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MATHIAS v. JACOBS

October 31, 2002

MICHAEL NED MATHIAS F/K/A NENAD MATIJASEVIC, PLAINTIFF,
V.
BRADLEY S. JACOBS DEFENDANT.



The opinion of the court was delivered by: VICTOR Marrero, United States District Judge.

    DECISION AND ORDER

I. BACKGROUND

By its decision rendered on September 27, 2001 (the "2001 Decision")*fn1 ruling on a motion for summary judgment, the Court determined that plaintiff Michael Mathias ("Mathias") was entitled to recover damages from defendant Bradley Jacobs ("Jacobs") for breach of a 1992 stock option agreement (the "Option Agreement" or "1992 Option Agreement") that contained a so-called "non-contact" promise the Court held unenforceable. The Court then directed the parties to propose a basis for computing any damages that Mathias may be entitled to recover by reason of the breach. In response, the parties submitted significantly different theories and methods to calculate the extent to which Mathias had suffered injury, including disagreement over the valuation of Mathias's stock options as of the time he purportedly exercised whatever rights he then held.

In a decision dated January 7, 2002 (the "2002 Decision")*fn2 the Court identified three disputed issues of fact that required a trial on damages:*fn3

1. Whether certain interests in the form or stock options and shares that Jacobs granted to Mathias in 1995 and 1997 constitute partial payment or credits towards any liability Jacobs may have had under the Option Agreement, thus reducing Jacobs's obligation to Mathias by the value of those securities;
2. Whether the value of Mathias's 1992 options on March 15, 1999, the date he sought to exercise them, was the publicly listed closing price of the underlying stock on that day, or the market price adjusted by the effects or certain undisclosed accounting fraud that allegedly inflated the price of the stock;
3. Whether the Court's invalidation of the non-contact provision contained in the parties' 1992 agreements requires, for the purposes or calculating damages, apportioning the value of the consideration the parties exchanged in connection with the Option Agreement and reducing any damages to which Mathias may be entitled by the portion of consideration attributable to the unenforceable promise.

The Court held a bench trial on these issues on July 29 — August 1, 2002.

II. FACTS

Mathias and Jacobs entered into the Option Agreement on June 1, 1992 in order to resolve a conflict that had arisen following the termination of Mathias's employment as a consultant to United Waste Systems, Inc. ("UWS"), a company of which Jacobs was the principal owner and chief executive. One aspect of that dispute involved Mathias's claim that Jacobs had promised him ownership of a five percent interest in UWS shares, a commitment Jacobs denied having made.

According to the Option Agreement, in order to settle their dispute, Jacobs granted Mathias an option to purchase 420,000 shares of UWS stock at $3.00 per share exercisable between June 1, 1994 and May 31, 1999. Mathias agreed to release and discharge all existing and potential claims or debts of any kind he might have against Jacobs, whether past, current or future. The Option Agreement contains a non-contact provision that states:

By way of illustration, the Option shall be automatically and unconditionally rescinded and terminated should [Mathias] contact, telephone or send a letter to any officer of the Company other than its Chief Executive Officer, or should [Mathias] contact, telephone or send a letter to any family member of any officer including the Chief Executive Officer.

(Option Agreement ¶ 2(c).)

At the same time, the parties executed another contract, (the "United Waste Agreement") that contained a severance package for Mathias. In it, UWS undertook to pay Mathias his regular monthly compensation of $8,000 plus health benefits for a period of 24 months commencing in June of 1992. The United Waste Agreement contained covenants by which Mathias committed for a period of two years to maintain the confidentiality of UWS trade secrets and not to compete with the company. It also included the full version of the non-contact provision referred to in the Option Agreement that this Court ruled excessively broad and thus unenforceable.*fn4

At some point after execution of the 1992 agreements, Mathias left for Europe and returned in late 1994 or early 1995. At a meeting between the parties shortly thereafter, Mathias informed Jacobs that he wanted to exercise his UWS options. What transpired at this meeting forms the focal point of much of the parties' dispute and frames the issues now before the Court. The parties accounts of their conversation and resulting understanding clash in material ways.

