CCM Rochester, Inc. v. Federated Investors, Inc.
OPINION & ORDER re: 8 MOTION to Dismiss filed by Federated Investors, Inc.: Given the state of the economy during the time period that is at issue, the fact that CCM received any payout based on growth of revenue is impressive. Mo reover, the fact that marketing may not have occurred exactly as discussed during the courtship of CCM is some evidence, but it is not overwhelmingly strong circumstantial evidence, of Federated's intent at an earlier, more economically-upbea t time. CCM has adequately alleged that Federated never intended to follow through on its representations that if its acquisition offer was accepted Federated would support the growth and expansion of the Clover products and that Federated made th ose misrepresentations to induce CCM to agree to backload a portion of the consideration through future payments tied to growth. In short, CCM's claim of fraud is at the edge of plausibility, but it is enough to cross "the line between po ssibility and plausibility of 'entitlement to relief.'" Twombly, 550 U.S. at 557. Similarly, CCM has adequately alleged a breach of contract claim based on allegations that Federated's acts and omissions during the Earnout Perio d were intentionally undertaken to harm CCM's Earnout Payments in breach of an implied covenant of good faith and fair dealing. Whether CCM can adduce proof to demonstrate these claims remains to be seen. Count Two of the Complaint is DISMISSED. In all other regards, Defendant's motion to dismiss is DENIED. The Clerk of Court is directed to terminate Docket Entry 8. (Signed by Judge Valerie E. Caproni on 11/25/2014) (tn)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
CCM ROCHESTER, INC.,
FEDERATED INVESTORS, INC.
DATE FILED: 11/25/2014
OPINION & ORDER
VALERIE CAPRONI, United States District Judge:
CCM Rochester, Inc., a registered investment advisor formerly known as Clover Capital
Management, Inc. (“CCM” or “Clover”), filed suit on May 20, 2014, seeking damages arising
out of a 2008 Asset Purchase Agreement (the “APA”) pursuant to which Federated Investors,
Inc. (“Federated”) acquired all of the assets of CCM. Compl. ¶ 2. Federated moves to dismiss
the Complaint under Fed. R. Civ. P. 12(b)(6) for failing to plead fraud with particularity and
failing to state claims for breach of implied duties to use best efforts and of good faith and fair
dealing. For the reasons discussed briefly below, the motion is GRANTED in part and DENIED
In evaluating a motion to dismiss, the Court must accept the well-pleaded allegations of
the Complaint as true and draw all inferences in the non-moving party’s favor. LaFaro v.
Cardiothoracic Grp., 570 F.3d 471, 475 (2d Cir. 2009). Nonetheless, in order to survive a
motion to dismiss, “a complaint must contain sufficient factual matter . . . to ‘state a claim to
relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “Plausibility” is not certainty. Iqbal does not
require the complaint to allege “facts which can have no conceivable other explanation, no
matter how improbable that explanation may be.” Cohen v. SAC Trading Corp., 711 F.3d 353,
360 (2d Cir. 2013). But “[f]actual allegations must be enough to raise a right to relief above the
speculative level.” Twombly, 550 U.S. at 555.
There is, of course, a heightened pleading standard for fraud. “In alleging fraud or
mistake, a party must state with particularity the circumstances constituting fraud or mistake.
Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.”
Fed. R. Civ. P. 9(b). To plead the circumstances constituting fraud with particularity, the
complaint must “(1) specify the statements that the plaintiff contends were fraudulent, (2)
identify the speaker, (3) state where and when the statements were made, and (4) explain why the
statements were fraudulent.” Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290 (2d Cir. 2006)
(quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). To plead malice,
intent, or knowledge “generally” means that “the general ‘short and plain statement of the claim’
mandate in Rule 8(a) . . . should control the second sentence of Rule 9(b).’ ” Iqbal, 556 U.S. at
687 (quoting 5A C. Wright & A. Miller, Federal Practice and Procedure § 1301, p. 291 (3d ed.
2004)). But “ ‘generally’ is not the equivalent of conclusorily . . . . [P]laintiffs must still plead
the events which they claim give rise to an inference of [malice, intent, or] knowledge” to satisfy
the Rule 8(a) pleading standard. Krys v. Pigott, 749 F.3d 117, 129 (2d Cir. 2014) (citations
Federated argues that the Complaint fails to plead the circumstances of the alleged fraud
with particularity and also argues that the Complaint fails adequately to plead fraudulent intent.
