Appendix — Reprosystem, B. V. v. SCM Corp.

8 3 a 1 9 6 6 Office - Supreme Court, U.S, }

FILED

N l

Ne. JU 1984

fl ei Ee OF 8. ot L STEVAS

a CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1983

REPROSYSTEM, B.V., AND N. NORMAN MULLER,

Petitioners,

V.

SCM CoRPORATION,

Respondent.

APPENDIX TO

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

EDWARD R. LEAHY

(Counsel of Record)

CHARLES G. COLE

RICHARD RUDA

STEPTOE & JOHNSON

CHARTERED

1250 Connecticut Ave., N.W.

Washington, D.C. 20086

(202) 862-2000

Attorneys for Petitioners

June 1, 1984

I I I TI OSES,

WILSON - EPES PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

i

TABLE OF CONTENTS

Page

APPENDIX A—

Opinion of the Court of Appeals for the Second

GE. SMU BNO nescence stecctseeseccnnsiensscenecees la

APPENDIX B—

Opinion of the District Court for the Southern

District of New York, June 30, 1981 _...........0......... 17a

Opinion of the District Court for the Southern

District of New York, September 15, 1981 ............ 69a

Opinion of the District Court for the Southern Dis-

trict of New York, March 31, 1982 _...........002000.0..... T4a

Opinion of the District Court for the Southern Dis-

trict of New York, August 27, 1982 _..........0000000..... 80a

Opinion of the District Co rt for the Southern Dis-

trict of New York, December 22, 1982 _............... 86a

Judgment of the District Court for the Southern

District of New York, December 22, 1982 ............. 90a

APPENDIX C—

pS Sk | Renee ee 92a

17 C.F... § 360.10b-5 (1968) .................................... 92a

la

APPENDIX A

UNITED STATES COURT OF APPEALS

SECOND CIRCUIT

No. 1228, Dockets 83-7011, 83-7067

REPROSYSTEM, B. V., and N. NORMAN MULLER,

Plaintiffs-Appellees, and

Cross-A ppellants,

V.

SCM CoRPORATION,

Defendant-Appellant, and

Cross-A ppellee.

Argued June 2, 1983

Decided Feb. 2, 1984

Before KAUFMAN, PRATT and GIBSON *, Circuit

Judges.

GEORGE C. PRATT, Circuit Judge:

Defendant SCM Corporation appeals from a judgment

of the United States District Court for the Southern Dis-

trict of New York, Robert W. Sweet, Judge, awarding

$1,062,000 in damages to plaintiffs Reprosystem, B.V.,

a Netherlands corporation, and N. Norman Muller, a

New York resident. 565 F.Supp. 4. The trial court found

that SCM was contractually obligated to sell its six for-

eign subsidiaries to plaintiffs, that SCM breached the

claimed contract of sale, and that even though plaintiffs

would not have been able to perform the contract they

were nevertheless entitled to breach-of-contract damages

measured by SCM’s “unjust enrichment” in the form of

profits received from the subsidiaries during the period

* Honorable Floyd R. Gibson, of the United States Court of

Appeals for the Eighth Circuit, sitting by designation.

2a

of negotiations between the parties. On appeal, SCM

contends that there was no contract because the parties

intended not to be bound unless and until a formal writ-

ten contract was executed, and that none ever was. SCM

further contends that there was no basis, legal or equi-

table, for an award of damages. Plaintiffs have cross-

appealed, claiming that the district court’s finding that

plaintiffs were unable to perform the contract was clearly

erroneous, and therefore, that they are entitled to the

entire profit SCM received from its subsequent sale of

the subsidiaries to others. Plaintiffs also challenge Judge

Sweet’s dismissal of their securities fraud and promissory

estoppel claims. On the main appeal we reverse the dis-

trict court’s conclusions that the parties were bound by

a contract and that SCM was enriched unjustly; on the

cross-appeal, we affirm its dismissal of the promissory

estoppel and securities fraud counts.

I.

We first review the facts pertinent to our resolution

of the appeal and cross-appeal. A more extensive ex-

position of the facts can be found in the district court’s

opinion 522 F.Supp. 1257 (S.D.N.Y. 1981).

Plaintiff Reprosystem B.V. was incorporated by plain-

tiff N. Norman Muller to hold the shares and assets he

sought to purchase from SCM’s foreign subsidiaries.

Defendant SCM is a multinational enterprise that man-

ufactures and distributes a variety of products. In 1976

the part of its business that consisted of marketing, leas-

ing, and servicing copy machines in Europe, Africa, and

the Middle East, was conducted by SCM’s International

Business Equipment Division through six wholly owned

subsidiaries incorporated under the laws of five foreign

countries. During fiscal year 1976, the six subsidiaries

together generated annual sales exceeding $40 million

and profits exceeding $4 million, and had approximately

one thousand employees.

3a

In late 1975 Paul Elicker, who was president, chief

executive officer, and chairman of the board of SCM, and

Herbert Elgi, the vice president of finance, decided that

SCM should dispose of its European copier subsidiaries.

At Elicker’s direction, Frank De Maio, who was vice

president and general manager of the International Divi-

sion, began to seek out potential purchasers.

Consistent with its decision to get out of the overseas

copying business, SCM sought to minimize its commit-

ment to any new products in that copier market. How-

ever, De Maio and William Rodich, the president of

SCM’s Business Equipment Division which included the

International Division, recognized that SCM’s zinc oxide

paper process was outdated, and they concluded that re-

gardless of ownership, the business would have to make

available a plain paper copier. During the spring of

1976, therefore, De Maio traveled to Japan and reached

a preliminary understanding with Mita, a Japanese man-

ufacturer, to supply SCM with approximately 3,000 plain

paper copiers.

Muller became interested in the proposed sale of the

subsidiaries. He met in April 1976 with both Elicker and

De Maio, and in May 1976 with Elicker and Rodich. Dur-

ing the May meeting Muller was provided with un-

audited statements of the subsidiaries showing an asset

value of approximately $16.8 million as of March 31,

1976, and a nine-month profit of approximately $3 mil-

lion.

In a letter prepared without assistance of counsel Mul-

ler, on May 7, 1976, offered to pay $9 million for the

SCM subsidiaries, subject to two conditions: (1) a satis-

factory audit by Muller’s accountants, and (2) execution

of a formal agreement, satisfactory to both SCM and

Muller. Rodich informed Muller that the letter provided

a basis for negotiations, but that discussions would have

to be suspended during a securities offering by SCM.

4a

When negotiations resumed in August 1976, Rodich

presented Muller with a list of nine points that SCM con-

sidered to be non-negotiable. These nine points, supple-

mented by four more in September, became the basis for

an “agreement in principle’ between Muller and SCM.

One provision of the “agreement in principle’ was that

during negotiations the companies would be operated by

SCM for the benefit of Muller, so that any profits or

losses occuring after August 1, 1976 would be used to

adjust the purchase price. SCM issued a press release

on September 28, 1976 announcing the “agreement in

principle”, but stating also that “[t]he proposed sale is

subject to a definitive agreement expected to be reached

soon.” SCM’s 10-K report, filed with the SEC on Sep-

tember 30, 1976, also stated that SCM made “no assur-

ance that the transaction would be completed.”

The parties contemplated that the transaction would

be developed in a “Global Agreement” setting out the

general terms of the transaction, plus six separate agree-

ments covering the respective details for the sales of the

six subsidiary corporations. Using the “agreement in

principle” as a starting point, general counsel for SCM

prepared a draft model agreement for sale of one of the

subsidiaries. After Muller’s attorneys, Hardee, Barovick,

Konecky & Braun, reviewed the draft and found it in-

complete, SCM retained the firm of Sullivan & Crom-

well to assist in negotiating and drafting all of the agree-

ments.

Concentrating on the Global Agreement and a model

agreement for one of the subsidiaries, Sullivan & Crom-

well generated more than fifteen drafts by mid-Decem-

ber, each of which was reviewed by the Hardee, Baro-

vick firm and returned for revision. Consistent with the

proviso in Muller’s initial offer that conditioned the con-

templated transaction on execution of a formal agree-

ment, each draft of the Global Agreement prepared by

Sullivan & Cromwell provided that the obligations of each

OA laa nt Ota ars ented hs

5a

party were subject to a condition precedent that it shall

have been provided with an opinion from counsel for the

other party that “this [Global] Agreement and each of

the Purchase Agreements has been duly authorized, exe-

cuted and delivered by [the other party]”.

On December 15 and 16, 1976 the parties and their

attorneys met to resolve all outstanding issues. At this

meeting the drafts prepared by Sullivan & Cromwell

were reviewed paragraph by paragraph, including the

paragraphs that required formal execution as a prereq-

uisite to binding effect. After two days of negotiations

no problems remained, the parties exchanged congratula-

tions, and Rodich took Muller to De Maio’s office where

he acknowledged that the meetings had been successfully

completed.

On December 17, 1976 Rodich sent telexes to the gen-

eral managers of the subsidiaries: “we now feel that the

problems are resolved and that the deal is made subject

to approval by various government agencies.” On Decem-

ber 27, 1976 and January 5, 1977, “final drafts” of the

Global Agreement and six separate agreements were cir-

culated by Sullivan & Cromwell. Because Rodich was

being reassigned to a new post, Elgi took over the ne-

gotiations on behalf of SCM. At year’s end, Elgi re-

viewed the proposed transaction, discovered that the

subsidiaries were operating more profitably than ex-

pected, and decided that the sale was a better deal for

Muller than for SCM. Elgi proposed alternatives to

Elicker in a meeting on January 4, including the alter-

native of killing the deal with Muller and selling the sub-

sidiaries individually. Elicker instructed Elgi to attempt

to close the proposed transaction with Muller.

In January the negotiations stalled. SCM introduced

new items for negotiation, fired the New York manage-

ment that was supposed to be transferred to Muller in-

tact, and discovered an accounting error which led to a

substantial increase in the purchase price. Muller con-

ba

tinued to avoid SCM’s requests that he document his

ability to provide the purchase price on closing. On Jan-

uary 20, 1977 SCM issued a press release stating that

it felt free to pursue other alternatives.

On January 31 Muller wrote SCM claiming that the

“final drafts” constituted binding contracts for the pur-

chase and sale of the subsidiaries. SCM responded on

February 2 by terminating the negotiations. At no time

was any of the draft contracts signed by either side.

II.

A. Existence of a Contract

Although “[c]ontract law has progressed and evolved

sounder principles since the days of ritualistic and form-

alistie sealed instrument requirements”, V’Soske v. Bar-

wick, 404 F.2d 495, 499 (2d Cir. 1968), cert. denied, 394

U.S. 921, 89 S.Ct. 1197, 22 L.Ed.2d 454 (1969), there

are still situations where the absence of a signed, formal

agreement is fatal to an argument that a contract exists.

This court summarized the alternative New York rules

on this subject in V’Soske:

First, if the parties intend not to be bound until

they have executed a formal document embodying

their agreement, they will not be bound until then;

and second, the mere fact that the parties contem-

plate memorializing their agreement in a formal

document does not prevent their informal agreement

from taking effect prior to that event. * * * These

rules, placing the emphasis on intention rather than

form, are sensible and reasonable.

Id. at 499 (citations omitted).

In V’Soske we held that the party invoking the first

rule of New York contract law described above must

prove either that both parties understood they were not to

be bound until the executed contract was delivered, or

7a

that the other party should have known that the disclaim-

ing party did not intend to be bound before the contract

was signed. In V’Soske the defendant buyer failed to

prove either proposition.

Thus, the primary question on this appeal is one of in-

tent. Banking & Trading Corp. v. Floete, 257 F.2d 765

769 (2d Cir.1958). Did the parties intend not to be

bound prior to execution of a formal contract? Or, did

they merely contemplate that their informal agreement

would be reduced to a formal writing at some later time?

In this case the trial judge determined that the parties

intended to be bound by the unexecuted “final drafts”

and did not intend their contractual obligations to be con-

tingent upon their signing formal contractual documents.

He wrote:

[I]t has been determined as a matter of fact that

eventually both parties intended to be bound by the

Final Drafts. Taking into account the totality of the

parties’ objective manifestations of intent as the

transaction progressed and the circumstances sur-

rounding the negotiations, I reject SCM’s contention

that a final signing would be required to constitute a

binding agreement. In the circumstances at bar,

SCM’s—indeed, both parties’—contemplation of sub-

sequent formal signed agreements did not overcome

the objective facts which established an agreement.

Thus the district judge, relying upon the second rule of

V’Soske, concluded that the parties merely contemplated

memorializing their informal! agreement in a signed, for-

mal document. This finding of fact is subject to the

clearly erroneous standards of review embodied in Fed-

eral Rule of Civil Procedure 52(a). Banking & Trading

Corp. v. Floete, 257 F.2d at 769; see also Oswald v. Allen,

417 F.2d 43 (2d Cir. 1969) (meeting of minds is ques-

tion of fact subject to Rule 52(a)). Therefore, the dis-

trict court’s finding that the parties intended to be con-

8a

tractually bound prior to execution of the formal con-

tracts must be upheld unless it was made without ade-

quate evidentiary support, is against the clear weight of

the evidence, or was induced by an erroneous view of

the law. See 9 Wright & Miller, Federal Practice and

Procedure: Civil § 2585 (1971).

Our review of the entire record leaves us with the

definite and firm conviction that a mistake was made by

the district court, United States v. United States Gyp-

sum, 383 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746

(1948), because the documents and testimony clearly

showed that the intent of both parties was not to be

bound prior to the execution of a formal, written con-

tract. Therefore, the first rule summarized in V’Soske

applies, and SCM was not bound by the “agreement in

principle”, by the “final drafts”, or by any claimed oral

understanding reached in the course of the extended ne-

gotiations.

The uncontested evidence clearly establishes the parties’

intent not to be bound prior to execution of formal con-

tracts. Muller’s initial purchase offer was made on the

expressed condition that “a formal agreement, which is

satisfactory to SCM and [plaintiffs] be entered into.”

Muller testified that Rodich “had no problem with that.”

Additionally, the September press release, prepared by

SCM and reviewed by Muller, stated: “The proposed

sale of the European copier business is subject to a defin-

itive agreement expected to be reached soon.” SCM’s 10-

K report, filed with the SEC in September 1976, also

stated: “[SCM] makes no assurance that this transac-

tion will be completed.”

Finally, the numerous drafts of the “Global Agree-

ment” conditioned the parties’ obligations on the receipt

of opinions from counsel of both buyer and seller con-

firming that the “[Global] Agreement and each of the

Purchase Agreements have been duly authorized, executed

and delivered”. Draft agreements for the sale of several

9a

of the subsidiaries had similar provisions. Additionally,

the drafts of the Global Agreement provided “when exe-

cuted and delivered, this [Global] Agreement and each of

the Purchase Agreements will be a valid and binding

agreement * * * in accordance with its terms.” Despite

their many other differences over the proposed contracts,

neither party took exception to these provisions that con-

ditioned their binding effect on formal execution and de-

livery. Thus, the contract drafts, combined with the par-

ties’ other written communications, conclusively estab-

lish a mutual intent not to be bound prior to execution

of the formal documents, and the district court’s finding

to the contrary is clearly erroneous. Its conclusion that a

contract existed must, therefore, be reversed.

The result we reach is supported by prior decisions

applying New York law. In Banking & Trading Corp. v.

Floete, 257 F.2d 765, we affirmed the district court’s hold-

ing that no contract existed because defendants had circu-

lated to dealers in the trade a letter which required exe-

cuted contracts, and that the letter was sufficient to com-

municate the defendant’s intent not to be bound. Simi-

larly, in ABC Trading Co. v. Westinghouse Electric Sup-

ply Co., 382 F.Supp. 600 (E.D.N.Y. 1974), the district

court held that a single reference to a written contract in

a letter from defendant to plaintiff was sufficient to put

plaintiff on notice and to prevent the defendant from

being obligated until a formal agreement was signed. See

also Chromalloy American Corp. v. Universal Housing

Systems, 495 F.Supp. 544 (S.D.N.Y. 1980), aff'd mem.,

697 F.2d 289 (2d Cir. 1982) (offer to purchase condi-

tioned on execution of written contract held sufficient

to show intent not to be bound prior to signing) ; Scheck

v. Francis, 26 N.Y.2d 466, 311 N.Y.S.2d 841, 260 N.E.2d

493 (1970) (transmittal letter showed intent not to be

bound until contract signed). Cf. Disken v. Herter, 73

A.D. 453, 77 N.Y.S. 300 (App. Div. 1902), aff'd, 175 N.Y.

480, 67 N.E. 1081 (1903) (where parties did not express

their intent to defer binding effect until execution of for-

10a

mal document, oral contract held valid) ; Municipal Con-

sultants & Publishers, Inc. v. Town of Ramapo, 47 N.Y.

2d 144, 417 N.Y.S.2d 218, 390 N.E.2d 1143 (1979)

(same).

Of equal importance, the result we reach is consistent

with the realities of the complex transaction at issue.

The proposed deal involved a $4 million sale of six com-

panies which were incorporated under the laws of five

different countries and which had assets of over $17

million, sales of $40 million, and profits of $4 million.

Completing the transaction would require approvals of

foreign governments, sales of both securities and assets,

and the transfer of almost one thousand foreign em-

ployees, not to mention the myriad additional details at-

tendant upon the sale of any business. Thus, the magni-

tude and complexity of the deal as reflected in the numer-

ous written contract drafts not only reinforce the parties’

stated intent not to be bound until written contracts were

signed, but also reflect a practical business need to re-

cord all the parties’ commitments in definitive documents.

See Banking & Trading Corp v. Floete, 257 F.2d at 769;

International Telemeter Corp. v. Teleprompter Corp., 592

F.2d 49, 57-58 (2d Cir. 1979) (Friendly, J., concurring)

(describing realities of modern corporate “deals”). Since

the parties intended not to be bound prior to execution of

those written documents and since none was ever executed,

no contract came into existence.