At trial, Mathias maintained that he told Jacobs that he wanted to exercise his right to UWS shares under Option Agreement and that Jacobs responded that the timing was not convenient, that Mathias should postpone his request to a time when Jacobs was in a better position to deliver the UWS stock, and that he could earn money by providing consulting services for UWS. Under Mathias's version, Jacobs agreed to retain Mathias as a consultant to UWS and later authorized new UWS options issued to him in 1995 and 1997 as compensation for actual work Mathias performed for the company in those years. Mathias also testified that at the time the new options were granted to him in 1995 and 1997 there were no discussions or understandings of any kind between the parties that those benefits constituted partial payments or credits of any kind towards reducing Jacobs's obligation to deliver the UWS stock pursuant to the Option Agreement.

According to Jacobs's rendering of the same encounter, Jacobs informed Mathias that the Option Agreement had automatically expired by its own terms by reason of impermissible contacts Mathias had made with UWS people soon after the 1992 agreements went into effect. Jacobs claimed that during this conversation Mathias acknowledged that the Option Agreement was a "dead deal." (Transcript of the Trial ("Tr."), at 353.) Jacobs contends that in recognition of Mathias's acceptance that the Option Agreement no longer existed, as a gesture of good will, and to keep relations with Mathias on favorable terms so as to avoid harm to UWS, he nonetheless agreed to permit Mathias to provide additional services to UWS and to compensate him in the form of new securities and other benefits.

In any event, on Jacobs's authorization, in December 1995 UWS granted Mathias a 10-year option to purchase 99,500 shares of UWS stock at $39.25 per share (the "1995 Option"). Mathias contends that this interest represented compensation for services he actually performed to UWS in 1995. The grant was approved by the UWS Board of Directors on October 11, 1995. Mathias points out that a footnote inscription in UWS's registration statement filed with the Securities and Exchange Commission indicated that these options were issued for "acquisition-related services." (Plaintiff's Trial Exhibit ("Pl.'s Ex.") 10, at 5.). Mathias exercised these options in January and February of 1996, receiving net proceeds of $639,412.90.

In March of 1997, UWS issued to Mathias an additional 10-year option to purchase 80,000 shares of UWS at $18.00 per share (the "1997 Option"). Mathias testified that this interest was intended as compensation for services he rendered to the company in 1997. Mathias exercised these options in May and June 1997, receiving net proceeds of $1,775,008.55.

In August of 1997 Jacobs completed a sale of UWS to USA Waste, which later became Waste Management Inc. ("WMI"), and then formed a new business, United Rentals, Inc. ("URI"). In September, 1997 Mathias was granted a Subscription Agreement to purchase 100,000 shares of URI (the "URI Stock"). The URI Stock was made available to him, before the company's initial public offering ("IPO"), at a "Friends and Family" price of $3.50 per share. The stock was subject to some restrictions on sale. Not more than one-third could be sold at any given time after one, two and three years of the purchase. Mathias purchased 100,000 shares of URI in his wife's name. URI went public in December of 1997 at a price of $13.50 per share.

In December of 1998 Mathias sold one-third of the shares, netting a total of $963,283.00, after deducting the purchase price. Mathias testified that, like the 1995 and 1997 Options, Jacobs granted him this benefit in payment for services Mathias had rendered to URI in the summer and fall of 1997. In December of 1999 URI prevented Mathias from selling the next third of the URI Stock and commenced litigation in Florida state court against Mathias and his wife (the "Florida Action") to recover the URI Stock, including the proceeds of the first shares Mathias sold.

Mathias purported to exercise his right under the Option Agreement on March 8, 1999 by written notice to Jacobs requesting delivery of the WMI securities by March 15, 1999 and tendering the purchase price of $1,200,000.00. The 400,000 UWS options Mathias claims he still held under the Option Agreement, after splits, adjustments and UWS's merger with WMI, converted to 191,111.09 shares of WMI as of March 15, 1999. On that date the closing price for WMI shares on the New York Stock Exchange ("NYSE") was $48.00.

