Townsley v. Airxcel, Inc.

Filing 62

OPINION & ORDER re: 45 MOTION to Dismiss the Second Amended Complaint; 51 MOTION for Discovery Plaintiff's Notice of Rule 56 Motion to Stay Motion for Summary Judgment and For Discovery: For the reasons set forth above, de fendant's motion is GRANTED in part and DENIED in part. The only claims that survive are the breach of subparagraph 1.5(d)(iii) and the related indemnification claim under subsection 7.2(b). The Clerk of Court is directed to terminate the motion at ECF Nos. 45 and 51. The parties shall appear before the Court for a pretrial conference on October 15, 2018, at 11:00 a.m. The parties are also directed to meet and confer and submit a proposed scheduling Order to the Court not later than one week before the conference. (Pretrial Conference set for 10/15/2018 at 11:00 AM before Judge Katherine B. Forrest.) (Signed by Judge Katherine B. Forrest on 8/15/2018) (jwh)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
DAVID TOWNSLEY,
:
:
:
Plaintiffs,
:
-v:
:
AIRXCEL, INC.,
:
:
:
Defendant.
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: August 15, 2018

18-cv-1439 (KBF)
OPINION & ORDER

KATHERINE B. FORREST, District Judge:
On September 1, 2016, Airxcel, Inc., the defendant herein, purchased
Townsley Industries, Inc. (d/b/a MCD Innovations (“MCD”)). The Stock Purchase
Agreement (“SPA”) was executed by MCD’s President, founder and plaintiff herein,
David Townsley. The SPA provided for an immediate payment of $16 million and a
potential maximum future payment (the “Earn-Out Payment”) of up to $5.6 million
based on achieving Adjusted EBITDA targets. At the close of the earn-out period,
MCD had failed to reach a target requiring any Earn-Out Payment. This litigation
followed.
On February 16, 2018, Townsley commenced this action, asserting several
claims. Two amendments to the initial complaint followed. The Second Amended
Complaint (‘SAC”), filed on April 18, 2018, is the operative pleading. It asserts
claims for fraudulent inducement (Count I), breach of contract (Count II), and
violation of the Texas Securities Act (Count III). On May 9, 2018, defendant moved

to dismiss the SAC in its entirety. Because defendant appended certain documents
extraneous to its motion, on May 18, 2018, the Court converted the motion to one
for summary judgment and provided each side an opportunity to submit additional
arguments or materials. Accordingly, the Court reviews the pending motion
pursuant to Rule 56 of the Federal Rules of Civil Procedure.
The resolution of plaintiff’s fraudulent inducement claim is straightforward:
it is precluded by the four corners of the SPA, including a Non-Reliance agreement
in section 4.31 and a merger integration clause in section 8.5. Plaintiff’s Texas
Securities Act claim is likewise precluded by a New York choice of law clause in
section 8.6 of the SPA. Defendant’s motion is therefore GRANTED as to these
claims.
The analysis of plaintiff’s breach of contract claim, however, is more complex.
The core assertion is that defendant breached its contractual obligations under the
SPA by failing to take actions, or taking actions, that resulted in MCD missing the
Adjusted EBITDA targets that would have triggered an Earn-Out Payment. After
carefully considering plaintiff’s allegations, the Court holds that plaintiff’s claim as
to subparagraphs (d)(i)-(ii) of section 1.5 must be dismissed because plaintiff’s
assertions do not fall within the very narrow set of actions that those
subparagraphs prohibit. Defendant’s motion is therefore GRANTED as to the
portion of plaintiff’s breach of contract claim concerning those provisions.
However, the Court concludes that there is a triable issue of fact as to
whether defendant acted with the intent and effect of avoiding or reducing the

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Earn-Out payment in violation of subparagraph (d)(iii) of section 1.5. And as a
result, plaintiff’s additional claim for breach of the SPA’s indemnification provision
in subsection 7.2(b), which requires indemnification for any loss resulting from a
breach of the SPA, must also go forward. Thus, defendant’s motion is DENIED as
to plaintiff’s claim for breach of SPA subparagraph (d)(iii) of section 1.5 and
subsection 7.2(b).
I.

