Opinion
99 Civ. 4888 (LAP)
October, 2000
OPINION
Plaintiff Sanofi-Synthelabo Inc. ("Sanofi") brings this action asserting claims under the Employee Retirement Income Security Act ("ERISA" or "Act") and various state law claims including breach of contract and fraud. Defendants Eastman Kodak Company and STWB, Inc. ("Kodak") move to dismiss plaintiff's amended complaint ("AC" or "Complaint") pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim, and 9(b) for failure to plead fraud with particularity. For the reasons set forth below, defendants' motion is granted in part and denied in part: with respect to the ERISA claims, the motion is granted in its entirety; with respect to the contract claims, the motion is granted in part and denied in part; and with respect to the fraud claims, the motion is granted with leave to replead.
BACKGROUND
This case stems from an asset purchase by Sanofi of Kodak's subsidiary, Sterling. The facts are quite complex and summarized here in relevant part for purposes of this opinion.
I. The Kodak — Sanofi Agreement
In June 1994, Kodak entered into negotiations to sell assets of its wholly-owned subsidiary, Sterling Winthrop, Inc., a predecessor company of defendant STWB, Inc., to Sanofi, S.A., the parent corporation of plaintiff here. (AC ¶¶ 1, 8, 10). The parties entered into an original agreement on June 22, 1994, which was subsequently amended, resulting in the asset purchase agreement ("APA") dated September 30, 1994. (Id. ¶ 9). The closing date of the APA was October 1, 1994. (Id.).
Sanofi is a Delaware corporation with its principal place of business in New York, New York. (AC ¶ 4). Kodak is a New Jersey corporation with its principal place of business in Rochester, New York. (Id. ¶ 5). Sterling is a Delaware corporation. (Id. ¶ 6).
In addition to purchasing Sterling's ethical drug business (id. ¶ 7), Sanofi agreed to hire "a substantial number of Sterling employees" and to assume the pension liabilities of these active employees and "thousands of former Sterling employees" (id. ¶ 1). To fund the pension liabilities, Kodak agreed to transfer assets from its employee pension program, the Kodak Retirement Income Plan ("KRIP"), to a pension plan Sanofi would establish (the "Sanofi Plan"). (Id. ¶¶ 1, 13). Both KRIP and the Sanofi Plan are defined benefit plans under ERISA. (Id. ¶ 12). The assets were calculated as of the closing date to be approximately $200 million (the "KRIP assets"). (Id. ¶ 14). There is no allegation that the amount of assets allocated on the closing date was incorrectly calculated. (Pl. Mem. at 21).
"[U]nder a defined benefit plan, the employee is entitled to a fixed period payment upon retirement regardless of the performance of the underlying assets." Systems Council EM-3 v. ATT Corp., 159 F.3d 1376 (D.C. Cir. 1998). See also 29 U.S.C. § 1002(35).
Sanofi alleges that the parties agreed that the KRIP assets would be "promptly transferred" (AC ¶ 1), as evidenced by the inclusion of a provision in both the original agreement and the APA that provided that the transfer "shall take place within 180 days after the Closing Date" (id. ¶ 19). See also APA § 5.5(c)(iii). Notwithstanding this 180-day requirement, the parties agreed that the transfer would not occur before both Kodak and Sanofi obtained favorable determination letters ("DL") from the Internal Revenue Service ("IRS"). (AC ¶ 20). Generally, a determination letter is received within six to twelve months after filing an application. (Id. ¶ 21).
A favorable determination letter states that a pension plan is qualified for tax exemption under § 401(a) of the IRS Code. (AC ¶ 20). See also 26 U.S.C. § 401.
Sanofi claims that it specifically asked Kodak "whether there was any . . . reason why it could take a long time to obtain the KRIP Determination Letter, and were [sic] told `no.'" (Id. ¶ 22). Sanofi asserts that based on Kodak's representations and the 180-day clause, it "understood that the interim period [between the closing date and the actual transfer of the pension assets] would not be very long." (Id. ¶ 26). As a result, Sanofi claims it agreed to receive a "short term, fixed imputed rate of return" of 7% on the KRIP assets instead of a market rate of return. (Id.).
Sanofi filed for its DL on March 30, 1995, 180 days after the closing date, and received it on December 12, 1995. (Id. ¶ 27). Kodak filed for its DL on March 31, 1995 and received it on May 13, 1998. (Id. ¶¶ 28, 53). Between May and June 1998, Kodak transferred half the KRIP assets to Sanofi. (Id. ¶ 53). The remaining half was transferred on December 31, 1998. (Id.).
II. KRIP Reviews and The CAP Program
In 1993, Kodak conducted an "internal review" of KRIP that lasted several months. (Id. ¶ 16). In April 1994, Kodak hired the Hewitt consulting firm to conduct a compliance audit of KRIP. (Id.). Thereafter, Kodak completed another internal audit. (Id.). As a result of these investigations, Kodak identified various defects in KRIP, which risked KRIP's tax-exempt status. (Id.).
