Trainum v. Rockwell Collins, Inc.
OPINION AND ORDER re: 57 JOINT MOTION for Summary Judgment filed by Ann C. Brewer, Bryan S. Trainum, L. Scott Trainum, 66 MOTION for Summary Judgment filed by Rockwell Collins, Inc., 61 MOTION for Summary Judgme nt filed by Bradley Smith. The Court hereby denies RCI's motion for summary judgment on its contract claim. The Court grants Scott Trainum's motion for summary judgment on RCI's contract claim only as to the S atcom 1 Agreement and the relocation costs, and otherwise denies it. The Court also grants summary judgment to Scott Trainum, Brewer, and Smith on RCI's fraud claim, but denies summary judgment to Bryan Trainum on RCI's fraud claim. The Co urt grants summary judgment to all defendants on the negligent misrepresentation and unjust enrichment claims. The Court denies RCI's motion for summary judgment with regard to Bryan Trainum's breach of contract claim. Finally, the Court g rants RCI's motion for summary judgment with regard to Scott Trainum's declaratory judgment claim except to the extent Scott Trainum seeks an order requiring the release of funds in escrow. The parties are reminded that trial of all remaini ng claims will commence at 9:00 a.m. on September 12, 2017. The Clerk of the Court is instructed to close the motions at docket numbers 57, 61, and 66. (As further set forth in this Opinion and Order.) (Signed by Judge Jed S. Rakoff on 5/30/2017) (mro)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
L. SCOTT TRAINUM, as Sellers'
OPINION AND ORDER
-vL. SCOTT TRAINUM, as Sellers'
-andBRADLEY SMITH, ANN BREWER, and
JED S. RAKOFF, U.S.D.J.
On August 6, 2015, Rockwell Collins,
("RCI"), an avionics
company, acquired International Communications Group,
( "ICG") ,
a company that specialized in developing communications systems for
(the "Acquisition"). The terms of the Acquisition were set
out in a Stock Purchase Agreement
("SPA") between RCI and L. Scott
Trainum ("Scott Trainum"), the Chief Executive Officer and major
shareholder of ICG, who also acted on behalf of ICG's other
shareholders in the transaction. In the months after the
Acquisition, RCI came to believe that ICG officials had made false
representations leading up to the signing of the SPA in order to
induce RCI to purchase ICG, and that various warranties in the SPA
had been breached. After RCI served a notice of claim seeking
indemnification for breaches of the SPA, Scott Trainum initiated
this action seeking a declaration that, inter alia,
ICG did not
breach the warranties in the SPA and that the remaining balance of
the purchase price, which was held in escrow pending the disposition
of RCI's notice of claim, should be disbursed. RCI responded by
asserting counterclaims against him and three other ICG officers.
Specifically, RCI asserted counterclaims for breach of contract
against Scott Trainum; unjust enrichment against Ann Brewer, Bryan
Trainum, and Bradley Smith; and fraud and negligent
misrepresentation against all four. Bryan Trainum then asserted a
counterclaim for breach of contract against RCI.
Following discovery, all parties filed motions for summary
judgment. RCI moves for summary judgment on Scott Trainum's
declaratory judgment claim, its breach of contract claim in part,
its unjust enrichment claim against Bryan Trainum, and Bryan
Trainum's counterclaim. Scott Trainum, Brewer, and Bryan Trainum
(collectively, the "Seller Defendants") move for summary judgment on
RCI's claims for fraud,
negligent misrepresentation, and unjust
enrichment, and on part of RCI's breach of contract claim. Smith
moves for summary judgment on all claims against him.
For the reasons explained below, the Court denies RCI's motion
on its contract claim; grants Scott Trainum's motion on the contract
claim in part and denies it in part; grants summary judgment to
Scott Trainum, Brewer, and Smith on RCI's fraud claim; denies
summary judgment to Bryan Trainum on RCI's fraud claim; grants
summary judgment to all defendants on the negligent
misrepresentation and unjust enrichment claims; denies RCI's motion
with regard to Bryan Trainum's breach of contract claim; and grants
in part RCI's motion on Scott Trainum's declaratory judgment claim.
The pertinent facts,
undisputed except where indicated, are as
RCI is an avionics company headquartered in Cedar Rapids,
Statement of Undisputed Material Facts Pursuant to Local Civil Rule
56.l in Supp. of Joint Mot. for Summ. J. of Countercl. Def. L. Scott
Trainum, Third-Party Def. Ann C. Brewer, and Third-Party Def. Bryan
S. Trainum ("Seller Defs. Rule 56.1 Stmt.")
Prior to its acquisition,
5-6, ECF No. 59.
ICG was a company based in Newport News,
Virginia, that designed and built satellite communications
systems used in aircraft. Rockwell Collins Inc.'s Resp.
to Countercl. Def. L. Scott Trainum, Third-Party Def. Ann C. Brewer,
and Third-Party Def. Bryan S. Trainum's Statement of Undisputed
Material Facts and Counter-Statement of Material Facts
56.1 Resp. to Seller Defs.")
1 (additional facts 1 ) , ECF No. 82. Ann
Brewer was the Chief Financial Officer of ICG, and Bryan Trainum was
the Vice President of Programs. Id.
2. 2 Bradley Smith assumed the
role of Chief Operating Officer at ICG in January 2015. Third-Party
Def. Bradley Smith's Statement of Undisputed Material Facts in Supp.
for Summ. J.
Pursuant to Local Civil Rule 56.1
1, ECF No.
Since the early 2000s, RCI and ICG had a business relationship
in which ICG supplied RCI with satcom products. RCI Rule 56.1 Resp.
to Seller Defs.
(additional facts). RCI's interest in acquiring
ICG primarily derived from two of ICG's ongoing programs to develop
satcom systems for the cockpits of commercial airplanes
"Programs"): the Aspire-300 program, which ICG was developing for
Honeywell International Inc.
("Honeywell"), and the ICS-300 program,
which ICG was developing internally with the assistance of The
Boeing Corporation ("Boeing") . Id.
In late 2014, RCI began conducting due diligence on ICG. Id.
35, 39-40. Smith served as a point of contact for RCI and provided
updates on the Programs, as,
for example, in a presentation in
February 2015. Rockwell Collins Inc.'s Resp. to Third-Party Def.
In their responses to certain of the Local Rule 56.1 Statements,
some of the parties here have submitted statements of additional
facts, whose assertions are distinguished from responses to
previously asserted facts by the notation (additional facts).
In addition, Bryan Trainum is Scott Trainum's son. Deel. of Aaron
F. Jaroff, Ex. 3 at 200, ECF No. 60.
Brad Smith's Statement of Undisputed Material Facts and Counter
Statement of Material Facts
("RCI Rule 56.1 Resp. to Smith")
ECF No. 80. Bryan Trainum also provided RCI
with information on the Programs. See Rockwell Collins Inc.'s
Statement of Material Facts
("RCI Rule 56.1 Stmt.")
12, 14, ECF
No. 70. However, RCI maintains that it received only very limited
information about the Programs throughout most of the due diligence
During the lead-up to the Acquisition, the Programs experienced
some setbacks. For example, on June 3, 2015, Honeywell notified ICG
that some of ICG's performance was behind schedule and expressed
concern about the timely completion of the Aspire-300 project. Deel.
of Michael Bhargava in Supp. of Counter-Pl. Rockwell Collins, Inc.'s
Opp. to Third-Party Def. Bradley Smith's Mot.
for Summ. J.
("Bhargava Deel. in Opp. to Smith Mot.") Ex. 17, ECF No. 79. In July
2015, ICG negotiated with Honeywell a six-month extension to the
schedule for the Aspire-300 project, and ICG provided RCI with a
copy of the Amendment to the Honeywell contract on July 10, 2015.
RCI Rule 56.1 Stmt.
17; Resp. to Rockwell Collins Inc.'s Statement
of Material Facts and Statement of Additional Undisputed Material
("Seller Defs. Rule 56.1 Resp.")
17, 17(a), ECF No. 75. In
addition, on June 23, 2015, Boeing sent ICG a request for additional
payment based on Boeing's efforts to compensate for ICG's poor
quality work. Bhargava Deel. in Opp. to Smith Mot. Ex. 19.
In July 2015, RCI sought more comprehensive information on the
Programs from ICG. At RCI's request, on July 13 Smith forwarded RCI
a master program schedule for the Aspire-300 and ICS-300 programs.
Smith Rule 56.1 Stmt.
38; see Deel. of Mark Cuccaro in Supp. of
Third-Party Defendant Bradley Smith's Mot. for Summ. J.
6, ECF No.
64. RCI and ICG then convened a two-day
series of meetings on the Programs in Newport News on July 20 and
21. RCI Rule 56.1 Resp. to Seller Defs.
(additional facts). The
first day of meetings focused on the Aspire-300 program, while the
second day focused on the ICS-300 program. See Seller Defs. Rule
98; RCI Rule 56.1 Resp.
98. The leaders of RCI's due
diligence team, Jeff Payne and Dion Hayes, attended the meetings, as
did members of RCI's engineering team, including Gregg Zupcsics. RCI
Rule 56.1 Resp. to Seller Defs.
(additional facts). The Seller
Defendants and RCI agree that Smith attended the meeting on July 20
regarding the Aspire-300 program,
44, and Bryan Trainum
attended and presented some material at the meeting on July 21
regarding the ICS-300 program, RCI Rule 56.1 Stmt.
however, states that he has no recollection of participating in
either meeting. Third-Party Def. Bradley Smith's Resp. to Rockwell
Collins Inc.'s Counterstatement of Material Facts
("Smith Rule 56.1
38-40, ECF No. 89.
RCI claims that ICG personnel made several representations
about the progress of the Programs during those meetings. According
to RCI, during the first presentation, the ICG team represented that
the Aspire-300 program had completed the Critical Design Review
("CDR") phase, had completed the "Red Label l" stage, and had
undergone sufficient "pre-qualification" testing to warrant "high
confidence" that the product designed would successfully complete
subsequent formal testing. RCI Rule 56.1 Resp. to Seller Defs.
During the second presentation, RCI
asserts that the ICG team also represented that the ICS-300 program
had completed the CDR phase, had "essentially full functionality,"
and had started Minimal Operational Performance Testing ("MOPS").
Following the meetings,
Zupcsics emailed Bryan Trainum his
notes from the meetings, which contained various details regarding
the programs, and asked Bryan Trainum for suggested additions or
47-48; Deel. of Michael Bhargava in Supp. of
Counter-Pl. Rockwell Collins, Inc.'s Opp. to Countercl. Def. L.
Scott Trainum, Third-Party Def. Ann C. Brewer, and Third-Party Def.
Bryan S. Trainum' s Mot. for Summ. J.
( "Bhargava Deel. in Opp. to
Seller Defs. Mot.") Ex. 27, ECF No. 83. Bryan Trainum responded that
the notes "look[ed] like a good summary of the discussion," and that
he was "reviewing all of the ICS-300 details .
