LP Funding, LLC v. Tantech Holdings, Ltd.
Filing
48
MEMORANDUM OPINION AND ORDER re: 24 MOTION to Amend/Correct 19 Answer to Complaint to add Counterclaims and for Leave to Add William H. Luckman as a Counterclaim-Defendant on the Counterclaims, filed by Tantech Holdings, Ltd. De fendant's motion for leave to amend its Answer to add counterclaims of fraudulent inducement and fraud and to add Luckman as a third-party counterclaim-defendant is granted in its entirety. Defendant is hereby directed to file its Amended Answer , Affirmative Defenses and Counterclaims as proposed in Exhibit B to Docket Entry Number 26 no later than Wednesday, May 4, 2016, and to serve it promptly upon Mr. Luckman. This Memorandum Opinion and Order resolves Docket Entry Number 24. (As further set forth in this Order.) (Signed by Judge Laura Taylor Swain on 4/27/2016) (spo)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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LP FUNDING, LLC,
Plaintiff,
-v-
No. 15CV4081-LTS
TANTECH HOLDINGS, LTD.,
Defendant.
-------------------------------------------------------x
MEMORANDUM OPINION AND ORDER
Before the Court is the timely motion of Defendant Tantech Holdings, Ltd.
(“Tantech” or “Defendant”) for leave to amend its Answer to the Complaint filed by Plaintiff LP
Funding, LLC (“LP Funding” or “Plaintiff”) in this case. (Docket Entry No. 1.) Defendant
seeks to assert New York law counterclaims of fraudulent inducement and fraud as against LP
Funding, and to add William H. Luckman (“Luckman”) as a third-party counterclaim-defendant.
The Court has considered the parties’ submissions thoroughly and, for the reasons stated herein,
grants Defendant’s motion.
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BACKGROUND1
Plaintiff has alleged that Defendant breached an agreement between LP Funding
and Tantech by failing to provide compensation owed in connection with consultation services
related to Defendant’s initial public offering (“IPO”). (See Docket Entry No. 1, Complaint ¶ 1.)
In June 2013, Tantech was considering hiring Burnham Securities (“Burnham”) as the
underwriter for its IPO on a United States securities exchange. (Counterclaims ¶ 6.) In or about
June 2013, Tantech’s CEO was introduced to Luckman at a meeting in Beijing, China. At the
meeting, Luckman indicated that he was responsible for Burnham’s China operations. (Id. ¶¶ 78.) Luckman also advised Tantech’s CEO, Zhengyu Wang, that Burnham would require, in
exchange for underwriting services, a warrant to purchase 16% of the shares issued in
connection with the IPO. (Id. ¶ 9.) In July 2013, several Burnham employees, including
Luckman, traveled to China and met with certain of Tantech’s Board members. (Id. ¶ 13.)
Following this meeting, Tantech decided to retain Burnham as its underwriter. (Id. ¶ 23.)
Shortly thereafter, Tantech received two draft agreements: one between Tantech
and Burnham (the “Burnham Agreement”), and the other between Tantech and Plaintiff (the “LP
Agreement”). (Counterclaims ¶ 24.) The Burnham Agreement provided for an 8% warrant, and
1
The facts recited herein are drawn from the Complaint in this action and from
Defendant’s proposed Amended Answer, Affirmative Defenses and
Counterclaims. (See Docket Entry No. 26, Declaration of Harry H. Rimm in
Support of Motion to Amend Answer to Add Counterclaims and CounterclaimDefendant (“Rimm Decl.”), Ex. B (“Counterclaims”).) The Complaint is
incorporated into the record by Defendant’s reference. (See Counterclaims ¶ 18.)
See Cortec Industries, Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991)
(“Relying on Rule 10(c), we have held that the complaint is deemed to include
any written instrument attached to it as an exhibit or any statements or documents
incorporated in it by reference.”). Facts alleged in the Counterclaims are
accepted as true for the purposes of the instant motion practice. See, e.g,
Paramount Pictures Corp. v. Puzo, 12CV1268-AJN, 2012 WL 4465574, at *1
(S.D.N.Y. Sept. 26, 2012).
