Deutsche Bank Sec. Inc. v Lexington Drake L.P.

[*1] Deutsche Bank Sec. Inc. v Lexington Drake L.P. 2010 NY Slip Op 52097(U) [29 Misc 3d 1230(A)] Decided on November 22, 2010 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 22, 2010
Supreme Court, New York County

Deutsche Bank Securities Inc. and SPCP GROUP, LLC, Plaintiffs,

against

Lexington Drake L.P., LEXINGTON ANTIOCH LLC, LEXINGTON REALTY TRUST, and TRIPLE NET INVESTMENT COMPANY LLC, Defendants.



603051/2008E



For Plaintiffs

Milbank Tweed Hadley & McCloy LLP

One Chase Manhattan Plaza

New York, New York 10005-1413

Sander Bak, Esq. and Tawfiq S. Rangwala, Esq.

For Defendants

Klestadt & Winters LLP

292 Madison Avenue, 17th Floor

New York, New York 10017-6314

John E. Jureller, Jr., Esq.

Bernard J. Fried, J.

Motion Sequence Numbers 001 and 002 are consolidated for disposition.

This action involves, primarily, a breach of contract claim arising in connection with the sale and purchase of bankruptcy claims against Dana Corporation (the Debtor), an automobile parts manufacturer that filed for bankruptcy relief in March 2006. Plaintiffs in this case are Deutsche Bank Securities Inc. (DBSI) and SPCP Group, LLC (SPCP)(collectively, Plaintiffs), purchasers of certain unsecured debts owed by the Debtor to Lexington Drake L.P. (Drake) and Lexington Antioch LLC (Antioch), landlords of the Debtor as to certain non-residential real estate leases that the Debtor rejected or terminated in its bankruptcy case. Lexington Realty Trust (Realty) is the corporate parent of Drake, Antioch and Triple Net Investment Company LLC (Triple Net); the foregoing entities are referred to, collectively, as Defendants. [*2]

In their complaint, Plaintiffs allege that seller-Defendants breached the terms of two separate claim assignment agreements. Defendants move for summary judgment dismissing the complaint (motion sequence number 001). Concurrently, Plaintiffs move for summary judgment (motion sequence number 002) against Defendants, seeking an amount equal to the purchase price of the bankruptcy debt claims, multiplied by a "purchase rate," plus interest and attorneys fees. For the reasons stated, Defendant's motion for summary judgment is denied, and Plaintiffs' summary judgment motion is granted only as to the issue of Defendants' liability.

On March 3, 2006, the Debtor and certain of its affiliates filed for relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). Complaint, ¶ 12. Soon after the bankruptcy filing, the Debtor rejected the commercial real estate leases with Antioch and Drake, which prompted (1) Antioch to file a lease rejection claim in the amount of $7,727,456 (the Antioch Claim), and (2) Drake to file a lease rejection claim in the amount of $7,679,980 (the Drake Claim). Id., ¶¶ 13-14.

The Antioch Claim and the Drake Claim (together, Bankruptcy Claims) were purchased by DBSI, at a discount, in June 2006, pursuant to two claim assignment agreements (the Contracts) containing the same terms and conditions. While the Contract for the Antioch Claim (purchased at the discount rate of 73.5% of the claim amount) was co-signed by Triple Net, the Contract for the Drake Claim (purchased at the discount rate of 70.0% of the claim amount) was co-signed by Realty. Thereafter, DBSI assigned its rights and obligations under the Contract for the Antioch Claim to SPCP. DBSI also assigned the Contract for the Drake Claim to Dune Capital LLC, but later reacquired such claim in order to pursue this action. With respect to the Drake Claim, DBSI asserts its claims and damages against Drake and Realty, and with respect to the Antioch Claim, SPCP asserts its claims and damages against Antioch and Triple Net. Complaint, ¶¶ 15-18.

