Opinion
15 Civ. 06242 (GBD)
08-24-2016
Jonathan MARCUS, as Trustee of the Grace Preferred Litigation Trust, Lloyd I. Miller Trust A-4, Milfamii L.P., Lenado Partners, Series A of Lenado Capital Partners, L.P., Lenado DP, Series A of Lenado DP, L.P., SPV UNO, LLC, Nikos Hecht, Individually, The Hecht Children's Trust II, Broadbill Partners, LP, Broadbill Partners II, LP, Costa Brava Partnership III LP, and Kurt Lageschulte, IRRA, Plaintiffs v. W2007 GRACE ACQUISITION I, INC., PFD Holdings, LLC, Goldman Sachs Realty Management, L.P. f/k/a Archon Group, L.P., Todd P. Giannoble, Brian T. Nordahl, Gregory M. Fay, Daniel E. Smith, and Mark Ricketts, Defendants.
Michael Allan Eisenberg, Michael A. Leon, Steven Barry Eichel, Robinson Brog Leinwand Greene Genovese & Gluck, P.C., New York, NY, G. Michael Gruber, Gruber Hurst Johansen Hail Shank LLP, Dallas, TX, for Plaintiffs. Ann-Elizabeth Ostrager, Darrell Scott Cafasso, John Charles Quinn, Sharon L. Nelles, Sullivan & Cromwell LLP, New York, NY, for Defendants.
Michael Allan Eisenberg, Michael A. Leon, Steven Barry Eichel, Robinson Brog Leinwand Greene Genovese & Gluck, P.C., New York, NY, G. Michael Gruber, Gruber Hurst Johansen Hail Shank LLP, Dallas, TX, for Plaintiffs.Ann-Elizabeth Ostrager, Darrell Scott Cafasso, John Charles Quinn, Sharon L. Nelles, Sullivan & Cromwell LLP, New York, NY, for Defendants.
MEMORANDUM DECISION AND ORDER
GEORGE B. DANIELS, United States District Judge:
Plaintiffs Jonathan Marcus, as Trustee of the Grace Preferred Litigation Trust, Lloyd I. Miller Trust A-4, Milfam II L.P., Lenado Partners, Series A of Lenado Capital Partners, L.P., Lenado DP, Series A of Lenado DP, L.P., SPV UNO, LLC, Nikos Hecht, individually, the Hecht Children's Trust II, Broadbill Partners, LP, Broadbill Partners II, LP, Costa Brava Partnership III LP, and Kurt Lageschulte, IRRA, bring this suit asserting twelve causes of action under federal, New York, Tennessee, and Texas law. (See Second Am. Compl. ("SAC") ¶¶ 94-180, ECF No. 63.)
Defendants W2007 Grace Acquisition I, Inc., PFD Holdings, LLC, Goldman Sachs Realty Management, L.P. f/k/a Archon Group, L.P., Todd P. Giannoble, Brian T. Nordahl, Gregory M. Fay, Daniel E. Smith, and Mark Ricketts move to dismiss the Second Amended Complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). Defendants also move for sanctions pursuant to Rule 11.
Defendants' motion to dismiss the Second Amended Complaint for failure to state a claim is GRANTED. Defendants' motion for sanctions is DENIED.
I. BACKGROUND
Defendant W2007 Grace Acquisition I, Inc. ("Grace") is a Tennessee corporation formed in 2007 that entered into a going-private merger transaction with a real estate investment trust that held hotel properties. (SAC ¶¶ 12, 27-28.) Defendants Goldman Sachs Realty Management, L.P. and PFD Holdings, LLC ("PFD") are affiliates of Grace. (SAC ¶¶ 13-14.) The individual Defendants are current and former directors of Grace, PFD, and Goldman Sachs Realty Management, L.P. (SAC ¶¶ 15-21.) Plaintiffs are eleven institutional and individual investors and former holders of Grace preferred stock as well as a litigation trust that represents Plaintiffs. (SAC ¶ 10-11.)
