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SCAN
SHORT FORM ORDER
SUPREME COURT STATE OF NEW YORKCOUNTY OF NASSAU
PRESENT:HON. lRAB. WARSHAWSKY,
Justice.TRIAL/IAS PART 16
MARC A. PERGAMENT, the Chapter 7 bankptcytrstee for the Estate of AMERICAN BIOGENETICSCIENCES , INC.
PlaintiffINDEX NO. : 016425/2001MOTION DATE: 03/18/2005MOTION SEQUENCE: 010
- against -
ALFRED J. ROACH, RONALD I. HELLERDAVID S. NAGELBERG, KENNETH J.KOOCK, MATIN H. MEYERSON, M.
MEYERSON & CO. , INC. , LAWRNCEKUPFERBERG, in his individual capacity and astrustee of the RACHEL BETH HELLER 1997TRUST and the EVAN TODD HELLER 1997TRUST, DONEHEW FUND LIMITEDPARTNERSHIP , ROBERT DONEHEW, R. DAVEGARWOOD, DAVID BIGGS, TYLER RUNELSKEVIN CHAROS , ANTHONY CHAROSDELAWARE CHARTER GUARANTY ANDTRUST COMPANY, in its capacity as trustee of theRONALD HELLER IRA, DAVIS S. NAGELBERGIRAand the MARTIN H. MEYERSON IRA, JACQUELINEKNAPP, JANICE HALL-NESSES , JOHN DAVIESINEST, INC. and PETER W. JANSSEN
Defendants.
The following papers read on this motion:
Notice of Motion, Defendants ' Statement Pursuant to Rule 19a , Afdavit & Exhibits Anexed..................... 1
Defendants ' Memorandum of Law in Support of Motion for Sumary Judgment......................................... 2
Affdavit of Matthew E. Miler in Opposition & Exhibits Anexed................................................................ 3
Memorandum in Opposition to Motion for Sumry Judgment.................................................................... 4
Affidavit of Reuben L. Sushmn & Exhibit Anexed...................................................................................... Reply Affdavit in Further Support of Motion for Summry Judgment & Exhibits Anexed.......................... 6
Reply Memorandum of Law in Support of Motion for Sumary Judgment................................................... 7
Motion pursuant to CPLR 3212 by the defendants M.H. Meyerson & Co. , Inc.
Ronald I. Heller, David S. Nagelberg, Kenneth J. Koock, Martin H. Meyerson, Lawrence
Kupferberg, Kevin Charos, Tyler Runnels and Anthony Charos , for summar judgment
dismissing the complaint insofar as asserted against them, is granted.
The plaintiff Marc A. Pergament, is Chapter 7 Bankptcy Trustee for American
Biogenic Sciences , Inc.
, ("
ABS"J, a now bankpt
, "
developmental stage
biopharmaceutical company which commercially researched and marketed certain
cardiovascular and neurobiology products (Cmplt. 1).
As a "developmental" corporation which had yet to successfully market its
products or generate a profit, ABS was continually in need of money to remain financially
viable (T. Roach Dep. , 116).
Since ABS lacked the resources to adequately collateralize traditional asset-based
financing, in May of 1998 it issued so-called "floorless convertible debentues " after
which its stock value began to precipitously decline (Defs ' 19(aJ Statement 10).
In order to stem the rapid decline in its stock, and because ABS faced potential
NASDAQ "delisting" based on its diminished net worth, ABS' directors concluded that it
would be necessary to purchase the outstanding convertible debentures - a strategy
requiring significant capital, which ABS then did not possess.
Some three months afer the debentue offering, in August of 1998 , ABS retained
codefendant M.H. Meyerson & Co, Inc. ("MHM"J as a financial advisor.
