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United States District Court, S.D. New York

November 10, 2005.

WHITTIER TRUST COMPANY, as trustee of the Gerald G. Loehr Separate Property Trust, WILLIAM C. JOHNSON, as trustee of The Gerald G. Loehr Separate Property Trust and in his individual capacity, TODD B. LOFTIS, and LINDA LOEHR, Defendants.

The opinion of the court was delivered by: HAROLD BAER JR., District Judge


Plaintiffs JHW Greentree Capital, L.P. and TMI Integrated Holdings Corp. (collectively, "Greentree") brought this action against defendants Whittier Trust Company ("Whittier"), William C. Johnson ("Johnson"), Todd B. Loftis ("Loftis") and Linda Loehr alleging, inter alia: securities fraud in violation of sections 10(b) and 20(a) of the Securities and Exchange Act of 1934; common law fraud; negligent misrepresentation; unjust enrichment; rescission; and indemnity. All of plaintiffs' claims arise out Greentree's acquisition of Tools & Metals, Inc. ("TMI"), a privately held corporation owned by Loftis and the Gerald G. Loehr Separate Property Trust (the "Loehr Trust" or the "Trust"). Defendants now move to dismiss the complaint pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, as well as the Private Securities Litigation Reform Act of 1995 ("PSLRA"). For the reasons set forth below, defendants' motion to dismiss is GRANTED in part and DENIED in part.


  TMI is a corporation that supplies industrial cutting tools and related services to, primarily, the Lockheed Martin Corporation ("Lockheed"). (Compl. ¶ 7). On March 30, 2004, Greentree acquired all of TMI's stock pursuant to an Agreement and Plan of Merger ("Merger Agreement"). (Id.) Prior to the acquisition, 90% of TMI's stock had been controlled by the Loehr Trust. (Id. ¶ 8). The Loehr Trust was established by the late Gerald Loehr, the former owner of TMI, for the benefit of his wife and children. (Id. ¶¶ 8, 66). Prior to the sale, the remainder of TMI's stock was controlled by Loftis, TMI's CEO from 1997 until December 2004. (Id. ¶ 10). Defendant Linda Loehr, Gerald's widow, was a member of TMI's board of directors from 1997 until the acquisition by Greentree. (Id. ¶ 12). Linda Loehr is also the lifetime beneficiary of the Loehr Trust. (Id.) Defendant Johnson was a member of TMI's board from 1997 until the merger, and is a co-trustee of the Loehr Trust. (Id. ¶ 9).*fn1 Johnson is also married to Sharon Loehr Johnson, Gerald Loehr's daughter and a remainderman of the Loehr Trust. (Id.) Whittier, a private trust company, is co-trustee of the Loehr Trust. (Id. ¶ 8).

  On October 4, 2004, just over six months after purchasing TMI for approximately $24 million, Greentree was alerted by the Internal Revenue Service of an investigation into its acquisition of TMI. (Id. ¶¶ 4,51). Shortly thereafter, Greentree was informed by Loftis, who remained CEO of TMI following the acquisition, that TMI was the subject of a federal criminal investigation for allegedly defrauding Lockheed, a government contractor. (Id. ¶ 52). After initiating its own internal investigation, Greentree learned that, beginning in 1998, Loftis had been creating false vendor invoices to conceal TMI's true costs and profit margins from Lockheed in order to inflate Lockheed's payments to TMI. (Id. ¶ 53). Plaintiffs allege that, due to the ongoing investigation into TMI's billing practices, TMI's credit lines and bank account have been frozen, its ability to win new business has been severely impaired, and it is facing potential debarment as a government contractor. (Id. ¶¶ 74, 77). Thus, Greentree alleges that its shares of TMI are "essentially worthless." (Id. ¶ 72).

  Plaintiffs allege that the defendants intentionally misled them with regard to TMI's financial stability. Specifically, plaintiffs allege that, prior to the merger, Loftis made repeated representations regarding TMI's relationship with Lockheed that Loftis knew to be false. (See, e.g. Compl. ¶ 29). Plaintiffs also allege that various representations regarding TMI's billing practices contained in the Merger Agreement, which was authorized by TMI's board of directors and signed by Loftis, Johnson and Whittier, were knowingly false. (Id. ¶¶ 41-43).

