Polycast Technology Corp. v. Uniroyal, Inc.

• Decision Date: 04 May 1992
• Docket Number: No. 87 Civ. 3297.,87 Civ. 3297.
• Citation: 792 F. Supp. 244
• Parties: POLYCAST TECHNOLOGY CORPORATION and Uniroyal Plastics Acquisition Corp., Plaintiffs, v. UNIROYAL, INC., CDU Holding, Inc., Joseph P. Flannery, John R. Graham, Alexander R. Castaldi, Robert Alvine, Donald L. Nevins, Jr., Alfred Weber, Clayton & Dubilier, Inc., the Clayton & Dubilier Private Equity Fund 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.
• Court: U.S. District Court — Southern District of New York

792 F. Supp. 244

POLYCAST TECHNOLOGY CORPORATION and Uniroyal Plastics Acquisition Corp., Plaintiffs, v. UNIROYAL, INC., CDU Holding, Inc., Joseph P. Flannery, John R. Graham, Alexander R. Castaldi, Robert Alvine, Donald L. Nevins, Jr., Alfred Weber, Clayton & Dubilier, Inc., the Clayton & Dubilier Private Equity Fund 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.

No. 87 Civ. 3297.

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

May 4, 1992.

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Paul, Weiss, Rifkind, Wharton & Garrison, New York City (Martin London, George P. Felleman, Carey R. Ramos, Walter Rieman, Carol Salem, Jonathan J. Freedman, Elizabeth J. Holland, Laura Farina, of counsel), and Stein, Zauderer, Ellenhorn, Frischer & Sharp, New York City (Sidney H. Stein, of counsel), for plaintiffs.

Debevoise & Plimpton, New York City (John H. Hall, Daniel M. Abuhoff, Joseph P. Moodhe, T. Edward Tighe, of counsel), for defendants.

Friedman & Kaplan, New York City (Edward A. Friedman, Andrew W. Goldwater, Eric Seiler, of counsel), for defendant Alfred Weber.

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge:

The genesis of this action is the sale and purchase of a corporation. The purchaser repents of its bargain, and seeks to undo it and recover compensatory and punitive damages. Subject matter jurisdiction in this Court is founded upon claims under the federal securities laws and the civil RICO statute, to which state and common law claims are appended. Following extensive discovery, defendants move under Rule 56, Fed.R.Civ.P., for summary judgment dismissing the complaint.

Background

The action was originally assigned to District Judge Walker (as he then was). Much of the factual background appears in his two prior opinions, reported at 1988-89 Transfer Binder Fed.Sec.L.Rep. (CCH) ¶ 94,005, 1988 WL 96586 (S.D.N.Y. Aug. 25, 1988) and 728 F.Supp. 926 (S.D.N.Y.1989), familiarity with which is assumed.

The litigation arises from the allegedly fraudulent sale by defendant Uniroyal, Inc. ("Uniroyal") of its wholly-owned subsidiary Uniroyal Plastics Company, Inc. ("Plastics") to plaintiffs Polycast Technology Corporation ("Polycast") and Uniroyal Plastics Acquisition Corp. ("UPAC"), a company formed by Polycast to consummate the sale. I will refer to the plaintiffs collectively as "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.

Judge Walker's prior opinions dealt with challenges to the legal sufficiency of various pleadings. Since that time the parties have completed extensive discovery. All defendants now move for summary judgment dismissing all of plaintiffs' claims against them.

The operative pleading is plaintiffs' fourth amended complaint (hereinafter the "Complaint"). The defendants are Uniroyal; its parent, CDU Holding, Inc.; six officers of Uniroyal and Plastics; Clayton & Dubilier, Inc., its two principals and related investment entities (the "C & S defendants"); and the trustees of the CDU Holding, Inc. Liquidating Trust.

CDU Holding, Inc. owned all of Uniroyal's common stock from September 24, 1985 to December 2, 1986. CDU Holding, Inc. Liquidating Trust is the successor in interest to Uniroyal and CDU Holding, Inc.

The trustees of the CDU Holding, Inc. Liquidating Trust are the individual defendants Alan R. Elton, Martin H. Dubilier, Joseph P. Flannery, John R. Graham, and Joseph L. Rice III.

At the pertinent times Flannery was chairman of the board, chief executive officer, and president of Uniroyal, as well as a stockholder. Flannery is also alleged to be a beneficiary of the Liquidating Trust.

Defendant Graham was chief financial officer and a stockholder of Uniroyal, and is a beneficiary of the Liquidating Trust. Defendant Alexander R. Castaldi was vice-president, controller, and a stockholder, and a beneficiary of the Liquidating Trust.

Defendant Elton was vice-president and general counsel of Uniroyal. He is named as a defendant in this action solely in his capacity as a trustee of the Liquidating Trust.

