RG Steel, LLC v. Severstal US Holdings, LLC et al

Filing 22

OPINION re: #103884 11 MOTION to Dismiss The Amended Complaint, filed by Severstal US Holdings, LLC, Severstal US Holdings II, LLC. Based upon the conclusions set forth above, Defendant's Motion to Dismiss is granted in part and denied in part: Plaintiff's First Cause of Action with respect to the 2010 Transportation Contract, and Fourth Cause of Action in its entirety, are dismissed. (Signed by Judge Robert W. Sweet on 1/14/2014) (ja) Modified on 1/22/2014 (ca).

ICT COURT
UNITED STATES DI
SOUTHERN DISTRICT OF NEW YORK

------­

-------X

RG STEEL, LLC,
Plaintiff,

13 Civ. 1540

-against

OPINION

SEVERSTAL US HOLDINGS, LLC and SEVERSTAL
US HOLDINGS II, LLC,
Defendants.

USDCSDNY
DOCUMENT
ELECTRONICALLY FILED

----X

DOC #:

A P PEA RAN C E S:
1\

OATE FU,EOj-::J:k
::--

--

Att
for the Defendants
LLC and Severstal US Hold

US Ho
Inc.

SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
Four T
s Square
New York, NY 10036
Scott D. Musoff, Esq.
SKADDEN, ARPS, SLATE,
155 North Wa
r
Chicago, IL 60606
By: Albert L. Hogan,
Amy L. Van Ge
Andrew J. Fuchs,

Attorne

MEAGHER & FLOM LLP

III, Esq.
r, Esq.
Esq.

for Plaintiff RG Steel

WILKIE FARR & GALLAGHER LLP
787 Seventh Avenue
New York, NY 10019
By:
Brian E. O'Connor,
Benjamin P. McCallen,
Joshua M. Troy, Esq.

e:

~

Sweet, D.J.

Defendants Severstal US Holdings, LLC ("SUSH") and
II,

Severs tal US Ho

Inc.

("SUSH II")

(collect

ly

"Severstal" or "Defendants") move pursuant to Rule l2(b) (6) to
Complaint of

ially dismiss t

aintiff RG Steel ("RG

Steel" or Plaintiff").

For t

h below, Defendants' motion is

reasons set

granted in part and denied in

rt.

Procedural History

iff initially commenced an action in this Court
on March 30, 2012.

After De

subject matter jurisdiction,
action on

s disputed

aintiff voluntarily dismissed

ril 20, 2012.

Plaintiff refill

the action the same day in the

Supreme Court of the State of New York.
filing

allegations of

Prior to Defendants

ir answer, Plaintiff and affiliat

protection under Chapter 11 of the Bankrupt

1

entities fi
Code, and the

r

State Court stayed the

ion.

By Notice of Removal dated March

7, 2013, RG Steel removed the action to this court.

Plaintiff filed the Amended Complaint ("Complaint") on
June 7, 2013.

The Complaint alleges five independent causes of

action and seeks to recover

losses and/or damages sustained

in connection with RG Steel's purchase of certain steel mills
from Defendants pursuant to the Stock Purchase Agreement

(the

"SPA") entered into in 2011, as well as certain declaratory
relief.

On July 22, 2013, Defendants filed the motion to
dismiss.

This motion was heard and marked

lly submitted on

October 2, 2013.

Facts

1. The Part

s and the SPA

RG Steel is a Delaware limited liability company that
manufactures a variety of steel mill products, including hot­
rolled, cold-rolled, and coated sheets, and tin mill products.
SUSH is a Delaware limited liability company.

It is the sole

owner of the issued and outstanding equity interests of SUSH II,
2

,

,

a Delaware corporation and former owner of the equity interests
of Severstal Sparrows Po
SUSH

, LLC ("Severstal

rrows Point").

SUSH II are subsidiaries of Severstal International, a

global steelma

which has

rations in Russia, the United

States and elsewhere.

RG Steel, SUSH, SUSH II and Severstal Sparrows Point
entered into a March 1, 2011 SPA, which provided that RG Steel
would purchase the equity in three U.S.-based steel companies
from SUSH. The

ilities are located in Sparrows Point,

Maryland, Warren, Ohio and Wheeling, West Virg

a and were

acquired by Severs tal between May 2008 and August 2008. In
connection with

transaction, RG Steel purchased all of the

equity of Severstal Sparrows Point, which in turn owned all of
outstanding equity in Severstal Warren LLC ("Warren" or
"Severstal Warren") and Severstal Wheeling Inc.
(Compl.

~

to the

7; SPA §§ 1.01, 1.04.)

("Wheeling").

In exchange, RG Steel agreed

lowing payment schedule:

(1) $125 million in cash,

subject to a purchase price adjustment based on the amount of
working capital at the company at closing (Id.

~

8.);

(2) $100

million in the form of a note (the "Note"), the principal of
which was due five years a

er closing (id.);

(3)

repayment of

$317 million of third-party bank debt owed by the Severstal
entities (

.) and (4) $36 million in cash to be paid to two
3

Severstal subsidiaries within one year of closing.

(Id.)

The

(Compl. 'Jl 37.)

transaction closed on March 31, 2011.

1. The Purchase Price

Section 1.01 of the SPA provides that the "aggregate
paid by [RG Steel] at the

consideration to

shall be (il the Note, plus

(ii)

in

ca

sing .
amount equal to the

Initial purchase Price (as adjusted pursuant to Section 1.04,
Final Purchase Price)."

The Note has a princ

1 amount of $100 million, with

a maturity date of March 21, 2016, and quarterly

erest

payments due beginning on June 30, 2012, until the entire
incipal amount is repaid in full.

(Exhibit 1, § 1.1.)

The

Note also sets forth certain mandatory prepayment events that
require immediate payment of the Note in full,

including,

for

example, a change of control or certain sales, transfers, and
di

itions of RG Steel's interest in

(Exhibit 1 Preamble,
of an event of

§

fault,

1.5.)

In addition,

(Id.

businesses.

upon the occurrence

including RG Steel's bankruptcy,

Severs tal may declare all or a portion of
due and payable.

acqui

§§

2.1, 2.3.)
4

Note immediately

Section 1.04(a) of the SPA defines the Initial
Purchase Price as $125 million, subject to an upward or downward
ustment based on the acquired business's net work capital and
certain indebtedness as of the Closing Date, also known as the
"Effective Time," as compared with
the SPA.

