The opinion of the court was delivered by: URBINA, District Judge.
GRANTING IN PART AND DENYING IN PART DEFENDANT USOP'S MOTION TO DISMISS;
GRANTING IN PART AND DENYING IN PART DEFENDANT LEDECKY'S MOTION TO
GRANTING IN PART AND DENYING IN PART DEFENDANT CLAYPOOLE'S MOTION TO
GRANTING THE PLAINTIFFS' MOTION FOR LEAVE TO AMEND THE COMPLAINT
In October 1997, the plaintiffs sold their company, Aztec International
("Aztec"), to defendant U.S. Office Products ("USOP") in exchange for
720,000 shares of USOP common stock. After the merger and before the
plaintiffs sold their USOP stock, the value of the USOP stock decreased
significantly. In response, the plaintiffs filed a 20-count complaint
violations, fraud, negligence, negligent
misrepresentation, conspiracy, and breach of fiduciary duty on the part
of the defendants. The complaint addresses two contracts: the written
Agreement and Plan of Reorganization ("Reorganization Agreement")
governing the merger of Aztec and USOP, and an oral contract wherein the
defendants allegedly promised to compensate the plaintiffs for the loss
in value of their USOP stock. In the Second Amended Complaint
("complaint"), the plaintiffs claim that the defendants breached the
contracts, made false statements regarding the contracts, and
fraudulently induced the plaintiffs to enter into the contracts.
The plaintiffs originally filed this action in the United States
District Court for the District of Delaware. The Judicial Panel on
Multi-District Litigation transferred the case to this court for pretrial
proceedings as part of the USOP Multi-District Litigation ("MDL") pending
in this court. This case and others in the USOP MDL action involve
defendants USOP; Jonathan Ledecky, the former President, Chief Executive
Officer, and Chairman of USOP; and James Claypoole, the President of the
Technology Solutions Division of USOP. This matter is now before the
court on the defendant USOP's, Ledecky's, and Claypoole's separately
filed motions to dismiss the complaint pursuant to Federal Rule of Civil
Procedure 12(b)(6). For the reasons set forth below, the court grants in
part and denies in part the defendants' motions to dismiss.
The plaintiffs are the former owners of Aztec, a closely held Delaware
corporation located in Connecticut that the plaintiffs sold to defendant
USOP in October 1997. Compl. ¶ 4. Plaintiffs Jack and Fran Meehan,
Les Asher, and Gordon Tingets reside in Connecticut, plaintiffs Beth and
Christopher Meehan reside in Colorado, plaintiff William Durniak resides
in New York, and plaintiff Michael Dickens resides in Texas. Id. ¶¶
7-15. The plaintiffs claim that during negotiations regarding the
USOP-Aztec merger, the defendants made false and misleading statements
and omissions regarding USOP's future business strategy. E.g., id. ¶¶
38, 62. The plaintiffs detrimentally relied on these false statements and
agreed to sell Aztec to USOP based on these statements and omissions.
Id. ¶ 38. The plaintiffs state that had they been aware of USOP's
true business plans, they would not have sold Aztec to USOP. Id. ¶
Once the plaintiffs became aware of USOP's new business strategy, they
met with defendants Ledecky and Claypoole in the District of Columbia in
February 1998 to discuss their concerns. Id. ¶¶ 54, 55. At this
meeting, defendant Ledecky guaranteed that USOP would provide the
plaintiffs with consideration equal to that agreed upon for the sale of
Aztec. Id. ¶ 56. Furthermore, Mr. Ledecky allegedly gave his personal
guarantee that he would make the plaintiffs whole if USOP failed to do
so. Id. Later, both Mr. Ledecky and USOP refused to provide the
plaintiffs with the consideration they allegedly agreed to. Id. ¶ 61.
B. Defendant USOP's Original Business Plan
Defendant Ledecky founded USOP, a company located in the District of
Columbia and incorporated in Delaware, in 1994.