Def. Mem. at 12-15. Additionally, Federated asserts that the facts alleged are insufficient to
support a fraud claim sounding in tort because the fraud claim is duplicative of the breach of
contract claims. Def. Mem. at 16. As to the breach of contract claims, Federated asserts: that the
limitations of liability clause contained in the APA precludes liability; that the claims
impermissibly seek to vary the terms of the contract in violation of the APA’s integration clause;
and that the Complaint fails plausibly to allege that Federated acted in bad faith. Def. Mem. at
In early 2008, “Clover sought a strategic partner with strong marketing capabilities” to
invest in its products to “realize the full potential of [Clover’s] investment management
franchise.” Compl. ¶ 2. Clover issued a “request for proposal” (“RFP”) to potential strategic
partners. Compl. ¶¶ 21-22. The RFP specified that Clover was “seeking a partner with an
extensive distribution network and marketing capabilities that could be used to expand Clover’s
client base and increase Clover’s assets under management.” Compl. ¶ 22.
On May 13, 2008, after Federated executives had visited Clover’s offices to discuss the
RFP, Federated made a detailed written proposal (the “Proposal”) to acquire all of Clover’s
assets. Compl. ¶¶ 3, 23-34; see Tambe Decl. Ex. 2.1 The Proposal responded to specific
questions, including the strategic rationale for Federated’s interest in acquiring Clover, potential
synergies that would be realized from combining the two companies, and strategies for
leveraging those synergies. Tambe Decl. Ex. 2 at 2-4. Of particular relevance here, Federated
stated: that “CCM will significantly and immediately expand [Federated’s] manufacturing
capabilities in the value sector – becoming our investment management “Center of
Excellence” for value products,” id. at 2 (emphasis in original); [that “Federated distributing
The Complaint stated that the Proposal and the APA were attached as exhibits, Compl. ¶¶ 4, 25, but both
documents were omitted, albeit inadvertently. See Dkt. 2. It is proper for the Court to consider the documents on a
motion to dismiss because both documents were “incorporated by reference” in the Complaint. DiFolco v. MSNBC
Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010).
CCM products represents a tremendous strategic growth opportunity for both firms,” id. at 3;]
that Federated would “[e]stablish a growth platform for the combined business” and “[s]ell CCM
products through [Federated’s] distribution platform,” id.; and that CCM would be integrated
into Federated “as one of the Federated team – all operating for the same company, towards the
same mutually established goals, . . . [and] receiving equal attention for resources and support,”
id. at 4.
On June 9, 2008, Clover executives met with Federated executives at Federated’s offices
in Pittsburgh, where Federated executives reiterated that Federated “intended to use its extensive
sales and distribution capabilities to significantly and rapidly expand the assets under Clover’s
management” and “intended to brand and promote the Clover Investment Products as
Federated’s ‘Center of Excellence’ for value-oriented investment products.” Compl. ¶¶ 35-36.
CCM accepted Federated’s acquisition offer and the parties – both highly sophisticated –
executed the APA on September 12, 2008. Compl. ¶ 4; see Tambe Decl. Ex. 3.2 The purchase
was structured so that there was an upfront cash payment to CCM at closing of $30 million and
contingent payments (the “Earnout Payments”) over five years following the closing (the
“Earnout Period”). Compl. ¶¶ 40-41. The contingent payments, which were tied to the growth
in revenues of the acquired business, ultimately amounted to approximately $18 million. Compl.
¶ 115. Federated suggests that, given the economic environment during the five-year period
following the execution of the APA,3 CCM’s growth and the contingent payments made to CCM
The parties subsequently amended the APA on December 1, 2008. See Tambe Decl. Ex. 4.
The deal closed days before the collapse of Lehman Brothers Holdings, Inc. triggered the “Great
Recession.” Def. Mem. at 5.
were substantial4 and argues that any claim that Clover was defrauded or treated unfairly is
implausible. Def. Mem. at 2.
