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April 3, 2003


The opinion of the court was delivered by: George B. Daniels, United States District Judge:


Plaintiffs brought suit against defendants alleging violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, and pendent state law claims in connection with plaintiffs' purchase from defendants of all the common stock of Copelco Capital, Inc. Defendants thereafter filed a motion to dismiss. Plaintiffs oppose that motion. For the following reasons, defendants' motion to dismiss is granted in part, and denied in part.


Federal Rule of Civil Procedure 12(b)(6) allows a party to move to dismiss a Complaint where the Complaint "fail[s] . . . to state a claim upon which relief can be granted[.]" FED. R. CIV. P. 12(b)(6). In reviewing a motion to dismiss, this Court accepts the allegations in the Complaint as true and draws all reasonable inferences in favor of the non-moving party. See Patel v. Searles, 305 F.3d 130, 134-35 (2d Cir. 2002). However, bald contentions, unsupported characterizations, and legal conclusions are not well-pleaded allegations, and will not suffice to defeat a motion to dismiss. See Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir. 1996). Here, a motion to dismiss will only be granted if the plaintiffs can prove no set of facts in support of their claims that would entitle them to relief. See Citibank. N.A. v. K-H Corp., 968 F.2d 1489, 1494 (2d Cir. 1992). A court may look at the Complaint and any documents attached to, or incorporated by reference in, the Complaint. See Dangler v. New York City off Track Betting Corp., 193 F.3d 130, 138 (2d Cir. 1999).

Defendants contend that plaintiffs' securities fraud, common law fraud, and negligent misrepresentation claims are based upon statements defendants made in documents other than the Securities Purchase Agreement (the "Agreement"). Defendants argue that these claims must fail as a matter of law because the Agreement explicitly precludes plaintiffs from relying on any representations except those included in the Agreement.

By the plain language of the Agreement, plaintiffs are precluded from asserting reliance on any other statements made by defendants except those contained in the Agreement. Section 4.08 of the Agreement states that "Sellers [defendants] make no representation or warranties with respect to . . . any other information or documents made available to Buyer [plaintiffs] or its counsel, accountants or advisors . . . except as expressly set forth in this Agreement." Agreement at § 4.08. Plaintiffs are sophisticated business entities who were represented by counsel, and negotiated the Agreement at arm's length. This Court, therefore, will hold plaintiffs to the agreement to which they bargained. Plaintiffs' securities fraud, common law fraud, and negligent misrepresentation claims cannot be based upon representations outside of the Agreement.

Nevertheless, plaintiffs contend that their securities fraud, common law fraud, and negligent misrepresentation allegations still survive as their Complaint, in fact, also alleges violations of the Agreement. Section 3.08 of the Agreement warrants that Copelco's financial statements were prepared in conformity with Generally Accepted Accounting Principles ("GAAP"), while § 3.09 of the Agreement warrants that the financial statements were prepared consistent with past Copelco practices. At paragraph 21 of the Complaint, plaintiffs quote § 3.08 of the Agreement and then allege that defendants "knew, or should have known, that the 1999 audited financial statements had not been prepared in conformity with GAAP and did not fairly represent the financial position of Copelco." Complaint at ¶ 21. Further, the Complaint alleges in the next paragraph that "[d]efendants' conduct also rendered other statements made by Itochu International in the Stock Purchase-Agreement deliberately false and misleading." Id. at ¶ 22. The Complaint then quotes the portion of § 3.09 of the Agreement where defendants warrant that the financial statements were prepared in accordance with past Copelco practices as an example of one such allegedly false and misleading statement in the Agreement. Id. Consequently, plaintiffs have sufficiently alleged violations of the Agreement, itself. Defendants' motion to dismiss the securities fraud, common law fraud, and negligent misrepresentation claims on the grounds that the Complaint does not allege a violation of the Agreement is therefore denied.*fn1

Next, defendants contend that plaintiffs' allegations are subject to the Agreement's exclusive remedy provision, which only provides for indemnification as a remedy in the event of a breach. Plaintiffs do not dispute the existence of the exclusive remedy provision. Rather, they argue that, regardless, a party may not contract out of liability for its own fraud.

