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Cih International Holdings, LLC v. Bt United States

September 28, 2011

CIH INTERNATIONAL HOLDINGS, LLC, PLAINTIFF,
v.
BT UNITED STATES, LLC, DEFENDANT.



The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge:

USDC SDNY

OPINION & ORDER

Plaintiff CIH International Holdings, LLC ("CIH") brings this action against Defendant BT United States, LLC ("BT") for breach of contract and breach of the implied duty of good faith and fair dealing. CIH seeks compensatory damages and a declaration that (1) BT has materially breached two contracts; (2) due to BT's breach, CIH has no obligation to indemnify it for certain tax claims; (3) BT's breach renders its notice of these claims a nullity; and (4) any and all claims against remaining escrowed funds have expired. CIH also asks the Court to direct the parties' escrow agent to disburse the remaining escrowed funds to CIH.

BT moves to dismiss the Complaint under Fed. R. Civ. P. 12(b)(6). It argues that CIH has failed to state a claim for breach of contract because it has not pleaded that the alleged breaches caused any legally cognizable prejudice. Since the claim for breach of the implied duty is based on the same facts, BT argues, it too should be dismissed.

The motion to dismiss is GRANTED as to all four Counts in the Complaint.

I.BACKGROUND

In April 2007, BT agreed to acquire a Brazilian telecommunications company called CI Holding Corporation ("CIHC") in exchange for a cash payment to CIHC's then-existing shareholders, warrant/option holders, and holders of claims to options ("Equityholders").

(Defendant's Memorandum of Law ("Def. Mem.") at 4.) CIH is the duly appointed representative of the Equityholders. The parties outlined their rights and duties related to the acquisition in an agreement executed on April 19, 2007, and amended on June 14, 2007 ("Merger Agreement"). (Compl. ¶ 10.) The Merger Agreement provides, inter alia, that CIH will indemnify BT for certain tax losses, and that BT will give CIH prompt notice of any tax claims asserted against BT by the Brazilian government; keep CIH regularly informed of the status of any tax audit or proceeding; notify CIH of the amount of any claim; adequately detail the portion of any claim subject to indemnification; and provide CIH with tax returns for its approval. (Id. ¶¶ 13, 15.) In addition to these covenants, the Merger Agreement also provides that "CIH shall be entitled to control the conduct" and settlement of any proceeding solely involving tax claims subject to indemnification. (Id.) CIH also has the right to enter proceedings and consent to the settlement of any dispute involving a mix of claims-those for which CIH must indemnify BT and those not covered by the Merger Agreement. (Id.)

On June 14, 2007, the transaction closed. (Id. ¶ 10.) On that day, BT, CIH, and Deutsche Bank National Trust Company ("Deutsche Bank") entered into an agreement for the escrow of funds withheld from the Equityholders' cash payments for BT's acquisition of CIHC (the "Escrow Agreement"; together with the Merger Agreement, the "Agreements"). (Id. ¶ 11.) Under the Escrow Agreement, CIH agreed to place $25,759,923.02 in an account with Deutsche Bank, from which the bank would disperse indemnification funds. (Id.) Certain members of CIH also pledged an additional $14,240,076.98 to further secure CIH's potential indemnification obligations to BT. (Id. ¶ 12.)

The Agreements provide that on June 14, 2010 (three years after the transaction closed), any remaining balance in the escrow account shall be released to CIH, less any funds retained to cover pending claims. (Id. ¶ 17.) Claims filed after June 14, 2010 are null and unenforceable, even if they would have been eligible for indemnification. (Id. ¶ 17.)

On June 10, 2010, BT delivered to CIH and Deutsche Bank a notice of certain tax claims pending before the Federal District Treasury Department in Sao Paulo, Brazil ("BT Tax Claims"). (Def. Mem. at 6.) CIH argues that BT's notice of these tax claims was defective because it was not accompanied by the necessary information and documentation. (Compl. ¶¶ 27-28.) CIH claims this defect constitutes a breach. (Id.)

CIH also alleges that BT breached other material terms of the Merger Agreement before giving notice on June 10, and that these breaches discharged CIH from its duties under the Merger Agreement and entitled CIH to a full payout of the remaining escrowed funds. (Id. ¶¶ 19-24.) Specifically, CIH claims that the Brazilian government notified BT of the BT Tax Claims "more than 18 months" before BT sent the June 10 notice to CIH. (Id. ¶ 19.) CIH alleges that it was not informed of the existence of certain claims until after BT had fully litigated them at the administrative level-when Brazilian law requires the submission of all facts, evidence, and legal arguments. (Id.; Declaration of Tercio Chiavassa*fn1 ("Ciavassa Decl.") ¶¶ 20-21, 25-27.) According to CIH, this late notice, along with seven other breaches of the Merger Agreement,*fn2 (see Compl. ¶ 19(a)-(g)), have materially prejudiced CIH by "prevent[ing it] from taking timely action to correct, defend, participate in the defense of, compromise, control, or arrange for a favorable settlement . . . of any of the [BT Tax Claims]." (Id. ¶ 22.)

Finally, CIH claims that BT filed the June 10 notice with "intent to injure and deprive [the Equityholders and CIH] of the remaining funds in the escrow account to which they are duly entitled." (Id. ¶ 31.) CIH alleges that, as of the date of the notice, BT knew that (1) the BT Tax Claims were specifically excluded from the Merger Agreement's indemnification clause; and (2) it had failed to comply with its obligations under this Agreement. (Id. ¶ 30.) BT has not withdrawn its notice of claim, essentially encumbering the remainder of the escrowed funds. (Id. ¶ 44.)

On October 12, 2010, CIH commenced this lawsuit, asserting that BT's breaches of the Agreements, as well as the implied covenant of good faith and fair dealing, render BT's notice of claims a nullity, and bar any further attempt to seek indemnification. On January 7, 2011, BT moved to dismiss on the grounds that CIH's claims are not justiciable, or adequately pleaded, because CIH has not suffered any prejudice.

II.DISCUSSION

A.Legal Standard for a Motion ...


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