Id. ¶ 24. USOP's
business strategy was to acquire existing companies in exchange for USOP
stock and then group these companies together as a single corporate
entity to achieve increased reported revenues, thereby increasing the
value of USOP stock. Id. To maintain its stock price, USOP used business
practices, such as the pooling-of-interests accounting method.*fn2 Id.
¶ 26. USOP could not use the pooling-of-interests accounting method,
however, if it intended to engage in a buyback or spin-off of an acquired
company within two years of the acquisition. Id. ¶ 26.
C. Defendant USOP's Negotiations with Aztec
In early 1997, USOP representatives approached plaintiff Jack Meehan,
Aztec's principal owner, about the possibility of acquiring Aztec. Id.
¶ 27. Based on USOP representatives' description of USOP's business
plan, Jack Meehan and Eric Schwartz, president of USOP's Computer Network
Services Division, entered into a confidentiality agreement. Id. USOP and
Aztec then began acquisition discussions. Id. ¶¶ 27-28. During these
discussions, USOP Technology Solutions President defendant Claypoole
indicated that defendant Ledecky was directing USOP's strategy for this
merger and that Mr. Ledecky was the visionary leader who would build USOP
into an $8 billion company by the year 2000. Id. ¶ 28.
During the first week of October 1997, Aztec received a Letter of
Intent from USOP confirming USOP's intent to acquire Aztec in exchange
for 720,000 shares of USOP stock. Id. ¶ 31. USOP representatives
refused the plaintiffs' original demand for cash consideration and
represented that the all-stock deal would be beneficial to the plaintiffs
because it would allow the transaction to qualify for
pooling-of-interests accounting treatment. Id. To this end, USOP's Letter
of Intent stated that "[t]he Proposed Acquisition [of Aztec] must qualify
for the pooling-of-interest [sic] accounting treatment." Id.
During late October 1997, Aztec and USOP representatives negotiated the
terms of the Reorganization Agreement. Id. ¶ 32. During these
negotiations, USOP representatives provided the plaintiffs with copies of
USOP's most recent prospectus and supplements, as well as various
articles on USOP, Mr. Ledecky, and the nature of USOP's stock. Id. USOP
did not mention any planned changes in its business strategy. Id. The
Reorganization Agreement provided for total consideration ("Merger
Consideration") of 720,000 shares of USOP Common Stock that were trading
at a price of $37.5625 per share as of the closing date. Id. ¶ 34.
The shares were subject to transfer restrictions in accordance with the
pooling-of-interests accounting rules. Id. ¶ 35. These restrictions
prohibited the plaintiffs from selling any of their USOP shares until USOP
and Aztec operations had been combined for a period of 30 days after
publication of their combined results in a public announcement. Id. USOP
controlled the timing of this public announcement and the restriction on
the plaintiffs' shares was set to expire in mid-February 1998. Id.
On October 24, 1997, the plaintiffs entered into the Reorganization
Agreement with USOP and its subsidiary, Mason Acquisition Corporation.
Id. ¶ 38. On the same day, the acquisition closed, Aztec became a
subsidiary of USOP, and the Aztec shareholders were issued 720,000
shares of USOP stock with a total market value of $27,000,000.00. Id. ¶
D. The Defendants' Alleged Misrepresentations and Omissions During the
Negotiation of the Reorganization Agreement
The plaintiffs plead that, during the negotiations, USOP's
representatives provided them with false and misleading information and
failed to disclose other adverse information. Id. ¶ 38. The
plaintiffs relied on this information and, if not for the defendants'
omissions and false statements, they would not have entered into the
Reorganization Agreement. Id. ¶¶ 39, 42, 45, 62.
From October 4 through 7, 1997, USOP held a Technology Solutions
Presidents' Meeting in the District of Columbia. Id. ¶ 37. Mr.
Claypoole presided over this meeting, which Computer Network Services
Division President Eric Schwartz attended. Id. At this meeting Mr.
Claypoole and other unnamed individuals discussed a new business strategy
involving entering into a stock repurchase and spin-off transaction. Id.
