Fort Howard Paper Co. v. William D. Witter, Inc.Fort Howard Paper Co. v. William D. Witter, Inc.
Charles F. Huber, II (“Huber”) and Thomson McKinnon Securities, Inc. (“Thomson McKinnon”) appeal from a judgment of the United States District Court for the Southern District of New York (Keenan, J.), declaring that appellee Fort Howard Paper Company (“Fort Howard”) was not liable in contract to either Huber or Thomson McKinnon for a finder’s fee in connection with the 1983 merger between Fort Howard and the Maryland Cup Corporation (“Maryland Cup”). The judgment also dismissed counterclaims for fraud asserted by Huber against Fort Howard and Maryland Cup. The appeal also seeks review of Judge Keenan’s denial of appellant’s motion to stay, dismiss or transfer this declaratory judgment action,
I. BACKGROUND
The facts precipitating this controversy are, for purposes of this appeal, largely undisputed. Huber, a citizen and resident of Connecticut, was employed in New York City as a promoter of mergers and acquisitions by Thomson McKinnon until June of 1981, when he joined the New York firm of William D. Witter, Inc. (“Witter”) in a similar capacity. In January of 1980, Gerald
A few months prior to this agreement, Dean Porter, another Thomson McKinnon employee, had offered Thomson McKinnon’s services to procure suitable merger candidates for Fort Howard. In May of 1980, Arnold Janofsky, Assistant to the President at Fort Howard, accepted Thomson McKinnon’s offer and requested assistance in locating an “interesting situation.” In a letter to Porter, Janofsky described the type of company Fort Howard was interested in acquiring and noted that “we would appreciate it if you would contact us with available facts and information including your fee, if any.” At this point, both Zentz and Porter solicited Huber’s involvement. From his New York office, Huber called Janofsky in Wisconsin and advised him that he had two possible acquisitions in mind for Fort Howard. Huber promised to try to arrange a meeting with the principals of each company, and Janofsky told Huber that Fort Howard would pay the customary finder’s fee to Thomson McKinnon if a merger or acquisition were to be consummated.
On June 3, 1980, Huber telephoned Janofsky in Wisconsin and told him that he believed Maryland Cup would be a suitable acquisition for Fort Howard. Janofsky expressed interest and requested more information. Huber then telephoned Merrill Bank, Maryland Cup’s Chairman, and scheduled a meeting at Bank’s summer home on Cape Cod. Huber met with Bank on July 11th, and the two discussed the general possibility of Maryland Cup being acquired by a company like Fort Howard. Bank expressed great enthusiasm over such a prospect and Huber revealed the identity of Fort Howard as a likely acquiring company. Bank apparently was excited by this idea and promised Huber that he “would be protected with respect to a finder’s fee.” Huber had indicated to Bank that an appropriate fee would be one-percent of the value of the merger transaction (which ultimately amounted to $570,000,000). Bank reiterated his interest and suggested that Huber set up a meeting with Fort Howard’s President, Paul Schierl, promising that if Fort Howard did not pay Huber’s fee, Maryland Cup would.
One week later, on July 18, 1980, Huber placed a call to Janofsky in Wisconsin. He was referred to Walter Charles, a Fort Howard Senior Vice-President who had replaced Janofsky. Huber informed Charles of his earlier discussions with Janofsky concerning a possible Fort Howard-Maryland Cup merger and of Bank’s desire to meet with Schierl. He also informed Charles that Janofsky had agreed to a one-percent finder’s fee to be paid upon conclusion of the merger. Finally, Huber told Charles that, although Bank had offered to protect him with respect to a fee, he still considered himself to be working for Fort Howard and would look to it for his fee. Charles responded that that was “fine.”