The Contracts contain multiple provisions that afford comprehensive protections to Plaintiffs: (1) representations and warranties of Defendants that the Bankruptcy Claims are valid and enforceable, and are not subject to defense, setoff, reduction, impairment, disallowance or subordination, in whole or in part (Contract, ¶ 4); (2) if any of the Bankruptcy Claims is offset, disallowed, subordinated or otherwise impaired (collectively, an Impairment), in whole or in part, for any reason whatsoever, Defendants will have to repay Plaintiffs an amount equal to the Impairment, multiplied by the applicable purchase rate, plus interest at 10% per annum (Contract, ¶ 7); and (3) Defendants will indemnify Plaintiffs for all losses or damages that result from Defendants' breach of any representation or warranty, or Impairment of the Bankruptcy Claims, including any action or objection that relates to any attempt to avoid, disallow, reduce, subordinate or otherwise impair the Bankruptcy Claims (Contract, ¶ 10). Complaint, ¶¶ 20-24.

In October 2007, the Debtor filed an objection to each of the Bankruptcy Claims, attempting to reduce the Drake Claim to $3,323,112 and the Antioch Claim to $3,713,112. Complaint, ¶ 26. In November 2007, through counsel hired by Defendants, Plaintiffs opposed the objections, and requested that the Bankruptcy Court deny such objections and allow the Bankruptcy Claims in their entirety.[FN1] Id., ¶ 27. Under the Chapter 11 reorganization plan proposed by the Debtor, creditors with [*3]general unsecured claims (such as the Bankruptcy Claims) would receive, in addition to other distributions, stock in the reorganized company (the Rights Offering) or a pro rata share of a large cash pool (the Settlement Pool); the cash payments to creditors were estimated to be in the range of 7 to 8 cents per dollar of unsecured claim. However, only creditors with allowed (undisputed) claims as of the plan confirmation date (initially set for December 10, 2007) were eligible to receive these additional distributions.[FN2] Hence, a prompt resolution of the Debtor's objections was required, if a creditor holding a disputed claim (such as Plaintiffs) wished to receive these distributions. Id., ¶¶ 27-29.

On November 27, 2007, the Bankruptcy Court held a hearing on the Debtor's objections, but declined to rule on such objections, and adjourned the claims objection hearing to a date that was after the confirmation hearing for the Debtor's Chapter 11 plan. In light of this scenario, "the parties were faced with the choice of attempting to resolve [prior to the confirmation date] the Debtor's objection through negotiation or forfeiting a significant part of the recoveries to which the [Bankruptcy] Claims were entitled." Id., ¶ 29. In early December 2007, the Debtor offered to resolve the objections if the Bankruptcy Claims were reduced by a total of approximately $5.4 million, which represented a proposed reduction of the Bankruptcy Claims by approximately 35%. By e-mail dated December 6, 2007, Defendants' counsel told Plaintiffs that "[w]e still believe we are correct on the merits [of the Bankruptcy Claims] and should ultimately prevail, but we still have to deal with the [bankruptcy judge], who is staunchly anti-landlord, and the litigation costs and uncertainties of the litigation." Counsel also stated that "[i]f the claims are not settled now, and ultimately [are] allowed in the full amount, the cash kicker would have to be forfeited." In view of counsel's statements, Plaintiffs exercised their rights under the Contracts and authorized counsel to negotiate a settlement of the Bankruptcy Claims with the Debtor. Id., ¶ 31.

On December 19, 2007, an agreement was reached with the Debtor that settled the Drake Claim at $6.5 million, which resulted in a reduction of such claim by $1,179,980. Similarly, on December 20, 2007, an agreement was reached that settled the Antioch Claim at $7.2 million, which resulted in a reduction of such claim by $527,456. The settlements became final and binding upon the parties, because no oppositions were filed with the Bankruptcy Court opposing the settlement terms. Id., ¶¶ 32-33.

