Opinion ID: 782841
Heading Depth: 2
Heading Rank: 2

Heading: Valuation of Damages for the Warrants

Text: 46 The principal grist for this appeal is the scope and measure of damages awarded to OGSI for Hollander's breach of the Engagement Letter. 47 Although the amount of recoverable damages is a question of fact, `the measure of damages upon which the factual computation is based is a question of law.' Wolff & Munier, Inc. v. Whiting-Turner Contracting Co., 946 F.2d 1003, 1009 (2d Cir.1991) (quoting United States ex rel. N. Maltese & Sons, Inc. v. Juno Constr. Corp., 759 F.2d 253, 255 (2d Cir. 1985)). In other words, whether the district court correctly calculated damages is a question of law that we review de novo.  Lauder v. First Unum Life Ins. Co., 284 F.3d 375, 379 (2d Cir.2002); see also Lucente v. Int'l Bus. Machs. Corp., 310 F.3d 243, 261 (2d Cir.2002); Juliano v. Health Maint. Org. of New Jersey, Inc., 221 F.3d 279, 286 (2d Cir.2000).
48 The district court calculated OGSI's damages from the date of the BMC tender offer, rather than the date of Hollander's breach. The district court reasoned that the most reasonable date to fix for the value of OGSI's percentage of the warrants is April 9, 1999, the date of consummation of the BMC tender offer at a price of $52.50 in cash. 49 Hollander contends that the district court erred in determining that OGSI would have held the warrants for the longest term possible and improperly computed OGSI's breach of contract damages from the date of the BMC tender offer, rather than from the date of his breach. We agree that damages are properly measured from the date of the breach. 50 The contract provided that it would be governed by New York law. This is not disputed by either party. Under New York law, damages for breach of contract should put the plaintiff in the same economic position he would have occupied had the breaching party performed the contract. See Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490, 495 (2d Cir.1995). New York courts are clear that breach of contract damages are measured from the date of the breach. See Simon v. Electrospace Corp., 28 N.Y.2d 136, 145, 320 N.Y.S.2d 225, 269 N.E.2d 21 (1971); see also Lucente, 310 F.3d at 262. We have consistently stated that New York's rule for `[m]easuring contract damages by the value of the item at the time of the breach is eminently sensible and actually takes expected lost future profits into account.' Lucente, 310 F.3d at 262 (quoting Sharma v. Skaarup Ship Mgmt. Corp., 916 F.2d 820, 826 (2d Cir.1990)). We have also noted that New York courts have rejected awards based on what `the actual economic conditions and performance' were in light of hindsight. Sharma, 916 F.2d at 826 (quoting Aroneck v. Atkin, 90 A.D.2d 966, 456 N.Y.S.2d 558, 559 (4th Dep't 1982)). 51 Admittedly, we have allowed damages to be measured at a later date in cases of conversion. In such cases, damages may be measured by `the highest intermediate value of the stock between the time of the conversion and a reasonable time after the owner has received notice of it to enable him to replace the stock.' Schultz v. Commodity Futures Trading Comm'n, 716 F.2d 136, 139-40 (2d Cir.1983) (quoting Gallagher v. Jones, 129 U.S. 193, 201, 9 S.Ct. 335, 32 L.Ed. 658 (1889)). Thus, the measure of damages in conversion of securities cases is either: (1) their value at the time of the conversion; or (2) their highest intermediate value between notice of the conversion and the time when reentry into the market would be both warranted and desired. See id. at 141-42. 52 Ours, of course, is not a conversion case. In Lucente v. International Business Machines Corp., 310 F.3d 243, 263 (2d Cir. 2002), we flatly rejected under New York law the use of the conversion measure of damages in a breach of contract case. In Lucente, we examined the precedent set forth in this Circuit by Hermanowski v. Acton Corp., 729 F.2d 921 (2d Cir.1984). In Hermanowski, the district court had puzzled over whether damages in a breach of contract action involving stock options should be calculated as of the date of the breach or under the conversion method. It rejected the latter. Hermanowski v. Acton Corp., 580 F.Supp. 140, 144-45 (E.D.N.Y.1983). It applied the traditional rule that damages for breach of contract are determined by the loss sustained or the gain prevented at the time and place of breach. Id. at 145 (citing Simon, 28 N.Y.2d at 145, 320 N.Y.S.2d 225, 269 N.E.2d 21). We affirmed substantially for the reasons set forth in the decision of the district court and specifically agreed that damages should be determined as of [the] date [of the breach]. Hermanowski, 729 F.2d at 922. The Third Circuit reached the same result in Scully v. U.S. WATS, Inc., 238 F.3d 497, 512-13 (3d Cir. 2001) (interpreting federal and New York law). 