Subsequent to this conversation, Charles was replaced as Huber’s contact on the Maryland Cup transaction by Gerald Korb, an Assistant Vice-President for Finance at Fort Howard. Huber wrote to Korb on August 27, 1980, describing the fee agreement that had been reached with representatives of both Maryland Cup and Fort Howard. Throughout September and October of 1980, Huber spoke with Korb in an effort to arrange a, meeting between Schierl and Bank. After a number of changes and cancellations, Huber managed to schedule the meeting for October 21, 1980. Bank and Schierl met that day in a Chicago hotel room reserved by Huber; Huber was not invited to attend the meeting. In a memorandum to the file dated October 28, 1980, Schierl described the meeting and reported the following:
Bank said he did have a meeting with Huber and that the subsequent events leading to our meeting were with his knowledge and in Bank’s opinion if any deal was ever consummated, Huber would be entitled to some sort of a finder’s fee.
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We agreed that we would contact Huber and say that if we do anything further it will be plant visits, and just generally cool our relationship with him.
After the meeting, Huber made a number of calls to Fort Howard to find out what had transpired. Huber also asked Korb for written confirmation of their finder’s-fee agreement. Korb orally reassured Huber that Fort Howard would pay the fee and that he should stop worrying about it. Huber tried to keep abreast of the negotiations by speaking with both Korb and Bank. Although Bank assured Huber that negotiations were progressing, Korb insisted that the merger was dead. Concerned by these inconsistent reports, Huber sought guidance from Schierl, who reassured Huber that negotiations were proceeding on course. Schierl reaffirmed his promise to pay the finder’s fee and asked that Huber continue to provide Fort Howard with information. He refused to provide a fee letter, however, explaining that it would involve disclosure of the negotiations to the Fort Howard Board of Directors and a consequent compromise of the secrecy essential to the success of the negotiations.
On February 23, 1981, Huber traveled to Wisconsin to meet with Schierl and Timothy Twomey, who had replaced Korb as Huber’s contact at Fort Howard. Huber spoke with Twomey throughout 1981. At Twomey’s request, Huber prepared a “pro forma” analysis of a Fort Howard-Maryland Cup merger. After completing that analysis, Twomey informed Huber that nothing further was needed.
In May of 1981, Huber called Twomey to advise him that he was leaving Thomson McKinnon to join Witter. He similarly advised Schierl by letter. On June 1, 1981, Twomey sent a letter to Thomson McKinnon, with a copy to Huber, stating that Fort Howard “has not agreed to retain either Huber or your corporation as a finder, investment banker or otherwise in connection with the proposed acquisition with Maryland Cup.” Huber called Twomey to question him about the letter, stating that his new employer, Witter, wanted assurances that Huber was acknowledged as the finder in the Fort Howard-Maryland Cup merger. Twomey reassured Huber that the only reason for the letter was to ensure that no one at Thomson McKinnon took Huber’s place in the Fort Howard-Maryland Cup transaction after Huber’s departure. Huber expressed his desire to visit Fort Howard in Wisconsin with William Witter to confirm that understanding, and Twomey agreed. In a letter to Schierl dated June 7, 1981, Huber reaffirmed his faith in Fort Howard’s “sense of fairness,” and Schierl responded that he would be in touch with Huber. Huber and Witter visited Schierl at Fort Howard’s Wisconsin offices and discussed the status of the merger.
On March 9, 1982, Huber called Twomey and was advised that the merger was dead. Huber later learned that the respective Boards of Directors had in fact agreed to the merger, subject to shareholder approval. On August 18, 1983, Huber’s counsel wrote to Schierl, informing Fort Howard that Huber expected to be compensated as the finder in the merger transaction. Thereafter, Huber’s counsel spoke with Fort Howard’s counsel on a number of occasions to explore the possibility of resolving the parties’ dispute. On September 6, 1983, Huber’s counsel was informed that Fort Howard had instituted this declaratory judgment action.
After the close of discovery, the parties briefed what all conceded to be the dispositive issue of choice of law. Although no formal motion was made, Judge Keenan and the parties then agreed that the action could be disposed of by summary judgment. Thereafter, Judge Keenan ruled in Fort Howard’s favor, declaring there existed no finder’s-fee liability, and dismissing Huber’s counterclaims. First, Judge Keenan held that Intercontinental Planning, Ltd. v. Daystrom, Inc.,
We see no error in the district court’s disposition of the contract claims, or in its ruling on the motion to transfer, stay or dismiss. However, because we conclude that Judge Keenan erred in dismissing the fraud claims, we remand the matter for further proceedings.
