Snowstorm Acquisition Corp. v. Tecumseh Products Co.

• Decision Date: 21 September 2010
• Docket Number: No. CIV.09-866-SLR,CIV.09-866-SLR
• Citation: 739 F.Supp.2d 686
• Parties: SNOWSTORM ACQUISITION CORPORATION Plaintiff, v. TECUMSEH PRODUCTS COMPANY, AlixPartners, LLP, AP Services, LLC and James Bonsall Defendants.
• Court: U.S. District Court — District of Delaware

739 F.Supp.2d 686

SNOWSTORM ACQUISITION CORPORATION Plaintiff,

v.TECUMSEH PRODUCTS COMPANY, AlixPartners, LLP, AP Services, LLC and James Bonsall Defendants.

No. CIV.09-866-SLR.

United States District Court,

D. Delaware.

Sept. 21, 2010.

Etta R. Wolfe, Esquire of Potter Anderson & Corroon LLP, Wilmington, Counsel for Plaintiff. Of counsel: Mark S. Baldwin, Esquire, Jennifer Mullen St. Hilaire, Esquire, and Dylan P. Kletter, Esquire of Brown Rudnick, LLP, Hartford, CT.

Ian Connor Bifferato, Esquire and Thomas F. Driscoll III, Esquire of Bifferato LLC, Wilmington, Counsel for Defendants AlixPartners, LLP, AP Services, LLC and James Bonsall. Of Counsel: Kenneth E. Rechtoris, Esquire and Todd E. Pentecost, Esquire of K & L Gates LLP, Chicago, IL.

MEMORANDUM OPINION

SUE L. ROBINSON, District Judge.

I. INTRODUCTION

Plaintiff Snowstorm Acquisition Corporation ("Snowstorm") filed this action against defendants Tecumseh Products Company ("Tecumseh Products"), AlixPartners, LLP ("AlixPartners"), AP Services, LLC ("APS"), and James Bonsall ("Bonsall") ¹ on November 13, 2009, alleging: (i) breach of contract; (ii) violation of § 10(b) (" § 10(b)") of the Securities Exchange Act of 1934 ("the Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; (iii) violation of § 20(a) of the Act, 15 U.S.C. § 78t(a); (iv) common law fraud; (v) declaratory judgment; and (vi) negligent misrepresentation. (D.I. 1) Presently before the court is the APS Parties' motion to dismiss counts (ii)—(iv) and (vi) pursuant to Federal Rule of Civil Procedure 9(b) for failing to comply with the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b), and under Federal Rule of Civil Procedure 12(b)(2), for lack of personal jurisdiction over Bonsall, and 12(b)(6), for failure to state a claim for which relief may be granted. (D.I. 10) The court has jurisdiction under § 78aa of the Act, and 28 U.S.C. §§ 1331 and 1367.² For the reasons set forth below, the court grants in part and denies in part the APS Parties' motion.

II. BACKGROUND

A. The Parties

Snowstorm is a Delaware corporation with its principal place of business in Beverly Hills, California. (D.I. 1 at ¶ 1) Snowstorm acquired TecumsehPower Company ("TecumsehPower") from Tecumseh Products on November 9, 2007. ( Id. at ¶ 47)

AlixPartners is a Delaware limited liability partnership with its principal place of business in Southfield, Michigan. ( Id. at ¶ 3) AlixPartners is engaged in, inter alia, the business of improving corporate financial and operational performance, and executing corporate turnarounds. (D.I. 12, Tab 11 at ¶ 3) APS is a Michigan limited liability company with its principal place of business in Southfield, Michigan. (D.I. 1 at ¶ 4) APS is a wholly-owned subsidiary of AlixPartners. ( Id.)

Bonsall is a managing director of AlixPartners, Executive Vice President of Tecumseh Products, and President of TecumsehPower. (D.I. 12, Tab 11 at ¶ 3) Bonsall is a citizen of Michigan living and working in Munich, Germany.

B. Tecumseh Products engages the APS Parties

The present controversy centers around the acquisition of TecumsehPower—the engine manufacturing division of Tecumseh Products—which was incorporated in approximately 2002. (D.I. 1 at ¶ 9) By July 2005, TecumsehPower was experiencing significant financial difficulties, so Tecumseh Products engaged AlixPartners and APS to facilitate improvement of TecumsehPower's financial condition. ( Id. at ¶ 10) In furtherance of the improvement efforts, Tecumseh Products entered into Letter Agreements with AlixPartners and APS, through which Bonsall was given the title of President of TecumsehPower along with the responsibility of ensuring improvement for TecumsehPower. ( Id. at ¶ 11) Additionally, the Letter Agreements afforded key personnel to assist in the efforts of the APS Parties, including Bob Busch ("Busch"), who was to act as Vice President in support of Bonsall. ( Id.) On or around January 19, 2007, Bonsall was named Interim President and Chief Operating Officer of Tecumseh Products and, on or around September 1, 2007, he was named Executive Vice President. ( Id.)

In accordance with the terms of the Letter Agreements, Tecumseh Products paid AlixPartners a fixed fee of $850,000 plus "monthly contingent success fees" based on AlixPartner's ability to improve TecumsehPower's "on-going cash flow" including "inventory-related cost reductions ... manufacturing efficiencies, quality improvements, transportation cost reductions and reducing or eliminating capital expenditures ...." ( Id. at ¶ 13) Between July 2005 and year-end 2007, Tecumseh Products paid AlixPartners in excess of $37 million for services rendered. ( Id.)

