Opinion
02 CIV. 1378 (DLC)
July 18, 2002
Erwin J. Shustak, Shustak Jalil Heller, New York, NY., Attorney for Plaintiffs.
Jeffrey Jacobovitz, Robert A. Jaffe Kutak Rock LLP, New York, NY., Attorney for Defendants.
OPINION AND ORDER
In January 2001, in connection with a securities fraud action filed under the caption Uehigashi v. Kanamori, 00 Civ. 5390 (DLC), this Court placed plaintiff Avatar Entertainment Corporation ("Avatar") into receivership and appointed Chieko Uehigashi its receiver. Plaintiffs Avatar and Solid State Logic, Inc. ("SSL") now seek to invoke the Court's ancillary jurisdiction over claims brought by Avatar in aid of the receivership and its supplementary jurisdiction over claims substantially similar to those brought by Avatar by bringing before this Court the above-captioned action.
SSL and Avatar move for partial summary judgment in connection with the first count of their amended complaint. Specifically, plaintiffs seek a declaratory judgment that as against plaintiffs, defendants Terminal Marketing Company, Inc. ("Terminal Marketing"), Terminal Finance Corp. II ("Terminal Finance"), and Wells Fargo Bank Minnesota, N.A. ("Wells Fargo") have no right to collect payments for certain recording studio equipment sold by SSL subject to financing by Terminal Marketing. Defendants cross-move for summary judgment and move to dismiss for lack of jurisdiction and failure to state a claim. For the reasons stated, defendants' motion to dismiss for lack of jurisdiction is granted.
Background
The instant action arises out of a series of complex financial transactions. Only those facts are presented which form the basis of the Court's finding that it lacks jurisdiction to hear the claims alleged in the action. The following facts are not disputed by the parties unless otherwise noted.
SSL is a Michigan corporation with its principal place of business in New York City. SSL manufactures and sells recording console equipment to recording studios. Terminal Marketing is a New York corporation with its principal place of business in New York City. Terminal Finance is a Delaware corporation with its principal place of business in New York City. Wells Fargo is a national banking corporation with its principal place of business in Minneapolis, Minnesota. Avatar is a New York Corporation with its principal place of business in New York City.
In the year 2000, SSL sold certain equipment to Terminal Marketing for a total price of $1,123,000 for which SSL has never received payment (the "Terminal Debt"). At the time of sale, Terminal Marketing leased the equipment to certain lessors and allegedly assigned the leases to Terminal Finance, who allegedly assigned them in turn to Wells Fargo. Terminal Marketing and Terminal Finance are currently defunct. Wells Fargo has sought to collect payment on the leases from the lessors and SSL has sought to collect payment on the sale of the equipment from Wells Fargo.
In 2001, Avatar brought suit against SSL for breach of warranty arising out of the failure of certain equipment supplied to Avatar. In connection with the settlement of the breach of warranty claim, SSL agreed in a Settlement Agreement and Cross Release (the "SSL-Avatar Settlement Agreement") dated August 9, 2001, to assign to Avatar a portion of the Terminal Debt. Specifically, SSL agreed that after the date on which it exchanged certain of Avatar's defective equipment for working equipment (the "Swap Date"), SSL "shall be deemed to have assigned $100,000 of the Terminal Debt to Avatar." According to plaintiffs, the Swap Date occurred sometime in the Summer of 2001. The SSL-Avatar Settlement Agreement further provides that "[u]pon the Swap Date, SSL shall immediately be deemed to have appointed Avatar as its agent to prosecute the Terminal Debt against [Terminal Marketing] . . . provided, however, that SSL shall remain the owner of the Terminal Debt." Finally, the SSL-Avatar Settlement Agreement provides that "[a]ny settlement with [Terminal Marketing] or its agents with respect to the Terminal Debt is subject in its entirety to the written approval of SSL."
