because it has failed to pay the notes given as part of the purchase price for the ICD stock.
Due performance by the plaintiff is an element of a claim for breach of contract under New York law.
Nevertheless, it is far from clear that a plaintiff is required to plead his or her own due performance in order to state a claim upon which relief may be granted.
Some district court decisions have held that a breach of contract plaintiff must make some allegation of its own performance.
On the other hand, the common law requirement that a contract plaintiff affirmatively allege the performance or occurrence of all conditions precedent has been abolished in New York practice
and, it would appear, under Federal Rule 9(c)
as well. The Rule does not in terms require the plaintiff to allege the performance or occurrence of conditions precedent; it simply permits a plaintiff to do so generally and requires specificity in the denial of any such allegation. The philosophy of notice pleading that underlies the Federal Rules of Civil Procedure -- which in most cases require only "a short and plain statement of the claim showing that the pleader is entitled to relief"
-- suggests that such a formalistic rule no longer has a place in federal practice. But there is no need to determine that issue in this case.
The essence of the position taken by Frankel and Leviant here is that Holdings cannot allege its own due performance because it has not paid the $ 5 million in notes which it gave for a comparatively small part of the purchase price. This action, however, is for breach of the purchase agreement. While Frankel and Leviant suggest that payment of the notes was among Holdings' obligations under the purchase agreement, their argument is unpersuasive.
Moreover, the complaint certainly does allege that Holdings delivered the notes and paid the Estimated Cash Purchase Price demanded. Thus, the complaint alleges that Holdings performed its major obligations.
Given that the complaint, generously construed as it must be, makes out a claim for relief and that Frankel and Leviant have advanced no substantial reason for believing that there has been any material failure of performance of Holdings' obligations under the purchase agreement, the Court declines to elevate form over substance. Insofar as Frankel and Leviant seek dismissal on the ground that there is no broader allegation of due performance by Holdings, the motion is denied.
III. The Alleged Breach of the Implied Covenant of Good Faith and Fair Dealing
The second claim for relief alleges that Frankel and Leviant breached the covenant of good faith and fair dealing implied in every contract and therefore in the purchase agreement. The claim rests entirely on the breaches of the purchase agreement alleged in the first claim for relief.
A claim for breach of the implied covenant "will be dismissed as redundant where the conduct allegedly violating the implied covenant is also the predicate for breach of covenant of an express provision of the underlying contract."
That is precisely the case here. The second claim for relief is dismissed.
IV. The Fraud and Related Claims Against Eisner
The fourth and seventh claims for relief charge Eisner with common law fraud and with aiding and abetting the alleged fraud by Frankel and Leviant, respectively. The fifth accuses it of negligent misrepresentation. The tenth seeks relief on a theory of breach of fiduciary duty. All four claims are based on the common theme that Eisner acted in concert with or aided and abetted Frankel and Leviant in making six alleged misrepresentations.
Eisner seeks dismissal of all of them on the ground that they fail to allege fraud with the particularity required by Rule 9(b) in three respects. According to Eisner, they do not allege facts giving rise to a strong inference of scienter, rest on allegations made only on information and belief, and do not plead the alleged overstatements of the Estimated Cash Purchase Price and the Book Value with particularity.
In evaluating this branch of Eisner's motion, it is useful to describe in somewhat more detail the theory that Holdings has set forth in its amended complaint.
The pleading alleges that Frankel and Leviant knew or were chargeable with knowledge that the Book Value of ICD was sufficiently low that its accurate disclosure would have given Holdings the right to walk away from the deal.
As they allegedly would have been unable to find another purchaser if deGeus and Loffelhardt had declined to close, would have lost deGeus and Loffelhardt as key employees, and would have been unable to secure the financial benefits of the proposed transaction, they secured the appointment of Eisner as the accounting firm because they knew that it could be manipulated to act in concert with them to overstate the reported Book Value and hence the Estimated Cash Purchase Price.
The defendants, acting in concert, then made the misrepresentations relied upon in order to induce Holdings, deGeus and Loffelhardt to go forward with the transaction.
Many of these allegations are made "on information and belief." Moreover, the complaint contains no suggestion as to why Eisner would have engaged in such duplicitous behavior apart from the fact that it previously had been responsible for auditing ICD's financial statements and is said to have had a "long-standing relationship with Frankel and Leviant."
Indeed, the complaint is ambivalent as to whether Eisner acted culpably -- it alleges, upon information and belief, that "Eisner's Failure to Account resulted from Frankel's and Leviant's direction to Eisner or from Frankel's and Leviant's willful withholding of information which could enable Eisner to accurately evaluate the Book Value and Purchase Price."
Nevertheless, the complaint alleges also, without the information and belief qualification, that the Estimated Cash Purchase Price was overstated by approximately $ 7.5 million and that the misrepresentations in question were "known by [Eisner] to be false when made and were made with the intent or with recklessness to deceive and defraud in order to prevent ICD Holdings from walking away."
Rule 9(b) of the Federal Rules of Civil Procedure requires that averments of fraud be made with particularity in order to protect a defendant's reputation from "improvident charges of wrongdoing," discourage strike suits, and provide fair notice of the basis for such claims.
The Rule therefore requires not only that the circumstances of the alleged fraud be pleaded with particularity, but that the plaintiff "allege facts that give rise to a strong inference of fraudulent intent."
Moreover, allegations of fraud made on information and belief are insufficient unless the facts are peculiarly within the knowledge of the defendant, and even in such cases facts setting forth a sufficient basis for the inference of fraud must be alleged.
This complaint does not even remotely satisfy the requirements of the Rule as to Eisner.
There are two theories on which a plaintiff may seek to establish the necessary inference of fraud: "either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness."
