purchase, the circumstances here fall squarely within such a
narrow scope.

As to the Net Worth requirement, Annecca Mem. 10 asserts
that because Michael Annecca “had the fiscal ability to infuse”
$2 million in capital contributions into Annecca, any problems
with Annecca's current Net Worth were curable (A. St. 464). But
that ignores the obvious difference between the net worth of a
business that is being purchased as a going concern when that net
worth has resulted from its preacquisition activities and the net
worth of that same business that is artificially boosted by the
injection of cash.

To highlight that distinction, hypothesize a business that
is being acquired on a multiple-of-earnings basis, with the
expectation that its net worth comprises business assets
{including normal working capital) of a nature that can properly
generate the desired level of earnings. Now suppose the business
to be acquired turns out to have only half of those business
assets and is therefore capable of generating only half of the
contemplated level of earnings. It simply will not do for the
seller to prime the going business with cash in the form of an
artificial one-time capital contribution, a contribution that
would present the buyer with a dramatically different deal from
the one for which it had bargained. Such a cash infusion, when

coupled with the preexisting going concern assets, would

19



consideration by Pricewaterhouse in performing its auditing role.

To reshape the Agreement's provisions into a requirement
that Pricewaterhouse had to create GAAP-compliant balance sheets
for Annecca (as opposed to just auditing the already created
GAAP-compliant balance sheets) would fly in the face of the
unambiguous language chosen by the parties (Collard v. Vill. of
Flower Hill, 421 N.E.2d 818, 823 (N.Y. 1981)). Indeed, Annecca's
proposed reading of that language is not a reasonable one within
the expectations of the parties--experienced and savvy
representatives of business entities (see Petracca v. Petracca,
756 N.Y.S.2d 587, 588 (App. Div. 2003); L. St. q24) .°

Annecca's misreading of Agreement §1.13 extends further to
its assertion (A. Mem. 15) that the Agreement §1.2 provision for
extension of the Closing Date for up to a month if Lexent did not
receive the “2000 Financial Statements” somehow indicates that
Pricewaterhouse was responsible for creating the documents. Not

so--remember that part of the definition of “2000 Financial

® Annecca proffers an affidavit by its own accountant
stating that in his “professional experience...it is not
uncommon” in the case of closely-held private companies for
accountants to create and audit financial statements
simultaneously (A. Mem. 16 n.7; A. Ex. N. 47). But even if that
statement is credited, it does not raise a genuine issue of
material fact in this instance, where the stated opinion as to
what may occur in other situations is directly at odds with the
unambiguous contract language that specifies otherwise in the
transaction now at issue (Excess Ins. Co. v. Factory Mut. Ins.
Co., 769 N.Y.S.2d 487, 489 (App. Div. 2003); British Int'l Ins.

Co. v. Sequros La Republica, S.A., 342 F.3d 78, 82 (2d Cir.
2003)).

13



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


obviously not generate the same kind of business results as the
originally contemplated full-blown net worth business assets--the
bargained-for acquisition.”

Nor is that a farfetched illustration, though it is
concededly stated in somewhat more dramatic terms than the
factual scenario here--recall that the Pricewaterhouse March 28,
2001 audit, on which Lexent relied for its termination decision,
showed Annecca's Net Worth to be only 80% of the Agreement's $9
million floor. And there is also the added consideration that
the proceeds of the acquisition were going directly to Michael
Annecca, so that allowing him to satisfy the Net Worth condition
precedent with his own funds would effectively force Lexent to
engage in the dollar-for-dollar price reduction arrangement that
Agreement §3.2(b) provided only if Annecca had a right to
terminate (as it did not).

As for whether Annecca had a realistic prospect of curing

22 Annecca's Mem. 10 n.4 refers to a statement during the
deposition of Lexent's CEO Alf Hansen that it characterizes as
having expressed the view that “it would have been more desirable
if the cash account of the Companies was higher upon its
acquisition.” But even leaving aside the fact that Annecca has
not tendered the cited pages of that deposition, so that this
Court cannot see exactly what the witness said and in what
context, there is a total difference between (1) an expression
that Lexent would have been pleased if the business it had
contracted to acquire had accomplished its financial results, and
had in the process amassed some added cash, and (2) the quite
different business situation described in the text. That
testimony, however it may read in fact, in no way derogates from
the force of the just-stated analysis.