Clover, on the other hand, asserts that Federated fraudulently induced it to accept the
acquisition offer and to accept much of the consideration in the form of future payments
contingent upon CCM’s post-acquisition growth. Compl. ¶ 5. CCM asserts that Federated
misrepresented its intent to use its marketing and distribution platform to grow the assets under
CCM’s management. Compl. ¶¶ 26-39, 118-121. According to Clover, Federated actually
intended “to undertake only minimal, pro forma efforts to market and distribute the Clover
[funds] and, even then, to do so as late in the Earnout Period as possible in order to minimize its
Earnout Payments to Clover.” Compl. ¶37. Moreover, CCM alleges that in the third year of the
Earnout Period, “Federated launched an intensive marketing and distribution campaign on behalf
of its own . . . value-oriented fund, which . . . was competing in the same space for assets” with
Clover. Compl. ¶¶ 76-78. CCM claims that, consistent with Federated’s bottom-line incentives,
this marketing campaign “affirmatively steered clients seeking large cap value products away
from Clover’s Large Cap Fund” and increased the assets under the competing fund’s
management by more than $15 billion dollars during the last three years of the Earnout Period.
Compl. ¶¶ 79, 86. CCM asserts that Federated’s acts and omissions breached an implied
obligation to use best efforts to market CCM’s funds because Federated had exclusive control
over marketing and sales of CCM’s investment products, Compl. ¶¶ 47-48, 125-126, and
breached an implied duty of good faith and fair dealing because Federated made affirmative
Under the APA’s formula for calculating contingent payments, the actual Earnout Payments reflected a
compounded annual growth rate of 9% per year for the five-year period. Compl. ¶ 115; Def. Mem. at 2. The
formula allowed Clover to be compensated for deficiencies in underperforming years with any surplus in years that
outperformed the capped Earnout Payment. Compl. ¶¶ 44-45.
efforts to minimize CCM’s Earnout Payments, Compl. ¶¶ 88-89, 131-135. Finally, CCM asserts
a claim for indemnity under Section 10.2 of the APA. Compl. ¶¶ 137-139.
The Complaint adequately alleges a claim for fraudulent inducement. To state a claim
for common law fraud under New York law, a plaintiff must allege facts showing: “(1) a
misrepresentation or a material omission of fact which was false and known to be false by
defendant, (2) made for the purpose of inducing the other party to rely upon it, (3) justifiable
reliance of the other party on the misrepresentation or material omission, and (4) injury.”
Premium Mortg. Corp. v. Equifax, Inc., 583 F.3d 103, 108 (2d Cir. 2009) (quoting Lama Holding
Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421 (1996)). Of course, “[i]n a federal diversity action,
such a claim must be pleaded with particularity” pursuant to Rule 9(b). Id.
The Complaint pleads with particularity misrepresentations of fact that can plausibly be
read to show a motive for committing fraud (the desire to minimize the cost of acquiring CCM,
Compl. ¶¶ 5, 39, 88-89) and an opportunity for doing so (e.g., Federated’s total control over
CCM’s sales and marketing enabled it to steer clients to Federated’s existing funds and not to
CCM’s equivalent funds, Compl. ¶¶ 47, 90-112). Cf. Turkish v. Kasenetz, 27 F.3d 23, 28 (2d
Cir. 1994).5 CCM alleges that it relied on specific representations Federated made in the
Proposal that indicated Federated would make immediate and significant efforts to distribute
CCM’s products. See, e.g., Compl. ¶¶ 30, 32-34; Proposal at 2-4. In addition to those
representations, CCM claims that Federated executives, who are named in the Complaint, made
The Court is not unsympathetic to Defendant’s argument that Federated’s and CCM’s interests were
aligned and, therefore, the motive alleged by CCM is illogical. Def. Mem. at 13. Nevertheless, CCM has
successfully threaded the needle with a theory that acknowledges Federated’s interest in the long term profitability
of Clover while still asserting a motive to delay the growth of Clover during the Earnout Period. Whether CCM can
successfully prove facts necessary to support that artfully-pled theory remains to be seen.
misrepresentations on June 9, 2008, during an in-person meeting in Pittsburgh about the
prospective acquisition. Compl. ¶ 35. CCM claims that Federated represented that, if CCM
accepted its acquisition proposal, Federated would use its resources to “fuel the growth” of the
assets under CCM’s management and robustly to promote CCM’s funds. Compl. ¶¶ 5, 34, 36.