III. THE ARGUMENTS AND LEGAL THEORIES

The parties offer divergent theories of damages corresponding to their respective versions of what occurred at their meeting on early 1995 when Mathias first communicated his intent to exercise his option under the Option Agreement. Mathias, according to his account of the discussion, came away with the understanding that the Option Agreement remained in effect and that his right to enforce it was simply postponed at Jacobs's request to a time more convenient to Jacobs. Moreover, in Mathias's view there was no mention then, nor at any of his subsequent conversations with Jacobs, that any of the later compensation or benefits Mathias received from UWS or Jacobs would be applied against the value of his 1992 options so as to reduce Jacob's liability. In consequence, Mathias contends that Jacobs remained obligated to make good on his commitment to deliver the UWS shares that the Option Agreement provided for and that any subsequent rewards Mathias obtained from Jacobs had noting to do with the earlier contract, but rather represented payments, over and above what Jacobs owed under the Option Agreement, for work Mathias actually performed in 1995 and 1997.

Under Jacobs's theory, in reliance upon Mathias's acknowledgement that he no longer had any rights and Jacobs had no remaining obligations under the 1992 Option Agreement, Jacobs entered into a new relationship with Mathias. He undertook to find projects for Mathias to work on and to compensate him in accordance with the new arrangement as long as Mathias remained on good terms with the company. Thus, Jacobs conceived of his agreeing to renew Mathias's association with UWS in the context of an understanding that the Option Agreement was a dead letter. To this extent, Jacobs argues, the 1995 and 1997 Options and the URI Stock interests Mathias later obtained from him were entirely unrelated to any obligation arising under the revoked Option Agreement.

Alternatively, Jacobs maintains that even if he had not effectively cancelled and supplanted the Option Agreement, he granted to Mathias financial interests that were understood to have been made in satisfaction of all or portions of Jacob's commitment under the Option Agreement, and that to allow Mathias to compel delivery of the 1992 options while already having received a substituted performance would comprise unjust enrichment. Moreover, Jacobs contends that Mathias's non-contact promise constituted the predominant benefit for which Jacobs had bargained and agreed to grant the 1992 options, and that because that provision was held unenforceable, the consideration Jacobs agreed to pay Mathias for the Option Agreement should be apportioned and reduced by the proportionate value of the total obligation attributable to the invalidated clause.

The task of resolving these sharply contrasting accounts of the parties' understanding and attendant theories of damages is complicated by the absence or any writing memorializing any accord purportedly reached at the parties' critical 1995 meeting. On this point, Mathias points to the Option Agreement itself which provides that

[t]here are no oral representations, understandings or agreements covering the same subject matter as this Agreement. This written Agreement is the final, complete and exclusive statement and expression of the agreement between [Jacobs] and [Mathias] and of all the terms of this Agreement, and it cannot be varied, contradicted or supplemented by evidence of any prior or contemporaneous oral or written agreements. This written Agreement may not be amended or terminated orally.

(Pl.'s Ex. 1; Option Agreement ¶ 11.)

Mathias construes this provision as precluding Jacobs from arguing and introducing parol evidence to prove that Mathias agreed orally to terminate his right to Jacobs's performance of the Option Agreement. Jacobs counters that by its own terms the Option Agreement was "automatically by unconditionally rescinded" in 1992 when Mathias violated the non-contact provision, and that consequently Jacobs was under no obligation to provide any written notice to Mathias, nor was Mathias's further agreement, oral or written, then required to effect a termination of the Option Agreement.

