Charron v. Sallyport Global Holdings, Inc.

15-256
Charron v. Sallyport Global Holdings
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
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At a stated term of the United States Court of Appeals for the Second Circuit,
held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of
New York, on the 1st day of March, two thousand sixteen.
PRESENT:
RALPH K. WINTER,
PETER W. HALL,
CHRISTOPHER F. DRONEY,
Circuit Judges.
_________________________________________
Thomas W. Charron, Jr., Individually and as
trustee of the Thomas W. Charron Jr. Grantor
Retained Annuity Trust dated July 8, 2010,
Plaintiff-Counter-Defendant-Appellee,
v. 15-256
Sallyport Global Holdings, Inc., JPD Private
Trust Company, Ltd., as Trustee of the GPD
Charitable Trust dated December 7, 2010, Gian
Paul Deblasio, AKA John P. DeBlasio,
Defendants-Counter-Claimants-Appellants,
John Doe, as trustee of the John Deblasio Charitable Trust for World Peace and
Development, Sallyport Global Services, Ltd., as Trustee of the John Deblasio Charitable
Trust for World Peace and Development,
Defendants.
__________________________________________
FOR PLAINTIFF-COUNTER-DEFENDANT-
APPELLEE: BRIAN A. GLASSER, TILLMAN J.
BRECKENRIDGE, Bailey & Glasser
LLP, Charleston, WV.
FOR DEFENDANTS-COUNTER-
CLAIMANTS-APPELLANTS: LISA SCHIAVO BLATT, Arnold &
Porter LLP, Washington, DC.
DAVID SCOTT FLUGMAN, JAY P.
LEFKOWITZ, Kirkland & Ellis LLP,
New York, NY.
__________________________________________
Appeal from a judgment of the United States District Court for the Southern District of
New York (Pauley, III, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND
DECREED that the judgment of the district court is AFFIRMED.
Plaintiff-appellee Thomas Charron and defendant-appellant John DeBlasio are the former
joint owners of defendant-appellant Sallyport Global Holdings, Inc. (“SGH”). When their
relationship soured, Charron and DeBlasio worked out a contract pursuant to which SGH bought
Charron’s interest in the company. That contract included a provision (the “Windfall Provision”)
stating that if DeBlasio sold the company within one year at a sufficient price, then Charron would
get to share in the proceeds of the sale. DeBlasio sold SGH within one year, but DeBlasio refused
to pay Charron anything under the Windfall Provision because he claimed the sale price was less
than the $65 million threshold price under that provision. Charron sued for breach of contract.1
Following an eight-day bench trial addressing the proper interpretation of the Windfall Provision
1 DeBlasio also counterclaimed for theft, conversion, and unjust enrichment, but the district court’s findings and
conclusions with respect to those claims have not been appealed.
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and the true price at which DeBlasio sold SGH, the district court found in favor of Charron on his
breach of contract claim and awarded him damages under the Windfall Provision. DeBlasio now
appeals. We assume the parties’ familiarity with the underlying facts, the procedural history of
the case, and the issues on appeal. For the reasons stated below, we affirm.
“In reviewing a district court’s decision in a bench trial, we review the district court’s
findings of fact for clear error and its conclusions of law de novo.” Bessemer Trust Co., N.A. v.
Branin, 618 F.3d 76, 85 (2d Cir. 2010) (quotation omitted). The district court’s interpretation of
contractual language is a matter of law that we review de novo, Collins v. Harrison-Bode, 303 F.3d
429, 432 (2d Cir. 2002), but its findings of fact about the intent of contracting parties are reviewed
for clear error, Nat’l Mkt. Share, Inc. v. Sterling Nat’l Bank, 392 F.3d 520, 528 (2d Cir. 2004). In
addition, we are “not allowed to second-guess the bench-trial court’s credibility assessments.”
Krist v. Kolombos Rest. Inc., 688 F.3d 89, 95 (2d Cir. 2012).
