Case No. 01-12974 (SMB)United States Bankruptcy Court, S.D. New York.
September 26, 2001
Kirkland Ellis, Attorneys for Defendants, New York, New York, Yosef J. Riemer, Esq., Lena Mandel, Esq., Of Counsel.
Stern Greenberg Kilcullen, Co-Counsel for Plaintiffs, Roseland, New Jersey, Herbert J. Stern, Esq., Joel M. Silverstein, Esq., Of Counsel.
Wasserman. Jurista Stolz, P.C., Co-Counsel for Plaintiffs, Milburn, New Jersey, Daniel M. Stolz, Esq., Harry M. Gutfleish, Esq., Of Counsel.
MEMORANDUM DECISION DISMISSING ADVERSARY PROCEEDING
STUART M. BERNSTEIN, Chief United States Bankruptcy Judge.
The plaintiffs commenced this adversary proceeding for a judicial declaration that a certain merger agreement, described below, was repudiated before the petition date by the debtor Teligent, Inc. (“Teligent”). Further, the plaintiffs Graham Sampson (“Graham”), his spouse Linda Sampson (“Linda”), Michael Nazaruk (“Michael”) and his spouse Karin Nazaruk (“Karin”), seek a declaration that the repudiation relieved them of their obligations under non-competition and non-disclosure agreements that they signed in connection with the merger.[1]
With the consent of all of the parties, the Court tried the repudiation issue on an expedited basis. Following a one day trial at which three witnesses testified and the Court received numerous documents, I conclude that the plaintiffs have failed to sustain their burden of proving a repudiation, and accordingly, the complaint is dismissed.
BACKGROUND
At all relevant times, Teligent was primarily engaged through its affiliates in the telecommunications business. In April 2001, IDT Corporation acquired approximately 29% of Teligent’s common stock, and Teligent and the other debtor affiliates filed chapter 11 petitions in this Court on May 21, 2001.
The events in question pre-date the bankruptcy and involve Teligent’s acquisition of Executive Conference, Inc. (“ECI”)[2] in September 2000. ECI was engaged in the business of providing teleconferencing services to its business customers. Graham and Michael started the business in February 1991 (Tr. 51)[3] , and owned equal shares. (Id. at 52.) Largely through Graham’s leadership, ECI continued to grow during the 1990s, doubling in size every eighteen to twenty-four months. (Id. at 54.) During 1996, 1997 and 1998, ECI INC 500 awards as one of America’s fastest growing companies. (Id. at 57.)
At the same time, Graham garnered personal recognition for his role in ECI’s success. From 1996 through 1999, he received an award for New Jersey’s finest business service, and was inducted into a business hall of fame in 1999. (Id.) Furthermore, in 1997, Graham won the Entrepreneur of the Year Award in the business services category for the nine states comprising the Eastern Region of the United States. (Id. at 57-58.)[4]
By 2000, Graham was putting substantially more time into ECI than Michael who was anxious to retire. (See id. at 55-56, 58.) Graham sought to buy out Michael’s interest, but the two could not reach agreement. Eventually, ECI retained Ernst Young to shop the company. (Id. at 62-63.) Ernst Young organized a “controlled auction” process, and narrowed the potential buyers to Teligent and one other company. (Id. at 63.) While Teligent’s “core” business concerned the delivery of wireless and wired telecommunication services, it also operated other enterprises. Teligent was eventually chosen, paving the way for an acquisition agreement.
A. The Merger Agreement
To effect the acquisition, Teligent and ECI entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), dated effective as of August 16, 2000, but not actually signed until on or about September 29, 2OOO.[5] (Id. at 79-80.) The other parties to the Merger Agreement included Graham, Michael, and their family trusts, respectively, the Sampson Family 2000 Trust (the “Sampson Trust”) and the Nazaruk Family 2000 Trust (the “Nazaruk Trust”). The Merger Agreement is a comprehensive document containing many provisions, and the following discussion is necessarily limited to those pertinent to the pending dispute.
1. The Merger Consideration
The Merger Agreement provided for three forms of merger consideration payable to Graham, Michael and the two trusts.[6] At the closing, Teligent tendered $50.84 million in cash and Teligent common stock (the “Initial Payment”) with Graham receiving $18.47 million and Michael $32.37 million. (Merger Agreement ¶ 2.02(e)(i).) In addition, Teligent promised to use commercially reasonable efforts to obtain the release of their guarantees of corporate indebtedness from Fleet Bank, and if necessary and permissible, substitute its own guarantee. (Id. at ¶ 5.15.)
