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MERRILL LYNCH & CO., INC. v. ALLEGHENY ENERGY

April 12, 2005.

MERRILL LYNCH & CO., INC., MERRILL LYNCH CAPITAL SERVICES INC., and ML IBK POSITIONS, INC., Plaintiffs,
v.
ALLEGHENY ENERGY, INC., Defendant. ALLEGHENY ENERGY, INC., AND ALLEGHENY ENERGY SUPPLY CO., LLC., Counterclaim-Plaintiffs, v. MERRILL LYNCH & CO., INC., and MERRILL LYNCH CAPITAL SERVICES, INC., Counterclaim-Defendants.



The opinion of the court was delivered by: HAROLD BAER, JR., District Judge

OPINION & ORDER

Present before the Court are cross motions for summary judgment. Plaintiffs Merrill Lynch & Co., Inc., Merrill Lynch Capital Services Inc., and ML IBK Positions, Inc. (collectively "Merrill Lynch") move for summary judgment with respect to their breach of contract claims as well as defendants' counterclaims for breach of contract, fraud, negligent misrepresentation, and breach of fiduciary duty. Defendants and Counterclaim Plaintiffs Allegheny Energy, Inc., Allegheny Energy Supply Co., LLC. (collectively "Allegheny") move for partial summary judgment with respect to both their counterclaim for breach of contract and the Plaintiffs' breach of contract claim. For the reasons discussed herein, the motions are GRANTED in part and DENIED in part.

I. BACKGROUND

  The facts, prior proceedings, and history of this litigation are more fully set out in the prior decisions in this matter, familiarity with which is presumed. Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 2003 U.S. Dist. LEXIS 21122 (S.D.N.Y. Nov. 25, 2003); Merrill Lynch, 2004 U.S. Dist. LEXIS 21543 (S.D.N.Y. Oct. 6, 2004). Briefly, this case arises out of Allegheny's purchase of Merrill Lynch's energy-commodities trading business known as Global Energy Markets ("GEM") for $490 million in cash and a 2% equity interest in Allegheny Supply ("Supply"). Merrill Lynch brought suit to enforce a provision in the Asset Contribution and Purchase Agreement ("Purchase Agreement") that provided that if Allegheny Energy Inc. ("Allegheny") did not contribute certain assets to Supply, Merrill Lynch had the right to "put" its equity position in Supply back to Allegheny Energy for $115 million plus interest. Allegheny brought counterclaims against Merrill Lynch for rescission, fraudulent inducement, breach of contract, and breach of fiduciary duty. These claims arose in connection with criminal charges brought against the former head of GEM, Daniel Gordon, for wire fraud, money laundering, and conspiracy to falsify books and records relating to his embezzlement of $43 million allegedly for premiums for what turned out to be a sham energy outage insurance contract (the "Falcon Energy" contract) he sold to GEM and which formed part of the Allegheny acquisition. Gordon has since pled guilty and admitted to knowledge that false financial documents were supplied to Allegheny before the sale. (Plea, U.S. v. Gordon, TR. 26:24-28:08) (03cv1494) (Dec. 19, 2003).

  Merrill Lynch moved to dismiss Allegheny's claims and on November 25, 2003 this Court (1) granted Merrill Lynch's motion to dismiss Allegheny's rescission claim, the punitive damages claim based upon fraudulent inducement, and the jury demand; and (2) denied Merrill Lynch's motion to dismiss the fraudulent inducement claim, the breach of contract claim, the breach of fiduciary duty claim, and the punitive damages claim based upon a breach of fiduciary duty. Merrill Lynch, 2003 U.S. Dist. LEXIS 21122 (S.D.N.Y. Nov. 25, 2003). Subsequently, Allegheny moved for leave to amend its counterclaims. On October 26, 2004, this Court granted Allegheny leave to amend but not with respect to any punitive damages on its fraud counterclaim or demand for a jury trial. This Court also denied on work product privilege grounds, production of two reports in connection with an internal investigation sought by Allegheny. Merrill Lynch, 2004 U.S. Dist. LEXIS 21543 (S.D.N.Y. Oct. 6, 2004).

  Present before the Court are cross summary judgment motions. Merrill Lynch seeks summary judgment against Allegheny for Merrill Lynch's breach of contract claim, and Allegheny's breach of contract, fraud, negligent misrepresentation, and breach of fiduciary duty counterclaims. Allegheny seeks partial summary judgment with respect to both breach of contract claims. For the reasons discussed herein, these motions are GRANTED in part and DENIED in part. II. LEGAL STANDARD

  A court will not grant a motion for summary judgment unless it determines that there is no genuine issue of material fact and the undisputed facts are sufficient to warrant judgment as a matter of law. Fed.R.Civ.P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby Inc., 477 U.S. 242, 250 (1986). The party opposing summary judgment "may not rest upon the mere allegations or denials of the adverse party's pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). In determining whether there is a genuine issue of material fact, the Court must resolve all ambiguities, and draw all inferences, against the moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam). When considering cross-motions for summary judgment, the same legal standards apply and a court "must evaluate each party's motion on its own merits, taking care in each instance to draw all reasonable inferences against the party whose motion is under consideration." Make The Road by Walking, Inc. v. Turner, 378 F.3d 133, 142 (2d Cir. 2004) (citations omitted); see also Morales v. Quintel Entm't, Inc., 249 F.3d 115, 121 (2d Cir. 2001) (holding that "each party's motion must be examined on its own merits, and in each case all reasonable inferences must be drawn against the party whose motion is under consideration").

