United States District Court, Southern District of New York
December 29, 1999
SCHOLASTIC INC. AND SCHOLASTIC PRODUCTIONS, INC., PLAINTIFFS,
ROBERT HARRIS AND HARRIS ENTERTAINMENT, INC., DEFENDANTS.
The opinion of the court was delivered by: Hellerstein, District Judge.
AMENDED OPINION AND ORDER
This case involves a joint venture formed by a publisher of
children's books and its subsidiary, plaintiffs Scholastic Inc.
("Scholastic") and Scholastic Productions Inc. ("SPI")
(collectively, the "Plaintiffs"), respectively, and a former
movie studio executive, Defendant Robert Harris, and his
production company, Defendant Harris Entertainment, Inc. ("HEI"),
to create a motion picture production company to produce
full-length feature films. Scholastic and SPI were to provide the
capital, and Harris and HEI, their knowledge and skill, in
acquiring, developing and producing motion pictures and other
forms of entertainment. Pursuant to an agreement (the
"Agreement") signed by SPI, Harris and HEI on October 12, 1990,
Harris claims that he is entitled to 100,000 stock appreciation
rights (the "SARs") in Scholastic, to be issued at designated
intervals at $18 per share.
Plaintiffs, suing for a declaratory judgment, allege that they
owe no SARs because the Agreement was not complete and
unambiguous, because the SARs were not earned and did not vest
and because Plaintiffs terminated the partnership (and,
therefore, their obligations) before such vesting. After
extensive discovery, both sides moved for summary judgment.
Plaintiffs moved for partial summary judgment on their First
Claim for Relief, seeking a declaratory judgment that Harris is
not entitled to the SARs. Defendants Harris and HEI moved for
summary judgment dismissing Plaintiffs' complaint, and for
judgment in their favor on their First Counterclaim, arguing that
Scholastic and SPI breached the agreement by refusing to grant
Harris the SARs.
I hold that the Agreement is complete and unambiguous, and that
Harris did not breach the terms and conditions of that contract,
and, consequently, that Harris is entitled to the SARs.
Accordingly, I deny Plaintiffs' motion for partial summary
judgment, and I grant Defendants' motion for summary judgment
dismissing the complaint and granting judgment on Defendants'
STATEMENT OF FACTS
A. The Parties
Defendant Robert Harris is a citizen of the State of
Connecticut and the President and CEO of HEI, a California
corporation. (Defendants' Am. Statement of Undisputed Facts
Pursuant to Rule 56.1 ("Harris 56.1"), at ¶¶ 1,2). Prior to his
involvement with the Defendants, Harris was the President of
Universal Television at MCA, Inc./Universal and the President of
Imagine Films, and had more than 25 years experience in the
entertainment industry. (Harris Aff. at ¶ 5). Harris & Company
("Harris & Co.") is a partnership whose offices are located in
Los Angeles, California. SPI and HEI are the two 50% owners of
Harris & Co.
Scholastic, Inc. ("Scholastic") is a corporation organized
under the laws of the State of New York whose stock is publicly
traded on NASDAQ. Scholastic, Inc. ("SPI"), also a New York
corporation, is a wholly-owned subsidiary of Scholastic. The
Court has diversity jurisdiction over the parties.
28 U.S.C. § 1332.
B. The October 12, 1990 Agreement
In early 1990, SPI and Scholastic commenced negotiations with
Harris and HEI to develop a motion picture production company.
(Plaintiffs Scholastic and SPI's Statement of Undisputed Facts
("Scholastic 56.1"), at ¶ 1). In addition to having a stake in
the produced films, Scholastic hoped to reap synergies from the
motion picture production company, like books, licenses, and
other ancillary products created from successful motion pictures.
(Scholastic 56.1, at ¶ 2). During 1990, Harris & Co. provided
Scholastic and SPI with a seven-year business plan, outlining the
proposed lines of business for the venture, as well as
anticipated revenues and expenditures. (Harris Aff., at Ex.6).
On October 12, 1990, SPI, agreed with HEI and Harris to a
written joint venture agreement (the "Agreement") for the
development and production of theatrical motion pictures and
television programs. (Harris 56.1, at ¶ 6). SPI agreed to provide
an initial $2,000,000 on a non-recourse basis for HEI's
"development costs as requested by HEI," and approximately
$116,000 per month for a 12 or 24 month period, according to the
options set out in the Agreement, from the initial development
funding date (the "IDFD") (the date the $2,000,000 was
(a) 24 months following the IDFD or (b) 12 months
from the date SPI makes available the Development
Loans to HEI pursuant to this paragraph as production
costs and overhead to permit HEI to develop
properties and provide services for such joint
(Agreement, at § 1(b)). The Agreement thus provided that SPI was
to contribute $2,000,000 initially, at HEI's request for HEI's
"development costs," and later, at SPI's option, another
$4,000,000 for "Development Loans" to HEI. In addition,
SPI undertook to pay HEI's overhead costs, that is, salaries to
and expenses of, officers and employees of HEI, including
salaries to and expenses of Plaintiff Harris, at the rate of
$116,000 per month for defined periods of time, for either a
one-year or two-year period, depending on the amount and extent
of developmental funding that SPI agreed to provide.