Next, Teligent agreed to pay Graham and Michael the aggregate sum of $19.3 million in “Deferred Merger Consideration,” divided between Graham and Michael on a 41.192%/58.808% basis. The payments were due in three annual installments marking the first, second and third anniversaries of the Merger Agreement, or on September 30, 2001 ($7.15 million), September 30, 2002 ($7.15 million) and September 30, 2003 ($5.0 million). In addition, Teligent agreed to pay interest accruing on the unpaid Deferred Merger Consideration at the annual rate of 6%. No more than 40% was payable in cash with the balance in Teligent common stock. Within this range, Teligent made the allocation between cash and stock. (Merger Agreement ¶ 2.02(e)(ii).)
Lastly, Teligent agreed to pay Graham EBITDA Merger Consideration on or before November 30, 2003. (Merger Agreement ¶ 2.02(e)(iii).) The amount was unliquidated, and would be determined based on ECI’s earnings (before income taxes, depreciation and amortization). The EBITDA Merger Consideration was payable in Teligent common stock or stock and cash, although the cash component could not exceed 50%. Again, Teligent made the allocation.
2. The GS Retention Bonus
Although Michael intended to retire from ECI, Graham did not. The Merger Agreement included separate provisions furnishing Graham with additional compensation, called the GS Retention Bonus, based on his continued employment. (Merger Agreement ¶ 5.10.) The GS Retention Bonus was payable for each of the 12 month periods ending September 30, 2001, September 30, 2002 and September 30, 2003, provided that Graham had not been terminated for cause or quit ECI voluntarily prior to the expiration of the applicable period. At the closing, Teligent disbursed an additional $1.7 million to Graham as a prepayment of the September 2001 installment. (Id.) Important to the present dispute, Graham’s termination without cause did not affect his right to the GS Retention Bonus.
3. The Non-Compete/Non-Disclosure Agreement
As part of the merger, Graham, Linda, Michael and Karin were required to execute a Related Party Non-Competition and Non-Disclosure Agreement the “Non-Compete/Non-Disclosure Agreement”). (See Merger Agreement ¶ , Ex. A (blank agreement); PX 36 (agreement executed by Graham).) As the title suggests, the Non-Compete/Non-Disclosure Agreement restricted their right to compete or disclose confidential business information. The non-competition obligation ran for five years, and in Graham’s and Linda’s case, five years after the cessation of Graham’s employment “for any reason.” (PX 36, ¶I.B.)
B. The Post-Merger Problems
Following the merger, Graham served as ECI’s chairman and chief executive officer (“CEO”). ECI’s post-merger performance continued to improve under his stewardship, and exceeded pre-merger projections. (Tr. 81, 85.) Teligent, however, was struggling, and Graham became increasingly concerned that it would not be able to meet its post-merger obligations. On March 7, 2001, Graham wrote to Alex Mandl, Teligent’s then-CEO, offering to buy ECI back. (PX 34A.) After noting that Teligent still owed $19.3 million plus an unliquidated amount of EBITDA consideration, Graham made the following proposal: he would pay $40 million on closing, return the approximate 2.2 million shares that he had received as part of the Initial Payment, assume the obligation to pay Michael his share of the Deferred Merger Consideration and release Teligent from the EBITDA payout considerations.
There is no evidence that Mandl or Teligent responded to the proposal. Furthermore, Teligent was about to undergo a substantial change. In April, IDT Corporation acquired Liberty Media’s approximate 29% stake in Teligent, making it the largest shareholder. On or about April 28, 2001, IDT installed Yoav Krill, one of its officers, as CEO of Teligent. (See
Tr. 230.) Krill, a former pilot in the Israeli Air Force, (id. at 227), received unambiguous “marching orders” mdash stop the bleeding. (Seeid. at 223, 238.) Given the timing, it appears that part of IDT’s strategy included a chapter 11 filing.