20



financials post-termination).

But perhaps this Court need not resolve that issue in
ultimate terms, for the application of the futility exception to
the Net Worth deficiency alone defeats Annecca's opportunity-to-
cure argument. In that respect Lexent was clearly justified in
making the decision that offering a cure opportunity would be
futile, so that it was entitled to avail itself of its
termination right immediately (contrast Engels v. French, 711
N.¥.S.2d 487, 488 (App. Div. 2000)).

Conclusion

There is no genuine issue of material fact that could
support a determination either (1) that Annecca actually
satisfied all of the conditions precedent that were required of
it under the Agreement or (2) that it could reasonably have fixed
matters so as to require Lexent to adhere to the Agreement's cure
provision. Thus Lexent's decision to terminate was, as a matter
of law, not a breach of the Agreement (Oak Bee, 551 N.Y.S.2d at
561-62). Accordingly Lexent is entitled to a judgment as a

matter of law, and this action is dismissed.

Milton I. Shadur
Senior United States District Judge

Date: March 5, 2004

22



that Lexent breached the Agreement by not giving Annecca an
opportunity to cure its failure to satisfy the conditions
precedent that have been identified here. In that regard
Agreement §7.7 provides:

In the event that Buyer’s due diligence review shall

disclose any condition of matter which Buyer, in its

sole reasonable judgment, deems to be unsatisfactory,

Buyer shall notify Sellers in writing of such

unsatisfactory condition or matter within ten (10) days

of Buyer‘’s determination, and Seller's [sic] shall then

have the period of thirty (30) days from the date of

Buyer's written notice to correct the condition or

matter to the sole reasonable satisfaction of Buyer, or

Buyer may terminate this Agreement on ten (10) days

written notice to Sellers.

But Annecca's effort to invoke that provision fails as well.
In light of (1) the material shortfall in Annecca’s Net Worth and
(2) the disastrous non-GAAP-compliant state of its balance sheets
and other books and records, it cannot be gainsaid that Annecca
would have been unable to cure those deficiencies if Lexent had
followed the path marked out in the quoted opportunity-to-cure
provision.

As in other jurisdictions, the courts applying New York law
recognize that there are circumstances in which one party need
not offer the other party a contractually-specified or implied
cure opportunity (Wolff & Munier, Inc. v. Whiting-Turner
Contracting Co,, 946 F.2d 1003, 1009 (2d Cir. 1991); Needham v.
Candie’s, Inc., No. 01 Civ. 7184, 2002 WL 1896892, at *4 (S.D.

N.Y. Aug. 16)). Express repudiation, abandonment of performance,

17


To the extent that the combined Net Worth of

Annecca...excluding the Excluded Assets, is less than

Nine Million Dollars ($9,000,000.000) and Seller has

not elected to terminate this Agreement, the cash

portion of the Purchase Price shall be decreased

accordingly, on a dollar for dollar basis.

But that position is really untenable, because it would
effectively read out of the Agreement the key clause “and Seller
[Annecca] has not elected to terminate this Agreement”--a clause
that necessarily could come into play only if Annecca had such a
right of termination. Indeed, the very inclusion of that clause
by the sophisticated contracting parties provides a powerful--
really a conclusive--showing that no other circumstance would
call for such an adjustment in the purchase price.

Because Annecca had no such right of termination, it cannot
call the Agreement §3.2(b) price reduction provision to its aid.
Instead, in the absence of some breach on Lexent's part that
would confer on Annecca a right to terminate,‘ Lexent's right to
terminate under Agreement §9.1, based on Annecca's failure to
satisfy the $9 million condition precedent, remains intact. Only

such a reading comports with the basic rule of contract

interpretation that requires every clause to have some purpose

(Bombay Realty Corp. v. Magna Carta, Inc., 790 N.E.2d 1163, 1165

* No such breach is disclosed by the undisputed facts--and
Annecca will not of course be permitted to bootstrap itself by
pointing to any asserted breach by Lexent (in the form of its
exercise of its own right to terminate) that the analysis in this
opinion rejects.



decision “based on flawed information” (A. St. 451). Lexent did
not respond to the April 4 letter, its representative having
previously told Michael Annecca that its termination decision was
final (A. st. $950, 52).

