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Honeywell Intl. Inc. v. Northshore Power Sys., LLC

Supreme Court of the State of New York, New York County
Jul 25, 2011
2011 N.Y. Slip Op. 51398 (N.Y. Sup. Ct. 2011)



Decided July 25, 2011.

REED SMITH LLP, Clay J. Pierce, Aaron Bourke, New York, NY, REED SMITH LLP, John Hagan, Chicago, IL, For Plaintiff.

MORVILLO, ABRAMOWITZ, GRAND, IASON, ANELLO BOHRER, P.C., Stephen Juris, Thomas Keane, New York, NY, GODFREY KAHN, S.C., John Kirtley, Maria Kreiter, Milwaukee, WI, For Defendant Northshore Power Systems, LLC.

FRIEDMAN KAPLAN SEILER ADELMAN LLP, Eric Seiler, Emily Stubbs, Christopher Colorado, New York, NY, For Defendant Oaktree Capital Management, L.P.

Motion sequence numbers 001 and 002 are consolidated for disposition.

In this action, plaintiff Honeywell International Inc. (Honeywell) seeks damages resulting from defendants' alleged breach of a Trademark License Agreement between Honeywell and defendant Northshore Power Systems, LLC (Northshore), dated October 31, 2007, as amended by Amendment No. 1 to the Trademark License Agreement (Agreement). The complaint asserts three causes of action for breach of contract against both defendants, and one cause of action for tortious interference with contract against defendant Oaktree Capital Management, L.P. (Oaktree). Defendants now move to dismiss the complaint for failure to state a cause of action and based upon documentary evidence.

Under the Agreement, which the parties submit as documentary evidence, Honeywell granted Northshore an exclusive eight-year license to use the "Honeywell" trademark to sell residential power generators. (Agreement, Keane Aff., Ex. 1-A, §§ 1.4, 1.7, 2.1.) Northshore paid Honeywell a one-time, non-refundable lump payment of $10 million on October 31, 2007, and this payment was to be "credited against Royalties . . . owed due to [Honeywell] starting from [October 31, 2007] through [August 31, 2009]." (Agreement, § 3.1.) The Agreement defined "Royalties" as 3% of net sales of products sold under the "Honeywell" brand name, and were required to be paid by Northshore within 60 days after the end of each calendar quarter. ( Id., §§ 3.2, 3.5.) The Agreement also required Northshore to "guarantee[]" a schedule of "Minimum Guaranteed Royalty Payments" to Honeywell "[f]or the Term of the Agreement . . . whether or not [Northshore made] sufficient sales of Licensed Products to owe that amount in royalties" ( id., § 3.3), and these payments were due within 30 days after the end of each time period specified in section 3.3 ( id., § 3.7). The first Minimum Guaranteed Royalty Payment was for the period November 1, 2009 through October 31, 2010. As security for Northshore's obligations to pay Royalties and Minimum Guaranteed Royalty Payments, the Agreement required Northshore to tender a $3.5 million letter of credit, in favor of Honeywell, by October 31, 2009. ( Id., § 3.4.)

The Agreement defined the "Term" as eight years from October 31, 2007, but Article 8, titled "Duration," provided that the Agreement "will continue in force" for eight years "unless sooner terminated under the provisions below." ( Id., § 8.1.) One of Honeywell's rights of termination arose under the Agreement upon Northshore's failure to submit written certification to Honeywell, "on the first day of each month," stating that Northshore "is solvent and has positive cash flow measured against its immediate obligations," and that Northshore is current with its financial obligations and trade accounts and has sufficient cash on hand to meet these obligations as they become due and payable for 60 days following the date of the certification letter. ( Id., § 9.1[e].) The Agreement also provided termination rights based upon certain breaches, expressly including a breach of Article 3 and Northshore's obligation to tender the letter of credit. ( Id., § 10.1.)

Northshore concedes that it did not secure the letter of credit by the October 31, 2009 due date or any time thereafter, attributing its non-performance to the financial crisis and recession in the years 2008 and 2009. (Northshore Opening Brief, at 3.) The complaint alleges that, between October 31, 2009 and March 2010, Oaktree — which had allegedly negotiated the original Agreement with Honeywell (Complaint, Keane Aff., Ex.1, ¶ 10) — attempted to renegotiate the Agreement, because Oaktree "did not want to put more money into Northshore and have much of that money just go directly to Honeywell in the short term" ( id., ¶ 23). Honeywell concedes that it agreed not to terminate the Agreement while discussing renegotiation of the Agreement with Oaktree, but Honeywell claims that it rejected all of Oaktree's proposed modifications to the Agreement and the parties' discussions broke down in March 2010. ( Id., ¶¶ 24, 25.)