Krill set about his mission with alacrity. He established a management team, (id. at 231-32), and commenced a review of the Teligent subsidiaries. (Id. at 191-92, 237.) Where necessary to stem continuing losses, he was prepared to close divisions. (Id. at 238.) He also imposed a Teligent-wide hiring freeze. (Id. at 88.) Although ECI’s profitable operations did not pose a concern, it was nevertheless swept up in Teligent’s hiring freeze, and Graham’s plea for a dispensation got nowhere. (Id. at 89-90.)
On May 10, 2001, Graham wrote to Krill, reiterating his interest in buying ECI. (PX 34.) His letter enclosed his earlier letter to Mandl. Krill was too busy dealing with Teligent’s immediate problems and the impending chapter 11 filings, and had no time to focus on the profitable ECI. He glanced at the covering letter, and forwarded both letters to the Teligent legal division. (See Tr. 202-04.) On May 10, Graham’s lawyers also wrote to Krill, demanding “adequate assurance” that Teligent would perform its payment obligations under the Merger Agreement. (PX 14.) Krill sent this letter to the legal division without reading it. (Tr. 207-08.) Graham’s lawyer sent Krill a corrected “adequate assurance” letter the next day. (PX 15.) Krill read the covering letter, but again, sent the revised “adequate assurance” letter to the Teligent legal division without reading it. (See Tr. 211-12.)
C. The Termination of Graham’s Employment
Unbeknown to Graham, his tenure at ECI was about to end. On May 14th, Teligent held a special telephonic board meeting in which Krill participated. According to the minutes (PX 42), Stuart Kupinsky, Esq., Teligent’s general counsel, advised the board that Teligent was “having difficulty” with Graham. Graham was “reluctant to cooperate” with Teligent. This “affected his performance and the operations and integration of ECI,” and Teligent had been preparing to fire Graham “for cause” even before the recent change in Teligent’s management. (Id.) Kupinsky also raised the matter of Graham’s bonus (estimated at between $10 million and $30 million over three years)
This led to a discussion of three possible courses of action: (1) terminate Graham before bankruptcy, rendering his bonus claim a pre-petition obligation, (2) terminate Graham post-petition, possibly prejudicing the bank group’s rights, or (3) allow Graham to continue to operate ECI. It is not clear how seriously the board considered the last option. After outside counsel, also participating in the call, noted that it would be better for the company to terminate Graham pre-petition, the board resolved to terminate Graham’s employment with ECI as “desirable and in the best interests of [Teligent].”[7] Following the meeting, Krill sent Graham a memorandum stating that his employment was terminated, effective immediately. (PX 1.)
D. The Repudiation Claim
During this time, Graham was vacationing in Fort Lauderdale; Krill thought it his duty to deliver the news personally. (Tr. 246-47.) Responding to Krill’s voice mail message, Graham called Krill on May 15th They had two brief conversations that day which form the basis of the repudiation claim. Graham placed the first call from his cell phone at 1:51 p.m.[8] It lasted three minutes until the connection was lost. According to Graham, Krill said that he was calling to notify Graham that he was being dismissed, effect i.e. immediately. Krill emphasized that he was just the messenger, and that the decision had been made by the Teligent board and the banking group. Krill advised Graham that the management committee had already been told, and that the employees would be informed that evening that they were “stalling in my contract.” (Id.
at 97.) Graham responded
that’s a breach of my contract, you can’t do that. Are you going to pay me out on my contract?
(Id. at 97-98.) Krill said “no,” and the phone connection disconnected. (Id. at 98.)
Sampson did not call Krill right back. Instead, he called his lawyers and spoke to them for twelve minutes, and also contacted Tom Calderone, and ECI employee, who he spoke with for ten minutes. He then called Krill back.
During the second conversation, which lasted approximately six minutes, Graham again warned Krill
you can’t breach this — you can’t terminate my employment. That’s not — that’s not part of it. I have a complete agreement that pays me out through 2003.
(Id. at 98.) According to Graham, Krill conceded that Teligent was breaching “the contract,” (id. at 98), and suggested that Graham consult his lawyers. (Id. at 99.) Finally, Krill confirmed that buying ECI back remained an option. (Id. at 140.)
All of these conversations took place while Graham was in a restaurant with five other people eating lunch. (Id. at 141.) He took contemporaneous notes of his conversations with Krill on the back of a place mat. (See PX 13.) The notes confirm much of the substance of his testimony, including Krill’s acknowledgment of the breach. Curiously, however, the notes do not refer specifically to any payments due under the “contract,” or Teligent’s refusal to make them.
