CIH Int'l Holdings, LLC v. BT United States, LLC

• Decision Date: 28 September 2011
• Docket Number: No. 10 Civ. 7790(PAC).,10 Civ. 7790(PAC).
• Citation: 821 F.Supp.2d 604
• Parties: CIH INTERNATIONAL HOLDINGS, LLC, Plaintiff, v. BT UNITED STATES, LLC, Defendant.
• Court: U.S. District Court — Southern District of New York

821 F.Supp.2d 604

CIH INTERNATIONAL HOLDINGS, LLC, Plaintiff,

v.BT UNITED STATES, LLC, Defendant.

No. 10 Civ. 7790(PAC).

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

Sept. 28, 2011.

James M. Bergin, Geoffrey R. Sant, Morrison & Foerster LLP, New York, NY, Jeremy Ben Merkelson, John P. Corrado, Morrison & Foerster L.L.P., Washington, DC, for Plaintiff.

Gregg M. Mashberg, Samantha Springer, Proskauer Rose LLP, Kenneth Earl Aldous, Jr., Aldous, New York, NY, for Defendant.

OPINION & ORDER

Honorable PAUL A. CROTTY, District Judge.

Plaintiff CIH International Holdings, LLC (“CIH”) brings this action against Defendant BT United States, LLC (“BT”) for breach of contract and breach of the implied duty of good faith and fair dealing. CIH seeks compensatory damages and a declaration that (1) BT has materially breached two contracts; (2) due to BT's breach, CIH has no obligation to indemnify it for certain tax claims; (3) BT's breach renders its notice of these claims a nullity; and (4) any and all claims against remaining escrowed funds have expired. CIH also asks the Court to direct the parties' escrow agent to disburse the remaining escrowed funds to CIH.

BT moves to dismiss the Complaint under Fed.R.Civ.P. 12(b)(6). It argues that CIH has failed to state a claim for breach of contract because it has not pleaded that the alleged breaches caused any legally cognizable prejudice. Since the claim for breach of the implied duty is based on the same facts, BT argues, it too should be dismissed.

The motion to dismiss is GRANTED as to all four Counts in the Complaint.

I. BACKGROUND

In April 2007, BT agreed to acquire a Brazilian telecommunications company called CI Holding Corporation (“CIHC”) in exchange for a cash payment to CIHC's then-existing shareholders, warrant/option holders, and holders of claims to options (“Equityholders”). (Defendant's Memorandum of Law (“Def. Mem.”) at 4.) CIH is the duly appointed representative of the Equityholders. The parties outlined their rights and duties related to the acquisition in an agreement executed on April 19, 2007, and amended on June 14, 2007 (“Merger Agreement”). (Compl. ¶ 10.) The Merger Agreement provides, inter alia, that CIH will indemnify BT for certain tax losses, and that BT will give CIH prompt notice of any tax claims asserted against BT by the Brazilian government; keep CIH regularly informed of the status of any tax audit or proceeding; notify CIH of the amount of any claim; adequately detail the portion of any claim subject to indemnification; and provide CIH with tax returns for its approval. ( Id. ¶¶ 13, 15.) In addition to these covenants, the Merger Agreement also provides that “CIH shall be entitled to control the conduct” and settlement of any proceeding solely involving tax claims subject to indemnification. ( Id.) CIH also has the right to enter proceedings and consent to the settlement of any dispute involving a mix of claims—those for which CIH must indemnify BT and those not covered by the Merger Agreement. ( Id.)

On June 14, 2007, the transaction closed. ( Id. ¶ 10.) On that day, BT, CIH, and Deutsche Bank National Trust Company (“Deutsche Bank”) entered into an agreement for the escrow of funds withheld from the Equityholders' cash payments for BT's acquisition of CIHC (the “Escrow Agreement”; together with the Merger Agreement, the “Agreements”). ( Id. ¶ 11.) Under the Escrow Agreement, CIH agreed to place $25,759,923.02 in an account with Deutsche Bank, from which the bank would disperse indemnification funds. ( Id.) Certain members of CIH also pledged an additional $14,240,076.98 to further secure CIH's potential indemnification obligations to BT. ( Id. ¶ 12.)

The Agreements provide that on June 14, 2010 (three years after the transaction closed), any remaining balance in the escrow account shall be released to CIH, less any funds retained to cover pending claims. ( Id. ¶ 17.) Claims filed after June 14, 2010 are null and unenforceable, even if they would have been eligible for indemnification. ( Id. ¶ 17.)

On June 10, 2010, BT delivered to CIH and Deutsche Bank a notice of certain tax claims pending before the Federal District Treasury Department in São Paulo, Brazil (“BT Tax Claims”). (Def. Mem. at 6.) CIH argues that BT's notice of these tax claims was defective because it was not accompanied by the necessary information and documentation. (Compl. ¶¶ 27–28.) CIH claims this defect constitutes a breach. ( Id.)

