SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK: PART 27
----------------------------------------------------------------------X
VALASSIS COMMUNICATIONS, INC., and
VCI ELECTRONIC COMMERCE, INC.,
Plaintiffs, Index No. 605222/00
P. C. No. 16881
- against -
WILLIAM WEIMER, LISA ESPINOZA WEIMER,
KEITH P. CLOUGHERTY, CHRIS FORTUNE, STONE
INVESTMENTS, INC. and WEBSTAKES.COM, INC.,
Defendants.
----------------------------------------------------------------------X
IRA GAMMERMAN, J.:
Motion sequence numbers 001 through 004 are consolidated for decision.
In this action for fraud and breach of contract, plaintiffs Valassis Communications, Inc. ("Valassis"), and VCI Electronic Commerce, Inc. ("VCI"), seek, inter alia, damages of $4 million, alleging that defendants made fraudulent and misleading statements and representations and breached certain warranties in connection with the purchase and sale of ownership interests in an Internet-related advertising business.
In four separate motions, defendants, without answering the Complaint, move to dismiss this action, invoking CPLR 3211(a)(1), based on documentary evidence; CPLR 3211(a)(7), for failure to state a cause of action; and CPLR 3016(b), for failure to plead fraud with particularity.
Plaintiffs, created in 1972, are listed on the New York Stock Exchange ("NYSE") as corporations engaged in promotion, marketing services, and coupon distribution via print media and the internet.
In August 1998, defendant William Weimer ("Weimer"), with a capital contribution of $100, founded The Net's Best ("TNB"), a limited liability company becoming its President, and one of its Managing Members. TNB produced a weekly circular, containing advertising for internet, or online, retailers, which was inserted into the Sunday editions of major metropolitan newspapers. Defendant Lisa Espinoza Weimer, Weimer's wife, was the Executive Vice President and a Managing Member of TNB. Prior to plaintiffs' purchase, the Weimers each owned 18.25% of TNB.
Defendant Stone Investments, Inc. ("Stone") is a venture capital firm that made a capital contribution of $1 million to TNB. Stone was a Managing Member of TNB, with a 50% ownership interest at the time of the sale to plaintiffs.
Defendants Chris Fortune, Keith P. Clougherty, and Webstakes.com were Non-Managing Members of TNB, with ownership interests of 5%, 1%, and 7.5%, respectively. Fortune, Clougherty, and Webstakes.com allegedly acquired their ownership interests as a result of the provision of goods and services to TNB.
In July 1999, TNB solicited plaintiffs' interest in becoming a strategic partner of TNB. As the discussions evolved, plaintiffs decided to purchase TNB, which defendants allegedly first offered to sell for $8 million. During the course of the negotiations, TNB prepared financial statements for the period August 1998 to July 1999, and financial projections from August 1999 to December 2000, which were given to plaintiffs. On October 14, 1999, defendants signed a Purchase Agreement, selling plaintiffs their entire ownership interests in TNB.
At the closing, plaintiffs paid all defendants, except Weimer, a total of $4 million. Plaintiffs agreed to make a deferred payment totaling $1 million, with Weimer receiving $912,500, and Stone receiving an additional $87,500, in equal instalments, on March 2, of 2001 and 2002. Weimer and Stone would receive the deferred payment only if TNB achieved certain pretax profit targets during 2000 and 2001, as set forth in Exhibit C of the Purchase Agreement.
Pursuant to the Purchase Agreement, Weimer entered into an employment contract with plaintiffs and became TNB's Vice President of Sales for internet/e-commerce media, effective October 14, 1999, to December 31, 2001. All the other defendants ceased to have any ownership or management interests in TNB after the closing.
Paragraph 9.11 of the Purchase Agreement contained a Merger Clause which, in pertinent part, read as follows:
This Agreement . . . contains the entire agreement among the parties thereto concerning the transactions and supersedes all prior agreements or understandings between the parties hereto relating to the subject matter hereof. No amendment, modification or waiver of this Agreement shall be binding unless executed in writing by the party or parties to be bound or affected by such amendment, modification or waiver.