Application ul 6 S dar

Agreement §11.9 states (and neither party disputes) that New
York law controls the present dispute (L. St. 918). 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



(“Pricewaterhouse”) to assist with due diligence and to audit
Annecca (L. St. 9922-23). 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. 449;
L. St. §55). lLexent 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. Amnecca'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. 950). 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



unfeasibility of cure and--critical to this case--incurability
are some of the circumstances that justify a party’s decision to
bypass the cure requirement and proceed directly to termination
(Needham, 2002 WL 1896892, at *4). Those exemplify the general
principle that once it becomes clear that one party cannot live
up to its obligations under a. contract, the other party is not

required to perform futile acts in furtherance of the contract

(Qak Bee Corp. v. N.E. Blankman & Co.,551 N.Y.S.2d 559, 562 (App.
i
Div. 1990) (per curiam)). Me
To be sure, the existence of an explicit cure provision in a
contract calls for a suitably narrow scope to be given to the

judicially sanctioned futility exception, to avoid the functional

elimination of that cure provision from the contract (Pet: ,

756 N.Y.S,2d at 588; Filmli 'ross-Coun: Pr LI v
United Artists Corp., 865 F.2d 513, 518-19 (2d Cir. 1989)).TM

But given Annecca's complete inability to raise a genuine issue
of material fact as to its ability to have cured its noncompliant

conditions precedent to Lexent's obligation to close the

4. Somewhat astonishingly, this proposition is the only one
for which Annecca cites or refers to any court opinion in the
course of its 20-page memorandum (see A. Mem. 9). And to boot,
despite both sides' recognition that New York law supplies the
rules of decision, that single unpublished, and by definition
nonprecedential, opinion is by a Magistrate Judge from this
district and looks to Illinois law (E. Trading Co. v. Refco,
Inc., No. 97 C 6815, 2001 WL 869626, at *3 (N.D. 111. Aug. 1)).
No matter, for Annecca's position does not carry the day in any
event.

18



million (L. St. 929; 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. 932; L. Ex. G at L09535). Even Annecca's own accountants
ultimately estimated its Net Worth for the same time frame as no
more than $8.5 million (or even as low as $7.2 million) (L. St.
433; A. St. 941).

Annecca contends that those numbers are irrelevant because
they are based on documentation as of the end of December 2000,
while Agreement §7.1 referred to Annecca's Net Worth on the
Closing Date of April 1, 2001 (A. St. 444; A. Mem. 13). But that
contention falls flat, because Annecca itself has asserted, based
on a later-prepared report by an accounting firm that it retained
months later, that “on or about March 31, 2001” its Net Worth was
between $8.4 and $8.9 million (A. Resp. 934). So no evidence at
all supports any notion that the critical Net Worth condition
precedent was met~--only the amount of the shortfall has not been
agreed upon, and as this opinion later reflects the very
existence of a shortfall was noncurable and hence fatal to
Annecca's position in this litigation.

Annecca Mem. 10 and 13-14 argue, as a fallback position,
that this price adjustment provision in Agreement §3.2(b)
required Lexent to proceed regardless of whether Annecca's Net

Worth was less than the contractual floor of $9 million:



tina Order Fdtm (6897)

Ze United States District Court, Northern District of Mlinois

i i Sitting Judge if Oth
nenor Magistrate Judge Milton I, Shadur than Aasigned Judge
CASE NUMBER 02 C 5092 DATE 3/5/2004
CASE Annecca Inc., et al vs. Lexent, Inc.
TITLE

{In the following box (a) indicate the party filing the motion, e.g, plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented]

MOTION:
DOCKET ENTRY:

qd) a Filed motion of [ use listing in “Motion” box above,]

(2) o Brief in support of motion due___.

3) ao Answer brief to motion due___. Reply to answer briefdue__.

