Opinion
No. 03 CV 8539 (RO).
July 15, 2005
MEMORANDUM ORDER
Plaintiff General Electric Capital Corporation ("GE") is a financial services company and lender located in Connecticut. Defendant D'Agostino is a privately-owned chain of grocery stores located in New York City and Westchester County. In the summer of 2002, D'Agostino began negotiating regarding the acquisition of King's Supermarkets, Inc. from Marks-Spencer Finance, Inc. for approximately $160 million. D'Agostino approached GE, GMAC Business Credit, LLC and OCM Mezzanine Fund, L.P. to secure financing. The ensuing year-long discussion and due diligence process yielded a letter agreement of July 16 wherein D'Agostino promised to pay a nonrefundable $250,000 fee in the event a suitable commitment letter was executed within two days. On July 18, the parties executed the anticipated Commitment Letter, in which GE agreed to assume primary responsibility for arranging and financing the DAG-Kings merger. D'Agostino paid the commitment letter delivery fee in full on that day. Then, upon accepting the Commitment Letter, D'Agostino executed a "Senior Fee Letter" in which it agreed to pay GE and GMAC another an additional (and nonrefundable) $200,000 commitment letter delivery fee no later than July 24, 2002. This fee was also timely paid. D'Agostino thereafter paid an additional (and nonrefundable) $700,000 "arrangement fee" pursuant to a separate letter agreement dated July 18. On July 18, GE also publicly announced that it expected the merger to consummate within eight weeks. On July 19, the parties executed a 200-page Merger Agreement. Yet, in spite of these great efforts and expense, GE declined to fund the merger and it was never consummated.
The bill for GE's unsuccessful assistance ultimately reached $7 million in fees. D'Agostino has paid $5 million.
Thereafter in October 2003, GE filed a complaint seeking $431,000 in out-of-pocket expenses, and in December 2003, D'Agostino filed an answer and counterclaims, blaming GE for the failure of the merger, and alleging: (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; (3) fraud and fraud in the inducement; (4) tortious interference with contract; (5) tortious interference with business relations; and (6) misuse of confidential information.
GE moves under Rules 9(b) and 12(b)(6) to dismiss the counterclaims for failure to state a claim or, in the alternative, to strike the claims for punitive and consequential damages pursuant to Rule 12(f). In considering a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the Court must accept as true all material factual allegations in the complaint,Atlantic Mutual Ins. Co. v. Balfour Maclaine Int'l, Ltd., 968 F.2d 196, 198 (2d Cir. 1992), and may grant the motion only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of [its] claim which would entitle [it] to relief," Still v. DeBuono, 101 F.3d 888, 891 (2d Cir. 1996);see Conley v. Gibson, 355 U.S. 41, 48 (1957). In addition to the facts set forth in the complaint, the Court may also consider documents attached thereto and/or incorporated by reference therein, Automated Salvage Transp., Inc. v. Wheelabrator Envtl. Sys., Inc., 155 F.3d 59, 67 (2d Cir. 1998), as well as matters of public record, Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 75 (2d Cir. 1998), cert. denied, 525 U.S. 1103 (1999).
D'Agostino's first counterclaim alleges that GE breached its contractual obligations under the Commitment Letter "by failing to provide the financing necessary to consummate the Kings merger" and by accepting money from D'Agostino when GE knew or should have known that no merger would take place. GE replies that its non-performance is excused by the failure of one or more of the following conditions precedent: (a) the preparation and execution of definitive agreements governing the senior and subordinated financing arrangements; (b) the receipt of a solvency opinion from an outside solvency firm; (c) the addition of three independent directors acceptable to GE Capital and to the D'Agostino board of directors; and (d) the completion of a sale-leaseback transaction with respect to six of the "Kings properties."
The failure of conditions (b) through (d) do not excuse GE's non-performance under the Commitment Letter. Condition (b) is a mere due diligence formality that could have been procured within a short period, and as such, is de minimus. The appointment of three independent directors — condition (c) — was actually a right of GE's to exercise. Condition (d) was "like a hundred other components of the DAG-Kings merger . . . merely awaiting a closing." Mem. Opp'n at 10. The law does not favor a construction which creates a condition precedent. See Penn Intermodal Leasing, Inc. v. Shipping Corp. of India, 1997 WL 431087 *6 (S.D.N.Y. 1997). A condition precedent will not be imposed unless the contract reveals it was the clear intent of the parties.
Condition (a), however, cannot be dismissed as de minimus, and is arguably a bona fide condition precedent as it demands the delivery of satisfactory documentation regarding the underlying financing arrangements. Nevertheless, its failure does not necessarily justify GE's non-performance, at least not at the pleading stage. This is clear from the allegations themselves. D'Agostino first counterclaim alleges that the deal collapsed because GE declined to fund the merger at a very late stage in the game. D'Agostino's subsequent counterclaims explain that GE's conduct was due to the presence of "unresolved inter-creditor conflicts." D'Agostino also alleges that GE was responsible for successfully managing these conflicts because of its dual role in serving both as the leading underwriter of a multi-component financing arrangement as well as a subordinated lender.
Assuming these allegations to be true for purposes of this motion, GE cannot excuse its non-performance under the commitment letter by invoking the non-occurrence of aspects of the transaction it was charged with furthering. See Spanos v. Skouras Theatres Corp., 364 F.2d 161, 169 (2d Cir. 1966) ("One who unjustly prevents the performance or the happening of a condition of his own promissory duty thereby eliminates it as such a condition. He will not be permitted to take advantage of his own wrong, and to escape liability for not rendering his promised performance by preventing the happening of the condition on which it was premised."). Accordingly, the motion to dismiss D'Agostino's first counterclaim is denied.
