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LASALA v. NEEDHAM & COMPANY

United States District Court, S.D. New York


October 11, 2005.

JOSEPH P. LASALA, as assignee of Fatbrain.com, Inc., Plaintiff,
v.
NEEDHAM & COMPANY, INC., J.P. MORGAN SECURITIES, INC., and MORGAN STANLEY, Defendants.

The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge

OPINION AND ORDER

I. BACKGROUND

  A. Prior Proceedings

  In an Opinion and Order dated August 30, 2005 ("August 30 Opinion"), I stayed this action until resolution of a pending partial settlement between the class of plaintiff investors and the issuer defendants ("Issuers") in the hundreds of coordinated securities actions known as In re Initial Public Offering Securities Litigation ("the IPO Litigation").*fn1 In the IPO Litigation, investors seek recovery for securities fraud against numerous underwriters and issuers of stock, pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934.*fn2 This Court preliminarily approved the partial settlement in February 2005.*fn3 As part of this partial settlement, the Issuers agreed to assign their interest in all claims against the Underwriters for "Excess Compensation" to a Litigation Trust, which will be created upon final approval of the settlement and will be represented by plaintiffs' class counsel.*fn4 These claims will be referred to as the "Assigned Claims."*fn5 Of the fifty-five Underwriters named as defendants in the IPO Litigation, almost all have entered into agreements with plaintiffs which toll the applicable statute of limitations for the Assigned Claims until the Issuers Settlement is approved.*fn6 To ensure that the statute of limitations on the Assigned Claims does not expire,*fn7 the plaintiffs and the Issuers have arranged to assign each Issuer's Assigned Claims against the non-tolling Underwriters to Joseph LaSala, who will (subject to court approval) become the Litigation Trustee once the Issuers Settlement is approved.*fn8 These assignments are conditional and for an extremely limited purpose, giving LaSala the power to do only two things: 1) file a separate action for each Issuer who has assigned claims to him; and 2) immediately seek a stay of that action.*fn9

  In accordance with his conditional assignments, LaSala has filed dozens of separate actions in this Court ("LaSala Actions"), along with a contemporaneous motion to stay each action.*fn10 Each action is the result of a conditional assignment of claims from a different Issuer, and each action names as defendants one or more of the non-tolling Underwriters. LaSala has filed each action shortly before the six-year anniversary of the IPO of the assignor-Issuer for that action (to avoid expiration of the statute of limitations), and defendants have filed a motion to dismiss in each action.*fn11

  As already noted, I granted LaSala's motion to stay in the August 30 Opinion.*fn12 Pursuant to a stipulation between the parties,*fn13 that Opinion had the effect of staying proceedings in fifty-four other cases currently pending in this Court, as well as future cases raising materially identical issues.*fn14 I granted the stay because the interests of the prospective beneficiaries of the Litigation Trust in preserving a potentially valuable benefit of the Issuer Settlement outweighed the claims of prejudice asserted by defendants.*fn15 I wrote that "[i]t would be unjust for this court to allow the statute of limitations on these claims to expire because the procedural safeguards accorded class-action settlements place these claims in a kind of limbo where the settling plaintiffs cannot yet vindicate the claims they obtained through the settlement."*fn16

  But a countervailing consideration exists which favors considering defendants' pending, and fully briefed, motion to dismiss now. Hundreds of thousands of settlement class members are about to receive notice of the complicated terms of the Issuers Settlement, in advance of the March 24, 2006 deadline to either opt-out or object to that settlement.*fn17 A timely evaluation of the true worth of the Assigned Claims is important for the decision-making process of settlement class members. And the pending fully-briefed motion to dismiss provides a vehicle by which that evaluation can be provided.*fn18

  As with the August 30 Opinion, although this Opinion will discuss only the facts of LaSala (as assignee of Fatbrain.com) v. Needham & Co., the parties have stipulated that this Opinion will govern the resolution of the parallel motions to dismiss pending in the other LaSala Actions.*fn19 B. Background of the Fatbrain.com LaSala Action

  Joseph LaSala is a New Jersey resident, who had no connection to the events giving rise to the Complaint's allegations prior to receiving his assignment.*fn20 The assignor of these claims, Fatbrain.com ("Fatbrain"), was "an online retailer of information resources focused on the technical professional."*fn21 At the time of its IPO, Fatbrain was a Delaware corporation.*fn22

