Court Opinion

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Opinions of the United
2006 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

5-17-2006

In Re: Cendant Corp
Precedential or Non-Precedential: Non-Precedential

Docket No. 04-3352

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Recommended Citation
"In Re: Cendant Corp " (2006). 2006 Decisions. Paper 1098.
http://digitalcommons.law.villanova.edu/thirdcircuit_2006/1098

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                                                                     NOT PRECEDENTIAL

                         UNITED STATES COURT OF APPEALS
                              FOR THE THIRD CIRCUIT

                                     Case No. 04-3352

                           IN RE: CENDANT CORPORATION
                               SECURITIES LITIGATION

                                    Eileen McLaughlin,
                                             Appellant

                        On Appeal from the United States District Court
                                 for the District of New Jersey
                                       (No. 98-cv-01664)
                         District Court Judge: Hon. William H. Walls
                                  ______________________

                              Argued March 9, 2006
         Before: AMBRO and BECKER, Circuit Judges, and STAGG,* District Judge

                                   (Filed May 17, 2006)

    Brain L. Wamsley, Esq. (ARGUED)
    Goodwin Procter
    599 Lexington Avenue
    New York, NY 10022
    Attorney for Appellant

    Samuel Kadet (ARGUED)
    Skadden, Arps, Slate, Meagher & Flom
    Four Times Square
    New York, NY 10036

*
    Hon. Tom Stagg, Senior District Judge, sitting by designation.
Burton H. Finkelstein
Finkelstein, Thompson & Loughran
1050 30th Street, NW
Washington, DC 20007
Attorneys for Appellee
                          ________________________

                              OPINION OF THE COURT
                              ________________________

BECKER, Circuit Judge

       Eileen McLaughlin appeals from a district court order dismissing her claims

against Cendant Corporation for breach of contract and breach of the implied duty of

good faith and fair dealing. We will affirm.

       Because we write mainly for the parties, we provide only a brief synopsis of the

facts and procedural history. While working at Cendant, McLaughlin earned the right

to buy company stock at a fixed price upon her departure. The rules governing these

options were set forth in two plans, the Option Plan and the Bonus Plan. Under those

documents, McLaughlin’s resignation triggered a four-month deadline in which to

exercise her options. In the meantime, however, Cendant learned of problems with its

accounting practices and retracted its financial statements from the SEC. The company

further determined that federal law did not allow it to issue additional stock until it had

filed new financials. Accordingly, Cendant imposed a temporary blackout on the

exercise of employee stock options and informed McLaughlin that it would not release

shares of stock in response to her exercise request.

       When the blackout was lifted, McLaughlin was allowed to exercise her options

                                             2
    for as many days as she lost in the blackout period. McLaughlin took advantage of this

    opportunity, but she earned substantially less than she would have if she had been able

    to acquire and sell her stock during the blackout.

           McLaughlin brought suit against Cendant and several of its officers and

    directors, alleging, inter alia, breach of contract and breach of the implied duty of good

    faith and fair dealing. The District Court granted Cendant’s motion for judgment on the

    pleadings pursuant to Federal Rule of Civil Procedure 12(c), and this appeal followed.

           The District Court had jurisdiction under 28 U.S.C. §§ 1331, 1332 and 1367 and

    Section 27 of the Exchange Act, 15 U.S.C. § 78aa. This Court has appellate

    jurisdiction under 28 U.S.C. § 1291.1 Our review of the District Court’s entry of

1
   We reject Cendant’s claim that appellate jurisdiction is lacking because the District
Court failed to certify its order pursuant to Federal Rule of Civil Procedure 54(b). When
a case involves multiple parties, an order dismissing claims against just one party is
ordinarily deemed “final,” and hence appealable, “only upon an express determination
that there is no just reason for delay and upon an express direction for the entry of
judgment.” See Fed. R. Civ. P. 54(b). As Cendant points out, the order dismissing
McLaughlin’s claims did not resolve claims between Ernst & Young (E&Y) and Cendant,
even though the latter claims were filed in an action that was consolidated with
McLaughlin’s suit “for all purposes.” In United States v. $8,221,877.16 in United States
Currency, 330 F.3d 141 (3d Cir. 2003), however, we held that a district court’s order
may, in limited circumstances, be treated as final even though it was not certified in
accordance with Rule 54(b). This is such a case. As in $8,221,877.16 in United States
Currency, several factors suggest that the District Court’s failure to make the requisite
certification does not render its order ineffectual. First, McLaughlin’s breach of contract
and implied duty claims have nothing to do with the merits of Cendant’s dispute with
E&Y. Second, McLaughlin’s interests are not recognizably aligned with E&Y’s. And
third, the two actions here “have been treated separately from the start.” See id. at 148.
Under these circumstances, we are not precluded from treating the District Court’s order
as final, and thus reach the merits of McLaughlin’s claims.

