Citibank, N.A. v. K-H Corp.

Decision Date25 June 1992
Docket NumberK-H,No. 107,D,107
PartiesFed. Sec. L. Rep. P 96,875 CITIBANK, N.A., Plaintiff-Appellant, v.CORPORATION and Kelsey-Hayes Company, Defendants-Appellees. ocket 91-7367.
CourtU.S. Court of Appeals — Second Circuit

Peter N. Wang, New York City (Laurie R. Josephs, Friedman, Wang & Bleiberg, P.C., New York City, Latham & Watkins, Chicago, Ill., of counsel), for plaintiff-appellant.

Thomas J. Kavaler, New York City (Howard G. Sloane, Jonathan D. Thier, Katherine B. Harrison, Daniel L. Cantor, Cahill Gordon & Reindel, New York City, Thomas J. Tallerico, Howard & Howard, Bloomfield Hills, Mich., of counsel), for defendants-appellees.

Before: CARDAMONE, PIERCE, and WALKER, Circuit Judges.

PIERCE, Circuit Judge:

Plaintiff-appellant Citibank, N.A. ("Citibank") appeals from a judgment of the United States District Court for the Southern District of New York, Peter K. Leisure, Judge, dismissing its fourth amended complaint against K-H Corporation and Kelsey-Hayes Company, seeking to recover damages based on alleged fraud with respect to the financing of the acquisition of four aerospace subsidiaries. The district court dismissed the fourth amended complaint pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief could be granted. On appeal, Citibank claims that the complaint adequately states causes of action for violation of the federal securities laws and common law fraud. For the reasons set forth below, we affirm the judgment of the district court.


On May 23, 1989, Citibank, a national banking association located in the State of New York, filed a complaint in the United States District Court for the Southern District of New York, naming as defendants Fruehauf Corporation ("Fruehauf"), 1 a Delaware corporation with its principal place On April 10, 1990, Citibank filed a third amended complaint, which contained six counts. This complaint also named appellees as defendants. Counts I, III and V of the third amended complaint asserted violations of the federal securities laws, and Counts II, IV and VI asserted common law fraud claims. On August 22, 1990, the district court granted the defendants' motion to dismiss the third amended complaint, for failure to state a claim, pursuant to Fed.R.Civ.P. 12(b)(6). Citibank, N.A. v. K-H Corp. and Kelsey-Hayes Co., 745 F.Supp. 899 (S.D.N.Y.1990). Citibank was given leave to file a further amended complaint, whereupon it filed a fourth amended complaint on October 4, 1990.

                of business in Michigan, and Kelsey-Hayes Company ("Kelsey-Hayes"), a wholly-owned subsidiary of Fruehauf with its principal place of business in Michigan.   Jurisdiction was based on diversity of citizenship of the parties, 28 U.S.C. § 1332.   The one-count complaint alleged that Fruehauf and Kelsey-Hayes had made false and fraudulent representations to Citibank to secure an extension of credit.   Subsequently a first amended complaint and second amended complaint were filed by Citibank

The fourth amended complaint, which was based on deposition testimony and other evidence disclosed during discovery, alleged the following: on June 24, 1987, Grabill Aerospace Industries, Ltd. ("GAIL"), William J. Stoecker--GAIL's sole shareholder--and Citibank, through Citicorp Industrial Credit, Inc., executed a commitment letter whereby Citibank agreed to extend financing to GAIL for the acquisition of five aerospace subsidiaries from Fruehauf and Kelsey-Hayes. Citibank's commitment was conditioned on, inter alia, an equity contribution of $20 million into GAIL from Stoecker, Stoecker's pledge to Citibank of the stock of GAIL, and GAIL's pledge of the stock of the aerospace subsidiaries to Citibank.

On June 25, 1987, Fruehauf, Kelsey-Hayes and GAIL entered into a Stock Purchase Agreement in which GAIL agreed to purchase from Fruehauf and Kelsey-Hayes all the shares of stock of the five aerospace subsidiaries for $164 million in cash, plus an amount not to exceed $1 million. As the date of the closing of the purchase of the five aerospace subsidiaries approached, as a result of information available to it, Citibank identified what it considered to be discrepancies with respect to the value of the aerospace subsidiaries. Citibank concluded that the purchase price of $165 million was too high and decided that it would not fund the transaction on that basis. As a result of Citibank's re-evaluation of the aerospace subsidiaries, which it communicated to GAIL, the terms of the transaction were changed: one aerospace subsidiary was eliminated from the purchase and the closing purchase price was reduced to $150 million in cash. These changes were incorporated into an Amendment to the Stock Purchase Agreement. The Amendment to the Stock Purchase Agreement also required that "[a]t the Closing, [GAIL] shall deliver to [Fruehauf] the Closing Purchase Price by wire transfer in immediately available funds...."