Because the settlements resulted in a reduction of the Bankruptcy Claims, which, according to Plaintiffs, was an Impairment of such Claims, Plaintiffs assert that they are entitled to be compensated pursuant to the Contracts. After Defendants refused the demand for compensation, Plaintiffs commenced this action. Notably, Plaintiffs and Defendants move simultaneously for summary judgment in their respective favor, as both agree that this case centers on contractual interpretation, which may be resolved as a matter of law, and that further fact discovery is unnecessary.

In setting forth the standards for granting or denying a motion for summary judgment, pursuant to CPLR 3212, the Court of Appeals noted, in Alvarez v Prospect Hospital (68 NY2d 320, 324 [1986]), the following:

As we have stated frequently, the proponent of a summary judgment motion must make a [*4]prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact. Failure to make such prima facie showing requires a denial of the motion, regardless of the sufficiency of the opposing papers. Once this showing has been made, however, the burden shifts to the party opposing the motion for summary judgment to produce evidentiary proof in admissible form sufficient to establish the existence of material issues of fact which require a trial of the action [internal citations omitted].

The courts have uniformly scrutinized motions for summary judgment, as well as the facts and circumstances of each case, to determine whether relief should be granted. Andre v Pomeroy, 35 NY2d 361, 364 (1974)(because entry of summary judgment "deprives the litigant of his day in court, it is considered a drastic remedy which should only be employed when there is no doubt as to the absence of triable issues"); Martin v Briggs, 235 AD2d 192, 196 (1st Dept 1997)(in considering a motion for summary judgment, "evidence should be analyzed in the light most favorable to the party opposing the motion"). However, conclusory allegations unsupported by competent evidence are insufficient to defeat a summary judgment motion. Alvarez, 68 NY2d at 324-25. Also, summary judgment is granted in favor of the movant if there are no material and triable issues of fact. Francis v Basic Metal, Inc., 144 AD2d 634 (2d Dept 1988). Further, documentary evidence must establish conclusively a defense to a claim as a matter of law, before the claim can be dismissed pursuant to CPLR 3211 (a) (1). Tsimerman v Janoff, 40 AD3d 242 (1st Dept 2007)(denying motion to dismiss based on documentary evidence because affidavits and documents did not conclusively establish a defense as a matter of law).

The complaint alleges that Defendants breached the Contracts by (1) failing to repay Plaintiffs pursuant to paragraph 7 of the Contracts, which requires Defendants' payment of an amount of the Bankruptcy Claims that was subject to Impairment, multiplied by an applicable purchase rate, plus interest; and (2) failing to comply with the representations and warranties in paragraph 4 of the Contracts, which triggers Defendants' obligation to indemnify Plaintiffs for their losses and damages (including legal fees), pursuant to paragraph 10 of the Contracts. Complaint, ¶¶ 35-67.

To prevail on a breach of contract claim, a plaintiff must allege and establish these elements: existence of a valid and binding contract, plaintiff's performance of the contract, defendant's material breach of the contract, and damages. See e.g. Noise in the Attic Productions, Inc. v London Records, 10 AD3d 303 (1st Dept 2004); Furia v Furia, 116 AD2d 694 (2d Dept 1986); J & L American Enter., Ltd. v DSA Direct, LLC, 10 Misc 3d 1076 (A), 2006 NY Slip Op 50101 (U)(Sup Ct, NY County 2006).

Here, the parties do not dispute that the Contracts are valid and binding, and that Plaintiffs had performed their obligations by paying Defendants the contractual purchase price for the Bankruptcy Claims. The parties also do not argue that the terms of the Contracts are ambiguous; yet, they each assert a different interpretation of those terms.

In their motion, Plaintiffs assert that Defendants breached the unambiguous terms of the Contracts by refusing to pay the impairment amounts thereunder. Plaintiffs' Opening Brief, at 16-18. Paragraph 7 of the Contracts provides, in relevant part:

In the event all or any part of the {Bankruptcy] Claim is offset, disallowed, subordinated, or otherwise impaired, in whole or in part, in the [Bankruptcy] Case for any reason whatsoever, [*5]including, without limitation, pursuant to an order of the Bankruptcy Court ... (collectively, an "Impairment"), Seller agrees to immediately repay, on demand of Buyer ... an amount equal to the amount of the [Bankruptcy] Claim subject to the Impairment multiplied by the Purchase Rate ... plus interest thereon at 10% per annum from the date hereof to the date of repayment ....