                                                3
judgment on the pleadings is plenary. See Mele v. Fed. Reserve Bank of New York, 359
F.3d 251, 253 (3d Cir. 2004).

       McLaughlin’s appeal requires us to decide two questions: whether the District

Court erred in dismissing McLaughlin’s breach of contract claim, and whether the

District Court erred in dismissing McLaughlin’s claim that Cendant breached an

implied duty of good faith and fair dealing. We consider each issue in turn.

                                             I.

       McLaughlin argues that Cendant breached its contract with her in two ways:

first, by not allowing her to exercise her options during the blackout period; and

second, by extending the exercise term once the blackout period ended. Neither

argument is persuasive.

       Section 7 of the Option Plan provides:

       Certificates representing the shares purchased shall be issued as promptly
       as practicable, provided that the Company may postpone issuing
       certificates for such shares for such time as the Company, in its sole
       discretion, may deem necessary or desirable in order to enable it to
       comply with any requirements of the Securities Act of 1933, as amended
       (“Securities Act”), the 1934 Act, [or] any Rules or Regulations of the
       Securities and Exchange Commission promulgated under either of the
       foregoing acts.

Similarly, Section 3 of the Option Plan provides: “Subject to the provisions of the Plan,

the Committee shall have the authority, in its sole discretion, ... to restrict the sale or

other disposition of the shares of Common Stock acquired upon the exercise of an

option and to waive any such restriction.”

                                              4
       McLaughlin argues that the provisions excerpted above do not permit the

company to bar a former employee from exercising duly acquired options. Instead, she

insists, they only authorize the company to “postpone issuing certificates” and to

“restrict the sale or other disposition” of Cendant stock obtained upon the exercise of

an option, once that option has been exercised.

       This argument is without merit. What Cendant did is not only practically

indistinguishable from what it was unequivocally authorized to do; it was also, to the

extent that it was different in form from what the plan prescribed, better for

McLaughlin than the alternative (taking McLaughlin’s money but not giving her the

shares). In these circumstances, we cannot say that Cendant committed a breach in any

meaningful sense of that term. This conclusion draws added strength from the

problematic nature of McLaughlin’s alternative construction, which would have

required Cendant to violate federal law in order to comply with the terms of the plan.

Cf. Fields v. Thompson Printing Co., 363 F.3d 259, 268 (3d Cir. 2004) (“It is axiomatic

that a court may refuse to enforce a contract that violates public policy.”) (citing W.R.

Grace & Co. v. Local 759, 461 U.S. 757, 766 (1983)).

       Nor can we agree that Cendant breached the agreement by extending the period

in which McLaughlin was allowed to exercise her options. McLaughlin contends that

the post-blackout extension violated the following provision:

       Any optionee whose employment with the Company (and its
       Subsidiaries) has terminated for any reason other than death or
       permanent and total disability ... may exercise his option, to the extent

                                            5
         exercisable on the date of such termination, at any time within four
         months after the date of termination, but in no event after the expiration
         of the term of the option.

         Several considerations suggest that the company did not run afoul of this

provision by extending McLaughlin’s exercise period so as to compensate her for days

lost during the blackout. First, like any text, contract language cannot be construed in a

vacuum. In the circumstances of this case, the “term” of the option did not expire four

months after the date of termination of employment, because the four-month period

was interrupted by the company’s blackout. Hence, the latter part of McLaughlin’s

exercise period is most reasonably regarded as part of the modified option term.

Second, the modification was not just beneficial to McLaughlin and reasonable under

the circumstances; it was also a proper exercise of the Compensation Committee’s

power “to make all other determinations necessary or advisable for administering the

Plan.”

         Finally, we note that McLaughlin’s contract claims would fail even if we were

to hold that the company did breach the agreement. Under Delaware law, proof of

damages is one element of a breach of contract claim. See, e.g., H-M Wexford LLC v.

Encorp, Inc., 832 A.2d 129, 140 (Del. Ch. 2003). The aim of awarding damages for a

breach of contract is “to return the party damaged to the position that party would have

been in had the breach not occurred.” Mantyla v. Wilson, No. 2001-12-193, 2004 WL
326927, at *3 (Del. Com. Pl. Jan. 21, 2004) (citing Delaware Limousine Serv. v. Royal

Limousine Serv., No. 87C-FE-104, 1991 WL 53449 (Del. Super. April 5, 1991)). On

                                              6
the facts of this case, it is plain that the company, if it had thought itself bound to let

McLaughlin exercise her options, would have prevented her, for the same length of

time, from selling the stocks she acquired. Similarly, McLaughlin was not harmed in

the least by the company’s allegedly unauthorized decision to extend her exercise

period after lifting the blackout. Because McLaughlin, absent the two alleged breaches

to which she points, would have been in exactly the same position as she is in now, she

is unable to prove damages under Delaware law.

