Kingdom 5-KR-41, Ltd. v. Star Cruises PLC

Full title: KINGDOM 5-KR-41, LTD., Plaintiff, v. STAR CRUISES PLC, ARRASAS LTD., TAN…

Court: United States District Court, S.D. New York

Date published: Aug 31, 2004

01 Civ. 2946 (DLC), 01 Civ. 7670 (DLC) (S.D.N.Y. Aug. 31, 2004)

Opinion

01 Civ. 2946 (DLC), 01 Civ. 7670 (DLC).

August 31, 2004

George F. Hritz, Paul D. Sarkozi, Richard B. Sweeney, Richard Bloom, Hogan Hartson LLP, New York, New York, for Plaintiff Kingdom 5-KR-41, Ltd.

Denis Fleischmann, Richard J. Schulman, Bryan Cave LLP, New York, New York, for Defendant The Bank of New York.

OPINION AND ORDER

DENISE COTE, District Judge

On February 26, 2004, the unjust enrichment and negligence claims brought by Kingdom 5-KR-41, Ltd. ("Kingdom") against the Bank of New York ("BNY") were dismissed. See Kingdom 5-KR-41, Ltd. v. Star Cruises PLC, No. 01 Civ. 2946 (DLC), 2004 WL 359138 (S.D.N.Y. Feb. 26, 2004) (the "February Opinion"). Discovery having concluded, BNY now moves for summary judgment on the sole surviving claim brought against it by Kingdom, to wit, a breach of contract claim.¹ This motion requires the construction of a Deposit Agreement (the "Agreement") governing BNY's obligations as a depositary for shares of a foreign company traded in the United States. For the following reasons, the motion is granted. Background

1 On August 16, 2001, Marketing Systems International, BWI ("MSI"), a Cayman Islands corporation, filed a class action complaint against Star Cruises PLC, Arrasas, Ltd., and BNY for violations arising from the same set of facts as those pleaded by Kingdom. Its causes of action track those pleaded by Kingdom. MSI's case was accepted as related to Kingdom's. On November 8, 2001, MSI was appointed Lead Plaintiff and its counsel Lead Counsel. The parties have stipulated that the decisions on claims in the Kingdom action shall apply with equal force to MSI's purported class action.

Familiarity with the February Opinion is assumed, and only the undisputed facts relevant to this motion will be repeated here. In order for a foreign corporation to trade on an American stock exchange, the foreign corporation must issue and deposit American Depositary Shares ("ADSs") with an American financial institution. The depositary institution then issues American Depositary Receipts ("ADRs") to the beneficial owners of the ADSs, who are then free to sell the ADSs on American securities exchanges. Through the ADR system, United States investors hold equity interests in foreign companies. See Kingdom, 2004 WL 359138, at *1 n. 4. The entity in whose name an ADR is registered on the books of the ADR depositary is called the registered owner, or "Owner". The entity that has the beneficial interest in the ADSs is called the beneficial owner.

In the transaction at issue in this lawsuit, Kingdom owned shares in NCL Holding ASA ("NCL"), and was the beneficial owner of NCL ADSs. NCL sponsored an ADR program and chose BNY as its ADR depositary. The Depositary Trust Company, a clearing agency, was the Owner of the ADRs.

Kingdom complains that BNY breached the Agreement entered into between BNY and NCL, thereby injuring Kingdom. Specifically, Kingdom contends that BNY accepted a cash redemption price offered in a compulsory tender offer for NCL shares on behalf of all of the ADRs it held, including those in which Kingdom had a beneficial interest, without first notifying Kingdom. Because of this acceptance, Kingdom lost its right to participate in a statutory valuation proceeding in Norway. Through that valuation proceeding other shareholders who had rejected the tender offer received almost twice as much in compensation for their shares in NCL as did Kingdom.

Kingdom contends that Section 4.02 of the Agreement required BNY to consult with it before accepting the price offered in the tender offer. BNY disagrees and also contends that two other provisions of the Agreement — Sections 2.01 and 5.03 — relieve BNY of an obligation to beneficial owners of ADRs when accepting a tender offer.