  The defendants are three of the non-tolling Underwriters, with whom Fatbrain entered into a "firm commitment underwriting" on or about November 20, 1998.*fn23 Needham & Co., Inc. was a co-lead managing underwriter for the Fatbrain IPO, receiving and reselling Fatbrain stock as part of that offering.*fn24 J.P. Morgan Securities, Inc. and Morgan Stanley were also members of the underwriting syndicate for the IPO.*fn25 All three defendants are Delaware corporations, with principal executive offices in New York City.*fn26 LaSala invokes this court's jurisdiction on the basis of diversity of citizenship between himself (New Jersey) and the defendants (Delaware-registered corporations principally doing business in New York).*fn27

  As part of the underwriting agreement, defendants contracted to buy three million shares, which they would then sell to investors in an IPO.*fn28 According to LaSala, the prospectus for the Fatbrain IPO provided that the underwriters were entitled to receive "certain disclosed underwriting discounts and commissions of $0.70 per share."*fn29

  LaSala alleges that defendants also received "Excessive Compensation" for the performance of the underwriting agreement, as a result of agreements extracted from their customers who purchased Fatbrain shares from the Underwriters on the IPO and in the aftermarket. Specifically, LaSala alleges that defendants' customers were forced to "kick back" a portion of the profits they derived through participation in the IPO through: 1) payment of inflated brokerage commissions; 2) transactions in unrelated securities made through or at the direction of a defendant to generate commissions; and 3) purchases of, and payments of commissions for, stock in future offerings underwritten by one or more of the defendants, including "follow-on" offerings of Fatbrain stock.*fn30 Based on these allegations, LaSala pleads three causes of action — breach of contract, unjust enrichment, and breach of fiduciary duty.*fn31

  Defendants first question LaSala's standing, arguing that his assignment did not convey a sufficient personal interest in the Assigned Claims.*fn32 Defendants also argue that this court lacks diversity jurisdiction, both because Fatbrain (a non-diverse party) should be considered the real party in interest, and because the assignment to LaSala should be considered a collusive assignment made solely to create diversity jurisdiction.*fn33

  Faced with a motion to dismiss raising both 12(b)(1) and 12(b)(6) grounds, I would normally consider the defendants' jurisdictional challenges before turning to the legal sufficiency of plaintiff's claims. However, as I noted in the August 30 Opinion, the possible jurisdictional defects of the Assigned Claims at this juncture are a product of the unique procedural posture of the LaSala Actions as they relate to the IPO Litigation.*fn34 For this reason, and in light of the pressing need to convey accurate information to class members regarding the value of the pending settlement, I will assume without deciding that I have jurisdiction over this action, and proceed to the merits.*fn35 II. LEGAL STANDARD

  Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a motion to dismiss should be granted only if "`it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'"*fn36 The task of the court in ruling on a Rule 12(b)(6) motion is "merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof."*fn37 When deciding a motion to dismiss, courts must accept all factual allegations in the complaint as true, and draw all reasonable inferences in plaintiffs' favor.*fn38 Courts generally do not consider matters outside the pleadings but may consider documents attached to the pleadings, documents referenced in the pleadings, or documents that are integral to the pleadings.*fn39

  III. DISCUSSION

  A. Breach of Contract

  "To prevail on a claim for breach of contract under New York law, a plaintiff must prove (1) the existence of an agreement between the plaintiff and defendant; (2) due performance of the contract by the plaintiff; (3) breach of the contract by the defendant; and (4) damages resulting from the breach."*fn40 Defendants challenge the Complaint's sufficiency regarding the last two elements, claiming that LaSala has not identified any provision of the underwriting agreement that was breached, and that the terms of LaSala's assignment do not allow him to assert any theory of damages, given that Fatbrain retained any claims based on underpricing of the IPO.*fn41

  The New York Court of Appeals has recently considered a very similar breach of contract claim.*fn42 In that case, the successor-in-interest to eToys, a bankrupt issuer, sued Goldman Sachs, the lead managing underwriter for its IPO, alleging five separate causes of action: breach of fiduciary duty, breach of contract, fraud, professional malpractice and unjust enrichment.*fn43 The underwriting agreement called for a firm commitment underwriting, where Goldman Sachs would buy the shares from the issuer and then "offer the shares for public sale upon the terms and conditions set forth in the prospectus."*fn44

  The gravamen of plaintiff's allegations was that, although Goldman bought the shares and sold them on the public market as agreed, Goldman also:

