Capax Discovery, Inc. v. AEP RSD Investors, LLC

• Decision Date: 19 January 2018
• Docket Number: Case No. 1:17–cv–00500
• Parties: CAPAX DISCOVERY, INC., Walker Global Solutions Naples, Inc., John Baiocco, Wynn Holdings, LLC, Thomson Federal Solutions, LLC, Plaintiffs, v. AEP RSD INVESTORS, LLC, Zovy Management LLC, Zovy Incentive LLC, Alta Equity Partners I Managers, LLC, Jessica Reed, Timothy Dibble, Timothy Alexson, Grace Connelly, Defendants.
• Court: U.S. District Court — Western District of New York

285 F.Supp.3d 579

CAPAX DISCOVERY, INC., Walker Global Solutions Naples, Inc., John Baiocco, Wynn Holdings, LLC, Thomson Federal Solutions, LLC, Plaintiffs,

v.AEP RSD INVESTORS, LLC, Zovy Management LLC, Zovy Incentive LLC, Alta Equity Partners I Managers, LLC, Jessica Reed, Timothy Dibble, Timothy Alexson, Grace Connelly, Defendants.

Case No. 1:17–cv–00500

United States District Court, W.D. New York.

Signed January 19, 2018

Benjamin D. Burge, David Ross Pfalzgraf, Jr., Rupp, Baase, Pfalzgraf, Cunningham & Coppola LLC, Buffalo, NY, for Plaintiffs.

Joseph L. Clasen, Sandra Marin Lautier, Robinson & Cole LLP, New York, NY, Patrick W. Begos, Robinson & Cole LLP, Stamford, CT, for Defendants.

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS, STRIKE, AND COMPEL ARBITRATION

(Doc. 9)

Christina Reiss, District Judge

On May 11, 2017, Plaintiffs Capax Discovery, Inc. ("Capax"), Walker Global Solutions Naples, Inc., John Baiocco, Wynn Holdings, LLC, and Thomson Federal Solutions, LLC brought this New York Supreme Court suit in Erie County, alleging fraudulent inducement, negligent misrepresentation, and breach of contract claims arising out of the sale of Zovy, LLC ("Zovy"). On June 5, 2017, Defendants AEP RSD Investors, LLC ("AEP RSD"), Zovy Management LLC ("Zovy Management"), Zovy Incentive LLC ("Zovy Incentive"), Alta Equity Partners I Managers, LLC ("Alta"), Timothy Dibble, Jessica Reed, Timothy Alexson, and Grace Connelly removed the case to this court on the basis of diversity jurisdiction, 28 U.S.C. § 1332.

Pending before the court is Defendants' motion to dismiss for failure to state a claim upon which relief may be granted and failure to plead fraud with specificity. Defendants have also moved to strike Plaintiffs' prayers for equitable relief, lost profits, compensatory damages, punitive damages, disgorgement, and attorney's fees. Finally, Defendants request an order compelling Plaintiffs to submit their breach of contract claim to arbitration pursuant to provisions in the Zovy Purchase Agreement ("the Agreement"). After oral argument on September 26, 2017, the court took the pending motion under advisement.

Plaintiffs are represented by Benjamin D. Burge, Esq. and David Ross Pfalzgraf, Jr., Esq. Defendants are represented by Joseph L. Clasen, Esq., Sandra Marin Lautier, Esq., and Patrick W. Begos, Esq.

I. The Complaint's Allegations.

The following facts are derived from allegations in the Complaint and the Agreement between Zovy's sellers and buyers which the parties agree is integral to the Complaint.¹ Plaintiff Capax is a Florida corporation with its principal place of business in New York. Plaintiff Walker Global Solutions Naples, Inc. is a Florida corporation. Plaintiff Wynn Holdings, LLC is a limited liability company organized under the laws of New Jersey. Plaintiff Thomson Federal Solutions, LLC is a limited liability company organized under the laws of Florida.

Defendants AEP RSD, Zovy Management, Zovy Incentive, and Alta are each limited liability companies organized under the laws of Delaware with principal places of business in Massachusetts. Individual Defendants Dibble, Reed, Alexson, and Connelly are natural persons domiciled in Massachusetts.

On September 23, 2016, Defendants sold data archiving company Zovy to Capax pursuant to the Agreement. Prior to the sale, Zovy and Capax each marketed email and data archiving software, which allowed end users to easily store and retrieve email and other electronic data in large volumes. Both companies relied on the same third-party software, Autonomy Consolidated Archive ("ACA"), to create their archiving solutions. Ultimately, Capax acquired the exclusive rights to ACA and thus possessed the option of declining to extend Zovy's license to use that software. Faced with the prospect of losing its ACA license, Zovy engaged Capax regarding a possible sale. Capax alleges that its sole interests in Zovy were two of its "marquee clients[,]" the United States Veterans Affairs Administration ("VA") and Chicago Bridge & Industry ("CB & I"). (Doc. 1–2 at 15, ¶ 31.) In light of Capax's allegedly strong bargaining position, Zovy agreed to a purchase price of one dollar, coupled with an earn-out provision that granted Defendants 50% of "monies generated" by Zovy's VA contract for five years after the deal closed. (Doc. 1–1 at 16–17, ¶ 29.)