By letter dated March 29, 2010, Honeywell notified Northshore that its failure to tender the letter of credit constituted a material breach of the Agreement. (Keane Aff., Ex. 2.) By response letter dated April 29, 2010, Northshore admitted that it had not delivered the letter of credit and sought to continue negotiating modification of the Agreement. ( Id., Ex. 3.) By letter dated August 16, 2010, Northshore informed Honeywell, pursuant to section 9.1(e) of the Agreement, that Northshore was "current with all of its financial obligations and trade accounts," but that it did " not have sufficient cash on hand or availability under [its] line of credit to meet [its] projected financial obligations as they become due and payable for the 60 day period following the date of this letter." ( Id., Ex. 4 [emphasis in original].) By letter dated August 19, 2010, Honeywell terminated the Agreement, based upon Northshore's failure to tender the letter of credit or cure the purported breach, and for failure to provide the solvency certification as required under the Agreement. ( Id., Ex. 5.) In its termination letter, Honeywell also requested unpaid Minimum Guaranteed Royalty Payments which, according to Honeywell, totaled approximately $21 million. ( Id.)

A. Northshore's Motion (No. 001)

Northshore seeks dismissal of Honeywell's first cause of action for breach of section 3.4 of the Agreement, which is based upon Northshore's failure to tender the letter of credit and seeks $21 million in Minimum Guaranteed Royalty Payments and $15 million in "lost royalties" over the life of the Agreement. (Complaint, ¶¶ 89-90.) Northshore admits that its failure to tender the letter of credit constituted a breach (Northshore Reply Brief, at 11), but argues that Honeywell cannot show any resulting damages because the purpose of the letter was to secure Royalty payments that Northshore claims were either paid or not yet due at the time of Honeywell's termination.

Breach of contract requires plaintiff to establish: (1) the existence of a contract; (2) performance of the contract by the injured party; (3) breach by the other party; and (4) damages. ( Noise In the Attic Prods., Inc. v London Records , 10 AD3d 303 [1st Dept 2004].) "Gains prevented as well as losses sustained are proper elements of damage. There is no rule of thumb to be applied to any given set of facts. We must look to the nature of the contract and the circumstances surrounding its breach." ( New York Water Serv. Corp. v City of New York, 4 AD2d 209, 213 [1st Dept 1957].) Under New York law, the failure to provide a contractually-required letter of credit gives rise to breach of contract and damages. ( C.T. Chems. [U.S.A.] v Vinmar Impex, 184 AD2d 441, 442 [1st Dept 1992] ["defendant's failure to open a proper letter of credit to pay for either installment of the shipments constituted a breach of its contract with plaintiff, entitling plaintiff to demand payment for the goods delivered and to withhold the balance of the shipment due under the contract"].)

As discussed above, the letter of credit secured Northshore's payment of Royalties and Minimum Guaranteed Royalty Payments. Under section 3.3 of the Agreement, the first Minimum Guaranteed Royalty Payment was for the period November 1, 2009 through October 31, 2010. Honeywell terminated the Agreement during the first Minimum Guaranteed Royalty Payment period, on August 19, 2010, but before the November 30, 2010 due date of this first payment. Northshore's argument that it "made all required Royalty payments" (Northshore Opening Brief, at 5), and that "[t]he Complaint does not allege anything to the contrary" ( id. at 6), fails to acknowledge the purpose of the letter of credit vis-à-vis the Minimum Guaranteed Royalty Payments, and the overall purpose of the Agreement, as alleged by Honeywell, to receive payment for Northshore's use of the Honeywell trademark.

Moreover, implicit in Northshore's argument is that Honeywell vitiated its own right to collect Minimum Guaranteed Royalty Payments by terminating the Agreement on August 19, 2010, instead of waiting until November 30, 2010. If Honeywell had waited until November 30th — a little over three additional months — to terminate, the first Minimum Guaranteed Royalty Payment would have been due but there would have been no letter of credit in place to secure payment, and Northshore had already conceded, in its August 16, 2010 letter, that it would be unable to meet its financial obligations, thereby negating any possibility of payment by Northshore. Thus, Northshore has not shown lack of damages, but rather, Honeywell's allegations, if proved, show that Honeywell suffered damages when it lost the benefit of its bargain, which included the secured use of its trademark.

Northshore claims that Honeywell terminated the Agreement before its Minimum Guaranteed Royalty Payments had vested. Citing section 3.3 of the Agreement, Northshore argues that Honeywell was entitled to Minimum Guaranteed Royalty Payments only "[f]or the term of the Agreement," and that these payments were never intended to survive termination. Section 11.4(a) of the Agreement provides that termination of the Agreement "shall [not] affect any right or obligation of either Party . . . which is vested pursuant to this Agreement as of the effective date of such . . . termination." Northshore fails to explain how the first Minimum Guaranteed Royalty Payment had not vested at the time of Honeywell's termination, which was during the first one-year payment period. In other words, the Agreement was in force more than nine months during the first Minimum Guaranteed Royalty Payment period before Honeywell's termination, arguably giving rise to vesting and pro rata damages for that payment period, because this payment was never secured by a letter of credit. In any event, as discussed in greater detail below (in connection with Honeywell's third cause of action), satisfaction of the conditions of section 12.2 of the Agreement rendered " all unpaid Minimum Guaranteed Royalty Payments . . . immediately due and payable" (Agreement, § 12.2 [emphasis added]), thereby undermining Northshore's arguments if Honeywell proves its allegations.