These statements were misrepresentations, according to CCM, because Federated did not intend
to “fuel the growth” of CCM until after the Earnout Period substantially passed, thereby
minimizing the amount of the contingent payments. Compl. ¶ ¶ 6, 37.6 CCM claims that
Federated created these false expectations in order to induce CCM to accept a greater portion of
its consideration in the form of future payments contingent upon post-acquisition growth so that
Federated could minimize its acquisition costs. Compl. ¶¶ 5, 37. CCM claims that because the
actual Earnout Payment was approximately $37 million less than the maximum potential Earnout
Payment, CCM was harmed by agreeing to allow the consideration to be paid, in part, through
contingent payments. Compl. ¶¶ 39, 116. At this stage of the litigation, the Complaint
adequately pleads the particulars of who, what, when and why of a claim for common law fraud.
See Graubard Mollen Dannett & Horowitz v. Moskovitz, 86 N.Y.2d 112 (1995); Channel Master
Corp. v. Aluminium Ltd. Sales, Inc., 4 N.Y.2d 403 (1958).
Federated argues that the APA’s integration clause and a disclaimer in Federated’s
proposal foreclose the reasonableness of any reliance on allegedly false statements. Def. Mem.
at 15. The integration clause, contained in Section 12 of the APA, states: “This Agreement and
the other Transaction Documents, together with any Exhibits and Schedules hereto or thereto,
Other facts in the Complaint support CCM’s assertion that it was lead to believe that Federated was
committed to rapidly integrating CCM and growing its investment funds. For example, the Complaint claims that
Federated’s president told Clover’s Chief Executive Officer and Chief Operating Officer (“COO”) that the COO
would assume a role on Federated’s executive committee, which steered Federated’s business operations. Compl. ¶¶
94-97. A seat on the executive committee would have bolstered the ability of CCM to promote CCM’s growth.
Compl. ¶ 98. Although the Complaint does not allege that these statements were false when made, they contributed
to CCM’s expectations regarding Federated’s actions post-acquisition.
contain the entire agreement and all understandings, and supersede all prior agreements and
understandings, both written and oral, between the Parties with respect to the Transactions.”
Tambe Decl. Ex. 3. New York law is clear, however, that a “‘general and vague merger clause’
is insufficient to warrant exclusion of parol evidence showing fraud.” Aetna Casualty and Surety
Co. v. Aniero Concrete Co., Inc., 404 F.3d 566, 575 (2d. Cir. 2005) (quoting Danann Realty
Corp. v. Harris, 5 N.Y.2d 317, 320 (1959)). By extension, “when a contract contains an
‘omnibus statement’ disclaiming that any representations outside the contract were made, it will
not preclude a claim for fraud.” Id. “When, however, the contracting party disclaims ‘the
existence of or reliance on specified representations,’ it will not be allowed to claim it entered
into the contract in reliance thereon.’” Id. (quoting Manufacturers Hanover Trust Co. v.
Yanakas, 7 F.3d 310, 315 (2d Cir. 1993)) (emphasis added). See also Cohen v. Cohen, 993 F.
Supp. 2d 414 (S.D.N.Y. 2014). The APA’s general merger clause disclaiming any
representation whatsoever does not preclude CCM from pleading reasonable reliance on specific
representations by Federated that allegedly induced it to accept Federated’s acquisition proposal.
The disclaimer in Federated’s proposal is equally unavailing. The disclaimer stated:
Both parties acknowledge that no contract or agreement providing for a
transaction will be deemed to exist unless and until a written definitive agreement
relating to the transaction has been executed and delivered. Either party may
terminate discussions at any time prior to the execution of a Definitive Agreement
without liability to the other party.
Tambe Decl. Ex. 2 at 2. This disclaims that a contract was formed based on the proposal; it does
not say that CCM could not or should not rely on the veracity of the representations in the
proposal when deciding whether to accept the acquisition offer.7
As a factual matter, if the representations in the proposal – particularly the representations relative to
marketing – were as important to CCM’s decision to accept Federated’s offer as it now represents them to have
been, one would expect sophisticated parties would have incorporated the most salient representations into the APA.
