Sunquest Info. Systems v. Dean Witter Reynolds

Decision Date24 March 1999
Docket NumberNo. Civ.A. 98-188J.,Civ.A. 98-188J.
PartiesSUNQUEST INFORMATION SYSTEMS, INC., a Pennsylvania Corporation, Plaintiff, v. DEAN WITTER REYNOLDS, INC., a Delaware Corporation, The Compucare Company, a Delaware Corporation, Defendants.
CourtU.S. District Court — Western District of Pennsylvania

Bruce C. Fuchs, Mark E. Ulven, Klett, Lieber, Rooney & Schorling, Pittsburgh,, PA, for Sunquest Information Systems, Inc., a Pennsylvania Corporation, plaintiff.

David A. Brownlee, Kenneth M. Argentieri, J.E. Hannon, Jr., Kirkpatrick & Lockhart, Pittsburgh, PA, for Dean Witter Reynolds, Inc., a Delaware Corporation, defendant.

Mark D. Shepard, Steven F. Baicker-McKee, K. Mark Hall, Babst, Calland, Clements & Zomnir, Pittsburgh, PA, for Compucare Company, a Delaware Corporation, defendant.

MEMORANDUM OPINION AND ORDER

D. BROOKS SMITH, District Judge.

In this case, plaintiff Sunquest Information Systems, Inc. filed a nine-count complaint against defendants Compucare Company and Dean Witter Reynolds, Inc., alleging that both defendants are liable to it as a result of misconduct arising out of Sunquest's acquisition of Antrim Corporation, a former subsidiary of Compucare that markets medical software. Plaintiff avers that defendants improperly failed to disclose hidden problem areas within Antrim, including "Year 2000" or "Y2K" deficiencies in its software products, that were material to plaintiff's decision to go through with the acquisition. Both defendants admit that plaintiff has properly pleaded causes of action for indemnity, breach of contract and breach of express warranty in counts I-III of the complaint, but have filed motions under Fed.R.Civ.P. 12(b)(6) to dismiss those portions of the complaint that sound in breach of implied warranty, negligent and fraudulent misrepresentation, securities fraud and rescission. For the following reasons, I will grant Compucare's motion in its entirety, but grant Dean Witter's motion only in part.

I.

According to the allegations of the complaint, which must be credited as true for the purposes of deciding this motion, "Sunquest develops, markets and supports integrated computer information systems for hospitals and other health-care providers[,] ... provid[ing] comprehensive information processing for hospital laboratory operations." Dkt. no. 1, ¶ 6. Plaintiff avers that it "is a leader in this field...." Id. In September 1996, plaintiff "became interested in acquiring information systems for out-patient laboratory operations...." Id. ¶ 7. Defendant Dean Witter, an investment banking firm retained by defendant Compucare, introduced plaintiff to Compucare and its subsidiary, Antrim. Id. ¶ 8. The parties negotiated for the sale of all outstanding shares of Antrim from Compucare to Sunquest; on November 26, 1996, a Stock Purchase Agreement ("SPA") was signed. Id., ¶ 9; see also dkt. no. 1, Exh. A (SPA).

The SPA is a thirty-nine page, single-spaced document setting forth the representations of Sunquest and Compucare. See dkt. no. 1, Exh. A. It contains an integration clause, as well as a choice of law provision reciting that the contract is to be "governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania...." Id. ¶¶ 9.6, 9.7. Plaintiff contends that some of Compucare's representations did not comport with the actual condition of Antrim; these form the basis for counts I-III of the complaint and are not specifically at issue here. Sunquest also avers, however, that defendants made a variety of oral misrepresentations about Antrim, specifically:

a. Antrim's most recent laboratory and financial information systems release was fully functional.

b. Antrim's most recent laboratory and financial information systems release was Year-2000 compliant (i.e., capable of handling the transition through the Year 2000 without failure) and had been developed and beta-tested.

c. Antrim had released a fully functional information system that could connect reference laboratories with hospital laboratories at multiple sites to create integrated information-delivery networks.

d. Antrim had released a fully functional blood bank system to process and manage information on donors and transfusion services for medical laboratories and blood centers.

e. Antrim had net operating losses of at least $4.9 million that could be carried forward for federal income tax purposes by Sunquest after the Stock Purchase. The net operating loss carry-forward was valuable to Sunquest as an offset against future federal taxable income.

Dkt. no. 1, ¶ 11. Despite the integration clause, Sunquest seeks to hold defendants liable for these alleged misrepresentations under tort and securities fraud theories. It also alleges that Compucare "created a false sense of urgency about closing the transaction and intentionally restricted Sunquest's access to important information regarding Antrim...." Id. ¶ 14.

As a result of these alleged misrepresentations, plaintiff avers that it was induced to consummate the SPA for $5 million, which it would not have done had full and truthful disclosures been made. Id. ¶ 17.