Under the terms of the Agreement, SPI and HEI agreed to
"jointly and equally own all motion picture and television
properties developed with the first $2,000,000 of SPI's
development funds." SPI was also given an option to acquire a 50%
equity stake in HEI ("SPI's Equity Election"). (Id.). SPI also
had the right to terminate funding on a certain date and retain
its Equity Election, but for only a 25% equity state in HEI.
(Id.). Thus, the Agreement provided:
At any time up to the end of fifteen months following
the IDFD, SPI shall have the right, at its sole
discretion, to give written notice to HEI terminating
SPI's continuing development funding obligations
beyond the initial $2,000,000 set forth above ("SPI's
Termination Right"). If SPI gives such notice, SI
(sic) shall thereafter have the right at any time to
exercise SPI's Equity Election and in such event SPI
shall only be entitled to acquire 25% of the equity
(Id.). If SPI chose not to exercise its Termination Right
before the date, 15 months after the IDFD, SPI was obligated to
provide, as stated above, an additional $4,000,000.00 in funding,
as "Development Loans." (Id.)*fn2.
According to the Agreement, HEI was to be run by Harris as the
CEO and chairman of the board, with an executive from Scholastic
to serve as the vice-chairman of its board of directors.
(Agreement, at § 2). Harris was given "complete authority and
control over all creative and business decisions of HEI," except
that certain major transactions, as defined by the Agreement,
would require the approval of SPI. (Id.). Harris was to enter
into an employment agreement with HEI providing for Harris'
exclusive services (except on projects he was working on with
Imagine Studios) for a period of three years from the IDFD,
provided that if SPI exercised its Termination Right, as
described above, Harris had the right to terminate his exclusive
employment arrangement with HEI. (Id.). In that event, Harris
could continue his employment on a basis non-exclusive to HEI
without any reduction in his salary. (Id.)
With respect to the projected corporate activities of HEI, the
Agreement provided that the joint venture would be primarily
focused on the "development, packaging, production and
distribution of theatrical feature films, (`A' titles), while
also involved "on a material level" in television development and
production." (Agreement, at § 3). In aspirational language, the
Agreement provided that:
HEI expects to develop at least five to ten new
feature film projects each year and to have at least
one film go into production during year two followed
by one to two films in production in year three.
Thereafter, it is HEI's goal to be in a position to
have two or three motion pictures commence production
(Id.). Harris agreed that a minimum of "approximately 50% of
HEI's theatrical motion picture development will involve seeking
and developing projects (`Scholastic-franchise' projects) which
complement or are suitable for exploitation by Scholastic's
publishing and other entertainment-related activities." (Id.).
The Agreement provided also that for "approximately 20% of
[Harris'] work time, he will be available to Scholastic and SPI
for consultation and
meetings in accordance with a schedule mutually approved by HEI
and SPI. . . . (Id.). Nothing in the Agreement, however,
provided for an objective measurement of the quality of Harris'
services or a definite quantification of his output.
The parties agreed that Harris' compensation would be $500,000
in annual salary, plus a percentage of the production and
overhead fees, bonuses on licensing and royalties, and other
ancillary rights, (Agreement, at § 4) and, the issue of this
lawsuit, 100,000 SARs.
100,000 stock appreciation rights to be issued at $18
per share and which shall vest one-third at the
conclusion of the fourth year of HEI's operations,
one-third at the conclusion of the fifth year of
HEI's operations and one-third at the conclusion of
the sixth year of HEI's operations.*fn3
Scholastic and SPI were granted the "first opportunity" to
license any "print publishing, merchandising and direct mail home
video distribution rights to HEI projects," "on equitable terms,"
and without being subjected to "a competitive bidding situation
for such rights." (Agreement, at § 5).
The Agreement contained a merger and integration clause,
providing that it was the "entire agreement" between the parties
(Agreement, at § 8j). The clause made reference to the parties'
intention to "enter into a long form agreement setting forth the
terms hereof and other terms and conditions customary in the
motion picture negotiations," but provided that until such long
form agreement was negotiated and executed, "this agreement" —
the one that the parties signed — "shall remain a complete and
mutually binding agreement." (Id.).
8. Miscellaneous. This agreement constitutes the
entire agreement between HEI and SPI. It is further
intended by the parties that they shall enter into a
long form agreement setting forth the terms hereof
and other terms and conditions customary in the
motion picture industry (which shall be subject to
good faith negotiations), but until such long form
agreement is executed, this agreement shall remain a
complete and mutually binding agreement . . .
(Agreement, at § 8). The Agreement was executed by HEI, SPI and
C. After the Execution of the Agreement
Despite their expressed intention to negotiate a "long form
agreement," and the exchange of written drafts for such an
agreement, the parties never came to another meeting of minds.
