Csi INv. Partners II, L.P. v. Cendant Corp.

• Decision Date: 29 March 2001
• Docket Number: No. 00 CIV. 1422 (DAB)(DFE).,00 CIV. 1422 (DAB)(DFE).
• Citation: Csi INv. Partners II, L.P. v. Cendant Corp., 180 F.Supp.2d 444 (S.D. N.Y. 2001)
• Parties: CSI INVESTMENT PARTNERS II, L.P., et al., Plaintiffs, v. CENDANT CORPORATION, et al. Defendants.
• Court: U.S. District Court — Southern District of New York

Page 444

180 F.Supp.2d 444

CSI INVESTMENT PARTNERS II, L.P., et al., Plaintiffs, v.CENDANT CORPORATION, et al. Defendants.

No. 00 CIV. 1422 (DAB)(DFE).

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

March 29, 2001.

COPYRIGHT MATERIAL OMITTED

Sean F. O'Shea, Esq., New York City.

Michael H. Gruenglas, Esq., Skadden, Arps, Slate, Meagher & Flom, LLP, New York City.

Daniel J. Beller, Esq., Paul, Weiss, Rifkind, Wharton & Garrison, NY.

ADOPTION OF REPORT AND RECOMMENDATION

BATTS, District Judge.

This matter is before the Court upon the October 31, 2000 Report and Recommendation of United States Magistrate Judge Douglas F. EatonThe parties have not filed objections.¹

Having reviewed the Report and Recommendation and finding no clear error on the face of the record, seeRule 72, Fed. R.Civ.P., Notes of Advisory Committee on Rules(citingCampbell v. United States Dist. Court,501 F.2d 196, 206(9th Cir.), cert. denied,419 U.S. 879, 95 S.Ct. 143, 42 L.Ed.2d 119(1974)), it is hereby

ORDERED AND ADJUDGED as follows:

1.The Report and Recommendation of United States Magistrate Judge Eaton dated October 31, 2000 be and the same hereby is approved, adopted, and ratified by the Court;

2.The Motions to Dismiss submitted by Defendants Cendant and Lipton are GRANTED on the basis that Plaintiffs' Section 10(b) claim, as set forth in the first cause of action, is time barred, insofar as it alleges fraud based on non-disclosure of the accounting irregularities.

3.The Motions to Dismiss are also GRANTED on the basis that Plaintiffs' Section 10(b) claim, also set forth in the first cause of action, fails to meet the requirements of Fed.R.Civ.P. 9(b), insofar as it alleges fraud based on misrepresentations and omissions concerning Cendant's intentions.

4.Defendant Lipton's request for a stay of the proceedings in this Court is DENIED.

5.Plaintiff is hereby granted leave to file an Amended Complaint upon the conditions stated in the Report and Recommendation and as outlined at pages 31-32.Should Plaintiff elect to file an Amended Complaint, mindful of the constraints imposed by Fed.R.Civ.P. 11, the Amended Complaint shall be filed within twenty (20) days of the date of this Order.Defendants shall move against or answer any Amended Complaint within twenty (20) days of service of said Complaint.

Should the parties elect to proceed before Magistrate Eaton for all purposes, they are directed to return the enclosed consent form pursuant to 28 U.S.C. § 636(c) within ten (10) days of the date of this Order.

SO ORDERED.

REPORT AND RECOMMENDATION TO JUDGE BATTS

EATON, United States Magistrate Judge.

TABLE OF CONTENTS
                                                                                               PAGE
                Preliminary Statement ............................................................. 448
                ALLEGED FACTS ..................................................................... 450
                LEGAL ANALYSIS .................................................................... 451
                  1. The Federal Statute of Limitations on the Non-Disclosure of the Accounting
                      Irregularities .............................................................. 451
                  2. Misrepresentations about Cendant's Intentions ................................ 451
                     a. Intention Not To Perform the Contract ..................................... 452
                     b. Pre-Closing Oral Misrepresentations ....................................... 454
                     c. Statute of Limitations .................................................... 456
                

     d. A Summary of Problems with the Fraud Claim Based on Cendant's
                          Intentions .............................................................. 457
                  3. Plaintiffs' Argument that They Suffered No Injury until May 1999 ............. 457
                  4. Plaintiffs' Argument for Equitable Tolling ................................... 462
                  5. Lipton's Argument about the Merger Clause .................................... 463
                  6. Lipton's Request for a Stay of Federal Court Proceedings ..................... 463
                SUMMARY AND RECOMMENDATION ........................................................ 464
                

Preliminary Statement

The complaint asserts a Section 10(b) securities fraud claim and related state-law claims against Cendant Corporation, Cosmo Corigliano(Cendant's former Chief Financial Officer), Amy Lipton(a former Deputy General Counsel of Cendant) and 100 unnamed defendants in connection with the purchase by Cendant, from Plaintiffs, of the capital stock of Credentials Services International, Inc.

