statements and omissions issued prior to and during the negotiations regarding the Purchase Agreement, artificially drove up the price of MK stock and gave the public (and plaintiffs in particular) a false impression of MK's profitability. (See Compl. PP 38-42, 59, 60-61, 64, 66, 94). Plaintiffs further contend that defendants knew, or should have known "that there were serious problems in the rail systems business which later came to light" (Compl. P 65), including: (1) the fact that MK was deliberately underbidding contracts for the manufacture of rail cars below its own internal estimates; (2) that MK was unable to meet its contract schedules, despite representations to the contrary; (3) that MK was experiencing undisclosed delays in testing of new transit cars; (4) that MK knew, unknown to its investors and the public, that persistent design problems with cars would push back delivery on the Caltrans contract; and (5) that manufacturing delays were causing undisclosed higher labor costs. (Compl. P 94).
In terms of misleading statements, while the First Amended Complaint quotes extensively from the 1991 Annual Report, (see Compl. PP 62-63) and alludes generally to "a series of false and misleading favorable public statements, in filings with the SEC, press releases, interviews and in communications with securities analysts" (Compl. P 38), nowhere is there any allegation as to what specific statements in the 1991 Report plaintiffs allege to have been fraudulent. Nor do plaintiffs explain "in what respects the statements at issue were false," or "allege facts that give rise to a strong inference of fraudulent intent." San Leandro Emergency Med. Plan v. Philip Morris, 75 F.3d 801, 812 (2d Cir. 1996); see Acito, 47 F.3d at 51-52; Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127-28 (2d Cir. 1994). At various points, plaintiffs merely allege in general and conclusory terms that these statements were false or misleading (see, e.g., Compl. P 38), without specifically alleging why. See 15 U.S.C. § 78u-4(b)(1), 109 Stat. 737 (1995) (complaint alleging fraud under Section 10(b) "shall specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading."); Salinger, 934 F. Supp. at 1413 (broad allegation of fraud as to extensively quoted press releases and reports failed to adequately identify how each statement was fraudulent or misleading). In short, plaintiffs extensive (and generic) reliance on the 1991 Annual Report as the basis for their claims must fail.
Moreover, plaintiffs' invocation of the alleged circumstances or problems relating to the rail systems business of which defendants allegedly were aware, and which (by omission) allegedly rendered the forecasts in the 1991 Annual Report misleading, fails to sufficiently illustrate how or why specific statements in the 1991 report were, in fact, false at the time they were made. Plaintiffs do not allege when MK was aware of these problems, when the problems developed, or who was aware of them. Cf. Arazie v. Mullane, 2 F.3d 1456, 1467 (7th Cir.1993) ("references to unreleased or internal information that allegedly contradict[s] [defendants'] public statements" should indicate "who prepared the projected figures, when they were prepared, how firm the numbers were, or which [company] officers reviewed them."). Nor do plaintiffs allege the basis upon which they make these assertions.
For all of these reasons, plaintiffs have failed to plead their fraud claims with sufficient particularity pursuant to Fed.R.Civ.P 9(b), Second Circuit pleading standards, and the Reform Act. These failures would merit dismissal of Counts One and Two of the Complaint.
D. The State Law Claims9
1. Fraud Under New York Law
To state a claim for fraud under New York law, plaintiff must allege: (1) a material misrepresentation; (2) falsity; (3) scienter; (4) reasonable reliance; and (5) damages. May Dep't Stores Co. v. International Leasing Corp., 1 F.3d 138, 141 (2d Cir.1993); Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966, 970-71 (2d Cir. 1987). Since, however, the elements of fraud under New York law and Section 10(b) essentially are the same, Fruchtman v. First Edition Composite Holdings, Inc., 1991 U.S. Dist. LEXIS 15949, *2, 1991 WL 238273 at *4 (S.D.N.Y.), and since common law fraud also must be pleaded with particularity under Fed.R.Civ.P. 9(b), see Update Traffic Systems, Inc. v. Gould, 857 F. Supp. 274, 285 (E.D.N.Y. 1994), plaintiffs' common law fraud claims "suffer from the same deficiencies" as do their Section 10(b) claims and must therefore be dismissed. See The Pits, Ltd., v. American Express International, 911 F. Supp. 710, 719 (S.D.N.Y. 1996); Morse v. Weingarten, 777 F. Supp. 312, 319 (S.D.N.Y. 1991).
