Opinion
No. L-3855-09
Date of Oral Argument: April 16, 2010
Date of Opinion: April 23, 2010
SARKISIAN, J.S.C., COHN LIFLAND PEARLMAN HERMANN KNOPF, LLP, Attorney for Plaintiff State of New Jersey, Department of Treasury, Division of Investment (Jeffrey Hermann, Esq. appearing).
WOLF POPPER LLP, Co-Counsel for Plaintiff State of New Jersey, Department of Treasury, Division of Investment, (Lester Levy, Esq. and Robert Finkel, Esq. appearing).
SKADDEN, ARPS, SLATE, MEAGHER FLOM LLP, Attorney for Defendants Merrill Lynch Co, Inc. and Bank of America Corp. (Andrew Muscato, Esq. appearing).
OPINION Summary of Action
This is defendants Merrill Lynch Co., Inc. and Bank of America Corp. ("Merrill")'s Motion to Dismiss the Complaint because, in defendants' view, none of the alleged causes of action states an actionable claim, R 4:6-2(e).
Statement of Operative Facts
I. NEW JERSEY DEPARTMENT OF INVESTIGATION'S ("NJDOI") PURCHASE OF PREFERRED SHARES
A. The Subscription Agreement
On January 15, 2008, Merrill completed a seven (7) investor private placement for $6.6 billion of its Non-Voting Mandatory Convertible Non-Cumulative preferred stock (the "Preferred Shares"). (¶ 71.) NJDOI was one of the seven (7) investors in the private placement, and through the Subscription Agreement, NJDOI purchased 3,000 shares of the Preferred Shares for $300 million. (¶ 69.) The six (6) other investors in the private placement were Korean Investment Corporation, Kuwait Investment Authority, Mizuho Corporate Bank, TPG, the Olayan Group and T. Rowe Price Associates, Inc. (¶ 71.)
All references to "¶" are to paragraphs of NJDOI's Complaint and Jury Demand, dated July 28, 2009. References to "Muscato Cert." are to the Certification of Andrew Muscato in Support of the Motion to Dismiss the Complaint, dated February 9, 2010.
Section 3.6 of the Subscription Agreement provided:
• Merrill's financial reports "did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading" [Section 3.6(a)] (¶ 73);
• Merrill's "consolidated balance sheets, and the related consolidated statements of income, changes in stockholders' equity and cash flows . . . have been prepared in accordance with GAAP consistently applied during the periods involved" [Section 3.6(b)] (¶ 74); and
• Merrill "has implemented and maintains (x) disclosure controls and procedures and (y) internal control over financial reporting . . . designed to (x) ensure that material information relating to [Merrill], including its consolidated Subsidiaries, is made known to the chief executive officer and the chief financial officer of [Merrill] by others within those entities, and (y) provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, respectively." [Section 3.6(c)] (¶ 75).
Section 3.16 of the Subscription Agreement stated that NJDOI "will rely upon the truth and accuracy of the foregoing representations." (¶ 76.)
B. NJDOI's Conversion and Reset Rights in the Preferred Shares
The Series 1 Preferred Shares were entitled to a 9% dividend through October 15, 2010. (¶¶ 80-81.) In addition, NJDOI had the right to convert its Preferred Shares into Merrill common shares at a reference price of $52.40 per common share at any time prior to October 15, 2010 (subject to adjustment within a range based on the trading price of Merrill common shares). (¶¶ 81-87.) The reset provision of the Preferred Shares provided that if, on or before January 15, 2009, Merrill issued $1 billion or more of common stock or securities that were convertible or exchangeable into common stock, the reference price of the Preferred Shares would be reset to the lowest common share price or purchase price per share contained in any of the reset triggering securities. (¶ 89.) NJDOI maintains that this reset feature protected NJDOI (and the other preferred shareholders) against dilution in the value of their Preferred Shares in the event Merrill issued equity securities at prices below $52.40 prior to January 15, 2009. (¶ 94.) The lower the reference price, the greater the number of shares the preferred shareholder would receive on conversion of its preferred shares into common shares.
II. THE SHARE EXCHANGE AGREEMENT
A. Negotiations Leading Up To The Exchange Agreement
On July 21, 2008, Merrill contacted NJDOI in an effort to modify the Subscription Agreement. (¶ 113.) Merrill required NJDOI to execute a confidentiality agreement and provided NJDOI with material non-public information concerning Merrill's operating results and financial plans. (¶ 114.) The confidentiality agreement prohibited NJDOI from discussing the contemplated transaction with any third party, including the other six (6) holders of the Series 1 Preferred Shares. Therefore, NJDOI contends that it was required to rely upon the accuracy of Merrill's representations as to the commitments of the other preferred shareholders in its negotiations. (¶¶ 121-22.)
