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Highland Capital Management LP v. Schneider

June 11, 2010

HIGHLAND CAPITAL MANAGEMENT LP, PLAINTIFF-APPELLEE,
RBC DOMINION SECURITIES CORP., THIRD-PARTY-DEFENDANT-COUNTER-CLAIMANT-APPELLEE,
v.
LEONARD SCHNEIDER, LESLIE SCHNEIDER, SCOTT SCHNEIDER, SUSAN SCHNEIDER, DEFENDANTS-THIRD-PARTY-PLAINTIFFS-COUNTER-DEFENDANTS-APPELLANTS,
JENKINS & GILCHRIST PARKER CHAPIN LLP, DEFENDANT.



SYLLABUS BY THE COURT

Defendants Leonard, Leslie, Scott, and Susan Schneider appeal from the judgment of the United States District Court for the Southern District of New York (Leisure, J.), entered after trial in favor of Plaintiff Highland Capital Management LP and Counter-Claimant RBC Dominion Securities Corp. on the basis of the jury's verdict, and from the court's denial of Defendants' motion for judgment as a matter of law or a new trial. Through an agent, Defendants engaged in negotiations for the sale of certain promissory notes to RBC, which planned to convey them to Highland. Highland and RBC alleged that Defendants' agent made an oral agreement to sell the notes to RBC at a significant discount. Defendants refused to deliver the notes, denying that any agreement of sale had been made. Because the evidence was insufficient to support a finding that Defendants' agent had actual or apparent authority to make the contract on Defendants' behalf or that he made such a contract, the Court of Appeals (Leval, J.) reverses the judgment.

The opinion of the court was delivered by: Leval, Circuit Judge

Argued: September 22, 2009

Before: LEVAL and RAGGI, Circuit Judges, and COTE, District Judge.*fn1

Defendants Leonard Schneider ("Schneider") and his children, Leslie, Scott, and Susan Schneider (collectively, "Defendants" or "the Schneiders") appeal from the judgment of the United States District Court for the Southern District of New York (Leisure, J.), which held them liable for damages to Plaintiff Highland Capital Management LP ("Highland") and Counter-Claimant RBC Dominion Securities Corp. ("RBC") (jointly, "Appellees"), pursuant to a jury verdict after trial, in the amount of approximately $40 million for breach of an alleged contract for the sale of promissory notes. Highland claimed to be the third-party beneficiary of an alleged contract by which the Schneiders, acting through an agent, Glen Rauch Securities ("GRS"), agreed to sell promissory notes of the McNaughton Apparel Group, Inc. ("McNaughton") at fifty-one percent of their face value to RBC. Appellees contend that, after several weeks of negotiation between Glen Rauch of GRS, acting for the Schneiders, and RBC, they concluded the alleged contract in an unrecorded telephone conversation on March 14, 2001. The Schneiders argue, among other contentions, that there could be no contract because their agent, GRS, had neither actual nor apparent authority to make the alleged contract on their behalf. We agree with the Schneiders that the evidence cannot support a finding that Rauch had either actual or apparent authority to make the contract or even that he expressed agreement to sell the notes. We therefore remand to the district court with instructions to set aside the verdict and enter judgment in favor of the Schneiders.

BACKGROUND

The evidence at trial, seen in the light most favorable to Appellees, showed the following. The Schneiders owned and operated two apparel businesses, which they sold to McNaughton in April 1998. In connection with this sale, they received McNaughton's promissory notes for $69 million. The Schneiders later became interested in selling the notes. To assist them in making the sale, they engaged GRS, which acted through its principal, Glen Rauch. Rauch contacted RBC as a potential purchaser. Before beginning negotiations in earnest over the sale of the notes, RBC and Rauch executed a Letter Agreement outlining the terms of the negotiations. The agreement stated:

Reference is made to certain promissory notes [of McNaughton] . . . held by [the Schneiders].

[RBC] understand[s] that Glen Rauch Securities, Inc. ("GRS") represents [the Schneiders] in the possible resale of some or all of the Notes. . . .

We both understand that the consummation of any transaction remains in the sole discretion and satisfaction of the [Schneiders] and [RBC], including without limitation with respect to price.

Pl.'s Ex. 20. Rauch instructed RBC that its communications concerning the proposed transaction should go through him and that it should not communicate directly with the Schneiders.

RBC intended to purchase the notes incurring only minimal risk by, prior to purchase, arranging to resell them to a third party at a markup over its own purchase price. During the course of its negotiations with the Schneiders, RBC received bids for the notes from Highland and another firm.

Most of the negotiations for RBC's purchase of the notes from the Schneiders were conducted by telephone, between Kenneth Ambrecht of RBC and Rauch. Because of doubts about McNaughton's solvency, the negotiations discussed prices representing a 35-60% discount from the face value of the notes. The content of the negotiations is largely undisputed, because RBC routinely recorded all telephone calls through its trading desk. The recordings of the conversations between Rauch and RBC show that, in accordance with the Letter Agreement, Rauch always sought authorization from the Schneiders before making any firm proposal to RBC and always made clear to RBC that any proposed terms required the Schneiders' approval. For example, on January 31, 2001, Ambrecht asked Rauch , "[I]s there any way you can get a firm [offer]?" J.A. 693. Rauch responded, "I'll tell [the Schneiders] to make you an offer." Id. On February 12, after consulting with the Schneiders, Rauch responded to Ambrecht with a "firm" offer at fifty-nine percent of face value. J.A. 708. After RBC rejected this price, Rauch told Ambrecht on February 26 he was "85 percent sure" he could "trade the whole piece at 54 [percent of face value]," explaining his uncertainty by noting, "I mean you know, dealing with individuals that are [laughter]." J.A. 711. Later that day, Rauch told Ambrecht that the Schneiders would "probably" agree to a price of fifty-three for the entire block of their notes. J.A. 719. However, Rauch also told Ambrecht that he had recently spoken with Leonard Schneider and it was Schneider's position that at "anything less than [fifty-four Schneider was] gonna hold on to 'em for a while." Id.

The negotiations continued in similar fashion into March. On March 12, Ambrecht made an offer at 50.5. Rauch replied, "I'm going to have to reflect back because the last thing I told [the Schneiders] was fifty-one is firm and now I've got to go back and tell them fifty and a half." J.A. 769. When the Schneiders rejected this price, Ambrecht said he would attempt to raise the price to fifty-one, but Rauch told him, "No, at this point, now, they're not going to do anything for a day and a half." J.A. 774. Yet on March 13 Rauch still thought "they'll probably trade them all at fifty-one." ...


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