Opinion
99-CV-1843
January 26, 2001
Gerald D. D'Amelia, Jr., Esq., Donohue, Sabo, Varley Armstrong, P.C., Albany, New York, Attorneys for Plaintiffs.
Robert E. Ganz, Esq., Ganz Wolkenbreit, LLP, Albany, New York, Attorneys for Defendant Robert Mohr and Susan Mohr.
Peter Larkin, Esq., Wilson, Elser, Moskowitz, Edelman Dicker, LLP, New York, New York, Attorneys for Defendants Barry M. Poppel and Disanto, Miochnik, McGrath Poppel, LLP.
MEMORANDUM-DECISION AND ORDER
1. INTRODUCTION
Plaintiffs Palm Desert Art, Inc. ("Palm Desert") and R. M. M. Acquisition, Inc. ("RAI") commenced this action alleging causes of action for securities fraud, pursuant to § 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, as well as common law claims of fraud and negligence. Defendants Robert Mohr and Susan Mohr (the "Mohrs") have moved to dismiss, pursuant to Fed.R.Civ.P. 12(b)(6), or alternatively for summary judgment pursuant to Fed.R.Civ.P. 56. Defendants Barry M. Poppel ("Poppel") and Disanto, Mirochnik, Mcgrath Poppel, LLP ("DMMP") also moved to dismiss, pursuant to Fed.R.Civ.P. 9 and 12(b)(6), or alternatively for summary judgment. The plaintiffs opposed both motions and have crossmoved for leave to amend the complaint, pursuant to Fed.R.Civ.P. 15. Oral argument was heard on September 13, 2000 in Albany, New York. Decision was reserved.
II. FACTS
The Mohrs were the owners and sole shareholders of R. M. M. Framemakers, Inc. ("Framemakers"), a wholesale and retail framing business. DMMP provided various accounting services to Framemakers, including preparing financial statements and tax returns. In 1998, Hugh G. Pike ("Pike"), president of Palm Desert, approached the Mohrs and expressed an interest in acquiring Framemakers.
Pike and Robert Mohr entered into extensive negotiations regarding the possibility of a merger. At Pike's request, the Mohrs provided a draft compilation financial statement dated June 30, 1998. This financial statement was prepared for Framemakers by DMMP.
The parties ultimately entered into a merger agreement on August 1, 1998, which provided that Framemakers would be merged into RAI and that all of Framemakers' real and personal property would be transferred to RAI in exchange for 645,000 shares of Palm Desert stock.
On August 4, 1998, Poppel provided a letter to the plaintiffs indicating that no material adverse change had occurred in Framemakers' financial condition between June 30, 1998 and August 2, 1998. The closing was held on August 5, 1998. Plaintiffs allege that after the closing, they discovered that Framemakers' assets were overstated and payables were understated, resulting in the net worth being overstated by more than $69,000.
As a result of disputes which arose after the merger, the parties agreed to undo the merger and restore each corporation to its premerger status. Pike and the Mohrs signed a Memorandum of Agreement ("Agreement") which provided essentially as follows: "In settlement of various disputes that have arisen . . ., the parties hereby agree to the following:" (1) Return of certain assets and all inventories to the Mohrs pursuant to a bill of sale; (2) Mutual execution of general releases; (3) Return of Palm Desert stock under specified terms. (Ganz Aff. Ex. 2.) The Agreement also provided that
This agreement shall be effective as of January 17, 1999. While it is understood that the legal documents needed to completed (sic) the retransfer of assets will not be completed until after that date, the parties agree that Mohr may operate the stores and the wholesale business as of that date and that all business transacted after that date shall belong to and shall be the obligation of Mohr or such entity as Mohr creates to operate the business.Id. ¶ 7. Palm Desert attached a copy of the Agreement to the Form 10-QSB which it submitted to the United States Securities and Exchange Commission. (See Ganz Aff. Ex. 1 at 10.) This form also states that "[i]n January 1999, the Company entered into an agreement to sell the business operations of RMM back to its original shareholders." Id. at 8.
The plaintiffs commenced this action essentially alleging that they were fraudulently induced into entering into the merger.
