Cauff, Lippman & Co. v. Apogee Finance Group, Inc.

Citations: 807 F. Supp. 1007; 1992 U.S. Dist. LEXIS 12350; 1992 WL 357528Docket: 90 Civ. 5970 (CBM)

Court: District Court, S.D. New York; August 7, 1992; Federal District Court

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The case involves plaintiffs CAUFF, LIPPMAN, CO. and Arthur J. Bernstein, d/b/a Amber International, suing defendants The APOGEE Finance Group, Inc., along with David Gould and Richard Cosse, for breach of contract regarding an agreement made on January 9, 1990. CAUFF, LIPPMAN seeks $1,999,998 in compensatory damages due to APOGEE's alleged failure to perform, while Bernstein claims breach of contract as a third-party beneficiary of the same agreement. Should they not recover damages from the breach, the plaintiffs additionally seek recovery based on quantum meruit for services rendered.

The trial occurred from June 1 to June 10, 1992, and the court established the following facts: 

1. CAUFF, LIPPMAN is a Florida corporation engaged in airplane brokerage, with operations in commercial jet aircraft leasing and financial consulting for airlines, and has processed transactions exceeding one billion dollars.
2. Arthur J. Bernstein, operating as Amber International, is a financial consultant with over twenty years of experience in aircraft leasing and corporate finance, handling more than $550 million in financing since mid-1991.
3. APOGEE, a Delaware corporation and approximately 80% owned by KLM Royal Dutch Airlines, was formed to assist in the disposal of aircraft and to provide financing for KLM and third-party airlines.
4. David Gould, a Managing Director of APOGEE, negotiated the agreement in question, while Richard C. Cosse serves as both a Managing Director and Chief Executive Officer of APOGEE. 

The court's findings are based on the evidence, testimonies, and stipulated facts presented during the trial.

In the summer of 1989, KLM, APOGEE, and Air Littoral aimed to structure a transaction for KLM to indirectly lease six Fokker F-100 aircraft to Air Littoral through various purchase and lease agreements, involving both U.S. and international financing. APOGEE was tasked with securing European financing to enhance its profit and initially planned a French tax lease, which was later replaced by a Japanese tax lease without affecting the duties of CAUFF, LIPPMAN, or BERNSTEIN under a prior agreement. KLM's objectives included removing the aircraft from its fleet, generating cash for APOGEE, enabling Air Littoral to operate and sublease the aircraft, and ensuring discreet structuring to conceal KLM's financial involvement. The U.S. financing segment was essential to compete with a French offer from Banque Nationale de Paris and aimed to provide tax benefits. Plaintiffs became involved in this U.S. financing in August 1989, following a conversation between BERNSTEIN and GOULD, where GOULD expressed KLM's intent and sought BERNSTEIN’s assistance in structuring the U.S. phase. BERNSTEIN was advised to recommend CAUFF, LIPPMAN as a potential unaffiliated buyer for the aircraft. Following this discussion, BERNSTEIN informed CAUFF about the opportunity, which CAUFF expressed interest in, contingent upon meeting their financial requirements.

Cauff and Bernstein selected Credit Suisse as the optimal financial institution for U.S. financing related to a transaction involving KLM and Air Littoral. Bernstein, having an existing business relationship with Credit Suisse, initiated contact with Wallace Henderson, the assistant vice president, in August 1989. Henderson expressed Credit Suisse's willingness to finance the U.S. phase. A meeting on August 28, 1989, in New York City included Gould, who conveyed KLM's intention to use the transaction to support Air Littoral, and confirmed that Bernstein should negotiate with Credit Suisse. Following this, Bernstein met with Henderson and Eric Noyes from Credit Suisse, who requested a term sheet for the financing structure. On September 6, 1989, Bernstein sent a prepared term sheet to Henderson.

Throughout the discussions, it was agreed that KLM would guarantee APOGEE's obligations in the transaction. A subsequent meeting on September 5, 1989, in Miami highlighted the necessity for APOGEE to secure financing terms that surpassed those offered by BNP, the French lender. Bernstein prepared competing financing and lease schedules to present to Credit Suisse, believing they would be more appealing than BNP's offers. These schedules were shared with Gould and subsequently with Air Littoral.

