Opinion
No. 01 Civ. 8922 (JFK).
June 28, 2004
THELEN REID PRIEST LLP, New York, New York, Eli R. Mattioli, Esq., Gabriel M. Nugent, Esq., Hermann Ferre, Esq., for Plaintiffs.
JACOBS PERSINGER PARKER, New York, New York, Jay A. Katz, Esq., for Defendant.
Findings of Fact Conclusions of Law
Background
This diversity case ( 28 U.S.C. § 1332) was tried by the Court, without a jury, on March 8, 9, 10, 11 and 12 and March 18, 2004. Plaintiffs Gruppo, Levey Co. and GLC Securities Corp. (collectively, "GLC") called three witnesses, Harry Chevan, Hugh Levey and its expert witness, Randolph Guggenheimer, Jr. ICOM Information Communications, Inc. ("ICOM") also called three witnesses, Harvey Beck, Alan Levine and its expert witness, David B. Epstein.
Plaintiffs brought this case to recover an investment banking fee from ICOM for negotiating and arranging a transaction between ICOM, its shareholders and NetCreations, Inc. ("NetCreations"). At a closing on September 14, 2001, NetCreations purchased 40% of ICOM's stock, 40% of certain shareholder loans and received three call options (the "Call Options"). The Call Options permitted NetCreations to purchase the balance of the 60% equity in ICOM, over time, in accordance with prescribed formulas contained in the Share Purchase Agreement. NetCreations paid $19 million Canadian at the Closing in consideration for receipt of these items.
The Amended Complaint initially contained four causes of action. The first two causes of action sounded in contract. The second two causes of action sought recovery under theories of quantum meruit and unjust enrichment. Plaintiffs and ICOM entered into an Engagement Letter dated July 25, 2000 (the "Agreement") at which time their business relationship commenced.
During the pre-trial stage, the parties cross moved for summary judgment. On July 1, 2003, the Court granted ICOM's motion to dismiss GLC's first and second causes of action for breach of contract and breach of the duty of good faith and fair dealing. The Court denied both parties the relief they sought with respect to GLC's third and forth causes of action for quantum meruit and unjust enrichment. ICOM moved for reconsideration and to interpose a counterclaim. ICOM's motion for reconsideration was denied. ICOM's request to be permitted to counterclaim for unjust enrichment was granted.
Findings Of Fact
Plaintiffs Gruppo, Levey Co. ("Gruppo Levey") and its broker-dealer affiliate, GLC Securities Corp. are Delaware Corporations which perform investment banking and financial advisory services for the direct marketing industry and related fields. (Tr. 54:15-19). Their principal place of business is New York, New York. (Pre Trial Orders, ¶ 2). Their services include mergers and acquisitions representing both buying and selling companies, private placements, debt raising and strategic advisory services. (Tr. 55:1-8).
"Tr." refers to Transcript page and line numbers.
Defendant ICOM is a Canadian Corporation engaged in the business of developing and selling consumer data. Its principal place of business is in Toronto, Ontario, Canada. (Tr. 72:1-73:13; Amended Complaint ¶ 2; Third Amended Answer and Counterclaim ("Answer and Counterclaim") ¶ 2).
Hugh Levey ("Levey") is Gruppo Levey's founder and Chairman. He is a managing director and shareholder of the company. (Tr. 303:12-21). Harry Chevan ("Chevan") is employed by Gruppo Levey as an investment banker. (Tr. 51:24-52:3). Chevan is also the President of GLC Securities Corp. (Tr. 238:10-11). Both men are involved in representing clients of GLC in transactions and in providing strategic advice. (Tr. 55:24-56:15; 303:22-304:2).
ICOM's founding shareholders were Harvey Beck ("Beck") and Alan Levine ("Levine"). (Tr. 446:24-447:4; 515:22-24). Doug McCormick ("McCormick") is the only other shareholder of ICOM. Collectively, they are all the "Shareholders." (Tr. 447:11-15). Levine was Chief Executive Officer of ICOM during the period relevant to this action and is a director of ICOM. (Tr. 516:5-6). At relevant times in the year 2000, Beck was co-Chief Executive Officer and is a director. (Tr. 447:16-17). He was primarily responsible for negotiating the agreement with GLC.
Beck called Levey in July 2000 concerning an offer by a company named TransUnion to purchase ICOM outright for $200 million Canadian. (Tr. 304:21-305:1; 305:20-25; 448:25-449:11; Beck Dep. 27:8-28:4). Beck explained that he was calling Levey because ICOM needed representation in that transaction, and GLC was highly recommended. (Tr. 305:2-10). Before calling GLC, Beck had discussions with an investment banking company called Research Capital about the possibility of a private placement of less than 50% of ICOM's stock, potentially followed by an initial public offering "IPO"). (Tr. 448:11-449:11; 466:15-23; Beck Dep. 23:23-26:13, 42:23-43:14).
When TransUnion's offer was received, ICOM decided to pursue discussions with TransUnion and canceled its plan to attempt a private placement potentially followed by an IPO. ICOM was interested in hiring GLC to represent them in a potential sale because of GLC's expertise in the direct marketing industry. Beck asked GLC to prepare a draft engagement letter. (Tr. 451:1-14; PCX-14A (¶¶ 5-6)).
