Icd Holdings S.A. v. Frankel
| Decision Date | 05 September 1997 |
| Docket Number | No. 96 CIV. 2499(LAK).,96 CIV. 2499(LAK). |
| Citation | 976 F.Supp. 234 |
| Parties | ICD HOLDINGS S.A., Plaintiff, v. Alfred M. FRANKEL, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Robert A. Weiner, Y. David Scharf, Mary E. Mullin, McDermott, Will & Emery, for Plaintiff.
Ira S. Sacks, Alex Lipman, Daniel L. Abrams, Fried, Frank, Harris, Shriver & Jacobson, for Defendants Alfred M. Frankel and Jacques Leviant.
Claude M. Tusk, David S. Hoffner, Shereff, Friedman, Hoffman & Goodman, LLP, for Defendant Richard A. Eisner & Co.
The plaintiff in this case was the purchasing vehicle in a 1994 management buyout of ICD, Inc. ("ICD"), a large international dealer in petrochemical based commodities. It brings this action against Alfred M. Frankel and Jacques Leviant, who sold the ICD shares to plaintiff, and Richard A. Eisner & Co. ("Eisner"), certified public accountants who prepared certain materials contemplated by the purchase agreement for use in determining the price. All defendants move to dismiss the complaint.
This is the second action concerning this transaction, the first having occasioned three opinions by this Court that set out the pertinent aspects of the purchase agreement and the nature of the dispute between the buyer and the sellers.1 There is, in consequence, no need to repeat any of that discussion here, and the Court will assume familiarity with the prior opinions. It is important, however, to focus on the nature and procedural history of the prior action in view of the former adjudication arguments raised by the defendants here.
In brief summary, the plaintiff in this case, ICD Holdings S.A. ("Holdings"), purchased all of the shares of ICD from Frankel and Leviant for (1) $5 million in promissory notes, and (2) cash equal to the Book Value, as defined by the purchase agreement, less $5.9 million. The notes were guaranteed by Holdings' two shareholders, Messrs. deGeus and Löffelhardt. The overall purchase price was subject to a post-closing adjustment in which the buyer or the sellers, as the case might be, would pay to the other any amount necessary to adjust the consideration transferred at the closing to an amount equal to the adjusted purchase price.
A dispute concerning the purchase price developed following the closing. Holdings then defaulted on the notes. In consequence, Frankel and Leviant sued Holdings and deGeus and Löffelhardt on the notes and guarantees, respectively, in New York Supreme Court. Holdings, deGeus and Löffelhardt removed that prior action to this Court.
The prior action was commenced not by the filing of a complaint, but by the service of a motion for summary judgment in lieu of complaint as permitted in such cases by Section 3213 of the New York Civil Practice Law and Rules. As there was no complaint, Holdings, deGeus and Löffelhardt filed no answer.2 Rather, they responded to the motion for summary judgment, contending, by way of defense, that Frankel and Leviant fraudulently had overstated the purchase price.
In Frankel I, this Court held that Holdings, by the terms of the notes it had signed, waived the defense of fraud in the inducement of the notes.3 While it held that deGeus and Löffelhardt had not waived such a defense to the guarantees, it went on to conclude that they had not raised a genuine issue of fact as to the existence of any material overstatement of the purchase price and therefore granted summary judgment on the notes and guarantees.4 It is important, moreover, to focus on the precise nature of the fraudulent inducement defense asserted by deGeus and Löffelhardt and on the basis for the Court's ruling.
The structure of this buyout transaction was complex. The purchase agreement, which is the document that obliged deGeus and Löffelhardt to execute their guarantees at the closing, conditioned their obligation to do so (as well as the obligation of Holdings to proceed with the purchase) on the receipt of a preliminary balance sheet showing the Estimated Cash Purchase Price — the Book Value as defined less $5.9 million — to be within ten percent of $67.8 million.5 In other words, if the Estimated Cash Purchase Price, determined in accordance with the purchase agreement, had been less than $61.02 million or more than $74.58 million, Holdings, deGeus and Löffelhardt would have had the right to walk away from the deal. The accountant's statement that was delivered at or prior to the closing — and that allegedly was overstated — showed an Estimated Cash Purchase Price of $64.9 million and thus fell within the range in which the buyer and guarantors were obliged to proceed with the transaction.
