LITTON INDUS. v. LEHMAN BROS. KUHN LOEB

The opinion of the court was delivered by: Cannella, District Judge.

Litton's motion for partial summary judgment is denied. Fed.R.Civ.P. 56. Lehman Brothers' cross-motion for partial summary judgment is granted in part and denied in part. Fed.R.Civ.P. 56. Litton's motion to strike the reply affidavit of Judith MacDonald is denied. Fed.R.Civ.P. 6(d), 56(e); Local Civil Rule 3(c)(2). Litton's motion for the entry of final judgment is granted. Fed.R.Civ.P. 54(b). The joint motion by Litton, BLI, and BLZ for the entry of final judgment is denied. Fed.R.Civ.P. 54(b). Litton's motion to reverse or modify Magistrate Judge Gershon's denial of its renewed motion to compel the deposition testimony of Dennis Levine is denied. 28 U.S.C. § 636(b)(1)(A) (1988); Fed.R.Civ.P. 72(a).

BACKGROUND

This substantial and complex securities litigation is one of the first civil actions to be filed following the Securities and Exchange Commission's [the "SEC"] well publicized charges that Dennis Levine wrongfully misappropriated inside information. Thus, it is not surprising that this matter has generated a protracted pretrial motion practice. The action has been before the Court on numerous prior motions and, therefore, complete familiarity with the facts is assumed. Nevertheless, a brief review of the underlying facts and extensive procedural history is crucial to a proper understanding of the instant motions.

This action arises out of plaintiff Litton Industries, Inc.'s ["Litton"] successfully negotiated acquisition of Itek Corporation ["Itek"] in January 1983. On September 20, 1982, defendant Lehman Brothers Kuhn Loeb Inc. (now known as Shearson Lehman Brothers) ["Lehman Brothers"] made an initial presentation to Litton concerning possible acquisition candidates in the electronic warfare industry, including Itek. Thereafter, the Litton Board of Directors decided to attempt a friendly takeover of Itek. On October 15, 1982, as a first step toward a possible tender offer, Litton began to purchase Itek stock in the open market. In order to establish a firm toehold in Itek, Litton set out to purchase in the open market 4.9% of the outstanding Itek common stock. In early November 1982, Litton informed Lehman Brothers that it wanted to hire Lehman Brothers as its investment banker for the possible acquisition of Itek.

On November 12, 1982, Lehman Brothers sent a letter to Litton proposing terms for its engagement by Litton. The letter stated that it shall become a binding agreement when executed by Litton. Litton reviewed the letter with its general counsel and thereafter requested certain modifications by Lehman Brothers. On November 23, after incorporation of the modifications, Joseph Casey, Litton's chief financial officer, executed the letter. The agreement, marked "CONFIDENTIAL" on each page, delineates the investment banking services to be rendered by Lehman Brothers and expressly provides that it "represents the entire understanding between the parties, and all other prior discussions and negotiations are merged in it."

The gravamen of Litton's third amended complaint is that defendant Ira B. Sokolow, an employee in Lehman Brothers' mergers and acquisitions department, leaked confidential information regarding Litton's proposed Itek acquisition to defendant Levine, also an employee in the mergers and acquisitions department. It is undisputed that Levine conducted massive amounts of trading based on material nonpublic information during his employment at Lehman Brothers. In particular, the complaint alleges that Levine purchased 50,000 shares of Itek stock through defendant Bank Leu International Limited (now known as Leu Trust and Banking (Bahamas) Limited) ["BLI"] in advance of the public disclosure of Litton's tender offer. The complaint also alleges unlawful open market purchases of Itek common stock by defendants Sokolow, Jean-Pierre Fraysse (BLI's managing director), Bernhard Meier and Christian Schlatter (BLI employees), Robert Wilkis (investment banker with Lazard Freres & Company), and BLI itself. Nontrading defendants who allegedly assisted Levine in his insider trading include Bank Leu A.G. ["BLZ"], John R. Lademann (BLI board member and BLZ management board member), and Bruno Pletscher (BLI's managing director). Although Litton is satisfied with its acquisition of Itek and does not seek to undo the transaction, it contends that defendants' illegal purchases artificially inflated the market price of Itek common stock, thereby causing Litton to pay more than it should have to acquire its toehold purchases of Itek stock in the open market and to complete its tender offer for and subsequent merger with Itek.

