Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

SCHONFELD v. HILLIARD

February 1, 1999

REESE SCHONFELD, INDIVIDUALLY AND DERIVATIVELY AS A SHAREHOLDER OF INTERNATIONAL NEWS NETWORK, INC., PLAINTIFF,
v.
RUSS HILLIARD, LES HILLIARD AND INTERNATIONAL NEWS NETWORK, INC., DEFENDANTS.



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

  OPINION AND ORDER

Plaintiff Reese Schonfeld, on behalf of himself and derivatively as a one-third shareholder of International News Network, Inc. ("INN"), sues Russ Hilliard and his brother, Les Hilliard, for various damages arising from the breach of an oral contract. Under the alleged contract, the Hilliards were obligated to finance a contemporaneously executed interim supply agreement between INN and the British Broadcasting Corporation World Service Television Limited ("BBC"). Plaintiff asserts, among other things, claims for breach of contract, breach of fiduciary duty and fraud.

The Hilliards now move for summary judgment pursuant to Fed.R.Civ.P. 56 dismissing all ten claims against them. In addition, the Hilliards submit two motions in limine to strike the proposed testimony of plaintiff's damages experts. Plaintiff cross-moves to strike all or part of the testimony of the four Hilliard experts. For the reasons stated below, the defendants' motions for summary judgment are granted in part and denied in part.

I.

Many of the facts relating to the formation of the alleged oral contract are in dispute. The following relevant facts are presented in the light most favorable to plaintiff.

Russ Hilliard and Les Hilliard are brothers who separately own and operate small cable television companies in the mid-West. In 1988, they founded INN, a Delaware corporation, for the purpose of distributing an international news and information channel in the United States. (Russ Hilliard Decl. ¶ 2) Later that year, the Hilliards retained the financial services company Daniels & Associates ("Daniels") to prepare a business plan and solicit investors for the project. (Dickinson Dep. at 29)*fn1

In 1990, the Hilliards hired plaintiff, a founder and former President and CEO of Cable News Network ("CNN"), as a consultant for INN. (Russ Hilliard Decl. ¶ 4) Later, in 1993, the Hilliards again approached plaintiff, who at that time was President of the Television Food Network, to discuss the possibility of bringing the BBC World News Channel, in a 24-hour format, to the United States. (Id. ¶ 5)

The Hilliards' negotiations with plaintiff culminated in a shareholder agreement, dated February 24, 1994, in which each signatory became a one-third shareholder in INN. (Russ Hilliard Decl. Ex. 1) Under that agreement, each shareholder was obligated to contribute $10,000 as equity in INN. (Id. ¶ 8(b)) In addition, Russ Hilliard and Les Hilliard each loaned INN $300,000 and agreed "to cause additional loans to be made to [INN] (in an amount not to exceed $350,000 in the aggregate) as may be necessary." (Id.) That agreement provided for a two-member Board of Directors. (Id. ¶ 3) Although no directors were officially designated, the record shows that Russ Hilliard and plaintiff effectively acted as directors. At this time, plaintiff also took on the roles of President and CEO of the new corporation. (Russ Hilliard Decl. ¶ 7)

With the reorganization of INN complete, the participants focused on acquiring BBC programming for a 24-hour news and information channel (the "Channel"). From the inception of the project, the parties understood that INN would be merely an investor in any entity ultimately established for the purpose of operating the Channel. INN's shareholders would be allowed to increase their equity in the proposed Channel by making additional cash investments in the operating entity rather than in INN, but no definitive decisions were made as to the percentage of profits INN, or any other equity investor, would receive.*fn2 (Russ Hilliard Decl. Ex. 1)

In late 1993 and early 1994, INN, through its attorney Richard Blumenthal, and plaintiff, the acting President, negotiated an agreement with the BBC, executed on March 14, 1994 (the "March Supply Agreement"). Subject to limitations, the BBC granted INN a 20-year permit to distribute BBC programming on the proposed Channel, commencing not earlier than June 1995 and not later than January 1996. (Russ Hilliard Decl. Ex. 2) The March Supply Agreement gave INN the exclusive right to distribute and license the Channel "as a whole." (Id. ¶¶ 7.1.2-3) Arguably, INN had exclusive rights only to the provision of programming in 24-hour blocks, permitting the BBC to license blocks of less than 24 hours to other U.S. channels. (Id. ¶¶ 7-8) Upon the written consent of the BBC, INN was allowed to assign the benefits of the March Supply Agreement to the proposed operating entity. (Id. ¶ 21.1) This consent was not to be withheld unreasonably. (Id.) With respect to any other assignments, however, the March Supply Agreement was personal to INN and, apparently, the BBC could grant or withhold consent for assignment as it saw fit.*fn3 (Id.) In addition, the BBC reserved the right to terminate all its obligations under the March Supply Agreement if INN failed to commence distribution of the Channel by March 1995. (Id. ¶ 18.1)

