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RJE CORP. v. NORTHVILLE INDUSTRIES CORP.

April 25, 2002

RJE CORP., PLAINTIFF,
V.
NORTHVILLE INDUSTRIES CORP., DEFENDANT.



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

  MEMORANDUM & ORDER

Plaintiff, RJE Corp. ("RJE"), has brought this action, invoking the Court's diversity jurisdiction, against defendant, Northville Industries Corp. ("Northville"), for a declaratory judgment and specific performance.

Finding for RJE, the Court declares that bids are to be based on the fair market value of the assets comprising the Pipeline System, without offset for the costs of future remediation for existing environmental liabilities, but that, provided certain conditions are met by Northville, specific performance is not warranted.

BACKGROUND

I. Procedural Posture of Litigation

RJE initiated its action by Order to Show Cause seeking a preliminary injunction to stay the bidding process pending the requested declaratory judgment. Because the likelihood of success was so inextricably linked to the Court's assessment of the disputed contract language, the Court prevailed upon the parties to convert the preliminary injunction motion to one for summary judgment since there did not appear to be any reason why the litigation should linger. Consistent with the parties' desire to reach an expeditious final resolution of their dispute, and because of certain time constraints associated with the bidding process, the Court set the matter down for an immediate evidentiary hearing to allow the parties to adduce evidence to support their respective interpretations of the relevant contract language. This extrinsic evidence would, of course, only be relevant in the event the Court were to conclude that the contract language was ambiguous, and hence not subject to the parol evidence rule.*fn1 The parties agreed that the bidding process would be stayed until seven days after the Court issued its declaratory judgment.*fn2

II. Events Leading to Execution of Relevant Agreements

Prior to September 1988, all of Northville's stock was owned by two factions of the Bernstein family. The Harold Bernstein family held 55.66% of the stock; the Raymond Bernstein family held 44.34% of the stock. Disputes arose between the families that were irreconcilable; accordingly, the families resolved to have Northville buy out the Raymond Bernstein family's stock, leaving the Harold Bernstein family in sole control of Northville.*fn3 Included amongst Northville's many holdings was the Pipeline System.

During the course of negotiations, the parties discovered two significant underground gasoline leaks from the Pipeline System. In October 1986, an 800,000 gallon leak was discovered at the Holtsville terminal; in November 1987, a 1.2 million gallon leak was discovered at the Setauket terminal. The leaks gave rise to various governmental investigations and a class action lawsuit. The environmental liabilities associated with these leaks, the extent of which were indeterminable at the time, became an impediment to the culmination of the parties' negotiations. Consideration was initially given to spinning off the Pipeline System into a separate corporation, in which the parties would retain joint ownership in proportion to their Northville stock. This proposal was rejected by both parties after being advised by counsel that the families could be exposed to personal liability because Northville's considerable assets would not be reachable to satisfy remediation claims. See Tr. at 116 (Mar. 19, 2002). Ultimately, the parties addressed the environmental problems, as well as all other matters relevant to the stock sale, in a series of agreements executed during the summer and fall of 1988, the last ones being executed on September 29, 1988. Relevant to this litigation, in addition to the Option Agreement (dated September 29, 1988), see Pl.Ex.*fn4 2, they included the underlying Stock Purchase Agreement (dated September 23, 1988), see Pl.Ex.1; a Consulting Agreement (dated July 1, 1988), see Pl.Ex. 4; and a Purchase Price Adjustment Agreement ("PPAA") (dated September 29, 1988), see Pl. Ex. 3. RJE was incorporated by the Raymond Bernstein family for the purpose of entering into these agreements. All of these agreements were drafted by RJE, except the PPAA, which was drafted by Northville.*fn5

III. Relevant Provisions of Agreements

A. Stock Purchase Agreement

The Stock Purchase Agreement provided that Northville would purchase all of RJE's Northville stock. Prior to the discovery of the leaks, the parties had come to a joint understanding that the entire value of Northville's stock was $57.5 million,*fn6 plus various other consideration not relevant to this litigation. See Tr. at 100 (Mar. 19, 2002) After discovery of the leaks, the parties reduced this value by $30 million. See Tr. at 108; Def. Ex.*fn7 C. Accordingly, the agreement provided that the purchase price for RJE's stock would be approximately $27.5 million, plus the various other consideration. See Tr. at 108, 150 (Mar. 19, 2002). Under the agreement, Northville was to maintain and operate the Pipeline System.