The third amended complaint asserts ten counts for various violations of the federal securities laws and RICO, as well as violations of state statutory and common law. Litton asserts the following four measures of damages: (1) against all defendants for the amount Litton overpaid for its tender offer and merger purchases of Itek common stock as a result of the artificial inflation in the market price allegedly caused by defendants' illegal trading [the "tender offer/merger purchase damages"]; (2) against all defendants for the amount Litton overpaid for its open market purchases of Itek common stock on November 19 and 22, 1982 as a result of defendants' illegal trading [the "open market purchase damages"]; (3) against Levine, Sokolow, Wilkis, Fraysse, Schlatter, Meier, and BLI for disgorgement of all profits, fees, and commissions earned as a result of their illegal trading [the "disgorgement damages"]; and (4) against Lehman Brothers, in the approximate amount of $2.4 million, for the return of all fees paid to Lehman Brothers under their contract for services relating to the Itek acquisition [the "fee damages"]. In connection with its common law claims, Litton also seeks punitive damages against all defendants.

Dismissal of Litton's Claims for Tender Offer/Merger Purchase Damages

Defendants initially moved for partial summary judgment on all counts to the extent they sought tender offer/merger purchase damages. By Memorandum and Order dated March 27, 1989, the Court granted defendants' motion, finding as a matter of law that Litton failed to establish a causal connection between defendants' insider trading and the price Litton paid for Itek common stock during the tender offer and subsequent Litton/Itek merger. See Litton Indus., Inc. v. Lehman Brothers Kuhn Loeb Inc., 709 F. Supp. 438 (S.D.N.Y. 1989) [the "March 27 Order"]. Based on the Court's finding of no causation, Lehman Brothers moved for partial summary judgment on those counts asserted against it to the extent they sought to recover tender offer/merger purchase damages. By Memorandum and Order dated August 4, 1989, the Court granted the motion, relying principally upon the March 27 Order. See Memorandum and Order, at 4-7, 86 Civ. 6447 (JMC), 1989 WL 162315 (S.D.N Y Aug. 4, 1989) [the "August 4 Order"].

Thereafter, Litton moved for certification of the March 27 Order pursuant to 28 U.S.C. § 1292(b). The defendants opposed the motion and cross-moved for the entry of final judgment pursuant to Rule 54(b) of the Federal Rules of Civil Procedure. The August 4 Order denied both motions, finding that the dismissed claims seeking tender offer/merger purchase damages were not properly the subject of an interlocutory appeal. The August 4 Order also denied Litton's motion for reconsideration and vacatur of the March 27 Order.

Dismissal of Litton's Claims for Disgorgement Damages

Defendants BLZ, BLI, Lademann, Pletscher, Schlatter, Fraysse, and Levine moved for partial summary judgment on Litton's securities fraud claim seeking disgorgement of all profits, fees, and commissions earned on the purchase and sale of Itek common stock. By Memorandum and Order dated April 18, 1990, as modified on June 27, 1990, the Court granted the motion as to all defendants except Levine, finding as a matter of law that Litton is not entitled to a disgorgement measure of damages because these defendants previously disgorged to the SEC the full amount of their trading profits from the purchase and sale of Itek securities. See Litton Indus., Inc. v. Lehman Brothers Kuhn Loeb Inc., 734 F. Supp. 1071 (S.D.N.Y. 1990) [the "April 18 Order"], modified, Memorandum and Order, at 2-3, 86 Civ. 6447 (JMC) (S.D.N.Y. June 27, 1990) [the "June 27 Order"]. As to Levine, the Court found that a genuine issue of material fact existed as to whether the amount previously disgorged to the SEC constituted all illegal profits realized by Levine.