  [E]ntered into arrangements whereby its customers were obligated to kick back to Goldman a portion of any profits that they made from the sale of eToys securities subsequent to the initial public offering. Because a lower IPO price would result in a higher profit to these clients upon the resale of the securities and thus a higher payment to Goldman Sachs for the allotment, plaintiff alleges Goldman Sachs had an incentive to advise eToys to underprice its stock. As a result of this undisclosed scheme, Goldman Sachs was allegedly paid 20% to 40% of the clients' profits from trading the eToys securities.*fn45 The Court of Appeals upheld a lower court's dismissal of the breach of contract claim, because "[i]t is undisputed that Goldman Sachs fulfilled its commitments as set forth in the parties' contract, purchasing all of the available shares . . . and reselling them to the public at the initial offering price [specified in the underwriting agreement]."*fn46 For this reason, EBC I is fully dispositive of LaSala's breach of contract claim, as LaSala cannot and does not allege that defendants failed to provide Fatbrain with the benefits of the underwriting agreement, which was to buy the prescribed number of shares and sell them at the agreed-upon offering price.

  The closest LaSala comes to identifying a specific provision of the underwriting agreement that was breached is when he asserts that the agreement incorporates by reference the terms of the prospectus, which provides that the Issuer "was entitled to receive all of the proceeds of the IPO net of certain disclosed underwriting discounts and commissions."*fn47 But even if this amounts to a breach, LaSala fails to allege that such a breach damaged Fatbrain.*fn48 Moreover, EBC I would compel the same result even if LaSala could allege underpricing.*fn49

  Finally, as part of his breach of contract claim, LaSala also asserts that "Fatbrain-Underwriter Defendants' receipt of Excessive Compensation also breached their duties of good faith and fair dealing."*fn50 Under New York law, "[i]n every contract there is an implied covenant of fair dealing and good faith."*fn51 "This covenant embraces a pledge that `neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.'"*fn52 But LaSala cannot plead such a claim because, as already noted, the Underwriters' alleged receipt of excessive compensation from investors did not frustrate the stated purposes of the Fatbrain underwriting agreement.*fn53 B. Unjust Enrichment

  Under New York law, a claim of unjust enrichment requires "`(1) that the defendant was enriched; (2) that the enrichment was at the plaintiff's expense; and (3) that the circumstances are such that in equity and good conscience the defendant should return the money or property to the plaintiff.'"*fn54 Defendants argue that LaSala's unjust enrichment claim fails because LaSala cannot, by the terms of his assignment, allege that any unjust enrichment of defendants was at plaintiff's expense:

The only benefit that Fatbrain conferred on the Defendants was its shares, for which it received the agreed-upon purchase price. To say that the Defendants were unjustly enriched by receipt of these shares would require LaSala to assert a legal claim for which it has not received an assignment: that the shares were worth more than the purchase price such that it would be unjust for the Defendants to retain this additional worth.*fn55
  This case is indistinguishable from Xpedior Creditor Trust.*fn56 In that case, plaintiff asserted that a defendant underwriter was unjustly enriched by the receipt of "excessive underwriting and other compensation" from its customers in connection with Xpedior's IPO. In dismissing the unjust enrichment claim, I noted that "Xpedior does not allege that [defendant underwriter] DLJ was enriched at its expense. To the contrary, DLJ allegedly received excess compensation from its own customers. They, not Xpedior, might have a cause of action."*fn57 Moreover, Xpedior, like LaSala, did not base any of its allegations on underpricing the IPO.*fn58

  As the Issuers have withheld underpricing-based claims,*fn59 LaSala (and, prospectively, the Litigation Trust) has to some extent received nothing for something — an otherwise-viable claim is foreclosed because LaSala is prevented from alleging the only theory that may fit the facts. Therefore, for the same reasons given in Xpedior Creditor Trust, LaSala's unjust enrichment claim must be dismissed.

  C. Breach of Fiduciary Duty Defendants assert that LaSala's breach of fiduciary duty claim is time-barred.*fn60 Under New York law, a breach of fiduciary duty claim carries a three-year statute of limitations when, as here, a plaintiff seeks only money damages.*fn61 As the Fatbrain IPO took place in 1998, LaSala's claim, brought in 2004, is far outside the statutory limitations period.*fn62

  LaSala attempts to defeat the statute of limitations defense with a novel argument — he urges the Court to treat his fiduciary duty claim as a cross-claim, belonging to Fatbrain, that it could have asserted in the IPO Litigation, where it is currently a co-defendant with the defendants in this litigation.*fn63 According to LaSala, as this "cross-claim" would have been timely under New York law if asserted by Fatbrain at the beginning of the IPO Litigation, LaSala's breach of fiduciary duty claim "relates back" to November 16, 2001, when the IPO Litigation commenced.*fn64