"PX" or "DX" refers to a Plaintiff's or Defendant's Exhibit.
On July 21, 2000, GLC provided ICOM a draft engagement letter. (Tr. 450:5-7; PX-1). Beck requested a change in the draft engagement letter's definition of "Transaction." (Tr. 470:9-13; Beck Dep. 39:4-42:2, 39:4-42:4). The draft agreement defined "Transaction" as a "sale of all or part of the Company, whether by sale of stock or of assets, or through merger, consolidation, reorganization, recapitalization, business combination or other transaction pursuant to which the Company is acquired by or combined with, in whole or in part, a third party." (PX-1). Beck sought to change this language to reflect that GLC was being engaged to sell one hundred percent (100%) of ICOM, and not for a private placement. (Tr. 159:19-160:4; 470:14-24; 472:2-473:10; 474:8-475:12). Mr. Levine agreed. (Levine Dep. 32:10-15).
Chevan worked with Beck and ICOM's lawyers to modify the language of the draft agreement. (Tr. 475:13-24; Beck Dep. 37:15-38:12). In addition to modifying the Agreement to reflect that the engagement was to sell 100% of the company, Beck agreed to increase the retainer paid to GLC from $100,000 to $200,000. (Tr. 450: 13-25).
GLC and ICOM executed a letter agreement dated July 25, 2000 (the "Agreement"). (PX-2). Section I of the Agreement states that "GLC will assist [ICOM] as its exclusive financial advisor in connection with identifying and seeking out a person, group of persons, partnership, joint venture, corporation or other entity . . . which would be interested in entering into a Transaction with the Company." (PX-2).
Section I of the Agreement makes clear that the term "Transaction" does not involve a minority sale of ICOM's stock, providing the following definition:
As used in this Agreement, the term "Transaction" shall mean a "sale of all or significant part of the Company, i.e., by sale of greater than 50% of the Company's stock, or by the sale of assets that form a business division of the Company, or through merger, consolidation, reorganization, recapitalization, business combination or other transaction pursuant to which the Company is acquired by or combined with, in whole or in such part, a third party. For greater certainty, the term Transaction shall not include any commercial, corporate or financial transaction other than such sale, e.g., an Initial Public Offering.
(PX-2) (emphasis added).
Section II of the Agreement defines the "Scope of Services" to be provided by GLC as dependent on the "nature of the Transaction" at issue. (PX-2). The compensation provisions of the Agreement provided that GLC's compensation upon the consummation of a "Transaction" would equal "2% of the Aggregate Transaction Value up to $180 million . . ., to be paid upon the consummation of a Transaction, as a condition to closing." (PX-2).
ICOM paid GLC an initial retainer in the amount of $200,000. (Tr. 450:18-25).
After the Agreement was signed, GLC pursued a transaction with TransUnion. (Tr. 68:8-24). Beck told Chevan that TransUnion had originally expressed an interest in negotiating for the purchase of all of ICOM for $180 to $200 million Canadian. (Tr. 69:22-70:4).
TransUnion requested ICOM and GLC supply specific historical and projected financial information about ICOM. (Tr. 70:13-24). GLC worked with ICOM executives and financial officers to develop this information. (Tr. 68:11-24). After reviewing the financial information, TransUnion gave ICOM a verbal proposal for the purchase of ICOM at a price in the range of $120 to $140 million Canadian. (Tr. 70:25-71:3; 453:2-17). TransUnion explained that the reduced purchase price from $180 to $200 million Canadian reflected its review of financial information not earlier supplied by ICOM. TransUnion had concerns over ICOM's "e-business," which was taking cash from ICOM's other operations. (Tr. 106:19-107:12; PX-3).
Chevan discussed TransUnion's revised offer with the Shareholders, and said that if the Shareholders had confidence in achieving ICOM's financial projections, he believed ICOM could solicit an offer higher than TransUnion's revised offer. (Tr. 75:25-76:12; 170:10-17). The Shareholders concluded that TransUnion had not valued ICOM highly enough and rejected TransUnion's offer. (Tr. 485:14-17; Levine Dep. 62:11-19). The Shareholders opted to market ICOM more broadly, with GLC's assistance. (Id.; Tr. 77:15-78:10).
In late-September 2000, after ICOM had rejected TransUnion's reduced offer, GLC worked with ICOM to develop an offering memorandum to be presented to potential partners (the "Offering Memorandum"). (Tr. 78:11-79:19; PX-4). Chevan was involved in day-to-day representation of ICOM, spending approximately 2000 to 2200 hours on that matter in 2000 and 2001. (Tr. 163:13-164:19). Levey oversaw GLC's efforts on behalf of ICOM. (Tr. 306:14-19).
