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dismissing plaintiff's securities fraud claim and rejecting allegation that plaintiff's stock options were not automatically converted under stock option plan as inconsistent with plaintiff's allegation that his stock options were automatically converted under the plan
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04 Civ. 0582 (RWS).
November 16, 2004
KING, PAGANO HARRISON, Attorneys for Plaintiff, New York, NY, By: JEFFREY W. PAGANO, ESQ., IRA M. SAXE, ESQ., Of Counsel.
SKADDEN, ARPS, SLATE, MEAGHER FLOM, Attorneys for Defendants, New York, NY, By: SAMUEL KADET, ESQ., TIMOTHY K. GIORDANO, ESQ., Of Counsel.
OPINION
Defendants Cendant Corporation ("Cendant"), Fairfield Resorts, Inc. ("Fairfield"), and FFD Development Company, L.L.C. ("FFD") (collectively, the "Defendants") have moved pursuant to Rules 12(b)(6) and 9(b), Federal Rules of Civil Procedure, and Section 21D of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended by the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), 15 U.S.C. § 78u-4, to dismiss claims 1, 3, 4, 5, 7 (to the extent based on gross negligence) and 8 in the amended complaint (the "Amended Complaint") of plaintiff Douglas Kinsey ("Kinsey"). For the reasons set forth below, the motion is granted and Kinsey is granted leave to move to file a second amended complaint.
The Parties
Kinsey is a resident of Georgia and a former employee of both Fairfield and FFD. (See Am. Compl. at ¶¶ 2, 9, 29.) Kinsey resigned from Fairfield in or about May 2003. (See Am. Compl. at ¶ 65.)
Fairfield is a Delaware corporation with its principal place of business in Florida and was at one time purported to be the largest vacation ownership company in the world. (See Am. Compl. at ¶¶ 4, 9.)
Cendant is a Delaware Corporation with its principal place of business in New York and is the parent company of Fairfield, having acquired it in April 2001. (See Am. Compl. at ¶¶ 3, 17.) Cendant is primarily a travel and real estate company with world-wide operations. (See Am. Compl. at ¶ 18; see also Excerpts from Cendant's Form 10-K, filed Mar. 29, 2001, attached as Exhibit B to the Declaration of Samuel Kadet, dated May 10, 2004 ("Kadet Decl."), at 4.)
FFD, a Delaware corporation with its principal place of business in Florida, was formed in connection with Cendant's acquisition of Fairfield in April 2001. (See Am. Compl. at ¶¶ 5, 17.)
Prior Proceedings
Kinsey commenced this action on January 26, 2004. In his initial complaint (the "Original Complaint") against Fairfield, FFD, Cendant and the Cendant Corporation Employee Stock Purchase Plan (collectively, the "Initial Defendants"), Kinsey alleged claims under the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. § 1001 et seq., as well as common law claims and violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. (See Original Compl. at ¶¶ 48-143.)
The Initial Defendants moved to dismiss the Original Complaint on March 26, 2004, including the purported ERISA claims and the claim for securities fraud. Kinsey then filed the Amended Complaint on April 23, 2004, alleging securities fraud in Count 1, breach of contract in Count 2, breach of fiduciary duty in Count 3, breach of the implied duty of good faith and fair dealing in Count 4, fraud and deceit in Count 5, negligent misrepresentation in Count 6, negligence in Count 7, unjust enrichment in Count 8, and failure to pay wages in Count 9, as well as seeking a declaratory judgment in Count 10.
The Defendants thereafter moved to dismiss Counts 1, 3, 4, 5, and 8 of the Amended Complaint in their entirety and Count 7 in part. The motion was heard and marked fully submitted on June 16, 2004.
As set forth in a letter from the Defendants' counsel to the Court following the filing of both the Amended Complaint and the Defendants' motion to dismiss the Amended Complaint, "[i]n light of these events, the parties believe and agree that there is no need for the argument on the Initial Motion to Dismiss. . . ." (Letter of Samuel Kadet to the Court, dated May 14, 2004, at 1.) Accordingly, the Initial Defendants' motion to dismiss the Original Complaint, filed on March 26, 2004, is deemed moot.
The Facts
The following factual background is drawn primarily from the allegations of the Amended Complaint and from documents referenced in and integral to the Amended Complaint, including, inter alia, the Fairfield Communities, Inc. 1997 Stock Option Plan (the "Plan") and the related option agreement between Kinsey and Fairfield (the "Option Agreement"), as well as public documents filed with the Securities and Exchange Commission (the "SEC"). See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991) (stating that "when a district court decides a motion to dismiss a complaint alleging securities fraud, it may review and consider public disclosure documents required by law to be and which actually have been filed with the SEC, particularly where plaintiff has been put on notice by defendant's proffer of these public documents"); Lewis Tree Serv., Inc. v. Lucent Techs., Inc., No. 99 Civ. 8556 (JGK), 2000 WL 1277303, at *3 (S.D.N.Y. Sept. 8, 2000) (holding that where a complaint contains allegations that the defendants breached a contract, the complaint "incorporates by reference the allegedly breached contract and the Court may consider the terms of that contract on a motion to dismiss") (citing Allworld Communications Network, L.L.C. v. MCI Worldcom, Inc., No. 99 Civ. 4256 (DC), 2000 WL 1013956, at *2 n. 1 (S.D.N.Y. July 24, 2000), appeal dismissed, 98 Fed. Appx. 72 (2d Cir. 2004); Cary Oil Co. v. MG Refining Mktg., Inc., 90 F. Supp. 2d 401, 407 n. 19 (S.D.N.Y. 2000)). The factual allegations are accepted as true for the purposes of this motion, see Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002), and do not constitute findings of fact by the Court.
In or about 1981, Kinsey commenced employment with Fairfield. He subsequently left employment with Fairfield in or around 1989 and commenced employment with Fairfield again in or around 1995. (See Am. Compl. at ¶¶ 9, 10.) In or about Fall 1996, Kinsey rose to the position of Vice President of Acquisitions for Fairfield. (See Am. Compl. at ¶ 10.)
In March 1997, Fairfield established the Plan (see Am. Compl. ¶ 11), which authorized the Fairfield Board of Directors (the "Fairfield Board") or its compensation committee to make discretionary awards to employees of options to purchase shares of Fairfield common stock. (See Plan, Kadet Decl., Exh. C, at 2). Under the Plan, any award of options would specify the required period of continuous employment and any other conditions to be satisfied before the awarded options would become exercisable. (See Plan, Kadet Decl., Exh. C, at 3.) The award could also provide for, or be amended to provide for, the earlier exercise of options in the event of a change in control of Fairfield. (See Plan, Kadet Decl., Exh. C, at 3.)
Under the Plan, each award of options was to be evidenced by a stock option agreement executed on behalf of Fairfield and delivered to the recipient employee. (See Plan, Kadet Decl., Exh. C, at 3.) The Fairfield Board (or the compensation committee) was authorized, without the consent of the recipient employee, to "amend any agreement evidencing a Stock Option granted under the Plan, or otherwise take action, to accelerate the time or times at which the Stock Option granted under the Plan, [and] to extend the expiration date of the Stock Option. . . ." (Plan, Kadet Decl., Exh. C, at 4.) The Fairfield Board or any duly authorized committee also could amend the Plan or terminate it at any time. (See Plan, Kadet Decl., Exh. C, at 5.)