Defendants Cendant and Lipton have filed separate motions to dismiss on the ground that the sole federal-law claim is barred by the federal statute of limitations.Lipton's motion asserts two additional grounds: (a) that the complaint fails to allege fraud with the specificity required by Rule 9(b), F.R.Civ.P., and (b) that the misrepresentations ascribed to Lipton are barred by a merger clause in the Purchase Agreement.Lipton's motion also requests that, if the complaint is not dismissed, the proceedings in this Court be stayed pending resolution of the parallel proceedings in state court.On July 31, 2000, Judge Batts referred both motions to me.For the reasons set forth below, I conclude that:

(1)Plaintiffs' federal-law claim, insofar as it is based on non-disclosure of massive accounting irregularities, is barred by the federal statute of limitations.

(2) The federal-law claim, insofar as it is based on misrepresentations about Cendant's intentions concerning its post-acquisition operation of Credentials, is not pleaded with the specificity required by Rule 9(b).

The second theory may or may not state a Section 10(b) claim with the filing of a more specific complaint.This issue cannot be determined at the present stage of the proceedings.I recommend that Judge Batts permit Plaintiffs to serve an amended complaint in strict compliance with Rule 9(b).At that point we will be in a better position to see whether any portion of the federal claim can survive.

ALLEGED FACTS

In considering a motion to dismiss, the court assumes the truth of Plaintiffs' allegations.The following statement of facts is culled from the complaint and the documents it incorporates by reference.(Citations, unless otherwise identified, are to paragraphs of the complaint; "Exh.A"refers to the Stock Purchase Agreement attached as Exhibit A to the complaint.)

Cendant, a large conglomerate, was created by the December 1997 merger of HFS, Inc. and CUC International, Inc. ¶ 15.Also in December 1997, Cendant entered into negotiations with Plaintiffs for the purchase of Credentials, which was engaged in a business (selling club memberships) similar to the business of Cendant's Comp-U-Card division ("CUC").¶¶ 15, 23, 37, 38.Defendants Corigliano and Lipton led the negotiations for Cendant.¶ 81.

The resulting Stock Purchase Agreement ("Purchase Agreement") provided for a purchase price of $125 million (less certain deductions), plus a contingent amount.The Contingent Payment would depend on the number of Net New Memberships (in excess of a defined Membership Threshold Amount) that were added to Credentials' membership base during the calendar year 1998.Promptly following March 1999, Cendant was required to deliver to Plaintiffs(a) a certificate providing specified information concerning new memberships, and (b) the first Contingent Payment, if any, payable by Cendant.¹¶¶ 43, 45, 50.

Cendant's marketing obligations with respect to Credentials' business were set forth in Section 5.11 of the Purchase Agreement:

SECTION 5.11Marketing Efforts.During the period from the Closing Date until December 31, 1998, Cendant will use reasonable commercial efforts to cause the products of the Company [Credentials] to continue to be marketed substantially in accordance with the general historical practices of Cendant's Comp-U-Card division for marketing products similar to those offered by [Credentials], it being understood that Cendant shall not be deemed to be in breach of this Section 5.11 as a result of any change in such marketing practices that in Cendant's good faith judgment is necessary to comply with applicable law (including any changes in law) or the requirements of third parties under any Material Agreement described in Section 3.1(p)(ii) hereof or that is consistent with changes in the general marketing practices of the industry in which [Credentials] competes.

¶ 52;Exh. A, § 5.11.

Initially, the parties had contemplated that the price for the stock of Credentials would be about $170 million, to be paid at the closing.Cendant suggested making a portion of the purchase price contingent upon the future performance of Credentials' business, which would be highly dependent on the resources and efforts devoted by Cendant.¶¶ 3, 40.Plaintiffs agreed to the Contingent Payment, in reliance on (a) Cendant's greater resources, (b) Cendant's contractual obligations under Section 5.11, and (c)Defendants' representations as to Cendant's aggressive plans to grow Credentials' membership base.¶¶ 3, 41, 51, 54, 55.Prior to the contract, Plaintiffs had projected 2 million Net New Memberships for 1998.With the added resources of Cendant, Plaintiffs expected at least an additional 1 million Net New Memberships, which would result in a Contingent Payment of at least $50 million.¶ 44.

A few days prior to the closing, defendants Corigliano and Lipton and another high-level executive resigned from Cendant.¶¶ 61, 81(c).However, Cendant assured Plaintiffs that the resignations were not connected to the acquisition of Credentials and that the acquisition would go forward.¶ 61.

The Purchase Agreement was executed and the sale of the stock was consummated on April 10, 1998.Plaintiffs received from Cendant the initial portion of the purchase price — cash in an amount in excess of $110 million.¶¶ 42, 49.

On April 15, 1998, Cendant issued a press release disclosing accounting...