Contracts, ¶ 7 (emphasis added).

Opposing Plaintiffs' summary judgment motion, Defendants argue that Plaintiffs misinterpreted the language in paragraph 7 because (1) the Bankruptcy Claims were not offset, disallowed or subordinated, in whole or in part, by a Bankruptcy Court order; (2) Plaintiffs could not unilaterally agree with the Debtor to settle the claims objection without a bona-fide dispute as to the validity of the Bankruptcy Claims, and their voluntary reduction of the claim amounts cannot be deemed as a "disallowance"; (3) Defendants cannot be required to compensate Plaintiffs for the voluntary reduction, which is not an Impairment of the Bankruptcy Claims, as it does not "align with the intentions and protections of impaired creditors under the Bankruptcy Code"; and (4) without triggering the condition in the Contracts that the Bankruptcy Claims must be "offset, disallowed, subordinated, or otherwise impaired," the relief requested by Plaintiffs cannot be granted. Defendants' Opposition Brief, at 8-10, 11.

As a threshold matter, although both parties assert that the terms of the Contracts are unambiguous, "[w]hether an agreement is ambiguous is a question of law for the courts ... Ambiguity is determined by looking within the four corners of the documents, not to outside sources." Riverside S. Planning Corp. v CRP/Extell Riverside, L.P., 13 NY3d 398, 404 (2009)(quotation marks and internal citations omitted). Upon examination of the language in paragraph 7, I agree with the parties that the terms therein are unambiguous. However, with respect to Defendants' argument that a court order is required to determine that the Bankruptcy Claims are invalid (i.e., to show such claims are "impaired"), there are no provision in the Contracts which requires a finding of the Bankruptcy Court that the Bankruptcy Claims are invalid, as a condition to Plaintiffs' right to seek recovery. In fact, paragraph 7 plainly states that if the Claims are disallowed or otherwise impaired "for whatever reason whatsoever," Defendants will repay Plaintiffs the impaired amounts. The quoted words are encompassing, as they may trigger repayment obligations under virtually all situations, including a reduction or disallowance of the claim amounts, in whole or in part, by settlement or otherwise. The courts have found such words unambiguous and enforceable. Innophos, Inc. v Rhodia, S.A., 38 AD3d 368, 369 (1st Dept 2007)(when the words "or other similar charges of any kind whatsoever" were used with the defined term "Tax or Taxes," such words were deemed "all-encompassing, not limiting, and, indeed, broad enough to cover the government assessment at issue"), affd 10 NY3d 25 (2008); Matter of Johnsen v ACP Distribution, Inc., 31 AD3d 172, 178 (1st Dept 2006)(when expansive language "in any manner whatsover" was chosen to define the scenarios that would trigger a contractual obligation, "the parties clearly intended to cover the broadest spectrum of events that would trigger" such obligation).

Pursuant to an order of the Bankruptcy Court establishing claims objection and settlement procedures, dated November 9, 2006 (the Settlement Order), the Debtor was authorized to enter into settlements with various creditors involving allowance or disallowance of disputed claims, and such [*6]settlements are deemed approved by the Bankruptcy Court "without further order," if no oppositions are filed opposing the settlements. Bak Affirmation, Exhibit 11. Hence, the fact that Plaintiffs' settlement of the Bankruptcy Claims was not independently approved by an order of the Bankruptcy Court is of no moment, as it is undisputed that approval of the settlement was obtained in compliance with the terms and conditions of the Settlement Order.