A. The Stock Purchase Agreements
On August 9, 2013, Plaintiffs sold their Grace preferred stock to PFD pursuant to eleven separate Stock Purchase Agreements ("SPAs") at a price of $10 per share. (SAC ¶ 71; SPA § 1.) The SPAs include an "Additional Purchase Price" provision that requires Grace to make additional payments to Plaintiffs if certain conditions are met within one year of August 9, 2013 ("Payment Period"). (See SPA § 3.) The provision provides:
The SPAs are attached as Exhibits B-1 through B-11 to the Second Amended Complaint. Although the SPAs' material terms are identical, their paragraph numbering differ. This decision cites to the SPA executed between PFD and Broadbill Partners, L.P. (SAC, Ex. B-1, Stock Purchase Agreement [hereinafter SPA], ECF No. 62-2.)
[I]f, prior to the one (1) year anniversary of the date hereof (the "Payment Period"), [PFD], [Grace] or any of their respective Affiliates ... has directly or indirectly (i) made a payment of Stockholder Consideration in respect of Preferred Stock in a Subsequent Transaction (as defined below) or (ii) entered into a binding agreement that provides for one or more payments of Stockholder Consideration in respect of Preferred Stock in a Subsequent Transaction regardless of whether such payments are made during or after the Payment Period, then [PFD] shall. ... pay to Seller
the Additional Purchase Price .... In no event shall any Additional Purchase Price or other consideration of any kind be due or payable in respect of any transaction or other event that is consummated on or after the end of the Payment Period, except as expressly provided in the preceding sentence.
(SPA § 3.)
Each Plaintiff released in the SPAs all claims that existed at the time of the transaction. In the SPAs, each Plaintiff
release[d], and covenant[ed] not to sue, [Grace], [PFD], their respective Affiliates and any of their respective officers, directors, employees, members, partners, agents, successors and assigns, and waive[d] any and all rights, actions, fees, liabilities, obligations, losses, damages, claims, demands and causes of action existing prior to or as of the date hereof whether known, suspected or unknown, whether in law or in equity which Seller or its controlled Affiliates may have or may claim to have prior to or as of the date hereof against [Grace], [PFD], The Goldman Sachs Group, Inc., Goldman, Sachs & Co., any controlled Affiliates of any of the foregoing Persons or any of their respective officers, directors, employees, members, partners, agents, successors and assigns ... in any matter to the extent relating to or arising out of the Shares, the Preferred Stock or the Company....
(SPA § 10(a).)
Plaintiffs also represented and warranted in the SPAs to their sophistication, independence, and access to information. Plaintiffs represented that they had "such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of the transactions contemplated." (SPA § 4(j).) They acknowledged that they had been given "unrestricted access" to a "virtual dataroom" containing "important information" relevant to the transaction. (SPA § 4(m).) Each Plaintiff represented that it had "independently and without reliance upon [Defendants]... made its own appraisal of and made its own investigation into [Grace], the Preferred Stock and the terms thereof as it deemed appropriate and made its own decision with respect to the sale of the Shares ..." (SPA § 4(1).)
B. The ARC Transaction
On May 23, 2014, certain Grace subsidiaries entered into a real estate sale agreement to sell all of Grace's 126 hotels to American Realty Capital Hospitality Trust, Inc. (ARC"). (See SAC ¶¶ 78, 92(d).) The agreement was subsequently revised to include only 116 hotels. (SAC ¶ 78 n.17). The transaction ("ARC Transaction") closed on February 27, 2015. (SAC ¶ 80).
The ARC Transaction did not provide for the payment of stockholder consideration to any Grace shareholder. (See Quinn Decl., Ex. F., Am. & Restated Real Estate Sale Agreement, dated Nov. 11, 2014, ECF No. 74-6.) Grace's Amended Charter requires that preferred shareholders receive a liquidation preference of $25 per share plus any unpaid and accrued dividends before any payment or distribution to junior shareholders in the event that Grace is wound-up, dissolved, or voluntarily or involuntarily liquidated. (See SAC ¶ 45; see also SAC, Ex. A, Am. and Restated Charter of Grace Acquisition I, Inc. ("Charter") § 5(b)(4)(A), ECF No. 63-1.) Grace's Amended Charter states, however, that "[a] voluntary or involuntary liquidation, dissolution or winding up of the Corporation shall not include ... a sale or transfer of all or substantially all of the Corporation's assets ...." (Charter § 5(b)(4)(C).)