Merrill informed NJDOI that Merrill was in discussions regarding the sale of a substantial majority of its credit default obligations and the termination of certain of its monoline hedges. (¶ 115.) Merrill further informed NJDOI that Merrill needed to sell billions of dollars of common shares to public investors to shore up its capital position. (¶¶ 116.) Merrill asked NJDOI to waive ("redeem") the reset provision of its Preferred Shares because the potential dilution of common shares from operation of the reset provision through January 15, 2009 created a significant deterrent to Merrill's ability to sell additional common shares in the public offering at an attractive price. (¶¶ 117-18.) Merrill further informed NJDOI that it was having the same communications with the other preferred shareholders to determine if they would agree to redeem the reset features. (¶¶ 117-120.) During the negotiations over the terms of the proposed transaction, NJDOI informed Merrill that it would not agree to convert its Preferred Shares or redeem the reset feature unless NJDOI received at least as favorable terms as the other investors, including TPG. (¶ 124.) NJDOI specifically insisted that it get at least as favorable terms as TPG because it was familiar with and respected TPG's senior management. (¶ 125.)
On Sunday, July 27, 2008, Eric Steifman, a Merrill managing director and Co-Head of Investment Banking, and William Clark, Director of NJDOI, agreed in principle that NJDOI would exchange its Preferred Shares (including $4.5 million of accrued unpaid dividends) for 11 million Merrill common shares and redeem the reset feature on the Preferred Shares. This amounted to an exchange ratio equivalent to $27.68 per share on the Preferred Shares. Merrill and NJDOI further agreed that NJDOI would only exchange its Preferred Shares on the condition that none of the other investors, including TPG, get a better deal on the exchange of their Preferred Shares. (¶¶ 126-27).
The next morning, July 28, 2008, Merrill distributed a draft Share Exchange Agreement and draft Disclosure Schedule to be appended to and made part of the Share Exchange Agreement. The draft Share Exchange Agreement stated that "[n]o Concurrent Transaction contains terms that are more favorable in any material respect to the purchaser in such Concurrent Transaction than those granted by [Merrill] in favor of [NJDOI] in this Agreement". The draft Disclosure Schedule stated that "one or more holders" of Preferred Shares had not yet committed to exchange its Series 1 Preferred Shares for common stock and that "at least one holder" was anticipated to convert its Series 1 Preferred shares to a new series of preferred stock without any reset feature. (¶¶ 129, 145.) Merrill informed NJDOI that Mizuho Corporate Bank ("Mizuho") had elected to convert their $1.2 billion of preferred shares into a new series of preferred shares (Series 2 preferred shares) because Mizuho was restricted from owning common stock. (¶ 130.) Based on Clark's conversation with Steifman on July 27 and the plain language of the draft Exchange Agreement, NJDOI contends it was assured that this transaction would not be on terms more favorable than NJDOI's exchange, that the Series 2 preferred shares would have a net present value comparable to NJDOI's conversion to common stock, and that the Series 2 preferred shares would have no reset feature. (¶ 131.) Merrill further informed NJDOI that the other four holders of the Series 1 Preferred Shares (except TPG) had already agreed to convert their Preferred Shares to common shares on the same terms as offered to NJDOI. (¶ 132.) Later that day, Eric Steifman, on behalf of Merrill, informed William Clark, on behalf of NJDOI, that TPG had agreed to redeem its Preferred Shares for common shares on the same terms as NJDOI had been offered. (¶ 133.)
NJDOI contends that, in reliance on Merrill's oral representations, on July 28, 2008, NJDOI, delivered to Merrill a signed signature page to the Exchange Agreement and Disclosure Schedule. (¶ 134.) Later that day, Merrill issued a public press release informing investors that it was taking further action to enhance its capital position, including an announcement that all investors, with the exception of Mizuho, had agreed to exchange their preferred shares to common shares on the same terms as NJDOI:
Bound by the confidentiality agreement imposed on it by Merrill, NJDOI could not independently verify what it was being told by Merrill as to the other investors.
$5.4 billion of the $6.6 billion of outstanding mandatory convertible preferred holders have agreed to exchange their outstanding preferred stock for approximately 195 million shares of common stock, plus accrued dividends payable in cash or stock at the option of the holder. A holder of $1.2 billion of outstanding mandatory convertible preferred [Mizuho] has agreed to exchange their securities for new mandatory convertible preferred securities with a reference price of $33.00 [i.e., the Series 2 Preferred Shares]. The reset feature for all securities exchanged has been eliminated.