II. DISCUSSION
A. Transfer, Stay or Dismissal of the Declaratory Judgment Action
Facing the formidable obstacle of New York’s Statute of Frauds, which would bar his contractual claim to any finder’s fee, Huber, not surprisingly, is anxious to see this dispute resolved in Wisconsin where, he believes, the courts are more likely to apply Wisconsin law, under which Fort Howard’s oral promise would be enforceable. See Ehrman v. Cook Electric Co.,
B. The Substantive Claims
1. Contract Claims
The parties’ principal focus on this appeal concerns Judge Keenan’s determination that New York law governs the enforceability of the oral contract. In so holding, Judge Keenan relied almost entirely on the New York Court of Appeals decision in Intercontinental Planning, Ltd. v. Daystrom, Inc.,
First, we think it clear that New York bears enough contacts with the instant dispute to justify application of its law. For example, Huber and Thomson McKinnon are based in New York City and conduct business there; numerous letters and phone calls precipitating the ultimate merger emanated from defendant Huber’s New York office. Indeed, nearly all the services for which Huber seeks compensation were rendered in New York. See Daystrom,
Second, on the basis of Daystrom, we are persuaded that New York enjoys the paramount interest in resolution of this action. The Daystrom court emphasized one of the important legislative purposes underlying the Statute of Frauds: to reduce the substantial number of unfounded and multiple claims for commissions asserted by finders.
Similarly, although both Maryland and Wisconsin may have legitimate interests in the resolution of this controversy, we see none sufficient to outweigh that of New York. As the Daystrom court made clear, “the facts or contacts which obtain significance in defining State interests are those which relate to the purpose of the particular law in conflict.”
Accordingly, we agree with Judge Keenan that New York law must govern resolution of the contract claim. Applying that law, we see no error in the district court’s finding that there existed insufficient writings to satisfy the Statute of Frauds. None of the documents offered by Huber, alone or together, are sufficient to constitute a writing, signed by the party to be charged, which contains either “expressly or by reasonable implication all the material terms of the agreement____” Morris Cohon & Co. v. Russell,
2. Fraud Claims
Judge Keenan also applied New. York law in dismissing the fraud claims. In essence, Huber asserted two instances of fraudulent misrepresentation. First, he alleged that Bank, .Maryland Cup’s Chairman, had falsely promised to pay his finder’s fee in return for his disclosure of the prospective acquiring company; He claims to have relied on that misrepresentation in undertaking further efforts toward negotiating the merger, not seeking other suitable acquisitions for Fort Howard, and not seeking further protection of his fee arrangement. Second, Huber alleged that Schierl, Fort Howard’s President, fraudulently misrepresented that he could not issue a fee letter but that Fort Howard would nonetheless pay his fee. In reliance on these two statements, Huber claims to have continued his efforts at promoting the merger.
Judge Keenan quite properly recognized that a party barred by the Statute of Frauds from pursuing a breach of contract claim is not necessarily barred from pursuing an action in tort. See Channel Master Corp. v. Aluminum Limited Sales, Inc.,
Relying on Channel Master Corp. v. Aluminum Limited Sales, Inc.,
The present action is in tort, not contract, depending not upon agreement between the parties, but rather upon deliberate misrepresentation of fact, relied on by the plaintiff to his detriment. In other words, the “legal relations” binding the parties are created by the utteranceof a falsehood “within a fraudulent intent” and by reliance thereon and the cause of action is entirely “independent of contractual relations between the parties.” As we wrote in Sabo v. Delman, 3 N.Y.2d 155 , 159,164 N.Y.S.2d 714 , 716 [143 N.E.2d 906 ], “it is well to bear in mind that the complaint before us neither asserts a breach of contract nor attempts to enforce any promise made by defendants.” If the proof of a promise or contract, void under the statute of frauds, is essential to maintain the action, there may be no recovery, but, on the other hand, one who fraudulently misrepresents himself as intending to perform an agreement is subject to liability in tort whether the agreement is enforcible [sic] or not.
