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United States District Court, Southern District of New York

May 30, 2002


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


This action is the result of a falling out among founders of an Internet or "dot com" business that was sold for more than $30 million during the heyday of the technology boom. Plaintiff, one of the original principals, claims that his former colleagues effectively did him out of his equity interest in their company in order to gain for themselves the benefits of the merger that produced the large economic reward. The matter is before the Court on the motions of the individual defendants and the acquiring company and its corporate parent to dismiss the third amended complaint on the ground that it fails to state a claim upon which relief may be granted.


The Court assumes the truth of the well pleaded factual allegations of the complaint. In addition, as plaintiff has placed before the Court documents that effectively were incorporated by reference in the third amended complaint, the Court considers those as well.*fn1

The Inception of DWWC

Plaintiff and four of the five individual defendants — Messrs. Price, Pezaris, Gersh and Matar — were employed in 1995 in the computer industry as computer programmers and/or technicians. In September of that year, they incorporated Daedalus World Wide Corporation ("DWWC") for the purpose of designing and operating computer programs, software and web sites to be used, operated by or sold to themselves or others. Each contributed $2,000 in capital, received twenty shares of DWWC common stock, and began working for the company,*fn2 although it appears that that none of the principals worked full time for DWWC until considerably later.*fn3 The group expanded on April 4, 1996 when defendant Fortnow acquired twelve DWWC shares in exchange for a contribution of $2,040.*fn4

1996 through January 1999

Plaintiff Surrenders Half His Interest

By September 1996, Pezarus, Gersh, and Price were working for the company at reduced or no salary.*fn5 Pezaris and Gersh approached plaintiff and Matar on behalf of DWWC and asked that each surrender ten of his shares on the theory that they were not working for DWWC and that it would be unfair for them to have the same equity interests as those who were. Both complied, although Matar at some later date was permitted to subscribe to ten new shares, thus restoring his equity interest.*fn6

The Development Agreement With SportsLine

In May 1998, DWWC entered into a contract with SportsLine USA, Inc., now known as, Inc. ("SportsLine"), to develop software for SportsLine's Internet sports fantasy online service.*fn7 The Development Agreement required that the 1998-99 National Football League Product, one of the subjects of the contract, be delivered no later than August 15, 1998.*fn8 It granted SportsLine an option to purchase, and a right of first refusal with respect to, all of the assets of DWWC as well as certain preemptive rights with respect to DWWC stock.*fn9

Plaintiff Becomes a Full Time DWWC Employee

The conclusion of the Development Contract put a good deal of pressure on DWWC to meet its obligations. In May 1998, Pezaris and Gersh asked plaintiff to leave his job and join DWWC to assist with the SportsLine project.*fn10 Plaintiff agreed to accept employment with DWWC at a salary of less than half that paid by his then current job. According to plaintiff, he was to receive an additional ten shares of DWWC stock "upon certain terms and conditions which would, after two years of employment with DWWC, raise his interest to one-half the respective interests of Price, Fortnow, Pezaris, and Gersh," the ten shares being a first step toward that objective.*fn11 With plaintiff on board, Price and Fortnow became full time employees of the company in June 1998.*fn12

On June 15, 1998, plaintiff entered into two agreements, the first an employment agreement with DWWC (the "Employment Agreement") and the second a stockholders' agreement among plaintiff, Price, Fortnow, Pezaris, Gersh, Matar and DWWC (the "Stockholders' Agreement").*fn13

1. The Employment Agreement

Although the Employment Agreement allegedly was an executed document, its text does not appear of record. The complaint alleges that it provided that plaintiff would receive ten new shares of DWWC common stock, but that the shares would be voidable if he failed to complete one year of employment to June 15, 1999.*fn14