Furthermore, "[o]nce a party has indicated an unequivocal intent to forego performance of his obligations under a contract, there is little to be gained by requiring a party who will be injured to await the actual breach before commencing suit, with the attendant risk of faded memories and unavailable witnesses." Rachmani Corp. v 9 E. 96th St. Apt. Corp., 211 AD2d 262, 266-67 [1st Dept 1995].) According to the complaint, Northshore's August 16, 2010 letter made clear that Northshore would be unable to fulfill its Minimum Guaranteed Royalty Payment, and Honeywell's alleged damage was, at least in part, evidenced by Northshore's admitted breach in failing to tender the letter of credit. In order to sustain legally cognizable damages, Honeywell was not required to wait until after November 30, 2010 to terminate the Agreement or commence this action. Northshore's failure to provide the letter of credit evidences the breach, as well as the alleged "[g]ains prevented" and "losses sustained" by Honeywell. ( New York Water Serv. Corp., 4 AD2d at 213.) For the foregoing reasons, Honeywell has stated a cause of action for breach of the Agreement, including damages resulting from Northshore's failure to tender the letter of credit.

Northshore seeks dismissal of the second cause of action, which alleges that Northshore's August 16, 2010 letter breached the solvency requirements of section 9.1(e) of the Agreement. Northshore argues that its letter was not a breach, but rather, merely gave rise to Honeywell's right of termination. Northshore also argues that this cause of action fails to allege any damages flowing from the alleged breach.

Section 9.1 of the Agreement identified events that would permit the "Agreement [to] be terminated by [Honeywell]," including Honeywell's right of termination upon Northshore's failure to submit a written certification of solvency, and section 9.1(e) referred to Northshore's "obligation to provide monthly written certifications." However, whether Northshore's August 16, 2010 letter constituted a breach or merely gave rise to Honeywell's right of termination is immaterial on this motion because, at a minimum, Honeywell has alleged Northshore's anticipatory breach of contract. ( Arnav Indus. Inc. Retirement Trust v Brown, Raysman, Millstein, Felder Steiner, LLP, 96 NY2d 300, 303 [court's function on motion to dismiss is to "determine only whether the facts as alleged fit within any cognizable legal theory"].)

Anticipatory breach involves "a wrongful repudiation of the contract by one party before the time for performance," entitling "the nonrepudiating party to immediately claim damages for a total breach." ( American List Corp. v U.S. News and World Report, Inc., 75 NY2d 38, 44.) Under this doctrine, "[t]he nonrepudiating party need not . . . tender performance nor prove its ability to perform the contract in the future," but rather, "the doctrine relieves the nonrepudiating party of its obligation of future performance and entitles that party to recover the present value of its damages from the repudiating party's breach of the total contract." ( Id.) "A refusal to pay before there is a present duty of performance, is by definition an anticipatory breach." ( Long Is. Light. Co. v State of New York, 89 Misc 2d 816, 818 [Ct Cl 1977].)

Here, Honeywell alleges that it terminated the Agreement based upon Northshore's August 16, 2010 letter, whereby Northshore admitted that "it did not have sufficient cash on hand or availability under its line of credit to meet its projected obligations as they became due and payable in the next sixty days." (Complaint, ¶ 95.) Northshore admits that it "candidly informed Honeywell it lacked the resources necessary to make a minimum royalty payment not yet due, but to become due on November 30, 2010" (Northshore Opening Brief, at 1), and that Northshore was "approaching insolvency" and "would not be able to meet its projected obligations as they became due and payable" ( id. at 3-4; see also Northshore's 8/16/10 Letter, Keane Aff., Ex. 4). Thus, not only did Northshore fail to comply with the solvency requirements of the Agreement, but according to Honeywell, it declared its inability and refusal to make an imminent Minimum Guaranteed Royalty Payment under the Agreement. Therefore, Honeywell has stated a cause of action for anticipatory breach of contract, including damages based upon Northshore's alleged repudiation. ( Norcon Power Partners, L.P. v Niagara Mohawk Power Corp., 92 NY2d 458, 462-63 ["when a party repudiates contractual duties prior to the time designated for performance and before' all of the consideration has been fulfilled, the repudiation entitles the nonrepudiating party to claim damages for total breach'"].)

Northshore seeks dismissal of Honeywell's third cause of action for breach of contract, which is based upon Northshore's failure to immediately pay all unpaid Minimum Guaranteed Royalty Payments under section 12.2 of the Agreement. Northshore argues that Honeywell fails to allege intentional conduct by Northshore that would trigger acceleration of Minimum Guaranteed Royalty Payments. Northshore claims that it "wanted to secure the Letter of Credit, but was simply unable" to do so (Northshore Opening Brief, at 9), and Northshore cites Honeywell's references to the economic recession which, according to Northshore, evidence that it was prevented from securing the letter of credit. (Complaint, ¶¶ 66, 68, 113, 115, 121.) In essence, Northshore claims that its failure to secure the letter of credit was not purposeful, but rather, was due to the financial crisis of 2008 and 2009.