Krill’s recollection of the telephone conversations was less precise. He told Graham that Teligent had decided to dismiss him for the good of the company, and that the decision had been approved by the board. (Tr. 247-48.) Krill initially testified that Graham never said that his termination was a breach of contract, (id. at 248), but then conceded that he might have. (Id. at 248-49.) Krill confirmed that Graham would not be paid out, and added that Teligent would do whatever it was legally obligated to do. (Id. at 188-89.)
Between the two calls, Krill received a call from Graham’s lawyer which he referred to Teligent’s legal counsel, and accordingly, was “on alert” when Graham called back. (Id. at 189-90.) During the second call, Krill simply repeated to Graham that he was being dismissed for the good of the company, and that Teligent would do whatever he legally had to do. (Id.
at 190.)
Krill’s secretary took notes of both conversations. (See PX 3 (contemporaneous handwritten notes); PX 2 (typewritten version).[9]
According to these notes, the Krill told Graham that he was being dismissed as president of ECI, and that his dismissal was for the benefit of the company. Graham responded “that contractually we could not do that.” The notes do not reflect any discussion of contractual payments or a pay out during the first call.
According to the notes, Graham first raised the payment during the second call, after he had spoken to his lawyers. The notes reflect that Krill repeated that Graham’s dismissal was for the good of the company. Graham reiterated that this was “against his contract with Teligent.” It was only then that Graham asked about the “payout of the contract and if Teligent was going to be doing it.” Krill said that “Teligent was not going to be doing the payout and “he would do whatever legally he needed to do.'” Finally, Krill said that Graham’s buying back ECI was still an option.
E. The Aftermath of the Dismissal
The plaintiffs in this adversary proceeding filed a diversity action against Teligent in New Jersey District Court six days later. (See PX 58.) They sought specific performance, or alternatively, rescission of the Merger Agreement and restitution by the plaintiffs of the benefits received. In the event the district court awarded rescission and restitution, the plaintiffs also sought PCI’s profits during the intervening period. Finally, Graham sought to recover for the reasonable value of his services. The district court action was filed on the same day as the chapter 11 petitions, and was automatically stayed.
Shortly, thereafter, the plaintiffs filed this adversary proceeding. They no longer seek specific performance. Instead, they seek a declaration that Teligent breached the Merger Agreement, freeing them from the obligations under their respective Non-Compete/Non-Disclosure Agreements.
DISCUSSION
The Merger Agreement states that it is governed by Delaware law (¶ 10.06), and the parties agree that Delaware law controls the issue of repudiation. Under Delaware law, a repudiation occurs when the promisor communicates his refusal to perform his promise in a positive and unequivocal manner. Cochran v. Denton, Civ. A. No. 11826, 1991 WL 220547, at *1 (Del.Ch. Oct. 28, 1991); Elliot Assocs., L.P. v.Bio-Response, Inc., Civ. A. No. 10624, 1989 WL 55070, at *3 n. 1 (Del.Ch. May 23, 1989) (applying New York law but noting its similarity to Delaware law); Carteret Bancorp, Inc. v. Home Group, Inc., 1988 WL 3010, at *5 (Del.Ch. Jan. 13, 1988); Sheehan v. Hepburn, 138 A.2d 810, 812 (Del.Ch. 1958) (“outright” refusal to perform); accord Citisteel USAInc. v. Connell Ltd. Partnership, 758 A.2d 928, 931 (Del. 2000); seealso RESTATEMENT (SECOND) OF CONTRACTS § 250, cmt. b (1981) (“In order to constitute a repudiation, a party’s language must be sufficiently positive to be reasonably interpreted to mean that the party will not or cannot perform”). The test is an objective one, and Court must consider the promisor’s communication in light of the facts and circumstances of the case. See Citisteel USA, Inc. v. Connell Ltd.Partnership, 758 A.2d at 931-32; Johnson Forge v. Leonard, 51 A. 305, 308
(Del. 1902)
The plaintiffs’ repudiation claim is based solely on Krill’s statement to Graham that Teligent would not pay him under his “contract. Since the other plaintiffs failed to offer evidence of any statements made directly to them, their repudiation claims fail as a matter of law. See
RESTATEMENT (SECOND) OF CONTRACTS § 250 cmt. b (“The statement must be made to the obligee under the contract, including a third party beneficiary or an assignee.”) As to Graham, the only “contract” imposing payment obligations was the Merger Agreement. From this, Graham reasons that Teligent repudiated all of its payment obligations.