The Court also rejects Federated’s final argument that the fraudulent inducement claim is
duplicative of a claim for breach of contract and therefore fails to state a claim for relief.
Federated cites Telecom International America, Ltd. v. AT&T Corp., 280 F.3d 175, 196 (2d Cir.
2001), for the settled rule of New York law that “simply dressing up a breach of contract claim
by further alleging that the promisor had no intention, at the time of the contract’s making, to
perform its obligations thereunder is insufficient to state an independent tort claim.” But
“parallel fraud and contract claims may be brought if the plaintiff . . . points to a fraudulent
misrepresentation that is collateral or extraneous to the contract” by alleging the defendant made
“a misrepresentation of a present fact [which] gives rise to a separate cause of action for
fraudulent inducement.” Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 184
(2d Cir. 2007). CCM’s fraudulent inducement claim satisfies the requirements to plead a tort
claim that is independent of a breach of contract claim under New York law.
BREACH OF CONTRACT
CCM claims that the APA’s payment structure imposed on Federated an implied
covenant to make reasonable, good faith efforts to market and distribute CCM’s investment
products and alleges that Federated’s failure to make “best efforts” to market and distribute
CCM’s investment products breached the APA. Compl. ¶¶ 123-126. CCM also claims that
Federated breached the APA’s implied duty of good faith and fair dealing by taking steps
intentionally calculated to reduce the Earnout Payments, thereby depriving CCM of the benefit
of its bargain. Compl. ¶¶ 131-134.
At the pleadings stage, however, the Court accepts CCM’s factual assertion that the representations were relied on
and were important to CCM.
Federated argues that CCM’s contract claims are barred because (1) Section 10.8 of the
APA is a contractual limitations on liability clause that precludes claims for breaches other than
breaches of representations, warranties, and covenants contained in the APA,8 Def. Mem. at 17;
(2) imposing implied covenants of “best efforts” and “good faith” would impermissibly vary the
agreed-upon terms of the APA that were negotiated between sophisticated parties, Def. Mem. at
18-21; (3) the Section 12 integration clause bars CCM from claiming the parties had any prior
agreement or understanding related to the APA, Def. Mem. at 20-21; and (4) the claims failed to
allege that Federated acted in bad faith, Def. Mem. at 21-25.
The Court finds that the Complaint states a claim for breach of the duty of good faith and
fair dealing, but does not state a claim for breach of an implied obligation to use best efforts to
market the Clover Funds.
Defendant asserts that the limitation of liability clause of the APA bars CCM’s breach of
contract claims. Def. Mem. at 17-18. As Defendant acknowledges, however, Section 10.8 of the
APA does not bar claims for intentional or willful breach. Def. Mem. at 17; APA Section 10.8
(“[E]xcept with respect to claims for fraud, intentional or willful breach . . . the rights provided
to the Parties under this Section 10 shall be the sole and exclusive remedies . . . .”). CCM
alleged that Federated’s actions were intentional or willful breaches of implied covenants to
Section 10.8 of the APA states:
Remedies Exclusive. From and after the Closing, except with respect to claims for fraud,
intentional or willful breach or equitable relief, or as provided in Section 6.6.3, Section 9(b),
Section 9(c), or Section 10.6 above, including specific performance made with respect to breaches
of any covenant in this Agreement or the other Transaction Documents (the “Excluded Claims”),
the rights provided to the Parties under this Section 10 shall be the sole and exclusive remedies of
the Parties and their respective Affiliates with respect to claims under this Agreement, the other
Transaction Documents or the Transactions contemplated hereby. Without limiting the generality
of the foregoing, other than in connection the Excluded Claims or as required under Applicable
Law by a Governmental Authority, in no event shall any Party, its successors, or permitted assigns
be entitled after the Closing to claim or seek rescission of the transactions contemplated by this
make best efforts and of good faith and fair dealing. See, e.g., Compl. ¶ 88 (“Federated’s failure
to make a reasonable effort to market and distribute Clover Investment Products, and Federated’s
marketing campaign on behalf of a competing Federated fund, each materially reduced the
Clover Investment Products’ growth rate during the Earnout Period. This was no accident.”);
Compl. ¶ 89 (“Federated’s acts and omissions were willfully and intentionally undertaken in bad
faith to . . . reduce Federated’s Earnout Payments to Clover.”); Compl. ¶ 133 (“Federated’s other
acts and omissions during the Earnout Period also adversely impacted the Clover Fund’s ability
to receive the Maximum Earnout Payment, thereby frustrating the purpose of the Agreement and
depriving Clover of the benefit of its bargain.”). By its own terms, the limitation on liability
clause contained in Section 10.8 of the APA does not preclude CCM’s contract claims at the
CCM’s claim that Federated breached an implied duty to use best efforts to market the
Clover investment products, however, would require the Court to read substantive terms into the
APA that could have been, but were not, included in the contract. New York law is clear that
when interpreting contracts, courts should apply “the ‘familiar and eminently sensible
proposition of law  that, when parties set down their agreement in a clear, complete document,
their writing should . . . be enforced according to its terms.’ ” Vermont Teddy Bear Co., Inc. v.