CIH also alleges that BT breached other material terms of the Merger Agreement before giving notice on June 10, and that these breaches discharged CIH from its duties under the Merger Agreement and entitled CIH to a full payout of the remaining escrowed funds. ( Id. ¶¶ 19–24.) Specifically, CIH claims that the Brazilian government notified BT of the BT Tax Claims “more than 18 months” before BT sent the June 10 notice to CIH. ( Id. ¶ 19.) CIH alleges that it was not informed of the existence of certain claims until after BT had fully litigated them at the administrative level—when Brazilian law requires the submission of all facts, evidence, and legal arguments. ( Id.; Declaration of Tercio Chiavassa ¹ (“Chiavassa Decl.”) ¶¶ 20–21, 25–27.) According to CIH, this late notice, along with seven other breaches of the Merger Agreement,² ( see Compl. ¶ 19(a)-(g)), have materially prejudiced CIH by “prevent[ing it] from taking timely action to correct, defend, participate in the defense of, compromise, control, or arrange for a favorable settlement ... of any of the [BT Tax Claims].” ( Id. ¶ 22.)

Finally, CIH claims that BT filed the June 10 notice with “intent to injure and deprive [the Equityholders and CIH] of the remaining funds in the escrow account to which they are duly entitled.” ( Id. ¶ 31.) CIH alleges that, as of the date of the notice, BT knew that (1) the BT Tax Claims were specifically excluded from the Merger Agreement's indemnification clause; and (2) it had failed to comply with its obligations under this Agreement. ( Id. ¶ 30.) BT has not withdrawn its notice of claim, essentially encumbering the remainder of the escrowed funds. ( Id. ¶ 44.)

On October 12, 2010, CIH commenced this lawsuit, asserting that BT's breaches of the Agreements, as well as the implied covenant of good faith and fair dealing, render BT's notice of claims a nullity, and bar any further attempt to seek indemnification. On January 7, 2011, BT moved to dismiss on the grounds that CIH's claims are not justiciable, or adequately pleaded, because CIH has not suffered any prejudice.

II. DISCUSSIONA. Legal Standard for a Motion to Dismiss

When considering a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the Court assumes all facts alleged in the complaint to be true, and draws all reasonable inferences in favor of the plaintiff. Kassner v. 2nd Ave. Delicatessen, Inc., 496 F.3d 229, 237 (2d Cir.2007). Nevertheless, simple chanting of the elements of a cause of action, “supported by mere conclusory statements, do not suffice.... While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949–50, 173 L.Ed.2d 868 (2009). To avoid dismissal, the complaint must contain “enough facts to state a claim to relief that is plausible on its face,” that is to say, facts that “nudge [ ] [the plaintiff's] claims across the line from conceivable to plausible....” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

B. Declaratory Judgment Standard

The Court has jurisdiction over a declaratory judgment action “only if there is an ‘actual controversy,’ 28 U.S.C. § 2201(a), which has been defined as one that is real and substantial ... admitting of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.” E.R. Squibb & Sons, Inc. v. Lloyd's & Cos., 241 F.3d 154, 177 (2d Cir.2001) (internal quotations omitted). “That the liability may be contingent does not necessarily defeat jurisdiction of a declaratory judgment action. Rather, courts should focus on the practical likelihood that the contingencies will occur.” Emp'rs Ins. of Wausau v. Fox Entm't Grp., Inc., 522 F.3d 271, 278 (2d Cir.2008) (internal quotations omitted). Specifically, the Court should examine: “(1) whether the judgment will serve a useful purpose in clarifying or settling the legal issues involved; and (2) whether a judgment would finalize the controversy and offer relief from uncertainty.” Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d 384, 389 (2d Cir.2005).

BT's central argument is that this action is not ripe for adjudication because there has been no final determination that any money is owed on the BT Tax Claims. (Reply Mem. at 2.) “Until and unless that occurs, it cannot be known whether, if at all, Plaintiff may somehow be ‘actually prejudiced.’ ” ( Id.) BT further argues that CIH's prejudice allegations are legally insufficient in that CIH “failed to allege that it has suffered any ‘tangible economic injury’ or other adverse consequence” as a result of BT's alleged breach of the notice provision in the Merger Agreement. (Def. Mem. at 13.)

Plaintiff counters that the “actual prejudice” language of § 11.02(a) only applies to the initial notice provision and not the remainder of the covenants that CIH claims BT breached ( e.g., the covenant requiring BT to cede control of any tax contest to CIH). (Pl. Mem. at 8.) CIH further contends that its position as an indemnitor entitles it to the no-prejudice rule New York courts have adopted for primary and excess insurers, which presumes prejudice where an indemnitee disregards his prompt-notification obligations. ( Id. at 10.) Finally, CIH argues that even if it is not entitled to the presumption of prejudice, CIH has adequately pleaded actual prejudice. ( Id. at 14.)

Plaintiff's claims relating...