More particularly, on August 13 , 1998 ABS and MHM
, "
a full service financial
institution " and entered into a Financial Advisory Agreement ("FAA") (Cmplt. ~ 26),
pursuant to which MHM - as an " independent contractor" - agreed to "provide such
regular and customary financial consulting advice as is reasonably requested by * * *
(ABS) (Agreement ~~ 2 , 10; Pomerantz Aff. ~ 7). The agreement furher provides that
MHM "shall have no authority to act for, represent or bind * * * (ABS) * * * except as
may be expressly agreed to by * * * ("ABS") in writing * * *" (Agreement ~ 10).
Ultimately, and in order to generate the capital necessary to successfully complete
the debenture purchase, ABS opted to pursue a "private placement" offering, consisting of
a "straight equity deal" in which shares of ABS common stock would be offered for sale
at a stipulated price. Alternative sources of generating income were considered, but were
not realistic or viable options in light of ABS' financial condition and lack of assets
(Schoell Dep. , 55-56).
The defendants contend that at some point in October of 1998 , ABS Chairman of
the Board Alfred Roach and ABS in-house counsel Leonard Suroff contacted
respectively, codefendants Ronald I. Heller (an MHM employee) and Mr. Meyerson of
MHM
, "'
independently as a possible source of financing ' and not as an ABS ' financial
advisor
' "
(Pomeranz Aff. ~ 31; SuroffDep. , at 238-239; Rule 19(a) Statement ~ 19).
Heller ultimately assembled a group of investors, which included friends , relatives and
business associates , who collectively agreed to pUrchase $1.7 milion worth of ABS stock
pursuant to the private placement offering (Heller Dep.. 71-72; Rule 19(a) Statement
18- 19).
According to Suroff, the private placement method of proceeding was already
agreed upon before ABS approached Heller (Suroff Dep. , 222-223) - with the price of
the stock constituting the only outstanding issue ofimport to be negotiated (Suroff Dep.
225; Defs ' 19(a) Statement ~~ 16- 17).
Suroff furher testified in this respect that Alfred Roach himself set the price of
per share, and that while Heller pressed for a lower price, Roach rebuffed his requests
upon the advice of counsel (Suroff Dep. , at 226; 19(a) Statement ~~ 16- 17; Roach Dep.
63). Further, ABS chief financial officer Joseph Schoell furher testified that although
inquires were made , he was unaware of any alternative or readily available financing on
terms superior than those of the private placement arrangement which ABS had decided
to pursue (Scheoll Dep. , 68- , 95).
Ultimately, Myerson and Heller, as well as codefendants David S. Nagelberg,
Kenneth J. Koock, Lawrence Kupferberg and Anthony Charos, purchased ABS stock at
the prescribed "straight equity" price of25 per share - a price slightly in excess of the
per share traded value of the stock at the time (Cmplt. , ~ 33; 19(a) Statement ~ 22).
The private placement was completed in late 1998 , and some 8 milion shares of
common stock were sold for the sum of $2.7 milion. It is undisputed that ABS
subsequently utilzed the funding generated by the private placement to successfully
repurchase the debentues (Cmplt. ~~ 30-31), after which its stock values increased
(Cmplt. ~~ 30- , ~ 36).
Notably, codefendants Ronald I. Heller, Martin H. Meyerson, Lawrence
Kupferberg, Kenneth J. Koock, and Anthony Charos , who were all employees ofMHM in
1998 , purchased ABS common stock in accord with the terms of a "Purchase and
Investment Agreement " which permitted buyers to later sell the stock pursuant to certain
conditions 19(a) Statement ~ 25), upon the earlier of the registration statement being
declared effective by the SEC or the elapse of one year. Alfred Roach also purchased
some 4 milion shares. Codefendants Tyler Runnels and Kevin Charos were not MHM
employees and had no relationship with ABS apart from their execution of stock purchase
agreements (Defs ' 19(a) Statement ~ 40).
The moving defendants later sold their ABS stock (some 6 milion shares) and
according to the plaintiff, they ultimately made a $1.85 milion dollar (125%) profit on
their initial investment (Miler, Aff. ~ 106; Cmplt. , ~~ 37-38, 44).