538 Madison Realty Co., 1 N.Y.3d 470, 475 (2004) (quoting W.W.W. Assocs., Inc. v.
Giancontieri, 77 N.Y.2d 157, 162 (1990)) (alterations in Vermont Teddy Bear). See also Law
Debenture Trust Co. v. Maverick Tube Co., 595 F.3d 458, 467 (2d Cir. 2010). “[C]ourts may not
by construction add or excise terms, nor distort the meaning of those used and thereby make a
new contract for the parties under the guise of interpreting the writing.” Reiss v. Fin.
Performance Corp., 97 N.Y.2d 195, 199 (2001). Notwithstanding conclusory allegations in the
Complaint to the contrary, the terms of the APA do not impose any obligation on Federated to
develop a specific plan to market or distribute CCM’s investment products.9 That being the case,
the Court cannot impose such an obligation on Federated under the rubric of an implied duty of
CCM’s claim of breach of the general implied duty of good faith and fair dealing stands
on different footing. “Under New York law, a covenant of good faith and fair dealing is implied
in all contracts.” Fishoff v. Coty Inc., 634 F.3d 647, 653 (2d Cir. 2011). “A breach of the duty
of good faith and fair dealing is considered a breach of contract,” id. (citation omitted), and “a
party may be in breach of the duty even when it has abided by the express terms of the contract,”
In Touch Concepts, Inc. v. Cellco Partnership, 949 F. Supp. 2d 447, 466 (S.D.N.Y. 2013)
(citations omitted). See also Elmhurst Dairy, Inc. v. Bartlett Dairy, Inc., 97 A.D.2d 781, 784 (2d
Dep’t 2012). The duties of good faith and fair dealing “do not imply obligations inconsistent
with other terms of the contractual relationship . . . [but] do encompass any promises which a
reasonable person in the position of the promisee would be justified in understanding were
included.” 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002)
(citations and internal quotations omitted). Moreover, the covenant “embraces a pledge that
neither party shall do anything which will have the effect of destroying or injuring the right of
Cf. Compl. ¶ 126 (“By failing to make a reasonable, good faith effort to market and distribute the Clover
Investment Products, such as the one detailed in Federated’s own Marketing Plan, Federated breached the
CCM relies on Perma Research & Dev. Co. v. Singer Co., 410 F.2d 572, 574 n.8 (2d Cir. 1969), for the
proposition that “the Second Circuit has emphasized that a defendant may be ‘obligated to use its best efforts to
market [plaintiff’s] product even if the agreement did not expressly say so.’” Pl. Mem. at 21. What Plaintiff
ignores is that the contract in Perma included an express obligation to manufacture and market the product. The
Second Circuit simply indicated that the contract at issue was not illusory – not only was there a manufacturing and
marketing obligation, but there was an implied duty to use best efforts in connection with those contractual
obligations. That is entirely distinguishable from what CCM asserts here – an implied best efforts duty in
connection with a marketing obligation that appears nowhere in the contract.
the other party to receive the fruits of the contract.” Fishoff, 634 F.3d at 653 (quoting 511 W.