On May 22, 1997, Kinsey was granted certain stock options (the "Awarded Options"), pursuant to which he had the right to purchase 10,000 shares of Fairfield common stock at $30.00 per share. (See Am. Compl. at ¶ 12.) As contemplated by the Plan, the terms and conditions of this grant were set forth in the Option Agreement, an agreement entered into by Kinsey on or about June 5, 1997 and executed effective as of May 22, 1997. (See Am. Compl. at ¶ 14; see generally Option Agreement, Kadet Decl., Exh. D.)
According to the Option Agreement, the Awarded Options were to vest (i.e., become exercisable) at a rate of 25% on each of the second, third, fourth and fifth anniversaries of the date of the award, provided that Kinsey remained in continuous employment with Fairfield from the award date until each such vesting date. (See Am. Compl. at ¶ 12.) So long as Kinsey remained employed by Fairfield, he could exercise any of the Awarded Options that had vested up to ten years after the May 22, 1997 award date. (See Am. Compl. at ¶ 12.)
On the other hand, if Kinsey ceased to be an employee of Fairfield for any reason other than death or discharge for cause (or resignation in anticipation of discharge for cause), the Option Agreement provided that Kinsey could exercise his vested Awarded Options only during the ninety calendar days following such termination, but in no event after the otherwise applicable ten-year expiration date. (See Option Agreement, Kadet Decl., Exh. D, at 2.) The Option Agreement further provided that any subsequent amendment to the Plan would be deemed an amendment to the Option Agreement, subject only to the requirement that no amendment would adversely affect Kinsey's rights thereunder without his consent. (See Option Agreement, Kadet Decl., Exh. D, at 3.)
Following this grant, Fairfield announced two stock splits, a 3-for-2 split effective July 15, 1997, and a 2-for-1 split effective January 30, 1998. In connection with each stock split, the Plan was amended appropriately. (See Am. Compl. at ¶¶ 15, 16.) Neither of the amendments changed the time within which Kinsey was entitled to exercise the Awarded Options. (See Am. Compl. at ¶¶ 15, 16.)
In April 2001, Cendant acquired Fairfield pursuant to a merger (the "Merger") and assumed the outstanding and unexercised options issued pursuant to the Plan. (See Am. Compl. at ¶ 17, 30.) As a result, in conjunction with the Merger, all such options, including Kinsey's, automatically became fully vested and were converted to options to purchase shares of Cendant common stock. (See Am. Compl. at ¶¶ 30, 31.) Under the applicable conversion factor, the Awarded Options became fully-vested options to purchase 33,918 shares of Cendant common stock at a "strike" price of $8.85 per share. (See Am. Compl. at ¶¶ 31, 32.)
As of December 31, 2000, the last full fiscal year before Cendant acquired Fairfield, there were approximately 917 million shares of Cendant common stock, and 187 million options to purchase shares of such stock, outstanding. (See Excerpts, Kadet Decl., Exh. B, at F-8, F-30.)
Kinsey received notice of the conversion of Fairfield stock options in a Statement of Stock Option Award, which explained that the newly-converted options remained subject to the terms and conditions set forth in the Plan and Option Agreement. (See Am. Compl. at ¶ 32.) As stated in a notice accompanying the Statement of Stock Option Award, "[t]his means that the original expiration date of [the] options will continue to apply, as well as the terms and conditions applicable to [the] options upon your separation from employment with Cendant and/or Fairfield." (Notice, Kadet Decl., Exh. E, at 1.)
In or around April 2001, Kinsey, who had been employed by Fairfield, became an employee of FFD. FFD was formed in connection with the Cendant acquisition of Fairfield. (See Am. Compl. at ¶¶ 17, 29.) In or about June 2001, Cendant sent a notice to Kinsey informing him that his stock options would expire on or about June 30, 2001. (See Am. Compl. at ¶ 36.)
On or about July 3, 2001, the Defendants informed Kinsey that the notice that his stock options would expire on June 30, 2001 was sent to Kinsey in error. The Defendants informed Kinsey that the Plan had been amended to provide that employment at FFD would "count" as continued employment at Fairfield and thus would not trigger the Plan's 90-day post-termination period after which all unexercised options would expire. (See Am. Compl. at ¶ 37.) According to Kinsey, on or about July 3, 2001 he was informed by a FFD officer, Greg Bendlin ("Bendlin"), in an e-mail that his unexercised options had not expired. (See Am. Compl. at ¶ 37.) On or about August 14, 2001, Bendlin informed Kinsey that his stock options would not expire until the later of one year after the Merger (i.e., April 2, 2002) or the ten-year term set forth in the Option Agreement (May 21, 2007). (See Am. Compl. at ¶ 39.)
Kinsey accepted employment with Fairfield again in or around October 2001, assuming the position of Senior Vice President of Real Estate Acquisitions. (See Am. Compl. at ¶¶ 40, 46, 47.)
On or about April 3, 2003 a Cendant officer informed Kinsey that the Cendant stock options converted from the Awarded Options had actually expired in April 2002, on the first anniversary of the Merger. (See Am. Compl. at ¶ 55.) Kinsey resigned from Fairfield in or about May 2003, shortly after a dispute arose concerning the expiration of his stock options. (See Am. Compl. at ¶ 65). According to Kinsey, at all relevant times, the amount that would have been realized by Kinsey had the stock options at issue been exercised exceeded $100,000. (See Am. Compl. at ¶ 67.)
The Rule 12(b)(6) Standard
In considering a motion to dismiss pursuant to Rule 12(b)(6), Fed.R.Civ.P., the court should construe the complaint liberally, "accepting all factual allegations in the complaint as true, and drawing all reasonable inferences in the plaintiff's favor," Chambers, 282 F.3d at 152 (citing Gregory v. Daly, 243 F.3d 687, 691 (2d Cir. 2001)), although "mere conclusions of law or unwarranted deductions" need not be accepted. First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 771 (2d Cir. 1994). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Villager Pond, Inc. v. Town of Darien, 56 F.3d 375, 378 (2d Cir. 1995) (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)). In other words, "`the office of a motion to dismiss is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.'" Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of New York, 375 F.3d 168, 176 (2d Cir. 2004) (quotingGeisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980)). Dismissal is only appropriate when "it appears beyond doubt that the plaintiff can prove no set of facts which would entitle him or her to relief." Sweet v. Sheahan, 235 F.3d 80, 83 (2d Cir. 2000); accord Eternity Global Master Fund, 375 F.3d at 176-77.
Choice of Law
As to Kinsey's state law claims, a court must apply the choice-of-law rules prevailing in the state in which the court sits. See, e.g., Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941); Krauss v. Manhattan Life Ins. Co., 643 F.2d 98, 100 (2d Cir. 1981). In this case, New York's choice-of-law principles are applied, according to which the governing law with respect to Kinsey's state-law claims is that "`of the jurisdiction which, because of its relationship or contact with the occurrence or the parties, has the greatest concern with the specific issue raised in the litigation.'"Tartaglia v. Paul Revere Life Ins. Co., 948 F. Supp. 325, 326 (S.D.N.Y. 1996) (quoting Babcock v. Jackson, 12 N.Y.2d 473, 481, 240 N.Y.S.2d 743, 749, 191 N.E.2d 279, 283 (N.Y. 1963)). Under New York's choice-of-law principles, "the first step in any choice of law inquiry is to determine whether there is an `actual conflict' between the laws invoked by the parties." Harris v. Provident Life Acc. Ins. Co., 310 F.3d 73, 81 (2d Cir. 2002) (quoting Booking v. Gen. Star Mgmt. Co., 254 F.3d 414, 419-20 (2d Cir. 2001) (citing In re Allstate Ins. Co., 81 N.Y.2d 219, 223, 597 N.Y.S.2d 904, 905, 613 N.E.2d 936, 937 (N.Y. 1993))).
