May 29, 2013
DSM2X, INC., Plaintiff,
GFK CUSTOM RESEARCH, LLC, Knowledge Networks, Inc., KN Dimestore Media, LLC, and Simon Kooyman, Defendants. No. 650008/2012.
This decision has been referenced in a table in the New York Supplement.
SHIRLEY WERNER KORNREICH, J.
Plaintiff DSM2x, Inc. (DSM2x) moves to dismiss the two counterclaims in the Answer to the Second Amended Complaint (respectively, the Answer and the SAC) pursuant to CPLR 3211. Plaintiff's motion is denied for the reasons that follow.
Factual Background & Procedural History
The court assumes familiarity with its order dated February 22, 2013 (the February Order), which contained a summary of the allegations in the SAC.  In the Answer, filed on November 12, 2012, defendants assert two counterclaims against DSM2x: (1) breach of contract; and (2) indemnification. The gravamen of these claims is defendants' allegation that DSM2x sought to " game the calculation of the Purchase Price" by inducing certain friends to enter into five contracts (the Cohen Contracts) with KN to " artificially increase the Purchase Price." See Answer, p. 18. As discussed in the February Order, the Purchase Price was to be determined by the formula in the APA's Valuation Matrix, which based the Purchase Price on the company's revenue and profits during the six months prior to defendants' exercising their purchase option— this calculation supposedly being representative of the company's value. Defendants' contention is that the Cohen Contracts, which were worth $300,000 and were pre-paid in full in September 2011 (about a month before defendants exercised their purchase option), were entered into at the behest of DSM2x. DSM2x allegedly requested pre-payment since the costs of these contracts were less than the value DSM2x would receive back from defendants once the Valuation Matrix's multiplier was taken into account. Ergo, defendants contend, DSM2x effectively used third parties to nominally pay money to defendants that defendants would have to repay multiple times over. The instant motion seeks dismissal of these claims.
On a motion to dismiss, the court must accept as true the facts alleged in the pleadings as well as all reasonable inferences that may be gleaned from those facts. Amaro v. Gani Realty Corp., 60 A.D.3d 491 (1st Dept 2009); Skillgames, L.L.C. v. Brody, 1 A.D.3d 247, 250 (1st Dept 2003), citing McGill v. Parker, 179 A.D.2d 98, 105 (1992); see also Cron v. Harago Fabrics, 91 N.Y.2d 362, 366 (1998). The court is not permitted to assess the merits of the pleadings or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged, the pleadings state the elements of a legally cognizable cause of action. Skillgames, id., citing Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275 (1977). Deficiencies in the pleadings may be remedied by affidavits. Amaro, 60 N.Y.3d at 491. " However, factual allegations that do not state a viable cause of action, that consist of bare legal conclusions, or that are inherently incredible or clearly contradicted by documentary evidence are not entitled to such consideration." Skillgames, 1 A.D.3d at 250, citing Caniglia v. Chicago Tribune-New York News Syndicate, 204 A.D.2d 233 (1st Dept 1994). Further, where a party seeks to dismiss a pleading based upon documentary evidence, the motion will succeed if " the documentary evidence utterly refutes [a party's] factual allegations, conclusively establishing a defense as a matter of law." Goshen v. Mutual Life Ins. Co. of NY, 98 N.Y.2d 314, 326 (2002); Leon v. Martinez, 84 N.Y.2d 83, 88 (1994).
The allegations related to the Cohen Contracts do not constitute a breach of the express terms of the APA. The provision at issue, Section 5.4, requires the parties to " use commercially reasonable efforts to consummate and make effective the transactions contemplated by this Agreement." It is undisputed that the contemplated merger was consummated and that the company made money on the Cohen Contracts. Nonetheless, DSM2x's alleged conduct frustrated the purpose of the Valuation Matrix. Though not explicitly pled, these allegations state a claim for breach of the covenant of good faith and fair dealing.
The covenant of good faith and fair dealing in the course of performance is implied in every contract. 511 West 232nd Owners Corp. v. Jennifer Realty, 98 N.Y.2d 144, 153 (2002). It is a pledge that neither party will do anything which destroys or injures the right of the other party to receive the benefits of the contract. Id. The duty of good faith and fair dealing does not imply obligations inconsistent with the contractual obligations, but it encompasses any promises that a reasonable person in the position of the promisee would be justified in understanding were included. Id . at 153-54.
A reasonable person would understand the Valuation Matrix to include true business that reflects the future value of the company, not one-time deals made to create the illusion of prosperity. If defendants' allegations are true, the Cohen Contracts were nothing more than a sham to make the business appear more valuable than it was. DSM2x's argument that defendants made a substantial sum of money on the Cohen Contracts is inapposite. Indeed, defendants were purportedly net losers on the Cohen Contracts because more money would have been remitted back to DSM2x than defendants received when the Valuation Matrix's multiplier is taken into account. That being said, the viability of this claim turns on the question of fact as to whether the Cohen Contracts were part of a kick-back scheme or whether they were merely the product of good faith referrals. If the is former is true, the proper calculation of damages would be a set off in the amount that the Cohen Contracts added to the Purchase Price pursuant to the Valuation Matrix.
Next, the court rejects DSM2x's arguments regarding GfK's standing and failure to plead damages. The pleadings allege that the January 2012 merger with GfK's co-defendants make it the proper party to assert rights under the APA. As for the latter argument, the question of fact as to how much money defendants lost precludes dismissal of the counterclaims.
Finally, the court denies DSM2x's motion to dismiss defendants' counterclaim for indemnification, which is governed by Section 9.2 of the APA. Section 9.2(a) states that DSM2x will indemnify defendants for losses " resulting from any nonfulfillment of any covenant or agreement by Seller." As the covenant of good faith and fair dealing is implied in and, therefore, part of every contract, DSM2x's breach of said covenant gives rise to a claim for indemnification under the APA. DSM2x's argument that it was not given proper written notice of defendants' indemnification claim under Section 9.5 is unavailing since the Answer contains all of the required information about the claim. Moreover, pre-suit written notice is beside the point given that defendants seek indemnification as a counterclaim in a lawsuit already commenced by DSM2x. Accordingly, it is
ORDERED that the motion by plaintiff DSM2x, Inc. to dismiss the counterclaims in the Answer is denied.