  III. DISCUSSION

  A. Merrill Lynch's Breach of Contract Claim

  To establish a breach of contract claim under New York law, a plaintiff must prove: (1) the existence of the contract; (2) plaintiff's performance; (3) breach by the defendant, and (4) damages. Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996). Merrill Lynch claims that it is entitled to summary judgment on its breach of contract claim because Allegheny breached the Purchase Agreement when it failed to transfer specified generation assets in Supply and subsequently refused to honor the "put." (Purchase Agreement § 5.15.) Allegheny admits that it did not transfer the assets or pay Merrill Lynch for its equity stake, but argues it is entitled to summary judgment because it was effectively released from any contractual obligation through Merrill Lynch's various breaches of representations and warranties in the Purchase Agreement. Merrill Lynch argues that its performance under the contract was complete at the closing of the GEM sale and that the only remedy for a subsequent breach of contract claim lies in Allegheny's counterclaims for breach of contract and fraud, which would serve to offset the put payment. See Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490, 497-98 (2d Cir. 1995) (defendant's breach of loan documents did not excuse plaintiff's performance under the note; amount due defendant under line of credit was to be set off from the damages recoverable by plaintiff for defendant's breach of contract). Because Allegheny accepted the benefit of the GEM purchase for nearly two years, it cannot now retroactively rescind or void the contract. This Court has already held that rescission is not an available remedy. Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 2003 U.S. Dist. LEXIS 21122 at *18 (S.D.N.Y. Nov. 25, 2003). At this point partial rescission is not an appropriate remedy either. The only way Allegheny can be excused from performance on the put is if Merrill Lynch failed to substantially perform. Wechsler v. Hunt Health Systems, Ltd., 330 F. Supp. 2d 383, 421 (S.D.N.Y. 2004) (performance is not excused if the other party substantially performed).

  It is clear that Merrill Lynch did perform in that as it delivered GEM to Allegheny. It is also clear that Allegheny breached the Purchase Agreement when it refused to honor the put. The issue is then whether Merrill Lynch's delivery of the company is enough to satisfy the requirements of substantial performance. See Id. at 421 (citing Hadden v. Consolidated Edison Co. of New York, Inc., 34 N.Y.2d 88, 96, 312 N.E.2d 445, (N.Y. 1974) ("it is not every breach of a constructive obligation which will excuse the other party from rendering its performance under the contract. . . . If the party in default has substantially performed, the other party's performance is not excused.")). If Merrill Lynch has substantially performed, then Allegheny must perform. F. Garofalo Elec. Co., Inc. v. New York University, 300 A.D.2d 186, 188-89, 754 N.Y.S.2d 227 (App.Div. 2002) (holding that if plaintiff "substantially performed its contractual obligations, then it would be entitled to the payment due under the contract less the cost of any correction of defects in its performance," even if the plaintiff breached the contract). Substantial performance is measured by several factors such as (1) whether any part of the contract is yet unfinished, (2) the nature of the default, and (3) the extent to which the aggrieved party has already received the substantial benefit of the performance. CSC Recovery Corp. v. Daido Steel Co., Ltd., 2000 U.S. Dist. LEXIS 1155 at *6 (S.D.N.Y. Feb. 4, 2000).

  Here, there is no performance left for Merrill Lynch. The nature of the default claimed by Allegheny is a breach of the representations and warranties in the agreement, not that Merrill Lynch has any performance to complete. If it breached the Purchase Agreement by misrepresenting what it was selling, the appropriate remedy for Allegheny is through its own breach of contract and fraud claims. Finally, Allegheny has derived the benefit of ownership of GEM for the past two years, and that was the primary purpose of the contract.

  Merrill Lynch also argues that § 9.02 of the Purchase Agreement bars Allegheny from denial of performance because it provides a "sole and exclusive remedy with respect to any and all claims relating to this Agreement and the transactions contemplated hereby (other than claims of, or causes of action arising from, fraud)" as indemnification for losses or damages "actually suffered or incurred." (Purchase Agreement § 9.02(b).) McCready v. Lindenborn, 65 N.E. 208, 211 (N.Y. 1902) (limitations on liability in contract provisions are enforceable by the court). Allegheny contends that this interpretation of the Purchase Agreement does not apply because it uses Merrill Lynch's breach as an affirmative defense and not to seek a remedy. However, the express carve-out for causes of action arising from fraud renders that provision meaningless to this action because the basis of Allegheny's claims is fraud.

  In light of the above, notwithstanding § 9.02 of the Purchase Agreement, it is proper to grant Merrill Lynch summary judgment on the liability issue with regard to its breach of contract claim. Damages should be offset against whatever judgment Allegheny obtains, if any, in its counterclaims against Merrill Lynch. However, for reasons discussed below, the Court cannot hold as a matter of law that Merrill ...


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