This new business strategy included spinning off the Technology Solutions
Division, which was to include Aztec. Id. ¶¶ 28, 31.
The defendants knew that this spin-off (which would occur within two
years of the Aztec acquisition) and repurchase plan would specifically
disqualify USOP from using the pooling-of-interests accounting method
specified in USOP's Letter of Intent. Id. ¶¶ 31, 36. In addition, USOP
representatives had represented that Mr. Ledecky was the driving force
behind USOP and that he and the company intended to continue making new
acquisitions. Id. ¶ 30. Despite knowledge of the planned transition
within USOP, the company's representatives failed to inform the
plaintiffs of the transition, continued to sell USOP as an
acquisition-driven company, and told them that USOP's strategy would not
undergo any drastic changes. Id. ¶¶ 32, 41.
E. Post-Merger Events within Defendant USOP
On November 5, 1997, USOP announced that Mr. Ledecky was stepping down
as President and Chief Executive Officer and that Tom Morgan would
replace him. Id. ¶ 40. In the press release, Mr. Ledecky referred to
Mr. Morgan's "outstanding service in transitioning [USOP] from an
acquisition-driven company to one that is focused on exploiting the
opportunities [it has] to realize tremendous operating efficiencies." Id.
Mr. Ledecky announced the news to plaintiffs Jack Meehan, William
Durniak, Les Asher, and Gordon Tingets during a conference call held that
same day. Id. On November 21, 1997, USOP held a management retreat for
its division presidents. Id. ¶ 42. At this retreat, the presidents
received copies of a memorandum prepared by new USOP President Tom
Morgan. Id. This memorandum stated that one of USOP's new priorities was
to become less dependent on acquisitions. Id. Following these events,
USOP's stock price dropped. Id. ¶ 43.
On January 13, 1998, USOP issued a detailed press release entitled
"U.S. Office Products Announces Strategic Restructuring," revealing that
USOP was planning a $1 billion self-tender for approximately 37 million
shares at a price of $27.00 per share. Id. ¶ 44. USOP was also
planning to spin-off four divisions: Corporate Travel Services,
Education, Print Management, and Technology Solutions. Id. The company
planned to incur approximately $800 million in additional indebtedness to
fund the repurchase, the spin-offs, and a $270 million equity investment
from a fund managed by Clayton, Dublier & Rice, a private equity
firm. Id. The press release estimated that at the close of all
transactions, USOP would have approximately
$1.3 billion in total
indebtedness and announced that Mr. Ledecky would step down as chairman
of USOP once the transactions were complete. Id. Following the
publication of this press release, USOP's stock price dropped sharply.
Although not mentioned in the press release, the transaction with
Clayton, Dublier & Rice allowed USOP management personnel, including
defendants Ledecky and Claypoole, to exercise stock options that the
plaintiffs believe allowed the defendants to saturate the market with USOP
stock. Id. ¶ 48. These options allowed USOP personnel to sell their
stock for $27.00 per share, "a substantial premium to the then-current
stock price, which has since repeatedly fallen." Id. Also on January 13,
1998, USOP notified the plaintiffs that the USOP stock that they received
as Merger Consideration would be traded in for watered-down USOP stock
and shares of stock in the four newly created spin-off companies. Id.
On January 21, 1998, the plaintiffs began planning to sell their USOP
stock pending the lifting of the pooling-of-interests transfer
restrictions. Id. ¶ 52. When plaintiff Meehan contacted USOP by
telephone, USOP's legal department informed Mr. Meehan that the
restrictions were lifted on January 13, 1998. Id. Although USOP's legal
department told Mr. Meehan that it had transmitted this information to
Mr. Meehan's office, it later acknowledged that it had sent the
notification to the wrong number. Id. Between January 13 and 21, 1998,
USOP's stock price declined from $20.56 per share to an unspecified
amount. Id. ¶ 53.
