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SUNQUEST INFO. SYS. v. DEAN WITTER REYNOLDS
March 24, 1999
SUNQUEST INFORMATION SYSTEMS, INC., A PENNSYLVANIA CORPORATION, PLAINTIFF,
DEAN WITTER REYNOLDS, INC., A DELAWARE CORPORATION, THE COMPUCARE COMPANY, A DELAWARE CORPORATION, DEFENDANTS.
The opinion of the court was delivered by: D. Brooks Smith, District Judge.
MEMORANDUM OPINION AND ORDER
In this case, plaintiff Sunquest Information Systems, Inc.
filed a nine-count complaint against defendants Compucare Company
and Dean Witter Reynolds, Inc., alleging that both defendants are
liable to it as a result of misconduct arising out of Sunquest's
acquisition of Antrim Corporation, a former subsidiary of
Compucare that markets medical software. Plaintiff avers that
defendants improperly failed to disclose hidden problem areas
within Antrim, including "Year 2000" or "Y2K" deficiencies in its
software products, that were material to plaintiff's decision to
go through with the acquisition. Both defendants admit that
plaintiff has properly pleaded causes of action for indemnity,
breach of contract and breach of express warranty in counts I-III
of the complaint, but have filed motions under Fed.R.Civ.P.
12(b)(6) to dismiss those portions of the complaint that sound in
breach of implied warranty, negligent and fraudulent
misrepresentation, securities fraud and rescission. For the
following reasons, I will grant Compucare's motion in its
entirety, but grant Dean Witter's motion only in part.
According to the allegations of the complaint, which must be
credited as true for the purposes of deciding this motion,
"Sunquest develops, markets and supports integrated computer
information systems for hospitals and other health-care
providers[,] . . . provid[ing] comprehensive information
processing for hospital laboratory operations." Dkt. no. 1, ¶ 6.
Plaintiff avers that it "is a leader in this field. . . ." Id. In
September 1996, plaintiff "became interested in acquiring
information systems for out-patient laboratory operations. . . ."
Id. ¶ 7. Defendant Dean Witter, an investment banking firm
retained by defendant Compucare, introduced plaintiff to
Compucare and its subsidiary, Antrim. Id. ¶ 8. The parties
negotiated for the sale of all outstanding shares of Antrim from
Compucare to Sunquest; on November 26, 1996, a Stock Purchase
Agreement ("SPA") was signed. Id., ¶ 9; see also dkt. no. 1, Exh.
a. Antrim's most recent laboratory and financial
information systems release was fully functional.
b. Antrim's most recent laboratory and financial
information systems release was Year-2000 compliant
(i.e., capable of handling the transition through the
Year 2000 without failure) and had been developed and
c. Antrim had released a fully functional information
system that could connect reference laboratories with
hospital laboratories at multiple sites to create
integrated information-delivery networks.
d. Antrim had released a fully functional blood bank
system to process and manage information on donors
and transfusion services for medical laboratories and
e. Antrim had net operating losses of at least $4.9
million that could be carried forward for federal
income tax purposes by Sunquest after the Stock
Purchase. The net operating loss carry-forward was
valuable to Sunquest as an offset against future
federal taxable income.
Dkt. no. 1, ¶ 11. Despite the integration clause, Sunquest seeks
to hold defendants liable for these alleged misrepresentations
under tort and securities fraud theories. It also alleges that
Compucare "created a false sense of urgency about closing the
transaction and intentionally restricted Sunquest's access to
important information regarding Antrim. . . ." Id. ¶ 14.
As a result of these alleged misrepresentations, plaintiff
avers that it was induced to consummate the SPA for $5 million,
which it would not have done had full and truthful disclosures
been made. Id. ¶ 17.
A motion to dismiss cannot be granted unless the allegations in
the complaint taken as true fail to state any claim upon which
relief can be granted. Angelastro v. Prudential-Bache Securities,
Inc., 764 F.2d 939, 944 (3d Cir. 1985) (citing Conley v. Gibson,
355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). In ruling
upon a motion to dismiss, a district court must accept as true
all facts alleged in the complaint, and view them in the light
most favorable to the plaintiff. Markowitz v. Northeast Land Co.,
906 F.2d 100, 103 (3d Cir. 1990). A court "need not credit a
complaint's `bald assertions' or `legal conclusions.'" In re
Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1429-30 (3d
Cir. 1997) (quoting Glassman v. Computer-vision Corp.,
90 F.3d 617, 628 (1st Cir. 1996)).
Normally, a district court deciding a motion to dismiss will
not consider documents that are not a part of the pleadings.