Section 12.2 of the Agreement made all of Northshore's "unpaid Minimum Guaranteed Royalty Payments . . . immediately due and payable" in the event of Honeywell's termination based upon Northshore's "intentional breach . . . that remains uncured in [Northshore's] reasonable opinion prior to termination under Articles 9 or 10," or Northshore's "intentional failure or inaction to cure a breach of the Agreement in [Northshore's] reasonable opinion prior to termination under Articles 9 or 10." ( Id., § 12.2.) Black's Law Dictionary (9th ed. 2009) defines "intentional" as "[d]one with the aim of carrying out the act." According to section 8A of the Restatement (Second) of Torts, "[t]he word "intent" is used . . . to denote that the actor desires to cause consequences of his act, or that he believes that the consequences are substantially certain to result from it." ( See Colavito v New York Organ Donor Network, Inc. , 8 NY3d 43 , 50 [citing section 8A with approval].)

Here, Northshore's own documentary evidence concedes that, since "last October before the letter of credit was due," up until its April 29, 2010 letter to Honeywell and Honeywell's termination of the Agreement, "Northshore elected to continue to negotiate a modification of the [Agreement] that would be mutually beneficial and acceptable to Honeywell and Northshore, choosing not to spend the considerable time that would be required to put in place the letter of credit." (Northshore's 4/29/10 Letter, Keane Aff., Ex. 3, at 1 [emphasis added].) Northshore's letter claims to have relied upon Honeywell's assurance that, as long as the parties continued negotiations over modifying the Agreement, Honeywell would not declare a breach based upon Northshore's failure to tender the letter of credit. ( Id.) However, Northshore's letter fails to refute any allegations of the complaint. If anything, Northshore's letter supports Honeywell's assertion that Northshore's aim and desire, at all times, was to avoid tendering the letter of credit in hopes of renegotiating the Agreement. Therefore, Northshore's argument that Honeywell fails to allege intentional conduct is unpersuasive.

Northshore also argues that Honeywell fails to allege compliance with the "reasonable opinion" language of section 12.2. According to Northshore, Honeywell "failed to allege facts to support that Northshore, in its reasonable opinion, intentionally breached or intentionally failed to cure a breach of the [Agreement]." (Northshore Opening Brief, at 10 [emphasis in original].) However, Section 12.2 makes Northshore's "reasonable opinion" relevant only to whether Northshore cured its breach. The complaint alleges that Northshore's breaches have always been, and remain, uncured. (Complaint, ¶¶ 28, 32.) Indeed, Northshore does not dispute Honeywell's assertion that it never cured prior to Honeywell's termination, rendering Northshore's "reasonable opinion" immaterial, as Honeywell alleges in the complaint. ( Id., ¶ 18; Agreement, § 12.2.) Therefore, Northshore's argument is unpersuasive, and its motion to dismiss the third cause of action on this ground is denied.

Northshore next argues that section 12.2 is a liquidated damages clause that constitutes an unenforceable penalty, because the acceleration of all Minimum Guaranty Royalty Payments is not reasonably related to the probable damage caused by Northshore's alleged breach.

Liquidated damages are "an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement." ( Truck Rent-A-Center, Inc. v Puritan Farms 2nd, Inc., 41 NY2d 420, 424.) "A contractual provision fixing damages in the event of breach will be sustained if the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation." ( Id. at 425.) However, if "the amount fixed is plainly or grossly disproportionate to the probable loss, the provision calls for a penalty and will not be enforced." ( Id.) "The burden is on the party seeking to avoid liquidated damages . . . to show that the stated liquidated damages are, in fact, a penalty." ( JMD Holding Corp. v Congress Fin. Corp. , 4 NY3d 373 , 380.)

In support of its argument, Northshore relies upon JMD Holding Corp. In JMD Holding Corp., JMD entered into a loan and security agreement with defendant Congress Financial Corp. The parties amended the agreement to increase JMD's maximum credit from $5 million to $40 million, and JMD committed to borrow from Congress to finance working capital needs through the term of the parties' agreement. As security, JMD granted Congress a security interest in JMD's assets, and JMD was required to transfer payments received from its account debtors to Congress, to pay down JMD's outstanding loan account, thereby creating availability for new revolving advances. Among Congress's contractual remedies for JMD's breach was an early termination fee of between 1% and 2% of the $40 million maximum credit.

