DOWNER & COMPANY, LLC vs. STI HOLDING, INC., & another. [Note 1]

MILKEY, J. Defendant Separation Technologies, Inc., engaged

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the plaintiff, an investment banking firm, to assist it in raising capital. Events played out in an unanticipated fashion, which led to a dispute over how much compensation the defendants owed the plaintiff under the contract. After trial, a Superior Court jury awarded the plaintiff approximately $2.26 million dollars in contractual damages (in addition to the $214,773 in compensation that had already been paid). The judge partially granted the defendants' motion for judgment notwithstanding the verdict (judgment n.o.v.), thereby reducing the jury award to approximately $1.46 million. On cross appeals, we affirm in part and reverse in part.

Background. [Note 2] The defendants are Separation Technologies, Inc. (STI), and its holding company, STI Holding, Inc. (STI Holding). [Note 3] STI developed technology to convert fly ash (a by-product of the combustion of coal) into a useful product for the ready-mix concrete industry. Between 1994 and 2001, STI installed its equipment on a commercial scale at three coal-fired power plants. By 2001, STI's principals had already begun thinking about "exit strategies," through which they could sell the company and thereby cash out their interests. However, in light of the company's limited track record of success, the principals decided that they needed to expand the business in order to make it a more attractive target of acquisition, with the potential sale of the company several years away. Therefore, with a specific goal of raising at least ten million dollars in capital, STI hired plaintiff Downer & Company, LLC (Downer), to assist with a "private placement of equity and/or debt."

On May 25, 2001, STI and Downer entered into a written contract that described the tasks Downer was to perform and explained how it was to be paid. Under the compensation provisions, Downer was to receive a monthly fee and reimbursement

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of its expenses. The contract also required STI to pay a "contingent transaction fee" for "each completed equity or debt investment in STI." Specifically, STI was required to pay Downer five percent of the "equity and/or debt raised," plus warrants on stock or other equity securities issued. [Note 4] For a fee to be due, the transaction had to occur during the term of the agreement or in a twelve-month "tail period" after the agreement was terminated. Downer did not have to prove that any transactions covered by the agreement specifically resulted from its efforts. [Note 5] STI retained control over whether to accept any offers.

On STI's behalf, Downer prepared an "offering memorandum" to solicit bids from potential investors interested in providing the capital STI was seeking. In response to its marketing efforts, Downer received two equity financing proposals and one debt financing proposal. [Note 6] STI eventually began to focus on the debt financing proposal, which was from Eureka Growth Partners (Eureka). The Eureka proposal would have provided STI with at least seven million dollars in new capital.

During this period, a representative of Titan America LLC (Titan), sat on STI's board of directors. Titan owned twenty percent of STI Holding's shares. [Note 7] It strongly opposed Eureka's proposal, because it thought the interest rate Eureka was seeking was too high and that the proposal made economic sense only if STI grew at a rate that Titan viewed as unrealistic. Titan

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was also concerned about the dilution of the value of its ownership interest that would result from STI's accepting outside financing. Faced with Eureka's offer, Titan made a competing debt financing proposal to STI. Its offer was similar to Eureka's although at a lower interest rate. However, consistent with its more conservative view of STI's short-term growth potential, Titan offered to loan STI far less money than Eureka: two and one-half million dollars for the first year, with another two and one-half million to be available thereafter if STI met certain to-be-agreed-upon performance goals. STI's board rejected Titan's proposal in favor of signing a nonbinding term sheet with Eureka.

Before STI consummated its contemplated financing deal with Eureka, Downer sought to convince Titan to participate in the Eureka proposal (which had been structured so that other investors, including existing shareholders, could provide up to five million dollars in addition to the seven million that Eureka was to provide). Titan considered putting up three million dollars toward this end, but ultimately rejected the option. Instead, Titan decided to attempt a takeover of the company. To accomplish this, Titan, on June 28, 2002, made a "tender offer" to the other existing STI Holding shareholders, offering to buy out all of their shares at a set price. The tender offer took both STI and Downer by surprise. As Downer conceded during its closing argument at trial, no one had thought that such an option was possible in the relevant time frame.

Downer provided to STI's principals an evaluation of the tender offer, and it helped them prepare a counteroffer as the negotiations rapidly developed. As Titan's takeover of STI became increasingly likely, Downer became concerned over how it would be compensated. On July 3, 2002, Downer informed STI that it still expected contingent transaction fees in addition to its monthly compensation and expenses if Titan's tender offer was successful. [Note 8] On July 8, 2002, Downer sent STI a preliminary invoice stating what it expected to be paid. After reviewing the matter with counsel, STI concluded that its interests were no

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longer aligned with Downer's, [Note 9] and it terminated the contract on July 10, 2002, effective August 9, 2002.