INN made several attempts to locate investors and secure carriage agreements from cable operators in an unsuccessful effort to meet the capital requirements prescribed by the March Supply Agreement. (Russ Hilliard Decl. ¶ 11) According to Blumenthal, the Hilliards promised that, in addition to their contributions under the shareholder agreement, "they would pay the initial cost of funding INN's efforts [in] seeking to implement the original [March] supply agreement." (Blumenthal Dep. at 54) Blumenthal testified that the Hilliards made an oral promise to pay ancillary costs — such as attorneys' and consulting fees. (Id.)

Soon after executing the March Supply Agreement, INN was approached by Cox Cable Communications ("Cox"), one of the largest cable operators in the United States (Dickinson Dep. at 39), with an offer effectively to buy out INN's supply rights. (Id. at 104-05) Cox wanted to launch two BBC channels, one with news and the other with entertainment programming. (Id. at 91) Cox was willing to pay INN a total of $1.7 million plus 20% of tenth-year gross revenues of both the proposed channels. (Id. at 91-92; Fader Decl. Vol. I, Ex. 4A) The deal eventually collapsed in August 1994, however, when INN denied a request by Cox for a 90-day extension to work out with the BBC certain non-financial terms of the arrangement. (Young Dep. at 52-54, 57, 143-44)

In October 1994, the FCC announced "going forward" rules, which allowed cable operators to charge subscribers an increased monthly rate for each new channel, up to six, added as of January 1, 1995. (Pl. Mem. in Opp'n at 25) This regulatory change provided a "window of opportunity" for the Channel to obtain distribution. (Young Dep. at 70-71) Eager to be in the market when the new rules took effect, INN and the BBC arranged a series of meetings to discuss the possibility of advancing the start date for launch of the Channel. (Russ Hilliard Decl. ¶¶ 14-16)

On November 17, 1994, and in the days following, Russ Hilliard, plaintiff and Blumenthal met in New York with Mark Young and Sarah Cooper — representatives of the BBC — to negotiate a deal whereby the BBC would provide programming on an interim basis within 60 to 90 days. In an "Interim Agreement," effective December 14, 1994, the BBC agreed to provide provisional programming as early as possible, and agreed to begin development of a revised programming format, specifically designed for the American audience, for launch no later than December 31, 1995, under a revised 20-year supply agreement (the "December Supply Agreement").*fn4 (Russ Hilliard Decl. Ex. 3, at 1) In consideration for the interim programming feed, the Interim Agreement provided that INN would pay the BBC the following amounts: (i) £ 3.35 million (the "Basic Payment") in a series of installments beginning January 3, 1995, and ending August 15, 1995; (ii) an additional fee of between £ 250,000 and £ 1.5 million in order to pay the BBC's costs in altering or substituting programming; and (iii) all costs associated with the transponder transmission of the "Interim Channel." (Id. at 2-5) The Interim Agreement provided also that the BBC could terminate the Interim Agreement if, by January 31, 1995, INN did not have letters from cable systems with an aggregate of at least 500,000 subscribers indicating an intent to carry the Interim Channel and the Channel. (Id. at 5)

According to plaintiff, Russ Hilliard made repeated representations to plaintiff, Blumenthal, Cooper and Young that he would fund the Interim Agreement. (Young Dep. at 73; Schonfeld Dep. at 77-78; Blumenthal Dep. at 82) Two witnesses aver also that at the November 1994 meetings, Russ Hilliard assured all participants that he and his brother, Les Hilliard, would personally fund the Interim Agreement if necessary. (Schonfeld Dep. at 71, 73; Blumenthal Dep. at 65) There is no evidence, however, of the exact wording of the promise to fund. Moreover, it is undisputed that there was no oral or written agreement regarding the form of funding — whether a loan or an equity investment, the total sum of the promised funding, or the liabilities and remedies of the parties in the event of a failure to fund. Even so, plaintiff and the BBC representatives present consistent testimony that when they signed both the Interim Agreement and the December Supply Agreement, they relied upon the Hilliards' promise to provide funding. (Young Dep. at 188-89, 211; Russ Hilliard Dep. 223-24, 299)