Our conclusion that no contract existed eliminates the

only basis on which Judge Sweet awarded damages to

plaintiffs. Nevertheless, the plaintiffs argue on this ap-

peal that the award can be sustained on alternative

theories of unjust enrichment and breach of a duty to

negotiate in good faith. We disagree.

B. Unjust Enrichment

After concluding that a binding contract existed be-

tween SCM and Reprosystem, the district court addressed

ee ee ee ee

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~~ ome

lla

the question of damages, holding that because plaintiffs

would not have been able to perform they were not en-

titled to traditional contract damages. Rather than send

the plaintiffs away emptyhanded, however, the trial court

awarded breach-of-contract damages measured by prin-

ciples of unjust enrichment. Citing the Restatement (Sec-

ond) of Contracts and Corbin, the court stated, ‘The

remedy of restitution to prevent unjust enrichment is

commonly applied both in the realm of quasi-contract and

as an alternative basis for recovery upon breach of con-

tract.” The trial court held that SCM was obligated

by its agreement to sell the subsidiaries to plaintiffs and

that to allow SCM to breach the contract and keep all

the profits from its subsequent sale of the subsidiaries to

others would “condone unjust enrichment.” He therefore

looked to the provision in the “agreement in principle”

that obligated SCM during the negotiation period to op-

erate the subsidiaries for Muller’s benefit, and he

awarded to plaintiffs the $1 million in profits earned by

the subsidiaries between August 1, 1976 and February 2,

1977. Thus, the basis for Judge Sweet’s award of dam-

ages was SCM’s breach of the alleged contract; unjust en-

richment merely provided the measure of those damages.

However, our reversal of the trial court’s conclusion that

a contract was created removes the predicate for plain-

tiffs’ recovery for breach of contract. We have also con-

sidered plaintiffs’ claim to a recovery grounded independ-

ently in the equitable doctrine of unjust enrichment, but

we find that claim to be without merit in the circum-

stances of this case.

The equitable doctrine of unjust enrichment rests, gen-

erally, on the principle that a party should not be al-

lowed to enrich himself at the expense of another. Miller

v. Schloss, 218 N.Y. 400, 113 N.E. 337 (1916). Under

New York law, a plaintiff seeking an equitable recovery

based on unjust enrichment must first show that a bene-

fit was conferred upon the defendant, and then show that

12a

as between the two parties enrichment of the defendant

was unjust. See Indyk v. Habib Bank Ltd., 694 F.2d 54,

57 (2d Cir. 1982).

Plaintiffs argue that Muller conferred benefits on SCM

by making several contributions to preserve SCM’s sub-

sidiaries and by causing dramatic improvement in their

operations and profits. These benefits, Muller claims, re-

sulted from several trips to Europe, reviewing of finan-

cial reports, securing suppliers, arranging financing from

banks, introducing key man insurance, and participating

in continuing operations. The most important contribu-

tion claimed by Muller was his development of the plain

paper copier program with Mita, which plaintiffs claim

resulted in enormous profits to SCM, profits that would

have been plaintiffs’ if SCM had not killed the deal.

The record shows, however, that Muller’s activities had

little to do with the subsidiaries’ successful operation

during the negotiation period. Muller did take several

trips to Europe in the fall of 1976, during which he dis-

cussed the subsidiaries’ future with SCM foreign man-

agement and consulted with several prospective lenders

and suppliers. However, there is no evidence to show that

Muller actually obtained credit for ongoing financing with

banks or that he secured any suppliers other than those

who were already dealing with SCM.

Equally unsupported is plaintiffs’ claim that Muller

contributed to the subsidiaries’ success by developing the

Mita plain paper copier project. As defendants argue,

and as the district judge recognized, SCM at ali times

had a vested interest in preserving the good will of its

subsidiaries and was aware that any prospective pur-

chaser would require plain paper copiers. Thus, while

SCM obviously sought to minimize its commitment to this

new product line, it nevertheless made preliminary ar-

rangements to obtain a supply of these copiers from Mita

in the spring of 1976, several months before negotiations

—— Se a

Eee

13a

with Muller reached a serious stage. Similarly, SCM—

not Muller—ordered and tested the Mita prototypes that

were displayed at the October 1976 trade fair. The dis-

trict judge found that it was this display, reflecting

SCM’s commitment to the conversion to plain paper

copiers, that helped preserve the subsidiaries’ sales force.

In contrast to SCM’s role, Muller’s involvement with

the Mita project was limited to a single “letter of in-

tent”? sent to Mita in December 1976 by De Maio, who was

still an employee of SCM, indicating that Reprosystem in-

tended to purchase 3,000 plain paper copiers. This sole

event, occurring near the end of the relevant time period,

provides insufficient support for plaintiffs’ argument that

Muller’s efforts with respect to the Mita project held the

subsidiaries together and conferred a million dollar bene-

fit on SCM.

We conclude that plaintiffs failed to show that they be-

stowed any benefit upon SCM; therefore, plaintiffs’ award

cannot be based on unjust enrichment. Moreover, even

if we were to conclude that plaintiffs had conferred some

benefit on SCM, plaintiffs have not shown that there is

anything unjust about SCM’s retaining the profits from

SCM’s businesses run by SCM’s management at SCM’s

expense.

C. Duty to Negotiate in Good Faith

Plaintiffs also seek to justify their recovery below by

claiming that SCM breached an obligation to negotiate in

good faith. The district court apparently found that such

a duty was created by the alleged contract between the

parties, for it stated: “On the facts as I have found them,

I concluded not only that SCM breached the agreements

reached at the end of 1976, but that it specifically

breached its duty of good faith negotiation and perform-

ance required by those agreements.” However, our con-

clusion that no contract existed eliminates this as a pos-

sible basis for imposing such a duty on SCM.

14a

As the district court recognized, under some circum-

stances a party to a contract may be bound by an implied

agreement to negotiate in good faith to reach an agree-

ment. See Pepsico Co., Inc., v. W.R. Grace & Co., 307

F.Supp. 718, 720 (S.D.N.Y. 1969). In this case such an

agreement might be inferred from the “agreement in

principle.” Compare Thompson v. Liquichimica of Amer-

ica, Inc., 481 F.Supp. 365 (S.D.N.Y. 1979). Nevertheless,

whatever implied agreement that existed here was too in-

definite to be enforceable under New York law. See

Joseph Martin, Jr., Delicatessen, Inc. v. Schumaker, 52

N.Y.2d 105, 486 N.Y.S.2d 247, 417 N.E.2d 541 (1981) ;

Candid Productions Inc. v. International Skating Union,

530 F.Supp. 1330 (S.D.N.Y. 1982). Consequently, plain-

tiffs cannot succeed on the theory that they are entitled

to damages because defendants breached a “duty to ne-

gotiate in good faith.”

D. Promissory Estoppel

On their cross-appeal, plaintiffs ask us to reverse the

district court’s conclusion that they failed to establish

promissory estoppel as an alternative basis for recovery.

In New York the elements of a claim for promissory

estoppel are: “a clear and unambiguous promise; a rea-

sonable and foreseeable reliance by the party to whom

the promise is made; and an injury sustained by the

party asserting the estoppel by reason of his reliance.”

Ripple’s of Clearview, Inc. v. LeHavre Associates, 88 A.D.

2d 120, 452 N.Y.S.2d 447, 449 (N.Y.App.Div. 1982)

(citations omitted).

In our view the district court correctly ruled that plain-

tiffs failed to establish a promissory estoppel here. Plain-

tiffs can neither point to any clear and unambiguous

promise made by SCM to the effect that it would con-

summate the deal, nor show that they reasonably relied

on any promise implied from SCM’s conduct during the

negotiations. The negotiations of the parties as reflected

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15a

in the draft agreements made it clear that the obligations

of both SCM and Muller were contingent upon execution

and delivery of the formal contract documents. See

Brause v. Goldman, 10 A.D.2d 328, 199 N.Y.S.2d 606

(N.Y.App.Div. 1960) aff'd, 9 N.Y.2d 620, 210 N.Y.S.2d

225, 172 N.E.2d 78 (1961).

E. Securities Fraud

Finally, plaintiffs urge us to reinstate their claim for

violations of §10(b) of the Securities Exchange Act of

1934, 15 U.S.C. § 78j(b) (1982), and Rule 10b-5, 17

C.F.R. § 240.10b-5 (1983), promulgated thereunder.

True, the district court dismissed the securities fraud

count by erroneously relying on the “sale of business”

doctrine, which although adopted in other circuits, see

Frederiksen v. Poloway, 637 F.2d 1147 (7th Cir.), cert.

denied, 451 U.S. 1017, 101 S.Ct. 3006, 69 L.Ed.2d 389

(1981) ; Chandler v. Kew, Inc., 691 F.2d 443 (10th Cir.

1977) ; King v. Winkler, 673 F.2d 342 (11th Cir. 1982),

has been rejected in this circuit, Golden v. Garafalo, 678

F.2d 1139 (2d Cir. 1982) ; see also Seagrave Corp. v. Vista

Resources, Inc., 696 F.2d 227 (2d Cir. 1982); Coffin v.

Polishing Machines, Inc., 596 F.2d 1202 (4th Cir.) cert.

denied, 444 U.S. 868, 100 S.Ct. 142, 62 L.Ed.2d 92

(1979) ; Daily v. Morgan, 701 F.2d 496 (5th Cir. 1983).

Nevertheless, plaintiffs cannot recover for securities

fraud, because they do not satisfy the “purchase or sale”

requirement of Birnbaum v. Newport Steel, 193 F.2d

461 (2d Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051,

96 L.Ed. 1356 (1952).

Plaintiffs were not and do not claim to be actual

purchasers or sellers of SCM stock. They claim only

that their right to sue under Rule 10b-5 arises from the

alleged contract to sell the shares of the subsidiaries, and

they rely on those cases in this circuit that have held

that a plaintiff can sue for fraud connected with an oral

contract for the sale of securities. See Desser v. Ashton,

16a

408 F.Supp. 1174 (S.D.N.Y. 1975), aff'd mem., 573 F.2d

1289 (2d Cir. 1977) ; Commerce Reporting Co. v. Puretec,

Inc., 290 F.Supp. 715 (S.D.N.Y. 1968).

However, because we have concluded that SCM did not

enter into a contract, the plaintiffs fall outside even that

enlarged class of persons who are protected by Rule 10b-

5. Judge Sweet’s dismissal of plaintiffs’ securities fraud

action is therefore affirmed.

IIT.

We conclude that the district court clearly erred in

finding that a contract existed betwee the parties, that

SCM was unjustly enriched, and that SCM owed a duty

to negotiate in good faith with Muller and Reprosystem.

Plaintiffs have not demonstrated any other basis for li-

ability on the facts found below. Accordingly, the judg-

ment of the district court is reversed on the contract

claim, and affirmed insofar as it dismissed plaintiffs’ re-

maining claims.

17a

APPENDIX B

UNITED STATES DISTRICT COURT

Ss. D. NEW YORK

No. 77 Civ. 5705 (RWS)

REPROSYSTEM, B. V., and N. NORMAN MULLER,

Plaintiffs,

V.

SCM CORPORATION,

Defendant.

June 30, 1981

OPINION

SWEET, District Judge.

This action was filed by plaintiffs Reprosystem, B. V.

(“Reprosystem”) a Netherlands corporation, and N.

Norman Muller (“Muller”), a New York resident,

against the defendant SCM Corporation (“SCM”),’ a

New York corporation. The complaint alleged damages

for breach of contract, promissory estoppel, failure to

perform and to negotiate in good faith, unjust enrich-

ment, and fraud under the federal securities law and the

common law. After extensive discovery, a four week trial

before the court was held in the course of which 17 wit-

nesses testified and well over 1,000 documents were in-

troduced into evidence. At issue are the rights and li-

abilities of the parties arising from an unsuccessful effort

in 1976 by Muller and Reprosystem to purchase the Euro-

pean photocopier business of SCM. Both sides were rep-

resented by extremely able counsel, not only during the

events giving rise to the litigation but particularly during

its trial. The issues presented, both factual and legal,

constitute an almost exhaustive pathology of an important

corporate transaction. For reasons more fully set forth

18a

below, Reprosystem and Muller are entitled to recover

certain of their damages resulting from SCM’s breach

of contract and failure to bargain in good faith.

FINDINGS OF FACT

The Parties

SCM is a multinational conglomerate manufacturing

and distributing a number of industrial, commercial

and consumer products. Its shares are listed on the New

York Stock Exchange. Prior to 1975 and during 1976

and the first half of 1977 it engaged in the business of

marketing, leasing and servicing office copiers, paper and

toner throughout Western Europe, the Middle East and

Africa. This business was conducted by its International

Business Equipment Division through six wholly owned

subsidiaries: Smith-Corona Marchant, 8.A., a French cor-

poration; SCM International 8.A., a Belgian corporation;

SCM (Switzerland) S.A., a Swiss corporation; SCM

(Deutschland) GmbH, a German corporation; Smith-

Corona Marchant International S.A., a Swiss (Chur)

corporation; and SCM (United Kingdom) Ltd., a United

Kingdom corporation. (These six subsidiaries are collec-

tively referred to as the “copier subsidiaries” or “sub-

sidiaries.”) During the 1976 fiscal year (ending June

30, 1976) the copier subsidiaries had assets of about

$17,000,000, total sales exceeding $40,000,000, operating

profits exceeding $4,000,000, and approximately 1000 em-

ployees.

Reprosystem was organized in the fall of 1976 to

hold the shares and assets of the subsidiaries. Its shares

were owned by Reprographex Antilles, N.V., a Dutch

Antilles corporation which in turn is a wholly owned sub-

sidiary of Reprographex International, Inc., a Delaware

subsidiary of MacMuller Industries, Inc., another Dela-

ware corporation. At the time of the transaction, a ma-

jority interest of Reprographex International, Inc. was

owned by Muller individually. Muller also owned a con-

trolling interest in MacMuller Industries, Inc., which

19a

during most of the period in question owned and oper-

ated Eagle Shirts, Inc. and Petrocelli Clothes, Inc. Muller

was responsible not only for his own conduct as an in-

dividual but for that of the corporations which he con-

trolled. He was an experienced businessman with “ability

to raise cash.”

The Preliminaries

Late in 1975 at a corporate planning meeting in Ber-

muda, Paul Elicker, the President and Chief Executive

and Chairman of the Board of SCM (“Elicker”’) and

Herbert Egli, the Vice President—Finance and Controller

of SCM, (“Egli’’?) and presumably others concluded it

was in SCM’s best interest to divest itself of its Euro-

pean copier business. This decision was communicated

to Frank DeMaio, Vice President and General Manager

of the International Group (‘“DeMaio’”’).

The business of the subsidiaries consisted principally

of the distribution of zinc oxide coated paper photocop-

iers, generally through lease of copier equipment, and

sometimes through sale. Under the lease method, the sub-

sidiaries would lease and service equipment, and this

equipment was identified as Equipment Held for Lease.

The subsidiaries also marketed paper supplies and toner

to equipment users, and serviced the equipment. Between

1972 and 1974 annual operating profits of the copier sub-

sidiaries ranged from about $4 million to about $5 mil-

lion. DeMaio and Elicker sought out potential purchasers

of this business, principally among its suppliers, without

success. Through DeMaio a firm specializing in bringing

together those interested in buying and selling corporate

interests learned of the SCM purpose and advised Muller,

who met first with DeMaio and then with Elicker and

DeMaio in April, 1976. At the outset Muller and DeMaio

had an understanding that if the proposed sale was ac-

complished DeMaio would receive an equity interest in

the acquiring company. In May a meeting was attended

20a

by Muller, Elicker and William Rodich (“Rodich’”), Pres-

ident of the Business Equipment Division of SCM of

which the International Group and the copier subsidiaries

were a part. The business of the subsidiaries was de-

scribed. Muller was provided with a statement of the as-

set value of the subsidiaries as of March 31, 1976, show-

ing an aggregate book value of $16.8 million on an un-

audited basis. The current profit and loss statement, also

provided to Muller, showed a nine month profit of about

$3.0 million.

A subsequent review by SCM’s accounting departmert

indicated that this unaudited statement might have been

overstated by $1 million. However, there is no evidence

that, if the asset value was indeed overstated, the over-

statement was deliberate and for a fraudulent purpose.

The full disclosure offered to Muller and his accountants

by SCM in the fall of 1976 also serves to refute any

fraudulent purposes. A projected drop in operating prof-

its in fiscal 1976-1977 for the subsidiaries of less than

$600,000 was not disclosed.

Although not expressed in writing initially, both par-

ties had certain underlying concerns. SCM desired to

divest itself of the business, to protect against any fur-

ther liabilities either on bank or employee severance guar-

antees, and to protect its good will and relationships

with customers and suppliers since it intended to re-

main in the typewriter business. Muller sought to pur-

chase an ongoing business and its distribution network

with its capacity to introduce new items. Early in the

discussions it was recognized that the availability of a

plain paper copier as opposed to a zinc oxide coated

paper copier was an important, if not vital, aspect of the

business. SCM, having decided to get out of the copying

business, sought to minimize its commitment to this new

product, while Muller believed a plain paper copier es-

sential to the continuation of the business. Rodich and

DeMaio had concluded that the availability of plain paper

ti ttl Mii

2la

copiers was necessary, regardless of the ownership of the

business, and during the spring of 1976 DeMaio travelled

to Japan and reached a preliminary understanding with

Mita, a Japanese manufacturer, to provide plain paper

copiers for SCM’s benefit. These underlying concerns of

the parties were articulated and understood but not

made the subject of any writing at this early state.

By letter of May 7, 1976, Muller offered to pay $9.0

million for the subsidiaries. His letter also contained the

following language, which forms a keynote to SCM’s po-

sition on the law:

This offer is made subject to the following condi-

tions:

1. that a satisfactory audit review will be performed

by our accountinng firm, S. D. Leidesdorf & Co.

2. that a formal agreement, which is satisfactory

to SCM and ourselves be entered into.