. to ensure they
were communicated correctly" and would provide clarification if
needed. RCI Rule 56.1 Resp. to Seller Defs.
After the July 20 and 21 meetings, RCI held an internal
meeting to discuss the information they had gleaned regarding the
Aspire-300 and ICS-300 programs.
49. Relying on the
representations in those meetings, RCI decided to acquire ICG. Id.
On August 6, 2015, Scott Trainum, on behalf of ICG's
shareholders, and RCI executed the SPA, pursuant to which RCI
acquired 100% of ICG's shares. RCI Rule 56.l Stmt.
l; see Deel. of
Michael Bhargava in Supp. of Counter-Pl. Rockwell Collins, Inc.'s
Mot. for Summ. J.
("SPA"), ECF No.
("Bhargava Deel. dated Apr. 7, 2017") Ex. A
69. For these shares, RCI agreed to pay $50
million, as well as an additional $14 million depending on certain
contingencies. Id. RCI deposited $4 million of the purchase price
$2 million of which was to be delivered to Scott
Trainum on the eight-month anniversary of the SPA (April 6, 2016)
and the other $2 million of which was to be distributed on the 16month anniversary (December 6,
2016). Seller Defs. Rule 56.1 Resp.
2 (additional facts). Out of the purchase price,
a schedule set out in the SPA,
in accordance with
ICG made payouts of $3,000,000,
$720,000, and $3,400,000 to Bryan Trainum, Brewer, and Smith,
respectively. See SPA Schedule 2. 1 (b) (iii) .
Article IV of the SPA contained several warranties by ICG. Most
consequentially for the purposes of this action,
each the Aspire-300 program and the ICS-300 program, an "estimate at
an estimate of the total cost, including
past costs and anticipated future costs, required to complete the
project. The EAC for Aspire-300 was $6,762,114, and the EAC for ICS300 was $9,515,643. SPA Schedule 4.ll(e).
ICG also warranted that
the financial statements attached to the SPA were accurate, and that
ICG had no liabilities except for those disclosed in the SPA's
schedules. SPA§§ 4.7,
RCI claims that, after the Acquisition,
it learned that the
Programs were not nearly as far along in their development as it had
understood before entering the SPA, and that both of the Programs
had yet to complete certain milestones that ICG personnel had
represented were already completed. Specifically, as to the ICS-300
project, RCI claims that after the Acquisition it learned that the
CDR had not been completed until July 29, 2015, that the project had
not yet begun MOPS testing, and that it did not have full
among other defects. RCI Rule 56.1 Stmt.
As to the Aspire-300 project, RCI claims that it discovered after
the Acquisition that Honeywell did not consider the CDR phase for
the Aspire-300 project to have been completed, that Honeywell had
rejected the Red Label 1 product that ICG submitted, that prequalification testing had not been completed, and that a redesign
was necessary. Id.
23(a)-(i). The Seller Defendants and Smith
dispute these claims. See Seller Defs. Rule 56.1 Resp.
23(a)-(i); Smith Rule 56.1 Resp.
As a result of the purported deficiencies, RCI contends that it
had to engage in substantial redesigns of the Aspire-300 and ICS-300
products and additional work that vastly increased the costs of
completing the Programs. According to RCI, the current EAC for the
ICS-300 project is $19,689,000, which is $8,692,000 more than the
EAC provided by ICG, RCI Rule 56.1 Stmt.
22, and the current EAC
for the Aspire-300 project is $22,121,000, which is $13,204,000 more
than the EAC provided by ICG,
26. In addition, RCI claims that
it discovered additional liabilities that ICG failed to disclose in
On April 5, 2016, RCI served on Scott Trainum a notice of
claim, which alleged breaches of several of the warranties in the
SPA and sought indemnification for the damages that RCI claimed it
sustained.3 Seller Defs. Rule 56.1 Resp.
3 (additional facts). The
notice of claim had the effect of barring the distribution of the
remaining portion of the purchase price held in escrow. Id.
(additional facts). The parties could not resolve the dispute and,
on September 7,
2016, Scott Trainum initiated this action seeking a
declaratory judgment that ICG had not breached any of the provisions
of the SPA referenced in RCI's notice of claim and also seeking an
order for the funds in escrow to be distributed to him. See Compl.
for Deel. J.
57, ECF No. 1. RCI subsequently filed counterclaims
against not only Scott Trainum but also Bryan Trainum, Smith, and
Brewer, see Def.-Counter-Pl. Rockwell Collins, Inc.'s Answer,
Countercls., and Third-Party Compl.
("Countercls."), ECF No. 15, and
Bryan Trainum filed a counterclaim against RCI for breach of
contract, Third-Party Def. Bryan S. Trainum's Answer, Affirmative
3 As a "Seller Indemnitor" under the SPA, see SPA Ex. A at 11, Scott
Trainum is responsible for indemnifying RCI for damages resulting
from ICG's breach of any of the representations and warranties in
Article IV of the SPA, see SPA § 11. 2 (a) (i)
Defenses, and Countercl., ECF No. 29. Smith moved to dismiss RCI's
claims against him, but that motion was denied. Mem. Order, Mar. 9,
2017, ECF No. 51.
Turning now to the instant motions, under Rule 56(a) of the
Federal Rules of Civil Procedure summary judgment is appropriate
when the "movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of
law." Fed. R. Civ. P. 56(a). The movant bears the burden of
demonstrating the absence of a genuine dispute of fact,
v. Liberty Lobby,
477 U.S. 242, 256 (1986), and, to award
summary judgment, the court must be able to find "after drawing all
reasonable inferences in favor of a non-movant" that "no reasonable
trier of fact could find in favor of that party," Heublein,
996 F.2d 1455, 1461 (2d Cir. 1993). A fact is
considered material "if it might affect the outcome of the suit
under the governing law," and a dispute of fact is deemed "genuine"
where "the evidence is such that a reasonable jury could return a
verdict for the nonmoving party." Holtz v. Rockefeller & Co., 258
69 (2d Cir. 2001)
(internal quotation marks and citations
The Court first considers the motions addressed to the claim
for breach of contract, which RCI asserts against Scott Trainum. To
prove a breach of contract under New York law, a plaintiff must show
the existence of an agreement,
contract by the plaintiff,
adequate performance of the
(3) breach of contract by the defendant,
and (4) damages." Eternity Glob. Master Fund Ltd. v. Morgan Guar.
Trust Co. of N.Y.,
375 F.3d 168, 177
(2d Cir. 2004)
quotation marks omitted).
RCI now moves for summary judgment in its favor on its breach
of contract claim based on alleged breaches of three warranties
contained in Article IV of the SPA. The breaches consist of the
underestimation of the respective EACs for the Aspire-300 and ICS300 projects, the failure to disclose an obligation to purchase
licenses, and the misrepresentation of the value of ICG's inventory.
Scott Trainum cross-moves for summary judgment in his favor on the
first two of those claims, as well as on breach claims arising out
of the failure to disclose an obligation to repay relocation costs
of a former employee and an alleged cost assertion from Embraer S.A.
The Court discusses each alleged breach in turn.
First, with regard to the alleged understatement of the
Programs' EACs, Section 4.ll(e) of the SPA provides:
The current Estimates at Completion (EACs) prepared by
management of the Company for existing Contracts of the Company
are set forth on Schedule 4.ll(e) and reflect (i) all material
costs incurred related to such Contracts in accordance with
GAAP and (ii) reasonable and appropriate estimates to complete
such Contracts, in each case based on actual costs incurred,
estimates of the effort to complete such Contracts from the
Company's engineering and program management functions and
industry standards and past Company practices.
As noted above, Schedule 4.ll(e) provided an EAC of $6,762,114 for
the Aspire-300 program, and $9,515,643 for the ICS-300 program.
RCI contends that the EACs were significantly understated
because they relied on false assumptions. Specifically, as to the
Aspire-300 program, RCI claims that the EAC was understated because
certain contractual milestones -- the CDR and Red Label 1 stages
as well as pre-qualification testing -- had not been
completed, despite ICG's representations that they had;
was calculated with "unburdened" labor rates that underestimated the
cost of labor; and (3)
the EAC did not factor in a six-month
extension to the project's timeline. RCI claims that the EAC for the
ICS-300 program was understated because
the project was in an
early stage of development, having not begun MOPS testing,
the product's software, nor completed pre-qualification testing, and
it too used unburdened labor rates. Given those flawed
assumptions, RCI concludes, the EACs could not be "true and
correct," in violation of Section 8.1 of the SPA,
and they were not
calculated in "accordance with GAAP" and were not "reasonable and
appropriate" given "actual costs incurred" and "industry standards,"
in violation of Section 4.ll(e).
It makes little sense to discuss whether EACs -- which are, by
their very name, estimates
are "true and correct." Rather, what
must be "true and correct" is not the EACs themselves but the
representation in Section 4.ll(e)
that the EACs reflect "reasonable
and appropriate estimates" based on actual costs,
and industry standards. See SPA§ 4.ll(e). RCI fails to establish
Section 8.1 of the SPA provides that "[t]he representations and
warranties set forth in [the SPA] shall be true and correct in all
[or all material] respects."
that there is no genuine dispute as to whether the EACs incorporated
flawed assumptions and whether those assumptions necessarily render
the EACs unreasonable.
As to the completion of milestones, while RCI focuses on its
assertion that ICG, despite its representations, had not completed
certain milestones for the Aspire-300 and ICS-300 projects, RCI does
not show how those purported misrepresentations caused the EACs to
be unreasonably low. In other words, RCI does not establish that the
EACs were necessarily based on an understanding that those
milestones were completed. Even if, as RCI suggests, the need to
complete an outstanding milestone increases the time and cost of the
project as a whole, RCI has failed to establish the premise needed
to show that the EACs understated these costs, i.e., that the EACs
were calculated under the assumption that further work on the
milestones was not required to complete the project.
In any case, even on the assumption that the failure to account
for not-yet-completed milestones could render the EACs unreasonable,
there remain genuine disputes of material fact that preclude summary
judgment in favor of RCI. Scott Trainum, in particular, vigorously
disputes the premise of RCI's argument, viz., that each of the
identified milestones was assumed to be complete when in fact it was
not. To take one example, while RCI asserts that ICG did not
complete the CDR on the ICS-300 project in October 2014, as ICG had
represented, see RCI Rule 56.1 Stmt.
2l(a), Scott Trainum contends
that Boeing considered the milestone complete as of October 29,
2014, see Seller Defs. Rule 56.1 Resp.
21(a); see also Deel. of
Michael L. Simes ("Simes Deel.") Ex. 3 at RCI ICG000130245
(including a Boeing presentation on the ICS-300 project that lists,
under the heading "Status/Accomplishments," the notation "Critical
Design Review (CDR) completed = 10/14/2014"), ECF No. 76. Scott
Trainum raises similar factual disputes regarding each of the other
allegedly incomplete milestones. See Seller Defs. Rule 56.1 Resp.
