Csi Inv. Partners II, L.P. v. Cendant Corp., 00 Civ. 1422.

• Decision Date: 07 September 2007
• Docket Number: No. 00 Civ. 1422.,00 Civ. 1422.
• Parties: CSI INVESTMENT PARTNERS II, L.P., Delaware limited partnership, CIS Acquisition Partners, L.P., a Delaware limited partnership, Canterbury Mezzanine Capital, L.P., a Delaware limited partnership, David C Thompson, M. Gerard Keehan, Vineet Pruthi, Donald J. Shea, James M. Rothe, Michael Cossel, John J. Adams, Robert E. Richardson, Marilyn Schwartz, and Charles Caudle, Plaintiffs, v. CENDANT CORPORATION, a Delaware corporation, Henry Silverman, Samuel Katz, and Cosmo Corigliano, Defendants. Cendant Corporation, Counterclaim-Plaintiff v. CSI Investment Partners II, L.P., CIS Acquisition Partners, L.P., Canterbury Mezzanine Capital, L.P., David C. Thompson, M. Gerard Keehan, Vineet Pruthi, Donald J. Shea, James M. Rothe, Michael Cossel, John J. Adams, Robert E. Richardson, Marilyn Schwartz, Charles Caudle, Counterclaim-Defendants, and Tonya Carmichael, Lincolnshire Equity, Inc., Lincolnshire Management, Inc., Steve Kumble, and Thomas J. Maloney, Additional Counterclaim-Defendants.
• Court: U.S. District Court — Southern District of New York

507 F.Supp.2d 384

CSI INVESTMENT PARTNERS II, L.P., Delaware limited partnership, CIS Acquisition Partners, L.P., a Delaware limited partnership, Canterbury Mezzanine Capital, L.P., a Delaware limited partnership, David C

Thompson, M. Gerard Keehan, Vineet Pruthi, Donald J. Shea, James M. Rothe, Michael Cossel, John J. Adams, Robert E. Richardson, Marilyn Schwartz, and Charles Caudle, Plaintiffs, v. CENDANT CORPORATION, a Delaware corporation, Henry Silverman, Samuel Katz, and Cosmo Corigliano, Defendants.

Cendant Corporation, Counterclaim-Plaintiff v. CSI Investment Partners II, L.P., CIS Acquisition Partners, L.P., Canterbury Mezzanine Capital, L.P., David C. Thompson, M. Gerard Keehan, Vineet Pruthi, Donald J. Shea, James M. Rothe, Michael Cossel, John J. Adams, Robert E. Richardson, Marilyn Schwartz, Charles Caudle, Counterclaim-Defendants, and Tonya Carmichael, Lincolnshire Equity, Inc., Lincolnshire Management, Inc., Steve Kumble, and Thomas J. Maloney, Additional Counterclaim-Defendants.

No. 00 Civ. 1422.

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

September 7, 2007.

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Michael Edward Petrella, Law Offices of Sean F. O'Shea, New York, NY, for Plaintiffs.

Ian R. Barrett, Kent B. Goss, Pillsbury, Madison & Sutro, L.L.P., Los Angeles, CA, Sean F. O'Shea, Law Offices of Sean F. O'Shea, New York, NY, for Plaintiffs/Counterclaim-Defendants.

Richard Francis Lawler, Winston & Strawn LLP, Gary P. Naftalis, Kramer Levin Naftalis & Frankel, LLP, Henry Edward Mazurek, Law Offices of Gerald L. Shargel, Robert Y. Sperling, Winston & Strawn, LLP, New, York, NY, Robert Y. Sperling, Winston & Strawn, LLP, Chicago, IL, Herbert J. Stern, Stern & Greenberg, Roseland, NJ, James Glenn Kreissman, Simpson Thacher & Bartlett LLP, New York, CA, for Defendants.

OPINION

BATTS, District Judge.