To avoid disqualification of KRIP's tax-exempt status, which would cost Kodak approximately $2.3 billion (id. ¶ 31), Kodak entered KRIP into a voluntary IRS correction program (the "CAP Program") in September 1995 (id. ¶ 30). "[B]y voluntarily initiating the CAP Program, Kodak would be able to limit its exposure and give itself a strong argument for a nominal sanction based on its cooperation." (Id. ¶ 31). "Kodak knew that the CAP Program would last at least one year" (id. ¶ 34), and "understood that the IRS would not issue the Kodak Determination Letter until the CAP Process was completed" (id. ¶ 33). By a CAP agreement dated May 13, 1998, Kodak was required to pay $13.8 million to cure the KRIP defects and a $100,000 IRS sanction. (Id. ¶ 39).
III. The Kodak — ECC Agreement
In December 1993, Kodak spun off its chemicals business, thereby forming the Eastman Chemical Company ("ECC"). (Id. ¶ 58). Like the agreement with Sanofi, the Kodak-ECC agreement required Kodak to transfer pension assets to ECC and for both companies to obtain favorable determination letters. (Id.). In September 1995, Kodak informed ECC that it had entered into the CAP Program to correct some defects in KRIP and that this "would significantly delay KRIP's receipt of a favorable IRS determination letter." (Id. ¶ 60). Notwithstanding the agreement to obtain determination letters, in July 1997, Kodak provided to ECC "an opinion of counsel that the KRIP Defects would be resolved" and thereafter transferred almost $700 million in pension assets to ECC. (Id.).
IV. Sanofi's Allegations
Sanofi alleges that during the June 1994 negotiations and after the closing date, Kodak failed to inform Sanofi that Kodak had conducted audits of KRIP, which revealed defects in the plan, and that Kodak had initiated the CAP Program. Sanofi claims that Kodak never advised Sanofi that there could be a delay in obtaining the Kodak DL, but rather was given assurances that KRIP was in compliance with the IRS Code and that there was nothing that would delay receipt of the DL. In reliance on these representations, Sanofi claims it agreed to receive a fixed 7% return rate on the KRIP assets during the interim period rather than the market rate of return. Sanofi alleges that the delay in obtaining Kodak's DL delayed the transfer of the pension assets and that:
the delayed transfer of [the] assets was the result of Defendants' deliberate and purposeful actions, and resulted in Kodak's enrichment by tens of millions of dollars at the expense of Sanofi and the Sanofi Pension Plan, in violation of the [APA] and in breach of Defendants' duties to the transferred beneficiaries of Kodak's pension plan under [ERISA].
(Id. ¶ 1).
DISCUSSION
Kodak makes the following arguments in support of its motion to dismiss: (1) plaintiff lacks standing to bring the ERISA and common law claims; (2) the Complaint fails to allege contract claims as a matter of law; and (3) the common law fraud claims are not pled with sufficient specificity.
While Kodak does not assert its standing defense pursuant to Fed.R.Civ.P. 12(b)(1), I interpret its argument to state a defense of lack of subject matter jurisdiction.
I. Standing A. ERISA Standing
Title 29 U.S.C. § 1132 of ERISA provides that civil actions may brought by a participant, beneficiary, fiduciary or the Secretary of Labor to enforce the provisions of the Act. See 29 U.S.C. § 1132. An employer does not have standing to bring claims under ERISA. Tuvia Convalescent Center, Inc. v. National Union of Hospital and Health Care Employees, 717 F.2d 726, 730 (2d Cir. 1983). An employer "may obtain standing by suing in its capacity as . . . a fiduciary to the employee retirement plan." McDermott Food Brokers, Inc. v. Kessler, 899 F. Supp. 928, 931 (N.D.N.Y. 1995).
Under ERISA,
a person is a fiduciary with respect to a plan to the extent (i) he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) he renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) he has any discretionary authority or discretionary responsibility in the administration of such plan.29 U.S.C. § 1002(21)(A).
Sanofi claims that it is a fiduciary of the Sanofi Plan and brings the ERISA claims on behalf of the plan because Kodak violated its fiduciary duties to the transferred KRIP participants. (AC ¶ 4, Pl. Mem. at 17). This argument fails in two respects. First, Sanofi has not pleaded any facts to demonstrate that it is a fiduciary. To the contrary, it states that it "spent resources engaging a suitable trustee to hold [the plan] assets, and financial advisors to manage them." (AC ¶ 92). Taking the facts as alleged, Sanofi fails to assert facts sufficient to show that it is a fiduciary.
Second, even assuming Sanofi is a fiduciary of the Sanofi Plan, and, therefore Sanofi has standing to bring ERISA claims on behalf of its plan participants, the defendants were never fiduciaries of the Sanofi Plan, and Sanofi was never a fiduciary of KRIP. See Flanigan v. General Electric Co., 93 F. Supp.2d 236, 257-58 (D.Conn. 2000) (any losses due to the alleged fiduciary breach would have been sustained by the predecessor plan; plaintiffs cannot obtain relief for the successor plan).
Sanofi cites Pilkington PLC v. Perelman, 72 F.3d 1396 (9th Cir. 1995) for the proposition that a successor plan may bring ERISA claims against the predecessor plan's fiduciaries. I decline to follow this holding. See Pilkington, 72 F.3d at 1402 (Kozinski, J., dissenting) ("There's no such thing as a fiduciary-at-large, someone who can be sued by anyone and everyone for a breach of duty; a fiduciary can be sued only by a beneficiary or another fiduciary of the trust that creates the duty.").
Sanofi also cites John Blair Communications, Inc. Profit Sharing Plan v. Telemundo Group, Inc. Profit Sharing Plan, 26 F.3d 360 (2d Cir. 1994). This case is inapposite as it involves defined contribution plans, not defined benefit plans.