  Plaintiffs allege that Loftis orchestrated the fraud at TMI, and that Johnson and Linda Loehr were aware of TMI's fraudulent billing practices. In 1997 John Andrew Loehr, a former CEO of TMI and Gerald Loehr's son, sued his father and TMI in state court in California for wrongful termination (the "California action"). (Compl ¶ 66; Declaration of Andrew L. Morrison, Esq., dated May 26, 2005, Ex. B). In his suit, John Andrew Loehr alleged that his father, Loftis, and other TMI employees were involved in an ongoing scheme to defraud the government through the administration of the Lockheed contract. (Compl. ¶ 66). When Gerald Loehr died in 1997, Johnson and Linda Loehr were substituted as defendants in the California action. (Compl. ¶ 69). Plaintiffs allege that John Andrew Loehr reported TMI's fraudulent activities to various members of TMI's board, including Johnson and Linda Loehr, "on multiple occasions, but each time Linda Loehr and Johnson willfully ignored the reports." (Compl. ¶ 68). Plaintiffs allege that, in response to Andrew Loehr's allegations, Linda Loehr told him to "`mind [his] own business[,]'" and Johnson "demanded proof." (Compl. ¶ 68). The California action settled in 1998. (Compl. ¶ 70). Plaintiffs allege that "neither Johnson nor Loehr took any steps to investigate John Andrew Loehr's allegations or stop the underlying misconduct against Lockheed." (Id.)


  When ruling on a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the Court must construe all factual allegations in the complaint in favor of the non-moving party. See Krimstock v. Kelly, 306 F.3d 40, 47-48 (2d Cir. 2002). The Court's consideration is normally limited to facts alleged in the complaint, documents appended to the complaint or incorporated in the complaint by reference, and to matters of which judicial notice may be taken. See Allen v. WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991).*fn2 A motion to dismiss should not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Shakur v. Selsky, 391 F.3d 106, 112 (2d Cir. 2004) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)). When a complaint alleges fraud, "Rule 9(b) requires that allegations of fraud be pleaded with particularity." Harsco Corp. v. Segui, 91 F.3d 337, 347 (2d Cir. 1996). This means that the complaint "must (1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state where and when the statements (or omissions) were made, and (4) explain why the statements (or omissions) are fraudulent. Id. A. Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act")

  "To state a cause of action under section 10(b) and Rule 10b-5, a plaintiff must plead that the defendant made a false statement or omitted a material fact [in connection with the purchase or sale of securities], with scienter, and that plaintiff's reliance on defendant's action caused plaintiff injury." Kalnit v. Eichler, 264 F.3d 131, 138 (2d Cir. 2000) (internal quotation omitted). "The requisite state of mind, or scienter, in an action under section 10(b) and Rule 10b-5[] that the plaintiff must allege is an intent to deceive, manipulate or defraud." Id. (internal quotation omitted). The PSLRA imposed heightened pleading requirements for securities fraud actions. Id. The PSLRA provides that:

In any private action . . . in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.
15 U.S.C. § 78u-4(b)(2).

  To establish fraudulent intent, a plaintiff may either allege facts showing "that defendants had both motive and opportunity to commit fraud" or allege "facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Kalnit, 264 F.3d at 138 (internal quotation omitted). A plaintiff may establish the requisite strong inference of scienter by alleging that the defendants: "(1) benefited in a concrete and personal way from the purported fraud . . .; (2) engaged in deliberately illegal behavior . . .; (3) knew facts or had access to information suggesting that their public statements were not accurate . . .; or (4) failed to check information they had a duty to monitor." Novak v. Kasaks, 216 F.3d 300, 311 (2d Cir. 2000).

  1. Loftis

  Plaintiffs allege numerous specific and intentional misrepresentations by Loftis. Loftis argues that plaintiffs' section 10(b) claim should be dismissed because plaintiffs fail to allege fraud with adequate particularity. While plaintiffs aver that the defendants collectively perpetrated a fraud by concealing TMI's billing irregularities, the complaint is rife with specific allegations that detail Loftis' role. (See, e.g. Compl. ¶¶ 58 "Greentree learned through its investigation that Loftis. . . . submitted forged and fictitious third-party vendor invoices to Lockheed").

