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July 25, 2007
GLIDEPATH HOLDING B.V., ET AL., PLAINTIFFS,v.SPHERION CORPORATION, DEFENDANT.
OPINION and ORDER
This action arises out of a business transaction gone bad. The Second Amended Complaint alleges four common law causes of action, namely: (1) fraud, (2) negligent misrepresentation, (3) aiding and abetting breach of fiduciary duty, and (4) unjust enrichment. The related arbitration has run its course, and Defendant has moved to dismiss all counts. For the reasons stated herein, Defendant's motion is DENIED.
I. Background
The facts described here are taken from the allegations in the Second Amended Complaint, which the Court, as it must on a motion to dismiss, assumes to be true.
A. Relevant Persons and Entities
Defendant Spherion Corporation ("Defendant") is a United States corporation which is engaged worldwide in providing outsourcing services and related support services. (Second Am. Compl. ¶ 4.) Spherion Technology (UK) Limited ("Spherion UK") is a wholly-owned subsidiary of Defendant, and is also alleged to be the alter ego of Defendant. (Id. ¶¶ 5,8, 10-16.) Plaintiff Glidepath Holding B.V. ("Plaintiff" or "Glidepath") is a Netherlands corporation which provided technology services and data management to its clients. (Id. ¶ 2.) Plaintiff Jeimon Holdings N.V. ("Plaintiff" or "Jeimon") is a Netherlands Antilles corporation which provides investment and venture capital to Glidepath. (Id. ¶ 3.) Reginald "John" Thompson was, during the time frame at issue here, a Managing Director of Spherion UK and later, the Chief Executive Officer of Plaintiff Glidepath. (Id. ¶ 5.) Salford Capital Partners Incorporated ("Salford"), was a business project advisor and agent of Plaintiff Jeimon. (Id. ¶ 7.)
B. The European CyberCenter Business*fn1
In the fall of 2001, Spherion UK was developing a business named the "European CyberCenter Business."*fn2 At this time, Spherion UK itself was suffering extensive losses, and it allegedly was seeking to avoid additional losses by selling off the European CyberCenter Business. (Id. ¶¶ 23-25.)
In December 2001, Defendant began to assess whether it was viable to divest itself of the European CyberCenter Business. (Id. ¶ 43.) Plaintiffs allege that Defendant was interested in divesting itself of the European CyberCenter Business for five reasons: (1) increased pressure on information technology ("IT") companies due to a declining client base for IT providers; (2) a deteriorating market for managed computer services, coupled with an overcapacity of providers; (3) an increasing financial drain on Spherion UK due to a large amount of contractual commitments; (4) a poor competitive position vis-a-vis other, more established providers already in the market; and (5) the European CyberCenter Business had a serious cashflow problem. (Id.)
C. The Alleged Fraudulent Scheme
Plaintiffs allege that, because no buyer would purchase the European CyberCenter Business if they possessed the same information as Defendant, Defendant embarked on an elaborate fraudulent scheme (the Second Amended Complaint alleges fourteen distinct components) to dupe an investor into purchasing the European CyberCenter Business. The basis of this scheme was as follows: (1) Thompson was directed by Defendant to seek buyers for the European CyberCenter Business, and authorized to induce them into the purchase through fraudulent means; (2) as part of the scheme, Thompson, an employee of Defendant's wholly-owned subsidiary Spherion UK, would agree to become the CEO of a new company which would receive funds from an investment company but run the European CyberCenter Business; (3) Defendant and Thompson agreed to thwart any potential purchaser's due diligence; and (4) Defendant agreed to maintain Thompson on its payroll throughout the course of the transaction to ensure investor confidence, but arranged, through a transaction outside his normal course of employment at Spherion UK, to pay him an additional fee for the successful transfer of the European CyberCenter Business.
The first part of this alleged scheme began in December 2001. At that time, Thompson met with a group of investors that would later become Plaintiff Jeimon. (Id. ¶ 76.) He gave a presentation regarding a proposed investment similar to the European CyberCenter Business, in which he proposed that he and the investors create a network of business centers to provide office management services to European clients. (Id. ¶ 78.) Thompson proposed that he would be the CEO of this new business (and take a stake in it), while the investors would provide the necessary capital to launch the business. (Id. ¶ 77.) In the December 2001 proposal, Thompson represented that the market for cyberservices in Europe was promising, and he supported this representation with both factual assertions and numerous charts. (Id. ¶ 80, Ex. 14.) Thompson also proposed a business plan for the new business, similar to that of the European CyberCenter Business. Thompson's proposal was aggressive and contemplated a full-service, comprehensive business with major infrastructure and over 5000 sales employees. (Id. ¶¶ 80-82, Ex. 14.) Plaintiffs allege that these claims were fraudulent when Thompson made them because "Thompson, [Defendant], and Spherion UK well knew that the reason [Defendant] was anxiously seeking to divest itself of the CyberCenter Business was that accurate financial information, forecasts, and projections, reflecting actual market conditions, showed that the prospects for the European CyberCenter Business were bleak and did not warrant further investment." (Id. ¶ 82.)
In addition, Plaintiffs allege that the business plan that Thompson marketed to them in the December 2001 presentation was fraudulent because it was geared to a market, and future market projections, that Defendant knew were fraudulent. (Id. ¶¶ 52(f)-(g), 52(i)-(j), 78-80, 81(c), 81(e), 85(c), 100(e), 130(c), 136(b)-(d), 145(e), 145(h), 159, 167(b)-(c).)
After the presentation, Plaintiff Jeimon brought in Salford to perform due diligence on Thompson's proposal. (Id. ¶ 83.) Thompson met with the due diligence team in January 2002, and gave another presentation in which he allegedly made false statements similar to those in the December 2001 presentation. (Id. ¶¶ 84-85; Ex. 15.) After these presentations, a representative of Salford sent a "Letter of Interest" to Thompson, expressing interest in Thompson's proposal, subject to "complete financial and legal assessment and due diligence." (Id. ¶ 89.)
In February 2002, Salford began to perform due diligence on the sale of the European CyberCenter Business. During the course of due diligence, Salford demanded and received financial and legal due diligence materials. (Id. ¶ 92.) Salford also retained a respected international law firm to aid its efforts. (Id.) On April 3, 2002, after the performance of this due diligence, Salford signed a term sheet, in which it agreed to create a business entity to pursue the European CyberCenter Business and to procure US $34,000,000 in investor funding. (Id. ¶ 93.) The term sheet called for Thompson to be CEO of this newly created company and for his personal service company to have a stake in the new venture. (Id.) The term sheet specified that all investment obligations were subject to Salford's review of and satisfaction with the results of continuing due diligence. (Id. ¶ 94.) On April 9, 2002, Plaintiff Jeimon advanced $800,000 to the newly formed enterprise (which became Plaintiff Glidepath) for the purchase of assets that were in liquidation (the "Exodus assets"). (Id. ¶ 95.)
Also in April 2002, employees at Spherion UK were forecasting problems with the market for Spherion UK's services. An internal presentation, attached to the Second Amended Complaint and dated April 3, 2002, titled "Technology Group: 4/03/02 Europe Update," stated, on a slide entitled "KPN status," that the market conditions for Spherion UK "continue to deteriorate." (Id. ¶ 44, Ex. 3.)
As part of Salford's due diligence, Salford was required to determine Thompson's status at Spherion UK and needed to ensure that he was in fact authorized by Spherion UK, his employer, to seek prospective buyers for the European CyberCenter Business. (Id. ¶ 95.) Thompson allegedly made the following representations to Salford during due diligence: (1) Thompson was leaving Defendant on good terms; (2) Spherion UK supported Thompson's participation in the new venture; (3) Spherion UK consented to the new venture's acquisition of the Exodus assets; (4) Spherion UK would waive certain potential confidentiality and intellectual property rights that related to the new venture; (5) Spherion UK was exiting the European CyberCenter Business for reasons unrelated to its prospects for success; and (6) Thompson could work with Salford on projects related to the new venture without violating any fiduciary duty or confidentiality obligation to Spherion UK. (Id. ¶ 97.) Salford asked Spherion UK for confirmation of these representations. (Id.)
On April 12, 2002, Robert Browning, a Director at Spherion UK, sent a letter to Salford, which stated:
As per your discussions with Mr. John Thompson, we are happy to confirm to you the following:
1. Spherion UK is no longer interested in the acquisition of the Exodus assets in Europe . . . . Spherion interest in Exodus assets in Europe was initiated in the first quarter of 2001 and formed part the strategy to build up at critical mass of IDC facilities and managed services capability to partner and offer in Europe. This strategy however could not be supported following the change in the economic climate in the USA in the last quarter of 2001. Mr. John Thompson . . . [was] therefore instructed to seek other interested parties to replace Spherion interests and commitments related to the acquisition and or operation of [Internet Data Center] assets and the provision of Spherions [sic] managed services in Europe.
In line with the change in strategy and to meet Spherion Inc[.] objective [sic] as outlined above, Mr. Thompson . . . [has] provided Salford Continental Inc. with documents related to Exodus assets in Europe together with reference due diligence papers issued to or by Spherion and it specifically authorizes the use by Salford Continental Inc. of said documents . . . .
2. To achieve Spherion Inc[.] objective [sic] to replace its commitment to provide managed services in Europe and to operate [Internet Data Center] facilities, John Thompson . . . [was] authorised to assist third party organisations, including but not limited to Salford Continental Inc., in the acquisition of Exodus assets in various sites in Europe. It is also understood that the above mentioned Spherion employees have agreed on an individual basis to become the management and direct or indirect shareholders of the new entity which is likely to operate these assets under conditions agreed with Salford Continental Inc.
The active participation of these individuals in this process, either in their own name or in the name of Spherion to achieve the above set out objective to replace Spherion Inc[.] obligations and commitments related to offering managed services or operating [Internet Data Center's] in Europe . . . has been done with the full knowledge and approval of Spherion and does and shall not give rise to any rights for Spherion Inc. in this regard. (Id. Ex. 17.)
Plaintiffs allege that this information was false on the basis of numerous communications between Thompson and other Spherion employees. On April 18, 2002, Roy Krause, Executive Vice President and Chief Financial Officer of Defendant, wrote to Thompson and confirmed much of the information in the initial disclosure to Salford, notably that Thompson was authorized by Spherion to seek buyers for the European CyberCenter business:
I confirm that John Thompson . . . [is] authorized to share plans, data and information concerning Spherion's ongoing plans for the future of the Europeans CyberCentre business, Exodus and matters related thereto and also to negotiate with any potential third party who expresses an interest in taking over Spherion's European CyberCentre business and associated interest. As we agreed, you will ensure that all third parties enter into appropriate confidentiality agreements with Spherion prior to disclosure of such information. Any proposed transaction must be presented to Spherion's Executive Management in the United States for their authorization and approval prior to entering into a binding agreement.