Rodich informed Muller that his May 7 letter pro-

vided the basis for negotiation, but all further discus-

sions were deferred because of a security offering by

SCM and a consequent “quiet period.” However, on Au-

gust 4 discussions were resumed at a luncheon at the

Atrium Club attended by Rodich, Egli, Muller and Brier,

the latter being a participant in MacMuller Industries,

as well as officers of Citibank where Muller and his com-

panies banked. One of the purposes of the meeting was

to discuss Muller’s financial standing. Wallace of Citi-

bank stated his satisfaction with the bank’s relationship

with Muller and added that he dealt only with seven

figure accounts. No further representations were made

or requested. Muller at the time was seeking financing

from Citibank, financing which he failed to obtain. Shortly

thereafter SCM obtained a Bishop Service and a Dun

& Bradstreet report relating to Muller. Mauller’s

strengths were described in the Bishop Service report by

22a

one source as “putting together financial deals, acquisi-

tions and raising money.” No further questions were

raised concerning Muller’s finances during this phase of

the discussions.

The Agreement in Principle

Shortly after the Atrium meeting Rodich gave Muller

a list of items which he considered to be essential to SCM

in connection with the contemplated transaction. At a

later meeting in September this list was supplemented by

four additional items. These memoranda are annexed as

an Appendix to this decision. These points were viewed

as “the Bible” by Rodich according to Muller and were

non-negotiable. Whether or not the term was in fact

used, these documents constituted the basic agreement

which remained in place throughout the discussions, in-

cluding the formula by which the purchase price was to

be calculated. Muller accepted these items, the firm of

Hardee, Barovick, Konecky & Braun (‘Hardee Baro-

vick”) was retained by Muller, meetings were held and at

one point in August it was even suggested that consid-

eration be given to a closing at the end of the month,

an objective which continued to elude the parties.

In mid-September, principally as a consequence of Ro-

dich’s memoranda it had been agreed by Rodich and

Muller that Muller would purchase the non-typewriter

European business of SCM, that the purchase price would

be calculated on the basis of a formula derived from

Muller’s offer of $9.0 million cash for $16.4 million as-

sets as of August 31, 1976, that the typewriter assets

would be stripped out by SCM prior to closing, that the

business would be operated by SCM for Muller in its or-

dinary course after August 31, 1976 and that the pur-

chase price would be adjusted to reflect events subse-

quent to that date. The transfer would be in a form de-

termined by SCM, which initially called for the in-

tended transfer of the stock of the French, German, Bel-

oe

23a

gian and Swiss subsidiaries, and the transfer of the cop-

ier assets of the U.K. and Chur subsidiaries. SCM re-

tained its claims against Xerox Corporation for damages

in a pending litigation involving, among other things,

claims that Xerox unfairly competed with the SCM

copier subsidiaries. Muller assumed responsibility for

possible employee severance and vacation pay obligations,

leases and employees in the U.K. relating to the copier

business, and the performance of SCM purchase agree-

ments for equipment and supplies. Muller had the right

to license and use the SCM name and logo for three

years with appropriate safeguards on its use. SCM made

certain warranties with respect to undisclosed liabilities,

inventories and accounts receivable. Discussions on these

matters correlated the “deep discount” from stated asset

value with the assumption by Muller of the employee sev-

erance liability and lease obligations of SCM.

The burden of preparation of more formal documents

fell upon Arthur J. Mannion, Jr. (“Mannion”), inside

counsel for SCM, his work product then to be reviewed

by the Hardee Barovick firm. The latter firm also em-

ployed Harvey Dale as outside tax consultant. A closing

at the end of September was then anticipated. Both sides

dispatched teams of lawyers and accountants to Europe,

the latter to conduct “a businessman’s review” and the

former to obtain facts and delineate issues to be incor-

porated in the agreements to be signed. The parties re-

sumed discussions in New York in the latter part of Sep-

tember dealing in part with issues resulting from the

trip, including the effect of a French transfer tax and the

anticipated time to obtain a necessary Bank of England

approval.

In connection with its 10-K report for the fiscal year

ending June 30, and other matters, Eliker met with

the SCM board and after discussion the following resolu-

tion was adopted:

24a

We have agreed in principle to sell our European

office copier operations to N. Norman Muller, a pri-

vate investor who owns substantial interests in vari-

ous businesses. Current personnel and management

wiil continue to operate the sold business.

SCM’s 10-K filed with the SEC on September 30, 1976,

stated in relevant part:

In late September, 1976, the Company reached an

agreement in principle to sell its European copier

sales and service operations. These operations ac-

count for approximately 40 percent of SCM’s copier

products net sales, with an operating income of ap-

proximately $2 million in fiscal 1976 which was ex-

pected to decline in fiscal 1977. The Company makes

no assurance that this transaction will be completed.

During the same period Muller was anxious to make his

presence felt in Europe and to establish a relationship

with the general managers of the subsidiaries. A trade

exhibition in Paris in late September 1976, the SICOB

show, provided an opportunity to satisfy Muller’s needs.

That, together with SCM’s reporting requirements, re-

sulted in a press release which was issued on September

28, 1976, and which stated with respect to the transac-

tion:

SCM Corporation has reached an agreement in prin-

ciple to sell its office copier service organizations in

the United Kingdom, France, Germany, Switzerland

and Belgium and its distribution operations covering

Europe, the Middle East and Africa to a company

controlled by N. Norman Muller, a private investor.

While terms of the agreement in principle were not

disclosed, Paul H. Elicker, president of SCM, indi-

cated that SCM would incur a pre-tax loss of ap-

proximately $1.4 million on the transaction.

The proposed sale of the European copier business

is subject to a definitive agreement expected to be

25a

reached soon. SCM said that all parts of the com-

bined 900-man marketing operation would be sold

to the new owners intact and the current manage-

ment will continue to operate the business. .. .

The announcement was reported in The New York Times,

The Wall Street Journal, on the Dow Jones ticker tape

and elsewhere. These events aroused sufficient interest

in Muller to result in an article in Forbes which reported

that Muller intended to use his own asseis to buy the

subsidiaries, a report that was more fictional than fac-

tual, given Muller’s discussion with Citibank and his

later discussions with the Chemical Bank to be considered

below.

The “agreement in principle’ thus approved by the

SCM Board and announced to the public at large con-

sisted largely of the thirteen items set forth in Rodich’s

August and September memoranda, to which Muller had

agreed. These points with some additions and alterations

remained central to the negotiations throughout.’

1 Plaintiffs’ version of the Agreement in Principle accords with

the evidence. The thirteen points are integrated and summarized

as follows:

(1) SCM was to sell and transfer all the six copier subsidi-

aries, except for business operations relating to typewriters.

(2) The typewriter assets were not to be transferred, but were

to be retained by SCM.

(3) SCM was to retain all cash and cash equivalents of the

copier business as of August 31.

(4) The transfer would be in a form determined by SCM;

SCM determined, based on its tax interests, to transfer the

stock of the French, German, Belgium and Swiss subsidiaries,

and to transfer the copier assets of the U.K. and Chur

subsidiaries.

(5) The purchaser would be a company to be formed by Mr.

Muller.

(6) The purchase price was to be the dollar equivalent of

53.4% of the book value of the copier assets of the companies

26a

After the issuance of the September 28 press release,

the principals left for Paris where the SICOB show was

in progress. Rodich addressed a luncheon meeting of the

as of August 31, 1976, to be calculated after asset values were

determined as of this date.

(a) As noted above plaintiffs assumed the balance sheet

liabilities towards payment of the purchase price and, if any

balance remained, this was to be paid in cash.

(b) SCM would have the right to allocate the total purchase

price among the six subsidiaries and assign values to each of

the four stock sales and two asset sales.

(7) SCM would retain claims it had against Xerox Corpora-

tion for damages in a pending litigation involving, among

other things, claims that Xerox unfairly competed with the

SCM copier subsidiaries.

(8) The purchaser would assume responsibility for:

(a) possible employee severance and also vacation pay

obligations;

(b) in the U.K., leases relating to the copier business and ;

employees relating to the copier business; and j

(c) performance under purchase agreements of SCM for

equipment and supplies.

(9) Plaintiffs would have the right to license and use the

SCM name and logo for three years with appropriate safe-

guards on its use.

(10) As to possible undisclosed liabilities, shortages of in-

ventory, and uncollectible receivables, SCM undertook as

follows:

(a) It warranted against undisclosed liabilities for all

claims over $10,000, and, if they were under $10,000 per claim,

to the extent such claims in total exceeded $150,000.

(b) It would be responsible for shortages of inventory coun*

to the extent they in total exceeded the inventory reserve.

(c) SCM would be responsible for uncollectible receivables

to the extent they in total exceeded the receivable reserve plus

$200,000 (but in no event less than $500,000) and to the ex-

tent of 53% for each dollar thus in excess.

The additional agreed-upon terms relating to transfer of the sub-

sidiaries are accurately summarized by the plaintiffs as follows:

27a

general managers of the subsidiaries at the Hotel Crillon,

sought their cooperation during the period before the con-

templated transfer could take place, offered a substantial

bonus in the event that the transaction was completed

as contemplated, and introduced Muller as the intended

buyer. He then left the meeting and returned to New

York. Muller remained and discussed the business of the

subsidiaries with the general managers, and attended the

SICOB show and a reception given at the Hotel Inter-

continental for the general managers and suppliers to the

subsidiaries. These events ended up as charges to Mul-

ler’s bill at the Crillon, as did the charges for the living

expenses of Muller’s party, all of which were subsequently

paid for by the French subsidairy. SCM seeks repay-

ment of approximately $14,000 by way of counterclaims,

more to establish some of the color surrounding these

events than to be made whole financially, and of course

Muller is responsible for any expenses not related to his

business activities. The evidence presented, however, has

been inconclusive as to the amount properly attributable

to Muller’s personal expense.

The Drafting Period

After returning to New York a first draft on an agree-

ment on the sale of one of the subsidiaries was prepared

by Mannion. It was considered to be incomplete by the

Hardee Barovick firm, some words were had on the sub-

(1) The operations of the subsidiaries and any profit or loss

after August 31, 1976 in the operations of the businesses would

be for the plaintiffs’ account and benefit.

(2) The businesses being sold would be operated “in the ordi-

nary course of business” from August 31, 1976 until the clos-

ing, preserving, among other things, the companies’ goodwill

with general managers, suppliers and customers.

(3) The businesses would be transferred “intact” and as an

“ongoing operation” and as part of this, all New York manage-

ment personnel and all general managers would be transferred.

(4) Mr. DeMaio would be in charge of operations until closing.

28a

ject, and by early November SCM retained Messrs. Sul-

livan & Cromwell to assist in the negotiations and prepa-

ration of agreements.

On November 8, 1976, SCM’s Board of Directors

adopted the following resolution:

RESOLVED, that the officers of the Company be

and hereby are authorized to negotiate the sale of

the Business Equipment Division copier operations in

England, France, Germany, Belgium (including dis-

tributor operations) and Switzerland to N. Norman

Muller or a company(ies) owned by N. Norman

Muller at such prices and pursuant to such other

terms and conditions, as in its absolute discretion,

may be approved by the Executive Committee of the

Board of Directors... .

It is undisputed that both parties anticipated that a

final written agreement would be reached and executed,

an anticipation that, of course, was never fulfilled al-

though a closing date of March 31, 1977 was acceptable

to Rodich and was subsequently advanced at SCM’s re-

quest as more fully set forth below. Meetings were held

between counsel on November 16, 17, 18 and December

10 and with the participation of the respective clients

on December 15 and 16. Drafts were discussed and ne-

gotiated. The starting points for these discussions were

the thirteen points outlined by Rodich in August and

September and accepted by Muller before the SICOB trip.

The negotiations produced a number of refinements and

changes.

The non-copier assets of the French, German, Swiss

and Belgian subsidiaries, the shares of which were to be

acquired by Muller, were not to be stripped out prior

to closing but rather to be transferred to third parties,

affiliates of SCM, for cash. Since the transaction con-

templated a purchase price based on the formula de-

scribed above, this change increased the cash in the sub-

sidiaries at the time of closing and thus increased the

cash required to close.

29a

Throughout it was understood that SCM was concerned

about its employee severance liability and its good will.

Clauses were drafted to prevent dividends, loans and

pledges which would transfer funds from the Muller op-

erating companies to Muller or his holding companies.*

These clauses were designed to prevent Muller from re-

moving assets from the subsidiaries but did not by their

terms prevent any other transfer pledges or loans to

third parties.

SCM sought to obtain a personal guarantee from Mul-

ler and a commitment to operate the subsidiaries for

three years. The request was refused, and no provision

appeared in the last drafts on this subject. SCM sought

a provision requiring approval by its Board of Directors

before signing, a request which was rejected in view of

the action already taken and upon the view of SCM’s

counsel that the signature would not be affixed unless

the agreement was approved.

At the negotiations at the Atrium Club in August,

SCM had sought reassurance as to Muller’s financial

competence. The Dun & Bradstreet and Bishop’s reports

had been reviewed. During the negotiations in the fall

SCM sought Muller’s personal guarantee and certified

financials but these requests were rejected by Muller.

The issue was resolved by the limitation on upstream

pledges, loans and dividends, the purpose of which was

to prevent the transfer of funds to Muller which might

jeopardize the viability of the subsidiaries.

During this period from September through December

it was understood by all concerned that the companies

which were to be the subject of the agreement were

being operated by SCM for the benefit of Muller. So-

2 These clauses in the last drafts permitted upstream transfers

“so long as the funds came to rest within the pool.” In other words,

for tax or accounting purposes the funds could be transferred si-

multaneously as long as they remained available for use in the pool.

30a

called “Flash Reports,” weekly forms reporting the per-

tinent financial data, were shared with Muller. Rodich

had instructed DeMaio to keep Muller apprised of all

developments. No significant problems were raised or

discussed between the parties during the period concern-

ing the operation of the business in the normal course.

However, one significant development, relating to the pro-

duction and marketing of a plain paper copier, began to

cast a shadow over the business picture.

DeMaio, after being instructed in the fall of 1975 that

SCM intended to cast his division adrift, loyally assisted

in the plans to locate a willing buyer to whom the busi-

ness could be transferred. However, he was persuaded

that the viability of the business even to its new owners

required the capacity to compete in the plain paper copier

field whether or not SCM had determined to abandon

this field. To this end he had obtained Rodich’s agree-

ment to travel to Japan in the spring of 1976 to select

a manufacturer of a plain paper copier and arrange

for its production as recounted above. By early fall

he had exchanged correspondence with Mita relating to

the production of a plain paper copier, its testing and

the purchase of a number of copiers. Muller shared De-

Maio’s belief that the availability of a plain paper copier

was essential to the health of the European subsidiaries.

The SICOB show was the public debut of the Mita plain

paper copier, and the European managers were encour-

aged and enthusiastic, shared DeMaio’s hope for the

success of this product and the consequent commissions

on sales, a factor which served to hold the sales organi-

zations together during this period of uncertainty. Orders

for sales were taken for production to commence some

time around the first of the year, and these orders ap-

peared on the Flash Reports.*

3 The orders for the plain paper copiers from late September

through January, as indicated by the Flash Reports, were approxi-

mately 450.

3la

It was anticipated that the Mita copier would cost

in the neighborhood of $3,000 and be sold for approxi-

mately $4.900 and that approximately 2,000 units would

be involved in the first year’s production. Thus an in-

itial investment of $6 million was in contemplation.

Since SCM in its 1976-77 budget had determined to re-

duce its commitment to the copier business and to liqui-

date its investment, and since Muller felt that plain

paper copiers essential to his ability to carry on the busi-

ness, the production of the plain paper copier had the

potential of presenting a significant divergence in busi-

ness objective between Muller and SCM. However, only

the tip of this issue could be perceived on the horizon in

mid-December, and neither of the parties focused upon

it. By all that had been discussed between the parties

and their counsel, the operation of the business was

proceeding to the satisfaction of each.

The Agreement and Final Events of 1976

By mid-December counsel had produced 16 drafts,

and pressures were building up for a resolution. Rodich

was to be reassigned as of January 1, 1977 to become

President of the Chemical and Metallurgical Division of

SCM headquartered in Baltimore, and as the principal

negotiator for SCM he sought to conclude the discussions.

He called a meeting at SCM for December 15 to be at-

tended by all counsel and their clients with the purpose

of clearing up all matters then outstanding.

Rodich, Muller, and DeMaio, Robert Kay, and Ronald

Konecky, counsel for the buyer, John Merow and Charles

Sprague, counsel for the seller, James Conway, the chief

auditor of SCM and Ben Evans, the S. D. Leidesdorf part-

ner bearing accounting responsibility for Muller, and two

other lawyers all testified as to the conduct of this meet-

ing. Two drafts were discussed, one a “Global” Agree-

ment between buyer and seller and the second, the agree-

ment for the sale of the French company which was in-

tended not only to serve to govern that transfer but

32a

also to serve as a prototype of the agreements to be

completed with respect to the Belgian, Swiss and German

companies. It is undisputed that the drafts were re-

viewed, page by page, and all open issues were sought to

be resolved. Parties caucused in various groups, discus-

sions were held, and agreement was reached wherever pos-

sible. It was contemplated that another draft would be

generated by Sullivan & Cromwell, and indeed on the

evening of December 15 another draft of the Global

Agreement was produced.

The meeting continued on December 16, and at its

conclusion the assembled group was asked by Rodich

whether there were any open terms, and none were ad-

vanced. Sullivan & Cromwell was to provide agreements

embodying the discussions. The negotiators were re-

leased, and adieus, season’s greetings and congratulations

were exchanged. Rodich escorted Muller to DeMaio’s of-

fice, and advised the latter that the meetings had been

successfully completed. Whether or not Rodich stated, as

recalled by Muller and DeMaio, “Frank, shake hands

with your new boss, the deal is done,” the import of the

meeting with DeMaio was to acknowledge in an infor-

mal manner the transfer of power. In addition Rodich took

Muller to Egli’s office and advised Muller that Egli would

finish up the transaction. He also informed the finder

that his fee could be expected around Christmas or shortly

thereafter.