When finally completed, the Offering Memorandum provided potential acquirers with an executive summary, a detailed description of ICOM's business and client base, historical information, financial projections and other information typically included in offering documents. (PX-4). In a section entitled "Description of Proposed Transaction," the Offering Memorandum stated that "[t]he [Shareholders] are considering a sale of all of the Company's stock or assets, but would also consider a sale of a majority or minority interest of the Company through which they would obtain liquidity." (Id.). The Offering Memorandum also expressed an interest on the part of the Shareholders "to determine the level of interest prospective purchasers may have in acquiring, in whole or in part, the stock or assets of ICOM." (Id.). In addition, the document explained that "[t]he three shareholders (the Owners) of ICOM have elected to pursue Transaction alternatives. . . . . The Owners are exploring proposals for an out right purchase of all of the equity or assets, a recapitalization, or a purchase from the Owners of a minority stake in the Company." (Id.). Each of these statements were reviewed and approved by Beck and Levine, and were deemed consistent with their willingness to consider selling even a minority interest in ICOM if it resulted in liquidity for the Shareholders. (Tr. 83:14-84:10; 485:18-487:11; Beck Dep. 69:8-70:24). Furthermore, the Shareholders authorized GLC to solicit proposals for the purchase of a minority interest in ICOM. (Tr. 84:11-14; Beck Dep. 74:17-76:4, 76:15-22, 76:25-77:7). In fact, the Shareholders had even begun to believe that a sale of a minority interest in ICOM was the most likely scenario. In a November 30, 2000 e-mail to ICOM's senior management, Levine wrote that the Shareholders' "best guess is that the most likely possible scenario is a partial investment by an external partner followed by one to two years from now by further investment either from other companies, the same company or the public markets." (PX-5).
Once completed, GLC began an aggressive campaign of distributing the Offering Memorandum and marketing ICOM to possible investors. GLC met with approximately 20 potential partners. (Tr. 89:15-22). On December 15, 2000, Consodata SA ("Consodata") and its future parent, Seat Pagine Gialle S.p.A. ("Seat"), offered to acquire, subject to due diligence and the execution of a satisfactory agreement, 100% of the capital stock of ICOM. (Tr. 90:2-14; PXs-6 7). Consodata's offer was for cash and/or fully tradable and liquid shares. The offer ascribed an enterprise value of $139.1 million Canadian to ICOM and an equity value of $128.8 million Canadian. (Tr. 97:17-99:7; PXs-6 7; DXs-E F).
GLC followed-up on Consodata's December 15, 2000 letter by having discussions with representatives of Consodata intended to further gauge Consodata's interest and determine whether Consodata represented a viable option for ICOM and the Shareholders. (Tr. 100:5-21). Having been authorized by the Shareholders to pursue a deal with Consodata, GLC arranged a January, 2001 meeting in ICOM's Toronto offices with senior executives of Consodata, ICOM, GLC and Rothschild Inc. ("Rothschild"), the investment bank advising Consodata and its affiliate, NetCreations, Inc. ("NetCreations"). (Tr. 95:21-96:7; PX-6).
Following the Toronto meeting, Consodata reaffirmed its interest in acquiring 100% of ICOM's fully diluted shares by a letter dated February 5, 2001 sent to Levey. (PX-7). Upon receipt of this letter, GLC began overseeing a due diligence process meant to provide Consodata and Rothschild with all of the relevant information necessary to facilitate Consodata' purchase of the ICOM shares. (Tr. 100:22-101:21). Under Chevan's direction, ICOM's incorporation documents, material contracts and lease agreements, historical and projected financial information, as well as other information requested by Consodata and Rothschild was assembled, reviewed and provided to Consodata and Rothschild. (Tr. 101:7-21; 102:2-14). The due diligence process spanned from February until the end of March, 2001. (Tr. 102:17-18).
As Consodata and Rothschild reviewed the financial information provided by ICOM, they started to have concerns about the Company's then-recent financial performance. After a number of years of good financial results, ICOM was experiencing a decline. (Tr. 103:8-104:7). GLC had reason to believe that Consodata's concerns had to do with the poor performance of ICOM's e-business. (Tr. 108:17-109:3). In mid-March, Chevan alerted the Shareholders to Consodata's concerns. (Tr. 104:19-105:12). Levine was aware of the drag ICOM's e-business had become on the Company's financial status (Tr. 376:24-377:16), and asked GLC if it could assist in restructuring the e-business to better ICOM's financial outlook. (Tr. 339:4-23).
In early April, 2001, Consodata indicated to Chevan that it was becoming increasingly uncomfortable with ICOM's financial performance and doubted that it would agree to an outright purchase of 100% of ICOM's stock. (Tr. 105:1-106:5). According to Chevan; in April Consodata informed him and GLC that ICOM's financial performance and prospects did not justify paying $139.1 million Canadian for the business and that it would not enter into a deal at that value. (Tr. 110:16-24). Consodata did, however, suggest that it could probably figure out a way to do another deal, namely one that would have it acquire ICOM over a period of years. (Tr. 110:23-24). As for an outright purchase of 100% of ICOM, Consodata insisted that it would not pay more than $50 million Canadian. (Tr. 111:10-16). This information was passed on to Beck and Levine who instructed Chevan to continue to work with Consodata and attempt to negotiate a deal. (Tr. 106:4-12; 109:5-20).