Defendants' argument that Plaintiffs could not unilaterally settle the claim objections, without engaging in a bona-fide dispute with the Debtor as to the validity of the Bankruptcy Claims, is without merit. Notably, the Contracts provide, in relevant part, that "Seller grants unto Buyer full authority to ... agree with the Debtor to allow the Claim in a lesser amount than the Proof of Claim Amount," and the authority granted is "discretionary in nature and exercisable at the sole option of Buyer." Contracts, ¶ 11. Thus, despite Defendants' assertion to the contrary, Plaintiffs are clearly entitled to enter into settlements with the Debtor, including settlements that resulted in a reduction of the claim amounts. Moreover, the Contracts do not require that the settlements can only be entered when there is a bona-fide dispute of the Bankruptcy Claims, and Defendants have not shown otherwise. Riverside S. Planning Corp., 13 NY3d at 404 ("Courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing")(internal quotation marks and citations omitted).

Defendants argue that even if Plaintiffs had the authority to settle the Bankruptcy Claims, they were "bound by an implied covenant of good faith and fair dealing," and a voluntary settlement "for a reason other than the validity of the amounts" vitiated Defendants' "bargained-for rights" under the Contracts and breached the implied covenant. Defendants' Opposition Brief, at 2. As noted above, if the Debtor's claim objections were not settled or resolved before the confirmation date of the Chapter 11 plan, creditors holding disputed claims (such as Plaintiffs) would have to forfeit the additional distributions (the Rights Offering and/or the Settlement Pool) under the plan. Thus, Plaintiffs had to choose between settling the Bankruptcy Claims at reduced amounts (which they had the right to do under the Contracts) or forfeiting the additional distributions. There is no evidence that choosing to settle the claim objections was in bad faith, and Defendants have not demonstrated otherwise. Also, requiring Plaintiffs to litigate the validity of the Bankruptcy Claims until ultimate resolution (which could be protracted and outcome uncertain), which would not occur until after confirmation of the Debtor's plan, would deprive them of the choice for receipt of the additional distributions. Such a requirement would be unfair to Plaintiffs, as it contravenes the axiom that "a contract which confers certain rights or benefits in one clause will not be construed in other provisions completely to undermine those rights or benefits." Ronnen v Ajax Electric Motor Corp., 88 NY2d 582, 590 (1996); Matter of Wallace v 600 Partners Co., 205 AD2d 202, 206 (1st Dept 1994)("Courts should not, under the guise of interpretation, rewrite part of an agreement which is clear and explicit simply because a party's expectation of the bargain does not materialize"), affd 86 NY2d 543 (1995).

Defendant's argument that Plaintiffs' voluntary settlement of the claim objections "does not align with the intentions and protections of impaired creditors under the Bankruptcy Code" is unpersuasive. The meaning of Impairment, as defined in the Contracts, should be viewed within the four corners of the Contracts, which govern the parties' rights and obligations. Importantly, although the Contracts related to claims filed in a bankruptcy case, the protections given to creditors under the Bankruptcy Code is neither relevant nor legally significant in the context of interpreting [*7]unambiguous terms of the Contracts. Here, the Contracts unambiguously provide that, if the Bankruptcy Claims are impaired "for any reason whatsoever," Defendants are required to repay Plaintiffs the impaired amounts.

Defendants also contend that the definition of "impairment" in Black's Law Dictionary supports their argument that there is no impairment of the Bankruptcy Claims. Black's Law Dictionary defines "impairment" to mean "the fact or state of being damaged, weakened, or diminished." Black's Law Dictionary (8th ed. 2004). It is undisputed that the Bankruptcy Claims were settled in reduced amounts, which means that they were "damaged, weakened or diminished" or "impaired." Yet, Defendants seek to extrapolate their argument to mean that "[i]mplicit in these definitions and the goal behind providing relief to those who have been impaired is the concept that, logically, the party holding the Claims would not voluntarily impair their own status." Defendants' Opposition Brief, at 9 (emphasis added). Accepting Defendants' argument contravenes the principle that "courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include." Vermont Teddy Bear Co. v 538 Madison Realty Co., 1 NY3d 470, 475 (2004) (internal quotation marks and citations omitted).