  Johnson and Loftis argue that the integration clause in the Merger Agreement bars any claim for fraud based on representations not contained within the Merger Agreement itself. The integration clause disclaims reliance on any representations or promises not set forth in the Merger Agreement. (Compl. Ex. A, § 13.10). Defendants are correct that the integration clause limits plaintiffs claims for fraud to those representations contained in the Merger Agreement. See In re Vivendi Universal, S.A. Securities Litigation, 02 Civ. 5571, 2004 WL 876050, *4 (S.D.N.Y. April 22, 2004) (finding that integration clause bars plaintiffs from relying on extra-contractual representations not contained in merger agreement to support fraud claim). However, here the integration clause does not bar plaintiffs from pursuing fraud claims relating to false statements or omissions contained within the Merger Agreement itself. Id. Loftis signed the Merger Agreement, which contained several misrepresentations. (See Compl. ¶ 42 sellers represent that "TMI [is] not `in violation of any terms or conditions' of the Lockheed contract" (quoting Merger Agreement § 4.10(b)).

  Defendants also argue that the exclusivity clause contained in the Merger Agreement limits plaintiff to indemnification for any breaches of the representations contained in the Merger Agreement. The exclusivity clause provides that indemnification shall be the sole remedy for any misrepresentation arising out of the Merger Agreement, except for claims of fraud. (Compl., Ex. A § 11.05). Thus, plaintiffs' fraud claims are not barred by the exclusivity clause. See also In re Vivendi, 2004 WL 876050, * 11 (where "a warranty provided by a contract makes representations as to present facts, such facts are extraneous to the contract" and may give rise to a claim for fraud).

  In addition, plaintiffs have adequately alleged reasonable reliance. Johnson and Loftis argue that plaintiffs should have discovered John Andrew Loehr's prior allegations of fraud at TMI since they were made in the context of a public lawsuit. However, it is unrealistic to expect a party to a transaction, even a sophisticated private equity firm, to scour the dockets of every court in the nation for closed actions involving an acquisition target. Plaintiffs allege that they were the victim of a concerted and prolonged effort to disguise TMI's fraudulent billing practices. Plaintiffs have sufficiently alleged that they reasonably relied on the representations contained in the Merger Agreement. Loftis also argues that the representations giving rise to plaintiffs' allegations of fraud concerned future events, and therefore cannot be the basis of an action for fraud. I disagree. An examination of the representations themselves proves otherwise. (See Compl. ¶ 42 "`all invoices and claims for payment . . . submitted by' TMI to Lockheed . . . `were current, accurate and complete in all material respects as of their submission date(s)' at all times during the three year period prior to the date of the Agreement" (quoting Merger Agreement, § 4.10)). This is clearly a representation concerning a present fact, rather than a promise of future action.

  Thus, Plaintiffs allege that Loftis repeatedly assured Greentree of TMI's fiscal health, and made representations to that effect in the Merger Agreement, while personally perpetrating a criminal fraud upon Lockheed. These allegations are sufficient to state a claim under section 10(b).*fn3

  2. The Loehr Trust*fn4

  Greentree argues that the Loehr Trust is liable for Loftis' fraudulent statements because Loftis was acting as agent for the Trust in the sale of TMI's shares. Plaintiffs allege that, since Loftis was their primary contact at TMI prior to the consummation of the acquisition, his statements and conduct should be attributed to the Trust, TMI's majority shareholder. Generally, following the Supreme Court's decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), "courts have . . . rejected efforts by plaintiffs to hold parties secondarily liable under [section] 10(b)" of the Exchange Act. Walther v. Maricopa Int'l Investment Corp., 97 Civ. 4816, 1999 WL 64280, * 1 (S.D.N.Y. Feb. 9, 1999) (Baer, J.). However, as the Second Circuit explained in Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 20 F.3d 87, 101 (2d Cir. 2001), "Central Bank did not eliminate primary liability for business entities." Thus, a plaintiff may allege that a corporate entity violated section 10(b) based on the intentional misrepresentations of its employees or agents. Id. Indeed, a "corporation can only act through its employees and agents," therefore, "an allegation that a particular agent [engaged in fraud] will not immunize the principals from liability for a knowing deception." Id. See also In re Worldcom, Inc., 02 Civ. 3288, 2003 WL 21488087, *9 (S.D.N.Y. June 25, 2003) (finding that Central Bank "did not . . . eliminate the use of principles of agency law to hold principals responsible for the misrepresentations of their agents").*fn5

