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ALNWICK v. EUROPEAN MICRO HOLDINGS

March 22, 2001

JEFFREY ALNWICK AND MARIE ALNWICK, INDIVIDUALLY AND AS BIG BLUE PRODUCTS, INC., AND ALTERNATIVELY, JEFFREY ALNWICK AND MARIE ALNWICK, INDIVIDUALLY AND DERIVATIVELY AS BIG BLUE EUROPE, B.V., PLAINTIFFS,
V.
EUROPEAN MICRO HOLDINGS, INC., EUROPEAN MICRO PLC, JOHN B. GALLAGHER, AND HARRY D. SHIELDS, DEFENDANTS, AND BIG BLUE EUROPE, B.V., NOMINAL DEFENDANT.



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

MEMORANDUM OF DECISION AND ORDER

This case concerns numerous allegations of fraud, breach of contract, and breach of fiduciary duty alleged by the Plaintiffs, who were participants in a joint venture. Presently before the Court is the Defendants' motion to dismiss based on the doctrine of forum non conveniens, or, in the alternative, for dismissal of the complaint for violation of F.ed.R.Civ.P. 8(c).

BACKGROUND

The Plaintiffs, Jeffrey and Marie Alnwick, ("Alnwicks") are owners of a New York corporation, Plaintiff Big Blue Products, Inc. engaged in the salvage and resale of computer components in the United States, and, to a lesser extent, in Europe. In 1996, Defendants Shields and Gallagher, owners of Defendant European Micro Holdings, an American corporation engaged, through a subsidiary corporation in England, in the sale of computer option products throughout Europe, approached the Alnwicks about creating a joint venture to expand Big Blue Products' business into the European market.

Following extended discussions and negotiations, the parties entered into three agreements in November or December 1996 to create the joint venture known as "Big Blue Europe." First, the Alnwicks, Shields, and Gallagher agreed to create a joint venture to be known as "Big Blue Europe" to engage in the sale of computer parts in Europe. The joint venture agreement included a non-competition provision, which prohibited Big Blue Europe from transacting business in the United States, and prohibited both Big Blue Products and Shields, Gallagher, and their European Micro Group companies from engaging in sales of computer parts in Europe, although Big Blue Products was permitted to maintain accounts with its few European clients. Second, the Alnwicks and the Shields/Gallagher team each agreed to contribute $132,500 in capital to the new venture, the Alnwicks' contribution to be made as inventory of computer parts, and the Shields/Gallagher contribution to be made in cash. In exchange, each pair received 50% of Big Blue Europe's stock. Third, the Alnwicks agreed to license the service mark "Big Blue" to Big Blue Europe. According to the complaint, all three of these agreements were oral.

On December 3, 1996, Big Blue Europe hired Bas Leeuwerke to manage its business affairs. By March 1997, Big Blue Europe, in part through the efforts of the Alnwicks, had secured several large clients. At the same time, efforts by Shields and Gallagher to obtain a $1.5 million line of credit with ABN Amro Bank fell through. According to the Alnwicks, during preliminary negotiations over the formation of Big Blue Europe, Shields and Gallagher touted their working relationship between European Micro Group and a bank known as Nat West, and promised that Nat West would "push ABN Amro Bank to provide a credit line without any guarantee." Shields and Gallagher refused, however, to permit European Micro Group to guarantee a loan to Big Blue Europe. According to the Alnwicks, European Micro Group did not assist Big Blue Europe in securing the line of credit because Shields and Gallagher were contemplating a stock offering in European Micro Group, and did not want to lessen the possible share price by assuming additional liabilities. However, Shields and Gallagher did not disclose to the Alnwicks their intentions involving European Micro Group.

In May 1997, a European bank called Rabobank Beverwijk ("Rabobank") agreed to extend a credit line to Big Blue Europe in the amount of $500,000 if Big Blue Europe increased its capital holdings to that amount. The Alnwicks and Shields/Gallagher entered into a second oral agreement to contribute additional capital to the venture, with each team contributing $133,000 in the same manner as the original capital agreement.

At approximately the same time, Shields and Gallagher allegedly transferred their shares in Big Blue Europe to European Micro Group. Also, instead of contributing the additional $133,000 in cash, Shields and Gallagher instead arranged for European Micro Group to loan that sum to Big Blue Europe. In addition, the Defendants allegedly caused Big Blue Europe to record the Alnwicks' second contribution as a $133,000 "no interest loan that Big Blue Europe never was required to repay." All of these actions were allegedly done by the Defendants without the Alnwicks' knowledge.