On December 16, the Board of SCM met and the fol-

lowing minute was made with respect to Elicker’s report:

He commented on the sale of the European copier

business and the assignment of domestic copiers to

Allied Paper.

By deposition Elicker expanded on this subject, stating

that he had informed the Board that he remained hopeful,

that the negotiations were “stuck,” that Rodich’s trans-

fer would be completed and that Egli would take over

for the short and temporary period remaining.

—_ e e e ee

33a

Elicker also testified by deposition that a receivable

for the Muller transaction had been booked by the Board

in 1976. Both Egli and Conway disputed this fact, and

testified that no such entry appears on the SCM books.

Egli also indicated that Elicker must have confused the

September write-down of the copier assets when he tes-

tified about this receivable. Given the clarity of Elicker’s

pretrial deposition, his absence at trial, the testimony of

Conway that such an entry would not have been made

for about ten days after year-end, and the findings

shortly to be described concerning Egli’s year-end memo,

the preponderance of the evidence weighs on the side of

the existence of the booking.

Just after the meeting, on behalf of Muller the follow-

ing request was made to the French government for ap-

proval of the transaction:

[SCM] has come to an agreement with Mr. Norman

Muller, a U.S. citizen, under which the Group of the

latter will take over the SCM copier business in some

of the European countries, i.e., West Germany, Bel-

gium, the United Kingdom, Switzerland, and France.

As the negotiations were being held DeMaic telexed to

Mita seeking to complete the plain paper copier trans-

action and confirming a Letter of Intent between Repro-

system and Mita for the purchase of about $6,000,000

worth of plain paper copiers from Mita. On December

16 DeMaio also notified Mita that

we have agreed, on December 15, 1976, to the final

terms and conditions pertaining to the sale of the

six European companies and the distribution right in

all other countries in all of Europe, the Middle East

and Africa.

While the negotiations were in progress, DeMaio had

prepared a telex for the managers keeping them advised

of the events. Rodich approved the telex and it was

transmitted on December 17. It read:

34a

This is a brief report on the status of our negotia-

tions to sell the Europe, Middle East and African

copier group to N. Norman Muller.

I am sure you appreciate that the complexity of the

transaction has made negotiations and workload

much more extensive than anyone anticipated. How-

ever, we now feel that the problems are resolved and

that the deal is made subject to approval by vari-

ous government agencies.

Before year end the DeMaio letter to Mita was re-

viewed by Rodich and the SCM inside counsel. They per-

ceived the danger of a long term commitment, as did

Muller who on December 20 rejected any responsibility

prior to taking title. SCM urges that this refusal by

Muller evidences the lack of an agreement. A more ra-

tional inference is that Muller merely sought to defer

his obligations until the expected closing. On December

28 Rodich wrote to Mita as follows:

I have had an opportunity to review Mr. F. D. De-

Maio’s letter of December 16, 1976, with which he

transmitted a ‘Letter of Intent’ in the name of Re-

prosystems, B.V. for the purchase of Copystar Model

251R.

As you are aware, SCM is in the process of selling

its Euroepan based office copier business to Repro-

systems, B.V. We have every reason to believe that

this sale will be consummated; however, it is not pos-

sible to accurately state when the transaction will

be completed.

We want to be sure that you understand that Mr.

DeMaio’s communication was.on behalf of Repro-

systems, B.V. and not SCM Corporation and that

performance under the ‘Letter of Intent’ is a legal

and financial responsibility of Reprosystems B.V.

Reprosystems will be licenced by SCM to use its

trademarks on copier products sold through the or-

35a

ganizations which they will be acquiring. We under-

stand that Reprosystems, B.V. intends to strengthen

and expand its copier business, and we hope that

Mita and Reprosystem will have a long and mu-

tually profitable relationship.

After the negotiations of December 15 and 16 Egli

again sought reassurance with respect to Muller’s finan-

cial capacity and requested a financial statement which

he said would be reviewed only by Rodich and Elicker

and be held in confidence. This statement, supplied by

Muller on December 20, 1976, showed a net worth of

$6,179,000. History and the vigor of SCM’s counsel has

revealed that these assets were overstated, including as

they did certain assets of Muller’s wife and some evalua-

tions of control stock that could have been the subject

of varying opinions. In fact, on the same day, in connec-

tion with anticipated bank financing, Mu'ler submitted

more conservative figures to the Chemical Bank, which

presumably had previously acquired data on Muller’s as-

sets. Muller set forth a net worth of $3,617,000 to the

bank. However, in December, 1976 SCM chose not to

pursue any further inquiry into Muller’s finances.

On December 27 Sullivan & Cromwell provided what in

the lexicon of this litigation have been termed the Final

Drafts of the Global Agreement, and the French, Bel-

gian, German and Swiss Purchase Agreements. On Jan-

uary 5 these were supplemented by the Final Drafts of

the United Kingdom and Chur Asset Purchase Agree-

ments. These Final Drafts, accomplished in the manner

described, constituted written agreements between the

parties on all material terms relating to the proposed

sale, and it was so understood by all those involved as

the morning of December 31, 1976. It was also expected

and understood that these Final Drafts might be subject

to some minor changes and that they would be executed

in the near future. The Global Agreement contained

standard language to the effect that it as well as each of

36a

the Purchase Agreements would become binding only

upon execution.

Counsel’s notes indicate certain reservations of Mul-

ler’s counsel concerning the non-competition, dividend lim-

itations, severance liability, and SCM indemnity clauses

in the Final Drafts, but no testimony was adduced to

establish that these represented serious, deal-breaking is-

sues for Muller. Indeed the most serious of these issues

from SCM’s professed point of view, the employee sever-

ance liability, engendered simply a query. The other

clauses had been previously discussed and resolved so that

renegotiation was not likely, despite the mark-ups made

by Palley, one of Muller’s counsel. In view of Muller’s

testimony concerning his own understanding of the trans-

action after the meeting of December 15 and 16 and

Palley’s testimony, the latter’s notes represent no more

than a careful lawyer’s review in preparation for a

further discussion with either his client or the other side,

neither of which took place. Although some uncertainty

existed with respect to the tax results of the French

transaction and the time by which the necessary Bank

of England approval could be obtained, these uncertainties

were to be resolved by third parties and the preponder-

ance of the evidence does not establish that these uncer-

tainties were sufficient to negate the understandings set

forth in the Final Drafts.

The Disagreement and Events in 1977

In accordance with his practice of reviewing financial

matters at the end of each quarter and in order to fa-

miliarize himself with the transaction, Egli took home

on New Year’s Eve certain of the documents relating

to the proposed sale to Muller. He reviewed the trans-

action and then made notes of his findings. These notes

became the basis of his recommendation to Elicker on

January 3. The handwritten notes were introduced, and

the alternatives as viewed by Egli were described as

follows:

87a

Present Alternatives

1) Resolve open [Muller deal] issues & get contract

signed (good for Muller not good for SCM).

2) Slow down on signing contract & send team to

Europe to study other approaches to liquidating

our investment.

3) Ask for cash payment put into escrow.

4) Kill deal and:

a) Try to spend $2.0-$2.5 [million] in liquida-

tion before 6/30/77 to reduce taxes.

b) Develop a specific plan for each disposition

separately.

These alternatives and the financial implications were

discussed with Elicker and Hall, Senior Vice President-

Administration of SCM on January 4, 1977. Although

there is no report of the substance of any internal SCM

discussions concerning the finances of the copier business,

by year-end it was apparent to Egli that net income for

the first half of the fiscal year would be in the neigh-

borhood of $500,000, almost the prior estimate of $600,-

000 in profits for the entire year. By the projected clos-

ing date Egli estimated profits of over $1.2 million.

Given the cash implications of the transaction, to be dis-

cussed below, it is inferred that these calculations re-

sulted in Egli’s conclusion that the deal was “good for

Muller, not so good for SCM.” Egli testified that at the

January 4 meeting, it was determined that SCM would

proceed with the deal, attempting to resolve all open is-

sues. In that connection Egli presented at the meeting

the following items, first noted in his December 31 memo:

1. Accrued vacation and holiday pay.

2. Interest on purchase price from 8/31.

3. 8/31 audit adjustments and calculation of pur-

chase price.

38a

4. Muller’s ability or willingness to finance as neces-

sary.

5. Timing of close—now after 3/31/77.

6. PPC’s. [plain paper copiers]

7. Which [general managers] are going with Mul-

eee

8. Gov’t approvals.

Only one of these issues—interest on the purchase price—

had not been the subject of previous discussion, and none

represented material issues beyond resolution except per-

haps whatever was indicated by the item “PPC’s” but in

any case this item was not amplified or explained on Jan-

uary 5 when Egli met with Muller and his counsel Kay.

Prior to that meeting and subsequent to his meeting

with Elicker, Egli met with counsel from Sullivan &

Cromwell, and all open items were discussed. No testi-

mony has been adduced that there was discussion at that

meeting to the effect that the deal should be killed, and

indeed there is no direct testimony from any SCM wit-

ness that the formal termination of negotiations which

occurred later on February 2, 1977 resulted because of

an intention of SCM to defeat the transaction.

From January 4 to February 2, 1977 events moved

rapidly and quite inexorably. Despite Mauller’s belief

that Egli’s function was simply to conclude the arrange-

ments, Egli at the January 5 meeting placed unresolved

issues on the table adding four additional items to those

he had noted over the weekend. Kay, having returned

from the holidays, did not rejoin but merely recorded the

positions taken by Egli. In the course of this meeting

Egli stated his intention to visit the subsidiaries, a trip

to which Muller objected, stating that it made more

sense to accelerate the paperwork and complete the

transaction. Egli insited on the trip, the purpose of which

was not satisfactorily explained by Egli at that time or

39a

at trial. DeMaio objected to the trip, carried his objec-

tions to Elicker and was overruled. DeMaio heard imme-

diately after the trip from the managers of the subsid-

iaries who told him that Egli had indicated serious

doubts about the completion of the transaction.

On January 11, William Cawley, Vice President and

Treasurer of SCM, wrote to Muller and suggested that

the SCM policy relating to equipment held for lease had

not been complied with and that certain action would be

taken. The letter further stated:

As you know, the contract requires SCM to carry

on the business of the European companies in the

ordinary course during the period between September

1 and closing. Our lawyers tell us that since those

instructions may be construed to be not in the or-

dinary course that we should request your consent.

In fact, the evidence at trial established that Rodich had

authorized the “additional investments” which were the

subject of the letter. The letter is significant since Caw-

ley testified by deposition that it was written at Egli’s

request and during his European trip. The inference is

thus drawn that after consultation with counsel, Egli

viewed the Final Drafts as a contract and had embarked

upon a change of direction for the European subsidiaries.

Egli then for the first time sought evidence of Muller’s

capacity to pay the cash required at closing, discussing

the transaction with officers of the Chemical Bank. The

bank provided Muller with an informal non-binding com-

mitment letter dated January 20, 1977 which was turned

4 Cawley’s request was for a waiver of the regular course of busi-

ness representation as affected by a repetition of the freeze on

acquiring new equipment which had been in effect throughout fiscal

1976-77. The freeze, part of SCM’s investment plan, had been

modified in operation by an understanding reached between DeMaio

and Rodich that new equipment for lease would be acquired if nec-

essary to satisfy old and important customers.

40a

over to SCM. Although SCM also used the resources of

the Chemical Bank and although Conway of SCM had

been in touch with the bank on the subject of Muller’s

financing, no further inquiries were made. In fact, unbe-

knownst to SCM, Muller had obtained the letter from

Chemical on the understanding that the cash in the sub-

sidiaries to be acquired would immediately be used to pay

the purchase price advanced by the bank, an understand-

ing which gave rise to serious questions raised by SCM

after the litigation had commenced and which are dealt

with below. Although the closing date had been fixed at

March 31, Egli insisted, without objection by Muller, on

its advance to February 28.

The purchase price and the attendant cash required to

close had been the subject of calculations by the account-

ants on more than one occasion. Both Evans, represent-

ing Muller, and Conway of SCM were in agreement on

the values of August 31, 1976, and the formula to ob-

tain adjustments to make these numbers current as of

the closing date. Indeed the variation between the cal-

culations as of the end of August and those at the end

of November and December was relatively insignificant,

the cash required to close hovering around $4.25 million.

However, this figure took a significant jump in January.

This increase resulted from a recalculation of certain

Swiss accounts receivable prior to August 31, and most

signicantly from the demand for interest on the purchase

price, approximately $145,000, and the request for $540,000

which resulted from an inter-company transfer. This

transfer involved a loan from the German subsidiary to

a Canadian SCM subsidiary, and the treatment of the

exchange rates had significant tax effects. The work

papers relating to this transaction were never turned

over to Muller’s accountants nor was the entry satis-

factorily explained—either at the time to Muller’s rep-

resentatives nor during the trial to the court. However,

whatever ultimately might have been the accounting ef-

4la

fect of this transaction, Muller agreed to accept the ad-

justment as presented. There was, however, no agree-

ment on the demand for interest on the purchase price,

and no evidence to counter the implication that this was

an afterthought intended at the least to offset the profits

earned by the subsidiaries.

Throughout the negotiations SCM had undertaken not

to compete in the copier field, and indeed its stated pur-

pose had been to withdraw from such competition. In

January this stance was altered, SCM seeking to retain

the ability to compete in the event that it acquired any

copier rights from Xerox as a result of pending litigation.

However, the most significant actions taken by Egli

related to operation in the normal course of business.

Egli took steps to reduce the leasing of new equipment,

presumably to increase cash sales. On January 11, as re-

countered above, SCM in effect withdrew the representa-

tion that the business had been conducted in the normal

course. In addition Egli told Muller he intended to go to

Europe to discuss the plain paper copier situation with

Mita. Muller asked to accompany Egli who refused the

request.

The plain paper copier issue had been precipitated by a

request by Mita for a letter of credit to cover merchan-

dise to be shipped. SCM, on the horns of a dilemma of

its own making, sought to keep the relationship intact

and at the same time to minimize capital commitment.

On the second trip to Europe in January, Egli negotiated

an understanding with Mita that relieved SCM of any

substantial ongoing relationship but } vmitted the sub-

sidiaries to meet their sales commitments. The substance

of this negotiation was undertaken under a pledge of

secrecy and substantially affected the business, as Egli

knew it would.

Upon his return from Europe Egli met with Elicker,

Rodich was called back to New York, and it was deter-

mined to fire DeMaio and the other New York adminis-

42a

trators of the subsidiaries and their secretaries without

discussion with Muller or any prior notice to him, al-

though continuity of management had long been under-

stood to be a consideration for Muller. Egli told DeMaio

he was fired and directed that he be escorted out of the

building. The firing of DeMaio, previously a _ well-

regarded executive of 11 years’ standing,® resulted from

the bottom line analysis by Egli of the financial results

of the transaction and DeMaio’s commitment to the con-

tinuation of the business on behalf of Muller, a course

upon which DeMaio had earlier been set by Rodich in

spite of the situation of inherent conflict that this

created.

Egli explained the firing as a result of the Mita mis-

understanding, a failure to implement the freeze on the

leasing of new equipment, and an unconfirmed report that

a controller in one of the subsidiaries sought to decrease

the cash in the subsidiaries as of August 31, for Muller’s

benefit and at DeMaio’s direction. In fact the freeze

policy had been modified by Rodich unbeknownst to Egli,

the reported event relating to the August 31 reports did

not occur, and the report itself was neither investigated

or confirmed. DeMaio’s participation in the Mita transac-

tions was known shortly after its occurrence and was

faithful to the business-in-the-ordinary-course precept.

The reasons given for the firing of DeMaio were pre-

textual, and therefore constitute significant evidence that

Egli indeed sought to kill the deal.

By January 20, SCM issued a press release stating that

it felt free to pursue “other alternatives” to a sale to

Muller, who at the moment of being informed of this

change of position was attendant upon an ill wife. He

5 DeMaio testified that though he had not discussed the Muller

transaction in detail with Elicker, he had met his chief executive

in the hall in December, 1976. Elicker thanked DeMaio for his

efforts on the transaction, wished him well in his future e:deavors

in the same role under Muller’s ownership and told him that he

well deserved the reward.

43a

asked Conway to modify the language to soften it~ impli-

cation, a request which was refused.

On January 31 Muller wrote to Elicker seeking to en-

force the agreement and on February 2 SCM formally

terminated the negotiations. At no time did Egli care-

fully review or discuss the Final Drafts internally; at no

time were any of the Final Drafts signed by any of the

parties, nor did Muller ever tender the purchase price.

In view of what was done as opposed to what may have

been said at the meetings held on January 5, 6, 14 and

17, and on February 2, I find that SCM’s financial inter-

est required that the sale not go forward, that Egli real-

ized that fact, that the actions taken in January, 1977 by

Egli on behalf of SCM had the effect of slowing down the

signing and killing the deal, and that a specific plan for

disposition of each corporation was evolved, contrary to

the Agreement in Principle and the Final Drafts. In

other words, the acts performed require the inference that

in January the responsible officers of SCM reached a con-

clusion to terminate the transaction with Muller.

The Ability to Perform the Agreement

Throughout the trial, if not during the negotiations,

SCM insisted that Muller lacked the capacity to perform

the transaction, and factual findings on this issue are re-

quired. At the outset it was understood that SCM was

concerned about two significant items, its potential em-

ployee severance liability of approximately $6 million and

its continuing bank guarantees. After Muller’s refusal to

give an undertaking to continue in business for three

years and a personal guarantee, SCM sought security for

the transferred companies through the restrictive provi-

sions on pledges, loans and dividends described above,

recognizing that the form of the transactions and the con-

tinuation of the companies in business with adequate

funding were significant to its concerns.

As to the liability on bank guarantees, early on Muller

undertook to have SCM removed from the guarantees.