(SPA

adjustment.
before

§

1.04.)

seline amounts set forth

The SPA provi

s for two phases of this

rst, pursuant to a calculation two business days
Closing, the Initial Purchase Price was subject to an

initial upward or downward adjustment
est

of

of the C

net wor

sed on Severstal's

ng capital and certain

edness as

sing Date, as compared with baseline amounts set forth

in the SPA.

( Id. )

estimates of net working capital and

indebtedness resulted in RG Steel paying only $85 million at the
osing.
cv-6

Several US Holdings LLC v. RG Steel, LLC, Case No. 11­

2 (RWS), 865 F. Supp. 2d 430 (S.D.N.Y. 2012).

Second, as is typ

1 with stock pur
format

to take into account additional
available shortly after Closing,

se agreements,

that would become

SPA provides for another,

final adjustment to the purchase price based on the difference
between final calculat

s of net working capital and certain

indebtedness, and Severstal's estimate of net working capital
and certain indebt

s of Severstal

5

rrows Point and its

subsidiaries, as of the Closing Date.

(SPA § 1.04(b).) The

second adjustment is conducted through a multi-step exchange of
calculations between the parties and yields the Final Purchase
Price.

(Id. )

2. The Arbitration Process

In the event that the parties were unable to agree on
the amount of this final adjustment, Article I of the SPA
provides for either party to refer their disputes to an
independent accounting firm.

(Id. §§ 1. 04 (b) (iii)

and (iv).) The

parties would then use the independent accounting firm's
resolution of their disputes to calculate the Final Purchase
Price.

(Id. §§ 1. 04 (a) (i),

(b) (iii), and (b) (iv) .)

In this case, at the conclusion of the parties'
exchange of calculations, RG Steel proposed adjustments to the
final purchase price that could, if accepted, essentially reduce
the cash purchase price to zero.

Severstal disputed the

validity of nearly all of these purported adjustments because
under Severstal's calculation of the purchase price adjustment,
RG Steel would owe it $29 million.

See Severstsal US Holdings

LLC v. RG Steel, LLC, 865 F. Supp. 2d 430

(S.D.N.Y. 2012).

September 3, 2011, RG Steel notified Severstal that it was
6

On

re

t

rties' disputes to a

Section 1. 04 (b) (iii) of the SPA.

itration pursuant to

Id. at 431.

parties selected an

dual within the

independent accounting firm to serve as arbitrator and
negotiated and executed an enga

On December 27,

independent accounting firm issued a schedule for

2011,
a

letter.

itration, including a stagge
is

exchange of submissions and a

date of May 11, 2012.

ibit 2.)

r to rendering a final

sion, the independent accounting

firm resigned as arbitrator
lving RG Steel.

( Comp I.

On March 8, 2012,

to a conflict of interest
81 . )

~

On May 31, 2012, RG Steel filed a voluntary
ief under Chapter 11 of the United States C

r

in the

States District Court for the District of Delaware.
(CompI.

~

1.)

bankruptcy stay,

Pursuant to t

a

tration

was suspended for approximately one year until recently when the
parties worked to

te and engage a new arbitrator.

parties have agreed upon a schedule that concludes
arbitration in 2013.

3.

(Compl.

~

81.)

resentations and Warranties

7

The

In negotiating the SPA, the parties bargained for and
obtained certain representations and warranties.

(Id.

<J1

In

8.)

particular, the preamble to Article II of the SPA provides that,
"[eJxcept as otherwise set forth in a schedule to any particular
representation and warranty (collectively, the "Disclosure
Schedules"), the Company and Parents represent and warrant to
Purchaser that all of the statements contained in this Article
II are true as of the date of this Agreement.

"

(Id.

<J1

30.)

Section 8.02 of the SPA provides that Defendants must
indemnify and hold harmless RG Steel for any breach of
representation or warranty made by Severstal in Article II or
failure to perform or fulfill any covenant contained in the SPA:

Subject to the provisions of this Article II, from and
after the Closing, Parents shall, jointly and
severally, indemnify Purchaser and its Affiliates
. in respect of, and hold them harmless from and
against, any and all Losses suffered, incurred or
sustained.
. by reason of or resulting from (i) any
inaccuracy or breach of a representation or warranty
of Parents and the Company contained in Article II of
this Agreement or (ii) any nonfulfillment of or
failure to perform any covenant or agreement on the
part of any of the Parents or, with respect to
covenants or agreements to be performed prior to the
Closing, the Company, contained in this Agreement.

8

(Compl.

~

32; SPA § 8.02.) "Loss" is defined as "any and

I

damages, Liabilities, costs and expenses (including reasonable
attorneys'

fees)."

~~

(Compl.

Depending on

32-33; SPA § 9.01(a).)

specific section, the

and warranties that form the
expire e

sis for indemnification claims

18 months after the

Closing, or 30 days after t
expires, or never.

(Id.

§

sentations

osing, f

years a

r the

applicable statute of limitations
8.01.)

If a CIa

Notice or Indemnity

Notice was timely provided, a representation or warranty
not expire until the relat

s

indemnification claim is resolved.

(Id. )

Sections 8.02(c)-(h) and 8.03-8.07 set fo
addit

1 detailed

sions applicable to the parties'

indemnification obligat
an indemnification claim.

and detai

ring a

1

process

aim Notice to the

the indemnifying party to
rty action.

assume control of the defense of a thi
8.06 provi

s for rna

As part of those procedures, Section

8.03 sets forth the process for
indemnifying party and

proce

Section

s that an indemnification claim set forth

VII shall be
inaccuracy in any

exclus

remedy of

parties "for any

resentation or warranty, mis

breach of warranty or nonfulfil

or fai
9

Article

sentation,

to be per

rmed

of any covenant or agreement contained" in the SPA.

. §

8.06. )

In Section 2.16, Severstal represented and warrant
Schedule 2.16 contained an accurate list of all "Mate
Contracts" to which Sparrows or an affiliate were a party.
§ 2.16(a)-(n).)

A Mater

(SPA

1 Contract is one that "involves

payment or receipt of an amount

excess of $1,000,000."

