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ANNECCA INC. v. LEXENT INC.

March 5, 2004.

ANNECCA INC., et al., Plaintiffs, V. LEXENT, INC., Defendant


The opinion of the court was delivered by: MILTON SHADUR, Senior District Judge

MEMORANDUM OPINION AND ORDER

Annecca, Inc. and its co-plaintiffs*fn1 (collectively "Annecca," treated after this sentence as a singular noun for convenience) have sued Lexent, Inc. ("Lexent"), asserting that Lexent breached a 29-page single-spaced printed Stock Purchase Agreement ("Agreement"), which called for Lexent's acquisition of the ownership interests in Annecca, Inc. and its affiliated companies, when Lexent terminated the Agreement and refused to fulfill the remainder of its obligations. Lexent has since moved for summary judgment under Fed.R.Civ.P. ("Rule") 56 on the premise that it was entitled to terminate the Agreement and to cease performance pursuant to its terms because Annecca had not satisfied several of the conditions precedent specified there,

Analysis shows that Annecca has not raised a genuine issue of material fact as to whether it had already fulfilled all of the conditions precedent in dispute, or as to whether it could reasonably have done so if Lexent had provided it with a cure opportunity under the Agreement. Accordingly Lexent's motion is granted, and this action is dismissed.

  Rule 56 Standards

  Every Rule 56 movant bears the burden of establishing the absence of any genuine issue of material fact (Celotex Corp. v. Catrett, (477 U.S. 317, 322-23 (1986)).*fn2 For that purpose courts consider the evidentiary record in the light most favorable to nonmovants and draw all reasonable inferences in their favor (Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002)). But to avoid summary judgment a nonmovant "must produce more than a scintilla of evidence to support his position" that a genuine issue of material fact exists (Pugh v. City of Attica, 259 F.3d 619, 625 (7th Cir. 2001)) and "must set forth specific facts that demonstrate a genuine issue of triable fact" (id.). Ultimately summary judgment is appropriate only if a reasonable jury could not return a verdict for the nonmovant (Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248 (1986)). What follows is a summary of the facts — viewed of course in the light most favorable to nonmovant Annecca,
Factual Background
  Annecca, Inc. and its affiliated companies are in the business of outsourcing local telecommunications services (L. St. ¶ 2). Lexent is a corporation that provides outsourced local telecommunications network services (L. St. ¶ 1). Federal jurisdiction is based on the requisite total diversity of citizenship between all plaintiffs on the one hand and Lexent on the other.

  On February 14, 2001 Lexent entered into the Agreement with all of the owners of the stock of Annecca, Inc. and its related companies, pursuant to which Lexent was to acquire all of the ownership interests in those entities (again for convenience collectivized here as "Annecca")(L. St. ¶ 8; Agreement Art. II).*fn3 Annecca and Lexent planned the Closing (a defined term) of the deal on April 1, 2001, although that date could have been delayed based on several delineated contingencies (Agreement § 1.2),

  Agreement Arts. VII and VIII expressly stated that each side's performance at Closing was subject to the satisfaction of several conditions precedent by the other side* Many of the conditions precedent created identical responsibilities for both parties. Thus Agreement §§ 7.1 and 8.1 were captioned "Truth of Representations and Warranties" and read:

