The opinion of the court was delivered by: GRIESA
Merrill Lynch Interfunding, Inc. ("MLIF") has sued Patrick and Jean Argenti to collect several million dollars worth of notes signed by the Argentis. These notes were partial guarantees for money that MLIF had advanced to Argenti, Inc., a company that MLIF and the Argentis jointly owned. The Argentis have counterclaimed to the effect that MLIF breached an agreement to provide additional financing to Argenti, Inc. and breached its fiduciary duty.
In this opinion Patrick Argenti will be referred to "Argenti," and Argenti, Inc. as "the Company."
After a six-week trial to a jury, the issues as to liability were presented to the jury first. The first interrogatory asked:
Do you find that Merrill Lynch Interfunding, Inc. made a contract with Argenti, Inc. and Mr. and Mrs. Argenti and breached that contract?
The jury answered in the affirmative. The second interrogatory asked:
Do you find that Merrill Lynch Interfunding, Inc. committed a breach of fiduciary duty?
The jury answered in the affirmative.
After these answers were received the damage issues were submitted to the jury. The Argentis had three theories of damages. The first was that MLIF's wrongdoing had caused the collapse of the Company, which had in turn resulted in the Company not being able to pay its notes, thus making the Argentis liable on their guarantees. The second theory of damages was that Argenti had suffered a loss of compensation from the Company. The third theory was that Argenti suffered a loss of profits and value in respect to his interest in the Company.
The first damage interrogatory submitted to the jury was:
Do you find that, as a result of Merrill Lynch not performing the contract, Mr. and Mrs. Argenti were damaged by being required to pay the notes relating to the Merrill Lynch advances to Argenti, Inc.?
Three possible answers were set forth.
If so, by what percentage?
The jury answered Yes, in part, and by a percentage of 75%.
The jury also found, in response to the second interrogatory, that Argenti had lost compensation in the amount of $ 737,500. In response to the third interrogatory, the jury found that Argenti had not suffered damages in the form of lost profits or value relating to the Company.
In connection with the entry of judgment on the basis of the verdict, there was considerable argument. The theory of the Argentis was that the court should assume no breach of the terms of the Company's or the Argentis' notes, and then calculate the amount of principal and interest which would have been due from the Company on its notes. This amount (approximately $ 6 million) would then, under the jury verdict, be discounted by 75%. The Argentis would be liable on their guarantee for the appropriate portion of the remaining 25% of the Company's obligation. From this amount would be deducted the sum of $ 737,500, representing damages suffered by Argenti in the form of lost compensation.
The court basically agreed with the method of calculation proposed by the Argentis. This resulted in the entry of a judgment in favor of MLIF and against the Argentis in the amount of $ 735,179.
MLIF has filed a post-trial motion requesting various forms of relief.
1. MLIF moves for judgment as a matter of law setting aside the jury's finding of breach of contract. MLIF asserts that this verdict is contrary to law by virtue of the Statute of Frauds and certain no-oral-modification clauses in prior instruments. MLIF also argues that the verdict of the jury on the contract issue was not supported by the evidence.
2. MLIF argues that it is entitled to judgment as a matter of law setting aside the jury's verdicts as to breach of fiduciary duty. MLIF argues that there is no legal basis for liability on this theory, and that the verdict was not supported by the evidence.
3. In the alternative, MLIF requests a new trial on both the contract and fiduciary duty issues, arguing that there were errors in the court's instructions.
4. As to the damage verdicts, MLIF argues that it is entitled to judgment as a matter of law setting aside the lost compensation award because the jury overlooked an undeniable element of mitigation.
5. In the alternative, MLIF requests a new trial on the damages issues, arguing that the first interrogatory about damages relating to the notes was improperly phrased.
6. MLIF requests that the judgment be amended. MLIF basically reiterates the arguments made prior to the entry of the judgment.
The court grants MLIF's motion for judgment as a matter of law setting aside the jury verdicts as to breach of fiduciary duty. MLIF's motion is in all other respects denied.
Argenti is in the clothing business. Jean Argenti is his wife. Argenti founded the Company to produce and sell women's dresses made of Chinese silk, and was able to offer them at relatively low prices. The Company was initially quite successful, and attracted the attention of MLIF.
MLIF is a subsidiary of Merrill Lynch, and makes investments in businesses hoping for a profit from their appreciation in value.