C. Memorandum of Understanding Regarding Proposed Settlement of Putative Tennessee Class Action
On August 20, 2014—eleven days after the one-year Payment Period had expired —Grace entered into a Memorandum of Understanding ("MOU") in a step toward settlement of a class action brought against Grace and certain of its affiliates and directors in the Western District of Tennessee. (See SAC ¶ 81.) The MOU is titled "Non-Binding Memorandum of Understanding" and begins "Plaintiffs and Defendants have reached a non-binding agreement to settle all claims ..." (Mar. 28, 2016 Hilliard Decl., Ex. 1, Non-Binding Memorandum of Understanding, ECF No. 81 (emphasis added).) A binding Stipulation of Settlement was executed in October 2014. (SAC ¶ 82(e).) The Stipulation of Settlement provided that, upon final approval, Grace would merge with another company and shares of Grace preferred stock would be converted into the right to receive $26 per share. (See Quinn Decl., Ex. H., Stipulation and Agreement of Settlement, dated Oct. 8, 2014, at 22, ECF No. 74-8.)
II. LEGAL STANDARDS FOR MOTION TO DISMISS
A. Motion to Dismiss Under Rule 12(b)(6)
"A Rule 12(b)(6) motion challenges the legal sufficiency of the claims asserted in a complaint." Trs. of Upstate N.Y. Eng'rs Pension Fund v. Ivy Asset Mgmt., 131 F.Supp.3d 103, 119–20 (S.D.N.Y.2015). In deciding a Rule 12(b)(6) motion, a court "accept[s] all factual allegations in the complaint as true ... and draw[s] all reasonable inferences" in favor of the plaintiffs. Holmes v. Grubman, 568 F.3d 329, 335 (2d Cir.2009) (quoting Burch v. Pioneer Credit Recovery, Inc., 551 F.3d 122, 124 (2d Cir.2008) ). A court is "not, however, ‘bound to accept conclusory allegations or legal conclusions masquerading as factual conclusions.’ " Faber v. Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir.2011) (quoting Rolon v. Henneman, 517 F.3d 140, 149 (2d Cir.2008) ). In order to survive such a motion, a complaint must plead "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
A court deciding a Rule 12(b)(6) motion is not limited to the face of the complaint. A court "may [also] consider any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit." ATSI Commc'ns v. Shaar Fund. Ltd., 493 F.3d 87, 98 (2d Cir.2007).
B. Motion to Dismiss Under Rule 9(b)
A securities fraud complaint must meet the heightened pleading standards of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). Kleinman v. Elan Corp., 706 F.3d 145, 152 (2d Cir.2013). Rule 9(b) requires that the "circumstances constituting fraud" must be "state[d] with particularity." Fed. R. Civ. P. 9(b). To satisfy Rule 9(b), a plaintiff "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 explain why the statements were fraudulent.’ " Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 108 (2d Cir.2012) (quoting Rombach v. Chang, 355 F.3d 164, 170 (2d Cir.2004) ). Under the PSLRA, the pleaded facts must give "rise to a strong inference" of fraudulent intent. 15 U.S.C. § 78u–4(b)(2)(A). A complaint must identify untrue statements specifically and, if applicable, it must identify the omitted facts that are "necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading." Id. § 78u–4(b)(1) ; Kleinman, 706 F.3d at 152. "[T]he reason or reasons why the statement is misleading" must also be pleaded. 15 U.S.C. § 78u–4(b). "To prove liability against a corporation ... a plaintiff must prove that an agent of the corporation committed a culpable act with the requisite scienter, and that the act (and accompanying mental state) are attributable to the corporation." Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir.2008).