Plaintiff contends
Steel

1

De

t it was assuming the

.)

s represented to RG

fits of ten-year coke supply

s that provided the steel ingredient coke at relatively
xed conversion prices for the Ii
Compl.

~~

44 46), but that RG Steel

contractual benefits for which it pa

of the agreements,
not receive the

the Service Provision

the "Co

Supply Agreements").

January 31, 2011

purchased co

, the Jewell
eement (collectively,
s, purportedly in

se warranties, failed to disclose a letter dated

violation of

Cleveland Inc.

De

53.) The

~

(Id.

agreements include: the Haverhill
Agreement,

(see

(the "January 31 Letter"), from ArcelorMittal

("ArcelorMi t tal"), through whom
, in which ArcelorMittal stat

fixed-price
by Sparrows was s

t

sion had been removed and
tantially higher.
10

(Id.

the favorable
ce to be paid

~

50.)

ArcelorMittal raised the price from $22.00 fixed/$20.90 variable
Ie under the Haverhill and Jewell

and $10.10fixed/$22.00 va

Agreements, respectively, to $37.50 fixed/$37.50 va
both.

(Id.

~

51.)

Plainti

alleges that this caus
I

to incur an unexpected Ii

y of $80.7 million.

which

existence of a t

~

(CompI.

(Id.)

ation contract

rrows was burdened wi

of $1,425,450.00.

RG Steel

Defendants failed to

Plaintiff also asserts
disclose t

under

to

an additional future

65.)

ifically, Defendants

provided Plaintiff with a 2007 contract in which a Sparrows
subsidia

, WCI Steel, Inc.

(the

ssor-in-interest to

Severstal Warren), agreed to transport no less than 215,000 tons
of coke

r

ar

Company ("Nor

15 years with Nor

lk Southern") and its

d not disclose that t

Contract was te

idiary railroads (the
~~

"2007 Transportation Contract").
purportedly

lk Southern Railway

60 61.)

2007 Transportation

nated in light of Severstal Warren's breach
r 1, 2010 ("the

and replaced with a contract executed De
"2010 Transportation Contract") .

(Id.

~~

62-63.) The 2010

Transportation Contract specified that "no t
under [the 2007 T

was shipped

ion Contract] in 2009, resulting in a

215,000 ton deficit and an obligation to pay [Nor
$1,425,450" (the

Defendants

Liability"), and
11

lk Southern]
r provided that

rgo collection of the Accrued

11

Norfolk Southern "

Liability and 215,000 tons is hereby added to the Prior Minimum
Volume for 2024."

(Id.

~

64.)

Further, Plaintiff all

s that Defendants failed to

adequately disclose the

e terms of the amendment to a

pellet purchase contract
Company ("Cliffs").

Sparrows and Cliffs Sales

(Compl.

~~

54 59.)

Subsequent to the

a

closing, Cliffs asserted a

of contract against
~~

RG Steel, which proceeded to arbitration.

(Id.

arbitration panel found in

and rendered an award

of Clif

against RG Steel for $18,963,465.40
in daily interest and $7,127.18
54-59.)

56-57.)

The

s, plus $1,524.53

a

tration fees.

Plaintiff contends that De

~~

s also failed to

disclose ten additional Material Contracts

suant to which

Sparrows was obligated to sell tin plate to thi
prices below the cost of production.

(Id.

(Compl.

~~

parties at
66-68.)

RG

Steel has suffered more than $38 million in losses as a result
of

se agreements.

(Id.

~

69.)

Finally, Plaintiff maintains
sclose

existence of changes to their

De

s

ctices occasioned

by the Coke Supple Agreements and the 2010 Tran

12

led to

rtation

(Compl.

Contract.

'1[

70.)

suant to Section 2.15 of the SPA,

sented and warranted that:

fendants

Except as set forth in Schedu
2.15, since September
ement: (i) the
30, 2010 to the date of this
Business has been conducted in
ordina
course
consistent with prior
ctices;
(x) neither the
Company nor any of its Subsidiar s has amended,
terminated, cancelled or compromised any material
ims or waived any other
ghts of substantial
value;.
(xvi) neither the Company on [sic] any of
its Subsidiaries has modified
any material respects
its payment practices with any of its material
suppliers.

(Id.

'1[ 71.)

Defendants purportedly violated this provision by

failing to disclose that (1) Sparrows mate
payment

ally modified its

ices under the Coke Supply Agreements in t

January 31 Letter (Id.

'1['1[

Transportation Contract,
yment

ices

42-53), and (2) pursuant to the 2010
rrows materially modified its

Norfolk Southern.

(See id.

'1['1[

60-65.)

4. Covenants

Arti

IV of the SPA is titled "Covenants and

Agreements."

Section 4.14 sets fo

regarding t

termination of intercompany agreements, which are

pre-existing agreements
remain

th Severstal, on

a number of covenants

tween Severstal entities that would
one hand, and those that were sold

13

to RG Steel, on the other hand.

idiary Sparrows

eel to cause its
Severstal's af

Section 4.14(d) obligates RG
to repay to

liates all outstanding intercompany trade

payables in an amount not to exceed $36 million "[oJn or pr
rst anniversary of the Closing Date."

to the

r

(Id. § 4.14(d).)

The Applicable Standard

In considering a motion to dismiss pursuant to Rule
12 (b) (6), the Court construes the compla

liberally, accepting

all factual allegations as true and drawing all reasonable
inferences in

plaintiff's favor.

Corp., 12 F.3d 1170, 1174

(2d

ar

Mills v. Polar Mol

r. 1993).

The issue "is not

whether a plaintiff will ultimately prevail but whether the
claimant is entitled to of

evidence to support the cIa

Villager Pond, Inc. v. Town

1995)

Darien, 56 F.3d 375, 378

"

(2d Cir.

(quoting Scheuer v. Rhodes, 416 U.S. 232, 235-36, 94 S .

Ct. 1683, 40 L.

. 2d 90 (1974)).

To survive di

ssal, "a complaint must contain

sufficient factual matter, accepted as true, to 'state a cl
to relief

is plausible on its face.'ff

Ashcroft v.

