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Ccm Rochester, Inc. v. Federated Investors, Inc.

United States District Court, S.D. New York

November 25, 2014



VALERIE CAPRONI, District Judge.

CCM Rochester, Inc., a registered investment advisor formerly known as Clover Capital Management, Inc. ("CCM" or "Clover"), filed suit on May 20, 2014, seeking damages arising out of a 2008 Asset Purchase Agreement (the "APA") pursuant to which Federated Investors, Inc. ("Federated") acquired all of the assets of CCM. Compl. ¶ 2. Federated moves to dismiss the Complaint under Fed.R.Civ.P. 12(b)(6) for failing to plead fraud with particularity and failing to state claims for breach of implied duties to use best efforts and of good faith and fair dealing. For the reasons discussed briefly below, the motion is GRANTED in part and DENIED in part.


In evaluating a motion to dismiss, the Court must accept the well-pleaded allegations of the Complaint as true and draw all inferences in the non-moving party's favor. LaFaro v. Cardiothoracic Grp., 570 F.3d 471, 475 (2d Cir. 2009). Nonetheless, in order to survive a motion to dismiss, "a complaint must contain sufficient factual matter... to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). "Plausibility" is not certainty. Iqbal does not require the complaint to allege "facts which can have no conceivable other explanation, no matter how improbable that explanation may be." Cohen v. SAC Trading Corp., 711 F.3d 353, 360 (2d Cir. 2013). But "[f]actual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555.

There is, of course, a heightened pleading standard for fraud. "In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed.R.Civ.P. 9(b). To plead the circumstances constituting fraud with particularity, the complaint must "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d Cir. 2006) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). To plead malice, intent, or knowledge "generally" means that "the general short and plain statement of the claim' mandate in Rule 8(a)... should control the second sentence of Rule 9(b).'" Iqbal, 556 U.S. at 687 (quoting 5A C. Wright & A. Miller, Federal Practice and Procedure § 1301, p. 291 (3d ed. 2004)). But "generally' is not the equivalent of conclusorily.... [P]laintiffs must still plead the events which they claim give rise to an inference of [malice, intent, or] knowledge" to satisfy the Rule 8(a) pleading standard. Krys v. Pigott, 749 F.3d 117, 129 (2d Cir. 2014) (citations omitted).

Federated argues that the Complaint fails to plead the circumstances of the alleged fraud with particularity and also argues that the Complaint fails adequately to plead fraudulent intent. Def. Mem. at 12-15. Additionally, Federated asserts that the facts alleged are insufficient to support a fraud claim sounding in tort because the fraud claim is duplicative of the breach of contract claims. Def. Mem. at 16. As to the breach of contract claims, Federated asserts: that the limitations of liability clause contained in the APA precludes liability; that the claims impermissibly seek to vary the terms of the contract in violation of the APA's integration clause; and that the Complaint fails plausibly to allege that Federated acted in bad faith. Def. Mem. at 17-25.


In early 2008, "Clover sought a strategic partner with strong marketing capabilities" to invest in its products to "realize the full potential of [Clover's] investment management franchise." Compl. ¶ 2. Clover issued a "request for proposal" ("RFP") to potential strategic partners. Compl. ¶¶ 21-22. The RFP specified that Clover was "seeking a partner with an extensive distribution network and marketing capabilities that could be used to expand Clover's client base and increase Clover's assets under management." Compl. ¶ 22.