(Scholastic 56.1, at ¶ 13). Instead, they agreed to twenty-one
written amendments to the Agreement, confirming and implementing
the October 12, 1990 agreement.*fn4 The amendment executed on
August 28, 1991, for example, explicitly confirmed the joint
venture between SPI and HEI, and provided that they would do
business as a partnership, Harris & Co. (Scholastic 56.1, at ¶
26). Other amendments changed the date upon which SPI had to
exercise its Termination Right (the First Amendment) and modified
various funding dates and modified the amounts of funding.
(Harris Aff. at Ex. 4). Another Amendment gave Harris discretion
to utilize the funds contributed to the Joint Venture by
Scholastic. Significantly, the Amendments referred specifically
to the "[A]greement" between the parties, i.e., the agreement
executed on October 12, 1990. (See, Harris Aff. at Ex. 4).
Thus, Scholastic's contentions
in this lawsuit are contradicted by its contemporaneous contract
negotiations with Harris during the two-and-a-half-year period of
their relationship, from October 1990 through May 1993.
With respect to the funding of the Joint Venture, on December
1, 1990, SPI contributed the $2,000,000.00 initial development
funding as required by section 1(b) of the Agreement, and that
became the Initial Development Funding Date ("IDFD"). (Harris
56.1, at ¶ 9). The funds were used to commission approximately 17
scripts (Harris 56.1, at ¶ 13), implementing the agreement of the
The parties heatedly dispute the successes and failures of the
Joint Venture, and have expressed themselves in voluminous and
vituperative submissions. Harris points to numerous projects and
scripts and the development of films for the Joint Venture, such
as "Indian in the Cupboard," "The Babysitter's Club," a number of
pay cable films, and executions of Joint Ventures with Tri-Star
Pictures, Fox Studios and other movie studios. Plaintiffs dispute
Harris' claim to successes and accomplishments. The dispute, it
seems to me, is not relevant. The contract required devotion of
time and reasonable effort. It did not make commercial success of
the efforts a condition of payment to Harris.
D. Scholastic and SPI Terminate the Funding of Harris & Co.
Disappointed with the results of the Joint Venture, in May
1993, SPI exercised the right provided by the contract to cease
further funding of the Joint Venture, and to have its interest in
Harris & Co. reduced to 25%. Under the contract, Harris was
excused from having to provide his services exclusively to the
Joint Venture. (Scholastic 56.1 at ¶ 17). By that point,
Scholastic had provided approximately $6.7 million to the Joint
Venture. (Harris 56.1 at ¶ 28). Thus, Scholastic terminated
further funding, stopped acquiring projects that Harris offered
to Scholastic and SPI, and advised Harris that it would not renew
the lease for the Joint Venture's offices. (Scholastic 56.1, at
¶¶ 23-25). Harris vacated the offices, and sold some of the
furniture back to the Plaintiffs. Pursuant to the Agreement,
Harris continued to work for the Joint Venture, but did not have
to do so exclusively. (See, Harris Aff., Ex. 4, at Twenty First
In late 1993, Harris reminded Scholastic that one-third of the
SARs promised to him by the Agreement would become due at the
conclusion of the fourth year of HEI's operations, in December
1994. Scholastic and SPI, by their attorney's letter of November
11, 1993, rejected the demand:
I do not intend to engage in a lengthy refutation of
your arguments that [Harris] is entitled to any stock
appreciation rights ("SAR"). . . . As I have stated
to you on several prior occasions, it is Scholastic's
position that it has no obligation to Robert
concerning the SARs.
(Scholastic 56.1, at ¶ 22). On January 11, 1995, Scholastic and
SPI, anticipating a suit by Harris to enforce his entitlement to
SARs under the October 12, 1990 agreement, filed this declaratory
judgment lawsuit seeking to declare that entitlement invalid.
E. The Claims of the Parties
Plaintiffs' Scholastic's and SPI's Amended Complaint (the
"First Amended Complaint"), consolidating two separate actions,
alleges nine claims for relief:
1. A declaratory judgment that Harris is not entitled to the
Stock Appreciation Rights ("SARs") (First Am.Compl., at ¶¶
2. A declaratory judgment that Harris and HEI breached the
terms of the Agreement because they "fail[ed] to accomplish, and
fail[ed] to make a good-faith effort to accomplish" certain
objectives.*fn5 (Id., at ¶¶ 49-53);
3-5. A declaratory judgment that Harris and HEI fraudulently
induced the Plaintiffs to enter into the Agreement; that Harris
and HEI conspired to fraudulently induce the Plaintiffs to enter
into the Agreement; and that Harris and HEI negligently
misrepresented to Plaintiffs certain material facts in order to
induce the Plaintiffs to enter into the Agreement. (Id. at ¶¶
54-61, ¶¶ 62-68, ¶¶ 69-76);
6. A declaratory judgment that Harris and HEI breached their
fiduciary duties to Scholastic and SPI. (Id. at ¶¶ 77-80);
7. An accounting because Harris and HEI unjustly enriched
themselves by misusing for personal benefit the funds provided by
Scholastic under the terms of the Agreement. (Id. at ¶¶ 81-83);
8. Damages because they converted such funds (Id. at ¶¶
9. An accounting of all funds improperly retained by
Defendants Harris and HEI denied liability and filed two
counterclaims alleging that Plaintiffs breached the Agreement by
not granting to Harris the SARs when due according to the terms
of the Agreement, and that Plaintiffs reneged upon an agreement
to pay Harris a finder's fee for the purchase of a film library
which Harris claims he steered to be Plaintiffs.*fn7
Scholastic's and SPI's motion for partial summary judgment
seeks a declaratory judgment that Harris is not entitled to the
SARs pursuant to the Agreement. Harris' and HEI's motion for
partial summary judgment seeks the dismissal of each of
Plaintiffs' Nine Claims for Relief, and for judgment on its first
counterclaim. Oral argument was held on the motions on July 27,
1999 and continued on September 1, 1999. I now deny Plaintiffs'
motion for summary judgment and grant Defendant's motion for
A. The Law Concerning Summary Judgment
The standard for granting summary judgment is well established.