556 U.S. 662, 129 S. Ct. 1937, 1949, 173 L. Ed. 2d 868

Iqbal,

(2009)

(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.
14

Plaintiffs must allege

Ct. 1955, 167 L. Ed. 2d 929 (2007)).

sufficient facts to "nudge [ ] their claims across the line from
conceivable to plausible."

550 u.s. at 570.

Twombly,

plausibility standard is not akin to a

"The

'probability

requirement,' but it asks for more than a sheer possibility that
a defendant has acted unlawfully."

Cohen v. Stevanovich,

Supp. 2d 416, 423 (S.D.N.Y. 2010).

Though the court must accept

the factual allegations of a complaint as true,

772 F.

it is "not bound

to accept as true a legal conclusion couched as a factual
allegation."

Iqbal,

556 u.s. at 678.

(quoting Twombly,

550 u.s.

at 555).

"Under New York law .

. judgment as a matter of law

is appropriate if the contract is unambiguous.

Contract

language is unambiguous when it has a definite and precise
meaning, unattended by danger of misconception in purport of the
[contract] itself, and concerning which there is no reasonable
basis for a difference of opinion."
Smartlens Corp.,

Photopoint Techs., LLC v.

335 F.3d 152, 160 (2d Cir. 2003)

(internal

citations omitted); see also Crane Co. v. Collec Indus., Inc.,
171 F.3d 733, 737

(2d Cir. 1999)

("If the parties' intent is

unambiguously conveyed by the plain meaning of the agreements,
then interpretation is a matter of law.").

It is black letter

law that "[a] contract should be construed so as to give full
15

meaning and effect to all of its provisions," and "[r]ather than
rewrite an unambiguous agreement, a court should enforce the
plain meaning of that agreement." Am. Express Bank v. Uniroyal,

Inc., 164 A.D.2d 275, 277 (N.Y. Sup. Ct. 1990).

I. Defendants' Motion to Dismiss is Granted

Severstal
Action

part, and the Second and Fourth Causes of Action in

their entirety,

are

moved to dismiss the First Cause

failure to state a

aim.

rtation Contract Gives
That Contract in Plaintiff's First Cause of Action
ssed

Defendants move to dismiss the portion of RG Steel's
rst Cause of Action relating to the 2010 contract with Norfolk
Southern, the 2010 Transportation Contract, which Plaintiff
alleges Defendants

iled to disclose resulting in a loss in the

amount of $1,425,450.

Both parties agree that Defendants disclosed a
transportation agreement between Severstal Warren and Nor
Southern Railway dated February 9, 2007
Southern Transportation Agreement") .

16

(t

(Compl.

"2007 Norfolk
~

60.)

This

lk

agreement has a 15

r term (through 2024) and required

Severstal Warren to t

with Norfolk Southern no less than

215,000 tons of co

r

(Id.

Haverhill, Ohio.

~

certain 215,000 tons

a coke plant located in
61.)

Severstal Warren failed to ship a

r the 2007 Norfolk Southern
gave rise to a $1,425,540

Transportation Agreement, whi

(Id.

liability.

~

62.)

Severstal Warren subsequently entered
, which provides that

into the 2010 Norfolk Southern

Norfolk Southern will forgo collection of t
Severstal Warren shall i
2024

sh

t

(in addition to the original t

64-65.)

ssed 215,000 tons in
for 2024) .

,s

According to RG Steel,

$1,425,450, and

{Id.

<]1<]1

lure to disclose

the subsequent 2010 Norfolk Southern

, "that obligated

Severstal Warren, LLC to pay the Acc

lity," by

increasing the required tonnage in a post
rather than a pre-closing $1,425,450

osing liability,
ility as

assessed under 2007 Transportation Contract, was a material

(Id.

breach under

§

2.16.

In

§

2.16 of the SPA, Severstal represented and

<]I

65.)

warranted that Schedule 2.16 contained an accurate list of all
"Material Contracts," which include:

17

(el any agreement, commitment or other Contract
relating to Indebtedness of the Company or a
Subs
ary thereof in an amount
excess of
$1,000,000;
(il any agreement, invoice, purchase order or other
arrangement with any supplier or for the furnishing of
services under the terms of which the Company or any
of its Subsidia
s (i) is likely to payor otherwise
give consideration of more than $1,000,000 in the
aggregate during the calendar year ending in December
31, 2011 or any calendar
r therea er or (ii) is
Ii ly to payor otherwise give consi ration of more
than $5,000,000
the aggregate over the remaining
term of such agreement, in each case, that is
not otherwise included under Section 2.16(d);
(j) any agreement, invoice, sa s 0
r or other
arrangement for the sale of inventory or for the
furnishing of se
ces by the Business that (il is
likely to involve consideration of more than
$1,000,000 in the aggregate during the calendar year
ending
December 31, 2011 or any calendar year
thereafter or (ii) is likely to payor otherwise give
consideration of more than $5,000,000 in the aggregate
over the remaining term of such agreement, in each
case, that is not otherwise included under Section
2.16(d) .

(SPA

§§

2.16 (e),

(i), and (j); CompI. '11 41.)

In Section 8.02,

Severstal agreed to indemnify RG Steel for "Losses suffered,
incurred, or sustained by [RG Steel] by reason of or resulting
from (il

inaccuracy or breach of a representation or

warranty of [Severstal]

"

(SPA

§

8.02.)

RG Steel has sufficiently alleged that the 2010
Transportation Contract was a "Material Contract," in that it
was an "agreement .

for the furnishing of services by the
18

Bus

SSU

"$l,OOO,OOO.U

with consideration

2.16(j).)

However, the cla

(See SPA §

$1,425,450 liability results

from the 2007 Norfolk Southern Transportation Agreement, not
from the 2010 Contract.

The 2010 Transportation Agreement does

not give rise to the loss,

provides that Norfolk Southern

"shall forgo collection U of t

pre-existing $1,425,450

obligation provided that Severstal Warren will ship
tons at issue in 2024.

.

altered from a pre-clos

liability to a post-clos

does not change the
the result of "any

~

64.)