III. DISCUSSION A. Motion to Dismiss Standard
A motion to dismiss "test[s] the legal sufficiency of the complaint, and thus does not require the Court to examine the evidence at issue."DeJesus v. Sears, Roebuck Co., 87 F.3d 65, 69 (2d Cir. 1996) (quotingCarey v. Mt. Desert Island Hosp., 910 F. Supp. 7, 9 (D.Me. 1995)). In reviewing the sufficiency of a complaint at the pleading stage, "[t]he issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236(1974).
A cause of action shall be dismissed for failure to state a claim under Fed.R.Civ.P. 12(b)(6), "only if `it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Tarshis, 211 F.3d at 35 (quoting Conley v. Gibson, 355 U.S. 41, 45-46(1957)). Accordingly, in considering a motion brought pursuant to Fed.R.Civ.P. 12(b), the court must assume all of the allegations in the complaint are true and "draw inferences from those allegations in the light most favorable to [the] plaintiff." Id. Nevertheless, a pleading which consists of bald assertions and conclusory allegations unsupported by factual assertions "will not suffice to state a claim." Tarshis, 211 F.3d at 35; DeJesus, 87 F.3d at 70.
Where a motion to dismiss is made prior to any discovery or the filing of an answer, the court is loath to dismiss the complaint, regardless of whether the plaintiff is unlikely to prevail, unless the defendant can demonstrate that plaintiff is unable to prove facts which would entitle him to relief. Wade v. Johnson Controls, Inc., 693 F.2d 19, 22 (2d Cir. 1982); see also Egelston v. State Univ. College, 535 F.2d 752, 754 (2d Cir. 1976).
B. The Memorandum of Agreement
A determinative issue in this case which was raised by the Mohrs is the legal significance of the Memorandum of Agreement. They claim that it constituted a novation of the merger agreement.
Under New York law, a party asserting the defense of novation must demonstrate the following four elements: "(1) a previously valid obligation; (2) agreement of all parties to a new contract; (3) extinguishment of the old contract; and (4) a valid new contract."Callanan Indus., Inc. v. Micheli Contracting Corp., 508 N.Y.S.2d 711, 712 (N Y App. Div. 3rd Dep't 1986); see also In re Balfour MacLaine Int'l Ltd., 85 F.3d 68, 82 (2d Cir. 1996); May Dep't Stores Co. v. International Leasing Corp., 1 F.3d 138, 140 (2d Cir. 1993) (defining novation under New York law as "an agreement for an existing obligation to be extinguished immediately by the acceptance of a new promise."). Once a novation is demonstrated, "the subsequent agreement extinguishes the old one and the remedy for any breach thereof is to sue on the superseding agreement." Lnzro Pizza Empire, Inc. v. Brown, 645 N.Y.S.2d 379, 380 (N.Y.App.Div. 4th Dep't 1996) (citations omitted).
The plaintiffs dispute that the fourth element of a novation is established, contending that the Agreement is merely and agreement to agree and therefore is not a binding contract. In support of their claim, the plaintiffs allege certain issues, such as the handling of accounts and reassignment of leases, required further negotiations and that their attorney was never shown the agreement before it was signed. However, for the reasons which follow, plaintiffs' argument is rejected.
"It is well settled that, under New York law, formation of a binding contract requires `mutual assent to the terms and conditions thereof.'"Franklin Pavkov Constr. Co. v. Ultra Roof, Inc., 51 F. Supp.2d 204, 214 (N.D.N.Y. 1999) (quoting Gupta v. University of Rochester, 395 N.Y.S.2d 566, 567 (N.Y.App.Div. 4th Dep't 1977) (citations omitted); see also Express Indus. Terminal Corp. v. New York State Dep't of Transp., 715 N.E.2d 1050, 1053 (N.Y. 1999) (stating that "there must be a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms" in order to create a binding contract).