Graham’s argument has superficial appeal, but in the end, overlooks the ambiguity in the words he and Krill used in light of the surrounding circumstances. As noted, the Merger Agreement granted two, independent forms of consideration: the merger consideration and the GS Retention Bonus, a form of employment compensation. Graham’s dismissal, regardless of the reason, did not affect his right to the merger consideration (or his obligation under the Non-Compete/Non-Disclosure Agreement). It might, however, off his right to the GS Retention Bonus if Teligent dismissed him “for cause.” Neither party referred to the Merger Agreement or the payment of the merger consideration during their discussions. Thus, when Krill dismissed Graham and confirmed that Teligent would not pay him under the “contract,” it is equally plausible that the two were focused on the GS Retention Bonus — the only payment that might hinge on Graham’s continued employment.
In this regard, both mistakenly believed that Teligent (or ECI) had a separate obligation to employ Graham. In truth, no such duty existed. Teligent was free to dismiss Graham with or without cause, and as seen, the reason for dismissal only affected the obligation to pay the GS Retention Bonus. Yet, as Graham himself testified, when Krill began the first conversation by telling him that he was fired, Graham responded that his discharge was a breach of contract. Krill, who had taken over Teligent less than three weeks earlier, also believed that Graham had an employment agreement, and assumed that this was the contract to which Graham was referring. (Tr. 218-20.)
The documentary evidence bolsters the finding that the breach of contract and payment discussions focused on Graham’s dismissal and Teligent’s employment-related obligations, and not the merger consideration. In this regard, I give more weight to the parties’ contemporaneous notes than to their testimony regarding conversations that took place eleven months later.[10] Krill’s secretary’s notes do not reflect any talk about payments during the first three minute call. Graham’s reference to Teligent’s breach clearly refer to Graham’s dismissal, not his pay out. Moreover, Graham’s notes allude to his dismissal and to Teligent’s knowledge that its action was a “breach, ” but do not mention payments or pay outs.
Instead, the secretary’s notes show that Graham did not raise the payment issue until after he had spoken to his lawyers and called Krill back. When Krill said that Teligent would not pay Graham under the “contract,” he was referring to the same non-existent employment contract that Graham had cited during his first call. Neither party referred to the “Merger Agreement,” and moreover, Graham never raised his obligation to refrain from competition or disclosure, two obligations unaffected by his dismissal.
The surrounding circumstances lend additional support to the finding than Teligent did not repudiate the obligation to pay the merger consideration. First, and most important, Teligent also owed merger consideration to Michael and the two trusts, but as noted above, never advised them that it would not make the payments.[11] It would be a stretch to conclude that Teligent intended to repudiate its merger obligations to Graham but not to Michael or the trusts. Second, Krill sent Graham a written notice of discharge one day earlier that was limited to his dismissal and did not mention any payments. The letter may not have reached Graham until after the calls, but it reflects that Teligent was addressing the employment relationship and nothing more. Third, Teligent intended to file bankruptcy. The merger consideration was fixed and fully earned pre-petition. As a general unsecured claim, it posed as immediate concern.
Based on the foregoing, the Court concludes that the plaintiffs, and Graham in particular, have failed to demonstrate by a preponderance of the evidence that Teligent repudiated its obligation to pay the merger consideration in a positive and unequivocal manner. Moreover, Graham’s discharge from ECI’s employment, regardless of the reason, does not relieve him of his non-disclosure and non-competition obligations. In light of this determination, I need not reach the other issues raised by the parties, or decide Teligent’s motion to supplement the record which is denied as moot. As this decision disposes of all of the remaining issues, the complaint is dismissed.
This opinion shall constitute the Court’s findings of fact and conclusions of law pursuant to Fed.R.Civ. p. 52(a), made applicable by Fed.R.Bankr. p. 7052. The parties are directed to settle an order consistent with this opinion.
Defendants’ Exhibit (“DX”) 1.)