215,000

That the obligation was
1

il

that the underlying liability is not
ccuracy or breach of a

warranty of [Severstal],U (see SPA

§

sentation or

8.02), but

r was

disclosed by Defendants in the 2007 Transportation Contract.
ils to plead a loss related to

Steel therefore

2010

Norfolk Southern Transportation Agreement, and Plaintiff's
allegations as to

contract are dismiss

2. Plaintiff

Practices

ct to
the 2010
Norfolk Southern

Plaintiff's Second Cause of Action alleges that the
Coke Supp
Transportat

y

s and the 2010 Nor

lk Southern

Contract, which Defendants failed to disclose,

19

RG

constituted changes in payment practices

of the

representation and warranty in § 2.15 of t

Pursuant to Section 2.15 of
represented and warranted to RG St

SPA.

(SPA § 2.15.)

SPA, Severstal
between September 30,

2010, and March 1, 2011, there was an

ence of certain changes

in its business, specifically

conducted in the ordinary
course consistent
ice" and (xvi)
"neither the Company or any of its Subsidiaries has
modified in any material re
s its payment
practices wi
of
s material suppliers."

(SPA § 2.15(a)

(i) and

January 31, 2011, De

)

.)

a

iff contends that on

nts received a letter modifying the

payment provisions of

Coke Supply Agreements,

and that "in or about

(CompI.

<j[

50)

r 1 2010," Severstal entered into

the 2010 Transportation Contract, which transformed a pre
lity into a post-closing obligation to

closing Accrued

nal 215,000 tons of coke with Norfolk

transport an
Southern.

(Id.

these
practices in

<j[<j[

63 64.)

s mater

The Complaint alleges that both of

lly changed Defendants' payment

of § 2.15.

20

The Co

ce

Supply Agreements are grounded In a Se

Provision Agreement, which provides

t,

livery of the Sparrows Point Coke to the
Point (as de
the Coke Supply
s) relating to
Sparrows Point facili
(i) Recipient [Severstal
rrows Point LLC] shall
notify Provider [Arcel
ttal] in writing of t
occurrence of such del
[and] (ii) Recipient
shall pay Provider in all cash amounts owed by
der for the Sparrows Point Coke pursuant to
icable Coke Supply
reement.

(Compl.

~

49.)

Although De

Supply Agreements, De

the Co
Janua

sclosed the existence of
nts did not disclose a
tal to Severstal N.A., in

31, 2011 letter from Arce

which the favorable fixed
the

nts

ice

sion had been

and

ice to be paid by Severstal Sparrows Point LLC had been

increas

,equating to an a

e price increase of $80.7

million over the term of the contracts.

(Compl.

~~

Defendants do not seem to dispute that t
s involves mater
occu

, but rather cont

1 suppliers, or that a
that this is merely

disclose a "Material Contract" in violation
lation of

§

2.15.

De

s maintains that

SPA, which sets forth Severstal's covenants dur
the execution of

50-51.)

underlying
ice change
ilure to

2.16, not a

§
§

4.01 of the
the time

SPA and closing, demonstrates that

21

§

2.15 does not provide for mere

Contracts.

ilures to disclose Material

Section 4.10 contains a covenant that the Company

shall "not enter into, materially amend or terminate any
Material Contract, or waive any material right thereunder."
(SPA § 4.10(k).)

According to Defendants, if the language in

Sections 4.10(a) and (r), which is identical to the language in
Sections 2.15 (i) and (xvi), included

sentations and

warranties related to the disclosure of Material Contracts, then
it would have been unnecessary to include provision (k) in
Section 4.10, showing that Section 2.15 (i) and (xvi)

d not

include representations and warranties related to disclosure of
Material Contracts.

(Defendants Memorandum in Support of Motion

to Dismiss, "Def. Mem."; at 20 (citing Muzak Corp. v. Hotel Taft
Corp., 1 N.Y.2d 42, 46-47

(1956)

("The rules of contruction of

contracts require us to adopt an interpretation which gives
meaning to every provision of a contract or, in the negative, no
provision of a contract should be Ie
effect.

without force and

If) ) .)

The representations and warranties covenants are not
superfluous: § 2.15(a) covers the pe

od from September 30, 2010

to the date of the execution of the SPA, and the covenants cover
the period between the execution of the SPA and closing.
4.01.)

(SPA §

Further, the January 31 Letter altered in a "material
22

respect" the payment practices of the Coke Supply Agreement,
which dealt with some of Defendants "material suppliers."
§ 2.15.)

(S

Regardless of Defendants' contractual interpretation,

the letter is not advanced for purposes of § 2.15 as a "Material
Contract," and in all aspects f
interpretation of § 2.15.

s the plain language

Whether the letter can also serve as

a "Material Contract" in violation of
determined.

§

2.16 need not be

Because the January 31 Letter materially alters

payment practices relating to material suppliers, RG Steel has
sufficiently alleged a violation of § 2.15 with respect to the
Coke Supply Agreements.

As to the 2010 Transportation Contract, Defendants
contend that even if

§

2.15 is applicable to the

ilure to

aim still fails as to

disclose Material Contracts, RG Steel's

the Norfolk Southern agreement because no changes in payment
practices are alleged to have occurred between September 30,
2010 and March 1, 2011 as required under

§

2.15.

The Complaint,

though, alleges that the change in payment practices forming the
basis for the c

im under the 2010 Transportation Contract (the

assumption of an obligation to transport an additional 215,000
tons of coke with Nor

lk Southern instead of pre-closing

liability) occurred when that agreement was entered into in or
about December 1, 2010, within the relevant period of September
23

30, 2010 to March 1, 2011.

(Compl.

~~

63-64.)

date of when the

aspect of § 2.15 that suggests that it is
potent

There is no

1 change is ultimately instituted, and not a change

occurring or made during the specif

pe

such, at this stage, RG Steel has suffi

od, that governs.

As

ently alleged that the

2010 Transportation Contract constitutes a change in payment
practices or in the ordinary course of business occurring

t

relevant period.

Defendants' motion to dismiss Plaintiff's Second Cause
of Action as to both the Co

Supply Agreements and the 2010

Transportation Contract is therefore denied.

3. Plaintiff Fails to Sufficient
under the 100

A Basis

Note or

Plaintiff's Fourth Cause of Action requests a
declarat
Note and

that it is excused from its obligations to pay the

$36 million repayment pursuant to Section § 4.14(d)

of the SPA until the purchase price adjustment a
complete and RG Steel is indemnifi

tration is

in this action for the

losses it has suffered as a result of Defendants' breach of the
SPA.