FACTS PERTINENT TO THE MOTION 1
In opposition to this motion, plaintiff recites a number of facts drawn from

the SAC regarding the history of negotiations between the parties. These facts are
frankly irrelevant to the resolution of this motion. Instead, the Court focuses on the
pertinent facts.
Airxcel is in the business of providing services and products to companies in
the recreational vehicle (‘RV”) industry. It owns and operates several subsidiaries,
including MCD. MCD specializes in manufacturing and selling window shades to
dealers, retailers and original equipment manufacturers in the RV industry.
In 2016, Airxcel began negotiations with MCD; these negotiations eventually
led to the SPA, dated as of September 1, 2016. During the negotiations, one point of
disagreement concerned the purchase price: MCD sought $20 million, and Airxcel
wanted to pay four million less, or $16 million. The Earn-Out Payment was agreed
upon as a way of closing this gap. As set forth in the language of the provision
quoted below, on the one hand Airxcel agreed to make an additional payment of up

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The following facts are undisputed unless otherwise noted.

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to $5.6 million to Townsley only if certain Adjusted EBITDA targets were met, on
the other hand, Townsley explicitly conceded that no payment was guaranteed.
Notably, the SPA did not contain any commitments or agreements of any kind by
Airxcel to operate the MCD in any particular manner, including with regard to the
number or identity of sales personnel.
One month following its acquisition of MCD, Airxcel announced a second
acquisition – this time of a company called “Dicor” along with is affiliates, including
one that competed directly with MCD, “United Shade.” No provision of the SPA
prohibited such a transaction and indeed, certain provisions (including Annex 2 and
subsection 1.5(d)) anticipate that one is possible.
Following the closing, Airxcel took over the operations of MCD. Over the
course of 2016, MCD’s revenues were lower than what Airxcel had anticipated or
plaintiff Townsley hoped. As of year-end 2017, MCD had failed to achieve the
Adjusted EBITDA targets to trigger any Earn-Out Payment.
Section 1.5 of the SPA sets forth the terms of the Earn-Out Payment.
Notably, in subparagraph (d), Airxcel (the “Purchaser”) agreed:
[not to] (i) take any action, or cause any action to be taken, the purpose of
which is to shift any Company-related revenues or expenses to or from an
Affiliate of the Company…(ii) allocate any corporate overhead expenses of
Purchaser or any Affiliate of Purchaser to the Company…(iii) take any
actions in bad faith, in the case of clauses (i), (ii) and (iii) with the intent
and effect of avoiding or reducing the Earn-Out Payment, if any,

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hereunder by such actions. David Townsley acknowledges that there is no
guarantee that he shall receive any Earn-Out Payment hereunder…
(ECF No. 47-1, § 1.5(d).)
The Selling Shareholders, which included Townsley, provided a series of
representations and warranties to defendant Airxcel. Among them are the
following:
4.31 Non-Reliance. The Selling Shareholders (a) have not relied upon the
accuracy or completeness of any express or implied representation,
statement or information of any nature made or provided by or on behalf
of Purchaser, except for the representations and warranties of Purchaser
expressly set forth in Article V, and (b) waives any right the Selling
Shareholders may have against any Purchaser Indemnified Party [which
includes the defendant Airxcel] with respect to any inaccuracy in any such
representation, statement or information or with respect to any
omission…of any potentially material information; provided, that this
Section 4.31 shall not apply to any claims for fraud or intentional breach
or any rights of the Selling Shareholder Indemnified Parties pursuant to
Article VII.
(Id., § 4.31.)
The SPA also contains a standard merger integration clause:
8.5 Entire Agreement; Amendments and Waivers. This Agreement
(including the Disclosure Schedules Exhibits and Annexes hereto) and the
other Selling Shareholder Documents, Company Documents and
Purchaser Documents represent the entire understanding and agreement
between the Parties with respect to the subject matter hereof and can be

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amended, supplemented or changed, and any provision can be waived,
only by written instrument…
(Id., § 8.5.) Section 8.6 contains a New York choice of law provision. Subparagraph
9.3(a)(viii) provides that the parties have “participated jointly in the negotiation and
drafting of the [SPA].”
II.