Jacobs's theory presents a conceptual hurdle difficult to overcome. The Court ruled the non-contact promise unenforceable, whether expressed in the United Waste Agreement, or separately in the Option Agreement. Accordingly, whether or not Mathias had violated this provision at the time of the parties' 1995 meeting, the clause had no legal effect. Jacobs's position necessarily requires giving a measure of recognition and enforcement to a provision that the Court later nullified. Jacobs could not represent that the Option Agreement had been cancelled and that he therefore no longer had any obligation to perform under it on account of Mathias's breach because the provision, void from the start, never acquired the effect or law. See Wamsley v. Champlin Refining and Chemicals, Inc., 11 F.3d 534, 539 (5th Cir. 1993) "(Void promises are not legally binding. . . . To say that a promise is void is to say that it created no legal obligation. . . ."); Restatement (Second) of Contracts § 7 cmt. a (1981) (noting that "a promise for breach of which the law neither gives a remedy nor otherwise recognizes a duty of performance by the promisor . . . is [a] `promise' or `agreement' that is void of legal effect."). For the same reason, even if oral and not otherwise documented, Mathias's purported agreement that the Option Agreement was rescinded could not be binding because his alleged violation would have related to an invalid promise.

Mathias's theory that the existence of the Option Agreement was unaffected by the parties' 1995 discussion better comports with the legal posture of the case. An oral agreement to amend or terminate the Option Agreement would have contradicted its express language. But even if he had entered into such an understanding, by operation of law that accord could not be recognized by the Court because it would be tantamount to enabling Jacobs to enforce a void promise. See Long v. Sears Roebuck, 105 F.3d 1529, 1536 n. 10 (3d Cir. 1007) (noting that void promises cannot be enforced or ratified because they are not legally binding). Against this standard, the Court thus proceeds to consider whether Mathias has presented sufficient evidence to sustain his theory of damages.

IV. FINDINGS OF FACT

A. ASSESSMENT OF CREDIBILITY

Because so much of Mathias's position rests on what was said at his meeting with Jacobs and is not supported by any other documentary record, in considering the validity of the claim the Court must rely substantially on its assessment of the credibility of Mathias's account of the events and the parties' discussions, in contrast to Jacobs's version. This comparison must be weighed against the overall veracity of the balance of the trial testimony, the parties' subsequent dealings, any credible corroboration by the evidence of other witnesses and by documentary proof, as well as by the logic of the situation assayed in the context of ordinary experience and common sense. Under these measures, Mathias fails to persuade the Court that he has met his burden of proof concerning the damages he claims.

As a threshold matter, and affecting the Court's judgment regarding every aspect of Mathias's assertion of damages, the Court notes that it found on Mathias's testimony significant gaps, contradictions and equivocation, detailed below with more particularity, that rendered his demeanor and presentation less than forthcoming. This apparent lack of candor on the claimant's part yielded consequential lacunae of illogic in the evidence and conceptual grounding proffered to support his claim. In contrast, the Court perceived in the demeanor and general impression created by Jacobs and witnesses John Milne, Oscar Folger and Ronald Quintero — and in the consistency of these individuals' accounts as to critical details — to reflect the more credible and compelling version of disputed events. Their testimony is more persuasively supported by other evidence on the record, and better comports with the empirical guidance served by logic and common sense. On these grounds, in the instances where material conflicts or doubts appear in the parties' respective accounts of disputed facts, the Court has resolved the issues against Mathias. With this perceptual assessment as a backdrop, the Court proceeds to examine the evidence relating to the core disputes upon which the bulk of Mathias's claim for damages is founded.

B. THE CREDITS

Mathias also stated, however, that during those very discussions with Jacobs, as he had on other occasions, he told Jacobs that he desperately needed "the money, I wanted to exercise my options," but that Jacobs replied that because the come was not convenient "he will reward me with the [1995 and 1997] options." (Tr. at 48.) In proper context, Mathias's repeated references, during conversations with Jacobs prior to and contemporaneous with Jacobs's granting him the 1995 and 1997 Options, to "my money" and "my cash" could have no sensible reference point or meaning other than the funds Jacobs presumably owed him under the 1992 Option Agreement. When pressed by the Court on this point, Mathias did acknowledge, inconsistent with his direct testimony, that in ...


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