Universal American Corp. v. Party Partners Healthcare Solutions Holdings LP et al
Filing
74
MEMORANDUM OPINION regarding Motion To Dismiss First Amended and Supplemental Complaint (D.I. 44 ). Signed by Judge Richard G. Andrews on 3/31/2016. (nms)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
UNIVERSAL AMERICAN CORP.,
Plaintiff,
v.
PARTNERS HEALTHCARE SOLUTIONS
HOLDINGS, L.P ., GTCR GOLDER
RAUNER II, L.L.C., GTCRPARTNERS IX,
L.P ., GTCR FUND IX/A, L.P ., GTCR FUND
IX/B, L.P., GTCR CO-INVEST III, L.P.,
DAVID KATZ, GREGORY SCOTT,
JEROME VACCARO, and JOHN
MCDONOUGH,
CivilActionNo.13-1741-RGA
Defendants.
MEMORANDUM OPINION
Blake Rohrbacher, Esq., Kelly E. Farnan, Esq., Katharine C. Lester, Esq., Richards, Layton &
Finger, P.A., Wilmington, DE; Andrew J. Levander, Esq. (argued), Linda C. Goldstein, Esq., ·
Paul C. Kingsbery, Esq., Dechert LLP, New York, NY; Stuart T. Steinberg, Esq., Elisa T. _
Wiygul, Esq., Dechert LLP, Philadelphia, PA, attorneys for Plaintiff Universal American Corp.
Jon E. Abramczyk, Esq., Ryan D. Stottman, Esq., Morris, Nichols, Arsht & Tunnell LLP,
Wilmington, DE; Scott A. McMillin, Esq. (argued), Richard U.S. Howell, Esq., Reed S. Oslan,
Esq., Kirkland & Ellis LLP, Chicago, IL, attorneys for Defendants Partners Healthcare Solutions
Holdings, L.P ., et al.
March»-' 2016
1
Before the Court is Defendants' Motion to Dismiss Universal's First Amended and
Supplemental Complaint. · (D.I. 44). The motion has been fully briefed (D.I. 45, 48, 49). The
Court heard oral argument. (D.I. 54). For the reasons that follow, Defendants' motion to
dismiss is GRANTED IN PART and DENIED IN PART.
I.
BACKGROUND
This dispute arises out of a merger between plaintiff Universal American Corporation and
Partners Healthcare Solutions, Inc. ("APS"). Universal provides insurance and health benefits
mainly to enrollees in the federal Medicare program. (D.1. 39 if 30). APS offers specialty health
care solutions that enable its customers, primarily state Medicaid agencies, to improve the
quality of care and decrease costs. These services include case management and care
coordination, clinical quality and utilization review, and behavioral health services. (Id.
ifif 31-
32).
APS's post-merger performance fell substantially short of both parties' expectations.
Universal claims this was due to an organized fraud scheme, and filed suit against the individuals
and entities that it claims were in charge of APS. Prior to the merger, APS was a portfolio
company of GTCR Golder Rauner II ("GTCR"), a private equity firm. David Katz was a
Managing Director ofGTCR, which is the general partner ofGTCR Co-Invest and GTCR
Partners IX; (Id.
ifif 15, 18).
GTCR Partners IX, in turn, is the general partner of GTCR Fund
DUA and GTCR Fund IX/B. 1 (Id.
if 16).
GTCR Co-Invest, GTCR Fund IX/A, and GTCR Fund
IX/B are all limited partners of Partners Healthcare Solutions Holdings, L.P. ("APSLP"), 2 a
1
The Complaint divides Defendants into four categories. The first category, comprised of all the GTCR entities, is
referred to collectively as the "GTCR Defendants." Katz, by himself, constitutes the second category.
2
APSLP, by itself, constitutes the third category of defendants.
2
Delaware limited partnership that was formed to hold APS. (Id.
ifif 17, 19).
The leadership of
APS was organized as follows: Gregory Scott served as the CEO, Jerome Vaccaro as the
President and COO, and John McDonough as the CFO. (Id.
ifif 21-23, 41).
McDonough, Scott,
and Vaccaro 3 are all named defendants in this case, and served as limited partners of APSLP.
(Id.
if 19).
Defendants Katz and Scott also sat on APS's five-member board. (Id.
if 39).
Universal asserts fifteen counts ranging from securities fraud and common law fraud to
aiding and abetting and unjust enrichment. Defendants have moved to dismiss Counts I-XI,
XIII, and XV ofUniversal's First Amended and Supplemental Complaint for failure to state a
claim upon which relief can be granted. (D.I. 44). Each relevant count will be addressed below.
II.
LEGALSTANDARD
Rule 8(a) requires "a short and plain statement of the claim showing that the pleader is
entitled to relief." Fed. R. Civ. P. 8(a)(2). Rule 9(b) requires that "a party must state with
particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b).
When reviewing a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), the court must
accept the complaint's factual allegations as true, but may disregard any legal conclusions.
Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009). The factual allegations do not
have to be detailed, but they must provide more than labels, conclusions, or a "formulaic
recitation" of the claim elements. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007).
There must be sufficient factual matter to state a facially plausible claim to relief. Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009). The facial plausibility standard is satisfied when the
complaint's factual content "allows the court to draw the reasonable inference that the defendant
is liable for the misconduct alleged." Id. ("Where a complaint pleads facts that are merely
3
Collectively, these three are the fourth category, the "Individual Defendants."
3
consistent with a defendant's liability, it stops short of the line between possibility and
plausibility of entitlement to relief." (quotation marks omitted)).
III.
DISCUSSION
A.
Securities Fraud Under Section lO(b) (Count I)
Universal alleges that Scott, Vaccaro, McDonough, and APSLP committed securities
fraud under Section lO(b) of the Securities Exchange Act of 1934. In order to state a claim
under Section lO(b), the plaintiff must allege: "(1) a material misrepresentation or omission by
the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the
purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic
loss; and (6) loss causation." Amgen Inc. v. Conn. Ret. Plans & Tr. Funds, 133 S. Ct. 1184,
1191-92 (2013) (quoting Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 36-38 (2011)).