The second counterclaim alleges that GE breached the implied covenant of good faith and fair dealing by "failing to take reasonable precautions and/or adequate measures to resolve inter-creditor issues precipitated by its participation in the merger financing structure both as the leading underwriter of a multi-component Senior Secured Credit facility and as a Subordinated Lender." CC ¶ 76. While the Commitment Letter does indeed purport to grant sweeping withdrawal rights upon GE, as early as Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 90-91 (1917), New York courts have imposed an implied duty to use "reasonable efforts" to advance primary goals of a contract. This duty extends to the exercise of contractual discretion, and includes a promise "not to act arbitrarily or irrationally in exercising that discretion." Dalton v. Educational Testing Service, 87 N.Y.2d 384, 389, 639 N.Y.S.2d 977, 978-80 (N.Y. 1995). While GE may indeed by able to prove that its withdrawal was not so motivated, D'Agostino is entitled to all well-pleaded inferences in its favor at this early stage, and so the counterclaim states a claim for relief. Accordingly, GE's motion to dismiss the second counterclaim is denied.
GE draws heavily upon the following language from the Commitment Letter:. . . . "Once effective, GE Capital's and GMACBC's obligations to provide financing in accordance with the terms of the Commitment Letter shall cease if . . . the Transaction does not close, or the Financing does not fund for any reason, on or before September 16, 2002, and neither GE Capital nor GMACBC nor any of their affiliates shall have any liability to any person in connection with its refusal to fund the Financing or any portion thereof after such date." Id. at 17-18.
The third counterclaim alleges that GE committed common law fraud and fraud in the inducement by "(a) affirmatively misrepresenting . . . that the proposed merger with Kings was substantially ready to close . . . while simultaneously concealing from D'Agostino that a potentially deal-breaking dispute still existed between GE and others concerning the transaction's basic financing; and (b) grossly understating the expenses. . . ." CC ¶ 88. Under New York law, a claim of fraudulent inducement requires proof: "(1) that the defendant made a representation, (2) as to a material fact, (3) which was false, (4) and known to be false by the defendant, (5) that the representation was made for the purpose of inducing the other party to rely upon it, (6) that the other party rightfully did so rely, (7) in ignorance of its falsity (8) to his injury."Computerized Radiological Servs. v. Syntex Corp., 786 F.2d 72, 76 (2d Cir. 1986) (quoting Brown v. Lockwood, 76 A.D.2d 721, 730, 432 N.Y.S.2d 186, 193 (2d Dept. 1980)). In addition, Rule 9(b) requires that in pleading fraud, "the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed.R.Civ.P. 9(b). In this Circuit, Rule 9(b) requires a party claiming fraud to "(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." Romach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004).
Nowhere does D'Agostino satisfy the first two requirements of Rule 9(b) as articulated in Romach. Allegations that GE "affirmatively misrepresent[ed] to D'Agostino that the proposed merger . . . was substantially ready to close . . . while simultaneously concealing . . . that a potentially deal-breaking dispute still existed . . ." do not come close to identifying what statement was fraudulent and who made that statement. Accordingly, D'Agostino's third counterclaim is dismiss with leave to replead.
The fourth counterclaim alleges that GE tortiously interfered with the contractual obligations between D'Agostino, Kings, GMAC, OCM and GECC. GE allegedly "knowingly created and failed to rectify inter-creditor conflicts precipitated by its participation in the merger financing structure . . ." and by so doing "caused GMAC, OCM and GECC to abandon their respective financing obligations, which prevented the merger from going forward." CC ¶ 97-98. A party claiming tortious interference with contract must plead and prove that the defendant knowingly induced the breach of an existing contract between the complaining party and another person. See NBT Bancorp. Inc. v. Fleet/Norstar Fin. Group, Inc., 87 N.Y.2d 614, 620-21, 641 N.Y.S.2d 581, 584-85 (N.Y. 1996). Since D'Agostino does not allege that GE induced any breach of contract between D'Agostino and any third party, the fourth counterclaim fails.
In order for the fifth counterclaim to state a claim for tortious interference with prospective economic advantage, a plaintiff must show: "(1) business relations with a third party; (2) defendants' interference with those business relations; (3) defendants acted with the sole purpose of harming the plaintiff or used dishonest, unfair, or improper means; and (4) injury to the relationship." Purgess v. Sharrock, 33 F.3d 134, 141 (2d Cir. 1994). This cause of action is dismissed since it "is deficient for lack of an allegation that defendant's conduct was `motivated solely by malice or to inflict injury by unlawful means rather than by self-interest or other economic considerations.'" Prestige Foods, Inc. v. Whale Securities Co., L.P., 243 A.D.2d 281, 282, 663 N.Y.S.2d 14, 15 (internal citations omitted).
The sixth counterclaim alleges that GE breached its contractual obligations by the misuse of confidential information in that GE "disseminate[d] non-public information about D'Agostino's business operations to third parties not involved in the proposed merger and/or otherwise without consent from D'Agostino." CC ¶ 116. While conceding inadequate specificity, D'Agostino argues it will "flesh out" its allegations through discovery. Mem. Opp'n at 21. D'Agostino's "promise" is no cure of this defect. Accordingly, I dismiss the sixth counterclaim with leave to replead.
As to GE's Rule 12(f) motion to strike the claims for punitive and consequential damages, it is granted on the basis of the plain language of the Commitment Letter.
The Commitment Letter provides: "Under no circumstances shall GE Capital or GMACBC or their affiliates be liable to you or any other person for any punitive, exemplary, consequential or indirect damages which may be alleged to result from this Commitment Letter, the Senior Fee Letter, the Arrangement Fee Letter, the Transaction, the Financing, the documentation related thereto or any other financing, regardless of whether the Transaction or the Financing closes." Id. at 17 (emphasis supplied).
Submit order on notice.