In so much as, the above named individuals are authorized by Spherion Corporation to provide plans, information, documentation and assistance to third parties to achieve Spherion's exit from the European CyberCentre market, I also confirm that the management team, in carrying out the above, will not be regarded as being in breach of the confidentiality provisions of their contracts of employment with Spherion.
This is also to confirm that Spherion Corporation has no further interest in the European assets or operations of Exodus. (Id. Ex. 18.)
On May 10, 2002, a letter was sent to Thompson,*fn3 by Roy Krause (who is not identified on the letter), which Plaintiffs allege was sent on behalf of Spherion UK. That letter confirmed that Thompson was authorized to seek buyers for the European CyberCenter Business, and also discussed a compensation package for Thompson if he succeeded. That letter states, in relevant part:
I believe over the past few days we have made good progress in working with you to find a solution to the CyberCentre project. Reflecting this progress, I thought it would be useful for me to set out the current position.
As we stated in our letter of May 2, 2002, you are authorised to share information on the CyberCentre business with third parties and to negotiate with any third party expressing an interest in the business. This is subject to you obtaining appropriate confidentiality undertakings in favour of Spherion and any disposal will, ultimately, need to be approved by Spherion's Executive Management.
You have explained to me that you are in discussions with potential backers but that you are not able to disclose to us their identity. For us, this is less than satisfactory. However, on the basis that you have received at least an appropriate confidentiality undertaking in favour of Spherion Technology (UK) Limited, we are prepared, for the time being, to accept this. You must appreciate though that we are reserving our position and may, down the line, require you to disclose to us the identity of any potential backer before allowing you to proceed further.
We have had some discussions on the terms of your incentive package. Again, I think we have made some good progress here but there are some outstanding issues we need to resolve before formalising the arrangements. In particular, we need to be satisfied we have fully understood all commitments and liabilities in relation to the CyberCentre business. I am confident though that we will be able to reach agreement on this.
The next few weeks are likely to be difficult for us both. In particular, you will inevitably find yourself in a position of conflict given the duties you continue to owe to Spherion and your interests in a potential third party acquisition.
In view of this, and having taken advice from our attorneys, we think it is in both your and our interests to formalise the basis on which, from now on, you can commit Spherion to further obligations.
We are committed to working with you to put together a transfer of the CyberCentre business by June 1 under which the acquiror will agree to take on the liabilities of the business including severance payments.
(Id. Ex. 5.)
One week later, on May 17, 2002, Bob Pnakovich faxed a letter, on Spherion letterhead, to Thompson. The letter was signed by Roy Krause, now identified as the Executive Vice President and Chief Financial Officer of Defendant. That letter stated that Thompson would receive €1,300,000 if he succeeded in finding a purchases for the European CyberCenter Business. It stated:
As you are aware, Spherion Corporation (the "Company") is investigating the transfer of its opportunity, as well as related contractual obligations and other liabilities, in respect of the CyberCenter, as contemplated by the KPN Broadband Network b. v. Managed Services Heads of Agreement and Resellers Agreement (the "Business"). During this process, your participation and cooperation are critical. I am writing to you, as a key executive of the Business, to offer an opportunity in this regard. Below, I have outlined the terms of compensation for your assistance in accomplishing this transfer.
For the purpose of this agreement, the Company's obligations and liabilities . . . approximate Euros 6,838,052.
For your assistance in the expeditious resolution of this matter, the Company will compensate you in the amount of Euros 1,300,000.00 for effecting a transaction which would transfer fully all of the Obligations to a third party ("Newco") . . . . Further, this offer is contingent on your full disclosure to the Company of all obligations of which you are aware and for which the Company is responsible in respect of the Business . . . . Although we understand that the amounts stated for such items may be subject to some variation, the underlying obligations associated with these items must be transferred in full for the transaction to be considered complete. . . .
Upon receipt of [sic] Letter of Intent . . ., the Company agrees to transfer the amount Euros 1,300,000.00 to a mutually agreeable escrow account, the custodians of which shall be one attorney to be designated by yourself, and a second attorney to be designated by the Company. . . . The Company will reserve the right to have such monies returned to it if the transaction has not been completed by June 14, 2002. . . .
In addition, upon completion of the transaction, the Company will
1) serve you notice of termination of your employment, 2) release you from your non-competition restrictions as set forth in your employment contract, 3) release you from any obligations to work for the Company during your six (6) month notice of termination period, and 4) initiate payment to you of £121,661 (British Pounds Sterling), less any tax requested to be withheld, upon receipt of your written agreement that such payment is full and final settlement of any amounts due to you from the Company and a mutually agreed confidentiality agreement.
Regardless of your ultimate decision as to your role in the divestiture of the Business, please remember that as long as you are an employee of the Company or its subsidiaries, you continue to be bound by your fiduciary duty to act in the best interests of the Company and subject to our letter to you of May 10, 2002 pertaining to certain restrictions governing your authorities in respect of your position in the Company. (Id. Ex. 6.)
As an additional part of its due diligence, "in or about the end of May 2002," Salford sought assurances from Thompson that he was not in breach of any fiduciary duty, duty of confidentiality, or any other duty owed to his employer, Spherion UK. (Id. ¶ 114.) Salford requested a copy of Thompson's termination agreement with Spherion UK. Thompson told Salford that such an agreement existed, but that it was subject to a confidentiality agreement. (Id.)
On May 21, 2002, a solicitor, James Bloomer (who had been copied on previous correspondence between Spherion UK and Thompson), wrote to Spherion on behalf of Plaintiff Glidepath memorializing a negotiation that had occurred the day before. Solicitor Bloomer stated:
We refer to our discussion yesterday evening and write on behalf of GlidePath, a Company newly formed in Europe, of its intention to assume the obligations of Spherion Technology (UK) Limited in relation to Spherion's CyberCentre business in the Netherlands. The obligations comprise: (1) capital expenditure commitments in the form of purchase orders and proposed equipment leases, related to computer software and hardware as outlined in your letter of 17th May to John Thompson[,] (2) contracts executed with KPN Telecom BV[,] (3) employment severance payments for Spherion employees working at the CyberCentre[.]
(Id. Ex. 19.)
In response to Solicitor Bloomer's May 21, 2002 email, Bob Livonius, Executive Vice President and Chief Operating Officer of Defendant, wrote Solicitor Bloomer on May 24, 2002, and stated:
Thank you for your Memorandum of Understanding, dated 21 May 2002, regarding the transfer of our position in the KPN CyberCenter to GlidePath . . . . While this project did not ultimately align well with recent changes in our strategic plans, we envision promising market opportunity for early participants offering managed services in this arena. In this regard, we wish to offer our support to GlidePath and KPN in ongoing marketing efforts. With Spherion's extensive client base in the U.S., we see a mutual benefit in being able to refer to GlidePath and KPN clients seeking an increased business presence in Europe. In the coming weeks, we can formalize the protocol and channels through which to pass along these marketing leads. (Id. Ex. 20.)
Plaintiffs also allege that these representations to Salford were false, as the true reason for Defendant's decision to sell the European CyberCenter Business was its knowledge that the market for the business's services have collapsed. An undated report prepared by a team of consultants from AtoBe Mobile Solutions ("AMS") at the request of Spherion management described the prospects for the European CyberCenter Business. (Id. Ex. 5.) That report stated that the value of the business did not cover its liabilities, and that there was little market for the European CyberCenter Business's services. (Id.) The Second Amended Complaint alleges, upon information and belief, that the report was delivered to Spherion US in April 2002. (Id. ¶ 45.)
In an undated slide show presentation which Plaintiffs allege was presented to the Board of Directors of Defendant prior to June 15, 2002, a slide entitled "KPN Cyber Center" states:
* Good Idea
* Ahead of it's [sic] time
* Caught in a poor economy-impacting future revenue
* Opportunity to sell (Id. Ex. 21.) A later slide in the same presentation titled "European Technology" stated two options for the disposal of the KPN Cyber Center assets, and also stated "Plan: Announce our course of action in August 1, 2002." (Id.) The slide stated that there was a 50% probability that Thompson could find a purchaser for the KPN CyberCenter by June 15, 2002, and also stated that Defendant could choose to close operations by July 1, 2002. (Id.)
Defendant sought to formalize its compensation agreement with Thompson in a letter dated June 25, 2002. On that date, Roy Krause, sent a letter to Thompson, stating:
We refer to our letter to you dated May 17th 2002 ("the May 17th letter"), and the subsequent email correspondence between representatives of this company and you.
In view of the fact that, under the terms of your contract of employment with Spherion Technology UK ("the UK Company"), you are already obliged to assist in the sale of the CyberCenter business, we are not prepared to make any further payments to you in respect of that sale over and above what is embodied in your contract. The exception to this is that we will pay you a termination payment of £121,661, which will be paid as outlined in the 17th May letter.
We appreciate that it is not part of your duties as Managing Director of the UK Company to play any part in the company ("Newco") that would acquire the CyberCenter business. In this regard, we understand that we must deal with Dolejsova Partners if we wish you to take an active role in Newco's acquisition of the CyberCenter business.*fn4
We are therefore prepared to pay 1,300,000 Euro to Dolejsova Partners to procure that you set up Newco and ensure that Newco acquires the business. This payment would be made in accordance with the terms of the 17th May letter. (Id. Ex. 9.)
"On or about June and July of 2002," Thompson negotiated a series of novation agreements (the "Novation Agreements") which arranged for a Dutch subsidiary of Plaintiff GlidePath to be substituted as the obligor on new contracts in place of Spherion UK. (Id. ¶ 116.) At the time, Thompson was both the Managing Director of Spherion UK and a senior manager of Plaintiff Glidepath. (Id.) Plaintiffs allege that the effect of these agreements was to release Spherion from the European CyberCenter liabilities. (Id.)
Due diligence on the deal continued. (Id. ¶ 117.) On July 12, 2002, Defendant sent a letter to solicitor Bloomer that confirmed Thompson was no longer employed by Spherion UK. In the letter Bob Pnakovich, a director at Spherion, stated:
I am able to confirm that Herbert Smith, Solicitors have been engaged by the Spherion Corporation to act regarding the disposal/closure of the Spherion Technology UK Limited business.