In furtherance of the sale, Plaintiffs allege that Defendants engaged in fraudulent accounting practices that violated Generally Accepted Accounting Principles ("GAAP") in order to inflate Zovy's value and induce Capax to consummate its purchase. Specifically, Plaintiffs claim that Defendants misstated the value of Zovy's VA contract; represented the CB & I contract as an asset when in fact it was a liability; generated invoices that were never sent for payment to create the impression of on-going business; generated invoices for accounts receivable that had previously been written off; and falsely claimed intangible intellectual property assets of $500,000 in software that it did not own. Plaintiffs allege that these and other alleged acts and omissions violated the representations and warranties in § 5 of the Agreement. Plaintiffs assert that they discovered Defendants' alleged malfeasance only while examining Zovy's business records after the closing.

Plaintiffs subsequently forwarded a "Book Value Certificate" to Defendants, setting forth the alleged discrepancies and noting the corrections that were allegedly necessary to accurately reflect Zovy's financials. Plaintiffs allege that Defendant Reed, as the member representative of AEP ASD, returned a statement of objections to the Book Value Certificate that disputed Capax's proposed corrections. Thereafter, Defendants allegedly failed to provide justification for their objection to Capax's revised valuation.

In their Complaint, Plaintiffs allege the following causes of action: Count I: fraudulent inducement seeking equitable relief in the form of rescission of the Agreement based on misrepresentations of material fact leading up to Zovy's sale; Count II: fraudulent inducement seeking money damages anticipated to exceed $10 million based on the same misrepresentations of material fact set forth in Count I; Count III: negligent misrepresentation based on the same false statements alleged in Counts I and II; and Count IV: breach of contract based on alleged violations of the representations and warranties contained in the Agreement.

Defendants seek dismissal of Counts I, II, and III, arguing that those allegations are duplicative of Plaintiffs' breach of contract claim. In the alternative, they contend these claims fail to plead fraud with the particularity required by Fed. R. Civ. P. 9(b). Defendants seek dismissal of Plaintiffs' breach of contract claim, asserting that the Agreement requires that claim to be submitted to arbitration.

II. Conclusions of Law and Analysis.

A. Standard of Review.

To survive a motion to dismiss for failure to state a claim under Fed. R. Civ. P. 12(b)(6), Plaintiffs' Complaint "must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Elias v. Rolling Stone LLC , 872 F.3d 97, 104 (2d Cir. 2017) (quoting Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ). The sufficiency of a plaintiff's complaint under Fed. R. Civ. P. 12 is evaluated using a "two-pronged approach[.]" Hayden v. Paterson , 594 F.3d 150, 161 (2d Cir. 2010) (quoting Iqbal , 556 U.S. at 679, 129 S.Ct. 1937 ). First, the court discounts legal conclusions or "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements[.]" Iqbal , 556 U.S. at 678, 129 S.Ct. 1937. Second, the court considers whether the factual allegations, taken as true, "plausibly give rise to an entitlement to relief." Id. at 679, 129 S.Ct. 1937. This second step is fact-bound and context specific, requiring the court "to draw on its judicial experience and common sense." Id.

Because Plaintiffs' first three causes of action sound in fraud, they must plead "with particularity the circumstances" that constitute the basis for their claims. Fed. R. Civ. P. 9(b). Accepting Plaintiffs' well-plead allegations as true, United States ex rel. Chorches v. Am. Med. Response, Inc. , 865 F.3d 71, 81 (2d Cir. 2017), the court applies a four part test to determine whether Plaintiffs' fraud claims are sufficient. See United States ex rel. Ladas v. Exelis, Inc. , 824 F.3d 16, 25 (2d Cir. 2016) ; Shields v. Citytrust Bancorp, Inc. , 25 F.3d 1124, 1127–28 (2d Cir. 1994). First, the complaint must "specify the statements that the plaintiff contends were fraudulent[.]" Chorches , 865 F.3d at 81. Second, Plaintiffs must "identify the speaker[.]" Id. Third, Plaintiffs must "state where and when the statements were made[.]" Id. And fourth, Plaintiffs must "explain why the statements were fraudulent." Id.

"[A]llegations may be based on information and belief when facts are peculiarly within the opposing party's knowledge." Wexner v. First Manhattan Co. , 902 F.2d 169, 172 (2d Cir. 1990). Where this "relaxed" standard is invoked, however, the "complaint must adduce specific facts supporting a strong inference of fraud[.]" Id. If malice or some other form of mens rea is required to support a claim for fraud, those allegations "may be averred generally." Id. (internal quotation marks omitted). If mens rea is required and alleged in general terms, plaintiffs are still required to "plead the factual basis that gives rise to a strong inference of fraudulent intent." Id. (internal quotation marks omitted).

B. Whether Plaintiffs' Fraud Claims are Duplicative of Their Breach of Contract Claim.

New York law governs Plaintiffs' claims for fraudulent misrepresentation and fraudulent inducement. See Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015) (applying New York law to fraud claim...