The moving party bears the initial burden of "informing the
district court of the basis for its motion" and identifying the
matter that "it believes demonstrate[s] the absence of a genuine
issue of material fact." Celotex Corp. v. Catrett,
477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ("Celotex").
Summary judgment may be granted if the pleadings and written
together with the affidavits, show that the moving party is
entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c)
(1999); Celotex, 477 U.S. at 323, 106 S.Ct. 2548; Gallo v.
Prudential Residential Servs. Ltd. Partnership, 22 F.3d 1219,
1223 (2d Cir. 1994) ("Gallo"). The trial court's task at the
summary judgment motion stage is to discern if there are genuine
issues of material fact to be tried, not to deciding them; its
duty is "issue-finding," it does not extend to
"issue-resolution." Gallo, 22 F.3d at 1224.
In determining whether summary judgment is appropriate, a court
must resolve all ambiguities and draw all reasonable inferences
against the moving party. Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538
(1986) ("Matsushita"). If the moving party meets its burden,
the burden shifts to the nonmoving party to come forward with
"specific facts showing that there is a genuine issue for trial."
Fed. R.Civ.P. 56(e) (1999). The nonmoving party must raise more
than just a "metaphysical doubt" as to the material facts.
Matsushita, 475 U.S. at 586, 106 S.Ct. 1348. "If the evidence
is merely colorable or is not significantly probative, summary
judgment may be granted." Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 250-51, 106 S.Ct. 2505, 91 L.Ed.2d 202. If there is an
absence of sufficient proof as to any essential element on which
the opponent of summary judgment has the burden of proof, any
factual dispute with respect to other elements becomes immaterial
and cannot defeat the motion. Gottlieb v. Co. of Orange,
84 F.3d 511, 519 (2d Cir. 1996) ("Gottlieb"). Speculative and
conclusory allegations by the non-movant are insufficient to
prevent a summary judgment motion from being granted. Allen v.
Coughlin, 64 F.3d 77, 80 (2d Cir. 1995) ("Allen").
B. Scholastic and SPI's First and Second Claims for Relief,
and Harris and HEI's First Counterclaim for Relief: Entitlement
to the SARs
Plaintiffs argue that Harris is not entitled to enforce the
SARs because: (a) the Agreement executed by the parties on
October 12, 1990 was not sufficiently detailed to constitute an
enforceable agreement with respect to the SARs, and the parties
failed to agree to a more detailed agreement; (b) Scholastic,
Inc., the issuer of the SARs, cannot be bound because it was not
a signatory to the Agreement and the Statute of Frauds bars proof
against it; and (c) the filing of suit by plaintiffs constituted
a dissolution of the partnership prior to the vesting dates of
the SARs. Plaintiffs' arguments are without merit.
1. The October 12, 1990 Agreement is Sufficient and
Under Section 8 of the Agreement, Scholastic and SPI agreed
that their Agreement "constitutes the entire agreement between
HEI and SPI." They recognized that they were negotiating, that
their agreement of October 12, 1990 "shall remain a complete and
mutually binding agreement," and that this was so even if their
negotiations were to fail.
In determining whether a contract exists, the inquiry centers
upon the parties' intent to be bound, i.e., whether there was a
"meeting of the minds regarding the material terms of the
transaction." Henri Assocs. v. Saxony Carpet Co., Inc.,
249 A.D.2d 63, 671 N.Y.S.2d 46, 49 (1st Dep't 1998); See also
Helmsley-Spear, Inc. v. New York Blood Center, Inc., 257 A.D.2d 64,
687 N.Y.S.2d 353 (1st Dep't 1999) ("Helmsley-Spear"). The
Court decides if the terms of the agreement are sufficiently
described. Helmsley-Spear, 687 N.Y.S.2d at 356. I hold that
they are; the parties' intent to be bound by the terms of the
Agreement are shown by the express terms themselves. The parties
recognized the possibility that negotiations to form a long form
agreement might fail, and provided for that contingency by
providing that their October 12, 1990 agreement would continue to
The parties' ultimate goal to enter into a long-form agreement
does not change the analysis. Since "[t]he easiest way for a
party to make clear an intention not to be bound is to say so,"
the absence of such an intention or indeed the presence of
language articulating an intent to be bound is of great
relevance. Farnsworth on Contracts § 3.7 (2d ed. 1998). Language
stating that a contract constitutes "an entire agreement"
(Agreement ¶ 8) strongly suggests that the parties intended to
form such a binding contract. Although the parties also agreed to
negotiate in good faith to create the details to facilitate the
implementation of the agreed upon terms, the inability to agree
further does not vitiate that which was already agreed. Cauff,
Lippman & Co. v. Apogee Finance Group, Inc., 807 F. Supp. 1007,
1021 (S.D.N.Y. 1992). See also Arcadian Phosphates, Inc. v.
