Lazard Freres & Co., Plaintiff-Counter-Defendant-Appellee v. Protective Life Insurance Company, Defendant-Counter-Claimant-Appellant
Docket: 616
Court: Court of Appeals for the Second Circuit; March 25, 1997; Federal Appellate Court
Lazard Freres Co. (plaintiff) brought a breach of contract action against Protective Life Insurance Company (defendant) concerning the sale of bank debt valued at $10 million from Maxwell Communications Corp. The district court granted summary judgment in favor of Lazard, concluding that Protective could not establish fraud in the inducement or failure of a condition precedent. The court identified two key factual disputes: the date of contract formation and whether Protective retained the right to review relevant documents until closing. These issues were significant enough for the Court of Appeals to vacate the lower court's decision and remand the case for further examination. The plaintiff, an investment bank, attempted to sell the bank debt shortly after agreeing to purchase it, with Lazard's representative communicating urgency to Protective regarding the immediate purchase due to pending public disclosures. Although Protective's representative, Mark Okada, initially did not commit to the purchase, he later sought approval from his superior, James Dondero, which led to an alleged oral agreement to buy the debt at 41.5 cents on the dollar, contingent on receiving specific representations from Lazard.
Lazard prepared and sent a final written contract, termed the 'Written Confirmation,' to Protective on January 28, 1994. A copy of the Scheme Report was sent to Protective four days later and received on February 2. Protective signed the Written Confirmation on February 8, despite having the Scheme Report for six days and not reading it beforehand, while claiming reliance on Lazard's representations about its contents.
Both oral and written agreements required documentation acceptable to both parties before closing. In late February 1994, after finally reading the Scheme Report, Protective believed it had been misled regarding the payment of debt and the existence of significant litigation against MCC. Consequently, Protective refused to negotiate the final documentation necessary for the bank debt purchase.
Following a substantial drop in the debt's price, Lazard was forced to sell it at a loss and subsequently sued Protective for breach of contract, seeking over $538,000 in damages. Protective removed the case to federal court, asserting defenses of fraud in the inducement and failure of a condition precedent due to Lazard's misrepresentations. Protective acknowledged its refusal to negotiate but claimed it was justified by Lazard's alleged misrepresentations and a contract provision allowing it to void the deal prior to closing.
On May 3, 1996, the district court granted Lazard summary judgment, determining that Protective, as a sophisticated entity, was not justified in relying solely on Lazard’s representations, especially since it had the Scheme Report and failed to read it. The court ruled that Protective could not claim to be defrauded when it neglected to review a document in its possession for six days. Thus, Protective's conduct excused the failure of the condition precedent, and the court did not rule on Protective's assertion regarding the right to void the agreement. An appeal followed.
Summary judgment is reviewed de novo, with all factual inferences favoring the nonmoving party. A genuine dispute exists if a reasonable jury could find in favor of the nonmoving party. The party seeking summary judgment must prove the absence of any genuine factual dispute. In this case, the district court assumed that Protective was not bound to purchase the MCC bank debt until it signed the Written Confirmation. Protective argues that it was contractually bound to the purchase from an earlier oral agreement made on January 28, 1994, and claims its reliance on Lazard’s misrepresentations should be assessed from that date rather than February 8, 1994. Protective supports its position with evidence, including testimony that Okada's statement "We're done" indicated a completed agreement, a phrase understood in the banking community as signifying contract formation. Additionally, the Written Confirmation dated January 28, 1994, seeks to confirm the agreement rather than initiate a new one, with Lazard acknowledging that Okada committed to the purchase on that date. Further, internal communications indicate efforts to finalize the trade before the public release of the Scheme Report, reinforcing Protective's assertion that the deal was consummated on January 28, 1994.