21(a)-(e), 23(a)-(i). Accordingly, RCI has failed to demonstrate
that there is no genuine dispute of material fact as to whether the
milestones in question were complete and,
if they were not, whether
the failure to account for their incompleteness rendered the EACs
for the Programs unreasonable.
RCI's argument that ICG appeared to use "unburdened" labor
rates that do not account for overhead costs, to
calculate the EACs also does not warrant summary judgment. RCI's
sole support for the conclusion that the use of unburdened labor
rates violates industry standards comes from the declaration of Sean
Foster, RCI's employee and damages expert. Foster states only that
it is "normal industry practice and in accordance with [GAAP] to
include indirect costs," as the use of a burdened engineering labor
Deel. of Sean
4-5, ECF No.
67. But Foster, who
makes his declaration "based upon [his] own personal knowledge and a
review of documents," id.
1, cites no basis for this assertion,
and, even if true, it does not conclusively establish that the use
of unburdened labor rates is not in accordance with GAAP or industry
practice. Moreover, Scott Trainum disputes RCI's claim that ICG did
in fact use unburdened labor rates. Seller Defs. Rule 56.1 Resp.
22(b). Thus, RCI has not put forth undisputed material facts showing
that ICG used unburdened rates and that doing so rendered the EACs
Nor is RCI entitled to summary judgment based on its argument
that ICG failed to adjust the EAC for the Aspire-300 program to
reflect a six-month extension to that program's schedule. On June
ICG provided RCI with an EAC for the Aspire-300 program of
$6,762,114, which is the amount that was ultimately provided in the
SPA. See Simes Deel. Ex. 29 at ICG010006021,
Deel. dated Apr. 7, 2017 Ex. A at Schedule 4.ll(e). Then, as noted
in July 2015 ICG and Honeywell extended the completion date
for the Aspire-300 program by six months. RCI Rule 56.1 Stmt.
Notably, in an email on July 1, 2015, shortly before ICG and
Honeywell agreed to the extension, Bryan Trainum wrote that the
current EAC for the Aspire-300 project would be incorrect if the end
date for the project were moved. See Bhargava Deel. dated Apr. 7,
2017 Ex. U. Thus it is clear that the EAC was not adjusted, despite
Bryan Trainum's indication that an extension of the schedule would
affect the EAC. Yet, given that RCI has not shown what other
assumptions went into the EAC and whether the EAC was reasonable
before the extension to the schedule, the unaccounted-for impact of
the extension alone does not establish that no rational trier of
fact could conclude that the EAC for the Aspire-300 was reasonable.
In sum, then, RCI has not demonstrated that it is entitled to
summary judgment on its breach of contract claim based on the
alleged understatement of the EACs.
But neither has Scott Trainum demonstrated that he is entitled
to summary judgment on RCI's contract claim in this regard. Scott
Trainum contends that RCI's claim must fail because the undisputed
evidence establishes that ICG reasonably calculated the EACs for the
Programs in accordance with the standards specified in Section
4.ll(e) of the SPA. Mem. in Opp. to Rockwell Collins Inc.'s Mot. for
("Seller Defs. Opp.")
54, 57-58, 70, 73-74), ECF No. 74. Yet he puts forth no
5 (citing Seller Defs. Rule 56.1
evidence establishing the EACs' conformity with industry standards.
See, e.g., Seller Defs. Rule 56.1 Stmt.
(stating that "ICG
and Defendants used ICG's material, actual costs incurred,
projection of future costs based on its labor rates,
and procedures, and industry standards" to formulate the EACs but
not referencing any evidence that ICG complied with industry
standards in doing so). Even if, as Scott Trainum argues,
calculated the EACs in accordance with its own practices and ICG
personnel believed the EACs to be reasonable, those facts,
own, are not sufficient to establish that there can be no genuine
dispute as to the reasonableness of the EACs.
Scott Trainum also argues that RCI cannot base its contract
claim on extra-contractual representations regarding the completion
of milestones because the parties disclaimed making any warranties
not contained in the SPA. See SPA§ 13.5
("Except for the
representations and warranties contained in Articles III,
IV, and V
or in any Transaction Document, as applicable, no party nor any
other Person makes any express or implied representation or warranty
on behalf of any Seller or Buyer, and each Seller and Buyer
disclaims any such representation or warranty."). Yet this objection
misses the mark: RCI's contract claim depends not on RCI's reliance
(unlike, as discussed infra, RCI's fraud claims)
but rather on the EACs' reliance on mistaken assumptions in their
calculations, which assumptions RCI alleges were also the subject of
In a similar vein, Scott Trainum argues that RCI cannot base
its contract claim on representations regarding the completion of
to the extent those representations were false,
RCI knew of their falsity.
Section 13.20 of the SPA provides that a
representation or warranty made by ICG shall not be deemed waived
unless one of two specified representatives of RCI 5 has "actual
(without any duty of inquiry)
as of the date [of the SPA's
execution] of any breach or inaccuracy of any representation or
warranty." However, "knowledge of any fact or circumstance that
could give rise to any such breach or inaccuracy, or access to any
document describing any fact or circumstance that could give rise to
any such breach or inaccuracy, alone shall not constitute actual
The two representatives referenced in the SPA are Dion Hayes and
Stephen Belland. SPA Schedule 13.20.
knowledge." SPA§ 13.20. Thus, even if the relevant persons at RCI
were aware that, contrary to ICG's representations, certain
milestones were not complete, Scott Trainum has not established that
those persons had actual knowledge of a breach of the applicable
warranty itself -- viz., that the EACs were calculated reasonably
rather than of a circumstance that could give rise to an inaccuracy,
which, by the terms of 13.20, does not entail a waiver of the
Accordingly, neither RCI nor Scott Trainum is entitled to
summary judgment on RCI's contract claim based on the alleged
understatement of the EACs, as there remain disputes of material
fact with regard to whether the statuses of various milestones were
appropriately factored into the EACs, whether the labor rates that
ICG used in calculating the EACs conformed with industry standards,
and whether the EAC for the Aspire-300 project was reasonable in
light of the extension to that project's schedule.
Second, as to RCI's claim that ICG failed to disclose an
obligation to purchase licenses, Section 4.7(b) of the SPA provides
in relevant part that,
"[e]xcept for Liabilities .
[ICG] has no Liabilities of any kind or
set forth on
nature." Exhibit A to the SPA defines "Liability" as "any and all
liabilities, obligations and commitments of whatever
. absolute or contingent,
become due, and whenever or however arising .
. or due or to
Pursuant to an agreement with Satcom 1 Aps
(the "Satcom 1
ICG was obligated to buy at least 350 licenses, at
$2200 each, which ICG had planned to use in a router that it
produced. RCI Rule 56.1 Stmt.
ICG did not list this obligation
in Schedule 4.7(b) of the SPA.
Yet, under the SPA, RCI has waived its claim in this regard, as
it had actual knowledge of the existence of the obligation at the
time the SPA was executed. Specifically, RCI does not dispute that
Dion Hayes, one of the individuals who is listed in Schedule 13.20
and whose knowledge may therefore be imputed to RCI, had received a
copy of the Satcom 1 Agreement. RCI Rule 56.1 Resp. to Seller Defs.
102 (g); see also Deel. of Aaron F. Jaroff
("Jaroff Deel.") Ex.
at 149 (Hayes testifying that he received the Satcoml license
agreement), ECF No.
60. Moreover, RCI does not dispute that it had
identified the obligation to purchase licenses pursuant to the
Satcom 1 Agreement during its review of that contract before the
Acquisition. RCI Rule 56.l Resp. to Seller Defs.
Jaroff Deel. Ex. 52 at RCI ICG000027092
116; see also
(including an internal RCI
document from March 2015 identifying issues raised in ICG's
Scott Trainum argues that the obligation should not be considered a
liability because, at least at the time the SPA was executed, there
was a market for the routers that used the licensed product and
therefore there was no reason to think that ICG would have to
swallow the cost of the licenses. Seller Defs. Rule 56.1 Stmt. ~~
140-49, 151. But, given the broad definition of liability set out in
the SPA, including all "obligations and commitments of whatever
nature," no matter whether or not such obligations could be expected
to prove profitable, this argument is unavailing. SPA Ex. A.
contracts, which identifies the Satcom 1 Agreement and notes that it
granted ICG "a royalty based license to use the licensed software"
in certain products). In addition, Hayes was copied on an email
specifically listing the particular royalty payment under the
Satcoml Agreement. Simes Deel. Ex. 5 at RCI ICG000808121.
Given that undisputed evidence, it is clear that Hayes had
actual knowledge of ICG's obligation under the Satcom 1 Agreement,
and thus, pursuant to Section 13.20 of the SPA, RCI waived its claim
for breach of that warranty that it had no such obligation. RCI
resists this conclusion, arguing that, under New York law, a buyer
may expressly preserve its rights under warranties even where it
knows the warranted facts are false. Although RCI is right that the
law permits preserving warranties, RCI has only partially preserved
its rights here, since the SPA specifies that warranties are not
waived unless there is actual knowledge of their breach. See Galli
v. Metz, 973 F.2d 145, 151 (2d Cir. 1992)
("Where a buyer closes on
a contract in the full knowledge and acceptance of facts disclosed
by the seller which would constitute a breach of warranty under the
terms of the contract, the buyer should be foreclosed from later
asserting the breach .
unless the buyer expressly preserves his
rights under the warranties." (emphasis added)).
Accordingly, Scott Trainum is entitled to summary judgment as
to RCI's breach claim based on the nondisclosure of the Satcom 1
Third, with regard to the alleged misrepresentation of the
value of ICG's inventory, Section 4.7(a) of the SPA provides, in
relevant part, that:
Except as set forth on Schedule 4.7(a), the Company Financial
Statements (i) have been prepared from and in accordance with
the accounting book, accounts and financial records of the
Company (which are maintained in accordance with GAAP) and in
accordance with GAAP consistent with the Company's Accounting
Practices and (ii) present fairly the financial position of the
Company as of the dates set forth therein and their results of
operations and cash flows for the periods set forth therein
In addition, Section 4.24 provides that ICG "maintains accurate
books and records reflecting the assets and liabilities of the
" SPA§ 4.24. In the SPA, ICG warranted that it
possessed an inventory balance of $3,994,145. SPA Schedule 4.7(a)
RCI claims that ICG breached the above warranties in two
It first claims that ICG always stated its inventory value
at cost, whereas GAAP requires that inventory value be stated at the
lower of cost or market value, and that this departure from GAAP led
ICG to include in the inventory value $315,607 for products that had
no market value and thus should have been written off. RCI Rule 56.1
39-42. 7 Yet RCI provides insufficient evidence that the
Scott Trainum correctly notes that RCI does not provide admissible
evidence in support of its contention that GAAP requires that
inventory balances to be stated at the lower of cost or market
value. See RCI Rule 56.1 Stmt. ~ 39 (citing Bhargava Deel. dated
Apr. 7, 2017 Ex. Eat 23:4-9 (deposition transcript describing only
an expert's qualifications)). RCI does, however, point to one of
ICG's financial statements reproduced in Schedule 4.7(a) of the SPA,
which notes that inventories "are stated at the lower of cost or
market." Id. ~ 9 (citing Bhargava Deel. dated Apr. 7, 2017 Ex. A at
inventory balance was in fact overstated for this reason. Brewer's
deposition testimony, which RCI claims established that ICG always
stated its inventory at cost, is equivocal: Brewer specifically says
"typically, the cost was the cost." Bhargava Deel. dated Apr. 7,
2017 Ex. RR at 186 (including only a brief snippet of Brewer's
testimony in this regard, which provides little context for her
statement). The same is true of her testimony describing the
decision not to write off the products in question. It is far from
clear that those products had no market value,
since she explains
that she decided not to write off the products in part because
another RCI employee said he could sell them. See id. at 148.