(¶¶ 135-36.) This press release was consistent with the terms of the Exchange Agreement between Merrill and NJDOI as well as Merrill's representations to NJDOI with respect to TPG. (¶ 137.)
B. The Exchange Agreement Codified Merrill'Representations and Warranties to NJDOI
By e-mail dated Tuesday, July 29, 2008 at 9:33 a.m., the day after NJDOI executed the signature page, Merrill delivered a fully executed signature page and copies of the Exchange Agreement and Disclosure Schedule, dated "as of July 28, 2008" to NJDOI. (¶ 138.) Section 3.13 of the Exchange Agreement stated:
No Concurrent Transaction contains terms that are more favorable in any material respect to the purchaser in such Concurrent Transaction than those granted by the Company [Merrill] in favor of the Purchaser [NJDOI] in this [Exchange] Agreement.
(¶ 140; Muscato Cert. Ex. C, § 3.13.)
"Concurrent Transaction" was defined by Section 6.1 of the Exchange Agreement as "any agreement on the date hereof to exchange shares of the Series 1 Preferred Stock [the Preferred Shares] for shares of the Company's [Merrill's] Common Stock by a party other than Purchaser [NJDOI]." (¶ 141.)
Also in the July 29, 2008 9:33 a.m. email, Merrill delivered to NJDOI the Disclosure Schedule to the Exchange Agreement. Section 3.13 of the Disclosure Schedule stated that if Merrill issued a new class of preferred shares, then those preferred shares would have a reference price of $33.00:
It is anticipated that at least one holder of Preferred Shares may not exchange its Preferred Shares for Common Stock and at least one holder of Preferred Shares may exchange its Preferred Shares for an equal number of shares of a new series of 9% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, par value $1.00 per share and liquidation preference $100,000 per share (the "New Series."). The New Series will have substantially the same voting powers, preferences and relative, participating, optionally and other special rights, and qualifications, limitations and restrictions as the Preferred Shares but will have a reference price of $33.00 and no reset protection.
(¶ 144; Muscato Cert. Ex. C, Disclosure Schedule § 3.13.)
The $33.00 reference price was economically equivalent to NJDOI's conversion price of $27.68 because although the holder of the "new series" of preferred shares would ultimately receive fewer shares of common stock on its conversion than NJDOI, it would have received the 9% dividend in the interim. (See ¶ 131.)
The Exchange Agreement contained the same provisions present in the Subscription Agreement concerning its required filings, GAAP compliance and proper records and controls. (¶¶ 150-52; Muscato Cert. Ex. C, § 3.6.) NJDOI contends that Merrill also again acknowledged "that [NJDOI] will rely upon the truth and accuracy of the foregoing representations." (¶ 154; Muscato Cert. Ex. C, § 3.14.)
C. Merrill's Breach of Section 3.13 of the Exchange Agreement and Disclosure Schedule
On July 29, 2008, at approximately 6:14 a.m., Merrill issued a press release correcting the July 28, 2008 press release. The July 29, 2008 press release revealed that a second holder of $500 million of Preferred Shares (the number of shares that TPG held) had not exchanged their Series 1 Preferred Shares for common shares. (¶ 147.) On July 31, 2008, Merrill further disclosed that the investor that held $500 million of Preferred Shares had been issued a new Series 3 of preferred shares that retained the 9% dividend, had no remaining reset rights, and had a reference price of $22.50 (the "TPG Transaction"). (¶ 148.) NJDOI alleges that the TPG Transaction violated Section 3.13 of the Exchange Agreement because it was entered into on terms more favorable than those given to NJDOI, and violated Section 3.13 of the Disclosure Schedule because TPG received a New Series of preferred shares with a reference price (substantially) below $33.00 per common share. (¶ 149.)
Thus, NJDOI contends that it received 11 million shares of Merrill common stock (and no 9% dividend), whereas NJDOI would have received approximately 13.2 million Merrill shares on conversion with a reference price of $22.50 ($300,000,000 divided by $22.50) (with accrued dividends prior to conversion).
