Standing in Another's Place: The Commercial Division Applies Delaware Law to Specifically Enforce a Contract

[authors: Valentina Shenderovich and Manuel Gomez]

In Severstal Dearborn, LLC et al. v. RG Steel, LCC et al., No. 653351/11 (Sup. Ct June 26, 2012) (“Severstal Dearborn”), the New York Commercial Division (Kornreich, J.) recently held that, under Delaware law, where a contract calls for payment of a sum to a third party beneficiary, one party to the contract can compel the other to make such payment through specific performance. The court held that such specific performance is called for even where the first party would not, ostensibly, suffer damages upon the other party’s refusal to pay.

The dispute in Severstal Dearborn arose from a Stock Purchase Agreement (“SPA”) entered into by Severstal US Holdings, LLC (“SUSH”), Severstal US Holdings II, LLC (“SUSH II”), nonparty Severstal Sparrows Point, LLC (“SSP”), and RG Steel, LLC. Under the SPA, Defendant RG Steel agreed to purchase from SUSH II all equity interests in SSP, and further allegedly agreed to pay any payables owed by SSP to Mountain State Carbon (“MSC”), a third party. The Severstal entities claimed these Payables owed by SSP to MSC amounted to $13,517,959 (“the Disputed Amount”).

After a disagreement over whether RG Steel was obligated to pay the Disputed Amount, the parties settled the dispute and entered into a letter agreement (the “Letter Agreement”), governed by Delaware law. In it, the parties agreed that, “[t]o the extent the Disputed Amount is recognized as a payable in that resolution, RG shall pay the Disputed Amount to MSC immediately.” SUSH and SUSH II (collectively, “Severstal”) subsequently sued the RG Steel entities (collectively “RG Steel”) for specific performance of the Letter Agreement – for RG Steel to pay the $13.5 million to MSC. RG Steel moved to dismiss on two grounds. First, it argued that Severstal lacked standing in that it would not suffer direct injury should RG Steel refuse to pay MSC because the entity that actually owed the monies to MSC was the non-party, SSP. Second, RG Steel asserted that specific performance was inappropriate because Severstal was essentially seeking a money judgment on behalf of MSC.

The court denied RG Steel’s motion to dismiss, holding that Severstal did have standing to compel RG Steel to pay the Disputed Amount to the third party and that such specific performance was the appropriate remedy for the circumstance at hand.

In resolving the standing issue, the court relied on Matter of Digex, Inc. Shareholders Litigation, 2004 WL 3090615 (Del. Ch. 2004) (“Digix”), where the court found a party had standing to enforce a settlement agreement that required the other party to pay success bonuses to attorneys who previously serviced both parties. Digix refused to pay the bonuses, arguing that the party moving for specific performance, the “Special Committee,” did not have standing because it would suffer no damages as a result of Digex’s refusal to pay. The Digix court rejected this argument and held that the Special Committee had a significant legal interest in ensuring the settlement was carried out and complied with. Specifically, the Digix court noted that the Special Committee “was a party to the [s]ettlement, and it has the right to seek enforcement of the [s]ettlement in requesting payment to its counsel.” Likewise, the Commercial Division in Severstal held that it was “possible to find injury to Severstal in that it had an interest in Mountain State through its ownership of a member of Mountain State [since RG Steel and Severstal each held a 50% interest in Mountain State].” The court reasoned that “[t]he obligation to Mountain State was important enough to be made part of the Letter Agreement,” and “[i]t would make no sense if it was unenforceable merely on RG Steel’s whim.”

Having established that Severstal had standing, the court went on to hold that specific performance was an appropriate remedy because Severstal sought payment to another party, not money damages for itself, and therefore Severstal would not be made whole otherwise.