Thus, Sanofi does not have standing to bring ERISA claims on behalf of the Sanofi Plan for Kodak's alleged breach of its fiduciary duty to the KRIP participants. Accordingly, Counts VI-VIII are dismissed.
I note that the law is clear that a transfer or spin-off of a pension plan does not implicate fiduciary duties under ERISA. In Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999), the Supreme Court held that an employer's decision to amend a retirement plan by providing an early retirement plan and creating a noncontributory plan for new participants did not trigger ERISA's fiduciary duties. "[A]n employer's decision to amend a pension plan concerns the composition or design of the plan itself and does not implicate the employer's fiduciary duties which consist of such actions as the administration of the plan's assets." Id. at 444. The Court explained that "[e]mployers and other plan sponsors are generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans. When employers undertake those actions, they do not act as fiduciaries, but are analogous to the settlors of a trust." Id. at 443, quoting Lockheed Corp. v. Spink, 517 U.S. 882, 890 (1996), quoting Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78 (1995) (internal quotation marks omitted and change in original).
Similarly, in Systems Council, 159 F.3d at 1377, the court of appeals, relying on Lockheed Corp., held that an employer was not acting in a fiduciary capacity when it spun off a division of the corporation and allocated pension and welfare plan benefits and liabilities between itself and the division. See also Blaw Knox Retirement Income Plan v. White Consolidated Industries, Inc., 998 F.2d 1185, 1190-91 (3d Cir. 1993) (employer's decision to sell unprofitable subsidiaries and underfunded pension plans was a business decision and not subject to ERISA's fiduciary requirements; plans did not allege that employer mismanaged plan assets or failed to meet requirement of sufficient funding of plan liabilities).
Sanofi does not disagree that the decision to transfer or spin off a pension plan is a business decision, which does not implicate a plan sponsor's fiduciary duties. (Pl. Mem. at 21). Rather, it argues that the timing of the transfer is an aspect of implementation, which is subject to fiduciary duties and, therefore, the alleged wrongful delay in transferring the assets was a breach of Kodak's fiduciary duties. (Id. at 21, 22, 23). Sanofi cites cases, however, that do not stand for this proposition. Varity Corp. v. Howe, 516 U.S. 489 (1996), involved allegedly misleading disclosures to plan participants about the security of their benefits; Waller v. Blue Cross of Cal., 32 F.3d 1337 (9th Cir. 1994), held that an employer acted as a fiduciary in choosing infirm annuity providers to satisfy plan liabilities; and District 65, UAW v. Harper Row, Publishers, Inc., 670 F. Supp. 550 (S.D.N.Y. 1987), held that an employer's selection of an insurance carrier to implement the disposition of plan assets upon termination was subject to ERISA's fiduciary standards. None of these cases addresses the issue of a delay in the transfer of plan assets, and there is no claim in this case that Kodak made misleading statements to its plan participants or chose unsound investments for the assets. To the contrary, at issue here is the excess assets Kodak gained from the high rate of return on investment.
It is worth noting, in any event, that the Sanofi Plan and its participants have no entitlement to any surplus assets. As discussed above, the plans at issue here are defined benefit plans under which plan participants and beneficiaries receive a fixed, periodic benefit regardless of the rate of return on the plan assets. If the assets are insufficient to meet liabilities, the employer must make contributions to the plan. Conversely, if the assets exceed the plan liabilities, the employer "may retain the surplus as a cushion against the day when yields decrease, or the employer may cease making contributions and allow the surplus to erode as liabilities continue to increase." Johnson v. Georgia-Pacific Corp., 19 F.3d 1184, 1189 (7th Cir. 1994). Hence, the plan and its participants have no entitlement to surplus assets under the facts alleged here.
See Hughes, 525 U.S. at 440-41 ("Since a decline in the value of a plan's assets does not alter accrued benefits, members similarly have no entitlement to share in a plan's surplus — even if it is partially attributable to the investment growth of their contributions."); John Blair Communications,, 26 F.3d at 366 (under a defined benefit plan, "it would matter little to the individual . . . members whether the plan lost out on [an increase] as long as those members were guaranteed their promised benefits at retirement"); Brillinger v. General Electric Co., RCA, 130 F.3d 61, 64 (2d Cir. 1997), cert. denied, 525 U.S. 1138 (1999) (participants in a defined benefit plan are not entitled to have their benefits increased because successful investment causes assets to grow); Malia v. General Electric Co., RCA, 23 F.3d 828, 833 (3d Cir. 1994) (under a defined benefit plan, employees have no right to residual assets in the context of a plan merger); Koch Industries, Inc. v. Sun Co., Inc., 918 F.2d 1203, 1207 (5th Cir. 1990) (under ERISA, acquiring corporation is not entitled to interest on funds transferred to pension plan); Bigger v. American Commercial Lines, Inc., 862 F.2d 1341, 1344-45 (8th Cir. 1988) (spun off "employees receive no more than their fixed defined benefit regardless of the value of the assets in the plan"); Systems Council, 159 F.3d at 1381 ("In short, ATT must transfer to Lucent only those assets that are necessary to fulfill the new plans' defined benefit obligations."); Foster Medical Corp. Employees' Pension Plan v. Healthco, Inc., 753 F.2d 194, 199 (1st Cir. 1985) (employees in spin-off do not receive a share of the surplus assets. "As long as the Foster Plan is fully funded, the employees are fully protected and will receive their defined benefits."); Flanigan, 93 F. Supp.2d at 257 (plan participants could not recover market gains on assets that were invested in anticipation of sale; "[p]laintiffs do not cite any cases requiring a plan to transfer more assets than § 208 requires due to the fiduciary obligations of the transferring plan.").
