Reiss v. Financial Performance Corp.
738 N.Y.S.2d 658, 764 N.E.2d 958, 97 N.Y.2d 195 (2001)
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Rule of Law:
When a contract, such as stock warrants, is clear, complete, and unambiguous on its face, courts will enforce it according to its express terms and will not imply omitted terms, particularly where the contingency was foreseeable and there is evidence the parties may have intentionally omitted such a provision.
Facts:
- On September 1, 1993, defendant corporation issued warrants to Robert S. Trump that were accompanied by a warrant agreement explicitly providing for adjustments in the event of a reverse stock split.
- Shortly after September 30, 1993, defendant corporation issued warrants to Rebot Corporation as partial repayment of a loan, enabling it to purchase up to 1,198,904 shares of defendant’s common stock for 10 cents per share until September 30, 1998.
- Defendant corporation also issued warrants to Marvin Reiss around the same time, recognizing his services as a director, entitling him to purchase 500,000 shares of common stock at 10 cents per share until August 31, 1998.
- Unlike the Trump warrant, the warrants issued to Rebot and Reiss did not incorporate any warrant agreement provisions requiring adjustment in the event of a reverse stock split.
- In 1996, defendant’s shareholders approved a one-for-five reverse split of its common stock, meaning each stockholder then owned one-fifth of the original number of shares, but with each share's value increased fivefold.
- In 1998, Rebot and Reiss sought to exercise a portion of their warrants, claiming they were entitled to buy the full number of shares specified at 10 cents per share, without any adjustment to reflect the reverse stock split.
- Defendant corporation rejected the request from Rebot and Reiss to exercise their warrants without adjustment.
Procedural Posture:
- Rebot Corporation and Marvin Reiss (plaintiffs) initiated an action in Supreme Court (trial court), seeking a declaratory judgment allowing them to exercise their warrants without adjustment and an extension of the warrants' expiration dates.
- The Supreme Court denied injunctive relief and dismissed the action.
- Plaintiffs appealed to the Appellate Division (intermediate appellate court).
- A divided Appellate Division modified the Supreme Court's decision by declaring judgment in defendant's favor, holding that an essential term of the contract was missing and implying a term for adjustment. The Appellate Division also affirmed the dismissal of plaintiffs' claim for reformation of the expiration date.
- Plaintiffs appealed the Appellate Division's decision to the Court of Appeals (New York's highest court).
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Issue:
Must warrants to purchase shares of stock be adjusted to reflect a reverse stock split authorized by the corporation, when the warrants themselves contain no express provision for such an adjustment?
Opinions:
Majority - Smith, J.
No, warrants to purchase shares of stock do not need to be adjusted for a reverse stock split if the warrants themselves do not contain a specific provision for such an adjustment. Duly executed stock warrants are enforceable contracts according to their clear and complete terms, and these warrants contained all material provisions necessary for enforcement, including the number of shares, price, and expiration date. The court will not imply an omitted term where the contract is silent on a foreseeable contingency, especially when there is evidence that the parties, who were sophisticated and counseled business persons, may have intentionally omitted such a provision. For example, a similar warrant issued to Robert S. Trump by the defendant just a month earlier explicitly included a reverse stock split adjustment provision, suggesting an intentional omission in the plaintiffs' warrants. An omission in a contract does not automatically create an ambiguity, and extrinsic evidence cannot be used to create ambiguity in a clear and unambiguous written agreement. Importing terms would amount to creating a new contract for the parties, which is not the role of the judiciary. The court distinguished Cofman v Acton Corp., which was relied upon by the Appellate Division, noting that Cofman did not involve evidence of intentional omission of a relevant provision.
Analysis:
This case strongly reinforces New York's adherence to the plain meaning rule in contract interpretation, particularly for sophisticated parties dealing with financial instruments. It serves as a caution against relying on implied terms to correct perceived inequities, especially when a contingency was foreseeable and could have been explicitly addressed. The ruling emphasizes the high burden on parties to meticulously draft comprehensive agreements, as courts will not rewrite contracts under the guise of interpretation, thereby limiting judicial activism in commercial disputes. Future cases involving omissions in complex commercial contracts will likely refer to this precedent to support strict enforcement of the written agreement.