  "[A]n agency relationship results from a manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and the consent by the other to act." Cromer Finance Ltd. v. Berger, 00 Civ. 2284, 2002 WL 826847, *4 (S.D.N.Y. May 2, 2002) (internal quotation omitted). "For an agency relationship to be created, both parties must manifest their assent to the arrangement." Lee v. Kim, 93 Civ. 8280, 1994 WL 586435, *3 (S.D.N.Y. Oct. 25, 1994). Also, "[w]here the principal does not exercise control over the professed agent, no agency relationship exists." Id. Here, while it appears that Loftis was acting as agent for TMI during the pre-acquisition negotiations, plaintiffs have not adequately alleged that Loftis was acting as an agent for the Loehr Trust. Loftis was TMI's CEO, and the Trust owned 90% of TMI's shares. However, the "law recognizes that corporations may be organized in ways to limit liability among separate entities. . . . [thus] a parent company is not automatically liable for the acts of [a] wholly-owned subsidiary." Manchester Equipment Co., Inc. v. American Way and Moving Co., Inc., 60 F. Supp. 2d 3, 6 (E.D.N.Y. 1999). To show that Loftis was an agent of the Loehr Trust, plaintiffs must allege that Loftis was delegated authority to bind the Trust. While plaintiffs allege that Loftis conducted negotiations with and made representations to Greentree on behalf of TMI and its board of directors, plaintiffs can not allege that Loftis acted with real or apparent authority to bind TMI's shareholders. Therefore, as presently pleaded, the Trust is not liable as principal for Loftis' actions.

  However, while Loftis was not an agent for the Trust, Johnson, as co-trustee, did act with authority to bind the Trust. Therefore, if Johnson engaged in fraud, Johnson's misrepresentations may be attributed to the Trust. See S.E.C. v. Ballesteros, 253 F. Supp. 2d 720, 729 (S.D.N.Y. 2003) (finding that trust may be liable for violations of Rule 10b-5 "based on the activities of individuals who dominate or control" the trust). Thus, plaintiff's claims against the Trust will turn on the sufficiency of plaintiff's allegations against Johnson. 3. Whittier

  Plaintiffs concede that the complaint "does not allege that Whittier is personally liable, as plaintiffs have sued Whittier only in its capacity as [c]o-trustee." (Pl.'s Mem. at 9 n. 6). Plaintiffs do not allege that Whittier personally engaged in any fraudulent conduct, nor that Whittier even had notice of any fraudulent activity at TMI. Indeed, Whittier only become co-trustee in 2002, several years after John Andrew Loehr's lawsuit. (Compl. ¶ 8). Plaintiffs conceded that its "purpose in naming Whittier . . . in [its] capacity[y] as [c]o-trustee, was, in effect, to include the Loehr trust in this action and to subject it and its assets to liability." (Pl.'s Mem. at 9 n. 7). Since plaintiffs plead no fraud by Whittier, the Trust can not be liable based on Whittier's actions as agent for the Trust. As set forth above, the Trust's liability will turn on Johnson's actions as agent. Therefore, plaintiffs' claims against Whittier must be dismissed.

  4. Johnson

  Plaintiffs allege that the Merger Agreement, which Johnson signed, contained several false and misleading statements. (Compl. ¶¶ 41-43). Specifically, the Merger Agreement represents that TMI was in full compliance with applicable federal procurement standards and that all invoices submitted to Lockheed were accurate. (Compl. ¶ 42). Plaintiffs allege that Johnson knew that these representations were false because he was aware of Andrew Loehr's allegations of fraudulent billing practices in the California action. Johnson argues that plaintiffs fail to allege his primary involvement in any fraud; that he had no duty to disclose detrimental information regarding TMI; and that plaintiffs have failed to allege scienter with the requisite particularity.*fn6

  Plaintiffs have adequately alleged that Johnson, by signing the Merger Agreement, made materially false statements with an intent to defraud. See In re JWP Inc. Securities Litigation, 928 F. Supp. 1239, 1256 (S.D.N.Y. 1996) (finding that defendant directors made misrepresentations in 10-K forms signed by the defendants). If, as plaintiffs allege, Johnson willfully ignored John Andrew Loehr's allegations and then proceeded to represent to TMI's buyers that the company's billing practices were in order, Johnson will be liable for violating section 10(b) of the Exchange Act. These allegations give rise to a "strong inference of fraudulent intent." In re Global Crossing, Ltd. Securities Litigation, 322 F. Supp. 2d 319, 329 (S.D.N.Y. 2004) (internal quotation omitted).*fn7 Furthermore, since Johnson signed the Merger Agreement in his capacity as co-trustee of the Loehr Trust, plaintiffs have adequately alleged that Johnson engaged in fraudulent conduct in his capacity as agent for the Trust. Therefore, plaintiffs have adequately stated a claim against Johnson individually and as co-trustee of the Loehr Trust for violating section 10(b).