RCI also claims that that the inventory value contained in the
SPA included $412,314 in inventory that did not exist when RCI
reviewed ICG's inventory following the Acquisition. RCI Rule 56.1
43. But the evidence RCI puts forth to show that this
inventory was missing is woefully inadequate. RCI points to a
schedule of purported inventory adjustments that was attached to the
notice of claims RCI sent to Scott Trainum. See Bhargava Deel. dated
SS. There is no indication of who compiled it or
and the notice of claims that purports to establish what the
ICG020012535). Thus, it is not the case that ICG made no warranty
pertaining to the use of cost and market value in its inventories.
In addition, the only date thereon is March 25, 2016, several
months after the Acquisition, which would attenuate any claim that
it reflects deficiencies in the inventory at the time of the
Acquisition. Bhargava Deel. dated Apr. 7, 2017 Ex. SS.
schedule signifies constitutes allegations, not evidence. RCI also
cites an undated document of unknown provenance, which describes a
physical count of inventory that took place in March 2016 and
resulted in an unspecified number of items being written off. Id.
Ex. UU. That evidence cannot establish that there is no dispute of
material fact as to whether ICG misstated its inventory balance at
the time the SPA was executed. Accordingly, RCI is not entitled to
summary judgment on its contract claim regarding inventory value.
Fourth, as to ICG's failure to disclose an obligation to repay
relocation costs of ICG's former employee Tim Rayl,
RCI states in
its briefing that it no longer asserts this claim. Mem. of Law in
Opp. to Countercl. Defs.' Joint Mot. for Summ. J.
( "RCI Opp. to
18-19, ECF No. 81. Scott Trainum is therefore
entitled to summary judgment on this claim.
Fifth, Scott Trainum seeks summary judgment on RCI's claim that
ICG breached Section 4.7(b) of the SPA by failing to disclose as a
liability a "cost assertion" against ICG by Embraer. RCI has not yet
made any payments related to the cost assertion and is currently
disputing its obligation to pay Embraer RCI Rule 56.1 Resp. to
(additional facts); Bhargava Deel. in Opp. to
Seller Defs. Mot. Ex. 33 at 170-72. As a result, Scott Trainum
argues that Embraer's cost assertion claim does not constitute a
liability required to be disclosed under the SPA, and that RCI
cannot show that it has suffered damages, as needed to establish a
contract claim. Yet, as noted above, the SPA's broad definition of
"Liability" includes claims that are "known or unknown, asserted or
unasserted, fixed, absolute or contingent, matured or unmatured,
accrued or unaccrued,
liquidated or unliquidated or due or to become
due," and therefore, even if the cost assertion had not yet accrued
at the time the SPA was executed and may not ultimately be owed, the
SPA nonetheless required ICG to disclose it. SPA Ex. A. Further,
while it is of course true that damages are a necessary
breach of contract claim, Scott Trainum provides no authority
demonstrating that a disputed obligation to pay a third party cannot
give rise to damages. See Mem. in Supp. of Joint Mot. for Summ. J.
on Behalf of Countercl. Def. L. Scott Trainum, Third-Party Def. Ann
C. Brewer, and Third-Party Def. Bryan S. Trainum 24 n.13, ECF No. 58
(citing Chendrimada v. Air-India, 802 F. Supp. 1089, 1092 (S.D.N.Y.
(dismissing a contract claim where the plaintiff failed to
allege any damages besides injuries for which a contract claim was
preempted)). Thus, Scott Trainum is not entitled to summary judgment
on this claim.
As a general objection to all of RCI's contract claims, Scott
Trainum claims that RCI cannot show that any alleged breaches caused
it damages. The Court is not persuaded. To the extent that ICG
understated its liabilities, including the cost required to complete
the Programs, or overstated its assets, RCI received in exchange for
the purchase price a less valuable company than ICG had represented
itself to be. Scott Trainum's theory that RCI's later fumbling of
the Programs, rather than any earlier duplicity by ICG, is
responsible for the divergence between the EACs and RCI's current
estimates of the total costs of the Programs goes to the amount, not
the existence, of damages. Thus,
it is not the case that RCI cannot
prove the required element of damages with regard to its breach of
A final matter regarding RCI's breach of contract claims is
whether, under the SPA, a damages cap applies to those claims.
noted above, the SPA requires Scott Trainum to indemnify RCI for any
damages arising out of ICG's breaches of the warranties and
representations in Article IV of the SPA. SPA§ ll.2(a) (i), Ex. A at
11. For the alleged breaches at issue in this case,
specifies that Scott Trainum's liability for damages shall not
exceed $5 million. SPA§ 11.S(f). However, the SPA provides an
exception to that limitation, as "[n]othing in the Agreement shall
limit any Person's rights or remedies .
for claims of fraud or
similar claims." SPA§ 11.S(j). In addition, Section 11.8, which
provides that indemnification shall generally be the exclusive
remedy available to the parties for breaches of the SPA, exempts
At oral argument on the instant motions, counsel for RCI and Scott
Trainum noted that the issue of a damages cap had not been fully
briefed in the memoranda theretofore submitted to the Court, and the
Court granted leave to file supplemental letter briefs restricted to
that issue, which those parties did on May 12, 2017. See Letter Br.
of Scott Trainum, Bryan Trainum, and Ann Brewer, ECF No. 99; Letter
Br. of Rockwell Collins, ECF No. 100.
Specifically, the limit applies to breaches of representations and
warranties contained in Article IV except for those in§§ 4.3, 4.4,
4.8, and 4.23. SPA§ 11.S(f). Here, RCI alleges breaches of§§ 4.7,
4.11, and 4.24.
from this requirement "claims of fraud or willful misconduct." SPA§
11.8. RCI argues that the $5 million cap should not apply to its
breach claims because ICG's breaches amounted to willful misconduct
under Section 11.8, which, it contends, encompasses any act
constituting a breach of contract if it is undertaken intentionally.
Scott Trainum contends that the cap must apply because RCI has not
established that ICG's conduct amounted to fraud, which, he argues,
is required either under Section 11.S(f) or, given New York courts'
interpretation of "willful misconduct" as requiring tortious
behavior, under Section 11.8.
The Court is not convinced by Scott Trainum's first argument in
this regard, which is that Section 11.S(f)'s enumeration of the
types of claims for which the cap does not apply must govern, even
in the face of the Section ll.8's general exemption of claims of
willful misconduct from the SPA's indemnification provisions,
because, under New York law,
specific contractual provisions control
despite general provisions to the contrary. See Capital Ventures
Int'l v. Republic of Arg.,
652 F.3d 266, 271
(2d Cir. 2011). But
there is nothing flatly inconsistent about those two provisions:
determining that willful misconduct that does not amount to fraud is
redressable through means other than indemnification, in accordance
with Section 11.8, in no way contravenes Section 11.S(f)'s allowance
of unlimited damages through indemnification for "fraud or similar
claims." Even if use of Section 11.8 to avoid the indemnification
cap renders moot Section 11.S(f)'s limited exception in certain
one could pursue a non-indemnification remedy with no
damages limit for willful misconduct that is arguably not exempted
from the cap under Section 11.S(j) ), Scott Trainum's interpretation
similarly reads Section 11.8 out of the SPA. Thus, RCI may pursue
its breach claims unhindered by the damages cap set out in Section
11.S(f) if, and only if, it can show that the breaches constituted
"fraud or willful misconduct" under Section 11.8.
The Court therefore must address what "willful misconduct"
under Section 11.8 means. The contract itself, as the parties agree,
is governed by the law of New York, and in Metropolitan Life
Insurance Co. v. Noble Lowndes International,
Inc., the New York
Court of Appeals interpreted an exemption for something similar to
"willful misconduct" from a contractual limitation on liability. 84
433, 618 N.Y.S.2d 882, 643 N.E.2d 504
(1994). Under the
contract at issue in that case, the defendant was not liable for
certain consequential damages resulting from its nonperformance, but
an "exception to this limitation was provided 'for intentional
misrepresentations, or damages arising out of [defendant's] willful
acts or gross negligence.'" Id.
(emphasis and alteration in
original). The plaintiff there argued, as RCI does here, that
"willful acts" denoted intentional, rather than inadvertent,
conduct. Id. The Court of Appeals, considering the structure of the
clause referencing "willful acts" as well as the broader context of
the contract, disagreed:
In excepting willful acts from defendant's general immunity
from liability .
. we think the parties intended to narrowly
exclude from protection truly culpable, harmful conduct, not
merely intentional nonperformance of the Agreement motivated by
financial self-interest. Under the interpretation tool of
ejusdem generis applicable to contracts as well as statutes,
the phrase 'willful acts' should be interpreted here as
referring to conduct similar in nature to the 'intentional
misrepresentation' and 'gross negligence' with which it was
joined as exceptions to defendant's general immunity from
liability for consequential damages. We, therefore, conclude
that the term willful acts as used in this contract was
intended by the parties to subsume conduct which is tortious in
nature, i.e., wrongful conduct in which defendant willfully
intends to inflict harm on plaintiff at least in part through
the means of breaching the contract between the parties.