2. The Stockholders' Agreement

The Stockholders' Agreement began with a recital that each of the individual signatories owned the number of shares listed on an attached Schedule A. The copy of the agreement that plaintiff has produced to the Court contains the schedule, which shows that defendants Price, Fortnow, Pezaris and Gersh each owned eighty DWWC shares and that plaintiff and defendant Matar each owned twenty.*fn15 Plaintiff, however, alleges that the schedule was not a part of the Shareholders' Agreement when he signed it and that the fact that the Price, Fortnow, Pezaris and Gersh each owned eighty rather than forty shares was concealed from him.*fn16 Whatever the fact in that regard, the Shareholders' Agreement did provide that the shareholders could not transfer their DWWC shares except in accordance with the agreement. It went on to give what amounted to a option to buy to DWWC followed, in the event DWWC declined to exercise the option, by an option to non-selling shareholders to buy in the event any of the shareholder parties wished to sell his shares. If in that event neither the corporation nor the non-selling shareholders exercised the options, the selling shareholder would be free to sell to an outsider within a period of thirty days.*fn17

Plaintiff Leaves DWWC

In January 1999, plaintiff left DWWC and moved to Texas to accept other employment.*fn18 As he left DWWC's employ prior to June 15, 1999, the additional ten shares that were issued to him in June 1998 were cancelled, leaving plaintiff with the ten shares he had acquired upon the formation of the company.*fn19 Plaintiff offered these to DWWC pursuant to the Stockholders' Agreement but no agreement was reached on price, so plaintiff continued to hold those shares.*fn20

The DWWC — SportsLine Deal

On December 6, 1999, DWWC, Price, Gersh, Fortnow, Pezaris,, Inc.,*fn21 and SportsLine entered into an agreement and plan of merger pursuant to which DWWC was merged with and into, Inc. The outstanding shares of DWWC were converted into a right to receive (a) cash equal to $4 million divided by the total number of fully diluted DWWC shares, (b) SportsLine common stock, and (c) additional compensation based on future revenues attributable to certain activities of the surviving company.*fn22 The complaint asserts that the total compensation received by Price, Fortnow, Pezaris and Gersh was $31 million in cash and stock.*fn23 Plaintiff's principal grievance is that he was cut out of this deal.

The complaint alleges — on information and belief — that DWWC and the individual defendants began negotiating with SportsLine with a view to the latter acquiring all of DWWC's shares "shortly after [plaintiff] left [DWWC's] employment" without notifying plaintiff.*fn24 Subsequently, and in anticipation of such a sale, these defendants on November 15, 1999 sent plaintiff an e-mail purportedly cancelling his remaining shares. When plaintiff disputed this purported cancellation, DWWC is said to have represented to SportsLine that plaintiff's shares were voidable pursuant to an oral agreement in view of the fact that he left DWWC's employ.*fn25

This latter assertion is not borne out, at least directly, by the merger agreement, which contains no such representation. In relevant part, it represents only that there were and, at the closing would be, 355.555 shares of DWWC common stock outstanding.*fn26 Further, the agreement characterizes Price, Gersh, Fortnow and Pezaris as "Principal Shareholders," not as the "Shareholders" or with some other form of words implying that they were all of DWWC's shareholders.*fn27 Nevertheless, the Court infers, in plaintiff's favor, that the shares were cancelled.*fn28

The Complaint

The third amended complaint, which now is the fourth iteration of plaintiff's claims, asserts ten claims for relief, all stemming from plaintiff's underlying contention that he was done out of any share, let alone a fair share, of the SportsLine deal.


The Court deals seriatim with the defendants' attacks on the ten claims for relief

I. The Fraud Claim Against the Individual Defendants and

The fraud claim in this case is a moving target, as plaintiff cannot seem to decide in what respect or respects he was defrauded.