Section 11.07 of the Agreement provides that "Sections 8.06 and 11.02 will provide the exclusive remedy for any misrepresentation, breach of warranty, covenant or other agreement . . . or other claim arising out of this Agreement or the transactions contemplated hereby." Agreement at § 11.07. In turn, §§ 8.06 and 11.02 of the Agreement both provide only for indemnification in the event of a breach, and the terms which trigger such indemnification. See Agreement at §§ 8.06 and 11.02.

Although the parties contracted for this exclusive remedy provision, it is well settled that "parties cannot use contractual limitation of liability clauses to shield themselves from liability for their own fraudulent conduct." Turkish v. Kasenetz, 27 F.3d 23, 27-28 (2d Cir. 1994). Further, the federal securities laws have an anti-waiver provision which specifically makes void any contractual clause that allows a party to waive compliance with the federal securities laws. Pursuant to 15 U.S.C. § 77cc(a), "[a]ny condition, stipulation, or provision binding any person to waive compliance with any provision of this chapter or of any rule or regulation thereunder, or of any rule of an exchange required thereby shall be void." 15 U.S.C. § 77cc(a).

The Second Circuit has had occasion to address the scope of the federal anti-waiver policy. In McMahan & Co. v. Wherehouse Enter., Inc., 65 F.3d 1044 (2d Cir. 1995), the Second Circuit analyzed the effect of a "no-action" contractual clause upon the plaintiffs' securities fraud claims. The "no-action" clause at issue provided that the plaintiffs could not bring suit against defendants unless certain procedural steps were followed, such as providing written notice to the defendants of a default. Plaintiffs failed to follow the procedural steps outlined, and defendants therefore claimed that plaintiffs waived their right to bring suit under the 1933 and 1934 Securities Exchange Acts. However, the Second Circuit upheld the district court's nullification of the "no-action" clause and found that "[t]he statutory framework of the 1933 and 1934 Acts compels the conclusion that individual security holders may not be forced to forego their rights under the federal securities laws due to a contract provision." McMahan, 65 F.3d at 1051.

Defendants rely on Harsco Corp. v. Segui, 91 F.3d 337 (2d Cir. 1996) for the proposition that a waiver clause is permissible under the federal securities laws. However, defendants mischaracterize Harsco. Harsco did not involve a waiver clause that prohibited any and all fraud suits under the federal securities laws or under the common law. It involved a contract that specifically outlined the representations that plaintiff was relying upon when it bought defendant's company. That plaintiffs fraud claim was based upon representations made outside the contract.

The Second Circuit was careful to distinguish the facts of Harsco from a contract provision which prohibits a party from suing at all under the federal securities laws. The court found that, in light of the carefully negotiated provision in the contract detailing the representations plaintiff relied upon, plaintiff may only bring a securities fraud suit based upon those specific representations included in the contract, and not based upon representations made outside the contract. The court found that "it is not fair to characterize [the representations agreed upon in the contract] as having prevented [plaintiff] from protecting its substantive rights. [Plaintiff] rigorously defined those rights in [the contract]." Harsco, 91 F.3d at 344. The Court found that "[plaintiff] has not waived its rights to bring any suit resulting from this deal." Id. Rather, plaintiff only waived its right to bring a federal securities suit based upon representations made outside the contract. See id.

Unlike the situation in Harsco, defendants here would have this court find that plaintiffs waived their right to bring any and all suits for fraud, even a suit concerning representations made within the contract. Such a broad-sweeping waiver clause is exactly the type of contractual provision that ยง 77cc(a) and the case law forbid. Therefore, the indemnification clause in the Agreement is void to the extent that it only provides one remedy, and defendants' motion to dismiss the ...

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