Arcadian Corp., 884 F.2d 69
, 72 (2d Cir. 1989) (language of
contract is most important factor in determining if preliminary
agreement is binding); George Backer Management, Corp. v. Acme
Quilting Co., 46 N.Y.2d 211, 213, 413 N.Y.S.2d 135,
385 N.E.2d 1062 (1978) ("[E]vidence of a very high order is required to
overcome the heavy presumption that a deliberately prepared and
executed written instrument manifests the true intention of the
parties."); Farnsworth at § 3.8(a) (if no agreement is reached on
open terms so that there is not ultimate agreement, "the parties
are bound by their original agreement. . . .)." (emphasis in the
It is fundamental that a contract will be found to be binding
by looking at the "objective manifestations of the intent of the
parties as gathered by their expressed words and deeds." Mencher
v. Weiss, 306 N.Y. 1, 114 N.E.2d 177; Homan v. Earle, 53 N.Y. 267,
272. I find, by looking at the expressed and unambiguous
terms of the October 12, 1990 agreement, that the parties
intended to be bound by their Agreement including Section 4 of
the Agreement, providing in unambiguous term that Harris shall be
entitled to the SARs on the Fourth, Fifth and Sixth Year
anniversary dates of "HEI's operations," (Agreement, at ¶ 4).
2. The Statute of Frauds is not a Valid Defense.
Plaintiffs' reliance upon the Statute of Frauds as an excuse to
discharge Scholastic is misplaced. Despite the fact that
Scholastic did not execute the contract, it admitted in its
pleading that both it and SPI had agreed to grant Harris 100,000
SARs in Scholastic. Under New York General Obligations Law §
5-701(b)(3)(c), notwithstanding the provisions of the Statute of
Frauds, there will be sufficient evidence that a contract has
been made if, among other things:
(c) The party against whom enforcement is sought
admits in its pleading, testimony or otherwise in
court that a contract was made; . . .
N YGen.Oblig.Law § 5-701(b)(3)(c) (McKinney's 1999). And
Scholastic and SPI admitted Scholastic's agreement to grant
100,000 SARs to Harris in their pleadings. Thus, Plaintiffs'
alleged in the complaint:
22. Pursuant to the Agreement, Scholastic and
Scholastic Productions also agreed to grant Harris
100,000 stock appreciation rights in Scholastic
which would vest, under certain conditions
precedent, one-third at the conclusion of the
fourth year of HEI's operations as set forth in
paragraph 3 of the Agreement (i.e. 1994), one-third
at the conclusion of the fifth year of HEI's
operations (i.e. 1995), and one-third at the
conclusion of the sixth year of HEI's operations
(First Am.Compl. at ¶ 22). Such an admission not only eliminates
the applicability of the Statute of Frauds, but also qualifies as
a conclusive judicial admission that Scholastic agreed to grant
Harris 100,000 SARs. See, Western World Insurance Company v.
Stack Oil, Inc., 922 F.2d 118
, 121-22 (2d Cir. 1990) (formal
admission in parties' amended answer constitutes judicial
admission that insurance policy included an endorsement); PPX
Enterprises, Inc. v. Audiofidelity, Inc., 746 F.2d 120
, 123 (2d.
3. A Breach of Contract by Defendants has not been Shown.
Scholastic and SPI argue that Harris breached the explicit
terms of the Agreement, entitling Scholastic and SPI to terminate
the partnership. The contention of breach is without merit.
First, the allegations in the First Amended Complaint of seven
different breaches, summarized at note 4, supra, are not
grounded in any provision of the Agreement. The allegations of
breach reflect, not what was in the Agreement but, rather, that
which Plaintiffs wish the Agreement had provided. However, since
Section 8 of the Agreement provides that it "constitutes the
entire agreement" between the parties, there is no possibility of
different oral agreements. Henri Assocs. v. Saxony Carpet Co.,
Inc., 249 A.D.2d 63, 671 N.Y.S.2d 46, 49 (1st Dep't 1998). The
claims of oral agreements described in Plaintiffs' lengthy
affidavits are excluded under the parole evidence rule, and
cannot raise a triable issue of fact. See, Hunt Ltd. v.