On September 15, 1989, a meeting at APOGEE's office established that the purchase price for each of the six aircraft would be $21,500,000, with a fifteen-year lease term. Profit allocations were agreed upon: Cauff, Lippman, and APOGEE were set to earn $1,999,998 and $1,000,000, respectively. The profit for Cauff and Lippman derived from the difference between the sale price to them ($22,166,667) and the repurchase price from them ($22,500,000).

The sale price of each Aircraft was $333,333.00 less than the repurchase price, totaling $1,999,998.00 for six Aircraft. CAUFF, LIPPMAN's profit margin remained unchanged despite negotiations and financing sources. By late September 1989, Credit Suisse accepted the essential transaction terms and initiated the finalization process. A draft commitment letter from Credit Suisse was received in early October, and on October 4, 1989, KLM confirmed APOGEE's exclusive selling rights for the Aircraft. The KLM guaranty was crucial for Credit Suisse's financing evaluation, leading CAUFF, LIPPMAN to propose a draft guaranty to GOULD on October 12, 1989. On October 23, CAUFF, LIPPMAN agreed to pay AMBER a fee contingent on the closing of transactions involving BERNSTEIN as an agent, with BERNSTEIN’s fee being derived from CAUFF, LIPPMAN's fee. By November 1989, GOULD confirmed KLM's agreement to guarantee the transaction. A meeting on November 29, 1989, involved CAUFF, LIPPMAN, BERNSTEIN, APOGEE, Credit Suisse, and their counsel to finalize documentation for the U.S. phase, where there were no material disputes over Credit Suisse's commitment. Changes to the transaction structure were agreed upon, including KLM selling the Aircraft to APOGEE, which would then sell them to CAUFF, LIPPMAN, who would lease them back. The purchase price per Aircraft increased by $500,000.00, responding to KLM's request for a capital infusion to Air Littoral. The revised structure, replacing a French tax lease with a Japanese tax lease, was also discussed. Credit Suisse was prepared to proceed based on APOGEE's assurance of KLM's approval and guarantee, despite concerns over the transaction's complexity.

Following the November 29, 1989 meeting, a revised contract was drafted between APOGEE and CAUFF, LIPPMAN, changing the structure from a sale/lease-back to a sale/sale-back and increasing the aircraft purchase price to $22 million. An Aircraft Sales and Financing Agreement (ASFA) was designated as the closing document for the U.S. phase of the transaction. In December 1989, due to KLM's additional capital interest in Air Littoral, GOULD requested an extra $500,000 increase per aircraft, raising the price to $22,500,000. Credit Suisse agreed to provide a total loan of $141,000,000 to facilitate the transaction. By December 10, 1989, APOGEE had supplied necessary information for Credit Suisse to continue financing recommendations. On January 7, 1990, Credit Suisse prepared a commitment letter, which CAUFF, LIPPMAN executed on January 9, 1990. GOULD initially objected to hull insurance terms but after negotiations, Credit Suisse removed this provision. Following this change, APOGEE found the contract acceptable and executed it on January 10, 1990, after GOULD confirmed KLM's approval and guarantee of the transaction. The parties instructed their attorneys to finalize documentation for closing. On January 16, 1990, a meeting was held to review documentation, where a simplified transaction structure was proposed, suggesting a direct loan from Credit Suisse to APOGEE instead of through CAUFF, LIPPMAN, aiming to reduce legal costs and complexity. Credit Suisse did not indicate it would withdraw from the original financing arrangement with CAUFF, LIPPMAN.

CAUFF, LIPPMAN expressed willingness to accommodate Henderson's proposal, but stipulated that any changes to the transaction structure were contingent upon receiving the fee outlined in the January 9, 1990 agreement. They emphasized that if the new structure was not pursued, the original terms of the January 9 agreement would prevail without any reduction in the agreed-upon fee. During a private discussion, GOULD conveyed concerns about the optics of a substantial fee being paid to CAUFF, LIPPMAN, but they maintained their stance on the fee. GOULD assured them they would be protected in the transaction, which led to a decision to redraft documents for direct financing through Credit Suisse, with no objections from GOULD thereafter. Henderson confirmed Credit Suisse's readiness to proceed, and the parties agreed to prepare revised documentation for a direct loan, to be reviewed in a meeting set for January 18, 1990.