On May 13, 2008, after Federated executives had visited Clover's offices to discuss the RFP, Federated made a detailed written proposal (the "Proposal") to acquire all of Clover's assets. Compl. ¶¶ 3, 23-34; see Tambe Decl. Ex. 2.[1] The Proposal responded to specific questions, including the strategic rationale for Federated's interest in acquiring Clover, potential synergies that would be realized from combining the two companies, and strategies for leveraging those synergies. Tambe Decl. Ex. 2 at 2-4. Of particular relevance here, Federated stated: that "CCM will significantly and immediately expand [Federated's] manufacturing capabilities in the value sector - becoming our investment management "Center of Excellence" for value products, " id. at 2 (emphasis in original); [that "Federated distributing CCM products represents a tremendous strategic growth opportunity for both firms, " id. at 3;] that Federated would "[e]stablish a growth platform for the combined business" and "[s]ell CCM products through [Federated's] distribution platform, " id. ; and that CCM would be integrated into Federated "as one of the Federated team - all operating for the same company, towards the same mutually established goals, ... [and] receiving equal attention for resources and support, " id. at 4.

On June 9, 2008, Clover executives met with Federated executives at Federated's offices in Pittsburgh, where Federated executives reiterated that Federated "intended to use its extensive sales and distribution capabilities to significantly and rapidly expand the assets under Clover's management" and "intended to brand and promote the Clover Investment Products as Federated's Center of Excellence' for value-oriented investment products." Compl. ¶¶ 35-36.

CCM accepted Federated's acquisition offer and the parties - both highly sophisticated - executed the APA on September 12, 2008. Compl. ¶ 4; see Tambe Decl. Ex. 3.[2] The purchase was structured so that there was an upfront cash payment to CCM at closing of $30 million and contingent payments (the "Earnout Payments") over five years following the closing (the "Earnout Period"). Compl. ¶¶ 40-41. The contingent payments, which were tied to the growth in revenues of the acquired business, ultimately amounted to approximately $18 million. Compl. ¶ 115. Federated suggests that, given the economic environment during the five-year period following the execution of the APA, [3] CCM's growth and the contingent payments made to CCM were substantial[4] and argues that any claim that Clover was defrauded or treated unfairly is implausible. Def. Mem. at 2.

Clover, on the other hand, asserts that Federated fraudulently induced it to accept the acquisition offer and to accept much of the consideration in the form of future payments contingent upon CCM's post-acquisition growth. Compl. ¶ 5. CCM asserts that Federated misrepresented its intent to use its marketing and distribution platform to grow the assets under CCM's management. Compl. ¶¶ 26-39, 118-121. According to Clover, Federated actually intended "to undertake only minimal, pro forma efforts to market and distribute the Clover [funds] and, even then, to do so as late in the Earnout Period as possible in order to minimize its Earnout Payments to Clover." Compl. ¶37. Moreover, CCM alleges that in the third year of the Earnout Period, "Federated launched an intensive marketing and distribution campaign on behalf of its own... value-oriented fund, which... was competing in the same space for assets" with Clover. Compl. ¶¶ 76-78. CCM claims that, consistent with Federated's bottom-line incentives, this marketing campaign "affirmatively steered clients seeking large cap value products away from Clover's Large Cap Fund" and increased the assets under the competing fund's management by more than $15 billion dollars during the last three years of the Earnout Period. Compl. ¶¶ 79, 86. CCM asserts that Federated's acts and omissions breached an implied obligation to use best efforts to market CCM's funds because Federated had exclusive control over marketing and sales of CCM's investment products, Compl. ¶¶ 47-48, 125-126, and breached an implied duty of good faith and fair dealing because Federated made affirmative efforts to minimize CCM's Earnout Payments, Compl. ¶¶ 88-89, 131-135. Finally, CCM asserts a claim for indemnity under Section 10.2 of the APA. Compl. ¶¶ 137-139.


The Complaint adequately alleges a claim for fraudulent inducement. To state a claim for common law fraud under New York law, a plaintiff must allege facts showing: "(1) a misrepresentation or a material omission of fact which was false and known to be false by defendant, (2) made for the purpose of inducing the other party to rely upon it, (3) justifiable reliance of the other party on the misrepresentation or material omission, and (4) injury." Premium Mortg. Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d Cir. 2009) (quoting Lama Holding Co. v. Smith Barney Inc., 88 ...

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