Kinsey has alleged in the Amended Complaint that "a substantial part of the events and omissions giving rise to the claims asserted herein occurred in this District." (Am. Compl. at ¶ 8.) While Kinsey has cited to both Georgia and New York law in his opposition papers with respect to his claim for breach of the implied duty of good faith and fair dealing, noting slight variations between the two bodies of law, he has otherwise relied on case law from New York with respect to his state law claims and has expressly asserted that his claim for breach of a fiduciary duty must stand "under any applicable state law. . . ." (Pl. Opp. Mem. at 2.)
For their part, the Defendants note in their moving papers that the Option Agreement provides that it is to be governed by Arkansas law except as to matters of corporate law, which are to be governed by Delaware law (see Option Agreement, Kadet Decl., Exh. D, at 3), although they cite to no Arkansas law with respect to Kinsey's claim for breach of the implied duty of good faith and fair dealing arising out of the Option Agreement. The Defendants otherwise assert that the conduct alleged in the Amended Complaint at least arguably occurred either in Florida, Georgia or New York, but that "no conflict issue for purposes of this motion" is perceived. (Defs. Mem. at 21-22 n. 7.)
Since "implied consent to use a forum's law is sufficient to establish choice of law," Tehran-Berkeley Civil Envtl. Eng'rs v. Tippetts-Abbett-McCarthy-Stratton, 888 F.2d 239, 242 (2d Cir. 1989), and, with the exception of the fiduciary duty claim, the parties have relied, at least in part, upon New York law and have noted no relevant conflicts with the law of the other potentially applicable jurisdictions, New York law will be applied here except as otherwise noted.
Discussion I. The Defendants' Motion Is Granted A. The Securities Fraud Claim Is Dismissed
Count 1 of the Amended Complaint alleges that the Defendants violated Section 10(b) of the Exchange Act, 15 U.S.C. § 78j and the regulations promulgated thereunder. (See Am. Compl. at ¶¶ 75-87.) Kinsey alleges, inter alia, that the Defendants intentionally and knowingly failed to disclose material facts and made false statements of fact, knowing them to be false, in relation to the time period within which Kinsey had to exercise his stock options. (See Am. Compl. at ¶ 78.)
To state a claim under Section 10(b) and Rule 10b-5 promulgated thereunder, a plaintiff must plead that "in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that plaintiff's reliance on defendant's action caused [plaintiff] injury." Acito v. Imcera Group, Inc., 47 F.3d 47, 52 (2d Cir. 1995) (internal quotation marks omitted); accord Lawrence v. Cohn, 325 F.3d 141, 147 (2d Cir. 2003). A claim under Section 10(b) sounds in fraud and must therefore meet the pleading requirements of Rule 9(b), Fed.R.Civ.P. See, e.g., In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 69-70 (2d Cir.), cert. denied sub nom Scholastic Corp. v. Truncellito, 534 U.S. 1071 (2001). Such a claim must also satisfy the requirements of the PSLRA, 15 U.S.C. §§ 78u-4(b)(1) and 78u-4(b)(2).
The Defendants argue that Count 1 fails because Kinsey did not "purchase" the Awarded Options within the meaning of Section 10(b) and that, even if he had, none of the purported misrepresentations occurred "in connection with" that award of options. The Defendants further argue that Count 1 does not comply with the heightened pleading requirements of Rule 9(b), Fed.R.Civ.P., and of the PSLRA.
1. Kinsey Did Not "Purchase" the Awarded Options or the Converted Cendant Stock Options
Kinsey does not dispute the Defendants' contention that his receipt of the Awarded Options in 1997 fails to qualify as a "purchase" for Exchange Act purposes. Instead, Kinsey argues that he purchased the Cendant stock options converted from the Awarded Options in April 2001 when he accepted employment with FFD and that he purchased the converted Cendant stock options again when he subsequently returned to work for Fairfield in October 2001. Kinsey contends that he accepted the employment offered to him in both instances based in part on the Defendants' representations to him concerning the period within which he could exercise his stock options.
Kinsey has alleged that, over the course of the negotiations leading to his October 2001 decision to return to Fairfield, the Defendants "also provided [Kinsey] with options in 50,000 shares of Cendant stock if he rejoined Fairfield." (Am. Compl. at ¶ 41.) These additional 50,000 shares of Cendant stock are not referenced in Count 1 of the Amended Complaint, which cites only the Awarded Options and the "converted Cendant stock options" (Am. Compl. at ¶ 77) as the relevant "securities" within the meaning of 15 U.S.C. §§ 77b(a)(1) and 78c(a)(10). (See Am. Compl. at ¶¶ 77-78.) Accordingly, these additional non-converted Cendant stock options are not relevant here and the discussion of Kinsey's stock options refers only to the Awarded Options and the Cendant stock options to which the Awarded Options were converted.
As the Defendants acknowledge in their moving papers, if an individual receives an award of grant stock options (or stock) in exchange for accepting employment, then, under the Second Circuit's decision in Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555 (2d Cir. 1985), that individual might be found to have made a "purchase" for Exchange Act purposes. See Yoder, 751 F.2d at 558-61 (holding that stock offered as an inducement to accept employment qualifies as a "purchase" of securities under the Exchange Act); see also Lawrence, 325 F.3d at 152-53 (collecting cases demonstrating that standing to sue under Section 10(b) is limited to actual purchasers and sellers of a security or to plaintiffs with a contractual right to purchase or sell a security). Even construing the allegations of the Amended Complaint as true, no such "purchase" occurred here.
As an initial matter, Kinsey has alleged in the Amended Complaint that all options under the Plan, including his Awarded Options, were automatically converted to options to purchase Cendant common stock upon Cendant's acquisition of Fairfield. (See Am. Compl. at ¶ 30 ("Under the Agreement and Plan of Merger between Cendant and Fairfield, Cendant assumed the outstanding and unexercised options under the 1997 Stock Option Plan, including [Kinsey's] options."), ¶ 31 ("As a result of Cendant's acquisition of Fairfield, all options to purchase stock under the 1997 Stock Option Plan became options to purchase Cendant common stock."); see also Am. Compl. at ¶ 77 (referring to "[t]he converted Cendant stock options issued to [Kinsey] as a result of the negotiations in connection with Cendant's acquisition of Fairfield").) Thus, according to the Amended Complaint, Kinsey received the converted options as a result of the Merger and not as the result of any employment decision in April 2001.
Although the exchange or conversion of securities in connection with a merger may constitute a purchase for purposes of a Section 10(b) claim where the plaintiff shareholder has alleged that he or she was deceived into approving the merger,see, e.g., S.E.C. v. Nat'l Secs., Inc., 393 U.S. 457, 467 (1969), no such allegations are present here, and the conversion of the Awarded Options therefore does not constitute an investment decision or "purchase."