A. The Fraud Claim in the Complaint

The complaint alleges that he retained his ten original shares, rather than selling them to DWWC during the first quarter of 1999, based on a representation by Fortnow "that he could either sell the stock to third parties or hold them until a later date in lieu of selling them to DWWC." Fortnow then failed to disclose that the shares "would terminate" if they were not sold to DWWC and that they were voidable if plaintiff failed to participate in the business "as the Defendants now claim." As a result of that representation and nondisclosure, plaintiff says, he was excluded from the benefits of the SportsLine merger.*fn29

In order to state a claim for fraud, a plaintiff must plead and prove "(1) a material misrepresentation of a presently existing or past fact; (2) knowledge or belief by the defendant of its falsity; (3) an intention that the other person rely on it; (4) reasonable reliance thereon; and (5) resulting damages."*fn30 In general, the law imposes no duty of disclosure in the absence of a fiduciary relationship.*fn31 Nevertheless, a duty to disclose arises in business negotiations where "one party makes a partial or ambiguous statement that requires additional disclosure to avoid misleading the other party."*fn32

The Court assumes without deciding that (a) DWWC had a right to cancel plaintiff's shares, and (b) Fortnow's alleged statement that plaintiff could retain his ten original DWWC shares and later sell them to a third party would have been sufficiently incomplete or misleading to give rise to a claim for fraud absent disclosure that such a right existed. But those assumptions, even if warranted, would not render plaintiff's fraud claim, as pleaded, legally sufficient.

In view of plaintiff's allegation that DWWC and the individual defendants claimed a right to cancel the original ten shares on the basis of an oral agreement with plaintiff,*fn33 there are only two possibilities. The first is that plaintiff is correct in asserting that there was no such agreement and no such right to cancel his shares.*fn34 The second is that plaintiff in fact did enter into such an agreement and that DWWC had such a right.

Whichever is the case, plaintiff has no fraud claim as pleaded in the complaint. If there was no agreement giving DWWC the right to cancel plaintiff's shares, then there was nothing misleading about Fortnow's failure to tell plaintiff that there was. And if there was an oral agreement giving DWWC the right to cancel the shares if plaintiff left its employ, plaintiff certainly knew of it because he was a party to that agreement. Having agreed that DWWC could cancel his shares if he left its employ, any reliance he may have placed on Fortnow's statement that he could sell the shares later would not have been justified.*fn35

B. The New Fraud Claim

Plaintiff's memorandum seeks to set forth an additional fraud claim that is not pleaded in the complaint. The Court nevertheless will deal with it now to avoid yet another motion for leave to amend.

The second theory is that plaintiff in June 1998 was induced to leave his other employment and join DWWC full time based on the assumption that Gersh, Fortnow, Price and Pezaris each owned forty DWWC shares when in fact each had been issued forty additional shares; thus plaintiff's proportionate equity in the company upon his acceptance of this employment allegedly was less than he allegedly believed it would be.*fn36 But this claim too is insufficient.

Plaintiff alleges that Pezaris and Gersh approached him in May 1998 to induce him to return to DWWC. He says they agreed on "terms and conditions which would, after two years of employment with DWWC, raise his interest to one-half of the respective interests of each" of Price, Fortnow, Pezaris and Gersh.*fn37 The complaint does not, however, say whether Pezaris and Gersh represented that the shares plaintiff would receive after two years would bring his interest to one-half of those of the others or whether, instead, the parties simply agreed that plaintiff would get an additional ten shares — bringing his holding to twenty shares — and that plaintiff mistakenly assumed that the added ten shares would bring him up to one-half of the interests of these four. And while plaintiff's memorandum refers to a "promise" by DWWC through Pezaris and Gersh, it does not say what that promise was.*fn38 In any case, plaintiff later, on June 15, 1998, signed the Employment Agreement. According to the allegations of the complaint, it provided only that plaintiff would get ten new shares that would be voidable if he left DWWC's employ before June 15, 1999, one — not two — years later. It said nothing about any relationship between the size of plaintiff's holding and those of the others.