PLAINTIFF’S CLAIMS
According to plaintiff, prior to plaintiff Townsley’s execution of the SPA,

Airxcel made numerous promises regarding how it would operate the business that
it failed to keep. For example, plaintiff asserts that he was told that Airxcel
intended to hire a new full-time salesperson and would devote its salesforce to
selling MCD’s products, that it would supply engineering assistance to enable MCD
to launch new products, that it would allow MCD to take advantage of is freight and
shipping network, and that it would expand MCD’s product lines and commercial
and distributor markets. The bulk of the factual allegations in the SAC are directed
at the communications in which Airxcel made these purported promises. Plaintiff
asserts that at no time was he told that Airxcel intended to acquire Dicor, a
competitor of MCD. The remaining allegations concern plaintiff Townsley’s
numerous communications with Airxcel following the closing of the stock purchase
transaction, complaining that MCD was not being operated in a manner that would

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maximize the opportunity for MCD to meet the targets triggering the Earn-Out
Payment.
III.

LEGAL PRINCIPLES
A.

Standard of Review

“The court shall grant summary judgment if 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 moving party bears the initial
burden of demonstrating “the absence of a genuine issue of material fact.” Celotex
Corp. v. Catrett, 477 U.S. 317, 323 (1986). When the moving party does not bear
the ultimate burden on a particular claim or issue, it need only make a showing
that the non-moving party lacks evidence from which a reasonable jury could find in
the non-moving party’s favor at trial. Id. at 322-23.
In making a determination on summary judgment, a court must “construe all
evidence in the light most favorable to the nonmoving party, drawing all inferences
and resolving all ambiguities in its favor.” Dickerson v. Napolitano, 604 F.3d 732,
740 (2d Cir. 2010). Once the moving party has discharged its burden, the opposing
party must set out specific facts showing a genuine issue of material fact for trial.
Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009). “[A] party may not rely on mere
speculation or conjecture as to the true nature of the facts to overcome a motion for
summary judgment,” as “[m]ere conclusory allegations or denials cannot by
themselves create a genuine issue of material fact where none would otherwise

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exist.” Hicks v. Baines, 593 F.3d 159, 166 (2d Cir. 2010) (internal citations
omitted).
B.

Breach of Contract

To succeed on a claim for breach of contract, a plaintiff must demonstrate “(1)
the existence of an agreement, (2) adequate performance of the contract by the
plaintiff, (3) breach of contract by the defendant, and (4) damages.” Eternity Glob.
Master Fund Ltd. v. Morgan Guar. Tr. Co., 375 F.3d 168, 177 (2d Cir. 2004)
(quoting Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996)). “Summary
judgment is generally proper in a contract dispute only if the language of the
contract is wholly unambiguous.” Compagnie Financiere de CIC et de L'Union
Europeenne v. Merrill Lynch, Pierce, Fenner & Smith Inc., 232 F.3d 153, 157 (2d
Cir. 2000).
Under New York law, “when the terms of a written contract are clear and
unambiguous, the intent of the parties must be found within the four corners of the
contract.” In re Matco-Norca, Inc., 22 A.D.3d 495, 496 (N.Y App. Div. 2005)
(citations omitted). “Further, a court may not write into a contract conditions the
parties did not insert by adding or excising terms under the guise of construction,
nor may it construe the language in such a way as would distort the contract's
apparent meaning.” Id. (citations omitted).
C.