Once Mr. Meehan learned of USOP's mistake regarding the facsimile, he
contacted Mr. Claypoole and demanded that Mr. Claypoole provide the
plaintiffs with solutions to their problems regarding the declining value
of USOP's stock. Id. ¶ 54. On January 22, 1998, Mr. Meehan and Mr.
Claypoole met in Florida and Mr Claypoole advised Mr. Meehan to "hold
tight" and said he would arrange a meeting with Mr. Ledecky. Id.
F. Plaintiff Meehan's February 11, 1998 Meeting with
Defendants Ledecky and Claypoole
On February 11, 1998, plaintiff Meehan met with defendants Ledecky,
then the Chairman of USOP, and Claypoole in the District of Columbia.
Id. ¶ 55. Phillip Arturi and Bruce Torello*fn3
Network Services, another USOP Technology Division company, also attended
the meeting. Id. At this meeting, Mr. Meehan informed Mr. Ledecky of his
concerns and told him that he and the other shareholders wanted to be
made whole. Id. Mr. Ledecky told Mr. Meehan that he was certain that the
pending stock spin-off and tender offer would "make Plaintiffs whole" and
earn them a profit. Id. ¶ 55. He also told Mr. Meehan "that his word
was his bond, this is how he built his business and [he had] never gone
back on [his] word." Id. (internal quotation marks omitted).
Mr. Ledecky stated that, if the post-split aggregate value of the
spin-offs and the cash received from the stock self-tender failed to equal
the Merger Consideration provided for in the Reorganization Agreement,
USOP would make the plaintiffs whole. Id. ¶ 56. Mr. Ledecky also said
he personally would make the plaintiffs whole if USOP failed to do so.
Id. In consideration for these promises, and at the insistence of both
Mr. Ledecky and Mr. Claypoole, the plaintiffs agreed to refrain from
selling any of their USOP stock prior to
the spin-off scheduled for April 25, 1998. Id. ¶ 56, Ex. A.
Mr. Claypoole urged the parties not to create a formal written
agreement because "these deals were made behind closed doors." Id. ¶
57. Mr. Meehan asked Mr. Ledecky if he would accept the details of the
agreement in writing, but Mr. Ledecky refused. Id. Mr. Claypoole,
however, did agree to accept a letter from Messrs. Meehan, Arturi, and
Torello concerning the meeting and the "make-whole" agreement. Id. Mr.
Meehan then asked Mr. Ledecky to shake hands to the agreement. Id. Mr.
Ledecky did so and told Mr. Meehan "[y]ou have my word." Id.
On February 12, 1998, Mr. Claypoole telephoned Mr. Meehan to confirm
that Mr. Ledecky had reached a satisfactory deal with Mr. Meehan. Id.
Mr. Claypoole also urged Mr. Meehan to keep the specifics of the meeting
confidential. Id. On February 15, 1998, Messrs. Meehan and Arturi sent a
letter to Mr. Claypoole detailing the agreement ("Claypoole letter").
Id. ¶ 58, Ex. A.
G. The May 21, 1998 Shareholders' Meeting
On May 21, 1998, Mr. Meehan and Mr. Arturi attended the USOP
shareholders' meeting in the District of Columbia in an attempt to meet
again with Mr. Ledecky. Id. ¶ 59. Mr. Ledecky met with Mr. Meehan and
asked him to forward a copy of the Claypoole letter to him because he
wanted to remind himself of the commitments he had made at the February
meeting. Id. Mr. Ledecky then urged the plaintiffs to continue to hold
their stock until September 7, 1998, 90 days after the spin-off of Aztec
which had been rescheduled from April 25, 1998 to June 9, 1998. Id.
¶ 59, Ex. B. Mr. Ledecky assured Mr. Meehan that this spin-off would
"more than make him whole." Id. On May 28, 1998, Mr. Meehan and Mr.
Arturi sent Mr. Ledecky a new letter ("Ledecky Letter") detailing the
alleged February 11, 1998 agreement ("February 11 Agreement") and
included a copy of the Claypoole letter. Id. ¶ 60, Ex. B.
