Baker v. Goldman Sachs & Co.

• Court: U.S. District Court — District of Massachusetts
• Writing for the Court: Patti B. Saris
• Decision Date: 31 October 2012
• Docket Number: Civil Action No. 09-10053-PBS,Civil Action No. 10-10932-PBS
• Citation: Baker v. Goldman Sachs & Co., Civil Action No. 09-10053-PBS, Civil Action No. 10-10932-PBS (D. Mass. Oct 31, 2012)
• Parties: JANET BAKER AND JAMES BAKER, Plaintiffs v. GOLDMAN SACHS & CO., et al., Defendants. ROBERT ROTH and PAUL G. BAMBERG, Plaintiffs v. GOLDMAN SACHS & CO., Defendant and Third-Party Plaintiff, v. JANET BAKER AND JAMES BAKER, Third-Party Defendants.

JANET BAKER AND JAMES BAKER, Plaintiffs

v.GOLDMAN SACHS & CO., et al., Defendants.

ROBERT ROTH and PAUL G. BAMBERG, Plaintiffs

v.GOLDMAN SACHS & CO., Defendant and Third-Party Plaintiff,

v.JANET BAKER AND JAMES BAKER, Third-Party Defendants.

Civil Action No. 09-10053-PBS

Civil Action No. 10-10932-PBS

UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

October 31, 2012

MEMORANDUM AND ORDER

SARIS, U.S.D.J.

After hearing and review of the record, the Court rules on the motions as follows:

1. Defendant Goldman Sachs & Co.'s ("Goldman") motion for summary judgment on the Baker plaintiffs' claims (Doc. No. 178, 09-cv-10053) is DENIED. Janet Baker asserts that she is a third-party beneficiary of the Engagement Agreement between Dragon and Goldman, and brings claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The Court denied Goldman's motion to dismiss raising this issue in Baker v. Goldman Sachs & Co., 656 F. Supp. 2d 226, 234-36 (D. Mass. 2009), with which the Court assumes familiarity.

Now, after discovery, Goldman presses the Court to take a new look based on the evidentiary record, arguing that no genuine dispute of material fact exists that Janet Baker was not an intended beneficiary of the Engagement Agreement. Among other things, Goldman points to testimony by the Bakers' counsel that when Janet Baker rejected the provision that the shareholders guarantee the payment of Goldman's fees, the Engagement Agreement was amended to strike the language in the initial draft that the engagement was for the information of the shareholders (among others). In its briefs, Goldman also argues that in the Engagement Agreement, the parties agreed that the shareholders would not hold Goldman liable and therefore insisted on the exculpation language in the fifth sentence of Annex A.

While there is evidence which supports defendant's position that Goldman did not intend to benefit shareholders, the plaintiff, Janet Baker, highlights evidence that she was personally addressed in the agreement and that the Goldman analysts considered her to be their client and knew that she waspersonally relying on their advice. Janet Baker also point out that earlier in the litigation, Goldman stipulated that the fifth sentence of Annex A, which provides the exculpation language¹ limiting its liability to her, applies only to derivative claims, not the direct claims presented here. See Transcript of Oral Argument at 17 (June 9, 2009)(No. 09-cv-10053). In light of the language and circumstances of the contract, the Court concludes there is a disputed question of fact as to whether defendant intended to give Janet Baker the benefit of the contract.

Goldman also asks the Court to revisit the viability of the Bakers' tort claims. In its earlier ruling, the Court determined that the plaintiffs brought direct tort claims under establishedMassachusetts law against Goldman. See generally Nycal Corp. v. KPMG Peat Marwick LLP, 426 Mass. 491, 493 (1998); Former Shareholders of Victory Distributors, Inc. v. Deloitte & Touche, LLP, No. 07-5122-BSL1 (Mass. Super. Ct. July 1, 2008). Because the claims are not shareholder derivative claims, the fifth sentence of Annex A does not apply.