III. THE SAC FAILS TO STATE A CLAIM
Defendants argue that the Second Amended Complaint must be dismissed because (1) Plaintiffs' contract claims fail by the SPAs' plain terms, (2) Plaintiffs' remaining claims are barred by the SPAs' releases, and (3) Plaintiffs' fraud-based claims are not adequately pleaded. (See Defs.' Mem. of Law in Supp. of Mots, to Dismiss SAC and for Sanctions ("Defs'. Mem.") at 2, ECF No. 73.)
A. Plaintiffs' Causes of Action for Breach of Contract and Breach of the Implied Duty of Good Faith and Fair Dealing Fail to State a Claim
Plaintiffs claim in Counts 1 and 2 of the Second Amended Complaint that Defendants breached the SPAs by failing to make payment to Plaintiffs under the SPAs' Additional Purchase Price provision. (SAC ¶¶ 94-106.)
1. Neither the ARC Transaction Nor the MOU Triggered the Additional Purchase Price Provision
Plaintiffs' first cause of action alleges that "PFD materially breached [the Additional Purchase Price provision] of the SPAs by failing to pay to Plaintiffs the Additional Purchase Price in connection with the ARC Transaction ... [and] the MOU entered in the Tennessee Lawsuit." (SAC ¶¶ 97-98.)
a. The ARC Transaction Did Not Trigger the Additional Purchase Price Provision Because It Did Not Constitute a Liquidation or De Facto Liquidation
Plaintiffs assert that Defendants' May 23, 2014 agreement to enter into the ARC Transaction "effectively was a liquidation of Grace's assets ... and triggered the payment of the Liquidation Preference to Preferred Shareholders under [Grace's] Amended Charter." (SAC ¶ 78.) Plaintiffs argue that the ARC Transaction therefore required the payment of stockholder consideration and triggered the Additional Purchase Price provision. (See SAC ¶ 78.)
The ARC Transaction, however, was neither a liquidation nor a de facto liquidation. "The term ‘liquidation’ when applied to a corporation, means the winding up of the affairs of the corporation by getting in its assets, settling with the creditors and debtors and apportioning the amount of profit and loss." Sedighim v. Donaldson, Lufkin & Jenrette, Inc., 167 F.Supp.2d 639, 648 (S.D.N.Y.2001) (quoting Rothschild Int'l Corp. v. Liggett Grp. Inc., 474 A.2d 133, 136 (Del.1984) ); see also Rosan v. Chicago Milwaukee Corp., No. C.A. 10526, 1990 WL 13482, at *4 (Del.Ch. Feb. 6, 1990) ("[T]wo of the central characteristics of a liquidation are the winding up of the corporation's affairs and the abandonment of its corporate identity."). Plaintiffs have not alleged sufficient facts—such as settlement with creditors, the apportionment of profit and loss, and the abandonment of corporate identity—to support their assertion that the ARC Transaction constituted a liquidation. See Sedighim, 167 F.Supp.2d at 648.
Courts look to four factors in determining whether a de facto liquidation has occurred: "(1) sale of assets; (2) paying off of creditors; (3) distribution of remaining proceeds to shareholders; and (4) abandonment of corporate form." Refco Grp. Ltd., LLC v. Cantor Fitzgerald, L.P., No. 13 Civ. 01654, 2014 WL 2610608, at *37 (S.D.N.Y. June 10, 2014) (quoting Quadrangle Offshore (Cayman) LLC v. Kenetech Corp., No. 16362NC, 1999 WL 893575, at *8 (Del.Ch. Oct. 13,1999), aff'd, 751 A.2d 878 (Del.2000) ). Plaintiffs have pleaded none of these factors except a sale of assets. Moreover, Grace's Amended Charter provides that "[a] voluntary or involuntary liquidation, dissolution or winding up of the Corporation shall not include ... a sale or transfer of all or substantially all of the Corporation's assets .... " (Charter § 5(b)(4)(C).) Plaintiffs have failed to adequately allege that the ARC Transaction constituted a liquidation or de facto liquidation and therefore that it triggered the Additional Purchase Price provision.
