Grupo Verzatec S.A. de C.V. v. RFE Inv. Partners
| Decision Date | 29 March 2019 |
| Docket Number | 17-cv-9887 (ALC) |
| Parties | GRUPO VERZATEC S.A. DE C.V., Plaintiff, v. RFE INVESTMENT PARTNERS ET AL., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Plaintiff Grupo Verzatec S.A. de C.V. ("Verzatec") filed this suit against Defendant RFE Investment Partners VII, L.P. ("RFE") alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act (the "Exchange Act") and common law fraud. Plaintiff also asserts breach of contract claims against all Defendants based on alleged misrepresentations and breached covenants. Defendants now Move to Dismiss Plaintiff's Complaint in its entirety. For the following reasons, Defendants' Motion is GRANTED.
Plaintiff Verzatec and its subsidiary Stabilit, Inc. ("Stabilit") manufacture and sell building supplies. SAC ¶ 25. NPI was a Delaware corporation and the sole shareholder of Nudo Products, Inc., Marlite, Inc. and Marlite Export Sales, Inc. (collectively, "Nudo"). SAC ¶ 2. Nudo prints, manufactures, and laminates Glasteel products. Id. at ¶ 26. As will be discussed in further detail below, NPI became a wholly owned Stabilit, Inc. subsidiary, thus, Verzatec is NPI's and Nudo'sultimate and sole stockholder. Id. at ¶ 26. Defendant RFE is a limited partnership headquartered in New Canaan, Connecticut. Id. at ¶ 12. Prior to the Merger, RFE held a majority of NPI's common and preferred stock. As NPI's controlling stockholder, RFE installed former Defendant Darryl Rosser ("Rosser") as an NPI director and as Nudo's Chief Executive Officer in December 2012. Id. at ¶ 10. Simultaneously, Rosser served as an Operating Executive for RFE. Id. at ¶ 10. Former Defendant Len Farrell ("Farrell") served as NPI's Chief Financial Officer in May 2013. Id. at ¶¶ 27, 30. (Rosser and Farrell, together, the "Officer Defendants")2
In September 2014, Nudo received notice of a claim for breach of warranty from the Palmyra Macedon Central School District ("PMCSD") alleging manufacturing defects in a Nudo panel PMCSD used in one of its buildings. Id. at ¶ 32. Rosser failed to have Nudo notify its insurer of PMCSD's claim against it. Id. Nudo's insurance policy required notice as a precondition for coverage. Id. at ¶ 33.
In December 2014, Plaintiff began negotiations to acquire NPI. Id. at ¶¶ 2, 34. Officer Defendants participated in the negotiations. Id. at ¶¶ 34, 38, 40. The SAC alleges that in December 2014, Rosser and Farrell modified the method Nudo used to calculate its inventory reserve to account for slow-moving and obsolete inventory. Id. at ¶ 36.
On December 2, 2015, NPI, Verzatec, Formet, Inc. (a Verzatec subsidiary) and Impact Stockholder Rep, LLC ("Stockholder Rep") on behalf of the Equity Holders and Responsible Bonus Recipients (as defined in the Agreement), agreed to an acquisition and entered into aMerger Agreement ("Agreement"). See ECF. Nos. 41-1, 41-2. The Agreement set forth all of the parties' obligations, including representations and warranties made by NPI as of the closing date (the "Closing") and indemnification procedures for any breaches of those representations and warranties. See Id. §§ 3, 9, 11.10.3
The Agreement also established a post-closing purchase price adjustment process that involved a comparison of NPI's Closing Net Working Capital ("Closing NWC"), as prepared by Plaintiff after the Closing, to NPI's calculations prepared prior to Closing. Id. § 2.3(c). The parties agreed that the working capital adjustment procedure would be "the sole and exclusive remedy of the Purchaser [] with respect to . . . any other claims relating to any of the components of the Company's Net Working Capital (in lieu of claims under Section 9.2 or Section 9.3 hereof)." Id. § 2.3(e).
As part of the agreement, NPI represented to Verzatec that, "[t]here ha[d] been no change in inventory valuation standards or methods with respect to the inventory in the three years prior to the Closing Date." SAC ¶ 54, Ex. A; ECF 41- 1 § 3.20. NPI also represented that, as of the December 18, 2015 Closing Date, "there [was] no ongoing demand, claim, suit, action, arbitration or legal, administrative or other proceeding pending or ... threatened against any Nudo Company ... that would reasonably be expected to result in liability in excess of $100,000." SAC ¶ 56, Ex. A § 3.10. Rosser and Farrell repeated this misrepresentation to Verzatec in the Company Disclosure Letter. Id. at ¶ 38.4
In the Merger Agreement, NPI also represented that its financial statements fairly presented "in all material respects, the condition of [Nudo, Marlite, Inc., and Marlite Export Sales, Inc.] as of the referenced dates ..." and that "[t]he inventory of [Nudo, Marlite, Inc., and Marlite Export Sales, Inc.], whether reflected on the Financial Statements or not, consists of raw materials and supplies, manufactured and processed parts, goods in process, and finished goods that are of a quality and quantity that are useable and saleable in the ordinary course of business, consistent with past practice." Id. at ¶ 54, Ex. A § 3.7,3.20.