Approximately 17 months after entering into the amended agreement, Congress notified JMD of its default, based upon JMD's failure to comply with collateral reporting requirements, to maintain minimum working capital and adjusted net worth, and to deliver required documentation, including audited financial statements and reports. Congress sought to retain a $600,000 "early termination fee," which represented 1.5% of the $40 million. ( Id. at 378.) JMD moved for summary judgment, arguing that the $600,000 early termination fee constituted an unenforceable penalty, not legitimate liquidated damages. In denying JMD's motion, the Court of Appeals considered Congress's costs to make the $40 million available to loan, which required Congress to have adequate funding in place throughout the term of the parties' agreement, and also Congress's diminished capacity to make profitable loans to other entities. ( Id. at 382-83.) In response to JMD's attempt to minimize its breaches as "minor record-keeping deficiencies," the Court stated that the breaches were "material," as "JMD neglected to provide Congress with the kind of information that any asset-based lender requires in order to track the movement and quality of its borrower's collateral and to determine loan availability accurately." ( Id. at 384.) The Court "cautioned generally against interfering with parties' agreements," and cited the trend favoring "freedom of contract through the enforcement of stipulated damage provisions as long as they do not clearly disregard the principle of compensation.'" ( Id. at 380-81, quoting 3 Farnsworth, Contracts § 12.18, at 303-304 [3d ed].)

Like JMD, Northshore's alleged breaches were material in that the letter of credit was designed to secure payment to Honeywell, and the Agreement's solvency requirement enabled Honeywell to track Northshore's ability to fulfill financial obligations under the Agreement. Under the reasoning of JMD Holding Corp., Honeywell also allegedly suffered a diminished capacity to make profitable trademark license agreements with other entities during the term of the Agreement, and expenses associated with procuring a substitute licensee. Thus, JMD Holding Corp. undermines Northshore's argument that Honeywell has not alleged damages. Furthermore, the Minimum Guaranteed Royalty Payments identified in section 3.3 of the Agreement total approximately $21 million, which represents the minimum amount Honeywell stood to gain under the Agreement and, therefore, as a matter of law is neither unreasonable nor disproportionate to the loss caused by Northshore's alleged breach. ( See e.g. 225 Fifth Ave. Retail LLC v 225 5th, LLC , 78 AD3d 440 [1st Dept 2010] [upholding $7,000 per day liquidated damages provision]; Oscar de la Renta, Ltd. v Mulberry Thai Silks, Inc., 2009 WL 1054830, *6, 2009 US Dist LEXIS 33221, *18-19 [SD NY 2009] ["amount due in liquidated damages is simply the sum of the minimum royalties due under the contract for the unexpired term of the contract at the time of the breach, as well as any royalty monies then due and owing," which represented "the minimum amount [plaintiff] stood to gain from the performance of the remainder of the contract — hardly an unreasonable or disproportionate estimate of the probable loss caused by a breach of the License Agreement"]; see also New York Water Serv. Corp., 4 AD2d at 213 ["(g)ains prevented as well as losses sustained are proper elements of damage"].)

Northshore argues that Honeywell cannot claim an additional $15 million in lost profits by casting its damages as lost future royalties, because recovery of lost profits is barred under the Agreement. Here, each of Honeywell's breach of contract causes of action seek $21 million in Minimum Guaranteed Royalty Payments, plus "lost royalties over the life of the Agreement (discounted to present value) above and beyond the Minimum Guaranteed Royalty Payments" (totaling an additional $15 million). (Complaint, ¶¶ 89-90, 98-99, 104-105.) Section 11.5 of the Agreement contains the following limitation of liability:


(Agreement, § 11.5 [emphasis in original].) Citing Steinbeck v Gerosa ( 4 NY2d 302, 317), Northshore argues that "the word royalty' is defined generally as a share of the profits reserved to the owner for permitting another to use his property." From this, Northshore concludes that "a royalty payment connotes the use of the payee's property by the payor. No use — no royalty payment." (Northshore Opening Brief, at 13.)

However, lost profits and royalties are not interchangeable. ( See e.g. David v Glemby Co., 717 F Supp 162, 172 [SD NY 1989] [dismissing claim for lost profits but permitting plaintiff to prove damages from "lost royalty income" at trial]; Pharm., Inc. v Am. Pharm. Partners, Inc., 511 F Supp 2d 324, 331 [ED NY 2007] ["lost profits' . . . generally refers to the excess of revenues over outlays in a given period of time, including depreciation and other non-cash expenses and is often synonymous with net profit,'" whereas the calculation of "lost royalties . . . is not dependent on profits"].) Moreover, if the reference to "lost profits" in section 11.5 of the Agreement referred to royalties, Honeywell would not be entitled to any royalties under the Agreement, leading to an unreasonable interpretation of the Agreement. ( See Acme Supply Co., Ltd. v City of New York , 39 AD3d 331 , 332 [1st Dept 2007] [" interpretation that gives effect to all the terms of an agreement is preferable to one that ignores terms or accords them an unreasonable interpretation'"]; Rosenthal v Quadriga Art, Inc. , 69 AD3d 504 , 507 [1st Dept 2010] [the court "must be careful not to add new terms or alter the terms of the contract in the guise of interpreting it"].) Northshore fails to provide any legal authority that supports interpreting section 11.5 to include royalties, which the parties could have done easily if they intended to do so. Accordingly, Northshore fails to show that Honeywell's alleged "lost royalties" are barred by section 11.5 of the Agreement. For the foregoing reasons, Northshore's motion to dismiss is denied in its entirety.