Id. at 438
That same reasoning applies here, as Section 11.8 joins
together "claims of fraud or willful misconduct," thereby indicating
that the two "should be interpreted here as referring to conduct
similar in nature." Id. In light of that reasoning, RCI cannot
succeed in its argument that since the SPA refers disjunctively to
"fraud or willful misconduct," the two must be different; even if
the two are not identical, willful misconduct must nonetheless be
interpreted similarly. RCI's argument that Metropolitan Life is
limited to the interpretation of the specific contract before the
Court of Appeals, and therefore does not govern this circumstance,
also fails. The Court of Appeals did indicate that it considered the
context of the whole agreement, and particularly several instances
in which the parties shifted the risk of the defendant's
nonperformance to the plaintiff, in concluding that an
interpretation of the contract's exemption from the limitation of
liability should not place all responsibility for consequential
damages on the defendant. Id. at 436-38. But RCI identifies no
reason to conclude that the SPA, as a whole, manifests an intention
for RCI not to bear some of the cost should the warranties therein
prove inaccurate. More generally, Metropolitan Life is in accord
with the ages-old New York (and common law) doctrine distinguishing
breaches of contract, whether intentional or unintentional, from
Moreover, though it contends that that New York courts would
interpret "willful misconduct" in the SPA to encompass merely
intentional breaches of contract, none of the cases that RCI cites
in support of this proposition interpret that phrase in the context
within a contractual provision limiting
liability. See El-Dehdan v. El-Dehdan,
978 N.Y.S.2d 239, 249 (2d
(discussing willfulness in the context of contempt
sanctions); Swezey v. Marra, 533 N.Y.S.2d 244, 246
(2d Dep't 1988)
(discussing whether a default on an agreement to purchase a home was
willful and finding that it was not because it was entirely out of
the party's control); Butler v. Shorefront Jewish Geriatric Ctr.,
Inc., 932 N.Y.S.2d 672,
679 (N.Y. Sup. Ct. 2011)
willfulness in a statute); Scholem v. Acadia Realty Ltd. P'ship, 992
N.Y.S.2d 857, 861
(N.Y. Sup. Ct. 2014)
misconduct as a ground for terminating an employee)
RCI also cites the Appellate Division's decision in Banc of
America Securities LLC v. Solow Building Company II, LLC, but that
Thus, the Court concludes that willful misconduct under Section
11.8 requires not just an intentional breach of contract but
"conduct which is tortious in nature,
i.e., wrongful conduct in
which defendant willfully intends to inflict harm on plaintiff."
84 N.Y.2d at 438. The Court, however, declines at this
stage to pass upon whether this standard was met here. Scott Trainum
has not moved for summary judgment on this ground, and the parties'
briefing does not address in any depth whether ICG's breaches of the
warranties in question amounted to tortious conduct.
The Court turns next to the fraud claims, which RCI asserts
against each of the defendants. "The elements of fraud under New
York law are:
'[l] a misrepresentation or a material omission of
fact which was false and known to be false by defendant,
for the purpose of inducing the other party to rely upon it,
justifiable reliance of the other party on the misrepresentation or
material omission, and 
injury.'" Premium Mortg. Corp. v.
583 F.3d 103, 108
(2d Cir. 2009)
(quoting Lama Holding Co. v. Smith Barney Inc.,
646 N.Y.S.2d 76,
88 N.Y.2d 413,
668 N.E.2d 1370 (1996)). Under New York law,
must be proven by clear and convincing evidence. Crawford v.
case is inapposite here because it does not interpret an exception
for willful acts in a contractual limitation of liability clause,
but rather discusses what constitutes an act for which a contractual
limitation of liability clause cannot restrict remedies as a matter
of law. 847 N.Y.S.2d 49, 54-57 (1st Dep't 2007). In any event, Solow
does not support RCI's position that a merely intentional breach
constitutes a willful act.
Franklin Credit Mgmt. Corp., 758 F.3d 473, 491
(2d Cir. 2014)
(citing Gaidon v. Guardian Life Insurance Co. of America,
349-50, 704 N.Y.S.2d 177, 725 N.E.2d 598
(1999)). This is a
substantive requirement of New York law, rather than a merely
procedural one, and therefore applies even in a federal case. Also,
this standard of proof applies to "[e]ach element of the fraud
claim," "at the summary judgment stage as well as at trial." ING
Glob. v. United Parcel Serv. Oasis Supply Corp., No. 11-cv-5697
(JSR), 2012 WL 4840805, at *7
(S.D.N.Y. Sept. 25, 2012). 12 The Court
considers the claims against each of the defendants in turn.
First, as to Scott Trainum and Brewer, RCI has not pointed to
any misrepresentations that those defendants made. Rather, RCI
claims that ICG was tightly controlled by the defendants here,
suggesting that all of the defendants had actual knowledge of the
Smith contends -- belatedly and deficiently -- that Iowa law
applies to the fraud claim against him. In his opening brief, Smith
asserted that Iowa law applied to the fraud claim for the reasons
that the Seller Defendants identified in their opening brief, though
those defendants argued only that Iowa law applied to the negligent
misrepresentation claim. Mem. of Law in Supp. of Third-Party Def.
Bradley Smith's Mot. for Summ. J. ("Smith Mem. ") 9, ECF No. 62.
Nonetheless, he stated that the law of fraud in New York and Iowa
did not differ materially, effectively conceding that New York law
applied. Smith Mem. 9 n.2; see Curley v. AMR Corp., 153 F.3d 5, 12
(2d Cir. 1998) (noting that a district court sitting in diversity in
New York only proceeds to a choice-of-law analysis if there is a
conflict between New York law and the law of another forum). Given
that concession, RCI's opposition to Smith's motion used only New
York law. In his reply brief, still without undertaking any choiceof-law analysis, Smith appealed to Iowa law. Reply Mem. of Law in
Further Supp. of Third-Party Def. Bradley Smith's Mot. for Summ. J.
("Smith Reply") 3-5, ECF No. 88. Smith has not demonstrated that
Iowa law applies, and the Court applies New York law to the fraud
claim against him.
alleged fraud such that they could be liable for it. See RCI Opp. to
Seller Defs. 7,
(citing People by Abrams v. Apple Health & Sports
80 N.Y.2d 803, 807, 599 N.E.2d 683, 587 N.Y.S.2d
("Officers and directors of a corporation may be held
liable for fraud if they participate in it or have actual knowledge
of it.")). However, beyond the general allegation of ICG's close
management, RCI puts forth no evidence of actual knowledge by either
Scott Trainum or Brewer. Thus, Scott Trainum and Brewer are entitled
to summary judgment on RCI's fraud claims against them.
Second, as to Bryan Trainum, RCI alleges that he made
in an email he sent to RCI on November 25,
2014, representing that the CDR for the ICS-300 program had been
completed in October 2014, RCI Rule 56.1 Resp. to Seller Defs.
(additional facts); and (2) when he led the presentation on the ICS300 project at the meeting on July 21, 2015, representing that the
project's CDR had been completed in October 2014, that the project
was currently undergoing "Minimal Operational Performance Testing
("MOPS") testing, and that the software for the product had
"essentially full functionality," id.
46; see Bhargava Deel.
dated Apr. 7, 2017 Ex. L (containing slides for the July 21, 2015
presentation); id. Ex. G at 170:4-7
(Bryan Trainum's deposition
testimony indicating that he gave the presentation); id. Ex. M
(containing notes on the presentation taken by Gregg Zupcsics)
RCI also alleges that Bryan Trainum put together a slide
presentation on December 1, 2014 containing allegedly false updates
While Bryan Trainum argues that each of the identified
representations was not false or not made by him, there are
conflicting accounts of who made certain statements at the July 21,
2015 meeting and the veracity of all of these statements is very
much in dispute, as discussed supra with reference to RCI's breach
of contract claim. See, e.g., RCI Rule 56.1 Stmt.
Rule 56.1 Resp.
18; Seller Defs.
18. Thus, there is at least a dispute of fact as
to whether Bryan Trainum made material misstatements.
Because RCI has not provided any direct evidence of Bryan
Trainum's intent to defraud, it must establish such intent through
circumstantial evidence. Doing so requires a plaintiff to "provide
evidence of facts that support a strong inference that the
defendants possessed the requisite fraudulent intent." Century Pac.,
Inc. v. Hilton Hotels Corp., 528 F. Supp. 2d 206, 222-23
(internal quotation marks and citations omitted). "The
requisite 'strong inference' of fraud may be established either (a)
by alleging facts to show that defendants had both motive and
opportunity to commit fraud,
or (b) by alleging facts that
constitute strong circumstantial evidence of conscious misbehavior
or recklessness." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124,
(2d Cir. 1994).
on the status of the Programs, but RCI does not put forth any
evidence showing that Bryan Trainum actually sent this presentation
to RCI, and therefore there is no evidence that it constitutes a
misrepresentation to RCI.
Although Bryan Trainum contends that there is no evidence that
he intended to defraud RCI, RCI has provided evidence that Bryan
Trainum had a motive to defraud by virtue of the fact that he stood
to receive a significant payout as a result of the Acquisition.
While "[m]otives that are generally possessed by most corporate
directors and officers," such as "the desire for the corporation to
appear profitable" or "to keep stock prices high to increase officer
compensation," are not sufficient to give rise to an inference of
Kalnit v. Eichler, 264 F.3d 131, 139 (2d Cir. 2001), the
Second Circuit has held that corporate insiders' misrepresentations
about a corporation's performance that were made in order to inflate
the stock price and sell their shares at a profit may constitute a
"concrete and personal" benefit from the fraud sufficient to satisfy
the motive requirement, Novak v. Kasaks, 216 F.3d 300, 307-08
After the Acquisition closed, Bryan Trainum received a check
from ICG for $3 million. Jaroff Deel. Ex. 3 at 199. While he
maintained that he was not aware before the Acquisition that he
would receive such a payment, see id., evidence in the record
indicates that, preceding the Acquisition, Scott Trainum repeatedly
discussed the prospect of payouts, including one to Bryan Trainum,
with various ICG officers. See, e.g., Bhargava Deel. dated Apr. 7,
2017 Ex. 11. Based upon that evidence, and the reasonable inference
that it is unlikely that Scott Trainum would freely discuss the
subject of such payments while Bryan Trainum, his son, was wholly
unaware of the possibility that he would receive one, there is at
least a dispute of material fact as to whether Bryan Trainum was
aware of and was motivated by the prospect of a payout. In addition,
it is undisputed that Bryan Trainum held shares in ICG that were
worth approximately $150,000 at the time of the Acquisition, SPA
Schedule l(d), and his father,
Scott Trainum, held shares worth
roughly $30,000,000, id., which provide further grounds from which a
fact finder might infer a motive to defraud.
Bryan Trainum does not dispute that he had an opportunity to
commit fraud. See Novak, 216 F.3d at 307
("Opportunity would entail
the means and likely prospect of achieving concrete benefits by the
means alleged." (quotation omitted)). Therefore there remains a
dispute as to whether he intended to defraud RCI with the
misrepresentations, if any, that he made. See Wechsler v. Steinberg,
733 F.2d 1054, 1058
(2d Cir. 1984)
(noting that "[i]ssues of motive
and intent are usually inappropriate for disposition on summary
As for reliance, it is undisputed that RCI relied on the
representations that ICG personnel made during the meetings on July
20 and 21, 2017. RCI Rule 56.1 Resp. to Seller Defs.