232nd Owners Corp., 98 N.Y.2d at 153). “For a complaint to state a cause of action alleging
breach of an implied covenant of good faith and fair dealing, the plaintiff must allege facts which
tend to show that the defendant sought to prevent performance of the contract or to withhold its
benefits from the plaintiff.” Fillmore E. BS Fin. Subsidiary LLC v. Capmark Bank, 552 F. App’x
13, 16 (2d Cir. 2014) (quoting Aventine Inv. Mgmt., Inc. v. Canadian Imperial Bank of
Commerce, 265 A.D.2d 513, 514 (2d Dep’t 1999)).
CCM makes specific allegations that Federated took steps intentionally calculated to
minimize the Earnout Payments to CCM. For example, CCM claims that not only did Federated
not make a meaningful effort to market and distribute CCM’s products as late as the fourth year
of the Earnout Period – despite having exclusive control over marketing and sales under the APA
– but it launched an intensive – and successful – marketing and distribution campaign on behalf
of a competing fund that displaced CCM’s investment products in Federated’s distribution
channels and steered investors away from CCM’s funds. Compl. ¶ 6-7, 47, 76-78, 86-87. These
actions were in the face of CCM’s explicit reasons for entering in to the APA (to form a strategic
partnership that would expand CCM’s client base and increase the assets under CCM’s
management, Compl. ¶ 22) and Federated’s representations that convinced CCM to sell its assets
to Federated (e.g., that the acquisition represented a “tremendous strategic growth opportunity;”
that Federated would “[e]stablish a growth platform for the combined business;” that CCM
would be Federated’s go-to fund for value products; and that CCM would “receiv[e] equal
attention for resources and support” as all other divisions of Federated, Tambe Decl. Ex. 2 at 24). While the covenant of good faith and fair dealing “cannot be construed so broadly as
effectively to . . . create independent contractual rights,” Consol. Edison, Inc. v. Northeast Utils.,
426 F.3d 524, 529 (2d Cir. 2005) (quoting Fesseha v. TD Waterhouse Investor Servs., 305
A.D.2d 268, 268 (1st Dep’t 2003)), CCM’s theory relative to its allegations that Federated took
steps to minimize CCM’s Earnout Payment does not do so.
For the same reasons that the Court finds that Complaint adequately alleges that
Federated acted intentionally to minimize CCM’s Earnout Payments, the Court also finds that
Complaint contains sufficient facts to give rise to an inference that Federated took those actions
in bad faith, to the extent bad faith is the proper measure of a breach of the covenant of good
faith and fair dealing. See Unigard Sec. Ins. Co. v. N. River Ins. Co., 4 F.3d 1049, 1069 (2d Cir.
1993) (holding that the “minimum standard for bad faith” is “gross negligence or recklessness”);
but see Sec. Plans, Inc. v. CUNA Mut. Ins. Soc., 769 F.3d 807, 817-18 (2d Cir. 2014) (“A
plaintiff [alleging a breach of the covenant of good faith] must show substantially more than
evidence that the defendant’s actions were negligent or inept . . . . such as that the defendant
‘act[ed] arbitrarily or irrationally in exercising [the] discretion’ afforded to it under the contract.”
Given the state of the economy during the time period that is at issue, the fact that CCM
received any payout based on growth of revenue is impressive. Moreover, the fact that
marketing may not have occurred exactly as discussed during the courtship of CCM is some
evidence, but it is not overwhelmingly strong circumstantial evidence, of Federated’s intent at an
earlier, more economically-upbeat time. CCM has adequately alleged that Federated never
intended to follow through on its representations that if its acquisition offer was accepted
Federated would support the growth and expansion of the Clover products and that Federated
made those misrepresentations to induce CCM to agree to backload a portion of the
consideration through future payments tied to growth. In short, CCM’s claim of fraud is at the
edge of plausibility, but it is enough to cross “the line between possibility and plausibility of
‘entitlement to relief.’ ” Twombly, 550 U.S. at 557.
Similarly, CCM has adequately alleged a breach of contract claim based on allegations
that Federated’s acts and omissions during the Earnout Period were intentionally undertaken to
harm CCM’s Earnout Payments in breach of an implied covenant of good faith and fair dealing.
Whether CCM can adduce proof to demonstrate these claims remains to be seen.
Count Two of the Complaint is DISMISSED. In all other regards, Defendant’s motion to
dismiss is DENIED. The Clerk of Court is directed to terminate Docket Entry 8.
United States District Judge
Date: November 25, 2014
New York, New York
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