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HIGHLAND CAPITAL MANAGEMENT v. SCHNEIDER

HIGHLAND CAPITAL MANAGEMENT, L.P., Plaintiff,
v.
LEONARD SCHNEIDER, LESLIE SCHNEIDER, SCOTT SCHNEIDER, and SUSAN SCHNEIDER, Defendants.



The opinion of the court was delivered by: PETER LEISURE, District Judge

OPINION AND ORDER

Plaintiff Highland Capital Management L.P. ("Highland") brings this action against defendants Leonard Schneider, Leslie Schneider, Scott Schneider, and Susan Schneider (the "Schneiders") to recover the profit it would have made had an alleged deal between the parties reached fruition. Highland claims that the Schneiders agreed to sell to it promissory notes issued by McNaughton Apparel Group, Inc. ("McNaughton"), but then reneged on the agreement upon receiving confidential information from insiders at McNaughton. (First Amended Petition ¶¶ 10-26.) Highland brings claims for breach of contract, tortious interference with contractual relations, and third-party beneficiary breach of contract. (First Amended Petition ¶¶ 27-45.) The Schneiders have answered Highland's claims, denying that they ever made any agreement with Highland and asserting, among other things, a defense of Statute of Frauds. (Answer ¶¶ 1-32, 39.) The Schneiders also bring a third-party complaint against third-party defendant RBC-Dominion Securities Corp. ("RBC"), a broker/dealer that acted as an intermediary in the alleged transaction between Highland and the Schneiders. RBC has answered the Schneiders' third-party complaint, denying the Schneiders' allegations and asserting counterclaims against the Schneiders for breach of duty to negotiate in good faith, breach of contract, and fraud. (Third-Party Answer.)

  The parties have brought four motions to the Court. First, the Schneiders have moved pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure to dismiss all of RBC's counterclaims. Second, the Schneiders have moved pursuant to Rule 12(c) to dismiss Highland's complaint. Third, Highland has moved pursuant to Rule 15(a) for leave to file a second amended complaint. In this motion Highland seeks to add the law firm representing the Schneiders, Jenkens & Gilchrist Parker Chapin LLP ("Jenkens & Gilchrist"), as a defendant to assert against it claims for tortious interference with contractual relations and prospective contractual and business relations. And fourth, Highland has moved again pursuant to Rule 15(a) for leave to file a third amended complaint.*fn1 In this motion Highland seeks leave to file a complaint similar to its proposed second amended complaint, which adds Jenkens & Gilchrist as a defendant.*fn2 Highland's proposed third amended complaint adds no new parties or claims to its proposed second amended complaint, but, according to Highland, conforms to evidence obtained during discovery in this case.

  The Court takes up in this opinion and order the last of these motions, Highland's motion for leave to file a third amended complaint. For the reasons set forth below, the Court grants in part Highland's motion for leave to amend the complaint.

  Background

  I. Factual Background

  A. Allegations of the Initial Pleading

  Highland alleges the following in its first amended petition, which is the current pleading of record. The Schneiders owned an apparel company called "Jeri-Jo." On or about April 15, 1998, the Schneiders sold Jeri-Jo to McNaughton Apparel Group, Inc. ("McNaughton"). In exchange, the Schneiders received from McNaughton earn-out payments, the calculation of which would be based on Jeri-Jo's performance. Once the earn-out payments became due, McNaughton and the Schneiders agreed that part of the payment would be issued in the form of promissory notes. As a result, McNaughton issued approximately $69 million in promissory notes (the "Notes") to the Schneiders. These Notes were considered high-risk debt because of uncertainty about McNaughton's ability to pay them off.

  In late 2000 and early 2001 the Schneiders sought to sell the Notes. They engaged Rauch Securities for this purpose, which in turn engaged RBC as an agent and exclusive broker for the purpose of selling the Notes. RBC found a buyer for the Notes, plaintiff Highland, and negotiations between RBC and Highland ensued. RBC informed Rauch and the Schneiders about the status of the negotiations. Highland ultimately agreed to purchase $45.6 million of the Notes at a price of 52.5 cents on the dollar, and on or about March 14, 2001, Rauch informed RBC that the Schneiders had agreed to the transaction.

  The following week the Schneiders decided not to go through with the deal, and the transaction never took place. Highland alleges that Jones Apparel Group, Inc. ("Jones") and McNaughton were negotiating a merger in early 2001 which would improve McNaughton's credit rating and thus the value of the Notes. Highland alleges that the Schneiders became aware of these negotiations on or about March 8, 2001, and/or March 13, 2001, and alleges that the Schneiders backed out of the deal with Highland upon learning about the merger and thereby received a windfall.

  The Schneiders deny these allegations.

  B. Allegations of the Proposed Third Amended Complaint

  Highland's Proposed Third Amended Complaint (the "New Complaint") sets forth significantly lengthier and more detailed allegations. It is written in an almost narrative form, and includes two attachments. The first attachment is a copy of a memorandum written by Bradley P. Cost, McNaughton's general counsel and a member of its board of directors, and an attorney at Torys, that Highland obtained during discovery. (New Compl., Exh. A.) The second attachment is the report of Highland's proposed expert Sean F. O'Shea, a former Assistant United States Attorney for the Eastern District of New York. (New Compl., Exh. B.)

  In addition to allegations substantively similar to those set forth in the original complaint, the New Complaint adds detailed allegations about the role played by the Schneiders' lawyers at Jenkens & Gilchrist in communicating inside information from McNaughton to the Schneiders. Highland alleges in the New Complaint that a series of conversations and negotiations between itself, RBC, Rauch, and the Schneiders in January, February, and early March 2001 led to an agreement to sell the Notes on March 12, 2001. Highland alleges that McNaughton's CEO, Peter Boneparth, while negotiating a merger with Jones, learned that the Schneiders sought to trade the Notes. As the Schneiders' sale of the Notes could interfere with the merger, Boneparth met with other McNaughton insiders on March 8, 2001, and determined to inform the Schneiders of the merger negotiations with Jones. A McNaughton insider thereafter contacted lawyers at Jenkens & Gilchrist on March 9, 2001, and informed them of the merger negotiations in a conversation characterized by Highland as a "Tip." The lawyers at Jenkens & Gilchrist thereafter communicated the information about the merger negotiations to the Schneiders on March 9 and March 13, 2001. Jenkens & Gilchrist lawyers ...


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