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Rauser v. LTV Electrosystems Inc.

February 9, 1971

RICHARD J. RAUSER, PLAINTIFF-APPELLEE,
v.
LTV ELECTROSYSTEMS, INC., DEFENDANT-APPELLANT



Kiley, Fairchild and Pell, Circuit Judges.

Author: Pell

PELL, Circuit Judge.

This was an action brought by Richard J. Rauser against LTV Electrosystems, Inc. alleging that LTV's predecessor, Memcor, Inc., had breached a stock option granted to Rauser. Memcor merged with LTV on April 19, 1967 subsequent to the alleged breach. LTV concedes its responsibility for Memcor's liabilities, if any, in connection with the action. The district court granted Rauser's motion for summary judgment on the issue of liability. Thereafter, following an evidentiary hearing, the court awarded Rauser damages based on the difference between the option price of $6 per share and the highest intermediate fair market value of Memcor's stock during what was determined by the court to be a reasonable time after the breach.*fn1 Rauser was also awarded interest from the damage date to the date of the judgment.

Rauser was a vice president of Memcor until September 1, 1966. On that date he resigned as vice president and assumed a consultant position with the title "Director of Labor Relations" and a salary of $160 per day, with $160 per week guaranteed. This relationship was terminated March 4, 1967.

On November 8, 1965, while still a vice president, Rauser entered into a Stock Option Agreement with Memcor. Under it, he had an option to purchase a specified number of the company's shares at a price of $6 per share within two years. On March 30, 1967, following the termination of all connection with Memcor, Rauser sought to exercise his rights under the option agreement by tendering the option price. Memcor refused his tender and returned his check on May 2, 1967.

Defendant contends that Rauser was not eligible to exercise the option on several grounds.

It is undisputed that Rauser was eligible for the option when it was granted. It is further undisputed that his eligibility to be granted options ceased when he resigned as a vice president approximately 10 months after the original options were granted.

LTV contends that Rauser's initial eligibility had to be maintained for one full year after November 8, 1965, the date on which his option was granted, before he would become eligible to exercise the option granted to him. It relies principally upon Paragraph 6 of the Agreement and Paragraph 7 of the Plan.*fn2

We can find nothing in these paragraphs which expressly or impliedly supports LTV's position. It argues that "so employed" as used in Paragraph 6 of the Agreement should be interpreted to mean "employed within the terms of the original eligibility." However, "so employed" clearly refers back to the phrase "employed by the company." The latter phrase is in no way limited to certain types of employment. We can see no justification for reading into these paragraphs dealing solely with the exercise of options the more restrictive limitations applicable to the grant of options.*fn3

It is clear that Rauser did remain "employed by the company" for more than a year after the option was granted. After his resignation as a vice president he continued in the employ of Memcor as "Director of Labor Relations," working every Tuesday for a weekly salary of $160. The company continued to deduct his federal taxes from this salary and he continued to participate in the Group Health Insurance Plan. We think it clear that Rauser's continuous and regular service, for a salary, subject to the direction of Memcor renders him an "employee" rather than an independent contractor as LTV argues. See generally 56 C.J.S. Master and Servant ยงยง 1-3.

LTV further argues that Rauser was not eligible to exercise the option under an interpretation of the Plan contained in a Resolution of the Stock Option Incentive Committee. Rauser contends that this interpretation is neither valid nor applicable to him. Assuming that it is, it changes nothing. The resolution simply restates the requirements of Paragraph 6 by substituting the words "terminated, resigns, or in any way leaves the employment of the Company" for the words "cease to be employed by the Company for any reason. * * *" Under either phrase, the question remains whether Rauser ceased to be employed by Memcor when he resigned as a vice president and became Director of Labor Relations. In our opinion he did not.

The material facts relating to Rauser's relation with Memcor were not in dispute before the trial court. The only dispute was whether the uncontested facts showed Rauser to be in the employ of the company within the meaning of the Agreement and Plan until 30 days prior to his exercise of the option. The interpretation of the contracts was a matter of law. The district court correctly held that Rauser was employed by the company within the meaning of the contracts. Thus, the grant of summary judgment on the liability issue was correct.

The district court awarded damages based on the difference between the option price and the highest intermediate market price between the date of breach and a reasonable time thereafter. LTV argues, citing Coffin v. State, 144 Ind. 578, 43 N.E. 654 (1896), and Roder v. Niles, 61 Ind.App. 4, 111 N.E. 340 (1916), that under Indiana law, which concededly controls, damages for breach of contract to deliver stock are the difference between the option price and the market value on the date of breach. We find these cases inapposite and the rule announced by the district court correct.

In Coffin v. State, supra, the plaintiff sued for the failure of the State of Indiana to deliver bonds. The plaintiff contracted to resell the bonds to a third party prior to the breach but that fact was unknown to the State. The Court applied the rule of Hadley v. Baxendale, 9 Exch. 341, and held that the plaintiff could not recover special damages for loss of its resale profits where the State did not know of the resale. In so doing, it treated the bonds as goods and found the measure of damages for non-delivery to be the difference between the market value of the goods and the contract price on the date of delivery. There was not a ...


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