(additional facts); Countercl. Def. L. Scott Trainum and Third Party
Defs. Ann C. Brewer and Bryan S. Trainum's Reply and Resp. to
Rockwell Collins Inc.'s Resp. to Statement of Undisputed Material
Facts and Counterstatement of Material Fact ("Seller Defs. Rule 56.1
Reply to RCI")
50, ECF No. 91. Bryan Trainum disputes, however,
that reliance on any of the alleged misrepresentations was
"In assessing whether reliance on allegedly fraudulent
misrepresentations is reasonable or justifiable, New York takes a
contextual view." J.P. Morgan Chase Bank v. Winnick,
350 F. Supp. 2d
(S.D.N.Y. 2004). Specifically, courts consider "whether the
received any 'clear and direct' signs of falsity,
whether the [plaintiff] had access to relevant information, whether
received a written (purported)
confirmation of the
truthfulness of the representations at issue, and whether the
'sophisticated.'" Coraud LLC v. Kidville Franchise
121 F. Supp. 3d 387, 394
omitted). With regard to the last factor
(the sophistication of the
plaintiff), while "[o]rdinarily there is no duty to exercise due
diligence, and [courts] have described the necessary showing of care
'minimal diligence' or 'negating its own recklessness,'"
"sophisticated business entities are held to a higher standard."
350 F. Supp. 2d at 406. Thus, "a sophisticated plaintiff
cannot establish that it entered into an arm's length transaction in
justifiable reliance on alleged misrepresentations if that plaintiff
failed to make use of the means of verification that were available
Inc. v. Kinney,
928 F. Supp. 2d 699,
(internal quotation marks omitted). In general,
given the many considerations to weigh,
"reasonable reliance is
therefore a question normally reserved for the finder of fact and
not usually amenable to summary judgment." Coraud, 121 F. Supp. 3d
Bryan Trainum argues that any reliance on alleged misstatements
by him was unreasonable for two main reasons. First, he claims that
RCI failed to perform a satisfactory due diligence process, which
could have uncovered the truth behind the alleged misstatements,
despite the fact that RCI employees admitted to having misgivings
about some of the information ICG provided and acknowledged having
insufficient information to fully evaluate the Programs. See Seller
Defs. Rule 56.1 Stmt. 121-23. Bryan Trainum has not shown, though,
that RCI's investigation was clearly deficient. During the course of
its due diligence process, RCI did conduct numerous meetings with
ICG staff, RCI Rule 56.1 Resp. to Seller Defs.
facts); Seller Defs. Rule 56.1 Reply to RCI
37, and solicited
information from ICG about the details of the Programs, see, e.g.,
Jaroff Deel. Ex. 27. In order to resolve questions about the
Programs that the diligence process had raised or left unanswered,
RCI convened the meetings with ICG on July 20 and 21, 2015. 14 Bryan
Trainum claims that this process was nonetheless insufficient
RCI contends that its reliance is additionally justified by the
fact that it went "to the trouble to insist on a written
representation that certain facts [were] true" by securing the
warranties in the SPA. DDJ Mgmt., LLC v. Rhone Group L.L.C., 15
N.Y.3d 147, 154, 905 N.Y.S.2d 118, 931 N.E.2d 87 (2010). Yet this
argument is misplaced because RCI did not secure warranties of the
truthfulness of the representations based on which it now asserts
its fraud claims, viz., the completion of particular milestones and
characterizations of the status of the Programs.
because RCI should have further investigated the representations
made at those meetings. Essentially, he claims that RCI should not
have merely sought additional information from ICG but independently
investigated using other sources.
Thus, the question here is whether RCI had access -- other than
from ICG -- to information that could verify or disprove the content
of the alleged misrepresentations. There can be no reasonable
reliance where "the facts represented are not matters peculiarly
within the party's knowledge, and the other party has the means
available to him of knowing, by the exercise of ordinary
intelligence, the truth or the real quality of the subject of the
representation." ACA Galleries,
928 F. Supp. 2d at 703 (quoting
Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 322, 157 N.E.2d 597,
184 N.Y.S.2d 599 (1959)). In contrast, "[w]hen matters are held to
be peculiarly within defendant's knowledge, it is said that
plaintiff may rely without prosecuting an investigation, as he has
no independent means of ascertaining the truth." Lazard Freres & Co.
v. Protective Life Ins. Co., 108 F.3d 1531, 1542
(quoting Mallis v. Bankers Trust Co.,
(2d Cir. 1997)
615 F.2d 68,
1980), abrogated in part on other grounds by Peltz v. SHB
Commodities, 115 F.3d 1082, 1090 (2d Cir. 1997)).
Bryan Trainum contends that information about the subject of
the alleged misrepresentations was not exclusively controlled by
ICG, but rather was available from other parties, including ICG's
partners on the Programs, Honeywell and Boeing. But there remain
genuine disputes about the extent of the information available to
RCI from those sources. For example, while it is undisputed that
confidentiality restrictions imposed by ICG's agreement with
Honeywell initially prevented RCI from obtaining certain information
about the Aspire-300 program, see Jaroff Deel. Ex. 51, and that RCI
eventually was permitted to access some information from Honeywell,
see id. Ex. 29; id. Ex. 5 at 136, the parties dispute whether
Honeywell was willing to disclose to RCI all of the information
about that program that was relevant to the Acquisition. See
generally Seller Defs. Rule 56.1 Stmt.
Resp. to Seller Defs.
106-11; RCI Rule 56.1
106-11. In addition, while the parties
agree that RCI was able to seek information from Boeing, they
dispute whether Boeing actually could provide information on the
subject of the representations. See Seller Defs. Rule 56.1 Stmt.
114; RCI Rule 56.1 Resp. to Seller Defs.
because ICG was developing the ICS-300 system internally with
limited technical assistance from Boeing, Boeing would not have had
as much information on that program as ICG did). Similarly, Bryan
Trainum does not demonstrate that Esterline Avista, a third-party
contractor that worked with ICG on the Programs and that
communicated with RCI about the Programs, see Jaroff Deel. Ex. 18 at
135-36, could provide information that confirmed or disproved the
representations, see Seller Defs. Rule 56.1 Stmt.
Accordingly, the Court concludes that there are genuine disputes of
fact as to whether the alleged representations pertained to facts
that were peculiarly within ICG's knowledge.
Bryan Trainum also argues that, under the terms of the SPA, RCI
specifically disclaimed reliance on any representations except those
specifically set out in the SPA. See SPA§ 13.5 15 ; Banque Arabe et
Internationale D'Investissement v. Md. Nat'l Bank, 57 F.3d 146, 155
(2d Cir. 1995)
("Where a party specifically disclaims reliance upon
a representation in a contract, that party cannot, in a subsequent
action for fraud,
assert it was fraudulently induced to enter into
the contract by the very representation it has disclaimed."
(quotation omitted)). However, "even such an express waiver or
disclaimer 'will not be given effect where the facts are peculiarly
That section provides, in relevant part:
Except for the representations and warranties contained in
Articles III, IV, and V or in any Transaction Document, as
applicable, no party nor any other Person makes any express or
implied representation or warranty on behalf of any Seller or
Buyer, and each Seller and Buyer disclaims any such
representation or warranty .
. Buyer hereby acknowledges
that, subject to its reliance on the representations and
warranties contained in this Agreement, it is taking full
responsibility for making its own evaluation of the adequacy
and accuracy of the [documents] furnished to it (including the
reasonableness of the assumptions underlying such projections,
estimates, risk analysis or forecasts) and agrees that it has
made its own inquiry and investigation into, and, based
thereon, has formed an independent judgment concerning the
Business, the Common Stock and the Company and has been given
adequate access to such information as it has requested and it
shall not assert any claim against Sellers or hold Sellers
liable for any inaccuracy, misstatement, or omission with
respect to information furnished by Sellers or any such Person
concerning Sellers and the Company.
within the knowledge of the party invoking it.'" Banque Arabe, 57
F.3d at 155 (quoting Stambovsky v. Ackley, 572 N.Y.S.2d 672, 677
(1st Dep't 1991)). Thus, because the Court concludes that there is a
genuine dispute as to whether the subject of the alleged
misrepresentations was peculiarly within the knowledge of ICG and
its officers, the disclaimer contained in Section 13.5 of the SPA
does not bar reasonable reliance at this stage.
There also exists a dispute of fact as to whether Bryan
Trainum's alleged misstatements caused RCI injury. Under New York
law, "[t]o establish causation,
[a] plaintiff must show both that
[the] defendant's misrepresentation induced [the] plaintiff to
engage in the transaction in question (transaction causation) and
that the misrepresentations directly caused the loss about which
[the] plaintiff complains
(loss causation)." Laub v. Faessel, 745
N.Y.S.2d 534, 536 (1st Dep't 2002). The latter concept "is closely
related to the common law doctrine of proximate cause." Merrill
Lynch & Co. v. Allegheny Energy,
Inc., 500 F.3d 171, 183 (2d Cir.
2007). As noted above, it is undisputed that statements at the
meetings on July 20 and 21, 2015 caused RCI to engage in the
Acquisition. Bryan Trainum contends, however, that RCI cannot show
that the alleged misrepresentations directly caused it any loss,
because those representations were too remote from any additional
costs that RCI had to expend on the Programs. Rather, Bryan Trainum
suggests, any additional costs that RCI incurred were the result of
its own mismanagement of the Programs. The Court is not persuaded
because, to the extent that the Programs required more time and
expense to complete than ICG represented, RCI was damaged by
receiving less in value than it had bargained for.
follows the well-established common law
"New York law .
rule that fraud damages represent the difference between the
purchase price of the asset and its true value, plus interest,
generally measured as of the date of sale." Id. Bryan Trainum argues
that this case does not govern here,
since RCI puts forth proof of
damages not in the form of a difference between purchase price and
true value but rather in the form of the additional expenditures
that RCI allegedly incurred in order to bring the Programs to the
status that Bryan Trainum represented the Programs had already
achieved. But this argument elevates form over function. Given that
the Programs were the primary reason RCI sought to acquire ICG,
Bhargava Deel. dated Apr. 7,
2017 Ex. Bat 87, their value was a
critical component of the value of the asset that RCI acquired. And,
in turn, the Programs' value is a function of both the ultimate
worth of the Aspire-300 and ICS-300 satcom systems and the cost
required to develop them. Thus, because RCI has provided evidence
supporting the proposition that the cost of the completing the
Programs was greater than Bryan Trainum's alleged misrepresentations
led it to believe,
see RCI Rule 56.1 Resp. to Seller Defs.
it has raised a genuine dispute as to whether it
was induced to pay more for ICG than its true value. See Merrill
500 F.3d at 183
(assuming that the purchaser of a business
"placed value on its intrinsic qualities, including its key
personnel and its financial performance," and concluding that if the
purchaser proved that the defendant "fraudulently misrepresented
those qualities, it may show that it has acquired an asset at a
price that exceeded its true value"). Of course, whether the
purported increased costs of completing the Programs were not the
result of any misrepresentations, but rather of RCI's postAcquisition actions alone, is a matter that may be proved at trial.
In sum, Bryan Trainum has not established that there is no
dispute of material fact bearing on his liability for fraud, and he
is therefore not entitled to summary judgment on that claim.