44a

The pro forma financials submitted to the Chemical Bank

in January in order to elicit its informal letter of com-

mitment revealed short term loans of $2,363,000 as of

November 30, 1976 as a liability of the new companies.®

Throughout the negotiations the requirement to produce

a certified check at closing was the only provision relat-

ing to Muller’s ability to close the transaction, other than

the somewhat informal required financial representations

already referred to. As evidenced by Muller’s submissions

to the Chemical Bank on January 7 it was his intention,

at least at that point, to provide the cash required to close

by a bridge loan, to be repaid out of the cash on hand in

the acquired companies. In view of the facts now found,

it is not necessary to determine the exact amount of cash

required to close. If the transaction had gone forward on

the basis of the Final Drafts, that amount would have

been in the neighborhood of $4.5 million. Had all SCM’s

proposed accounting charges been accepted that amount

would have been increased by approximately $1 million.

A substantial amount of testimony was adduced by both

sides on the subject of Muller’s capacity to perform the

agreements represented by the Final Drafts. This in-

cluded the refusal of Citibank in the early fall to provide

financing and a similar refusal by the Chemical Bank

International Division, though these refusals are by no

means conclusive evidence on Muller’s ability to finance

the transaction. Citibank was dealing with different facts

than those which were present in December, and Chemical

had internal reasons for refusal. Nonetheless, these re-

6 Egli on many occasions during the trial stressed his concern

about SCM’s liability on these guarantees. However, the guaran-

tees were not the subject of identified documents, nor had they

been tabulated and presented to Muller. No objective reason was

advanced to indicate that any difficulty would be encountered in

getting SCM off the guarantees other than the observation that

SCM was a substantial corporation, and Reprosystem was not. Egli

testified that Muller did nothing to accomplish the agreed upon

substitution. Neither did SCM, which according to Egli would have

had a far greater interest in the matter.

45a

fusals do establish that financing for a $5 million transac-

tion cannot be assumed.

It was agreed by certain witnesses for each side that

some mention was made by Muller’s representatives that

they might seek to use the cash in the German company

in connection with financing the purchase price. Muller

and his representatives, Kay and Evans, all testified that

it was understood by both sides that the cash on hand in

the acquired companies could be used to finance the pur-

chase price, and it is certain that some discussion along

these lines, at least with respect to the German company,

did take place. A review of the documentary evidence

also establishes a preponderance of evidence that the issue

was discussed, particularly in connection with the restric-

tive provisions which occupied a considerable amount of

time in negotiation and drafting. The notes and recollec-

tion of Kay, Muller’s counsel, are supported by a parallel

reference in the notes of SCM’s outside counsel relating

to the same provision at the same meeting. In the vocab-

ulary of the parties the entry “Purchase price may leave

the pool” establishes the fact that the cash in the sub-

sidiaries was considered with respect to Muller’s financ-

ing, despite the inability of counsel for SCM to recall the

significance of the phrase.

However, even though I find that this method of financ-

ing the purchase price was discussed between the parties,

the discussion is relatively unimportant. SCM at no time

sought to inhibit any such financing. The testimony con-

cerning the commonality of such a practice is undisputed,

and SCM could hardly be characterized as an ill-advised

seller. There was no prohibition in the Final Drafts or

in the discussions of the parties barring Muller from

using the cash in the subsidiaries to assist in the financ-

ing of the purchase price.”

7 Although such a gloss might be sought to be imposed upon the

restrictive provisions, the language of the provisions reads other-

wise.

46a

Of course, in the light of the facts so “ar a: found, it

is obvious that Muller’s ability to perform the contract

he alleges cannot be established by anything that actually

occurred, but rather by an assessment of what in all prob-

ability would have occurred. It is undisputed that Mul-

ler did not tender a certified check in the amount of the

cash required at closing as it was calculated as of Decem-

ber 31, 1976 or for any other amount which might have

been determined. Indeed, outside of the projected financ-

ing, no direct evidence was presented to establish that a

source was available to provide the $4 million plus which

would have been required. Muller’s informal bank com-

mitment letter from Chemical was just that. No commit-

ment fee had been paid, and Chemical was not bound to

produce the financing. Further, the projected financing

depended on cash remaining in the companies to be sold.

Both Rodich and Muller testified that Muller had

agreed to eliminate SCM’s liability on the bank guaran-

tees and that such a result could be achieved either by

paying the loans or relieving SCM of its liability. It

would not have violated the understanding between the

parties for SCM to have required the subsidiaries to pay

off the short term loans and overdrafts prior to closing,

or to require Reprosystem to do so immediately after

closing should the banks be unwilling to release SCM

from its guarantees. SCM has successfully demonstrated

that such an event would have stripped the subsidiaries

of cash. Under such cirumstances the contingent nature

of the Chemical’s informal commitment does not rise to

the level of proof that Reprosystem would have been able

to perform the contract and provide the necessary cash

at closing. That Muller had assets, there is no doubt, but

no direct evidence was presented as to the amount of cash

which could have been generated by the use of these as-

sets. Similarly, though the subsidiaries undoubtedly had

value, no direct evidence was presented that any partic-

ular financial sources would have provided the bridge fi-

nancing necessary. The commercial reality of Muller’s

47a

ability to close the transactions was not established by a

preponderance of the evidence.

CONCLUSIONS OF LAW

The facts as found above do not lead to simple conclu-

sions of law, to be recited as first principles, known and

recognized from the beginning of recorded legal history.

What has been described is the complicated interaction

which takes place when major corporations dispose and

acquire substantial assets. Such transactions require lines

to be drawn, projected from earlier established principles

which then define duties and obligations perhaps not pre-

viously perceived or articulated as such.

In this instance the parties in December, 1976, agreed

upon all material terms of a contract which was to be

embodied in a final agreement to be executed. An agree-

ment was reached, and that agreement required the good

faith action of both parties to complete the transaction.

SCM’s acts from December 31 are inconsistent with its

duty to perform its agreement to act in good faith. SCM

has been unjustly enriched with profits earned on Muller’s

account, and must disgorge those profits as the most

readily available approximation of the relief to which

Muller is entitled in damages and restitution. On the

other hand, given the failure of Muller to establish that

Reprosystem was ready, willing and able to perform the

bargain, Muller is not entitled to damages based on any

profit which he might achieve had the end-transaction

been performed, or full expectation damages measured in

any other way.

SCM’s acts, described above, while in violation of its

obligations to Reprosystem, were motivated not by an in-

tent to defraud or deceive but simply out of a careful

financial analysis, not rising to the level of fraud under

the securities laws or common law. It seems almost im-

plicit that the federal claim, though facially sufficient,

served principally to establish initial jurisdiction, which

48a

was accomplished without objection or motion. The claim,

however, is insufficient both as a matter of law and fact.

The Securities Claim

If the strict language of Section 10(b) of the Secu-

rities Exchange Act of 1934 (“the 1934 Act”), 15 U.S.C.

§ 78j(b), and Rule 10b-5 promulgated thereunder, were to

be applied automatically because a sale of securities was

contemplated, then virtually every sale of a business

structured as was this transaction would call into play

the panoply of rights and remedies under the securities

law. An examination of the essential purpose of such

laws is required whenever this outreach is sought.

The subject matter of this lawsuit is the purchase and

sale of a business, even though that purchase and sale in

part involved a transfer of ownership evidenced by stock.

Recently, the Seventh Circuit Court of Appeals confronted

the question of “whether alleged fraud regarding the sale

of assets and stock in a corporation falls within the scope

of [the federal securities] laws.” In Frederiksen v. Polo-

way, 637 F.2d 1147, (7th Cir. 1981), cert. denied,

U.S. ——, 101 S.Ct. 3006, 69 L.Ed.2d 389 (1981), it was

held that the acquisition of a marina did not involve a

“security” within the purview of the federal securities

law. The court, at 637 F.2d 1150, quoted the following

observation of the Supreme Court in United Housing

Foundation, Inc. v. Forman, 421 U.S. 887, 849, 95 S.Ct.

2051, 2059, 44 L.Ed.2d 621 (1975) :

The primary purpose of the Acts of 1933 and 1934

was to eliminate serious abuses in a largely unregu-

lated securities market. The focus of the Acts is on

the capital market of the enterprise system: the sale

of securities to raise capital for profit-making pur-

poses, the exchanges on which securities are traded,

and the need for regulation to prevent fraud and to

protect the interest of investors.

The Frederiksen court noted further the conclusion of the

Court in Forman that the securities laws do not apply

49a

when the goal of a purchaser is not investment, but a

desire to “use or consume the item purchased.” 637 F.2d

at 1150, quoting 421 U.S. at 852-53, 95 S.Ct. at 2060-61.

The 1934 Act provides that “[t]he term security means

any ... stock,” 15 U.S.C. § 78c(a) (10); but that defini-

tion, as are all the definitions in § 78c(a), is preceded by

the prhase “unless the context otherwise requires;” the

definition of “security” in the 1933 Act is prefaced by the

same phrase, 15 U.S.C. § 77b(1). Although the transac-

tion involved in Frederiksen appeared to be within the

letter of the 1934 Act it was not—given the commercial

as opposed to investment character—within the spirit, nor

within the intention of its makers. Jd. at 1150. Indeed,

as the Frederiksen court noted, the “literal application”

argument was specifically rejected by the Court in For-

man, supra, 421 U.S. at 848, 95 S.Ct. at 2058, in the fol-

lowing terms:

We reject at the outset any suggestion that the pres-

ent transaction evidenced by the sale of shares called

‘stock,’ must be considered a security transaction sim-

ply because the statutory definition of a security in-

cludes the words ‘any . . . stock.’ Rather we adhere

to the basic principal that has guided all of the

Court’s decisions in this area:

‘[I]n searching for the meaning and scope of

the word “security” in the Act[s], form should

be disregarded for substance and the emphasis

should be on economic reality.’ Tcherepnin v.

Knight, 389 U.S. 332, 336 [88 S.Ct. 548, 553,

19 L.Ed.2d 564] (1967).

As in Frederiksen, the “economic reality” of this transac-

tion was that Muller intended to manage and operate the

business and had no intention to rely on the present and

future efforts of SCM to produce profits. Thus, the se-

curities law claim fails for the reason that the contem-

plated transaction did not involve an investment of money

50a

in a common enterprise from which the profits were ex-

pected “to come solely from the efforts of others.” Jnt’l

Brhd. of Teamsters v. Daniel, 439 U.S. 551, 558 & n.11,

99 S.Ct. 790, 815, 58 L.Ed.2d 808 (1979), quoting For-

man, supra, 421 U.S. at 851-522, 95 S.Ct. at 2060; SEC

v. W. J. Howey Co., 328 U.S. 293, 301, 66 S.Ct. 1100,

1104, 90 L.Ed. 1244 (1946); Williamson v. Tucker, 632

F.2d 579, 592-601 (5th Cir. 1980) ; Glen-Arden Commod-

ities, Inc. v. Costantino, 493 F.2d 1027 (2d Cir. 1974);

Barsy v. Verin, 508 F.Supp. 952 (N.D. Ill. 1981); Wie-

boldt v. Metz, 355 F.Supp. 255 (S.D.N.Y. 1973).

Further, the claimed frauds of overstated assets and

inflated income were not made with the scienter required

to be established under the federal securities laws or un-

der the common law. As set forth above, these were

projections made in good faith. The profits projection

proved to be more or less accurate although SCM man-

agement believed otherwise at one time. Although the

assets described to Muller in the spring of 1976 may have

been overstated by a million dollars, there is no evidence

that such overstatement was made with a fraudulent in-

tent or even recklessly. See Aaron v. SEC, 446 U.S. 680,

100 S.Ct. 1945, 64 L.Ed.2d 611 (1980); Ernst & Ernst

v. Hochfelder, 425 U.S. 185 (1976); Elkind v. Liggett &

Myers, Inc., 635 F.2d 156, 165 (2d Cir. 1980); Samuels

v. Eleanora Baheer, B.V., 500 F.Supp. 1357, 1361-62

(S.D.N.Y. 1980).

Of course, it has been found as fact above that SCM

had determined not to complete the transaction after

Egli’s analysis at the end of 1976. There was no state-

ment to that effect, and SCM sought to imply that it still

intended to go forward with the transaction. There was,

however, no misrepresentation to that effect. At worst

there was a failure to disclose the fact of a decision to

“kill the deal.” Were the federal securities laws appli-

cable, this omission would require further analysis. In

5la

the last analysis there was no purchase and sale of a

security, and despite the dutiful citation of Omega Execu-

tive Services, Inc. v. Grant, [1979 Transfer Binder] Fed.

Sec.L.Rep. (CCH) {98,848 at 95,445 (S.D.N.Y. 1979)

by Reprosystem, the securities laws are thus inapplicable.

The Contract Claim

These conclusions simply return the court to where the

parties have been throughout the litigation, the deter-

mination of New York law with respect to the rights and

liabilities of parties seeking to contract.* Several prin-

ciples of law relevant to the determination of whether a

contract existed are urged by the parties as “ancient,”

“cardinal” and “controlling.” As is often the case, initial

guidance is derived from Judge Weinfeld:

The day is long past when a red ribbon and seal is

the parties’ agreements in order to validate such

required upon documents which contain the terms of

agreements.

Royal Indemnity Co. v. Westinghouse Elec. Corp., 385

F.Supp. 520, 522 (S.D.N.Y. 1974). Indeed, it is well es-

tablished that where parties reach an agreement they are

bound by it, whatever its form and however it is mani-

fested. See e.g., Kleinschmidt Div. of SCM Corp. v. Futu-

ronics Corp., 41 N.Y.2d 972, 395 N.Y.S.2d 151, 363 N.E.

2d 701 (1977) ; Sanders v. Pottlitzer Bros. Fruit Co., 144

N.Y. 209, 39 N.E. 75 (1894).

What is looked to in determining whether an agreement

has been reached is not the parties’ after-the-fact pro-

fessed subjective intent, but their objective intent as

8 The parties have relied on New York law in support of their re-

spective positions on the contract issue, assuming accurately that it

would govern in this action where Muller and SCM are New York

residents, virtually all of the negotiations and contracts drafting

took place here, and the various contract drafts all specify that New

York law should govern disputes arising thereunder.

52a

manifested by their expressed words and deeds at the

time. Brown Bros. Electrical Contractors, Inc. v. Beam

Constr. Corp., 41 N.Y.2d 397, 393 N.Y.S.2d 350, 352, 361

N.E.2d 999, 1001 (1977). If the parties’ expressions and

conduct would lead a reasonable man to determine that

they intended to reach a binding agreement, their agree-

ment will be enforced. Phillip v. Gallant, 62 N.Y. 256,

263 (1875). In determining whether the parties entered

into a contractual agreement and what were its terms,

disproportionate emphasis is not to be put on any

single act, phrase, or other expression, but, instead,

on the totality of all of these, given the attendant

circumstances, the situation of the parties, and the

objectives they were striving to attain [citations

omitted].

Brown Bros., supra, 393 N.Y.S.2d at 352.

Moreover, waile there is no enforceable agreement if

the parties have not agreed on the essential terms, /nter-

ocean Shipping Co. v. Nat'l Shipping & Trading Co., 462

F.2d 673, 676 (2d Cir. 1972) ; ABC Trading Co. v. West-

inghouse Elec. Supply Co., 382 F.Supp. 600 (E.D.N.Y.

1974), in New York and across the country a binding

contract can be formed despite “material open issues.”

See e.g., N.Y.U.C.C. (“UCC”) 2-204, (McKinney 1964).

As the New York Court of Appeals held in Kleinschmidt,

supra:

Under the Uniform Commercial Code [2-204(3)], if

the parties have intended to contract, and if an ap-

propriate remedy may be fashioned, a contract for

sale does not fail for indefiniteness if terms, even im-

portant terms, are left open... . It is no longer true

that dispute over material terms inevitably prevents

formation of a binding contract. What is true...

is that when a dispute over material terms manifests

a lack of intention to contract, no contract results.

58a

Thus, when there is basic agreement, however mani-

fested and whether or not the precise moment of

agreement may be determined, failure to articulate

that agreement in the precise language of a lawyer,

with every difficulty and contingency considered and

resolved, will not prevent formation of a con-

Wwach...-+

395 N.Y.8.2d at 152, 363 N.E.2d at 702. If the parties

fail to work every aspect of the agreement out, such

terms can be resolved by the court. See e.g., United

States v. Bedford Associates, 657 F.2d 1300 at 1310,

1311 (2d Cir. 1981); V’Soske v. Barwick, 404 F.2d 495

(2d Cir. 1968); American Cyanamid Co. v. Elizabeth

Arden Sales Corp., 331 F.Supp. 5$7 (S.D.N.Y. 1971).

Even failure to agree expressly on the payment terms

does not alone prevent an enforceable agreement. Rose

v. Spa Realty Associates, 42 N.Y.2d 336, 397 N.Y.S.2d

922, 366 N.E.2d 1279 (1977).

It is recognized that if the parties intend not to be

bound until they have executed a formal document em-

bodying their agreement, they will not be bound until

then. Int'l Telemeter Corp. v. Teleprompter Corp., 592

F.2d 49, 56, and 57-58 (Friendly, J. concurring) ;

V’Soske, supra, at 499; Chromalloy American Corp v.

Universal Housing Systems of America, Inc., 495 F.Supp.

544, 550 (S.D.N.Y. 1980) ; Scheck v. Francis, 26 N.Y.2d

466, 311 N.Y.S.2d 841, 260 N.E.2d 493 (1970); UCC 2-

305(4); Restatement (Second) of Contracts § 32, com-

ment c (Tent. Drafts 1-7, 1973); 1 Williston on Con-

tracts § 28 at 66-67 (3d ed. 1957). On the other hand

the mere fact that the parties contemplate memorializing

their agreement in a formal document does not prevent

their less formal agreement from taking effect prior to

that event. Teleprompter, supra, V’Soske, supra; Bank-

ing & Trading Corp. v. Floete, 257 F.2d 765, 769 (2d

Cir. 1958) ; see also Sommer v. Hilton Hotels Corp., 376

F.Supp. 297 (S.D.N.Y. 1974) ; Tymon v. Linoki, 16 N.Y.

