United States District Court, E.D. Pennsylvania
[Copyrighted Material Omitted]
For BRUCE TOLL, Plaintiff: STEPHEN A. COZEN, LEAD ATTORNEY, COZEN & O'CONNOR, PHILADELPHIA, PA; KEVIN T. KERNS, STEPHEN AARON MILLER, COZEN O'CONNOR, PHILADELPHIA, PA.
For LEONARD TANNENBAUM, Defendant: MATTHEW H. HAVERSTICK, LEAD ATTORNEY, NANCY J. GELLMAN, CONRAD O'BRIEN, PHILADELPHIA, PA; ALEXANDER KAPLAN, KEVIN J. PERRA, PROSKAUER ROSE LLP, NEW YORK, NY; AYA M. SALEM, CONRAD & O'BRIEN, PHILADELPHIA, PA.
EDUARDO C. ROBRENO, J.
Plaintiff Bruce Toll brings this action against his former son-in-law, Leonard Tannenbaum, for breach of an oral contract. Toll alleges that in 2007 he personally guaranteed $15 million in loans to Tannenbaum in order to keep one of Tannenbaum's investment management companies afloat. Am. Compl. ¶ 1, ECF No. 34. Toll claims that, in exchange, Tannenbaum orally promised to share equally all of his profits from the management company with Toll's daughter (and Tannenbaum's wife at the time), Elizabeth Toll. Id. Toll now seeks enforcement of the alleged oral agreement, or, in the alternative, equitable relief sounding in quasi-contract. Id. ¶ ¶ 53, 55, 62, 69. He also claims that Tannenbaum never intended to perform on the contract, and thus is liable for fraud. Id. ¶ ¶ 75-79. Tannenbaum has moved for summary judgment on all of Toll's claims. ECF Nos. 59, 60.
Upon consideration of each of Toll's claims, the Court concludes that each can be resolved in Tannenbaum's favor as a matter of law. First, the Court finds that New York law governs the contract dispute, and thus the breach of contract claim is barred by New York's statute of frauds. Second, under New York law the quasi-contract claims, although not barred by the statute of frauds, are otherwise impermissible because of the relief sought and because any inequity hinges on the existence of an agreement. Third, Pennsylvania's statute of limitations bars the fraud claim, as undisputed facts reveal that Toll could easily have discovered the existence of the claim more than two years before filing this lawsuit. The Court therefore will grant Tannenbaum's motion and will enter judgment in favor of Defendant.
I. FACTUAL BACKGROUND
Toll and Tannenbaum have a long history of doing business together, which began about a year after Tannenbaum married Toll's daughter Elizabeth in 1997. Pl.'s Resp. 4, ECF No. 65. Toll agreed to help his new son-in-law start an investment fund (" Fund I" ) by providing the funds for the venture. Id. The two agreed to a 90%-10% share of the profits, with Toll receiving the larger portion. Id. Tannenbaum also set up a separate company to manage Fund I, which collected management fees from the fund that were then paid to Tannenbaum. Id. Fund I became very successful, with both Toll and Tannenbaum making millions of dollars from the venture. Am. Compl. ¶ ¶ 14-18.
In 2004, Tannenbaum approached Toll about investing $60 million in a second investment fund (" Fund II" ). Pl.'s Resp. 5. Toll was unwilling to invest $60 million, but agreed to invest $20 million. Id. Toll also personally guaranteed a $6.7 million loan to Fund II in 2005. Def.'s Mem.
Supp. Mot. Summ. J. 6, ECF No. 59-1; Kaplan Decl., Ex. 1, Toll Dep. 56:8-57:21, June 14, 2012, ECF No. 59-3 (" Def. Toll Dep." ). Unlike with Fund I, Toll did not have a profit share in Fund II. Def.'s Mem. Supp. Mot. Summ. J. 5; Pl.'s Resp. 5. Tannenbaum set up a management company for Fund II, which again collected management fees from the fund that were paid directly to Tannenbaum. Pl.'s Resp. 5-6.