The commitment letter is taken seriously, as are verbal commitments, with the Written Confirmation serving as a written acknowledgment of a prior verbal agreement. Lazard argues that the Written Confirmation indicates Protective accepted the terms, suggesting a legally binding agreement. However, Protective contends that it only considered itself bound after Okada signed the Written Confirmation on February 8, relying on Lazard's misrepresentations. Lazard claims that Protective changed its stance to assert it was bound as of January 28 after realizing it had not read the Scheme Report before signing the Written Agreement.
There remains a genuine factual dispute regarding when Protective became bound. Lazard's interpretation of the term "herein" in the Written Confirmation lacks clarity, and a motion for summary judgment can only be granted if the agreement's language is unambiguous. If the language allows for multiple reasonable interpretations and there's extrinsic evidence of the parties' intent, the meaning of the contract becomes a factual issue preventing summary judgment.
Moreover, Protective's initial pleadings, which might suggest Okada believed he was bound only after signing the Written Confirmation, are contradicted by Okada’s clear deposition testimony. Lazard's argument about due diligence is misplaced; the relevant question is when that due diligence was expected—before signing the Written Confirmation or merely as an acknowledgment of an existing agreement. This creates a factual dispute that Lazard has not resolved, as questions about the parties’ statements, intentions, and understandings are typically factual matters in contract law. In business practice, oral agreements often precede written confirmations, with the latter serving as evidence of the prior agreement rather than constituting a new contract.
In the bank debt market, an oral commitment may not bind a party, with the definitive agreement arising only upon signing a written confirmation. If an oral agreement occurs prior to due diligence, the party generally retains the right to conduct due diligence before signing closing documents. However, at the summary judgment stage, the burden of proof lies with Lazard to demonstrate a lack of genuine material fact, which it failed to do. Therefore, it is assumed that Protective was obligated to purchase the MCC bank debt on January 28, 1994, pending document review before closing. Summary judgment can only be affirmed if Protective's reliance on that date was unjustifiable under applicable state law.
Regarding choice of law, a federal court in diversity cases must follow the forum state's rules—in this case, New York. Historically, New York applied a rigid territorial approach to choice-of-law issues, but has since adopted a more flexible method, focusing on the jurisdiction with the most significant relationship to the dispute. This newer approach considers various significant contacts, such as the place of contracting and negotiation. The district court determined that New York law applies to Lazard's breach of contract claim since the contract was drafted, negotiated, and executed predominantly in New York.
Conversely, the law governing Protective's affirmative defense of fraud in the inducement is less clear. Protective argues for the application of New York's tort principles, but the cited cases do not mandate this result. The district court correctly ruled that the choice of law provision in the contract does not apply to tort claims, as it governs only contractual issues. Thus, while the breach of contract claim is governed by New York law, the question of justifiable reliance in the fraudulent inducement defense resembles a tort issue, complicating the choice of applicable law.
Under New York's choice of law rules, different jurisdictions may apply to tort and contract claims in a lawsuit. However, in this case, only a contract claim exists alongside an affirmative defense rooted in tort. There is no precedent suggesting that New York courts would apply differing laws to a breach of contract claim and its affirmative defense. The validity of a contract is determined by the laws of the state with the most significant relationship to its formation, which in this case is New York. Consequently, New York substantive law governs the affirmative defense of fraud in the inducement.
To establish a fraud claim under New York law, a party must demonstrate justifiable reliance. Courts are reluctant to uphold claims of justifiable reliance when sophisticated parties have access to critical information but fail to act on it. Lazard cites prior cases to support its position, yet these cases are problematic for several reasons: many involved contractual disclaimers of reliance on oral representations, which are not present here; some addressed nondisclosure rather than affirmative misrepresentation, necessitating different proofs; and crucially, the relevant facts in those cases were accessible to the relying party.
In contrast, Protective did not have access to the Scheme Report at the time of entering the agreement, and thus could not investigate independently. Because the information was considered to be within Lazard's exclusive knowledge, Protective had the right to rely on Lazard's representations without conducting further inquiry. Lazard's urgency in encouraging Protective to finalize the deal before the Scheme Report's release compounded this reliance issue.