Plaintiffs also claim in Count 11 that the ARC Transaction is void under Section 48–23–102 of the Tennessee Code. (See SAC ¶¶ 169-74.) That section entitles a shareholder "to dissent from, and obtain payment of the fair value of the shareholder's shares in the event of ... [the] [c]onsummation of a sale or exchange of all, or substantially all, of the property of the corporation other than in the usual and regular course of business, if the shareholder is entitled to vote on the sale.... " Tenn. Code Ann. § 48–23–102(a)(3) (emphasis added). Under Grace's Amended Charter, preferred shareholders did not have a right to vote on the ARC Transaction. (See Charter §§ 5(b)(6), 5(c)(7) (enumerating circumstances when preferred shareholders have voting rights).) Count 11 is therefore DISMISSED.
b. The MOU Did Not Trigger the Additional Purchase Price Provision Because It Was Entered Outside the Payment Period and Was Nonbinding
Plaintiffs argue that the MOU entered into by Grace and certain affiliates in a step toward settlement of a class action brought in the Western District of Tennessee triggered the Additional Purchase Price provision. (See SAC ¶¶ 81-82.) The SPAs' Additional Purchase Price provision requires Grace to make additional payments to Plaintiffs only if certain events occurred "prior to the one (1) year anniversary" of the SPAs' execution, which occurred on August 9, 2013. (SPA § 3; SAC§ 71.) Moreover, the last sentence of the SPAs' Additional Purchase Price provision states that "[i]n no event shall any Additional Purchase Price or any other consideration of any kind be due or payable in respect of any transaction or other event that is consummated on or after the end of the Payment Period ...." (SPA § 3 (emphasis added).) Grace and its affiliates entered the MOU on August 20, 2014—eleven days after the Payment Period had expired. The MOU was entered too late to trigger the Additional Purchase Price provision.
In addition to being untimely, the MOU was not a binding agreement to pay stockholder consideration. The MOU is titled "Non-Binding Memorandum of Understanding" and begins "Plaintiffs and Defendants have reached a non-binding agreement to settle all claims .... " (Mar. 28, 2016 Hilliard Decl., Ex. 1, Non-Binding Memorandum of Understanding, ECF No. 81 (emphasis added).) A binding Stipulation of Settlement was executed only in October 2014—after the Payment Period had expired. (SAC ¶ 82(e).) The MOU did not trigger the Additional Purchase Price provision. Even if the MOU had been signed within the one-year period, it would not have triggered a payment unless the deal was also consummated within that same period. Plaintiffs have failed to plead sufficient facts to support the reasonable inference that Defendants breached the SPAs' Additional Purchase Price Provision in connection with the ARC Transaction or MOU. Plaintiffs' first cause of action is therefore DISMISSED.
2. Plaintiffs' Claim for Breach of the Implied Duty of Good Faith and Fair Dealing Does Not Sufficiently Allege a Separate Cause of Action
Plaintiffs' second cause of action alleges that Defendants breached the implied duty of good faith and fair dealing by "delay[ing] [the] executi[on of] the MOU by eleven days to avoid paying the Additional Purchase Price under the SPAs." (SAC ¶ 103.)
"Under New York law, parties to an express contract are bound by an implied duty of good faith, but breach of that duty is merely a breach of the underlying contract." Harris v. Provident Life & Acc. Ins. Co., 310 F.3d 73, 80 (2d Cir.2002) (quoting Fasolino Foods Co. v. Banca Nazionale del Lavoro, 961 F.2d 1052, 1056 (2d Cir.1992) ). "Typically, ‘raising both claims in a single complaint is redundant, and courts confronted with such complaints under New York law regularly dismiss any freestanding claim for breach of the covenant of fair dealing’ where the claims derive from the same set of facts." Ret. Bd. of Policemen's Annuity & Ben. Fund of City of Chicago v. Bank of New York Mellon, No. 11 Civ. 05459, 2014 WL 3858469, at *3 (S.D.N.Y. July 30, 2014) (quoting JPMorgan Chase Bank, N.A. v. IDW Grp., LLC, No. 08 Civ. 09116, 2009 WL 321222, at *5 (S.D.N.Y. Feb. 9, 2009) ). "[T]he obligation of good faith does not create obligations that go beyond those intended and stated in the language of the contract." Wolff v. Rare Medium, Inc., 210 F.Supp.2d 490, 497 (S.D.N.Y.2002) (citing Granite Partners, L.P. v. Bear, Stearns & Co. Inc., 17 F.Supp.2d 275, 305 (S.D.N.Y.1998) ), aff'd, 65 Fed.Appx. 736 (2d Cir.2003). As Plaintiffs' second cause of action derives from the same set of facts as the first cause of action, it is redundant.