Judge Keenan pointed to the significant fact that, in Channel Master, the plaintiff specifically sought damages incurred in reliance on the defendant’s misrepresentations and that the complaint neither asserted a breach of contract nor attempted to enforce any promise made by the defendant. “Thus, the fraud claim was actionable because the injury alleged was the detriment actually suffered by plaintiff rather than the value of what defendant promised.” Slip op. at 27. On the other hand, Judge Keenan noted, “if the only interest at stake is that of holding a party to a promise, the party seeking relief ‘may not transmogrify the contract claim into one for tort.’ ” Id. (quoting Hargrave v. OKI Nursery, Inc.,
We reject this conclusion for two reasons. First, although not discussed by Judge Keenan, Huber’s request for punitive damages distinguishes the fraud claims from those in contract. Generally, of course, punitive damages are not allowed in contract actions, while they quite properly are in tort actions. See Thyssen, Inc. v. S.S. Fortune Star, 777 F.2d 57, 63 (2d Cir.1985); Brink’s Inc. v. City of New York, 717 F.2d 700, 704-05 (2d Cir.1983); Garrity v. Lyle Stuart, Inc.,
Second, and more important, we conclude that Judge Keenan erred in dismissing Huber’s otherwise well-pleaded fraud claims simply because the ad damnum demands were too high. “[I]f a tort
Our recent decision in Lehman v. Dow Jones makes clear the availability of an independent action for fraud based upon an unfulfilled fraudulent promise to pay a finder’s fee. On facts strikingly similar to those presented here, Judge Friendly, writing for the panel, noted that under New York law, “the plaintiff in a fraud action predicated on a promise made with no intent to perform may nonetheless ‘recover the direct pecuniary loss, if any, suffered by reason of the wrong.’ ” Lehman v. Dow Jones, at 295 (quoting Solin Lee Chu v. Ling Sun Chu,
In short, we find that Judge Keenan improperly dismissed Huber’s legally distinct fraud claims. In so holding, we perceive no erosion in the viability of the Statute of Frauds defense in contract actions. By affording claimants the opportunity to assert fraud claims premised upon oral promises of remuneration, we do not more than curb the Statute of Fraud’s use as a shield for wrongdoers. See Imperator Realty Co. v. Tull,
The preceding discussion assumes application of New York law to the fraud claims. Judge Keenan concluded that under either a lex loci delicti or governmental interest analysis, New York’s law must apply. The traditional lex loci doctrine requires application of the law of the place where the plaintiff’s injury occurred. Schultz v. Boy Scouts of America, Inc.,
Huber contends that New York law should not apply, arguing that “Daystrom interest ... is surely not so omnivorous that it swallows up claims based on independent fraudulent representations ____” In particular, he argues that in Daystrom, the fraudulent promise was identical to the contractual promise, while here, the promises are wholly independent. We disagree. First, Bank’s promise that Maryland Cup would pay Huber’s fee if Fort Howard did not must be viewed as fundamentally identical to the original contractual promise upon which Huber sued, since it too embodied an agreement to pay a finder’s fee in the event of a successful merger.
III. CONCLUSION
To summarize: We affirm the district court’s decision denying Huber’s motion to stay, transfer or dismiss the declaratory judgment action. We also affirm the district court’s decision insofar as it applied New York law to the contract claims and found those claims to be barred by the Statute of Frauds; we reverse the district court’s dismissal of the fraud claims. On remand, the district court should evaluate the reinstated fraud claims subject to the
Notes
. According to Huber, "[w]hile counsel for the parties were discussing settlement, Fort Howard was actually preparing its declaratory judgment complaint to be filed in the Southern District of New York, so as to enable the Wisconsin based Fort Howard to avoid Schaller v. Litton Industries, Inc.,
. Under New York law, any "contract to pay compensation for services rendered in ... negotiating the purchase, sale [or] exchange ... of a business opportunity [or] business,” whether the contract be "implied in fact or in law to pay reasonable compensation," is void unless "it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith____” N.Y.Gen.Oblig.Law § 5-701(a)(10) (McKinney Supp.1986). There is no doubt that § 5-701(a)(10) bars oral finder’s-fee contracts. See Freedman v. Chemical Constr. Corp.,
. Huber has abandoned his promissory estoppel claims on appeal, and, accordingly, we do not reach them.