Fraudulent Inducement

A claim of fraudulent inducement under New York law requires plaintiffs to
allege: “‘(1) that the defendant made a representation, (2) as to a material fact, (3)

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which was false, (4) and known to be false by the defendant, (5) that the
representation was made for the purpose of inducing the other party to rely upon it,
(6) that the other party rightfully did so rely, (7) in ignorance of its falsity (8) to his
injury.’” Eaves v. Designs for Fin., Inc., 785 F. Supp. 2d 229, 246 (S.D.N.Y. 2011)
(quoting Computerized Radiological Servs. v. Syntex Corp., 786 F.2d 72, 76 (2d Cir.
1986)). A plaintiff asserting fraudulent inducement must also satisfy the
“heightened pleading standards of Federal Rule of Civil Procedure 9(b), which
provides that ‘[i]n alleging fraud or mistake, a party must state with particularity
the circumstances constituting fraud or mistake.’” Id. at 246-47 (quoting Fed. R.
Civ. P. 9(b)).
“It is black letter law in New York that a claim for common law fraud will not
lie if the claim is duplicative of a claim for breach of contract.” EQT Infrastructure
Ltd. v. Smith, 861 F. Supp. 2d 220, 233 (S.D.N.Y. 2012) (citations omitted); see also
Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13, 20 (2d
Cir.1996) (requiring that a fraud claim raised in a case stemming from a breach of
contract be “sufficiently distinct from the breach of contract claim”) (citation
omitted).
In Bridgestone/Firestone, the Second Circuit identified three situations in
which a plaintiff may bring a fraud action after a defendant makes “intentionallyfalse statements . . . indicating [an] intent to perform under the contract.” 98 F.3d
at 19-20. A “plaintiff must either: (i) demonstrate a legal duty separate from the
duty to perform under the contract; or (ii) demonstrate a fraudulent

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misrepresentation collateral or extraneous to the contract; or (iii) seek special
damages that are caused by the misrepresentation and unrecoverable as contract
damages.” Id. (internal citations omitted).
With respect to collateral or extraneous fraudulent misrepresentations, “New
York distinguishes between a promissory statement of what will be done in the
future that gives rise only to a breach of contract cause of action and a
misrepresentation of a present fact that gives rise to a separate cause of action for
fraudulent inducement.” Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d
171, 184 (2d Cir. 2007) (citations omitted); Crabtree v. Tristar Auto. Grp., Inc., 776
F. Supp. 155, 163 (S.D.N.Y. 1991) (explaining that generally, a “representation that
performance will be made, even if only implied through the negotiation process, is
not distinct from the contract,” but that there is an exception “if the promise made
was a representation of present fact, not future intent”) (citations omitted).
Put another way, “[a] plaintiff sufficiently states a claim upon which relief
may be granted only when it alleges fraud that is extraneous to the contract, rather
than merely fraudulent non-performance of the contract itself.” Todi Exports v.
Amrav Sportswear, Inc., No. 95 Civ. 6701, 1997 WL 61063, at *2 (S.D.N.Y. Feb.13,
1997) (citation omitted). “Where courts have found viable fraud claims based on
fraudulent misrepresentation, the statements concerned matters separate and
distinct from the subject matter of the contract.” MCI World Commc’ns, Inc. v.
North Am. Commc’ns Control, Inc., No. 98 Civ. 6818, 2003 WL 21279446, at *9
(S.D.N.Y. June 4, 2003) (discussing various cases and dismissing plaintiff’s

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fraudulent misrepresentation claim because “[t]he misrepresentations . . . are
closely related to the subject matter of the contract and concern representations of
future intent, not a separate, present fact”).
IV.

LEGAL PRINCIPLES
Only plaintiff’s breach of contract claim (and only a portion thereof) survives

scrutiny. As to his fraudulent inducement and Texas Securities Act claims, the
terms of the SPA are so clear that while plaintiff Townsley may be disappointed, he
never had a basis for bringing these claims.
A.

The Contract Claim

Plaintiff asserts that defendant breached the Earn-Out provision (contained
in section 1.5) and the indemnification provision (contained in subparagraph
7.2(b)(ii)). With regard to the former, plaintiff asserts that defendant improperly
“shifted” revenue and expenses and took actions in bad faith in order to avoid
triggering the Earn-Out Payment.
As an initial matter, the terms of section 1.5 relating to the Earn-Out
Payment are clear and unambiguous. The “shift[ing]” of revenues or expenses to
which subparagraph (d)(i) refers prohibits shifting MCD revenues or expenses to or
from an affiliate company, and also prohibits the shifting of MCD revenues or
expenses from one time period into another. Subparagraph (ii) refers to
gamesmanship with regard to overhead expense allocation. And finally,
subparagraph (iii) concerns any such actions prohibited by the prior subparagraphs