Plaintiffs CSI Investment Partners II, L.P., CIS Acquisition Partners, L.P., Canterbury Mezzanine Capital, L.P., David C. Thompson, M. Gerard Keehan, Vineet Pruthi, Donald J. Shea, James M. Rothe, Michael Cossel, John J. Adams, Robert E. Richardson, Marilyn Schwartz, and Charles Caudle (collectively referred to as "Sellers" or "Plaintiffs") sue Defendants Cendant Corporation ("Cendant"), Henry Silverman, Samuel Katz, and Cosmo Corigliano based on alleged violations of a Stock Purchase Agreement ("SPA"). The SPA provided for the sale of Credentials Services International, Inc. ("Credentials") by Sellers to Cendant for a set price of $125 million, plus an additional amount which was contingent on Credentials' future performance ("Acquisition"). Plaintiffs allege, inter alia, that Cendant fraudulently induced them to agree to the contingent payment clause of the SPA by misrepresenting to Sellers that it would use certain marketing strategies to market Credentials' products and by not informing them about a wide-scale accounting fraud within Cendant's ranks. Cendant, while conceding the existence of "accounting irregularities" among its ranks, asserts that it did not fraudulently omit or misrepresent any information in the course of the SPA negotiations. Cendant also argues that, in any event, Sellers failed to inform Defendants that Credentials had allegedly violated the Fair Credit Reporting Act and breached a prior agreement with Non — Party Experian, Inc. This failure to inform, Defendants argue, is a defense to any liability they may owe Plaintiffs.

Plaintiffs have brought a securities fraud claim against all Defendants pursuant to 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j ("Count One")¹; a common law fraud claim against all Defendants ("Count Two"); three breach of contract claims against Cendant ("Count Three", "Count Four", and "Count Five"); a claim for breach of the covenant of good faith and fair dealing against Cendant ("Count Six"); an accounting claim against Cendant ("Count Seven"); a negligent misrepresentation claim against all Defendants ("Count Eight")²; and a claim for declaratory relief against Cendant ("Count Nine").³

Cendant has brought a common law fraud counterclaim against all Counterclaim-Defendants⁴ ("Counterclaim One"); an indemnification counterclaim against all Plaintiffs ("Counterclaim Two"); a breach of fiduciary duty counterclaim against Plaintiffs Michael Cossel, Gerard Keehan, and Robert E. Richardson ("Counterclaim Three"); a breach of the covenant of lawful operation counterclaim against all Plaintiffs ("Counterclaim Four"); and an unjust enrichment claim against all Counterclaim-Defendants ("Counterclaim Five").

Now before the Court are Cendant's Motion for Summary Judgment on Counts One, Two, Three, Four, Six, Seven, and Eight, as well as Defendants Henry Silverman and Samuel Katz' Motion for Summary Judgment on Counts Two and Eight. Also before the Court are Counterclaim-Defendants' Motion for Summary Judgment on all of Cendant's counterclaims, Plaintiffs' Motion for Summary Judgment on Count Four of the Third Amended Complaint, and Plaintiffs' Motion for Sanctions for Pervasive Discovery Abuse and Spoliation of Evidence. For the reasons stated below, Defendant Cendant's Motion for Summary Judgment shall be GRANTED ED IN PART and DENIED IN PART, Defendants Silverman and Katz' Motion for Summary Judgment shall, be GRANTED, Counterclaim-Defendants' Motion for Summary Judgment on the Counterclaims shall be GRANTED, Plaintiffs' Motion for Summary Judgment on Count Four of the Third Amended Complaint shall be GRANTED, arid Plaintiffs' Motion for Sanctions for Pervasive Discovery Abuse and Spoliation of Evidence shall be GRANTED IN PART and DENIED IN PART. As well, summary judgment shall be GRANTED in Plaintiffs' favor on Count Three of the Third Amended Complaint.

I. BACKGROUND

A. The Parties

At all times relevant to the Complaint, Plaintiffs CSI Investment Partners II, L.P. ("CSI") and CIS Acquisition Partners, L.P. ("CIS") were limited partnerships managed by Counterclaim-Defendant Lincolnshire Management, Inc. ("Lincolnshire"). (Maloney Dep. 9-12, at Lawler Aff. of Jan. 30, 2007⁵, Ex. 5.) Together, CSI and CIS held 80% of the interest in Credentials, a corporation which provided information to consumers about their credit reports. (Credentials Preliminary Prospectus JPHQ 00003, at Lawler Aff. of Jan. 30, 2007, Ex. 5.) Plaintiff Canterbury Mezzanine Capital, L.P. ("Canterbury") is an investment fund which owned 10.8% of Credentials' stock. (Maloney Dep. 51-52.)