In order to defeat the buyers' motion for summary judgment on the guarantees, Frankel I held, deGeus and Löffelhardt were obliged to adduce evidence sufficient to raise a genuine issue of fact as to the existence of a material overstatement of the Estimated Cash Purchase Price.6 It concluded that they had not done so, "principally because the evidence is insufficient to permit the inference that properly prepared balance sheets as at September 30, 1993 would vary materially from those [the accountant] prepared."7
DeGeus and Löffelhardt sought relief from the judgment under Rule 60(b)(2), additional accounting evidence in support of their position that there had been a material overstatement. Among the evidence proffered was an opinion of a Price Waterhouse & Co. accountant, solicited after the date of the decision in Frankel I, to the effect that there had been an overstatement of the Estimated Cash Purchase Price of $5.4 million.8 The Court, however, denied the motion on the alternative grounds that (i) the evidence had been available to deGeus and Löffelhardt when the original motion had been litigated and, (ii) in any case, was immaterial given the structure of the purchase agreement. The Court noted "the Guarantors can avoid their guarantees ... only if they can establish that they would not have signed the guarantees if they had known the true state of affairs."9 They were obliged by the purchase agreement to execute and deliver the guarantees provided the Estimated Cash Purchase Price fell anywhere within a broad range. The Court went on to say that the amount of the overstatement alleged by Price Waterhouse was less than the $6.78 million that the Court regarded as necessary to have given Holdings, deGeus and Löffelhardt the right to walk away from the deal.10 The Court indicated also, however, that a smaller "error might well give [the Guarantors] a claim for a refund of part of the purchase price ..."11
This action was commenced during the pendency of the prior action.12 The amended complaint, unsurprisingly, tells essentially the same story that Holdings, deGeus and Löffelhardt advanced in their effort to defeat summary judgment on the notes and guarantees save that Eisner here is a party to the suit. The complaint contains ten causes of action. The first through third seek damages against Frankel and Leviant for breach of contract on various theories. The fourth through sixth charge Frankel, Leviant and Eisner with common law fraud, negligent misrepresentation and securities fraud, respectively. The seventh accuses Eisner of aiding and abetting the alleged fraud by Frankel and Leviant. The eighth through tenth allege that Eisner breached its alleged contractual and fiduciary obligations to Holdings and committed professional malpractice.
Frankel and Leviant move to dismiss the entire complaint on the grounds that all of Holdings' claims are barred by both issue and claim preclusion, often referred to as collateral estoppel and res judicata, respectively. Eisner contends that Holdings' fraud, aiding and abetting and negligent misrepresentation claims must be dismissed on the basis of issue preclusion.13
The fraud claims asserted here depend upon the allegation that the defendants made six misrepresentations to Holdings: that (1) Eisner would act independently, (2) Eisner would prepare the balance sheet in accordance with U.S. generally accepted accounting principles ("GAAP"), (3) Eisner would perform an audit or special procedures with respect to ICD and the retained subsidiaries, (4) the Estimated Book Value, as of September 30, 1993, was $70,573,766, (5) the Estimated Cash Purchase Price was $64,933,450, and (6) the 1992 financial statements were materially correct.14 In fact, Holdings alleges, the Estimated Cash Purchase Price, accurately stated, would have been approximately $55,573,450 million, a figure that would have permitted it to walk away from the deal; the Estimated Book Value was overstated by about $9.3 million; Eisner was not independent and did not prepare the balance sheet in accordance with GAAP; and the 1992 financial statements were inaccurate.
All of the defendants contend that the Court's rulings in Frankel I decided these issues against Holdings and that these claims therefore must be dismissed. In addition, Frankel and Leviant argue that the breach of contract claims against them are based on one of two theories: either (1) there was a misrepresentation of the book value of the businesses on the balance sheet or (2) there was a breach of the purchase agreement in failing to account for the transaction in accordance with its terms. The rejection of the fraud defense asserted in Frankel I, they contend, precludes Holdings from establishing either theory and requires dismissal of the contract claims as well.
Litigants who have had a full and fair opportunity to litigate ordinarily will not be heard to relitigate an issue actually, finally and necessarily decided against them in a prior action. In order for this doctrine of issue preclusion to apply, four requirements must be satisfied:
"(1) the issues in both proceedings must be...
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