(4) im Ruling/Hearingon___setfor__—_at

(5) oO Status hearingfheld/continued to] [set for/re-set for]on__—setfor__—_—_att

(6) im) Pretrial conference[held/continued to] [set for/re-set for]on__—_—setfor__———sat_—
(0) Oo Trial[set for/re-set for]on__at

(8) Oo [Bench/Jury trial] [Hearing] held/continuedto__at

(9) im} This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}

OFRCP4(m) OLocal Rule 41.1 OO FRCP41(a)(1) ( FRCP41(a)(2).

qo) Wf [Other docket entry] Enter Memorandum Opinion and Order. Lexent’s motion for summary
judgment is granted and this action is dismissed. (64-1)

dal) @ [For further detail see order attached to the original minute order.]
No notices required, advised in open court.

No notices required.

oY | Notices mailed by judge’s staff.
Notified counsel by telephone.
Docketing to mail notices.

7 | Mail AO 450 form.

sn
Copy to judge/magistrate judge.
t Peay,
courtroom tye) bong
SN deputy’s ~N
initials -
Ks 2.” Date/time received in ;
central Clerk's Office nang deputy inials



(A. Resp. 9937, 39),° it attempts to escape from that
acknowledged deficiency by claiming (A. Mem. 15) that the
ultimate obligation to create the 2000 Financial Statements
belonged to Lexent (or more specifically to Lexent's agent,
Pricewaterhouse), so that the absence of GAAP-compliant balance
sheets assertedly could not be a failure of a condition precedent
that warranted Lexent's termination decision. But as with the
other respects in which Annecca has mischaracterized terms of the
Agreement, what it urges here does not track with Agreement
§1.13's definition of “2000 Financial Statements”:

“2000 Financial Statements” shall mean the balance

sheets...and the related statements of income and cash

flows for the year then ended, together with related
footnotes, which shall be prepared in accordance with

GAAP...and shall have been audited by

PricewaterhouseCoopers.

Annecca attempts to latch onto the phrase “and shall have
been audited by PricewaterhouseCoopers” as purportedly making
Pricewaterhouse responsible for creating the underlying GAAP-
compliant balance sheets that would form a component of the

Agreement-defined “2000 Financial Statements.” But that position

reflects a fundamental misconception of the respective roles

6 What Annecca fails to note--or prefers to ignore--is that
such noncompliance is itself a direct violation of its
representation to the contrary in Agreement §4.4(a) (ii). In
turn, Agreement §7.1 made the truth of that and all other
representations and warranties as of the Closing Date a condition
precedent to Lexent's obligation to close the deal. And no
evidence exists to suggest that the untruth was (or could have
been) cured by the Closing Date.

11



(N.Y. 2003)).§

Because the Agreement confers a right of termination on
Lexent if a shortfall exists on Annecca's part as to any one
condition precedent, Lexent's decision to terminate the Agreement
would have been fully justified by Annecca's just-confirmed
failure to meet the Net Worth condition precedent. But there was
more: Annecca also failed to satisfy the Agreement §7.1
condition precedent that all of its representations and
warranties had to be true, complete and correct as of the Closing
Date. Most notably, Annecca did not produce 2000 Financial
Statements that Agreement §4.4(a) (i) required to be in compliance
with generally accepted accounting principles (“GAAP”):

The 2000 Financial Statements: (A) will be correct and

complete in all material respects...(B) will be

prepared in accordance with GAAP consistently applied

throughout the periods covered...(D) will present

fairly the consolidated financial condition....

While Annecca admits that the balance sheets it originally

created and tendered to Lexent were not in compliance with GAAP

5 Even if the two provisions just discussed were to be read

differently, so that they were arguably in conflict, Lexent would
still have another potential string to its bow that Annecca does
not: Agreement §9.1 (the termination provision) begins with the
language “Notwithstanding any other provision contained herein to
the contrary,” an overriding clause that is conspicuously absent
from Section 3.2(b). That contrast teaches that Agreement §9.1
trumps Agreement §3.2(b) (Handleb: Inc. v. Utica First Ins. Co.,
735 N.¥.S.2d 249, 251 (App. Div. 2002); Seaman-Andwall Corp. v.
Wright Mach. Corp., 295 N.¥.S.2d 752, 755 (App. Div. 1968)).