E. Breach of Contract/Rescission
In Counts Three and Five of the First Amended Complaint, plaintiffs allege that defendants breached the Purchase Agreement and the Non-Competition Agreements, respectively. These claims are based upon defendants' alleged misrepresentations as to the value of the MK stock that served as the consideration in these contracts.
Under New York law, the parties to a contract are free to bargain as to the consideration exchanged, even if that consideration is "grossly unequal or of dubious value." Apfel v. Prudential-Bache Securities, Inc., 81 N.Y.2d 470, 600 N.Y.S.2d 433, 435, 616 N.E.2d 1095 (1993). "Far from consideration needing to be coextensive or even proportionate, the value or measurability of the thing forborne or promised is not crucial as long as it is acceptable to the promisee." Weiner v. McGraw-Hill, Inc., 57 N.Y.2d 458, 457 N.Y.S.2d 193, 197, 443 N.E.2d 441 (1982). Thus, in the absence of fraud or unconscionability, the adequacy of consideration is not a proper subject of judicial review. Apfel, 600 N.Y.S.2d at 433; Kinley Corp. v. Ancira, 859 F. Supp. 652, 657 (W.D.N.Y. 1994).
Plaintiffs, relying on In re Estate of Bennett, 205 N.Y.S.2d 50 (Sur. Ct. 1960), argue that since they allege fraud in connection with defendants' valuation of the stock, they have stated a claim for breach of contract. That case, however, serves only to bolster defendants' argument that fraud in the inducement affects only the validity of the contract itself. Id. at 53. Thus, while fraud is a proper consideration in terms of equitable remedies in a contract action, see id. at 53 ("There is no doubt, however, that inadequacy of consideration, when combined with fraud . . . is a most material ingredient in the case as affecting the discretion of the Court in granting specific performance or determining validity.") (emphasis added), the fraud alleged in plaintiffs' breach of contract claims does not amount to a breach of the terms of the contract.
Rescission, however, is a proper remedy for fraud in the inducement. See Hadden v. Cons. Edison Co. of N.Y., 34 N.Y.2d 88, 356 N.Y.S.2d 249, 257, 312 N.E.2d 445 (1974); Kutas v. State of New York, 135 Misc. 2d 1044, 517 N.Y.S.2d 857, 861 (Ct. Claims 1987), aff'd, 146 A.D.2d 542, 537 N.Y.S.2d 30 (1st Dep't 1989). Of course, since such claims are based upon fraud, they too must meet the particularity requirements of Fed.R.Civ.P. 9(b). See, e.g., Gindi v. Silvershein, 1996 U.S. Dist. LEXIS 5309, *4 (S.D.N.Y.) (dismissing fraudulent inducement claim under Rule 9(b)); Ox v. Union Central Life Ins. Co., 1995 U.S. Dist. LEXIS 15997, *14 (S.D.N.Y.) (same). Since plaintiffs have failed to satisfy these requirements, their breach of contract and rescission claims must be dismissed.
F. Breach of Covenant of Good Faith/Unjust Enrichment
"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." Fasolino Foods Co. v. Banca Nazionale del Lavoro, 961 F.2d 1052, 1056 (2d Cir. 1992); see also Union Carbide Corp. v. Montell N.V., 944 F. Supp. 1119, 1136 (S.D.N.Y. 1996); National Football League v. Dallas Cowboys, 922 F. Supp. 849, 855 (S.D.N.Y. 1996). Similarly, unjust enrichment is a quasi-contractual remedy unavailable where an express contract exists. Apfel, 600 N.Y.S.2d at 437; Foxley v. Sotheby's, Inc., 893 F. Supp. 1224, 1234 (S.D.N.Y. 1995). Since plaintiffs' breach of covenant and unjust enrichment claims are duplicative of their breach of contract claims, they too must be dismissed. Union Carbide, 944 F. Supp. at 1136; National Football League, 922 F. Supp. at 855; Foxley, 893 F. Supp. at 1234.
