Opinion ID: 344160
Heading Depth: 1
Heading Rank: 3

Heading: The Availability of the Relief of Rescission.

Text: 35 The February 13, 1976 order of the District Court dismissed Darin's complaint under Rule 12(b)(6) because, among other reasons, the complaint failed to state a valid basis for the remedy of rescission which Darin requested. 10 We find that this determination was premature and that the court below should receive more evidence on the issues of the materiality of the best efforts clause and whether the status quo can be restored between the parties. 36 The standard which governs the dismissal of a complaint under Rule 12(b)(6) is that a complaint should not be dismissed for insufficiency unless it appears to be a certainty that plaintiff is entitled to no relief under any state of facts which could be proved in support of the claim (emphasis omitted), 2A Moore's Federal Practice P 12.08 at 2271 (2d ed. 1975); Build of Buffalo, Inc. v. Sedita, 441 F.2d 284 (2d Cir. 1971) (Civil Rights action); Holmes v. New York City Housing Authority, 398 F.2d 262 (2d Cir. 1968) (Civil Rights action); Kurzweg v. Hotel St. Regis Corp., 309 F.2d 746 (2d Cir. 1962). More on point, the Supreme Court has recently held that (w)hen a federal court reviews the sufficiency of a complaint, before the reception of any evidence either by affidavit or admissions, its task is necessarily a limited one. The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). Since Judge McFadden decided two crucial issues that the allegedly breached best efforts clause of the contract was not a material clause and that the status quo could not be restored among the parties on the complaint (and appended contract) without the aid of affidavits or other evidence, the question, under Scheuer, is whether the Court should have postponed its decision until the evidence was in. 37 Although the standards for dismissing the complaint are federal standards, the federal district court judge must stand in the shoes of a state court judge when ruling on these contract issues in a diversity case such as this. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Kurzweg v. Hotel St. Regis Corp., 309 F.2d 746 (2d Cir. 1962). We thus turn to New York law for the standards which govern the remedy of rescission. 11 38 In addition to the traditional damage remedy for breach of contract, New York will allow a party to rescind an executed contract for the sale of stock, but only if special conditions are met. Lauer v. Raymond, 190 App.Div. 319, 180 N.Y.S. 31 (1st Dept.1920). The particular conditions on which Darin's rescission quest failed were whether the clause allegedly breached by CUC was a material part of the contract, and whether the status quo existing at the time the contract was signed could be restored if rescission were granted. 39 Rescission is a sparsely granted remedy and the party seeking rescission must show that his opponent breached a material aspect of the contract. Fink v. Friedman, 78 Misc.2d 429, 358 N.Y.S.2d 250 (Sup.Ct.1974); Strand Bldg. Corp. v. Russell and Saxe, Inc., 36 Misc.2d 339, 232 N.Y.S.2d 384 (Sup.Ct.1962), aff'd 19 A.D.2d 592, 240 N.Y.S.2d 948 (1963). A  material breach has been defined as one which would justify the other party to suspend his own performance, 12 Williston on Contracts, § 1469 at 186 (3rd ed. 1970), or a breach which is so substantial as to defeat the purpose of the entire transaction. Fink, supra. The question may be posed: Would the innocent party have agreed to enter the contract without the inclusion of the disputed clause? 40 Darin claims that CUC breached its promise to use its best efforts to register Darin's stock which Darin had received in return for all of his TM stock. The district court found that, based on the complaint and appended contract itself, the clause was not material. 12 41 Older New York cases have distinguished between the legal and equitable remedies of rescission. Seneca Wire and Manuf. Co. v. Leach, 247 N.Y. 1, 159 N.E. 700 (1928); E.T.C. Corp. v. Title Guarantee and Trust Co.,271 N.Y. 124, 2 N.E.2d 284 (1936). Although it is not clear whether the distinction persists, Darin's suit is an equitable one since he seeks a court supervised exchange of the TM and CUC stock and assets. 13 As such, the question of materiality is clearly for the court. Fink, supra, 78 Misc.2d at 435, 358 N.Y.S.2d 250; Rudman v. Cowles Comm., Inc., 30 N.Y.2d 1, 330 N.Y.S.2d 33, 280 N.E.2d 867 (1972); Stamps v. Mills Music, Inc., 196 Misc. 480, 92 N.Y.S.2d 79 (Sup.Ct.1949); cf., Borax v. Borax, 3 A.D.2d 404, 161 N.Y.S.2d 232 (1957), aff'd, 4 N.Y.2d 113, 172 N.Y.S.2d 805, 149 N.E.2d 326 (1958). The remaining question is whether the District Judge could properly have decided this question based on the limited information before him. We think not. 42 The parties have cited numerous cases in support of, or in opposition to, the materiality of the best efforts clause. Most of these cases are inapposite for two reasons: first, many deal with stock rescissions based on violations of the federal securities laws; the instant case is a breach of contract case and is governed by state not federal law. Second, the cases tend to deal with the materiality of a particular clause after evidence on the issue has been received and weighed; these cases beg the question, since we are concerned about whether the district court decided the issue prematurely. 43 The essential tool in properly interpreting a contract is to first ascertain the intent of the parties. Rottkamp v. Eger, 74 Misc.2d 858, 346 N.Y.S.2d 120 (Sup.Ct.1973); Strand Bldg. Corp. v. Russell and Saxe, Inc., 36 Misc.2d 339, 232 N.Y.S.2d 384 (Sup.Ct.1962), aff'd, 19 A.D.2d 592, 240 N.Y.S.2d 948 (1963). 44 Unless the intent is unambiguous from the four corners of the documents, extrinsic evidence of the parties' intent should be received. Rottkamp, supra, 74 Misc.2d at 125, 346 N.Y.S.2d 120; cf. Heller and Henretig, Inc. v. 3620-168th St., Inc., 302 N.Y. 326, 98 N.E.2d 458 (1951). 