The plaintiffs allege that on September 4, 1998, defendant Ledecky sent
an e-mail to Mr. Arturi, with copies to defendant Claypoole and other
USOP officials, stating that Mr. Ledecky's "actions and discussions with
[Mr. Arturi] which were documented were done in [his]
capacity as an officer of USOP at the direction of [his] then
colleagues." Id. ¶ 61. Once it became clear that the post-split
aggregate value of the spin-offs and the cash received from the impending
stock self-tender were less than the Merger Consideration, the plaintiffs
demanded that USOP and Mr. Ledecky cover their losses. Id. Both USOP and
Mr. Ledecky refused. Id.
The plaintiffs originally filed this action in the United States
District Court for the District of Delaware. Subject-matter jurisdiction
in that court was premised on diversity of citizenship under
28 U.S.C. § 1332. The Judicial Panel on Multi-District Litigation
transferred the case to this member of this court for pretrial
proceedings pursuant to 28 U.S.C. § 1407, as part of the USOP MDL
action. Subsequently, the plaintiffs filed a 20-count complaint focusing
on the Reorganization Agreement and the February 11 Agreements and
claiming breach of contract, promissory estoppel, unjust enrichment,
fraud, fraudulent inducement, inducement by misrepresentation, negligent
misrepresentation, negligence, civil conspiracy, breach of fiduciary
duty, and violation of the Connecticut Unfair Trade Practices Act.
On September 13, 1999 the defendants filed motions to dismiss the
plaintiffs' complaint. Since the filing of these motions this MDL action
was stayed several times due to bankruptcy
filings, MDL transfers, and
mediation efforts. Renewed Mot. of Class Action Pls. to Restore Case to
Active List at 1-2. On March 5, 2001 USOP filed a Notice of Bankruptcy.
On January 4, 2002 USOP filed a Notice of Effective Date of Joint
Liquidation Plan of Reorganization of USOP.
J. The Plaintiffs' Withdrawn Counts
In their oppositions to the defendants' motions to dismiss, the
plaintiffs agree to withdraw the fiduciary duty and conspiracy claims,
Counts VI, VII, XIII, and XVII, in their entirety. Pls.' Opp'n (Ledecky)
at 6 n. 4; Pls.' Opp'n (USOP)*fn4 at 2 n. 1; Pls.' Opp'n (Claypoole) at
6 n. 3.*fn5 The plaintiffs also agree to withdraw the fraud and
misrepresentation claims regarding the Reorganization Agreement against
defendant Ledecky contained in Counts II-V and VIII. Finally, the
plaintiffs assert that they will withdraw the promissory estoppel claim
regarding the February 11 Agreement against defendant Claypoole in Count
XX. Pls.' Opp'n (Ledecky) at 6 n. 4; Pls.' Opp'n (Claypoole) at 6 n. 3.
A. Legal Standard for a Motion to Dismiss for Failure to State a Claim
For a complaint to survive a Rule 12(b)(6) motion to dismiss, it need
only provide a short and plain statement of the claim and the grounds on
which it rests. FED. R. CIV. P. 8(a)(2); Conley v. Gibson, 355 U.S. 41,
47 (1957). A motion to dismiss under Rule 12(b)(6) tests not whether the
plaintiff will prevail on the merits, but instead whether the plaintiff
has properly stated a claim. FED. R. CIV. P. 12(b)(6); Scheuer v.
Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Harlow
v. Fitzgerald, 457 U.S. 800 (1982). The plaintiff need not plead the
elements of a prima-facie case in the complaint. Swierkiewicz v. Sorema
N.A., 534 U.S. 506, 511-14 (2002) (holding that a plaintiff in an
employment-discrimination case need not establish her prima-facie case in
the complaint); Sparrow v. United Air Lines, Inc., 216 F.3d 1111, 1114
(D.C. Cir. 2000). Thus, the court may dismiss a complaint for failure to
state a claim only if it ...