III. MERRILL'S MERGER WITH BANK OF AMERICA
A. The Merger with Bank of America
On September 15, 2008, Merrill and Bank of America announced that they had entered into an agreement whereby Bank of America would acquire all of Merrill for approximately $50 billion in Bank of America common stock, exchanging each share of Merrill common stock for 0.8595 shares of Bank of America common stock (the "Merger"). (¶ 167.) Merrill's proxy statement for the merger was mailed on November 3, 2008, and the shareholders voted to approve the Merger with Bank of America on December 5, 2008. The Merger was consummated on January 1, 2009. (¶ 174.) Through the Merger, NJDOI argues that Bank of America specifically assumed the terms of the Series 1 Preferred Shares, the Series 2 preferred shares, and the Series 3 preferred shares and converted the outstanding preferred shares into Bank of America Series 2 preferred shares, and Series 3 preferred shares, respectively. (¶ 175.)
B. Merrill's Post Merger Financial Results
On October 16, 2008, Merrill announced a net operating loss of $5.2 billion for the third quarter of 2008. (¶¶ 168-69.) On January 16, 2009, at 6:01 a.m., two (2) weeks after Merrill was acquired by Bank of America, Bank of America filed a Form 8-K that reported that Merrill had recorded a massive $15.31 billion loss in the fourth quarter of 2008, its largest loss in any of the past six quarters of consecutive losses. (¶ 176.) Included in the loss was a credit valuation adjustment of $3.22 billion related to Merrill's concentration of monoline financial guarantee exposure, including $2.9 billion of losses attributable to the previously undisclosed concentration of monoline insurance underlying Merrill's collateralized debt obligations ("CDO"), collateralized loan obligations ("CLO"), residential mortgage-backed securities ("RMBS") and commercial mortgage backed securities ("CMBS" collectively with CDO, CLO and RMBS, the "High Risk Insured Assets.") (¶¶ 6, 177.) The January 16, 2009 8-K also revealed, for the first time, that Merrill Lynch had additional monoline insurance, in the form of credit default swaps ("CDS"), of $50.3 billion and $58.0 billion at December 26, 2008 and September 26, 2008, respectively. The 8-K explained that "the gross notional amount of CDS [was] purchased as protection to hedge predominantly Corporate CDO, CLO, RMBS and CMBS exposure." (¶ 178.)
C. Bank of America's January 15, 2009 Sale of Warrants To the U.S. Government
After Merrill's true losses and exposures became known to Bank of America in the third and fourth quarters of 2008, Bank of America threatened to back out of the Merger. (¶ 181.) To assist Bank of America in completing the Merger, the United States Department of the Treasury agreed, on January 15, 2009 to purchase from Bank of America 800,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series R and a warrant to purchase 150,375,940 shares of Bank of America's common stock, for an aggregate purchase price of $20 billion in cash. (¶ 181.) The warrants issued by Bank of America to the U.S. Government were priced at $13.30 per warrant, equivalent to $15.47 per warrant if denominated in Merrill shares, based on the .8595 exchange ratio. (¶ 183.)
Because the warrants issued to the U.S. government were convertible into common stock, NJDOI contends that their issuance would have triggered the reset feature of NJDOI's Preferred Shares, entitling NJDOI to a reduced reference price of $15.47 per share. As a result, the eventual conversion of NJDOI's Preferred Shares would have given NJDOI over 19.4 million Bank of America common shares, rather than the 11 million shares of Merrill stock it received pursuant to the Exchange Agreement. (¶ 184).
Defendants' Contentions
Defendants, in the disclosure section, disclosed that at least one other investor might enter into an agreement with Merrill on terms more favorable than plaintiff's on a date other than July 28, 2008.
Plaintiff's claim for breach of covenant of good faith and fair dealing should be dismissed because it uses the same allegations asserted to support a breach of contract claim.
Plaintiff is barred from relying on alleged prior oral representations or SEC filings made on or after July 28, 2008 to interpret the meaning of the Shared Exchange Agreement because of the parole evidence rule.
There is no breach of contract because plaintiff hasn't alleged facts demonstrating Merrill's SEC filings before July 28, 2008 should have included $50 billion in notional amounts of monocline insurance. Also, plaintiff's controls and record keeping allegations do not establish any breach of agreements. Moreover, assuming that there was a breach of the Agreements, plaintiff has not established damages.
Under the Martin Act, plaintiff is precluded from asserting common law causes of action, such as negligent misrepresentation, that do not contain an element of intent relating to the purchase or sale of securities. Therefore, plaintiff's negligent misrepresentation claim should be dismissed. Also, plaintiff's negligent misrepresentation claim based upon a duplicative breach of contract claim cannot stand.
Plaintiff's claim for rescissory damages should be dismissed because plaintiff's complaint elects to enforce contractual obligations and does not plead a claim for rescission.
All five (5) causes of action against Bank of America should be dismissed because plaintiffs were not in privity with Bank of America, nor did they have a special relationship which "approaches" privity.