I can also confirm that a Compromise Agreement has been signed between Spherion Technology UK Ltd and John Thompson terminating his employment contract with the Spherion Corporation.
John Thompson will remain bound by various obligations, including but not limited to duties of confidentiality and non-disclosure within his Employment Contract and the Compromise Agreement. However, these obligations do not restrict John Thompson from seeking and accepting a position with another employer. (Id. Ex. 22.) Plaintiffs allege this letter contained materially false statements, as Thompson was not finally released from his employment with Spherion until September 2002. (Id. ¶ 119, Ex.
During the same time period that Salford was conducting due diligence, from May 2002 to September 2002, Plaintiff Jeimon advanced over US $12,000,000 to Plaintiff GlidePath. (Id. ¶ 120.) On September 19, 2002, Plaintiff Jeimon executed a GlidePath Shareholders Agreement with Thompson. (Id. ¶ 121.) From October 29, 2002 to September 28, 2003, Plaintiff Jeimon continued to advance funds to Plaintiff GlidePath. These funds totaled more than US $34,000,000. (Id. ¶ 122.) Plaintiff Jeimon alleges that all of the investments made into Plaintiff GlidePath were fraudulently induced by Defendant's statements in the aforementioned correspondence. (Id. ¶ 123.)
D. The Sale of Spherion UK's Software Quality Management Division
On October 16, 2002, Defendant sold Spherion UK's Software Quality Management Division ("SQM") to Systems Testing Associates ("STA") for $100,000. Plaintiffs allege that Thompson, who by October 16, 2002 was employed by Glidepath, was the sole director of STA and its owner. (Id. ¶ 68.) STA then resold the assets for £1,750,000, for an approximately US $2,000,000 profit. (Id. ¶ 71.) Plaintiffs allege that Thompson's fiduciary duties to Plaintiffs were violated when he usurped this corporate opportunity. Plaintiffs further allege that, because Defendant was aware of Thompson's position as Glidepath's CEO, and because the transaction was "calculated to assist Thompson in concealing the transaction from plaintiffs," Defendant was aware of Thompson's breach of his fiduciary duties. (Id. ¶¶ 69-70.)
II. Discussion
A. Standards of Review
1. Rule 12(b)(6)
The Supreme Court has recently held that "[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the 'grounds' of his 'entitle- [ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1964-65 (2007) (citations omitted and second alteration in original). In Bell Atlantic, id. at 1964-69, the Supreme Court also abandoned reliance on the oft-cited line from Conley v. Gibson that, "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief," 355 U.S. 41, 45-46 (1957). As the Court explained, a literal application of Conley's "no set of facts" rationale is improper because "a wholly conclusory statement of claim would survive a motion to dismiss whenever the pleadings left open the possibility that a plaintiff might later establish some 'set of [undisclosed] facts' to support recovery . . . ." Bell Atl., 127 S.Ct. at 1968. Instead, the Court emphasized that "[f]actual allegations must be enough to raise a right to relief above the speculative level . . . [,]" id. at 1965, and "once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint[,]" id. at 1969. Plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Id. at 1974. If it "ha[s] not nudged [its] claims across the line from conceivable to plausible, [its] complaint must be dismissed." Id.; see also Iqbal v. Hasty,No. 05-5768-cv, - F.3d - , 2007 WL 1717803, at *11 (2d Cir. June 14, 2007) ("After careful consideration of the Court's opinion and the conflicting signals from it that we have identified, we believe the Court is not requiring a universal standard of heightened fact pleading, but is instead requiring a flexible 'plausibility standard,' which obliges a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible.").
"In adjudicating a Rule 12(b)(6) motion, a district court must confine its consideration 'to facts stated on the face of the complaint, in documents appended to the complaint or incorporated in the complaint by reference, and to matters of which judicial notice may be taken.'" Leonard F. v. Israel Disc. Bank of N.Y.,199 F.3d 99, 107 (2d Cir. 1999) (quoting Allen v. West Point-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991)); see Cortec Indus., Inc. v. Sum Holding, L.P., 949 F.2d 42, 47-48 (2d Cir. 1991) (allowing defendant to produce a prospectus with its motion to dismiss which was integral to the complaint but which plaintiff failed to attach to the complaint); see also 2 Broadway LLC v. Credit Suisse First Boston Mortgage Capital LLC, No. 00 Civ. 5773, 2001 WL 410074, at *5 (S.D.N.Y. Apr. 23, 2001).
2. Rule 9(b)
Defendant also alleges that Plaintiffs have failed to meet the heightened pleading requirements for fraud outlined in Federal Rule of Civil Procedure 9(b). In order to give a defendant clear notice of a plaintiff's claims, and to protect a defendant from undue harm to its reputation, allegations of fraud must be plead with specificity. See Ross v. A.H. Robins Co., 607 F.2d 545, 557 (2d Cir. 1979). Under Rule 9(b), "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." Fed. R. Civ. P. 9(b). Specifically, the Second Circuit has "read Rule 9(b) to require that a complaint '(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'" Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d Cir. 1993)). "In order to avoid abuse of the less stringent requirement for pleading scienter, however, plaintiffs are required to 'allege facts that give rise to a strong inference of fraudulent intent.'" Campaniello Imports, Ltd. v. Saporiti Italia S.p.A., 117 F.3d 655, 663 (2d Cir. 1997) (citing Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994)). A "strong inference" "must be more than merely 'reasonable' or 'permissible'- it must be cogent and compelling, thus strong in light of other explanations. A complaint will survive . . . only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Tellabs, Inc. v. Makor Issues & Rights, Ltd., No. 06-484, 127 S.Ct. 2499, 2502-03 (2007).*fn5 "[C]onclusory allegations that defendant's conduct was fraudulent or deceptive are not enough." Alnwick v. European Micro Holdings, Inc., 281 F. Supp. 2d 629, 639 (E.D.N.Y. 2003) (quoting Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 114 (2d Cir. 1982) (alteration in original)). These requirements ensure that "a complaint alleging fraud" is filed "only after a wrong is reasonably believed to have occurred," so that the complaint seeks "redress for a wrong, not to find one." Segal v. Gordon, 467 F.2d 602, 607-08 (2d Cir. 1972).
However, Rule 9(b) must still be read in light of the liberal pleading requirement of Rule 8, which only requires a "short and plain statement" of the claim. See Ouaknine v. MacFarlane, 897 F.2d 75, 79 (2d Cir. 1990). Plaintiffs are not required to plead with detailed evidence. See Kravetz v. Brukenfeld, 591 F. Supp. 1383, 1386 (S.D.N.Y. 1984). Accordingly, allegations may be made on information and belief where the fraud is based on matters within the adverse party's sole knowledge, but still must be accompanied by a statement of the facts upon which the belief is founded. See First Capital Asset Mgmt. v. Satinwood, Inc., 385 F.3d 159, 179 (2d Cir. 2004).
B. Fraudulent Intent
Defendant alleges that Plaintiffs' first cause of action should be dismissed because the facts alleged within the Second Amended Complaint do not raise a sufficiently strong inference of fraudulent intent. Defendant argues that: (1) the payment of a success bonus to Thompson does not raise an inference of fraud because it violates no law and Defendant was under no duty to disclose the fee; (2) the Second Amended Complaint fails to plead sufficient facts to establish that there exists any set of facts which would show that Defendant was aware the market for the European CyberCenter Business would collapse at the time any representations to Plaintiffs were made; (3) Thompson's statements cannot be attributed to Defendant, as they were unaware of and not approved by Defendant, and therefore are insufficient to raise an inference of fraud on behalf of Defendant; and (4) Defendant did not make a representation to Plaintiffs regarding Thompson's employment status. (Def.'s Br. in Supp. of Mot. to Dismiss 2d Am. Compl. Under 9(b) & 12(b)(6) ("Def.'s Br.") 17-22.)
As an initial matter, it is necessary to consider exactly what statements are alleged to be fraudulent in the Second Amended Complaint. The Second Amended Complaint alleges eight different fraudulent representations made to Plaintiffs or their agents: (1) the statements regarding the potential market for the European CyberCenter Business made by Thompson at his presentation to prospective buyers in December 2001 (Second Am. Compl. ¶¶ 76-80); (2) Thompson's statements during that presentation regarding the applicability of the European CyberCenter Business Plan (id. ¶¶ 52(f)-(g), 52(i)-(j), 78-80, 81(c), 81(e), 85(c), 100(e), 130(c), 136(b)-(d), 145(e), 145(h), 159, 167(b)-(c)); (3) similar statements made by Thompson in a presentation to Plaintiffs' due diligence team in January 2002 (id. ¶¶ 83-85); (4) Thompson's representation to Salford during due diligence that Spherion UK was exiting the European CyberCenter Business for reasons unrelated to its prospects for success (id. ¶ 97); (5) Browning's letter to Salford, dated April 12, 2002, that stated Defendant was leaving the European CyberCenter Business due to a change in the economic climate of the United States (id. Ex. 17); (6) Thompson's representation in May 2002 that his employment with Defendant had been terminated (id. ¶ 114); (7) Livonius's May 24, 2002 letter to Solicitor Bloomer that stated Defendant envisioned a promising market for the European CyberCenter business (id. Ex. 20); and (8) Pnakovich's July 12, 2002 letter to Solicitor Bloomer which stated that Thompson's employment with Defendant had been terminated (id. Ex. 22).
As more than half of the allegedly fraudulent statements were made by Thompson, it is prudent first to consider Defendant's contention that it is not responsible for Thompson's statements. Defendant argues that: (1) it did not approve, and was, in fact, unaware of any of the representations made by Thompson during his presentations to potential investors; and (2) Plaintiffs' attempts to impute Thompson's statements to Defendant under the doctrine of respondeat superior fail because a duty of inquiry into Thompson's statements arose and Plaintiffs failed to properly carry out that duty. (Def.'s Br. 20-21.) Plaintiffs respond that they have sufficiently plead both agency liability and respondeat superior to survive a motion to dismiss. Plaintiffs have the better of the argument.