On March 11, 2002, plaintiffs' counsel Erwin Shustak ("Shustak") sent a letter via fax to defendants' co-counsel Frank Peretore in connection with the refinancing of Avatar's debt to Wells Fargo (the "March 11 Letter"). In the March 11 Letter, Shustak stated:
I also confirm that, at the time of closing, we will deliver to you a dismissal, with prejudice, of any claim asserted on behalf of Avatar in the pending SSL and Avatar vs. Wells Fargo litigation which relates to Terminal II's failure to sell the Avatar collateral in a commercially reasonable manner. The balance of the claims, which relate to the debt owed to SSL, however, will not be affected by the release.
Peretore's account of Wells Fargo's negotiations with Avatar conflicts with that provided in the March 11 Letter. Peretore states that during its negotiations with Avatar, "it was Wells Fargo's position that Avatar would have to agree to release all its claims against Wells Fargo and dismiss all its claims" in the instant action. Peretore further states that Wells Fargo "understood that Avatar had to choose between proceeding with the Settlement (and related extension of credit) or continuing as a party in this litigation, but that it could not do both."
On March 19, 2002, Avatar and Wells Fargo entered into a Second Amendment to Settlement Agreement (the "Second Amended Settlement"). Notwithstanding the March 11 Letter, in the Second Amended Settlement, Avatar released all existing claims against Wells Fargo and agreed to dismiss with prejudice all claims asserted in the instant action:
[Avatar] releases and forever discharges . . . Wells Fargo and . . . Wells Fargo's officers, directors, shareholders, parents, affiliates, subsidiaries, successors and assigns, employees, agents and representatives, and all other persons in any manner whatsoever associated with . . . Wells Fargo, of and from any and all claims, causes of action, demand, damages and defenses, whether known or unknown, which [Avatar] has or may have against . . . Wells Fargo, from the beginning of time through the date of this Agreement, and defendant further agrees to, simultaneously with entry into this Agreement, enter into a Consent Order dismissing with prejudice any and all claims it has asserted or could have asserted int [sic] the action entitled Solid State Logic Ltd., et al. v. Terminal Marketing Co., Inc. et al., Case No. 02 CV 1378.
(Emphasis supplied).
On April 17, 2002, and despite the general release contained in the Second Amended Settlement, plaintiffs filed an amended complaint in the instant action. With respect to jurisdiction, the amended complaint states:
This Court's jurisdiction is based upon the ancillary jurisdiction which it has to aid in the accomplishment of the ends sought and directed in the receivership action. . . . In addition, the Court has jurisdiction over the claims of Plaintiff Solid State Logic, Inc. pursuant to 28 U.S.C. § 1367.
Discussion
Plaintiffs argue that the Court has original subject matter jurisdiction, pursuant to Avatar's receivership in this Court, over Avatar's claims with respect to the portion of the Terminal Debt allegedly assigned to it and supplemental jurisdiction pursuant to 28 U.S.C. § 1367(a) over SSL's claims with respect to the remainder of that debt. Plaintiffs argue in the alternative that the Court has diversity jurisdiction over the parties pursuant to 28 U.S.C. § 1332(a). Each of these arguments is considered in turn.Subject Matter Jurisdiction Pursuant to Avatar's Receivership
Plaintiffs argue that the Court's original jurisdiction over the instant action stems from its ancillary jurisdiction over any suit brought by Avatar in aid of the receivership. "The ancillary suit is cognizable in the court of the main suit regardless of the citizenship of the parties or the amount of controversy because the res over which the receiver took control is already before the court." United States v. Franklin Nat. Bank, 512 F.2d 245, 249 (2d Cir. 1975). Defendants do not dispute that a federal receiver may sue in the court of its appointment through an ancillary proceeding "to accomplish the ends sought and directed by the suit in which the appointment was made," Pope v. Louisville, N.A. C. Ry. Co., 173 U.S. 573, 577 (1899). Defendants do dispute, however, whether Avatar has any claims to pursue in the instant action in aid of the receivership.