However, the January 18 meeting was canceled by APOGEE, which had prepared the revised documents as requested. Subsequently, GOULD indicated that he would not complete the transaction unless CAUFF, LIPPMAN agreed to reduce their profit. He presented a message slip from Yasuda Trust, asserting APOGEE's intent to seek financing from Yasuda unless a lower fee was accepted. APOGEE offered $700,000, which Cauff rejected, insisting on the full fee of $1,999,998 as per the January 9 contract. Throughout the discussions, CAUFF, LIPPMAN, and Credit Suisse remained prepared to proceed with the transaction as originally agreed.

On January 19, 1990, APOGEE raised its offer to CAUFF, LIPPMAN to $750,000, which was rejected. On the same day, Apogee Finance Group Air Littoral (AFG-GAL) was incorporated as a special purpose bankruptcy-remote entity to receive loan proceeds from Yasuda. CAUFF, LIPPMAN communicated to COSSE on January 23, affirming their willingness to proceed with the transaction per the January 9 agreement. There were no further discussions between APOGEE and CAUFF, LIPPMAN, and the U.S. segment of the transaction closed in February 1990 with Yasuda as the lender and AFG-GAL as the borrower. CAUFF, LIPPMAN maintained that they would not accept a fee reduction and were prepared to proceed as originally agreed.

APOGEE contended that CAUFF, LIPPMAN and BERNSTEIN failed to meet four conditions precedent in the January 9 agreement. Plaintiffs asserted that these conditions were either fulfilled or rendered impossible due to APOGEE's actions. The first condition required the negotiation and execution of customary documentation, which was hindered by APOGEE's cancellation of a meeting meant for final negotiations. The second condition related to the sale and delivery of Aircraft, not fulfilled due to the same cancellation, although Aircraft were later delivered during the U.S. phase of the transaction. The third condition mandated CAUFF, LIPPMAN to secure a satisfactory loan commitment for the U.S. phase. Evidence indicated that the terms from Credit Suisse were satisfactory to APOGEE, and GOULD had no significant objections that were not resolved prior to the planned meeting. Despite a breakdown in negotiations with CAUFF, LIPPMAN, APOGEE sought direct U.S. financing from Credit Suisse, bypassing CAUFF, LIPPMAN.

APOGEE accepted the terms of the Credit Suisse commitment letter after the hull insurance provision was removed, as indicated by the January 9, 1990 agreement. GOULD stated that APOGEE would not sign the agreement until an acceptable loan commitment was secured. He deemed the January 7, 1990 Credit Suisse commitment letter unacceptable due to its provision allowing Credit Suisse to review Japanese lease documents, which GOULD claimed were sensitive and proprietary. The court found this testimony unpersuasive for three reasons: APOGEE previously provided relevant documents to Credit Suisse and others; Japanese tax leases were common in aircraft finance at the time; and the revised Credit Suisse commitment letter removed the review requirement, instead asking for a representation from APOGEE and KLM regarding adverse lease terms. 

The financing commitment from Yasuda, received on January 29, 1990, mirrored the earlier Credit Suisse proposal and was prepared shortly after discussions with CAUFF, LIPPMAN ended. The terms of both Yasuda's and Credit Suisse's commitment letters were substantially similar, even containing the same typographical error. Yasuda's financing, with negative amortization, matched Credit Suisse's proposed amount, leading APOGEE to save $1,230,000 in total by not proceeding with the January 9 agreement. The court concluded that APOGEE acted in bad faith by canceling a January 18 meeting and refusing to negotiate further with Credit Suisse, despite its interest in financing the U.S. phase of the transaction. GOULD acknowledged the difficulty of negotiations with Yasuda and noted that APOGEE would have continued talks with Credit Suisse if CAUFF, LIPPMAN's compensation had been reduced, justifying this by claiming the risks for CAUFF, LIPPMAN would change if they stepped out of the transaction chain as suggested by Credit Suisse.

The proposed change in CAUFF, LIPPMAN's role would not have significantly impacted their risks or obligations under the January 9, 1990 agreement. The Credit Suisse loan was non-recourse, guaranteed by KLM, and funneled through a special bankruptcy-remote corporation. A key condition for the transaction was KLM's Supervisory Board approval, which APOGEE was responsible for securing. APOGEE contended it did not breach its duty to seek this approval, claiming the transaction was unready for submission and unlikely to be approved. The court disagreed, finding APOGEE acted in bad faith by failing to pursue the necessary steps for approval. 