We are presented with two primary questions on appeal: (1) whether DeBlasio’s sale of
SGH to DC Capital (the “DC Capital Transaction”) triggered the Windfall Provision; and if so, (2)
what portion of that sale price is Charron entitled to receive under the Windfall Provision? We
consider each in turn. For ease of reference, we reproduce the full text of the Windfall Provision
here:
2.04 Windfall Protection. As additional consideration for [Charron’s] Shares,
[SGH] agrees to make an additional payment to [Charron], on the basis and subject
to the limitations provided in this Section 2.04. If, on or prior to the first
anniversary of the date hereof, John DeBlasio or any of his affiliates or any other
direct or indirect equity holder sells or agrees to sell shares of [SGH]’s capital stock
(or equity of an intervening Person or assets of [SGH] or any [SGH] subsidiary)
constituting 20% or more by voting power or economic value of [SGH]’s assets or
equity to a third party in one or a series of related transactions for a price that
reflects an enterprise value of [SGH] equal to or greater than $65,000,000 (a
“Windfall Sale”), within three Business Days following the closing of such
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Windfall Sale, [SGH] or such stockholder shall pay [Charron] an amount equal to
20% of the proceeds received from the Windfall Sale, such payment to be made to
[Charron] pro rata in accordance with the percentages set forth on Schedule I.
J.A. at 2727-28. Because the parties both interpret this contract under New York law, we too
apply New York law in our analysis. See Krumme v. WestPoint Stevens Inc., 238 F.3d 133, 138
(2d Cir. 2000) (“The parties’ briefs assume that New York law controls, and such implied
consent . . . is sufficient to establish choice of law.” (quotation omitted)).
A. Whether the Windfall Provision Was Triggered
At the outset, we note the parties both acknowledge there is no standard definition of
“enterprise value.” Both parties’ experts define the term generally as the overall value of the
entire business—in other words, the value of its anticipated future cash flows.
DeBlasio first argues that the Windfall Provision was never triggered because the DC
Capital Transaction, as valued by DeBlasio and DC Capital, reflected a total price of SGH of only
$64.5 million. He contends the phrase “reflects an enterprise value” in the Windfall Provision
would be relevant only if DeBlasio sold less than 100% of SGH. For example, if he sold only
50% of SGH’s equity for $35 million, then that transaction would “reflect” an implied enterprise
value of $70 million. But because he sold the entire company, DeBlasio argues, the $64.5 million
price tag he and DC Capital assigned to this deal necessarily “reflect[s] the total ‘enterprise value’
of [SGH].”
In interpreting a contract,
[o]ur function is to apply the meaning intended by the parties, as derived from the
language of the contract in question. Lopez v. Fernandito's Antique, 305 A.D.2d
218, 219, 760 N.Y.S.2d 140 (2003). A “written agreement that is complete, clear
and unambiguous on its face must be enforced according to the plain meaning of its
terms.” Greenfield v. Philles Records, 98 N.Y.2d 562, 569, 750 N.Y.S.2d 565,
780 N.E.2d 166 (2002). In searching for the intent of the parties, our goal must be
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to accord the words of the contract their “fair and reasonable meaning.” Heller v.
Pope, 250 N.Y. 132, 135, 164 N.E. 881 (1928). In other words, “the aim is a
practical interpretation of the expressions of the parties to the end that there be a
‘realization of [their] reasonable expectations.’” Brown Bros. Elec. Contrs. v.
Beam Constr. Corp., 41 N.Y.2d 397, 400, 393 N.Y.S.2d 350, 361 N.E.2d 999
(1977) (quoting 1 Corbin, Contracts, § 1).
Duane Reade, Inc. v. Cardtronics. LP, 863 N.Y.S.2d 14, 16 (1st Dep’t 2008).