Les Hilliard was not at the relevant meetings in November 1994 and did not make an express oral promise to lend or invest any additional funds at that time. (Schonfeld Dep. at 66) Both Young and Blumenthal testify, however, that they believed that Russ Hilliard was acting on his brother's authority, as he had on several occasions during the INN-BBC negotiations. (Young Dep. at 84-85; Blumenthal Dep. at 72, 161-62) Moreover, Les Hilliard allegedly alluded to the funding promise in conversation directly to Blumenthal. (Blumenthal Dep. at 102) In addition, it is alleged that on at least one occasion Les Hilliard was present when Russ Hilliard confirmed to the relevant parties that the Hilliards would personally fund the Interim Agreement. (Schonfeld Dep. at 35) Les Hilliard allegedly did nothing to disabuse the parties of their belief that Russ Hilliard was authorized to speak on his behalf. (Pl. Mem. in Opp'n at 88)

As the deadline for the first payment drew near, Russ Hilliard spoke directly with Young and said that he would prefer to "extend the time scale by which [the first] payment will be made to the beginning of January." (Young Dep. at 74) Russ Hilliard explained that "because of the Christmas break and his and Les' holiday in Jamaica, they would be unable to get their funds from their bank account into the INN bank account in time to allow the interim agreement to be signed." (Id.) On December 15, 1994, Cooper telephoned Russ Hilliard to confirm that the first $1 million payment could be made on January 3, 1995, and the Interim Agreement was put in final form based on that understanding. (Fader Decl. Vol. II, Ex. 58; Young Dep. at 102-04)

As of the middle of January 1995, the Hilliards had made no payments, INN was in default of payments totaling $5 million and the Hilliards had failed to return plaintiff's and BBC's many telephone calls. (Young Dep. at 121-26; Cooper Dep. at 21-22) On February 8, 1995, Russ Hilliard, plaintiff, Young, Cooper and two other representatives of the BBC met in New York to determine whether the breaches of the Interim Agreement and the alleged oral agreement would be rectified. At the meeting, Russ Hilliard did not deny that he and his brother had promised to fund the Interim Agreement (Cooper Dep. at 44, 62), although he did offer a reason for why the funds were not provided, having to do with the difficulty INN would have obtaining cable operator support. Ultimately, the BBC agreed to release INN without any payment and in exchange, INN dissolved the Interim and December Supply Agreements. (Young Dep. at 99-100, 139-40; Russ Hilliard Decl. Ex. 5)

Plaintiff alleges the Hilliards never intended to fund the Interim Agreement and that they made malicious and willful misrepresentations to conceal that fact. (Am. Compl. ¶¶ 70-71) He further alleges that but for the Hilliards' false inducement he would not have abandoned the existing March Supply Agreement to enter into the Interim and December Supply Agreements. (Id. ¶ 75)

In April 1995, plaintiff commenced this diversity action pursuant to 28 U.S.C. § 1332(a)(1), alleging derivative claims for fraud, breach of contract, promissory estoppel, breach of the fiduciary duties of loyalty and care, and mismanagement and waste of corporate assets. In addition, he alleges direct claims for breach of contract, promissory estoppel and breach of the fiduciary duties of loyalty and care. (Am. Compl. ¶¶ 69-126)

II.

Before turning to the merits of the Hilliards' summary judgment motion, I address two threshold issues regarding this court's jurisdiction and the law that governs the litigation.

First, I consider whether this court has jurisdiction over the subject matter of plaintiff's claims. See Fed.R.Civ.P. 12(h)(3); (Russ Hilliard Reply Mem. at 39-41). The court's subject matter jurisdiction is predicated upon diversity of citizenship pursuant to 28 U.S.C. § 1332(a), which requires that the amount in controversy exceed $75,000. It is undisputed that there exists complete diversity of citizenship. The Hilliards, however, contend that the amount in controversy, at least under Claims 7 to 10, is less than the jurisdictional minimum and that those claims, therefore, must be dismissed.