Third, as to RCI's fraud claim against Smith, RCI advances two
theories: that Smith made misrepresentations, and that he failed to
disclose certain material information. As to the former theory, RCI
identifies five alleged misrepresentations:
in a February 2015
due diligence meeting, Smith presented misleading estimated costs of
the Programs, see RCI 56.1 Resp to
at some point in the first half of 2015, Smith said that the
Aspire-300 CDR had closed, see id.
(3) on July 13, 2015, Smith
provided RCI with copies of the master schedules for the Programs,
which represented that CDR had been completed for both of the
Programs and that the Red Label 1 prototype had been completed for
Aspire-300 program, see id.
33; see also Cuccaro Deel. Ex. 6;
ICG staff made the same representations during the meetings on July
20 and 21, 2015, see RCI 56.l Resp to
facts); and (5)
Smith expressed his "comfort" with the schedule for
the Aspire-300 project, see id.
Yet RCI cannot sustain a fraud claim against Smith based on the
alleged misrepresentations because RCI has not put forth evidence
that it actually relied on any of them. In its opposition to Smith's
motion, RCI asserts that "the evidence demonstrates that Rockwell
did, in fact,
rely upon the representations and omissions made by
Smith," but then proceeds to cite only to evidence indicating that
RCI relied on meeting notes taken during the meetings on July 20 and
21, 2015. Mem. of Law in Opp. to Countercl. Def. Bradley Smith's
Mot. for Summ. J.
Rule 56.1 Resp. to
("RCI Opp. to Smith") 14, ECF No. 78
(additional facts)). But it is
undisputed that Smith did not make any misrepresentations regarding
the Programs during those meetings; in fact,
the RCI employee on
whose notes RCI claims it relied could not recall Smith saying
anything at the meetings except advising the ICG staff on what
questions they could answer pursuant to confidentiality agreements.
Bhargava Deel. in Opp. to Smith Mot. Ex. 12 at 244-45. RCI's failure
The fourth and fifth of these alleged misrepresentations cannot
serve as the basis for a fraud claim against Smith. The fourth set
of alleged misrepresentations was not made by Smith, and there is no
evidence that it was made at Smith's direction, rather than simply
in his presence. See RCI Rule 56.l Resp. to Smith~ 38 (additional
facts). The fifth purported misrepresentation is not a present
statement of fact but rather, in essence, a future prediction, which
ordinarily is not actionable. See Matsumura v. Benihana Nat. Corp.,
542 F. Supp. 2d 245, 252 (S.D.N.Y. 2008) ("It is axiomatic
that predictive or opinion statements about future events, without
more, are not misrepresentations.").
to put forth evidence that it actually relied on representations
that Smith made, as opposed to representations that were later made
by other members of the ICG staff, precludes its fraud claim against
Smith based on affirmative misrepresentations. 17
With regard to the second theory, that Smith failed to disclose
material information, RCI essentially puts forth a claim of
fraudulent concealment under New York law. "New York recognizes a
duty by a party to a business transaction to speak .
party possesses superior knowledge, not readily available to the
other, and knows that the other is acting on the basis of mistaken
knowledge.'" Brass v. Am.
987 F.2d 142, 150 (2d
(quoting Aaron Ferer & Sons Ltd. v. Chase Manhattan Bank,
N.A., 731 F.2d 112, 123 (2d Cir. 1984)). RCI argues that Smith had
oversight over the Programs, was a point person for RCI's due
diligence requests, and attended the meetings between ICG and RCI on
July 20 and 21, 2015, and therefore he must have known that the
information being passed on to RCI during the diligence process was
incomplete. See RCI Opp. to Smith 7-9. Yet, according to RCI, Smith
In addition, it would have been unreasonable for RCI to rely on
the first and second alleged misrepresentations identified above. As
to the first, RCI cannot convincingly claim that it reasonably
relied on the cost estimates provided by Smith roughly six months
before the Acquisition when the SPA contained the EACs, which
clearly superseded previous estimates of costs. The second suffers a
similar defect: the testimony regarding that statement is vague and
equivocal as to the venue and time period in which the statement was
made as well as what Smith said, see Bhargava Deel. in Opp. to Smith
Mot. Ex. 25 at 165-66, and this ambiguity renders RCI's reliance on
the statement unreasonable given the more concrete assurances and
information supplied to RCI during the diligence process.
failed to disclose relevant material information,
Honeywell sent ICG a letter in June 2015 expressing concerns about
RCI Rule 56.1 Resp. to
facts); that Boeing requested additional payment from ICG in June
22; and that neither the respective CDRs for each of the
Programs nor the ICS-300 Red Label 1 phase had been completed, id.
RCI has not cited, nor has the Court encountered, authority
holding that a non-party to a transaction has a duty to disclose
material facts to one of the parties to the transaction based on the
theory that RCI cites. See id.
("New York recognizes a duty by a
party to a business transaction to speak
& Sur. Co. v. Aniero Concrete Co.,
(2d Cir. 2005)
404 F.3d 566,
("The elements of fraudulent concealment under
New York law are: a relationship between the contracting parties
that creates a duty to disclose,
the party bound to disclose,
knowledge of the material facts by
scienter, reliance, and damage."
(emphasis added)). Holding Smith, who was not a party to the SPA,
personally liable for fraud for failing to correct a
misrepresentation by a co-worker or to provide all information that
is material to a transaction would extend this doctrine beyond its
established parameters, and the Court declines to do so here.
Turning next to the claims for negligent misrepresentation,
which RCI asserts against all defendants, the Court first addresses
which forum's law applies to these claims. The Seller Defendants and
Smith contend that Iowa law applies, while RCI contends that New
York law applies.
When determining which forum's law applies, a district court
sitting in diversity in New York first evaluates whether there is a
conflict between the laws of the respective fora,
and, if there is,
then proceeds to apply a choice-of-law analysis. Curley v. AMR
Corp., 153 F.3d 5, 12
(2d Cir. 1998). "In tort actions,
if there is
a conflict of laws, New York courts apply an 'interests analysis,'
under which the law of the jurisdiction having the greatest interest
in the litigation is applied." Id. Under New York law, "[i]t has
long been held that when the conflict pertains to a conductregulating rule, the law of the place where the tort occurs will
generally apply, with the locus of the tort generally defined as the
place of the injury." Elmaliach v. Bank of China, Ltd.,
(1st Dep't 2013). In turn, "the Second Circuit has
concluded that New York courts would hold that 'loss from fraud is
deemed to be suffered where its economic impact is felt,
the plaintiff's residence.'" In re Petrobras Secs. Litig., 152 F.
3d 186, 196 (S.D.N.Y. 2016)
(quoting Sack v. Low,
360, 366 (2d Cir. 1973)).
The Seller Defendants (and Smith, who adopts the Seller
Defendants' argument in this regard) assert that Iowa's law of
negligent misrepresentation differs from that of New York, and that,
because RCI is based in Iowa,
Iowa is the locus of the tort, which
means that, under New York's choice-of-law analysis,
governs the negligent misrepresentation claims. The Court agrees,
and RCI does not seriously contest this analysis.
argues that the SPA's choice-of-law provisions dictate that New York
law applies to the claims against the Seller Defendants. Those
provisions state, in relevant part, that the Seller Defendants and
RCI consent to jurisdiction and venue in New York "for the purposes
of any Action arising out of or relating to the Transaction [and]
this Agreement," SPA§ 13.ll(a), and that the SPA is governed by New
York law, SPA§ 13.13.
This argument fails in light of the Second Circuit's decision
in Finance One Public Co. v. Lehman Brothers Special Financing,
Inc., 414 F.3d 325, 333
(2d Cir. 2005). In that case, the Second
Circuit addressed a set of contractual choice-of-law and forum
selection provisions similar to the ones here, which provided that
the contract was to be governed by New York law and that, "[w]ith
respect to any suit, action or proceedings relating to this
Agreement," the parties consented to jurisdiction in New York. Id.
at 332. The court explained that, under New York law,
are outside the scope of contractual choice-of-law provisions that
RCI merely suggests that if the Court undertakes the interests
analysis, it could consider New York's interest in the litigation
based on.the parties' selection of New York as a forum. RCI Opp. to
Seller Defs. 23 n.7. This consideration, alone, does not tip the
scales in favor of applying New York law.
19 A court sitting in diversity in New York applies New York law to
determine the scope of a choice-of-law clause. See Fin. One, 414
F.3d at 333.
specify what law governs construction of the terms of the contract,
even when the contract also includes a broader forum-selection
clause." Id. at
(noting "a reluctance on the part of New York
courts to construe contractual choice-of-law clauses broadly to
encompass extra-contractual causes of action"). The court therefore
held that the extra-contractual claims at issue there fell outside
of the choice-of-law provision. Id. The same analysis applies here
and dictates that the SPA's choice-of-law provision designating the
law governing the SPA does not also entail that New York law applies
to tort claims arising out of the Acquisition.
RCI also argues that New York law applies to its negligent
misrepresentation claim against Smith because Smith, in his motion
to dismiss, appealed to the standard for negligent misrepresentation
under New York law. See Mem. of Law in Supp. of Third-Party Def.
Bradley Smith's Mot. to Dismiss 7-9, ECF No. 28. However, RCI does
not specify which legal doctrine would prevent Smith from changing
his view of the law that applies to RCI's claims, much less cite
authority to that effect, nor does it suggest that it has been
prejudiced by the change in theory. Thus, in accordance with the
RCI's citation to About.com, Inc. v. Targetfirst, Inc., which came
to a conclusion contrary to the one reached in Finance One, is
unavailing. No. 01-cv-1665 (GBD), 2002 WL 826953, at *2 (S.D.N.Y.
Apr. 30, 2002). About.com relied on the reasoning of Turtur v.
Rothschild Registry Int'l Inc., 26 F.3d 304 (2d Cir. 1994). In
Finance One, the Second Circuit explained that Turtur used Texas
law, not New York law, to interpret the scope of the choice-of-law
provision at issue and had been misinterpreted in later decisions.
See 414 F.3d at 333-34.
relevant choice-of-law analysis, the Court applies Iowa law to the
negligent misrepresentation claims.
Under Iowa law, the tort of negligent misrepresentation applies
only to "persons who,
'in the course of [their] business, profession
or employment, or in any other transaction in which [they have] a
pecuniary interest,' supply information to others in their business
transactions." Dinsdale Constr., LLC v. Lumber Specialties, Ltd.,
888 N.W.2d 644,
(alterations in original). RCI argues that Dinsdale
(quoting the Restatement
sets out a "pecuniary interest test" that provides an independent
ground for finding a duty whenever one supplies information in the
course of a transaction in which one has a financial stake. Applied
here, RCI contends that because the defendants received payouts for
their shares and/or bonuses as part of the Acquisition, they had
pecuniary interests in the provision of information to RCI and
therefore may be liable under Iowa law.