To the extent that the Amended Complaint suggests an inconsistent allegation, i.e., that Kinsey was somehow different from the other Plan participants or that the Awarded Options were not automatically converted and vested upon the Merger (see, e.g., Am. Compl. at ¶ 24 (explaining that "[d]uring the course of [the April 2001] negotiations, Fairfield, FFD and Cendant management advised [Kinsey] that in the event that he chose to become employed by Cendant through FFD, his Fairfield stock options would be converted to Cendant stock options"), ¶ 77 (alleging that Kinsey "acquired the converted Cendant stock options as a result of individualized negotiations in connection with his decision to accept employment with Cendant through FFD and his decision to remain with Cendant through employment with Fairfield")), such a contradictory allegation does not undermine the conclusion just reached. See, e.g., In re Livent, Inc. Noteholders Sec. Litig., 151 F. Supp. 2d 371, 405-06 (S.D.N.Y. 2001) (explaining that "a court need not feel constrained to accept as truth conflicting pleadings that make no sense, or that would render a claim incoherent, or that are contradicted either by statements in the complaint itself or by documents upon which its pleadings rely") (collecting cases).
Second, the allegations of the Amended Complaint do not suggest that Kinsey "purchased" the converted stock options in April 2001 and October 2001 within the meaning of Section 10(b) and the applicable case law. Yoder and the other cases on which Kinsey relies are inapposite, as they stand for the proposition that a plaintiff who received stock options in exchange for and as in inducement for accepting employment has standing as a "purchaser." See, e.g., Yoder, 751 F.2d at 558-61; Dubin v. E.F. Hutton Group, Inc., 695 F. Supp. 138, 145 (S.D.N.Y. 1988) (explaining that the plaintiff, in accepting the defendant's job offer, had exchanged "something of tangible value — he changed his way of life and his job — in return for the stock and stock options available through the Plan" and concluding that the plaintiff qualified as a "purchaser" of a security); Collins v. Rukin, 342 F. Supp. 1282, 1287-89 (D. Mass. 1972) (determining that the plaintiff, who had agreed, in accepting employment with the defendant, that he should receive certain stock options, qualified as a purchaser of securities). Unlike the plaintiffs in Yoder, Dubin, and Collins, Kinsey does not allege that he received the converted stock options in exchange for or as an inducement for acceptance of employment either in April 2001 or in October of that same year. Rather, Kinsey is alleged to have received the Awarded Options in May 1997 (see Am. Compl. at ¶ 12), which Awarded Options were converted to Cendant stock options upon the Merger. (See Am. Compl. at ¶¶ 30-31). Even taking as true the allegations that Kinsey was induced to accept employment with FFD in April 2001 and with Fairfield in October 2001 based, in part, on the Defendants' representations and omissions concerning the relevant period in which he could exercise the converted stock options (see Am. Compl. at ¶¶ 24, 29, 45, 46), these allegations are insufficient to establish that Kinsey was a "purchaser" of securities on either occasion, as no purchase or sale of the converted stock options occurred. To conclude otherwise would lead to the untenable result that a purchase or sale could be said to have occurred upon any misrepresentation concerning a security already purchased or sold. Consequently, Kinsey's securities fraud claim must be dismissed. 2. The Securities Fraud Claim Is Not Pled With Sufficient Particularity
As the allegations of the Amended Complaint fail to establish that a "purchase" of the converted stock options occurred in either April 2001 or October 2001, the Defendants' alternate argument that any alleged misrepresentations did not occur "in connection with" those purchases need not be reached.
Count 1 fails for the additional reason that it has not been pled with sufficient particularity, as required by both Rule 9(b), Fed.R.Civ.P., and the PSLRA. See, e.g., Novak v. Kasaks, 216 F.3d 300, 306-07 (2d Cir. 2000) (setting forth the heightened pleading standards of the PSLRA that must be met by a plaintiff who alleges securities fraud under Section 10(b) and Rule 10b-5); Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir. 1994) (stating that "[s]ecurities fraud allegations under § 10(b) and Rule 10b-5 are subject to the pleading requirements of Rule 9(b)").
To satisfy Rule 9(b), a complaint setting forth a claim pursuant to Section 10(b) and Rule 10b-5 "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.'"Shields, 25 F.3d at 1128 (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)); accord Stevelman v. Alias Research, Inc., 174 F.3d 79, 84 (2d Cir. 1999). To plead a material misrepresentation or omission under the PSLRA, "the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information or belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1).
The Amended Complaint does not include sufficiently particular allegations concerning the majority of misrepresentations and omissions cited by Kinsey. There are no allegations, for instance, concerning when and where the "individualized negotiations" between Kinsey and the Defendants leading to Kinsey's decisions to accept employment with FFD in April 2001 and with Fairfield in October 2001 took place, nor does the Amended Complaint indicate who participated in those negotiations, the identity of the speaker of the alleged representations made to Kinsey during those negotiations, or when the representations themselves were made. (See Am. Compl. at ¶¶ 23-29, 40-46, 77). Similarly, Kinsey has failed to identify when Cendant's writing or writings concerning the conversion of the Awarded Options to Cendant stock options were issued. (See Am. Compl. at ¶ 32.) Although the details of statements concerning the exercise period for Kinsey's stock options purportedly made by Bendlin, an FFD officer, in e-mails on or about July 3, 2001 and August 14, 2001 (see Am. Compl. at ¶¶ 37, 39) are pled with adequate particularity, these allegations would only potentially salvage Kinsey's claim if he were a "purchaser" of converted Cendant stock options in October 2001 (i.e., following the issuance of the e-mails), which, for the reasons stated above, he was not, and if he had adequately pled scienter, which, for the reasons stated below, he has not.
Moreover, Kinsey has not refuted the Defendants' argument that the Amended Complaint, which is replete with references to the Defendants' purported actions and omissions, fails to satisfy the basic requirement that "[w]here multiple defendants are involved, the complaint is required to describe specifically each defendant's alleged participation in the fraud." Spira v. Curtin, No. 97 Civ. 2637 (TPG), 2001 WL 611386, at *3 (S.D.N.Y. June 5, 2001); see also Double Alpha, Inc. v. Mako Partners, L.P., No. 99 Civ. 11541 (DC), 2000 WL 1036034, at *3 (S.D.N.Y. July 27, 2000) (dismissing Section 10(b) claims where the complaint did not distinguish among the multiple defendants and "alleg[e] specific acts of wrongdoing as to each one of them"); In re Blech Secs. Litig., 928 F. Supp. 1279, 1294 (S.D.N.Y. 1996) (dismissing Section 10(b) and other claims for failure to satisfy Rule 9(b), since "Rule 9(b) is not satisfied by a complaint in which `defendants are clumped together in vague allegations'") (quoting Three Crown Ltd. P'ship v. Caxton Corp., 817 F. Supp. 1033, 1040 (S.D.N.Y. 1993)). Kinsey's cursory allegation that the Defendants shared common ownership and common officers and/or directors at all relevant times following the Merger (see Am. Compl. at ¶ 35) and his argument that all of the Defendants were "`one'" with respect to the wrongdoing alleged in the Amended Complaint (Pl. Opp. Mem. at 13) do not excuse his failure to differentiate among the Defendants or otherwise exempt his pleadings from the requirements of Rule 9(b). See, e.g., Filler v. Hanvit Bank, Nos. 01 Civ. 9510 (MGC) 02 Civ. 8251 (MGC), 2003 WL 22110773, at *3 (S.D.N.Y. Sept. 12, 2003) (dismissing fraud claims against related corporate entities for lack of specificity where "[t]he complaints are full of conclusory allegations that the Korean entity acted through [its] parent [and] assume that these two corporations constitute a single entity [without] any explanation of why these distinct corporations should be regarded as one"); Kolbeck v. LIT America, Inc., 923 F. Supp. 557, 570 (S.D.N.Y. 1996) (explaining that "[b]road allegations that several defendants participated in a scheme, or conclusory assertions that one defendant controlled another, or that some defendants are guilty because of their association with others, do not inform each defendant of its role in the fraud and do not satisfy Rule 9(b)") (citing Landy v. Mitchell Petroleum Tech. Corp., 734 F. Supp. 608, 620-21 (S.D.N.Y. 1990)), aff'd, 152 F.3d 918 (2d Cir. 1998).