10



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. 96%" St. Apartment Corp., 629

N.Y¥.S.2d 262, 269 (App. Div. 1995); Morge 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



its various GAAP-compliance problems so as to render the futility
exception unavailable, its contention to that effect is at best
dubious. On that score Annecca would have to point to a material
factual indication (with the benefit of the required favorable
inferences) that if it had known Lexent was questioning its
performance it could have scrambled feverishly to rework its
balance sheets, books and records into compliance with GAAP (A.
st. 9Q51, 57)?

In that regard Annecca's accounting expert opines that
Pricewaterhouse “could have easily have completed” [sic] a GAAP
opinion on the combined financial statements within the time
required by the Agreement (including the extension periods
outlined in Agreement §1.2) (A. St. 424). Once again that opinion
misses the division of functions specified in the Agreement:
Instead the question is whether Annecca could have cured its
independent obligation to come forward with balance sheets,
records and books that were consistent with GAAP within the
requisite time frame--not whether Pricewaterhouse could then have
timely finished its audit upon being furnished with those clean
financial records. That seems highly problematic (to say the
least) in light of the chapter and verse provided by
Pricewaterhouse as to the hopelessly messy nature of the Annecca
records (a position effectively confirmed by how long it took

Annecca and its hired accountants to come up with some decent

21



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. 91). 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. 98; Agreement Art. II) .3
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

* Throughout the Agreement Annecca is designated as
“Sellers” and Lexent as “Buyer.”



Statements” calls for the audit (not the preparation) of
financial documents by Pricewaterhouse. Hence all that Agreement
§1.2 calls for is pushing back the Closing Date if
Pricewaterhouse could not complete its audit function by the
originally anticipated Closing Date.

Nor does Lexent‘s awareness that Annecca’s balance sheets
were not GAAP-compliant at the outset of the negotiations alter
the unambiguous terms of the Agreement as to conditions precedent
(A. St. W4(e), 4(h); A. Resp. 942). What Agreement §4.4(a) (i)
specifies looks to the future, not the past--it requires that the
“2000 Financial Statements...will be prepared in accordance with
GAAP.” Moreover, the effect of the integration clause in
Agreement §11.8 is that any such claim based on asserted prior
oral understandings or arrangements is precluded (Marine Midland
Bank-S. v. Thurlow, 425 N.E.2d 805, 807 (N.Y. 1981)).

Finally, in addition to the just-described shortcomings as
to the 2000 Financial Statements, it has already been pointed out
that Annecca clearly breached its Agreement §4.4(a) (ii)
representation that its “books, records and accounts...accurately
and fairly reflect [its] transactions, assets and liabilities in
accordance with GAAP.” In that respect Annecca Mem. 19 insists
that the quoted requirement was merely an obligation to ensure
that its books were sufficiently adequate and complete so that an

audit could eventually be conducted according to GAAP (A. Ex. S

14


(d), (4) (1)).°

In sum, there is. no genuine issue of material fact that can
fend off the determination that just a few days before the
scheduled Closing Date Annecca had not satisfied more than one of

the Agreement's conditions precedent to Lexent’s obligation to

close, Indeed, even if Annecca'g contentions as to the adequacy

of its financials were to be viewed as more persuasive than this
|

opinion has found them to be, ite phort fal in Net Worth terms
would alone have given Lexent the right to terminate legitimately
under Agreement §9.1.1°

Opportunity To Cure

Annecca makes one last effort to avert defeat: It urges

®° Annecca’s “evidence” to the contrary on this point (and
on many others as well) consists of an affidavit by its
accountant containing the unsubstantiated observation that
Annecca’s books and records “fully and fairly represented” its
financial condition and “were sufficient to create” GAAP-
compliant financial statements (A. St. 948). Especially in the
face of the particularized difficulties described by
Pricewaterhouse, such general and conclusory statements do not
raise a genuine issue of material fact sufficient to stave off
summary judgment (Albiero v. City of Kankakee, 246 F.3d 927, 933
(7th Cir. 2001)).

10 Relatedly, there is no evidence that Lexent lost its
right to terminate by preventing or otherwise frustrating
Annecca’s efforts (as in Sunshine Steak, Salad & Seafood, Inc. v.

