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