DeBlasio argues that because courts may not rewrite the terms of a contract when its terms
are clear and unambiguous, see, e.g., Cruden v. Bank of N.Y., 957 F.2d 961, 976 (2d Cir. 1992), the
district court cannot rewrite the terms of his contract with DC Capital. This argument
misleadingly focuses on the wrong agreement. DC Capital is not a party to this case and Charron
was not a party to the DC Capital Transaction. We are tasked with interpreting the contract
between DeBlasio, or SGH, and Charron—the contract that includes the Windfall Provision. As
to that contract DeBlasio neither provides a reasonable explanation why, nor presents any extrinsic
evidence showing that, he and Charron intended the Windfall Provision to function so that
DeBlasio’s unilateral (with respect to Charron) and potentially arbitrary valuation of SGH’s equity
in a subsequent sale would control Charron’s potential proceeds from that sale. See Duane Reade,
863 N.Y.S.2d at 16 (“[O]ur goal must be to accord the words of the contract their fair and
reasonable meaning.” (quotation omitted)).
The district court pointed out the absurdity of DeBlasio’s interpretation. We agree. This
interpretation might make sense in a pure cash-for-equity deal, but where, as here, the sellers are
paid partly in cash and partly in rollover equity shares in the purchasing corporation, the total face
value or “price” of the deal as stated in the deal documents need not and may very well not reflect
the true value of those equity shares or the total value of SGH. The $64.5 million face value of the
DC Capital Transaction may well be an arbitrary label. For example, DeBlasio and DC Capital
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could have agreed SGH was worth $74.5 million and DeBlasio’s 38% equity share was worth
$13.8 million, but agreed to list the equity share as being worth $3.8 million and the total sale price
as $64.5 million. As the district court explained, “[a]fter agreeing to pay $60.7 million in cash
and 38% of the acquiring entity, any value ‘assigned’ to the equity stake would not affect the
economics of the deal. While the deal as a whole may be the product of an arm’s length
transaction, it does not follow that the rollover equity is actually worth the $3.8 million attributed
to it.” SPA at 10.
To be sure, DeBlasio’s interpretation is reasonable insofar as he argues that he and Charron
used the word “reflect” to establish a fair and proportional total value of SGH in a situation where
DeBlasio sells more than 20% but less than 100% of SGH. Indeed, this captures the ordinary
meaning of “reflect,” which is to “[e]mbody or represent (something) in a faithful or appropriate
way,” e.g., “stocks are priced at a level that reflects a company’s prospects.” Reflect, Oxford
Dictionaries, http://www.oxforddictionaries.com/us/definition/american_english/reflect (last
visited Feb. 29, 2016). DeBlasio inexplicably contends, however, that when 100% of SGH’s
shares are sold, the word “reflects” takes on an entirely different meaning. In that case, he
implies, “reflects” actually means “states.” Thus, whatever dollar amount the DC Capital
Transaction sale documents state SGH is worth automatically becomes the total enterprise value of
SGH for purposes of the Windfall Provision. DeBlasio offers no reasonable explanation why
“reflect” would mean one thing when less than 100% of shares are sold but another thing when
100% of shares are sold. Absent evidence to the contrary, we assume that DeBlasio and Charron
intended “reflect” to take on its ordinary meaning in all situations arising under the Windfall
Provision. The plain meaning of the phrase “a price that reflects an enterprise value of [SGH] of
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[at least $65 million]” is something along the lines of: a dollar amount that faithfully or
appropriately represents an enterprise value of SGH of at least $65 million. The district court
implicitly adopted such a definition and thus did not err in declining to accept blindly the $64.5
million price tag on the DC Capital Transaction as the true enterprise value of SGH. Moreover,
the record is replete with evidence that the DC Capital Transaction was not what it seemed and that
no one truly valued SGH at $64.5 million. The enterprise value reflected in the DC Capital
Transaction was a factual issue to be determined by the judge as factfinder.
