Duafala v. Globecomm Systems Inc.

Filing 27

MEMORANDUM AND ORDER granting 22 Motion to Compel; granting in part and denying in part 22 Motion to Dismiss. Defendant's motion to compel arbitration of Plaintiffs claims for breach of contract and for an accounting is granted. Defendant's motion to dismiss Plaintiffs fraud claim is denied; andthe motion to stay the fraud claim pending the arbitration is granted. (Ordered by Judge Leonard D. Wexler on 2/5/2015.) (Fagan, Linda)

FILED
IN CLERK'S OFFICE
U S DISTRICT COURTED NY

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK

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RICHARD DUAFALA, Representative of
ComSource, Inc. Stockholders,

*

FEB 052015

*

LONG ISLAND OFFICE

MEMORANDUM AND ORDER
Plaintiff,

cv 13-4944
-against(Wexler, J.)
GLOBECOMM SYSTEMS INC.,
Defendant.

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APPEARANCES:
Gallagher, Harnett & Lagalante LLP
By:
Brian K. Gallagher, Esq.
380 Lexington Avenue
New York, NY 10168
Attorneys for Plaintiff
Stein Sperling Bennnett DeJong Driscoll PC
By:
Jeffrey M. Schwaber, Esq.
Deanna L. Peters, Esq.
25 West Middle Lane
Rockville, MD 20850
Attorneys for Plaintiffs
Kramer Levin Naftalis & Frankel LLP
By:
Jonathan M. Wagner, Esq.
Tobias B. Jacoby, Esq.
1177 Avenue of the Americas
New York, NY 10036
Attorney for Defendant
WE)(LER, District Judge:
Before the Court is the motion of Globecomm Systems Inc. ("Globecomm" or
"Defendant") to compel arbitration pursuant to the Federal Arbitration Act ("FAA''), 9 U.S.C. §
I, et seq., or to dismiss Plaintiff's breach of contract claims and request for accounting pursuant
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to Federal Rules of Civil Procedure ("Fed.R.Civ.P."), Rule 12(b)(6). Defendant also seeks to
dismiss, or alternatively stay, Plaintiffs fraud claim pursuant to Fed.R.Civ.P., Rules 8(a), 9(b)
and 12(b)(6). For the reasons that follow, Defendant's motion to compel arbitration is granted,
and accordingly, Defendant's motions to dismiss the breach of contract and accounting claims
are denied. Defendants' motion to dismiss the fraud claim is denied, and the motion to stay that
claim pending arbitration is granted.
BACKGROUND
I.

Factual Background
A. The Agreement
The facts that follow are taken from Plaintiffs Amended Complaint ("AC" or

"Complaint") or the parties' Agreement and Plan of Merger (the "Agreement"). This action
stems from the purchase ofComSource, Inc. ("ComSource") by Globecomm through the
Agreement entered into on April 8, 2011. AC, 1 I. ComSource, founded in 2004, provides
engineering services, software development and testing for telecommunications equipment. By
the end of 20 I 0, it achieved unaudited revenues of $22.7 million. AC, 1 6. Because of his health
issues, ComSources' majority stockholder, Jerald C. Cruce ("Cruce") sought to sell the company
and used an investment banking firm to market the company to potential purchasers. AC, 1 7.
The goal of the ComSource's stockholders was to obtain the highest value for their shares
and ensure that ComSource's business would continue to grow. AC, 1 10. Globecomm made an
offer which included an initial cash payment, as well as additional cash and stock earn out
payments ("Earn Out Payments") in each of the two years following the merger, based on the
amount of business conducted in each of those two years. AC, 11 11-14. Based on
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Globecomm's representations that it had the resources and desire to continue to grow
ComSource's business, ComSource's stockholders rejected other offers with a higher initial cash
payment in favor ofGlobecomm's offer. AC, ~~ 11-12.
The Agreement was executed and effective as of April 8, 2011. Section 2.05 of the
Agreement and its Exhibit G detail how the Earn Out Payments would be calculated for Year 1
and Year 2. Such payments would be made after Globecomm met certain earnings targets, or
Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA"). AC,

~

15. Thus,

calculation of the EBITDA was the first step in determining the value of the Earn Out Payments.
An Earn Out Payment was made in Year 1 in the amount of$4,700,000. AC,

~~

18-19.

