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Vysyaraju v. Management Health Solutions, Inc.

United States District Court, Second Circuit

August 10, 2013

KAMESWARA R. VYSYARAJU ET AL., Plaintiffs,
v.
MANAGEMENT HEALTH SOLUTIONS, INC., Defendant.

MEMORANDUM OPINION AND ORDER

JOHN G. KOELTL, District Judge.

This case arises from a stock purchase agreement (the "Agreement") between the plaintiffs and the defendant. The Agreement governed the sale of the plaintiffs' stock in companies collectively referred to as AtPar to the defendant. Pursuant to the Agreement, the defendant agreed to pay the plaintiffs a sum calculated according to Generally Accepted Accounting Principles ("GAAP") if the AtPar stock revenues hit or exceeded a specific threshold amount.

The plaintiffs allege that the defendant breached the Agreement by failing to apply GAAP to calculate AtPar revenues as specified in the Agreement. The plaintiffs seek a declaratory judgment to resolve the alleged ambiguity in the Agreement regarding the meaning of GAAP. The plaintiffs have also brought claims for breach of contract, unjust enrichment, estoppel, and breach of the implied covenant of good faith and fair dealing. The plaintiffs request appointment of an independent accounting firm, an accounting, and that this Court retain jurisdiction to enter final judgment from any award of an independent accounting firm.

The defendant has moved to dismiss this action on the grounds that there is no ambiguity in the contract regarding the meaning of GAAP. The defendant also argues that it has complied with the Agreement and that the plaintiffs are not entitled to any of the relief requested.

This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1332 based on the complete diversity of citizenship of the parties.

For the reasons explained below, the motion to dismiss is granted, and the Amended Complaint is dismissed.

I.

In deciding a motion to dismiss pursuant to Rule 12(b)(6), the Court accepts the allegations in the Complaint as true, and draws all reasonable inferences in the plaintiffs' favor. McCarthy v. Dun & Bradstreet Corp. , 482 F.3d 184, 191 (2d Cir. 2007); Arista Records LLC v. Lime Group LLC , 532 F.Supp.2d 556, 566 (S.D.N.Y. 2007). The Court's function on a motion to dismiss is "not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden , 754 F.2d 1059, 1067 (2d Cir. 1985). The Court should not dismiss a complaint if the plaintiffs have stated "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570 (2007).

"A claim has facial plausibility when the plaintiff[s] plead[] factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009). While the Court should construe the factual allegations in the light most favorable to the plaintiffs, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Id . Where the interpretation of a contract is at issue, in considering the contract's terms to determine whether the plaintiffs can prove any set of facts which would entitle them to relief, the Court is "not constrained to accept the allegations of the complaint in respect of the construction of the Agreement, " although all contractual ambiguities must be resolved in the plaintiffs' favor. Int'l Audiotext Network, Inc. v. Am. Tel. & Tel. Co. , 62 F.3d 69, 72 (2d Cir. 1995); see also Compania Financiera Ecuatoriana de Desarollo, S.A. v. Chase Manhattan Bank, No. 97 Civ. 5724, 1998 WL 74299, at *1 (S.D.N.Y. Feb. 19, 1998), aff'd, 165 F.3d 13, 13 (2d Cir. 1998) (unpublished table opinion).

When presented with a motion to dismiss pursuant to Rule 12(b)(6), the Court may consider documents that are referenced in the Complaint, documents that the plaintiffs relied on in bringing suit and that are either in the plaintiffs' possession or that the plaintiffs knew of when bringing suit, or matters of which judicial notice may be taken. See Chambers v. Time Warner, Inc. , 282 F.3d 147, 153 (2d Cir. 2002); City of Roseville Emps.' Ret. Sys. v. EnergySolutions, Inc. , 814 F.Supp.2d 395, 402 (S.D.N.Y. 2011); see also See In re ProShares Trust Sec. Litig. , 889 F.Supp.2d 644, 648 (S.D.N.Y. 2012) aff'd, No. 12-3981, 2013 WL 3779364 (2d Cir. July 22, 2013).

II.