According to Tannenbaum, the parties' personal relationship deteriorated during that period (id. at 5), and by 2006 Tannenbaum had developed a deep " animosity" toward Toll (id. at 7). Nonetheless, Tannenbaum again approached Toll regarding a third venture that was launched in 2007 (id. at 6), and which eventually gave rise to this litigation. The third venture, called Fifth Street Mezzanine Partners, III, L.P. (" Fund III" ), was founded on February 15, 2007, as an investment fund organized under the laws of Delaware. Am. Compl. ¶ 25. As with his previous ventures, Tannenbaum also established a private management company, Fifth Street Management LLC (" Fifth Street Management" ), to advise Fund III and to collect a fee for management services. Pl.'s Resp. 6-7. That company was formed on March 8, 2007. Am. Compl. ¶ 25. On January 2, 2008, Tannenbaum took Fund III public by merging it with and into Fifth Street Finance Corporation, a public company for which Tannenbaum currently serves as Chief Executive Officer and Chairman of the Board of Directors. Id. ¶ 24.
Toll was involved in the formation of Fund III and Fifth Street Management in several different ways. First, he agreed to commit $25 million to finance the venture. Pl.'s Resp. 6. He also agreed to guarantee a $50 million line of credit to Fund III, in exchange for a one percent annual fee. Id. at 11. That agreement was initially reached orally, but was later reduced to writing. Id. at 11 n.7; see also Kaplan Decl., Ex. 2, Guaranty Fee Agreement, Oct. 10, 2007. Toll further provided a short-term " bridge loan" of $15 million to Fund III, charging a 12% interest rate. Pl.'s Resp. 11. Finally, Toll guaranteed $15 million in loans to Tannenbaum personally. Id. at 10;
id., Ex. F, Promissory Note, May 14, 2007; id., Ex. G, Promissory Note, May 14, 2007; id., Ex. H, Unconditional Guaranty, May 14, 2007. It is that $15 million loan guaranty that is the subject of this lawsuit, as the parties hotly contest the circumstances giving rise to it.
According to Toll, negotiations regarding the $15 million loan guaranty began in the latter part of 2006, when Tannenbaum told him that Fund III and Fifth Street Management were in need of a capital infusion and asked him to personally guarantee loans to keep the company afloat. Am. Compl. ¶ ¶ 27-28; Pl.'s Resp. 7. Without Toll's personal guaranty, Tannenbaunm allegedly was unable to obtain a loan of the size necessary to keep Fund III running. Pl.'s Resp. 7. Toll claims to have told Tannenbaum that he was unwilling to guarantee the loans without some form of compensation, noting the parties' prior 90%-10% profit-sharing arrangement. Id.
at 7-8. According to Toll, Tannenbaum proposed that they forgo the 90%-10% split, instead offering to share with his then-wife, Elizabeth Toll, half of the profits he earned from Fifth Street Management. Id. at 8; id., Ex. B, Toll Dep. 89:19-90:6, June 14, 2012 (" Pl. Toll Dep." ). Toll alleges that, after a series of discussions that took place over several months, he and Tannenbaum reached an oral agreement to that effect. Id. at 9. More precisely, Toll claims that in May 2007 he verbally accepted Tannenbaum's offer to share 50% of his earnings from Fifth Street Management with Elizabeth, in exchange for Toll's personal guaranty of $15 million in loans to support Fund III. Pl. Toll Dep. 88:11-89:23, 109:23-20. That alleged oral agreement was never reduced to writing, and Toll says that he never told anyone about the deal until this lawsuit, including his daughter Elizabeth. Def. Toll Dep. 115:1-12.
On May 14, 2007, Toll signed an Unconditional Guaranty in which he was the " Guarantor" of $15 million in loans from Wachovia Bank, and Tannenbaum was the " Borrower." Pl.'s Resp., Ex. H, Unconditional Guaranty, May 14, 2007. The loan guaranty consisted of two promissory notes, one for $12 million and one for $3 million. Id., Ex. F, Promissory Note; id., Ex. G, Promissory Note. Tannenbaum signed these notes and mailed them to Wachovia Bank in Philadelphia. Id. at 10. Since then, Tannenbaum has made tens of millions of dollars in profits from Fifth Street Management. Id. at 13-14; Am. Compl. ¶ 38; Answer ¶ 38, ECF No. 35.