54a

2d 293, 266 N.Y.S.2d 357 (1965); APS Food Systems,

Inc. v. Ward Foods, Inc., 70 A.D.2d 488, 421 N.Y.S.2d

223 (1st Dep’t 1979); S. J. Groves & Sons Co. v. L. M.

Pike & Son, Inc., 41 A.D.2d 584, 340 N.Y.S.2d 230 (4th

Dept. 1973) ; Zirman v. Beck, 34 Misc.2d 597, 225 N.Y.S.

2d 330 (Sup.Ct.Bronx.Co. 1962); Karson v. Arnow, 32

Mise.2d 499, 224 N.Y.S.2d 891 (Sup.Ct.N.Y.Co. 1962).

As put succinctly by Professor Corbin:

The parties have power to contract as they please.

They can bind themselves orally or by informal let-

ters or telegrams if they like. On the other hand,

they can maintain complete immunity from all obli-

gation, even though they have expressed agreement

orally or informally upon every detail of a complex

transaction. The matter is merely one of expressed

intention. If their expressions convince the court

that they intended to be bound without a formal

document, their contract is consummated, and the

expected formal document will be nothing more than

a memorial of that contract. [footnote omitted].

1 A. Corbin Contracts, § 30 at 98-99 (2d ed. 1963).

Again, these rules are but aspects of a broader govern-

ing principle which looks to reality and substance in a

transaction, not form. As noted in V’Soske, supra, 404

F.2d at 499:

Contract law has progressed and evolved sounder

principles since the days of ritualistic and formalis-

tic sealed instrument requirements. Thus, these

rules, placing the emphasis on intention rather than

form, are sensible and reasonable.

This objective theory of contracts was stated by Judge

Learned Hand in Hotchkiss v. National Bank of New

York, 200 F. 287, 293 (S.D.N.Y. 1911), aff’d, 201 F. 664

(2d Cir. 1912), aff'd, 231 U.S. 50, 34 S.Ct. 20, 58 L.Ed.

115 (1913), as follows:

55a

A contract has, strictly speaking, nothing to do with

personal, or individual, intent of the parties. A con-

tract is an obligation attached by the mere force of

law to certain acts of the parties, usually words,

which ordinarily accompany and represent a known

intent. If, however, it were proved by twenty bish-

ops that either party, when he used the words, in-

tended something else than the usual meaning which

the law imposes upon them, he would still be held,

unless there were some mutual mistake, or some-

thing else of the sort.

See Brown Bros., supra, 393 N.Y.S.2d at 351-52, 361

N.E.2d at 1000-02.

In a series of decisions which I find controlling here,

our circuit has applied this objective theory of contracts

to various transactions, some involving the transfer of

substantial business entities, and found a contract to ex-

ist from an oral or informal agreement.

In American Cyanamid Co. v. Elizabeth Arden, supra,

it was held that in a letter agreement for the purchase of

a “far flung business” from a large and sophisticated cor-

poration for about $35,000,000, it was not fatal to fail

to include representations and warranties, to leave to fur-

ther negotiations questions relating to an escrow fund

for the purchase price, to fail to establish accounting

principles to verify the net worth, and to omit the closing

date. Similarly, an oral contract with Joseph E. Seagram

& Sons, Inc. to provide the plaintiff with an opportunity

to purchase a wholesale liquor distributorship of an ap-

proximate value and profit potential within a reasonable

time has been upheld as sufficiently definite to be enforce-

able. Lee v. Joseph E. Seagram & Sons, Inc., 413 F.Supp.

693 (S.D.N.Y. 1976), aff'd, 552 F.2d 447 (2d Cir. 1977).

In V’Sd&ke, supra, an informal exchange of “corre-

spondence” resulted in an enforceable contract for the

purchase of a business for approximately $1.7 million,

56a

even though the parties contemplated the subsequent ex-

ecution of a formal written agreement. In Teleprompter,

supra, International Telemeter and Teleprompter had en-

gaged in a sequence of negotiations over the terms of an

agreement settling complex patent litigation. A series of

drafts of the settlement agreement was exchanged, and

the parties orally agreed on the terms of the settllement.

However, prior to delivery of the signed settlement docu-

ments, new management at Teleprompter refused to pro-

ceed with the settlement agreement. The Second Circuit

upheld the District Court’s finding under New York law

that since the parties had reached a final agreement and

had manifested objective indications of their intent to be

bound, the settlement agreement would be enforced. In

Viacom Int'l, Inc. v. Tandem Productions, Inc., 526 F.2d

593, 595-96 (2d Cir. 1975), an oral agreement gowerning

distribution and syndication rights for the television pro-

gram “All In The Family” was held to be binding. Ac-

cord, Ellis Canning Co. v. Bernstein, 348 F.Supp. 1212

(D.Colo. 1972) ; Itek Corp. v. Chicago Aerial Industries,

Inc., 248 A.2d 625 (Sup.Ct.Del. 1968).

Thus, the objective manifestations of SCM and the

plaintiffs must be weighed by the court and the line

drawn between the competing principles set forth above.

The weighing has been done, and it has been determined

as a matter of fact that eventually both parties intended

to be bound by the Final Drafts. Taking into account the

totality of the parties’ objective manifestations of intent

as the transaction progressed and the circumstances sur-

rounding the negotiations, I reject SCM’s contention that

a final signing would be required to constitute a binding

agreement. In the circumstances at bar, SCM’s—indeed,

both parties’—contemplation of subsequent formal signed

agreements did not overcome the objective facts which

established an agreement. Implicit here, as well, is my

conclusion that none of the contract terms which remained

open after consensus was reached on the Agreement in

Principle and then on the Final Drafts were such, taken

57a

separately or together, as to prevent the agreements from

taking effect. The indefiniteness of the purchase price

was insignificant in light of the formula provided by the

parties for the court, if necessary, to give content to that

term. United States v. Bedford Associates, supra, 657

F.2d at 1310. Additionally, the alleged need for SCM

Board approval of any final agreements, e. g. Ashton v.

Chrysler Corp., 261 F.Supp. 1009, 1013 (E.D.N.Y. 1965) ;

Weisner v. 791 Park Avenue Corp., 6 N.Y.2d 426, 434,

190 N.Y.S.2d 70, 75-76, 160 N.E.2d 720, 724 (1959), is

without significance here, given the language of the Final

Drafts and the involvement of the Board in the agree-

ments already reached.

Nor is the existence of the agreement defeated by the

requirements of the statute of frauds. Indeed, SCM does

not seriously dispute the point.® It is well-established un-

® The arguably relevant statute of frauds provisions are the fol-

lowing, which provide, in full or in pertinent part:

N.Y.G.O.L. § 5-701 (McKinney, Supp. 1980) :

(a) Every agreement, promise or undertaking is void, unless

it or some note or memorandum thereof be in writing, and

subscribed by the party to be charged therewith, or by his

lawful agent, if such agreement, promise or undertaking:

(1) By its terms is not to be performed within ore year from

the making thereof....

N.Y.U.C.C. § 1-206 (McKinney 1964) :

(1) Except in the cases described in subsection (2) of this

section a contract for the sale of personai property is not en-

forceable by way of action or defense beyond five thousand

dollars in amount or value of remedy unless there is some writ-

ing which indicates that a contract for sale has been made be-

tween the parties at a defined or stated price, reasonably iden-

tifies the subject matter, and is signed by the party against

whom enforcement is sought or by his authorized agent.

(2) Subsection (1) of this section does not apply to contracts

for the sale of goods (Section 2-201) nor of securities (Section

8-319) nor to security agreements (Section 9-302).

N.Y.U.C.C. § 2-201 (McKinney 1964) :

(1) Except as otherwise provided in this section a contract for

the sale of goods for the price of $500 or more is not enforce-

58a

der New York law that the memorandum required by the

statute of frauds need not be incorporated in a single doc-

ument, but may be derived from several documents which

relate to each other, only one of which need be prepared

by the defendant. Weitnauer Trading Company Ltd. v.

Annis, 516 F.2d 878, 880 (2d Cir. 1975) ; Great Destina-

tions, Inc. v. Transportes Aereas Portuguese S.A.R.L., 460

F.Supp. 1160 (S.D.N.Y. 1978); Crabtree v. Elizabeth

Arden Sales Corp., 305 N.Y. 48, 110 N.E.2d 551 (1953) ;

APS Food Systems, supra, 421 N.Y.S.2d at 225. "The

court in the Crabtree case thus recognized that the law

“permit[s] the signed and unsigned writings to be read

together, provided that they clearly refer to the same sub-

ject matter or transaction.” 305 N.Y. at 55, 110 N.E.2d

551.

The statute of frauds requirements have been satisfied

by the Final Drafts and the acts of SCM as found above,

including the December 17, 1976 telexes to the general

managers of the copier subsidiaries, the December 16,

1976 letter signed by Frank DeMaio to Mita Holland

B.V., the testimony concerning the meetings of Decem-

ber 15 and 16 and the documents prepared on or about

able by way of action or defense unless there is some writing

sufficient to indicate that a contract for sale has been made

between the parties and signed by the party against whom en-

forcement is sought or by his authorized agent or broker. A

writing is not insufficient because it omits or incorrectly states

a term agreed upon but the contract is not enforceable under

this paragraph beyond the quantity of goods shown in such

writing.

N.Y.U.C.C. § 8-319 (McKinney 1964) :

A contract for the sale of securities is not enforceable by way

of action or defense unless

(a) there is some writing signed by the party against whom

enforcement is sought or by his authorized agent or broker

sufficient to indicate that a contract has been made for sale of

a stated quantity of described securities at a defined or stated

price....

59a

December 31, 1976 by Herbert Egli, referring to “the

deal.”

However, although under these principles a contract

has been established, the matter does not end there. Even

having established an enforceable agreement a plaintiff

cannot be allowed to recover for an alleged breach of con-

tract unless he can establish by a preponderance of the

evidence that the defendant would have received “sub-

stantially what he bargained for.” 6 Williston, supra,

§ 884 at 402. See United States v. Penn Foundry &

Mfg. Co., 337 U.S. 198, 69 S.Ct. 1009, 93 L.Ed. 1308

(1949); United States Overseas Airlines, Inc. v. Com-

pania Aerea Viajes Expresos de Venezuela, S.A., 246 F.2d

951, 952 (2d Cir. 1957); Hodes v. Hoffman Int'l Corp.,

280 F.Supp. 252, 258-59 (S.D.N.Y. 1968). Here, under

both common law and the UCC, the spurned buyer’s right

of action for anticipatory breach depends on his shoulder-

ing the burden of demonstrating his readiness, willingness

and ability to tender performance when due. See Scholle

v. Cuban-Venezuelan Oil Voting Trust, 285 F.2d 318 (2d

Cir. 1960) ; Decor by Nikkei Int'l, Inc. v. Federal Repub-

lic of Nigeria, 497 F.Supp. 893, 907-908 (S.D.N.Y.

1980), aff'd, 647 F.2d 300 (2d Cir. 1981); UFITEC,

S.A. v. Trade Bank & Trust Co., 21 A.D.2d 187, 249

N.Y.S.2d 557 (1st Dep’t 1964), aff'd, 16 N.Y.2d 698, 261

N.Y.S.2d 893 (1965).

The aggrieved plaintiff does not, in order to satisfy his

burden, have to actually tender a performance which has

been rendered futile by defendant’s repudiation, Scholle,

supra; Allbrand Discount Liquors, Inc. v. Times Square

Stores Corp., 60 A.D.2d 568, 399 N.Y.S.2d 700 (2d Dep’t

1977); UFITEC, supra, 249 N.Y.S.2d at 560. Further,

plaintiff's burden upon anticipatory repudiation by de-

fendant could be satisfied by a showing that defendant,

by his actions, rendered performance by plaintiff impos-

sible. Amies v. Wesnofske, 255 N.Y. 156, 162-68, 174

N.E. 436 (1931). However, this record fails to establish

60a

that sort of impossibility. Here, I have found as a mat-

ter of fact that, quite apart from any wrongs committed

by SCM, Muller has failed to demonstrate by a prepon-

derance of the evidence that he possessed the ability to

come up with the cash at closing. This failure bars en-

forcement of the otherwise enforceable agreement.

The Duty to Perform in Good Faith

On the facts as I have found them, I conclude not only

that SCM breached the agreements reached at the end of

1976, but that it specifically breached its duty of good

faith negotiation and performance required by those

agreements. A fundamental obligation to deal in good

faith, found in established case law, required SCM to act

otherwise than to single-mindedly bail out of what it

came to see as a bad deal.

Itek Corp. v. Chicago Aerial Industries, Inc., supra,

presented a similar situation. In that case, Itek, a pro-

spective purchaser of the assets of Chicago Aerial Indus-

tries, Inc. (“CAI’’), sued for breach of a contract to sell

those assets. The parties had arrived at an agreement on

the price, which was subject to several conditions includ-

ing “that formal documents be prepared to the satisfac-

tion of the parties,” and they had also signed a “Letter

of Intent.” Nevertheless, CAI received a better offer from

another purchaser, terminated discussions with Itek and

sold the assets to the higher bidder. The court held that

there was evidence which would support the conclusion

that at the time of the Letter of Intent, Itek and CAI

intended to be bound to the agreement for the sale of

assets, and further that the parties’ “Letter of Intent,”

which set forth the basic terms of their transactions, ‘‘ob-

ligated each side to attempt in good faith to reach final

and formal agreement.” 248 A.2d at 625.

While the letter of intent involved in Itek contained an

explicit requirement that the parties shall “make every

reasonable effort” to close the deal formally, see also

6la

Arnold Palmer Golf Co. v. Fuqua Industries, Inc., 541

F.2d 584 (6th Cir. 1976); Thompson v. Liquichimica of

America, Inc., 481 F.Supp. 361 (S.D.N.Y. 1979) and

481 F.Supp. 365 (S.D.N.Y. 1979); American Broadcast-

ing Companies, Inc. v. Wolf, 52 N.Y.2d 394, 438 N.Y.S.2d

482 (1981), the tek reasoning has been applied in simi-

lar commercial settings where the good-faith duty has

been enunciated. Thus, in Pepsico, Inc. v. W. R. Grace &

Co., 307 F.Supp. 713 (S.D.N.Y. 1969), where the parties

had issued a joint press release announcing their “agree-

ment in principle” to sell a controlling interest in a sub-

sidiary of Grace, the court noted Pepsico’s argument,

based on /tek, that the agreement in principle carried

with it an obligation to negotiate the terms of a definitive

agreement in good faith, and responded as follows:

Assuming that there was a binding agreement on

May 8th [the date the agreement in principle was

announced], we would agree that an obligation to

negotiate in good faith was implied... .

Id. at 720. See also American Cyanamid, supra, 331 F.

Supp. at 606; Knapp, Enforcing the Contract to Bargain,

44 N.Y.U.L. Rev. 673, 716-23 (1969) .°

19 Professor Knapp who in his article advocates the enforcement

of a preliminary agreement in such a context specifically as a con-

tract to bargain, offers the following expression of the character of

manifestation of intention which would serve to create such a

contract:

The essential question is whether the parties have expressed

both satisfaction with and commitment to the essential terms

of the proposed transaction, to the extent that each would

reasonably regard the other as unjustified in withdrawing for

any reason other than a failure—after negotiation in good

faith—to arrive at a complete and final agreement (footnote

omitted).

44 N.Y.U.L.R. at 720. After some analysis, he suggests addi-

tionally:

[A] contract to bargain is ‘ikely to be enforced only where

there has been either a unilateral withdrawal from negotia-

62a

Indeed, under New York law, every contract carries

with it an implied obligation of good faith. Lowell v.

Twin Disc, Inc., 527 F.2d 767, 770-71 (2d Cir. 1975) ;

Niagara Mohawk Power Corp. v. Graver Tank & Mfg.

Co., 470 F.Supp. 1308, 13816 (N.D.N.Y. 1979) ; Joseph E.

Seagram & Sons, Inc., supra, 413 F.Supp. at 698; Som-

mer v. Hilton Hotels Corp., supra, at 301-02; Matter of

DeLaurentiis, 9 N.Y.2d 503, 215 N.Y.S.2d 60, 63-64, 174

N.E.2d 736, 738-739 (1961); Baker v. Chock Full O’Nuts

Corp., 30 A.D.2d 329, 292 N.Y.S.2d 58 (1st Dep’t 1968).

This obligation has statutory force as well. The policy

behind the Uniform Commercial Code is to “give effect to

the agreement which has been made. . . conditioned by

the requirement of good faith action which is made an

inherent part of all contracts within this Act.” UCC

§ 2-305, Official Comment 6 (McKinney 1964). In addi-

tion, the Code in § 1-203 specifically provides that

“le]very contract or duty within this Act imposes an obli-

gation of good faith in its performance or enforcement.”

Thus, while a party to any negotiations for the pur-

chase and sale of property is not automatically obligated

to carry the negotiations through to closing, see Brause v.

Goldman, 10 A.D.2d 328, 199 N.Y.S.2d 606, 611 (1st

Dep’t 1960), aff'd, 9 N.Y.2d 620, 210 N.Y.S.2d 225, 172

N.E.2d 78 (1961), consistent with principles of New

York law dating back to Wood v. Duff-Gordon, 222 N.Y.

88, 118 N.E. 214 (1917), SCM was obligated to act fairly

under the Agreement in Principle and the Final Drafts to

negotiate in good faith to finalize matters and then pre-

sumably, to accomplish the end transaction.

tions or at least an insistence on terms so clearly unreason-

able that they could not have been advanced with any expecta-

tion of acceptance, coupled with some demonstrable advantage

to be gained by defendant in avoiding the contemplated trans-

action.