However, in Dinsdale the Iowa Supreme Court did not indicate
that it intended to depart from the previous standard for negligent
misrepresentation, under which "the tort does not apply when a
defendant directly provides information to a plaintiff in the course
of a transaction between the two parties, which information harms
the plaintiff in the transaction with the defendant." Sain v. Cedar
Rapids Comm. School Dist.,
626 N.W.2d 115, 126 (Iowa 2001). Rather,
Dinsdale expands Sain's reasoning and therefore expands the scope of
the tort "beyond persons in the course of their business or
profession of supplying information" to others who have "a pecuniary
interest in supplying the information," particularly, on the facts
before the Dinsdale court, to a business that both sells products
and supplies information to clients. 888 N.W.2d at 652. Under this
it still must be the case that the provider of
information has a pecuniary interest in providing the information
itself, rather than,
for example, in a related transaction.
Underscoring this point, in explaining how the pecuniary interest
requirement ran through previous decisions, Dinsdale quotes Sain and
other decisions that have held that adversarial relationships do not
give rise to claims for negligent misrepresentation. See id. at 651
(citing Molo Oil Co. v. River City Ford Truck Sales, Inc.,
N.W.2d 222, 227
("[I]f the transaction at issue took
place at arm's length, the plaintiff's cause of action must
Thus, although Dinsdale expanded the class of persons who could
be liable for the tort, it does not go so far as to give rise to
liability against persons who do not derive a benefit from supplying
information but rather make representations in the context of
transactions. Since it is undisputed that the defendants were not in
the business of supplying information but rather were counterparties
to a business deal, under Iowa law they cannot be liable for the
tort of negligent misrepresentation and are entitled to summary
judgment on RCI's claim.
The Court turns next to RCI's claims for unjust enrichment
against Brewer, Bryan Trainum, and Smith, to which the parties agree
New York law applies.
"The basic elements or an un]ust enrichment
claim in New York require proof that
(1) defendant was enriched,
at plaintiff's expense, and (3) equity and good conscience militate
against permitting defendant to retain what plaintiff is seeking to
recover." Briarpatch Ltd., L.P. v. Phoenix Pictures,
Inc., 373 F.3d
306 (2d Cir. 2004). "However, an unjust enrichment claim will
not lie 'where it simply duplicates, or replaces, a conventional
contract or tort claim.'" Ebin v. Kangadis Food Inc., No. 13 Civ.
(JSR), 2013 WL 6504547, at *6 (S.D.N.Y. Dec. 11, 2013)
Corsello v. Verizon N.Y.,
944 N.Y.S.2d 732
Inc., 18 N.Y.3d 777,
967 N.E.2d 1177,
In response to the defendants' argument that its unjust
enrichment claim merely duplicates its tort claims, RCI contends
that the two types of claims are distinct: while its fraud and
negligent misrepresentation claims allege that defendants' actions
led to an inflation of the purchase price of ICG,
enrichment claim alleges that the defendants have wrongly retained
benefits from the transaction through their "wrongful acts,
omissions and representations." RCI Opp. to Seller Defs. 20. While
RCI may be correct that, with respect to its unjust enrichment
claim, it makes a further allegation not present in its tort claims
viz., that defendants were enriched by their wrongdoing 21
difference would be present in any comparison of unjust enrichment
claims with tort claims. RCI has theretore tailed to demonstrate any
significant difference between its tort and unjust enrichment
Where, as here, the wrongful conduct alleged with regard to
unjust enrichment and tort claims is the very same, courts have
dismissed unjust enrichment claims as duplicative. See, e.g., Gordon
v. Hain Celestial Grp.,
Inc., No. 16-cv-6526 (KBF), 2017 WL 213815,
(S.D.N.Y. Jan. 18, 2017)
(noting that the "[p]laintiff
allege[d] that [the] defendants' alleged unjust enrichment stem[med]
the very same conduct underlying her other claims," and
concluding that the former would succeed or fail depending on
whether the latter did). Doing so here is warranted because "[t]o
the extent that [the tort] claims succeed, the unjust enrichment
claim is duplicative; if [RCI's] other claims are defective, an
unjust enrichment claim cannot remedy the defects." Corsello, 18
N.Y.3d at 791. For example, if RCI succeeds in proving its fraud
claim against Bryan Trainum, the unjust enrichment claim based on
the same fraudulent conduct would be redundant; but if RCI's fraud
claim fails because, say, Bryan Trainum did not make any
misrepresentation or RCI did not rely on any misrepresentation to
The Court notes that RCI largely bases its claim that Bryan
Trainum and Smith had a motive to defraud RCI on their receipt of
payouts as a result of the Acquisition, and thus enrichment is not
entirely absent from the tort claims either.
finding Bryan Trainum liable for unjust enrichment
would be unwarranted. As the same is true for all defendants, they
are all entitled to summary judgment on the unjust enrichment claim.
The Court next considers Bryan Trainum's counterclaim for
breach of contract. Bryan Trainum, who took a job with RCI following
the Acquisition, alleges that RCI failed to award him the shares due
to him when he was terminated from RCI. Specifically, under his
retention agreement with RCI, he was entitled to the equivalent of
$75,000 in restricted stock units if he remained with RCI for three
years after his retention
until September 2018), but these
shares would vest immediately if he was terminated "without cause."
RCI Rule 56.1 Stmt.
29. "Cause" is defined in the agreement as
either "an act of material dishonesty made by [one] in connection
with [one's] responsibilities as an employee" or "gross misconduct."
30. In September 2016, RCI terminated Bryan Trainum's
34. Bryan Trainum denies that he was notified at
the time that he was being terminated for cause. Seller Defs. Rule
RCI argues that it is entitled to summary judgment on this
claim because Bryan Trainum's misrepresentations before the
Acquisition and failure to correct them afterwards provide ample
"cause" for his termination. Yet whether Bryan Trainum and others
did make misrepresentations is very much in dispute for the reasons
discussed above with regard to RCI's fraud claim against him, and
therefore so too are whether he failed to correct any
misrepresentations and whether such conduct was the basis for his
termination. See Seller Defs. Rule 56.1 Resp.
RCI also argues that Bryan Trainum has tailed to satisfy his
burden to produce any evidence demonstrating that his termination
was without cause.
For his part, Bryan Trainum maintains that
summary judgment is unwarranted unless RCI can show by undisputed
evidence that his termination was for cause. There is no need to
resolve this question of which side bears the burden, however,
because there exists some evidentiary basis from which a factfinder
might infer that RCI was motivated to terminate Bryan Trainum, not
because of his misconduct, but rather because of other factors,
specifically the pending litigation between RCI and defendants.
Bryan Trainum was not terminated at the time RCI learned of the
various alleged misrepresentations
(which was in early 2016 at the
latest, since RCI served its notice of claim in April 2016), but
only in September 2016, which was when Scott Trainum filed this
action against RCI. See Compl. for Deel. J. Taking that evidence in
the light most favorable to Bryan Trainum, it is sufficient to raise
a genuine issue as to whether he was fired for cause. See Benoit v.
Comm. Capital Corp., No.
03 Civ. 5328
(S.D.N.Y. Aug. 25, 2008)
("[Plaintiff] generally denies all of these
(PKL), 2008 WL 3911007, at *6
[that there were legitimate reasons to fire him],
arguing that his termination was the result of financial
[defendant's] transaction .
the evidence in a light favorable to the non-moving party,
[plaintiff] has raised a genuine issue of material fact as to
whether his termination was for cause pursuant to the Employment
is not entitled to summary Judgment on Bryan
Lastly, the Court considers Scott Trainum's declaratory
judgment claim. To determine the propriety of ruling on a
declaratory judgment claim, a court must inquire:
(1) whether the judgment will serve a useful purpose in
clarifying or settling the legal issues involved; (2) whether a
judgment would finalize the controversy and offer relief from
uncertainty; (3) whether the proposed remedy is being used
merely for procedural fencing or a race to res judicata; (4)
whether the use of a declaratory judgment would increase
friction between sovereign legal systems or improperly encroach
on the domain of a state or foreign court; and (5) whether
there is a better or more effective remedy.
New York v. Solvent Chem. Co.,
664 F.3d 22, 26 (2d Cir. 2011)
(internal quotations and alterations omitted).
Where, as here, an action involves both a breach of contract
claim and a declaratory judgment claim seeking a declaration that
the contract was not breached, the critical question is whether
resolution of the contractual dispute through adjudication of the
breach claim provides a more effective remedy than litigating the
declaratory judgment claim. That question,
in turn, primarily
depends on whether adjudication of the contract claim, which has the
advantage of also allowing for damages, would resolve all of the
issues that the declaratory judgment claim raises. See Intellectual
Capital Partner v. Institutional Credit Partners LLC, No. 08 Civ.
10580 (DC), 2009 WL 1974392, at *6 (S.D.N.Y. July 8, 2009)
that, where "[a]ny cloud of uncertainty regarding the scope and
enforceability of the provisions
[at issue] will be dispelled in
litigation or the breach or contract
would serve no useful purpose"
(internal quotation omitted)).
In the Complaint, Scott Trainum seeks a declaration of "the
rights and obligations of the parties under the SPA," including
declarations that Scott Trainum and the Sellers are not obligated to
indemnify RCI for any claim asserted in the Notice of Claim; that
ICG did not breach any warranties as alleged in the Notice of Claim,
if it did,
that RCI waived its claims of breach because it had
actual knowledge of the breaches; and that indemnification is capped
at $5 million. Compl.
for Deel. J. at 12. All of these issues will
be resolved through the litigation of RCI's contract claims,
id. Ex. C (Notice of Claims) with Countercls.
58-69, and counsel
for the Seller Defendants conceded as much at oral argument on these
motions. Tr. dated May 5, 2017 at 4. Yet Scott Trainum also seeks,
as part of his declaratory judgment claim,
relief in the form of an
order requiring the release of funds held in escrow, which would not
necessarily follow even if Scott Trainum succeeded in defending
against RCI's breach of contract claims. Thus the Court dismisses as
duplicative Scott Trainum's declaratory judgment claim except to the
extent that it seeks an order regarding the release of funds from
for the foregoing reasons,
the Court hereby denies
RCI's motion for summary judgment on its contract claim. The Court
grants Scott Trainum's motion for summary judgment on RCI's contract
claim only as to the Satcom 1 Agreement and the relocation costs,
and otherwise denies it. The Court also grants summary judgment to
Scott Trainum, Brewer, and Smith on RCI's fraud claim, but denies
summary judgment to Bryan Trainum on RCI's fraud claim. The Court
grants summary judgment to all defendants on the negligent
misrepresentation and unjust enrichment claims. The Court denies
RCI's motion for summary judgment with regard to Bryan Trainum's
breach of contract claim. Finally, the Court grants RCI's motion for
summary judgment with regard to Scott Trainum's declaratory judgment
claim except to the extent Scott Trainum seeks an order requiring
the release of funds in escrow.
The parties are reminded that trial of all remaining claims
will commence at 9:00 a.m. on September 12, 2017. The Clerk of the
Court is instructed to close the motions at docket numbers 57, 61,
New York, NY
May 3CJ, 201 7
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