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DIMON INCORPORATED v. FOLIUM

May 3, 1999

DIMON INCORPORATED, ET ANO., PLAINTIFFS,
v.
FOLIUM, INC., ET AL., DEFENDANTS.



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

MEMORANDUM OPINION

Plaintiff DIMON Incorporated ("DIMON") and a wholly owned subsidiary purchased all of the stock of Intabex Holdings Worldwide, S.A. ("Intabex") and the assets of Tabex (Private) Limited, now Blair Investments (Private) Limited ("Tabex") in April 1997 for a total of $264,190,000. DIMON now alleges it was fraudulently induced to overpay for the acquisition and brings this action against the sellers for breach of contract, fraud, negligent misrepresentation, civil conspiracy, breach of duty of loyalty and breach of warranty. Defendants in various permutations move to dismiss many of the claims.

Background

In the fall of 1996, the shareholders of Intabex, a leaf tobacco merchant, began efforts to sell their stock in combination with the tobacco assets of Tabex.*fn1 Intabex then was owned 63.6 percent by Folium, Inc. ("Folium"), 31.8 percent by Tabacalera S.A. ("Tabacalera"), and 4.6 percent by Leaf Management Investments Ltd. ("LMI"). Tabex was a wholly owned subsidiary of Folium.*fn2 Folium allegedly is an investment vehicle for the benefit and control of Anthony, Charles and Paul Taberer,*fn3 who allegedly controlled Intabex and Tabex through Folium.*fn4 LMI allegedly held shares of Intabex on behalf of key management within Intabex.*fn5 Tabacalera, according to the complaint, was an outside investor with no relationship to the Taberers external to Intabex.

In their pursuit of an acquirer, Intabex and Tabex hired the New York investment banking firm, CS First Boston, and provided it with financial information that was used in the preparation of an offering memorandum that was made available to potential buyers.*fn6 Upon learning that Intabex was on the market, DIMON, an international leaf tobacco merchant based in Danville, Virginia,*fn7 began negotiations to acquire Intabex and the tobacco related assets of Tabex.*fn8 Thus commenced a sequence of meetings and conversations, lasting from October 1996 through the closing of the deal in April 1997, and involving numerous representatives of DIMON, Intabex, Folium, Tabacalera, Tabex, and Anthony and Paul Taberer.*fn9

The negotiations culminated in a series of agreements: (1) the Stock Purchase Agreement ("SPA") among DIMON and the shareholders of Intabex, (2) the Asset Purchase Agreement ("APA") between Dibrell Brothers Zimbabwe (Private) Limited ("Dibrell"), a wholly owned subsidiary of DIMON, and Tabex, and (3) the Coordinating Agreement ("CA") between and among DIMON, Dibrell, Intabex, Folium, LMI, Tabex and Tabacalera.*fn10 Pursuant to those agreements, DIMON and Dibrell purchased all of the stock of Intabex and the assets of Tabex in April 1997, respectively, for a total of $264,190,000. The purchase price was paid in the form of 1.7 million shares of DIMON common stock, $140 million in 10-year, 6.25% DIMON convertible subordinated debentures, and $86,120,000 in cash.

The complaint asserts that DIMON and Dibrell were tricked into paying more than the stock and assets were worth because the financial statements provided to them did not accurately reflect the financial performance of Intabex. Specifically, DIMON alleges, inter alia, that the Taberers — through their control of Folium and its control of Intabex — operated a carefully masked accounting scheme which led to the overstatement of Intabex's earnings and net worth.

The most critical aspect of the alleged fraud was that certain expenses of Intabex S.A. ZUG ("Intabex S.A."), Intabex's primary trading company,*fn11 were debited during the fiscal years 1995-96 and 1996-97 to a so-called "Blank Account" instead of to the appropriate expense accounts,*fn12 thus artificially inflating income and net worth.*fn13 The complaint alleges that Intabex's income for the year ended March 31,1996 and its net worth at that date consequently were overstated by $22.7 million and $58.7 million, respectively.*fn14 The operation of this Blank Account, according to DIMON, was that it was carefully concealed and discovered only with great effort after the closing of the acquisition.