B. Standing to Bring Common Law Claims
Kodak also argues that Sanofi does not have standing to bring the common law contract and fraud claims because Sanofi's "allegations demonstrate that plaintiff does not have an injury-in-fact fraud or contract claim it can assert." (Def. Reply Mem. at 1). A party seeking to invoke the jurisdiction of the federal courts must meet the requirements of standing under Article III of the United States Constitution. To have standing, a plaintiff must allege personal injury fairly traceable to the defendant's allegedly unlawful conduct and which is likely to be redressed by the requested relief. See Hirsch v. Arthur Andersen Co., 72 F.3d 1085, 1091 (2d Cir. 1995) (citing Allen v. Wright, 468 U.S. 737, 751 (1984)). A party must "assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties." Warth v. Seldin, 422 U.S. 490, 499 (1975). Standing is a jurisdictional matter, and the complaint must "allege facts demonstrating that he is the proper party to invoke jurisdictional resolution of the dispute." Solow v. Stone, 994 F. Supp. 173, 178 (S.D.N.Y.) (quotation omitted), aff'd, 163 F.3d 151 (2d Cir. 1998).Sanofi meets this standard. Sanofi brings its common law claims on its own behalf (Pl. Mem. at 4; see also AC, Counts I-V) and pleads that it "itself was damaged by reason of Kodak's delay." (AC ¶ 65). It claims that separate and apart from any ERISA injury to the Sanofi Plan, the company was injured by the alleged breach of contract, of which it is an assignee, and by the alleged fraud perpetrated both during the contract negotiations and after the closing date. Additionally, Sanofi requests relief on it own behalf (AC, Ad damnum clause ¶ 3) and asserts that due to Kodak's alleged wrongful delay, it "has fewer assets" and has "suffered economic loss." (Pl. Mem. at 5). The final element of redressability is also satisfied as a monetary award is the means devised by the law to make a plaintiff in Sanofi's position whole. Thus, Sanofi's state law claims are sufficient to meet the threshold for standing.
"In connection with the closing, Sanofi, S.A. assigned its right to purchase the [Sterling] assets located in the United States, including all such rights and obligations relevant here (the `U.S. Assets'), to its indirect, wholly-owned subsidiary, Sanofi Winthrop, Inc. . . . a predecessor corporation to plaintiff Sanofi." (AC ¶ 10).
Kodak argues that Sanofi's articulation of its damages does not plead an injury-in-fact. (Def. Mem. at 4). See AC ¶ 65 ("every missing asset in the Sanofi Pension Plan represents an exposure to Sanofi."). However, I note Sanofi's broader discussion of its damages in its memorandum of law (see Pl. Mem. at 5), and cannot say as a matter of law at the pleading stage that Sanofi could not prove recoverable damages.
II. Sufficiency of Pleadings Under Fed.R.Civ.Proc. 12(b)(6)
In deciding a motion to dismiss, I must view the Complaint in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 237 (1974); Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 562 (2d Cir. 1985). I must accept as true the factual allegations stated in the Complaint, Zinermon v. Burch, 494 U.S. 113, 118 (1990), and draw all reasonable inferences in favor of plaintiff. Scheuer, 416 U.S. at 236; Hertz Corp. v. City of New York, 1 F.3d 121, 125 (2d Cir. 1993). A motion to dismiss can only be granted if it appears beyond doubt that plaintiff can prove no set of facts in support of its claim which would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957).A. Contract Claims
Sanofi brings three contract claims including breach of contract and breach of the covenant of good faith. As discussed more fully below, Kodak's motion to dismiss Count I is granted and its motion to dismiss Counts II and III is denied.
1. Count I — Breach of Contract
Sanofi asserts that the Delay Clause of the APA was triggered because the IRS would not issue a DL until Kodak signed the CAP settlement agreement (Pl. Mem. at 7), and without the Kodak DL, there could be no transfer of assets. Sanofi claims that Kodak is thereby "contractually required to hold Sanofi harmless from the economic losses Sanofi suffered as a result of the delayed transfer." (AC ¶ 70).
This argument cannot be maintained. The Hold Harmless Clause provides, among other things, that
in the event that the [IRS] . . . takes the position in a determination letter, ruling, advisory opinion or other written or oral communication that the transfer of assets . . . cannot be made unless . . . additional contributions are made to a Seller Retirement Plan or a Transferee Pension Plan[, and the delay is beyond two years, then] Kodak shall hold Purchaser harmless from any economic loss resulting from such delay.
APA § 5.5(c)(iii). While Sanofi pleads that the CAP filing delayed the issuance of a determination letter, it does not plead that the IRS "took the position" that a transfer of assets could not be made. Sanofi's argument to the contrary, APA § 5.5(c)(iii) is not triggered by the facts as pleaded in the Complaint, and, therefore, the Hold Harmless Clause does not apply. Accordingly, Count I is dismissed.