  5. Linda Loehr

  Plaintiffs allege that, while Linda Loehr did not sign the Merger Agreement, she authorized Johnson and Loftis to make the representations contained therein. (Compl. ¶ 41). Furthermore, plaintiffs allege that various representations contained in the Merger Agreement purport to be based on the "Knowledge of the Sellers," a term which is defined to include the actual knowledge of Linda Loehr. (Compl. ¶ 41). Plaintiffs allege that Loehr knew the representations contained in the Merger Agreement to be false because she had willfully ignored John Andrew Loehr's prior allegations of fraud at TMI. (Compl. ¶ 68). Loehr argues that plaintiffs have failed to plead a primary violation of section 10(b). Specifically, Loehr argues that plaintiffs have failed to allege that she misrepresented material information, that she had no duty to disclose information to the plaintiffs, and that she cannot be liable for Loftis' misrepresentations under an agency theory.

  Primary liability for violations of section 10(b) of the Exchange Act "may be imposed . . . on persons who made fraudulent misrepresentations [and] on those who had knowledge of the fraud and assisted in its perpetration." Wright v. Young, 152 F.3d 169, 176 (2d Cir. 1998) (internal quotation omitted). Under the "group pleading doctrine," "plaintiffs may rely on a presumption that statements" in jointly published materials "are the collective work of those individuals with direct involvement in the everyday business of the company." In re Vivendi Universal, S.A. Securities Litigation, 381 F. Supp. 2d 158, 191 (S.D.N.Y. 2003) (Baer, J.) (internal quotation omitted). "Thus, a member of the upper level management . . . who had knowledge of the fraud, and assisted in its perpetration" may be liable under section 10(b). Id. Here, plaintiffs' allege that Linda Loehr, as an outside director, "authorized" the representations contained in the Merger Agreement. (Compl. ¶¶ 41, 46).*fn8 However, Loehr's presence at a board meeting at which the merger was approved does not constitute "assistance in [the] perpetration" of the fraud sufficient to create primary liability for any affirmative misrepresentation. See Wright, 152 F.3d at 176. Plaintiffs have not alleged that Linda Loehr was involved in the day to day operations of TMI, nor that she was directly involved in negotiating or drafting the Merger Agreement. In fact, the minutes of the board meeting at which the Merger Agreement was approved reveal no participation by Loehr. Rather, the minutes show that Johnson summarized the fundamental aspects of the transaction and that Johnson, along with another board member, were "delegated the power to finalize the terms and conditions of the Merger Agreement on behalf of" TMI. (Supp. Dec. of H. Barry Vasios, dated July 13, 2005, Ex. 1).*fn9 Loehr cannot be liable for the misrepresentations contained in the Merger Agreement since she did not sign that agreement. Furthermore, plaintiffs have not alleged that Linda Loehr played an active role in drafting the Merger Agreement.*fn10

  Alternatively, plaintiffs seek to hold Linda Loehr liable for her alleged omissions. Plaintiffs claim that Linda Loehr was obligated to disclose to Greentree whatever she may have known regarding TMI's fraudulent billing practices. "[S]ilence in connection with the purchase or sale of securities may operate as a fraud actionable under [section] 10(b). . . . [if the plaintiff demonstrates] that the defendant had a duty to disclose arising from a relationship of trust and confidence between parties to a transaction." Vento & Co. of New York, L.L.C. v. Metromedia Fiber Network, Inc., 97 Civ. 7751, 1999 WL 147732, * 9 (S.D.N.Y. March 18, 1999) (internal quotation omitted). Under New York law, "[a] duty to speak cannot arise simply because two parties may have been on opposite sides of a bargaining table." Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993). However, such a duty may arise "when one party possesses superior knowledge, not readily available to the other, and knows that the other is acting on the basis of mistaken knowledge." Id. (internal quotation omitted).