Pursuant to Federal Rule of Civil Procedure 9(b), the above elements must be pled "with
particularity," and, under the Private Securities Litigation Reform Act ("PSLRA"), the pled facts
must give "rise to a strong inference that the defendant[s] acted with the required state of mind."
15 U.S.C. § 78u-4(b)(2); Institutional Inv'rs Grp. v. Avaya, Inc., 564 F.3d 242, 253-54 (3d Cir.
2009); see also In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 217 (3d Cir. 2002)
("Rule 9(b) requires, at a minimum, that plaintiffs support their allegations of securities fraud
with all of the essential factual background that would accompany 'the first paragraph of any
newspaper story'-that is, the 'who, what, when, where and how' of the events at issue."). A
strong inference of scienter "is one that is 'cogent and at least as compelling as any opposing
inference ofnonfraudulent intent."' Avaya, 564 F.3d at 267 (quoting Tellabs, Inc. v. Makar
Issues &Rights, Ltd., 551U.S.308, 314 (2007)).
4
Defendants argue that Universal has failed to plead with particularity that specific
misrepresentations or omissions were "made." Defendants also contend that Universal has failed
to allege facts that give rise to a strong inference of scienter, and that Universal has failed to
plead the element of reliance. These arguments are addressed separately.
i. Particularity in Alleging Misrepresentations
In the opinion granting Defendants' first Motion to Dismiss, the Court held that "[t]he
amended complaint should lay out, with particularity, each fraudulent statement or
representation, its materiality, which specific defendant made the representation, when it was
made, why it was false or misleading, scienter, and explain how Universal relied on it." (D.I. 36
at 6). Defendants argue that Universal has failed to do this. (D.I. 45 at 20-24). Specifically,
Defendants argue that by grouping certain Defendants together in its complaint, Universal relies
on "'catch-all' or 'blanket' assertions that do not live up to the particularity requirements of the
[PSLRA]." Rockefeller, 311 F .3d at 224 n.19 (quoting Fla. State Bd. ofAdm in. v. Green Tree
Fin. Corp., 270 F.3d 645, 660 (8th Cir. 2001)). I disagree.
"The PSLRA requires [a plaintiff] to specify the role of each defendant, demonstrating
each Defendant's involvement in misstatements and omissions." Winer Family Tr. v. Queen,
503 F.3d 319, 335-36 (3d Cir. 2007). In suits involving multiple defendants, "securities fraud
plaintiffs [must] distinguish among those they sue and enlighten each defendant as to his or her
part in the alleged fraud." In re MicroStrategy, Inc. Sec. Litig., 115 F. Supp. 2d 620, 649 n.57
(E.D. Va. 2000) (quotation marks omitted). Only the "maker" of a fraudulent statement maybe
held liable under Section 1O(b). Janus Capital Grp., Inc. v. First Derivative Traders, 131 S. Ct.
2296, 2301 (2011). The maker of a statement is a "person or entity with ultimate authority over
the statement, including its content and whether and how to communicate it." Id. at 2302.
5
"Nothing in Janus precludes a single statement from having multiple makers." Glickenhaus &
Co. v. Household Int'!, Inc., 787 F.3d 408, 427 (7th Cir. 2015); see also City ofPontiac Gen.
Emps. Ret. Sys. v. Lockheed Martin Corp., 875 F. Supp. 2d 359, 374 (S.D.N.Y. 2012).
The Court concludes that the complaint adequately alleges particular misrepresentations
with respect to APSLP, Scott, and McDonough. For each, the complaint lays out "each
fraudulent statement ... , which specific defendant made the representation, [and] when it was
made." (D.I. 36 at 6). Universal alleges that Scott "signed the Merger Agreement on behalf of
both APSLP and APS" and that he signed the Officer's Certificate, certifying the representations
on behalf of APS, while also acting as the agent of APSLP. (D .I. 3 9 ifif 90-91, 107). The
complaint further lays out how the various representations within the Merger Agreement and the
Officer's Certificate were fraudulent. With respect to McDonough, the complaint specifically
alleges that McDonough made numerous oral misrepresentations on_December 13, February 14,
and February 29. (Id.
irir 139, 147).
Defendants contend, relying on Janus, that McDonough cannot be the "maker" of his
statements because the complaint provides that these statements were made "on behalf of APS
and APSLP." (D.I. 45 at 24 (quoting D.I. 39 irir 139, 147)). Defendants ;misread Janus. The
Supreme Court, in Janus, addressed a situation where one legal entity (an investment advisor)
was involved in the preparation of statements contained in another entity's (an investment fund)
SEC filings. Janus, 131 S. Ct. at 2305. There, the Court held that because the investment fund
had the ultimate authority over the statements, it "made" the statements.4 Id. Since "Janus [did]
4
The Court agrees that "nothing in the Court's decision in Janus limits the key holding ... to legally
separate entities." Haw. Ironworkers Annuity Tr. Fund v. Cole, 2011WL3862206, at *3 (N.D. Ohio
Sept. 1, 2011). The "analysis applies equally to whether [some defendants] may be held liable for the
misstatements of their co-defendants." In re Coinstar, Inc. Sec. Litig., 2011 WL 4712206, at *10 (W.D.
Wash. Oct. 6, 2011). The key determination is "ultimate authority," where "[t]he degree of separation
6
not alter the well-established rule that 'a corporation can act only through its employees and
agents,"' a corporate insider may "make" a statement-for purposes of Section 1O(b)-"pursuant
to his responsibility and authority to act as an agent" of the corporation. In re Merck & Co., Inc.
