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LADENBURG THALMANN & CO. v. IMAGING DIAGNOSTIC SYSTEMS

December 10, 2001

LADENBURG THALMANN & CO. INC., PLAINTIFF,
v.
IMAGING DIAGNOSTIC SYSTEMS, INC., DEFENDANT.



The opinion of the court was delivered by: VICTOR Marrero, U.S. District Judge.

  Decision and Order

Plaintiff Ladenburg Thalmann & Co., Inc. (hereinafter "Ladenburg") brought this action, invoking the Court's diversity jurisdiction pursuant to 28 U.S.C. § 1332, against defendant Imaging Diagnostic Systems, Inc. (hereinafter "IDS"). Ladenburg claims fraud and breach of contract. IDS filed the instant motion to (1) dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim and pursuant to Fed. R. Civ. P. 9(b) for failure to plead fraud with particularity, and (2) strike Ladenburg's request for punitive damages and seeking costs and expenses. For the reasons set forth below, IDS's motion to dismiss is granted in part and denied in part, and its motion to strike is granted.

I. BACKGROUND

Ladenburg's complaint alleges that, on or about May 1, 2000, Ladenburg and IDS executed a letter agreement under which Ladenburg was engaged as the exclusive placement agent for a proposed private offering of up to $7 million worth of IDS securities (Compl. ¶ 1, Ex. A (hereinafter "First Agreement").) Ladenburg also alleges that on the same date, Ladenburg and IDS executed a second letter agreement whereby Ladenburg was engaged as the exclusive placement agent for $20 million of IDS securities in a proposed private offering. (Compl. ¶ 1, Ex. B (hereinafter "Second Agreement").)

By a letter dated May 23, 2000 and addressed to Robert J. Kropp, Director of Investment Banking at Ladenburg, (hereinafter "Kropp"), Linda B. Grable, president of IDS, (hereinafter "Grable") requested that Ladenburg agree to terminate and release IDS from its obligations under the First and Second Agreements (hereinafter the "Release"). (Affidavit of Linda B. Grable, dated May 24, 2001, ¶ 2, Ex. 1.)*fn1 The Release states that IDS informed Ladenburg of its need for financing prior to the completion of the First and Second Agreements and, by agreeing to the Release, Ladenburg would permit IDS to seek alternate sources of funding. (Release.) Further, on its face the Release appears to terminate the First and Second Agreements without IDS owing any fees or compensation to Ladenburg and to absolve IDS "from any claims for fees and/or any other compensation" made by Ladenburg under the First or Second Agreement. (Release.)

Ladenburg alleged that on or about May 31, 2000, while both agreements were in effect, Grable represented to Michael Vasinkevich, managing director of Ladenburg's Structured Finance Group (hereinafter "Vasinkevich"), that IDS needed financing immediately. Ladenburg alleged that Vasinkevich informed Grable that "Ladenburg could not provide [such funding] at this time due to the market overhang . . . held by Charleton Avenue LLC." (Compl. ¶ 15, Ex. C (hereinafter "Revocation Letter") (emphasis added).) A market overhang is created by the existence of a security that is convertible into common stock at a discount to the market price; the convertable securities may be made available for sale on the market at any time regardless of the market price. The market overhang at issue involved the possession of a "substantial block of discount Series I convertible preferred stock and convertible debentures [issued by IDS and] held by Charlton Avenue LLC." That situation allegedly hindered Ladenburg's efforts to obtain investors for IDS. (Revocation Letter.) Ladenburg alleges that, in fact but unknown to Vasinkevich, Charleton Avenue LLC converted its holdings prior to May 26, 2000 and that IDS was aware of that conversion. (Compl. ¶ 15; Revocation Letter.)

Ladenburg further asserts that at the time of her conversation with Vasinkevich on or about May 31, 2001, Grable was aware that the market overhang already had "disappeared". (Revocation Letter.) Grable did not inform Vasinkevich or anyone at Ladenburg of the conversion and disappearance of the market overhang. Instead she "induced" Kropp to execute on May 31, 2000, the Release she had proposed to Ladenburg in the form of the May 23, 2000 letter to Kropp. (Compl. ¶ 15; Revocation Letter.)

Ladenburg alleges that it would not have executed the Release had it not been laboring under the misconception that there remained a market overhang. (Compl. ¶¶ 15, 56; Revocation Letter.) Ladenburg believes that Grable's silence violated a duty to disclose, arising out of IDS's possession or superior knowledge, that IDS owed to Ladenburg. (Compl. ¶¶ 16, 54-55.)

At some point soon after executing the Release letter on May 31, 2000, Ladenburg discovered the conversion and disappearance of the market overhang. (Revocation Letter.) Ladenburg further alleges that upon its discovery of the conversion, it realized it was able to provide the immediate financing IDS requested. (Revocation Letter.) Immediately, on June 1, 2000, it sent the Revocation Letter to IDS that (1) alerted IDS to the mistake of fact under which Ladenburg acted, (2) purported to "revoke" the Release, and (3) indicated that it was willing and able to fulfill its obligations under the First and Second Agreements. (Revocation Letter.) Ladenburg has alleged two claims for fraud based on the foregoing conduct.

IDS argues that even if the foregoing is accepted as true for purposes of the motion to dismiss, the complaint should be dismissed for failure to state a claim. In particular, IDS asserts that the Release operates as a bar to Ladenburg's entire action. Concerning Ladenburg's fraud claims in particular, IDS argues that Ladenburg failed to identify any damages caused by the alleged fraud and failed to specify the fraud with sufficient particularity. Finally, IDS asserts that Ladenburg's request for punitive damages should be stricken because Ladenburg failed to allege conduct sufficiently wrongful to support an award of punitive damages under the standard required by New York law.

II. DISCUSSION

A. STANDARD OF REVIEW UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(6)

A district court may grant a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) only if it appears beyond doubt that the non-moving party could prove no set of facts that would entitle it to relief. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Valmonte v. Bane, 18 F.3d 992, 998 (2d Cir. 1994). In reviewing the pleadings, the court must accept the non-moving party's allegations as true. See Hishon, 467 U.S. at 73. Furthermore, a court may consider documents attached to the complaint as exhibits, or incorporated by reference, as well as any documents that are integral to, or explicitly referenced in, the pleading. See I. Meyer Pincus & Associates, Inc. v. Oppenheimer & Co., Inc., 936 F.2d 759, 762 (2d Cir. 1991); 2 Broadway LLC v. Credit Suisse First Boston, No. 00 Civ. 5773, 2001 WL 410074, 5 (S.D.N.Y. Apr. 20, 2001).

Ladenburg attached to the complaint the First Agreement, Second Agreement and Revocation Letter. The complaint and Revocation Letter contain express references to the Release. (Compl. ¶¶ 15, 17, and Ex. C.) Indeed, Ladenburg's fraud allegations arise out of the execution of the Release. (Compl. ¶¶ 15-17, 45-51, ...


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