1

1 To preserve its right to seek setoff,
RG Steel also mentions that it seeks
to de
its obI
ions beca~se Severstal has materially breached the SPA.

24

ction 4.14(d} of the SPA requires Plaintiff to repay
$36 million in existing intercompany trade payables on May 31,
2012, the first anniversa
4.14(d).}

of the C

sing.

(Compl.

~

73; SPA

§

Article IX of the SPA provides that Note "shall mean

a note in the principal amount of $100 million, issued by RG
Steel to Severstal.

The Note with a principal amount of $100

million was executed on March 31, 2011, and provides
quarterly interest payments beginning on June 30, 2012, until
the entire principal amount is repaid in

11 by March 31, 2016.

(Exhibit 1, Preamble, § 1.1.)

A. The SPA does not Condition the $36 Million
Indemni cation Claims
Repayment on

Plaintiff maintains that its entitlement to a
declaration does not depend on an express provision permitting
withholding of payments otherwise due on the SPA.

Rather, RG

Steel's Fourth Cause of Action serves to preserve Plaintiff's
right to seek setoff claims, to the extent they are assert
other than as counterclaims in this action.

Plaintiff's Fi

The Complaint does not plead facts support
such a material breach,
explaining what the material breach allegedly consists of, or
relevant
factors to support its theory.
Instead, Plaintiff me
states that it is
entitled to a declaration" lased upon Severstal's material breaches of the
SPA." (Compl. 'l! 82.)
This is insufficient to support Plaintiff's claim.
Riviera Fin. Of Tex. v. CapGemini US, LLC, 511 F. App'x 92, 95 (2d Cir. 2013)
(a material breach must be "so substantial as to defeat the purpose of the
entire transaction. ") .

25

Cause of Action, which Defendants do not dispute,
\\

the amounts owed [] by Severstal

seeks setoff

connection with the

post-closing purchase price adjustment and indemnity claims."
(Compl.

~~

115-120.)

According to RG Steel, the Fourth Cause of

ed to ensure that P

Action is

Steel's breach of contract
to the SPA to not pay

intiff

(1)

independent of RG

ims, preserves its right pursuant

$36 million obligation be

the

ce adjustment process is complete and the

purchase

indemnification claims are resolved; and, more generally,
serve RG St

's set

claims against Plaintiff
different action.

(2) to

f rights in the event Defendants assert
r amounts owed under the SPA in a

2

Even if an explicit SPA provision were required to
justify the Fourth Cause of Action,

Plaintiff further maintains

that the SPA permits the netting of such payment obligations.

In

rmini

the final purchase price adjustment,

the arbitrator analyzes two variables: the wor
indebtedness of Sparrows.
1.04(b)(

(S PA §

1. 04 (b) (i i) . )

ng capital and
Section

) provides that \\any payment required to be made by a

party" because of the adjustment \\may be made net of the amount
Plaintiff maintains that this cause of action will be unnecessary in the
event Defendants' answer includes counterclaims for the $36 million payment
and the Note, and the
price adjustment process concludes prior to
judgment in this case.

26

ce adjustment process.

to" the purchase

This allows payments

against one another if both working capital and

to be nett

indebtedness exceed expectations.
there

id to such party pursuant

yment required to be

of any lesser

Pia

iff aile

s that it is

reasonable that the SPA intended, and should be

erpreted to provide, a commercially reasonable result
res

yment obligations, including

to other

$36 million

repayment and any recovery Plaintiff is entitled to
indemnificat

Corp.,

claims.

See Interdi

407 F. Supp. 2d 522, 530

(S.D.N.Y 2005)

(quoting In re

(1st Dep't 2003)

("A contract should not be

produce a result that is abs

sed on its

tal Comm'ns Corp. v. Nokia

Lipper Holdings, LLC, 766 N.Y.S.2d 561, 562
(collecting cases)

th

erpreted to

, commercially unreasonable or

contrary to the reasonably expectation of the parties.").

1 matter,

As an

aintiff does not advocate for

a "commercially reasonable" result.

Plaintiff's version of

"netting" in this case is of indefinite delay: t
not occur unless and until RG Steel prevails on t
indemnificat
$36

claims in this litigation.

netting would
disputed

The deadline for the

Ilion repayment occurs on the first anniversary of

Closing.

indemnification claims likely could not be

concluded before this

adline because, depending on t

claim at issue, the representations
27

type of

warranties that form the

r the

basis for indemnification expire either 18 months a
closing, five

r the closing, or 30 days after the

rs a

applicable statute of limitations expires, or never.

(3

8.01.)

ly

If a Claim Notice or Indemnity Notice was t

provided, a representat

§

or warranty does not expire until the

related indemnification c

is resolved, and the SPA provides

no deadline for resolution of an indemnification cIa

It is

unreasonable to suggest that the parties intended to condition
the repayment upon claims

did not even have to brought, let

alone resolved, until years a

er the repayment of t

million is requi

(SPA

right of setoff where none
is well settled that
di

§

4.14(d).)

$36

s would create a

t exists, and may never exist.

re is no right to setoff a possible,

ed liability against an undisputed claim that is

payable.

It

See, e.g., Willett v.

and

ncolnshire Mgmt., Inc., 756

N.Y.S.2d 9, 10 (1st Dep't 2003); Spodek v. Park Prop. Dev.
Assoc., 693 N.Y.S.2d 199, 199 (2d Dep't 1999)

purportedly owing from plaintiff to
sputed and there is no
unliquidated liability aga

ght to set

("

obli

ion

fendant is currently

ing

f a possible,

t a liquidat

claim that is due

and payable."); Banco Popular North America v. Lieberman, 75
A.D.3d 460, 461 (1st Dep't 2010)
bas

upon alleged

("Defendants' claim to a setoff

roper [J practices by plaintiff is merely

28

a possible, unliquidated liability, and does not preclude
pIa

SPA provisions demonstrate that the

In addition,
part

fendantJ . ") .

iff's immediate recovery [from

s did not contract for or intend such a correlation

between the provisions.
highlights that the part

The existence of SPA

§

1.04(b) (

s expressly provided for those

circumstances in which one obligation under the SPA should
not include that the repayment

netted against another, and

obligation can or should be dependent upon the indemnification
claims.