Kinsey has also failed to plead scienter adequately. In order to plead scienter under the PSLRA, "plaintiffs must `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind,' as required by the language of the Act itself." Novak, 216 F.3d at 311 (quoting 15 U.S.C. § 78u-4(b)(2)). In order to satisfy this requirement, "a complaint may (1) allege facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness, or (2) allege facts to show that defendants had both motive and opportunity to commit fraud." Rombach v. Chang, 355 F.3d 164, 176 (2d Cir. 2004) (quoting Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000)). Pursuant to Rule 9(b), "[m]alice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed.R.Civ.P. 9(b). Notwithstanding the generosity of this standard, the Second Circuit has long recognized that "we must not mistake the relaxation of Rule 9(b)'s specificity requirement regarding condition of mind for a `license to base claims of fraud on speculation and conclusory allegations.'" Acito, 47 F.3d at 52 (quoting Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990)).
Kinsey argues that the Defendants had both motive and opportunity to commit the fraud alleged. In support of his argument, he points to allegations in the Amended Complaint concerning Cendant's "questionable accounting practices" (Am. Compl. at ¶ 20) at or around the time of the Merger and Cendant's "scheme to understate its liabilities for off balance sheet entities and its employee stock options." (Am. Compl. at ¶ 21). It is alleged that Cendant announced in or about August 2002 that it would end its practice of refusing to report employee stock options as expenses as of January 2003 and reduce its issuance of employee stock options in the future. (See Am. Compl. at ¶¶ 48-49.) It is further alleged that at or around that same time Cendant's shareholders determined that Cendant's president should no longer have the right to a mandatory grant of stock options and that Cendant "took these actions in response to the business scandals and securities fraud lawsuits that it was facing." (Am. Compl. at ¶ 53.) Kinsey argues that motive may be inferred from the timing of the August 2002 announcement and the decision by Cendant's shareholders, both made after Kinsey was told that he had until May 2007 to exercise his converted stock options and before Kinsey was informed that his options had expired. (See Am. Compl. at ¶¶ 37-39, 55; see also Am. Compl. at ¶ 82 (alleging that the Defendants "had the motive to commit fraud because Cendant decided to drastically curtail its grant of stock options, including those to its own President, and therefore determined that it would not allow [Kinsey] to enjoy a right no longer available to its own President").)
Kinsey's allegations of general wrongdoing and the reduction in the award of employee stock options have no discernible bearing on any motive that the Defendants may have had to misrepresent to Kinsey the relevant exercise period for his converted stock options. This is particularly so in light of the timing of the August 2002 announcement and the shareholder decision, both of which came well after the summer of 2001, when the only misleading statements alleged with sufficient particularity purportedly occurred. Moreover, even accepting Kinsey's cursory allegation of the Defendants' "scheme" to mislead the public with regard to Cendant's accounting for awards of stock options as true, there are no allegations in the Amended Complaint suggesting how the purported misrepresentations to Kinsey concerning the exercise period for his Awarded Options, later the converted stock options, could have furthered that scheme.
Kinsey's conclusory allegation that the Defendants — including certain unidentified "directors and officers" — had the motive to commit fraud "because they were then able to realize, or believed themselves able to realize, concrete and personal benefits from the false statements and/or the wrongful disclosures . . ., specifically in relation to reducing the liability that it faced in connection with the securities fraud and other lawsuits that it faced and in its struggle to remove the public taint of financial scandal that had fallen upon Cendant and to increase the value of their own stock options" (Am. Compl. at ¶ 83) fares little better. Even adopting, arguendo, the somewhat strained assumption that the benefits alleged were sufficiently concrete,see generally Chill v. Gen. Elec. Co., 101 F.3d 263, 270 (2d Cir. 1996) (explaining that motive entails "`concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged'") (quotingShields, 25 F.3d at 1130), there is no suggestion offered by Kinsey as to how the Defendants, by purportedly misleading Kinsey concerning the exercise period for his Awarded Options, might have realized any of the generalized benefits alleged. As the Defendants observe, the notion that Kinsey's exercise of his 33,918 Awarded Options would have anything more than a de minimis effect on another shareholder's, much less the Defendants', holdings of Cendant common stock — of which there were nearly one billion shares outstanding as of December 21, 2000 — is implausible and no allegations to the contrary have been offered.
Kinsey has also contended that the factual allegations in the Amended Complaint adequately plead scienter because they set forth strong circumstantial evidence of recklessness. "To qualify as reckless conduct, defendants' conduct must have been `highly unreasonable' and `an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.'" Scholastic, 252 F.3d at 76 (quoting Rolf v. Blyth, Eastman Dillon Co., 570 F.2d 38, 47 (2d Cir. 1978)) (alteration in original). Thus, "[w]here the complaint alleges that defendants knew facts or had access to non-public information contradicting their public statements, recklessness is adequately pled for defendants who knew or should have known they were misrepresenting material facts with respect to the corporate business." Id. Where, however, a "plaintiff has failed to demonstrate that defendants had a motive to defraud . . ., he must produce a stronger inference of recklessness." Kalnit v. Eichler, 264 F.3d 131, 143 (2d Cir. 2001); see also Chill, 101 F.3d at 270 (noting that there is a "significant burden on the plaintiff in stating a fraud claim based on recklessness"). Kinsey fails to demonstrate how the allegations in the Amended Complaint in any way support such a "stronger inference."
In opposition to the Defendants' motion, Kinsey has recited various alleged misrepresentations and then proffered the conclusions that "[t]hese representations were profoundly false" (Pl. Opp. Mem. at 17) and that recklessness has been established because the Defendants allegedly made misrepresentations "on no less than seven occasions." (Id.). Even assuming that these representations — the majority of which, as stated above, have not been pled with sufficient particularity — were false, or repeatedly made, such falsity or repetition does not demonstrate that the representations were made knowingly or recklessly.
Kinsey argues that knowledge may be inferred because on or about April 3, 2003, two years after the alleged misrepresentations, an officer of Cendant, Richard Meisner ("Meisner"), allegedly informed him that "the Board of Directors had determined" that all Fairfield options became fully vested at the time of the Merger in April 2001 and that for Fairfield employees (like Kinsey) who became employed by FFD, the applicable option agreements "was amended" to provide that those employees had one year (rather than three months) from the date of the Merger to exercise their options. (See Am. Compl. at ¶ 55.) Thus, according to Kinsey, at the time of the challenged representations in 2001, it had already been decided by the Board of Directors that Kinsey would be unable to exercise his stock options through 2007.