In the summer of 1997, Shields and Gallagher approached the Alnwicks concerning the sale of their Big Blue Europe stock to European Micro Group. Shields and Gallagher allegedly told the Alnwicks that a publicly traded partner in the joint venture would allow Big Blue Europe access to additional capital sources, greater visibility, and other benefits, and denied that the arrangement would have any negative effect on the value of Big Blue Europe or the Alnwicks. However, according to the Alnwicks, however, Shields and Gallagher had already harmed Big Blue Europe by failing to diligently pursue the line of credit out of concern for European Micro Group's stock price; transferring their shares to European Micro Group without informing the Alnwicks; and by mischaracterizing Shields and Gallagher's second capital contribution as a loan by European Micro Group so as to enhance its balance sheet, all without the Alnwicks' knowledge.

In August 1997, based on the Defendants' representations, the Alnwicks agreed to permit the Defendants to transfer their 50% ownership of Big Blue Europe to European Micro Group. The Alnwicks allege that this "cross-purchase agreement" somehow "placed personal debt obligations on the Alnwicks simply because they held fifty percent or greater of the shares of Big Blue Europe." The complaint is not specific as to what these obligations were, or to how the agreement "obligate[d] the Alnwicks personally for the debts of Big Blue Europe arising from undisclosed insider transactions."

In September 1997, Shields and Gallagher attempted to convince the Alnwicks to agree to take out a short-term $350,000 loan to expand Big Blue Europe's operations. Despite their reluctance, the Alnwicks agreed to incur the loan, based on European Micro Group's promise that the loan would allow it to introduce its own customers to Big Blue Europe. The Alnwicks allege that they would not have agreed to this loan had they known about other, unspecified "pre-existing debt obligations" the Defendants had already placed on Big Blue Europe.

In late 1997, in violation of the cross-purchase agreement and without the Alwicks' knowledge, European Micro Group caused Big Blue Europe to pledge its capital to Rabobank in exchange for an additional line of credit. In April 1998, the Defendants allegedly fabricated a shareholders meeting to approve of the pledge of capital, even though the Alnwicks were never informed of any such meeting and did not participate.

On January 31, 1998, Shields and Gallagher sold European Micro Group to a new Nevada corporation they had formed, European Micro Holdings.

In March 1998, the Defendants demanded that Big Blue Europe change its inventory accounting methods, alleging that it violated generally accepted accounting principles. The Alnwicks contend that these allegations were false, that the Defendants had misrepresented the accounting methods to their auditors, and that the demand violated the original joint venture agreement, which provided that Big Blue Europe would use the same operational methods and practices as Big Blue Products in the United States. According to the Alnwicks, this change in accounting methods was intended to devalue Big Blue Europe to allow the Defendants to purchase it at a reduced price.

Also in March 1998, the Defendants met with the Alnwicks in Nashville, Tennessee. At that meeting, the Defendants criticized the operations and progress of the company, requested permission for Big Blue Europe to engage in operations in the United States, and offered to purchase the Alnwicks' shares. In response, the Alnwicks criticized the Defendants' ongoing failure to vigorously seek out additional clients. The Alnwicks rejected most of the Defendants' requests at the Nashville meeting, but did agree that the Defendants would take over the daily management of Big Blue Europe.

Upon assuming the daily management of Big Blue Europe, the Defendants allegedly implemented new policies and practices to devalue the company without consulting the Alnwicks, such as a large write-down of inventory in June 1998 to which the Alnwicks did not consent and a change in Big Blue Europe's fiscal reporting year.

In the fall of 1998, the Defendants allegedly caused Big Blue Europe to begin soliciting business in the United States, in violation of the joint venture agreement. The Defendants also instructed Leeuwerke to conceal this fact from the Alnwicks.

In January 1999, the Alnwicks and European Micro Holdings agreed to modify the non-competition provisions of the joint venture agreement to permit European Micro Holdings to sell certain new computer parts in Europe; in exchange, Big Blue Europe would be permitted to sell computer option products there. However, when Big Blue Europe attempted to sell the computer option products, European Micro Holdings told Big Blue Europe that such sales violated the non-competition agreement.

Also in January 1999, he Defendants allegedly asked Rabobank to increase Big Blue Europe's line of credit by a quarter million dollars. In response, Rabobank demanded that Big Blue Europe secure an additional $180,000 in capital. In response to what the Alnwicks contend were false promises that the additional capital was needed to support increased demand from European Micro Holdings clients that the Defendants were prepared to steer to Big Blue Europe, the parties each agreed to contribute another $90,000 in inventory to the company. According to the Alnwicks, the Defendants intended to again record their $90,000 contribution as a loan to Big Blue Europe. After delivering $37,500 worth of inventory, the Alnwicks discovered that Big Blue Europe did not intend to issue additional stock to represent the new infusion of capital. The Alnwicks suspended shipment of the remaining portion of their contribution and demanded information regarding European Micro Holdings' contribution, and discovered that no poltion of the promised $90,000 had been paid.