The circumstances of an alleged fraud must be pleaded with particularity.*fn39 "This requires reasonable detail as well as the allegation of facts from which a strong inference of fraud reasonably may be drawn."*fn40 That standard simply is not satisfied with respect to the second of plaintiff's fraud theories for any of a number of reasons, not least of them the lack of any allegation as to what, if any, representations were made to him. Nevertheless, the Court cannot exclude the possibility that plaintiff might make out a legally sufficient claim on this newly articulated theory.

Accordingly, the first claim for relief fails to state a claim upon which relief may be granted and must be dismissed. The dismissal will be without prejudice to the filing, as against all defendants other than SportsLine, Price and Fortnow, of an amended complaint alleging plaintiff's second theory with the particularity required by Rule 9(b).*fn41

II. The Conversion Claim

The second claim for relief is that Price, Fortnow, Pezaris, Gersh and Matar converted plaintiff's original ten shares of DWWC common stock by merging DWWC into without regard to plaintiff's interest by virtue of their attempted cancellation of those shares.*fn42 This claim is legally insufficient.

In order to state a claim for conversion, plaintiff must allege that "(1) [he] had legal ownership or an immediate superior right of possession to specific identifiable personal property, and (2) defendants exercised unauthorized dominion over the property to the exclusion of plaintiff's rights."*fn43 No action lies for conversion of intangible property.*fn44 There is no suggestion here that the defendants took plaintiff's stock certificate. Hence, the complaint fails adequately to allege conversion.

III. Breach of Fiduciary Duty Claim Against Individual Defendants and

The third claim for relief alleges that Price, Fortnow, Pezaris, Gersh and Matar all were directors of DWWC at the time of the merger, that they therefore owed plaintiff a fiduciary duty, and that they breached that duty by (a) failing to inform plaintiff of the pending transaction with, and (b) purporting to cancel his shares without legal authority.*fn45

The first of these theories is insufficient as a matter of law. While "corporate officers and directors [of a New York corporation such as DWWC] have a fiduciary relationship with the shareholders of their corporation," a duty to disclose a pending corporate transaction arises only where they engage in insider trading, where a statute or regulation requires disclosure, or to place in proper context otherwise misleading prior disclosures.*fn46 There are no such allegations here.

The second of plaintiff's allegations stands differently. Corporate directors and controlling shareholders of close corporations like DWWC are held "to the extreme measure of candor, unselfishness and good faith."*fn47 They may not act "for the aggrandizement or undue advantage of the fiduciar[ies] to the exclusion or detriment of the shareholders.*fn48 Surely they may not act "if the sole purpose is reduction of the number of profit sharers, or ultimately `to increase the individual wealth of the remaining shareholders.'"*fn49

Assuming, as plaintiff alleges, that the individual defendants caused DWWC to cancel plaintiff's remaining ten shares in anticipation of the merger on the basis of a fictitious claim that there was an oral contract permitting that cancellation, their action cannot have had any legitimate corporate purpose. The action would have served only to cut plaintiff out of the SportsLine deal and thus to leave a smaller group among which to share the proceeds of the merger. In this respect, therefore, the third claim for relief states a legally sufficient claim against the director defendants.

The same can not be said with respect to, which also is named as a defendant on this claim. The complaint contains no allegations suggesting that it owed any fiduciary duty to the plaintiff or that it breached such a duty. The fact that it was aware that plaintiff disputed the propriety of the cancellation of his shares does not supply either element.

Accordingly, the third claim for relief will be dismissed in its entirety as to and dismissed as against the individual defendants except insofar as it alleges that they breached their fiduciary duties to plaintiff by cancelling his remaining ten shares for the purpose of freezing him out of the deal, knowing that they had no right to do so.

IV. Breach of Contract by the Individual Defendants and

The fourth claim for relief asserts that the individual defendants and DWWC breached the Stockholders' Agreement by cancelling his shares. This claim is frivolous. While the Stockholders' Agreement provided DWWC and the individual defendants with options to buy the shares in the event plaintiff offered them for sale, it contained nothing that limited any rights that DWWC or anyone else may have had, or thereafter may have acquired, to cancel those shares.