Sec., Derivative, & ERISA Litig., 2011WL3444199, at *25 (D.N.J. Aug. 8,2011) (quoting Suez
Equity Inv'rs, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 101 (2d Cir. 2001)). In such an
instance, the corporate insider may have the "ultimate authority" over the statement. Janus does
not insulate corporate officers from liability where the plaintiff "can plead, and ultimately prove,
that those officers ... had 'ultimate authority' over the statement." Id. Defendants' reading of
Janus, "taken to its logical conclusion ... would absolve corporate officers of primary liability
for all Rule lOb-5 claims, because ultimately, the statements are within the control of the
corporation which employs them." Id.; see also Glickenhaus, 787 F.3d at 427. The complaint
contains sufficient allegations to conclude, at the motion to dismiss stage, that McDonough
"made" certain misrepresentations.
While Universal adequately alleges misrepresentations as to APSLP, Scott and
McDonough, it fails to do so with respect to Vaccaro. Universal's complaint directs no
individualized allegations at Vaccaro. Instead, the complaint lumps Vaccaro together with
McDonough and/or Scott, making only vague allegations about his participation in preparing
certain documents and presentations. For instance, the complaint alleges "Scott, Vaccaro, and
McDonough collectively prepared and delivered a presentation to Universal senior management"
(D.I. 39 ~ 55), and that "Scott, Vaccaro, and McDonough created and delivered a presentation to
the Universal Board of Directors." (Id.
~
59). This is insufficient. Although "Janus recognized
that attribution could be 'implicit from surrounding circumstances,"' the key question is whether
between entities will inform the analysis of where [that] ultimate authority lies." Haw. Ironworkers, 2011
WL 3862206, at *3.
7
a person or entity has authority over a statement. City ofRoseville Emps. Ret. Sys. v. Energy
Sols., Inc., 814 F. Supp. 2d 395, 418 (S.D.N.Y. 2011) (quoting Janus, 131 S. Ct. at 2302).
Universal fails to allege any specific facts or "surrounding circumstances" that show Vaccaro
was a "person or entity with ultimate authority over [any particular] statement, including its
content and whether and how to communicate it." Janus, 131 S. Ct. at 2302. Therefore,
Vaccaro cannot be held liable under Section 1O(b). See, e.g., Thorpe v. Walter Inv. Mgmt.,
Corp., 111 F. Supp. 3d 1336, 1356 (S.D. Fla. 2015) ("[C]ull[ing] together and disseminat[ing]
information to the public that turned out to be false .... [is] insufficient to support a finding that
a defendant is the maker of the alleged misrepresentation."); Luminent Mortg. Capital, Inc. v.
Merrill Lynch & Co., 652 F. Supp. 2d 576, 594-95 (E.D. Pa. 2009). Count I is therefore
dismissed with respect to Vaccaro.
ii. Ieference ofScienter
Defendants contend that Universal has failed to plead facts giving rise to a strong
inference of scienter. Specifically, Defendants argue that Universal relies on improper "group
pleading" and further, that Universal "ignor[ es] the fact that the § 1O(b) defendants received a
considerable amount of [Universal] stock in exchange for the sale of APS, making them
vulnerable to any ill-effects of their own representations, and thus decreasing the likelihood that
any misrepresentations were made deliberately." (D.I. 45 at 24).
For each of APSLP, Scott, and McDonough, the complaint adequately pleads scienter.
Universal alleges, for instance, that Scott falsely certified in the Officer's Certificate that no
material adverse effects ("MAEs") had occurred since the execution of the Merger Agreement.
(D.I. 39 iii! 133-34). The complaint explains how APSLP and Scott knew, or recklessly
disregarded, that this representation was false. (Id.
8
if 95). Universal alleges that when
McDonough reaffirmed the 2012 Budget forecast during his phone calls with Universal on
February 14 and 29, he had actual knowledge of at least five MAEs, which "would be expected
to reduce APS's forecast of2012 EBITDA by over $11 million, or 25 percent." (Id.
iii! 103-05).
Additionally, "when multiple promised events fail to occur, there is a point where a strong
inference of fraud can be made." EP Medsystems, Inc. v. EchoCath, Inc., 235 F.3d 865, 881 (3d
Cir. 2000). Universal alleges that a series of "new business pipelines," "which contained the
names of each prospective client, the probability of winning the new contract, and the amount of
revenue to be generated in 2012, were a brazen series oflies." (D.I. 39 if 9). The Individual
Defendants and Katz withheld the real pipeline from Universal because, Universal alleges, its
disclosure would "open up a hornet's nest." (Id.; see also id.
iii! 78, 101).
Ultimately, "[o]fmore
than 30 potential contracts [that Universal was assured] were likely to provide revenue in 2012,
only two in fact generated revenue in that year, in the amount of $350,000 - an unimaginable
98.7% shortfall." (Id.
if 9; see also id. iii! 136-38, 142, 146).
The complaint lays out how each
officer knew, or recklessly disregarded, that each of these pipelines was false. (See, e.g., id.
iii!
56, 57). The temporal proximity of the misrepresentations in relation to the truth's revelation
may also be considered in determining whether alleged facts give rise to a strong inference of
I
scienter. Avaya, 564 F.3d at 272. Universal alleges that, within six weeks of closing, the
Individual Defendants decreased their EBITDA forecast by forty percent, and within four
months, the forecast was further reduced by ninety percent. (Id.
iii! 10, 110).
Additionally,
"personal financial gain may weigh heavily in favor of a scienter inference." Tellabs, 551 U.S.
at 325. Scott and McDonough had "powerful motives to conceal the truth about APS's
business." (D.I. 39 if 61). "[T]hey would be able to exchange their illiquid and worthless APS
shares for valuable, publicly traded shares of Universal ... [and] would increase their personal
9
compensation by as much as 40 percent." (Id.
irir 61, 152-53).
These allegations are sufficient to
give rise to a strong inference of scienter.