Ultimately, the negotiations and due diligence resulted in Consodata providing GLC with a term sheet on April 24, 2001, setting forth the structure of a proposed investment in ICOM. (PX-8). The proposal embodied in the term sheet was for NetCreations, as a subsidiary of Consodata, to acquire 40% of ICOM's corporate stock and 40% of the loans made by the Shareholders to ICOM for an initial payment of $20 million Canadian on June 30, 2001. ICOM was also to grant Consodata two call options. Each call option would permit Consodata to acquire an additional 30% of ICOM, at formula values, on June 30, 2003 and June 30, 2004, respectively. A third call option would permit Consodata to acquire the balance of ICOM's equity — either 30% or 60% — at a non-formula, maximum value of $139.1 million Canadian, any time after June 30, 2001. (PX-8). This term sheet, prepared by Rothschild on behalf of Consodata, was passed along from GLC to the Shareholders on April 27, 2001. (Tr. 524:2-14; DX-J).
The Shareholders were less than thrilled with the proposal set forth in the April 24, term sheet. Nonetheless, the Shareholders instructed GLC to continue work towards closing a deal while at the same time seeking to improve the terms of such a deal. (Tr. 559:1-562:3). Pursuant to the Shareholders' instruction, GLC engaged in a process of moving the deal toward closure and also attempting to sweeten the offer for ICOM. (Tr. 121:11-17). In addition, because the Shareholders were not enthralled by the prospect of selling only a minority interest, GLC contacted some of the prospective partners to whom it had sent the Offering Memorandum in the Fall of 2000. Unfortunately, none of these companies were willing make an offer to acquire ICOM. (Tr. 118:8-119:18).
Although GLC was able to successfully secure some improvements in the offer from Consodata, the Share Purchase Agreement that was ultimately closed on September 14, 2001 was substantially similar to the one proposed in April 2001. (Tr. 120:6-121:1). As initially proposed in April, the actual Share Purchase Agreement called for the purchase of 40% of ICOM stock and 40% of the shareholder loans, and granted Consodata discretionary Call Options for the purchase of the remaining 60% of ICOM. (PX-13). GLC was successful in securing the Shareholders a buyback right, a management incentive program and a minimum enterprise value of $83.6 million Canadian in the event Consodata exercised the Call Options. (Tr. 524:18-525:12; PX-13).
While the final terms and structure of the Consodata-ICOM deal were being negotiated, a fee dispute, that would eventually result in this action being filed, developed between ICOM and GLC. In a mid-June 2001 discussion with ICOM Chief Financial Officer Murray Mateyk ("Mateyk"), Chevan learned that the Shareholders were of the opinion that if the Consodata deal closed as then structured, they might not owe GLC a Transaction Fee. (Tr. 124:14-24; 126:1-8; 301:24-302:12). Chevan told Levey of his conversation with Mateyk and suggested that Levey might want to address the fee matter with the Shareholders. (Tr. 126:22-127:6). Levey, agreeing with Chevan's suggestion, promptly called Levine, who was Levey's primary contact at ICOM and with whom he had a friendly relationship. (Tr. 307:1-308:11; 309:11-20). Levey asked Levine, whether there was any issue of GLC getting paid for this transaction at closing. Levine responded that there was not. (Tr. 309:21-25). Levine denies that Levey called him in June of 2001 to discuss the possible fee issues. (Tr. 526:21-23). The Court, however, is persuaded that such a call did occur and that either Levine simply does not remember it or is mistaken. It was perfectly logical and to be expected that Levey would make such a call.
In late July or early August of 2001, an "all hands" meeting was held in Toronto. The meeting was attended by Levey, Chevan, Levine, ICOM's lawyers, Pierre Albouy ("Albouy") of Rothschild and representatives of Consodata. (Tr. 127:15-24; 315:12; 527:2-17). During this meeting Levey suggested to Albouy that the draft Share Purchase Agreement be changed to require ICOM to pay GLC's fees rather than the Shareholders. (Tr. 315:19-316:24). Consodata initially balked at the idea, but eventually agreed to a compromise by which ICOM would be responsible to GLC for all of the fees to be paid prior to the deal's closing and the fees due to GLC upon the deal's closing would be the responsibility of the Shareholders. (Tr. 368:23-369:6). Levine was aware that the payment of GLC's fees was an issue and he agreed to the compromise arrangement. (Tr. 317:23-319:16; 528:4-529:2).
On August 17, 2001, the subject of GLC's fees was again raised by Levey in a phone conversation with Levine. (Tr. 321:4-323:2). During this conversation, Levey indicated that GLC expected to be paid a Transaction Fee of 2% of the $139.1 million Canadian enterprise value upon the closing. (Tr. 584:17-20). Levine told Levey that in light of the fact that the Shareholders would only be receiving $19 million Canadian at the closing and any other payments were deferred in discretionary call options, he did not think GLC's expectation was reasonable. (Tr. 530:14-20). In response, Levey told Levine he would be as flexible as possible but still expected to be compensated, with the bulk of the payment made at the closing. (Tr. 321:13-16). In order to bolster his case that GLC was entitled to 2% of the $139.1 million Canadian enterprise value of the deal, Levey agreed to send Levine information about how fees are typically calculated in investment banking deals. (Tr. 133:20-134:8; 322:22-323:2).
