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BURKE v. STEINMANN

May 12, 2004.

THOMAS BURKE, Plaintiff,
v.
WALTER S. STEINMANN, JR. and STRAFFORD VENTURES, INC., Defendants



The opinion of the court was delivered by: GERARD E. LYNCH, District Judge

OPINION AND ORDER

Plaintiff Thomas Burke moves for summary judgment against defendants, a Pennsylvania corporation and its sole shareholder, on two breach of contract claims. Plaintiff claims that defendants failed to compensate him in accordance with the terms of a Management Agreement between him and defendants relating to his management of the Typhoon Brewing Company, and also breached their obligations to plaintiff under a Stock Acquisition Agreement. Plaintiff also moves to dismiss defendants' various counterclaims. For the reasons stated below, summary judgment is granted in part and denied in part, and defendants' counterclaims are dismissed.

  BACKGROUND

  Typhoon Brewing Company ("Typhoon") was a Manhattan restaurant owned by Stone House NYC, L.P. ("Stone House"), a New York limited partnership with approximately thirty-five limited partners. (Steinmann Tr. 5-6, annexed to Olk Aff. as Ex. F.*fn1) Defendant Stafford Ventures, Inc. ("Stafford"), a Pennsylvania corporation with its principal place of business in New Jersey, is the general partner of Stone House. Defendant Walter Steinmann, Jr. ("Steinmann") is the sole shareholder of Stafford. Prior to plaintiff's involvement in the restaurant, Steinmann also oversaw Typhoon's financial affairs. (Id. at 24, 33.)

  In 1999, Typhoon's business had decreased and the restaurant was in dire financial straits. (Id. at 25-31.) In an effort to save the business, Steinmann sought to bring in a new partner who would provide an infusion of capital and receive an ownership stake in the restaurant. Through a broker, Steinmann met Burke and the two men began negotiations for the eventual sale of Typhoon to Burke, who had experience in the restaurant business. As a result of these negotiations, the parties entered into three agreements: a Memorandum of Understanding ("MOU") signed on or about June 7, 1999 (Ex. L), a Management Agreement signed on or about June 13, 1999 (Ex. A), and a Stock Acquisition Agreement signed on November 1, 1999 (Ex. E).

  The MOU described the overall agreement between the parties: that Steinmann would transfer 70 percent of his interest in Stafford to Burke, and that Burke would assume managerial and operational control of Stone House and thus Typhoon. As specified in the MOU, in order to effectuate the transfer the limited partners of Stone House would be required to approve certain changes in the partnership structure, including an amendment to "the formula providing for the division of `Distributable Cash' as set forth in the partnership agreement." (Ex. L at 2.) The MOU was eventually superceded by the Stock Acquisition Agreement (Ex. E at ¶ 15), and so the MOU's other specific terms are not relevant to the present action. After the MOU was signed, Steinmann introduced Burke as the new owner of Typhoon, and Burke began managing the restaurant. (Olk. Aff. ¶ 19.) The Management Agreement, signed approximately one month after the MOU, provided the terms of employment during the interim period while Burke was managing the restaurant but had not yet become an owner as anticipated in the MOU and subsequent Stock Acquisition Agreement.

 The Management Agreement

  The Management Agreement states that "Prospective Sellers will cause Stafford to employ Burke as operating manager of the Business for a period of three hundred sixty five (365) days beginning on June 14, 1999, unless terminated earlier pursuant to the terms of this Agreement. . . ." (Ex. A at ¶ 1.) The Management Agreement also includes a provision regarding extensions:
This Agreement . . . may be extended by Burke if determinations on the applications for consent from Landlord, TLC, CPC, SLA and/or BATF have not been received. Prospective Sellers may extend the period set forth in paragraph 1 of this Agreement for a reasonable period of time, but only if there is reasonable certainty that the required consents will be received
(Ex. A at ¶ 10.) The Management Agreement was extended in writing until December 14, 2000. (Ex. Fat 161, Ex. X.)

  The Management Agreement described two scenarios under which it would terminate. First, Burke could be fired for "cause," defined as "(a) criminal charges alleging commission of a felony being brought against Burke by a governmental authority; (b) Burke having committed fraud on the Business or any of the Prospective Sellers; or (c) intentional misconduct of Burke which is materially injurious to the Business." (Ex. A at ¶ 11.) Second, if the necessary consents to the transfer were not obtained from the Stone House limited partners, the Management Agreement would terminate and Burke would be compensated retroactively for his work managing Typhoon at a rate of $2,000 per week from June 14, 1999, until Burke received notice of the termination of the Agreement. (Id. at ¶ 6(A).)