According to a Credentials Prospectus, Credentials "provide[d] value-added programs that enable[d] customers to monitor the accuracy of their personal credit data that [was] collected and held by credit reporting bureaus." (Credentials Preliminary Prospectus JPHQ 00003, at Lawler Aff. of Jan. 30, 2007, Ex. 1.) Credentials provided this information to its customers "in a readily understandable, readable format". (Id.) It marketed its programs to consumers using "direct marketing techniques, consisting of direct mail and telemarketing campaigns conducted through endorsed co-marketing relationships with major credit card issuers ... such as banks, retailers, and oil companies." (Id.)⁶

The following Individual Plaintiffs were officers and/or employees of Credentials, and also owned shares in Credentials just prior to the Acquisition (Ex. A of the SPA, at Pls.' 56.1 Stmt., Ex. 26 (hereinafter cited as "SPA")): David C. Thompson ("Thompson") joined Credentials in 1996 as Chief Financial Officer and by 1997 he was the Chief Executive Officer (Thompson Dep. 58:16-17, 64:5-65:5, at Lawler Aff. of Jan. 30, 2007, Ex. 12); M. Gerard Keehan ("Keehan") was an executive vice president (Keehan Dep. 22:4-22, 29:16-19, at Lawler Aff. of Jan. 30, 2007, Ex. 13); Vineet Pruthi ("Pruthi") was the Chief Financial Officer after Thompson was promoted to CEO (Pruthi Dep. 26:14-17, 37:4-9, at Lawler Aff. of Jan. 30, 2007, Ex. 4); Donald J. Shea ("Shea") served as senior' vice president of new products (Shea Dep. 31:7-10, 32:3-5, 39:20, 40:4, at Lawler Aff. of Jan. 30, 2007, Ex. 14) James M. Rothe ("Rothe") served as senior vice president of sales (Rothe Dep. 8:19-23, 61:19-21, at Lawler Aff. of Jan. 30, 2007, Ex. 15); Michael Cossel ("Cossel") served as executive vice president of operations and systems (Cossel Dep. 39:22-24, at Lawler Aff. of Jan. 30, 2007, Ex. 16); John A. Adams ("Adams") became a vice president in July 1997(Adams Dep. 28:14-17; at Lawler Aff. of Jan. 30, 2007, Ex. 17); Robert E. Richardson ("Richardson") became a vice president during the late summer of 1996 (Richardson Dep. 36:14-18, at Lawler Aff. of Jan. 30, 2007, Ex. 18); Marilyn Schwartz ("Schwartz") was a senior vice president (Schwartz Dep. 35:6-20, at Lawler Aff. of Jan. 30, 2007, Ex. 19); and Charles Caudle ("Caudle") preceded Thompson as the Chief Executive Officer, but then became vice chairman of the board in 1997(Caudle Dep. 21:17-19, 23:23, 56:8, at Lawler Aff. of Jan. 30, 2007, Ex. 20). Counterclaim-Defendant Tonya Carmichael worked at Credentials as a vice president of production. (Carmichael Dep. 19:23-25, at Lawler Aff. of Jan. 30, 2007, Ex. 22.) She was responsible for direct mail acquisition and fulfillment. (Id. at 19:7-22) Counterclaim-Defendants Steven J. Kumble and Thomas J. Maloney were Chief Executive Officer and president of Lincolnshire, respectively. (Kumble Dep. 44:13-16, at Lawler Aff. of Jan. 30, 2007, Ex. 7; Maloney Dep. 73:4-9, at Lawler Aff. of Jan. 30, 2007, Ex. 10.)

Defendant Cendant was a corporation organized under the laws of the state of Delaware with its principal place of business located in the state of New Jersey. (Third Am. Compl. ¶ 10; Cendant Am. Answer ¶ 10.) Cendant was created when CUC International, Inc. ("CUC") and HFS Incorporated ("HFS") merged in December 1997 ("CUC-HFS merger").⁷ (Cendant Form 10K at SAR 14503, at Lawler Aff. of Jan. 30, 2007, Ex. 25.) Cendant provided various membership-based consumer services, travel services, and...