Discussion

Summary judgment may not be granted unless the submissions of the parties taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c), Fed.R.Civ.P. The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination the Court must view all facts in the light most favorable to the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). When the moving party has asserted facts showing that the non-movant's claims cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on the "mere allegations or denials" of his pleadings. Rule 56(e), Fed.R.Civ.P.; accord Burt Rigid Box, Inc. v. Travelers Property Cas. Corp., 302 F.3d 83, 91 (2d Cir. 2002).

Under New York law,² in order to prevail on a breach of contract claim, a plaintiff must show: "1) a contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages." Terwilliger v. Terwilliger, 206 F.3d 240, 246 (2d Cir. 2000) (citation omitted). A contract must be construed "to give effect to the intention of the parties as expressed in the unequivocal language they have employed." Id. at 245. Whether or not the terms of a contract are ambiguous is a matter of law. A contract term is ambiguous when the term at issue

2 Section 7.06 of the Agreement dictates that all rights under the Agreement and ADRs are governed by the laws of the State of New York.

could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.

British Intern. Ins. Co. Ltd. v. Seguros LA Republica, S.A., 342 F.3d 78, 82 (2d Cir. 2003) (citation omitted).³ In contrast, contract language is unambiguous if it has "a definite and precise meaning, unattended by danger of misconception in the purport of the contract itself, and concerning which there is no reasonable basis for a difference of opinion." Photopaint Technologies, LLC v. Smartlens Corp., 335 F.3d 152, 160 (2d Cir. 2003) (citation omitted). If the contract is "unambiguous on its face, the parties' rights under such a contract should be determined solely by the terms expressed in the instrument itself rather than from extrinsic evidence as to terms that were not expressed or judicial views as to what terms might be preferable." County of Suffolk v. Alcorn, 266 F.3d 131, 138 (2d Cir. 2001) (citation omitted). See South Road Assoc., LLC v. International, 770 N.Y.S.2d 126, 128 (2d Dep't 2003). "The proper interpretation of an unambiguous contract is a question of law for the court, and a dispute on such an issue may be properly resolved by summary judgment." Adirondack Transit Lines, Inc. v. United Transportation Union, 305 F.3d 82, 85 (2d Cir. 2002) (citation omitted).

3 The parties' briefs rely on law governing integrated agreements and otherwise treat the Agreement as an integrated contract. This Opinion will do so as well.

Sections 2.01 and 5.03 of the Agreement are the starting point for the analysis of Kingdom's breach of contract claim since they most directly address BNY's obligations in the context at issue here. After a discussion of these two sections, the section on which Kingdom relies — Section 4.02 — will be addressed.

1. Section 2.01

Section 2.01 of the Agreement addresses the issue of notice to the extent notice is required by the Agreement. It explicitly relieves BNY of any obligation to provide notice to a beneficial owner when the Agreement requires notice to be given. Section 2.01 is entitled "Form and Transferability of Receipts," and states in relevant part:⁴

Title to a Receipt (and to the American Depositary Shares evidenced thereby), when properly endorsed or accompanied by proper instruments of transfer and transferred in accordance with the terms of this Deposit Agreement . . . shall be transferable by delivery with the same effect as in the case of a negotiable instrument under the laws of New York; provided, however, that the Issuer and the Depositary, notwithstanding any notice to the contrary, may treat the Owner thereof as the absolute owner thereof for the purpose of determining the person entitled to distribution of dividends or other distributions or to any notice provided for in this Deposit Agreement and for all purposes and neither the Depositary nor the Issuer shall have any obligation or be subject to any liability under this Deposit Agreement to any Beneficial Owner of a Receipt unless such Beneficial Owner is the Owner thereof.

4 The "Issuer" refers to NCL; the "Depositary" refers to BNY; the "Beneficial Owner" includes Kingdom.

(Emphasis supplied.)

