FILED: NASSAU COUNTY CLERK 09/30/2016 02:39 PM INDEX NO. 014491/2011 NYSCEF DOC. NO. 67 RECEIVED NYSCEF: 09/30/2016 Exhibit 13
Jeffrey M. Eilender Partner jeilender@schlamstone.com 26 Broadway, New York, NY 10004 Main: 212 344-5400 Fax: 212 344-7677 schlamstone.com BY FAX (WITHOUT EXHIBITS) AND BY HAND The Honorable Vito M. DeStefano Special Referee Thomas V. Dana Commercial Division, Nassau County Commercial Division, Nassau County Supreme Court of the State of New York Supreme Court of the State of New York 100 Supreme Court Drive 100 Supreme Court Drive Mineola, New York 11501 Mineola, New York 11501 Fax: (516) 493-3391 Fax (516) 571-1427 and (516) 493-3010 Re: Schlossberg v. Schwartz, et al., Index No.: 014491/2011 Dear Justice DeStefano and Special Referee Dana: We write to both of you in your capacity as mediators in connection with the settlement of this matter. In particular, we write to follow up on the July 13, 2016 conference before Justice DeStefano. As set forth below, our understanding from Justice DeStefano is that the Defendants had been asked to try to craft an offer that would close the gap between the parties. Instead, they submitted a draft which retracted points that had been agreed to over a three month negotiation process. Indeed, we view this latest draft as not a serious offer but almost a fit of pique. Everyone is understandably frustrated at how long this process has taken, but we need all the parties to focus on the few gaps that remain and how to close them rather than take steps backwards. We also apologize as to how much time and effort this has taken from the two of you, but we strongly believe that we need further help to complete this process and ask for another settlement conference. For the convenience of the Court, we attach (as Ex. 5 to the by-hand copy of this letter) our redlined version of the draft agreement in response to the last, best offer we received from the Defendants. A copy of the settlement transcript is attached as Exhibit 1.
The Current Status of the Settlement During the July 13, 2016 conference, Justice DeStefano made certain suggestions to the parties aimed at closing the gap between them. As the latest version of the draft agreement at that point was Plaintiff s version of June 27, 2016, Defendants undertook to prepare their best offer in response, which was expected to resolve at least some of the issues remaining in dispute between the parties in connection with the agreement. Plaintiff patiently waited for three weeks for Defendants to come back with their best offer. Defendants long-awaited presentation of their new redline version of the agreement on August 8, 2016 (a copy of which is attached as Exhibit 2) ended up being an act of their utter bad faith: not only does Defendants best offer entirely fail to resolve any issues raised in the prior correspondence before Justice DeStefano and discussed at the July 13, 2016 conference, but it also takes back several important items to which Defendants had already agreed in the course of the previous negotiations. As a result, this is a disastrous setback for the whole process. The most vivid illustration is Section 13 of the agreement, requiring Mr. Schlossberg to cooperate with Steuben in several Patent Litigations in which it is involved. In this connection, Steuben previously agreed to fully indemnify Mr. Schlossberg for any expenses, liability, costs and attorneys fees arising from or relating to the Patent Litigations. Section 13 of Steuben s June 3, 2016 version of the agreement (a copy of which is attached as Exhibit 3) included elaborate provisions relating to such indemnification. Among other things, Steuben agreed that if Mr. Schlossberg determines in his own reasonable discretion that he became legally adverse to Steuben, he would be entitled to counsel of his own choosing, at Steuben s expense. Now Steuben purports to exclude all these provisions in its new best offer. At the same time, Defendants best offer accepts none of Plaintiff s suggestions intended to address his concerns raised before Justice DeStefano at the July 13, 2016 conference and in Plaintiff s preceding July 11, 2016 letter (a copy of which is attached as Exhibit 4), and makes no alternative suggestions to address such concerns. In particular, Defendants best offer version simply crosses out Plaintiff s proposed provisions: (a) in Section 5 and Section 24, aimed at limiting Defendants ability to manipulate Steuben s assets through mergers, transfers and other change-of-control transactions; (b) in Section 6, aimed at limiting Mr. Schwartz s ability to effectively nullify his personal guarantee by manipulating the legal ownership of his assets; (c) in Section 29, aimed at ensuring that the parties are not violating their legal obligations to 2