At Levey's direction, Chevan prepared a memorandum meant to justify GLC's fee request. (Tr. 135:22-136:16; PX-11). Chevan's memorandum compared certain methods of calculating GLC's expected compensation upon the closing of the NetCreations deal with typical compensation methods for other types of investment banking deals, including private placements in which only a minority stock interest was purchased. (Tr. 137:18-141:13; 323:17-25; PX-11). In addition, the memorandum set forth what GLC referred to as a "Settlement" calculation. This represented a compromise GLC was willing to accept by which GLC would still receive most of its fee at the closing while deferring the remainder. (Tr. 326:5-19; PX-11). Chevan e-mailed the memorandum to Levine on August 18, 2001. (PX-11). Levine responded with an e-mail expressing his appreciation for the "perspective," asking Chevan to forward his memorandum to the other two Shareholders and instructing, "[L]et's close the deal!!!" (PX-12). No further communications were made in regards to the memorandum forwarded on August 18, 2001. (Tr. 149:24-150:16; 589: 6-11).
GLC continued to work to close the deal on ICOM's behalf. On September 12, 2001, the Share Purchase Agreement was signed, (PX-13), and on September 14, 2001 the closing took place. (Tr. 54:9-17). The deal that was closed was in large part identical to the one contemplated by the April 24, 2001 term sheet. NetCreations purchased 40% of ICOM's stock and the shareholder loans to ICOM and obtained options for the remaining 60% of ICOM's stock and shareholder loans. The Shareholders received $19 million Canadian. (Tr. 120:14-121:9; PX-13).
In the week leading up to the signing of the Share Purchase Agreement and the closing, Levey spoke with Levine regarding the still unsettled question of GLC's fee. Levey informed Levine that GLC was willing to accept US$700,000 — US$800,000 upon closing of the deal and work out a schedule for the payment of what it perceived to be the balance that would then be owed. (Tr. 327:10-328:2; 534:11-18; 535:13-16). On, or about, the day of the closing, Levey requested the Shareholders send GLC an interim payment of US$200,000. (Tr. 329:9-25; DX-AA). In response to an invoice sent by Levey to Levine for the US$200,000 interim payment on September 17, 2001 (DX-AA), the Shareholders wired GLC US$100,000. (Tr. 536:1-8; DX-AC; DX-AD). According to Levine's e-mail advising Levey that he was wiring the US$100,000, the Shareholders were still attempting to determine what they believed was fair compensation for the work performed by GLC. (DX-AC).
GLC's efforts on behalf of ICOM and the Shareholders were time consuming, complicated and ultimately relatively successful. Although the Shareholders did not get all they hoped for when they initially began to consider selling the Company, they were pleased with the result GLC obtained. In a September 28, 2001 e-mail to Albouy, Levine wrote that "[Levey] and [Chevan] have been critical to the successful conclusion of our negotiations and we appreciate their efforts." (PCX-4). In another e-mail, Levine told his partners that GLC "ha[d] done a great job" and that "Gilbert [Alloul] finally admit[ted] that he doesn't know how [ICOM] got such a good deal out of anyone in this climate." (PCX-16A). Nonetheless, and in spite of further conversations among Levey, Chevan and the Shareholders on September 24, 2001, the parties could not agree upon a fee to be paid GLC. (Tr. 248:1-250:11). Having already determined that GLC does not have a contractual right to a Transaction Fee, see 2003 WL 21511943 (S.D.N.Y. July 1, 2003), the purpose of this trial was to determine whether GLC is entitled to quantum meruit relief.
Conclusions of Law
To establish a quantum meruit claim under New York law, a plaintiff must prove that the defendant was enriched at the plaintiff's expense, and that equity and good conscience dictate that the defendant compensate the plaintiff. Fieger v. Pitney Bowes Credit Corp., 251 F.3d 386, 403 (2d Cir. 2001). Specifically, "[t]he elements of a claim for quantum meruit are (1) plaintiff rendered services to defendant; (2) defendant accepted those services; (3) plaintiff expected compensation; and (4) the reasonable value of the services." GSGSB, Inc. v. New York Yankees, 862 F. Supp. 1160, 1170 (S.D.N.Y. 1994); see also R.B. Ventures, Ltd. v. Shane, 112 F.3d 54, 60 (2d Cir. 1997); Kreiss v. McCown de Leeuw Co., 131 F. Supp. 2d 428, 437 (S.D.N.Y. 2001). The basic notion underlying the doctrine of quantum meruit is that one party should not be allowed to enrich itself at the expense of another. See Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 263 (2d Cir. 1984).
Under the doctrine of quantum meruit, when one party agrees to accept the services of another, an implied contract to pay the reasonable value of such services is formed. GSGSB, Inc., 862 F. Supp. at 1170. But, where there is already an express contract to render such services to a party, an implied contract is not formed. See Clark-Fitzpatrick, Inc. v. Long Island R.R. Co., 521 N.Y.S.2d 653, 656 (1987) ("A `quasi contract' only applies in the absence of an express agreement, and is not really a contract at all, but rather a legal obligation imposed in order to prevent a party's unjust enrichment."). Thus, under New York law, the existence of an express contract will ordinarily preclude quantum meruit relief. See id. If, however, the services performed by the party seeking relief fall outside of the scope of the express contract, quantum meruit relief may be available. Hotel Aquarius, B.V. v. PRT Corp., 1992 WL 391264, at *5 ("[T]he existence of an express contract does not preclude recovery on the basis of [ quantum meruit] for services and benefits conferred outside the contract."); see also Joseph Sternberg, Inc. v. Walber 36th St. Assocs., 594 N.Y.S.2d 144, 145-46 (App.Div. 1st Dep't 1993) (allowing plaintiff to proceed with a quantum meruit claim while also proceeding on an express contract claim because the express contract did not cover the dispute).