Specifically, Sanofi pleads:
The Delay Clause was triggered because, in fact, the Asset Purchase Agreement required the issuance of the Kodak Determination Letter before the pension assets could be transferred, and the IRS would (and did not) issue that Letter until after Kodak agreed in the CAP Agreement to make a multimillion dollar contribution to KRIP to cure the underfunding caused by certain of the KRIP Defects. Since Kodak did not even begin to transfer the KRIP Participant Pension Assets until more than three and one-half years after the Closing Date, the Hold Harmless Clause became operative.
(AC ¶ 42).
2. Count II — Breach of Contract and Count III — Breach of the Covenant of Good Faith
Sanofi claims that Kodak breached the APA by wrongfully preventing a condition precedent from occurring. Sanofi asserts that Kodak wrongfully delayed the asset transfer by acting in bad faith in delaying receipt of the DL and in "refus[ing] to perform necessary actuarial calculations until 1998." (Pl. Mem. at 8-9). It is unclear what the legal basis is for this claim other than a breach of the covenant of good faith. In fact, in its memorandum of law, Sanofi relies on the implied covenant of good faith in defending this claim. See id. at 9. Thus, the legal theory of Count II is seemingly duplicative of Count III, and the two claims merge.
Sanofi claims Kodak breached the implied covenant of good faith by failing "to act diligently and in good faith to obtain [the determination letter]." (Id. at 10). Kodak argues that the implied covenant cannot override the language of the APA and that the APA controls the timing of the transfer. (Def. Mem. at 14-15). See APA § 5.5(c)(iii) ("in no event shall [the] transfer take place" before Kodak receives a DL). Under New York law, "where there is an express contract no recovery can be had on a theory of implied contract. An exception lies where the defendant has frustrated the plaintiff's performance of his duties under the contract." Knobel v. Manuche, 536 N.Y.S.2d 779, 781 (N.Y. A.D. 1989) (internal citations and quotation marks omitted). "[A] party may not frustrate the performance of an agreement by bringing about the failure of a condition precedent." Creighton v. Milbauer, 594 N.Y.S.2d 185, 187-88 (N.Y. A.D. 1993) (citation omitted). As the New York Appellate Division, First Department, has explained,
where the occurrence of the condition is largely or, as here, exclusively within the control of one of the parties, it is said that the express language of the condition gives rise to the implied language of promise. . . . The condition does not necessarily form the basis for an independent promise supporting recovery of damages for its breach. However, the failure of the condition may not be set up as a defense to the underlying obligation under the contract where the party charged with the duty to fulfill the condition has failed to make a good-faith effort to bring it about. A fortiori, failure of the condition cannot be utilized as a defense where, as here, the party resisting the contractual obligation has affirmatively acted to obviate it fulfillment.
Eastern Consolidated Properties Inc. v. Adelaide Realty Corp., 691 N.Y.S.2d 45, 48-49 (N.Y. A.D. 1999) (internal citations and quotation marks omitted), aff'd, 95 N.Y.2d 785 (N.Y. 2000).
Here, the parties agreed that the plan assets were not to be transferred before the receipt of both parties' determination letters. (AC ¶ 20; APA § 5.5(c)(iii)). Thus, the receipt of the determination letters was a condition precedent to the transfer. Additionally, it was exclusively within Kodak's control to pursue its DL. If, as Sanofi claims, Kodak wrongfully delayed the receipt of the DL, Sanofi may recover on the "implied language of promise" for Kodak's failure "to make a good-faith effort" to obtain the Kodak DL.
Sanofi states a claim, whether termed a breach of contract or breach of the implied covenant of good faith, due to Kodak's alleged failure to satisfy faithfully the condition precedent. Accordingly, Kodak's motion to dismiss Counts II and III is denied.
B. Fraud Claims
Sanofi claims that Kodak made material omissions and affirmative misrepresentations both during the negotiations and after the closing date upon which Sanofi relied to its detriment. (AC ¶¶ 81-93). Sanofi alleges that Kodak omitted and misrepresented information about the time it would take Kodak to obtain a DL and its efforts to complete the transfer of assets. As a result, says Sanofi, the transfer was delayed and Sanofi lost return on investment on the transferred assets. For the reasons discussed below, Counts IV and V are dismissed with leave to replead.
1. Rule 9(b)
Fed.R.Civ.Proc. 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.Proc. 9(b). "`[T]he 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.'" Acito v. IMCERA Group, Inc., 47 F.3d 47, 51 (2d Cir. 1995) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)).
Rule 9(b) provides that "`[m]alice, intent, knowledge, and other condition of mind of a person may be averred generally.'" Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994) (change in original). The Court of Appeals noted in Shields that
since Rule 9(b) is intended "to provide a defendant with fair notice of plaintiff's claim, to safeguard a defendant's reputation from improvident charges of wrongdoing, and to protect a defendant against the institution of a strike suit," the relaxation of Rule 9(b)'s specificity requirement for scienter "must not be mistaken for license to base claims of fraud on speculation and conclusory allegations."
Id. (internal quotation marks and citations omitted). Thus, in order to give meaning to Rule 9(b)'s purpose, plaintiffs are required "to allege facts that give rise to a strong inference of fraudulent intent." Id.; see also Chill v. General Elec. Co., 101 F.3d 263, 267 (2d Cir. 1996). A "strong inference" can be shown either "(a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Shields, 25 F.3d at 1128; see also Chill, 101 F.3d at 267.