Contrary to Defendants' assertions, Universal does not advance any "group pleading"
theory in its complaint. "The group pleading doctrine is a judicial presumption that statements in
group-published documents ... are attributable to officers and directors who have day-to-day
control or involvement in regular company operations." Winer, 503 F.3d at 335. Since the
"doctrine allows a plaintiff to plead that defendants made a misstatement or omission of a
material fact without pleading particular facts associating the defendants to the alleged fraud,"
the Third Circuit has held that the doctrine did not survive the enactment of the PSLRA. Id. at
335-37. Universal's complaint is devoid of any allegations that any statements in documents are
attributable to any defendant "on the basis of their titles" or "their general level of day-to-day
involvement." Southland Sec. Corp. v. INSpire Ins. Sols., Inc., 365 F.3d 353, 365 (5th Cir.
2004); see also Winer, 503 F.3d at 335-37. Thus, while the complaint does group certain
plaintiffs together when alleging certain actions, it does not rely on the group pleading doctrine.
Defendants also argue that the receipt of Universal stock militates against an inference of
scienter, relying on cases which find that a "compelling inference against scienter is raised"
when defendants increase their stock holdings. Percoco v. Deckers Outdoor Corp., 2013 WL
3584370, at *6 (D. Del. July 8, 2013); see also Monk v. Johnson & Johnson, 2011WL6339824,
at *12 n.12 (D.N.J. Dec. 19, 2011). Here, the fact that the Individual Defendants received
Universal stock as consideration does not preclude an inference of scienter. The Individual
Defendants exchanged their APS stock for Universal stock, which has value independent of the
APS's performance. (D.I. 39 irir 61, 111, 152). The "compelling inference against scienter,"
found in cases like Percoco and Monk, is animated by the intuition that a defendant would not
10
sink his own ship. This inference is not implicated in a situation where, as here, the defendants
acquire stock in an entity with independent value.
Therefore, the complaint alleges facts sufficient to support a strong inference of scienter.
iii. Pleading Reliance
Defendants also argue that Universal has failed to show reliance on any extra-contractual
misrepresentations made before the execution of the Merger Agreement. The reliance element
(also known as ''transaction causation") requires that a plaintiff show that it "entered the
transaction at issue in reliance on the claimed misrepresentation or omission." McCabe v. Ernst
& Young LLP, 494 F.3d 418, 425 (3d Cir. 2007). "The most traditional (and most direct) way a
plaintiff can demonstrate reliance is by showing that he was aware of a company's statement and
engaged in a relevant transaction ... based on that specific misrepresentation." Halliburton Co.
v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2407 (2014) (quoting Erica P. John Fund, Inc. v.
Halliburton Co., 131 S. Ct. 2179, 2185 (2011)). Universal alleges that ifit had "known the
appalling truth, it never would have bought APS." (D.I. 39 if 1; see also id.
if 165).
Further,
Universal specifically alleges that it "relied on the material misrepresentations and omissions [of
the Individual Defendants] ... in deciding whether or not to acquire APS ... and in deciding
whether to close the Transaction." (Id.
if 219; see also id. ifif 102, 163(a), 164, 198).
These
allegations, taken as tiue, are sufficient to plausibly suggest that Universal "entered the
· transaction ... in reliance on the claimed misrepresentation[s] or omission[s]." See McCabe,
494 F.3d at 425. The count cannot be dismissed on this basis.
Therefore, Defendants' motion to dismiss Count I is granted with respect to Vaccaro and
denied with respect to Scott, McDonough, and APSLP.
B.
Control Person Liability Under Section 20(a) (Counts II and III)
11
Universal alleges control person liability under Section 20(a) of the Securities Exchange
Act against Scott, Vaccaro, McDonough, and APSLP (Count II), and against Katz and the GTCR
Defendants (Count III). 5 Section 20(a) provides:
Every person who, directly or indirectly, controls any person liable under any
provision of this chapter or of any rule or regulation thereunder shall also be liable
jointly and severally with and to the same extent as such controlled person to any
person to whom such controlled person is liable ... unless the controlling person
acted in good faith and did not directly or indirectly induce the act or acts
constituting the violation or cause of action.
15 U.S.C. § 78t(a). To state a claim under Section 20(a), the plaintiff must show: "(1) an
underlying violation by a controll[ ed] person or entity; (2) that the defendants are 'controlling
persons;' and (3) that the defendants were in some meaningful sense culpable participants in the
fraud." In re Digital Island Sec. Litig., 223 F. Supp. 2d 546, 561 (D. Del. 2002) (quotation
marks omitted), aff'd, 357 F.3d 322 (3d Cir. 2004); see also Belmont v MB Inv. Partners, Inc.,
708 F.3d 470, 484-85 (3d Cir. 2013). "[T]he heightened standard of the PSLRA requires that a
claim under Section 20(a) state with particularity the circumstances of both the defendants'
control of the primary violator, as well as of the defendants' culpability as controlling persons."
In re Digital Island, 223 F. Supp. 2d at 561; see also Snowstorm Acquisition Corp. v. Tecumseh
Prods. Co., 739 F. Supp. 2d 686, 707 (D. Del. 2010). Culpable participation may only be based
on inaction ifthe plaintiff proves both knowledge of the underlying fraud and that the inaction
was "deliberate and done intentionally to further the fraud." Belmont, 708 F.3d at 485; see also
Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 890 (3d Cir. 1975). Additionally, "it is well-settled
that the mere fact that an individual is a-director of a firm is not sufficient to show he is a
5
The Court previously concluded that the allegations against the GTCR Defendants were sufficiently
pleaded. (D.I. 36 at 8-9).
12
controlling person of the firm." In re Digital Island, 223 F. Supp. 2d at 561 (quotation marks
and alterations omitted).