The initial issue before the Court, is whether the work done by GLC to negotiate, facilitate and close the NetCreations deal on ICOM's behalf falls within the scope of the Agreement. The Court finds that GLC's work was not covered by the Agreement. The Agreement states that GLC was engaged to identify a partner to enter into a Transaction with ICOM. (PX-2). As discussed, the definition of Transaction was carefully negotiated and drafted with precision to ensure that the Agreement reflected that GLC was being engaged to sell a majority interest in and control of ICOM, and not for a private placement. (Tr. 159:19-160:4; 470:14-24; 472:2-473:10; 474:8-475:12). Both Sections I and II of The Agreement, respectively setting forth the nature of GLC's engagement and the scope of the services it was to provide, are shaped by the notion that GLC was hired to facilitate a Transaction. (PX-2). Both the language of the Agreement and the testimony of the witnesses at trial leave no doubt that GLC's work under the Agreement was to be exclusively focused on arranging a sale of a majority interest in ICOM. GLC's work with respect to the NetCreations private placement was, therefore, done outside the scope of the Agreement.
In a sense this point can be made by looking at the corollary to whether the performance was covered by the Agreement. The terms of the Agreement did not require GLC to provide any services related to the sale of a minority interest in ICOM. Thus, had GLC refused to negotiate or close the NetCreations deal on ICOM's behalf, it would not have been in breach of the Agreement. As such, the work GLC did perform cannot be deemed to have been within the scope of the Agreement.
ICOM premises a great deal of its argument on the fact that Levey and Chevan believed until the Court ruled otherwise that they were entitled to a Transaction Fee under the Agreement. Were GLC claiming they were entitled to quantum meruit relief because it had rescinded its contract with ICOM, Levey and Chevan's belief that they were entitled to a Transaction Fee would in fact serve as evidence that the contract had not been rescinded. See Reilly v. Natwest Markets Group Inc., 181 F.3d 253, 264 (2d Cir. 1999). GLC is not, however, arguing that it rescinded the contract. Rather, GLC's position at trial was that the services provided fell outside of the scope of the express contract. Because the claim for quasi-contractual relief is made in that posture, the fact that Levey and Chevan mistakenly, as this Court has already determined, believed GLC was entitled to a Transaction Fee is of no consequence.
The unescapable reality is that ICOM knew months prior to the closing that the deal as proposed by Consodata was for a private placement. (PX-9; PX-10). This truth is borne out by the fact that the executives of ICOM discussed in early June of 2001 whether the deal would warrant a Transaction Fee (PX-9; PX-10). and that GLC, with ICOM's knowledge, attempted to re-shop ICOM to the potential partners initially contacted in the Fall of 2000. (Tr. 118:8-119:18). Nonetheless, whenever Levey or Chevan discussed the subject of fees with the Shareholders, they were led to believe that GLC would be paid without much dispute. By requesting that GLC re-market ICOM in the hope of finding a purchaser willing to acquire a majority stake in the Company and concurrently reassuring GLC that it would be paid, the Shareholders were sending GLC the message that they understood the proposed deal was for a minority interest but that they wanted GLC to pursue it. The practical effect of sending this message was to request by implication that GLC perform work outside the scope of the Agreement.
Having addressed the threshold question of whether the Agreement prevents a claim by GLC for quantum meruit relief, the Court must next determine whether the elements necessary to establish a right to such relief are satisfied. The first two elements are hardly contested. As explained, GLC did render services on ICOM's behalf and those services were willingly accepted by ICOM. ICOM does make a half-hearted attempt to claim the services rendered did not confer a benefit on ICOM because the proceeds from the sale were reaped by the Shareholders rather than the Company. Not only does this argument attempt to elevate form over substance, it also is microscopically focused on only one of the benefits of the deal. To accept ICOM's argument would be to deny the existence of other benefits that inured to ICOM by the sale of a minority interest. For example, private placements typically benefit companies' health and financial status.
ICOM presents a far more vigorous argument that GLC could not, and did not, have any expectation of receiving compensation from ICOM for a sale of less than a majority interest in ICOM. ICOM contends that because Consodata and ICOM agreed that the fees due at the closing would be the responsibility of the Shareholders (Tr. 239:24-240:1; PX-13), GLC could not reasonably expect to be compensated by ICOM. Furthermore, ICOM argues that because the deal relied so heavily on discretionary call options and the value of the Call Options were not separately valued, GLC could not have expected to receive any compensation greater than that which it had already received from ICOM.