Subsequently, in October of2001 , an ABS shareholder commenced the
predecessor to the instant action - a shareholder derivative action in which ABS was
named as a nominal defendant (Miler Aff. , ~~ 107- 108).
In September of 2002 , ABS fied for protection under Chapter 7 of the United
States Bankrptcy Code (Miler Aff. , ~~ 107- 108) and in October of2003 , the plaintiff
Marc A. Pergament, as Chapter 7 Bankptcy Trustee, was substituted for the ABS
shareholder as the plaintiff in the within action.
Pergament thereafter fied a "first amended complaint" containing four separate
causes of action sounding in breach of fiduciary duty, breach of contract and unjust
enrichment/constructive trust (Cmplt. , ~~ 49-69).
In support of his claims, the plaintiff contends in substance, that the October, 1998
private placement was "conceived of and executed by, the MHM defendants " whom the
plaintiff describes as " insiders" who affirmatively advised ABS in connection with the
private placement offering (Cmplt. , ~~ 32- , 42).
Moreover, according to the plaintiff, MHM , functioned as ABS de facto
placement agent" or underwriter with respect to the disputed private placement and
thereby owed a fiduciar duty to ABS. The plaintiff furher theorizes that placement, as
conducted here, permitted the defendants to purchase the stock at a "grossly inadequate
and "fundamentally unfair" price (25~), resell it when the price rebounded - as they knew
it would upon completion of the debenture repurchase - and then pocket the profits which
should have accrued to the ABS and its shareholders (Cmplt. , ~~ 45-48).
Upon the instant notice, the MHM defendants move for summary judgment
dismissing the complaint, arguing in sum that: (1) neither the FAA nor any other
component of their relationship with ABS gave rise to a fiduciary duty of care or breach
of contract; (2) no advice was , in any event, ever requested by ABS under the FAA with
respect to the private placement and no financial services were provided; and (3) the
plaintiff does not possess a viable claim predicted upon the equitable theories of unjust
enrichment and constrctive trust. The Cour agrees.
Generally speaking '" ( a) fiduciary relation exists between two persons when one
of them is under a duty to act for or to give advice for the benefit of another
upon matters within the scope of the relation
'" (
Mandelbart v. Devon Stores , 132 AD2d
162 , 168 quoting from Restatement (Second) of Torts, 874 (comment a) see generally
Northeast General Corp. v. Wellington Advertising. Inc , 82 NY2d 158 , 162 (1993);
Diamond v Oreamuno. 24 NY2d 494 497-498 (1969); Reuben H. Donnelley C01:. v.
Mark I Marketing C01:. , 893 FSupp. 285 , 289(S. 1995J).
However
, "
(b)efore courts can infer and superimpose a duty of the finest loyalty,
the contract and relationship of the parties must be plumbed" ortheast General C01:. v.
Wellngton Advertising. Inc supra, at 162 (1993)). "If the parties find themselves or
place themselves in the mileu of the 'workaday ' mundane marketplace , and if they do not
create their own relationship of higher trust, courts should not ordinarily transport them to
the higher realm of relationship and fashion the stricter duty for them ortheast General
C01:. v. Wellngton Advertising. Inc supra, at 162; Fyrdman & Co. v. Credit Suisse First
Boston C01: , 272 AD2d 236 , 237see also Meinhard v. Salmon, 249 NY 458 464
(1928)).
Moreover, where claims alleging the purported breach of a fiduciary duty merely
assert a "conventional business relationship" or depicts "an arm s length business
transaction without special circumstances" no fiduciar duty wil arise (V. Ponte and
Sons. Inc. v. American Fibers Intern , 222 AD2d 271 272; WIT Holding Corp. v. Klein
282 AD2d 527 , 529; CIBC Ban Trust Co. (Cayman) Ltd. v.Credit Lyonnais. 270
AD2d 138 , 139 see also SNS Bank. N.V. v. Citbank. N. 7 AD3d 352 355; Cuomo V.