Paragraph 4 of the Purchase Agreement stated that
[e]ach of the members severally (and not jointly) with respect to representations and warranties that relate to such Member (it being the intent that no Member shall be responsible for any representation or warranties made by any other Member that relates only to such Member) . . . and [Member], to the best of [its] knowledge, represents[s] and warrants[s] to Valassis . . . as follows (provided, however, that [Member] makes such joint and several representations and warranties only to the best of . . . its knowledge).
Schedule 4.12, which was attached to and incorporated into the Purchase Agreement, disavowed any representations not contained in the signed Agreement, disclaiming that TNB was "a party to or bound by any . . . oral contracts, obligations or commitments, including . . . any . . . (a) contract, commitment or arrangement involving, in any case, $25,000, or more or . . . (e) any contract with a term of, or requiring performance, more than six months from its date." Copies of all of TNB's existing contracts were annexed to Schedule 4.12.
Section 4.26 declared that "[o]ther than the representations and warranties expressly stated in this Section 4, the Company and [sellers] make no other or further representations and/or warranties whatsoever." With respect to disclosure, section 4.22 of the Agreement stated that
No representation or warranty by the Company or any Member and no statement or certificate furnished by or on behalf of the Company or such Member to Valassis or its agents pursuant to this Agreement or in connection with the Transactions contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which made, not materially misleading. There is to the Company's and such member's best knowledge no fact which materially adversely affects or in the future may materially adversely affect the business, condition, affairs or operations of the Company which has not been set forth herein or otherwise disclosed in writing to Valassis by the Company (other than an occurrence or development with respect to general economic or financial conditions).
Weimer alleges that plaintiffs breached several express provisions of his Employment Agreement with TNB, in an effort to minimize TNB's profits and to avoid paying Weimer the $912,500 due as his share of the Deferred Purchase Price. Weimer states that TNB achieved 97% of its revenue goals, yet plaintiffs refused to honor their obligations to him, pursuant to the Employment and Purchase Agreements. Weimer asserts that he served a demand letter on plaintiffs, on November 17, 2000, seeking to enforce the parties' agreements, and plaintiffs responded with this action on November 30, 2000.
The complaint contains two causes of action, for fraud and for breach of contract, and seeks punitive damages and the return of the $4 million paid for TNB. It is alleged that defendants had made false and misleading statements about the viability of the business, the company's product, and the financial projections for the business, while omitting to state material facts regarding the state of the business that were peculiarly within defendants' knowledge. Allegedly, Weimer and Stone falsely indicated that, in October 1999, TNB would generate sizable increases in revenue, on the sale of advertising space in the circular to new advertisers that had recently signed up with TNB. Allegedly, defendants told plaintiffs that TNB's largest existing advertisers, Fingerhut, Egghead, and shopping.com, had committed to renew their contracts for the year 2000, for amounts significantly higher than their 1999 commitments. Weimer and Stone allegedly represented that TNB's new and existing customers, with renewed and increased commitments, would raise TNB's annualized 1999 revenue of $2 million, based on actual financial results up to July 1999, to $4.2 million in 1999. The projections were that TNB would earn up to $11.3 million in 2000.
Plaintiffs state that defendants gave them sales contract status reports indicating that TNB had "many new customers that had committed to, or had a 'high' probability of committing to, hundreds of thousands of dollars in advertising in TNB circulars to be distributed in the fourth quarter of 1999." Complaint, ¶18. Plaintiffs maintain that the status reports provided by defendants contained false and misleading information, in that many of the alleged "committed" advertisers had not made any commitments to TNB. The status report represented that one entity, Freeshop, had a "high" probability of entering into an advertising contract with TNB to purchase $300,000 worth of ads in October and November 1999. Freeshop, however, only purchased $50,000 worth of ads from TNB throughout 1999. Allegedly, after the purchase agreement was signed, Freeshop informed plaintiffs that it had never committed with TNB to purchase anything beyond the $50,000 ad space. In another example, the status reports indicated that defendant Webstakes.com had a high probability of purchasing $90,000 in ad space during the fourth quarter of 1999, but only bought $3500 worth of ads.