B. Consulting Agreement

The Consulting Agreement was signed relatively early in the negotiations. As best the Court can glean from this agreement, it was executed prior to the other agreements so that the Raymond Bernstein family members would leave their management positions at Northville, thereby allowing Northville to negotiate directly on behalf of the Harold Bernstein family. This was presumably done with the recognition that the negotiations underway would result in the Harold Bernstein family's sole control of Northville.

The Consulting Agreement required Northville to provide RJE with an annual "consulting fee" of $840,000, in return for which RJE was obligated to furnish up to twenty hours a month of "consulting and advisory services" upon Northville's request. Consulting Agreement § 3 ("Extent of Services"). In practice, as Northville's attorney explained, RJE received the "consulting fee without providing any services or any benefit." Tr. at 173-74 (Mar. 19, 2002). Northville's obligation to pay the consulting fee was terminable only upon severance of the parties' joint interest in the Pipeline System pursuant to the Option Agreement. See Consulting Agreement § 5 ("Termination Provision").

C. Option Agreement

The Option Agreement provided for five methods by which the parties could sever their joint interest in the Pipeline System: (1) Sale Provision; (2) Right of First Refusal Provision; (3) Purchase Option Provision; (4) Purchase Option Termination Provision, and (5) Abandonment Provision.

The Pipeline System is defined in the preamble of the Option Agreement:

[T]he properties and assets of every kind, nature and description, real, personal and mixed, tangible or intangible, including the rights to use properties or assets of another person, which constitute a network of terminals and pipelines on Long Island, New York (the "Pipeline System") . . . all of which properties and assets being more particularly described on Annex A hereto (the "Pipeline Assets").

Option Agreement at 1. Annex A includes a detailed list of the assets comprising the Pipeline System including, inter alia, land, buildings and other structures, fuel storage tanks, docks, piers, appliances, equipment, machinery, pipes, automobiles, trucks, furniture, and supplies. See Option Agreement at Annex A.*fn8

Sale Provision & Right of First Refusal Provision: Under the Sale Provision, Northville could sell to a third party at any time, except during a 180-day period "beginning with the anniversary of five years from the date [of execution of the Option Agreement.]" Option Agreement § 1.01; see Option Agreement § 2.02 ("Sale Provision") (incorporating 180-day period defined in Option Agreement § 1.01). Under the Right of First Refusal Provision, before Northville could sell to a third party, RJE had the option to buy the Pipeline System "at a price equal to the price offered [by the third-party] upon the same terms and conditions [offered by the thirdparty]." Option Agreement § 2.01 ("Right of First Refusal Provision"). If Northville sold the Pipeline System to a third party, RJE would receive "44.34% of [] sale proceeds or other consideration," subject to adjustments for tax liabilities and insurance proceeds. Option Agreement § 2.02.

Purchase Option Provision: If Northville did not sell the Pipeline System during the first five years, RJE had the right under the Purchase Option Provision to purchase the Pipeline System during the ensuing 180-day period for $16.7 million,*fn9 subject to certain enumerated adjustments. See Option Agreement § 1.01 ("Purchase Option Provision"); see also Tr. at 55-56 (Mar. 19, 2002).