Following some additional negotiations, Titan's tender offer was accepted, and Titan obtained full ownership and control of both STI and STI Holding on or about August 15, 2002. Downer expanded its demands to include transaction fees on all of the money that Titan paid to acquire STI, [Note 10] and it eventually demanded additional contingent fees on certain transactions that Titan made after taking control of the company. Those transactions were of two distinct types. One was Titan's purchase of two loans from STI's creditors (totaling $5,179,541). The other was for cash advances that Titan provided STI during the one-year "tail period." The parties do not dispute that Titan frequently made cash advances to STI in that period, and that STI frequently made transfers back to Titan. Throughout the year in question, STI always owed money to Titan, with the highest running balance at just over three million dollars ($3,000,063). Downer demanded a transaction fee on $10,427,212, the total of all the cash transfers Titan made to STI, without consideration of the payments STI regularly made in the opposite direction.

STI refused to pay the contingent transaction fees, and Downer brought a breach of contract claim against both STI and STI Holding. [Note 11] After an eleven-day trial, the jury found both defendants liable and awarded damages of $2,261,000. [Note 12] The defendants filed a motion for judgment n.o.v. through which they

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argued that, as a matter of law, no contingent transaction fees were owed under the contract. [Note 13] The judge denied the judgment n.o.v. motion in part and granted it in part. Specifically, he allowed to stand the portion of the jury verdict that corresponded to the tender offer (and related pre-acquisition payments), while voiding the remainder of the award, which was evidently based on the postacquisition transactions. [Note 14] The judge also granted the same relief through conditionally allowing the defendants' motion for a new trial unless Downer accepted a remittitur (which it did). Both parties appealed.

Discussion. STI's appeal. The defendants argue that, as a matter of law, they owe no contingent transaction fee for Titan's purchase of existing stock from the other STI Holding shareholders. According to them, the unambiguous terms of the contract did not encompass these transactions, and the judge should never have asked the jury to determine whether the defendants' refusal to pay the corresponding contingent transaction fee was a breach of contract. [Note 15] We agree.

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Whether a contract is ambiguous is a question of law that we address de novo. Basis Technology Corp. v. Amazon.com, Inc., 71 Mass. App. Ct. 29 , 36 (2008). See Targus Group Intl., Inc. v. Sherman, ante 421, 428 (2010) ("The interpretation of a contested written contract is a question of law ordinarily appropriate for disposition by summary judgment"), citing Lumber Mut. Ins. Co. v. Zoltek Corp., 419 Mass. 704 , 707 (1995); LoCicero v. Hartford Ins. Group, 25 Mass. App. Ct. 339 , 341 (1988).

To support its interpretation of the compensation provision, Downer focuses principally on the phrase "each completed equity or debt investment in STI." Downer argues that this term is broad enough to encompass Titan's purchase of existing STI Holding stock. Such an interpretation is indeed possible if the language is taken out of context and read in isolation. [Note 16] However, meaning and ambiguity are creatures of context. See Starr v. Fordham, 420 Mass. 178 , 190 & n.11 (1995) (contractual language must be read in context). In interpreting a contract, " '[t]he objective is to construe the contract as a whole, in a reasonable and practical way, consistent with its language, background, and purpose.' " Sullivan v. Southland Life Ins. Co., 67 Mass. App. Ct. 439 , 442 (2006), quoting from Massachusetts Property Ins. Underwriting Assn. v. Wynn, 60 Mass. App. Ct. 824 , 827 (2004). Reading the language in context dooms Downer's view.

The parties do not dispute that STI engaged Downer to assist it in raising the new capital needed to allow the company to expand. This purpose is reflected in language used throughout the contract. For example, the contract refers to transactions made in "this financing round," and Downer conceded at trial that "financing" necessarily refers to raising capital. [Note 17] The compensation provision itself also reflects this mission by stating

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that the five percent fee was due on "equity and/or debt raised" (emphasis added). Given the stated purpose for which Downer was retained, we believe that the parties intended that a transaction fee be paid for those transactions that "raised" funds for STI (whether provided directly to STI, or funneled to STI through STI Holding). [Note 18]

Titan's takeover, by itself, raised no new capital for STI (or STI Holding). [Note 19] The money that Titan paid instead went to the outgoing shareholders who seized the unanticipated opportunity to cash out. [Note 20] We conclude that the tender offer did not fall within the scope of what Downer was hired to accomplish and that Titan's purchase of the existing stock was not the type of transaction for which STI would owe Downer a contingent fee. A contrary interpretation would deprive STI of the benefit of its bargain by binding it to pay a contingent fee on transactions that provided the company none of the capital that the contract was intended to raise. [Note 21]

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This is not to say that there must be perfect congruity between the scope of work portion of the contract and the compensation provisions. Certainly, the parties were free to draft the compensation provisions with a broader brush in order to allow Downer to receive appropriate compensation when it fulfilled its part of the bargain in ways that were not specifically foreseen. But that is very different from concluding that Downer should be paid "contingent" compensation regardless of whether STI received the benefits that it reasonably expected under the contract.