2. Count IV — Fraudulent Inducement
Sanofi alleges that during the June 1994 negotiations, Kodak made material misrepresentations by "falsely representing that it knew of no reason that could lead to an unusual delay in obtaining the Kodak Determination Letter" (AC ¶ 82) because "Kodak knew that there was no possibility that the KRIP . . . Assets would be transferred within 180 days" (id. ¶ 83). Sanofi claims that it relied on those misrepresentations when it agreed to take the 7% fixed rate of return. (Id. ¶ 84). This claim does not meet the standard of Rule 9(b) because it lacks particularity and fails to allege any motive for Kodak's conduct.
Throughout its Complaint, Sanofi states that it made specific inquiries of Kodak regarding KRIP's compliance with applicable laws, the time it would take Kodak to obtain a DL, and whether there were any circumstances that would delay the receipt of the DL. See id. ¶¶ 18, 21-25. In response, Sanofi claims, Kodak affirmatively misrepresented the truth or omitted material information. While Sanofi alleges various material omissions, Sanofi does not identify the person requesting information from Kodak, to whom inquiries were made, or whether either or both of the speakers was in a position to bind the company by his or her statements or omissions. Additionally, Sanofi fails to specify the time and place of these inquiries, other than "at the time of the June negotiations." (Id. ¶ 24).
See AC ¶ 18 ("The Defendants never disclosed any of [the internal investigations or audits of KRIP conducted by Kodak] to Sanofi's representatives."); id. ¶ 19 ("At no time did the Defendants say anything to suggest that they could not comply with the 180 day transfer requirement — even though, in fact, they knew that they could not comply with that term."); id. ¶ 22 ("Despite knowing about the KRIP Defects, Kodak's representatives deliberately failed to disclose them in response to direct inquiries."); id. ¶ 24 ("The Defendants were aware of the KRIP Defects at the time of the June negotiations, but deliberately refused to disclose them to Sanofi's representatives").
Similarly, Sanofi's allegations of affirmative misrepresentations do not meet the particularity standards of Rule 9(b). For example, the Complaint alleges that
Sanofi's representatives specifically asked whether there was any other reason why it could take a long time to obtain the KRIP Determination Letter, and were told "no."
(Id. ¶ 22). In addition, the Complaint alleges that
in the Asset Purchase Agreement Sanofi's representatives also obtained an extremely strong representation from Defendants regarding KRIP's compliance with applicable federal regulations. Specifically, Defendants represented that KRIP was in "substantial compliance with ERISA and the [IRS] Code." In addition, the Defendants also represented that KRIP had received a favorable determination letter from the IRS and that they were "not aware of any circumstances likely to result in revocation of any such favorable determination letter."
(Id. ¶ 23). Sanofi also claims that Kodak's representatives
made affirmative misrepresentations disclaiming any [KRIP] defects. . . . Indeed, a Kodak employee reviewing a draft of the Original Agreement wrote to one of the Kodak negotiators on June 13, 1994, that "the inclusion of the `180 days' could well mislead a reader of the contract [i.e., Sanofi] into thinking that the transfer might take place that early, whereas it almost surely could not take place . . . into 1997."
(Id. ¶ 24) (second change and second ellipsis in original). Lastly, Sanofi asserts that
[a]t least one Kodak negotiator who dealt directly with Sanofi's representatives in the June negotiations and who made representations to them about the timing of the KRIP asset transfers stated that she did not know that others at Kodak understood that Sanofi was being misled, because she had not seen the June 13 memorandum or spoken to the author about it. She also acknowledged that, had she seen the memorandum (or been aware of its contents), she would have told Sanofi — because this is precisely the sort of information about which Sanofi's representatives were inquiring.
(Id. ¶ 25). None of these allegations is sufficiently detailed to satisfy Rule 9(b). Many do not include specific fraudulent statements Kodak allegedly made, and all fail to identify the "Defendants" or the Sanofi or Kodak "representatives" who are speaking. In addition, the claims lack specificity as to time and place of the alleged misrepresentations.
In its memorandum of law, Sanofi includes a footnote identifying two Kodak negotiators who allegedly made knowingly false statements about the risks of delay in obtaining a DL. (Pl. Mem. at 13 n. 9). I note that this footnote does not cure the 9(b) defects of Sanofi's Complaint.
Finally, Sanofi fails to plead any scienter of Kodak. After describing the various alleged fraudulent statements and omissions made during the June 1994 negotiations, Sanofi never claims that Kodak was aware of its alleged misconduct. For example, while the June 13, 1994 memorandum could raise the inference that Kodak was aware that it was misleading Sanofi, there is no allegation of who wrote the memo, to whom it was written, whether the memo was received and read by the recipient, and whether others were aware of its contents. In fact, the Complaint states that the Kodak representative "did not know that others at Kodak understood that Sanofi was being misled. . . ." (Id.). In its answering brief, Sanofi asserts:
Defendants also had a powerful, concrete motive to misrepresent these material facts: to avoid the risk that the IRS might discover the KRIP Defects before Kodak was ready to bring them to its attention, thereby exposing Kodak to the risk of multi-billion dollar penalties. AC 15-18.