In light of the foregoing, Plaintiffs' motion for summary judgment, based on Defendants' failure to repay the impaired amounts pursuant to paragraph 7 of the Contracts, is granted. Consequently, Defendants' motion for summary judgment, seeking dismissal of the complaint based on the same ground, is denied.[FN3]

In addition to the repayment obligations under paragraph 7 of the Contracts, Plaintiffs assert that Defendants breached the representations and warranties contained in paragraph 4 of the Contracts, which triggered indemnity obligations under paragraph 10, requiring them to indemnify Plaintiffs for their losses.

Paragraph 4 of the Contracts contains representations and warranties of Defendants which state, in relevant part, that "the [Bankruptcy] Claim is valid, liquidated and undisputed and non-contingent" and "the Claim is not subject to any defense, claim or right of setoff, reduction, impairment ... disallowance ... in whole or in part ... that have been or may be asserted by or on behalf of the Debtor or any party to reduce the amount of the Claim or affect its validity, priority or enforceability." In turn, paragraph 10 provides, in relevant part, that Defendants agree to indemnify Plaintiffs from all losses and damages, "which result from [Defendants'] breach of any representation, warranty or covenant set forth herein, or any Impairment of the Claim,[FN4] including, but not limited to, any action ... objection or investigation relating to any attempt or threatened [*8]attempt to ... disallow, reduce ... or otherwise impair the Claim ... ." Contracts, ¶¶ 4 and 10 (emphasis added). Pursuant to the above language, Plaintiffs have been afforded very extensive and encompassing protections in respect of their claims purchase.[FN5]

In an attempt to minimize or vitiate the highly expansive protections given to Plaintiffs under the Contracts, Defendants seek to introduce extrinsic evidence, in the form of prior drafts of the Contracts and e-mail correspondence between the parties, even though they agree that the terms of the Contracts are unambiguous. Bonventre Affidavit in Opposition, ¶¶ 15-35; Exhibits A-K.[FN6] For example, Defendants argue that because certain language in the draft Contracts were deleted from the signed Contracts, such deletion reflected the parties' intent as to the definition of Impairment. The deleted language indicated that, if all or part of the Bankruptcy Claims were objected to or impaired by the commencement of any action, such an event would have been an Impairment of the Claims. Based on the deleted language, Defendants argue that the mere fact the Debtor objected to the Claims was not an Impairment, especially where Defendants defended the objections (at their own cost and expense) and steadfastly maintained that the Claims were fully valid, and Plaintiffs never disputed the Claims' validity in their e-mails. In such regard, Defendants contend that there was no evidence of a breach of the representation or warranty as to the validity of the Claims, and the only damage to Plaintiffs resulted from their unilateral decision to settle the claim objections at reduced amounts. Defendants' Opposition Brief, at 12-19.[FN7]

Where the terms of the contracts are unambiguous, resort to extrinsic evidence as an aid to contract interpretation is not warranted or necessary. RM Realty Holdings Corp. v Moore, 64 AD3d 434, 437 (1st Dept 2009)(extrinsic evidence is inadmissible to create an ambiguity in an unambiguous contract). Indeed, the courts have stated that "[t]he fundamental, neutral precept of contract interpretation is that agreements that are construed in accord with the parties intent, and that the best evidence of what parties to a written agreement intend is what they say in their writing." Innophos, 10 NY3d at 29, quoting Greenfield v Philles Records, 98 NY2d 562, 569 (2002). Moreover, "[e]xtrinsic evidence of the parties' intent may be considered only if the agreement is ambiguous, which is an issue of law for the courts to decide." Id. (citations and internal quotation marks omitted). Here, all parties (and the court) agree that the contractual terms are unambiguous. Furthermore, the Contracts provide, in paragraph 19, that "[t]his Agreement supersedes any previous contract or agreement between Buyer and Seller and constitutes the entire understanding between [*9]the parties." This merger or integration provision precludes and supersedes any prior understanding or agreement. In any event, even after taking into account the deleted language (as urged by Defendants), there remains ample and expansive language in the signed Contracts, including paragraphs 4 and 10, that provides far-reaching protections to Plaintiffs in the event of loss.