The SPAs' Additional Purchase Price provision requires Grace to make additional payments to Plaintiffs if certain events occurred "prior to the one (1) year anniversary" of the SPAs' execution, which occurred on August 9, 2013. (SPA § 3; SAC§ 71.) The negotiated terms of the SPAs did not obligate Defendants to structure their transactions in a manner that would most benefit Plaintiffs. Plaintiffs cannot use the duty of good faith and fair dealing to impose such an obligation on Defendants. Plaintiffs have pleaded no facts indicating that Defendants deliberately delayed the ARC Transaction or the MOU with the improper purpose of avoiding the Additional Payment Price provision. Therefore, Plaintiffs' second cause of action is DISMISSED.
B. Plaintiffs' Remaining Causes of Action Are Barred By the SPAs' Release
In the SPAs, each Plaintiff "release[d] ... all ... claims, demands and causes of action existing prior to or as of [August 9, 2013] whether known, suspected or unknown ... against [Grace], [PFD], The Goldman Sachs Group, Inc., Goldman, Sachs & Co., any controlled Affiliates of any of the foregoing Persons or any of their respective officers [and] directors ... in any matter to the extent relating to or arising out of the Shares, the Preferred Stock or the Company " (SPA § 10(a).) Plaintiffs' remaining non-contract causes of action (Counts 3-10, 12) are based on conduct that occurred before the SPAs were executed and therefore fall with the scope of their release. Plaintiffs seek to rescind the release, arguing that they were fraudulently induced into entering the SPAs. (See SAC ¶¶ 107-14.) Plaintiffs, however, are not entitled to rescission because they have not identified a fraud in the inducement separate from the subject of the release.
Count 3 asserts a claim for rescission under New York law of the SPAs' release. (SAC 107–14.) Count 4 asserts a claim for breach of fiduciary duty under Tennessee law. (SAC ¶¶ 115-25.) Count 5 asserts a claim for alter ego liability against Grace for PFD's obligations. (SAC ¶¶ 126-32.) Count 6 asserts a claim for aiding and abetting breach of fiduciary duty under Tennessee law. (SAC ¶¶ 133-39.) Count 7 asserts a violation of the Tennessee Securities Act against PFD. (SAC ¶¶ 140-43.) Count 8 asserts a violation of the Texas Securities Act. (SAC ¶¶ 144-50.) Count 9 asserts a violation of Section 10(b) of the Exchange Act of 1934 and Rule 10b-5. (SAC ¶¶ 151-61.) Count 10 asserts a violation of Section 20(a) of the Exchange Act of 1934. (SAC ¶¶ 162-68.) Count 12 asserts a shareholder suit under Section 48–24–301 of the Tennessee Code to dissolve Grace based on the purported fraudulent acts committed by Grace and its Directors. (SAC ¶¶ 175–80.)
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1. Plaintiffs Are Not Entitled to Rescission of the SPAs' Release
Plaintiffs' third cause of action asserts a claim for rescission under New York law of the SPAs' release. (SAC ¶¶ 107-14.) The parties to the SPAs agreed that the SPAs "shall be governed by and construed in accordance with the laws of the State of New York .... " (SPA § 22.) Under New York law, "a party that releases a fraud claim may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release. Were this not the case, no party could ever settle a fraud claim with any finality." Centro Empresarial Cempresa S.A. v. Am. Movil, S.A.B. de C.V., 17 N.Y.3d 269, 929 N.Y.S.2d 3, 952 N.E.2d 995, 1000 (N.Y.2011) (internal citation omitted). Plaintiffs have alleged no fraud separate from those that are the subject of the SPAs' release. Plaintiffs are therefore not entitled to rescission, and Plaintiffs' Third Cause of Action is DISMISSED.