Litton seeks disgorgement damages against the trading defendants as an alternative remedy to its tender offer/merger purchase damages and its open market purchase damages. As a result of the April 18 Order as modified, the disgorgement measure of damages remains against only Levine and the trading defendants who did not move for summary judgment — Sokolow, Wilkis, and Meier. However, given the summary judgment dismissal of the tender offer/merger purchase damage claims and the subsequent settlement and dismissal of the open market purchase damage claims, Litton cannot establish liability for securities fraud. Therefore, the demand for trading profits against Levine, Sokolow, Wilkis, and Meier is no longer viable. The remedy of disgorgement cannot create liability for securities fraud, but rather acts as an alternative measure of damages once liability and resulting out-of-pocket damages have been established.

Dismissal of Litton's Claims for Open Market Purchase Damages

Litton, BLI, and BLZ entered into a settlement agreement whereby Litton agreed to seek dismissal with prejudice of its claims for open market purchase damages asserted against all defendants in exchange for certain payments from BLI and BLZ. By Memorandum and Order dated June 27, 1990, the Court dismissed with prejudice pursuant to Rule 41(a)(2) the claims asserted against all defendants for open market purchase damages. See June 27 Order, at 3-4.

The Remaining Claims

The complaint has been dismissed as to all defendants except Lehman Brothers. As to Lehman Brothers, the complaint asserts claims for federal securities fraud, negligence, breach of contract, and breach of fiduciary duty. These claims have been dismissed to the extent they seek to recover tender offer/merger purchase damages and open market purchase damages. The only remaining theory of recovery for each of Litton's claims against Lehman Brothers is fee damages. In connection with its claim for breach of fiduciary duty, Litton also seeks punitive damages.

There are presently six motions pending before the Court. First, Litton moves for partial summary judgment on its claims against Lehman Brothers for breach of contract and breach of fiduciary duty to the extent they seek fee damages. Second, Lehman Brothers cross-moves for partial summary judgment on all counts asserted against it to the extent they seek fee damages. Third, Litton moves to strike the reply affidavit of Judith MacDonald submitted by Lehman Brothers in connection with its cross-motion for partial summary judgment. Fourth, Litton moves for the entry of final judgment pursuant to Rule 54(b) or, in the alternative, for certification for appeal pursuant to 28 U.S.C. § 1292(b) (1988), on its claims for tender offer/merger purchase damages dismissed by the March 27 Order and the August 4 Order, as well as its claims for disgorgement damages dismissed by the April 18 Order. Fifth, Litton and defendants BLZ and BLI jointly move for the entry of final judgment under Rule 54(b) on the claims for open market purchase damages dismissed by the June 27 Order. Lastly, Litton moves to reverse or modify Magistrate Judge Gershon's denial of its renewed motion to compel the deposition testimony of Levine.

DISCUSSION

I. Cross-Motions for Summary Judgment

A. Breach of Contract

Litton contends that Lehman Brothers breached an essential term of its contract with Litton by failing to maintain the confidentiality of all information concerning Litton's plans to acquire Itek. Specifically, Litton alleges that the breach of contract occurred "on or prior to November 12, 1982" when Sokolow leaked Litton's acquisition plans to Levine while acting within the scope of his employment in Lehman Brothers' mergers and acquisitions department. See Third Amended Complaint, at ¶¶ 26, 27. Based upon this alleged breach of contract, Litton seeks to recover as damages the fee paid to Lehman Brothers for its services. The motion and cross-motion for summary judgment present three distinct issues: (1) whether a contract existed at the time of the alleged breach on November 12, 1982; (2) if so, whether the contract imposed an obligation upon Lehman Brothers to maintain the confidentiality of Litton's plans to acquire Itek; and (3) assuming breach of an existing contract, whether Litton is entitled to the return of its fee as a restitutionary measure of damages.

The essential elements of an action for breach of contract under New York law are (1) formation of a contract between the parties, (2) plaintiff's performance, (3) defendant's failure to perform, and (4) resulting damages to plaintiff. See Posner v. Minnesota Mining & Mfg. Co., 713 F. Supp. 562, 563 (E.D.N.Y. 1989); Stratton Group, Ltd. v. Sprayregen, 458 F. Supp. 1216, 1217 (S.D.N.Y. 1978). It is axiomatic that to prevail on a claim for breach of contract, a plaintiff must establish the existence of an enforceable contract at the time of the alleged breach.

