The opinion of the court was delivered by: CEDARBAUM
This is an action by the would-be purchaser of all the stock of Four Star Holdings, Inc. ("Four Star Holdings") complaining of defendants' failure to consummate an alleged agreement for the sale of the company to plaintiff. Defendants move to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. For the reasons discussed below, plaintiff's securities fraud claim is dismissed for failure to meet the "in connection with" requirement of the federal securities law. The state claims are dismissed pursuant to 28 U.S.C. § 1367(c)(3).
Plaintiff Production Resource Group, L.L.C. ("PRG") is a Delaware corporation with its principal place of business in New York. Defendants Stonebridge Partners Equity Fund, L.P. ("Stonebridge") and Four Star Associates, LP are limited partnerships organized under Delaware law with their principal places of business in New York, and are shareholders of Four Star Holdings. Defendants Michael S. Bruno, Jr. and David A. Zackrison, New York residents, are general partners of Stonebridge. Defendants Bill L. Aishman, a Connecticut resident, and Anthony P. Cancellieri and Darren DeVerna, New York residents, are shareholders of Four Star Holdings.
The complaint asserts that defendants Stonebridge, Bruno and Zackrison violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, which prohibit fraudulent, material misstatements or omissions in connection with the sale or purchase of a security.
The complaint also asserts claims for common law fraud, negligent misrepresentation, promissory estoppel, breach of contract and breach of duty to negotiate in good faith. The complaint seeks compensatory damages, punitive damages and specific performance. Defendants' principal argument in support of their motion to dismiss is that the parties never entered into a binding agreement for the sale of the stock of Four Star Holdings. Defendants point to writings allegedly exchanged during negotiations that purportedly demonstrate that the parties intended to be bound only by a written stock purchase agreement.
Subject matter jurisdiction is premised on 28 U.S.C. § 1331, because the complaint asserts a claim for violation of the federal securities laws, and on supplemental jurisdiction pursuant to 28 U.S.C. § 1367. Thus, subject matter jurisdiction depends on the securities fraud claim. Wholly apart from defendants' contention that the parties never entered into a contract for the sale of securities, there is a serious question as to whether the complaint states a claim for violation of § 10(b) of the Securities Exchange Act. Accordingly, the parties were directed to submit supplemental memoranda of law on the issue of whether the complaint states a claim under § 10(b), in light of that section's requirement that the alleged fraud be "in connection with" securities and not other aspects of a transaction in which securities are sold. The parties have submitted memoranda on this issue.
ALLEGATIONS OF THE COMPLAINT
The complaint sets out the following allegations, which must be taken as true on this motion to dismiss. Plaintiff is a supplier of various products, including scenery, lighting and computerized control systems, for live entertainment productions, corporate events and themed entertainment. Four Star Lighting, Inc. ("Four Star Lighting"), a wholly owned subsidiary of Four Star Holdings, is a supplier of theatrical lighting systems for Broadway plays, and controls almost three-fourths of the market for such business. Plaintiff desired to increase its position in the market for theatrical lighting for Broadway shows. Accordingly, in the spring of 1997, plaintiff and defendants commenced discussions concerning the acquisition by plaintiff of Four Star Holdings ("the Acquisition").
On November 26, 1997, after negotiations concerning the Acquisition had taken place between the spring of 1997 and September 1997, defendant Bruno, acting on behalf of all defendants, told plaintiff that "the defendants were dealing exclusively with PRG concerning the sale of Four Star [Holdings] and that they would accept PRG's offer of $ 22 million" for Four Star Holdings. The parties agreed that the closing of the Acquisition would take place after plaintiff completed a $ 100 million bond offering. That offering was completed in the third week of December, 1997.
On December 23, 1997, several of plaintiff's officers met with defendants Bruno and Zackrison and an attorney for defendants. Stonebridge asked plaintiff, and plaintiff agreed, to increase the purchase price to $ 23,250,000 to reflect certain capital expenditures that Four Star Holdings had made since the spring. Bruno "attempted to extract an additional $ 1 million from PRG," but withdrew the request during a series of telephone calls on the evening of December 23.
On the following day, December 24, plaintiff sent a draft letter of intent to Zackrison at Stonebridge containing the terms the parties had discussed, as well as some additional provisions concerning the Acquisition. Later that day, Bruno advised plaintiff that defendants would not agree to the additional terms in the letter of intent, but that they would be "happy to sell" Four Star Holdings to plaintiff in accordance with the terms agreed to at the December 23 meeting and that under those terms, "the deal is yours." On December 31, Bruno reiterated to plaintiff that defendants intended to execute a written document "memorializing" the terms of the Acquisition discussed on December 23. Bruno also reiterated that the defendants were and had been dealing exclusively with plaintiff in connection with the sale of Four Star Holdings, and that they were not talking to anybody else and would not do so.
At a meeting on January 7, 1998, the parties agreed to the final terms of the Acquisition, a written agreement was finalized and printed, and the parties shook hands on the completion of the transaction. It was understood and intended by the parties that they had entered into an enforceable agreement that was to be memorialized by the signing of the written agreement. Plaintiff agreed to exchange signature pages on January 9, 1998, based on Bruno's assurance that the parties "had a deal" and on defendants' representations that a schedule to the written agreement would be available on January 9, 1998. Bruno also told plaintiff that defendants had received an unsolicited letter of intent from another party offering $ 28 million for Four Star Holdings, but that Bruno was not going to return the phone call because the defendants had reached a deal with plaintiff.
However, defendants failed to transmit an executed copy of the written agreement to plaintiff on January 9, 1998, and on January 13, 1998, Zackrison advised plaintiff that defendants were reneging on the Acquisition and that defendants were on the verge of selling Four Star Holdings to another party for a higher price than plaintiff had agreed to pay. Since then, defendants have refused to honor their contractual commitment to sell Four Star Holdings to plaintiff.
Plaintiff asserts that defendants Stonebridge, Bruno and Zackrison, acting in interstate commerce, engaged in manipulative and deceptive acts and practices and a course of business which operated as a fraud upon plaintiff in connection with the Acquisition. Specifically, plaintiff asserts that these defendants intentionally or recklessly made material representations of fact to plaintiff that were false in that: (a) defendants were not negotiating exclusively with plaintiff; (b) defendants had no intention of consummating the Acquisition with plaintiff, but were using plaintiff as a "stalking horse" to obtain higher offers for Four Star Holdings; (c) defendants were not negotiating with plaintiff in good faith; and (d) defendants had no intention of ...