While Eisner indisputably had the opportunity to commit fraud, there is not even the remotest suggestion of any motive sufficient to warrant the inference that it availed itself of that opportunity.
Hence, the sufficiency of Holdings' fraud allegations depends upon whether it has set forth strong circumstantial evidence of culpable wrongdoing.
Here there is precious little basis in the amended complaint for inferring conscious misbehavior or recklessness. Although the complaint contains the conclusory assertion that Eisner knew or recklessly disregarded the fact that its own statement was inaccurate, there is no suggestion that Eisner knew what the Book Value and Estimated Cash Purchase Price actually were. Nor is there any substantial allegation that it knowingly or recklessly failed to carry out its task properly or disregarded discrepancies. The allegations that it failed to conduct or have conducted an on-site review of the books of the Russian subsidiaries and that it disregarded "certain accounting discrepancies with respect to" those entities,
are made on information and belief, and neither is supported by any statement of facts as required by Rule 9(b).
Accordingly, the Court holds that the fraud allegations against Eisner fail to state a claim upon which relief may be granted. The fourth, fifth, seventh and tenth claims for relief therefore will be dismissed as against Eisner.
As deliberate fraud is not a necessary element of either the fifth or tenth claim for relief, which assert negligent misrepresentation and breach of fiduciary duty, respectively, leave to replead those causes is appropriate unless they are dismissible on other grounds.
V. The Breach of Contract and Malpractice Claims Against Eisner
The eighth and ninth claims for relief allege breach of contract and professional malpractice by Eisner. The theory of both is that Holdings, together with Frankel and Leviant, jointly retained Eisner and that the alleged overstatement of the Book Value and Estimated Cash Purchase Price was the product of malpractice and breach of Eisner's contractual duties, said to have been set forth in the purchase agreement, to Holdings.
Eisner seeks dismissal on the grounds that (1) Eisner was never its client and therefore lacks standing to bring these claims, (2) the scope of Eisner's engagement in any case was set forth in letters dated March 28 and May 31, 1995 rather than in the purchase agreement, which it never signed, (3) Eisner did exactly what the scope of its engagement required, and (4) Eisner in any case performed its services in accordance with the purchase agreement.
A. Standing and the Scope of the Engagement
The complaint alleges that "ICD Holdings, together with Frankel and Leviant pursuant to a retention agreement, jointly retained Eisner to perform certain accounting functions . . ."
That allegation must be taken as true for purposes of this motion to dismiss. Eisner's contention that Holdings "fails to allege the date of this alleged agreement or whether it was written or oral"
is beside the point, as there is no requirement that such details be pleaded in a contract or professional malpractice case.
Very much the same point disposes of Eisner's contention that the scope of its engagement was set forth in its March 28 and May 31, 1995 letters rather than in the purchase agreement. The amended complaint asserts that Eisner was retained by Holdings and the other defendants to prepare "an accurate statement [of] Book Value in accordance with U.S. GAAP and . . . an accurate statement of the Estimated Cash Purchase and Final Cash Purchase Prices,"
which at least arguably referred to the preparation of statements in accordance with the purchase agreement. As the Court is obliged on this motion to accept the truth of these allegations as well, it must assume for purposes of this motion that the scope of Eisner's engagement was defined by the purchase agreement.
B. Compliance with the Purchase Agreement
1. AOZT and Hisparus
As explained in Frankel I and Frankel II, the core of this dispute is whether AOZT Versus and Hisparus, two Russian subsidiaries of ICD, had negative equity values as of September 30, 1993, the amounts of any such negative equity values, and whether any such negative values were required to be included in the Book Value reflected in the preliminary balance sheet.
Eisner now claims that the equity value of these Russian subsidiaries was not intended by the purchase agreement to be included in the preliminary or closing balance sheets.
If it is correct, this central element of Holdings' claim will fail.
Eisner contends that Exhibit 6.03(4) to the purchase agreement makes clear that the parties intended that AOZT Versus and Hisparus were not to be included in the preliminary or closing balance sheets, but were among the items that would be accounted for, if necessary, by a post-closing additional contingent purchase price payment. There is substantial force to the argument, both from the terms of Exhibit 6.03(4) and from the fact that evidently neither side in the transaction had up-to-date financial statements for either subsidiary. Nevertheless, Holdings' position is not clearly wrong, at least on the face of the documents. AOZT Versus and Hisparus were "Retained Businesses" as that term was defined in the purchase agreement.
The Book Value was defined to include the excess of assets over liabilities "of the Retained Businesses . . ."
Hence, there is support for the position that the equity value of these entities was to have been included.
As the foregoing demonstrates, there manifestly is a material issue of fact as to whether the purchase agreement required the equity values of these entities to be included.
2. ICD Paris
Holdings contends that Section 6.11 of the purchase agreement required that any negative book value of ICD Group S.A., referred to as ICD Paris, which was sold separately to Holdings, be credited against the purchase price for ICD, that in fact ICD Paris had a negative book value, and that Eisner failed properly to reflect that negative value in the preliminary and closing balance sheets.
Eisner rejoins that there was no such obligation.
Section 6.11 of the purchase agreement provides:
"If prior to June 30, 1994, Sellers sell, transfer or otherwise dispose of at least 50% of the outstanding stock or assets of ICD Group (Hong Kong) Limited . . . , Sellers shall have the right, at Sellers' option, to require Buyer to acquire on the closing date of the ICD Hong Kong Sale, all of the outstanding stock or assets of ICD [Paris] for a purchase price equal to the book value (the 'ICD S.A. Book Value') of the assets of ICD [Paris]. If the ICD S.A. Book Value shall be negative at the time of the acquisition by Buyer, Sellers shall pay to Buyer the amount by which the ICD S.A. Book Value is less than zero."