First, the Amended Complaint does not make clear at what point the unspecified Defendant's Board of Directors allegedly made the determination to which Kinsey refers or when and by whom the amendment referenced was made. Kinsey alleges merely that the Board of Directors "had determined that all Fairfield options became fully vested at the time of the Cendant-Fairfield acquisition in April 2001" and that "Meisner's e-mail also stated that if a Fairfield employee had been transferred to FFD, that employee's option was amended to provide an extended post-termination exercise period which ended on or about April 2002. . . ." (Am. Compl. at ¶ 55.) Just when the unidentified Board of Directors is alleged to have reached its determination is not clear, as the clause "at the time of the Cendant-Fairfield acquisition in April 2001" could apply logically to the moment at which the options were fully vested or to the moment at which the determination was made. Further, there is no indication that the amendment to which Kinsey refers was effectuated simultaneous with the determination of the Board of Directors, or by whom that amendment was made.
Even adopting Kinsey's construction of his own allegation,i.e., that the determination of the Board of Directors was made as of the time of the Merger and that the amendment was made by that same Board at the same time, this allegation is not enough to ascribe scienter to the Defendants. With regard to recklessness,
It is not enough to establish fraud on the part of a corporation that one corporate officer makes a false statement that another officer knows to be false. A defendant corporation is deemed to have the requisite scienter for fraud only if the individual corporate officer making the statement has the requisite level of scienter, i.e., knows that the statement is false, or is at least deliberately reckless as to its falsity, at the time that he or she makes the statement.In re Apple Computer, Inc. Sec. Litig., 243 F. Supp. 2d 1012, 1023 (N.D. Cal. 2002) (citing Nordstrom, Inc. v. Chubb Son, Inc., 54 F.3d 1424, 1435-36 (9th Cir. 1995)); see also Southland Sec. Corp. v. Inspire Ins. Solutions Inc., 365 F.3d 353, 366 (5th Cir. 2004) ("For purposes of determining whether a statement by a corporation was made by it with the requisite 10(b) scienter" one must "look to the state of mind of the individual corporate official or officials who make or issue the statement" at issue.); First Equity Corp. of Fla. v. Standard Poor's Corp., 690 F. Supp. 256, 260 (S.D.N.Y. 1988) ("A corporation can be held to have a particular state of mind only when that state of mind is possessed by a single individual."), aff'd, 869 F.2d 175 (2d Cir. 1989). The sole allegations of misleading statements set forth with particularity here concern the e-mails purportedly sent by Bendlin in the summer of 2001. Kinsey does not argue, nor does the Amended Complaint offer particularized facts from which to conclude, that Bendlin acted knowingly or recklessly when he made the representations at issue. Accordingly, no inference of recklessness may be drawn here, much less the "stronger inference" required.
Kinsey's scienter allegations also fail for the independent reason that none of them differentiates between Cendant, FFD and Fairfield. See, e.g., Smith v. Circuit City Stores, Inc., 286 F. Supp. 2d 707, 716 (E.D. Va. 2003) ("Plaintiff's scienter allegations fail for the independent reason that . . . [they] lump Defendants together. . . .").
Even drawing all reasonable inferences in Kinsey's favor and assuming, arguendo, that Kinsey was a "purchaser" of the Awarded Options in April 2001 and October 2001, Count 1 of the Amended Complaint nonetheless must be dismissed, as Kinsey's claim has not been pled with the particularity required by both Rule 9(b), Fed.R.Civ.P., and the PSLRA.
B. The Breach Of Fiduciary Duty Claim Is Dismissed
Count 3 alleges a common law claim of breach of fiduciary duty. Specifically, Kinsey alleges that, "[b]ased upon the business and personal relations developed since in or about 1981 between Plaintiff and various officers, directors and executives of Defendants Fairfield, FFD and Cendant, Plaintiff reposed his trust and confidence in their integrity and fidelity," and, "[a]s a result, a fiduciary relationship developed between Plaintiff and such various officers, directors and executives. . . ." (Am. Compl. at ¶¶ 96, 97.) According to Kinsey, this fiduciary relationship created in the Defendants "a duty to refrain from making a false statement of material fact to him in relation to such business and employment decisions" and "a duty to provide him with accurate information in connection with representations of material fact. . . ." (Am. Compl. at ¶¶ 98, 99.) The Defendants contend that Count 3 should be dismissed because Kinsey has not pled sufficient facts to establish that a fiduciary relationship ever existed between him and any of the Defendants.
The law, whether that of New York or of Georgia, will not imply a fiduciary relationship based merely on Kinsey's status as an employee. See, e.g., Lind v. Vanguard Offset Printers, Inc., 857 F. Supp. 1060, 1067 (S.D.N.Y. 1994) (dismissing a breach of fiduciary duty claim where the purported fiduciary relationship was based on the plaintiff's status as an employee, since "under New York law, an employer-employee relationship is not fiduciary in nature") (citing Van Brunt v. Rauschenberg, 799 F. Supp. 1467, 1474 (S.D.N.Y. 1992); Ingle v. Glamore Motor Sales, Inc., 140 A.D.2d 493, 494, 528 N.Y.S.2d 602, 604 (2d Dept. 1988), aff'd, 73 N.Y.2d 183, 538 N.Y.S.2d 771, 535 N.E.2d 1311 (1989)); Atlanta Mkt. Ctr. Mgmt. Co. v. McLane, 269 Ga. 604, 607, 503 S.E.2d 278, 281-82 (Ga. 1998) ("The employee-employer relationship is not one from which the law will necessarily imply fiduciary obligations; however, the facts of a particular case may establish the existence of a confidential relationship between an employer and an employee concerning a particular transaction, thereby placing upon the parties the fiduciary obligations associated with a principal-agent relationship."). Thus, without additional factual allegations, Kinsey's breach of fiduciary duty claim fails as a matter of law. See Madera v. Metro. Life Ins. Co., No. 99 Civ. 4005 (MBM), 2002 WL 1453827, at *8 (S.D.N.Y. July 3, 2002) (dismissing a claim that depended on the existence of a fiduciary relationship between an employer and an employee because under New York law "[t]he employer-employee relationship is not fiduciary in nature, and plaintiff alleges no further facts from which to infer that such a relationship existed") (citation omitted); ServiceMaster Co. v. Martin, 252 Ga. App. 751, 758, 556 S.E.2d 517, 524 (Ga.Ct.App. 2001) (holding that a breach of fiduciary duty claim was properly dismissed where the plaintiff was merely an employee and there were no well-pled facts indicating that a confidential relationship existed, since the law will not imply a fiduciary relationship).
Kinsey has cited to authority from both jurisdictions in opposing the Defendants' motion to dismiss Count 3. As the result reached here would be the same under either New York or Georgia law, it need not be determined which jurisdiction's law applies.