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the LP Agreement provided for a second warrant to purchase 250,000 Tantech shares at a certain
price. (Counterclaims ¶¶ 25-26.) Tantech believed that the warrants called for by the two
agreements totaled approximately 16% of the shares to be issued and that the compensation
structure under the agreements was consistent with the Burnham compensation structure that
Luckman had previously discussed. (Id. ¶ 27.) Tantech also believed that the warrants were
ultimately meant to compensate Burnham because LP Funding was owned by, or under common
ownership with, Burnham. (Id. ¶ 30.) Both agreements were executed in or about August 2013.
(Id. ¶ 32.) From the time that Tantech was initially introduced to Luckman to the time that the
LP Agreement was executed, Luckman never indicated that he was associated with, or was
providing services on behalf of, any entity other than Burnham. (Id. ¶¶ 10, 12, 20, 22.)
Moreover, Luckman never disclosed that the warrants provided for by the agreements
constituted anything other than compensation for Burnham’s services. (Id. ¶¶ 31-33.)
While preparing for the IPO, Tantech became dissatisfied with Burnham’s
services and terminated its contract with Burnham. (Id. ¶¶ 41-42.) Tantech believed that, in so
doing, it had also terminated its contractual relationship with Plaintiff. (Id. ¶ 43.) Burnham
retained another investment bank as its underwriter and successfully completed the IPO on or
about March 24, 2015. (Id. ¶¶ 42, 44.)
Plaintiff thereafter brought this action, alleging that Defendant had breached the
LP Agreement by refusing to compensate Plaintiff in accordance with the terms of the
Agreement. (Complaint ¶¶ 15-19.) Defendant initially answered the Complaint. (See Docket
Entry No. 19.) On October 30, 2015, the Court issued a Pretrial Scheduling Order, setting a
deadline of November 30, 2015, for the filing of applications to amend pleadings. (See Docket
Entry No. 23.)
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DISCUSSION
Leave to Amend to Add Counterclaims
Rule 15(a) of the Federal Rules of Civil Procedure provides that leave to amend a
pleading should be freely granted “when justice so requires.” Fed. R. Civ. P. 15(a). While
granting or denying leave to amend is a decision entrusted to the discretion of the district court,
Reisner v. General Motors Corp., 511 F. Supp. 1167, 1171 (S.D.N.Y. 1981), the Supreme Court
has held that leave should be granted unless: (1) there is evidence of undue delay, bad faith,
dilatory motive, or repeated failure to cure deficiencies on the part of the party seeking to amend;
(2) allowing amendment would cause the opposing party undue prejudice; or (3) amendment
would be futile. See Foman v. Davis, 371 U.S. 178, 182 (1962). Here, Plaintiff’s objections to
amendment rest solely on Plaintiff’s position that the Counterclaims would be futile. As the
party opposing amendment, Plaintiff “bears the burden of establishing that an amendment would
be futile.” Ferring B.V. v. Allegran, Inc., 4 F. Supp. 3d 612, 618 (S.D.N.Y. 2014). “In
addressing the proposed futility of an amendment, the proper inquiry is comparable to that
required upon a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6).” Aetna Cas. & Surety
Co. v. Aniero Concrete Co., Inc., 404 F.3d 566, 604 (2d Cir. 2005) (internal quotation marks and
citation omitted).