Section 2.01 is clear and unambiguous. Pursuant to the Agreement, to the extent that BNY was required to give notice, it was required to give that notice to the Owner, and had no "obligation" and was not "subject to any liability" under the Agreement to give notice to a beneficial owner, that is, Kingdom. Section 2.01 does not suggest more than one meaning when read in the "context of the entire integrated agreement." British Intern. Ins. Co., 342 F.3d 78 at 82 (citation omitted).

Kingdom argues that Section 2.01 is addressed only to questions of title when ADRs are transferred, and is not a general notice provision. This section, however, is not so limited. It is true that Section 2.01 is addressed to the transfer of receipts, and that the clause containing the directions regarding notice begins with the words "provided, however," and thus relates back to the discussion of the transfer of receipts. Nonetheless, Section 2.01 continues with language that reaches beyond this section and the issue of a transfer of receipts. It directs that BNY may treat the Owners as the "absolute owner" as "to any notice provided for in this Deposit Agreement and for all purposes." (Emphasis supplied.) By its express terms, Section 2.01 also relieves BNY, as the depositary of NCL's ADRs, of "any obligation" and "any liability" to "any Beneficial Owner" with respect to distributions and notices provided for in the Agreement. It is telling that Kingdom has identified no other section of the Agreement regarding notice that is at odds with this construction of Section 2.01. Thus, Section 2.01 excuses BNY from the obligations Kingdom asserts were owed to it as a beneficial owner.

Kingdom also appears to argue that BNY cannot rely on Section 2.01 since BNY did not give any notice to the Owner before accepting the tender offer. Assuming that Kingdom were able to establish that there was a contractual requirement that BNY provide notice regarding valuation rights before accepting the compulsory tender offer, Kingdom has not shown that a breach by BNY of purported obligations to an Owner gives rise to a breach of contract claim by a beneficial owner such as Kingdom where Section 2.01 explicitly deprives a beneficial owner of the right to bring suit for a failure to provide notice.

Section 5.03

Section 5.03 of the Agreement limits BNY's liability to beneficial owners to liability for the negligent or bad faith performance of those obligations it has expressly undertaken to perform. Section 5.03 is entitled "Obligations of the Depositary, the Custodian and the Issuer," and states in relevant part:

The Issuer assumes no obligation nor shall it be subject to any liability under this Deposit Agreement to Owners or Beneficial Owners, except that it agrees to perform its obligations specifically set forth in this Deposit Agreement without negligence or bad faith.

The Depositary assumes no obligation nor shall it be subject to any liability under this Deposit Agreement to any Owner or Beneficial Owner (including, without limitation, liability with respect to the validity or worth of the Deposited Securities), except that it agrees to perform its obligations specifically set forth in this Deposit Agreement without negligence or bad faith.

Neither the Depositary nor the Issuer shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Securities or in respect of the Receipts, which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability shall be furnished as often as may be required. . . .

The Depositary shall not be responsible for any failure to carry out any instructions or vote any of the Deposited Securities, or for the manner in which any such vote is cast or the effect of any such vote; provided, however, that any such action or nonaction is in good faith.

(Emphasis supplied.)

BNY contends that the only obligations it was required to perform under the Agreement in connection with the compulsory tender officer were the collection and distribution of the cash proceeds. Kingdom asserts that Section 4.02 contains a broad "catch-all" provision that encompasses distributions other than those listed elsewhere in the Agreement (i.e., in Sections 4.01, 4.03, and 4.04),⁵ and thereby includes the "distribution" of appraisal rights. Therefore, unless Kingdom's reading of Section 4.02 prevails, the Agreement relieved BNY of any obligation to Kingdom regarding appraisal rights since it was not an obligation it had undertaken to perform in the Agreement.

5 Section 4.01 concerns distributions in cash; Section 4.03 concerns distributions in shares; Section 4.04 is entitled "Rights," and concerns distributions of "any rights to subscribe for additional Shares or any rights of any other nature."