The net result of the alleged misrepresentations was that TNB sold $200,000 worth of advertising space in the last quarter of 1999, even though defendants had caused plaintiffs to believe that TNB had sales commitments worth $2,195,000 for that period. Plaintiffs claim that the data establishes that defendants "knew that they did not have leads on sufficient new advertising customers to support their revenue projections for 2000, which were, in fact, ten times greater than [TNB's] then-existing revenue streams." Complaint, at ¶33. Plaintiffs assert that defendants formed a business with limited growth prospects, created marketing materials and financial projections falsely indicating that the company was on the verge of becoming extremely profitable, then sold it to plaintiffs just before the bottom fell out. Complaint, at ¶2. Plaintiffs maintain that defendants gave them financial statements and projections, inter alia, to induce them to purchase the company for an "amount well in excess of TNB's actual value." Complaint, at ¶18.
In general, on a CPLR 3211 motion to dismiss, the pleading should be construed liberally, and the facts alleged in the complaint presumed to be true and accorded the benefit of every possible favorable inference, CPLR 3026; Rovello v Orofino Realty Co., 40 NY2d 633, 634 (1976). On a CPLR 3211(a)(1) motion, where documentary evidence flatly contradicts the factual claims, the entitlement to the presumption of truth and the favorable inferences are rebutted, Ullmann v Norma Kamali, Inc., 207 AD2d 691, 692 (1st Dept 1994). The test is met when the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law, Leon v Martinez, 84 NY2d 83, 88 (1994).
In order to sustain a cause of action for fraudulent inducement, plaintiffs must show misrepresentation or a material omission of fact, which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury, Lama Holding Co. v Smith Barney, Inc., 88 NY2d 413, 421 (1996). CPLR 3016(b) requires that such a claim, like any fraud cause of action, must set forth the circumstances constituting the wrong in detail, see, Shea v Hambros PLC, 244 AD2d 39, 46 (1st Dept 1998); Megaris Furs, Inc. v Gimbel Bros., Inc., 172 AD2d 209, 210 (1st Dept 1991). If sufficient factual allegations of even a single element are lacking, then the cause of action must be dismissed, see, Shea v Hambros PLC, supra; Megaris Furs, Inc. v Gimbel Bros., Inc., supra.
It is well established that speculation and expressions of hope for the future do not constitute actionable representations of fact, see, Quasha v American Natural Beverage Corp., 171 AD2d 537 (1st Dept 1991). A party does not make an actionable representation of fact when predicting a future event with no knowledge of whether or not the event may occur, see, Albert Apt. Corp. v Corbo Co., 182 AD2d 500, 501 (1st Dept), lv dismissed 80 NY2d 924 (1992). A claim for fraud is barred by the existence of a specific disclaimer and failure to exercise reasonable diligence, see, Danann Realty Corp. v Harris, 5 NY2d 317, 320 (1959). Unlike a general merger clause, a specific written disclaimer will vitiate an allegation that one party reasonably relied on an alleged misrepresentation of the other in executing a contract, see, id.; see also, CFJ Assocs. of New York, Inc. v Hanson Indus., 274 AD2d 892, 894 (3d Dept 2000).
Fraud claims against Fortune, Clougherty, and Webstakes
Defendants Clougherty and Fortune, assert that they were never employees or managers of TNB, but mere stockholders, who also worked for independent companies that provided services to TNB. Clougherty and Fortune contend that plaintiffs make no allegations of wrongdoing against them, besides claiming that Clougherty and Fortune held strategic positions in TNB or maintained close personal friendships with the Weimers. Clougherty and Fortune, and Webstakes assert that they were not involved in the negotiations that culminated in plaintiffs' purchase of TNB, and did not make any representations about TNB to plaintiffs.
Plaintiffs have not alleged any specific wrongdoing or misrepresentations by Fortune, Clougherty, or Webstakes. Plaintiffs allege that Weimer and Stone negotiated the transaction on behalf of all defendants, and made the specific representations about the viability of TNB to plaintiffs. The Complaint simply includes Webstakes, Clougherty and Fortune in various general allegations asserted against all defendants, or posits that these three defendants had to have known of the alleged false representations that Weimer and Stone made to plaintiffs. Plaintiffs cannot use such general language to predicate any fraud claims against Clougherty, Fortune, and Webstakes. Without allegations that these three defendants personally participated in or had actual knowledge of the alleged wrongful conduct, the fraud claims against them must be dismissed, see, e.g., Residential Bd. of Managers of Zeckendorf Towers v Union Square-14th Street Assocs., 190 AD2d 636, 638 (1ST Dept 1993).
