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June 10, 1996

ALFRED M. FRANKEL, et ano., Plaintiffs, against ICD HOLDINGS S.A., et al., Defendants.

The opinion of the court was delivered by: KAPLAN

 LEWIS A. KAPLAN, District Judge.

 As sometimes occurs in acquisitions in which, like this one, the ultimate purchase price is to be determined by reference to a balance sheet to be prepared after the closing, the Buyers *fn2" in time claimed that the closing balance sheet was fraudulent and refused to pay the Notes. The sellers thereupon commenced this action in New York Supreme Court by moving for summary judgment on the Notes and Guarantees in lieu of complaint. See N.Y. CPLR § 3213 (McKinney 1992). Defendants removed to this Court and resist summary judgment, principally on the ground that the alleged fraud is a defense to the Notes and Guarantees. *fn3"



 Prior to the events at issue here, ICD traded in over one hundred products and had holdings around the world. It was the ultimate parent entity of B.V., and all of its common stock was owned by plaintiffs Alfred M. Frankel and Jacques Leviant.

 In 1993, Messrs. de Geus and Loeffelhardt were managing directors of, and were part of the management team that controlled, the commercial aspects of ICD's European and Russian operations. (de Geus Aff. P 5) Indeed, they were its most senior officials and ran the day to day operations of B.V. (Frankel Decl. P 9) Anxious to obtain a greater share in the profits of those operations, they discussed with plaintiffs a number of options to accomplish that goal. (de Geus Aff. P 6) According to defendants, plaintiffs were interested in selling because they were concerned about the economic environment in Europe and Russia. (Id. P 7)

 The Buyout Transaction

 The parties agreed on a buyout transaction in late 1993 or the first days of 1994. (Id. PP 6, 14, 15 & Ex. D) De Geus and Loeffelhardt caused Holdings to be organized to serve as the acquisition vehicle, and the transaction was structured as a purchase by Holdings of all of the common stock of ICD. (See id. P 7)

 The Purchase Agreement

 The Purchase Agreement provided that the purchase price would be:

"determined as an amount equal to the Book Value (as defined in Section 1.04) less $ 900,000 (subject to final adjustment as agreed by the parties ...), plus an additional contingent Purchase Price set forth in Section 6.03 below." (Id. Ex. D § 1.03(a))

 "Book Value" was to be determined from a special purpose consolidated statement of net assets as of September 30, 1993, as adjusted (the "Balance Sheet"). (Id. Ex. D § 1.04)) The parties agreed that Book Value would be determined by Richard A. Eisner & Co., ICD's certified public accountants. (Id).

 As is typical, the transaction contemplated the preparation of a preliminary balance sheet, which would provide the basis for the closing, with the price subject to subsequent adjustment upon the preparation of the definitive Balance Sheet later on. Section 1.05(a) of the Purchase Agreement provided in pertinent part that the accountants would:

 In the event the transaction closed on a Preliminary Balance Sheet, plaintiffs were obligated to deliver the Closing Balance Sheet and a determination of the Final Cash Purchase Price within thirty days thereafter. (Id. Ex. D § 1.05(b)) If the Closing Balance Sheet indicated that the Buyers had overpaid, Holdings was entitled to return of the overpayment. (Id. Ex. D § 1.05(c))

 The Purchase Price was to be paid in cash plus two Notes aggregating $ 5 million. (Id. Ex. D § 1.03(c)) Significantly, the agreement provided that the amount of any post-closing adjustment in the price would be paid promptly (id. Ex. D § 1.05(c)); there is no suggestion in the Agreement or the Notes that the Buyers would be paid (or accept) the return of any overpayment in the form of a reduction in the principal amount of the Notes.

 It was a condition to the obligation of each side to go forward with the transaction that the Estimated Cash Purchase Price be within ten percent of $ 67.8 million. (Id. Ex. D §§ 7.05, 8.04) De Geus claims that the sellers knew that the Buyers would not proceed with the transaction if the Estimated Cash Purchase Price was less than ninety percent of the $ 67.8 million figure. (Id. P 11)

 The "Open Items"

 As indicated above, part of the purchase price was described in the Purchase Agreement as "additional contingent Purchase Price set forth in Section 6.03" of the Agreement. (Id. Ex. D § 1.03(a)) Section 6.03 provided in relevant part that the sellers would be entitled, as additional contingent Purchase Price, to a percentage of the Closing Date Profits of Holdings and certain subsidiaries for each fiscal quarter, beginning with the quarter ending December 31, 1993. Insofar as is relevant here, "Closing Date Profits" for any quarter was defined as "the net cash profit (or loss) realized in such quarter from any contract or other item of value not reflected on the Balance Sheet which arose before October 1, 1993 (certain of which are set forth in Exhibit 6.03(4)), including, without limitation, arising from the relationship with V.O. Soyuzchim Export ..." (Id. Ex. D § 6.03(a)(4)) Exhibit 6.03(4) to the agreement listed sixteen "open items" and stated that all adjustments that would result therefrom would be split between the sellers and the Buyers in the ratio of 70/30 "and ...

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