(Pl. Mem at 13). Passing whether such a motive, if pleaded, might be sufficient, it is not so pleaded, and there is no allegation that any such consideration affected Kodak's dealings with Sanofi. See, e.g., AC ¶ 17 ("Prior to June 1994, Kodak also began to consider strategies to reduce the exposure posed by the KRIP Defects, including making submissions to the [IRS] on a voluntary basis because self-reporting those defects would reduce Kodak's exposure."). Sanofi has not raised a strong inference of intent to defraud because it has not sufficiently alleged facts constituting strong circumstantial evidence of conscious misbehavior or recklessness, or that Kodak had motive and opportunity to commit fraud.
While Sanofi's fraudulent inducement claim does not meet the particularity and scienter requirements of Rule 9(b), I cannot say that Sanofi would not be able to state a claim for fraud that would meet these requirements. Accordingly, Count IV is dismissed with leave to replead.
2. Count V — Fraud
Sanofi claims that after the October 1, 1994 closing date, Kodak breached its duty "to disclose the true state of affairs to Sanofi" (Pl. Mem. at 16) with regard to entering KRIP into the CAP Program in September 1995 and the resulting potential delay in obtaining a determination letter. Sanofi alleges that
Sanofi faults Kodak for failing to file for its determination letter by December 31, 1994, as it had represented it would do. (AC ¶ 28). However, Kodak filed for its determination letter one day after Sanofi, on March 31, 1995, and neither party filed until the 180th day after the closing date. (Id. ¶¶ 27, 28, 55).
Kodak purposefully kept Sanofi entirely in the dark about the CAP Program filing. The filing itself was made on a confidential basis, and Kodak made no effort to alert Sanofi that it had entered KRIP into the CAP Program. Indeed, Kodak did not even inform Sanofi about the CAP Program filing until nearly two years later.
(AC ¶ 35). Although Sanofi draws a potentially damaging picture of Kodak's conduct after the closing of the deal, Sanofi fails to plead its fraud claim with sufficient particularity or to allege sufficient motive on the part of Kodak.
The Complaint alleges that upon its receipt of its determination letter in December 1995 (id. ¶ 43), Sanofi began to contact Kodak about the asset transfer and consistently received either no response at all or a false response from Kodak.
On March 19, 1996, Sanofi's General Counsel sent a letter to Kodak's General Counsel attaching the Sanofi Determination Letter and asking to begin the process of transferring assets. Kodak did not respond.
(Id.). See also id. ¶¶ 45, 49, 51.
[I]n May 1996, Sanofi's Chief Financial Officer called one of Kodak's chief negotiators of the Asset Purchase Agreement to discuss the status of the pension asset transfer. During the call, the Kodak employee agreed that the process should begin. He did not, however, advise Sanofi that Kodak had filed KRIP under the CAP Program, that the Kodak Determination Letter would not be received before the CAP Program was completed, or that the CAP Program might take years. Moreover, the Kodak negotiator agreed to work with Sanofi to establish the steps necessary to transfer the assets, including forecasting a probable time for the transfer and arranging for a meeting among the actuaries for the respective companies. Nevertheless, following the call, the Kodak negotiator took no follow-up action, spoke to no one at Kodak regarding the call, and never spoke to the Sanofi CFO again.
(Id. ¶ 44). Sanofi claims that in March 1997, Kodak's treasurer advised Sanofi's CFO that Kodak would be making an asset transfer to ECC before transferring assets to Sanofi. (Id. ¶ 46). The Complaint further alleges that
[a]fter more months of delay, in July 1997 Sanofi's CFO again placed a call to Kodak's treasurer. That call was returned by yet another Kodak employee. When asked about the transfer of pension assets to ECC, the Kodak employee advised Sanofi's CFO that the Kodak Determination Letter had still not been received, but that the ECC transfer had taken place on the basis of an opinion of counsel rather than a determination letter. The Kodak employee acknowledged in a memorandum written contemporaneously with that call that Sanofi's CFO "was very clear that he [was] very disturbed by the delay in the asset spin-off and that he is eager to proceed with the spin-off even if it is based upon an opinion of counsel." Instead of informing Sanofi's CFO of the KRIP Defects or the CAP Program, the Kodak employee instead said that the delay was due to the IRS having raised some "minor" compliance issues.
(Id. ¶ 47) (change in original). Sanofi further claims that it was not until July 14, 1997 that "a Kodak in-house attorney" advised Sanofi's general counsel that Kodak had entered KRIP into CAP in September 1996, when in fact KRIP entered the program in September 1995. (Id. ¶ 48). Finally, Sanofi alleges that "a different in-house Kodak attorney" wrote Sanofi a letter in October 1997
suggest[ing] that the parties could pursue proceeding by opinion of counsel in lieu of the Kodak Determination Letter, but that any opinion of counsel letter from Kodak would be "full of caveats, conditions and disclaimers" and that Sanofi would not be provided any Kodak communications with the IRS because Kodak would then need to provide such information to other companies waiting for KRIP pension asset spin-offs. In fact, these statements were also false: Kodak had already determined that it would not agree to expedite the transfer of the pension assets by providing Sanofi with an opinion of counsel; Kodak had agreed to transfer the KRIP assets to ECC via an opinion of counsel which contained no "caveats, condition, and disclaimers;" and Kodak had already provided to ECC much or all of its IRS communications.
(Id. ¶ 50).
