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MCI WORLDCOM COMM. v. NORTH AMERICAN COMM. CONTROL

June 4, 2003

MCI WORLDCOM COMMUNICATIONS, INC. FORMERLY KNOWN AS WORLDCOM TECHNOLOGIES, INC., THE SUCCESSOR IN INTEREST TO WORLDCOM, INC., PLAINTIFFS-COUNTERCLAIM DEFENDANT, AGAINST NORTH AMERICAN COMMUNICATIONS CONTROL, INC., DEFENDANT-COUNTERCLAIM PLAINTIFFS, AND JAMES MILANA, THOMAS MILANA, SR., LEN GOLDSTEIN, FRANK CACCAMO, GARY FRAGIN, JACK GLUCK, GRUBER & HEITNER, CERTIFIED PUBLIC ACCOUNTANTS, AND ROBERT GRUBER, ADDITIONAL DEFENDANTS.


The opinion of the court was delivered by: Laura Taylor Swain, District Judge

OPINION AND ORDER

This litigation arises from a dispute concerning an agreement between Plaintiff MCI WorldCom Communications, Inc. ("WorldCom") and Defendant North American Communications Control, Inc. ("NACC") under which WorldCom provided long distance services to NACC, which, in turn, provided long distance services to its customers. WorldCom filed a complaint alleging breach of contract against NACC. Following commencement of discovery, WorldCom amended the complaint to add a fifth cause of action (the "Fifth Cause of Action") against NACC and certain individual shareholders and officers of NACC alleging fraudulent inducement, conspiracy and aiding and abetting claims. Defendants NACC, James Milana, Frank Caccamo, Jack Gluck, Thomas Milana, Sr., Gary Fragin, and Gruber & Heitner, CPA s, and Robert Gruber move to dismiss the Fifth Cause of Action pursuant Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure.

For the reasons set forth below, the motions of Defendants are granted in their entirety.*fn1

BACKGROUND

The following facts, which are alleged in the complaint, are taken as true for purposes of the motions to dismiss. WorldCom is a provider of long distance telephone services. NACC provides various forms of telecommunications services to it end-user customers. In or about the summer of 1994, WorldCom's predecessor in interest agreed provide telecommunications services to NACC. WorldCom billed NACC for these services on a billing system known as the Oracle System. Subsequently, the billing function for almost all services then being provided was transferred to a billing system known as the AS-400 System commencing with the invoice dated January 1, 1996 for the billing period commencing on December 1, 1995. Certain services then being provided were not transferred to the AS-400 System and continued to be billed on the Oracle System. (Complaint ¶ 18.)

At the time of the transfer of the billing function from the Oracle System to the AS-400 System, NACC's outstanding balances for all services previously provided was not transferred from the Oracle System to the AS-400 System, but remained on the Oracle System as separate accounts that were due and owing from NACC to WorldCom. (Id. ¶ 20.) WorldCom and NACC entered into a Rebiller Service Agreement on or about July 10, 1997 (the "Agreement"), whereby WorldCom agreed to provide certain designated telecommunications services, for which NACC agreed to pay specified rates and charges. (Id. ¶ 21.) The Agreement was amended on or about October 21, 1997. The Amendment reduced certain rates NACC was being charged pursuant to the Agreement (together, the Agreement and the Amendment will be referred to as the "Agreement"). (Id. ¶ 22.)

In November 1997, WorldCom resolved certain billing disputes with NACC by providing NACC with a "a package of credit adjustments for the NACC account" in the aggregate amount of $1,921,911 (the "Credit Adjustment Agreement"). (Id. ¶ 24.) Under the package, an amount of $1,296,554 was credited to NACC's outstanding balance on an invoice dated February 1, 1998, which had been billed on the AS-400 System, and an amount of $625,357 was applied to reduce NACC's balance billed on the Oracle billing system, reducing the amount owed on the Oracle system to $331,425. (Id. ¶ 25.) WorldCom and NACC agreed that the credit package fully addressed, resolved and satisfied all credits that were due NACC from the inception of the relationship up to the date of the Agreement, as well as all credits that were due NACC for the period from the date of the Agreement through October 30, 1997. (Id. ¶ 23.)