2. The SPAs' Release Bars All Claims Relating to Grace and the Preferred Stock
"Generally, a valid release constitutes a complete bar to an action on a claim which is the subject of the release." Centro, 929 N.Y.S.2d 3, 952 N.E.2d at 1000 (internal quotation marks omitted). "Notably, a release may encompass unknown claims, including unknown fraud claims ....." Id. "A sophisticated principal is able to release its fiduciary from claims .... " Id. , 929 N.Y.S.2d 3, 952 N.E.2d at 1001. The purported "material omissions," (see SAC ¶ 120), that are the basis of Plaintiffs' non-contract claims relate to events that occurred before the parties entered into the SPAs (see id.). Namely, Plaintiffs allege that Grace failed to (1) disclose that it met the SEC's shareholder of record threshold on January 1, 2013, (2) comply with the SEC's reporting requirements, and (3) disclose that Grace violated its Amended Charter by purchasing Preferred Shares through PFD in 2012. (SAC ¶¶ 67–68, 120.) These claims, which existed at the time that the SPAs were executed, are barred by the SPAs' release.
a. The SPAs' Release Extends to Plaintiffs' Breach of Fiduciary Duty Claim
Plaintiffs' fourth cause of action alleges that Grace, PFD, and the individual Defendants are liable for breach of fiduciary duty under Tennessee law. (SAC ¶¶ 115-25.) Plaintiffs' sixth cause of action alleges that Goldman Sachs Realty Management, L.P. is liable for aiding and abetting that breach of fiduciary duty. (SAC ¶¶ 133-39.) Plaintiffs argue that, under Tennessee law, a contract—including a release—between a fiduciary and a beneficiary is presumed to be invalid. (Resp. in Opp'n to Defs.' Mot. to Dismiss ("Opp'n") at 16, ECF No. 80.) Courts applying Tennessee law have found, however, that a release that expressly disclaims reliance thereby also disclaims the existence of a fiduciary relationship. See Power & Tel. Supply Co. v. Suntrust Banks, Inc., No. 03–2217 M1/V, 2005 WL 1329208, at *4 (W.D.Tenn. May 10, 2005). The SPAs' release therefore extends to Plaintiffs' breach-of-fiduciary-duty claims.
b. The SPAs' Release Extends to Plaintiffs' Federal Securities Claims
Plaintiffs' ninth cause of action alleges a violation of Section 10(b) of the Exchange Act of 1934 and Rule 10b-5, (SAC ¶¶ 162-61), and Plaintiffs' tenth cause of action alleges that Defendants are liable as controlling parties under Section 20(a) of the Exchange Act of 1934, (SAC ¶¶ 162-68). Plaintiffs argue that these claims cannot be released. (See Opp'n at 21-22.) "[I]t is well settled that Section 29(a) [governing waiver provisions] only invalidates releases between parties which, in [an] attempt to circumvent compliance with the federal laws, are anticipatory waivers of compliance with the Exchange Act." Lancer Offshore, Inc. v. Dominion Income Mgmt. Corp., 2002 WL 441309, at *5 (S.D.N.Y. Mar. 20, 2002). The purported "material omissions," (see SAC ¶ 120), that are the basis of Plaintiffs' Section 10(b) claim and derivative Section 20(a) claim relate to events that occurred before the parties entered into the SPAs, (see id.). These claims are also barred by the SPAs' release.
Counts 3 through 10 and Count 12 are barred by the SPAs' release. Counts 3 through 10 and Count 12 are therefore DISMISSED. The Second Amended Complaint is DISMISSED in its entirety.