Therefafter, starting in June 2012, Globecomm estimated that it did not expect to make an Earn
Out Payment in Year 2. AC,

~~

20-21. On April22, 2013, Globecomm sent a notice to Richard

Duafala as the Stockholders' Representative,' that based on the EBITDA for Year 2, no Earn
Out Payments were due. AC,

~

22. According to the Complaint, Globecomm's EBITDA figure

for Year 2 was an 82% drop from Year 1 and a "vast departure" from the level of business
conducted by ComSource at the time of the Agreement. AC,

~

23.

After receiving that notice, Duafala and an accountant traveled to see certain books and
records as permitted by the Agreement, and soon thereafter, Duafala sent Globecomm an Earn
Out Dispute Notice, requesting to see certain documents, pursuant to Section 2.05(b ). AC

~~

25-

'The Agreement names Jerald L. Cruce as Stockholders' Representative, and designates
Richard Duafala, as Stockholders' Representative in the event of the permanent disability or
death of Mr. Cruce. See Agreement, at 1; Section 2.07. The Stockholders' Representative is
authorized to "take any and all additional action as is contemplated to be taken by or on behalf of
the Company Stockholders by the terms of this Agreement." See Agreement, Section 2.07(a).
Duafala brings this action as Plaintiff in that capacity. AC, ~ 1-2.
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26. Duafala alleges the information requested was not produced, and that the EBITDA figures
were "incorrect" and "undervalued." AC,

~~

28-31.

Section 2.05 of the Agreement, titled "Earn Out," describes how the EBITDA is
calculated and the Earn Out Amounts determined. In the event of a dispute over the calculation
of the EBITDA, Section 2.05(b) provides that such dispute shall be settled "in accordance with
the procedures set forth in Section 2.03(c)," which states:
all amounts remaining in dispute shall be submitted for resolution to a recognizable,
reputable and impartial certified public accounting firm that is mutually acceptable to
Parent and Stockholders' Representative (the "Neutral Firm") .... Within thirty (30) days,
... the Neutral Firm shall deliver its determination ... [which] shall be binding, final and
conclusive.
Section 2.03( c): Dispute.
B. The Amended Complaint
Plaintiff's Amended Complaint alleges that Defendant breached Section 2.05(d) of the
Agreement by "chilling" and ultimately "eliminating" ComSource's business following the
closing date and during the Earn Out measurement periods. Section 2.05( d) obligates
Globecomm to continue to operate the business diligently and to maximize the EBITDA.
Specifically, Globecomm covenants to
(i) operate [ComSource] diligently and in the ordinary course of business, as consistent
with the operations of the Company heretofore, ... (ii) not take any actions that would
materially change the operations of the Business or ... prevent [ComSource] ... from
conducting its business ... or preserving ... relationships with customer, suppliers or
others; ... (iv) use commercially reasonable efforts to facilitate [ComSource] in its efforts
to maximize EBITDA; and (v) not take any action intended to circumvent payment of the
maximum Earn Out Amounts under Section 2.05 hereunder.
AC, ~ 17-18; Agreement, Section 2.05(d): Post-Closing Operations.
Plaintiff alleges that, amongst other things, Globecomm "shifted and reassigned" business
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from ComSource to another Globecomm subsidiary "in a purposeful effort to reduce the
EBITDA" to avoid any Year 2 payment. AC, ~~ 33-35. Plaintiff also alleges breach of the
implied duty of good faith and fair dealing, requests an accounting pursuant to Section 2.03(c),
and brings a claim for fraud, alleging that ComSource stockholders relied on Globecomm's
misrepresentations that it would grow ComSource's business and reach higher earn out
payments, and in reliance thereon, rejected other more favorable purchase offers in favor of
Globecomm's offer. AC,

~~

36-52.

Defendant moves to compel arbitration of the breach of contract claims and the request
for an accounting, arguing these claims are essentially a dispute over the calculation of the
EBITDA, which the parties agreed to arbitrate. Alternatively, Defendant seeks to dismiss those
claims for failure to state a claim under Rule l2(b)( 6). Defendant also moves to dismiss the
fraud claim for failure to plead with sufficient particularity under Rule 9(b), and for failure to
state a claim under Rule 12(b)(6), or alternatively, moves to stay the fraud claim pending
arbitration of the contract and accounting claims.
DISCUSSION

I.

Legal Principles
A.

