtain the partnership's customers, goodwill, employees, and other assets for his own benefit. Dittmer answered by invoking Section 9.1 of the agreement and, relying on Section 5.1, counterclaimed for 40% of RIF's losses. The jury found for plaintiffs on both claims, awarding them $30,000,000, which represented their half share of the fair market value of the partnership at the time of trial.
Dittmer raises a host of alleged errors in the trial, only a few of which require extended discussion. The first issue raised on appeal is whether, as Dittmer asserts, plaintiffs were allowed to convert the case into a fraud action on the eve of trial. According to Dittmer, this eleventh-hour conversion violated his due process rights and Fed. R. Civ. P. 16. In addition, he argues that certain evidence offered and received in support of the fraud claim violated Federal Rules of Evidence 608(b) and 403. Before addressing these arguments, it is necessary to summarize briefly the pretrial evolution of the case.
The complaint, filed in 1983, alleged in substance that Dittmer a) violated his fiduciary duty to the partnership by soliciting the partnership's customers and employees without plaintiffs' consent, and b) dissolved the partnership in contravention of the partnership agreement. The pre-trial order, filed in 1984, expanded upon but did not significantly alter these contentions. One of several issues of fact designated by the parties was whether "RIF incurred losses in excess of $600,000."
Dittmer moved for partial summary judgment in May 1985, submitting in support thereof an accountant's audit of the partnership's business showing that its net losses exceeded $2.8 million, thus triggering Dittmer's rights under Section 9.1 of the agreement. Confronted with the audit, plaintiffs responded, inter alia, that the net losses were entirely in RIF-NY and could not be attributed to the RIF partnership. In support of their position, referred to by Dittmer as the "Business Form Distinction," plaintiffs submitted four promissory notes, evidencing Dittmer's capital contribution to the business, running directly from RIF-NY to Dittmer. Since no cash flowed to or from the partnership, plaintiffs argued, it could not be deemed to have suffered losses within the meaning of Section 9.1 of the agreement. In a footnote to their summary judgment memorandum, plaintiffs noted the existence of a parallel set of promissory notes, produced by Dittmer during discovery, which purport to run directly from the partnership to Dittmer, but plaintiffs added that "Dittmer does not rely upon the existence of those notes for purposes of ...