Plaintiff's Contentions
The complaint states a cause of action for breach of contract due to various breaches by defendant of the terms of the Share Subscription Agreement and the Share Exchange Agreement. Damages are shown by the fact that (1) Merrill's breach of Section 3.13 caused NJDOI to lose the right to convert its Preferred Shares on the better terms afforded to TPG and (2) Merrill's breach of Section 3.6(a) — (c) caused NJDOI to purchase its Preferred Shares at an inflated price, and to convert its Preferred Shares at an inflated reference price.
The complaint states a cause of action for negligent misrepresentation because Merrill owed it a fiduciary duty which arose from Merrill requiring plaintiff to rely on the representations and warranties in the Agreement. This duty is separate and distinct from any breach of contract claim.
The Martin Act does not preclude plaintiff's litigation on claims which could be a basis for liability under the Act because private causes of action based on such claims are not preempted under the Act.
Defendants' Motion to Dismiss the claims for rescissory damages is improper under R 4:6-2(e). It also should be denied because the relief provided for plaintiff's claims can only be determined if any entitlement to remedies is proved.
The complaint states a cause of action for breach of the implied duty of good faith and fair dealing because it violated its representations and warranties by signing and delivering the Agreement to NJDOI after it knew or had reason to know that TG would not convert its Preferred Shares on the same terms as NJDOI.
Bank of America is a proper defendant in this case because, pursuant to the Agreements, successors and assigns are bound by the same. Bank of America has absorbed Merrill's assets and liabilities, and therefore there is contractual successor liability.
Analysis
I. RULE 4:6-2(E) STANDARD
Both parties agree that the New York substantive law governs, per the Agreements between the parties. "Ordinarily, when parties to a contract have agreed to be governed by the laws of a particular state, New Jersey courts will uphold the contractual choice if it does not violate New Jersey's public policy. N. Bergen Rex Transp. v. Trailer Leasing Co., 158 N.J. 561, 568 (N.J. 1999). "Another well-established principle of choice of law is controlling, however, namely that the procedural law of the forum state applies even when a different state's substantive law must govern."Id. at 569
Rule 4:6-2(e) requires the court to engage in a painstaking examination of the complaint in depth and with liberality "to ascertain whether the fundament of a cause of action may be gleaned even from an obscure statement of claim" or whether such a cause of action could arise if the plaintiff were given an opportunity to amend. Printing Mart v. Sharp Elecs. Corp.,116 N.J. 739, 746 (1989) ("In reviewing a complaint dismissed under Rule 4:6-2(e) our inquiry is limited to examining the legal sufficiency of the facts alleged on the face of the complaint.") andTaladai v. Cooper Tire Rubber Co.,360 N.J. Super. 547, 555-56 (Law Div. 2001).
The Court first notes that in oral argument defendant, inter alia, argued in citing the insufficiency in the allegations of plaintiff's complaint (for example, pointing to paragraphs 102, 108, 112 and 191) by matching it against the documents attached to defendants' submissions. This review, which the Court performed, would have the Court significantly go beyond the scope of review required under Rule 4:6-2(e). A. Breach of Contract (Counts 1 through 3 of the Complaint)
The elements of a cause of action for breach of contract are the existence of a contract between the plaintiff and defendant, consideration, performance by the plaintiff, breach by the defendant and damages resulting from the breach. Alarm Monitoring Corp. v. D'Agostino Supermarkets, Inc., 2008 NY Slip. Op. 52550U, 6 (N.Y. Sup. Ct. 2008).
In the first two (2) counts of its complaint, NJDOI alleges that Merrill represented and warrantied that Merrill's financial and accounting statements were in compliance with GAAP and were not false and misleading. NJDOI further alleges that Merrill represented and warrantied that it had adequate and appropriate controls over its financial reporting.
NJDOI contends that these representations and warranties were false when made. The complaint alleges Merrill's financial statements were false and misleading from at least the third quarter of 2007 because Merrill's reporting of its High Risk Insured Assets on a net basis was misleading to investors, as it failed to disclose its exposure to these assets. Specifically, the complaint alleges that Merrill failed to properly disclose and account for more than 50.313 billion in High Risk Insured Assets and over $50 billion in exposure to hedges on High Risk Insured Assets until January of 2009.
NJDOI further contends that Merrill's financial statements were prepared in violation of GAAP because it failed to make material disclosures.
NJDOI alleges that had Merrill had sufficient internal controls, Merrill would have known the full magnitude of the High Risk Insured Assets and that it had to make certain disclosures.