ICOM's reliance on the language in the Share Purchase Agreement to claim that GLC had no reasonable expectation to be paid by ICOM is misplaced. The language in the Share Purchase Agreement was the outgrowth of Consodata's fear that the cash resources of the Company were too constrained to pay the fees. (Tr. 130:5-7). The language, therefore, was intended to protect Consodata's interest, not to limit GLC's right to seek compensation. The Share Purchase Agreement binds ICOM and NetCreations, it does not bind GLC. GLC's involvement in the deal was the result of its engagement by ICOM. As discussed, underlying quantum meruit relief is the notion that an implied contract has been created. In this instance, the implied contract is between ICOM and GLC, not GLC and the Shareholders. Considering that the implied contract is between ICOM and GLC and that GLC is not bound by the Share Purchase Agreement, GLC could reasonably have expected that ICOM would compensate it for closing the deal.
With respect to ICOM's arguments concerning the lack of a valuation of the Call Options, that argument goes to what the reasonable value of GLC's services is. That is a separate element of the claim for relief to be addressed in turn. That the Options were not specifically valued does not preclude GLC from expecting to be compensated.
Turning, then, to this question and the fourth element of the quantum meruit analysis: what is the reasonable value of the services performed by GLC? Both GLC and ICOM presented expert testimony at trial regarding the value of GLC's services in negotiating and closing the NetCreations deal. (PX-15; DX-AP). GLC relied on the report (PX-15) and testimony of Randolph Guggenheimer, Jr. ("Guggenheimer"), a Managing Director of Burnham Securities, Inc. (Tr. 390:12-16; 409:3-10). Guggenheimer has more than thirty years of experience in the investment banking industry, and has been involved in all aspects of mergers and acquisitions ("MA"), public offerings, private placements, valuations, fairness opinions, goodwill valuations and tax valuations. (Tr. 390:17-392:23). In addition, Guggenheimer has served as an arbitrator on financial matters for the National Association of Securities Dealers and the New York Stock Exchange. (Tr. 395:15-18).
Guggenheimer testified that in his expert opinion, 2% of $139.1 million Canadian was the reasonable value of GLC's services on behalf of ICOM in connection with the NetCreations deal. (Tr. 397:22-398:11). Guggenheimer's conclusion stems from his review of the pleadings, depositions and relevant documents concerning GLC's services and the NetCreations deal; interviews of Chevan and Levey; experience in the investment banking industry; knowledge of the industry's compensation practices; discussions with other investment banking professionals; and knowledge of transactions with attributes similar to the NetCreations deal. (Tr. 398:12-16; 401:17-402:9; 406:1-12; 419:3-23; 445:1-2; PX-15). Based on this research and knowledge, he determined that the size and complexity of the deal and the time spent by GLC working on the deal rendered 2% the appropriate factor by which to calculate the fee. (Tr. 398:25-399:15; 400:8-12; 430:2-431:15; 438:11-439:19). Guggenheimer also concluded that this rate should be applied to the maximum enterprise value of $139.1 million Canadian ascribed to the NetCreations deal. (Tr. 398:25-399:15; 400:8-12; 430:2-431:15; 438:11-439:19). In reaching this conclusion, Guggenheimer took into consideration that industry custom and practice attributes value to discretionary call options. Such options, he claimed, enable parties to structure and consummate business transactions in cases where uncertainty regarding future success of the target company would otherwise preclude such deals. (Tr. 400:13-21; 427:9-20).
In order to reassure himself that his conclusions with respect to the value of GLC's services provided to ICOM were correct, Guggenheimer compared the fee he recommends for GLC with the one that ICOM paid Rothschild. Rothschild's fee of US$1.5 million was somewhat less than that which Guggenheimer concluded GLC to be entitled to, but within the same ballpark (albeit a pitcher's park). (Tr. 315:23-316:24). In light of the fact that it is customary for the seller's banker to be better compensated than the buyers (Tr. 405:15-25; 406:10-407:4), Guggenheimer determined his proposed fee reasonable.
Guggenheimer also concluded that the value he ascribed to GLC's services was accurate even if the deal is considered by the standards of a private placement rather than those of an MA transaction. Fee rates for private placements are typically in the range of 7-10%. This rate would, however, be applied only to the money that changed hands at the closing. If the deal is considered a private placement, Guggenheimer conceded that the Call Options would not be deemed to have a value. (Tr. 407:11-408:7).
Not surprisingly, ICOM's expert, David Epstein ("Epstein"), disagreed with Guggenheimer's conclusions. Although he agreed with Guggenheimer that the rate should range between 1.5% and 2% for a deal the size of the NetCreations deal, he disagreed with Guggenheimer's belief that the rate should be on the higher end of that range. Epstein believes the percentage should be set at 1.5%, the low end of the range, because GLC received a large retainer. (Tr. 624:15-19). More importantly, Epstein disagreed with Guggenheimer with respect to the call options. Epstein testified that the transaction value portion of the formula is ordinarily defined as the consideration received by the seller or the amount paid by the buyer. In this case that amount was limited to only the $19 million Canadian paid at the closing. (Tr. 625:12-17).