45 We turn now to the document itself. CUC argues that the clause could not have been one of the contract's keystones. Its most telling point is that since the registration of the stock was not a condition precedent 14 to the exchange of the securities, and since best efforts necessarily means that the stock might never have been registered, the fact that CUC was required to endeavor to register the stock could not have been a central obligation. CUC also asserts that a liquidated damage clause not the remedy of rescission governs a breach of the best efforts provision. 15 We think, however, that this argument misses the point. Best efforts registration clauses are common and are significant. Due to the nature of the securities business and the vagaries of the SEC, registration can never be guaranteed, but in the usual case a best efforts clause is as close to a guarantee of registration as any careful seller is willing to give. In this case, it is not difficult to imagine why someone like Darin, whose earnings as an entertainer might fluctuate wildly or suddenly disappear, might have wanted the added flexibility that registration would provide. 46 However, it may be inferred from the contract that Darin wanted his stock registered. The Registration Statement was to be filed by CUC in 1968. 16 Darin was to be compensated by additional stock if the registration was delayed and the price of CUC fell implying that Darin was prepared to possibly sell the stock once it was registered. 17 Even though registration was not guaranteed, Darin may have been willing to take this risk but only on the condition that CUC try its best to accomplish this objective. In other words, without CUC's best efforts promise, Darin may not have even considered exchanging his TM stock. CUC notes that if this is true, then the contract itself could have provided for rescission in the event of failure to register the stock. But CUC may have opposed the idea or Darin may have accepted the risk involved in order to allow the contract to proceed, or Darin may not have thought of this rescission alternative. 47 Of course, this court can speculate. 18 All we need consider, however, is whether or not the question of materiality can be decided on the complaint alone. We hold that it cannot, that the intent of the parties was too ambiguous to be totally gleaned from only the contract, and that the District Court should have received evidence on the question. 19 See Perma Research and Development Co. v. Singer Co., 308 F.Supp. 743 (S.D.N.Y.1970) (summary judgment too frail a vehicle by which to dispose of a complex case) and two cases which denied motions to dismiss a complaint and a counterclaim on the grounds that clauses in the contracts were matters for trial. Strand Bldg. Corp. v. Russell and Saxe, Inc., 36 Misc.2d 339, 232 N.Y.S.2d 384 (Sup.Ct.1962), aff'd, 19 A.D.2d 592, 240 N.Y.S.2d 948 (1963). Stamps v. Mills Music, Inc., 196 Misc. 480, 92 N.Y.S.2d 79 (Sup.Ct.1949). 48 A second ground on which the District Judge based his decision to dismiss the complaint was that it would be impossible to restore the parties to the status quo existing prior to the stock exchange in 1968. Rudman v. Cowles Comm. Inc., 30 N.Y.2d 1, 330 N.Y.S.2d 33, 280 N.E.2d 867 (1972). Although this is a question of fact, the only basis on which Judge McFadden could have decided the question was on the pleadings and unrecorded pre-trial conferences. 49 While Rule 12(c) Fed.R.Civ.P. allows a district judge to treat a motion to dismiss a complaint as a motion for summary judgment, Rule 56(c) provides that the judgment may be rendered if, based on pleadings, depositions, answers to interrogatories, admissions on file, and any affidavits, there are no material disputed facts at issue. 50 There is no indication that affidavits were solicited from the parties, nor is there any indication on the record or the briefs that the motion to dismiss would consider any factual disputes. What we suspect occurred is that Judge McFadden, who presided over seventeen other suits against CUC and Seeburg in addition to the Darin action, based his status quo ruling on his own personal knowledge of this series of cases. If true, this was, of course, not in accord with Rule 12(c) or ordinary considerations of fairness with respect to Darin. 51 We hold that whether the status quo could be achieved is a question of fact and could not be decided solely on the pleadings. The question is also one of law since it appears that the status quo requirement as to the defaulting party relaxes as the breach, itself, becomes more serious. Jones Chemicals, Inc. v. City of Binghamton, 26 A.D.2d 710, 271 N.Y.S.2d 507 (1966), aff'd, 20 N.Y.2d 808, 284 N.Y.S.2d 702, 231 N.E.2d 288 (1967); Duggan v. Platz, 238 App.Div. 197, 264 N.Y.S. 403 (1933), modified, 263 N.Y. 505, 264 N.Y.S. 403, 189 N.E. 566 (1933). Quite clearly, these questions can only be answered after the facts have been flushed out. 52 A third basis on which the court below decided that rescission is not a proper remedy is that, although Darin may have a claim to the TM stock which he exchanged, he has no claim to the underlying assets which have since been sold to third parties. Since the District Judge sits as an equity judge in this rescission action, it is for the court to fashion the proper remedy after all the relevant facts have been found. 53 The District Judge rested his decision to deny rescission on a final ground: that Darin failed to plead that he was damaged as a result of the action of CUC. However, it appears that under New York law, damage need not be specifically pleaded in an action to rescind a contract. Lauer v. Raymond, 190 App.Div. 319, 180 N.Y.S. 31, 38 (1st Dept. 1920); Scheidl v. Universal Aviation Equipment, 159 N.Y.S.2d 278, 281 (Sup.Ct.1957). 54 CUC further suggested that Darin's rescission claim was barred for another reason laches. However, in his opinion of July 11, 1975 Judge McFadden ordered that the question of laches was to be tried if and only if Darin survived the motion to dismiss. The question of laches is thus not properly before us at this time. 55