20-3576 DSB Holdings v. Harvard Steel Sales

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

Rulings by summary order do not have precedential effect. Citation to a summary order filed on or after January 1, 2007, is permitted and is governed by Federal Rule of Appellate Procedure 32.1 and this court’s Local Rule 32.1.1. When citing a summary order in a document filed with this court, a party must cite either the Federal Appendix or an electronic database (with the notation “summary order”). A party citing a summary order must serve a copy of it on any party not represented by counsel.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 25th day of October, two thousand twenty-one.

PRESENT: Dennis Jacobs, Steven J. Menashi, Circuit Judges John P. Cronan, District Judge. * ____________________________________________

DSB HOLDINGS, LLC,

Plaintiff-Appellant,

GALVSTAR HOLDINGS, LLC, Plaintiff,

v. No. 20-3576

*Judge John P. Cronan of the United States District Court for the Southern District of New York, sitting by designation. HARVARD STEEL SALES, LLC,

Defendant-Appellee,

JEREMY JACOBS, Defendant. ____________________________________________

For Plaintiff-Appellant: MATTHEW H. SHEPPE, Reiss Sheppe LLP, New York, New York

For Defendants-Appellees: MICHAEL J. BARRIE, Benesch, Friedlander, Coplan & Aronoff, Wilmington, Delaware

Appeal from a grant of summary judgment by the United States District

Court for the Southern District of New York (Daniels, J.).

Upon due consideration, it is hereby ORDERED, ADJUDGED, and

DECREED that the grant of summary judgment by the district court is

AFFIRMED.

Plaintiff-Appellant DSB Holdings, LLC (“Galvstar”) appeals from the

judgment of the district court entered on September 23, 2020, granting summary

judgment to Defendant-Appellee Harvard Steel Sales, LLC (“Harvard”) on

Galvstar’s claim for breach of the covenant of good faith and fair dealing. See

2 Galvstar Holdings, LLC v. Harvard Steel Sales, LLC, No. 16-CV-7126,

(S.D.N.Y. Sept. 23, 2020). Galvstar argues that the district court erred by

(1) drawing factual inferences against the non-moving party at the summary

judgment stage, (2) failing to acknowledge certain disputed issues of material fact,

and (3) failing to consider circumstantial evidence of Harvard’s alleged intention

to take over Galvstar’s business.

When this case previously came before our court, we affirmed the dismissal

under Rule 12(b)(6) of Galvstar’s claims for breach of a joint venture agreement

and breach of fiduciary duty, and we denied Galvstar’s request for leave to amend

its claim for breach of contract, which the district court had also dismissed. Galvstar

Holdings, LLC v. Harvard Steel Sales, LLC,

(2d Cir. 2018). We vacated

the dismissal of Galvstar’s claim for breach of the covenant of good faith and fair

dealing, however, because—taking the allegations in the complaint as true—

Galvstar stated a plausible claim for relief. Id. at 16-17. The district court had

determined that Harvard’s nonpayment of obligations to Galvstar under a May

2013 term processing agreement (“May TPA”) was “attributable to a dispute over

the quality control of steel and a machine failure.” Id. at 17. We noted that “such

fact-finding outside of the allegations is not proper at the motion to dismiss stage”

3 but that “[t]he district court’s conclusion may hold true at the summary judgment

stage.” Id. With the litigation now having progressed to the summary judgment

stage, we hold that the district court properly granted summary judgment to the

defendants on the claim for breach of the covenant of good faith and fair dealing.

We assume the parties’ familiarity with the underlying facts, the procedural

history of the case, and the issues on appeal.

“We review the district court’s rulings on summary judgment de novo,

resolving all ambiguities and drawing all permissible inferences in favor of the

nonmoving party.” Tiffany & Co. v. Costco Wholesale Corp.,

, 83 (2d Cir.

2020). However, the nonmoving party “may not rely on conclusory allegations or

unsubstantiated speculation” to defeat summary judgment. Scotto v. Almenas,

(2d Cir. 1998).

Galvstar claims that Harvard violated the covenant of good faith when it

stopped ordering steel and declined to pay outstanding invoices in full after the

May 2013 TPA was executed. Galvstar argues that Harvard’s purported concerns

about the quality of Galvstar’s steel were pretextual and that Harvard decided not

to order steel or to pay invoices in full in order to undermine Galvstar and

eventually to take over Galvstar’s business. We agree with the district court that

4 the record does not support a reasonable inference that Harvard acted as part of a

scheme to take over its business. It is undisputed that the quality of Galvstar’s steel

was a legitimate concern. Indeed, Daniel Bain, Galvstar’s president, at one point

described the quality as “outrageous.” App’x 425. Galvstar argues that the

contractual arrangements already accounted for the uneven quality of the steel.