Lifschultz Freight, Inc., 889 F.2d 1274, 1277 (2d Cir. 1989);
Armour & Co. v. Celic, 294 F.2d 432, 438 (2d Cir. 1961).
At oral argument, Plaintiffs narrowed their claim of breach to
three: HEI failed to devote 50% of its theatrical motion picture
development activities on projects for SPI; Harris failed to
devote 20% of his time developing projects for SPI; and Harris
and HEI failed to provide Scholastic and SPI "first opportunity
to license available print publishing, merchandising, home video,
[and] home distribution rights" for Joint Venture Projects. There
is not, however, a single contemporaneous document in the record
that notified Defendants of any such claim of breach, and
certainly no notice calling upon plaintiff to correct or cure an
alleged breach. Plaintiffs' allegations and claims vary
materially from the terms and conditions stated in the Agreement.
Counsel for Plaintiffs admitted this fatal absence in oral
THE COURT: Is there a letter or other notice in the
exhibits which gives Harris notice that he is in
breach and gives him notice to cure?
MR. GARBUS: There are dialog[ues]. I don't think
there is a letter.
(Oral Arg.Tr., July 27, 1999, at pp. 17-18).
It was not until over ten months after the parties stopped
performing under the contract that Plaintiffs first claimed that
Defendants committed a breach. Plaintiffs have failed to set out
any facts demonstrating that Defendants committed a breach. See
International Paper Co. v. Margrove, Inc., 75 Misc.2d 763,
348 N.Y.S.2d 916 (1973) (five months following final delivery,
acceptance of goods and buyer's attempt to set payment schedule,
was not reasonable time within which to notify seller of breach).
4. Plaintiffs' Filing of a Lawsuit Did Not Relieve it of
Obligations Owed to Plaintiffs.
I hold, also, that the bringing of suit by Plaintiffs did not
abrogate Plaintiffs' obligations to Defendants. It would be a
strange rule of law if a plaintiff, simply by filing suit, could
despoil a contract promisee of that which he fairly had the right
to receive. Furthermore, even if the filing of suit effected a
dissolution of the partnership, a dissolution alone does not
terminate the rights and obligations of the partners. N Y
Partnership Law § 61 (McKinney's 1999). Dissolution terminates
only a partner's authority to act for the partnership except to
the extent necessary to wind up partnership affairs (see, N Y
Partnership Law § 64 (McKinney's 1999)), but any pre-dissolution
liabilities or obligations of the partners continue. Keogh v.
Breed, Abbott & Morgan, 224 A.D.2d 180
, 181, 637 N.Y.S.2d 124
(1st Dep't 1996); Pastor v. State Tax Commission,
115 A.D.2d 144, 146, 495 N.Y.S.2d 515, 517 (3d Dep't 1985).
Here, Plaintiffs never notified Harris of the termination of
the Joint Venture. There is no document in the record that
expresses such a termination. In its original complaint,
Plaintiffs alleged only that "the [Joint Venture] is not
operating as contemplated by the paragraph 3 of [the] Agreement,
and has not operated since at least March 1, 1994;" but there is
no mention of any document evidencing that Plaintiffs notified
either Harris or HEI of Plaintiffs claim that the Joint Venture
was terminated. (Scholastic 56.1, at ¶ 34).*fn8 The filing of
the lawsuit in a partnership at will could, of course, constitute
a notification by Plaintiffs that they wished to dissolve the
partnership and seek an accounting. See N.Y. Partnership Law §
68 (McKinney's 1999); Yorkes v. Ross, 142 A.D.2d 642,
530 N.Y.S.2d 590 (2d Dep't 1988) ("Any partner who has not wrongfully
dissolved partnership has the right to wind up partnership
affairs "provided . . . that any partner . . . upon cause shown
may obtain winding up by the court.""). But such notice by
Plaintiffs does not thereby effect a quitclaim of obligations by
Plaintiffs to Defendants. According to the terms of the
Agreement, the SARs that SPI granted to Harris vested "one third
at the conclusion of the fourth year of HEI's operations,
one-third at the conclusion of the fifth year of HEI's
operations, and one third at the conclusion of the sixth year of
HEI's operations. (Agreement, at ¶ 4).
Thus, I hold that Defendant Harris is entitled to recover from
Plaintiffs the reasonable value of 100,000 stock appreciation
rights in Scholastic, Inc., as of December 1994, December 1995
and December 1996, respectively. The undisputed record shows that
the publicly-traded shares of Scholastic, Inc. had values as of
those dates of $47.00 per share, $69.25 per share, and $74.50 per
share, respectively. (Pl. Am.Resp. to Def. First Notice to Admit.