By the plain language of the Second Amended Settlement, Avatar agreed to release Wells Fargo "from any and all claims" which it "has or may have" against it through March 19, 2002, the date of the agreement. Sometime in the Summer of 2001, when the Swap Date took place, Avatar was assigned $100,000 of the debt allegedly owed to SSL by Terminal Marketing and was appointed SSL's agent in the prosecution of all of the debt. Because Avatar's claim for $100,000 against Wells Fargo was available to Avatar on or before March 19, 2002, it falls within the release provided for in the Second Amended Settlement. Furthermore, Avatar agreed in the Second Amended Settlement to "dismiss with prejudice any and all claims it has asserted or could have asserted" in the instant action. Avatar not merely "could have asserted," but had asserted its claim for $100,000 against Wells Fargo when it filed its original complaint in this action on February 22, 2002. By the plain language of the Second Settlement Agreement, Avatar agreed to dismiss this claim with prejudice.
Plaintiffs resort to several expedients in an effort to undo the belt and suspenders release provisions of the contract Avatar signed. They cite Judge Learned Hand's opinion in Vines v. General Outdoor Advertising, Inc., 171 F.2d 487 (2d Cir. 1948), for the proposition that the intent of the parties to a release must be "gather[ed] from the instrument as a whole." Id. at 492. Plaintiffs contend that when read as a whole, the Second Amended Settlement indicates that the parties intended Avatar to release any claims it may have that arose out of its debt to Terminal Marketing, which was the focus of the Second Amended Settlement, but not to release any claims it may have against Wells Fargo. Plaintiffs argue that the release "cannot be read so broadly as to release any claim that Avatar has to part of the proceeds of SSL's claims against Wells Fargo."
It is difficult, however, to imagine a more broadly-worded, inclusive release than the one to which Avatar agreed in the Second Amended Settlement. In Vines, Judge Hand wrote that "the courts of New York accept the common law doctrine that in a release words of general import, followed or preceded by words relating to specific claims, are, ceteris paribus, limited to the specific claims." Id. The release in the Second Amended Settlement does indeed contain "words relating to specific claims," but it does so only to provide explicitly, lest there be any doubt, that Avatar dismisses with prejudice all claims in the instant action.
Plaintiffs also argue that the March 11 Letter indicates that the parties intended to limit the Second Amended Settlement to claims arising out of Avatar's debt to Terminal. "When, as here," however, "a release is signed in a commercial context by parties in a roughly equivalent bargaining position and with ready access to counsel, the general rule is that, if `the language of the release is clear . . . the intent of the parties [is] indicated by the language employed." Locafrane U.S. Corp. v. Intermodal Systems Leasing, Inc., 558 F.2d 1113, 1115 (2d Cir. 1977) (quoting German Roman Catholic Orphan Home v. Liberty Nat. Bank Trust Co., 18 N.Y.2d 314, 317 (1966)). Under New York Law,
Although they do not explicitly agree that New York Law applies, both parties argue New York law in their briefs and make no mention of the law of any other forum on this issue. In this situation, New York law properly applies. Tehran-Berkeley Civil Envt'l Eng'rs v. Tippetts-Abbett-McCarthy-Stratton, 888 F.2d 239, 242 (2d Cir. 1989) (applying New York law "[u]nder the principle that implied consent to use a forum's law is sufficient to establish choice of law").
[i]t is well settled that where, as here, the parties have a written agreement which is clear and unambiguous in its terms and expresses the parties' entire agreement and intentions, evidence of a prior or contemporaneous communication during negotiations of the agreement that contradicts, varies, or explains the agreement is generally barred by the parol evidence rule.
Annis v. Phillips, 683 N.Y.S.2d 107, 108 (2d Dept. 1998). Accordingly, the March 11 Letter may not be considered in determining the clear and unambiguous language contained in the Second Amended Settlement's release.