But Galvstar’s production issues prompted Harvard to reevaluate its expectations.

In April 2013, Galvstar’s plant shut down for several days because of a mechanical

failure associated with the leveler. Harvard canceled “in excess of 4,000 tons” of

processing orders as a result, according to a letter from Harvard’s chief

commercial officer. Id. at 630. “We had no guarantee that the leveler would work

and the mill was getting ready to roll the tons so we had no choice but to cancel

the orders.” Id. Harvard also insisted on its right to reduce its payments to Galvstar

to account for the low quality of the steel it received. Section 4.2 of the May TPA

memorialized the parties’ understanding that invoices “will be reduced to account

for non-conforming material that may carry lesser value.” Id. at 31. Harvard

explained that it would not pay the outstanding invoices in full in order to account

for the non-conforming steel it had received. See, e.g., id. at 542.

5 Against the evidence that Harvard acted because of concern about steel

quality and the machine failure, Galvstar points to a meeting at which Timothy

Pynchon, the portfolio manager for Pioneer Investments Management (Galvstar’s

primary lender), purportedly communicated to Harvard’s president, Jeremy

Jacobs, an interest in replacing the leadership of Galvstar. Galvstar also identifies

emails in which Pynchon shared with Jacobs a draft proposal that suggested

Harvard would assume operating control of Galvstar. The district court properly

concluded that this evidence would not be sufficient for a reasonable jury to

conclude that Harvard did not intend to honor the May TPA because it was

engaged in a scheme to take over Galvstar. The allegedly suspicious meeting

between Pynchon and Jacobs had been arranged by Galvstar following the

breakdown of Galvstar’s facility. Galvstar offers hearsay evidence of what was

said at that meeting, but the evidence does not indicate a scheme involving

nonperformance of the May TPA. Moreover, the record indicates that Pynchon

sent identical draft proposals to both Daniel Bain, Galvstar’s owner, and to Jacobs,

compare App’x 687-92, with id. at 693.1-693.6, suggesting that it was not a secret

from Galvstar. There is no evidence in the record that Jacobs and Pynchon ever

spoke about the proposal, let alone coordinated their activities around such a

6 proposal, and both Jacobs and Pynchon disclaimed having discussed it. Galvstar’s

argument that this evidence creates a factual dispute over Harvard’s intention

relies on impermissibly speculative inferences and conclusory allegations.

Such inferences are untenable because the May TPA did not require

Harvard to purchase any steel or to pay its invoices in full. “Under New York law,

parties to an express contract are bound by an implied duty of good faith, but

breach of that duty is merely a breach of the underlying contract.” Harris v.

Provident Life & Acc. Ins. Co.,

(2d Cir. 2002). Accordingly, the

covenant of good faith and fair dealing emphasizes “consistency with the justified

expectations of the other party.” Bank of China v. Chan,

(2d Cir.

1991) (quoting Restatement (Second) of Contracts, § 205 cmt. a (1981)). To violate

the covenant, a party’s actions “must directly violate an obligation that falls within

[the parties’] reasonable expectations, that is to say, the implied promise must be

so much a part of a contract as to be essential to effectuate the contract’s purposes.”

Id. As we previously noted, “the implied covenant does not extend so far as to

undermine a party’s general right to act on its own interests in a way that may

incidentally lessen the other party’s anticipated fruits from the contract.” Galvstar

Holdings, 722 F. App’x at 16 (quoting M/A-COM Sec. Corp. v. Galesi,

,

7 136 (2d Cir. 1990)). Indeed, New York courts have cautioned that, “[w]hile the

covenant of good faith and fair dealing is implicit in every contract, it cannot be

construed so broadly as effectively to nullify other express terms of a contract, or

to create independent contractual rights.” Fesseha v. TD Waterhouse Inv. Servs.,

(2003).

Under the May TPA, Galvstar and Harvard agreed to be bound only on “a

deal-by-deal basis,” App’x 36, and that invoices “will be reduced to account for

non-conforming material that may carry lesser value,”

. In fact, Harvard

agreed to remit payment on invoices only “once non-conforming values have been

assigned.”

The May TPA formed the “entire agreement and understanding”

between the parties,

, it governed the parties’ conduct retroactive to

December 2012,

, and it was terminable at will upon advance written

notice,

. Because Harvard’s actions were consistent with its rights

under the May TPA, Galvstar was obliged to produce more than speculative

inferences to establish that those actions amounted to a violation of that

agreement.

8 * * *

We have considered Galvstar’s remaining arguments, which we conclude

are without merit. For the foregoing reasons, we AFFIRM the judgment of the

district court.

FOR THE COURT: Catherine O’Hagan Wolfe, Clerk of Court

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