Fraud claims against the Weimers and Stone
The fraud claims asserted against the Weimers and Stone meet the specificity requirements of CPLR 3016(b). However, most, if not all, of the deficiencies that defendants have alleged against the Weimers and Stone could have been discovered by routine investigation, see, e.g., Cohen v Colistra, 233 AD2d 542, 543 (3d Dept 1996). There is nothing in the record to suggest that plaintiffs were unable to undertake an investigation of the representations, regarding the proposed commitments of TNB's customers, or that defendants in any manner prevented plaintiffs from doing so, id. (simple telephone call to the county assessor could have verified the tax assessment made on the disputed property). Where, as here, plaintiffs had the means, by the exercise of reasonable diligence, to ascertain the truth or falsity of material representations allegedly made by Stone and the Weimers, they cannot assert justifiable reliance, see, id. The schedules attached to the Purchase Agreement included copies of TNB's existing contracts, with the names, addresses and telephones numbers of the contact persons responsible for the advertising contracts with TNB. Plaintiffs' claims about the Freeshop commitment to TNB could have been verified, especially when plaintiffs received Schedule 4.12, with copies of all of TNB's existing contracts. However, plaintiffs do not indicate what, if any, attempt was made to verify that entities such as Freeshop or Egghead had made the alleged commitments to increase their advertising business with defendants.
Furthermore, an action for fraud cannot be based on speculative statements or expressions of hope concerning a future event, see, Derwald v LJN Toys, Ltd., 161 AD2d 223, 224 (1st Dept 1990). Plaintiffs' claims of materiality are inadequate where, for instance, it is contended that defendants maintained that TNB would be immensely profitable in 2000 and 2001. Such speculation and expressions of hope for the future cannot constitute actionable representations of fact, see, Albert Apt. Corp. v Corbo Company, supra, 182 AD2d, at 501; see also, Quasha v American Natural Beverage Corp., 171 AD2d 537, supra (speculations, advertising puffery, and hopes for the future were not actionable fraud claims).
Plaintiffs are sophisticated commercial entities who are precluded from claiming justifiable reliance on any pre-closing written or oral representations, such as the status reports, which were not merged into the Purchase Agreement, and were specifically disclaimed. Valassis is a large well-established company with a listing on the NYSE, and specialization in the publication of newspaper inserts. VCI's Registration Statement filed with the SEC on March 25, 1999, indicated that VCI was "a leading marketing services company . . . offer[ing] a broad array of marketing products, including: Free-Standing Inserts ("FSIs") . . . delivered . . . to nearly 58 million households . . . ." According to that SEC filing, VCI generated revenues of $675.5 million in 1997.
Given their experience and standing in the industry, plaintiffs clearly had the ability and the opportunity to evaluate the value and reliability of TNB's contractual commitments and defendants' rosy projections for TNB. Consequently, even if defendants knowingly offered plaintiffs false financial projections, to induce plaintiffs to buy TNB, plaintiffs may not claim reliance on the financial information. The financial statements that defendants gave to plaintiffs indicated that, as of December 31, 1998, TNB had incurred losses of $275,011.82 and carried equity of $325,088.18. Between January 1, and July 31, 1999, TNB's losses swelled to $601,947.35, and its equity decreased to $123,140.83. During this same time, TNB's receivables grew modestly, from $1.1 million, to $1.3 million. These figures, which reflected TNB's entire financial history, cannot substantiate plaintiffs' claim of justifiable reliance upon the statements from defendants, that TNB's revenue stream would increase tenfold, to $11.3 million, in the second year following plaintiffs' acquisition of the new company, see, e.g., Siemens Solar Indus. v Atlantic Richfield Co., 251 AD2d 82 (1st Dept 1998) (sophisticated entity's opportunities to obtain knowledge of the matters that were the subject of the alleged misrepresentations precluded claims of justifiable reliance).