The alleged breach of contract under the Third Count of plaintiff's complaint is defendant's alleged breach of Section 3.13 of the Exchange Agreement, which states:
No Concurrent Transaction contains terms that are more favorable in any material respect to the purchaser in such Concurrent Transaction than those granted by the Company in favor of Purchaser in this Agreement. Since January 15, 2008, other than any issuances of Excluded Securities and other than pursuant to (i) this Agreement, (ii) the Concurrent Transactions, (iii) the Concurrent Transactions (as defined in the Share Subscription Agreement) and (iv) the investment agreements with Temasek Capital (Private) Limited and Davis Selected Advisors LP each dated December 24, 2007, the Company has not issued or sold or entered into any contract, commitment, understanding or arrangement by which the Company is bound to issue or sell any equity securities of the Company or any Subsidiary thereof or any options, warrants, rights to subscribe to, calls or commitments of any character whatsoever to issue or sell equity securities of the Company or any Subsidiary thereof.
The other alleged breach of contract under Count Three of plaintiff's complaint arises from the Disclosure Schedule, Section 3.13, which states:
1. One or more parties not affiliated with foreign sovereigns are not required to waive sovereign immunity.
2. It is anticipated that at least one holder of Preferred Shares may not exchange its Preferred Shares for an equal number of shares of a new series of 9% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, par value $1.00 per share and liquidation preference $100,000 per share (the "New Series"). The New Series will have substantially the same voting powers, preferences and relative, participating, optional, and other special rights, and qualifications, limitations and restrictions as the Preferred Shares but will have a reference price of $33.00 and no reset protection.
3. The Company is also in negotiations and has signed a non-binding letter of intent to sell a controlling interest in Financial Data Services, Inc. ("FDS"), based on an enterprise value for FDS in excess of $3.5 billion.
4. As previously discussed with Purchaser, the Company is currently planning to raise capital through the Public Offering. In connection with the Public Offering, the Company is also engaged in discussions and negotiations with Temasek regarding a transaction pursuant to which Temasek would subscribe for additional shares of Common Stock in the Public Offering.
Plaintiff's complaint alleges that Merrill subsequently disclosed on July 31, 2008 that an investor that held $500 million of Preferred Shares (TPG) had been issued a new Series 3 of Preferred Shares that retained the 9% dividend, but had no remaining rest rights, and had a reference price of $22.50.Complaint, ¶ 148. As a result, plaintiff contends that TPG was able to convert to a New Series of Series 3 Preferred Stock with preferential terms (a $22.50 reference price per common share).
Here, the Court finds that plaintiff has sufficiently pled a cause of action for breach of various provisions of both the Share Execution Agreement and the Share Subscriber Agreement, under Counts 1, 2 and 3. A contract for consideration existed between the plaintiff and the defendants in the form of the Share Subscription Agreement dated January 15, 2008, and a Share Exchange Agreement dated July 28, 2008. Plaintiff has alleged that defendant breached its representations and warranties in the Agreements that its financial statements were not false and misleading, and were prepared in accordance with the Generally Accepted Accounting Principles, and also that Merrill had adequate records and control procedures. Plaintiff has further alleged that Merrill breached its representations and warranties in the Exchange Agreement that no other holder of preferred shares would be given conversion terms more favorable than those Merrill proposed to give to NJDOI. Finally, plaintiff has pled damages as a result of Merrill's alleged breach of contract — plaintiff contends that because TPG received preferential terms to those given to NJDOI, NJDOI was improperly denied an additional 2.15 million Merrill shares, plus the right to receive the 9% dividend through October 15, 2010, on the conversion — an amount equivalent to approximately $86 million.
The Court has considered, and does not find persuasive, defendants' argument that the Parole Evidence Rule bars plaintiff's cause of action for breach of contract based on Section 3.13. "[A]bsent fraud or mutual mistake, where the parties have reduced their agreement to an integrated writing, the parole evidence rule operates to exclude evidence of all prior or contemporaneous negotiations between the parties offered to contradict or modify the terms of their writing." Marine Midland Bank-Southern v. Thurlow,53 N.Y.2d 381, 387 (N.Y. 1981). Here, the Court does not find that plaintiffs are offering evidence of the negotiations and events leading up to the execution of the Share Exchange Agreement to vary or contradict the terms therein. Rather, plaintiff contends that it has offered evidence concerning the course of dealings between NJDOI and Merrill Lynch in the days leading up to the execution of the Agreements, and the press releases released by Merrill on July 28, 2008 and July 29, 2008 to provide background and context to these agreements, and to proffer evidence of Merrill's breach of the same. B. Negligent misrepresentation (Count 4 of Complaint)
"Since a vast majority of commercial transactions are comprised of such "casual" statements and contacts, we have recognized that not all representations made by a seller of goods or provider of services will give rise to a duty to speak with care."Kimmell v. Shaefer, 675 N.E.2d 450, 454 (N.Y. 1996). "Rather, liability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified." Id. "Whether the nature and caliber of the relationship between the parties is such that the injured party's reliance on a negligent misrepresentation is justified generally raises an issue of fact." Id. "In determining whether justifiable reliance exists in a particular case, a fact finder should consider whether the person making the representation held or appeared to hold unique or special expertise; whether a special relationship of trust or confidence existed between the parties; and whether the speaker was aware of the use to which the information would be put and supplied it for that purpose." Id.