       In sum, Cendant did not breach its contract with McLaughlin and, even if it did,

McLaughlin did not suffer any damages. Accordingly, McLaughlin’s contract claims

were properly dismissed.

                                             II.

       McLaughlin next claims that Cendant breached its implied duty of good faith

and fair dealing. We disagree.

       The relevant law is set forth in Frontier Oil Corp. v. Holly Corp., No. 20502,

2005 WL 1039027 (Del. Ch. Apr. 29, 2005):

       The covenant of good faith and fair dealing, implied in every Delaware
       contract, arises from “fundamental notions of fairness.” It “is a judicial
       convention designed to protect the spirit of an agreement when, without
       violating an express term of the agreement, one side uses oppressive or
       underhanded tactics to deny the other side the fruits of the parties’
       bargain.” The Court, of course, may not substitute its notions of fairness
       for the terms of the agreement reached by the parties. Indeed, the implied
       covenant may only be invoked where it is “clear from what was
       expressly agreed upon that the parties who negotiated the express terms
       of the contract would have agreed to proscribe the act later complained of
       as a breach of [their agreement] had they thought to negotiate with

                                              7
       respect to that matter.” “[W]here the subject at issue is expressly covered
       by the contract, ... the implied duty to perform in good faith does not
       come into play.” Finally, imposing an obligation on a contracting party
       through the covenant of good faith and fair dealing “is a cautious
       enterprise” and instances “should be rare.”

Id. at *28 (internal citations omitted) (alterations in original).

       Applying these principles to the facts of our case, McLaughlin’s claim fails for

several reasons. First, McLaughlin does not point to any allegedly “oppressive or

underhanded tactics” employed by Cendant to thwart the spirit of the agreement.

Indeed, as noted above, Cendant’s course of action was indistinguishable from, and

better for McLaughlin than, conduct that was expressly contemplated by the plan.

       Second, it is by no means “clear from what was expressly agreed upon that the

parties who negotiated the express terms of the contract would have agreed to

proscribe the act later complained of as a breach of [their agreement] had they thought

to negotiate with respect to that matter.” As noted above, in these circumstances the

contract expressly allowed Cendant to withhold stock certificates, to restrict sales of

shares, or to do both. Hence, it cannot be “clear” that the parties, if apprised of the

facts at hand, would have prevented Cendant from doing essentially the same thing

under a different name.

       Third, the “subject at issue is expressly covered by the contract.” The subject

here is whether Cendant could block the exercise of employee options to ensure

compliance with federal rules while the company was refiling its financials. The plan

here explicitly provided for such blocking as may be needed “to enable it to comply

                                              8
    with any requirements of the Securities Act of 1933, as amended (“Securities Act”), the

    1934 Act, [or] any Rules or Regulations of the Securities and Exchange Commission

    promulgated under either of the foregoing acts.” See Dunlap v. State Farm Fire &

    Cas. Co., 878 A.2d 434, 441-442 (Del. 2005) (“Existing contract terms control, ... such

    that implied good faith cannot be used to circumvent the parties’ bargain, or to create a

    ‘free-floating duty ... unattached to the underlying legal document.’ Thus, one

    generally cannot base a claim for breach of the implied covenant on conduct authorized

    by the terms of the agreement.”) (citations omitted) (second alteration in original).2

                                                III.

             For the reasons stated above, we will affirm the judgment entered by the District

    Court.

2
   McLaughlin relies on Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund,
624 A.2d 1199, 1208-1209 (Del. 1993), for the proposition that “a fairly pleaded claim of
good faith/bad faith raises essentially a question of fact which generally cannot be
resolved on the pleadings or without first granting an adequate opportunity for
discovery.” We think that Desert Equities is distinguishable from our case for two
reasons. First, as noted above, in our case the implied duty to perform in good faith does
not even come into play, because “the subject at issue is expressly covered by the
contract.” See Frontier Oil Corp., 2005 WL 1039027, at *28. Second, although Desert
Equities imposes a low bar for surviving a motion for judgment on the pleadings, the
plaintiff in that case made plausible, albeit general, allegations of bad faith. See Desert
Equities, Inc., 624 A.2d at 1202 (noting allegation that the defendant excluded plaintiff
from certain investments in retaliation for filing previous suit). In our view, McLaughlin
does not even allege facts which, taken as true, are sufficient to establish a breach of
Cendant’s implied duty of good faith.

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