Section 4.02

The Agreement does not mention appraisal rights. Kingdom contends, however, that Section 4.02 should be read to impose on BNY the obligation to provide it with notice of its right to reject the compulsory tender offer price per share and to obtain an appraisal of the share price. Section 4.02 is entitled "Distributions Other Than Cash, Shares or Rights," and reads in pertinent part:

[W]henever the Depositary shall receive any distribution other than a distribution described in Section 4.01, 4.03 or 4.04, the Depositary shall cause the securities or property received by it to be distributed to the Owners entitled thereto . . . in proportion to the number of American Depositary Shares representing such Deposited Securities evidenced by Receipts held by them respectively, in any manner that the Depositary may deem equitable and practicalbe for accomplishing such distribution; provided, however, that if in the opinion of the Depositary such distribution cannot be made proportionately among the Owners entitled thereto, or if for any other reason . . . the Depositary deems such distribution not to be feasible, the Depositary may, after consultation with the Issuer, adopt such method as it may deem equitable and practicable for the purpose of effecting such distribution, including, but not limited to, the public or private sale of the securities or property thus received, or any part thereof, and the distribution of the net proceeds of any such sale . . . by the Depositary to the Owners entitled thereto. . . .

(Emphasis supplied.)

Section 4.02 does not create an obligation to provide Kingdom with notice of its right to an appraisal. Its title refers to "distributions other than . . . rights." An appraisal right is not a "distribution." Even if it could be construed to be a distribution, it is a distribution of a "right". The text of the section reinforces this understanding of the scope of Section 4.02. It commands that if BNY receives "securities or property" for distribution, it may distribute them to the Owners in any manner that is practical. If a proportional distribution is not feasible, BNY may, after consulting with NCL, sell the securities or property and distribute the net proceeds. Nothing in this provision suggests it is addressing the provision of notice of appraisal rights. There is no ambiguity in its terms that would support Kingdom's reading. Breach of Good Faith and Fair Dealing

Kingdom asserts that even if the Deposit Agreement did not impose an obligation on BNY that would support a breach of contract claim by Kingdom, BNY nonetheless breached the implied covenant of good faith and fair dealing by taking "affirmative actions," such as terminating Kingdom's appraisal rights, "that were not contemplated by . . . the contract, thereby effectively depriving Kingdom of the benefits of the contract." Kingdom maintains that BNY further breached the covenant of good faith and fair dealing by using its "discretion" under Section 4.02 in "bad faith" because it failed to consider the options available to it to protect the interests of ADS holders.

Under New York law, a duty of good faith and fair dealing is implicit in every contract, but only in connection with rights or obligations originating in the contract. The duty "includes any promises which a reasonable person in the position of the promisee would be justified in understanding were included, [h]owever, no obligation can be implied that would be inconsistent with other terms of the contractual relationship."Times Mirror Magazines, Inc. v. Field Stream Licenses Co., 294 F.3d 383, 394 (2d Cir. 2002) (citation omitted). Because the duty arises from the terms of the contract, a breach of the duty of good faith and fair dealing "is merely a breach of the underlying contract." Fasolino Foods Co. v. Banca Nazionale del Lavoro, 961 F.2d 1052, 1056 (2d Cir. 1992) (citation omitted) (lack of an express obligation by defendant to approve letters of credit precluded claim for breach of good faith and fair dealing). For example, there is an implied duty imposed on each party to a contract to do nothing "to prevent the other party from carrying out the agreement on his part." Chemical Bank v. Stahl, 712 N.Y.S.2d 452, 462 (1st Dep't 2000).

Having failed to raise an issue of fact that would support a finding that BNY breached a contractual duty to Kingdom, Kingdom cannot salvage its contractual claim by resort to the implied duty of good faith and fair dealing. The doctrine cannot be used to create duties that do not arise from the contract and are inconsistent with the terms of the contract.

Conclusion

BNY's motion for summary judgment is granted. The claims against BNY for breach of contract brought in Kingdom v. Star Cruises, et al., 01 Civ. 2946 (DLC), and Marketing Systems Int'l v. Star Cruises, et al., 01 Civ. 7670 (DLC), are dismissed with prejudice. The Clerk of Court shall enter judgment for the defendants and close both of the cases.

SO ORDERED.