On November 10, 1988 MLIF entered into a leveraged buy-out agreement with the Company. The mechanics took the form of MLIF lending the Company $ 11.5 million and agreeing to a $ 3.5 million line of credit. The Company made a $ 10 million distribution to Argenti. The Company retained $ 1.5 million of the loan and had the benefit of the line of credit. Under a Stockholders Agreement dated November 10, 1988 MLIF effectively obtained a 40% interest in the Company. It received one share of stock in the Company at the time, but had a right to purchase the remainder of a 40% share of the Company's stock for a nominal amount, which it exercised later. MLIF had the right to appoint two of the Company's five directors.
At the time of the transaction, the Company had a factoring arrangement with the CIT Group. Financing of receivables with a factor was vital to the Company's business.
Sometime after the leveraged buy-out the Company began to experience a downturn, which Argenti contends was caused by a recession in the United States and by supply problems in China.
On November 22, 1989 MLIF advanced the Company $ 800,000 and Argenti advanced the Company $ 1.2 million.
On July 13, 1990 there was a restructuring. Outstanding principal and interest due on the November 1988 lending were converted to a Junior Term Note in the amount of $ 16,541,118. Interest was to be paid commencing December 31, 1995 and principal was due September 30, 2000. The new note was subject to the November 1988 Loan and Security Agreement, referred to thereafter as the "Junior Merrill Agreement."
At the same time, MLIF advanced an additional $ 5 million to the Company. Also, MLIF purchased the $ 1.2 million November 1989 advance from Argenti. A new note was issued by the Company dated as of July 13, 1990 to cover the 1989 advances and the $ 5 million current advance. The amount of the new note was $ 7,146,222. This is referred to as the "Senior Merrill Loan." It was covered by a Loan and Security Agreement dated July 13, 1990, referred to as the "Senior Merrill Agreement." Interest was to be paid beginning September 30, 1990 and principal was to be paid in installments from March 31, 1991 through December 31, 1995.
In a somewhat complicated form, the details of which need not be described here, the Argentis in effect guaranteed 53.01% of the Senior Merrill Loan. The amount of the guarantee was $ 3.7 million and the Argentis gave MLIF a promissory note in that amount dated as of July 13, 1990. The details of the arrangement were set forth in a document called the "Participation Agreement," dated July 13, 1990. The schedule of principal and interest payments coincided with the schedule in the note given by the Company. The Argentis executed a Security Agreement dated July 13, 1990 relating to the $ 3.7 million note, pledging a number of works of art. In addition, the Argentis executed a Mortgage Deed dated July 13, 1990 covering real estate in Greenwich, Connecticut.
In November 1990 MLIF advanced an additional $ 1.5 million to the Company. The Company gave a Special Advance Note dated as of November 29, 1990, providing that principal would be paid on March 31, 1992 and that interest payments would start March 31, 1991. The Argentis guaranteed half of that advance by executing an Additional Promissory Note in the amount of $ 750,000 dated as of November 29, 1990, with the same schedule of principal and interest payments as in the Company note.
In March 1991 MLIF advanced another $ 1.5 million to the Company. The Company gave a Second Special Advance Note dated as of March 11, 1991 with principal due on June 30, 1992 and interest payments starting June 30, 1991. Under the usual procedure the Argentis gave a Second Additional Promissory Note in the amount of $ 750,000 dated as of March 11, 1991 with the same schedule of principal and interest payments as in the Company note.
Another advance in the amount of $ 3 million was made by MLIF to the Company in May 1991. The Company gave a Third Special Advance Note dated as of May 10, 1991, with principal to be paid June 30, 1992 and interest payments to start September 30, 1991. The Argentis gave a Third Additional Promissory Note in the amount of $ 1.5 million dated as of May 10, 1991 with the same schedule of principal and interest payments as in the Company note.
MLIF advanced the Company another $ 500,000 in September 1991. This was reflected in a Fourth Special Advance Note dated as of September 18, 1991 providing for principal to be paid December 31, 1993 and interest payments to start on September 30, 1991. The Argentis gave a Fourth Additional Promissory Note in the amount of $ 250,000 dated as of September 18, 1991 with the same schedule of principal and interest payments as in the Company note.
Amended Special Advance Note
Amended Second Special Advance Note
Amended Third Special Advance Note
The amended notes of the Argentis were:
Amended Additional Promissory Note
Amended Second Additional ...