An employer does not have to approve, or even be aware of, a representation made by an employee to be liable for that representation. It is black-letter agency law in New York that an employer is liable for the representations of its agents when those representations are made within the scope of the agent's employment. See 2A N.Y. Jur. 2d Agency & Indep. Contractors § 290 (2007); see also Chubb & Son, Inc. v. Consoli, 726 N.Y.S.2d 398, 400 (App. Div. 2001); Adler v. Helman, 564 N.Y.S.2d 828, 830 (App. Div. 1991). "An agent does not cease to act within his or her authority merely because the agent is engaged in a fraud upon a third person." 2A N.Y. Jur. 2d Agency & Indep. Contractors § 290; see also Parlato v. Equitable Life Assurance Soc'y, 749 N.Y.S.2d 216, 220-21 (App. Div. 2002). In addition, the "liability for an agent's fraud or misrepresentation applies even where the principal had no knowledge of the misrepresentation or fraud and intended no fraud." 2A N.Y. Jur. 2d Agency & Indep. Contractors§ 291; see also Marine Midland Bank v. John E. Russo Produce Co., 405 N.E.2d 205, 211-12 (N.Y. 1980); Jarvis v. Manhattan Beach Co., 43 N.E. 68, 70 (N.Y. 1896).
Plaintiffs have alleged that Thompson was acting within the scope of his employment when he made the allegedly fraudulent presentations to them, stating in the Second Amended Complaint that Thompson was instructed to find potential buyers from the Spherion liabilities. (Second Am. Compl. ¶¶ 74-75.) Plaintiffs have also alleged and provided documentation that Thompson's later representations to Plaintiffs were made during the course of his employment. (Id. ¶¶ 74-75, 97-100, Exs. 5-17.) These allegations are sufficient, at the motion to dismiss stage, to attribute Thompson's allegedly fraudulent statements to Defendant. See Cosmos Import & Export Ltd. v. Merrill Lynch, Pierce Fenner & Smith, Inc., No. 96 Civ. 6224, 1997 WL 328068, at *6 (S.D.N.Y. June 16, 1997) (holding that a complaint that stated a factual basis for attributing an agent's statements to his principal was sufficient to survive the principal's motion to dismiss).*fn6
The Plaintiffs have pleaded sufficient facts regarding seven of the allegedly fraudulent statements to satisfy the requirements of Rule 9(b). The Second Circuit requires that, to satisfy Rule 9(b), a plaintiff alleging fraud must identify the allegedly fraudulent statements, identify the speaker, state when the statements was made, and explain why the statements are supposedly fraudulent. See Rombach,355 F.3d at 170. Plaintiff has done this for seven of the eight allegedly fraudulent statements listed supra. Plaintiff failed to specify, however, when the alleged fraudulent statements that Thompson made to Salford during the course of due diligence were made. (Second Am. Compl. ¶ 97.) Thus, the Court will only consider the remaining seven statements that Plaintiffs allege were fraudulent. See id.; Sun Micro Med. Techs. Corp. v. Passport Health Commc'ns, Inc., No. 06 Civ. 2083, 2006 WL 3500702, at *10-11 (S.D.N.Y. Dec. 4, 2006) (dismissing fraud cause of action where plaintiff failed to plead when fraudulent
Defendant also argues, in its reply brief, that Thompson's statements cannot be attributed to Defendant because Defendant had to ratify his fraudulent statements to be bound by them. (Def.'s Br. 6 n.8.) This, again, is an argument for summary judgment. The doctrine of ratification applies when an agent acts outside the scope of his actual authority, but his or her acts are later ratified by the principal and therefore attributable to it. 2A N.Y. Jur. 2d Agency & Indep. Contractors §§ 169-70 (2007). Plaintiffs, however, have pleaded that Thompson had actual authority, and they have pleaded sufficient facts to survive a motion to dismiss. Which theory of New York Agency law is most correct as applied to the facts of this case is a question best answered after the facts are developed in discovery. Again, it is sufficient at this stage that Plaintiffs have pleaded facts upon which a rational jury could attribute Thompson's statements to Defendant.
Finally, Defendant argues that Plaintiffs had a duty of inquiry into Thompson's authority. Relying on the Second Circuit's decision in FDIC v. Providence College, 115 F.3d 136, 141 (2d Cir. 1997), Defendant argues that this duty arises when: (1) the facts and circumstances are such as to put the third party on inquiry; (2) the transaction is extraordinary; or (3) the novelty of the transaction raises red flags regarding danger or fraud. Again, as these are all situations regarding the facts surrounding the transaction, and not the allegations in the complaint, this argument is not yet ripe. However, even assuming it was properly raised at this point, Plaintiffs have alleged that they did inquire into Thompson's status (Second Am. Compl. Ex. 18). This is sufficient at the motion to dismiss stage. statements were made or explain why the alleged statements were fraudulent).
In addition to the Rombach factors, a plaintiff must also plead sufficient facts to raise a "strong inference" of fraudulent intent. When considering the inference of scienter raised by a complaint, a reviewing court "must ask: When the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?" Tellabs, 127 S.Ct. at 2511. Although "[g]reat specificity as to scienter is not required," plaintiffs "have the burden of pleading circumstances that provide at least a minimal factual basis for their conclusory allegations of scienter." Cohen v. Koenig, 25 F.3d 1168, 1173 (2d Cir. 1994) (internal quotations and citations omitted). "The requisite 'strong inference' of fraud may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Lerner v. Fleet Bank, N.A., 459 F.3d 273, 291 (2d Cir. 2006) (citing Shields, 25 F.3d at 1128). Here, Plaintiffs have met their burden under Rule 9(b).
1. Motive and Opportunity
When pleading scienter based on motive and opportunity, "[m]otive would entail concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged. Opportunity would entail the means and likely prospect of achieving concrete benefits by the means alleged." Shields, 25 F.3d at 1130. Here, Defendant does not contest that it had the opportunity to commit the alleged fraud. All that is at issue is whether Plaintiffs have pleaded sufficient facts to establish that Defendant had a motive to commit fraud. As the Second Circuit has explained, "what is required when endeavoring to plead facts supporting a strong inference of motive and opportunity is not a bare invocation of magic words such as motive and opportunity but an allegation of facts showing the type of particular circumstances that our case law has recognized will render motive and opportunity probative of a strong inference of scienter." Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000).
This is somewhat complicated, however, as courts in the Second Circuit have been much more likely to describe particular circumstances that are insufficient to establish "motive and opportunity," rather than circumstances that are sufficient. For instance, in Chill v. General Electric Company, the Second Circuit held that standard corporate incentives, such as "motive to maintain the appearance of corporate profitability, or the success of an investment" do not entail "concrete benefits" that establish a claim for fraud. 101 F.3d 263, 268 (2d Cir. 1996). The Chill court also held that merely seeking to justify an investment, or to make that investment appear profitable, was insufficient motive to sufficiently plead fraudulent intent in a securities fraud action. See id. at 268. In addition, a simple economic benefit from an allegedly fraudulent statement may be insufficient, as "we assume that the defendant is acting in his or her informed economic self-interest." Shields, 25 F.3d at 1130. In short, a motive that is common to every corporation, or to any type of business, normally is not sufficient motive to prove fraudulent intent. See In re Veeco Instruments, Inc., Sec. Litig., 235 F.R.D. 220, 230 (S.D.N.Y. 2006).
In some cases, however, a desire to avoid making future payments on an existing liability has been found to be a sufficient motive to survive Rule 9(b). In Cohen v. Koenig, the Second Circuit found that where a complaint contained allegations that one party to a sale had a financial incentive to "paint a far rosier financial picture than actually existed in order to induce" the other party into a sale, such allegations were sufficient to survive Rule 9(b). 25 F.3d 1168, 1174 (2d Cir. 1994). Additionally, in Turkish v. Kasenetz, the Second Circuit held that a complaint adequately pled motive and opportunity where the alleged motive was financial, specifically "a desire to avoid repaying the loans" and to end prior litigation. 27 F.3d 23, 28 (2d Cir. 1994).
Here, none of Defendant's arguments regarding the inference of fraud, listed supra, undermine Plaintiffs' allegations of Defendant's motive to commit fraud. The Second Amended Complaint alleges ten different financial reasons that motivated Defendant to commit fraud. (Second Am. Compl. ¶ 132.) These include the desire to avoid nearly € 7,000,000 in existing liabilities. (Id.) Although many of the other alleged motivations are based on Plaintiffs' allegations that Defendant knew at the time that the European CyberCenter Business had little prospect for success (which Defendant claims is merely pleading fraud by hindsight), both Cohen and Turkish stand for the proposition that a business seeking to avoid a loss or induce a beneficial sale has sufficient motive to commit fraud to raise the requisite "strong inference" of fraud under Rule 9(b). In other words, it can be said that the inference of fraud raised by the complaint, considered in light of the existing standards of the Second Circuit, is at least as strong as any opposing inference. Hence, even if some of Plaintiffs' allegations could be dismissed as fraud by hindsight, there are sufficient allegations in the Complaint to survive Defendant's motion.*fn7
2. Circumstantial Evidence of Conscious Misbehavior or Recklessness
As Plaintiffs have adequately pleaded motive and opportunity to commit fraud, there is no need for the Court to consider whether they have also sufficiently pleaded conscious misbehavior. It is noteworthy, however, that even if Defendant's allegations of fraud by hindsight and "puffery" are set aside, Plaintiffs have pleaded with particularity a number of representations which meet the standard for conscious misbehavior.
To meet this standard, a plaintiff must plead specific facts "constituting strong circumstantial evidence of defendants' recklessness, and possibly even conscious misbehavior." In re Veeco, 235 F.R.D. at 231. Here, Plaintiffs have pleaded that at least two of the statements made to them during due diligence were consciously false. First, in May 2002 Thompson told Plaintiffs that his employment with Defendant had already terminated. (Second Am. Compl. ¶ 114.) Second, on July 12, 2002, a representative of Defendant sent a letter to a lawyer for Plaintiffs stating that Thompson's employment had terminated. (Id. Ex. 22.) According to the allegations in the Second Amended Complaint, Thompsons's employment did not officially end until September 10, 2002. (Id. Ex. 23.)
These statements are specific facts which raise a sufficiently strong inference of fraud to survive Rule 9(b). "'An egregious refusal to see the obvious, or to investigate the doubtful, may in some cases give rise to an inference of recklessness.'" Chill, 101 F.3d at 269 (quoting Goldman v. McMahan, Brafman, Morgan & Co., 706 F. Supp. 256, 259 (S.D.N.Y. 1989)). Viewing the facts in the light most favorable to the Plaintiffs and drawing all reasonable inferences in his favor -- as the Court must do at the motion to dismiss stage -- it is inconceivable that either Thompson or Defendant would be unaware of Thompson's employment status.