Here, NJDOI contends that because Merrill required NJDOI to enter a confidentiality agreement prior to commencing negotiations on the Exchange Agreement, NJDOI could not speak with the other holders of Preferred Shares to confirm Merrill's representations that everyone (including TPG) had agreed to exchange on the same terms, accordingly placing itself in a position of trust and confidence by requiring that Merrill be the only source of information of the Share Exchange Agreement. Accordingly, NJDOI alleges that a fiduciary duty of care existed from defendant to plaintiff. NJDOI contends that this duty is separate and distinct from its contractual claims. The Court finds that, under these circumstances, plaintiff has sufficiently alleged that (1) a fiduciary duty was owed to it by defendants, a duty that was separate and distinct from duties arising from the contract between the parties; and (2) that defendants breached this duty.
C. The Martin Act (N.Y. Gen. Bus. Law 352- 359)
"The Martin Act prohibits a broad range of fraudulent and deceitful conduct as to securities." Caboara v. Babylon Cove Dev., LLC,2008 NY Slip Op 6281, 1 (N.Y. App. Div. 2d Dep't 2008). "Enforcement of the act is vested exclusively with the Attorney General of the State of New York (hereinafter the Attorney General)." Id. "While there is no express or implied private right of action under the Martin Act, private causes of action sounding in common-law fraud and breach of contract may rest upon the same facts that would support a Martin Act violation as long as they are sufficient to satisfy traditional rules of pleading and proof." Id. This is because "nothing in the clear import of the language of the Martin Act requires a conclusion that the Legislature intended to abrogate any common-law remedy arising from conduct prohibited under the act."Id. at 3. "Nor are the remedies afforded the Attorney General made exclusive by the Martin Act." Id. "Thus, the plaintiffs' common-law fraud and breach of contract causes of action were neither abrogated nor supplanted by the Martin Act." Id. Contra Granite Partners, L.P v. Bear, Stearns Co ,17 F. Supp. 2d 275, 291 (S.D.N.Y. 1998) ("[i]t is well established that there exists no private right of action for claims that are within the purview of the Martin Act.")
Here, the Court declines to dismiss plaintiff's claims for negligent misrepresentation under the Martin Act. The Court notes that in defendants' brief in support of their motion to dismiss, defendants cited several cases, including Granite Partners, infra, which interpret the Martin Act to abrogate a private plaintiff's cause of action for negligent misrepresentation which is premised upon facts which would trigger the Martin Act. However, these cases are all federal cases interpreting the Martin Act.Granite Partners, infra; Castellano v. Young Rubicam, Inc, 257 F.3d 171, 190 (2nd Cir. 2001) (affirming dismissal of plaintiff's claim for breach of fiduciary duty which would be actionable under the Martin Act because, in its view, [t]he New York Court of Appeals has held that there is no implied private right of action under the Martin Act . . . and other New York courts have determined that sustaining a cause of action for breach of fiduciary duty in the context of securities fraud would effectively permit a private action under the Martin Act, which would be inconsistent with the Attorney-General's exclusive enforcement powers thereunder."); and Lehman Bros. Commercial Corp. v. Minmentals Int'l Non-Ferrous Metals Trading Co., 179 F. Supp. 2d 159, 162 (S.D.N.Y. 2001) ("courts have stated that the Act not only bars private claims brought directly under the statue, but also precludes common-law claims based on facts that provide the Attorney General grounds for instituting an action under the Act.")
However, the Court is inclined to follow Caboara and allow plaintiff's complaint alleging negligent misrepresentation to continue, despite contrary non-controlling case law which would appear to support defendants' proposition, namely due to the fact that Caboara is a New York state case (as opposed to federal) and is the most recent case cited (2008 versus the 2001 and 1998 decisions cited by defendants). For these reasons, defendants' argument to dismiss the negligent misrepresentation count based on the Martin Act is denied.