To finance the acquisition, GAIL, the four aerospace subsidiaries and Citibank entered into a Secured Credit Agreement. Under the Secured Credit Agreement, the acquisition price was identified as $150 million, which included: (a) a $20 million cash contribution from Stoecker, and (b) financing by Citibank in the form of $50 million from the issuance of mezzanine acquisition notes, a term loan of $75 million and a revolving loan of up to $22.5 million. 2 As collateral security for, and as a condition for Citibank to provide the financing for the acquisition, the Secured Credit Agreement required Stoecker to pledge to Citibank the stock of GAIL and for GAIL to pledge to Citibank the stock of the four aerospace subsidiaries. Also, under the Secured Credit Agreement, another condition to Citibank providing the financing to GAIL was the receipt by GAIL of the $20 million contribution from Stoecker.

Less than a week prior to the closing of the purchase of the four aerospace subsidiaries, Stoecker telephoned Fruehauf's General Counsel and told him that he was unable to provide GAIL with the total cash contribution required under the Secured Credit Agreement. Stoecker requested that Fruehauf allow him to substitute a promissory note for $7 million as part of his required $20 million cash contribution. Fruehauf agreed. During the week when final negotiations took place for the purchase of the four aerospace subsidiaries, a meeting was held between Stoecker and Fruehauf's General Counsel. At this meeting, Stoecker executed a promissory note in favor of Fruehauf in the amount of $7 million. The promissory note was not mentioned in the closing papers for the acquisition of the four aerospace subsidiaries, or in any other documents relating to the financing or closing of the acquisition, and prior to the closing Fruehauf and Kelsey-Hayes did not disclose the transaction reflected by the promissory note or the existence thereof to Citibank.

During the closing, Fruehauf made a wire transfer of $7 million of its own funds from an account in Detroit, Michigan to the account in California to which the funds representing the closing purchase price were to be transferred by GAIL and Stoecker. Fruehauf and Kelsey-Hayes, though aware of the wire transfer, did not disclose it to Citibank.

On August 6, 1987, at the closing, representatives or agents of Fruehauf and Kelsey-Hayes represented that the full closing purchase price of $150 million in cash had been received by Fruehauf's bank from GAIL. The representatives of the defendants contemporaneously delivered to Citibank opinion letters executed by Fruehauf's General Counsel to the same effect. Representatives of Fruehauf and Kelsey-Hayes permitted the acquisition to close and accepted, as part of the purchase price, $130 million in financing from Citibank.

The fourth amended complaint alleged that the defendants and Stoecker fraudulently induced Citibank to believe that the aerospace subsidiaries were worth $150 million cash in an arms-length transaction. The $150 million cash market valuation was allegedly misleading in two respects: (1) instead of a cash price, the actual consideration paid to Fruehauf was paid partly in cash and partly by an unsecured promissory note from Stoecker, the sole shareholder of the buyer GAIL; and (2) the price was not negotiated at arms-length, but GAIL was forced to accept Fruehauf's asking price because GAIL's sole shareholder was dependent on Fruehauf to provide a major portion of the equity capital required for the deal and thus was unable to bargain fully with Fruehauf.

According to the fourth amended complaint, because "GAIL was a holding company formed for the purposes of the Acquisition, with no material assets other than the stock of the subsidiaries [the] defendants knew that Citibank relied solely upon stock that Citibank believed was worth $150 million in cash as collateral for the extension of $147.5 million in credit for financing the Acquisition...." If Citibank had been aware of the other financing agreement between Fruehauf and Stoecker, the complaint alleged, Citibank would have refused to provide the financing as contemplated. Later, after GAIL defaulted and Citibank was unable to realize $150 million from the sale of its collateral--the GAIL stock and the stock of the four aerospace subsidiaries--in satisfaction of the loan, it filed this suit.

The fourth amended complaint contains six counts. Count I asserts that Fruehauf's and Kelsey-Hayes' alleged fraudulent conduct, misrepresentations and concealments violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1988), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1991). Count III alleges that Fruehauf and Kelsey-Hayes aided and abetted Stoecker's violation of § 10(b) and Rule 10b-5; and Count V alleges that Fruehauf conspired with Stoecker to violate § 10(b) and Rule 10b-5. The remaining three counts allege violations of state law. Count II asserts...

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