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Wurtsbaugh v. Banc of America Securities LLC

June 20, 2006

WAYNE WURTSBAUGH, PETRUS VAN ZYL, JACK L. DIXON, INDVIDUALLY AND AS TRUSTEE OF THE JACK LEE DIXON FAMILY TRUST, AND GEORGE A PELLETIER, PLAINTIFFS,
v.
BANC OF AMERICA SECURITIES LLC, DEFENDANT



The opinion of the court was delivered by: Denise Cote, District Judge

OPINION AND ORDER

This diversity action arises out of the sale of Direct Access Financial Corporation ("DAFC") to defendant Banc of America Securities LLC ("Banc of America"). The plaintiffs, Wayne Wurtsbaugh ("Wurtsbaugh"), Petrus Van Zyl, Jack Dixon both individually and as a trustee of the Jack L. Dixon Family Trust, and George Pelletier are the founders and former principals of DAFC. In 2004, they sold the assets of DAFC to Banc of America through an Asset Purchase Agreement ("Agreement") and Wurtsbaugh joined Banc of America as an employee pursuant to a separate employment agreement. Plaintiffs claim that they were fraudulently induced into accepting the Agreement and that Banc of America has violated both the spirit and the letter of the contract. Plaintiffs claim breach of contract, unjust enrichment, and fraud under New York law and seek either damages or recission of the contract and damages. Plaintiffs also seek a declaratory judgment that non-compete clauses in the Agreement and in Wurtsbaugh's employment letter are unenforceable. Banc of America has moved to dismiss all of the plaintiffs' claims in their amended complaint, filed on December 13, 2006 ("Complaint"), pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons set forth in this Opinion, the defendant's motion is granted in part.

Background

The following facts are taken from the Complaint, and the Agreement and the Wurtsbaugh employment letter, documents which are integral to the Complaint. The plaintiffs developed InstaQuote, software used to access securities markets for executing trading strategies and receiving market data, and founded DAFC in 2000. By 2003, DAFC provided direct market execution services for over twenty-five securities broker-dealers and interfaced with fifteen different clearing firms.*fn1

In May 2003, Banc of America began discussions with DAFC about a possible acquisition. The discussions bore fruit. On February 21, 2004, plaintiffs, DAFC and Banc of America signed the Agreement, which sold all of DAFC's assets, including InstaQuote, to Banc of America. Under the Agreement, what was formerly DAFC would continue to operate as part of Banc of America, and would be called the DAF Division. Wurtsbaugh and some of DAFC's employees were hired by Banc of America to operate the DAF Division as part of the Agreement.

The Agreement calls for three types of payments by Banc of America. First, Banc of America is to pay up to $50 million to DAFC, structured as three installments of $15 million*fn2 and an additional $5 million target payment if the DAF Division meets certain performance goals in 2004 ("2004 Target Payment"). The payments of up to $50 million are referred to in the Agreement as the "Purchase Price".

Second, Banc of America agreed to three contingent payments to be paid in 2005, 2006 and 2007 ("Contingent Payments"). The value of those payments is determined by the growth of the DAF Division's business.*fn3 That business is defined in the Agreement as "the business of developing, marketing, licensing and distributing" the InstaQuote software and other related software. Growth is measured for two separate groups of customers: (1) prime brokerage customers of Banc of America ("Prime Clients") and (2) other customers who adopt InstaQuote ("Non-Prime Clients").

Third, the Agreement provides for a revenue pool ("Revenue Pool"), based on a formula that is in large part identical to the formula used to calculate the Contingent Payments. The Revenue Pool was to be distributed to, among others, a number of the DAFC employees that were hired by Banc of America under the Agreement. None of the plaintiffs were listed in the Agreement as receiving payment from the Revenue Pool.*fn4

The Agreement also contained the following covenant governing "Reasonable Best Efforts" ("Best Efforts Clause"):

Subject to the terms and conditions of this Agreement, each of the Parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable Laws to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement; provided, however, that nothing in this Agreement shall obligate [Banc of America] or any of its Affiliates to agree (a) to limit or not to exercise any rights of ownership of [DAFC's business], or to divest, dispose of or hold separate all or any portion of the respective businesses, assets or properties or [sic] of [DAFC's businesses] or (b) to limit in any manner whatsoever the ability of such entities (i) to conduct their respective businesses or own such assets or properties or to own and operate [DAFC's business] or (ii) to control their respective businesses or operations of the businesses or operations or [DAFC's business] or its operations. (emphasis supplied).

Finally, the Agreement was a fully integrated document. It included a clause entitled Entire Agreement; Assignment ("Merger Clause") which stated in relevant part:

This Agreement and the applicable Employment Letters constitute the entire agreement among the Parties with respect to the subject matter hereof and supersedes [sic] all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. (emphasis supplied). A separate clause required any amendment to be in writing: "any term of this Agreement may be amended, and the observance of any term of this Agreement may be waived...only by an instrument in writing." (emphasis supplied).

The plaintiffs allege that a critical factor in choosing to sell DAFC to the defendant was certain "representations" made by Banc of America concerning the opportunity for DAFC to grow and increase revenue by linking it to Banc of America's clearing operation. During negotiations leading up to the sale Wurtsbaugh discussed the importance of combining DAFC's software and Banc of America's clearing operation with Ross Stevens ("Stevens"), Chief Operating Officer of Banc of America Securities Global Equities, and Guillermo Cortina ("Cortina"), a Senior Manager of Corporate Planning at Banc of America.

After the Agreement had been signed, but a week before the sale was to close, Banc of America entered into an agreement in principle with the Securities and Exchange Commission ("SEC") to divest itself of its clearing operation. Upon learning of the agreement, plaintiffs contacted Banc of America. Stevens assured plaintiffs that the administrative proceedings with the SEC would not negatively impact the ability of plaintiffs to generate revenue and receive the maximum Contingent Payments. Stevens also told plaintiffs that Banc of America was acquiring FleetBoston ("Fleet") and that Fleet had a better and larger clearing operation than Banc of America's. The Agreement closed on March 22, 2004.

On April 1, 2004, after having acquired the Fleet clearing operation, Banc of America liquidated both the Banc of America and the Fleet clearing operations. According to Stevens, the decision to divest all clearing operations was made by Kenneth Lewis, the Chairman, Chief Executive Officer, and President of Banc of America Corporation.

Plaintiffs allege that, by a variety of means, Banc of America has frustrated the efforts of the DAF Division to generate additional Non-Prime clients and to increase Non-Prime Revenue. The forms of interference alleged include reassigning the DAF Division's sale force to sell other Banc of America products, improperly categorizing DAF Division clients as Prime Clients and seeking to convert Non-Prime Clients to Prime Clients, and ordering the DAF Division to devote time to servicing Banc of America clients. The plaintiffs contend that Banc of America's interference in the management of the DAF Division has undermined the ability of the division to generate revenue from Non-Prime Clients and thus has compromised the ability of the DAF Division to earn Contingent Payments.

Banc of America made its first Contingent Payment in October 2005 ("October 2005 Payment"). The plaintiffs allege that Banc of America deliberately under-calculated the October 2005 Payment by overstating costs and by understating certain average revenue calculations used in determining the payment under the Agreement. The Complaint does ...


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