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KREISS v. MCCOWN DE LEEUW & CO.

March 4, 1999

DAVID B. KREISS AND GREGORY M. SHELTON, PLAINTIFFS,
v.
MCCOWN DE LEEUW & CO. AND OUTSOURCING SOLUTIONS, INC., DEFENDANTS.



The opinion of the court was delivered by: Ward, District Judge.

OPINION

Defendants McCown DeLeeuw & Co. ("MDC") and Outsourcing Solutions, Inc. ("OSI") (collectively, "Defendants") move to dismiss this diversity action pursuant to Federal Rule of Civil Procedure 12(b)(6).*fn1 For the reasons stated below, Defendants' motion is granted in part and denied in part.

BACKGROUND*fn2

For many years plaintiffs David Kreiss ("Kreiss") and Gregory Shelton ("Shelton") (collectively, "Plaintiffs") worked in the debt management and collection industry. Together they devised a strategy to combine, in a single organization, companies with debt-portfolio purchasing capabilities and companies with contingent-fee collection capabilities. They developed a business plan (the "Business Plan") to obtain funding to acquire targeted companies in the industry. In early 1995, Plaintiffs presented the Business Plan to MDC, a private venture banking firm, as well as to other venture capital companies. At a meeting on March 30, 1995, the principals of MDC presented Plaintiffs with a letter agreement appending a document entitled "Project Recover Equity Investment Term Sheet" (letter and term sheet collectively, the "Term Sheet"). See Am.Compl., Ex. A. The Term Sheet sets forth the major terms of the proposed business venture and Plaintiffs' participation therein.

Among other things, the Term Sheet provides for the formation of a company (which subsequently became OSI) and for MDC and Plaintiffs to contribute a certain amount of equity. The Term Sheet also outlines Kreiss' and Shelton's respective positions and duties as OSI's President/CEO, and Executive Vice President. With regard to compensation, the Term Sheet states, in part:

  [t]he Company will put in place an option program
  whereby Mr. Kriess will be eligible to receive
  options to purchase common equity of the Company
  equal to 2.5% of the Company. . . . In the Board's
  sole discretion, Mr. Kreiss may also be entitled to
  receive options for an additional 0.5% - 1.0% of the
  common equity of the Company . . . if certain
  "super-performance" targets are met. . . .

Id. at 2-3. Additionally, the Term Sheet states that "[a]t the time of the initial Acquisition, Mr. Kreiss and Mr. Shelton will be entitled to receive 5.0% and 1.5%, respectively, of the common equity of the Company. . . ." Id. at 3.

Plaintiffs and a representative of MDC signed the Term Sheet at the March 30, 1995 meeting. Thereafter, Plaintiffs signed two agreements: the Amended and Restated Stockholders Agreement (the "Stockholders Agreement"), and the Stock Option Award Agreement (the "Options Agreement"). Affidavit of Glenn Kurtz, dated April 30, 1998 ("Kurtz Aff."), Exs. 4, 5 and 6. The Stockholders Agreement sets forth the stockholders' rights in connection with ownership of OSI common stock, including transfer, sale and registration of the stock. Section 2.5 of the Stockholders Agreement provides, among other things, for OSI's right to repurchase any shares or vested stock options held by a management stockholder upon termination of employment. Kurtz Aff.Ex. 4 § 2.5. In addition, Section 2.5 contains two formulas for calculating the repurchase price of the stock options in the event a management stockholder resigns. Which formula applies depends on whether the management stockholder resigns for "good reason," as defined in the Section. Id.

The Options Agreement grants each Plaintiff options to purchase $0.01 par value common stock of OSI at a per share price of $12.50 pursuant to the company's stock option plan, and sets forth the applicable terms and conditions. Kurtz Aff.Ex. 5, ¶ 1. Paragraph 2(d)(iii)(B) provides, among other things, that if the optionee resigns for "good reason," the optionee may exercise his or her vested stock options, subject to OSI's right of repurchase, as provided in the Stockholders Agreement. Significantly, the Options Agreement grants Plaintiffs fewer stock options than promised in the Term Sheet.

After the March 30, 1995 meeting, at which the Term Sheet was signed, Plaintiffs organized OSI. Kreiss contributed $100,000 in equity to the company and Shelton contributed $50,000 in equity, in exchange for 8,000 and 4,000 shares of common stock respectively. MDC contributed $15,000,000 to the creation of OSI. In the months following, Plaintiffs successfully implemented the Business Plan as contemplated in the Term Sheet, garnering substantial earnings for OSI. Through Plaintiffs' expertise and business contacts, OSI acquired four existing companies in the debt management and collection industry. Throughout the course of the acquisitions, Defendants assured Plaintiffs that they would receive substantial equity stakes in OSI, equaling tens of millions of dollars.

OSI's fourth acquisition, of a company named Payco, took place in January 1996, following a successful $100,000,000 debt offering. Plaintiffs were instrumental in identifying Payco as potential target company and in the negotiations that led to its acquisition. Despite Plaintiffs' contribution, Defendants ultimately "excluded" Kreiss from the Payco deal. Defendants told Plaintiffs that upon acquisition of Payco, a new CEO would be hired for OSI and that Plaintiffs would "no longer be in positions to control the operations of OSI." Am.Compl. ¶ 25. Subsequently, Defendants significantly reduced Plaintiffs' authority and responsibilities. Defendants never conveyed to Plaintiffs the equity as promised in the Term Sheet.

On October 22, 1996, Plaintiffs resigned their positions as officers, directors and employees of OSI. Just prior to their resignations, Kreiss and Shelton tendered cash payment and written notice to OSI that they were exercising their options to acquire OSI common stock under the Options Agreement. Defendants rejected Plaintiffs' exercise of their stock options.

Plaintiffs commenced this action on December 23, 1997. The amended complaint ("Amended Complaint") asserts claims for wrongful rejection of Kreiss' and Shelton's exercise of stock options (Claims I and II — breach of contract); breach of the Term Sheet (Claim III — breach of contract); and quantum meruit or unjust enrichment, based on Plaintiffs' performance of their obligations under the Term Sheet (Claim IV — quasi-contract). By way of relief Plaintiffs seek specific performance to enforce their stock options under the Options Agreement, monetary damages and reimbursement of the costs of litigation, pursuant to Section 5.7(d) of the Stockholders Agreement. On March 3, 1998, Defendants interposed an answer and counterclaim for reimbursement of litigation costs under Section ...


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