  "A director [who is a] non-participant in the transaction[] owes no duty to insure that all material, adverse information is conveyed to prospective purchasers of the stock of the corporation on whose board he sits." Lanza v. Drexel & Co., 479 F.2d 1277, 1289 (2d Cir. 1973). See also In re Union Carbide Corp., 666 F. Supp. 547, 563 (S.D.N.Y. 1987) ("in the absence of direct participation in a securities violation, an outside director has no duty to disclose adverse material facts or information to . . . prospective purchasers"). While a close question, plaintiffs have not sufficiently alleged that they had a relationship of trust and confidence with Linda Loehr to give rise to a duty to disclose. Plaintiffs have not alleged that Loehr was involved in the negotiations involving the merger, nor that she had any communications with plaintiffs at all. Her mere status as an outside director of TMI does not create a duty to disclose, even if she had some knowledge of past misdeeds at TMI.

  This is not to say that there will never be instances in which an outside director not directly involved in the perpetration of a fraud nonetheless has a duty to disclose. Such a duty may arise when the director was intimately involved in the sale of the securities, or when it is alleged that the director had direct knowledge of others' affirmative misrepresentations. Here, plaintiffs have not sufficiently alleged that Linda Loehr knew that false representations were made to the plaintiffs in connection with the merger.

  Finally, Linda Loehr cannot be liable for Loftis' alleged misrepresentations. Even if individual principals may still be liable for acts of their agents that violate section 10(b), see In re Worldcom, 2003 WL 21488087, * 9, plaintiffs have not alleged that Linda Loehr controlled Loftis nor that she authorized him to act on her behalf. While Loftis may have acted on behalf of TMI, he did not act on behalf of Linda Loehr, and outside director of TMI.*fn11 B. Section 20(a) of the Exchange Act

  Plaintiffs allege that Johnson and Linda Loehr violated section 20(a) of the Exchange Act. (Compl. ¶¶ 93-97). "Controlling-person liability" under section 20 of the Exchange Act "is a separate inquiry from that of primary liability and provides an alternative basis of culpability." Suez Equity, 250 F.3d at 101 (internal quotation omitted). To establish controlling-person liability, a plaintiff must allege: 1) "a primary violation by the controlled person[;]" 2) "control of the primary violator by the targeted defendant[;]" and 3) "that the controlling person was in some meaningful sense a culpable participant in the fraud perpetrated by the controlled person." In re Vivendi, 381 F. Supp. 2d at 189 (internal quotation omitted).

  "Control over a primary violator may be established by showing that the controller possessed `the power to direct or cause the direction of the management and policies of a person . . .'" In re Blech Securities Litigation, 961 F. Supp. 2d 569, 586 (S.D.N.Y. 1997) (quoting 17 C.F.R. § 240.12b-2). To defeat a motion to dismiss, a plaintiff must "plead facts which support a reasonable inference that the control person had the potential power to influence and direct the activities of the primary violator." Converse, 1997 WL 742534, * 3. Conclusory allegations of control are insufficient to allege controlled-person liability. See In re Deutsche Telekom, 2002 WL 244597, *7. There is some confusion within this Circuit regarding the content of the culpable participation requirement. Cf. In re Deutsche Telekom A.G. Securities Litigation, 00 Civ. 9475, 2002 WL 244597, *6 (S.D.N.Y. Feb. 20, 2002) (culpable participation must be pled in accordance with the heightened pleading requirements of the PSLRA); In re Vivendi, 318 F, Supp. 2d at 190 (culpability not subject to heightened pleading requirement); In re Worldcom, Inc. Securities Litigation, 02 Civ. 3288, 2005 WL 638268, *13 (S.D.N.Y. March 21, 2005) (plaintiff need not plead a culpable state of mind to allege culpable participation).

  Plaintiffs allege that Johnson, as chairman of the board of directors of TMI, as well as co-trustee of the Loehr Trust, had the power to influence and control Loftis. (Compl. ¶ 94). I agree. Not only was Johnson chairman of the board, but he also (along with Whittier) controlled 90% of TMI's shares. If Loftis answered to anyone, it was Johnson. Thus, plaintiffs have adequately alleged that Johnson "possessed the power to direct" Loftis' actions. In re Blech Securities Litigation, 961 F. Supp. 2d at 586 (internal quotation omitted). Plaintiffs' have also sufficiently plead a primary violation by Loftis. See § II A(1) infra. Finally, since plaintiffs have adequately alleged that Johnson himself violated section 10(b) of the Exchange Act, these allegations suffice to establish that Johnson was a "culpable participant" in Loftis' fraud. See § II A (3) infra.