See, e.g.,

N.Y.S.2d 76,

80

In re New York City Asbestos

(1st Oep't 2007)

tigation, 838

(canon of contract

interpretation, expression unius est exclusion alterius, the
expression of one thing implies the ex

usion of

other); VKK

Corp. v. National Football League, 244 F.3d 114, 130 31
2001)

(2d Cir.

(same).

To the contrary, the $36
the satis

Ilion repayment relates to

ction of a pre-existing legal obligation between two

of Severstal's subsidia

es, and is set

rth in Article IV,

titled Covenants and Agreements as one of many conditions
related to intercompany agreements.

Indemnification is detailed

independently in Article VIII.

In no place

1.04(b)(ii), or elsewhere in

SPA, does any provision provide
29

Section

a correlation between the two sections, ma

the unambiguous $36

million repayment obligation (see SPA § 4.14(d)) dependent on
indemnification

resolution

aims, or allow a
based upon other

postponement of that payment obligat
potential liabilit

s.

Further, Section 8.06 provides

indemnification process set

rth in Article III shall be

exclusive remedy of the parties "for any
representation or warranty, mis

ccu

performed of any

covenant or agreement" contained in the SPA.

alternat
allow a pa

s for

to those

§

8.06.)

aims for indemnification

seeking indemnification to suspend its performance
ions pending res

ion of its

ion claims.

As such,
obli

(SPA

tailed in Article VIII, and does not

of other independent obli
indemnif

in any

sentation, breach of

warranty or nonfulfillment or failure to

s excludes reme

the

PIa inti

cannot postpone its repayment

ion pending the resolution of its indemnification claims.

B. The SPA does not Contemplate that

Post-Closing
Purchase Price Adjustment was to be Resol
Prior
to Plaintiff's $36 Million Repayment Obligation
under the SPA

30

the event that RG Steel is not entitl

to

pending indemnification claims,

postponement based on

entitled to a

Plaintiff contends it would still

claration

staying its obligation to pay the $36 million, because this
etion of

repayment is conditioned on the
price

final purchase

ustment process.

RG Steel al

s that the SPA called

a time

constrained adjustment process: SUSH II was to prepare and
del

r to RG Steel a Closing Statement containing Sparrows'

actual working capital and outstanding indebtedness "[a]s soon
as

icable a

(60 )

"

r the Closing Date, but not later than sixty

(SPA § 1.04 (b) (i) .)

review and provi

RG Steel then had 30

SUSH II with any Protest Notices.

1.04(b) (iii).) Failure to deliver a Notice
period "constitue[d]

rece

thin that t

(Id.)

ternat

ly, upon

of a Notice, SUSH II had 30 days to object or was
to have accepted" RG Steel's adjustments.

1.04 (b) (iii) .)
g

§

[RG Steel's] acceptance of the Clos

red by [SUSH II.]"

Statement as

to

10 bus

If SUSH II t

ly object

ss days "to resolve the

, the part

§

s were

spute[,]U or, if no

resolution was forthcoming, to refer

dispute to either an

accounting

of notice" of a party's

rm or "within f

intent to initiate a referral.

(5 )

(Id.)

31

/

The SPA then granted the

part

ys to submit to the chosen accounting firm "a

s 10

ir positions "together with

written statement summarizing"

such supporting documentation" as deemed necessary.
accounting firm should "render its
da

of

( Id. )

The

cision within thirty (3)

s appointment or as soon thereafter as is reasonably
.) Lastly, the

practicable."

ision of the arbitrator

"shall be final and binding," and "shall not be subject to
appeal" by either party.

(Id.)

According to Plaintiff, this

time table demonstrates that the SPA intended to condition the

$36 million on completion of

final purchase price adjustment

process.

The SPA does not, however, provide for a date certain
by which the purchase price adjustment process is required to
completed, or that it be completed "within 6 months of Closing,"
as Plaintiff suggests.

(CompI. err 19) The (1) parties did not

have a finite deadline by
arbitration (id.
te

§

ch to refer the matter to

1.04 (b) (iii)3;

(2) the parties did not have a

adline by which to provide the arbitrator with an

"engagement letter" (id.);

(3) the arbitrator could render

Although the SPA states that the
ies must wait until ten
after
Severstal's notification to RG Steel of objections to the Protest Notice to
refer matters to arbitration, it does not require either
to do so at
any
fic time. RG Steel waited until 60
after Severstal issued its
objections to the Protest Notice to refer this matter to the independent
account
firm.
Several US Holdings LLC v. RG Steel, LLC, Case No. 11-cv­
6922 (RWS), 865 F. Supp. 2d 430 (S.D.N.Y 2012).
3

32

her

reasonably practicable" (id.).
no

(Def. Mem. at 12-13.)

There is

post-closing purchase price adjustment

rement that

sary of t

be concluded prior to the first
for Plaintiff's suggestion that
int

as is

days or "as soon therea

sion within thi

osing, or

SPA structured a "timetable"

ng to allow RG Steel to setoff against its $36 million

payment due on the first anniversary of the Closing any amounts
owed by Severstal to RG Steel as a result of
adjustment.

4

(Compl.

'1[

19.)

PIa

purchase price

ff's cited time tables thus

do not suggest, let alone require, that the $36 million
repayment be postponed until
purchase price

completion of the post-closing

ustment.

Nor does any other provision in t
$36 million repayment obligat
ing purchase
$36 million

on the completion of the post­

ce adjustment.

The SPA

not inc

the

yment in the purchase price or in any way

signate it as a component of the purchase
post-clos

SPA condition the

purchase

ice adjustment.

ce or relat

to

(SPA §§ 1.01;

Nothing in the SPA suggests that the parties
ated that RG Steel
ce adjustment, or that
would be owed money under the post-closing
the timetables RG Steel cites were intended to
RG Steel to setoff
against the $36 million repa
obligation.
Further, according to RG
Steel's theory, if Severs tal owed RG Steel any money when the
-closing
purchase price
ustment concluded after "six months," Severstal would have
had to have paid RG Steel, and then wait another six months for RG Steel (or
its subsidiary) to pay the $36 million to Severstal.
(?laintiff Opposition
Memorandum, "Pl. Opp."; at 18 19.)
Such an obI
ion would have been
explicitly deta led in the contracts had it been intended.
4

33

1.04.)