Mahopac Nat. Bank, 5 AD3d 621).
Although ABS retained MHM as its financial advisor - as limited by the terms
the FAA - the contractual relationship forged by the parties ' written agreement neither
contains "cognizable fiduciary terms" nor otherwise elevates the relationship created upon
the facts presented, to one evincing a "higher trust" ortheast General Corp. v.
Wellngton Advertising. Inc supra, at 162). Rather, the FAA characterizes MHM as an
independent contractor;" requires an affirmative request for advice by ABS; and further
dilutes the exclusivity of the arrangement by expressly reserving MHM' s right to enter
into agreements with, and provide advice to, other, potentially competing clients
(Agreement ~~ 2 , 7, 10). Nor does the FAA refer to any particular or specific transaction
in respect to which advice was to be supplied or assistance rendered. In sum, if "these
sophisticated parties wanted a fiduciary-like relationship" they did not "spell( ) it out in
their agreements
" (
Trump v. Corcoran Group. Inc , 240 AD2d 159).
The Cour notes that the deposition testimony the plaintiff relies on to support his
claim that financial advice was affirmatively sought by ABS, or that MHM acted as
placement agent, does not support his claims (Miler Aff. ~~ 43; Suroff Dep. , 223-227;
238-239).
A careful review of the cited testimony in its proper context, indicates that neither
Timothy Roach nor Leonard Suroff testified that ABS affirmatively requested advice
pursuant to the FAA relating to the private placement.
Rather, Suroff testified that Heller and Meryerson were independently consulted as
a source of possible financing for the placement, and that they were not approached as
advisors within the meaning of the FAA (SuroffDep. , 223-227; 238-239) - claims
buttressed by the absence of any documents or correspondence memorializing a
consultation request or otherwise evidencing MHM' s purorted status as ABS' placement
agent or underwriter (T. Roach Dep. , 125). Nor was any fee paid to ABS for alleged
services rendered in connection with the private placement (Suroff Dep. , 226-227; 19(a)
Statement ~ 18).
Moreover, while Timothy Roach speculated and assumed that ABS must have
been talking to its financial advisors with respect to the placement (T. Roach Dep. , 65
68), he later conceded that he was not the "right person" to ask about this issue; that he
never actually spoke to anyone at MHM about the question; and that he did not recall
speaking to anyone else at ABS concerning discussions they may have had with MHM
concerning financial services or advice (T. Roach Dep. , 120- 121). Accordingly, the
record supports the defendants ' contention that advice was never affirmatively sought by
ABS in accord with the terms of the FAA.
Nor do the paries ' submissions otherwise support a finding that a fiduciary duty
arose between the movants and ABS.
While contract terms are not necessarily determinative since courts wil look
(b)eyond what may be memorialized in writing" to see "whether a pary reposed
confidence in another and reasonably relied on the other s superior expertise or
knowledge
" (
Wiener v. Lazard Freres & Co. , 241 AD2d 114, 122), the constellation of
factors presented, falsi short of otherwise establishing such a relationship.
Here, the record supports the conclusion that - whether misguided or not - ABS
itself elected to generate funding through non-traditional, risk intensive means (the
floorless" convertible debentures), and that the ensuing volatiltyand downward spiral of
its stock precipitated ABS' independent decision to retire the debentures through the
private placement (SuroffDep. , 222-223).
Thereafter, and in light of its inabilty to secure asset-based or alternative funding
(Schoell Dep. , 13- , 17- 18; 55), ABS chairman Alfred Roach approached Heller and
Meryerson, who - together with other investors they later privately assembled - offered to
acquire a significant portion ($1.7 milion) of the placement at a price set by Roach
(Heller Dep. , 99- 100; Suroff Dep. , 128- 129).