  Plaintiffs' allegations with respect to Linda Loehr, however, are deficient. Plaintiffs have failed to allege specific facts, apart from Linda Loehr's status as an outside director, that establish her control over Loftis. "[D]irector status alone does not constitute control for the purposes of [section 20] liability." In re Livent, Inc. Noteholders Securities Litigation, 151 F. Supp. 2d 317, 436 (S.D.N.Y. 2001). Apart from conclusory allegations regarding Linda Loehr's authority, plaintiffs do not allege that Linda Loehr was involved in the administration of the Lockheed contract or in the negotiations with Greentree. Linda Loehr's attendance at board meetings involving the general affairs of the company does not suffice to establish that she exercised any control over Loftis with regard to the activities giving rise to the alleged fraud. Therefore, plaintiffs have failed to allege that Linda Loehr is liable for a violation of section 20(a) of the Exchange Act.

  C. State Law Claims*fn12

  1. Fraud in the Inducement

  The requirements for pleading common law fraud, including fraud in the inducement, are essentially identical to the standards for pleading violations of section 10(b) and Rule 10b-5. See Nanopierce Technologies, Inc. v. Southridge Capital Management, L.L.C., 02 Civ. 0767, 2003 WL 21507294, *6 (S.D.N.Y. June 30, 2003). Under New York law, to plead fraud, a plaintiff must allege: "1) a material false representation or omission of an exsting fact, 2) made with knowledge of its falsity, 3) with an intent to defraud, and 4) reasonable reliance, 5) that damages plaintiff." Schlaifer Nance & Co., Inc. v. Estate of Andy Warhol, 927 F. Supp. 650, 660 (S.D.N.Y. 1996).

  As set forth above, see §§ IIA(1), IIA(3), plaintiff has adequately alleged that defendants Johnson and Loftis made intentional misrepresentations within the Merger Agreement itself. Plaintiff has raised a strong inference that, in making these representations, Johnson and Loftis had an intent to defraud. 2. Fraudulent Concealment

  "To establish fraudulent concealment, a plaintiff must [allege] that the defendant had a duty to disclose the material information that was purportedly omitted." Id.*fn13 Johnson and Loftis argue that neither had a duty to disclose material information giving rise to a claim for fraudulent concealment. Plaintiffs' allege that Loftis was their primary contact throughout the negotiations leading up to the acquisition. (Compl. ¶ 27). Thus, plaintiffs have adequately alleged that there existed a "relationship of trust and confidence" with Loftis giving rise to a duty to disclose. Vento, 1999 WL 147732, * 9. However, plaintiffs do not allege that they engaged in prolonged communications with Johnson. In fact, plaintiffs do not allege that they dealt individually with Johnson at all. Johnson's position as chairman of the board, by itself, does not give rise to a duty to disclose in the context of an arms length negotiation between sophisticated parties. Therefore, plaintiffs have failed to adequately allege a claim for fraudulent concealment with respect to Johnson.*fn14

  3. Conspiracy

  Johnson and Loftis also argue that plaintiffs have failed to adequately allege conspiracy to commit fraud. To allege conspiracy to commit fraud, plaintiff must allege an unlawful agreement to commit fraud, defendant's intentional participation in furtherance of the plan or purpose, and resulting damages. Kashi v. Gratsos, 790 F.2d 1050, 1055 (2d Cir. 1986). However, a plaintiff may not "reallege a tort asserted elsewhere in the complaint in the guise of a separate conspiracy claim." Aetna Casualty & Surety Co. v. Anieto Concrete Co., Inc., 404 F.3d 566, 591 (2d Cir. 2005). Here, plaintiffs conspiracy claim is factually duplicative of the other allegations in the complaint. (Compl. ¶ 113). Therefore, this claim is dismissed as to all defendants.