The Supreme Court established in St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 288-89, 58 S.Ct. 586, 82 L.Ed. 845 (1938), that:

  The rule governing dismissal for want of jurisdiction
  in cases brought in the federal court is that, unless
  the law gives a different rule, the sum claimed by
  the plaintiff controls if the claim is apparently
  made in good faith. It must appear to a legal
  certainty that the claim is really for less than the
  jurisdictional amount to justify dismissal.

In shaping the "legal certainty" principle set forth in St. Paul, the Second Circuit has noted that

  legal impossibility of recovery must be so certain as
  virtually to negat[e] the plaintiff's good faith in
  asserting the claim. If the right to recovery is
  uncertain, the doubt should be resolved . . . in
  favor of the subjective good faith of the plaintiff.

Tongkook America, Inc. v. Shipton Sportswear Co., 14 F.3d 781, 784 (2d Cir. 1994) (citations omitted). The party invoking the jurisdiction of the court has the burden of proof on this issue. See Chase Manhattan Bank v. American Nat'l Bank, 93 F.3d 1064, 1070 (2d Cir. 1996).

The court's inquiry into jurisdiction is not limited to the face of the complaint, see McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 181, 56 S.Ct. 780, 80 L.Ed. 1135 (1936), but resort to discovery materials may be used only "to amplify the meaning of the complaint allegations." Zacharia v. Harbor Island Spa, Inc., 684 F.2d 199, 202 (2d Cir. 1982) (citation omitted). Moreover, any defense asserted on the merits may not be considered or adjudicated on a jurisdictional motion. See id. A valid defense, in other words, does not deprive a federal court of jurisdiction. See Smithers v. Smith, 204 U.S. 632, 642, 27 S.Ct. 297, 51 L.Ed. 656 (1907); Tongkook America, 14 F.3d at 784.

Although not cited by the Hilliards, there is case law that permits a court when faced with a rule that bars or limits liability, to go beyond the pleadings for the limited purpose of applying that rule to determine the court's jurisdiction. See, e.g., Pratt Central Park Ltd. v. Dames & Moore, Inc., 60 F.3d 350 (7th Cir. 1995); Valhal Corp. v. Sullivan Assoc. Inc., 44 F.3d 195 (3d Cir. 1995); Pachinger v. MGM Grand Hotel-Las Vegas, Inc., 802 F.2d 362 (9th Cir. 1986). The Second Circuit, however, has not adopted this approach.

The controlling law for this court was established in Zacharia. In that case, the lower court had dismissed a guest's claim for the value of items deposited in a hotel safe deposit box. See Zacharia, 684 F.2d at 201-02. The district court had first determined that a limitation-of-liability policy, signed by the guest, capped recovery below the amount-in-controversy requirement. Then, after finding that the policy was valid under state law, the court dismissed the complaint for lack of subject matter jurisdiction. See id. at 202. The Second Circuit reversed, finding that the district court had improperly gone beyond the allegations in the complaint. The Court held that the liability limitation was an affirmative defense, the completeness of which did not deprive the court of jurisdiction, and reiterated that jurisdiction is based on the complaint alone, without considering defenses. See id.; see also Ochoa v. Interbrew America, Inc., 999 F.2d 626 (2d Cir. 1993) (noting that, in the absence of a claim of bad faith, the determination of amount in controversy is limited to a plaintiff's complaint).

The Hilliards base their jurisdictional challenge, in part, on their belief that plaintiff cannot recover for lost profits under New York law. (See Russ Hilliard Reply Mem. at 39-41) For the reasons discussed below, I agree that the claim for lost profits must be dismissed. That decision, however, is based on a factual inquiry that goes beyond the complaint, which, as noted, is not permitted on a jurisdictional motion. See Zacharia, 684 F.2d at 202. Because it is undisputed that a claim for lost profits is not barred in New York, it is not legally impossible that plaintiff might recover the amounts he claims. Accordingly, I cannot at the present time dismiss this case for lack of subject matter jurisdiction.

The second threshold issue is whether New York or Delaware law governs (i) the issues related to the formation, enforcement and breach of the alleged oral contract to fund, and (ii) the ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.