Here, again, Sanofi fails to identify the various Kodak "employees," "attorneys" or "negotiators" who made the specific misrepresentations on behalf of the company. In addition, after a rather lengthy presentation of Kodak's alleged misconduct, Sanofi fails to allege a motive. Sanofi states that "as a consequence of a raging bull market, KRIP was able to obtain unusually high returns on its investments" (id. ¶ 55), and that Kodak retained the difference [between the 7% return it paid to Sanofi upon the asset transfer and the market appreciation in the KRIP assets], thereby reducing [Kodak's] future payment obligations by that amount" (id. ¶ 56). This factual statement, in and of itself, is insufficient to raise a strong inference of intent to defraud because it simply states the outcome of the financial arrangement agreed to in the APA. It surely (and understandably) does not allege the required link — that Kodak knew that the "raging bull market" would continue.
Sanofi further alleges that
Kodak had an economic incentive to transfer KRIP assets to ECC more quickly than to Sanofi: Kodak's agreement with ECC required that it share with ECC any appreciation on pension assets earned by KRIP. In contrast, the short term interest rate Sanofi was induced to accept was far less than the actual rate of return KRIP earned on those assets. Thus, it was profitable for Kodak first to devote its resources to transferring KRIP assets to ECC, and only thereafter to pay attention to its obligations to Sanofi. It was for that reason (and ECC's frustration about the delayed transfer of KRIP assets) that Kodak decided that the ECC transfer would come first.
While Sanofi makes several pejorative references to being "induced to accept" the 7% rate (AC ¶ 61) and KRIP's obtaining "unusually high returns on its investments" in the March 30, 1995 to 1998 time frame because of the "raging bull market" (AC ¶ 55), it nowhere asserts that had Sanofi known what it now says are the real facts that Sanofi would have sought something other than what it obtained under the APA.
(Id. ¶ 61) (footnote added). This conclusion is insufficient from which to infer a fraudulent intent without an appropriate factual foundation. Sanofi offers no facts to support its conclusion that Kodak wrongfully completed its asset transfer to ECC first, or that it was profitable for Kodak to complete the ECC transfer before the Sanofi transfer. In fact, as Sanofi describes, Kodak closed its deal with ECC in December 1993, almost a year before its deal with Sanofi. (Id. ¶ 58). Additionally, the ECC spin-off involved "nearly $700 million in KRIP assets," over three times those involved in the Sanofi deal. (Id. ¶ 60). Although Sanofi claims that Kodak was required to share with ECC any appreciation earned by KRIP, given the $700 million base asset amount, Sanofi does not explain why it was profitable for Kodak to devote its resources to completing the ECC transfer first.
In any event, even assuming that it was profitable for Kodak to effect the ECC transfer before the Sanofi transfer, profitability, in and of itself, is insufficient to establish motive under Rule 9(b). As explained by now-Chief Judge Walker in Novak v. Kasaks, 216 F.3d 300, 307 (2d Cir. 2000) (relied on by Sanofi), in his review of Second Circuit law relating to motive, albeit in the context of Rule 10b-5:
Plaintiffs could not proceed based on motives possessed by virtually all corporate insiders, including: (1) the desire to maintain a high corporate credit rating, see Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., Inc., 75 F.3d 801, 814 (2d Cir. 1996), or otherwise sustain "the appearance of corporate profitability, or of the success of an investment," Chill, 101 F.3d at 268. . . .
Additionally, Sanofi's effort to articulate a motive for fraud based on Kodak's "preferential treatment" of ECC also fails. See AC ¶¶ 57-62. Sanofi cites no cases for the proposition that a company may not treat different business partners differently with respect to a deal's formation, structure and implementation. Without a sufficient allegation that Kodak's decision to complete the ECC transfer first was made for fraudulent reasons, the discussion of the ECC deal is simply a red herring.
Finally, Sanofi appears to argue that Kodak's alleged post-closing misrepresentations and omissions resulted in Sanofi's being "unable to protect rights under the APA, AC 92, including losing warranty and indemnification claims because it did not learn (until after the representation expired, APA § 7.1) that KRIP was not in substantial compliance with ERISA and the Code." (Pl. Mem at 16-17). To the extent this is intended to relate to motive, no such allegation appears in the Complaint.
While Sanofi's fraud claim does not meet the standards of Rule 9(b), I am also unable to say as a matter of law that plaintiff is unable to state a claim. Accordingly, Count V is dismissed with leave to replead.
CONCLUSION
Defendants' motion to dismiss the ERISA claims (Counts VI-VIII) is granted.
Defendants' motion to dismiss the contract claim based on the Hold Harmless Clause (Count I) is granted.
Defendants' motion to dismiss the contract claims based on the covenant of good faith and fair dealing (Counts II and III) is denied, and those claims are merged.
Defendants' motion to dismiss the fraudulent inducement and fraud claims (Counts IV and V, respectively) is granted with leave to replead. Because Sanofi waited to assert fraud claims until close to the end of discovery while having the benefit of nine months of discovery, and due to the impending trial date, repleading will be within five business days of the date hereof. If, after review, Kodak believes the repleaded counts suffer from the same or similar defects as those noted above, it shall so notify Sanofi within five business days of receipt. If the parties do not agree as to the disposition of the claims, counsel shall contact the Court within twelve business days of the date hereof.
For the reasons set forth above, defendants' motion to dismiss the Complaint is granted in part and denied in part.
SO ORDERED.