Plaintiff alleges that Officer Defendants provided false financial schedules and reports to Verzatec from February 2016 through June 2016. SAC ¶ 80. For example, the financial schedules failed to disclose Nudo's obsolete and slow-moving inventory. Id. at ¶ 82. Plaintiff also alleges the financial schedules affirmatively concealed PMCSD's claim and subsequent lawsuit on February 16, 2016. Id. at ¶¶ 83, 75. Officer Defendants also concealed the fact that NPI's exposure on the PMCSD claim was made worse by management's failure to timely notify the insurer of the claim, causing NPI's insurer to deny coverage. Id. at ¶¶ 76-77, 81. Officer Defendants also omitted the fact that Nudo owed $113,665 to the insurance company that provides coverage to Nudo for workers compensation claims. Id. at ¶ 83.
The Closing occurred on December 18, 2015. Id. at ¶ 41. Following the Closing, Verzatec prepared and provided its Closing NWC to the Stockholder Rep, as required by the Agreement. Id. ¶¶ 80, 84. On June 30, 2016, NPI, Verzatec, Verzatec's subsidiary, and Stockholder Rep entered into a "Final Agreement regarding Working Capital, Accounts Receivable and Tax Refunds." (the "Final Agreement"). See Id. ¶¶ 80; Cohen Decl. Ex. B. Pursuant to the Final Agreement, Verzatec agreed "to forever release [the Equityholders] and their respectivesuccessors, assigns and affiliates from any and all further liability with respect to the provisions of Section 2.3 of the Agreement or the matters covered thereby" as consideration for payment of an additional $227,000 to Verzatec. Id.
Later, Verzatec discovered RFE concealed the inventory accounting problems, Nudo's reserve for such inventory was $1.5 million short, and that Nudo owed $113,665 on its 2016 workers compensation insurance policy. Id. at ¶¶ 91-92. Additionally, Verzatec learned of PMCSD's breach of warranty claim against Nudo, the ensuing litigation, the denial of insurance coverage and Nudo's resulting $1 million-plus prospective exposure. Id. at ¶¶ 93-94.
On November 10, 2016, Plaintiff provided notice of a claim related to, among other things, the "slow-moving and obsolete inventory situation." Id. at ¶ 95. On November 16, 2017, Plaintiff served another Demand Notice pursuant to Section 11.10(a) of the Agreement on the Stockholder Rep (the "2017 Notice"). Id. at ¶ 100; Cohen Decl. Ex. D. In the 2017 Notice, Verzatec provided notice of (i) the same inventory claim that Verzatec had previously identified in November 2016; and (ii) a claim related to an alleged breach of representation related to litigation involving the PMSD. Id.
On December 18, 2017, Plaintiff filed its initial complaint, asserting claims for fraud and fraudulent inducement against the Equityholders and Officer Defendants and indemnification against the "Indemnifying Seller Parties." ECF. No. 1.
On February 27, 2018, Plaintiff filed its First Amended Complaint and removed the fraud and fraudulent inducement claims against all Equityholders except Defendant RFE and added claims under Sections 10(b) and 20(b) of the Exchange Act and against RFE. ECF. No. 17. Afterthe parties submitted pre-motion conference letters to the Court, Plaintiff filed the SAC, amending its Section 20(b) claim against RFE to a Section 20(a) claim. ECF. No. 41. On July 18, 2018, Plaintiff voluntarily dismissed Officer Defendants after reaching a settlement. ECF No. 50.
On July 27, 2018, Defendants moved to dismiss the SAC in its entirety. ECF No. 51. Defendants argue, inter alia, that Plaintiff's securities law and fraud claims rely on a fallacy that the Officer Defendants acted as agents for RFE. ECF No. 52.
When deciding a motion to dismiss, the Court must "accept as true all factual statements alleged in the complaint and draw all reasonable inferences in favor of the non-moving party." McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 191 (2d Cir. 2007). However, the Court need not credit "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
Claims should be dismissed when a plaintiff has not pleaded enough facts that "plausibly give rise to an entitlement for relief." Id. at 679. A claim is plausible "when the plaintiff pleads factual content that allows the Court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 678 (citing Twombly, 550 U.S. at 556). While not akin to a "probability requirement," the plaintiff must allege sufficient facts to show "more than a sheer possibility that a defendant has acted unlawfully." Id. (citing Twombly, 550 U.S. at...
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