  LaSala's argument consists of three propositions: 1) New York law provides that defenses or counterclaims are not time-barred if they would have been timely when plaintiff's complaint was filed;*fn65 2) the relevant New York statute, C.P.L.R. section 203(d), refers only to counterclaims and defenses, but New York courts have applied it to cross-claims as well;*fn66 therefore 3) LaSala's claims should be deemed timely under section 203(d).*fn67

  But even assuming, arguendo, that each of these propositions is valid, there is a yawning gap in LaSala's logic between the first two propositions and the last, which he makes no attempt to bridge. Specifically, LaSala does not cite a single case, and I have found none, where a plaintiff asserted a claim that was deemed to be a cross-claim based only on the fact that a separate party in separate (and still-active) litigation could have but has not asserted the claim as a cross-claim. Accordingly, LaSala's breach of fiduciary duty claim is time-barred and must be dismissed.*fn68

  D. Leave to Amend

  Pursuant to Rule 15(a) of the Federal Rules of Civil Procedure, leave to amend a complaint "shall be freely granted when justice so requires."*fn69 Moreover, "[i]t is the usual practice upon granting a motion to dismiss to allow leave to replead."*fn70 Plaintiff is therefore granted leave to replead within twenty days of this Opinion and Order. IV. CONCLUSION

  For the foregoing reasons, defendants' motion to dismiss is granted without prejudice, and plaintiff's cross-motion for consolidation is denied as moot. The Clerk is directed to close defendants' motion to dismiss and plaintiff's cross-motion for consolidation [numbers 14 and 24 on the docket sheet]. The stay of this action, entered on August 30, 2005, remains in effect. Additionally, pursuant to the stipulation between the parties, the Clerk is directed to close defendants' motion to dismiss and plaintiff's cross-motion for consolidation in the other "LaSala Actions" listed in Appendix I.

 