53 Paragraph 5(a) of the Engagement Letter provided that, upon signing the Engagement Letter, Hollander was to pay OGSI a retainer of $50,000 in cash and deliver warrants that shall vest immediately upon signing of this Agreement. This provision entitled OGSI to acquire 25,000 shares of 4D common stock. Similar to a stock option, a warrant is defined as any ... certificate evidencing a right to subscribe to or otherwise acquire another security, issued or unissued. 17 C.F.R. § 240.12a-4(a)(1). It is undisputed that Hollander refused to deliver the warrants. This refusal was in breach of the Engagement Letter. 54 Based on clear New York law, the proper valuation for the warrants was the date of the breach — the date Hollander failed to deliver the warrants. See Simon, 28 N.Y.2d at 145, 320 N.Y.S.2d 225, 269 N.E.2d 21 (The proper measure of damages for breach of contract is determined by the loss sustained or gain prevented at the time and place of breach ... [t]he rule is precisely the same when the breach of contract is nondelivery of shares of stock.) (internal citation omitted); Aroneck, 456 N.Y.S.2d at 559 ([D]amages for the defendants' breach of contract to purchase plaintiffs' stock ... [are computed] by ascertaining the difference between the agreed price of the shares and the fair market value at the time of the breach.). 55 Not surprisingly, OGSI contends that it should get the benefit of the higher valuation of the warrants at the date of the tender offer because it would have held the warrants longer. In support of this valuation, the district court and OGSI rely on Commonwealth Assocs. v. Palomar Med. Techs., Inc., 982 F.Supp. 205 (S.D.N.Y. 1997). In Commonwealth, the plaintiff was awarded the value of the underlying common stock as of the date on which the plaintiff showed that it would have sold the stock if the warrants had been issued. See id. at 211. The facts presented here, however, are distinguishable. 56 In Commonwealth, the breach occurred when the defendant failed to honor the plaintiff's request for registration and issuance of the shares. The plaintiff did not learn of the defendant's repudiation of the contract until that time. See id. Because the defendant continued to pay the plaintiff for financial consultation, the plaintiff was justified in assuming that the defendant would honor its obligation with regard to the warrants. See id. 57 In the present case, however, the relevant breach occurred when Hollander failed to deliver the warrants. Unlike the plaintiff in Commonwealth, OGSI knew immediately that Hollander had breached. Commonwealth is simply inapposite. 58 In sum, the district court erred in valuing the warrants as of the date of the consummation of the BMC tender offer. The appropriate date for measuring OGSI's damages is the date of the breach. 59 It is noteworthy that the Engagement Letter did not expressly require immediate physical delivery of the warrants upon signing. Rather it stated that the warrants shall vest immediately upon signing this Agreement. There is some indication that the parties believed that the warrants were to be delivered immediately. The district court found that the Engagement Letter was breached, shortly after the execution of the Engagement Letter. Hollander testified that the contract language stating that the warrants would vest immediately meant that [OGSI] would receive the 25,000 warrants immediately upon signing the agreements. Craig Newman, OGSI's general counsel, testified that the warrants were due in February 1995 and that he considered it a breach of the engagement letter when [Hollander] didn't deliver the warrants.... However, the exact date of the breach — the date from which damages should be calculated — was not determined by the district court, nor was it thoroughly briefed by the parties on this appeal. 60 For this reason, we vacate in part and remand to the district court with instructions to determine the date of breach and to recompute OGSI's breach of contract damages accordingly.
61 The district court valued the warrants held by the six (6) former employees of OGSI as of January 1, 1998, the first date the warrants were exercisable. For the reasons previously discussed, the warrants in the hands of the assignees should be valued in the same way as those retained by OGSI. Thus, the date of the breach by Hollander, as determined by the district court on remand, is the appropriate date for valuation of all the warrants.
62 Hollander contends that the district court also erred in determining that he would not have exercised his right under the Engagement Letter to buy back the warrants. Because we find that OGSI's breach of contract damages should be measured from the date of the breach, there is no need to reach this issue.