third parties by entering into the agreement and that Plaintiff therefore will not find himself behind Steuben s bank or other creditors in line for its diminished assets. Simply put, Defendants are ignoring Plaintiff s serious concerns about being paid under the settlement agreement. As described in Mr. Schlossberg s prior correspondence to the Court, such concerns stem from two sources Defendants established track record of reneging on other contractual obligations and especially Mr. Schwartz s established track record of draining Steuben of money for his own personal interests. Indeed, the events that gave rise to this very case now give rise to a realistic fear that Mr. Schwartz will move money from Steuben (via the other affiliates) and himself (via trusts that he controls) to make Steuben and himself judgment-proof. This is not speculation, but is based on close observation of how he has organized his financial affairs and those of Steuben in the past three decades. Accordingly, Plaintiff is asking for reasonable measures to ensure actual payment. The Critical Issues to Resolve One of the most important of such measures concerns Mr. Schwartz s assets securing his personal guaranty. As is apparent from the settlement transcript, the parties have expressly agreed that Steuben s payments of $13 million shall be secured by personal guarantee of defendant Henry Schwartz. (Tr. 3:20-22). Defendants do not dispute that. But a personal guaranty is a useless piece of paper if Mr. Schwartz does not personally own sufficient funds. It is not uncommon for a lender to require representations, warranties and covenants that provide assurances that the guarantor can actually fulfill its obligations if and when they become due. Here, such devices are particularly necessary. Despite Mr. Schwartz s wealth, given his advanced age and related estate-planning, his track record of improper diversion of funds, and the known fact that he has already transferred all his Steuben stock into a family trust, Mr. Schwartz can hardly be expected to maintain sufficient funds in his individual name to satisfy his obligations under the Guaranty unless the agreement expressly requires him to do so. Plaintiff s proposed requirement for Mr. Schwartz to provide an annual certification from a CPA is not prejudicial to anyone and serves simply to ascertain compliance with the agreement. This does no more than maintains the practical effect of the Guaranty which, again, Mr. Schwartz has expressly agreed to provide. The issue of the assets securing Mr. Schwartz s personal guaranty was specifically discussed at length at the July 13 conference. But Defendants resulting best offer 3
crosses out the entire proposed language of Section 6 and thereby ignores the entire discussion before Justice DeStefano and the entirety of his suggestions concerning this point. This is not good faith conduct aimed at facilitating the settlement rather, it is a blatant attempt to blackmail Plaintiff into accepting the unacceptable. Another critical point, also focused on potential manipulation of assets, concerns Steuben s possible change of control. On the record, Defendants agreed that, [i]f Steuben Foods is sold or transferred to a [ non-family ] third party at any point before Mr. Schlossberg received his full payment under the settlement... his payment under the settlement will be accelerated... (Tr. 6:18-7:16). In their initial draft and many subsequent revisions of the agreement, Defendants attempted to expand the permissible change of control of Steuben that would allow Steuben to be merged with, or its assets transferred to, an Affiliate of Mr. Schwartz, without triggering acceleration. Plaintiff, negotiating in good faith, tentatively accepted much of Defendants suggestions but conditionally, adding further language limiting Mr. Schwartz s ability to freely shuffle Steuben s assets to wipe out its ability to pay Plaintiff. Defendants new best offer demonstrates that they are unwilling to accept any such limitations, even though they initiated the expansion of this provision and even though the deal they were getting with all these limitations is still better than the essential terms to which they agreed on the record. On the record, the parties only agreed to a transfer to a family trust or a family member. In such an event, Steuben would still exist as a single entity. However, Plaintiff never agreed to a merger between Steuben and other entities or a transfer of assets from Steuben, which would compromise Steuben s ability to meet its payment obligations to Mr. Schlossberg. If there are no adequate safeguards in place, Plaintiff will return to the language agreed on the record on this point, eliminating the expansions proposed by Defendants. * * * Attached as Exhibit 5 is Mr. Schlossberg s new redline version of the agreement proposed as his best offer in response to Defendants August 8 version. As apparent from this document, Mr. Schlossberg has accepted much of Defendants suggested language throughout the agreement and abandoned many prior demands discussed in his July 13 letter to the Court. The critical issues discussed above, however, remain as do several other disputed issues. 4
We thank the Court again for its role in achieving the settlement in this case and look forward to finalizing the terms of the settlement at the September 9 conference. Respectfully, Jeffrey M. Eilender Cc: Joseph Covello, Esq. (by email) 5