which would require Alliance to be candid and honest about its negotiations with third parties and not encourage Plaintiffs to make the $ 30 million financing available if it lacked any intention of obtaining financing from them." Id. Plaintiffs' complaint about defendant having "encouraged [them] to make the $ 30 million financing available" is misplaced. Plaintiffs received over $ 1 million in consideration for making the $ 30 million available and had an obligation to do so pursuant to the Letter agreement, regardless of whether defendant was negotiating with Bally.
Finally, the precise language of the termination provision and the addendums to the Letter further supports the view that defendant had no duty to abstain from, or disclose, its negotiations with Bally. The termination provision provides that the break-up fees be paid "immediately" upon the occurrence of the triggering event. unless there was a good faith disagreement among the parties in negotiating the terms of the loan in which case the break-up fees were to be paid at a later date. Such a provision necessarily contemplates circumstances in which the break-up fees would be due, other than "good faith" disagreements arising during the loan negotiations.
To impose a good faith obligation would thus frustrate the rather precise termination mechanism for which the parties themselves bargained.
Similarly, Schedule I to the Letter, setting forth the conditions precedent to funding the loans, twice refers to the Lenders' (i.e., plaintiffs') obligation to negotiate the loan terms in good faith, but nowhere refers to an equivalent obligation by defendant. See Letter at I-2, PP 6,7. Such a construction is completely consistent with the nature of the agreement between the parties. Plaintiffs committed to making $ 30 million available to defendant, and thus had a duty to negotiate the loan terms in good faith so as to not render this commitment nugatory. Defendant, by contrast, did not commit to actually borrowing the $ 30 million and therefore has no concomitant duty to negotiate the terms of the loan with plaintiffs.
An implied covenant by defendant not to negotiate a merger is therefore inconsistent with both the terms of the Letter and the intent of the parties evidenced therein. Defendant's motion to dismiss plaintiffs' claim for breach of the duty of good faith and fair dealing is granted.
III. The Third Cause of Action: Fraudulent Concealment
Plaintiffs allege that defendant fraudulently concealed its negotiations with Bally Gaming and that plaintiffs relied on such concealment to their detriment by continuing to negotiate the terms and details of the loans with defendant between August 30 and October 18. Plaintiffs do not assert a cause of action for fraud in the inducement because they do not know when defendant began the Bally negotiations.
To state a cause of action for fraud, plaintiffs must allege (1) a material misrepresentation, (2) scienter, (3) reasonable reliance and (4) damages. Banque Arabe et Internationale D'Investissement v. Maryland Nat'l Bank, 57 F.3d 146, 153 (2d Cir. 1995). When a claim is based on alleged nondisclosure of a material fact the plaintiff must also allege facts giving rise to a duty to disclose. Success Universal LTD. v. CWJ Int'l Trading, Inc., 1996 U.S. Dist. LEXIS 13793, No. 95 Civ. 10210 (DLC), 1996 WL 535541 (S.D.N.Y. Sept. 20, 1996) at *6. Plaintiffs' claim fails because they have failed to allege damages or a duty to disclose.
As to damages, plaintiffs have failed to articulate how they were harmed by the nondisclosure. At most, they incurred costs in negotiating the loan agreements, which costs are recoverable from defendant as discussed above. No other damages, however, flow from the nondisclosure itself (as opposed to the negotiation and actual signing of the Merger Agreement, which plaintiffs concede was within defendant's rights). Plaintiffs' contention that "as a result of Alliance's non-disclosure, Plaintiffs made available $ 30 million, which funds could have been used elsewhere," Pl. Mem. at 19, is disingenuous. Plaintiffs were committed to making the $ 30 million available pursuant to the terms of the Letter agreement and received over one million dollars in consideration therefore. Even had defendant disclosed the ongoing negotiations with Bally, plaintiffs would have had an obligation to make the money available. That was the nature of their "commitment to lend the Borrower an aggregate amount up to $ 30 million," which commitment terminated six months after signing the Letter agreement and not upon disclosure of defendant's negotiations. Having failed to plead any damages resulting from the non-disclosure, this cause of action must be dismissed.
Plaintiffs have also failed to allege facts giving rise to a duty to disclose. It is clear that under New York law a duty to disclose exists when a confidential, fiduciary or other "special" relationship exists among the parties. Id.; George Cohen Agency, Inc. v. Donald S. Perlman Agency, Inc., 114 A.D.2d 930, 495 N.Y.S.2d 408, 411 (App. Div. 1985); Ray Larsen Assocs., Inc. v. Nikko America, Inc., 1996 U.S. Dist. LEXIS 11163, No. 89 Civ. 2809 (BSJ), 1996 WL 442799 (S.D.N.Y. Aug. 6, 1996) at *4. Regular business relations, such as those at issue here, do not rise to the level of a special relationship without more. See Success Universal, 1996 WL 535541 at *6 (arms-length transaction between buyer and seller not special relationship); cf. Manufacturers Hanover Trust Co. v. Yanakas, 7 F.3d 310, 318 (2d Cir. 1993) (bank-customer relationship generally does not give rise to fiduciary duty).