As with Plaintiff's allegations regarding the

indemnification claims, the

ies could have provided for a

mechanism to credit the amounts

Severstal owed under the
ustment

post-closing purchase price

Ilion

$36 million

fact that the deadline to

repayment, and did not do so.
make the $36

inst t

yment was a

r the tenuous deadline to

complete the purchase price adjustment process does not create
an obli

ion between two independent provisions for which the

parties did not contract.

It is well established that "courts

may not rewrite a term of a contract by ,
is clear and unambiguous on its

rpretation' when it

Fiore v. Fiore,

N.Y.2d 971, 973 (1979); see also Am. Express Bank,
277.

sophisti

contract

part

164 A.D.2d at

s at issue undoubtedly knew how to

r the payments to be conditioned as such, and

declined to do so.

This

iberate choice must be given ef

Chimart Assocs. v. Paul, 66 N.Y.2d 570, 574 75(1986)
t

the de

sions by "sophisticat

at arm's length" in a "mult
contract

46

such ri

, counsel

(holding

parties

aling

Ilion dollar transaction" to not

s must be given ef

)

.

C. Nei er the SPA nor the Note Condition Payment upon
Resolution of the Post-Closing Purchase
ce
Adjustment Process or Resolution of Indemni cation
Claims

34

In addition to postponement on the repayment,
Plaintiff all

s that "RG Steel is entitled to a declaration

that it is excused from its obligations to pay the Note
until the purchase price adjustment process is complete and RG
Steel is indemnified for the losses it has suffered as a result
of Severstal's

ch of the SPA.

oS

Note itself sets

Neither the SPA nor t
condition relat
price

the Note to eit

the post-closing purchase

ustment or the indemnification claims.

Instead, the

Note from the post-

SPA specifically excludes

rth any

osing

purchase price adjustment: Section 1.01 of the SPA provides that
"aggregate consideration to be paid by [RG Steel] at the
Closing .

11

(i) the Note, plus

(ii) cash in the

amount equal to the Initial Purchase Price (as adjus
to Section 1.04, the 'Final Purchase Price').ff
de

s t

Init

the post closing purchase
Final Purchase
the

Section 1.04(a)

1 Purchase Price as $125 million,

an initial adjustment at Clos

ceo

and a f

pursuant

ject to

1 adjustment through

ice adjustment, which yie

the

Because Section 1.01 provides that only

tial Purchase Price is adjust

pursuant to Section 1.04

5 The "Final Purchase Price" subsection of Plaintiff's "Factual Al
ions"
does not mention any claim related to the Note (CampI. , 82), and does not
include any allegations about a relationship between the Note and either the
post-closing
e price adjustment and/or the indemnification provisions
of the SPA that would require conditioning payment of the Note upon
resolution of either. The Plaintiff's opposition brief also does not offer
any arguments to support such a requirement or allowance.

35

ustment (SPA § 1.04),

the post-closing purchase price

incipal amount of the Note was to rema
rdless of the fluctuations in
1 Purchase Price.
S

Initial Purchase Price and

For example,
I

tial Purchase Price
Ilion, Severstal would

lowered the purchase price by over $125

ss $125 million.

(Id.

§§

s

to RG Steel in that amount

1.01 (a) and (bl (iv).)

The SPA there

s not allow RG Steel to postpone

its present obligations under
price adjustment.

Note based on the purchase

Severstal cannot postpone its present

obligations by reducing t
years later.

provisions of the

r

, if the initial adjustment to t

had to pay cash at the C

at $100 million

Nor do the

1 amount of the Note due
sions governing the

indemnification claims relate to the interest or principal
payments of the Note.
to the contrary, the

The

ines in Article VIII show that,
fication claims need not be brought

or resolved by June 30, 2012, the time that the interest
payments on the Note

, or March 31, 2016, the

principal payment on the Note is due.
1.1. )

RG Steel

e

(Exhibit 1 Pre

s thus failed to show that

Note is

conditioned upon either the purchase price adjustment or
resolution of t

ification claims.

36

e,

§

any basis for a

aintiff has not pI

Because

aration to postpone its obligations under the $100 mill
Note and the $36 million repayment until
purchase price adjustment

ss is concluded and the

indemnification claims are res
is di

ssed in

senti

post-closing

, the Fourth Cause of Action

zer, Inc. v.

See, e.g.,

Stryker Corp., 348 F. Supp. 2d 131 (S.D.N.Y. 2004)

(failure to

indemnify was only excused if the contract made the
indemnification obligation dependent upon plaintiff's
rformance under other sections of the agreement).

II.

Plaintiff's Motion to Replead is Denied

In the event RG Steel's all

tions are found

insufficient, Plaintiff requests leave to amend its dismis
claims.

ent undue delay, bad faith,

undue prejudice, or

futility, the "mandate" under Rule 15(a) (2) to freely grant
leave to amend "is to be

" Foman v.

s, 371

u.s. 178,

182 (1962); see also
of Am. N.A.,
this Ci

626 F.3d 699, 725 (2d Cir. 2010)

t has

("'The rule in

n to allow a party to amend its plea
37

ngs in

nonmovant of prejudice or bad

absence of a showing by
fai th. ' ")

(quoting Block v. First Blood Assocs.,

988 F. 2d 344,

350 (2d Cir.1993)) .

s case has been pending since April 2012 and
discove

has yet to begin.

A second amended complaint would

cause no material delay in the resolution of this case.
However, amendment would be futi

PI

the plain language of the SPA, whi

is unambiguous and

conclus

Plaintiff has not cited

would plead to overcome

iff's cia

additional

cts it

se provisions of the SPA, but rather

states that "any amendment would simply offer cia
issues discussed in this motion."
such, Plaintiff's request

fail on

ty on the

(Pl. Opp. at 19-20.)

As

leave to amend the dismissed

claims is denied.

Conclusion

Based upon the conclusions set forth above,
Defendant's Motion to Dismiss is granted in part and denied in
part: Pia

iff's First Cause of Action with respect to the 2010

Transportation Contract, and Fourth Cause of Action
entirety, are dismissed.

38

its

It is so ordered.
New York, NY
January 1~, 2014

ROBERT W. SWEET
U.S.D.J.

39