At the outset of this action, DIMON and Dibrell sought damages of more than $110 million for alleged breaches of the SPA and APA, violation of Section 10(b) of the Securities Exchange Act, of 1934*fn15 and Rule 10b-5 thereunder,*fn16 violation of the Racketeering Influenced and Corrupt Organizations Act ("RICO"),*fn17 common law fraud, negligent misrepresentation, and breach of fiduciary duty. Subject matter jurisdiction was alleged to rest on diversity of citizenship and the federal questions presented by the RICO claim. Defendants moved to dismiss the complaint.

In response to the motions to dismiss, Dibrell took a voluntary dismissal, and DIMON dropped its federal securities law and RICO claims. DIMON filed a second amended complaint which contains six causes of action, with jurisdiction premised exclusively on alienage.*fn18 With the agreement of the parties, the motions to dismiss the earlier pleadings have been deemed applicable to the second amended complaint, and the parties were given an opportunity to brief any new issues raised by that pleading. At this point, Tabex and the Taberers seek dismissal of the entire action as to them. Folium and LMI concede the sufficiency of the indemnification and injunctive relief claims, but seek dismissal of the common law tort claims. The motions now are ripe for decision.

Discussion

Subject Matter Jurisdiction

DIMON is a citizen of Virginia. Dibrell and all of the defendants are aliens.*fn19 Tabex and the Taberer defendants initially maintained that the three causes of action arising under federal statutes were insufficient as a matter of law and that the rest of the case therefore should have been dismissed for lack of subject matter jurisdiction, as the presence of aliens on both sides destroys complete diversity.

The presence or absence of jurisdiction under 28 U.S.C. § 1332 ordinarily is assessed as of the filing of the complaint. Nevertheless, the rule is not without exceptions, and federal courts have the power to permit the addition or deletion of parties where necessary to preserve jurisdiction.*fn20 Leave is freely granted. Indeed, the failure to grant leave absent prejudice to the remaining defendants is an abuse of discretion.*fn21

Here, defendants have failed to show any prejudice from the dropping of Dibrell as a plaintiff. In consequence, while the better course would have been for plaintiffs to move pursuant to Rule 21 to drop Dibrell,*fn22 the Court treats Dibrell's notice of dismissal pursuant to Rule 41 as such an application and grants the motion.

The dismissal of Dibrell leaves DIMON as the only remaining plaintiff. As DIMON's citizenship is diverse from that of all of the defendants, subject matter jurisdiction exists with respect to all of DIMON's claims.

Personal Jurisdiction

Tabex and the Taberers question the existence of personal jurisdiction over them. While DIMON ultimately will bear the burden of establishing in personam jurisdiction, its only obligation at this pleading stage is to demonstrate a prima facie*fn23 case. This it has done.

First, Tabex has consented to suit here. The CA, in which Tabex irrevocably consented to suit in this Court "for any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby," recites that its objects include coordinating "the performance of the Stock Purchase Agreement and the Asset Purchase Agreement and to provide for certain additional obligations of Tabex . . ."*fn24 While Tabex asserts in entirely conclusory fashion that the claims against it "do not relate to, or arise out of, the" CA,*fn25 its argument elides the critical words from the CA clause submitting to jurisdiction. Tabex submitted to jurisdiction in this Court not only with respect to claims relating to or arising out of the CA, but also with respect to claims relating to or arising out of "the transactions contemplated" by the CA.*fn26 DIMON's purchase of the shares of Intabex undeniably was one of the transactions contemplated by the CA.

Second, N.Y. CPLR § 302(a), subd. 1, provides in substance that there is personal jurisdiction under New York law with respect to claims arising out of the transaction of business in New York, directly or through an agent, by a nondomiciliary.*fn27 Here, DIMON alleges that the Taberers, through Intabex and Tabex, retained a New York firm, CS First Boston, to market this deal, that the offering memorandum by which the transaction was promoted contained the Taberers' recommendation that the acquirer of Intabex acquire also the assets of Tabex, that important preparations and primary negotiations occurred here, that Anthony and Paul Taberer personally participated in negotiations in New York in their respective corporate capacities and in their own behalf, and that these activities ultimately resulted, among other things, in Anthony Taberer being elected to the DIMON board and Paul and Charles Taberer receiving management positions with DIMON.*fn28

In these circumstances, DIMON manifestly has alleged that Tabex and the Taberers have transacted business in New York.*fn29 And the question whether the claims arise out of this transaction of business here is not troublesome. The dispositive question is whether there is "some articulable nexus ...


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