Polycast Technology Corp. v. Uniroyal, Inc.
| Decision Date | 21 November 1989 |
| Docket Number | No. 87 Civ. 3297 (JMW).,87 Civ. 3297 (JMW). |
| Citation | 728 F. Supp. 926 |
| Parties | POLYCAST TECHNOLOGY CORPORATION, Plaintiff, v. UNIROYAL, INC., CDU Holding, Inc., Joseph P. Flannery, John R. Graham, Alexander R. Castaldi, Donald L. Nevins, Jr., Robert Alvine, Alfred Weber, Clayton & Dubilier, Inc., Clayton & Dubilier Private Equity Limited Partnership, Clayton & Dubilier Associates Limited Partnership, Martin H. Dubilier, Joseph L. Rice III, and Alan R. Elton, Martin H. Dubilier, Joseph P. Flannery, John R. Graham, and Joseph L. Rice III as Trustees of CDU Holding, Inc. Liquidating Trust, Defendants. Alfred WEBER, Counterclaim-Plaintiff, v. POLYCAST TECHNOLOGY CORPORATION and Uniroyal Plastics Company, Inc., Counterclaim-Defendants. |
| Court | U.S. District Court — Southern District of New York |
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John H. Hall, Daniel M. Abuhoff, Debevoise & Plimpton, New York City, for defendants.
Carey Ramos, Paul, Weiss, Rifkind, Wharton & Garrison, Sidney Stein, Stein, Zauderer, Ellenhorn, Frischer & Sharp, New York City, for plaintiff.
Andrew Goldwater, Friedman & Kaplan, New York City, for counterclaim-plaintiff.
This dispute arises from the allegedly fraudulent sale by defendant Uniroyal, Inc. ("Uniroyal") of its wholly owned subsidiary Uniroyal Plastics Company, Inc. ("Plastics") to plaintiff Polycast Technology Corporation ("Polycast"). In substance, Polycast alleges that in valuing and pricing the shares of Plastics and in consummating the transaction, it relied on materially misleading information furnished by defendants with respect to the financial status, earnings potential, and operating condition of Plastics, and that as a result it paid a grossly excessive price for the stock.
In four claims, the defendants are charged variously with violations of Rule 10b-5 promulgated under section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (the "Exchange Act"), section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2) and common law fraud. In this motion, defendants Martin H. Dubilier, Joseph L. Rice III, Clayton & Dubilier, Inc., The Clayton & Dubilier Private Equity Fund Limited Partnership ("Private Equity") and Clayton & Dubilier Associates Limited Partnership (C & D Associates) (collectively, the "C & D Defendants"), who are charged as both principals and aiders and abettors, move to dismiss the § 10(b) and common law claims against them for failure to plead fraud with particularity pursuant to Fed.R.Civ.P. 9(b) and to dismiss the § 12(2) claims for failure to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6).
Also Polycast moves for leave to file an amended complaint ("Proposed Fourth Amended Complaint") adding a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), to add Uniroyal Plastics Acquisition Corp ("UPAC") as a plaintiff, and to make certain additional changes. The C & D defendants have requested an order dismissing the First through Fifth Claims of the Proposed Fourth Amended Complaint should the Court grant Polycast's motion for leave to file an amended complaint.
Defendant and counterclaim-plaintiff Alfred Weber has moved to dismiss counterclaim-defendant Plastics' first amended counterclaims for failure to plead fraud with particularity, and for failure to state a claim upon which relief may be granted.
The Court presumes familiarity with its prior opinion, Polycast Technology Corp. v. Uniroyal, Inc. Current Fed.Sec.L.Rep. (CCH) ¶ 94,005, 1988 WL 96586 (S.D.N.Y. Aug. 25, 1988), and summarizes only the salient and additional facts here. On August 25, 1988, this Court dismissed, with leave to amend, Polycast's claims against the C & D defendants under federal securities and common law for failure to plead fraud with particularity. Subsequently, Polycast filed an amended complaint ("Third Amended Complaint"). The C & D defendants now move to dismiss certain claims of the Third Amended Complaint on the same grounds. For the reasons set forth below, this motion is denied.
It is well settled that on a motion to dismiss, the Court must accept the allegations of the complaint as true. Luce v. Edelstein, 802 F.2d 49, 52 (2d Cir.1986). The complaint identifies C & D as an investment banking firm owned at all times relevant to this action by its Chairman, Martin Dubilier and Chief Executive Officer Joseph Rice. Both men were directors of Uniroyal and CDU Holding, Inc. Rice and Dubilier are also general partners of C & D Associates which is a general partner of C & D Private Equity ("Private Equity"). Private Equity is a limited partnership managed by C & D. As of the liquidation of Uniroyal and its parent, Private Equity allegedly owned all of the outstanding Class C common stock, or 32.5% of the then outstanding stock of CDU Holding, Inc. In addition, from September 24, 1985 until the liquidation of CDU Holding, Inc. on December 2, 1986, Private Equity owned all of the outstanding shares of Uniroyal's Second Preferred stock. CDU Holding, Inc., owned all of Uniroyal's common stock throughout 1986 until Uniroyal and CDU Holding, Inc. were liquidated on December 2, 1986. Third Amended Complaint at ¶¶ 6, 18-26.