IV. DEFENDANTS' MOTION FOR SANCTIONS IS DENIED
Defendants argue that the Second Amended Complaint (1) is based on factual allegations that Plaintiffs knew or should have known were false in violation of Rule 11(b)(2), (2) asserts frivolous claims in violation of Rule 11(b)(3), and (3) was filed for an improper purpose in violation of Rule 11(b)(1). (Defs.' Mem. at 37.) Rule 11 states that an attorney who presents "a pleading, written motion, or other paper" to the court thereby "certifies" that to the best of his or her knowledge, information, and belief formed after a reasonable inquiry, the filing is (1) not presented for any improper purpose, "such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation," (2) "warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law," and (3) supported in facts known or likely to be discovered on further investigation. Fed. R. Civ. P. 11(b). In addition, the PSLRA mandates that, at the end of any private securities action, the district court must "include in the record specific findings regarding compliance by each party and each attorney representing any party with each requirement of Rule 11(b)." 15 U.S.C. § 78u–4(c)(1). If the court finds that any party or lawyer violated Rule 11(b), the PSLRA mandates the imposition of sanctions. See 15 U.S.C. § 78u–4(c)(2).
Rule 11"is targeted at situations ‘where it is patently clear that a claim has absolutely no chance of success under the existing precedents, and where no reasonable argument can be advanced to extend, modify or reverse the law as it stands ....’ " Stern v. Leucadia Nat. Corp., 844 F.2d 997, 1005 (2d Cir.1988) (quoting Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 254 (2d Cir.1985) ). The Second Circuit has "stressed that ‘any and all doubts must be resolved in favor of the signer.’ " Id. (quoting Eastway, 762 F.2d at 254 ).
Defendants' briefs describe that Plaintiffs revised the iterations of the complaint to remove inaccurate allegations after Defendants' counsel provided them with relevant information. (See, e.g., Defs.' Mem. at 40; Defs.' Reply Mem. of Law at 19.) For example, Plaintiffs had alleged in the original and amended complaints that two agreements material to Plaintiffs' sale of their Grace preferred stock to PFD had been concealed from them. After Defendants provided Plaintiffs with a directory of the contents of the virtual dataroom, Plaintiffs revised their fraud-based claims in the Second Amended Complaint such that they no longer relied on the allegation that Defendants concealed the two agreements. Plaintiffs continued to suggest in the Second Amended Complaint's recitation of facts, however, that the two agreements were concealed from Plaintiffs. (See SAC ¶¶ 32, 58, 91.) This failure to remove completely the allegations from the recitation of facts does not rise to the level of sanctionable conduct.
Although Plaintiffs' claims are indeed barred by the SPAs, their filings do not support a conclusion that their claims were clearly frivolous or were alleged in bad faith. "An argument constitutes a frivolous legal position for purposes of Rule 11 sanctions if, under an objective standard of reasonableness, it is clear ... that there is no chance of success and no reasonable argument to extend, modify or reverse the law as it stands." Morley v. Ciba – Geigy Corp., 66 F.3d 21, 25 (2d Cir.1995) (internal quotation marks omitted). "The fact that a legal theory is a long-shot does not necessarily mean it is sanctionable." Fishoff v. Coty Inc., 634 F.3d 647, 654 (2d Cir.2011). That Plaintiffs' claims failed to pass the motion-to-dismiss threshold does not mean that they clearly had no chance of success and that there was no reasonable argument to extend the law as it stood at the time of filing. See, e.g., In re Merrill Lynch Tyco Research Sec. Litig., No. 03 Civ. 04080, 2004 WL 305809, at *5 (S.D.N.Y. Feb. 18, 2004). Nor have Defendants sufficiently shown that Plaintiffs acted with improper motive.
This Court does not find that any party or attorney to this action has violated Rule 11(b). Defendants' motion for sanctions is DENIED.
V. CONCLUSION
Defendants' motion to dismiss Plaintiffs' Second Amended Complaint is GRANTED. The Second Amended Complaint is DISMISSED in its entirety.
Defendants' motion for sanctions pursuant to Rule 11 of the Federal Rules of Civil Procedure is DENIED.
The Clerk of Court is directed to close the motions at ECF Nos. 71 and 72.
SO ORDERED.