Universal alleges that"[n]on-party APS committed a primary violation of Section 1O(b)
of the Exchange Act with respect to the material misrepresentations and omissions in the Merger
Agreement, the Company Disclosure Letter, and the Officer's Certificate," and with respect to a
misrepresentation made by an APS in-house lawyer about a software license. (D.I. 39 if 183).
The complaint alleges that Katz, Scott, Vaccaro, McDonough, and APSLP acted as controlling
persons of APS. (Id.). Defendants argue that the complaint fails to state a Section 20(a) claim.
Since the analysis with respect to Katz differs from that in regards to the Individual Defendants
(and APSLP), Katz is addressed separately.
i. Katz
In the opinion granting Defendants' first motion to dismiss, the Court stated that
"Universal should plead with particularity facts showing that Katz had primary responsibility for
APS's overall management and day-to-day operations or was a 'major player' in those
operations." (D.I. 36 at 8). Defendants argue that Universal has failed to do so. I disagree.
Universal spells out the major role that Katz played in the sale of APS to Universal. The
complaint alleges that Katz "personally negotiated all material terms of the [merger], including
price, with Universal's Chairman." (D.I. 39 ifif 54, 76-77). He exchanged "approximately 300
emails directly with Universal's top management." (Id.
if 54). Katz coordinated the flow of
information from APS, through the Individual Defendants, to Universal. (Id.
ifif 54-55, 72). The
complaint explains that Katz "was an aggressive, hands-on manager," who exchanged
''thousands of emails" with APS management. (Id.
irir 40-42). This is more than sufficient to
show that Katz "was a 'major player"' in APS's "overall management and day-to-day
13
operations." (D.1. 36 at 7-8); see also Snowstorm, 739 F. Supp. 2d at 707-08. Universal has
sufficiently pleaded the element of control.
The complaint also adequately pleads Katz's "culpable participation" in the underlying
fraud APS is alleged to have committed. Universal specifically alleges that Katz, with
knowledge of the underlying fraud, intentionally "prevented the discovery of the fraud."
Belmont, 708 F.3d at 485. For instance, Katz hid "material deficiencies" in APS's obligations
under the Customer B contract when he emailed Universal' s Chairman on December 26, 2011.
(D.I. 39 iii! 80, 95(d), 157(h)). Katz prevented APS from meeting with APS's outgoing Chief
Compliance Officer, due to his "own suspicions that the CCO would be a whistleblower." (Id.
159(d); see also id.
iii! 44, 85-87).
if
These allegations are more than sufficient. See, e.g., Sheehan
v. Little Switzerland, Inc., 136 F. Supp. 2d 301, 315 (D. Del. 2001) (allegation that former
officers and directors "each signed an SEC filing knowing that the filing contained an omission
that would likely mislead the market ... demonstrates culpable conduct").
The motion to dismiss is therefore denied with respect to Count III.
ii. Individual Defendants and APSLP
Defendants assert that the complaint untenably alleges that Scott, Vaccaro, and
McDonough are both engaged in fraud as primary violators (under Section lO(b)) and as
controlling persons of those underlying primary violators. (D.I. 45 at 28-29). In other words,
they are both "the controller and the controlled." In re Regal Commc 'ns Corp. Sec. Litig., 1996
WL 411654, at *4 (E.D. Pa. July 17, 1996); see also Ka/nit v. Eichler, 85 F. Supp. 2d 232, 246
(S.D.N.Y. 1999). Defendants contend this is grounds for dismissal of the§ 20(a) claim, as the
Individual Defendants cannot be both the controller and the controlled.
14
There is no rule that prevents a plaintiff :from alleging a§ 20(a) violation and§ lO(b)
violation against the same defendant. As acknowledged by several courts, Regal and Kalnit do
not hold otherwise. See, e.g., In re Van der Moolen NV. Sec. Litig., 405 F. Supp. 2d 388, 412
(S.D.N.Y. 2005); Sheehan, 136 F. Supp. 2d at 313-15. mKalnit and Regal, the respective
plaintiffs sought to hold individual defendants liable as controllers for the very misrepresetations
they were alleged to have made. See Kalnit, 85 F. Supp. 2d at 246; In re Regal, 1996 WL
411654, at *4. "[T]he logical inconsistency that required dismissal of the Section 20(a) claim in
Kalnit [may] not [be] present ... [when] multiple misrepresentations and omissions by various
of the Defendants have been alleged, and it is conceivable that one defendant ultimately might be
found to be a primary violator while another defendant might be found to be a control person
under Section 20(a)." In re Van der Moolen, 405 F. Supp. 2d at 412. Here, I am not convinced
there is any "logical inconsistency" which results from Universal' s allegations, since there are
numerous misrepresentations alleged against multiple defendants. Thus, the complaint need not
be dismissed on this basis.
Defendants also argue that Universal fails to plead control with the requisite particularity.
Control is "the possession, direct or indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting securities, by
contract, or otherwise." 17 C.F.R. § 240.12(b)-2; see also Rochez Bros., 527 F.2d at 890;
-Snowstorm, 739 F. Supp. 2d at 707. Defendants contend that Universal impermissibly seeks to
establish control "simply by referencing a defendant's position as an officer or director of the
purported primary violator." (D.I. 45 at 29 (citing Skeway v. China Nat. Gas, Inc., 2012 WL
2877645, at *1 (D. Del. July 6, 2012))). Universal contends its complaint "explains how Scott,
Vaccaro, and McDonough not only had the titles of CEO, COO and CFO but also acted as such,
15
creating and delivering ... virtually all of the fraudulent documents and oral misrepresentations
fed to Universal." (D.I. 48 at 31 ). Universal then asserts that "[t]he allegations here are more
like those in [Snowstorm]," since it "has adequately pled the role of each of Scott, Vaccaro and
McDonough in controlling APS, the company they were paid to run." (Id.). Universal does not
specifically reference any pertinent allegations in the complaint. I do not think this is an
oversight, as I too cannot unearth any from the 104-page complaint. General allegations
pertaining to "management responsibilities fail to allege [control] with the requisite specificity,"
as the control person must be shown to "possess[] actual control over the transactions in
question." See In re Digital Island, 223 F. Supp. 2d at 560-61; Skeway, 2012 WL 2877645, at
*1.
