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Khan v. Laninver USA, Inc.

United States District Court, W.D. New York

January 9, 2020

Khalid M. Khan, Plaintiff,
Laninver USA, Inc., Defendant.


          Hon. Hugh B. Scott United States Magistrate Judge


         Plaintiff Khalid M. Khan (“Khan”) owned a company that specialized in shrink sleeve product packaging. Defendant Laninver USA, Inc., a holding company in a large corporate family associated with product packaging, took an interest in Khan's company. The parties struck a deal in which defendant would buy out Khan's company in two stages. Defendant first would buy a majority stake in Khan's company. Under the deal, if the net earnings by Khan's company crossed a certain threshold number then defendant was contractually obligated to finish buying out Khan for a value set by formula in the contract. The formula potentially would net Khan a sale price into eight figures. Critically, the deal between the parties was silent as to what would-or would not-happen if Khan's company did not cross that important threshold number. Khan believes that defendant exploited that loophole in the deal by making intentionally bad management decisions as majority owner that guaranteed that Khan's company would not cross the threshold. A failure to cross the threshold, according to Khan, would let defendant escape the contractual mandate and would give defendant the option of pressuring Khan into selling his company cheap.

         To pursue his accusations against defendant, Khan has an active amended complaint against defendant that contains accusations of breach of fiduciary duty and failure to indemnify against losses. (Dkt. No. 29.) The case currently comes before the Court on a motion by defendant to dismiss the amended complaint altogether (Dkt. No. 33) under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Very briefly, defendant argues that Khan has not sufficiently pleaded a violation of a specific provision of the deal between the parties, including any provision that would give rise to a fiduciary duty. Defendant also believes that Khan's claimed damages are too speculative. Khan responds that he has cited explicit provisions of the deal between the parties that defendant has breached and that lead to specific damages. Khan argues further that the breach of fiduciary duty arises from defendant's failure, as a majority owner, to look out for his interests as the minority owner.

         District Judge Lawrence J. Vilardo has referred this case to this Court under 28 U.S.C. §§ 636(b)(1)(A) and (B). (Dkt. No. 11.) The Court held oral argument on November 20, 2019. For the reasons below, the Court respectfully recommends granting the motion to dismiss in part.


         A. Initial Events and the Purchase Agreement

         This case concerns allegations[1] that defendant intentionally damaged Khan's contractual business options to allow it to buy him out at an improper discount. Until 2012, Khan owned a company called Shaant Industries, Inc. in Dunkirk, New York. Shaant Industries, Inc. was “a producer of shrink sleeve product packaging in the North American shrink sleeve and flexible packaging industry.” (Dkt. No. 29 at 1.) In 2012, defendant approached Khan to discuss acquiring his company to expand its global shrink-sleeve operations into the United States and Canada. The Court will use the name “Laninver” to refer collectively to defendant and to what appears to be a complex network of holding companies:

At all relevant times, Laninver is a holding company with no business operations of its own, wholly owned by Laninver S.H.C. S.L. based in Madrid, Spain, which, in turn, is wholly owned by Grupo Lantero, an international company also headquartered in Madrid, which is a prominent player in the global packaging industry, including multiple European and North and South American markets, with controlling ownership interests in multiple product line group companies.
As it is relevant to this action, one of Grupo Lantero's holdings consists of “Emsur, ” itself a parent company and/or group of business entities with at least 10 production plants dedicated to the manufacture of flexible packaging primarily for packaging food and dairy products in countries spanning the Americas, Europe, Africa, the Middle East, and Asia.
Among other subsidiary companies and businesses, Emsur serves as the parent entity for Emsur USA LLC (“Emsur USA”), a Delaware limited liability company formed on December 16, 2013, and thereafter qualified to do business in the State of Illinois where it maintains its principal place of business at 2800 Carl Boulevard in Elk Grove Village, the same business location as defendant Laninver.
Defendant Laninver is the manager of Emsur USA.
Emsur also serves as the parent entity of other related subsidiaries, including, but not limited to, business entities commonly referred to within the Grupo Lantero family of businesses as “Emsur Mexico, ” “Emsur Spain, ” and “Emsur Poland.” At all relevant times, Emsur's plants in the United States, Mexico, Spain, and Poland produce printed flexible packaging.

(Id. at 3.) The discussions continued for about three years and culminated in two agreements. On March 16, 2015, Khan and Laninver entered a Memorandum of Understanding. (Dkt. No. 34-1.) Through the Memorandum of Understanding, the parties declared their intent to have Shaant Industries, Inc. reorganize as Ultrapak LLC (“Ultrapak”). Laninver then intended to purchase a 51 percent stake in Ultrapak to become its majority owner; Khan would be the only other member of the new LLC and would hold a 49 percent stake.

         A few months later, on July 8, 2015, Khan and Laninver made their intentions formal when they entered a Membership Interest and Note Purchase Agreement (the “Purchase Agreement”). (Dkt. No. 34-2.) The Purchase Agreement contains many details about how the parties would set up Ultrapak and take their ownership interests in it. Some of the details have particular relevance to the pending motions. Section 2 of the Purchase Agreement is the core of the agreement and describes how transfer of ownership would occur in two phases. Section 2.1 describes the first phase, called an Initial Interest: Khan would sell Laninver a 51 percent interest in Ultrapak. (Id. at 5.) Section 2.2 describes a conditional second phase called the Additional Interest. The Court is oversimplifying here, but in essence, if Ultrapak's net revenues for the 12 months ending June 30, 2018 met or exceeded $4.5 million then Laninver was required (“shall purchase from Khan”) to buy out Khan's remaining 49 percent ownership stake. (Id.) The amount of the purchase under Section 2.2 would follow a formula described elsewhere in Section 2 and could run as high as several times the net revenues in question. (Id. at 6.) Closing each phase of the ownership transfer would require Laninver to make certain representations and warranties about documentation and financing. (Id. at 9, 10.) Under Sections 4.1(c)(ii) and 4.2(c)(iii), the parties were required to comply “in all material respects [with] all agreements, obligations and conditions contained in this Agreement” for each phase of the ownership transfer. (Id. at 9, 10.) Under Section 6, Laninver provided representations and warranties to Khan pertaining to authority to enter the Purchase Agreement and the representations that it made to Khan. (Id. at 15.) In Section 8.3, the parties agreed that the Purchase Agreement with attached exhibits constituted “the full and entire understanding and agreement between the parties.” (Id. at 16.) In Section 8.5, the parties agreed that New York law would govern the Purchase Agreement.

         For purposes of the pending motions, the most important section of the Purchase Agreement is Section 7.2. Section 7.2 is titled “Indemnification by Purchaser [i.e., Laninver]” and reads in its entirety as follows:

The Purchaser hereby agrees to indemnify and hold harmless Khan from and against all Losses that he may incur as a result of (a) the breach of any representation or warranty of the Purchaser in this Agreement or (b) the breach of any covenant of the Purchaser in this Agreement or any Ancillary Agreement or (c) the fraud or willful misconduct of the ...

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