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ADVANCED MARINE TECHS. v. BURNHAM SECS.

August 7, 1998

ADVANCED MARINE TECHNOLOGIES, INC., Plaintiff, against BURNHAM SECURITIES, INC., et al., Defendants.


The opinion of the court was delivered by: KAPLAN

MEMORANDUM OPINION

 LEWIS A. KAPLAN, District Judge.

 Plaintiff Advanced Marine Technologies, Inc. ("AMT") claims that defendant Burnham Securities, Inc. ("Burnham"), through its officer, A. Michael Victory, agreed to obtain financing for AMT and then failed to perform. It seeks to recover damages on theories of breach of contract, fraud, promissory estoppel, and negligence, among others. Burnham and Victory seek dismissal of the complaint on the grounds that there never was any contract between AMT and Burnham, that there is no basis for a fraud claim, and that the complaint fails to make out the elements of the other causes of action.

 Facts

 As the matter is before the Court on a motion to dismiss the amended complaint, the allegations of that pleading and all inferences that reasonably may be drawn therefrom are assumed true save in one particular. Paragraph 61 of the amended complaint refers to and quotes much of Victory's letter, dated July 8, 1997, to AMT. As plaintiff thus has incorporated the letter by reference into the complaint, the Court considers the entire letter under the settled law of this Circuit. *fn1"

 In May 1997, AMT, which is engaged in the development of marine propulsion technology, was in financial difficulty. *fn2" During that month, it met with Burnham's Victory and discussed the possibility of Burnham acting as AMT's investment bank. *fn3" A second meeting was held later in the month at which AMT presented its technology to a number of Burnham officials in addition to Victory. *fn4" Plaintiff alleges, on information and belief, that Burnham held a meeting shortly after May 29 at which it decided that "it was not capable of, nor interested in raising funds for AMT on a best efforts basis" and so advised Victory. *fn5" Nevertheless, AMT alleges that Burnham advised Victory that he was free to pursue financing for Burnham on his own. *fn6"

 Discussions between Victory and AMT continued. On June 2, 1997, according to AMT, Victory told it that Burnham was interested in and capable of raising $ 6 to $ 7 million for AMT. *fn7" On June 30, 1997, AMT met with Victory and another Burnham representative. Victory told them that Burnham would commit to raising the money provided AMT could raise $ 250,000 to stabilize its operations for 90 to 120 days. *fn8" He supposedly said also that AMT would receive an engagement letter from Burnham later that day. *fn9"

 During the month of June, AMT was in discussions also with another potential source of funds, Investec, which on June 26 proposed to raise more than $ 8 million for AMT. *fn10" When AMT disclosed the Investec discussions to Victory, however, Victory allegedly advised that Investec's terms to AMT were more expensive than those that Burnham would require. *fn11" In consequence, AMT on July 8, 1997 allegedly told Investec that it would work with Burnham in raising financing, although it held out the possibility that Investec might play a role in providing some interim financing. *fn12"

 It was at this point that Victory wrote AMT the letter referred to in the opening paragraph of this section, which is quoted selectively in the amended complaint for rather obvious reasons. The letter reads in full as follows, with the critical portion omitted by plaintiff rendered in italics:

 
"We very much enjoyed our conversations yesterday, and your update on the encouraging developments at AMT. At your request, I have summarized below Burnham Securities' current attitude with respect to establishing a possible investment banking relationship with your company.
 
"Based on our preliminary due diligence, we are impressed with AMT's product line and its market potential, as well as the commitment of your current management team. As a result, we are preparing a proposed Engagement Letter which will be available by the end of this week, subject to the matters discussed below.
 
"The engagement letter will propose that Burnham Securities will, on a best efforts basis, attempt to raise up to $ 6,000,000 for the company (or such other amount as may be mutually agreed upon). Such engagement will be contingent upon the company raising not less than $ 250,000 in interim 'bridge' financing and the absence of any materially adverse finding (as determined solely by Burnham) which might arise from the completion of our due diligence. It will also contain other provisions (such as indemnification) as is typical of such agreements. Finally, the letter will outline Burnham's compensation, which we have briefly discussed but not yet agreed upon. The compensation will involve an upfront retainer, a success fee payable in cash at the closing, and warrants to purchase shares of AMT in the future.
 
"Stefan, I emphasize that this letter is not an agreement on the part of Burnham to move forward with the financing, which will result only from the execution of a mutually acceptable engagement letter.
 
"We look forward to working with you in the future and hope we can play a role in your success." *fn13"

 Two days later, AMT and Victory met with Investec to discuss Investec's role in raising financing. Investec expressed willingness to continue, presumably on the limited basis that had been indicated. Victory indicated that (i) he and Burnham had contacted prospective investors, who were "universally positive," (ii) there was no conflict of interest between Burnham and Investec, (iii) Burnham would commit to raising $ 5 to $ 7 million for AMT, although it would take 90 to 120 days to do so, (iv) Burnham would lead the underwriting and prepare the offering materials, and (v) Burnham would place a representative on AMT's board. *fn14" Following the July 10 meeting, however, Victory allegedly told AMT that Investec's terms were "too 'avarice'" [ sic ] and recommended against working with Investec at all. *fn15" AMT therefore informed Investec that it would not engage its services. *fn16"

 July found AMT in discussions with the Binch Group, another prospective investor. Victory and AMT met with Binch on July 14, 1997, on which occasion Victory allegedly repeated substantially the same comments made at the July 10 meeting with Investec. In addition, he is said to have stated that Burnham would (i) waive its retainer fee, (ii) take 7.5 percent in cash and an option to buy 7.5 percent of AMT's equity at the offering price, and (iii) furnish an engagement letter on the following day. In addition, Victory is said to have stated that "the engagement letter was just a formality." *fn17"

 As promising as things may have looked, they quickly unraveled. On or about July 18, 1997, a Burnham representative called AMT and advised its chief executive that no engagement letter would be forthcoming, that it was very embarrassed by Victory's conduct, and that Victory was suffering from a substance abuse problem. *fn18" In subsequent discussions between Burnham representatives and AMT, Burnham stated that Victory had been a recovering alcoholic for over six years, that Burnham had not authorized his actions with respect to AMT, that it nevertheless had given its "blessings with respect to AMT so long as Victory could make it a success," and that Burnham would not commit to raise financing for AMT. *fn19"

 Plaintiff makes a number of allegations with respect to Burnham's alleged awareness of Victory's alleged alcohol problem. It claims that Burnham employees detected the odor of alcohol in Victory's office and on his breath during working hours. *fn20" It alleges also that Burnham had "actual knowledge" that Victory was drinking excessively during the relevant period. *fn21" On the other hand, it alleges as well that Victory prevented one Chauvet, a Burnham employee who was involved in Victory's initial discussions with AMT, from continuing to work on the transaction "so that he could without any witnesses continue drinking excessively during the negotiations with AMT." *fn22" The complaint is curiously silent as to whether AMT perceived Victory's allegedly obvious alcohol problem.

 According to the complaint, Burnham fired Victory on or about July 18, 1997. Victory subsequently committed himself ...


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