Notwithstanding the fact that Litton executed the November 12 engagement letter on November 23, Litton argues that a valid, enforceable contract existed by November 12 because the parties reached an oral understanding as to the terms of the agreement. In this regard, Litton contends that by November 12 the parties had completed their negotiations over the essential elements of the contract and that performance had begun on the good faith understanding that unsettled matters would be resolved when the agreement is reduced to writing. Lehman Brothers, however, contends that a binding contract did not arise until Litton signed the November 12 engagement letter on November 23.

The executed written contract provides that the agreement shall be construed in accordance with New York law. Under New York law, if the parties do not intend to be bound by an agreement until it is reduced to writing and signed, there is no binding contract until the formal document is executed. See Scheck v. Francis, 26 N.Y.2d 466, 469-70, 311 N YS.2d 841, 843, 260 N.E.2d 493, 494 (1970); East 56th Plaza, Inc. v. New York City Conciliation & Appeals Bd., 80 A.D.2d 389, 392-93, 439 N.Y.S.2d 361, 364 (1st Dep't 1981). On the other hand, where the parties have agreed on the substantial terms of a contract but have not yet reduced their agreement to writing, the contract is binding when the oral agreement is made even though the parties contemplate memorializing their agreement in a formal document. See Municipal Consultants & Publishers, Inc. v. Town of Ramapo, 47 N.Y.2d 144, 148-49, 417 N.Y.S.2d 218, 219-20, 390 N.E.2d 1143, 1144-45 (1979). Ultimately, the intent of the parties determines when enforceable legal rights arise from contract negotiations.

The Second Circuit has delineated four principal factors to determine whether the conduct of the parties manifests an intention to be bound in contract at some point prior to the execution of a written instrument: (1) whether a party reserved the right not to be bound absent a written agreement, (2) whether all terms of the contract have been agreed upon, (3) whether there has been partial performance of the alleged contract, and (4) whether the alleged agreement concerns complex business matters that ordinarily are reduced to writing. See Winston v. Mediafare Entertainment Corp., 777 F.2d 78, 80 (2d Cir. 1985); R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 75-76 (2d Cir. 1984). The Court must balance all of these factors, as no single factor is determinative. See R.G. Group, 751 F.2d at 75. In balancing these factors, "[w]hat matters are the parties' expressed intentions, the words and deeds which constitute objective signs in a given set of circumstances." Id. at 74.

1. Express Reservation

Where a party expressly reserves the right not to be bound by an agreement absent a signed writing, "[c]ourts are reluctant to discount such a clear signal, and it does not matter whether the signal is given during the course of bargaining, or at the time of the alleged agreement." Id. at 75. The Second Circuit has repeatedly recognized that mutual intent not to be bound prior to execution of a formal document is established when neither party takes exception during the course of bargaining to language in a draft agreement providing that the agreement will be binding when executed and delivered. See, e.g., Winston, 777 F.2d at 81; R.G. Group, 751 F.2d at 76; Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 262 (2d Cir.), cert. denied, 469 U.S. 828, 105 S.Ct. 110, 83 L.Ed.2d 54 (1984). Consistent with this principle, this district recently held that no binding contract exists prior to execution where the draft agreement provided that "[t]his letter, when countersigned by you, shall constitute our understanding until a more formal agreement is prepared." Elvin Assocs. v. Franklin, 735 F. Supp. 1177, 1182 (S.D.N.Y. 1990) (emphasis added); see also Chrysler Capital Corp. v. Southeast Hotel Properties Ltd. Partnership, 697 F. Supp. 794, 801 (S.D.N.Y. 1988), aff'd mem., 888 F.2d 1376 (2d Cir. 1989).