A strong inference of fraud is raised by these allegedly conscious misrepresentations regarding the employment status (and the conflicts of interest) of a key player in the transaction. These statements, regardless of the other numerous statements which Plaintiffs allege to be false, also demonstrate that Plaintiffs have raised a sufficiently "strong" inference of fraud pursuant to survive Defendant's motion to dismiss.*fn8
C. Fraud and Negligent Misrepresentation
In addition to the Second Amended Complaint's alleged failure to adequately plead fraudulent intent, Defendant also argues that both Plaintiffs' first and second causes of action, the fraud and negligent misrepresentation claims, fail because Plaintiffs have failed to adequately plead loss causation or reasonable reliance. The Court will address each in turn.
1. Loss Causation
Under New York law, common law fraud is "a representation of fact, which is untrue and either known by defendant to be untrue or recklessly made, which is offered to deceive and to induce the other party to act upon it, which causes injury." Solar Travel Corp. v. Nachtomi, No. 00 Civ. 3564, 2001 WL 641151, at *4 (S.D.N.Y. June 8, 2001). A claim of negligent misrepresentation requires that the plaintiff establish "that the defendant had a duty to use reasonable care to impart correct information because of some special relationship between the parties, that the information was incorrect or false, and that the plaintiff reasonable relied upon the information provided to his detriment. Id. at *6 (internal quotations and citations omitted). Loss causation is an essential element of each claim. Id. at *4, 6. "Loss causation 'is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff.'" Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172 (2d Cir. 2005) (quoting Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003)). In other words, "[l]oss causation is causation in the traditional 'proximate cause' sense -- the allegedly unlawful conduct caused the economic harm." AUSA Life Ins. Co. v. Ernst and Young, 206 F.3d 202, 209 (2d Cir. 2000); see also Manufacturers Hanover Trust Co. v. Drysdale Secs. Corp., 801 F.2d 13, 20 (2d Cir. 1986). "The purpose of the proximate cause requirement is to fix a legal limit on a person's responsibility, even for wrongful acts." First Nationwide Bank, 27 F.3d at 769.
To adequately plead loss causation, "'a plaintiff must allege . . . that the subject of the fraudulent statement or omission was the cause of the actual loss suffered.'" Lentell, 396 F.3d at 173 (quoting Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir. 2001)). A misstatement or omission of relevant fact is the cause of a loss if "the risk that caused the loss was within the zone of risk concealed by the misrepresentations and omissions alleged by a disappointed investor." Id. A plaintiff has adequately pled loss causation with regard to the concealment or misstatement of a material fact if it alleges that its loss was foreseeable to the party alleged to have concealed or misrepresented the material fact and that its loss was caused by the materialization of the concealed (or misrepresented) fact. See id. at 172; Emergent Capital, 343 F.3d at 197 ("Similar to loss causation, the proximate cause element of common law fraud requires that plaintiff adequately allege a causal connection between defendants' non-disclosures and the subsequent decline in . . . value []."); Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir. 1992) ("To establish loss causation a plaintiff must show, that the economic harm that it suffered occurred as a result of the alleged misrepresentations.").
Even where a plaintiff has made such a showing, there are other factors that may limit a plaintiff's claim of loss causation. "Many considerations enter into the proximate cause inquiry including the 'foreseeability of the particular injury, the intervention of other independent causes, and the factual directness of the causal connection.'" First Nationwide Bank, 27 F.3d at 769 (quoting Brandenburg v. Seidel, 859 F.2d 1179, 1189 (4th Cir. 1988)); accord AUSA Life Ins. Co., 206 F.3d at 216 ("Foreseeability is tied into loss causation . . . ."). For instance, a plaintiff is unlikely to recover when "the plaintiff's loss coincides with a marketwide phenomenon causing comparable losses to other investors . . . ." First Nationwide Bank, 27 F.3d at 772. Also, a plaintiff must address the possibility that intervening events caused its loss. Id. A court may also consider other factors typically relevant into proximate cause inquiries. For example, the Second Circuit has affirmed a district court's dismissal (on a Rule 12(b)(6) motion) of a case where there was a five-year gap between the alleged misrepresentations and the plaintiff's losses. See id. ("When a significant period of a time has elapsed between the defendant's actions and the plaintiff's injury, there is a greater likelihood that the loss is attributable to events occurring in the interim."). But, where a plaintiff adequately alleges that a defendant's fraud caused plaintiff's loss, the question of whether, in fact, the loss was caused by an intervening event (including a general market loss), the Second Circuit has held, "is a matter of proof at trial and not to be decided on a Rule 12(b)(6) motion to dismiss." Emergent Capital, 343 F.3d at 197.
Here, Plaintiffs have alleged that Defendant intentionally misrepresented the potential market for the European CyberCenter Business and the suitability of the business plan that it had developed for that market. Other courts in this district have refused to dismiss cases where the plaintiff alleges that a defendant misrepresented the financial health of a company, as well as the profitability of the company's business. See, e.g., Fogarazzo v. Lehman Bros., Inc., 341 F. Supp. 2d 274, 289 (S.D.N.Y. 2004) ("[T]he Banks are alleged to have lied about the financial health and future prospects of RSL -- namely, the investment quality of RSL securities. Moreover, RSL ultimately failed because of the very facts that the Banks misrepresented: that RSL was in financial trouble and that the entire 'internet telephony sector' was collapsing."). The Second Circuit came to a similar conclusion in Suez Equity. In that case, the defendant was alleged to have misrepresented the inept background of the corporate executive in the subject company. 250 F.3d at 98. The Second Circuit held that this misrepresentation satisfied the plaintiff's obligation to plead loss causation in two ways. First, the misrepresentation directly "caused" a loss because it caused the investors to overestimate the value of their purchase. They assumed they were investing in a business with competent management, which would affect the price. Second, because it was foreseeable that an enterprise run by inexperienced management would fail, the later failure of the business was within the zone of risk created by their misrepresentation. Id.
Here, Plaintiffs have alleged that Thompson knew that the market for the European CyberCenter Business was weak or nonexistent and also that he, and thus Defendant, knew that the business plan he pitched to Plaintiffs had little or no prospect for profitability. Plaintiff has also alleged that these two factors were the reason the business failed. In the end, like the plaintiffs in Fogarazzo and Suez Equity, Plaintiffs have pled that Defendant misrepresented the "investment quality" of the European CyberCenter Business, and that misrepresentation caused the business to fail. Thus, Plaintiffs have met their pleading obligations, and whether or not the failure of the European CyberCenter Business was in fact caused by Defendant's misrepresentations, or, as Defendant alleges, by a general market slowdown, is a matter not to be decided on a motion to dismiss. See Emergent Capital, 343 F.3d at 197.
Defendant contended at oral argument that this scenario does not meet the plausibility requirements recently announced by the Supreme Court, because Plaintiffs' theory of the case requires Thompson to have signed on to lead and, more importantly, take a stake in, a business he knew was doomed to failure. This is not a frivolous argument; however, Plaintiffs also allege that Defendant offered to pay Thompson more than a million dollars to ensure this scenario came about. That payment is sufficient to make the scheme plausible enough to survive at this stage of the case.
2. Reasonable Reliance*fn9
Reasonable reliance is a necessary element of Plaintiffs' fraud and negligent misrepresentation claims. See Wynn v. AC Rochester, 273 F.3d 153, 156 (2d Cir. 2001) (noting elements of fraud under New York law); Hydro Investors, Inc. v. Trafalgar Power, Inc., 227 F.3d 8, 20 (2d Cir. 2000) (noting elements of negligent misrepresentation under New York law). "In assessing the reasonableness of a plaintiff's alleged reliance, [the Court] considers the entire context of the transaction, including factors such as its complexity and magnitude, the sophistication of the parties, and the content of any agreements between them." Emergent Capital, 343 F.3d at 195. "Although reasonable reliance is a fact-specific inquiry generally considered inappropriate for determination on a motion to dismiss, whether a plaintiff has adequately pleaded justifiable reliance can be a proper subject for a motion to dismiss in certain circumstances." Allied Irish Banks, P.L.C. v. Bank of America, N.A., No. 03 Civ. 3478, 2006 WL 278138, at *8 (S.D.N.Y. Feb. 2, 2006) (internal quotations and citations omitted).
Defendant argues that Plaintiffs' reliance was unreasonable as a matter of law because:
(1) they were aware of Thompson's potential conflicts of interest at the time they engaged in the transaction; (2) Plaintiffs failed to request any representation regarding Thompson's employment status; and (3) Plaintiffs failed to inquire about any ongoing or future economic arrangement between Thompson and Defendant. Contrary to Defendant's arguments, Plaintiffs' allegations of reasonable reliance are sufficient to survive at this stage. Under New York law, a plaintiff bears the burden of protecting itself from fraud made during the course of a business acquisition. Id. However, most cases where courts have granted motions to dismiss because of a failure to adequately plead reasonable reliance have concerned situations where a plaintiff failed to examine readily available information, relied on oral representations of information when it could easily have asked for additional information, or failed to properly investigate a transaction. Id. at *9. The factual situation alleged in the Second Amended Complaint is different, however.
Here, Plaintiffs allege that they did perform due diligence, that they did investigate the representations made to them regarding the European CyberCenter Business, and that they did inquire into Thompson's relationship with Defendant. (Second Am. Compl. ¶¶ 92, 98, 109, 117.) Plaintiffs claim that Defendant thwarted that due diligence by misrepresenting information related to these requests and arranging a payment to Thompson to ensure that the sale went off successfully. This payment allegedly was more than simply a success fee, as it is alleged to include compensation for continuing to work in Defendant's interest after Thompson's employment with Defendant had terminated and during the time he was Glidepath's CEO. (Id. Ex. 8.)
Defendant relies primarily on Emergent Capital, 343 F.3d at 192, for the proposition that Plaintiffs' failure to request specific representations from Defendant regarding Thompson's employment status demonstrates as a matter of law that their reliance was unreasonable. (Def.'s Br. 27.) However, Plaintiffs allege in the Second Amended Complaint that they did request representation from Defendant regarding Thompson's employment status, and both Thompson and one of Defendant's officers represented to Plaintiffs that he was no longer employed by Defendant at a time when he was still an employee. (Second Am. Compl. ¶ 117, Ex. 22.) In addition, Emergent Capital is distinguishable from the present case. In Emergent Capital, the plaintiff's claim was based on extra-contractual representations made to it by a close personal friend of a director. The plaintiff had alleged that the close relationship between the two men made plaintiff's reliance reasonable. The court rejected that argument. 343 F.3d at 196. The court stated, "[g]iven the sophistication of this financial transaction and of the parties, and absent any allegation of a fiduciary relationship, the personal friendship between [the two directors] does not make [plaintiff's] reliance on the alleged extra-contractual representations reasonable." Id. Here, however, Plaintiffs have alleged a fiduciary relationship existed between themselves and Thompson during a period of the alleged fraudulent scheme. Although Defendant disputes that Thompson was a fiduciary of Plaintiffs at the time that many of the allegedly fraudulent representations were made, the exact nature of Thompson's relationship to Plaintiffs and Defendant is sufficiently complex that this case is one where the claim of reasonable reliance is ill-suited for decision on a motion to dismiss. See AIG Global Secs. Lending Corp. v. Banc. of Am. Secs., No. 01 Civ. 11448, 2005 WL 2385854, at *9 n.5 (S.D.N.Y. Sept. 26, 2005) ([T]he issue of whether an investor reasonably relied on a defendant's misrepresentations is a fact-intensive inquiry that cannot be decided on this motion to dismiss.").
