The opinion of the court was delivered by: Thomas J. Rueter, United States Magistrate Judge
Presently before the court are defendant's motion for partial summary
judgment (Document No. 30), and plaintiff's motion for summary judgment
(Document No. 31). Each party filed numerous briefs, reply briefs,
exhibits and affidavits in support of its own motion and in opposition to
the other party's motion. The motions with respect to the reformation
issue only were referred to the undersigned for disposition by the
Honorable J. Curtis Joyner by order dated July 31, 2002. For the reasons
stated below, defendant's motion for partial summary judgment is
GRANTED, and plaintiff's motion for summary judgment is DENIED.
The basic facts are undisputed and the court will summarize them
briefly here. Defendant, Forcenergy, Inc., was an independent oil and gas
company engaged in exploring for and producing oil and natural gas.*fn1
Plaintiff, OTA, is a Delaware limited partnership and is an arbitrageur
in the business of investing and trading securities for its own account.
(Pl.'s Mem. of Law Supp. Summ. J. at 4.) In June and July, 2000,
plaintiff bought approximately 10,000 warrants convertible into common
shares of defendant (the "Warrants"). OTA did not purchase the Warrants
directly from defendant, but bought them on the
secondary market from
another seller. Id. at 14. Defendant had issued the Warrants
approximately three months earlier as part of its Chapter 11 bankruptcy
reorganization. Under defendant's Chapter 11 plan of reorganization,
defendant sold its unsecured creditors 40,000 "Units," each Unit
consisting of one share of defendant's preferred stock and forty-five
warrants, each warrant convertible into one share of defendant's common
stock at the price of $10.00 per share. (Def.'s Appendix Supp. Summ. J.
Exs. 1 and 3.)
Defendant and American Stock Transfer & Trust Company (the "Warrant
Agent") entered into a Warrant Agreement dated March 20, 2000. The
parties agree that the Warrant Agreement provides that each Warrant may be
converted into one share of defendant's common stock, a one to one
ratio. The parties agree that the Warrant Agreement contains no errors at
the time it was drafted, and accurately reflects the intent of the
parties to that agreement. (Pl.'s Mem. of Law Supp. Summ. J. at 16.)
Plaintiff claims that it purchased the Warrants because it believed
that each Warrant was convertible into forty-five shares of defendant's
common stock, a one to forty-five ratio. Id. at 13-14. Plaintiff contends
that it believed that only 40,000 Warrants had been issued.*fn2
Plaintiff asserts that it formed these beliefs after reviewing certain
documents including defendant's filings with the United States Securities
and Exchange Commission ("SEC"), and defendant's Chapter 11 bankruptcy
plan and disclosure statement. Id. at 10-14. Plaintiff also claims that it
confirmed this conversion ratio in two telephone calls to defendant's
employees before purchasing the first batch of Warrants. Id. at 13-14.
Two of plaintiff's employees, Neil Weiner and David Tattersall, conducted
the due diligence on behalf of the plaintiff. Id. at 10-14.
Plaintiff also seeks summary judgment and asserts that defendant's
motion for summary judgment should be denied because: (1) it is not
seeking to amend the Warrant Agreement, but rather the specific
individual agreement between plaintiff and defendant created when
plaintiff first purchased Warrants; (2) the value of defendant's stock
will not be diluted because defendant no longer has any common stock
after its merger with Forest Oil, alternatively, the court may award
plaintiff money damages rather than stock; and (3) plaintiff's other
claims offer only a partial remedy, reliance damages rather than
expectancy damages. (Pl.'s Br. Opp. Mot. Summ. J. at 2-4.)
Plaintiff acknowledges that Delaware law governs the reformation
issue. (Pl.'s Br. Opp. Mot. Summ. J. at 16-18.) Defendant also
acknowledged that Delaware law applies, citing to Section 11 of the
Warrant Agreement which provides that it is governed by Delaware law.
(Def.'s Br. Supp. Mot. Summ. J. at 23 n. 12.)*fn4 This court concludes
that the issue of reformation is governed by Delaware law.
Summary Judgment Standard. Pursuant to Fed.R.Civ.P. 56(c), summary
judgment is proper "if the pleadings, depositions, answers to
interrogatories, and admission on file, together with the affidavits, if
any, show that there is no genuine issue as to any material fact and that
the moving party is entitled to a judgment as a matter of law."
