CPI's obligations to him created in Goodridge a fiduciary duty
to disclose Old CPI's past irregular practices to Harvey.
However, Goodridge's involvement in Harvey's acquisition of Old
CPI was limited to protecting his interests in existing
obligations, and was not so substantial that he owed a duty to
disclose to any potential purchaser.
B. § 12(2)
Harvey also alleges that Goodridge, Fernandez and Daula's
behavior violated § 12(2) of the Securities Act of 1933,
15 U.S.C. § 771 (1988). § 12(2) makes liable to the purchaser "any
person who offers or sells a security . . . by means of a
prospectus or oral communication, which includes an untrue
statement of a material fact or omits to state a material fact
necessary in order to make the statements . . . not misleading.
. . ."
The elements of § 12(2) are similar to those of § 10(b). Both
provisions apply the same materiality standard. See Ross v.
Warner, Fed.Sec.L.Rep. (CCH) ¶ 97,735 at 98,863 (S.D.N Y
1980). § 12(2) lacks the stronger scienter requirement applied
to claims under § 10(b), while § 12(2) applies only to persons
who offer or sell securities.
Harvey contends that Goodridge is a seller within the meaning
of § 12(2) because he conspired with Fernandez to facilitate a
fraudulent sale to Harvey so that each of them could realize
the greatest possible profit on their operation. See Capri v.
Murphy, 856 F.2d 473, 478 (2d Cir. 1988) (defendant "at whose
behest" false representations were made liable under § 12(2)).
As is discussed above, however, Goodridge's ties with Old CPI
were severed before the merger, and he played no role in Old
CPI during merger negotiations, nor did he ever make any
representations to Harvey. Moreover, Goodridge's compensation
pursuant to the sale of his share of Old CPI was guaranteed
regardless of when or whether any future sale of the company
occurred, which as a factual matter discredits Harvey's
contention that Goodridge was integrally but clandestinely
involved in CPI's merger with Harvey. Even if, as Harvey
emphasizes, Goodridge's departure was to facilitate an eventual
sale and his compensation was fashioned to equal roughly half
the proceeds of an eventual sale, Goodridge's actions are
consistent with those of any self-interested shareholder
cashing in his or her shares. Accordingly, he is not a "seller"
as to Harvey within the meaning of § 12(2).
Fernandez and Daula clearly are statutory sellers. Fernandez
represented Old CPI throughout the extensive negotiations
between the parties, and both he and Daula signed the Merger
Agreement. Nevertheless, as is the case with its § 10(b) claim,
Harvey has failed to show that it suffered cognizable damages
as a result of the material misrepresentations and omissions
made. Accordingly Harvey's § 12(2) claim cannot prevail.
C. Common Law Fraud
Harvey also claims that Fernandez, Daula and Goodridge
committed common law fraud.
Under New York law, to establish its claim Harvey must
demonstrate 1) misrepresentation or nondisclosure of a material
fact, 2) intent to deceive by the defrauding party, 3)
justifiable reliance upon the misrepresentation by the
defrauded party, and 4) injury to the defrauded party as a
result of its reliance. Idrees v. American University of
Caribbean, 546 F. Supp. 1342, 1346 (S.D.N.Y. 1982); Jo Ann Homes
at Bellmore, Inc. v. Dworetz, 25 N.Y.2d 112, 302 N.Y.S.2d 799,
803, 250 N.E.2d 214, 216-17 (1969). Because these elements are
substantially identical to those governing § 10(b), the
identical analysis applies here, and Harvey has failed to make
a sufficient showing as to Goodridge, Daula or Fernandez, or as
to Goodridge's liability as an "aider and abettor".
Harvey claims that Fernandez, Goodridge and Daula also are
liable to it under RICO, 18 U.S.C. § 1962(c). To establish its
claim, Harvey must show that the defendant 1) conducted the
affairs 2) of an enterprise 3) through a pattern 4) of
racketeering activity 5) that has caused injury to the
complaining party's business or property. Kuczynski v. Ragen
Corp., 732 F. Supp. 378, 385 (S.D.N.Y. 1989); see also Sedima
S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275, 3285,
87 L.Ed.2d 346 (1985). While there is little doubt that all
three defendants on Harvey's counterclaims conducted the
affairs of an enterprise, namely CPI, the other elements are in
substantial dispute. Because, as is discussed above, Harvey has
failed to show that it suffered any actual injury as a result
of the alleged fraudulent scheme, either in the form of lost
sales or profits or undisclosed liabilities, Harvey is
precluded from recovering pursuant to RICO just as it is
pursuant to other theories it advances. For that reason, this
opinion need not address whether any of the parties engaged in
acts that might be deemed a pattern of racketeering activity.
While Harvey has failed to prevail on its counterclaims,
there remains the question whether it has made a sufficient
showing to excuse performance of its obligations to Goodridge
pursuant to the Assumption Agreement.
Harvey alleges that the merger was fraudulently induced by
misrepresentations which it attributes to Fernandez, Daula and
Goodridge, and argues that it therefore should not be required
to make payments to Goodridge for which it became liable as a
result of the merger. As discussed above, while Goodridge was
not responsible for any material misrepresentations or
omissions that were made, Fernandez and Daula did falsely
warrant that Old CPI had been operated in a lawful manner, a
representation that clearly was material to Harvey's decision
to merge with the company.