D. Aiding and Abetting Breach of Fiduciary Duty
Defendant also argues that Plaintiffs' third cause of action should be dismissed for failure to plead knowledge on behalf of Defendant. The Parties agree that to adequately plead a claim of aiding and abetting a breach of fiduciary duty under New York law, a plaintiff must allege: (1) breach of a fiduciary duty owed to the plaintiff; (2) defendant's knowing participation in the breach; and (3) damages. See Kolbeck v. LIT Am., Inc., 939 F. Supp. 240, 245 (S.D.N.Y. 1996). Defendant argues that Plaintiffs have failed to plead that Defendant had any knowledge of Thompson's breach of fiduciary duty. Plaintiffs allege that Thompson personally received funds from Defendant to encourage him to cause Glidepath to invest in the European CyberCenter Business. If true, such an action would be a breach of his fiduciary duties. 2A N.Y. Jur. 2d Agency & Indep. Contractors § 215 ("An agent may not have interests in the subject transaction which are adverse to those of his or her principal."); see also TPL Assocs. v. Helmsley-Spear, Inc., 536 N.Y.S.2d 754, 756 (App. Div. 1989). Further, Plaintiffs have alleged that Defendant knew of this transaction, and have attached to the Second Amended Complaint a letter from Defendant to Thompson stating that, because they could not pay him as an employee once he became CEO of Glidepath, they would transfer funds to his personal account to ensure that he take "an active role in [Glidepath's] acquisition of the European CyberCenter Business." (Second Am. Compl. Ex. 8.) Thus, Defendant's motion to dismiss Plaintiffs' aiding and abetting breach of fiduciary duty claims is denied.*fn10
E. Unjust Enrichment
Defendant argues that Plaintiffs' claim for unjust enrichment should be dismissed because, under their interpretation of the facts of the case, "equity and good conscience" do not require restitution under these circumstances, which is a necessary element of an unjust enrichment claim. Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir. 2000). However, Defendant's interpretation of the "equity and good conscience" element as applied to these facts is not an issue for this motion. The issue before the Court is whether Plaintiffs have pled a set of facts that states a plausible claim. All New York law requires at this stage is that a plaintiff plead that the defendant was enriched, that the enrichment came at the plaintiff's expense, and that the enrichment was unjust. See id.; Dubai Islamic Bank v. Citibank, N.A., 126 F.Supp.2d 659, 669 (S.D.N.Y. 2000). That burden is met here. See Dubai Islamic Bank, 126 F.Supp.2d at 669, (rejecting motion to dismiss where plaintiff had adequately pled basis for unjust enrichment claim).
III. Conclusion
For the reasons stated in this Opinion, Defendant's motion to dismiss the Second Amended Complaint is DENIED.
Kenneth M. Karas United States District Judge
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United States District Court, S.D. Illinois
June 2, 2005.
DAVID R. PANZIER, II, Plaintiff,
THE DIAL CORPORATION and LOCAL 618, INTERNATIONAL BROTHERHOOD OF TEAMSTERS, CHAUFFEURS, WAREHOUSEMEN AND HELPERS OF AMERICA, Defendants.
MEMORANDUM and ORDER
Now before the Court is Defendant The Dial Corporation's
(hereinafter "Dial") motion for summary judgment (Doc. 25) and
memorandum in support (Doc. 26) and Defendant Local 618,
International Brotherhood of Teamsters, Chauffeurs, Warehousemen
and Helpers of America's (hereinafter "Local 618") motion for
summary judgment (Doc. 27) and memorandum in support (Doc. 28) as
to Plaintiff David R. Panzier, II's two-count second amended
complaint under Section 301 of the Labor Management Relations
Act, 29 U.S.C. 185 (Doc. 18). In Count One, Panzier alleges
Dial breached its collective bargaining agreement with Local 618
when it discharged Panzier without proper cause. In Count Two,
Panzier alleges Local 618 breached its duty to fairly represent
Panzier when it allegedly acquiesced or unreasonably permitted
Dial to terminate Panzier's employment without just or proper
cause and then failed to take his case to arbitration without any
good faith basis. Panzier responded jointly to the motions for summary judgment
at Doc. 29. Dial replied at Doc. 31 and Local 618 replied at Doc.
30. This matter being fully briefed, the Court begins its
analysis with a brief recitation of the factual background and
procedural history.
Factual Background and Procedural History
Dial operates a plant in St. Louis, Missouri where it
manufactures dry detergent, liquid detergent and related products
during three daily shifts. Panzier began working for Dial on
September 26, 1988, and was employed by Dial for approximately 15
years until his employment was terminated on May 15, 2003,
retroactively effective May 9, 2003. At the time of his
termination, Panzier worked as a Technician III Line Leader
directing a crew of employees.
Local 618 is the labor union that represents the bargaining
unit employees employed by Dial at its St. Louis plant. The
bargaining unit employees's employment, which included Panzier,
is governed by a collective bargaining agreement (hereinafter
"CBA") negotiated by Dial and Local 618. Article 20 of the CBA,
the "Management Rights" clause, provides in part:
All management functions, rights, powers and
authority which the Company has not specifically and
clearly limited or abridged by this Agreement are
recognized by the Union as being retained solely and
exclusively by the Company, including, but not
limited to, and by way of example only: . . . the
direction of the working forces including but not
limited to the right to hire, promote, transfer,
suspend, demote, discipline or discharge for proper
cause. . . .
As well, Dial has "Plant and Distribution Center Rules"
(hereinafter "Plant Rules") that apply to the bargaining unit
employees. In Article 27 of the CBA, Dial and Local 618 agreed
that Dial could implement such rules concerning certain standards
of conduct and what constitutes proper cause for termination of
The Plant Rules separate infractions into three categories of
increasing severity: general, major and serious. The Plant Rules
provide that an employee's accumulation of two written notices
for general or major infractions in a twelve-month period will
result in suspension, while accumulation of three warning notices
in a twelve-month period for general or major infractions "will
result in permanent separation" of that employee. Specifically,
the Plant Rules state:
Infractions of these rules will be dealt with by
using the written warning notice concept, starting
with the first written warning notice. Letters of
reprimand and written warning notices can be issued
concurrently, depending upon the seriousness of the
Warning notices are cumulative, regardless of the
nature of the infraction, and will remain in effect
for twelve months. Letters of reprimand remain in
effect for two years. A second written warning notice will result in a disciplinary suspension.
Should an employee's conduct warrant the issuance of
a third written warning, as a progression on the
first and second notices, the employee will be
permanently separated from employment.
During his employment with Dial, Panzier was involved in a
couple of infractions. On August 8, 2002. Panzier was counseled
for violating Plant Rule II-T (morally or socially unacceptable
behavior) on July 7, 2002. On July 7, 2002, in response to a
manager's request to obtain a product sample, Panzier apparently
became angry and threw his cup from which he was drinking,
shouted at management, and started slamming drawers and lab
equipment. In that counseling, Dial specifically informed Panzier
that further inappropriate conduct would subject him to further
discipline up to and including termination.
Panzier was also counseled on August 8, 2002 for violating
Plant Rule II-U (failure to report or being late for scheduled or
assigned overtime without proper substantiation) on August 3 and
4, 2002 when Panzier failed to report for overtime. Panzier was
written up, and Panzier and Local 618 grieved the write up as
Panzier claimed he was attending to a relative in the hospital.
After the fact, Panzier provided a doctor's note indicating that
his brother-in-law had been hospitalized. Employee Relations
Manager Patricia Canada voided the counseling and explained to
Panzier what would constitute proper documentation to prevent the
issue of a counseling or discipline for violating Plant Rule II-U
in the future.
Thereafter, Panzier accumulated three warning notices within a
twelve-month period that resulted in his employment being
terminated in accordance with the CBA and Plant Rules. Panzier
received the first written warning on October 3, 2002 for
violating Plant Rule II-R (a major rule prohibiting smoking,
eating or chewing snuff or tobacco). Panzier was found smoking a cigarette in the control room on September 23, 2002. Panzier and
Local 618 filed a grievance over the discipline, which Dial
denied. Local 610 pursued the grievance through the third step,
however it did not arbitrate the grievance as Panzier did not ask
that it be arbitrated.
The next written warning was about a month later on November 8,
2002, when Panzier received a written warning for violating Plant
Rule II-D (a major rule concerning changing clothes before
punching out at the end of the shift without authorization).
Panzier reported late that day for mandatory anti-harassment
training. Panzier clocked out and went to shower and change his
clothes before attending the meeting. Panzier responded that he
did not know of the meeting. Panzier and Local 618 filed a
grievance over the discipline and pursued the grievance to the
third step, but Dial ultimately denied the grievance. Local 618
did not arbitrate the grievance as Panzier failed to notify Local
618 within thirty days after the third step meeting to express
interest in pursuing the grievance to arbitration. Panzier did
not protest Dial's denial of the grievance or otherwise protest
Local 618's decision not to arbitrate the grievance.
The third written warning occurred several months later as a
result of three incidents. On April 24, 2003, Panzier was
scheduled to report to work for overtime at 4:00 a.m. and did not
report until 5:35 a.m. The next day, April 25, 2003, Panzier was
again scheduled to work for overtime at 4:00 a.m. and did not
report until 7:11 a.m. Dial determined that each instance was a
violation of Plant Rule II-U (a major rule for being late for
scheduled overtime without proper substantiation). However,
Panzier states he had car trouble on both days. On April 24, he
states his car's battery died. Then on April 25, his car's
serpentine belt snapped and he had to wait for his wife to return
home so he could use her car. Panzier took the car in for repair
on May 4, 2003, at the end of his work week. Then on May 6, 2003, Panzier left the plant without being
relieved of duty and without the approval of his manager. Dial
employees are not allowed to end their shift until their relief
has reported for work or until otherwise authorized. That day,
five minutes prior to the end of his shift, Panzier asked his
supervisor, Tim Jensen, if his relief, Angel Jennings, had
reported for duty, and was told she had not. Later, Panzier
thought he heard Jennings' voice while he was in the restroom.