In April and June 1999, after it became clear that Rabobank would not extend the $250,000 in credit to Big Blue Europe, the Defendants arranged for European Micro Holdings to make several loans to the company without the Alnwicks' knowledge or consent. In addition, the Defendants allegedly caused the company to improperly record the value of its inventory, further reducing the apparent assets of Big Blue Europe.

In early June, the Defendants allegedly falsely accused the Alnwicks of violating the non-compete agreement by selling computer parts in Europe. At the same time, according to the Alnwicks, the Defendants themselves were violating the agreement by soliciting customers in the United States. Accordingly, in early June 1999, the Alnwicks informed Defendant Shields that they wished to terminate the joint venture and dissolve Big Blue Europe. Defendant Shields allegedly responded that paperwork necessary to transfer the Shields/Gallagher shares to European Micro Holdings had never been filed, and thus, under Dutch law, the corporation could not be liquidated.

On July 16, 1999, European Micro Holdings offered to buy the Alnwicks' interest in Big Blue Europe for $200,000. By August 1999, the Alnwicks were able to obtain various financial records for the company that revealed many of the foregoing acts. In September 1999, the Alnwicks wrote to Leeuwerke and directed him to cease negotiations with Rabobank for an extension of Big Blue Europe's credit line; to cease accepting loans on behalf of the company; and to refrain from paying on any of the loans from European Micro Holdings that the Alnwicks had not consented to. In addition, they requested that a shareholders meeting be scheduled before the end of the month.

On September 17, 1999, the Defendants' attorney wrote to the Alnwicks repeating the $200,000 buyout offer and stating that, if the offer was not accepted by October 31, 1999, the Defendants would seek to collect on the outstanding loans to Big Blue Europe and liquidate the company. On October 4, 1999, the Alnwicks rejected the offer, but stated that they would make a counter-offer. The Alnwicks also demanded that Big Blue Europe cease its competition with Big Blue Products in the United States. On October 6, 1999, the Defendants responded, rejecting any possible counter-offer, and informing the Alnwicks that they intended to inform Rabobank that European Micro Holdings would be calling in its loans to Big Blue Europe on October 31, 1999 if the buyout offer was not accepted.

On October 8, 1999, the Alnwicks initiated a proceeding against the Defendants in the District Court of Amsterdam, Holland, seeking to attach European Micro Holdings' shares of Big Blue Europe and any loan proceeds owed by Big Blue Europe to the Defendants pending the outcome of the corporate disputes. The Alnwicks informed the Dutch Court that they would be filing a lawsuit against the Defendants within 4 weeks in both the United States and Holland. The Dutch court granted the attachment orders the same day, on the condition that the Alwnicks file their lawsuits within 30 days. The Alnwicks then commenced this action on November 12, 1999.

The complaint alleges 33 causes of action. The first cause of action accuses all of the Defendants of misappropriating the Alnwicks' trade secrets relating to Big Blue Products' customers, methods, and suppliers. The second cause of action against European Micro Holdings, Shields, and Gallagher charges common law fraud, citing numerous instances described above in which these Defendants allegedly misrepresented their intentions and actions towards Big Blue Europe and the Alnwicks. The third cause of action, also for common-law fraud, accuses Defendant European Micro Holdings of misrepresenting the benefits of its own stock offering, while the fourth cause of action alleges that European Micro Holdings aided and abetted the frauds of the other Defendants. The fifth through eleventh causes of action charge various Defendants with breaches of the joint venture, capital contribution, cross-purchase agreements, non-competition, and licensing agreements. The twelfth through seventeenth causes of action allege that various Defendants tortiously interfered with the joint venture, cross-purchase, and capital contribution agreements, as well as with the employment agreement between Big Blue Europe and Leeuwerke. Causes of action nineteen through thirty allege either breach of fiduciary duty or aiding and abetting a breach of fiduciary duty with regard to the various events described above. The final three causes of action each allege tortious interference with Leeuwerke's employment agreement, and appear to be identical to claims in the thirteenth, fifteenth, and eighteenth causes of action.

The Defendants filed the instant motion seeking to dismiss the case based on the doctrine of forum non conveniens on the grounds that most of the witnesses and documents are located in the Netherlands, and most of the acts at issue took place there. In addition, the Defendants point out that a parallel lawsuit filed by the Plaintiffs in the Netherlands involves most of the same allegations and causes of action as this case. In the alternative, the Defendants seek dismissal of the complaint for prolixity pursuant to Fed.R.Civ.P. 8(a).

Following the full briefing of this motion, the Court has been flooded with correspondence from the parties citing recent Second Circuit cases on the issues involved, discussing developments in related proceedings in various international fora, and generally supplementing the parties' briefs. The Court has considered these additional, unscheduled supplements only to the extent of taking notice of the cited cases and reviewing ...


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