A duty to disclose can also arise "where one party possesses superior knowledge, not readily available to the other, and knows that the other party is acting on the basis of mistaken knowledge." Shamis, 1996 U.S. Dist. LEXIS 11669, 1996 WL 457320 at *5 (emphasis added). Plaintiffs argue that defendant had a duty to disclose because it had superior knowledge of certain information not readily available to plaintiffs and that plaintiffs were acting on the basis of such mistaken knowledge. Plaintiffs, however, fail to meet the second part of the "superior knowledge" test--i.e., they fail to allege that defendant knew (or should have known) that plaintiff was acting on the basis of the mistaken knowledge. Indeed, as discussed above, plaintiffs had an obligation to make the funds available to defendant, even if defendant was negotiating with Bally. Plaintiffs thus could not have acted any differently had they been aware of the negotiations. In the cases cited by plaintiffs, by contrast, it was reasonable for the non-disclosing party to presume that the other party would act differently if it were fully informed. See Palmer v. A & L Seamon, Inc., 1996 U.S. Dist. LEXIS 4063, No. 94 Civ. 2968 (JFK), 1996 WL 153946 (S.D.N.Y. April 2, 1996) (duty by company official to disclose terms of employee's contract to company, where company terminated employee based on lack of knowledge); Shamis, 1996 U.S. Dist. LEXIS 11669, 1996 WL 457320 at *5 (duty to disclose third-party's deteriorating credit-worthiness where plaintiff extended credit to third-party); Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40, 45 (2d Cir. 1991) (duty to disclose proper discount rate for golden parachute payment where plaintiffs reasonably relied on misrepresentations in choosing benefits); Young v. Keith, 112 A.D.2d 625, 492 N.Y.S.2d 489, 490-91 (App. Div. 1985) (fraud claim stated for failure to disclose serious deficiencies in mobile home park's sewer system); cf. Swersky v. Dreyer and Traub, 219 A.D.2d 321, 643 N.Y.S.2d 33, 37 (App. Div. 1996) (no duty to disclose unless one party's superior knowledge renders transaction inherently unfair). Whether viewed as a question of no duty to disclose, no reasonable reliance or lack of damages, the result is the same: because plaintiffs were obligated pursuant to the Letter agreement to make the funds available regardless of the ongoing negotiations with Bally, a cause of action for fraudulent concealment cannot stand.
IV. The Fourth Cause of Action: Indemnification
Plaintiffs seek indemnification based on the following clause in the Letter:
The Borrower [defendant] hereby indemnifies and holds each Lender . . . harmless from and against any and all claims, damages and liabilities (including all reasonable fees, expenses and disbursements of counsel) which may be incurred by or asserted against [a Lender] in connection with or arising out of any . . . litigation or proceeding arising out of or in connection with this letter agreement . . . whether or not . . . the Loans are made . . . . The Borrower shall pay all out-of-pocket expenses incurred by either or both of the Lenders . . . in connection with this letter agreement . . . whether or not the Loans are made.
Letter at 5. Plaintiffs seek indemnification for (a) attorney's fees in this action and (b) the out-of-pocket expenses they incurred with respect to the Letter and the loan negotiations.
In light of the general rule against shifting attorney's fees, a general indemnification clause is not deemed to encompass fees in an action brought by the indemnitee against the indemnitor unless "the intention to do so is unmistakably clear from the language" of the indemnification clause. Hooper Assocs., LTD. v. AGS Computers, Inc., 74 N.Y.2d 487, 549 N.Y.S.2d 365, 367, 548 N.E.2d 903 (1989). As in Hooper, the language here is not so "unmistakably clear", as the clause "is typical of those which contemplate reimbursement when the indemnitee is required to pay damages on a third-party claim." Id.; see also Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 20-21 (2d Cir. 1996).
Plaintiffs are entitled to their out-of-pocket expenses, however, pursuant to the clear language of the Letter. Defendant's only argument to the contrary is that the ad damnum clause seeks only attorney's fees with respect to Count IV. The complaint alleges, however, that defendant is liable for such costs, Compl. PP 16, 35, and seeks "such other and further relief as to the Court may deem just and proper." Accordingly, the complaint states a claim for indemnification of plaintiffs' out-of-pocket expenses related to the Letter. Plaintiffs' fourth cause of action is dismissed insofar as it seeks attorney's fees in this action.
For the reasons discussed above, defendant's motion is GRANTED with respect to plaintiffs' claims for breach of the duty of good faith and fair dealing (II), fraud (III) and indemnification of attorney's fees in this action (IV). Defendant's motion is DENIED with respect to plaintiffs' claims for breach of contract (I) and indemnification of expenses related to the Letter agreement and negotiating the terms of the loans (IV).
Dated: October 27, 1997
New York, New York
Harold Baer, Jr.