In the spring of 2009, the promissory notes for the Wachovia Bank loans became due, with $12 million still outstanding. Pl.'s Resp. 12. Wachovia asked that Tannenbaum either pay off the balance, or that Toll sign another personal guaranty to extend the loan for the remaining $12 million. Id. Toll says that he asked to be released from the guaranty, but that Tannenbuam threatened to default unless Toll signed another personal guaranty. Id. Toll therefore reluctantly agreed to sign another personal guaranty for the $12 million, allegedly so as not to jeopardize the previous agreement regarding the sharing of profits with Elizabeth. Id.; Am. Compl. ¶ 42.
Shortly after Toll signed the second guaranty on May 26, 2009, Tannenbaum separated from Elizabeth Toll and initiated divorce proceedings. Pl.'s Resp. 12. Toll contends that he attempted to contact Tannenbaum in the fall of 2009 to remind him of his obligation to share the profits from Fifth Street Management with Elizabeth, but Tannenbaum refused to take his calls. Am. Compl. ¶ ¶ 44-45. Toll also sent emails to Tannenbaum and to Bernard Berman, the president of Fifth Street Management, asking to be paid a one percent fee for guaranteeing the loans; Toll explained that he believed that he was entitled to the fee because he received such a fee for his guaranty of the $50 million loan to Fund III. Pl.'s Resp. 13;
Def.'s Mem. Supp. Mot. Summ. J. 6-7; id., Ex. 5, Email Exchange, Sept. 24, 2009; id., Ex. 6, Email Exchange, Sept. 17, 2009. Tannenbaum responded that Toll was " not entitled to any compensation in this regard." Id., Ex. 6.
Tannenbaum's divorce with Elizabeth became final on October 6, 2010 (Am. Comp. ¶ 46), and the two entered into a marital separation agreement. Id. at 8; id., Ex. 10, Separation Agreement. In the separation agreement, Elizabeth Toll disclaimed any interest in Fifth Street Management and released any and all claims against Tannenbaum. Id., Ex. 10, Separation Agreement § 7.1(f).
Both parties agree that, although Fifth Street Management has generated profits, to date Tannenbaum has not shared any of the profits with Elizabeth. Id. at 2; Pl.'s Resp. 14. Toll therefore contends that Tannenbaum is in breach of their oral agreement of May 2007. Am. Compl. ¶ 1. Tannenbaum, on the other hand, says that the alleged oral agreement never existed, and thus that he is not, and never has been, required to share the profits from Fifth Street Management with his former wife. Def.'s Mem. Supp. Mot. Summ. J. 3. According to Tannenbaum, Toll agreed to guarantee the $15 million loans for no consideration at all, as he did with the previous $6.7 million loan to Fund II. Id. at 6.
II. PROCEDURAL HISTORY
Toll filed suit against Tannenbaum in the Montgomery County Court of Common Pleas on October 19, 2011, bringing claims for breach of contract, unjust enrichment, quantum meruit, promissory estoppel, and fraud. Notice of Removal, Ex. A, Compl., ECF No. 1. Tannenbaum removed the case to the Eastern District of Pennsylvania on November 15, 2011, on the basis of diversity jurisdiction. Id. at 1-3.
On December 12, 2011, Tannenbaum filed a motion to dismiss. ECF No. 13. After holding a hearing, the Court granted the motion as to the breach of contract claim, holding that compensatory damages under the contract could only be recovered by the intended beneficiary: Elizabeth Toll. Order of March 14, 2012, at 14 n.5, ECF No. 29. The Court explained that, because Elizabeth had released all claims against Defendant pursuant to their separation agreement, she could not recover damages under the alleged contract. Id. The Court advised Toll that he could, however, bring an action for specific performance of the contract, for nominal damages, or for his actual damages. Id. The Court denied the motion to dismiss as to the other counts.