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or generally, taken in bad faith and “with the intent and effect” of avoiding or
reducing the Earn-Out Payment.
As set forth in paragraph 80 of the SAC, plaintiff’s factual assertions
supporting breaches of subparagraphs 1.5(d)(i) and (ii) concern Airxcel’s (1)
acquisition of MCD’s competitor, United Shade, (2) terminating MCD’s
commissioned sales force, (3) requiring MCD to disclose to its affiliate, United
Shade, certain proprietary information, (4) failing to provide MCD with appropriate
engineering support, and (5) requiring MCD’s sole remaining salesperson to
perform marketing work for United Shade. As to the first four, it is plain that none
of these factual allegations concerns a “shift” in actual MCD revenue or expenses
between MCD and an affiliate or from one time period to another, as contemplated
by (i); it is also plain that none concerns allocation of overhead expenses. As to the
fifth, even if the Court were to decide that this conduct shifted an expense from
United to MCD, plaintiff has not alleged (nor could he) that this shift was alone
responsible for MCD’s failure to meet the Earn-Out target.
The sole remaining question is whether there is a sufficient, non-conclusory
basis in the SAC to suggest that defendants took actions in bad faith with the intent
and effect of avoiding or reducing the Earn-Out. This is a more complicated
question.
Notably, subparagraph (iii) is broader than subparagraphs (i) and (ii). It
prohibits defendant from taking any actions – whether it be the revenue shifting in
(i) or the expense allocation in (ii), or otherwise – with the intent and effect of

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avoiding or reducing the Earn-Out. Defendant asserts that this subparagraph is
limited to the actions described in (i) or (ii), but that is incorrect. The provision is
written broadly to both enumerate specific actions in those subparagraphs, but to
include “any actions” taken in bad faith. This expansive language allows the claim
to survive.
There is a triable issue of fact that this Court cannot resolve at this stage, as
to whether the actions about which plaintiff complains, both in his pleading as well
as in his declaration (ECF No. 57), were taken with the intent and effect to impact
the Earn-Out Payment. Defendant argues that in all events, none of the alleged
actions could have had the effect of avoiding or reducing the Payment. As support,
it proffers the revenues obtained from all sales – whether the sales of United Shade
or MCD – eliminate a triable issue. If this argument were being made at the
conclusion of full discovery, the Court would agree with defendant. But it is not.
This is an early motion for summary judgment, one that can narrow the case, but
not eliminate it. Plaintiff’s argument that he requires discovery in order to
investigate these facts carries the day. It may well be that an investigation into
defendant’s financials will put this issue to rest. If so, the Court is confident that
defendant will renew this argument at the appropriate time.
Finally, the outcome of plaintiff’s indemnification claims follows the Court’s
rulings above. Subsection 7.2(b) provides that as “Purchaser”, the defendant agrees
to indemnify plaintiff as one of the “Selling Shareholders” against losses “based
upon, attributable to or resulting from” (ii) the “breach of any covenant or other

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agreement on the part of Purchaser under this Agreement.” This language sweeps
in the commitments in Section 1.5. Accordingly, to the extent that plaintiff is able
to pursue his claim as to subparagraph 1.5(d)(iii), he has a potential claim under
subsection 7.2(b) for any interest and attorneys’ fees as well.
B.

Fraudulent Inducement

In contrast to the two portions of his contract claim that remains live,
plaintiff’s fraudulent inducement claim fails entirely. The SAC and record on this
motion recite the very same conduct in support of plaintiff’s contract and fraudulent
inducement claim. In sum, that before the deal was inked, defendant promised
that it would run MCD’s operations in a particular manner: that it would hire new
sales people, not lay certain of them off, supply engineering assistance to expand
the product line and allow MCD to use a discounted freight network. None of these
promises were included in any of the reps and warranties to which the parties
agreed. There are several reasons why this conduct cannot form the basis of a
fraudulent inducement claim.
As a factual matter, when the parties executed the SPA, they chose to include
several provisions designed to eliminate later asserted reliance on extra-contractual
promises. In this regard, they included a “Non-Reliance” section in which the
Selling Shareholders, including plaintiff, have “not relied upon the accuracy or
completeness of any express or implied representation, statement or information of
any nature, made or provided by or on behalf of Purchaser,” except for those
included in Article V of the SPA. (§ 4.31.) While it is true that that provision