 
The representations and warranties of [Sellers in Agreement § 7.1, Buyer in Agreement § 8.1] contained in this Agreement, and all representations and warranties set forth in any Exhibit or Schedule attached hereto, shall be true, complete and correct as of the Closing Date except as otherwise set forth herein, without the necessity of any amendment or modification . . .
And Agreement §§ 7.2 and 8.2 were captioned "Performance" and set out another condition precedent applicable to both parties:
Each of the agreements, obligations, conditions and covenants to be performed or complied with by [Sellers or any of them in Agreement § 7.2, Buyer in Agreement § 8.2] on or before the Closing Date pursuant to the terms hereof shall have been duly performed or complied with on or before the Closing Date. . . . Other conditions precedent were party-specific.
Importantly, Agreement § 7.11 required Annecca to have a Net Worth (as defined by the Agreement) of at least $9 million as of the Closing Date. And to return to a now-critical two-way provision, Agreement § 9.1 provided that either party could terminate the Agreement before the Closing Date if the other party had not met its particular conditions precedent:
Notwithstanding any other provision contained herein to the contrary, this Agreement may terminate at any time prior to the Closing Date . . . (b) by Buyer, if any of the conditions provided in Article VII hereof have not been met by the Closing Date; or (c) by Sellers, if any of the conditions set forth in Article VIII shall not have been met by the Closing Date.
  As part of its acquisition process, Lexent enlisted the services of two separate teams from Pricewaterhousecoopers LLP ("Pricewaterhouse") to assist with due diligence and to audit Annecca (L. St. ¶¶ 22-23). Pricewaterhouse carried out its assignments and reported to Lexent before the scheduled Closing Date.
  On March 29, 2001 Lexent notified Annecca by letter (L. Ex. J, confirming an earlier telephonic advice) that it was exercising its Agreement § 9.1(b) termination option (A. St. ¶ (49; L. St. ¶ 55). Lexent asserted two main reasons for its choice, though it said that they did not represent "a complete list of Lexent's reasons for terminating":
1. Annecca's net worth was "very substantially and materially less than the $9 million threshold at the end of 2000," as required by the Agreement.
2. Annecca's records and financial statements were so incomplete, and in some instances inaccurate, that they could not provide Lexent with a sufficient understanding of Annecca's critical financial condition.
  Michael Annecca spoke with a Lexent representative that same day, stating that Annecca still wished to proceed with the acquisition and inquiring about what he could do to change Lexent's decision (A. St. ¶ 50). On April 4, 2001 Annecca also sent a letter to Lexent (L. Ex. K) stating that Annecca was sincerely disappointed with Lexent's decision to terminate the Agreement and expressing concern that Lexent had made that decision "based on flawed information" (A. St, ¶ 51). Lexent did not respond to the April 4 letter, its representative having previously told Michael Annecca that its termination decision was final (A, St. ¶¶ 50, 52).

  Application of Rule 56 Standards

  Agreement § 11.9 states (and neither party disputes) that New York law controls the present dispute (L. St. ¶ 18). And under New York law a party bringing a breach of contract claim must prove the existence of a contract, its own performance, breach by the other party and damages (First Inv. Corp. v. Liberty Mut. Ins. Co., 152 F.3d 162, 168 (2d Cir. 1998)).

  As already stated, Agreement Art. VII and VIII explicitly designate several of each party's obligations as "conditions precedent" to the other party's performance. In New York (as in all other jurisdictions) an express condition precedent is an act or event agreed upon by the parties that, unless excused, must occur before a duty to perform a subsequent promise arises (Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., 660 N.E.2d 415, 418 (N.Y. 1995)). Express conditions precedent must be literally performed — substantial compliance is not enough to compel the other party's performance of its resultant obligation (id. at 418-19). And although such a result may sometimes seem harsh, courts should be wary of reorganizing or excusing express conditions precedent and thereby upsetting the will of the parties, because the operation of conditions precedent is generally integral to a contract (id. at 418).

  Agreement § 9.1(b) also specifically granted Lexent the right to terminate the Agreement if Annecca failed to fulfill any one. of the conditions precedent listed there (Marcantonio v. Rousso, 684 N.Y.S.2d 567, 568 (App. Div. 1999). Hence Lexent cannot be liable to Annecca for assertedly breaching the Agreement if Annecca cannot raise a genuine issue of material fact as to its having performed all of the conditions precedent to Lexent's obligations (Rachmani Corp. v. 9 E. 96th St. Apartment Corp., 629 N.Y.S.2d 262, 269 (App. Div. 1995); Morse v. Ted Cadillac, Inc., 537 N.Y.S.2d 239, 240 (App. Div. 1989)). And this opinion's ensuing account of the relevant facts reveals that even when the record is viewed in Annecca's favor, Annecca unquestionably failed to meet more than one of the conditions precedent to Lexent's obligations,
Annecca's Failure To Satisfy Conditions Precedent
  First and of vital importance, Agreement § 7.11 required Annecca to have a Net Worth of "at least Nine Million Dollars" as of the Closing Date. "Net Worth" was defined as "the stockholders' equity or members' capital . . . as shown on the Closing Balance Sheets" (Agreement § 1.11).

  In its March 9 due diligence report Pricewaterhouse preliminarily estimated Annecca's Net Worth at about $8.75 million (L. St. ¶ 29; L. Ex. E at L00012). Pricewaterhouse's more precise March 28 work product — its audit report-placed Annecca's Net Worth at December 31, 2000 at only a bit over $7.2 million (L. St. ¶ (32; L. Ex. G at L09535). Even Annecca's own accountants ultimately estimated its Net Worth for ...


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