Murphy acknowledged informing Okada that Lazard was well-informed about the MCC bank debt situation. Okada, communicating from a pay phone in Disney World, had to rely on Murphy's statements to seize an opportunity. Protective, whose evidence is accepted at summary judgment, contended that Lazard structured the transaction so that Protective had to depend on Lazard's representations and commit to purchasing the MCC bank debt before reviewing the Scheme Report. Thus, Protective may have had justification for relying on Lazard's alleged misrepresentations when it orally agreed to purchase the debt on January 28, 1994.
However, it was noted that Protective, as a significant and experienced player in the bank debt market, had a duty to safeguard against misrepresentation. Protective could have requested an examination of the Scheme Report as a condition for closing. A party cannot claim fraud when it fails to exercise due care and proceeds with a transaction without securing necessary documentation or protective language in the agreement. The absence of such language in the contract undermines the reasonableness of reliance on the misrepresentation as a matter of law, though this does not conclude the case since Protective asserts it included such language in the agreement.
Protective's second affirmative defense relates to the failure of a condition precedent. The January 28 oral agreement was made with the understanding that the deal was "subject to documentation," and the Written Confirmation stated that it was conditioned upon the preparation, review, and execution of acceptable documentation. Protective argued that Okada believed this condition allowed him to review the Scheme Report during the documentation process and potentially void the agreement if dissatisfied. Protective maintained that its signing of the Written Confirmation did not negate this right to due diligence. Upon reviewing the Scheme Report during the final documentation process, Okada discovered Lazard's alleged misrepresentations and ceased negotiations.
Protective asserts it secured a contractual provision that protects it from Lazard's misrepresentations by retaining the right to withdraw from the contract after an independent review of documents, specifically the Scheme Report, which contains information unique to Lazard. This claim, which amounts to a month-long option to purchase a volatile security at a fixed price, cannot be dismissed outright due to insufficient uncontested evidence regarding industry practices, the parties' conduct, or the financial implications of their claims. For Protective's argument to succeed at trial, it must demonstrate that the Scheme Report was part of the 'documentation' allowed for review before closing and that such review could occur post-signing of the Written Confirmation, both of which may present challenges in proving.
Lazard contends that the Written Confirmation conditions the deal on the "preparation" and "execution" of documentation, implying it refers only to documents to be created by the parties. However, the phrase "preparation, review and execution of documentation" suggests that it could include pre-existing documents. The Scheme Report, previously forwarded and included among closing documents, supports this interpretation. Additionally, any ambiguity in the Written Confirmation should be construed against Lazard, the drafter, under the contra proferentem principle. Consequently, at this stage, it cannot be definitively stated that the Written Confirmation excludes the Scheme Report from documents that required approval before closing.
The relevance of the Written Confirmation lies in its clarification of the oral contract dated January 28, 1994. The phrase "subject to documentation" does not unambiguously exclude the Scheme Report, as evidenced by Okada's testimony that he understood "documentation" to include it. There are no contradictory statements from Lazard's witnesses. Therefore, it cannot be legally concluded that the agreement did not grant Protective the right to void the contract upon reviewing the Scheme Report prior to executing the final closing documents, nor that Protective acted unreasonably or failed to conduct due diligence in determining Lazard's accurate representation of the Scheme Report's contents.