Defendants also argue that the complaint fails to adequately plead "culpable
participation." Universal argues that culpable participation is adequately alleged, as the
complaint explains that Vaccaro and McDonough "knew of the many misrepresentations in the
Merger Agreement and Officer's Certificate, including some that referred to Vaccaro's and
McDonough's own knowledge." (D.I. 48 at 31-32; D.I. 39 iii! 123-35; see also id.
if 91).
Further, the complaint alleges that Scott and Vaccaro "both knew that numerous MAEs had
occurred between signing and closing." (D.I. 39 if 147). "[P]leading knowledge of the facts
underlying the fraud, or even knowledge of the fraud itself, is simply not enough to establish
culpable participation in the securities violation by an allegedly controlling person."
Steamfitters Local 449 Pension Fund v. Alter, 2011WL4528385, at *11 (E.D. Pa. Sept. 30,
2011); see also In re Digital Island, 223 F. Supp. 2d at 563 (dismissing Section 20(a) claims
where the complaint "was utterly lacking in any details as to when or how [any participation]
occurred," even though the complaint pleaded "a factual predicate for the individual defendants'
16
knowledge of the purported misstatements"). Beyond allegations of knowledge, Universal
merely alleges that Scott, Vaccaro, and McDonough "culpably participated" in the alleged fraud.
(D.I. 39 if 184(a)). Universal argues it has "[p]led [c]ulpable [p]articipation [t]hrough [d]etailed
[f]actual [a]llegations of [a]ctual [k]nowledge of the [f]alsity of~ .. [s]tatem.ents." (D.I. 48 at
32). Actual knowledge with "vague alleg[ations] that the individual defendants 'participated' in
the purported omissions" is not sufficient. Digital.Island, 223 F. Supp. 2d at 563. Universal
must plead both knowledge of the underlying fraud and that the inaction was "deliberate and
done intentionally to further the [underlying] fraud." Belmont, 708 F.3d at 485. It has not done
so.
Therefore, for two independent reasons, Count II is dismissed for failing to state a claim
upon which relief could be granted.
Common Law Fraud Based on Extra-Contractual Statements and Omissions
(Counts VII, VIII, IX, X, XI, and XIII)
C.
Universal asserts claims of fraud and fraud in the inducement against Scott, Vaccaro,
McDonough, Katz, and APSLP. To state a claim for common law fraud, Universal must plead
facts supporting an inference that: "(1) the defendant falsely represented or omitted facts that the
defendant had a duty to disclose; (2) the defendant knew or believed that the representation was
false or made the representation with a reckless indifference to the truth; (3) the defendant
intended to induce the plaintiff to act or refrain from acting; (4) the plaintiff acted in justifiable
reliance on the representation; and (5) the plaintiff was injured by its reliance." See Abry
Partners V, L.P. v. F & W Acquisition LLC, 891A.2d1032, 1050 (Del. Ch. 2006). Delaware
law permits parties to define "those representations of fact that formed the reality upon which the
parties premised their bargain." Id. at 1058. "[S]ophisticated parties to negotiated commercial
contracts may not reasonably rely on information that they contractually agreed did not form a
17
part of the basis for their decision to contract." Id. at 1056 (quoting H-M Wexford LLC v.
Encorp, Inc., 832 A.2d 129, 142 n.18 (Del. Ch. 2003)). To be effective, a contract "must contain
language that, when read together, can be said to add up to a clear anti-reliance clause by which
the plaintiff has contractually promised that it did not rely upon statements outside the contract's
four comers in deciding to sign the contract." Kronenberg v. Katz, 872 A.2d 568, 593 (Del. Ch.
2004).
In granting the first motion to dismiss, the Court stated that Universal would be
"permitted to amend its complaint, because, similar to the contract in [TransDigm Inc. v. Alcoa
Global Fasteners, Inc., 2013 WL 2326881 (Del. Ch. Feb. 1, 2013)], the language of Section 3.34
does not contain an express waiver with respect to the accuracy or completeness of the
information provided by the Defendants." (D.I. 36 at 11). In TransDigm, the Delaware Court of
Chancery denied a motion to dismiss for fraudulent, active concealment based on an anti-reliance
provision which did not "disclaim reliance on extra-contractual omissions" or provide that
"TransDigm was making ... [a] representation as to the 'accuracy and completeness' of
information ... provided." TransDigm, 2013 WL 2326881, at *7-9. The court distinguished
RAA Mgmt., LLC v. Savage Sports Holdings, Inc., 45 A.3d 107 (Del. 2012), holding that the
agreement at issue in RAA and the cases upon which it relied "contained language expressly
disclaiming reliance on both the omission of information and extra-contractual representations."
TransDigm, 2013 WL 2326881, at *9.
Since TransDigm appeared at the time to be the sole guidance from the Delaware state
courts on the extra-contractual omission theory, the Court was persuaded to follow it. See
McKenna v. Ortho Pharm. Corp., 622 F.2d 657, 661-63 (3d. Cir. 1980). Recently, however, the
Court of Chancery issued another decision on the subject. See Prairie Capital IIL L.P. v. Double
18
E Holding Corp., 2015 WL 10464814, at *9-12 (Del. Ch. Nov. 24, 2015). There, the court held
that because parties in an arms' length contractual setting "begin[] the process without any
affirmative duty to speak, any claim of fraud .... cannot start from an omission." Id. at *9.
"[T]herefore, contractual provisions that identify the representations on which a party
exclusively relied define the universe of information that is in play for a fraud claim." Id.