Defendant Robert Alvine was group vice-president of the Engineered Products Group — Worldwide of Uniroyal, a Uniroyal stockholder, and president of Plastics until October 31, 1986. He is a beneficiary of the Liquidating Trust.

Defendant Donald L. Nevins, Jr., was controller of the Engineered Products Group of Uniroyal.

Defendant Alfred Weber was vice-president and the general manager of Plastics until November 1, 1986, a stockholder of Uniroyal, and is a beneficiary of a Liquidating Trust.

The "C & D defendants," as they are collectively referred to in the litigation, consist of Clayton & Dubilier, Inc., the Clayton & Dubilier Private Equity Limited Partnership, the Clayton & Dubilier Associates Limited Partnership, and the individual defendants Dubilier and Rice. The relationship of the C & D defendants to Uniroyal and Plastics came about in this fashion. Confronted with a hostile tender offer in 1985, Uniroyal executed a merger agreement later that year with CDU Acquisition, Inc. and CDU Holding, Inc. A leveraged buyout was consummated through a merger transaction. Following completion of that transaction, all of Uniroyal's common stock was held by CDU Holding, Inc., whose shareholders included Flannery, Graham, and Weber. But the largest beneficial shareholder of CDU Holding, Inc. was the Clayton & Dubilier Private Equity Fund Limited Partnership ("C & D Private Equity"), which held 32.5% of the common stock of CDU Holding, Inc. The general partner of C & D Private Equity was Clayton & Dubilier Associates Limited Partnership ("C & D Associates"). Dubilier and Rice were the general partners of C & D Associates.

At the times pertinent to this litigation, Uniroyal's three-man executive committee consisted of Flannery, Rice and Dubilier.

Defendants Flannery, Graham, Castaldi, Alvine, Clayton & Dubilier, Inc., the Clayton & Dubilier Private Equity Fund Limited Partnership, the Clayton & Associates Limited Partnership, Dubilier and Rice are alleged to have been at the pertinent times controlling persons of Uniroyal and of CDU Holding, Inc. under section 15 of the Securities Act of 1933, 15 U.S.C. § 77o and section 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78t.

Polycast agreed to purchase Plastics from Uniroyal in a Stock Purchase Agreement (hereinafter "SPA") dated as of July 23, 1986. The transaction closed on October 31, 1986. Plaintiffs now regret that purchase, regard themselves as the victims of fraud, and commenced this action which they summarize in their brief at 2:

The core of this case is a fraud claim — that defendants deliberately misrepresented what Plastics would earn in 1986 and subsequent years and that plaintiffs relied upon those false representations in purchasing Plastics for $110 million.

That core finds expression in nine claims for relief set forth in the complaint, as follows:

The first claim, against all defendants, alleges violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Complaint, ¶¶ 34-148.

The second claim, against all defendants, alleges violation of section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2). Complaint, ¶¶ 149-159.

The third claim, against the C & D defendants, charges them as principals in violating section 12(2) of the Securities Act. Complaint, ¶¶ 160-161.

The fourth claim, against all defendants, charges violations of the RICO statute, 18 U.S.C. § 1962(c). Complaint, ¶ 162-181.

The fifth claim, against all defendants, alleges common law fraud. Complaint, ¶¶ 182-189.

The sixth claim, against all defendants, alleges negligent misrepresentation. Complaint, ¶¶ 190-195.

The seventh claim, against Uniroyal and the trustees of the Liquidating Trust, alleges breach of warranty. Complaint, ¶¶ 196-202.

The eighth claim, against Uniroyal and the trustees of the Liquidating Trust, is for indemnity. Complaint, ¶¶ 203-208.

The ninth claim, against Uniroyal and the trustees of the Liquidating Trust, is for reformation of the purchase agreement. Complaint, ¶¶ 209-225.

In their prayers for relief, pleaded in the alternative, plaintiffs seek rescission or reformation of the contract, and compensatory and punitive damages, with compensatory damages to be trebled under RICO.

The parties have engaged in extensive discovery. The deposition transcripts and documents produced are voluminous. It is difficult to imagine that trial will give rise to additional evidentiary material of any significance. All defendants now move for summary judgment.

Discussion

Under Fed.R.Civ.P. 56(c), the moving party is entitled to summary judgment if the papers "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." On such a motion, "a court's responsibility is to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party." Coach Leatherware Co., Inc. v. Ann Taylor, Inc., 933 F.2d 162, 167 (2d Cir.1991) (citing Knight v. U.S. Fire Insurance, 804 F.2d 9 (2d Cir.1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987)). The responding party "must set forth specific facts showing that there is a genuine issue for trial." Fed. R.Civ.P. 56(e). "The non-movant cannot `escape summary judgment merely by vaguely asserting...