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CCM Rochester, Inc. v. Federated Investors, Inc.

United States District Court, S.D. New York

February 10, 2017

CCM ROCHESTER, INC., Plaintiff,
v.
FEDERATED INVESTORS, INC., Defendant.

          OPINION & ORDER

          VALERIE CAPRONI, United States District Judge

         Plaintiff CCM Rochester, Inc., a registered investment advisor formerly known as Clover Capital Management, Inc. (“CCM” or “Clover”), sued Defendant Federated Investors, Inc. (“Federated”), for damages arising out of Federated's acquisition of Clover. Plaintiff claims that Federated fraudulently induced Clover into the acquisition contract and that Federated breached the implied covenant of good faith and fair dealing. Federated moves for summary judgment on both claims. Defendant's Motion for Summary Judgment, Dkt. 76. For the reasons discussed below, the Motion is GRANTED in its entirety.

         FACTUAL AND PROCEDURAL BACKGROUND

         Clover issued a request for proposal (“RFP”) “seeking a strategic partner with an extensive distribution network and the marketing capabilities necessary” to grow Clover's investment business. SOF ¶¶ 38, 677.[1] Federated responded to the RFP with a proposal to acquire 100% of Clover's assets. Fed. Ex. 6 (“RFP Response”) at 6. According to Plaintiff, in the negotiations leading to Clover's acquisition (the “Acquisition”), “Federated emphasized its distribution capabilities and represented to Clover, among other things, that Federated intended to apply its resources to significantly and rapidly expand Clover's assets under management.” Jones Decl. ¶ 4. Plaintiff also asserts that Federated represented that it “intended to use its ‘powerful distribution platform' to sell Clover Investment Products and ‘fuel the growth' of Clover's investment management franchise.” Opp. Br. at 13 (citing SOF ¶¶ 335, 575). Federated disputes Plaintiff's characterization of Federated's purported representations and admits only that the RFP Response stated that: Federated “brings a powerful distribution platform on which to sell CCM managed products” and “plan[s] on distributing CCM managed products through all of our existing channels”; one of Federated's “primary goals” was to “[e]stablish a growth platform for the combined business; and [s]ell CCM products through our distribution platform”; and that “Federated can provide resources in a variety of ways-all of which provide leverage and opportunity to CCM by: . . Applying the resources of Federated to fuel the growth of CCM's business.” SOF ¶¶ 676, 678 (citing RFP Response).[2]

         In 2008, the parties executed the Asset Purchase Agreement (“APA”), pursuant to which Federated acquired substantially all of Clover's assets (the “Acquisition”). SOF ¶ 78; Fed. Ex. 12. In exchange, Federated paid Clover $30 million at the time of the closing and agreed to make contingent payments (“Earnout Payments”) over five years (“Earnout Period”), provided that the growth in Clover's revenue was greater than a certain amount. Fed. Ex. 12 at 32; SOF ¶ 104, 539.[3] The APA did not require Federated to use particular levels of marketing or sales support for Clover products, nor did it guarantee that Clover would receive Earnout Payments at all, let alone Earnout Payments equivalent to the maximum available under the APA. SOF ¶¶ 93-94.[4] The Earnout Period started on December 1, 2008, and concluded on December 1, 2013. SOF ¶ 88.

         Following the acquisition, in March 2009, Federated created two mutual funds: Federated Clover Large Value Fund (“Clover Value”) and Federated Clover Small Value Fund (“Clover Small Cap”). Territ Decl. ¶ 4; SOF ¶¶ 721, 724. Federated also offered other mutual funds on its sales platform, such as the Federated Strategic Value Dividend Fund (“Strategic Value”). SOF ¶ 735. Although Clover Value and Strategic Value “compete in the same [investment] space, ” the two funds reflect different fund profiles and investment options: Strategic Value invests in “high dividend yielding stocks of companies with dividend growth potential” whereas Clover Value invests in companies that have capital appreciation potential, without regard to dividend yield. SOF ¶¶ 554-558, 736-38, 742; Clover Ex. 61.

         The undisputed record reflects that during the Earnout Period, Federated created marketing materials and presentations for the Clover funds, SOF ¶¶ 344-366; promoted the Clover funds on its websites and through the media, SOF ¶¶ 367-404; promoted the Clover funds to its internal sales force through presentations at its National, Regional, and Mid-Year Sales Conferences, SOF ¶¶ 267-88, 295-97; and responded to inquiries regarding the Clover funds by current and potential clients, SOF ¶¶ 405-408. Although Plaintiff admits these marketing activities occurred, Plaintiff contends that Federated intentionally and in bad faith delayed distributing Clover Value.[5]

         In support of its assertion that Federated delayed distributing Clover Value, Plaintiff offers several emails from Federated directors and members of Federated's Clover sales team, including a 2012 email from Stephen Carl, Federated Clover's Chief Operations Officer, noting that Clover Value had not been “taken to market . . . yet, ” Clover Ex. 43. Plaintiff also cites a 2013 email from Peter Smith, a portfolio manager for Clover products, seeking comments “to begin positioning the Clover Value fund, ” Clover Ex. 61; and a 2014 email from Mr. Smith stating that “the Clover Value fund is getting teed up to be emphasized by the sales force for the second half of this year . . . all are on board to ramp up our efforts, ” Clover Ex. 64. Federated disputes Plaintiff's evidence and theory of delay.