Toll filed an amended complaint on March 22, 2012, which again brought claims for breach of contract, unjust enrichment, quantum meruit, promissory estoppel, and fraud. For his breach of contract claim, Toll now seeks actual damages in excess of $50,000 for " the loss of the value of the share in Fifth Street Management that he would have received but for his reliance on Tannenbaum's promise, and the loss of the ability to otherwise invest the money subject to the guaranty." Am. Compl. ¶ 53(1). In the alternative, he requests specific performance of the agreement - that is, that the Court compel Tannenbaum to pay Elizabeth Toll 50% of the past, present, and future profits of Fifth Street Management and any successor entities. Id. ¶ 53(2). For his equitable
claims, which he argues in the alternative, Toll seeks restitution in an amount equal to the reasonable value of the interest in Fifth Street Management that he would have had if Tannenbaum had not promised to share profits with Elizabeth. Id. ¶ ¶ 60, 67, 73, 79. Based on the parties' previous business history, Toll contends that the reasonable value of that interest would be 90% of the profits since May 14, 2007. Id.
On October 17, 2012, Tannenbaum moved for summary judgment. Among other things, he contends that Toll's contract claim is governed by New York law, and that, because it is based on an alleged oral agreement, it is barred by New York's statute of frauds. Def.'s Mem. Supp. Mot. Summ. J. 3. Toll responds that the contract claim is controlled by Pennsylvania law, which would not bar his claim. Pl.'s Resp. 1. There is therefore a threshold choice-of-law question that must be addressed to resolve Tannenbaum's motion.
The Court held two hearings in connection with the choice-of-law question. At the first, the Court heard argument on whether the factual matters underlying the choice-of-law issue should be resolved under the summary judgment standard - viewing the facts in the light most favorable to the non-moving party and reserving any disputes regarding material facts for the jury - or whether they should be resolved by the Court under the preponderance of the evidence standard. For the reasons discussed below, see infra Section IV.A.2, the Court concluded that choice of law is a legal question for the court to resolve, which, however, may require resolution of disputed facts. The Court then held a second hearing, at which the parties presented evidence regarding the factual disputes underlying the choice-of-law issue. That issue, as well as the overall motion for summary judgment, is now ripe for disposition.
III. LEGAL STANDARD
Summary judgment is appropriate if there are no genuine disputes as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a). " A motion for summary judgment will not be defeated by 'the mere existence' of some disputed facts, but will be denied when there is a genuine issue of material fact." Am. Eagle Outfitters v. Lyle & Scott Ltd., 584 F.3d 575, 581 (3d Cir. 2009) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). A fact is " material" if proof of its existence or nonexistence might affect the outcome of the litigation, and a dispute is " genuine" if " the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248.
The Court will view the facts in the light most favorable to the nonmoving party. " After making all reasonable inferences in the nonmoving party's favor, there is a genuine issue of material fact if a reasonable jury could find for the nonmoving party." Pignataro v. Port Auth. of N.Y. & N.J., 593 F.3d 265, 268 (3d Cir. 2010). While the moving party bears the initial burden of showing the absence of a genuine issue of material fact, meeting this obligation shifts the burden to the nonmoving party who must " set forth specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 250.
Tannenbaum contends that he is entitled to judgment as to all Toll's claims. Specifically, Tannenbaum argues that the breach of contract and equitable quasi-contract claims are impermissible under New York's statute of frauds, that the fraud
claim is barred by the two-year statute of limitations, and that all of Toll's claims should be dismissed because under the undisputed facts no reasonable jury could find that the alleged agreement even existed. Toll, of course, disagrees, saying that " [t]his case presents a classic 'swearing contest' that cannot be resolved on a motion for summary judgment." Pl.'s Resp. 1. He argues that Pennsylvania law applies to - and permits - the contract and quasi-contract claims, and that even under New York law the quasi-contract claims can survive. Finally, he asserts that the fraud claim is not barred by the statute of limitations because of the so-called " discovery rule," which tolls the limitations period when a ...