Downer's cross appeal. Downer argues that the judge erred by reducing the jury verdict, and that it is entitled to a contingent fee for the postacquisition transactions even if one is not due for the tender offer itself. [Note 22] We agree in part.

When it purchased the two notes on which STI owed debts to third parties, Titan did not cancel STI's debt. Thus, Titan's purchase of the notes had no impact on STI other than changing the identity of the parties to whom it owed the money. Therefore,

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the judge correctly concluded that, as a matter of law, Titan's purchase of these notes could not be viewed as an "equity or debt investment in STI" (for which STI was required to pay a contingent transaction fee to Downer).

However, the same cannot be said with regard to the cash advances that Titan provided to STI. On this record, the jury could have concluded that such payments provided the very expansion capital that STI had been seeking and that it had hired Downer to help obtain. [Note 23] The fact that Titan at this point fully owned STI Holding, which in turn owned STI, does not by itself prevent the cash infusions from being considered debt investment. Cf. Union Pac. R. Co. v. Commissioner of Int. Rev., 69 F.2d 67, 69 (2d Cir. 1934) (for tax purposes, bonds of wholly-owned subsidiary held by parent can still be considered "held for investment"). Indeed, STI itself characterized these transactions as "loans" from Titan in an internal accounting document, and an STI witness acknowledged that the cash advanced to STI reflected money that STI "owed to Titan."

The defendants are left to argue that, where there was no loan instrument, no apparent interest, and no plain consequences if STI did not repay the loan, the cash infusions should not be considered debt investments. The defendants rely on contractual language providing that "[d]ebt investments include committed lines of credit and all other interest bearing instruments." They interpret "include" as definitional, such that the term "debt investments" means, and only means, loans set forth in interest bearing instruments. Although this is a possible reading of the contractual language, it is not the only reading. See Connerty v. Metropolitan Dist. Commn., 398 Mass. 140 , 149 n.8 (1986) ("The use of the word 'including' in [G. L. c. 258,] § 10(c), indicates that the enumeration of intentional torts in that section is not an all-inclusive list"). [Note 24] We believe that the word "include" as used in reference to "debt investments" allowed the jury to

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conclude that, while loans established by interest bearing instruments are part of the larger class of debt investments for which a contingent fee was due, they do not delimit the boundaries of that class. The term "debt investments" is sufficiently elastic to encompass the infusions of cash that Titan provided, especially given that the raising of this capital fulfilled the very purpose for which Downer was hired.

A question remains as to how the cash advances should be measured. As noted above, Downer claims a contingent transaction fee on cash advances totaling over ten million dollars, a figure it derives by adding up all of the transactions in one direction, while ignoring all of those in the other. We agree with STI that reliance on that figure was unreasonable. While the exact financial relationship between STI and Titan is difficult to characterize, Titan effectively provided STI a line of credit against which it could draw. As STI suggests, a more appropriate measure of the value of such "financing" is the maximum balance it allowed STI to draw over the course of the year (the largest amount of debt held by Titan that could at any point have been used by STI for its operations). [Note 25] Although it could be argued that even this figure overstates the value of the transactions (

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since its average balance was lower), Downer prevailed at trial and it is entitled to the maximum portion of the jury award that can reasonably be justified in the evidence. We therefore conclude that Downer is entitled to a five percent contingent transaction fee on $3,000,063 ($150,003). [Note 26]

Finally, we note that our result is consistent with the reasonable expectation of the parties when they entered into the contract. See 1 Corbin on Contracts § 1.1, at 2 (1993) ("That portion of the field of law that is classified and described as the law of contracts attempts the realization of reasonable expectations that have been induced by the making of a promise"). Downer was hired to help STI raise capital, and it had a reasonable expectation of obtaining a five percent fee on the capital raised during the life of the contract and the one-year tail period. Downer had no reasonable expectation that it would be entitled to five percent of the value of the eighty percent of the company not owned by Titan. [Note 27] Conversely, when STI signed the contract, it expected that it would have to pay five percent of the financing that became available during the relevant time period; any expectation that it could escape any contingent fee even if capital was raised was not reasonable.

Conclusion. The judgment is reversed and the case is remanded for a new judgment to be entered providing that Downer take no contingent transaction fee on Titan's purchase of existing STI stock; Downer take a contingent fee on cash advances from Titan to STI computed on the maximum balance Titan allowed

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STI draw down, i.e., $3,000,063; interest on amounts due to accrue from August 19, 2002.

So ordered.