Monroe Staffing Servs. v. Whitaker
| Docket Number | 20-CV-1716 (GBD) (BCM) |
| Decision Date | 09 June 2023 |
| Parties | MONROE STAFFING SERVICES, LLC and STAFFING 360 SOLUTIONS, INC., Plaintiffs, v. PAMELA D. WHITAKER, Defendant. |
| Court | U.S. District Court — Southern District of New York |
REPORT AND RECOMMENDATION TO THE HON. GEORGE B DANIELS
Plaintiff Monroe Staffing Services, LLC (Monroe) and its parent plaintiff Staffing 360 Solutions, Inc. (Staffing 360) purchased a staffing agency known as Key Resources Inc. (KRI) from defendant Pamela D. Whitaker for just over $12 million. In this action, plaintiffs allege that Whitaker misrepresented material facts about KRI's compliance with certain immigration-related laws, thereby breaching representations and warranties made in the parties' share purchase agreement (SPA). Whitaker asserts two counterclaims. The first counterclaim alleges that plaintiffs breached the SPA when they refused to make two post-closing "earnout payments" totaling approximately $4 million. The second counterclaim alleges that plaintiffs' failure to make the earnout payments was part of a larger scheme to acquire staffing agencies at a discount by making an initial payment and then fabricating reasons to avoid paying the rest of the purchase price, in violation of the North Carolina and New York statutes prohibiting unfair business practices.
Now before me for report and recommendation (see Dkt 64) is plaintiffs' motion (Dkt. 84) to dismiss the second counterclaim pursuant to Fed.R.Civ.P. 12(b)(6). Plaintiffs contend that the SPA's choice-of-law provision precludes Whitaker from pursuing any claims under North Carolina law, see Pl. Mem. (Dkt. 85) at 11-17, and that New York's General Business Law (GBL) does not reach their alleged conduct. Id. at 17-22. Because plaintiffs are correct on both points, the motion should be granted.
Plaintiff Monroe, a Delaware limited liability company, is a "highly successful staffing agency" with a presence in six states, including North Carolina. Am. Compl. (Dkt. 40) ¶¶ 6, 12. Staffing 360, which is Monroe's parent company, see SPA at 1, is a publicly traded Delaware corporation headquartered in New York City. Am. Compl. ¶ 7. Staffing 360 is a "rapidly growing international staffing company engaged in the acquisition and integration of U.S. and U.K. staffing agencies." Id. ¶ 16.
Defendant Whitaker is a resident of North Carolina. Answer and Counterclaims (Ans.) (Dkt. 80) at 21, ¶ 2.[1] From 1997 to 2018, Whitaker owned nonparty KRI, "a North Carolina corporation and employee staffing agency." Id. ¶ 3.
In the spring of 2018, plaintiffs were interested in expanding Monroe's operations in North Carolina. Am. Compl. ¶ 23. As part of these efforts, they began discussions with Whitaker, who was seeking potential buyers for KRI with the assistance of the investment banking firm Anderson, LeNeave & Co. (Anderson). Id. ¶ 24. The parties continued discussions "[o]ver the course of several months," id. ¶ 28, during which Anderson provided information regarding KRI's operations to plaintiffs, including a confidential "Information Memorandum" discussing KRI's ability to provide its clients with "expertise" with respect to "I-9 Compliance," i.e., the verification of "identity and employment authorization of individuals hired for employment in the United States." Id. ¶¶ 30-32. Plaintiffs further allege that, during negotiations, Whitaker personally assured them that KRI had "very tight controls over all of [its] administrative activities" and has "never had any legal issues in relation to [its] temporary workers." Id. ¶¶ 38-39.
On August 27, 2018, the parties entered into the SPA, pursuant to which Whitaker sold all of her shares in KRI to Monroe for a total purchase price of $12,163,188. Am. Compl. ¶ 50; SPA § 1.02. Staffing 360, which was a party to the SPA, "guaranteed the full and timely performance of Monroe's payment obligations" under the contract, Am. Compl. ¶ 55, and was "entitled to assert any and all rights, remedies and defenses which would otherwise be available to [Monroe] under" the SPA. Id. ¶ 56 (alteration in original); see SPA § 1.05(b). The purchase price was to be paid in three installments:
SPA § 1.03. After the parties executed the SPA, "Monroe promptly tendered the Closing Date Payment[.]" Am. Compl. ¶ 78.
The SPA includes a New York choice-of-law and consent-to-jurisdiction provision:
Governing Law; Submission to Jurisdiction. This Agreement, and all matters arising out of or relating to this Agreement, shall be governed by and construed in accordance with the internal laws of the State of New York, without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction). Any legal suit, action, proceeding, or dispute arising out of or related to this Agreement, the other transaction documents, or the transactions contemplated hereby or thereby may be instituted in the federal courts [] or the courts of the State of New York in each case located in the city and county of New York, and each party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action, proceeding, or dispute.
The first earnout payment was due on or about August 27, 2019, see SPA ¶ 1.03(b), but was not paid. See Am. Compl. ¶ 82. On September 11, 2019, the parties entered into an Amendment Agreement, id. ¶ 81, which delayed the deadline for the first earnout payment but required Monroe to pay interest during the period of delay, and accelerated the deadline for the second earnout payment, as follows:
Am. Ag. § 2. Section 8.08 of the SPA, regarding choice of law and consent to jurisdiction, was incorporated by reference into the Amendment Agreement and "made a part hereof." Am. Ag. § 3. The SPA otherwise remained "in full force and effect." Id. § 4.
Plaintiffs allege that Monroe paid Whitaker interest in the amount of $10,000 per month, pursuant to the terms of the Amendment Agreement, from September 2019 through January 2020. Am. Compl. ¶ 82.
In September 2019 - the same month the Amendment Agreement was signed - plaintiffs "prepared to conduct a routine audit of its operating units including, for the first time, KRI." Am. Compl. ¶ 85. During that audit, plaintiffs discovered that KRI had failed to comply with certain requirements of the Immigration Reform and Control Act, Pub. L. No. 99-603, 100 Stat. 3359 (1986), in that it failed to "create or maintain completed Forms I-9 for all employees," failed to "complete all required sections of the Forms I-9, for those employees with Form I-9s," failed to "complete I-9 paperwork for employees within three days of hire," and failed to "complete ReVerification Form I-9s for employees whose work authorization expired during their employment, on or before the date the employment authorization expired[.]" Am. Compl. ¶ 100.
According to plaintiffs, "[t]his discovery also meant that many of the warranties and representations set forth in the SPA included material misstatements of present facts and/or omitted material facts." Am. Compl. ¶ 115. Plaintiffs point to § 3.02 of the SPA, in which Whitaker represented that KRI had "full corporate power and authority . . . to carry on its business as it has been and is currently conducted," id. ¶ 116; § 3.07 of the SPA, in which she represented that "'[t]he Company has no liabilities, obligations, or commitments of any nature whatsoever . . . except . . . those which are adequately reflected or reserved against in the Balance Sheet' . . . provided to Plaintiffs," id. ¶ 124; and § 3.08 of the SPA, in which she represented that "there has not been . . . any change, event, condition, or development that is, or could reasonably be expected to be, individually or in the aggregate, materially adverse to the business, results of operations, condition (financial or otherwise), prospects, or assets of [KRI]." Id. ¶ 125.
On November 25, 2019, plaintiffs notified Whitaker that "certain of...
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