Furthermore, even if the March 11 Letter were considered, it is not persuasive evidence of the intent of the parties. There is no indication that Wells Fargo agreed to the terms of the letter, which offers a self-serving account of the parties' negotiations. Rather, Peretore states that Wells Fargo "understood that Avatar had to choose between proceeding with the Settlement (and related extension of credit) or continuing as a party in this litigation, but that it could not do both."
Plaintiffs also argue that under the terms of the Avatar-SSL Settlement Agreement, Avatar could not have agreed to release its claim against Wells Fargo for $100,000 of the debt allegedly owed by Wells Fargo to SSL. Specifically, plaintiffs point to the provisions of the Avatar-SSL Settlement Agreement which provide that "SSL shall remain the owner of the Terminal Debt" and that "[a]ny settlement with [Terminal Marketing] or its agents with respect to the Terminal Debt is subject in its entirety to the written approval of SSL." Apparently, plaintiffs argue that for purposes of ancillary jurisdiction, Avatar is the owner of the debt assigned to it, but for purposes of the Second Amended Settlement, Avatar is not. These provisions cannot rescue Avatar from the terms of the Second Amended Settlement, however. The Avatar-SSL Settlement Agreement also provides that, upon the Swap Date, SSL "shall be deemed to have assigned $100,000 of the Terminal Debt to Avatar." Under New York law, this specific provision is controlling over the general provisions relating to SSL's ownership of the debt allegedly owed to it by Terminal Marketing and SSL's right to reject any settlement with respect to that debt. See Aguirre v. City of New York, 625 N.Y.S.2d 597, 598 (1995) ("Where there is an inconsistency between a specific provision and a general provision of a contract, the specific provision controls."). Thus, under the terms of the Avatar-SSL Settlement Agreement, Avatar is the assignee of $100,000 of the debt allegedly owed to SSL by Terminal Marketing and was capable of reaching a settlement with Wells Fargo with respect to that debt.
Supplemental Jurisdiction
Having dismissed all claims over which it has original jurisdiction pursuant to Avatar's receivership, the Court declines to exercise supplemental jurisdiction over SSL's claims. Pursuant to 28 U.S.C. § 1367(c)(3), a district court "may decline to exercise supplemental jurisdiction" over supplemental claims if it "has dismissed all claims over which it has original jurisdiction." "[T]he discretion implicit in the word `may' in subdivision (c) of § 1367 permits the district court to weigh and balance several factors, including considerations of judicial economy, convenience, and fairness to litigants." Purgess v. Sharrock, 33 F.3d 134, 138 (2d Cir. 1994). Here, it is apparent that the provisions in the Avatar-SSL Settlement Agreement by which Avatar was assigned a portion of the debt allegedly owed to SSL were at least in part an effort in forum shopping, one which will not be rewarded here. In any event, this litigation is in its early stages, and in such circumstances it is particularly appropriate to decline to exercise supplemental jurisdiction.
Subject Matter Jurisdiction
Pursuant to Diversity Among the Parties Pursuant to 28 U.S.C. § 1332(a), a district court may exercise original jurisdiction over cases "in which the citizenship of each plaintiff is diverse from the citizenship of each defendant." Caterpillar Inc. v. Lewis, 519 U.S. 61, 68 (1996). Plaintiff SSL is a Michigan corporation with its principal place of business in New York City. Pursuant to 28 U.S.C. § 1332(c)(1), which provides that a corporation is deemed a citizen of its state of incorporation and the state in which it has its principal place of business, SSL is both a Michigan and a New York citizen. Defendants Terminal Marketing and Terminal Finance also have their principal place of business in New York City and are thus New York citizens for diversity purposes. Because there is a lack of diversity between at least one plaintiff and one defendant, the Court cannot exercise original diversity jurisdiction over plaintiffs' claims. See Wisconsin Dep't of Corrections v. Schacht, 524 U.S. 381, 388 (1998).
Conclusion
For the reasons stated, defendants' motion to dismiss for lack of jurisdiction is granted.