To secure approval, APOGEE needed to work with Kees Voormolen from KLM's Holdings Department, recommending the transaction to him for further processing. However, GOULD did not recommend the transaction, believing that CAUFF, LIPPMAN's compensation was excessive and would be rejected by KLM. Despite KLM's concerns about the compensation, GOULD did not attempt to negotiate a reduction until after the contract was executed, nor did he inform CAUFF, LIPPMAN, BERNSTEIN, or Credit Suisse about KLM's objections. Instead, he misrepresented to them that KLM had approved the transaction, which constituted bad faith and concealment by APOGEE.

Furthermore, testimony indicated that KLM would have approved the deal despite its issues with the compensation if it had reached the Supervisory Board. Ultimately, the court concluded that APOGEE acted in bad faith regarding its duty to seek KLM's approval.

KLM's Supervisory Board approved a financing arrangement in which Yasuda provided APOGEE with approximately $140.25 million, closing on February 23, 1990. Plaintiffs successfully established their claim for quantum meruit recovery, demonstrating that a reasonable fee for their services was $1.4 million. CAUFF, LIPPMAN filed a lawsuit against APOGEE for breaching a contract dated January 9, 1990, and BERNSTEIN, identified as a third-party beneficiary, claims damages based on this breach. The court affirmed BERNSTEIN's standing to sue, rejecting defendants' argument that BERNSTEIN was merely an incidental beneficiary. Under New York law, a non-party can sue for breach if they are an intended beneficiary, as defined by the Restatement (Second) of Contracts. The court noted that BERNSTEIN was explicitly named in the contract as the broker and that CAUFF, LIPPMAN was responsible for BERNSTEIN's compensation, supporting the conclusion that BERNSTEIN was an intended beneficiary entitled to recovery.

BERNSTEIN is recognized as a third-party beneficiary entitled to recover brokerage fees as explicitly stated in the sub-lease agreement. Paragraph 11 identifies BERNSTEIN as a broker involved in the transaction, confirming all parties were aware of BERNSTEIN's role when the January 9, 1990 contract was executed. CAUFF, LIPPMAN's agreement to pay BERNSTEIN's fees from funds received from APOGEE's performance demonstrates their intention to benefit BERNSTEIN. BERNSTEIN's active participation in structuring and negotiating the contract further solidifies his status as an intended beneficiary with standing to sue.

An enforceable contract requires clear terms that allow for reasonable interpretation of the parties' intent. While not all non-material terms need to be finalized for the contract to be binding, the January 9, 1990 agreement sufficiently outlines the essential terms, including the purchase and resale prices for Aircraft, delivery dates, payment terms, and other critical provisions. The language of the contract indicates a mutual intention to create a binding agreement, obligating parties to negotiate any remaining terms in good faith. Additionally, the inclusion of a condition precedent for KLM Supervisory Board approval does not negate the intention to form a binding contract.

The January 9, 1990 agreement between CAUFF, LIPPMAN, and APOGEE was supported by adequate consideration, as CAUFF, LIPPMAN secured a loan commitment from Credit Suisse, benefiting APOGEE with a viable loan structure. Defendants argued that CAUFF, LIPPMAN abandoned the contract during a January 16, 1990 meeting by agreeing to a new transaction where Credit Suisse would lend directly to APOGEE, resulting in an undefined brokerage fee for CAUFF, LIPPMAN. Mutual agreement to abandon a contract discharges obligations and renders it unenforceable.

Determining whether a contract has been mutually abandoned is a factual question, where abandonment can be inferred from the parties' conduct, which must be clear and inconsistent with an intent to remain bound. If one party refuses to perform, the other can either sue for breach or treat the contract as abandoned, requiring a clear repudiation and refusal to perform.

CAUFF, LIPPMAN did not refuse to fulfill their obligations under the original contract, as they indicated a willingness to proceed with it if parties could not agree on the new structure. Consequently, since the parties never finalized CAUFF, LIPPMAN's compensation under the new proposal, the original contract remained effective, indicating no abandonment occurred.