It is arguable that Harvey might prevail if it now sought to
invalidate the entire merger based on Fernandez's and Daula's
misrepresentations. However, Harvey seeks only to disassociate
itself from its obligations to Goodridge which arise from and
are inextricably interrelated with all aspects of the Merger
Agreement, without forfeiting the remainder of that agreement,
notably its acquisition of CPI, which it in turn sold at an
unidentifiable but possibly substantial price in 1982.
Goodridge rightly observes that the June 26, 1981 Merger
Agreement and the August 5, 1981 closing documents refer to and
incorporate each other, and all facilitate the same
transaction. Accordingly, all elements of those agreements,
specifically including the Assumption and Indemnity Agreements,
must be interpreted together and function as if they were one
instrument. See BWA Corp. v. Alltrans Express U.S.A., Inc.,
112 A.D.2d 850, 493 N.Y.S.2d 1, 3 (1st Dep't 1985). According to a
variety of old but still valid authority which Goodridge
invokes, one who seeks to escape performance of a fraudulently
induced contract can only do so by rescinding the entire
agreement, and cannot escape performance of its obligations
while retaining the benefits it realized from the agreement.
See Wood v. Dudley, 188 A.D. 136, 176 N.Y.S. 494, 497-97 (1st
Dep't 1919); see also National Wall Paper Co. v. Hobbs, 35
N YS. 932, 933 (1st Dep't 1895). Accordingly, Harvey's remedy
must either be to attempt to recover whatever damages may be
due it from Fernandez and Daula (as it in fact did here), or to
attempt to extricate itself from the entire contract.*fn5
Harvey cannot simply disavow those portions of the contract
which it finds most odious.
To summarize, Goodridge's contract claim is granted. Harvey's
counterclaims and affirmative defenses are denied.
Submit judgment on notice.
This decision supplements the Findings of Fact and
Conclusions of Law filed on June 28, 1991. That decision did
not reach the issue of The Harvey Group, Inc.'s ("HGI")
liability to Arnold Goodridge and New Wave Electronics, Inc.
(collectively "Goodridge") and to Frank Fernandez under its
agreement to indemnify Fernandez for obligations arising from
Fernandez's guarantees to Goodridge, nor whether and to what
extent Goodridge and Fernandez are entitled to receive legal
fees and costs from HGI or New CPI.
The rulings made in the June 28 opinion as to Components
Plus, Inc.'s ("New CPI") liability to Goodridge under the
Assumption Agreement, and as to counterclaims brought by HGI
and New CPI, remain undisturbed.
The Assumption Agreement[fn1a] by which the acquiring company
assumed all Old CPI's obligations to Goodridge was signed only
by representatives of Old CPI and of Neboc (now known as "New
CPI"), but not by Neboc's parent company HGI. Because it
previously has been held that there is no basis to "pierce the
corporate veil" and hold HGI liable under that agreement, the
sole means by which liability can attach to HGI, as opposed to
its subsidiary, is through the Merger Agreement and related
indemnity letter (collectively "Indemnity Agreements") which
also were executed at the time of the acquisition of Old CPI.
Unlike the Assumption Agreement, the Merger Agreement[fn2a]
and Indemnity Letter[fn3a] pursuant to that Agreement obligate
HGI directly to Fernandez.
Section 6.7 of the Merger Agreement provides:
Harvey shall use its best efforts to cause
Fernandez to be released from each of the
guaranties by him of CPI obligations
("Guaranties") listed in Schedule XIX hereto and,
on or prior to the Closing Date, will execute and
deliver to Fernandez a letter, dated the Closing
Date ("Indemnity Letter"), substantially in the
form of Exhibit E hereto, pursuant to which Harvey
will agree to indemnify Fernandez against all
claims, losses, liabilities and expenses,
including reasonable attorneys' fees, which may be
incurred by him under the Guarantees.
In its August 3, 1981 Indemnity Letter to Fernandez pursuant
to this provision, HGI stated in pertinent part:
Pursuant to Section 6.7 of the Agreement and Plan
of Merger . . . the undersigned (HGI) agrees to
indemnify you and hold you harmless from any
claims, losses, liabilities and expenses,
including reasonable attorneys' fees, arising out
of, based upon or relating to your guaranties
("Guaranties") of the obligations of CPI as listed
on Schedule XIX to the Agreement.
The guarantees listed in Schedule XIX included Fernandez's
"Guarantee of the obligations of CPI, dated January 21, 1981,
in favor of Goodridge and New Wave." Pl. Ex. 26-29. That
guarantee,[fn4a] executed at the time of Old CPI's buyout of
Goodridge's shares in the company, obligated Fernandez to
provide a personal guarantee of "prompt and unconditional
payment" of Old CPI's obligations to Goodridge. The guarantee
agreement further provides that "The Guarantor waives any right
of subrogation, reimbursement or indemnity whatsoever and any
right of recourse to security for the Obligations unless and
until all Obligations have been paid and performed in full."
Fernandez previously has been held liable to Goodridge under
this Guarantee. See Goodridge v. Harvey Group, Inc.,