  4. Aiding & Abetting

  Plaintiffs allege that Johnson and Linda Loehr aided and abetted Loftis' fraud. To establish a claim for aiding and abetting fraud, plaintiff must allege "(1) the existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in achievement of the fraud." UniCredito Italiano S.P.A. v. JPMorgan Chase Bank, 288 F. Supp. 2d 485, 502 (S.D.N.Y. 2003) (internal quotation omitted). To state a claim for aiding and abetting fraud, a plaintiff must allege particular facts showing that defendant had actual knowledge of the alleged fraud. "Constructive knowledge of the primary fraud — the possession of information which would cause a person exercising reasonable care and diligence to become aware of the fraud — is not sufficient to support an aiding and abetting claim." Filler v. Hanvit Bank, 339 F. Supp. 2d 553, 557 (S.D.N.Y. 2004). Plaintiffs have not sufficiently alleged actual knowledge by Johnson or Loehr. Plaintiffs allege that Johnson was willfully ignorant to Loftis' fraud, but allege no particular facts that tend to show Johnson actually knew of the fraudulent billing practices. Therefore, this claim is dismissed as to Johnson and Loehr.

  5. Negligent Misrepresentation

  Defendants argue, inter alia, that the integration and exclusivity provisions of the Merger Agreement preclude plaintiff from bringing a claim for negligent misrepresentation. As set forth above, the integration clause prohibits plaintiffs from relying on representations not contained in the Merger Agreement. The exclusivity clause provides that indemnification shall be the sole remedy for any misrepresentation arising out of the Merger Agreement (except for claims of fraud). (Compl., Ex. A § 11.05). Therefore, the exclusivity clause bars plaintiffs from asserting a claim for negligent misrepresentation. 6. Unjust Enrichment/Rescission

  To state a claim for unjust enrichment, plaintiff must allege that "defendant was enriched [] at plaintiff's expense, and [] equity and good conscience militate against permitting defendant to retain what plaintiff is seeking to recover." Briarpatch Ltd., L.P. v. Phoenix Pictures, Inc., 373 F.3d 296, 306 (2d Cir. 2005). Defendants contend that plaintiffs' claim for unjust enrichment fails where, as here, a valid contract exists. Defendants further argue that this equitable remedy is barred because plaintiffs have adequate remedies at law. However, "the quasi-contract remedy of unjust enrichment may be alleged. . . . [b]ecause the Merger Agreement could be voided if, for instance, plaintiffs are able to prove that they were induced to enter into the agreement by defendants' fraud." In re Vivendi, 2004 WL 876050, * 12.*fn15

  Plaintiffs also seek rescission based on mutual mistake. "To plead a claim for mutual mistake, the factual allegations must establish that both contracting parties shared the same erroneous belief as to a material fact, and their acts do not in fact accomplish their mutual intent." FSP, Inc. v. Societe Generale, 02 Civ. 4786, 2005 WL 475986, *15 (S.D.N.Y. Feb. 28, 2005). Where, as here, the agreement contains an exclusivity provision that contemplates inaccuracies in the parties' representations, plaintiffs cannot state a claim based on mutual mistake. Id. at 14-15.

  7. Indemnity

  Plaintiffs allege a claim for indemnity pursuant to section 11.02 of the Merger Agreement against defendants Johnson, Whittier and Loftis as signatories of the Merger Agreement. (Compl. ¶¶ 137-143). Johnson and Loftis do not dispute this claim. However, since this Court has determined that plaintiffs have failed to state a federal claim against Whittier, I will dismiss the indemnification claim as to Whittier without prejudice.

  8. Jury Demand

  Johnson argues that plaintiffs have expressly waived their right to a jury by provision in the Merger Agreement. (See Compl., Ex. A § 13.07). Plaintiffs argue that this provision is unenforceable since plaintiffs allege fraud and are seeking to void the contract. However, plaintiffs do not allege that "the waiver provision itself was procured by fraud." Merrill Lynch & Co. v. Allegheny Energy, Inc., 328 F. Supp. 2d 411, 424 (S.D.N.Y. 2003) (Baer, J.). This was a negotiated agreement between two sophisticated parties and therefore the jury waiver provision should be enforced. Id.


  For the reasons set forth above, defendants Linda Loehr's and Whittier's motions to dismiss are hereby GRANTED. Defendant Johnson's motion to dismiss is hereby GRANTED with respect to plaintiffs' claims for fraudulent concealment, conspiracy, aiding and abetting, negligent misrepresentation and rescission, and DENIED in all other respects. Defendant Loftis' motion to dismiss is hereby GRANTED with respect to plaintiffs' claims for conspiracy, negligent misrepresentation, and rescission, and DENIED in all other respects. Plaintiff, should it choose to do so, has 20 days to submit an amended pleading in an effort to cure the defects with respect to those aspects of the motion to dismiss that the Court has granted. The Clerk of the Court is directed to close this motion.



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