Defendant seeks to amend its Answer to add counterclaims of fraudulent
inducement and fraud. (See Counterclaims ¶¶ 45-67.) Thus, the futility of the proposed
counterclaims must be evaluated in light of the heightened pleading standard for fraud claims
established by Federal Rule of Civil Procedure 9(b), which places “two further burdens on fraud
plaintiffs – the first goes to the pleading of the circumstances of the fraud, the second to the
pleading of the defendant’s mental state.” Loreley Financing (Jersey) No.3 Ltd. v. Wells Fargo
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Securities, LLC, 797 F.3d 160, 171 (2d Cir. 2015). To state a claim for fraudulent inducement
under New York law, a plaintiff must allege: “(1) a material misrepresentation or omission that
induced the party to sign the contract; (2) scienter; (3) reliance; and (4) injury.” Davidowitz v.
Patridge, 08CV6962-NRB, 2010 WL 5186803, at *7 (S.D.N.Y. Dec. 7, 2010) (citing Lama
Holding Co. v. Smith Barney, Inc., 88 N.Y.2d 413, 421 (1996)). To state a fraud claim under
New York law, a plaintiff must allege: “(1) a misrepresentation or omission of material fact; (2)
which the defendant knew to be false; (3) which the defendant made with the intention of
inducing reliance; (4) upon which the plaintiff reasonably relied; and (5) which caused injury to
the plaintiff.” Wynn v. AC Rochester, 273 F.3d 153, 156 (2d Cir. 2001) (citing Lama Holding,
88 N.Y.2d at 421). Here, Plaintiff has proffered two arguments concerning the alleged futility of
Defendant’s proposed amendment: that Defendant has failed to allege scienter sufficiently,2 and
that Defendant cannot, as a matter of law, allege that it reasonably relied on alleged
misrepresentations or omissions made by Plaintiff or Luckman in light of the fact that the LP
Agreement included a merger clause.
Scienter need not be alleged with great specificity to survive a Rule 12(b)(6)
motion under Rule 9(b) standards. See Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990).
“Nonetheless, plaintiffs have the burden of pleading circumstances that provide at least a
minimal factual basis for their conclusory allegations of scienter. Such a basis may be shown
through allegations of a motive to deceive and access to accurate information.” Cohen v.
2
The term “scienter” – the requisite mental state for a claim of fraud or fraudulent
inducement – is defined as “an intent to deceive, manipulate, or defraud.” See
Dekalb County Pension Fund v. Transocean Ltd., No. 14-0894-CV, F.3d ,
2016 WL 1055363, at *7 n.74 (2d Cir. Mar. 17, 2016) (citing Black’s Law
Dictionary (10th Ed., 2014)).
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Koenig, 25 F.3d 1168, 1173-74 (2d Cir. 1994) (internal quotations and citations omitted).
Defendant alleges that Luckman was a senior officer or principal of Plaintiff at all relevant
times, that he held himself out as representing Burnham only and stated that the 16% warrant
quantity was required as compensation for Burnham, and that he did not disclose his own
affiliation with Plaintiff or that he was acting for any interest other than that of Burnham in
negotiating the agreements. (Counterclaims ¶¶ 3, 10-12, 19-22, 31.) Defendant thus alleges
facts indicating that Luckman’s statements and omissions were knowingly false when made, and
that he had a motive (gain from and/or for Plaintiff, his undisclosed principal) to deceive,
making out the requisite basis for an inference of scienter.
Plaintiff also argues that Defendant cannot, as a matter of law, allege reasonable
reliance on any purported misrepresentation or omissions because the LP Agreement includes a
merger clause, which Plaintiff argues categorically precludes Defendant from demonstrating
reasonable reliance. Persuasive authority is, however, to the contrary. See Century Pacific, Inc.
