The opinion of the court was delivered by: Kevin Thomas Duffy, District Judge:
Rifts among directors of a corporation are not infrequent.
Nor is it uncommon for such disputes to lead to protracted,
often vitriolic, legal proceedings. As such, this action,
which arises out of a written "Settlement Agreement"
purporting to resolve differences between bickering directors
of the plaintiff Health-Chem Corporation ("Health-Chem"), is
not unusual. What distinguishes it from similar cases is that
it reflects, in microcosm, the staggering effects of "Black
Monday", October 19, 1987. On that date, the stock market saw
a precipitous fall in the Dow Jones industrial average of over
500 points — its worst drop ever. The effects of that
drop, which saw a concomitant fall in price of Health-Chem
stock, led Health-Chem to bring this action seeking a
declaration that the Settlement Agreement between the parties
is invalid and must be renegotiated.
Defendant and counterclaim plaintiff Leon C. Baker moves
pursuant to Fed.R. Civ.P. 56 for summary judgment dismissing
the complaint and granting Baker's counterclaims against
Health-Chem and counterclaim defendant Marvin M. Speiser.
Health-Chem opposes the summary judgment motion and moves to
amend its complaint pursuant to Fed.R.Civ.P. 15. Speiser
cross-moves pursuant to Fed.R.Civ.P. 56 for summary judgment
dismissing Baker's fourth counterclaim as against Speiser
Health-Chem is a public company whose shares are traded on
the American Stock Exchange. Baker is a former general counsel
and director of Health-Chem, and directly or indirectly holds
over one million of Health-Chem's common shares. Speiser is
the Chairman of the Board of Directors and President of
Health-Chem. Baker and Speiser are the two largest individual
stockholders of Health-Chem.
On March 29, 1987, Health-Chem, Speiser, and Baker entered
into an Outline of Settlement (the "Outline") that settled
ongoing litigation between them. The Outline provided that it
"will be incorporated into a definitive agreement to be
negotiated and executed among the parties as soon as
possible." Baker Affid. in Support of Summary Judgment, Exh.
B. Under the Outline, Baker agreed to sever his relationship
with Health-Chem and, among other things, to the sale of all
of his Health-Chem common shares and the liquidation of
Health-Med Corporation, a subsidiary of Health-Chem in which
Baker had a minority interest. Outline of Settlement, Baker
Affid. in Support of Summary Judgment, Exh. B ¶¶ 1, 2.*fn1
Health-Chem was given the right to sell Baker's shares any
time after August 1, 1987, and throughout the 13-month sale
period ending August 31, 1988. Health-Chem also agreed to
deliver to Baker a bank letter of credit for $16,303,849,
providing that upon Baker's demand
the bank would pay Baker any deficiency between the net
proceeds actually received by Baker in connection with the
sale of his shares and $16,303,869. Outline ¶ 1. The
amount of $16,303,869 was arrived at by multiplying Baker's
1,207,694 shares by a price of $13.50 per share, the closing
price on Health-Chem stock on the last trading day before the
Outline was executed. The letter of credit was never
On July 7, 1987, Health-Chem, Speiser, and Baker entered
into a "Settlement Agreement" which detailed and finalized the
matters the parties had agreed to in the Outline.*fn2
See Settlement Agreement, Baker Affid. in Support of
Summary Judgment Exh. A.*fn3 Health-Chem again agreed to pay
Baker the difference between the aggregate sales price of his
stock and $16,303,869. Settlement Agreement ¶ 1.4(a). The
Settlement Agreement further provides for substitution of an
escrow of government securities for the letter of credit
provided for in the Outline. Settlement Agreement §
1.4(d). An escrow agreement between Health-Chem, Baker, and
the Bank of New York, as escrowee,*fn4 was executed
simultaneously with the Settlement Agreement. Pursuant to the
escrow agreement, Health-Chem deposited securities with an
aggregate market value of not less than $16 million into an
escrow fund with the Bank of New York. See Escrow
Agreement, annexed to Settlement Agreement, Exh. B.
Health-Chem has not arranged a sale of nor purchased any of
Baker's Health-Chem shares. Following the October 19, 1987
stock market crash, Health-Chem stock fell to the range of
approximately $4 per share and never returned to its former
level. At that price, the deficiency that Health-Chem would
have to pay Baker between the aggregate sales price and the
guaranteed amount exceeds $11 million.
By this action Health-Chem essentially seeks: (a) a
declaratory judgment that Baker is obligated to renegotiate
the terms of the Settlement Agreement; (b) to enjoin Baker
from forcing Health-Chem to sell to the public or repurchase
Baker's shares; and (c) to enjoin Baker from requiring
Health-Chem to pay Baker the monies due under the Settlement
Health-Chem's arguments against enforcement of the
Settlement Agreement center on the terms of a restrictive
covenant included in an Indenture executed by Health-Chem in
April 1981. Pursuant to that Indenture, Health-Chem authorized
and issued $20,000,000 in principal amount of Health-Chem
debentures. See Indenture, Baker Affidavit in Support
of Motion for Summary Judgment, Exh. C. Section 7.06 of the
Indenture throws Health-Chem into default on the debentures if
it were to "make any distribution on its Capital Stock or to
its stockholders . . . or purchase, redeem or otherwise
acquire or retire for value any Capital Stock" in excess of
the "Available Amount." The Available Amount is defined in
§ 7.06(b) of the Indenture as fifty percent of
Health-Chem's net earnings since 1980 plus any amount
Health-Chem has received from the sale of its shares since
A. The Effect of the Indenture's Restrictive
Health-Chem's interpretation of "distribution" relies on the
admission of extrinsic evidence in order to determine the
meaning to be given § 7.06. Admission of such evidence,
however, is not warranted by the unambiguous provision of the
Indenture nor supported by the law. Contract terms must be
construed so as to give effect to the intent of the parties as
indicated by the language of the contract. Curry Road Ltd.
v. K Mart Corp., 893 F.2d 509, 511 (2d Cir. 1990).
Extrinsic evidence of the contracting parties' intent is
admissible only when the language of the contract is
ambiguous. Id. Whether a contract term is ambiguous
is a question of law. Id. Walk-In Medical Centers, Inc. v.
Breuer Capital Corp., 818 F.2d 260, 263 (2d Cir. 1987).
Contract language is not ambiguous when it has "`a definite
and precise meaning, unattended by danger of misconception in
the purport of the [contract] itself, and concerning which
there is no reasonable basis for a difference of opinion.'"
Hunt Ltd. v. Lifschultz Fast Freight, Inc.,
889 F.2d 1274, 1277 (2d Cir. 1989) (quoting Breed v. Insurance Co.
of North America, 46 N.Y.2d 351, 355, 385 N.E.2d 1280,
1282, 413 N.Y.S.2d 352, 355 (1978)). Conversely, a term is
ambiguous when it is "`capable of more than one meaning when
viewed objectively by a reasonably ...