Kinsey's assertions that a fiduciary duty developed based upon the "business and personal relations" between Kinsey and certain unidentified officers, directors and executives of the Defendants (Am. Compl. at ¶ 96) or that the Defendants had superior information in respect to the Awarded Options are not sufficient allegations of fact to demonstrate the existence of a fiduciary relationship. See, e.g., ServiceMaster, 252 Ga. App. at 758, 556 S.E.2d at 524 (stating that "conclusory statements" of a confidential relationship are an insufficient basis upon which to infer that an employer-employee relationship is fiduciary in nature); Freedman v. Pearlman, 271 A.D.2d 301, 305, 706 N.Y.S.2d 405, 409 (N.Y.App.Div. 1st Dep't 2000) (concluding that allegations that an employee trusted his employer to treat him fairly "do not give rise to a fiduciary duty"); see also Onanuga v. Pfizer, Inc., No. 03 Civ. 5405 (CM), 2003 WL 22670842, at *3 (S.D.N.Y. Nov. 7, 2003) (holding that a claim depending on the existence of a special relationship must be dismissed where the plaintiff has not pled facts from which to infer that a fiduciary relationship existed). Nor does the purported length of Kinsey's employment relationship with some of the Defendants suffice to establish a fiduciary relationship here. See id. ("Plaintiff's allegation that her husband was a life-long employee of Pfizer does not plead any special relationship.");Ellis v. Provident Life Acc. Ins. Co., 3 F. Supp. 2d 399, 402, 411 (S.D.N.Y. 1998) (concluding that no fiduciary relationship existed between the plaintiff and his employer of approximately 24 years), aff'd, 172 F.3d 37 (2d Cir. 1999).
As the allegations of the Amended Complaint are insufficient to establish the existence of a fiduciary relationship between Kinsey and the Defendants, Count 3 must be dismissed.
C. The Claim For Breach Of Implied Duty Of Good Fair And Fair Dealing Is Dismissed
In Count 4 of the Amended Complaint Kinsey alleges that "[b]y virtue of the contractual and fiduciary relationship" between Kinsey and each of the Defendants, each of the Defendants owed Kinsey an implied duty of good faith and fair dealing. (Am. Compl. at ¶¶ 104-106.) The Defendants breached this implied duty, according to Kinsey, "by, without limitation, failing to act in a fair and good faith manner in relation to their representation of material facts, and their omission of material facts, to [Kinsey] in relation to the significant business and employment decisions that he faced." (Am. Compl. at ¶ 107.) For the reasons just set forth, the Amended Complaint contains no factual allegations giving rise to a fiduciary relationship, leaving only the contractual relationship among the parties as the basis for Kinsey's claim.
Although Count 4 does not specify from which contract arises the implied duty allegedly breached by the Defendants, Kinsey has argued in opposition to the Defendants' motion that both the Plan and Option Agreement give rise to the duty at issue. Thus, according to Kinsey, the Plan provides that the Compensation Committee or the Board may, without Kinsey's consent, amend any stock option agreement granted under the Plan with respect to the time or times within which the stock options must be exercised. The Option Agreement states that,
Any amendment to the Plan shall be deemed to be an amendment to this Agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of the Participant hereunder without the Participant's consent.
(Option Agreement, Kadet Decl., Exh. D, at 3.) Kinsey argues that these provisions imply that the exercise period could not be modified without an amendment to the Plan and Kinsey's consent, and that, as a result of these provisions, it was incumbent upon the Defendants to notify Kinsey if and when they chose to change the expiration date of the exercise period and to refrain from misrepresenting that expiration date to him.
Under the law of New York, a covenant of good faith and fair dealing is implied with respect to every contract. See New York Univ. v. Cont'l Ins. Co., 87 N.Y.2d 308, 318, 639 N.Y.S.2d 283, 289, 662 N.E.2d 763, 769 (N.Y. 1995). This covenant is breached when a party "acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party of the right to receive the benefits under their agreement." Jaffe v. Paramount Communications Inc., 222 A.D.2d 17, 22-23, 644 N.Y.S.2d 43, 47 (N.Y.App.Div. 1st Dep't 1996). Where a claim for breach of the covenant of good faith and fair dealing is duplicative of a claim for breach of contract, the claim for breach of the covenant of good faith and fair dealing is properly dismissed. See Engelhard Corp. v. Research Corp., 268 A.D.2d 358, 358-59, 702 N.Y.S.2d 255, 256 (N.Y.App.Div. 1st Dep't 2000) (holding that a claim for breach of the implied covenant of good faith and fair dealing was properly dismissed as duplicative of a breach of contract claim).
Kinsey has failed to allege facts that would support a claim for breach of the covenant of good faith and fair dealing as distinct from a claim for breach of express contract. The crux of Kinsey's allegations is that the Defendants did not act in good faith under the Option Agreement when they purportedly shortened the expiration date of the Awarded Options without providing notice to Kinsey and obtaining his consent. Whether, as Kinsey argues, the Defendants "actually clandestinely amended the Plan or the [Option] Agreement without informing [Kinsey], or just plain refused to abide by their terms" (Pl. Surreply Mem. at 4), the conduct alleged relates to the Defendants' purported breach of express provisions of the subject agreements rather than any separate and independent grounds for Kinsey's claim of breach of the covenant of good faith and fair dealing. Accordingly, Kinsey's claim of breach of the implied covenant of good faith and fair dealing is dismissed. See, e.g., ICD Holdings S.A. v. Frankel, 976 F. Supp. 234, 243-44 (S.D.N.Y. 1997) ("A claim for breach of the implied covenant will be dismissed as redundant where the conduct allegedly violating the implied covenant is also the predicate for breach of covenant of an express provision of the underlying contract.") (internal quotation marks omitted).
D. The Fraud And Deceit Claim Is Dismissed
In Count 5 of the Amended Complaint Kinsey alleges that Fairfield represented to him that the options provided to him did not expire until May 22, 2007, ten years from the date of the grant. (See Am. Compl. at ¶ 111.) Kinsey further alleges, upon information and belief, that "at the time of the above-mentioned representation by Defendant Fairfield regarding [Kinsey's] rights in relation to his stock options, Defendant Fairfield knew that [Kinsey] would not be allowed to exercise his stock options up to and including May 21, 2007." (Am. Compl. at ¶ 112.) The Defendants are also alleged to have represented to Kinsey that "his newly-converted Cendant stock options remained subject to the terms of the 1997 Stock Option Plan" and to have intentionally failed to disclose to Kinsey, "until well after one year following Cendant's acquisition of Fairfield, of their position that [Kinsey's] stock options expired one year after that acquisition." (Am. Compl. at ¶¶ 113-114.) Kinsey alleges that "[t]hese omissions were material to [Kinsey's] business and employment decisions," and he assertedly relied upon the Defendants' "promises, representations and omissions" as the Defendants allegedly intended that he would. (Am. Compl. at ¶¶ 115-116.) As a result of the alleged conduct, Kinsey alleges that he has sustained economic and other injuries. (See Am. Compl. at ¶ 119.)
The Defendants argue that Count 5 must be dismissed because Kinsey has failed to allege fraud with the particularity required by Rule 9(b), Fed.R.Civ.P. Specifically, the Defendants contend that Kinsey has only provided conclusory allegations that the supposedly fraudulent acts were committed knowingly, intentionally or recklessly, and that such allegations are insufficient.
As set forth above, although Rule 9(b) provides that the requisite state of mind may be "averred generally," Fed.R.Civ.P. 9(b), Rule 9(b) is not "a `license to base claims of fraud on speculation and conclusory allegations.'" Acito, 47 F.3d at 52 (quoting Wexner, 902 F.2d at 172). Thus, a conclusory allegation of knowledge or intent without a sufficient motive theory or allegations of fact constituting strong circumstance evidence of conscious misbehavior is insufficient to withstand a motion to dismiss. See id. at 53.