The contract in question may be interpreted as effective from January 28, 1994, requiring only a ministerial signing of a Written Confirmation, and still allowing for voiding before closing upon diligent examination of documents, such as the Scheme Report. If the contract indeed dates from January 28 and grants Protective the right to review, Protective's refusal to close the deal would be justified in the event of a misrepresentation of the Scheme Report by Lazard, preventing Lazard from recovering for breach of contract. Protective's argument suggests that if it can prove its retained right to review the Scheme Report before closing, it should win, regardless of when the contract became binding. However, the Written Confirmation is ambiguous concerning the parties' intent on January 28, particularly if no binding oral contract existed. Without clear contractual language, a sophisticated party cannot claim a right to review a document it possessed for nearly a week prior to making the contract. Under New York law, genuine issues of material fact remain regarding both the contract's effective date and Protective's rights under the contract. The district court's summary judgment is vacated, and the case is remanded for further proceedings. If the finder of fact determines the contract became effective on February 8, 1994, or concludes that Protective lacked the right to void the deal, Lazard will prevail. Conversely, if Protective proves it was bound by the January 28 oral agreement with a review right and that Lazard materially misrepresented the Scheme Report, Lazard will not be able to recover for breach of contract. The Joint Appendix is sealed, and references herein align with unsealed briefs. Lazard denies the alleged statements but must be assumed true for summary judgment. Additionally, Lazard's argument concerning the enforceability of the oral agreement under the statute of frauds raises further considerations about Protective's binding status prior to signing the Written Confirmation.
The complexity of the statute of frauds raises uncertainty about whether Lazard could enforce an alleged oral agreement if Protective had not signed the Written Confirmation. The contract would be enforceable for amounts up to $5,000, and Lazard might have found an internal document from Protective acknowledging the agreement, which would satisfy the statute. Additionally, Protective's acknowledgment of the contract in court or to third parties could also fulfill the statute's requirements. Since Protective admitted to the existence of an agreement, the statute of frauds does not bar enforcement. Lazard could potentially argue that it relied on Protective's promise, having completed a purchase based on that promise, which may render the oral agreement enforceable despite the statute. The court noted that Lazard's failure to raise this issue until the appeal hindered Protective's ability to establish a factual basis for these considerations. Generally, the statute of frauds cannot be introduced for the first time on appeal, but Lazard may still assert it on remand as evidence of the parties' intent regarding the oral agreement. Moreover, there is confusion regarding whether New York applies the same choice of law rules for tort and contract claims, with the prevailing approach being to apply the law of the jurisdiction with the greatest interest in the litigation.
In New York, the choice of law for contracts and torts is governed by two distinct theories: the "center of gravity" or "grouping of contacts" for contract disputes, and an "interest analysis" for tort claims. The applicable law is determined by the jurisdiction that has the most significant relationship to the issue at hand. While New York traditionally favored the law of the place where a contract was made, this approach has been deemed overly rigid. For instance, the location of the second signature in a contract may be less relevant if the contract was orally agreed upon earlier. In the context of a dispute involving Lazard, a New York partnership, and Protective, a California entity, the court noted that despite Protective's arguments for California law based on traditional factors, New York has moved away from strictly adhering to these factors. Furthermore, if the fraudulent inducement claim were analyzed under tort law, it likely would still favor New York law due to the state's strong interest in the matter. The court also clarified that the justification for reliance on undisclosed information does not require that the information be exclusively known to the defendant. Cases have established liability even when the plaintiff could have uncovered the truth with reasonable investigation.
Lazard may achieve judgment if it demonstrates that the contract was only formed upon Protective's signing of the Written Confirmation on February 8, 1994, as this would indicate that Protective's reliance was unjustified. The case of Rodas, which involved an express disclaimer of reliance, is not directly applicable here, although its principles were reaffirmed in Curran, Cooney, Penney, Inc. v. Young. Koomans, Inc., which did not contain such a disclaimer. The references to the duty of securing protective contractual language in both Rodas and Curran are considered dicta, yet they reflect New York law. Additionally, Protective's argument regarding the absence of closing documentation as a condition precedent is dismissed, as it is unreasonable for a party to agree to a contract and then refuse to negotiate closing documents, which represents a breach of the implied obligation of good faith. Protective contends that its failure to negotiate was justified due to Lazard's alleged fraud, but this claim contradicts the principle that reliance must be justifiable to avoid contract effects based on fraud. Lazard's assertion that industry knowledge negates this is unsubstantiated, especially in light of testimony from Protective's executives, who are experienced in the bank debt market.