The upbeat projections that defendants allegedly made to plaintiffs generally mirrored those heard in the internet industry around the time the purchase agreement was signed, see, e.g., Griggs, Johnston, and Connors, Computers: Winners and Losers, Australian Fin. Rev., December 28, 2000, at 16 ("The only surprise about the tech crash of 2000 was that it did not happen sooner, as investors pushed anything technology-related to irrational highs."); Friedman, Bargain Hunters Stalking 'Dot-Coms,' LA Times, December 12, 2000, at C6 (Few market pros expect the buying hysteria of 1999 and early-2000 to return to the Net sector). Hence, the claims of fraud based upon the financial projections promising that plaintiffs would earn substantial income after their purchase of TNB are not viable absent a showing that defendants made such statements with the knowledge that they were false and unreasonable, see, Leung v Lotus Ride, Inc., 198 AD2d 155, 156 (1st Dept 1993).
Plaintiffs' breach of contract claims
In their second cause of action, plaintiffs charge that defendants breached various representations and warranties contained in the purchase agreement. Defendants counter that the claims for breach of warranties cannot stand, because of plaintiffs' failure to provide prior written notice of the alleged breach, as mandated by Section 9.8 of the Purchase Agreement. Section 9.8 provides that
[a]ny party learning of a possible breach of this Agreement shall, as soon as reasonably practicable after discovering such breach, provide the breaching party with written notice of such breach, and if the breach is curable, the breaching party shall have a reasonable period of time, not to exceed thirty (30) days, to cure such breach; provided that this paragraph shall not apply in the case of an intentional breach.
As plaintiffs are claiming that defendants deliberately misrepresented TNB's actual and projected financial and economic health, in order to induce plaintiffs to buy TNB, the clear terms of the Purchase Agreement relieved plaintiffs of any obligation to provide defendants with a written notice of breach. I can, therefore, consider the merits of plaintiffs' claims.
Plaintiffs allege that defendant violated section 4.6 of the Purchase Agreement, that stated that since July 1999, "there ha[d] been no change in the condition (financial or otherwise), assets, liabilities, business, operations or affairs of the company, other than changes in the ordinary course of business, none of which singly or no combination of which in the aggregate has been materially adverse." Plaintiffs also claim that defendants violated Section 4.15 of the Purchase Agreement that represented and warrantied that on the date of closing, with respect to the "complete and correct list of all current customers of [TNB]" attached, that defendants had no knowledge that any such customer "has terminated or is expected to terminate a material portion of its normal business with the [TNB]."
Plaintiffs cite section 4.22 of the Purchase Agreement, claiming that defendants made an "untrue statement of a material fact or omit[ted] to state a material fact" that "materially adversely affect[ed] the business, condition, affairs or operations" of TNB. Relying on section 4.22, plaintiffs also allege that defendant failed to disclose several materially adverse changes in TNB's customer base: (1) that several large advertisers would not renew their contractual commitments for 2000; (2) that there was not significant interest from new advertising customers in the circular to permit TNB to make a profit in 2000; and (3) that market information and product experience indicated that sales of advertising space in TNB's circular could not be increased to a level that would make TNB profitable.
The critical question in a contractual breach of warranty case is whether the non-breaching party believed that it was relying on the seller's representation as to any existing facts, see, CBS, Inc. v Ziff-Davis Publishing Co., 75 NY2d 496, 503 (1990). To be actionable, an express warranty must warrant an existing specified fact, and not a promise of future performance, see, First Bank of Americas v Motor Car Funding, Inc., 257 AD2d 287, 292 (1st Dept 1999); Sisler v Security Pac. Bus. Credit, Inc., 201 AD2d 216, 222 (1st Dept), lv dismissed 84 NY2d 978 (1994) (To the extent plaintiff relies on the express representation and warranty of authority and validity, its contract, estoppel, breach of warranty and intentional or reckless misrepresentation claims fail because it cannot establish justifiable reliance).