The Agreement required NACC to meet certain minimum monthly commitments and not otherwise be in default of the Agreement before WorldCom applied a credit of $400,000 paid in two installments. (Id. ¶ 27.) In connection with the Agreement, WorldCom applied a credit to NACC's account in the amount of $400,000, which was included as part of the $1,296,554 credit in respect of the February 1, 1998 invoice. (Id. ¶ 28.) The Agreement also provided that NACC was to maintain at least $400,000 in monthly revenue. If NACC failed to maintain such revenue, NACC would be assessed a deficiency charge. (Id. ¶ 29.) In addition, under the Agreement, NACC agreed, unconditionally, to pay all undisputed charges billed within 30 days of the invoice. (Id. ¶¶ 30, 31.)

Commencing in May of 1998, at a time when NACC owed WorldCom in excess of $2,596,000 and was in material breach and default of its payment obligations pursuant to the Agreement, WorldCom gave NACC written notice demanding that it cure such breach by paying all monies that were then currently due and owing or suffer the termination of all services being provided. (Id. ¶ 33.) Negotiations between the parties failed to result in the payment of the demanded monies due and owing WorldCom, and NACC continued to refuse to cure such breach. In the latter part of August 1998, WorldCom began to terminate telecommunications services to NACC pursuant to the Agreement. The termination was substantially completed in September of 1998. (Id. ¶ 34.) After crediting NACC's account with all payments made and credits and adjustments given, NACC had an aggregate outstanding balance of $5,605,385 for services provided, consisting of $5,273,960 as evidenced by the invoice dated November 1, 1998, for the billing period commencing on October 1, 1998, and an amount of $331,425 that remained owing for telecommunication services billed on the Oracle System. (Id. ¶ 35.) Furthermore, as the result of NACC's breach of the Agreement, NACC also materially breached its continuing obligations under the section of Agreement requiring that NACC maintain specified monthly commitments. Therefore, NACC was liable for the return of the $400,00 credit previously applied by WorldCom. (Id. ¶ 36.)

In addition, as the result of WorldCom's termination of the Agreement based on NACC's default, NACC is obligated to pay WorldCom a deficiency charge for the unexpired portion of the term, which amounts to ten months, at the rate of $400,000 per month or $4,000,000 in the aggregate. NACC has failed and refused to do without any legal cause or justification. (Id. ¶ 37.)

The Fifth Cause of Action alleges that Defendants NACC, James Milana, Thomas Milana, Sr. ("Milana Sr."), Len Goldstein, Frank Caccamo, Gary Fragin, Jack Gluck, Gruber & Heitner, CPAs ("G& H"), and Robert Gruber conspired and to induce WorldCom to enter into the Agreement.

Defendants Milana, Milana Sr. and Goldstein were the original shareholders, officers and directors of NACC, with Milana being the President and owning 50% of the issued stock, Milana Sr. owning 30% of the issued stock, and Goldstein being the Chief Executive Officer and owing 20% of the issued stock. (Id. ¶ 59.) In or about January of 1996, Fragin and Gluck each purchased a 25% stock interest (50% in the aggregate) in NACC from its then existing shareholders for a purchase price of $1,000,000, of which Milana received $500,000, Milana Sr. received $300,000 and Goldstein received $200,000. (Id. ¶ 60.) Fragin had previously been a successful investment banker with many associates and contacts in the financial community and had been Gluck's business partner in a telecommunications company immediately prior to their purchase of a stock interest in NACC. (Id. ¶ 61.) Gluck had a personal and social relationship with Fragin and had been Fragin's business partner in a telecommunications company immediately prior to their purchase of stock in NACC. (Id. ¶ 62.) In or about January of 1996, Fragin loaned Gluck the $500,000 he used to purchase his 25% stock interest in NACC. (Id. ¶ 63.) Since January of 1996, Fragin has been the Chairman of the Board and a director of NACC and has become the largest owner of NACC stock (holding approximately 38% of the company's stock. (Id. ¶ 64.) Fragin also has approximately $2,000,000 of his personal funds invested in NACC, based on his purchases of NACC stock, loans made to NACC and the purchase of NACC debentures through a private placement that he arranged. (Id. ¶ 65.)