Standards on a Motion to Compel Arbitration

In determining whether a claim should be arbitrated, the Court must determine (I)
whether the parties agreed to arbitrate; (2) the scope of that agreement; (3) if federal statutory
claims are asserted, whether Congress intended those claims to be nonarbitrable; and (4) if the
court concludes that some, but not all, of the claims in the case are arbitrable, whether to stay the
balance of the proceedings pending arbitration. See JLM Industries. Inc. v. Stolt-Nielsen SA,

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387 F.3d 163, 169 (2d Cir. 2004) (quoting Oldroyd v. Elmira Sav. Bank, FSB, 134 F.3d 72,
75-76 (2d Cir. 1998)); E.S. Originals Inc. v. Totes Isotoner Com., 734 F.Supp.2d 523, 529
(S.D.N.Y. 2010).
"Federal policy strongly favors the enforcement of arbitration agreements." Paramedics
Electromedicina Comercial. Ltda v. GE Medical Systems Information Technologies. Inc., 369
F.3d 645, 654 (2d Cir. 2004) (citing 9 U.S.C. § 2; Moses H. Cone Mem'l Hosp. v. Mercury
Constr. Com., 460 U.S. I, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)). Yet, arbitration is '"a
matter of consent, not coercion."' JLM Industries. Inc., 387 F.3d at 171, (quoting Volt Info. Scis.
v. Bd. ofTrs. of Leland Stanford Junior Univ., 489 U.S. 468,479, 109 S.Ct. 1248, 103 L.Ed.2d
488 (1989)). It is a '"matter of contract,' and therefore 'a party cannot be required to submit to
arbitration any dispute which [it] has not agreed so to submit."' JLM Industries, Inc., 387 F.3d at
171 (quoting Vera v. Saks & Co., 335 F.3d I 09, 116 (2d Cir. 2003) (other citations omitted).
Thus, "[ w]hile the FAA expresses a strong federal policy in favor of arbitration, the purpose of
Congress in enacting the FAA 'was to make arbitration agreements as enforceable as other
contracts, but not more so."' JLM Industries. Inc., 387 F.3d at 171 (quoting Cap Gemini Ernst &
Young. U.S .. L.L.C. v. Nacke!, 346 F.3d 360, 364 (2d Cir. 2003) (other citations omitted). Thus,
the court deciding a motion to compel arbitration must first determine "whether the parties
agreed to arbitrate that dispute." Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc.,
252 F.3d 218, 225 (2d Cir.), cert. denied, 122 S.Ct. 546 (2001) (quoting Mitsubishi Motors Corp.
v. Soler Chrvsler-Plymouht. Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 3353, 87 L.Ed.2d 444
(1985) (internal quotations omitted)).
The scope of the arbitration clause is critical to determining whether the parties have
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agreed to arbitrate the claim at issue. The Second Circuit has instructed that the court should first
classify whether the clause is either "broad" or "narrow." "Where the arbitration clause is
narrow, a collateral matter will generally be ruled beyond its purview. Where the arbitration
clause is broad, 'there arises a presumption of arbitrability' and arbitration of even a collateral
matter will be ordered if the claim alleged 'implicates issues of contract construction or the
parties' rights and obligations under it."' Louis Dreyfus Negoce S.A. v. Blystad Shipping &
Trading Inc., 252 F.3d 218,224 (2d Cir.), cert. denied, 122 S.Ct. 546 (2001) (citing Cornell
Univ. v. UAW Local2300, 942 F.2d 138, 140 (2d Cir. 1991) and quoting Collins & Aikman
Prods. Co. v. Bldg. Sys., Inc., 58 F.3d 16,23 (2d Cir. 1995)). If the clause is narrow, the court
must consider whether the "issue is on its face within the purview of the clause." McDonnell
Douglas Finance Com. v. P.P. & L. Co., 858 F.2d 825, 832 (2d Cir. 1988) (quoting Rochdale
Village. Inc. v. Public Service Employees Union, Local No. 80, 605 F.2d 1290, 1295 (2d Cir.
1979) (internal quotations omitted) (other citations omitted). "In determining whether a
particular claim falls within the scope of the parties' arbitration agreement, this Court 'focus[ es]
on the factual allegations in the complaint rather than the legal causes of action asserted."'
Specht v. Netscape Communications Corp., 306 F.3d 17, 36 (2d Cir. 2002) (quoting Genesco.
Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840,846 (2d Cir. 1987)); E.S. Originals Inc. v. Totes
lsotoner Corp., 734 F.Supp.2d 523, (S.D.N.Y. 2010).
II.

Disposition of the Motion
A.