¶ 5). Consequently, the respective per-share value of the SARs,
based on the issue price provided by the Agreement of $18 per
share, was: $29.00, $51.25 and $56.50, respectively. Multiplying
the respective differences each by 33,333.33 shares, the
resulting values are $966.666.57, $1,708,333.16 and
$1,883,333.15. The total value that Harris is entitled to recover
is $4,558,332.88, plus interest from the vesting dates and a
reasonable grace period thereafter.*fn9
C. Plaintiffs' Third, Fourth and Fifth Claims for Relief
should be Dismissed
1. Plaintiffs' Third Claim for Relief Alleging Fraudulent
Plaintiffs' Third Claim for Relief alleges that Harris and HEI
fraudulently induced both Scholastic and SPI to enter into the
Agreement by making material misrepresentations with respect to
how many projects HEI would develop, the amount of time and
resources Harris would utilize for the development of
"children's, young-adult and family films," and the amount of
time Harris would devote to such endeavors. These are the
identical duties which Harris and HEI are alleged to have
breached with respect to the Agreement. (Compare First
Am.Compl., at ¶ 51(a)-(g) (Breach of contract allegations),
with ¶ 55(a)-(g) (fraudulent inducement claim)). Moreover, like
their breach of contract
claim, Scholastic and SPI allege that they have been damaged in
the amount "estimated to be at least $6,800,000 plus interest and
punitive damages in an indeterminate amount but no less than the
sum of $10,000,000." (First Am.Compl., at ¶ 61).
The same allegations which serve as the basis of a breach of
contract claim may not serve as the foundation of a fraudulent
inducement claim. See, Rolls-Royce Motor Cars, Inc. v.
Schudroff, 929 F. Supp. 117, 123 (S.D.N.Y. 1996) (mere promissory
statement that a party will live up to his contractual
obligations generally cannot be the basis of a fraud claim;
allegations of breach of contract do nor give rise to a claim of
fraud) ("Rolls-Royce"); Deerfield Communications Corp. v.
Chesebrough-Ponds, Inc., 68 N.Y.2d 954, 956, 510 N.Y.S.2d 88,
89, 502 N.E.2d 1003 (1986). Courts which have analyzed this issue
have refused to permit a fraudulent inducement claim arising from
a contractual relationship unless: (1) the claims are premised on
a "separate duty outside the [contract]" or (2) the plaintiff
seeks to recover "special damages proximately caused by the
alleged false representations that are not recoverable under the
current contract measure of damages." Best Western Int'l, Inc.
v. CSI International Corp., No. 94 Civ. 360, 1994 WL 465905, at
*5 (S.D.N.Y. Aug. 23, 1994); see also, Sudul v. Computer
Outsourcing Servs., 868 F. Supp. 59, 62-63 (S.D.N.Y. 1994).
Here, the identical allegations which serve as the basis for
Scholastic and SPI's breach of contract claim serve as the basis
for the fraudulent inducement claim. Bell Sports, Inc. v. System
Software Assocs., Inc., 45 F. Supp.2d 220, 227 (E.D.N.Y. 1999).
The same damages are sought, and Scholastic and SPI do not claim
special or distinct damages caused by the alleged fraudulent
inducement. Dornberger v. Metropolitan Life Ins. Co.,
961 F. Supp. 506, 542 (S.D.N.Y. 1997). Plaintiffs' Third Claim for
Relief alleging fraudulent inducement of contract is dismissed
2. Plaintiffs' Fourth Claim for Relief Alleging Conspiracy
Plaintiffs' Fourth Claim for Relief alleges that HEI and Harris
conspired fraudulently to induce them to enter into the
Agreement. (First Am. Compl., at ¶ 62-68). Under New York law, a
claim for conspiracy to defraud cannot be maintained without
demonstrating the underlying action of fraud. Since, I have
dismissed with prejudice Plaintiffs' claim alleging fraudulent
inducement, I am also dismissing with prejudice Plaintiffs'
Fourth Claim for Relief alleging that HEI and Harris conspired to
defraud Scholastic and SPI.
3. Plaintiffs' Fifth Claim for Relief Alleging Negligent
Plaintiffs' allegations with respect to its negligent
misrepresentation are identical to its fraudulent inducement and
conspiracy claims — indeed, the same seven allegations that
served as the foundation for the breach of contract, fraudulent
inducements and conspiracy claims are set forth as the basis for
a claim of negligent misrepresentations. (See First Am. Compl.,
at ¶ 51(a)-(g) (Breach of Contract claim), at ¶ 55(a)-(g)
(Fraudulent Inducement claim), at ¶ 64(a)-(g) (Conspiracy claim);
at ¶ 70(a)-(g) (Negligent Misrepresentations)). Because this
claim is based on the same deficient allegations supporting those
claims for relief, Plaintiffs' Fifth Claim for Relief is also
dismissed. Rolls-Royce, 929 F. Supp. at 124.
D. Plaintiffs' Sixth and Seventh Claims for Relief should be
Plaintiffs' Sixth Claim for Relief alleges that Harris breached
his fiduciary duties to the Plaintiffs. The allegations are
essentially the same as those alleged as the conduct which
breached the Agreement.
Under New York law, the elements of a claim for breach of
fiduciary duty are (1) breach of a duty owed to the Plaintiffs;
(2) Defendants' knowing participation in the breach of fiduciary
duty; (3) and damages suffered by the plaintiff which were
proximately caused by the alleged breach. See, e.g., Diduck v.