In September 1985, pursuant to an agreement signed by Rice as President of CDU Acquisition, Inc. and CDU Holding, Inc. and an unspecified signatory on behalf of Uniroyal, Uniroyal merged with CDU Acquisition, Inc., a wholly owned subsidiary of CDU Holding. As a result, CDU Holding acquired all of Uniroyal's common stock. C & D Private Equity owned 32.5% of the common stock of CDU Holding, Inc., and 260,000 shares of Uniroyal redeemable second preferred stock. The complaint alleges that after the merger was complete, the C & D defendants, among others, embarked upon a plan to liquidate Uniroyal and pay the bulk of the proceeds to themselves. As part of that plan, they commenced preparations for the sale of Plastics.
The complaint alleges, in essence, that throughout the preparations and negotiations leading to Polycast's purchase of Plastics, the C & D defendants, among others, repeatedly misrepresented Plastics' financial health and prospects, particularly Plastics' 1986 estimated earnings.
Polycast claims the C & D defendants' role in the deception began in December 1985 when they began preparing the allegedly fraudulent offering memorandum upon which Polycast relied in purchasing Plastics and continued until the sale of Plastics closed on October 31, 1986. Specifically, Polycast alleges that on December 3, 1985, Rice and Dubilier received a draft offering memorandum from Drexel Burnham Lambert Incorporated ("Drexel") acting as investment bankers for C & D and Uniroyal in connection with the sale of Plastics. On December 5, 1985, Dubilier and Peter Dolle of C & D met with employees of Uniroyal, Plastics and Drexel at C & D's offices to discuss the sale. Polycast alleges that at the meeting, Dubilier, Dolle and others reviewed the draft offering memorandum and discussed a 1986 earnings projection of $24 million that would appear in the offering memorandum. Id. at ¶ 40. Polycast also alleges that notes taken by defendant Donald L. Nevins at the meeting contain the phrase "need 600 more in EBIT earnings before taxes." Polycast interprets these words as reflecting discussion at or immediately following the meeting that the $24 million earnings projection contained at least $600,000 in known earnings shortfall. Id.
In a February 1986 meeting, Drexel gave C & D representatives a list of potential bidders who would be offered the opportunity to review the Plastics offering memorandum. Polycast alleges that either Dubilier or Rice or both attended that meeting. Later that month, Drexel presented to Dubilier and Rice exclusively a document entitled "Uniroyal Plastics Company Preliminary Valuation Analysis." Id. at ¶ 42. The alleged purpose of the document was to provide a basis for determining the market value of Plastics.
On February 5, 1986, Drexel circulated a new draft offering memorandum to Rice and Dubilier, among others. Id. at ¶ 43. The cover letter accompanying the draft noted in detail the areas of Plastics' business requiring attention by the recipients of the draft. For example, the letter directed the recipients' attention to "more detail on competition in coated fabrics and roofing adhesives." Id. It also contained notice that the recipients of the draft would meet the following week to discuss the draft and the noted areas of Plastics' operations.
On February 13 at approximately 9 a.m., Dubilier spoke with defendants Castaldi, Alvine and Nevins by phone about the financial statements to be included in the offering memorandum. Id. at ¶ 44. Polycast alleges that during this conversation, Dubilier specifically discussed how the offering memorandum should present Plastics' management personnel, legal, treasury, computer, communications and industrial relations expenses. The following day, February 14, Drexel circulated a revised draft offering memorandum to Rice and Dubilier among others. Id. at 45. A note accompanying this draft stated that it incorporated "comments received from ... Clayton and Dubilier during the past week." Id. Subsequently, Drexel circulated the final draft of the Plastics offering memorandum to Rice and Dubilier, among others.
On about February 24, Dubilier contacted Castaldi who later reported his discussions with Dubilier to Nevins. Id. at ¶ 47. Polycast alleges — on information and belief based on Nevins' notes — that Castaldi "instigated by" Dubilier, pressured Nevins to "find purported support" for the inflated 1986 earnings forecasts for Plastics to disclose to Polycast. Id. More specifically, Castaldi allegedly pressured Nevins "as to why Uniroyal could not project higher...
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