The Cour disagrees that this factual predicate raises a triable issue of fact with
respect to whether ABS "reposed confidence in * * * (movants) and reasonably relied on
* * * (their) superior expertise or knowledge" in relation to the transaction (Wiener v.
Lazard Freres & Co supra, at 122; Societe Nationale D'Exploitation Industrielle Des
Tabacs Et Allumettes v. Salomon Bros. Intern. Ltd. , 251 AD2d 137 , 138). To the
contrary, the record supports the conclusion that the agreement among the paries -
including the above-market, 25~ per share price - was reached after negotiation "between
sophisticated, counseled business people negotiating at arm s length' " (South Road
Associates. LLC v. Intern. Business, 4 NY3d 272 (2005), quoting from Vermont Teddy
Bear Co.. Inc. v. 538 Madison Realty Co.. 1 NY3d 470 475 (2004), and Matter of
Wallace v. 600 Parners Co , 86 NY2d 543 548 (1995) see WIT Holding C01:. v. Klein
supra) . In fact, the evidence indicates that Alfred Roach was a businessman with some 40
years ' of experience in various management positions and that both he and ABS'
management possessed significant experience in raising capital through securities
offerings. More particularly, the parties ' submissions establish that there had been an
initial, ABS public offering and various private placements involving convertible
debentues which preceded the subject, 1998 placement (A. Roach Dep. , 83-86; Suroff
Dep. , 38). Further, Roach, through another company he founded (TII Network
Technologies), similarly participated in an initial public offering and subsequent private
placements thereafter.
Although Meyerson and Heller participated in the negotiations which preceded the
placement, the evidence establishes that they functioned not as ABS' financial advisor or
in some amorphously defined fiduciary capacity, but rather, as investors to whom ABS
tued in light of its inabilty to secure traditional, alternative. Indeed, the more
persuasive and logical inference to be drawn, is that the MHM defendants were
negotiating for, and acting on behalf of, the various investors whom Mr. Heller had
assembled in order to generate the $1.7 milion in promised stock purchases. It bears
noting that the FAA expressly provides that MHM "shall have no authority to act for
represent or bind * * * (ABS) * * * except as may be expressly agreed to by * * *
ABS") in writing * * *" (Agreement ~ 10). Additionally, the fact that ABS Chairman
Roach and Heller had maintained a prior commercial and/or personal relationship, adds
nothing of material import to the relevant factual analysis and does not demonstrate the
existence of a fiduciary duty (see. WIT Holding Corp. v. Klein, supra
Lastly, the opinion of the plaintiff s financial expert to the effect that the private
placement was unfair and that alternative equity and/or debt placement scenarios existed
is contrar to the record evidence concerning, inter alia ABS' strained financial status
and its realistic prospects for securing financing and/or attracting purchasers wiling to
acquire its stock (Q.. David v. County of Suffolk, 1 NY3d 525 526 (2003); Diaz v. New
York Downtown Hosp , 99 NY2d 542 , 544 (2002); Amona v. Orange and Rockland
Utilties. Inc , 792 NYS2d 360 (2 Dept. 2005)).
Furher, the plaintiffs theory is conjectual, and is based upon the hindsight
assumption that, among other things, ABS common stock - then trading at 19~ cents per
share - would have constituted an attactive investment at an initial "benchmark" price of
$1.50 and a subsequently discounted price of some 68~ per share, notwithstanding the
stock' s volatilty and precipitous downward movement prior to October of 1998 (R.
Sushman Aff. ~ 12-15). Nor does the record support the conclusion that there was any
guarantee of profit or that investment in the placement was not fraught with significant
risk. It is notable in the respect that ABS' registration statement was not declared
effective by the SEC until some eight months after it was fied, during which time ABS
continued to struggle financially and face potential NASDAQ deli sting- a occurence
described by ABS' vice- president for financial affairs as likely to result in bankptcy,
absent a "major merger transaction or another financing" (Defs ' Exh.