Kaszycki & Sons Contractors, Inc., 974 F.2d 270
, 281 (2d Cir.
Plaintiffs fall to set forth any evidence that Harris breached
any duty owed to them outside the contract. And since their
allegations of breach of a fiduciary duty are identical to those
supporting their claim for breach of contract, and I have held
that neither Harris nor HEI breached the Agreement between the
Plaintiffs and Harris and HEI, the allegations of breach of
fiduciary obligation are without merit. See, North Shore
Bottling Co. v. C. Schmidt & Sons, 22 N.Y.2d 171, 179,
292 N.Y.S.2d 86, 239 N.E.2d 189 (1968); Layden v. Boccio,
253 A.D.2d 540, 541, 686 N.Y.S.2d 763 (2d Dep't 1998) ("Layden")
("Since the plaintiff is not alleging tort liability or a breach
of a duty distinct from, or in addition to, the breach of
contract," the claims alleging breach of fiduciary duty and
unjust enrichment are dismissed.). For the same reasons,
Plaintiffs' Seventh Claim for Relief alleging unjust enrichment
must also be dismissed. Clark-Fitzpatrick, Inc. v. Long Island
R.R. Co., 70 N.Y.2d 382, 388-89, 521 N.Y.S.2d 653, 656,
516 N.E.2d 190 (1987); Layden, 253 A.D.2d at 541, 686 N.Y.S.2d 763.
Consequently, Plaintiffs' Sixth and Seventh Claims for Relief,
alleging breach of fiduciary duty and unjust enrichment, are
dismissed with prejudice.
E. Plaintiffs' Eighth Claim for Relief alleging Conversion
should be Dismissed
Plaintiffs allege that money contributed by Scholastic and SPI
was unlawfully converted by Harris and HEI.
Under New York law, the elements of conversion are: (1) that
the plaintiff has a "right to possession" of the property
converted; (2) the Defendant's possession of the payment was
unauthorized; (3) the Defendant acted to exclude the rights of
the lawful owner of the property; (4) the property or payment is
"specifically identifiable;" and (5) the Defendant is obligated
to return the payment. Key Bank v. Grossi, 227 A.D.2d 841,
642 N.Y.S.2d 403 (3rd Dep't 1996). Moreover, claims for conversion
will be deemed redundant and dismissed when "damages are merely
being sought for breach of contract." Rolls-Royce, 929 F. Supp.
at 124; Peters Griffin Woodward, Inc. v. WCSC, Inc., 88 A.D.2d 883,
884, 452 N.Y.S.2d 599, 600 (N.Y.A.D.1st Dept. 1982).
In the instant action, Plaintiffs fail to set forth any facts
demonstrating that either Harris or HEI was not authorized to use
the capital contributions provided by Scholastic and SPI for the
purpose of the Joint Venture. (Oral Arg.Tr., Sept. 1, 1999, at
pp. 13-19). Indeed, under the terms of the Agreement, Scholastic
and SPI were obligated to provide such contributions to HEI, and
HEI was entitled to receive and use such money. There was no
obligation on the part of HEI and Harris to return money to
Plaintiffs, or to reimburse them for any losses. Plaintiffs have
no legally sufficient claim for conversion. Consequently,
Plaintiffs' Eighth Claim for Relief is dismissed with prejudice.
F. Plaintiffs' Ninth Claim for Relief Requesting an
Plaintiffs base their claim for an accounting on their
allegations of breach of contract and torts causing harm to
Plaintiffs, and argue that precise amount of damage cannot be
determined accurately. First Amended Compl. at ¶¶ 87-92. But, the
inability to quantify damages does not give rise to an
accounting. See Leveraged Leasing Admin. Corp. v. PacifiCorp
Capital, Inc., 87 F.3d 44, 49
(2d Cir. 1996). Furthermore, Plaintiffs admit that Harris and HEI
did no more than spend on partnership matters the money that
plaintiffs provided pursuant to their contract obligations. (Oral
Arg.Tr., Sept. 1, 1999, at pp. 13-19). That also is not a ground
for an accounting. See Leveraged Leasing, 87 F.3d at 49
(determining that in case alleging breach of contract and
conversion, "no useful purpose would be served" by adding an
equitable accounting claim to claims for breach of contract and
I have found that neither Harris nor HEI breached any of the
terms of the Agreement, and that neither Harris nor HEI committed
any of the torts alleged by Plaintiffs, Plaintiffs' claim for an
accounting is thus without basis. Thus, Plaintiffs Ninth Claim
for Relief seeking an accounting is dismissed.
For the reasons stated, I hold that neither Harris nor HEI
breached the Agreement, and that Scholastic and SPI are obligated
to grant Harris the SARs as of December 1994, 1995 and 1996 and,
thus, Harris is entitled to judgment in the amount of
$4,558,332.88 from the Plaintiffs, plus interest as noted in
footnote 9. Harris and HEI are entitled to judgment against
Scholastic and SPI on their First Counterclaim, and Plaintiffs'
Complaint is dismissed with prejudice. The Clerk of the Court is
directed to close this case.