V. Breach of Contract by, Inc.

Plaintiff alleges that breached the Development Agreement and the merger agreement. He claims that it breached the former by failing to require that plaintiff's shares be purchased for full consideration pursuant to that contract. He asserts that it breached the latter by failing to pay him for his shares pursuant to the agreement and plan of merger.

Plaintiff was not a party to the Development Agreement. "Under New York law, only an intended beneficiary of a contract may assert a claim as a third-party beneficiary. A third party is an intended beneficiary where either (1) `no one other than the third party can recover if the promisor breaches the contract' or (2) `the language of the contract otherwise clearly evidences an intent to permit enforcement by the third party.'"*fn50 Neither condition is satisfied. Certainly the agreement evidences no intent to permit enforcement by plaintiff. Similarly, it cannot be said that no one other than the plaintiff could recover if SportsLine breached the Development Agreement, as Daedalus plainly could have enforced it. In consequence, plaintiff may not sue as a third-party beneficiary for breach of the Development Agreement. In any case, the Development Agreement contains nothing that required SportsLine or anyone else to buy plaintiff's shares.*fn51

So far as the second theory is concerned, the individual defendants canceled plaintiff's shares on or about November 15, 1999, at least three weeks before the effective day of the merger. Whether that cancellation was appropriate or wrongful, it is impossible to see how SportsLine or, more appropriately, breached the agreement and plan of merger by not paying plaintiff as if he were a shareholder of DWWC three weeks after he ceased being a shareholder.

VI. Interference With Prospective Economic Advantage

The sixth claim for relief contends that the individual defendants and's predecessor, DWWC, interfered with plaintiff's prospective economic relations with Commissioner by doing him out of his original ten shares of DWWC stock and thus depriving him of his rightful share of the contingent compensation paid under the merger agreement.

In order to state a legally sufficient claim for tortious interference with prospective economic advantage, a plaintiff must allege:

"(1) business relations between the plaintiff and a third party; (2) the defendant's interference with those business relations; (3) the defendant acted with the sole purpose of harming the plaintiff, or used dishonest, unfair or improper means; and (4) injury to the business relationship."*fn52

"Wrongful means include physical violence, fraud, misrepresentation, civil suits, criminal prosecutions, and some degree of economic pressure."*fn53

While the question perhaps is not free from doubt, plaintiff, by virtue of his status as a shareholder on November 15, 1999, the date his last shares were cancelled, had a prospective business relationship with SportsLine and/or on the theory that negotiations for their acquisition of DWWC began prior to that date.*fn54 The cancellation of the shares precluded the culmination of that relationship. If, as plaintiff alleges, it took place without color of right and for the purpose of freezing plaintiff out of the deal, the individual defendants and DWWC, the liabilities of which passed to by merger, used wrongful, unfair or improper means. In consequence, the motions to dismiss are denied insofar as they are addressed to the sixth claim for relief.

VII. Tortious Interference With Contract

The seventh claim for relief asserts tortious interference with contract by the individual defendants, DWWC,*fn55 and This claim, too, however, presents a moving target.

The theory of the claim as pleaded is that plaintiff was a third-party beneficiary of the Development Agreement and the agreement and plan of merger, that the cancellation of his shares froze him out of the deal, and that this somehow interfered with those contracts. This, however, is patently insufficient. Plaintiff was not a third-party beneficiary of either the agreement for the reasons stated above.

Doubtless recognizing the insufficiency of the claim as pleaded, plaintiff has advanced a new theory in his memorandum. He now argues that the Development Agreement and the agreement and plan of merger "amount to an implied contract arising from [plaintiff's] ownership of stock in DWWC" and that the cancellation of his shares tortiously interfered with that contract.*fn56 But this theory fares no better than that pleaded in the complaint.