B. Oaktree's Motion (# 002)

Honeywell's three breach of contract causes of action are asserted against Oaktree as Northshore's "equitable owner," alleging that "Oaktree exercised complete control over Northshore" and "used that control and/or ownership to abuse the corporate form" and "inflict harm upon Honeywell." (Complaint, ¶¶ 91, 100, 106.) Oaktree argues that these causes of action should be dismissed, because the complaint fails to allege, among other things, that Northshore was a sham or a vehicle for fraud.

According to the complaint, all of the parties are Delaware entities, which supports the application of Delaware law. (Complaint, ¶¶ 1-3; see EED Holdings v Palmer Johnson Acquisition Corp., 387 F Supp 2d 265, 273 n 3 [SD NY 2004] ["the law of the state of incorporation, here Delaware, ordinarily governs whether to disregard the corporate form"].) However, the Agreement contains a New York choice-of-law provision, whereby Honeywell and Northshore agreed that "[t]he validity, interpretation and enforceability of this Agreement shall be governed by the laws of the State of New York." (Agreement, § 20.1; see Boss v American Exp. Fin. Advisors, Inc. , 15 AD3d 306 , 307 [1st Dept 2005], affd 6 NY3d 242 [New York courts "enforce contractual provisions for choice of law and selection of a forum for litigation'"].)

"The first step in any case presenting a potential choice of law issue is to determine whether there is an actual conflict between the laws of the jurisdictions involved." ( Matter of Allstate Ins. Co. [Stolarz, New Jersey Mfrs. Ins. Co.], 81 NY2d 219, 223.) "Where no conflict exists between the laws of the jurisdictions involved, there is no reason to engage in a choice of law analysis." ( Elson v Defren, 283 AD2d 109, 114 [1st Dept 2001].)

New York and Delaware laws are "substantially similar" in determining whether to disregard the corporate form ( EED Holdings, 387 F Supp 2d at 273 n 3), which is undisputed by the parties (Oaktree Opening Brief, at 11; Honeywell Opp. Brief, at 11 n 5). Both require a showing that the defendant "exercised complete domination of the corporation in respect to the transaction attacked," and "that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury." ( Morris v New York State Dept. of Taxation and Fin., 82 NY2d 135, 141; Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P. v Wood, 752 A2d 1175, 1183-84 [Del Ch 1999] [piercing the corporate veil requires a showing of "complete domination and control" such that the corporation "no longer ha[s] legal or independent significance of [its] own,'" and that the corporation is "a sham" that "exists for no other purpose than as a vehicle for fraud"].) Therefore, there is no conflict and no need for a choice of law analysis.

"The law permits the incorporation of a business for the very purpose of escaping personal liability." ( Bartle v Home Owners Co-op., 309 NY 103, 106 [1955].) "[A]n inference of abuse of the corporate structure ordinarily does not arise . . . where a corporation was formed for legal purposes or is engaged in legitimate business.'" ( Joseph Kali Corp. v A. Goldner, Inc. , 49 AD3d 397 , 399 [1st Dept 2008] [citation omitted]; see also 210 E. 86th St. Corp. v Grasso, 305 AD2d 156, 156 [1st Dept 2003] ["corporation was no dummy' or sham operation" where it "was in existence for many years before it entered into the lease with petitioner, paid the rent thereunder for six years before defaulting, paid its taxes and, with minor record-keeping exceptions, otherwise observed corporate formalities"].)

For instance, in TNS Holdings, Inc. v MKI Sec. Corp. ( 92 NY2d 335, 340), the plaintiff corporation entered into three agreements with the defendants to sell them a software system that was the plaintiff's primary asset. Of the three agreements, the plaintiff entered two with "MKI" and one with "Batchnotice." ( Id. at 337.) MKI and Batchnotice were related by virtue of their common corporate parent, but Batchnotice's sole asset was the software purchased from the plaintiff corporation. ( Id. at 337-38.) Of the three agreements, only the agreement with Batchnotice contained an arbitration clause. ( Id. at 337.) Under an "alter ego" theory, the plaintiff sought to enforce the arbitration clause against MKI. ( Id. at 338.) The Court of Appeals held that MKI was not the alter ego of Batchnotice. The Court reasoned that, even though the plaintiffs' "negotiations were with MKI, plaintiffs cannot now complain that they did not know what they were agreeing to in executing the agreement with Batchnotice" ( id. at 340), an entity that "had no assets other than the software to be purchased from [the plaintiff corporation]" ( id. at 338). The Court further reasoned that the agreement between the plaintiff and Batchnotice "was the product of substantial negotiations, including some regarding the inclusion of an arbitration clause," and "[n]othing suggests that plaintiffs entered into the agreement involuntarily, or that they thought they were contracting with an entity other than Batchnotice." ( Id. at 340.)