Therefore, Plaintiffs' motion for summary judgment, based on Defendants' breach of the representations and warranties under paragraph 4 and the indemnity provisions under paragraph 10 of the Contracts, is granted. Consequently, Defendants' motion for summary judgment, seeking dismissal of the complaint premised on alleged breaches upon the same grounds, is denied.

Based on Defendants' breaches of the Contracts, Plaintiffs assert that they are entitled to damages, as computed pursuant to the formula set forth in paragraphs 7 and 10 of the Contracts. Specifically, Plaintiffs assert that (1) as to the Drake Claim, they are entitled to recover $825,986, plus interest at 10% per annum from June 30, 2006; (2) as to the Antioch Claim, they are entitled to recover $387,680, plus interest at 10% per annum from June 30, 2006; and (3) they are entitled to attorneys' fees and expenses with respect to both Claims. Complaint, at 18.

However, Plaintiffs have not taken into account the additional distributions (i.e., distributions with respect to the Rights Offering and/or Settlement Pool) they received under the Debtor's plan in computing damages. The additional distributions must have been considered and weighed by Plaintiffs in connection with their decision to settle the Bankruptcy Claims at reduced amounts. Indeed, as specifically pointed out by both parties, in an e-mail from DBSI to Defendants, dated December 12, 2007, DBSI stated, in relevant part, as follows:

As a threshold matter, Dune and SPCP would like [Defendants] to confirm with Dana that if an agreement in principle is reached with Dana ... on December 17, 2007 to allow the Claims, that Dana will guarantee that the Claims will be (i) eligible for participation in the Series B preferred rights offering (subject only to Dune or SPCP meeting the eligibility requirement), or (ii) eligible to participate in the Settlement Pool for Allowed Ineligible Unsecured Claims (assuming that Dune or SPCP do not meet the eligibility requirements for participation in the Series B preferred rights offering). Assuming that Dana can give this assurance, Dana and SPCP hereby direct [Defendants] to accept Dana's latest offer to allow the [] Drake claim at $6,500,000 and the [] Antioch claim at $7,200,000 ... If Dana advises that the Claims are ineligible to participate in (i) or (ii), as applicable, please let me know and I will pass this along to Dune and SPCP and ask them how they wish to proceed ....

Bak Affirmation, Exhibit 12; Bonventre Affidavit, Exhibit J.

From the foregoing, there appears to be issue regarding the eligibility of Plaintiffs' participation in the Rights Offering.

Moreover, in an e-mail from Dick Rouse (an employee of Defendants) to Bonventre, dated December 12, 2007, he wrote:

Beham called this morning and said they're prepared to recommend a claim of $6.5 million on [Drake] and $7.2 million on Antioch, or a total of $1.7 million less than we applied for [in our filed proofs of claim.] At 72 cts./$ that works out to $1.2 million to us, which is almost exactly equal to the bonus the purchasers get if [they] settled. [Counsel is] going to [DBSI] to say we're prepared to accept if they waive our indemnity (no give-back). Apparently, the purchasers need us to settle so they reach the $25.0 million threshold necessary to be a "qualified investor," so we seem [*10]to have good leverage.

Bak Supplemental Affirmation, Exhibit 2 (emphasis added). Based on the foregoing, it appears that Plaintiffs might not have been entitled to participate in the Rights Offering (as the threshold amount to qualify was $25 million and the sum of the Bankruptcy Claims did not reach such amount), unless they promptly settled the Bankruptcy Claims before the plan confirmation date, and aggregated the Bankruptcy Claims with other claims (not purchased from Defendants) in order to make the threshold.