If RJE exercised this purchase option, the parties agree that the Option Agreement required RJE to assume all the extant environmental liabilities. See Def. Memo in Opp. to Prelim. Inj. at 7; Tr. at 55-56 (Mar. 19, 2002). The parties informed the Court that they came to this conclusion because the Option Agreement calls for Northville to list all environmental liabilities in a liability disclosure schedule, the contents of which RJE would be required to assume under the Purchase Option Provision. See Tr. at 54-55 (Mar. 19, 2002); see also Option Agreement §§ 1.01, 1.03(b)(ii), 4.08(d), Annex B. As Mark Shehan, one of RJE's attorneys in the 1988 negotiations, confirmed:

Q: And RJE would therefore assume all of those [environmental] liabilities had it exercised its option [under the Purchase Option Provision]; isn't that correct, sir?

A: Had it exercised its option.

Q: And RJE would have had no cap on the environmental liabilities had it exercised that option, would it?

A: That is correct.

Tr. at 55-56 (Mar. 19, 2002). The Purchase Option Provision is the only provision in any of the four agreements that made reference to the assumption of environmental liabilities by RJE in connection with any sale of the Pipeline System.

Purchase Option Termination Provision: This provision provided that Northville could buy out RJE's interest in the Pipeline System for $13.3 million,*fn10 subject to certain enumerated adjustments, during the first five years and at any time during the subsequent 180-day period (unless, of course, RJE had exercised its purchase option during that 180-day period).*fn11 See Option Agreement § 1.04 ("Pipeline Option Termination Provision"). The provision references the PPAA by providing that RJE may decide to accept less than the $13.3 million in lieu of payments RJE would otherwise be required to make to Northville under the PPAA. See Option Agreement § 1.04(ii); see also PPAA §§ 1, 2.

Abandonment Provision: This provision, which has triggered the litigation, governed the disposition of the Pipeline System should Northvile decide, as it now has, to "shut down or cease operating" the Pipeline System. It provides:

In the event [Northville] determines to shut down or cease operating . . . the Pipeline System . . . [Northville] shall promptly notify RJE in writing and obtain . . . an appraisal . . . [by] an independent appraiser . . . as to the fair market value of the Pipeline System. Following the receipt of such appraisal, RJE and [Northville] shall have the right to submit to each other, within 30 days of the receipt of the appraisal, a bid (the "RJE Bid" and the "[Northville] Bid", respectively) at which price it will purchase the Pipeline System or effect the Pipeline Option Termination,*fn12 respectively. If the RJE Bid is higher than the [Northville] Bid, RJE shall purchase the Pipeline System and, if the [Northville] Bid is higher than the RJE Bid, [Northville] shall effect the Pipeline Option Termination, each at the prices specified in their respective bids; provided, however, that if neither the RJE Bid or [sic] the [Northville] Bid is higher than the appraisal price of the Pipeline System, RJE and [Northville] shall not have the right to purchase the Pipeline System or effect the Pipeline Option Termination, respectively, but [Northville] shall use its best efforts for a period of one year to obtain a thirdparty buyer for the Pipeline System.

Option Agreement § 2.04 ("Abandonment Provision"). At the hearing, Mr. Shehan explained how the Abandonment Provision came to be included in the Option Agreement:

Q: Now, you mentioned before certain conversations you had with [Northville's attorney's] regarding the abandonment provision?

A: Yes, I did.

Q: Do you recall how the topic of the abandonment scenario first came up?
A: I brought it up in response to discovering that we would lose our consulting fee per the consulting agreement if Northville ceased to operate the Pipeline System and again wanted the ability to perhaps purchase that asset, and so it was brought up in a telephone call. In fact, I have to say, is a new point, this is what out client wants. . . .

Tr. at 41 (Mar. 19, 2002). There is no mention of environmental liabilities in the Abandonment Provision.

D. Purchase Price Adjustment Agreement

Finally, the PPAA required RJE to pay 44.34% of designated Northville liabilities ("Covered Liabilities"), consistent with its responsibilities prior to the Stock Purchase Agreement, up to a defined cap. See PPAA ยงยง 1 & 2. The cap was set at "approximately the amount that [RJE] received [in consideration for its shares of Northville]," Tr. at 206 (Mar. 20, ...


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