v. Hilton Hotels Corp., 528 F. Supp. 2d 206, 228 (S.D.N.Y. 2007) (holding that a merger clause
will preempt an action for fraud under New York law only “where the merger clause expressly
references a specific subject of prior representations”; and “where the clause was included in a
multi-million dollar transaction that was executed following negotiations between sophisticated
business people and a fraud defense is inconsistent with other specific recitals in the contract”)
(internal citations omitted); see also Kwon v. Yun, 606 F. Supp. 2d 344, 357-58 (S.D.N.Y. 2009)
(merger clause does not bar allegation of reasonable reliance where no specific representation
explicitly referenced in the merger clause as one not being relied upon is apparent on the face of
the contract); CDO Plus Master Fund Ltd. v. Wachovia Bank, N.A., 07CV11078-LTS, 2009 WL
2033048, at *5 (S.D.N.Y. July 13, 2009) (merger clause and disclaimer held preclusive of fraud
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claim in connection with high value complex transaction where fraud claims were inconsistent
with disclaimer and express contract provision).3 Here, the merger clause at issue is a general
one, which makes no reference to any specific prior representations. (See Complaint, Ex. A.)
Furthermore, the proposed counterclaims do not, on their face, indicate that the transaction at
issue here was of such a sophisticated character that preclusion of the fraud claim is warranted as
a matter of law. The Court thus concludes that Plaintiff has failed to satisfy its burden of
demonstrating that the proposed amendment would be futile.
The Court will, accordingly, grant Defendant leave to amend its Answer to add
the proposed counterclaims.
Leave to Add a Third-Party Counterclaim-Defendant
Federal Rule of Civil Procedure 20(a)(2) provides that “[p]ersons . . . may be
joined in one action as defendants if: (A) any right to relief is asserted against them jointly,
severally, or in the alternative with respect to or arising out of the same transaction, occurrence,
or series of transactions or occurrences; and (B) any question of law or fact common to all
defendants will rise in the action.” See Fed. R. Civ. P. 20(a)(2). Defendant moves for leave to
amend its Answer to add Luckman as a third-party counterclaim-defendant to the fraudulent
3
Plaintiff’s cited authorities likewise acknowledge that a general merger clause is
not an absolute bar to a finding of reasonable reliance. See Junk v. Aon Corp.,
07CV4640-LMM, 2007 WL 4292034, at *7 (S.D.N.Y. Dec. 3, 2007) (stating that,
“though not an outright bar to [a fraudulent inducement claim], the existence of a
merger clause does increase a court’s reluctance to determine that a plaintiff
reasonably relied on an oral representation” and finding that sophistication of
plaintiff in that case warranted dismissal of claim); Robinson v. Deutsche Bank
Trust Co. Americas, 572 F. Supp. 2d 319, 323 (S.D.N.Y. 2008) (acknowledging
that “[u]nder New York law, . . . a general merger clause does not, standing alone,
preclude a claim of fraudulent inducement”).
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inducement and fraud counterclaims.
“In deciding whether to permit joinder, courts apply the same standard of
liberality afforded to motions to amend pleadings under Rule 15.” Lawrence v. Starbucks Corp.,
08CV3734-LTS, 2009 WL 4794247, *2 (S.D.N.Y. Dec. 10, 2009) (internal quotation omitted).
Plaintiff’s opposition to the joinder of Luckman is premised solely on Plaintiff’s argument
regarding the futility of Defendant’s proposed counterclaims. (See Pl. Memo at p. 6.) The Court
has rejected Plaintiff’s futility argument and therefore grants Defendant leave to join Luckman
as a third-party counterclaim-defendant in this action.
CONCLUSION
For the foregoing reasons, Defendant’s motion for leave to amend its Answer to
add counterclaims of fraudulent inducement and fraud and to add Luckman as a third-party
counterclaim-defendant is granted in its entirety. Defendant is hereby directed to file its
Amended Answer, Affirmative Defenses and Counterclaims – as proposed in Exhibit B to
Docket Entry Number 26 – no later than Wednesday, May 4, 2016, and to serve it promptly
upon Mr. Luckman.
This Memorandum Opinion and Order resolves Docket Entry Number 24.
SO ORDERED.
Dated: New York, New York
April 27, 2016
/s/ Laura Taylor Swain
LAURA TAYLOR SWAIN
United States District Judge
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