Id. at 723. See also Dugdale and Lowe, Contracts to Contract and

Contracts to Negotiate, [1976] J.Bus.Law 28.

PAD a6 Rat ath he

63a

The Damages

Although I have concluded that Muller is not entitled

to recover his full expectation damages however those

might be measured, compare Lee v. Joseph E. Seagram

& Sons, Inc., supra, 413 F.Supp. at 705-07; Pennsylvania

Co. v. Wilmington Trust Co., 39 Del.Ch. 453, 166 A.2d

726 (Ch.Ct. 1960), aff'd, 40 Del.Ch. 140, 172 A.2d 63

(Sup.Ct. 1961); Gold Seal Prods., Inc. v. R.K.O. Radio

Pictures, Inc., 184 Cal.App.2d 843, 286 P.2d 954 (Dist.

Ct.App. 1955), SCM’s breach of the agreement reached

and the concomitant breach of its good faith obligation

entitle Muller to relief.

As the determination of liability on these facts is not

simple, neither is the assignment of a proper remedy.

The court has not been presented with nor has it dis-

covered a similar case involving on the one hand the bad

faith repudiation of a preliminary agreement for the sale

of a business, and on the other hand the failure of proof

by the would-be purchaser of his own ability to perform

when such was to come due. A recovery allowed under

these circumstances may be viewed as the appropriate

compensation for the defendant’s breach of its duty to

deal in good faith, see American Broadcasting Companies,

Inc. v. Wolf, supra, 4388 N.Y.S8.2d at 485, 487-88; Knapp,

supra, at 723-26, or, more traditionally, as the appro-

priate measure of damages, all things considered, for

SCM’s repudiation of the agreement reached by the

parties. Cf. Fair Sky, Inc. v. Int'l Cable Ride Corp., 23

A.D.2d 633, 257 N.Y.S.2d 351, 353 (1st Dep’t 1965).

The most logical and readily available measures of dam-

ages under these circumstances is the profit earned by

SCM in the period before the anticipated closing during

which, according to the agreement, the copier subsidiaries

were being run in the normal course of business on Mul-

ler’s account. This fund, generated before to the antic-

ipated closing date, was accruing to Muller above and

beyond the value of the assets of the subsidiaries that he

64a

was to receive in exchange for the price that was finally

to be agreed on. Given his failure to establish his own

ability to perform, Muller certainly may not recover the

bargained-for properties, the profit realized thereon after

the would-be closing date or even the profit accruing to

SCM from the sale of the properties to others. However,

it would be inequitable in view of SCM’s bad faith con-

duct from which it was able to profit so handsomely, to

allow it to retain that amount which, in exchange for

Muller’s commitment to the deal, was to be accruing to

his account even before his ability to perform was to be

tested at closing.

This conclusion seems appropriate in the light of the

doctrine of restitution or unjust enrichment. The remedy

of restitution to prevent unjust enrichment is commonly

applied both in the realm of quasi-contract and as an

alternative basis for recovery upon breach of contract.

See Restatement, supra, Topic 4-Restitution §§ 384, 391,

and Introductory Note thereto (Tent. Draft No. 14,

1979) ; 5 Corbin, supra, §§ 1106-07. This doctrine rests,

generally, upon the equitable principle that a person shall

not be allowed to enrich himseif at the expense of another.

Miller v. Schloss, 218 N.Y. 400, 407, 118 N.E. 337

‘(1916). It is not necessarily grounded on contract or on

promise but on an obligation created by law,

when and because the acts of the parties or other

have placed in the possession of one person money, or

its equivalent, under such circumstances that in

equity and good conscience he ought not to retain it,

and which ex aequo et bono belongs to another.

Id.; see Paramount Film Distributing Corp. v. State, 30

N.Y.S.2d 415, 334 N.Y.S.2d 388, 393, 285 N.E.2d 695, 698

(1972); Friar v. Vanguard Holding Corp., 78 A.D.2d 83,

434 N.Y.S.2d 698, 701-02 (2d Dep’t 1980); Hightway

Corp. v. Dime Savings Bank, 94 Misc.2d 274, 404 N.Y.S.

2d 302 (Civ.Ct. Queens Co. 1978), aff'd, 99 Misc.2d 9839,

65a

420 N.Y.S.2d 887 (Sup.Ct. Queens Co. 1979). An element

in the equation is that the unjust enrichment of the de-

fendant be at the expense of the claimant, and this

usually necessitates a finding that a benefit was conferred

by the claimant, or in other words that a benefit corre-

sponds to a loss to the claimant. See Nacional Financiera,

S.A. v. Banco De Ponce, 120 N.Y.S.2d 378, 415-17 (Sup.

Ct. N.Y.Co. 1953) ; aff'd, 283 A.D. 939, 181 N.Y.S.2d 303

(1st Dep’t 1954); 50 N.Y. Jur. Restitution §6 (1966).

However, there is case support for a finding of unjust

enrichment without such a readily identifiable corre-

spondence. Saunders v. Kline, 55 A.D.2d 887, 391 N.Y.S.

2d 1, 2 (1st Dep’t 1977) ; 50 N.Y.Jur., supra, at 162; see

also Brooks v. Peoples’ Bank, 233 N.Y. 87, 184 N.E. 846

(1921); Roberts v. Ely, 118 N.Y. 128, 20 N.E. 606

(1889); Robert Reis & Co. v. Volck, 151 A.D. 613, 136

N.Y.S. 367 (1st Dep’t 1912); Knapp, supra, at 724-25

n.174; see generally 4 Corbin, supra, § 979 and 5 Corbin,

supra, § 1107.

Under the circumstances presented here where SCM

had obligated itself as part of the agreements reached to

run the copier subsidiaries for Muller’s account from

August 31, 1976 to the anticipated closing date, I con-

clude that to allow SCM to retain the profit earned dur-

ing all of that period would be to condone unjust

enrichment."

11 The plaintiff has failed to establish the basis for promissory

estoppel urged as an alternative ground for recovery.

Based on the reliance principle, the doctrine is set forth in

§90(1) of the Restatement, supra, (Tent.Drafts Nos. 1-7, 1973)

as follows:

A promise which the promisor should reasonably expect to in-

duce action or forebearance on the part of the promisee or a

third person and which does induce such action or forebearance

is binding if injustice can be avoided only by enforcement of

the promise. The remedy granted for breach may be limited as

justice requires.

[Continued ]

66a

Whatever the theory, there would be certain logic to

fashioning a recovery to encompass out-of-pocket legal

and other expenditures in preparation for performance,

or even the cost of forebearance (presumably the value

of opportunities foregone). However, bearing in mind the

flexibility of available contract remedies, see 5 Corbin,

supra, § 996, since Muller is in a sense gaining the bene-

fit of his bargain—or, at least, as much of it as he is en-

titled to under the circumstances—he will not at the same

time recover his legal fees incurred to produce this bene-

fit, apparently the only significant out-of-pocket expense,

or any other reliance-type damages. See Corbin, supra,

$$ 1034, 1036. Cf. Gruen Industries, Inc. v. Biller, 608

F.2d 274, 280-82 (7th Cir. 1979). I have concluded the

proper remedy is the award to Muller of the profit earned

by the copier subsidiaries from August 31, 1976 to Febru-

ary 2, 1977, the date of the repudiation.

On the basis of this opinion, a conference will be held

on July 9, 1981 at 5:00 p.m. to determine whether any

further hearing is required in order to enter judgment in

accordance with this opinion.

IT IS SO ORDERED.

11 [Continued ]

See Schmidt v. McKay, 555 F.2d 30, 36 (2d Cir. 1977) ; James King

& Son, Inc. v. DeSantis Constr. No. 2 Corp., 97 Misc.2d 1063, 413

N.Y. S8.2d 78, 81 (Sup.Ct. N.Y.Co. 1977). But see Swerdloff v. Mobil

Oil Corp., 74 A.D.2d 258, 427 N.Y.S.2d 266, 268 (2d Dep’t), appeal

denied, 50 N.Y.2d 9138, 481 N.Y.S.2d 523 (1980). The measure of

damages under this theory would be the value of the claimant’s

action or forebearance in reliance, to its detriment. Such detriment

may be found in forebearance from action which amounts to a

change in position, in reliance on the words or deeds of the defend-

ant. Cf. Warren v. Hudson Pulp & Paper Corp., 477 F.2d 229 (2d

Cir. 1973). In the commercial setting of this case, the extent of

Muller’s detrimental reliance might be the value of other business

opportunities foregone in anticipation of the closing of this deal

pursuant to the agreements already reached. See Swerdloff, supra,

427 N.Y.S.2d at 268-270; Goetz and Scott, Enforcing Promises: An

Examination of the Basis of Contract, 89 Yale L.J. 1261, 1267-70,

1287-88 (1980). However, no such evidence has been adduced.

67a

APPENDIX

The August memorandum reads as follows:

1.

SCM to sell the stock of the German, French, Bel-

gium and Swiss subsidiaries and the copier assets

of the Chur and U.K. subsidiaries.

SCM shall have the right to allocate the total pro-

ceeds, assigning values to each of the four stock

sales and two asset sales.

In no case will cash and securities be included nor

will assets related to the typewriter distribution

business (which is currently being separated out)

be included.

The names of the purchased subsidiaries will be

changed and the use of the SCM name and logo will

be discontinued within an agreed upon time limit.

SCM will retain or discharge all balance sheet lia-

bilities except those that relate to compensation and

employee benefits, which will be assumed by the

purchaser.

In the U.K., liability for employees and leases relat-

ing to the copier business will be assumed by the

purchaser.

Goods in transit from suppliers (purchased under

contract commitments and prepaid) will be reim-

bursed by purchaser at delivered cost rather than

being included in the inventory account.

Purchaser will assume responsibility for perform-

ance under purchase agreements entered into by

SCM for equipment and supplies for the operations

to be sold.

New York personnel directly related to Interna-

tional Copier operations will be employed by pur-

chaser.

68a

The September memorandum reads as follows:

1. We will license use of name for three years with

appropriate safeguards on its use.

2. We will warrant against undisclosed liabilities to

the extent that they exceed a pool of $150,000, the

purpose of which is to absorb claims not in excess of

$10,000 per claim. We will have the right to dis-

pose of claims as we see fit.

8. We will only be responsible for shortages of inven-

tory count and then to the extent that such short-

ages exceed a pool equal to the inventory reserve.

(time limitation)

4. We will be responsible for uncollectable receivables

in excess of a pool which is to be equa! to the re

ceivable reserve plus $200,000, but not less than

$500,000. We will reimburse purchaser at the rate

of 53¢/$ (2) for losses in excess of the pool. (time

limitation )

69a

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

77 Civ. 5705 (RWS)

REPROSYSTEM, B. V., and N. NORMAN MULLER,

Plaintiffs,

—against—

SCM CoRPORATION,

Defendant.

APPEARANCES:

HALE, RUSSELL & GRAY, ESQS.

Attorneys for Plaintiffs

122 East 42nd Street

New York, New York 10017

By: SELVYN SEIDEL, ESQ.

MARK I. SILBERBLATT, ESQ.

LEE A. POLLOCK, ESQ.

FREDERIC M. SHULMAN, ESQ.

Of Counsel

CURTIS, MALLET-PREVOST, COLT & MOSLE,

ESQS.

Attorneys for Defendant

100 Wall Street

New York, New York 10005

By: PETER FLEMING, JR., ESQ.

JOHN E. SPRIZZO, ESQ.

JAMIE V. GREGG, ESQ.

Of Counsel

[Filed Sept. 18, 1981]

70a

SWEET, D.J. Currently before the court in this ac-

tion for breach of contract and related wrongs are various

issues raised by the parties with regard to the recovery to

be had by plaintiffs Reprosystem, B. V. (‘“Reprosystem”’ )

and N. Norman Muller (“Muller”), pursuant to this

court’s opinion of June 30, 1981, familiarity with which

is assumed, and the conference held on July 9, 1981. In

the prior opinion, which followed a three-week bench trial

on the issue of liability, it was determined that while

plaintiffs are entitled to a certain recovery due to breach

of contract and failure to bargain in good faith on the

part of defendant SCM Corporation (“SCM”), plaintiffs,

due to their failure to establish their ability to perform,

are not entitled to full expectancy damages. ‘The issues

now raised by the parties will be disposed of in accord-

ance with this opinion.

Initially, the court has considered the arguments of the

parties, on the facts as found and the law, addressed to

the basis for recovery previously determined, and rejects

them all. The parties urge, respectively, that recovery

should be more broadly based and extensive, and that no

recovery should be had under any theory. I have already

observed, in the prior opinion, that neither the determi-

nation of liability nor the assignment of a proper remedy

is simple on the facts of this case involving on the one

hand the bad faith repudiation of a preliminary agree-

ment for the sale of a business, and on the other hand

the failure of proof by the would-be purchaser of its own

ability to perform when such was to come due. While

the merits of the court’s opinion upon the facts found has

been argued ably by the parties, nothing which has been

presented convinces me that my determination of June 30

on this subject should be altered. As plaintiffs correctly

point out, however, the actual, undisputed date of SCM’s

repudiation, by letter of Herbert Egli of SCM to Muller,

was February 4, and not February 2, 1977. Thus, in ac-

cordance with the intent of my prior opinion, plaintiffs

Tla

are entitled to the profit earned by the copier subsidiaries

from August 31, 1976 to February 4, 1977.

The parties’ respective calculations of the profit earned

by the subsidiaries during that period differ significantly,

with plaintiffs estimating approximately $2 million, and

SCM, approximately $1.6 million. There will be a factual

hearing if necessary to be scheduled by the parties and

the court and completed by September 30, 1981 with re-

spect to any terms not resolved by this opinion.

The parties have disputed the propriety of several sug-

gested deductions and additions to the raw profit figure.

SCM’s requested deduction for the profit of the United

Kingdom subsidiary will be denied. While there was some

evidence of reservations on plaintiffs’ part with respect to

the purchase of the U.K. subsidiary, the record, viewed as

a whole, supports the conclusion that the purchase of this

subsidiary along with the others was contemplated.

Therefore, no such deduction will be allowed. The New

York office expense attributable to the copier operation is

a proper deduction (as recognized by plaintiffs), as is

the interest cost allocated to the subsidiaries during the

relevant period. However, the requested deduction for

general corporate overhead has not been supported by

reference to any pertinent document or agreement of the

parties, and thus is unwarranted. Further, in view of

the findings of this court as refiected in the opinion of

June 30, there is no basis for a 49% deduction represent-

ing the share of Reprosystem not owned by Muller. Both

plaintiffs were parties to the so-called Agreement in Prin-

ciple and the Final Drafts with Reprosystem as purchaser.

The most heated dispute—involving the most money—

is over the suggested deduction of taxes paid by the sub-

sidiaries, and the addition of prejudgment interest on the

award. Plaintiffs cite several cases which would indicate

that a pre-tax profit measure is the norm in assigning

damages in breach of contract and related contexts of

statutory violations causing loss of profits. L.P. Larson,

72a

Jr., Co. v. William Wrigley, Jr., Co., 277 U.S. 97 (1978) ;

Eiberger v. Sony Corp. of America, 459 F. Supp. 1276,

1286-89 (S.D.N.Y. 1978), aff'd in part rev’d in part, 622

F.2d 1068 (2d Cir. 1980); Paper Converting Machine

Co., Inc. v. FMC Corp., 482 F. Supp. 907, 916 (E.D.

Wisc. 1977), aff'd, 558 F.2d 832 (7th Cir. 1978); Lee v.

Joseph E. Seagram & Sons, Ine., 413 F. Supp. 693, 706-

07 (S.D.N.Y. 1976), aff'd, 522 F.2d 447 (2d Cir. 1977).

See also Bloor v. Falstaff Brewing Corp., 454 F. Supp.

258, 277-80 (S.D.N.Y. 1978), aff'd, 601 F.2d 609 (2d

Cir. 1979). SCM urges, with some force however, that

while the “rule” of pre-tax profits may correctly apply

in cases where the facts justify an award of lost profits

or the like as expectation damages upon a breach of con-

tract or similar wrong, as in the cases cited by piaintiffs,

it does not apply in this case, where the award is based

on a theory of disgorgement of unjust enrichment.

In the unique circumstances of this case, the court

sought to fashion a remedy which, as was stated in the

opinion of June 30, could be viewed as the appropriate

compensation for the defendant’s breach of its duty to

deal in good faith, or as the appropriate measure of

damages, all things considered for SCM’s repudiation of

the agreement reached by the parties. However, in view

of plaintiffs’ failure to establish their ability to perform

and the consequent inappropriateness of awarding expec-

tation damages, as previously stated, the award is justi-

fied most reasonably in terms of the doctrine of restitu-

tion or unjust enrichment.

SCM correctly points out that plaintiffs’ cite no case

in which a pre-tax figure was used in computing an

award having such an equitable basis, and the court has

discovered none. Further, while the measure of damages

to which a plaintiff is entitled in the traditional breach of

contract context is the amount necessary to put him in as

good a position as he would have been in had the contract

been performed. Perma Research & Development Co. v.

-_, ae a ae a Se PU

73a

Singer Co., 542 F.2d 111, 116 (2d Cir.), cert. denied,

429 U.S. 987 (1976); see also Marshall v. Burger King

Corp., 509 F. Supp. 353, 356 (E.D.N.Y. 1981), the proper

measure under the theory of restitution is the benefit to

the defendant, the extent of the unjust enrichment. S.S.

Silberblatt, Inc. v. East Harlem Pilot Project, 608 F.2d

28, 41 (2d Cir. 1979) (“Ordinarily an award of restitu-

tion based on unjust enrichment, unlike contract damages,

is not designed to put the aggrieved party in the position

where he would have been if the contract had been per-

formed but to restore him to the status quo ante, regard-

less of the contract price or rate.) ; Naimoli v. Massa,

81 Misc.2d 431, 366 N.Y.S.2d 573, 578 (City Ct. Geneva

1975). Compare, Turnkey Proposals, Inc. v. Rose, 57

A.D.2d 949, 395 N.Y.S.2d 96, 97 (2d Dep’t 1977)

(“[e]ven if recovery were to be based upon quantum

meruit, since there was substantial performance on the

part of the plaintiff, the proper measure of damages

would still be the contract price [citation omitted].”).