G. Negligent Misrepresentation
Lastly, defendants argue that plaintiffs claims for negligent misrepresentation must be dismissed. "Under New York law, a plaintiff may recover for negligent misrepresentation only where the defendant owes her a fiduciary duty." Stewart v. Jackson & Nash, 976 F.2d 86, 90 (2d Cir.1992). The question of whether defendants owed plaintiffs a fiduciary duty in this case need not be addressed, however, since the negligent misrepresentation claims must be dismissed along with the fraud claims. The particularity requirements of Rule 9(b) apply to claims of negligent misrepresentation as well. Simon v. Castello, 172 F.R.D. 103, 1997 U.S. Dist. LEXIS 3768, *6, (S.D.N.Y.); In Re Leslie Fay Companies, Inc. Securities Litigation, 918 F. Supp. 749, 766 (S.D.N.Y.1996); Garcia v. Spanish Broadcasting System, Inc., 1993 U.S. Dist. LEXIS 6490, *9 (S.D.N.Y.). Because of the lack of particularity discussed above, Counts Ten and Eleven of the First Amended Complaint must be dismissed.
H. Plaintiffs' Cross-Motion to Amend
Plaintiffs cross-move for leave to file a Second Amended Complaint. Under Fed.R.Civ.P. 15(a), "leave [to amend] shall be freely given when justice so requires." Leave should be denied, however, when it would be futile, cause undue delay or prejudice, or when it is sought in bad faith. Foman v. Davis, 371 U.S. 178, 182, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962). Plaintiffs include a number of changes in their proposed Second Amended Complaint. The Court will address these amendments seriatim.
1. Diversity Jurisdiction
Paragraph 3 of the proposed Second Amended Complaint asserts jurisdiction based upon diversity of citizenship of the parties pursuant to 28 U.S.C. § 1332. Since, however both the federal and state law claims have been dismissed, the assertion of an alternative basis of jurisdiction at this point is futile.
2. Dropping Defendants
The proposed Second Amended Complaint drops certain defendants from certain Counts. See, e.g., Prop. Am. Compl. Count Two (dropping MK and MK Rail); Count Three (dropping individual defendants); Count Four (dropping individual defendants). Since all of these claims have been dismissed in their entirety, such amendment would be insufficient to revive these claims.
3. Amendments Regarding Inquiry Notice
At paragraph 92 of the proposed Second Amended Complaint, plaintiffs allege that, notwithstanding the July 19, 1994 announcement of the second quarter loss, "the true condition of MK's finances was still withheld from the public and the plaintiffs." Plaintiffs further allege that information regarding MK's financial status and the extent of defendants' deception was not available until February of 1995.
These proposed amendments are futile as well. "The test as to when fraud should with reasonable diligence have been discovered is an objective one." Armstrong, 699 F.2d at 88 (emphasis added). Thus, plaintiffs' allegations as to what they actually and subjectively did or did not know in July of 1994 are irrelevant for the purposes of determining when they were on inquiry notice. Moreover, plaintiffs' conclusory allegations of fraudulent concealment (Prop. Am. Compl. P 46) are insufficient as a matter of law to toll the statute of limitations. Armstrong, 699 F.2d at 88;
4. Amendments Regarding Personal Jurisdiction
In response to defendants' argument that the Second Amended Complaint should be dismissed for lack of personal jurisdiction over the individual defendants, plaintiffs assert in the proposed Second Amended Complaint that negotiations surrounding the Purchase Agreement took place in New York. (Prop. Am. Compl. P 48). Since all claims have been dismissed on other grounds, however, this amendment would be futile.
5. Miscellaneous Amendments
Plaintiffs also submit a number of minor proposed changes, (Prop. Am. Compl. PP 40, 41, 42, 58, 67, 71, 113, 130), none of which are sufficient to cure the defects discussed in part II(C)(3), supra. The changes serve neither to elucidate nor particularize the fraudulent nature of any statements, who uttered them, when they were uttered or the defendants' knowledge that they were false. Thus, such amendments would be futile.
For all of the foregoing reasons, it is hereby
ORDERED, that defendants' motion to dismiss is GRANTED in its entirety, and the First Amended Complaint is DISMISSED; it is further
ORDERED, that plaintiffs cross-motion for leave to amend is DENIED.
IT IS SO ORDERED.
Binghamton, New York
May 16, 1997
Hon. Thomas J. McAvoy
Chief U.S. District Judge