The Court found Guggenheimer to be significantly more persuasive than Epstein. Thus, the Court largely adopts Guggenheimer's logic with respect to the valuation of GLC's services. The Court does not, however, agree that 2% of $139.1 million Canadian is the appropriate formula by which to calculate the reasonable value of GLC's services. That formula would be appropriate were the Court to believe that this deal should be deemed an MA transaction. Although the initial desire of Consodata and ICOM was to close an MA transaction, the reality is that the deal that ultimately closed was merely a private placement. ICOM did not become a part of NetCreations as a result of this deal, nor did NetCreations gain control of ICOM. Rather, NetCreations simply purchased a minority stake in the Company. Guggenheimer's own testimony supports the notion that the banking industry would view this deal as a private placement. (Tr. 394:20-395:11).
Accepting Guggenheimer's testimony relative to how fees are determined in private placements as credible, the Court finds that the appropriate measure is 8% of $19 million Canadian. As discussed, the appropriate transaction value to be used when assessing a private placement is the cash that changed hands at the time of the closing. In this instance $19 million Canadian was paid by NetCreations to the Shareholders for 40% of the Company's stock and 40% of the Shareholder loans. With regard to the decision to use 8% as the appropriate measure, that rate falls squarely within the customary range of 7-10% cited by Guggenheimer. The Court agrees with Guggenheimer that the NetCreations deal was a complicated one that required a great deal of work on GLC's part. For that reason, the rate used to determine the fee should be greater than what is essentially the lowest possible reasonable rate. The Court also recognizes that there is merit to Epstein's arguments that GLC received a large retainer fee and that GLC lacks the prestige to charge what some of the better known Wall Street banks charge. Taking these realities into account, the Court finds 8% to be fair and reasonable.
Eight-percent of $19 million Canadian is $1,520,000 Canadian. This sum, therefore, represents the reasonable value of GLC's services.
One final hurdle must be cleared, however, before quantum meruit relief can be granted. ICOM contends that GLC's claim for quantum meruit relief is fatally flawed by the failure to satisfy the statute of frauds. Section 5-701 of the General Obligations Law of New York states that "[e]very 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." In order for a quantum meruit claim to be advanced, there need only be a writing that evidences that the plaintiff was engaged by the defendant to assist in a transaction that was later consummated. See Davis Mamber, Ltd. v. Adrienne Vittadini, Inc., 212 A.D.2d 424, 424-26 (1st Dep't 1995). "The writings need not evidence an actual intention to pay. It is sufficient if the evidence demonstrates that services were requested and the parties reasonably expected that such services were not to be preformed gratuitously." Shapiro v. Dictaphone Corp., 66 A.D.2d 882, 885 (2d Dep't 1978).
In this instance there are numerous writings that when pieced together satisfy the statute of frauds and corroborate the intentions and expectations of the parties. The linchpin is the e-mails exchanged between Chevan and Levine and copied to Levey and Mark DeGennaro on August 18, 2001. (PX-11; PX-12). These e-mails, with the attached "Fee Calculation" memorandum (PX-11), provide written evidence of ICOM's desire that GLC close the NetCreations deal and GLC's expectation that it would be compensated for its work on the deal. The e-mails reference the fact that GLC rendered services on ICOM's behalf and that the parties understood that GLC would request payment for those services. Levine's response to Chevan indicates that ICOM was aware of GLC's expectation and wanted GLC to continue to provide ICOM its services.
Levine's October 10, 2000 e-mail to ICOM's employees indicating that the Shareholders were considering a "partial sale" is another piece of the puzzle. (PX-3). So too is Levine's e-mail of November 30, 2000, stating the Shareholders' belief that a private placement was the most likely outcome of their efforts to market the Company. (PX-5). The Offering Memorandum when taken in conjunction with the Fall 2000 e-mails and the August 18, 2001 e-mails represents yet another puzzle piece. Pieced together, a writing sufficient to satisfy the statute of frauds is created.
The statute of frauds is intended to serve as a bar to equitable recovery in those instances when there is a "complete absence of memorandum" concerning the services rendered. Morris Cohon Co. v. Russell, 23 N.Y.2d 569, 575-76 (1969). In light of the documents cited by the Court, this is not such a situation. The statute of frauds does not, therefore, prevent GLC from recovering under a theory of quantum meruit.
Conclusion
GLC is entitled to a fee of $1,520,000 Canadian, representing 8% of $19 million Canadian. $542,888.16 Canadian is credited against this sum as having already been paid by ICOM in partial satisfaction of the fee. (DX-AG). Thus, GLC is awarded damages in the amount of $977,111.84 Canadian, plus pre-judgment interest calculated at the prevailing rate from September 14, 2001. Plaintiffs are also entitled to post-judgment interest consistent with the provisions of 28 U.S.C. § 1961 until the award is fully paid. Using the Canadian/United States conversion rate of .6447 stipulated to by the parties (Stip. dated March 31, 2004), US$629,944, plus interest, is presently due and owing from ICOM to GLC. A judgment in that amount is hereby entered by the Court. In light of the fact that the Court has found that GLC is owed a fee in excess of the monies paid it by ICOM, ICOM's counterclaim seeking recovery of some of the money it previously paid GLC is denied. The Court orders this case closed and directs the Clerk of Court to remove it from the Court's active docket.SO ORDERED.