To begin, there is simply nothing in the Development Agreement that gave plaintiff any rights — explicit or implied — with respect to the eventual merger consideration. In consequence, there is no basis for a claim that the cancellation of his shares in November 1999 tortiously interfered with his right to share in that consideration.

So too with the merger agreement, albeit the conclusion comes at the end of a somewhat different path. Plaintiff ceased to be a DWWC shareholder on November 15, 1999. Hence, whatever else may have been wrong with the action of the individual defendants in cancelling plaintiff's shares of November 15, 1999, it cannot have interfered with rights created by the merger agreement because the merger agreement did not come into existence for another three weeks.

VIII. Unjust Enrichment

Plaintiff seeks to recover against the individual defendants and, presumably as successor-in-interest to DWWC, on a theory of unjust enrichment.

In order to state a claim for unjust enrichment claim under New York law "plaintiff must show that (1) defendant was enriched, (2) the enrichment was at plaintiff's expense and (3) the circumstances were such that equity and good conscience require defendant to make restitution."*fn57

Here, the individual defendants were enriched at plaintiff's expense by their allegedly wrongful cancellation of plaintiff's shares, as the elimination of those shares gave each of them a larger share of the aggregate merger consideration by depriving plaintiff of the portion that otherwise would have gone to him. If, as plaintiff alleges, the individual defendants wrongfully canceled his shares for the purpose of profiting at his expense, they were enriched unjustly. Accordingly, the eighth claim for relief is sufficient as against the individual defendants.

In contrast, DWWC was not enriched at plaintiff's expense. The merger consideration went entirely to the shareholders of record as of the effective date of the merger, which was on or after December 6, 1999.*fn58 In consequence, there is not basis for the claim of unjust enrichment against

IX. Oppression of Minority Shareholder

The ninth claim for relief seeks recovery against the individual defendants alone on the ground that the cancellation of plaintiff's shares constituted oppression of a minority shareholder.

It is difficult to understand what plaintiff is driving at here. Certainly plaintiff, as a minority shareholder, enjoyed all statutory rights afforded to shareholders generally and was the beneficiary of fiduciary duties owed shareholders by corporate officers and directors. Plaintiff argues that he should be permitted "to avail himself of any remedial statute addressing the issue" of minority shareholder oppression.*fn59 The only statute he cites, however, is Section 623 of the Business Corporation Law.*fn60 But Section 623 — which establishes the procedure governing the appraisal rights of shareholders dissenting from certain corporate actions*fn61 — has absolutely no bearing on this case, as plaintiff was not a shareholder as of the effective date of the merger. In any case, Section 623 applies only where some other statute confers an appraisal right, and plaintiff points to no such statute. Accordingly, the ninth claim for relief is insufficient.

X. Civil Conspiracy

The tenth claim for relief charges the individual defendants and with conspiracy to defraud, to convert plaintiff's shares, and to oppress him as a minority stockholder.

In view of the dismissal of the conversion and oppression of a minority shareholder claims, as well as part of the fraud claim, this claim ought to be repleaded.


For the foregoing reasons, the motions by the individual defendants and by defendants, Inc. and, Inc. to dismiss the third amended complaint are granted to the extent that

(a) the first, second, fourth, fifth, seventh, ninth and tenth claims for relief are dismissed with leave to replead, on or before June 10, 2002, only the first and tenth claims and those only to the limited extent indicated above, and

(b) the third and eighth claims for relief are dismissed as against, Inc.

The motions are denied in all other respects. What remains of the action, absent the filing of an amendment to the complaint pursuant to the leave granted in paragraph (a) above, therefore are the third and eighth claims for relief against the individual defendants and the sixth claim for relief. For the sake of convenience, the plaintiff shall not file a fourth amended complaint. Should plaintiff avail himself of the leave granted herein, he shall serve and file an amendment to the complaint repleading only the first and tenth claims for relief in accordance herewith.


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