Defendant's Motion to Compel Arbitration

I. Agreement to Arbitrate
The Court first must determine whether the parties here agreed to arbitrate. JLM
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Industries. Inc., 387 F.3d at 169. It is clear to the Court that Section 2.05(b) reflects an intent to
arbitrate. The Agreement explicitly states that if there is a dispute concerning the calculation of
the EBITDA, the parties "shall settle any such dispute in accordance with the procedures outlined
in Section 2.03(c)." Section 2.03(c) details that "all amounts remaining in dispute shall be
submitted for resolution to a recognizable, reputable and impartial certified public accounting
firm ... " and that such firm "shall deliver its determination of the amounts remaining in
dispute, ... which determination shall be final, binding and conclusive." The Court finds that this
clear language reflects an intention to arbitrate. That these clauses do not contain the word
"arbitrate" or "arbitrator" is not definitive on whether there is such an agreement. See
McDonnell Douglas Finance Com. v. P.P. & L. Co., 858 F.2d at 830.
2. Scope of the Arbitration Agreement
Next, it is necessary to determine the scope of the arbitration clause. The Court finds that
the clause here is a narrow one. It is contained in Section 2.05: Earn Out, dealing with the
additional "consideration payable and/or issuable to the Company Stockholders in respect of the
Purchase Price pursuant to Section 2.02." The language of the clause itself is specific to disputes
concerning the EBITDA, and is not a clause intended to cover all disputes that might arise
between the parties. Indeed, the "Miscellaneous" article of the Agreement states that "any suit or
proceeding related to or arising out of this Agreement" shall be brought in New York State
Court, Suffolk County or the Eastern District of New York. See Agreement, Section 12.06:
Jurisdiction. Thus, the Court finds that this clause is narrow by its own terms and governs

disputes concerning calculation of the EBITDA. The Plaintiff agrees. See Plaintiffs
Memorandum in Opposition ("Pl. Mem.") , at 5-6.
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The question here is whether the scope of the clause also governs Plaintiffs claims that
Defendant breached Section 2.05(d) of the Agreement by "chilling" the growth ofComSource to
minimize the EBITDA. Section 2.05( d): Post-Closing Operations, obligates the Defendant to
operate the business "diligently" and "consistently," not take any actions that would "materially
change the operations," use commercially reasonable efforts "to maximize EBITDA," and "not
take any action intended to circumvent payment of the maximum Earn Out Amounts under
Section 2.05." See Agreement, Section 2.05(d). Plaintiff argues that Defendant breached these
terms, AC,

~

33-34, and this dispute is beyond the scope of the arbitration clause concerning

calculation of the EBITDA.
Defendant claims this dispute is about the calculation of the EBITDA, which Plaintiff
admits in the complaint when he alleges that "the EBITDA figure for Year 2 is incorrect and
undervalued." AC,

~

31. Defendant claims Plaintiff further admits this by alleging that

"Globecomm shifted and re-assigned business and contracts that were to be performed by
[ComSource] to Globecomm for performance by another of Globecomm's wholly owned
subsidiaries. Globecomm took these actions in violation of§ 2.05(d) of the Agreement, in a
purposeful effort to reduce the EBITDA figure for Year 2 to the point that no Earn Out Payment
would be due to ComSource Stockholders." AC,

~

34.