Having determined that the enterprise value reflected in the DC Capital Transaction was an
issue of fact, this case becomes quite simple. Charron presented an expert to assess the value of
the rollover equity interest that DeBlasio received in the DC Capital Transaction, and appellants
did not. Using conservative cash-flow projections, Charron’s expert opined that DeBlasio’s
rollover equity interest was worth $20,133,126. The district court found credible most of
Charron’s expert’s testimony and ultimately found that the value of DeBlasio’s rollover equity
interest was $18,286,578. It did not clearly err in doing so.
The district court also included in its valuation of SGH two loans that Charron alleged
DeBlasio stripped out of SGH shortly before the closing of the DC Capital Transaction. Charron
claimed these assets should be considered part of DeBlasio’s compensation and the district court
agreed. This was a factual determination, which we review for clear error, because it went toward
determining the enterprise value of SGH for purposes of the Windfall Provision. The parties’
experts agreed that whether these loans are properly included in the enterprise value of SGH turns
on whether they were operating assets. Although there was some evidence that these loans were
not essential to SGH’s business, the district court relied upon the fact that in connection with the
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DC Capital Transaction SGH and its subsidiaries listed these loans among their material contracts
in the ordinary course of business. It also found credible an email sent by a DC Capital executive
to DeBlasio expressing concern that DeBlasio planned to transfer one of these two loans to himself
personally even though it was a “working capital investment borne 100% by Sallyport.” SPA at
25. We cannot disturb the district court’s credibility determinations, and “[w]here there are two
permissible views of the evidence, the factfinder’s choice between them cannot be clearly
erroneous.” Anderson v. Bessemer City, 470 U.S. 564, 574 (1985).
As to the value of those two loans, Charron’s expert opined that they were worth $2.75
million together, and appellants’ expert did not dispute that estimate. The district court thus
included that amount in its calculation of the enterprise value reflected in the DC Capital
Transaction. Adding that figure to the $18,286,578 value of DeBlasio’s rollover equity interest
and the $60.7 million in cash, the district court found SGH’s enterprise value as reflected in the DC
Capital Transaction to be $81,736,578. We see no clear error in these findings.
B. What Portion of the Sale Price Is Charron Entitled to Receive?
In the event of a Windfall Sale, i.e., if the Windfall Provision has been triggered, DeBlasio
must pay Charron “an amount equal to 20% of the proceeds received from the Windfall Sale.”
J.A. at 2728.
Charron contends this entitles him to 20% of all proceeds received, while DeBlasio argues
that he must pay 20% only of the proceeds above the $65 million threshold. DeBlasio relies on a
Black’s Law Dictionary definition of “windfall,” but ignores the fact that the Windfall Provision
expressly defines a Windfall Sale as a “s[ale of] shares of [SGH]’s capital stock . . . for a price that
reflects an enterprise value of [SGH] equal to or greater than $65,000,000,” J.A. at 2727. The
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plain language of the Windfall Provision obligates DeBlasio to pay 20% of “the proceeds received
from the Windfall Sale,” J.A. at 2728 (emphasis added), not some of the proceeds or proceeds
above a certain price. The inclusion of the phrase “equal to” in the triggering provision would
make no sense if DeBlasio’s interpretation was adopted. The district court properly rejected
DeBlasio’s interpretation and gave effect to the plain meaning of the provision.
Finally, DeBlasio’s argument that the contract should be reformed to reflect a windfall
provision that applies only incrementally above a certain threshold price has no merit. Although
DeBlasio identified evidence showing that he and Charron initially considered his approach to the
Windfall Provision during negotiations, J.A. at 2846-49, there is no evidence that the parties
mutually intended to adopt that approach. See Healy v. Rich Products Corp., 981 F.2d 68, 73 (2d
Cir. 1992) (holding that party seeking contract reformation must show by clear and convincing
evidence that “both parties to a bilateral transaction share the same erroneous belief and their acts
do not in fact accomplish their mutual intent” (ellipsis and quotation omitted)).
We have considered all of appellants’ remaining arguments and find them to be without
merit. The judgment of the district court is AFFIRMED.
FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk
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