W.I.M, Realty, Inc., 522 N.¥.S.2d 292, 293 (App. Div. 1987)).
Obviously Lexent did not cause Annecca’s deficiency in its Net

Worth. And because under the Agreement Annecca alone (and not
Pricewaterhouse) was responsible for ensuring that Annecca’s
balance sheets, books, and records were GAAP-compliant, Lexent’s
decision to sever its relationship with Pricewaterhouse before
that firm completed its final audit does not amount to such
prevention or frustration (A. St. 420).

16



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.

ule 56 Stand.

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)).? 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

2? This District Court's LR 56.1 implements Rule 56 by
requiring parties to submit evidentiary statements and responses
to such statements, to highlight which facts are disputed and
which facts are agreed upon. This opinion cites to Lexent’s LR
56.1 statement as “L. St. q--," to Annecca’s LR 56.1 statement as
‘A. St. 9--" and to their respective responses as “A. Resp. q--”
and “L. Resp. §--.” Where either party's LR 56.1 statement is
undisputed by the other, the opinion includes only a citation to
the original statement, “L.” and “A.” designations are also used
to refer to all other documents submitted by the parties.

2



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
ANNECCA INC., et al.,

Plaintiffs,

)

)

v. No. 02 C °°? NOCKETED

LEXENT, INC., } MAR 0 8 2004
Defendant . )

MEMORANDUM OPINION AND ORDER

Annecca, Inc. and its co-plaintiffs' (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

1 Those co-plaintiffs comprise T.N.C., Inc., U.S. Electric,
LLC, The Michael J. Annecca Living Trust, Inc., Michael Annecca

and Andrew Denon,


occupied by management and the accounting profession in the
generation of audit reports: It is management's responsibility
to produce a company's financial statements that are the grist
for the independent accountarts' mill, and it is then the
accountants' role to render opinion as to the adequacy (or
inadequacy) of those management-prepared statements.’

Both the standards of th accounting profession and, perhaps

more importantly, the languagé of Agreement §1.13 refute the

Annecca position. They plainly distinguish between the functions
of preparing the balance sheets and other underlying financial
statements and the audit of that raw material, with
Pricewaterhouse being made responsible only for auditing the
already GAAP-compliant balance sheets prepared by Annecca
(perhaps with the assistance of its own accountants). That
division of function was in turn anticipated to produce the “2000
Financial Statements” as defined by Agreement §1.13 and referred
to in Agreement §§4.4(a) (i) and 4.4(c). Moreover, as n.6
reflects, Agreement §4.4(a) (ii) expressly placed on Annecca the

responsibility for providing GAAP-compliant financials for

7 Although what has just been said in the text should be
known by any business lawyer (or any litigator who becomes
involved in business litigation), this opinion has attached as
its App. 1 the “Report of Independent Accountants” that forms the
opinion portion of the Pricewaterhouse March 28, 2001 audit
report (L. Ex, G). That is a model of what the standards of the
accounting profession require, and its first paragraph conforms
precisely to what this opinion has just stated.

12



48). Annecca is wrong.

To begin with, it is worth noting that requiring a company’s
books and records to be kept in accordance with GAAP is common
parlance in contracts (see, e.g., Quantum Corporate Funding, Ltd.
v. Assist You Home Health Care Servs. of Va., L.L.C., 144 F.

Supp.2d 241, 243 (S.D. N.Y. 2001) and AUSA Life Ins. Co. v. Ernst
& Young, 991 F. Supp. 234, 238 (S.D. N.Y. 1997)). But on a more

case-specific basis, the representation stated in the Agreement
was breached here in literal terms: Pricewaterhouse auditors
specifically described Annecca’s books as “clearly not in
accordance with GAAP” (L. Ex. R. at 103).

Suppose arguendo, despite that literal breach, that the
Agreement were to be read as Annecca would have it: that
Annecca’s books and records merely had to be amenable to a GAAP-
compliant audit. Even if such a skewed reading were accepted,
Annecca unquestionably failed to meet even such a less demanding
standard. Representatives of Pricewaterhouse characterized their
work on the Annecca matter as a “very, very messy audit” based on
their difficulty in finding information and on the generally poor
condition of Annecca’s books (L. Ex. R at 79-80). And Annecca‘s
own accountant acknowledged that its books and records were not

as complete and accurate as they could have been (A. St. 994 (a)-

15