To support its position that the claims are really derivative in nature, Goldman places heavy reliance on Massey v. Merrill Lynch & Co., 464 F.3d 642 (7th Cir. 2006), which does have similar facts. In Massey, the Seventh Circuit dismissed plaintiff shareholders' claims because they were "solely derivative claims." Id. at 643. The claims were based on diminution in stock values caused by defendant Merrill Lynch's fraudulent statements in a "fairness opinion" to a corporate board that led to the disastrous purchase of another corporation, and resulted in a plunge in stock price and bankruptcy. Id. at 644. Although holding that the claims of fraud in the fairness opinion could only be brought on behalf of the corporation under Indiana law, the Court acknowledged that a plaintiff shareholder could maintain a direct action where there is "a breach of a duty owed specially to the stockholder separate and distinct from the duty owed to the corporation." Id. at 648 (citing Sacks v. American Fletcher Nat'l Bank & Trust Co., 279 N.E.2d 807, 811 (Ind. 1972))(internal quotations omitted). This holding isconsistent with the line drawn in established caselaw. See generally 12B Fletcher Cyclopedia of the Law of Corporations, § 5921 (rev. perm. ed. 1984)("A shareholder may sue as an individual where the act complained of . . . creates a cause of action in favor of the shareholder as an individual, such as where the act is in violation of duties arising from contract or otherwise, and owed to the shareholder directly.").

Massey is distinguishable on the facts. The Seventh Circuit highlighted that the opinion letter expressly stated that there was no recommendation to any stockholder as to how a shareholder should vote on the proposed merger, and the plaintiffs in Massey made no allegations that "Merrill Lynch made any misrepresentations to them as individual shareholders." Id. at 650. While the line between direct and derivative liability is not always clear, and helpful caselaw sparse and fact-specific, here plaintiffs have asserted that Goldman made negligent and fraudulent statements directly to them to persuade them to vote for a merger and sign the merger agreement in exchange for a hefty fee. Significantly, Massey did not involve a merger situation where the harmed corporation ceased to exist after the merger to vindicate corporate rights. At oral argument, Goldman took the position that Lernout & Hauspie, the corporation which Dragon merged into, is the only entity that could have pursued any remedy against Goldman. However, Lernout & Hauspie is thecorporation that participated in the fraudulent conduct. In related litigation, the First Circuit held that a bankruptcy trustee of a subsidiary of Lernout & Hauspie would not have his own cause of action. See Nisselson v. Lernout, 469 F.3d 143, 158 (1st Cir. 2006) (holding in pari delicto defense barred lawsuit because subsidiary "shares the culpability of the fraud's progenitor").

Goldman proclaims vehemently and vigorously that holding it liable to shareholders for negligent or fraudulent misrepresentations made directly to them which induced a vote to merge would violate "basic principles of corporate law." However, even if the harm caused is deemed to be a corporate injury, "the rule that a shareholder cannot sue in his own name for an injury sustained by the corporation is not ironclad." Pagan v. Calderon, 448 F.3d 16, 28 (1st Cir. 2006). There may be an exception that shareholders may bring a direct lawsuit "if it is absolutely inconceivable that the corporation itself would pursue a claim for the misconduct." Id. Here, such an exception surely applies as a contrary ruling would mean Goldman would be immune from tort liability because no corporation could pursue the claim.

Next Goldman parries with the doctrine of judicial estoppel. While previous testimony appears to create some inconsistencies with certain statements made by the Bakers in this lawsuit, thestatements do not "contradict[] clear answers to unambiguous questions in an earlier deposition" and cannot serve as a basis for dismissing the Bakers' claims. Gillen v. Fallon Ambulance Serv., 283 F.3d 11, 26 (1st Cir. 2002); see also Pyramid Secur., Ltd. v. IB Resolution, Inc., 924 F.2d 1114, 1123 (D.C. Cir. 1991) (stating that the "no contradiction" rule is less likely to apply where the previous testimony took the form of a deposition rather than an affidavit because a "deponent may have been confused about what was being asked or have lacked immediate access to material documents"). For example, Goldman claims that Janet Baker previously testified in 2004 that Goldman's role did not include performing in-depth financial due diligence on Lernout & Hauspie for Dragon. See Doc. 180 ¶ 15. However, while she may have downplayed Goldman's role in her previous testimony, she did generally state that the Bakers wanted Goldman to "help us do whatever due diligence needed to be done . . ." Doc. 210 ¶ 15.

2. Defendant Goldman's motion for summary judgment on the Roth plaintiffs' claims (Doc. No. 133, 10-cv-10932) is DENIED. Genuine disputes of material fact exist with respect to when the statute of limitations...