Schedule 4.12 of the Purchase Agreement contained the terms of all of TNB's then-existing contracts, and plaintiffs do not allege that the schedule contained any misrepresentations. Plaintiffs maintain that the status reports contained false and misleading reports about the state of TNB's business. However, the status reports were not incorporated into the purchase agreement, which specifically disclaimed all extraneous representations and warranties. Nor did the purchase agreement contain any representations regarding the future volume or source of TNB's business, or of TNB's profitability. Defendants maintain that sections 4.6 and 4.22 of the purchase agreement merely warranted that there had been no material adverse changes in TNB's business other than the "changes in the ordinary course of business" or other than "an occurrence or development with respect to general economic or financial developments." Plaintiffs do not claim that any of the alleged adverse changes in TNB's business deviated from "the ordinary course of business" or from "general economic or financial conditions" affecting similar companies in the industry, see, e.g., Griggs, Johnston, and Connors, Computers: Winners and Losers, Australian Fin. Rev., supra; Friedman, Bargain Hunters Stalking 'Dot-Coms,' LA Times, supra; see also, Damato, Fund Investors Rue 'Internet' Moniker, WSJ, August 11, 2000, at C1 ("The tech funds turning in the most dismal performances in 2000 all have the word 'Internet' in their names."); Hamilton and Mangalindan, Venture Capitalists Get Tougher on E-Losers; Operative Term Is Triage, May 25, 2000, WSJ, at A1 ("Just months ago . . . the Internet seemed to promise untold stock-market wealth, . . . that party is suddenly over, and Web investors are in brutal triage mode.").
For the most part, plaintiffs seek to enforce promises or projections regarding TNB's future profitability that were not mentioned in the express warranties. The purchase agreement spoke of post-closing profit targets, attainment of which would have entitled Weimer and Stone to a deferred payment of $1 million. None of the warranties stated that TNB would make a profit in 2000, or that TNB's revenue would grow tenfold in less than two years. None of the warranties that were dependent on TNB's future profitability are actionable as a matter of law, for they represent and warrant the occurrence of future events, such as general economic conditions, e.g., Satler v Merlis, 252 AD2d 551, 552 (2d Dept 1998), over which defendants had no control, see, Albert Apt. Corp., supra, 182 AD2d, at 502 (no actionable fraud claims against sponsors of cooperative where offering plan cautioned that no assurances or guarantees were made regarding future changes in taxation rates or assessed valuations). The law requires that plaintiffs be bound by the clear language of the Agreement they signed, see, W.W.W. Assocs., Inc. v Giancontieri, 77 NY2d 157, 162 (1990) ("A familiar and eminently sensible proposition of law is that, when [sophisticated businessmen] set down their agreement in a clear, complete document, their writing should, as a rule, be enforced according to its terms"). Therefore, plaintiffs' breach of contract claims cannot withstand defendants' dismissal motions.
It is undisputed that Webstakes deviated from its contractual commitment to purchase $32,000 worth of ads from TNB in October 1999, and that Webstakes' $3500 ad purchase in the fourth quarter of 1999 materially deviated from Webstakes' normal business with TNB. Thus, TNB may be able to assert a breach of contract claim against Webstakes. The remaining defendants, however, assert that they had no knowledge that Webstakes would renege on its contractual obligations to TNB, and plaintiffs do not allege that defendants had any such knowledge. Therefore, Webstakes' contractual breach with TNB cannot predicate plaintiffs' claims for breach of representations or warranties against the defendants to this action.
Finally, this was a private transaction, negotiated at arms length among commercial entities. The absence of an allegation of an egregious tort directed at the public at large justifies dismissal of the ad damnum for punitive damages, see, Steinhardt Group Inc. v Citicorp, 272 AD2d 255, 256 (1st Dept 2000), citing Rocanova v Equitable Life Assur. Socy. of the U.S., 83 NY2d 603 (1994).
Accordingly, it is hereby
ORDERED that the motions of defendants, William Weimer and Lisa Espinoza Weimer, Keith P. Clougherty and Chris Fortune, Stone Investments, Inc., and Webstakes.com, Inc., seeking dismissal of the Complaint is granted; and the Complaint is dismissed with costs and disbursements to defendants as taxed by the Clerk of the Court upon the submission of an appropriate bill of costs; and it is further
ORDERED that the Clerk is directed to enter judgment accordingly.
Date: December 21, 2001
E N T E R
__________________________________
J.S.C.