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LITTON INDUS. v. LEHMAN BROS. KUHN LOEB
June 4, 1991
LITTON INDUSTRIES, INC., PLAINTIFF,
LEHMAN BROTHERS KUHN LOEB INCORPORATED, DENNIS LEVINE, IRA B. SOKOLOW, ROBERT M. WILKIS, BANK LEU INTERNATIONAL, LTD., BANK LEU A.G., BERNHARD MEIER, JOHN R. LADEMANN, BRUNO PLETSCHER, JEAN-PIERRE FRAYSSE, AND CHRISTIAN SCHLATTER, DEFENDANTS.
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).
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
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
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
Dismissal of Litton's Claims for Tender Offer/Merger
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
Dismissal of Litton's Claims for Open Market Purchase
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 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
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.
I. Cross-Motions for Summary Judgment
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
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.
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.
2. Context of the Negotiations and Terms Left to be
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,
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 ...