Since January of 1996 Gluck has been a shareholder, officer (until sometime in 1997) and director of NACC and has received compensation as either an employee or consultant. (Id. ¶ 66.)

Goldstein was a shareholder, officer, director and employee of NACC until he left NACC's employ in approximately the latter part of 1997 or early 1998. (Id. ¶ 67.) Caccano was employed by NACC and was its Executive Vice President and is now its President. (Id. ¶ 68.) G & H prepared NACC's corporate tax returns and handled related financial information. (Id. ¶ 69.) Gruber was the partner in charge of NACC's account at G & H, and he provided financial/business advice to NACC. (Id. ¶ 70.) Milana, Caccamo and Goldstein (until he left NACC's employ) and Glock worked at NACC's offices, which are in the Southern District, on a daily basis and were fully informed and knowledgeable as to all material developments and events and day to day activities at NACC. (Id. ¶ 71.)

Fragin and Milana Sr. were kept fully informed and knowledgeable as to all material developments and events at NACC and were kept fully advised as to all material day to day operations and activities at NACC on a regular basis. (Id. ¶ 72.) Milana, Milana Sr., Goldstein (until he left NACC's employ), Caccamo, Fragin and Glock attended NACC Board of Directors meetings and or informal meetings in the Southern District of New York in connection with the business and operations of NACC. (Id. ¶ 73.) Milana, Milana Sr., Goldstein (until he left NACC's employ), Fragin, Gluck and Caccamo were all of the shareholders, officers and directors of NACC. Milana is President, Goldstein is Chief Executive Officer, Caccamo is Executive Vice-President and Fragin is Chairman of the Board of NACC. (Id. ¶ 74.)

One of the main reasons that Fragin and Gluck invested in NACC was that, by increasing NACC's gross monthly revenues, they could sell NACC and/or the shareholders' stock interest in NACC to a third party at a very high multiple of NACC's gross monthly revenues and thereby make a huge personal profit. (Id. ¶ 77.) Gluck, Goldstein and Milana, with the knowledge and consent of the other shareholders, held discussions and negotiations in 1996, 1997 and 1998 with Total-Tel Communications, Inc. ("Total-Tel"), and other third-party companies, relating to the possible sale of NACC and/or the shareholders' stock interest in NACC at a negotiated multiple of NACC's gross monthly revenues. (Id. ¶ 78.) In or about September of 1996, when NACC was negotiating with Total-Tel for the sale of NACC and/or the shareholders' stock interest, NACC's shareholders considered 18 times gross monthly revenues a fair valuation of their NACC stock interest. (Id. ¶ 79.) Prior to the parties' entry into the Credit Adjustment Agreement, on or about July 10, 1997, WorldCom (or a predecessor entity) had been providing NACC with the overwhelming portion of its telecommunications services since the summer of 1994, pursuant to an oral agreement that had been amended from time to time. (Id. ¶ 80.) Before the parties entered into the Credit Adjustment Agreement, NACC had made irregular payments for services, resulting in WorldCom issuing demand and termination letters to NACC that threatened termination of services unless payment was made. NACC thereafter made its payments in order to continue receiving service. (Id. ¶ 81.)

WorldCom also owed NACC credits for certain matters that arose prior to the parties' entry into the Credit Adjustment Agreement. The amount of NACC's past due obligations owed to WorldCom exceeded the aggregate amount of credits NACC was entitled to receive. (Id. ¶ 82.) During the negotiations leading up to the execution of the Credit Adjustment Agreement NACC, Milana, Milana Sr., Caccamo, Goldstein, Fragin and Gluck, "acting singly and in concert conspiring together, knowingly and intentionally," entered into an unlawful scheme that they carried out in this jurisdiction. (Id. ¶ 83.) G&H and Gruber knowingly and intentionally joined in the continuing the conspiracy sometime before September 15, ...


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