Fed.R.Civ.P. 56(c). See also Michaels v. New Jersey, 222 F.3d 118, 121
(3d Cir. 2000), cert. denied, 531 U.S. 1118 (2001). In considering a
motion for summary judgment, the evidence must be considered in the light
most favorable to the non-moving party, and all inferences must be drawn
in that party's favor. Celotex Corp. v. Catrett, 477 U.S. 317, 322
(1986). The court, however, must consider the evidence supporting
reformation in light of the standard of proof plaintiff must meet to
establish its right to that equitable remedy. Cerberus Int'l, Ltd. v.
Apollo Management, L.P., 794 A.2d 1141, 1149 (Del. 2002) (adopting
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254 (1986) ("[I]n ruling
on a motion for summary judgment, the judge must view the evidence
presented through the prism of the substantive evidentiary burden.")). In
the instant matter, the party seeking reformation bears a high burden of
proof. "The agreement as executed must stand unless the party seeking
reformation can, by clear and convincing proof, provide the court with a
clear understanding of how the intended agreement conflicts with the
formal writing." Croxton v. Chen, 1998 WL 515346, at *2 (Del. 1998)
(citing Hob Tea Room v. Miller, 89 A.2d 851, 857 (Del. 1952)). See also
Cereberus, 794 A.2d at 1149 (considering a defendant's
motion for summary
judgment in an action for reformation of a merger agreement, the Delaware
Supreme Court concluded that "the trial court must determine whether the
plaintiffs on the summary judgment record proffered evidence from which
any rational trier of fact could infer that plaintiffs have proven the
elements of a prima facie case [for reformation] by clear and convincing
Reformation. Reformation is an equitable remedy that is "sparingly"
granted. H. Prang Trucking Co., Inc. v. Local Union No. 469, 613 F.2d 1235,
1239 (3d Cir. 1980). "Reformation presupposes that a valid contract
between the parties was created but, for some reason, was not properly
reflected in the instrument that memorializes the agreement." Id. Under
Delaware law, two doctrines allow reformation.
The first is the doctrine of mutual mistake. In such a case, the
plaintiff must show that both parties were mistaken as to a material
portion of the written agreement. The second is the doctrine of unilateral
mistake. The party asserting this doctrine must show that it was mistaken
and that the other party knew of the mistake but remained silent.
Regardless of which doctrine is used, the plaintiff must show by clear
and convincing evidence that the parties came to a specific prior
understanding that differed materially from the written agreement.
Cerberus, 794 A.2d at 1151-52 (footnotes omitted). See also Emmert v.
Prade, 711 A.2d 1217, 1219 (Del.Ch. 1997) (a document may be reformed to
reflect the original intent of the parties but reformation is appropriate
"only when the contract does not represent the parties' intent because of
fraud, mutual mistake or, in exceptional cases, a unilateral mistake
coupled with the other parties' knowing silence.") (citation omitted).
"Reformation is not a mandate to produce a reasonable result." Collins
v. Burke, 418 A.2d 999, 1002 (Del. 1980). Rather, the principle of
reformation is "based on intention." Id.
Reformation has also been allowed to those in privy with the original
parties. "Reformation will be allowed not only as against the original
parties, but also against those claiming under them in privity, such as
representatives, heirs or designees, legatees, assignees, voluntary
grantees, or judgment creditors, or purchasers from them with notice of
the facts." Phoenix Chair Co. v. Daniel, 155 So. 363, 366 (Ala. 1934). In
Emmert, the executor of the estate of the decedent had standing to
pursue, albeit unsuccessfully, a reformation claim to reform beneficiary
designations of decedent's life insurance policy and pension plan to
match the disposition of assets under decedent's will. Emmert, 711 A.2d
at 1217-18. See also L.E. Myers Co. v. Harbor Ins. Co., 384 N.E.2d 1340,
1345-46 (Ill.App. 1st Dist. 1978) (reformation of written instruments may
be had by the immediate parties thereto and by those standing in privity
with them, such as their successors; a person not a party or a privy to
the transaction, even a person with a substantial interest therein, may
not maintain the action), aff'd, 394 N.E.2d 1200 (Ill. 1979).
The "mistake" requiring reformation, however, must have occurred
between the original parties to the contract and existed at the time the
contract is executed. Collins v. Burke, 418 A.2d 999 (Del. 1980)
(reformation granted based on "mistake" in original deed); Fitzgerald v.
Cantor, 1998 WL 781188 (Del.Ch. Oct. 28, 1998) ("mistake" at issue in
reformation claim was between parties to the original contract).
Reformation is not intended to bring documents into conformity with an
intention that arose after the original
contracts were executed. Emmert,
711 A.2d at 1219 (will may not be ...