"Whether a binding contract exists is basically a question of the intent of the parties." Litton Indus. Credit Corp. v. Plaza Super of Malta, Inc., 503 F. Supp. 83, 86 (N.D.N.Y. 1980) (citing C.M. Gridley Sons. Inc. v. Northeastern Consol. Co., 321 N.Y.S.2d 171 (N.Y.App.Div. 3d Dep't 1971)). Rather than looking at the parties' subjective intent, "[i]n determining whether the parties entered into a contractual agreement and what were its terms, it is necessary to look . . . to the objective manifestations of the intent of the parties as gathered by their express words and deeds." Brown Bros. Elec. Contractors. Inc. v. Beam Constr. Corp., 361 N.E.2d 999, 999 (N Y 1977) (citations omitted). To ascertain the objective intent of the parties, the totality of the parties' words and conduct, as well as the surrounding circumstances must be evaluated. Id. at 1001.
While a mere agreement to agree is not enforceable, the fact that some matters were left open for future agreement does not necessarily render a contract unenforceable. Lo Cascio v. Aquavella, 619 N.Y.S.2d 430, 432 (N.Y.App.Div. 4th Dep't 1994); Conopco. Inc. v. Wathne Ltd., 593 N.Y.S.2d 787, 787 (N.Y.App.Div. 1st Dep't 1993). Further, "[w]here the parties have completed their negotiations of what they regard as essential elements, and performance has begun on the good faith understanding that agreement on the unsettled matters will follow," the contract will generally be enforced. Metro-Goldwyn-Mayer. Inc. v. Scheider, 360 N.E.2d 930, 931 (N.Y. 1976) (quotations and citation omitted).
Pike's subjective belief that the Agreement was merely an agreement to agree and that he failed to show it to his attorney prior to signing it are irrelevant to the inquiry here. Rather, the objective circumstances in this case weigh in favor of finding that the Agreement constitutes a binding contract. Both sides agree that in order to settle the various disputes that arose after the merger, they intended to undo the merger and restore each to their premerger status. (See Pike Aff. ¶ 44.) As a result of this mutual desire, they negotiated the terms of the Agreement which is signed by Pike, as well as both Robert and Susan Mohr, and is relatively specific with respect to its terms. It specifically provides that "[i]n settlement of various disputes that have arisen . . ., the parties agree to the following . . ." (Ganz Aff. Ex. 2) (emphasis added). The Agreement further provides for the return of assets, inventory, and shares, and for reassignment of leases as consideration for the Agreement. Finally, the Agreement sets forth an effective date of January 17, 1999, even though the parties acknowledged that documents necessary to complete the deal would not be completed until after that date.
There is no indication from the four corners of the Agreement that the parties contemplated further negotiations. However, even assuming that certain issues were not specifically addressed in the Agreement, rendering the Agreement unenforceable is not the necessary result. This is especially so in light of the fact that the parties have partially relied upon the Agreement, such that the Mohrs have resumed possession and operation of the business.
In addition to the Agreement itself, there is other objective evidence that the parties considered the Agreement to be a binding contract. First, it was filed with the SEC and labeled by the plaintiffs as an agreement to sell the business back to the original shareholders. (See Ganz Aff. Ex. 2 at 8, 10.) The plaintiffs do not claim in their submission to the SEC that the Agreement is merely an agreement in principle and that further negotiations are necessary. Second, as previously mentioned, arrangements were made such that the Mohrs were able to resume possession and operation of the business.
In light of the foregoing and considering the totality of the circumstances in this case, the Agreement manifests a mutual intent by the parties to settle their disputes arising out of the merger and to be bound by its terms. Thus it is a binding and enforceable contract. As such, it constitutes a novation of the merger agreement and the plaintiffs' only remedy is under the Agreement. They cannot now sue over matters which occurred prior to, and are apparently resolved by, the signing of the Agreement.
IV. CONCLUSION
Since there is a novation of the merger agreement, the plaintiffs' only remedy is to sue under the superseding Memorandum of Agreement. Therefore, the complaint, which virtually ignores the Memorandum of Agreement and asserts claims for matters occurring prior to merger, must be dismissed, pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief can be granted.
Accordingly, it is
ORDERED, that
1. The motion to dismiss by defendants Robert Mohr and Susan Mohr is GRANTED;
2. The motion to dismiss by defendants Barry M. Poppel and Disanto, Mirochnik, McGrath Poppel, LLP is GRANTED;
3. The complaint is DISMISSED; and
4. Plaintiffs' motion to amend the complaint is DENIED as moot.
The Clerk is directed to enter judgment accordingly.
IT IS SO ORDERED.