SO ORDERED. Appendix I — Actions Covered by the Resolution of Issues in this Opinion
The Clerk is directed to close the pending motions in the following actions:
Case Name Docket Sheet Number
1. LaSala (as assignee of theGlobe.com) v. J.P. Morgan Sec., 04 Civ. 8957 13, 22 2. LaSala (Fatbrain.com) v. Needham & Co., 04 Civ. 9237 14, 24 3. LaSala (Ticketmaster) v. Allen & Co., 04 Civ. 9529 17, 27 4. LaSala (Concur Techs.) v. J.P. Morgan Sec., 04 Civ. 9912 10, 18 5. LaSala (CBS Marketwatch) v. Morgan Stanley, 05 Civ. 0382 9, 16 6. LaSala (Covad Communications Group) v. J.P. Morgan Sec., 05 Civ. 0760 9, 17 7. LaSala (Perot Systems Corp.) v. Morgan Stanley, 05 Civ. 1060 10, 19 8. LaSala (Pacific Internet Ltd.) v. J.P. Morgan Sec., 05 Civ. 1553 13, 17 9. LaSala (Modem Media) v. Morgan Stanley, 05 Civ. 1554 9, 18 10. LaSala (SBCIS/Prodigy Communications) v. Prudential, 05 Civ. 1987 12, 16 11. LaSala (Verticalnet) v. J.P. Morgan Sec., 05 Civ. 1988 11, 19 12. LaSala (WebMD Corp.) v. Morgan Stanley, 05 Civ. 1989 12, 20 13. LaSala (Bottomline Tech.) v. J.P. Morgan Sec., 05 Civ. 2039 7, 14 14. LaSala (Vignette Corp.) v. Morgan Stanley, 05 Civ. 2243 10, 18 15. LaSala (Intraware) v. J.P. Morgan Sec. 05 Civ. 2393 11, 15 16. LaSala (iVillage, Inc.) v. J.P. Morgan Sec., 05 Civ. 2983 7, 10 17. LaSala (Auto Web.com) v. Morgan Stanley, 05 Civ. 3167 7, 11 18. LaSala (Autobytel.com) v. Morgan Stanley, 05 Civ. 3222 9, 13 19. LaSala (Critical Path) v. J.P. Morgan Sec., 05 Civ. 3322 11, 13 20. LaSala (Ziff-Davis) v. J.P. Morgan Sec., 05 Civ. 3389 8, 12 21. LaSala (Priceline.com) v. Morgan Stanley, 05 Civ. 3390 9, 13 22. LaSala (Extreme Networks) v. Morgan Stanley, 05 Civ. 3649 10, 14 23. LaSala (Net Perceptions) v. J.P. Morgan Sec., 05 Civ. 4075 N/A 24. LaSala (Marimba) v. Morgan Stanley, 05 Civ. 4267 N/A 25. LaSala (Portal Software) v. J.P. Morgan Sec., 05 Civ. 4431 N/A 26. LaSala (Radio One) v. Prudential Equity Group, 05 Civ. 4474 N/A 27. LaSala (TheStreet.com) v. J.P. Morgan Sec., 05 Civ. 4573 N/A 28. LaSala (Copper Mountain Networks) v. Morgan Stanley, 05 Civ. 4659 N/A 29. LaSala (Alloy Online) v. Prudential Equity Group, 05 Civ. 4682 N/A 30. LaSala (Redback Networks) v. Morgan Stanley, 05 Civ. 4762 N/A 31. LaSala (Brocade Communications) v. Morgan Stanley, 05 Civ. 4955 N/A 32. LaSala (F5 Networks) v. J.P. Morgan Sec., 05 Civ. 5291 N/A 33. LaSala (High Speed Access Corp.) v. J.P. Morgan Sec., 05 Civ. 5292 N/A 34. LaSala (Openware Servs.) v. J.P. Morgan Sec., 05 Civ. 5506 N/A 35. LaSala (Overture Servs.) v. J.P. Morgan Sec., 05 Civ. 5665 N/A 36. LaSala (Ariba) v. Morgan Stanley, 05 Civ. 5858 N/A 37. LaSala (Cybersource) v. J.P. Morgan Sec., 05 Civ. 5859 N/A 38. LaSala (Juniper Networks) v. J.P. Morgan Sec., 05 Civ. 5877 N/A 39. LaSala (Stamps.com) v. Prudential Equity Group, 05 Civ. 5878 N/A 40. LaSala (E-Loan) v. J.P. Morgan Sec., 05 Civ. 6019 N/A 41. LaSala (AskJeeves) v. Morgan Stanley, 05 Civ. 6172 N/A 42. LaSala (Primus Knowledge Solutions) v. J.P. Morgan Sec. 05 Civ. 6173 N/A 43. LaSala (Axeda Systems) v. Prudential Equity Group, 05 Civ. 6454 N/A 44. LaSala (Paradyne Networks) v. J.P. Morgan Sec., 05 Civ. 6455 N/A 45. LaSala (Audible) v. J.P. Morgan Sec., 05 Civ. 6456 N/A 46. LaSala (Drugstore.com) v. Morgan Stanley, 05 Civ. 6625 N/A 47. LaSala (NexPrise) v. Morgan Stanley, 05 Civ. 6626 N/A 48. LaSala (Net2Phone) v. Morgan Stanley, 05 Civ. 6627 N/A 49. LaSala (Internet Initiative) v. Morgan Stanley, 05 Civ. 6916 N/A 50. LaSala (Fair Isaac) v. J.P. Morgan Sec., 05 Civ. 7099 N/A 51. LaSala (Red Hat) v. J.P. Morgan Sec., 05 Civ. 7135 N/A 52. LaSala (Silverstream Software) v. Morgan Stanley, 05 Civ. 7246 N/A 53. LaSala (Agile Software) v. Morgan Stanley, 05 Civ. 7353 N/A 54. LaSala (Lionbridge Techs.) v. Prudential Equity Group, 05 Civ. 7354 N/A 55. LaSala (Wink Communications) v. J.P. Morgan Sec., 05 Civ. 7364 N/A 56. LaSala (Netsilicon) v. J.P. Morgan. Sec., 05 Civ. 8029 3 57. LaSala (Kana Software) v. J.P. Morgan Sec., 05 Civ. 8166 N/A 58. LaSala (eGain Communications) v. Prudential Equity Group, 05 Civ. 8224 3 59. LaSala (Foundry Networks) v. J.P. Morgan Sec., 05 Civ. 8323 3 60. LaSala (ITXC Corp.) v. J.P. Morgan Sec., 05 Civ. 8325 3 61. LaSala (Tivo) v. J.P. Morgan Sec., 05 Civ. 8383 3 62. LaSala (____) v. Morgan Stanley, 05 Civ. 8385 3 63. LaSala (Visiqor Solutions) v. J.P. Morgan Sec., 05 Civ. 8455 3 64. LaSala (Digital Insight Corp.) v. Morgan Stanley, 05 Civ. 8456 3 65. LaSala (Smartdisk Corp.) v. J.P. Morgan Sec., 05 Civ. 8547 2

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