During the period of the Letter Agreements, the APS Parties implemented several strategic changes as advisors to Tecumseh Products. Significantly, the APS Parties advised TecumsehPower to shut down its lawn and garden engine business which had previously constituted approximately 31% of TecumsehPower's annual revenues. ( Id. at ¶ 15) Following this decision, TecumsehPower's snow thrower engine line constituted the majority of TecumsehPower's annual sales at between 54% and 64%. ( Id. at ¶ 16) In addition, the APS Parties made changes to TecumsehPower's Quality Assurance Group's "zero tolerance" customer complaint goal. ( Id. at ¶ 18) As a result, instead of tracking every quality complaint made by customers, as it had previously done,³ the APS Parties instructed TecumsehPower to track only the complaints that required a written response (known as "spills"). ( Id. at ¶¶ 18-19) According to Snowstorm, AlixPartnersreceived a contingency fee based on the reduced complaint volume that resulted. ( Id. at ¶ 19) Further, Snowstorm alleges that AlixPartners instructed TecumsehPower to refrain from: (1) including any other types of information in Quality Assurance reports; (2) including any type of "anecdotal" information in Quality Assurance reports; and (3) "editorializing" in any such reports. ( Id. at ¶ 20) Quality Assurance employees were also instructed not to bring up quality issues in group meetings, and any employees who refused to cooperate were instructed not to attend group meetings. ( Id.)

C. The Failing MTD Relationship

Historically, MTD Products, Inc. ("MTD") was one of TecumsehPower's largest clients. ( Id. at ¶ 22) MTD is a market leader—with annual revenues in excess of $1 billion—in the design and manufacture of outdoor power equipment, including lawnmowers, snow throwers, chain saws, hedge trimmers, chippers and riding tractors. ( Id. at ¶ 21) MTD had accounted for over 50% of TecumsehPower's overall engine business, and was TecumsehPower's largest client in the snow thrower business, where TecumsehPower controlled approximately 80% of the market. ( Id. at ¶ 22) For much of this time, TecumsehPower had been MTD's exclusive provider of snow thrower engines, operating under a series of three-year memoranda of understanding ("MOU"). ( Id. at ¶¶ 21-22) On March 18, 2005, MTD and TecumsehPower entered into the "Snow Product Line" MOU (the "Snow MOU") which established an exclusive relationship between the two companies. ( Id. at ¶ 23) The Snow MOU was to expire on February 28, 2008, but an "evergreen" provision provided that, in the event the Snow MOU is not terminated at least "90 days prior to [the] end of any given term," "the Snow MOU automatically renew[ed] for an additional year upon completion of the initial term and/or any renewal term ...." ( Id. at ¶ 24)

By mid-2006, the relationship between MTD and TecumsehPower had become strained. ( Id. at ¶ 25) On July 17, 2006, MTD sent a letter to Bonsall, as President of TecumsehPower, in which it advised that "[e]vents over the past year are such that the third year contemplated under the Snow MOU is simply not feasible at this point." ( Id.) The letter cited several issues, including the fact that "Tecumseh[Power] continues to have snow engine quality issues and has shown an inability to effectively resolve issues once identified." ( Id.) Two days later, Bonsall responded to MTD in an email seeking MTD's affirmance that it "has no grounds to, nor does it presently intend to, cancel the [Snow] MOU during the term provided in the agreement." ( Id. at ¶ 26) On July 31, 2006, MTD replied to Bonsall:

For the reasons discussed in [the] July 17, 2006 letter to you it is MTD's position that [TecumsehPower] has breached the [Snow] MOU. As a result, it is MTD's position that the [Snow] MOU is now terminated.... [U]nder the circumstances[,] MTD simply cannot commit to making [TecumsehPower] its exclusive provider of snow engines through the 2008 season.

( Id. at ¶ 27) Two days later, Bonsall responded that "MTD cannot unilaterally terminate the [Snow] MOU." ( Id. at ¶ 28) MTD maintained its position through oral and written correspondence that TecumsehPower was no longer MTD's exclusive snow thrower engine supplier. ( Id. at ¶ 29)

In February 2007, MTD sent TecumsehPower a "Supplier Performance Scorecard" in which TecumsehPower was rated as sub-standard and below unacceptable. ( Id. at ¶ 30) Specifically, in the quality category, MTD gave TecumsehPower ascore of 13 out of 40, and in the "PPM" subcategory,⁴ MTD scored TecumsehPower 0 out of 14. ( Id.)

Despite MTD's low ratings of TecumsehPower's Quality Assurance Program, TecumsehPower attempted to salvage the relationship through new, multi-year MOUs in the snow thrower division. ( Id. at ¶ 31) MTD was not interested in maintaining a long-term relationship. ( Id.) In fact, by January 2007, MTD was taking efforts in furtherance of engaging a Chinese supplier and Briggs & Stratton in order to replace TecumsehPower as its supplier of snow thrower engines. ( Id. at ¶ 32) Bonsall and other senior management at TecumsehPower were aware of rumors circulating about MTD seeking other suppliers, to which Bonsall and the other senior executives...