After exiting the restroom, Panzier asked Jensen if Jennings had
called out and Jensen said she had not. Panzier then told Jensen
he was leaving, and Jensen said that was fine. However, Panzier's
replacement did not arrive until 5:02 p.m. that day, instead of
4:00 p.m., and did not call off work. Dial took the events of
April 24, April 25 and May 6 and included them all in a third
Then on May 7 and 9, 2003, Dial, Panzier and Local 618 met to
discuss the April 24, 2003, April 25, 2003 and May 6, 2003
incidents. During the May 7, 2002 meeting, Panzier claimed the
tardiness on April 24 and 25 were the result of car problems. On
May 5, 2003, Panzier had submitted receipts for a car battery and
an engine belt. However, Dial rejected the receipts as proper
documentation as the receipts were not dated for the date on
which Panzier missed work. Panzier alleges it was impossible for
him to get his car serviced that day as he was working from 5:35
a.m. until 4:00 p.m. on April 24, and was scheduled to be back at
work at 4:00 a.m. on April 25. Additionally, Panzier and his wife
were in bankruptcy and under financial stress and Panzier states
he need to wait until he received his paycheck the following
Thursday to repair his vehicles, which he did that next Saturday.
Nonetheless, Dial chose to terminate Panzier.
Then on May 14, 2003, Panzier, through the Local 618, grieved
his suspension and Chief Shop Steward, Cindy Keys, signed the
grievance. On May 15, 2003, Panzier was formally discharged, and Panzier grieved his discharge through Local 618.
Again, Keys signed the grievance. On May 22, 2003, Local 618 and
Dial conducted a combined second and third step grievance meeting
pursuant to Article 7 of the CBA regarding Panzier's termination
grievance. At the meeting were Panzier, Marvin Kropp, Business
Representative and Recording Secretary for Local 618, Keys,
Canada, and Mary Hoffman, Human Resources Manager of Dial.
On May 29, 2003, Dial informed Local 618 that Panzier's
termination grievance was denied. In accord with Article 7,
Section 4 of the CBA, Local 618 had thirty days from Dial's May
29, 2003 denial of Panzier's grievances to notify Dial of its
intent to arbitrate. Local 618 decided not to proceed to
arbitration on Panzier's termination grievance and informed
Panzier of its decision in a letter dated June 30, 2003. As Local
618 did not notify Dial of its intent to arbitrate, Dial
considered this matter closed on June 28, 2003, once the thirty
days had passed.
On July 15, 2003, Panzier and his wife, Patty Panzier, faxed a
letter to Kropp requesting that Local 618 arrange another meeting
with Dial regarding Panzier's termination. Panzier and his wife
asserted that Panzier has an alcohol problem and did so at the
time of his termination, which Kropp failed to raise during the
May 22 meeting. After receiving the facsimile, Kropp sent a
letter on July 17 to Tom Delaney, Dial's Director of Human
Resources, requesting an additional meeting regarding Panzier's
discharge. Kropp then sent a letter to Panzier advising that an
additional meeting had been requested, but alerted Panzier that
Dial was not required to agree to meet with them. Kropp further
explained that if Panzier had an alcohol problem, he could have
used Dial's Employee Assistance Program prior to his termination.
On July 21, 2003, Panzier's wife also faxed a handwritten
letter to Delaney, who provided a copy to Hoffman. On July 25,
2003, Dial sent a written response to Local 618, stating Dial did not want to meet as Local 618 had been made of aware of
Dial's decision to terminate Panzier's employment and choose not
to arbitrate the matter, thus Dial considered the matter closed.
Kropp informed Panzier by letter of Dial's decision not to meet.
Panzier then filed an unfair labor practice charge against
Local 618 with Region 14 of the National Labor Relations Board
(hereinafter "NLRB") on July 22, 2003. Panzier alleged that Local
618 violated the National Labor Relations Act for refusing to
arbitrate Panzier's discharge grievance and for allegedly
perfunctorily processing his discharge grievance. On September
10, 2003, Field Attorney John P. Hasman of Region 14 of the NLRB
informed Panzier that he was recommending that his unfair labor
practice charge against Local 618 be dismissed, and it was
dismissed on September 11, 2003. Panzier appealed the decision
and the appeal was denied on January 14, 2004.
Panzier filed his original complaint against Defendants on
December 29, 2003 (Doc. 1), amending his complaint on February 4,
2004 (Doc. 2), and later filing a second amended two-count
complaint on July 22, 2004 (Doc. 18). In Count One of the second
amended complaint, Panzier alleges Dial breached its collective
bargaining agreement with the Union when it allegedly discharged
Panzier without proper cause. In Count Two, Panzier alleges Local
618 breached its duty to fairly represent Panzier when it
allegedly acquiesced or unreasonably permitted Dial to terminate
his employment without just or proper cause and then failed to
take his case to arbitration without any good faith basis.
Standard Governing Summary Judgment
Summary judgment is proper if the pleadings, depositions,
interrogatory answers, admissions, and affidavits reveal that
there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.
Vukadinovich v. Board of School Trustees of North Newton School
Corp., 278 F.3d 693, 698 (7th Cir. 2002). The Court is to view
the record "in the light most favorable to the non-moving party."
Dyrek v. Garvey, 334 F.3d 590 (7th Cir 2003), citing
FEDERAL RULE OF CIVIL PROCEDURE 56(c).
The mere existence of an alleged factual dispute is not
sufficient to defeat a summary judgment motion. Anderson v.
Liberty Lobby, 477 U.S. 242, 247 (1986); Salvadori v.
Franklin School District, 293 F.3d 989, 996 (7th Cir. 2002).
Rather, to successfully oppose summary judgment, the nonmovant
must present definite, competent evidence in rebuttal.
Salvadori, 293 F.3d at 996, citing Vukadinovich,
278 F.3d at 699.
Panzier has filed a hybrid section 301/fair representation suit
claiming that Dial breached the collective bargaining agreement
and that Local 618 breached the duty of fair representation it
owes to its members. See Reed v. United Transp. Union,
488 U.S. 319, 328 (1989); McLeod v. Arrow Marine Transp., Inc.,
258 F.3d 608, 612-13 (7th Cir. 2001). In order for a plaintiff
to prevail in such an action, he must have a meritorious claim
against both the union and the employer; the claims are
interlocking in the sense that neither is viable if the other
fails. Crider v. Spectrulite Consortium, Inc., 130 F.3d 1238,
1241 (7th Cir. 1997). The Court will address Local 618 and
Dial's arguments in turn.
1. Whether Local 618 breached its duty of fair representation
to Panzier.
A union breaches the duty of fair representation only if its
actions are arbitrary, discriminatory, or in bad faith. Vaca v.
Sipes, 386 U.S. 171, 190 (1967). Each of these possibilities
must be considered separately in determining whether or not a
breach has been established. See Ooley v. Schwitzer Div., Household Mfg. Inc., 961 F.2d 1293,
1302 (7th Cir. 1992), citing Air Line Pilots Ass'n, Int'l v.
O'Neill, 499 U.S. 65 (1991); see also, e.g., Crider,
130 F.3d at 1243.
To be "arbitrary", a union's conduct toward its members must be
"so far outside a wide range of reasonableness that it is wholly
irrational or arbitrary." Air Line Pilots Ass'n,
499 U.S. at 78. The United States Supreme Court has emphasized that the
arbitrary prong of the analysis is very deferential and has held
that "a union's actions are arbitrary only if, in light of the
factual and legal landscape at the time of the union's actions,
the union's behavior is so far outside a `wide range of
reasonableness,' as to be irrational." Air Line Pilots Ass'n,
499 U.S. at 67. Applying this standard, a court "will not
substitute [its] judgment for that of the union, even if, with
the benefit of hindsight, it appears that the union could have
made a better call." McKelvin, 124 F.3d at 867. This wide
range of deference is warranted because Congress did not intend
for courts to interfere with the decisions of the employee's
chosen bargaining representative. Id. Therefore, "so long as a
colorable argument could be made at the time of the union's
decision to drop its support that the grievance is meritless, the
decision cannot be regarded as arbitrary." Id. at 867-68.
In this case, a rational jury simply could not find that the
Union failed this test, as there is no evidence of any conduct
that even approaches being outside a "wide range of
reasonableness." Kropp, who has been employed with Local 618 for
twenty years, stated that the decision was made not to arbitrate
Panzier's claim as Local 618 did not think they could win the
arbitration. See Doc. 28, Exh. 3, p. 18. Kropp stated that when
deciding whether to arbitrate, he initially looked at all the
facts surrounding Panzier's claim, and discussed them with his
boss, John Guerra, the secretary/treasurer of Local 618. The two
discussed Panzier's claims for a couple of hours over a couple of
days. Both agreed that they did not believe they would win if
they arbitrated Panzier's grievance as he fell into the progressive discipline
and Panzier had received three writeups within a twelve-month
period. Panzier himself admits that he had received three
write-ups within a twelve-month period, subjecting him to
termination. Such deliberation by Kropp and Guerra about whether
or not to arbitrate Panzier's claim and the resulting decision
not to arbitrate Panzier's claim as he had three write-ups on his
record within a twelve-month period, is not so far outside a wide
range of reasonableness so as to find that Local 618 acted
In support of his argument that Local 618 acted arbitrarily,
Panzier states that a reasonable arbitrator would have overturned
the November 8, 2002 write up because Panzier did not change his
clothes before punching out, he only changed clothes after
punching out. However, Local 618 would not be able to attack the
merits of the November 8, 2002 write-up as the time to do so had
already passed. As well, Panzier himself never asked that Local
618 arbitrate that grievance when he had the option to do so. As
a result, that write-up constitutes one strike against him in the
progressive discipline system.
Panzier further argues that Local 618's decision not to
arbitrate Plaintiff's termination was arbitrary because it
arbitrated other cases that Panzier contends were more egregious
than Panzier's purported misconduct. However, the Court notes
that Panzier cites to no caselaw in support of this argument. How
a union treats other grievances is relevant only as to
substantively similar grievances. Konen v. Int'l Brotherhood of
Teamsters, Local 200, 255 F.3d 402, 407 (7th Cir. 2001).