The core issue in the dispute revolves around whether the conditions precedent in the January 9, 1990 contract were met to enforce it against APOGEE. If performance is contingent on an event that does not occur, obligations do not arise. However, a party cannot use another's failure to meet a condition precedent as an excuse for non-performance if that party caused the condition's failure.

The doctrine of prevention allows a party to be excused from fulfilling a condition precedent if another party wrongfully prevents its occurrence. This principle is grounded in the idea that no party should benefit from their own wrongful conduct that hinders the occurrence of a condition. In this case, the defendant, APOGEE, is found to have an obligation to act in good faith and facilitate the fulfillment of conditions set forth in the January 9, 1990 contract. The implied covenant of good faith requires parties not only to refrain from hindering a condition's occurrence but also to take positive steps to ensure it. A failure to act in good faith can lead to the conclusion that a condition is satisfied or excused, thereby making the contract enforceable.

Applying these doctrines, the court determined that all four conditions precedent in the January 9, 1990 contract were either satisfied or thwarted by APOGEE's bad faith actions. The first condition, which involved negotiating and executing necessary documents, was excused due to APOGEE's wrongful prevention. Despite being obligated to negotiate in good faith, APOGEE halted progress not due to genuine disagreements but rather because of objections to CAUFF, LIPPMAN's previously agreed compensation. By January 16, 1990, the necessary documents were substantially prepared, and changes were agreed upon, but APOGEE canceled a subsequent meeting intended for final execution. At a rescheduled meeting, APOGEE insisted on reducing the agreed fee before proceeding. Similarly, the second condition, which required the sale and delivery of the Aircraft by set dates, was also obstructed by APOGEE.

APOGEE's non-appearance at the January 18, 1990 meeting hindered the execution of necessary closing documents, which would have facilitated the delivery of the Aircraft as per the agreement. The condition precedent related to financing was met when APOGEE secured financing from Yasuda. Additionally, the third condition requiring CAUFF, LIPPMAN to obtain an acceptable loan commitment was satisfied, despite APOGEE’s claims to the contrary. Evidence indicates that APOGEE did not raise significant objections to the Credit Suisse financing during the January 16 meeting and later sought to establish a direct financing relationship with Credit Suisse, suggesting acceptance of the terms previously offered. 

APOGEE’s assertion that the loan commitment was unacceptable appears to stem from its own bad faith, as the breakdown in negotiations was due to CAUFF, LIPPMAN's refusal to lower its fee, which APOGEE deemed excessive. The failure to fulfill the condition precedent of obtaining a loan commitment is attributed to APOGEE's actions, particularly its cancellation of the January 18 meeting and refusal to negotiate further. Even if additional terms were still to be agreed upon, APOGEE cannot evade its contractual obligations due to its own refusal to engage in discussions that could have finalized the agreement. Lastly, the fourth condition precedent regarding approval from KLM's Supervisory Board was not pursued in good faith by APOGEE, thus excusing its requirement.

APOGEE is bound by its contractual obligations regardless of its failure to secure KLM Supervisory Board approval, as it had a duty to negotiate in good faith to finalize closing documents. After entering the January 9, 1990 agreement, APOGEE was required to make earnest efforts to obtain KLM’s approval but neglected to do so, despite being aware of KLM's objections to CAUFF, LIPPMAN's compensation. APOGEE's inaction cannot be justified by these objections, and KLM would have approved the transaction if it had progressed. APOGEE’s refusal to continue negotiations unless CAUFF, LIPPMAN lowered its fees does not relieve it of its contractual duties, especially since the condition precedent of KLM's approval was within APOGEE’s control.

Under New York law, damages for breach of contract must restore the injured party to the economic position they would have occupied if the contract had been fulfilled. CAUFF, LIPPMAN is entitled to $1,999,998.00 in damages, along with pre-judgment interest from January 18, 1990, with these damages also benefitting BERNSTEIN under his commission agreement. Additionally, plaintiffs have a claim for $1,400,000.00 based on quantum meruit due to the benefits conferred on GOULD, who utilized the groundwork laid by BERNSTEIN, CAUFF, LIPPMAN, and Credit Suisse but are limited to the recovery from the breach of contract claim to avoid double recovery. Plaintiffs are awarded $1,999,998.00 plus pre-judgment interest and costs. Claims against individual defendants GOULD and COSSE were dismissed at trial.