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continues and does not apply to claims of fraud or intentional breach of contract, it
is plain that the intention of this provision is to limit the effect of pre-closing
statements to the specific reps and warranties included in the SPA. Finally, the
parties agreed to include a broad merger integration provision. In section 8.5,
plaintiff agreed that the SPA represented the entire agreement between the Parties
with respect to the subject matter thereof. (ECF No. 47-1, § 8.5.)
This factual record is supplemented by a legal recognition that a plaintiff
fails to state a claim when its allegations of fraud are no more than “merely
fraudulent non-performance of the contract itself.” Todi Exports, No. 95 Civ. 6701,
1997 WL 61063, at *2. “Where courts have found viable fraud claims based on
fraudulent misrepresentation, the statements concerned matters separate and
distinct from the subject matter of the contract.” MCI World Commc’ns, Inc., No. 98
Civ. 6818, 2003 WL 21279446, at *9 (discussing various cases and dismissing
plaintiff’s fraudulent misrepresentation claim because “[t]he misrepresentations . . .
are closely related to the subject matter of the contract and concern representations
of future intent, not a separate, present fact”). Thus, plaintiff’s reliance on alleged
pre-execution promises as the basis for his fraud claim cannot withstand scrutiny.
Defendant argues that the same contractual provisions that preclude the
fraud claim also preclude the contract claim. This is incorrect. The particular
language in subsection 1.5(d) allows for a contract claim where, as alleged here,
certain post-execution conduct is taken with the intent and effect of avoiding or
reducing the Earn-Out Payment. The inclusion of this language thus allows

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plaintiff to assert that post-closing conduct (such as the elimination of sales
positions, failure to provide engineering support and the like), were undertaken
with such purpose in mind, and had the negative effect that is contractually
prohibited. Thus, the breach of contract claim in this regard proceeds because of
different contractual language than that precluding the fraud claim.
C.

The Texas Securities Act

In light of the New York choice of law provision, plaintiff’s claim under the
Texas Securities Act (“TSA”) fails. As part of the SPA, the parties agreed that the
subject matter of the contract would be governed by New York law. The TSA is a
claim brought under Texas law; New York law does not include the TSA.
However, this claim also fails for the same reason the fraud claim fails: it is
precluded by various contractual provisions. The TSA claim is based on an alleged
failure by defendant to keep certain promises made prior to signing the SPA. But
section 4.31 contains an explicit disclaimer of reliance on such promises and the
merger integration clause in section 8.5 similarly prevents general use of extracontractual promises to support a claim.
V.

PLAINTIFF’S MOTION PURSUANT TO RULE 56(d)
In opposition to this motion, plaintiff has brought a motion pursuant to

Federal Rule of Civil Procedure 56(d) for discovery. That motion is denied with
regard to both the fraud claim and the TSA claim. Discovery will not cure the
issues upon which this Court’s decision to dismiss those claims relies. Similarly, as

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the subparagraphs 1.5(d)(i) and (ii) claims are almost entirely based on a
misreading of the contract, discovery will not assist with regard to them.
VI.

CONCLUSION
For the reasons set forth above, defendant’s motion is GRANTED in part and

DENIED in part. The only claims that survive are the breach of subparagraph
1.5(d)(iii) and the related indemnification claim under subsection 7.2(b).
The Clerk of Court is directed to terminate the motion at ECF Nos. 45 and
51. The parties shall appear before the Court for a pretrial conference on October
15, 2018, at 11:00 a.m. The parties are also directed to meet and confer and submit
a proposed scheduling Order to the Court not later than one week before the
conference.
SO ORDERED.
Dated:

New York, New York
August 15, 2018
____________________________________
KATHERINE B. FORREST
United States District Judge

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