Therefore, if Local 618 treats grievances that are substantively
similar to Panzier's grievance, differently, than that would be
relevant to this Court's analysis as to whether Local 618 acted
Panzier puts forth the arbitrations of Robert Watson, Brant
Boyd, James Silas, and Corky Luedman. However, the record is devoid of any evidence that
these other grievances were substantively similar to Panzier's
grievance. Watson, Luedman and Silas were all terminated for one
time events, not progressive events like Panzier. And while Boyd
was discharged for accumulating three warning notices within a
twelve-month period, Boyd's grievance was taken to arbitration as
Local 618 was challenging whether Boyd had actually received
three warning notices in a twelve-month period. See Doc. 28,
Exh. 4. Boyd's first warning notice used in his twelve-month
calculation was issued on June 26, 2000 for an attendance
violation. Boyd then entered into a "last chance" agreement for
his attendance problems on February 2, 2001. He later received
warning notices on April 9, 2001 and on May 23, 2001. Local 618
contended that on May 23, 2001, Boyd should have only been at the
second warning stage with a three-day disciplinary suspension as
the date Boyd entered into the last chance agreement should not
have been counted against Boyd, but the date of the warning
itself in that matter, June 26, 2000 is what counts. This is
unlike Panzier's situation as he admits to getting three warning
notices in a twelve-month period.
As to whether Local 618's conduct was discriminatory and in bad
faith, while the two must be analyzed separately, the analyses
look to the subjective motivation of the Union officials. Trnka
v. Local Union No. 688, UAW, 30 F.3d 60, 63 (7th Cir. 1994).
There needs to be proof that the union acted (or failed to act)
due to an improper motive. E.g., Crider, 130 F.3d at 1243;
Trnka, 30 F.3d at 63; Ooley, 961 F.2d at 1304.
Panzier first argues that Local 618 acted in bad faith in
choosing not to arbitrate his grievance because Panzier was
affiliated with and participated in a "team concept" program
known as the OE program that Local 618 allegedly did not like.
The only information the Court can glean from the record
regarding the OE program is that it was a program designed to get
union and Dial management employees to work together. Doc. 26, Exh. B, p.
169-70. Apparently the program was implemented in phases sometime
in 2001 to 2002, but was not in effect in 2003.
The record is completely devoid of any evidence of Local 618's
bad faith towards Panzier because of his involvement with the OE
program. Moreover, the record before the Court contains barely
any information regarding the program. For instance, the Court is
unaware of when the program started and ended, the exact periods
of time Panzier was involved in the program, Panzier's role in
the program, or even how the program worked. The only evidence
Panzier puts forth regarding the OE program is Kropp's deposition
testimony that Local 618 did not like the program as it "pitted a
lot of members against each other." Doc. 28, Exh. 3, p. 29-30.
However, Kropp further testified that he was not sure whether
Panzier was involved in the program, only that he "was probably
like a group of people out there that was either on it/off it at
different times." Id. This evidence is far short of
demonstrating bad faith or that Local 618's conduct was
discriminatory towards Panzier. In fact, Panzier himself
testified that OE program was not even in existence when he was
discharged. Doc. 28, Exh. the NLRB found that Panzier's conduct
with OE "was remote in time to [Panzier's] discharge and there
was no evidence of any animus towards [Panzier] because of [his]
involvement." Doc. 30, p. 4.
Further, Panzier again argues that the ease any arbitrator
would have in overturning his November 8, 2002 write-up and Local
618's unwillingness to arbitrate his grievance demonstrates Local
618's bad faith. However, this does not in anyway infer a bad
motive on the part of Local 618, especially considering that
Panzier himself did not ask Local 618 to arbitrate that specific
write-up when he had the chance.
Panzier also argues again that Local 618's decision to
arbitrate other grievances that were more egregious than Panzier's purported misconduct is
evidence of Local 618's discrimination and bad faith towards
Panzier. Yet as stated previously, the record is devoid of any
evidence that these other grievances were substantively similar
to Panzier's grievance so as to be relevant evidence of
discrimination or bad faith.
Moreover, the Court notes that Local 618 always pursued all the
grievances filed by Panzier through the system. As to Panzier's
discharge grievance, Chief Shop Steward Cynthia Keys filed the
grievance protesting Panzier's discharge. Then Local 618 and Dial
conducted a combined second and third step grievance meeting
regarding Panzier's discharge grievance pursuant to Article 7 of
the CBA. Panzier was present at the meeting and represented by
Kropp and Keys. Panzier was given the opportunity to present
evidence, and Panzier himself has stated that at the meeting he
"stressed that [he] had been a valuable employee for 15 years,
had done a lot for the company including safety inspections and
run orientation meetings for new employees [and that] Marvin
Kropp also made these points to the company representatives in an
attempt to reduce my discipline to a suspension." Doc. 28, p. 9.
As well, Local 618 was successful in a past grievance of
Panizer's. In October 2002, Local 618 pursued Panzier's grievance
regarding his warning notice for being absent in August 2002, and
Dial withdrew the written warning. As the United States Court of
Appeals for the Seventh Circuit has stated, "the union's
willingness to pursue [plaintiffs] meritorious claim tends to
show that it bore no ill will toward him [when it dropped his
meritless claim]." Souter v. Int'l Union, 993 F.2d 595, 599
(7th Cir. 1993). Further, the Court notes that Local 618
continued to represent Panzier even after notifying him that they
were not arbitrating his discharge grievance. Panzier and his
wife sent a letter to Kropp on July 15 demanding that Kropp
request an additional meeting about the discharge grievance with Dial to raise the issue of Panzier's
newly alleged alcohol problem. While Kropp was not required under
the CBA to request the meeting, Kropp complied and requested an
additional meeting with Dial. As well, Kropp informed Panzier
that an additional meeting had been requested. As a result, the
record before the Court does not show that there is any evidence
that Local 618 acted discriminatory or in bad faith towards
Therefore, the Court finds that Local 618 has not breached its
duty of fair representation. Local 618's actions were not
arbitrary, discriminatory or in bad faith. See Vaca,
368 U.S. at 171. As a result, the Court grants summary judgment in favor
of Local 618 as to Count Two of Panzier's second amended
2. Whether Dial breached the collective bargaining agreement.
As the Court found above that Local 618 has not breached its
duty of fair representation and Panzier's claim against Local 618
is not viable, in turn, neither is Panzier's claim against Dial.
As stated previously, in order for a plaintiff to prevail in such
an action, he must have a meritorious claim against both the
union and the employer; the claims are interlocking in the sense
that neither is viable if the other fails. Crider,
130 F.3d at 1241. Therefore, the Court grants summary judgment in favor of
Dial and against Panzier as to Count One of Panzier's second
amended complaint.
3. Whether the statute of limitation has run as to Panzier's
The Court notes that Dial asserted in its motion for summary
judgment that Dial and Local 618 are entitled to summary judgment
because Panzier failed to commence this action within six months
of Local 618's decision not to arbitrate Dial's final decision on
Panzier's grievance. While Dial is correct in that there is a six month statute of
limitation as to Panzier's claims, the Court finds that Panzier's
claims are not barred by the applicable statute of limitation.
In DelCostello v. Int'l Brotherhood of Teamsters,
462 U.S. 151, 155 (1983), the Supreme Court held that an employee's
"hybrid" suit against an employer for breach of a collective
bargaining agreement and a union for breach of its duty of fair
representation was subject to the six-month statute of limitations
found in § 10(b) of the National Labor Relations Act,
29 U.S.C. § 160(b). The statute of limitations begins to run "when the
claimant discovers, or in the exercise of reasonable diligence
should have discovered, the acts constituting the alleged
[violation]." Christiansen v. APV Crepaco, Inc., 178 F.3d 910,
914 (7th Cir. 1999), citing Metz v. Tootsie Roll Industries,
Inc., 715 F.2d 299, 304 (7th Cir. 1983). "Application of this
general rule turns on the context in which the claim arose."
Pulliam v. United Auto Workers, 354 F. Supp.2d 868, 872 (W.D.
Wis. 2005).
In the case at bar, the clock on Panzier's claims began to run
from the time he discovered, or reasonably should have
discovered, that Local 618 would not take further action on his
grievance. Chapple v. Nat'l Starch & Chemical Co.,
178 F.3d 501, 505 (7th Cir. 1999). The determination of the accrual date
involves an objective inquiry; plaintiff's asserted actual
knowledge is not determinative if he did not act reasonably and
"in effect, closed [his] eyes to evident and objective facts
concerning accrual of [his] right to sue." Noble v. Chrysler
Motors Corp., 32 F.3d 997, 1000 (6th Cir. 1994).
Defendants assert that Panzier's CBA states that Local 618 had
thirty days from Dial's answer to Step 3 of the grievance system
to notify Dial of its intent to arbitrate. Therefore, Dial
asserts that the six month statute of limitation ran from June
28, 2003, thirty days after Dial's May 29, 2003 denial of Panzier's grievance. The Court disagrees.
The record before the Court reveals that Local 618 sent a
letter to Panzier dated June 30, 2003, in which they informed
Panzier of its decision not to arbitrate his claim. While Panzier
should have been aware that Local 618 had until June 28, 2003 in
which to notify Dial of its intent to arbitrate, it is not
unreasonable for Panzier to wait a couple of days after the June
28th deadline passed to learn of the decision, considering Local
618 may be sending him a letter at the end of the deadline, which
it in fact did. There is nothing in the record before the Court
that reveals that Panzier learned or should have learned of Local
618's decision not to arbitrate his claims any earlier than June
30, 2003. Cf. Pulliam v. United Auto Workers,
354 F. Supp.2d 868, 872 (W.D. Wis. 2005); Konen v. Int'l Brotherhood of
Teamsters, 255 F.3d 402 (7th Cir 2001). Therefore, the Court
finds that Panzier's claims began to run no earlier than June 30,
2003. And as Panzier filed this suit on December 29, 2003, it is
The Court GRANTS Defendant The Dial Corporation's motion for
summary judgment (Doc. 25) and GRANTS Defendant Local 618,
International Brotherhood of Teamsters, Chauffeurs, Warehousemen
and Helpers of America's motion for summary judgment (Doc. 27). Accordingly, the Court DIRECTS the Clerk of the Court to enter
summary judgment in favor of Defendants The Dial Corporation and
Local 618, International Brotherhood of Teamsters, Chauffeurs,
Warehousemen and Helpers of America, and against David R.
Panzier, II. This case is now CLOSED.
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