Thus, borrowing the traditional unjust enrichment analy-

sis, it would be inappropriate for SCM to have to disgorge

to plaintiffs a sum representing taxes paid on the profits

which this court has held SCM unjustly retained. This

deduction for taxes will be allowed.

Finally, in view of the equitable nature of the relief

granted, in the exercise of my discretion, I decline to

award pre-judgment interest. Bosco v. Alicino, 37 A.D.

2d 552, 322 N.Y.S.2d 414 (lst Dep’t 1971); C.P.L.R.

§ 5001 (a).

IT IS SO ORDERED.

/s/ Robert W. Sweet

ROBERT W. SWEET

U.S.D.J.

DATED: New York, N.Y.

September 15, 1981

74a

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

77 Civ. 5705 (RWS)

REPROSYSTEM, B. V., and N. NORMAN MULLER,

Plaintiffs,

—against—

SCM CoRPORATION,

Defendant.

APPEARANCES:

HALE, RUSSELL & GRAY, ESQS.

Attorneys for Plaintiffs

122 East 42nd Street

New York, New York 10017

By: SELVYN SEIDEL, ESQ.

STEPHEN GILLERS, ESQ.

MARK I. SILBERBLATT, ESQ.

Of Counsel

CURTIS, MALLET-PREVOST, COLT & MOSLE,

ESQS.

Attorneys for Defendant

100 Wall Street

New York, New York 10005

By: PETER FLEMING, JR., ESQ.

BRADLEY TYLER, ESQ.

Of Counsel

T5a

SWEET, D. J. Over a year after the close of testi-

mony in this action issues still remain relating to the

calculation of damages, despite the opinions of this court

filed on June 30, 1981 and September 15, 1981. The dili-

gence and skill of counsel has served again to illuminate

the complications presented in determining the appropri-

ate damages to be awarded to the purchaser of a multi-

million dollar business when the transaction is improperly

terminated. Familiarity with the opinions previously filed

and the lexicon of the litigation is assumed.

Based upon the hearing conducted on March &, 1982,

and the submissions of the parties I conclude that, absent

an agreement between the parties, a further evidentiary

hearing will be required to determine the amount of taxes

paid by the German and French subsidiaries allocable to

the period August 31, 1976 to February 4, 1977, which

would serve to reduce the profits earned by those sub-

sidiaries. In addition, the plaintiffs Reprosystem B. V.

and N. Norman Muller (collectively “Muller”) challenge

the proof concerning actual transactions completed dur-

ing the relevant period upon which the net currency con-

version loss is based. A hearing on this issue also thus

required.

Following the schedule which has been presented by t’ 2

defendant SCM Corporation (“SCM”), I understand that

the accounting adjustments for August 1976 fiscal and

August 1976 calendar and to include the period from the

end of fiscal year 1976 to February 4, 1977 can be agreed

upon.

As is indicated from what has been set forth, actual

taxes paid by the subsidiaries will serve to reduce in-

come, as well as taxes which can be demonstrated to be

attributable to the period at issue, but no credit will be

allowed for taxes paid on profits upstream to SCM. The

tax consequences upon the subsidiaries will be left where

they originated. The same reasoning will apply to any

corporate assessment calculation which will be disallowed

76a

unless such an assessment appears on the records for the

relevant period or can be reconstructed in accordance

with the practice employed in 1975, if such there be.

As for item D, other income or expense, this adjust-

ment turns upon the net currency loss, referred to above,

upon which a further hearing will be required, and the

interest earned by the German subsidiary attributable to

the “Canadian note,” an issue which was considered by

the parties as the understanding concerning the transac-

tion was eroding early in January, 1979. It was not re-

solved in 1977 and without proof that the appropriate

book entries reflecting the treatment sought by SCM were

made during the relevant period, the adjustment will be

disallowed. The converse, of course, is equally applicable.

No adjustments will be made based on the “might-have-

beens” of the Mita transactions, or additional New York

expense attributable to the negotiations including the fees

and disbursements of Sullivan and Cromwell. No interest

adjustment will be made other than that which can be

demonstrated as having been made in the normal course

during the period in question, or calculated in the same

manner as any such deduction taken on the books of the

subsidiaries at the end of fiscal 1975.

These determinations have been required because of the

need to establish the profits of the subsidiaries during the

period from August 31, 1976 to the termination of the

discussions, during which period the subsidiaries were to

be operated in the normal course and for Muller’s benefit.

Of course, this calculation was never made during the

period, hence the present difficulty. It is an effort to

disgorge profits improperly acquired by SCM and to

which Muller is entitled, even though because of SCM

acts he was never required to tender the purchase price.

The artificiality of the calculation is underlined when

the tax consequences are considered. I have already con-

cluded that any taxes paid by the subsidiaries should

77a

be deducted from the profit calculation for the reasons

just set forth. However, with their customary skill and

diligence counsel for Muller have argued that not only is

the credit unwarranted but that payment of the judgment

will provide a tax credit, a benefit to SCM which should

also be turned over to Muller to prevent SCM from bene-

fitting from its improper conduct. Some authority has

been cited for the proposition, which has some persuasive

effect particularly given the equitable nature of the relief

sought to be granted.

Perhaps the clearest exposition of Muller’s theory in

the cases is set forth in Schnadig Corp. v. Gaines Mfg.

Co., 620 F.2d 1166, 1169-71 (6th Cir. 1980) where in a

patent infringement case the court concluded that “total

profits” under the statute required the award of pre-tax

profits, principally because of the effect of what Muller

has termed here the judgment tax benefit. However, the

court noted that the award was made under a statutory

provision rather than as a recovery under the common

law. See also MacBeth-Evans Glass Co. v. L. E. Smith

Glass Co., 23 F.2d 459, 463 (3d Cir. 1927) (patent ac-

tion) ; W. W. Sly Mfg. Co. v. Pangborn Corp., 276 F. 971,

977 (D.Md. 1921), aff'd, 284 F. 217 (4th Cir. 1922)

(patent action).

Yet from a practical effect consideration of the judg-

ment tax benefit urged by Muller would appear to be a

legal trompe l’oeil, an ever receding calculation into in-

finity as each successive tax credit was made available

to the winning party. True, of course, the process could

be stopped at any rational point. such as after the first

credit is turned over to the prevailing party, yet the

process points out the difficuliy of altering the effect of

future tax liability as a consequence for a present judg-

ment say nothing of the difficulty in resolving the amount,

if any, of such a tax credit. The judgment tax credit will

not be allowed.

78a

Similarly, decisions that have included an inflation

factor in damage calculations have generally been limited

to cases involving the present value of future wages,

medical expenses and pain and suffering. See, e.g., Doca

v. Marina Mercante Nicaraguense, 634 F.2d 30, 34-40

(2d Cir. 1980), cert. denied, 451 U.S. 971, 101 S.Ct.

2049 (1981) (lost future wages); Espana v. United

States, 616 F.2d 41, 44 (2d Cir. 1980) (future medical

expense and future pain and suffering); Dullard v.

Berkeley Assoc. Co., 606 F.2d 890, 896 (2d Cir. 1979)

(wrongful death award; future earning capacity) ; Steck-

ler v. United States, 549 F.2d 1372, 1375-78 (10th Cir.

1977) (future earnings) ; Feldman v. Allegheny Airlines,

Inc., 524 F.2d 384, 387 (2d Cir. 1975) (wrongful death;

future earning capacity). No proof has been adduced on

this subject—nor is it invited. Here again, the suggestion

is appealing, and in some other circumstance or at some

other level of determination it may be required, but in

the exercise of my discretion and in the absence of any

authority granting such relief in a commercial transac-

tion, I decline to adjust Muller’s recovery to give effect

to inflation.

One underlying reason for my reluctance to adopt Mul-

ler’s well thought out and interesting suggestions for

calculating additional damages has been previously stated

in my denial of prejudgment interest. Since Muller was

never required to tender the purchase price, he has not

been deprived of the use of his funds since the termina-

tion of the negotiations. Further, had the transaction

gone forward, it is impossible to determine how the sub-

sidiaries would have fared under Muller’s management

and whether the profits earned during the relevant period

would have survived for either tax or inflation purposes.

I suspect the ingenuity of counsel has been exercised to

compel me, sub silentio, to review the decision already

reached, the denial of prejudgment interest, which if

granted could well have substituted for the requested

79a

judgment tax and inflation credits. I now do so, and con-

clude under all the circumstances, all known to the parties

and set forth elsewhere, in the exercise of my discretion,

that neither the prejudgment interest nor the requested

credits are appropriate for inclusion in the damages.

if the parties are able to agree upon a damage calcu-

lation in the light of this opinion, a judgment will be

settled upon notice. If not, a further hearing will be held

on May 15 or such other date as is convenient for counsel

and the court.

IT IS SO ORDERED.

/s/ Robert W. Sweet

ROBERT W. SWEET

q U.S.DJ.

DATED: New York, N.Y.

March 31, 1982

AEX ahd ai Mi abicecivinaes ie

80a

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

77 Civ. 5705 (RWS)

REPROSYSTEM, B. V. and N. NORMAN MULLER,

Plaintiffs,

—against—

SCM CorRPORATION,

Defendant.

APPEARANCES:

HALE, RUSSELL & GRAY, ESQS.

Attorneys for Plaintiffs

122 East 42nd Street

New York, New York 10017

By: SELVYN SEIDEL, ESQ.

STEPHEN GILLERS, ESQ.

MARK I. SILBERBLATT, ESQ.

Of Counsel

CURTIS, MALLET-PREVOST, COLT & MOSLE,

ESQS.

Attorneys for Defendant

100 Wall Street

New York, New York 10005

By: PETER FLEMING, JR., ESQ.

BRADLEY TYLER, ESQ.

Of Counsel

[Filed Sept. 13, 1982]

8la

SWEET, D.J. A post trial hearing was conducted on

June 2, 22 and July 1, 1982 at which evidence was pre-

sented with respect to the calculation of damages to be

awarded by way of judgment in favor of plaintiffs Repro-

system B, B.V. (“Reprosystem’”) and N. Norman Muller

(“Muller”) against deefndant SCM Corporation (“SCM”).

Judgment will be entered in accordance with this memo-

randum opinion on notice within ten (10) days of the

date hereof.

Prior Proceedings

On June 30, 1981 an opinion was filed which determined

the liability issues raised in Reprosystem’s action against

SCM arising out of SCM’s failure to transfer its Euro-

pean copier assets to Reprosystem. Certain issues as to

the calculation of damages remained outstanding and a

further opinion was issued on September 15, 1981 on that

subject. The effect of taxes on the damages calculation

became a principal issue, since the judgment to be en-

tered sought to award Reprosystem the profit which SCM

had garnered by its conduct, held to be a breach of its

duty. The difficulty, of course, arose because the transac-

tion upon which Reprosystem sued did not in fact take

place, and the tax effect on the theoretical transaction be-

came more difficult to determine. Reprosystem sought

recovery for pre-tax profits, while SCM urged that the

post tax profits constituted the proper measure of dam-

ages under the June opinion.

The September 15, 1981 memorandum opinion sought

to deal with the issue by stating:

Thus, borrowing the traditional unjust enrichment

analysis, it would be inappropriate for SCM to have

to disgorge to plaintiffs a sum representing taxes

paid on the profits while this court has held SCM

unjustly retained. This deduction for taxes will be

allowed.

82a

As subsequent events have established, “taxes paid” be-

came as difficult to determine as a consequence of the

change in circumstances and the difference between tax

treatment in the United States and Europe as the origi-

nal liability issues had been.

Discovery was conducted, a hearing was held and

on March 381, the court issued yet another memorandum

opinion on the subject of damages and taxes, concluding

that a factual hearing would be required to establish

the amount of German and French taxes paid attributable

to the period as well as the effect of certain currency

transactions. Reprosystem’s claim that SCM should also

pay over a judgment tax was rejected. More discovery

took place, and a final hearing was held on June 2, 22

and July 1, 1982 as recounted above.

By and large the amount of gross profits for the

period in question have been determined. These amounts

will be affected by the treatment to be accorded the

following items.

(1) the $25,107 attributable to income of the Chur.

(2) The $191,000 adjustment to the profits of its

French subsidiary for the period from August 25 to

August 31, 1976 (“the French adjustment”).

(3) The $171,000 interest accrued to the German

subsidiary as a result of the intercompany loan to

the Canadian subsidiary (“the Canadian transac-

tion’).

(4) Foreign currency adjustments.

(5) The $55,000 attributable by SCM to a corporate

assessment (“the SCM corporate assessment”).

(6) The $196,000 SCM claims is payable and there-

fore deductible on the assets of the foreign subsidi-

aries (“the SCM interest’).

83a

(7) The tax deductions for

(a) United Kingdom and Belgium.

(b) Chur

(c) Switzerland

(d) Germany

(e) France

As to the overall income calculation, I conclude on the

evidence submitted that Chur subsidiary profits were

mistakenly overstated by $25,107.

The French adjustment of $191,000 must be determined

on the basis of the allocation of the burden of proof. The

change betwen the August 25 and 31 figures is dramatic

and is based solely upon a one-page revision without any

evidence adduced from books of original entry. However,

this revision went unchallenged by Reprosystem’s ac-

countants in the fall of 1976, and no direct evidence has

been adduced to support a conclusion, urged by Repro-

system, that the revision was wnjustified. Although there

is evidence that the treatment given by SCM is atypical,

there has been no direct challenge to the original records

which have been produced. Contrary to Reprosystem’s

contentions, I conclude that the burden of proof did not

shift after the decision on liability was reached and that

the plaintiffs have failed to establish that the SCM re-

vision was other than what it was represented to be,

either in 1976 or today. Were more evidence available,

the result might well be otherwise.

The Canadian transaction resulted when the German

subsidiary accrued interest on a loan which it had made

to the Canadian SCM subsidiary. Regardless of how this

asset would have been treated upon the completion of

the transaction, in the meantime, interest, either paid or

accrued by a subsidiary, was an appropriate item for

profit determination and was so considered by SCM with

84a

respect to all other interest items. This reduction in in-

come was first raised by SCM after Egli’s year end

examination and was not explained satisfactory to Repro-

system in January, 1977. Consistency requires that the

Canadian interest be added to the income of the German

subsidiary. A concomitant of the determination on the

Canadian transaction is that any currency adjustment

for such a transaction must also be allowed as well as

the $17,000 conceded by Reprosystem.

The corporate assessment and the SCM interest were

never paid by the subsidiaries and were SCM adjustments

rather than entries on the subsidiaries’ books. These de-

ductions are not appropriate in this context, for there is

no evidence that they would have been made had the

transaction gone forward.

No taxes claimed by SCM were actually paid by the

United Kingdom, Belgium or Chur subsidiaries and there-

fore none are deductible from the profits of those sub-

sidiaries. As to Switzerland, SCM has failed to establish

that taxes were paid or that reserves for taxes were

established on the books of the subsidiary during the

relevant period.

The probiem is heightened with respect to France and

Germany where no taxes were actually paid during the

period, but rather were paid or assessed at a later

period. To fix the amount of tax attributable to the

damage period becomes a theoretical calculation which

varies depending on whether United States, French or

Germ: n accounting principles are applied, what taxes are

considered, and even which books of account are to be

employed.

Since it was contemplated that Reprosystem would take

over the French and German subsidiaries, less the type-

writer assets, the tax liability for the period when ulti-

mately decided, would have served to reduce its profit.

Reprosystem has adduced no testimony to conflict with

85a

that presented by SCM as to the tax liability which would

have ultimately accrued for the German and French sub-

sidiaries during the damage period and the SCM calcu-

lation for German taxes paid will be employed in calculat-

ing damages.

With respect to the French subsidiary the taxes paid

for fiscal 1977 are known and can be attributed mathe-

matically to the damage period. What appears to be

at issue is the profit calculation against which this de-

duction is to be made. This figure should be calculated

in the same fashion that was employed in the prepara-

tion of the “flash reports” and adjustments for profits

earned agreed upon by the participating parties during

the damage period.

Submit judgment on notice within ten (10) days.

IT IS SO ORDERED.

/s/ Robert W. Sweet

ROBERT W. SWEET

U.S.D.J.

DATED: New York, N.Y.

August 27, 1982

86a

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

77 Civ. 5705 (RWS)

REPROSYSTEM, B. V., and N. NORMAN MULLER,

Plaintiffs,

—against—

SCM CorRPORATION,

Defendant.

APPEARANCES:

HALE, RUSSELL & GRAY, ESQS.

Attorneys for Plaintiffs

101 Park Avenue

New York, New York 10178

By: SELVYN SEIDEL, ESQ.

STEPHEN GILLERS, ESQ.

MARK I. SILBERBLATT, ESQ.

Of Counsel

CURTIS, MALLET-PREVOST, COLT & MOSLE,

ESQS.

Attorneys for Defendant

100 Wall Street

New York, New York 10005

By: PETER FLEMING, JR., ESQ.

BRADLEY TYLER, ESQ.

Of Counsel

[Filed Dec. 23, 1982]

87a

SWEET D.J. Yet another memorandum opinion is re-

quired on the subject of damages in the context of judg-

ments proposed by the parties. Familiarity with past

orders, opinions and terminology used by the parties and

the court is assumed.

The most meaningful item in contention is the $448,000

which according to SCM represents the currency adjust-

ment which would have been required by its German

subsidiary with respect to the intercompany loan to the

Canadian subsidiary. Of course, this is a non-copier asset

and as such, would not have been part of the transaction,

had it gone forward. According to the affidavit submitted

by SCM in support of its proposed judgment and its

previously submitted supplemental memorandum on dam-

ages:

. . . SCM properly accounted for th

This text is long and has been trimmed here. Open the source document for the complete record.