In the instant action, the November 12 engagement letter signed by Lehman Brothers contains unequivocal language referring to its validity upon execution. Specifically, the concluding paragraph provides as follows: "If the foregoing correctly sets forth the understanding and agreement between [Lehman Brothers] and [Litton], please so indicate in the space provided for that purpose below, whereupon this letter shall constitute a binding agreement." (Emphasis added.) It is beyond peradventure that both parties reserved the right not to be bound prior to execution of the letter. Moreover, Litton has submitted no evidence that any party objected to this mutual reservation of rights. Thus, the Court accords "considerable weight" to the express reservation in the November 12 engagement letter not to be bound absent execution by Litton. See R.G. Group, 751 F.2d at 75.

The opening sentence of the November 12 engagement letter states that the letter "will confirm the understanding and agreement" between Lehman Brothers and Litton. It is disingenuous for Litton to argue that this confirmatory language shows that the parties fully negotiated the terms of their engagement and that execution of the letter was purely ministerial. The record clearly establishes that the parties did not negotiate all terms of their engagement prior to receipt of the letter and that Litton itself did not believe there was a prior understanding between the parties. First, it is undisputed that Litton requested certain modifications to the November 12 engagement letter, including deletion of a provision requiring it to indemnify Lehman Brothers. Second, and most significantly, Litton's current position that all material terms of the contract had been agreed to by November 12 is belied by the unambiguous testimony of Joseph Casey, Litton's chief financial officer who negotiated the contract with Lehman Brothers. Casey testified that upon receipt of the November 12 engagement letter, in Litton's view there was no prior understanding as to the terms of the proposed agreement. See Deposition of Joseph T. Casey, at 293-94, 86 Civ. 6447 (JMC) (S.D.N.Y. Aug. 5, 1987) ["Casey Deposition"]. In addition, both Litton's chairman and its general counsel testified that Litton did not retain Lehman Brothers until sometime after the November 15 meeting between the parties. See Deposition of Fred W. O'Green, at 377, 86 Civ. 6447 (JMC) (S.D.N.Y. July 17, 1987); Deposition of Robert H. Lentz, at 164-65, 86 Civ. 6447 (JMC) (S.D.N.Y. Aug. 6, 1987). Based upon the uncontroverted testimony of various Litton officers, it cannot be said that "there was literally nothing left to negotiate or settle, so that all that remained to be done was to sign what had already been fully agreed to." R.G. Group, 751 F.2d at 76.

Litton's reliance on the deposition testimony of Steven Schwarzman, a Lehman Brothers managing director, fails to create a genuine issue as to whether the parties had agreed to the essential terms of the proposed engagement by November 12. Schwarzman simply testified that once Lehman Brothers has a business understanding as to the nature of the deal, it is not crucial to promptly mail the engagement letter. See Deposition of Steven A. Schwarzman, at 88, 86 Civ. 6447 (JMC) (S.D.N.Y. Apr. 19, 1990). Schwarzman's testimony, however, does not consider whether in fact these parties agreed to all of the essential terms and left nothing to negotiate.

3. Partial Performance of the Alleged Agreement

Partial performance of the alleged contract by one party coupled with acceptance by the party disclaiming the contract is compelling proof of mutual assent to the essential contract terms despite the absence of a formal written document. "[P]artial performance is an unmistakable signal that one party believes there is a contract; and the party who accepts performance signals, by that act, that it also understands a contract to be in effect." R.G. Group, 751 F.2d at 75-76. Mere preparatory acts, however, do not constitute partial performance. See id.; Shearson Lehman CMO, Inc. v. TCF Banking & Sav., 710 F. Supp. 67, 71 (S.D.N.Y. 1989).

Litton cursorily asserts that Lehman Brothers commenced performance of its engagement prior to the leak by Sokolow to Levine and the resultant Itek stock purchases by Levine on November 12. Litton, however, has failed to point to any facts in the record which would indicate partial performance prior to execution of the document on November 23. Litton correctly observes that in early November Casey told Schwarzman that Litton was in the process of acquiring a 4.9% interest in Itek through open market purchases and that Litton wanted to engage Lehman Brothers as its investment banker for the proposed acquisition. See Casey Deposition, at ...