The Court finds that the dispute here is within the scope of the arbitration clause agreed
by the parties to govern a dispute about the calculation of the EBITDA. The complaint itself
alleges that the EBITDA was undervalued and incorrect, which led to the non-existent Year 2
Earn Out Payment. While Plaintiff argues that this constitutes a breach of the duties in Section
2.05(d), the essence of the dispute is that the EBITDA is incorrect or was miscalculated. It is
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clear from the language in Section 2.05(b) that the parties intended any dispute on the calculation
of the EBITDA should be handled as described in Section 2.03( c) and "submitted for resolution
to a recognizable, reputable and impartial certified pubic accounting firm" for a "final, binding
and conclusive" determination. See Section 2.05(b ); Section 2.03(c).
Defendant argues that E.S. Originals Inc. v. Totes Isotoner Corporation, 734 F.Supp.2d
523 (S.D.N.Y. 2010) is instructive here. At issue in that case was an agreement to make "earnout payments" following an asset purchase arrangement, and provided that disputes concerning
the earn-out payments be submitted to an independent accounting firm for resolution. The
plaintiff brought breach of contract and fraud claims, yet the court ruled that the claims were
governed by the narrow arbitration clause, noting that the allegations of the complaint focused on
accounting matters and improper calculations, which were "on their face" within the scope of the
arbitration clause. Id., 734 F.Supp.2d at 530-531. Defendant here argues that since the
Plaintiffs allegations also focus on "incorrect" and "undervalued" EBITDA, this Court should
similarly find that the claims are governed by the arbitration clause.
Plaintiff argues otherwise, urging that this Court be guided by other rulings in this
Circuit, namely McDonnell Douglas Finance Com. v. P.P. & L. Co., 858 F.2d 825 (2d Cir. 1988)
and XL Capital, Ltd. v. Kronenberg, 2004 WL 21001952 (S.D.N.Y. 2004). McDonell involved a
stock purchase agreement that permitted the defendant utility, PP&L, to call for the redemption
of preferred shares and to indemnizy shareholders who suffered certain economic losses. The
agreement included a narrow arbitration clause stating that any dispute concerning the
"computation of the amount of the required indemnity payment or refund thereof... or with the
good faith determination of [PP&L] that there is a substantial risk of [indemnification]," be
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referred to an independent tax counsel. McDonnell, 858 F.2d at 827. Plaintiff shareholders
brought a lawsuit, claiming that the call for redemption was wrongful and in bad faith, and PP&L
argued those claims were covered by the arbitration clause. The district court found the claims
were not within the scope of the arbitration clause, and the Second Circuit affirmed, ruling that
the clause was intended to reach only tax issues, including PP&L's good faith interpretation of
those tax issues, and not the broader questions ofPP&L's bad faith or wrongful conduct. Id., at
832-833.
XL Capital, Ltd. v. Kronenberg, 2004 WL 21001952 (S.D.N.Y. 2004), also involved a
stock purchase agreement that provided for arbitration with the AAA of "all questions, issues or
disputes," yet disputes on the worksheets reflecting calculations of an "earned payout amount"
that might trigger additional payment to the sellers were to be referred to an accounting firm for
resolution. !d., at *I. The sellers filed a formal demand for arbitration of claims for fraud and
deceitful conduct, negligent misrepresentation and breach of contract. In response, the purchaser
argued the claims were governed by the narrow clause mandating resolution by the accounting
firm. The court ruled that the claims of fraud and breach of contact were outside the scope of the
narrow accounting arbitration clause since it was clear the parties "did not contemplate that nonaccounting issues such as fraud and breach of contract would be submitted to an accounting
firm." !d., at *2. Thus, the Court found that those claims were covered by the parties broader
clause to arbitrate before the AAA. !d.
In affirming, the Second Circuit questioned whether the "fraud, negligent
misrepresentation, and breach of contract claims here are simply accounting issues in disguise."
The court noted the distinction that these claims did not challenge the accuracy of the earned
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payout amounts, stating that "the gravamen of the claims before the AAA is that after the alleged
fraud or breach, the Worksheets necessarily lead to a lower earn out payment. In that sense, the
claims assume accurate calculation of the Worksheets in order to make out the causal nexus to
the claimed damages." XL Capital, Ltd. v. Kronenberg, 145 Fed.Appx. 384, 385 (2d Cir. 2005).
The Court affirmed the district court's decision that the claims were outside the scope of the
narrow, accounting arbitration clause, but stated that "any portion ofthe dispute ... which turns on
an objection to the Worksheet rather than an objection to acts" must be referred to the accountant
under the narrow arbitration clause. !d., 145 Fed.Appx at 386.
Taken together, these case lead to the conclusion that Plaintiffs claims here are within
the scope of the arbitration clause. Plaintiffs complaint itself challenges the accuracy of the
calculations, specifically the "incorrect" and "undervalued" EBITDA. AC,

~

31. In essence, this

is an accounting dispute regarding how the EBITDA was calculated, and what numbers were
used to calculate the EBITDA. While Plaintiff styles the claims as breach of contract, he alleges
that Globecomm "shifted and reassigned business and contracts that were to be performed by
[ConSource] to Globecomrn for performance by another ofGlobecomm's wholly owned
subsidiaries." AC,

~

34. Thus, the claims here, like the challenge to the calculation of the earned

out payments in E.S. Originals Inc. are governed by the limited arbitration clause. The claims in
XL Capital, Ltd. and McDonnell, which concern conduct as opposed to calculations, are
distinguishable from those at issue here. Since the Court finds the claims here to in essence be
claims concerning the calculation of the EBITDA, the Court finds that those claims are within
the scope ofthe arbitration agreement between the parties. Therefore, Defendant's motion to
compel arbitration of Plaintiffs claims for breach of contract and request for an accounting is
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granted, and the motion to dismiss those claims is denied.
B.