This raises an issue as to whether Plaintiffs are entitled to be compensated for their damages, pursuant to the formula set forth in paragraphs 7 and 10 of the Contracts, as asserted by Plaintiffs. Because the additional distributions (the "bonus" mentioned in the above e-mail) compensated Plaintiffs' loss, at least in part, in settling the Bankruptcy Claims at reduced amounts (i.e., the "impaired" amounts), they should be taken into consideration when computing Plaintiffs' actual loss. However, the existing record does not contain sufficient information to make such a determination at this time. Therefore, consistent with the rationale stated herein, Plaintiffs shall submit an affidavit, with notice to Defendants, detailing the calculation of damages. Moreover, to the extent that Defendants are liable to Plaintiffs for attorneys' fees and expenses, Plaintiffs shall file and serve an application for an award of the actual and reasonable fees and expenses incurred in the pursuit of this case, not the Bankruptcy Claims in the Debtor's bankruptcy case. Any issue arising in connection with the computation of damages and/or the award of attorneys' fees and expenses will be heard by a special referee of this court.

Based on all of the foregoing, it is hereby

ORDERED that Defendants' motion (motion sequence number 01) for summary judgment dismissing the complaint is denied; and it is further

ORDERED that Plaintiffs' motion (motion sequence number 02) for summary judgment is granted only with respect to the issue of Defendants' liability; and it is further

ORDERED that the issues with respect to (1) the amount of damages suffered by Plaintiffs and (2) the award of attorneys' fees and expenses in favor of Plaintiffs, are hereby referred to a Special Referee of the court, pursuant to CPLR 4311 and 4301, to hear and report with recommendations, except that, in the event of and upon the filing of a stipulation by the parties, as permitted by CPLR 4317, the Special Referee, or another person designated by the parties to serve as referee, shall hear and determine the aforesaid issues; and it is further

ORDERED that, with respect to that portion of Plaintiffs' motion, which seeks an award of damages and of attorneys' fees and expenses against Defendants, is hereby held in abeyance, pending the receipt of the report and recommendations of the Special Referee and a motion pursuant to CPLR 4403 or receipt of the determination of the Special Referee or the designated referee; and it is further

ORDERED that counsel for Plaintiffs shall, within 30 days from the date of this decision, serve a copy of this decision with notice of entry, together with a completed Information Sheet (which is available on the court's website), upon the Special Referee Clerk in the Motion Support Office in Room 119 at 60 Centre Street, who is directed to place this matter on the calendar of the Special Referee's Part (Part 50R).

Dated: November 22, 2010

ENTER:

_____________________

J.S.C. Footnotes

Footnote 1:Notably, the objections sought to reduce the aggregate amount of the Bankruptcy Claims by more than half.

Footnote 2:The plan was confirmed by the Bankruptcy Court on December 26, 2007. Bonventre Affidavit in Opposition, ¶ 27.

Footnote 3: Defendants also argue that Plaintiffs' motion should be denied because they did not submit an affidavit of a person with knowledge of the facts. An attorney's affidavit (which was submitted by Plaintiffs in this case) is sufficient when the disputed issue can be resolved by examining documentary evidence, including the interpretation of unambiguous contractual terms. Hoeffner v Orrick, Herrington & Sutcliffe LLP, 61 AD3d 614, 616 (1st Dept 2009).

Footnote 4:Using the defined term "Impairment" in this paragraph has the effect of adding "belts and suspenders" to the repayment obligations owed in paragraph 7, when the Claim is "Impaired."

Footnote 5:This is not surprising, because Plaintiffs are seasoned traders/investors in bankruptcy claims and distressed debts, and the Contracts are based on standard "assignment of claim" forms drafted by Plaintiffs.

Footnote 6:Much of the same extrinsic evidence is used by Defendants in their argument that the Bankruptcy Claims are not impaired under paragraph 7 of the Contracts.

Footnote 7:Notably, many of the arguments made by Defendants in defense to the breach of representations and warranties in paragraph 4 (and the indemnity obligations under paragraph 10) overlap and mirror those made by them in their defense to the repayment obligations under paragraph 7 of the Contracts.