II.

A motion to dismiss cannot be granted unless the allegations in the complaint taken as true fail to state any claim upon which relief can be granted. Angelastro v. Prudential-Bache Securities, Inc., 764 F.2d 939, 944 (3d Cir.1985) (citing Conley v. Gibson, 355 U.S. 41, 45-56, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). In ruling upon a motion to dismiss, a district court must accept as true all facts alleged in the complaint, and view them in the light most favorable to the plaintiff. Markowitz v. Northeast Land Co., 906 F.2d 100, 103 (3d Cir.1990). A court "need not credit a complaint's `bald assertions' or `legal conclusions.'" In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1429-30 (3d Cir.1997) (quoting Glassman v. Computervision Corp., 90 F.3d 617, 628 (1st Cir. 1996)).

Normally, a district court deciding a motion to dismiss will not consider documents that are not a part of the pleadings. "However, an exception to the general rule is that a `document integral to or explicitly relied upon in the complaint' may be considered `without converting the motion [to dismiss] into one for summary judgment.'" Burlington Coat, 114 F.3d at 1426 (quoting Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1220 (1st Cir.1996) (emphasis added)); see also In re Donald J. Trump Casino Securities Litig., 7 F.3d 357, 368 n. 9 (3d Cir.1993) (approving the consideration of a prospectus attached to a motion to dismiss in a securities action because the plaintiff's claims were based on the document). This obviously includes exhibits attached to a complaint. Kania v. Archdiocese of Philadelphia, 14 F.Supp.2d 730, 736 n. 3 (E.D.Pa.1998); Horizon Unlimited, Inc. v. Silva, No. 97-7430, 1998 WL 88391, *2 (E.D.Pa. Feb. 26, 1998), reconsideration denied, 1998 WL 150999 (E.D.Pa. Mar. 27, 1998). Indeed, in the event of a factual discrepancy between the pleading and the attached exhibit, the exhibit controls. ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 859 n. 8 (3d Cir.1994).

III.

Defendant Compucare seeks dismissal of count four of plaintiff's complaint, which purports to state a claim for breach of implied warranty. In that count, plaintiff avers that "[t]he medical information systems transferred to Sunquest by Compucare as part of a voluntary transaction creating an interest in property were subject to the implied warranties of merchantability ... and fitness for a particular purpose prescribed by the Uniform Commercial Code...." Dkt. no. 1, ¶¶ 54-55. Defendant argues that "the transaction between Compucare and Sunquest was a sale of stock, not a sale of Antrim's assets, and, therefore, no warranties were created regarding Antrim's assets, other than those specifically set forth in the Stock Purchase Agreement." Dkt. no. 7, at 4 (emphasis deleted). I agree with defendant.

Assuming, without deciding, that a sale of securities is properly treated as a sale of goods under Article II of the UCC, only three implied warranties are created in such a transaction: title, genuineness and validity. Independent Order of Foresters v. Donaldson Lufkin & Jenrette, Inc., 919 F.Supp. 149, 153 (S.D.N.Y.1996) (citing 8 Williston on Contracts §§ 254A, 954C). Plaintiff does not allege that any of these three warranties was breached. Instead, plaintiff asks this court to treat the stock purchase as, in substance, an asset sale and apply the warranties of merchantability and fitness as if the transaction were a sale of goods, specifically Antrim's software. I cannot do so.

Paragraph 1.1 of the SPA and paragraph 9 of the complaint both characterize the disputed transaction as a sale of stock, not an asset sale, yet plaintiff alleges that it was Antrim's computer systems that were flawed. Dkt. no. 1, ¶¶ 20, 22, 23, 25. It is axiomatic, of course, that there can be no breach of warranty without a sale, Whitmer v. Bell Tel. Co., 361 Pa.Super. 282, 522 A.2d 584, 588 (1987), which involves the passage of title from seller to buyer, id.; Miley v. Harmony Mill L.P., 803 F.Supp. 965, 969 (D.Del.1992). Sunquest, however, obtained only the shares of Antrim's stock, not title to its assets, as consideration for the $5 million it paid Compucare. Courts have routinely refused to recognize implied warranties in other contexts in which there was no passage of title, see Whitmer, 522 A.2d at 589 (purchase of telephone services); Miley, 803 F.Supp. at 969 (lease),1 and I can discern no rationale for recognizing them here.

To be sure, plaintiff is able to cite several cases in which implied warranties were recognized in transactions other than sales. In All States Leasing Co. v. Ochs, 42 Or.App. 319, 600 P.2d 899, 909 (1979), an Oregon court recognized such a warranty in a lease of capital equipment. And, in Newmark v. Gimbel's, Inc., 54 N.J. 585, 258 A.2d 697, 701 ...

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