         Plaintiff asserts that Federated “affirmatively and aggressively steered investors seeking large cap value investment products away from [] Clover Value to Strategic Value.” Opp. Br. at 2. In marshalling its evidence, Plaintiff relies primarily on two incidents as proof of bad faith: a disagreement over the strategy to use in pitching business to a particular University client (the “University Client”) and Federated's refusal to agree to a reduced fee requested by MassMutual, a large institutional client.[6]

         In the fall of 2009, the University Client advised Federated that it was interested in moving its account to “a different large cap value mandate.” Clover Ex. E (“Heaton Tr.”) at 41:1-9. Federated salespersons on the account initially proposed that the University Client consider Clover or MDT fund.[7] SOF ¶¶ 833-36. A Federated director, Ms. Cathie Applegate, informed the Federated salespersons that Strategic Value might be attractive to the University Client, Clover Exs. 7-8, Fed. Ex. N-2 (“Applegate Tr.”) at 154:18-155:15 (discussing Clover Ex. 8), and that the Chief Investment Officer, Mr. Stephen Auth, and the Client Portfolio Manager did not want Strategic Value to be pitched as the last spot to the University, Clover Ex. 15. Ultimately, Federated pitched Clover Value as Federated's top choice for the University Client, Clover Ex. 21, SOF ¶ 864, and the University Client moved its account to Clover Value. SOF ¶ 445.

         The second incident on which Plaintiff relies to prove bad faith involved MassMutual, a large institutional customer. In May 2009, MassMutual approached Clover with an opportunity to manage one of MassMutual's small cap funds, SOF ¶ 865, but it proposed a fee that was lower than Federated's usual rate and that was lower than the fee Clover had previously received from MassMutual. SOF ¶¶ 650-51, 869; Carl 30(b)(6) Tr. at 183:2-16. Federated made MassMutual a counter-offer on the fee proposal, which MassMutual rejected. SOF ¶¶ 652-54. Although Plaintiff asserts, ipse dixit, that Federated “routinely granted comparable discounts to its own institutional clients, ” Opp. Br. at 11, Plaintiff does not provide any evidence to support that assertion.[8]

         Ultimately, during the Earnout Period, Federated's gross sales of Clover Value and Clover Small Cap were approximately $364 million and $677 million, respectively, totaling over $1 billion in gross sales.[9] SOF ¶ 465. In total, Federated's gross sales of Clover mutual funds, other Clover products, and Clover's sub-advising arrangements exceeded $2 billion. SOF ¶ 477. Federated paid a total of $18, 462, 305 in Earnout Payments to Clover. SOF ¶ 540.

         In 2014, Plaintiff initiated this litigation against Federated, alleging fraudulent inducement and breach of an implied duty of good faith and fair dealing.[10] Plaintiff contends that by representing to Clover that it intended to use its “powerful distribution platform” to sell Clover products and “fuel the growth” of Clover's business, Federated fraudulently induced Clover to enter into the APA and to accept much of the consideration in the form of future payments that were dependent upon Clover's post-Acquisition growth. Compl. ¶¶ 117-21. Plaintiff also asserts that Federated's conduct with respect to the Clover products depressed the Earnout Payments, thereby breaching Federated's duty of good faith and fair dealing. Compl. ¶¶ 128-35. Federated moves for summary judgment on both claims.

         DISCUSSION

         Summary judgment is appropriate when “the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). “A genuine dispute exists when the evidence is such that, if the party against whom summary judgment is sought is given the benefit of all permissible inferences and all credibility assessments, a rational factfinder could resolve all material factual issues in favor of that party.” Sec. & Exch. Comm'n v. Sourlis, No. 14-2301-CV(L), 2016 WL 7093927, at *2 (2d Cir. Dec. 6, 2016) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).

         The non-moving party, however, “must do more than simply show that there is some metaphysical doubt as to the material facts” and “may not rely on conclusory allegations or unsubstantiated speculation.” Jeffreys v. City of New York,426 F.3d 549, 554 (2d Cir. 2005) (citations and internal quotation marks omitted). Rather, the nonmoving party must come forward with “specific facts showing that there is a genuine issue for trial.” Weinstock v. Columbia Univ., 224 F.3d 33, 41 (2d Cir. 2000) (quoting Anderson, 477 U.S. at 256). “Summary judgment is appropriate when there can be but one reasonable conclusion as to the verdict, i.e., it is ...


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