Further, the court stated that the effect of the anti-reliance clause at issue "extend[ed] to claims
based on omissions," and "[t]o the extent TransDigm suggests that an agreement must use a
magic word like 'omissions,' then [it] respectfully disagree[d] with that interpretation." Id. at
*12. With respect to TransDigm, I am inclined to agree with Prairie Capital. "Every
misrepresentation, to some extent, involves an omission of the truth." Id. at *10 (quoting
Universal Am. Corp. v. Partners Healthcare Sols. Holdings, L.P., 61 F. Supp. 3d 391, 400 (D.
Del. 2014)). "When parties identify a universe of contractually operative representations in a
written agreement, they remain in that universe ... [and] cannot escape through a wormhole into
an alternative universe of extra-contractual omissions." Prairie Capital, 2015 WL 10464814, at
*l O; see also Abry, 891 A.2d at 1058.
Here, the Merger Agreement's Section 3.34, entitled "No Other Agreements," provides,
in relevant part:
WITHOUT LIMITING PARENT'S RECOURSE AS ELSESWHERE SET FORTH IN
THIS AGREEMENT (OR ANY ANCILLARY AGREEMENT CONTEMPLATED
HEREBY), EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES
EXPRESSLY MADE BY THE COMPANY IN THIS ARTICLE 3, NONE OF APSLP,
THE COMPANY OR ANY SUBSIDIARY OF THE COMPANY OR ANY APSLP
RELATED PERSON HAS MADE OR AUTHORIZED THE MAKING OF ANY
REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED,
CONCERNING THE SUBJECT MATER OF THIS AGREEMENT, INCLUDING, BUT
NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. NEITHER PARENT NOR THE MERGER SUB IS RELYING
OR HAS RELIED ON ANY REPRESENTATIONS AND WARRANTIES EXCEPT FOR
THOSE EXPRESSLY MADE BY THE COMPANY IN THIS ARTICLE 3 (OR THE
19
CERTIFICATE DELNERED PURSUANT TO SECTION 6.2(h)(i) OF THIS
AGREEMENT)).
(D.I. 46, Ex. A at 63-64, § 3.34 (italicization added)). 6 The parties also included an integration
clause, which provides that Merger Agreement, along with certain other written agreements,
"constitute the entire agreement among the parties with respect to the matters covered hereby and
supersedes all previous written, oral or implied understandings among them with respect to such
matters." (Id. at 113, § 8.12). These sections of the agreement "combine to mean that
[Universal] did not rely on other information" outside the Merger Agreement's Article 3 or the
Officer's Certificate. 7 Prairie Capital, 2015 WL 10464814, at *8. "If a party represents that it
only relied on particular information, then that statement establishes the universe of information
on which that party relied." Id.; see also FdG Logistics LLC v. A & R Logistics Holdings, Inc.,
2016 WL 819215, at *13 (Del. Ch. Feb. 23, 2016). Universal, the "parent" under Section 3.34,
stated that it relied exclusively on the representations and warranties in the Merger Agreement
and the Officer's Certificate. This statement, when viewed along with the integration clause,
"add[s] up to a clear anti-reliance clause." Kronenberg, 872 A.2d at 593.
6
A similar anti-reliance provision, addressing what APS may rely upon, is found at the end of Article 4,
which deals with the representations and warranties of the parent and the merger sub. (See id. at 72, §
4.15). I note that, in this 109-page agreement, the only other section written entirely in capital lettersaside from a quotation set forth in Section 2.8(b)-is Section 8.8(b), which relates to waiver of the right
to trial by jury. (See id. at 112, § 8.8(b )).
7
The Court notes that the contractual language at issue in Prairie Capital differs from that at issue here.
The language in Prairie Capital included a provision stated that the Buyer "relied on ... the results of its
own independent investigation" and "the representations and warranties of the Double E Parties expressly
and specifically set forth in this Agreement." Prairie Capital, 2015 WL 10464814, at *7. The clause
also stated: "THE BUYER UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT ALL
OTHER REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS OR
IMPLIED ... ARE SPECIFICALLY DISCLAIMED BY THE DOUBLE E PARTIES." Id. While the
exact language differs, I see no reason to depart from the logic of Prairie Capital. Where, as here, a
contracting party has specifically disclaimed reliance on extra-contractual statements, "[t]he critical
distinction is not between misrepresentations and omissions, but between information identified in the
written agreement and information outside of it." Id. at *9.
20
Universal also argues that statements made after the Merger Agreement was signed, but
before closing, are not encompassed by the anti-reliance clause. (D.I. 48 at 35). Since the
Merger Agreement explicitly references the delivery of the Officer's Certificate, and that its
representations are not subject to the anti-reliance provision, the anti-reliance effect of the
Merger Agreement extends to extra-contractual representations made during the period between
signing and closing. Any other reading would render nugatory the exclusive effect of the
representations in the Officer's Certificate. That is, if the Merger Agreement only applied to
statements prior or contemporaneous to it, any subsequent representations-including those in
the Officer's Certificate-could be relied upon. There would be no need to single out the
Officer's Certificate as something that could be relied upon if everything after the signing of the
Merger Agreement could be relied upon. Thus, such a reading would result in surplus
contractual language, which should be avoided. See O'Brien v. Progressive N. Ins. Co., 785
A.2d 281, 287 (Del. 2001) ("Contracts are to be interpreted in a way that does not render any
provisions illusory or meaningless." (quotation marks omitted)). The anti-reliance clause is
therefore not an ambiguous provision that is "reasonably or fairly susceptible" to different
interpretations. See VLIW Tech., LLC v. Hewlett-Packard Co., 840 A.2d 606, 615 (Del. 2003).
Universal's interpretation is therefore rejected.