  In addition to the $2,000 per week in retroactive compensation, the Management Agreement provided that if the anticipated transfer of ownership did not occur for any reason other than the four listed exceptions, Steinmann would pay Burke an additional $500,000:
If Steinmann, Jr. fails to sell seventy percent (70%) of the outstanding shares of Strafford to Burke for any reason other than: (a) the inability, despite full cooperation, to obtain consent to the transaction from Stone House, Landlord, Lender, SLA, or BATF; (b) Burke's termination of this Agreement; (c) Burke's decision not to enter into the Stock Acquisition Agreement; or (d) Burke's breach of the terms of the Stock Acquisition Agreement, Steinman Jr. shall pay Burke the sum of $500,000.
(Id. at ¶ 8.)

 Requirement of Consents for the Transfer of Ownership

  As specified in the Management Agreement and the Stock Acquisition Agreement, the transfer of ownership was contingent on receiving the consent to the transfer of stock from a number of parties, including Typhoon's landlord, the New York State Liquor Authority, the Bureau of Alcohol, Tobacco. and Firearms, and the limited partners of Stone House. (Id. at 2-3.) The Stock Acquisition Agreement specified that "all parties will use their best efforts to expeditiously obtain the required consents and will cooperate and comply with all reasonable requests related to obtaining such consents." (Ex. Eat ¶ 4.)

  The Management Agreement placed the responsibility for obtaining all consents on the defendants. As it turned out, plaintiff's attorneys sought and obtained the consents of the liquor authorities and the landlord (Ex. O), and Steinmann took charge of obtaining the consent of the limited partners, an arrangement agreed upon by the parties since many of the limited partners were Steinmann's friends or family. (Olk Aff. ¶¶ 10, 29.) The initial solicitation to the limited partners for consent was dated June 7, 1999, the same date as the MOU. (Ex. H at 20-21.) The solicitation letter requested the partners' consent to restructure both their loans to the partnership and the distribution of income between the limited and general partners. (Id. at 21-23.) It is undisputed that the solicitation sent to the limited partners did not include an opinion of counsel as to the regularity of the transaction, as required by the Stone House limited partnership agreement. Section 13.08(a) of the agreement provides that, in the context of a proposed amendment to the agreement, "[t]he General Partner shall . . . furnish the Partners with an opinion of counsel . . . as to the proposed amendment." (Ex. M.) At his deposition, Steinmann could not recall who drafted this consent letter. (Ex. F at 166-67.) Neither Burke nor his attorneys were involved in the preparation of the letter. (Olk AfF. ¶ 4 4.) On December 17, 1999, Burke's attorneys were notified by Steinmann's personal attorney that more than two-thirds of the limited partners had approved the transaction. (Id. 1145-47).

  In January 2000, on the advice of his attorneys, Burke retained the law firm of LeBoeuf, Lamb, Greene & McRae, L.L.P. ("LeBoeuf) to review the consents which had been solicited by Steinmann. (Id. ¶ 4 7.) In a memo dated June 20, 2000, LeBoeuf concluded that the consents, as obtained, were not sufficient under New York law: "As originally proposed the amendment to the Partnership Agreement would require the approval of 100% of the limited partners of Stone House," because the transaction involved a change to "the manner of computing the distributions of any partner."*fn2 (Ex. W.) In the same letter, LeBoeuf suggested two alternative structures which would permit a two-thirds vote by the limited partners to be sufficient. (Id.) Neither Steinmann nor his attorney disputed the LeBoeuf conclusion, and following their receipt of the memo Steinmann sent a new letter to the limited partners, dated April 12, 2001, to resolicit their consent to the transaction as structured by LeBoeuf. (Ex. F at 103:16-20.) By the time of the second solicitation, however, relations between the parties had soured. Following the new solicitation and a meeting of the partners, only twenty percent of the limited partners gave their consent, far short of the two-thirds needed to effectuate the transfer. The record does not conclusively establish the extent of Steinmann's efforts to obtain ...


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