Similarly, here, Honeywell's alter ego claims are based upon allegations that it negotiated the Agreement directly with Oaktree, not with Northshore, and that Oaktree "provided 100% of Northshore's initial equity" through entities that Oaktree managed and controlled. (Complaint, ¶¶ 48, 53.) Honeywell claims that Oaktree "severely undercapitalized Northshore from the beginning" ( id., ¶ 54), but concedes that Oaktree provided Northshore with the initial $23 million in start-up capital required under the Agreement, "$10 of which was immediately paid to Honeywell pursuant to the Agreement" ( id., ¶ 55). Honeywell claims that the remaining $13 million was less than required in order for Northshore to make the Minimum Guaranteed Royalty Payments under the Agreement ( Id., ¶¶ 56, 79), but Honeywell fails to identify any provision in the Agreement that required additional funding from Oaktree. The complaint makes clear that, as in TNS Holdings, Inc., the Agreement between Honeywell and Northshore "was the product of substantial negotiations" ( 92 NY2d at 340), including the required up-front "lump sum payment of ten million dollars" required under section 3.1 of the Agreement and an additional $13 million, both of which Honeywell concedes were provided by Oaktree. Honeywell admits that it was aware, when it executed the Agreement, that it was contracting with Northshore (Complaint, ¶¶ 8-20), and none of Honeywell's allegations suggest that it entered into the Agreement involuntarily or that it thought it was contracting with an entity other than Northshore.

The complaint repeatedly refers to Oaktree's alleged representations that "it intended to provide sufficient working capital for the venture" (Complaint, ¶ 47), "that funding and capitalization would not be an issue long-term due to Oaktree's ample resources," and that Oaktree would make "additional (and substantial) capital infusions starting approximately one year after Northshore's launch" ( id., ¶ 57) to "keep it a viable business that could meet its obligations under the Agreement" ( id., ¶ 80). According to Honeywell, "Northshore's intentional undercapitalization and illusory separate corporate existence put Oaktree in a position to reap any profits generated by Northshore . . ., while simultaneously avoiding any risk [of] exposure that may have resulted from Northshore's underperformance and/or breach of the Agreement." ( Id., ¶¶ 81, 39.)

However, these conclusory allegations do not show that Oaktree stripped Northshore's assets or fraudulently drained its funds, as allegedly occurred in the cases cited by Honeywell. ( See Rotella v Derner, 283 AD2d 1026, 1027 [4th Dept 2001]; Network Enter., Inc. v APBA Offshore Prods., Inc., 2003 WL 124521, 2003 US Dist LEXIS 491 [SD NY 2003]; Carte Blanche (Singapore) PTE., Ltd. v Diners Club Intl., Inc., 758 F Supp 908, 917 [SD NY 1991].) To the contrary, Honeywell concedes that Oaktree provided initial funding for Northshore consistent with Northshore's obligations under the Agreement. Thus, Honeywell's allegations are consistent with well-established law that "permits the incorporation of a business for the very purpose of escaping personal liability." ( Bartle, 309 NY at 106.)

Honeywell was free to pursue security or a guaranty from Oaktree prior to entering into the transaction. Not only did Honeywell fail to do so prior to entering into the Agreement, but it reaffirmed the Agreement with Northshore upon executing the amendment to the Agreement which, according to Honeywell, occurred on April 2, 2009, long after Oaktree's purported undercapitalization. (Complaint, ¶ 9.) In short, Honeywell's allegations fail to show that Oaktree's purported domination and control were used to commit a fraud or wrong against Honeywell, sufficient to give rise to "a perversion of the privilege to do business in a corporate form.'" ( Walkovszky v Carlton, 18 NY2d 414, 420 [finding allegations of undercapitalization and intermingled assets "barren of any sufficiently particular[ized] statements'" that would justify piercing the corporate veil]; see also Sheridan Broadcasting Corp. v Small , 19 AD3d 331 , 332 [1st Dept 2005] ["plaintiffs have not alleged, with the requisite particularized statements detailing fraud or other corporate misconduct,' facts that would warrant piercing the corporate veil, especially since [a]n inference of abuse does not arise . . . where a corporation was formed for legal purposes or is engaged in legitimate business'"]; Outokumpu Eng'g Enters. v Kvaerner EnviroPower, 685 A2d 724, 729 [Del Super 1996] [under Delaware law, the "injustice'" required to impose alter ego liability "must be more than the breach of contract alleged in the complaint"].) For the foregoing reasons, Honeywell's first, second and third causes of action for breach of contract fail to state a claim against Oaktree.