As previously discussed, there are no allegations in the Amended Complaint suggesting why the Defendants would have been motivated to defraud Kinsey or that the purported misinformation that Kinsey received concerning the expiration date for the exercise of the Awarded Options was the result of anything more than negligence or mistake. In particular, even accepting as true the allegations in the Amended Complaint concerning Cendant's accounting practices (see Am. Compl. at ¶ 20), its purported desire "to mislead the public regarding the value of the company" at or around the time of the Merger (Am. Compl. at ¶ 20), and its announcement in or about August 2002 that it planned to reduce the issuance of employee stock options (see Am. Compl. at ¶ 49), these allegations are not relevant to, nor sufficient to establish, any purported motive to defraud Kinsey with respect to the expiration date for exercise of his stock options. See, e.g., Kalnit, 264 F.3d at 139 ("Sufficient motive allegations entail concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged.") (internal quotations omitted). Nor are the Amended Complaint's allegations of false statements and misrepresentations adequate to "establish conscious behavior and recklessnes[s]" on the part of the Defendants, as Kinsey suggests. (Pl. Opp. Mem. at 17.) Accordingly, Count 5 must be dismissed, as Kinsey has failed to plead scienter with sufficient particularity.
E. The Gross Negligence Claim Is Dismissed
Count 7 sets forth a claim for negligence. According to the Amended Complaint, the Defendants had a duty to administer stock options in a reasonable manner and to inform participants and beneficiaries of any information impacting the rights of those participants and beneficiaries under the Plan. (See Am. Compl. at ¶ 135.) Kinsey alleges that the Defendants breached their duty by failing to advise him "on a timely basis of their position that his rights to exercise his stock options ended within one year of the Cendant acquisition of Fairfield." (Am. Compl. at ¶ 136.) In addition, the Defendants are alleged to have acted "recklessly and/or with a conscious disregard of [Kinsey's] rights by failing to ascertain the facts available to them in relation to such representations," which conduct, according to Kinsey, amounts to gross negligence. (Am. Compl. at ¶ 138.) The Defendants do not challenge Kinsey's negligence claim itself but argue that Kinsey has failed to state a claim for gross negligence.
Kinsey concedes that to state a claim for gross negligence, as opposed to ordinary negligence, the facts alleged must demonstrate "the want of even scant care," Hong Kong Exp. Credit Ins. Corp. v. Dun Bradstreet, 414 F. Supp. 153, 160 (S.D.N.Y. 1975), and the purported misconduct must "smack of intentional wrongdoing." Tevdorachvili v. Chase Manhattan Bank, 103 F. Supp. 2d 632, 644 (E.D.N.Y. 2000) (quoting Colnaghi, U.S.A., Ltd. v. Jewelers Prot. Servs., Ltd., 81 N.Y.2d 821, 824, 595 N.Y.S.2d 381, 383, 611 N.E.2d 282, 284 (N.Y. 1993)) (internal quotation marks omitted). Kinsey's allegations demonstrate only that the Defendants purportedly made representations to Kinsey regarding the exercise period for his stock options and then completely contradicted those representations almost two years later. No factual allegations in the Amended Complaint show why this supposed transmission of misinformation alone establishes the want of scant care, or suggest that the Defendants' purported failure to provide accurate information to Kinsey "smacks" of intentional wrongdoing. Thus, while Kinsey may adequately have pled a claim for ordinary negligence, the Amended Complaint does not state a claim for gross negligence. See, e.g., Sutton Park Dev. Corp. Trading Co. v. Guerin Guerin Agency Inc., 297 A.D.2d 430, 431, 745 N.Y.S.2d 622, 624 (N.Y.App.Div. 3d Dep't 2002) (concluding that a properly pled claim for ordinary negligence did not support a claim for gross negligence where the complaint lacked factual allegations demonstrating that the purported negligence was of an aggravated character that evinced a reckless disregard of plaintiff's rights or smacked of intentional wrongdoing). The claim of gross negligence included in Count 7 is therefore dismissed.
F. The Unjust Enrichment Claim Is Dismissed
In Count 8 of the Amended Complaint, Kinsey alleges that the Defendants were unjustly enriched at his expense insofar as they are alleged, by "acting in concert and conspiracy with each other" and "as agents for each other," to have "made material misrepresentations and failed to disclose material information within their knowledge regarding the time period by which [Kinsey] had to exercise his stock options." (Am. Compl. at ¶ 142.)
As set forth above, see supra note 2, the only relevant stock options are those converted from the Awarded Options. Although Kinsey has alleged that he received additional Cendant stock options in October 2001 (see Am. Compl. at ¶ 41), he has not alleged what exercise period applies or applied to those additional stock options or suggested that any of the Defendants' representations might be related to the exercise of those additional stock options. Accordingly, the analysis of Count 8 does not concern the additional stock options provided to Kinsey in October 2001.
The Defendants argue that for Kinsey to sustain his claim of unjust enrichment he must identify a benefit that he conferred on the Defendants such that it would be inequitable for them to retain the conferred benefit without paying for it. See, e.g., Smith v. Chase Manhattan Bank, USA, N.A., 293 A.D.2d 598, 600, 741 N.Y.S.2d 100, 102 (N.Y.App.Div. 2d Dep't 2002). In opposition, Kinsey asserts that the Defendants benefitted from their purported misconduct because the Awarded Options became part of the pool of authorized Cendant stock that Defendants either sold or may sell on the open market. However, as this so-called benefit is a result of the purported misconduct rather than a benefit that Kinsey conferred on the Defendants, his claim for unjust enrichment is dismissed. See id. II. Leave To Move to File A Second Amended Complaint Is Granted
Kinsey does not explain how FFD or Fairfield could be said to possess or have the ability to sell shares of Cendant common stock that otherwise would have been issued to Kinsey had he timely exercised his stock options.
The single case cited by Kinsey, Paramount Film Distrib. Corp. v. State of New York, 30 N.Y.2d 415, 334 N.Y.S.2d 388, 285 N.E.2d 695 (N.Y. 1972), is not to the contrary. There, unlike here, the plaintiff sought to recover a purported benefit that it had actually conferred on the defendant (i.e., the payment of motion picture license fees). See Paramount Film Distrib., 30 N.Y.2d at 416, 334 N.Y.S.2d at 389, 285 N.E.2d at 695.
Rule 15(a) only permits an amendment of a pleading "once as a matter of course," provided no responsive pleading has been served. Fed.R.Civ.P. 15(a). "Otherwise a party may amend the party's pleading only by leave of court or by written consent of the adverse party. . . ." Id. Kinsey used his sole opportunity to amend as of right when, instead of responding to the initial motion to dismiss, he filed the Amended Complaint. He, nevertheless, "reserves his right" to amend the Amended Complaint in his papers submitted in opposition to the Defendants' motion. (Pl. Opp. Mem. at 4.)
Leave to amend "shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). Thus, "[i]t is the usual practice upon granting a motion to dismiss to allow leave to replead." Cortec Indus., 949 F.2d at 48 (citing Ronzani v. Sanofi S.A., 899 F.2d 195, 198 (2d Cir. 1990); Devaney v. Chester, 813 F.2d 566, 569 (2d Cir. 1987); Pross v. Katz, 784 F.2d 455, 459-60 (2d Cir. 1986)). In view of certain of the grounds for dismissal set forth above, the discretion of the Court is invoked and leave is granted to move to amend the Amended Complaint.
Conclusion
For the reasons set forth above, Counts 1, 3, 4, 5, and 8 of the Amended Complaint are dismissed in their entirety and Count 7 is dismissed in part. Leave to move to file a second amended complaint within thirty (30) days of the entry of this opinion and order is granted.
It is so ordered.