The Court accepts the plaintiffs' allegations in the Amended Complaint as true for purposes of this motion to dismiss. The defendant, Management Health Solutions, is a New York corporation with its principal place of business in Connecticut. (Am. Compl. ¶ 22.) The plaintiffs are individuals who owned and operated a New Hampshire corporation known as AtPar, Inc., which merged into a Delaware corporation also called AtPar, Inc. (Am. Compl. ¶¶ 12-21, 26.) The corporation that resulted from the merger is collectively referred to as "AtPar." AtPar offers certain software products and generates revenue from the sale of licenses and maintenance and support services for those software product offerings. (Am. Compl. ¶ 3.)

On March 31, 2010, the plaintiffs and the defendant entered into the Agreement, pursuant to which the plaintiffs sold all of the stock in AtPar to the defendant. (Am. Compl. ¶¶ 26-27; see Am. Compl., Ex. A ("SPA").) Among other things, the defendant agreed to provide the plaintiffs with an "Earn-Out Payment" if AtPar achieved revenues of at least $2, 900, 000.00 (the "threshold") in the period from January 1, 2010 through March 31, 2011 (the "Earn-Out Period"). (Am. Compl. ¶¶ 3-4; SPA §§ 1.2(c); 1.2(c)(i).) The Agreement refers to the revenue from any AtPar sales used to determine if the threshold was met as "Qualifying Revenue." (SPA § 1.2(c).) The Agreement defines "Qualifying Revenue" as follows:

The Earn-Out Payment will be based on the Company's revenues from the sale, during the period January 1, 2010 through and including March 31, 2011 (the "Earn-Out Period"), of AtPar software licenses, software maintenance, and software support for current and future AtPar software product offerings, software maintenance, and software support for current and future AtPar software product offerings as of the Closing Date, but excluding revenue related to all sales of services and hardware, the amount of such revenue to be determined according to GAAP ("Qualifying Revenue").

(SPA § 1.2(c).)

The Agreement provides that the defendant and AtPar's independent auditors would produce an "Earn-Out Report" providing the defendant's "written determination, including reasonable detail supporting the determination, of the Qualifying Revenue and the calculation of the Earn-Out Payment (if any)." (SPA § 1.2(c)(iii); see Am. Compl. ¶ 39.) As noted above, the Agreement provides that Qualifying Revenue was to "be determined according to GAAP." (SPA § 1.2(c).)

Within sixty days of the defendant's provision of the Earn-Out Summary Report to the plaintiffs, the Agreement permits the plaintiffs to submit an Earn-Out Objection Notice "specifying in reasonable detail the Seller Representative's disagreement with [the defendant's] determination of the Qualifying Revenue." (SPA § 1.2(c)(iii).) The Agreement refers to any dispute regarding the calculation of Qualifying Revenue as a "Calculation Dispute."[1] (SPA § 1.2(c)(iii).) If a Calculation Dispute arises that the parties cannot resolve between themselves the Agreement provides as follows:

[The plaintiffs' representative] may request that the American Arbitration Association appoint an independent third party accounting firm of recognized national or regional standing (the "Independent Accounting Firm"), to review this Agreement and the disputed items or amounts for the purpose of calculating the Qualifying Revenue and the Earn-Out Payment (if any) (it being understood that in making such calculation, the Independent Accounting Firm will be functioning as an expert and not as an arbitrator.... The Independent Accounting Firm's determination of any disputed items or amounts and its calculation of the Earn-Out Payment... shall be binding and conclusive on the parties.

(SPA § 1.2(c)(iii).)

The Agreement also mentions GAAP in the sections that provide for disclosure of AtPar's and the defendant's financial records. (See SPA §§ 3.7, 5.6.) Section 3 of the Agreement provides the representations and warranties of the selling stockholders. (SPA at 9.) Pursuant to section 3.7, the stockholders represented and warranted that they delivered to the defendant true and complete copies of AtPar's financial statements, which the stockholders represented and warranted "conform to and are consistent with the books and records of [AtPar], and have been prepared in accordance with generally accepted United States accounting principles as consistently applied ("GAAP"), consistent with past practice." (SPA § 3.7.) The defendant did not object to the GAAP application or the determination of revenue by the plaintiffs. (Am. Compl. ¶ 43.) Section 5 of the Agreement provides the representations and warranties of the defendant. (SPA at 29.) Pursuant to section 5.6, the defendant represented and warranted that its internal financial ...


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