Honeywell's fourth cause of action asserts a direct claim against Oaktree for tortious interference with contract. Oaktree argues that this cause of action should be dismissed for failure to state a cause of action under the laws of New Jersey, where Honeywell maintains its headquarters. Honeywell counters that Minnesota law should apply, because Honeywell's Minnesota-based "ACS-Division . . . had primary responsibility for performance and enforcement issues related to the Agreement." (Honeywell Opp. Brief, at 17.)

Under New Jersey law, the elements of tortious interference are: (1) the plaintiff has a contract with a third party; (2) the defendant, who is not a party to the contract, interfered intentionally and with malice; (3) the interference caused the plaintiff's loss; and (4) damages. ( Printing Mart-Morristown v Sharp Elec. Corp., 116 NJ 739, 751.) Under Minnesota law, the elements are: "(1) the existence of a contract; (2) the alleged wrongdoer's knowledge of the contract; (3) intentional procurement of its breach; (4) without justification; and (5) damages." ( Kjesbo v Ricks, 517 NW2d 585, 588 [Minn 1994] [quotation marks and citation omitted].)

The "malice" requirement appears to distinguish the laws of New Jersey and Minnesota. However, under New Jersey law, "[t]he term malice is not used in the literal sense requiring ill will toward the plaintiff,'" but rather, "malice is defined to mean that the harm was inflicted intentionally and without justification or excuse" ( Printing Mart-Morristown, 116 NJ at 751), rendering New Jersey's malice requirement analogous to the requirements of intent and lack of justification in Minnesota. In any event, both states dismiss tortious interference claims when the purported intentional conduct is based upon the defendant's economic self-interest. In fact, New Jersey links its malice requirement to wrongs intentionally committed by the defendant "without excuse or justification." ( Cedar Ridge Trailer Sales, Inc. v National Community Bank of N.J., 312 NJ Super 51, 66 [NJ Super App Div 1998] ["the fact that a breaching party acted to advance [its] own interest and financial position'" was insufficient to "establish the necessary malice or wrongful conduct"].) Similarly, Minnesota courts dismiss tortious interference claims, as a matter of law, when the alleged interfering party is not "motivated by anything other than business reasons." ( R.A., Inc. v Anheuser-Busch, Inc., 556 NW2d 567, 571 [Minn Ct App 1996]; see also Anderson v MLT, Inc., 2004 WL 1964975, *2, 2004 Minn App LEXIS 1037, *4

[Minn Ct App 2004] ["legitimate economic interest can justify interference in a contract"].) Indeed, Honeywell concedes that lack of justification is an element of tortious interference in Minnesota. (Honeywell Opp. Brief, at 18-19.) Therefore, there is no reason to engage in a choice of law analysis. ( Elson, 283 AD2d at 114.)

Honeywell's tortious interference claim alleges that, "[w]hen faced with a weakened business environment in 2009, Oaktree decided, contrary to its repeated representations, that it would no longer contribute capital (or otherwise provide any assistance) to Northshore's operations under the original terms of the Agreement with Honeywell." (Complaint, ¶ 113.) Honeywell claims that "Oaktree withheld further financial assistance to Northshore because . . . Oaktree did not want to put more money into Northshore if much of that money would just go to Honeywell in the short term" ( id., ¶ 114), and concedes that Oaktree's "decisions . . . further[ed] Oaktree's economic interests" ( id., ¶ 115 [emphasis added]) and were an attempt by Oaktree "to avoid pressures to adequately capitalize Northshore" ( id., ¶ 117). Thus, Honeywell's allegations show that Oaktree's conduct, if established, was motivated by Oaktree's economic self-interest and was, therefore, justified. Therefore, Honeywell's tortious interference claim fails to state a cause of action against Oaktree.

Accordingly, it is hereby

ORDERED that defendant Northshore Power Systems, LLC's motion to dismiss the complaint (motion sequence number 001) is denied; and it is further

ORDERED that defendant Oaktree Capital Management, L.P.'s motion to dismiss the complaint (motion sequence number 002) is granted and the complaint is dismissed, in its entirety, as against said defendant, with costs and disbursements to said defendant as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of said defendant; and it is further

ORDERED that the action is severed and continued against defendant Northshore Power Systems, LLC with respect to the first, second and third causes of action of the complaint; and it is further

ORDERED that defendant Northshore Power Systems, LLC is directed to serve an answer to the complaint within 30 days after service of a copy of this order with notice of entry; and it is further

ORDERED that counsel are directed to appear for a preliminary conference in Part 60, on September 28, 2011, at 2:30 PM.

Summaries of

Honeywell Intl. Inc. v. Northshore Power Sys., LLC

Supreme Court of the State of New York, New York County
Jul 25, 2011
2011 N.Y. Slip Op. 51398 (N.Y. Sup. Ct. 2011)
Case details for

Honeywell Intl. Inc. v. Northshore Power Sys., LLC

Case Details


Court:Supreme Court of the State of New York, New York County

Date published: Jul 25, 2011


2011 N.Y. Slip Op. 51398 (N.Y. Sup. Ct. 2011)