Motion to Dismiss or Stay Plaintiff's Fraud Claim

Defendant also moves to dismiss Plaintiffs fraud claim, arguing that Plaintiff, as the
Stockholder Representative, does not have standing to bring a fraud claim, that Plaintiff has not
properly plead fraud, and that the claim should be dismissed as duplicative of the breach of
contract claim. Alternatively, Defendant moves that the fraud claim be stayed pending the
arbitration. The Court grants Defendant's motion that this claim be stayed pending the
arbitration. See 9 U.S.C. § 3. Nevertheless, the Court addresses Defendant's following
arguments and denies Defendant's motion to dismiss.
I. Standing

The Court finds that Plaintiff, as the Stockholder Representative, has standing to bring a
fraud claim. As stated above, the Agreement appoints the Stockholder Representative to "act on
behalf of each [stockholder] in connection with ... this Agreement" and "to take any and all
additional action as is contemplated to be taken by or on behalf of the [shareholders] by terms of
this Agreement." See Agreement, Section 2.07(a). The Court finds that this provides the
Stockholder Representative with sufficient standing to bring the fraud claim.
2. Sufficient Pleading
In considering a motion to dismiss made pursuant to Rule 12(b)(6), the court must accept
the factual allegations in the complaint as true and draw all reasonable inferences in favor of
Plaintiff. Bold Electric, Inc. v. City ofNew York, 53 F.3d 465,469 (2d Cir. 1995). Reciting
bare legal conclusions is insufficient, and "[w]hen there are well-pleaded factual allegations, a
court should assume their veracity and then determine whether they plausibly give rise to an
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entitlement to relief." Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). A pleading that does nothing
more than recite bare legal conclusions is insufficient to "unlock the doors of discovery." !d., at
678-679.
Fed. R.Civ.P., Rule 9(b) requires that fraud be pled with particularity. To establish fraud,
a plaintiff must show "(I) the defendant made a material false representation, (2) the defendant
intended to defraud the plaintiff thereby, (3) the plaintiff reasonably relied upon the
representation, and (4) the plaintiff suffered damage as a result of such reliance."
Bridgestone/Firestone. Inc. v. Recovery Credit Services. Inc., 98 F.3d 13, 18 (2d Cir. 1996)
(citations omitted). Plaintiff alleges that Globecomm knew that the ComSource stockholders
sought to grow the business after the purchase, and it represented that it had the resources and
revenue to grow the business and make earn out payments. AC, ~~ I 0-11, 41. Plaintiff further
alleges that in reliance on these representations, which he alleges were false, the ComSource
stockholders accepted Globecomm's offer over others, and were damaged as a result. AC,

~~

42-

46.
Accepting Plaintiffs allegations as true as required on a motion to dismiss, and yet
reviewing the allegations for the required specificity, the Court finds that the Plaintiff has
sufficiently pleaded a fraud claim. The Court also rejects Defendant's argument that Plaintiffs
claim fails because New York law does not permit a fraud claim where the fraud relates to the
breach of contract. See Helios Intern. S.A.R.L. v. Cantamessa USA. Inc., 2013 WL 3943267
(S.D.N.Y. 2013). Here, the fraud claim concerns representations made in connection with the
sale of ComSource to Globecomm, while the breach of contract claim concerns the calculation of
the EBITDA and the failure to make the Year 2 Earn Out Payment. Thus, the Court denies
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Defendant's motion to dismiss the fraud claim,' and grants Defendant's motion to stay that claim
pending the arbitration of Plaintiff's other claims.
CONCLUSION
Defendant's motion to compel arbitration of Plaintiffs claims for breach of contract and
for an accounting is granted. Defendant's motion to dismiss Plaintiffs fraud claim is denied; and
the motion to stay the fraud claim pending the arbitration is granted.
SO ORDERED.

s/ Leonard D. Wexler

7 -

(/fooNA;r:D. WEXLER
UNITED STATES DISTRICT JUDGE
Dated: Central Islip, New York
February 5, 2015

'Defendant also argues the fraud claim should be dismissed for Plaintiffs failure to
sufficiently plead damages, claiming that under New York law, a fraud plaintiff cannot recover
"the loss of an alternative bargain" and is limited to the "out of pocket" rule, which compensates
a plaintiff "for what they lost because of the fraud, not to compensate them for what they might
have gained." Lama Holding Co. v. Smith Barney. Inc., 88 N.Y.2d 413,421 (1996). In
response, the Plaintiff appears to argues that Maryland law applies to the fraud claim. In light of
the stay of the fraud claim pending arbitration, the Court declines to rule on this question.
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