Universal largely premises its common law fraud claims on Defendants' extra-contractual
representations. Counts VII through IX are expressly based on "Extra-contractual Statements
and Omissions." Counts X and XI are based, in part, on extra-contractual statements. Since the
statements or omissions, whenever made, are not encompassed within "the universe of
information that is in play for a fraud claim," they cannot sustain Universal's common law fraud
I
claims. Prairie Capital, 2015 WL 10464814, at *9; see also Abry, 891 A.2d at 1058. If
21
Universal relied on certain representations by Defendants, it should have included those
representations in their agreement. " [A] party cannot promise, in a clear integration clause of a
negotiated agreement, that it will not rely on promises and representations outside of the
agreement and then shirk its own bargain in favor of a 'but we did rely on those other
representations' fraudulent inducement claim." Abry, 891 A.2d at 1057. Count VII must
therefore be dismissed. To the extent Count X relies on extra-contractual representations or
omissions, it is dismissed. Counts VII, IX, XI, and XIII are derivative of the underlying fraud
claims in Counts IV, VII, and X. To the extent these counts rely on extra-contractual statements
or omissions, they are dismissed.
D.
Common Law Fraud Claims Based on Contractual Misstatements (Counts
IV, V, VI, X, XI, and XIII)
The Court previously held that Abry "clearly allows fraud claims based on
representations contained in the Merger Agreement and the Officer's Certificate," and that those
claims "are properly alleged against APSLP and Scott." (D.I. 36 at 9); see Abry, 891 A.2d at
1064 (public policy of Delaware does "not permit [a contracting party] to insulate itself' from
liability for fraudulent acts); Ameristar Casinos, Inc. v. Resorts Int'! Holdings, LLC, 2010 WL
1875631, at *11 (Del. Ch. May 11, 2010) ("[A] fraud claim can be based on representations
found in a contract."). Defendants argue Universal's common law fraud claims amount to
impermissible "bootstrapping." (D.I. 45 at 16-17); see Narrowstep, Inc. v. Onstream Media
Corp., 2010 WL 5422405, at *15 (Del. Ch. Dec. 22, 2010) (A plaintiff"cannot 'bootstrap' a
claim of breach of contract into a claim of fraud merely by alleging that a contracting party never
intended to perform its obligations." (quoting latex Commc'ns, Inc. v. Defries, 1998 WL 914265,
at *4 (Del. Ch. Dec. 21, 1998))). Defendants argue that Universal's fraud claims are "a
collection of breach of contract claims, each alleging that there was some detail about a customer
22
contract that Defendants did not disclose." (D.1. 45 at 17); see Data Mgmt. Internationale, Inc.
v. Saraga, 2007 WL 2142848, at *3 (Del. Super. Ct. July 25, 2007) ("Even an intentional,
knowing, wanton, or malicious action by the defendant will not support a tort claim if the
plaintiff cannot assert wrongful conduct beyond the breach of contract itself."). While
Defendants' assessment of the law is correct, its characterization of the complaint's factual
allegations is not. Universal does not merely allege that Defendants failed to comply with their
disclosure obligations under the agreement; Universal alleges that certain contractual statements
were false. (See D.I. 48 at 33 (citing D.I. 39 iiiI 4, 5, 6, 50-52, 62-67, 79, 88-89, 91, 95, 105, 107,
109, 113-16, 123-24, 130, 133-34)). I conclude that Universal has properly alleged common law
fraud based on contractual misstatements.
The parties dispute whether these claims are properly alleged against Vaccaro and
McDonough. As the Court stated in its first opinion, they did not sign the Officer's Certificate.
(D.I. 36 at 9). Universal argues that the claims should be sustained, with respect to Vaccaro and
McDonough, under Anvil Holding Corp. v. Iron Acquisition Co., 2013 WL 2249655, at *6-7
(Del. Ch. May 17, 2013). The Anvil Holding court denied a motion to dismiss with respect to
individual defendants where it was "reasonably conceivable" that the individual defendants "not
only knew the Company was making false representations and warranties, but actively concealed
from the Buyer information that made those representations false." Id. at *7. The Court found
that this active concealment, when considered in conjunction with the defendants' attendance at
certain meetings, was "sufficient to make it reasonably conceivable that the Individual
Defendants caused the Company to make a false representation in the Purchase Agreement." Id.
Several other Delaware courts have followed Anvil Holding. See, e.g., Aviation West Charters,
LLC v. Freer, 2015 WL 5138285, at *5-6 (Del. Super. Ct. July 2, 2015); ITW Global Invs. Inc. v.
23
Am. Indus. Partners Capital Fund IV, L.P., 2015 WL 3970908, at *11 n.131 (Del. Super. Ct.
June 24, 2015). Here, the complaint alleges that the McDonough and Vaccaro are among "the
individuals whose knowledge allegedly makes the [contractual] representations false." Anvil
Holding, 2013 WL 2249655, at *7; (D.I. 39 ifif 6, 106-07, 133-34, 162, 164; see generally id.
ifif
50-123). The complaint further alleges that Vaccaro and McDonough, as senior managers of
APS, "active[ly] concealed" the true state of APS and "participate[ed] in meetings leading up to
the closing." Anvil Holding, 2013 WL 2249655, at *7; (see generally D.I. 39 ifif 1, 4, 22-23,
122-49). Therefore, the complaint pleads sufficient facts to plausibly suggest that Vaccaro and
McDonough, through their involvement in the negotiation and sale, "caused [APS] to make ...
false representation[s] in the [Merger Agreement]." Anvil Holding, 2013 WL 2249655, at *7;
see also Aviation West, 2015 WL 5138285, at *6. Counts IV, V, X, and XIII are therefore
properly alleged against Vaccaro and McDonough.
I conclude that Defendants' motion to dismiss is denied with respect to Count IV. Counts
V and VI, which are derivative of Count IV, also survive dismissal. Defendants' motion is also
denied with respect to Counts X, XI, and XIII to the extent they are premised on C
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