D. Breach of the Implied Duty of Good Faith and Fair Dealing (Count 5 of Complaint)
"Under New York law, every contract contains an implied covenant of good faith and fair dealing, which requires that no party to that contract can do anything which will destroy or injure the right of another party to receive the benefits of the contract."Chase Manhattan Bank, N.A. v. Keystone Distribs.,873 F. Supp. 808, 815 (S.D.N.Y. 1994). "A party may be in breach of its implied duty of good faith and fair dealing even if it is not in breach of its express contractual obligations." Id.
Defendants contend that plaintiff cannot assert a claim for the breach of the covenant of good faith and fair dealing when the claim incorporates the same allegations asserted to support a breach of contract claim, and that the covenant claim should be dismissed as being duplicative of the contract claim. To support this position, defendants cite several cases which the Court finds are unpersuasive in the case at bar. By way of example, in Cerberus Int'l Ltd. v. BancTec, Inc., 791 N.Y.S.2d 28 (App.Div. 2005), the Court did in fact dismiss plaintiff's causes of action for breach of the implied covenant of good faith and fair dealing because the court found this cause of action was "duplicative of the contract claim." Cerberus Int'l Ltd., 791 N.Y.S. 2d at 127. However, in that case, the Court had also, on summary judgment, dismissed the underlying contract claim. Therefore, a reasonable inference can be drawn that the reason the breach of the implied covenant of good faith and fair dealing claim was dismissed as duplicative of the contract claim is because the contract claim itself was invalid as a matter of law. Interestingly, another case cited by defendants, Trianco, LLC v. Int'l Bus. Machs. Corp,271 F. App'x 198, 204 (3rd Cir. 2008) actually citesCerberus, infra, for the proposition that "[u]nder New York law, a claim for breach of the implied covenant of good faith and fair dealing must be separate from any breach of contract claim."
Here, plaintiffs have sufficiently pled facts which, if proven, would support their claim against defendants for breach of the covenant of good faith and fair dealing. By allegedly providing TPG with conversion rights at preferable terms, defendant destroyed or injured the rights of Merrill under the Exchange Agreement to receive the same terms as others did in concurrent transactions, resulting in NJDOI's loss of Merrill shares at a lower reference price.
BANK OF AMERICA'S LIABILITY
Section 6.9 of each Agreement provides for successor and assign liability:
The provisions of this Agreement shall be binding upon and inure to the benefit of the parties thereto and their respective successors and assigns, provided that neither party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of the non-assigning party hereto. Notwithstanding the previous sentence, Purchaser may assign its rights and obligations to one or more of Purchaser's Subsidiaries that agrees in writing with the Company to be bound by the terms and provisions of this Agreement to the same extent as Purchaser, but no such assignment shall relieve Purchaser of its obligations hereunder.
"A corporation may be held liable for the torts of its predecessor if (1) it expressly or impliedly assumed the predecessor's tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations." Grant-Howard Associates v. General Housewares Corp., 63 N.Y.2d 291, 296 (N.Y. 1984). "The second and third items are based on the concept that a successor that effectively takes over a company in its entirety should carry the predecessor's liabilities as a concomitant to the benefits it derives from the good will purchased." Id. "This is consistent with the desire to ensure that a source remains to pay for the victim's injuries." Id. at 297.
Rescissory claims
Plaintiff contends that it is premature to strike its claims for rescissory damages because the form of relief must be determined after entitlement to relief is established. The Court agrees with this proposition. See Ambac Assur. Corp v. EMC Mortg. Corp,
2009 U.S. Dist. LEXIS 26456 (S.D.N.Y. March 16, 2009 ("Defendant's motion to strike Plaintiff's prayer for rescissory damages is denied because the relief provided for Plaintiff's claims will be determined if any entitlement to remedies is proved.")
Here, plaintiff has sufficiently pled that the Agreements bind Bank of America because plaintiff contends that Bank of America absorbed Merrill's assets and liabilities. Plaintiff also asserted that Bank of America expressly or impliedly assumed the predecessor's tort liability by way of the foregoing provisions in the Agreements. For these reasons, the Court does not find it proper to dismiss Bank of America as a party under R 4:6-2(e). Defendants' motion to dismiss is DENIED. SO ORDERED.
GLOSSARY
APB — Accounting Principles Board
CDO — Collateralized Debt Obligations
GAAP — Generally Accepted Accounting Principles
NJDOI State of New Jersey, Department of Treasury, Division of Investment, on behalf of Common Pension Fund A
NYAG — New York State Attorney General
SEC — Securities and Exchange Commission
TPG — TPG-Axon Capital