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AMNEX, INC. v. ROWLAND

October 30, 1998

AMNEX, Inc., Plaintiff, against ROBERT A. ROWLAND, DONALD D. SIMMONS and CARL MICHAEL MOEHLE, Defendants.


The opinion of the court was delivered by: EDELSTEIN

OPINION & ORDER

 EDELSTEIN, District Judge :

 Plaintiff, AMNEX, Inc. ("AMNEX") filed its Complaint on March 23, 1998 against Defendant Robert A. Rowland ("Rowland"), the former majority shareholder and Chairman of the Board of Directors of a Texas telecommunications company known as Capitol Network Systems, Inc. ("CNSI"). The Complaint alleged state common law claims of breach of contract and fraud in the inducement, and violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, in connection with AMNEX's June 28, 1996 corporate acquisition of CNSI. Complaint PP 1-2. On June 9, 1998, AMNEX filed an Amended Complaint joining Defendants Donald D. Simmons "Simmons") and Carl Michael Moehle ("Moehle") who were among the several sellers of CNSI.

 Defendants Rowland, Simmons and Moehle move this Court to abstain from deciding Plaintiff's common law fraud and breach of contract claims in favor of pending litigation and to dismiss Plaintiff's federal securities claim as time-barred. Memorandum of Law in Support of Defendant Robert A. Rowland's Motion to Dismiss, ("Rowland Br.") at 1-2.

 Background

 AMNEX is a publicly traded holding company organized under the laws of the State of New York. Amended Complaint P 1. Through its subsidiaries, AMNEX provides a variety of telecommunications services throughout the United States and abroad. Id. In June 1996, AMNEX purchased CNSI from Defendants Rowland, Simmons and Moehle, as well as from other stockholders. In connection with the sale, AMNEX allegedly promised Rowland that it would guaranty a promissory note--with a principal balance of $ 1,197,691.82 (the "Rowland Note")--payable to Rowland from CNSI. Rowland Br. at 2. Rowland further asserts that CNSI later defaulted on the Rowland Note and AMNEX failed to honor its guaranty. Id.

 On July 11, 1997, Rowland sued AMNEX and CNSI in Cause No. 97-07955, Rowland v. AMNEX, Inc. and Capital Network System, Inc., in the 353rd Judicial District Court for Travis County, Texas (the "Texas Litigation") to recover on the Rowland Note. AMNEX affirmatively defended against Rowland's claims in the Texas Litigation by contending that Rowland and the other sellers of CNSI made material misrepresentations to AMNEX that amounted to fraud in the inducement to purchase CNSI. See Affidavit of Clifford Thau in Support of Motion to Dismiss ("Thau Aff.") at Exhibits "B" and "C".

 On March 23, 1998, AMNEX commenced the instant case. All three Defendants, prior to answering either the Complaint or the Amended Complaint, filed their present motions asking this Court to abstain from deciding Plaintiff's common law fraud and breach of contract claims in deference to the Texas Litigation, and to dismiss as untimely the federal securities claim. Rowland Br. at 1-2; Memorandum of Law in Support of Defendant Carl Michael Moehle's Motion to Dismiss at 1-2; Memorandum of Law in Support of Defendants Donald D. Simmons' Motion to Dismiss at 1-2.

 Discussion

 A. Federal Claim

 The third cause of action in AMNEX's Amended Complaint alleges that the Defendants induced AMNEX to purchase CNSI's shares at an artificially high price, violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Amended Complaint P 58-64. The key allegation in AMNEX's claim is that the sellers of CNSI misrepresented the condition of CNSI's Mexican operations in the months leading up to the sale. Specifically, AMNEX alleges that the sellers of CNSI concealed that at least fifty-two Mexican customers had canceled their contracts with CNSI during the Spring or Summer of 1996, prior to closing the sale of CNSI to AMNEX. Amended Complaint at P 7. In response, Defendants argue that this Court should dismiss AMNEX's federal securities claim as time-barred, stating that AMNEX failed to bring its 10b-5 claim within one year after it discovered facts that allegedly support the federal securities claim. Rowland Br. at 9.

 The rules for determining the timeliness of 10b-5 claims are well established. "Litigation instituted pursuant to § 10(b) and Rule 10b-5 . . . must be commenced within one year after the discovery of the facts constituting the violation and within three years after such violation." Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991). AMNEX filed this lawsuit on March 23, 1998. Therefore, AMNEX's federal securities claims would be time-barred if AMNEX discovered or should have discovered the facts supporting the claims before March 23, 1997.

 AMNEX's Amended Complaint states that:

 
After the Acquisition [of CNSI] was completed on June 28, 1996, the trend of customer losses, broker resignations, disconnections, confiscations, and other regulatory pressures mounted, culminating in a massive drop in revenue in August and September 1996. AMNEX, unaware of its new acquisition's pervasive problems, had assumed that CNSI's business would continue running smoothly in the months immediately following the Acquisition. By October of 1996, however, AMNEX had become painfully aware that the revenue projections which SNSI had presented during the due diligence period had ignored the many incipient threats to CNSI's operations. AMNEX ...

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