. In Daystrom, (1) the defendant came to New York to obtain the services of a finder; (2) the finder sought a suitable acquisition in New York; (3) the acquired corporation had responded to the finder’s New York solicitation in the New York Wall Street Journal; (4) the finder introduced the principals of the merger to each other in New York; (5) a finder’s-fee agreement was negotiated in New York between the parties; and (6) the principals agreed to compensate the finder during a meeting in New York. From these facts, appellants contend that “Daystrom’s rationale applies only when a principal comes into New York, relying on its reputation as an international clearing house for business, to seek a finder. Where an out-of-state principal does not initiate the contact with a New York finder, the finder’s location in New York becomes fortuitous.” We do not read Daystrom so narrowly. In holding that the Statute of Frauds protects foreign principals "who come into New York,” the Court of Appeals sought to extend the rule’s protection to all non-New York residents who take advantage of the state's position and reputation as a market place and clearing house; it did not seek to protect only the more limited class of those who actively seek out New York as a forum for their transactions. Indeed, as Judge Keenan found, Huber was a beneficiary of New York’s policy of encouraging foreign principals to use New York finders, safe in the knowledge that the laws of New York would offer them protection from unfounded claims of oral promises.
. For example, the most important writing offered by Huber is Janofsky’s letter to Porter at Thomson McKinnon suggesting that Fort Howard might be interested in a potential acquisition. The letter requested Porter to contact Fort Howard "with available facts and information including your fee, if any.” There certainly is to be found no promise to pay a finder’s fee in that invitational language. The second writing offered by Huber is an internal Fort Howard memorandum authored by Schierl following his meeting with Merrill Bank, Maryland Cup’s Chairman. The memorandum indicates that Bank thought Huber would be entitled to a finder’s fee; it is silent as to any acknowledgment of obligation by Fort Howard, with whom Huber claims to have contracted. The remaining documents are even less helpful to Huber, consisting of two of his own letters to Fort Howard detailing his concerns over the absence of a fee letter, another Fort Howard internal memorandum, pointing out that Huber had expressed such concerns, and finally, a Fort Howard letter to Huber flatly disclaiming any finder’s-fee liability. The district court did not err in concluding that these writings were insufficient as a matter of law to satisfy the Statute of Frauds.
. Critical to this conclusion was Judge Keenan’s determination that New York law would govern the fraud claim. Under New York law, the measure of damages for fraud is governed by the "out-of-pocket rule," e.g., Dress Shirt Sales, Inc. v. Hotel Martinique Assocs.,
Were New York’s measure of damages not to apply, the foregoing contract/fraud analysis would lose relevance since hoth fraud and contract claims would afford equal damage measures. Indeed, Judge Keenan specifically stated that under the law of Wisconsin or Massachusetts, in contrast to that of New York, a plaintiff barred from asserting a contract claim by the Statute of Frauds could seek to recover his finder’s fee under a theory of fraud.
. Ultimately, the Lehman panel affirmed dismissal of plaintiffs fraud claim for failure to establish the required element of injury. Judge Friendly concluded that the plaintiff had suffered no pecuniary loss stemming from the fraud itself since the services provided to effectuate a merger, e.g., tracking and analyzing the prospective acquired company, were those which were plaintiff’s very business. Critical to that conclusion was the fact that the plaintiff in Lehman had performed these services and made available their product to a number of prospective acquiring companies in the hope of stimulating an eventual merger. See at 296, 297 n. 12. The present case clearly falls within the holding of Shapiro v. Dictaphone Corp.,
. Indeed, paragraph 61 of Huber’s Amended Answer and Counterclaims set forth that he and Maryland Cup, through Merrill Bank, had an agreement concerning the payment of a finder’s fee.
. Although New York’s out-of-pocket rule limits the damages recoverable by a fraud plaintiff to actual pecuniary loss, Reno v. Bull,