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