, "
In short, the "record lacks any evidence that the * * * (defendants) performed * * *
services that could give rise to * * * fiduciary duties owed to * * * (ABSJ"(Citadel
Management Co.. Inc. v. Macklowe Organization, 286 AD2d 572). Those branches of
the motion which are for dismissal of the breach contract and constructive trust claims
(third and fourth causes of action), are similarly granted.
With respect to the breach of contract claim - asserted solely against MHM - the
complaint alleges that instead of providing beneficial financial advice, MHM allegedly
10-
advised and caused" ABS to enter into the October, 1998 private placement, thereby
breaching the FAA aJ;d the implied "covenant of good faith and fair dealing" (Cmp1t.
62- 65).
The Cour, however, has already concluded that the terms of the FAA required an
affirmative request for advice; that no such request was made; that MHM did not advise
or cause ABS to enter into the 1998 private placement, and that, in any event, the record
fails to support the plaintiff' s underlying assumption that alternative, financing options
were realistically available to ABS at the time in question.
Furher, the " (p)laintiffs reliance upon the implied covenant of good faith and fair
dealing * * * is unavailng inasmuch as the covenant, if construed as broadly as plaintiff
proposes, would effectively annul other express terms of the contract and create
contractual rights independent of the contract" itself (Cushman & Wakefield. Inc. v.
American Management Ass n Intern Inc. , 8 AD3d 67 , 68 see also Murphy v. American
Home Products Corp , 58 NY2d 293 304-305 (1983); Golub Associates Inc. v.
Lincolnshire Management. Inc. , 1 AD3d 237 238).
Lastly, the Court agrees that the plaintiff s fourh cause of action sounding in
constructive trst, must also be dismissed.
Although the constrctive trust remedy is extremely flexible and "may be imposed
whenever necessary in order to satisfy the demands of justice
" (
Simonds v. Simonds , 45
NY2d 233 241-244 (1978); Weadick v. Herlihy, 16 AD3d 223; Lipton v. Donnenfeld, 5
AD3d 356 357-358), its application is not unlimited, since proof must be submitted
demonstrating, inter alia unjust enrichment and the existence of a fiduciary or
confidential relationship (Saunders v. AOL Time Warner. Inc AD3d (Ist Dept.
2005); Modica v. Modica, 15 AD3d 635 637 see Sharp v Kosmalski , 40 NY2d 119 , 121
(1976); Gaglio v. Molnar-Gagli, 300 AD2d 934 938; see also Citbank. N.A. v. Walker
12 AD3d 480 481).
Here, the Cour has previously rejected the plaintiffs claim that a confidential or
11-
fiduciar relationship existed between the movants and ABS, thereby foreclosing reliance
upon a constrctive trust theory of recovery (Q.. Saunders v. AOL Time Warner. Inc
supra: Sokol v. Addison, 293 AD2d 600; Ellner v. Pope, 285 AD2d 624 625; Ruha v.
Guior. 277 AD2d 116). Additionally, since ABS effectively obtained the benefit of its
bargain by securing the funding it required and then successfully retiring the outstanding
debentues, its claim that the movants were unjustly or inequitably enriched at its
expense, IS unpersuasive.
The Court has considered the plaintiff s remaining contentions and concludes that
none are sufficient to defeat the movants ' motion for summary judgment.
Lastly, the plaintiffs request for leave to serve an amended complaint - made
without service of a cross motion or an annexed proposed pleading - is denied (CPLR
3025 (b); Loehner v. Simons , 224 AD2d 591 see also Young v. A. Holly Patterson
Geriatric Center, 792 NYS2d 914 (2 Dept. 2005); Sewkarran v. DeBells , 11 AD3d 445
see , Defs ' Reply Brief at 15- 16).
Accordingly, it is
ORDERED that the motion for summar judgment dismissing the complaint
insofar as asserted against the moving defendants, is granted.
Dated: May 13 , 2005
~~~~
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