"However, an exception to the general rule is that a `document
integral to or explicitly relied upon in the complaint' may be
considered `without converting the motion [to dismiss] into one
for summary judgment.'" Burlington Coat, 114 F.3d at 1426
(quoting Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1220 (1st
Cir. 1996) (emphasis added)); see also In re Donald J. Trump
Casino Securities Litig., 7 F.3d 357, 368 n. 9 (3d Cir. 1993)
(approving the consideration of a prospectus attached to a motion
to dismiss in a securities action because the plaintiff's claims
were based on the document). This obviously includes exhibits
attached to a complaint. Kania v. Archdiocese of Philadelphia,
14 F. Supp.2d 730, 736 n. 3 (E.D.Pa. 1998); Horizon Unlimited, Inc.
v. Silva, No. 97-7430, 1998 WL 88391, *2 (E.D.Pa. Feb. 26, 1998),
reconsideration denied, 1998 WL 150999 (E.D.Pa. Mar. 27, 1998).
Indeed, in the event of a factual discrepancy between the
pleading and the attached exhibit, the exhibit controls. ALA,
Inc. v. CCAIR, Inc., 29 F.3d 855, 859 n. 8 (3d Cir. 1994).
Defendant Compucare seeks dismissal of count four of
plaintiff's complaint, which purports to state a claim for breach
of implied warranty. In that count, plaintiff avers that "[t]he
medical information systems transferred to Sunquest by Compucare
as part of a voluntary transaction creating an interest in
property were subject to the implied warranties of
merchantability . . . and fitness for a particular purpose
prescribed by the Uniform Commercial Code. . . ." Dkt. no. 1, ¶¶
54-55. Defendant argues that "the transaction between Compucare
and Sunquest was a sale of stock, not a sale of Antrim's assets,
and, therefore, no warranties were created regarding Antrim's
assets, other than those specifically set forth in the Stock
Purchase Agreement." Dkt. no. 7, at 4 (emphasis deleted). I agree
Assuming, without deciding, that a sale of securities is
properly treated as a sale of goods under Article II of the UCC,
only three implied warranties are created in such a transaction:
title, genuineness and validity. Independent Order of Foresters
v. Donaldson Lufkin & Jenrette, Inc., 919 F. Supp. 149, 153
(S.D.N.Y. 1996) (citing 8 Williston on Contracts §§ 254A, 954C).
Plaintiff does not allege that any of these three warranties was
breached. Instead, plaintiff asks this court to treat the stock
purchase as, in substance, an asset sale and apply the warranties
of merchantability and fitness as if the transaction were a sale
of goods, specifically Antrim's software. I cannot do so.
Paragraph 1.1 of the SPA and paragraph 9 of the complaint both
characterize the disputed transaction as a sale of stock, not an
asset sale, yet plaintiff alleges that it was Antrim's computer
systems that were flawed. Dkt. no. 1, ¶¶ 20, 22, 23, 25. It is
axiomatic, of course, that there can be no breach of warranty
without a sale, Whitmer v. Bell Tel. Co., 361 Pa. Super. 282,
522 A.2d 584, 588 (1987), which involves the passage of title from
seller to buyer, id.; Miley v. Harmony Mill L.P., 803 F. Supp. 965,
969 (D.Del. 1992). Sunquest, however, obtained only the
shares of Antrim's stock, not title to its assets, as
consideration for the $5 million it paid Compucare. Courts have
routinely refused to recognize implied warranties in other
contexts in which there was no passage of title, see Whitmer, 522
A.2d at 589 (purchase of telephone services); Miley, 803 F. Supp.
at 969 (lease),*fn1 and I can discern no rationale for recognizing
To be sure, plaintiff is able to cite several cases in which
implied warranties were recognized in transactions other than
sales. In All States Leasing Co. v. Ochs, 42 Or.App. 319,
600 P.2d 899, 909 (1979), an Oregon court recognized such a warranty
in a lease of capital equipment. And, in Newmark v. Gimbel's,
Inc., 54 N.J. 585, 258 A.2d 697, 701 (1969), the New Jersey
Supreme Court permitted an implied warranty claim to go forward
in a case involving a permanent wave solution that caused injury
when applied by a beautician in the employ of defendant. See also
Hoffman v. Misericordia Hosp., 439 Pa. 501, 267 A.2d 867 (1970)
(blood transfusion). These cases, however, which concern, in the
first instance, a transaction substantially in the nature of a
sale and, in the second, a products liability case for personal
injury in the last, waning days of the "citadel of privity," are
inapposite here. Indeed, none of these cases, or any others cited
by plaintiff, has gone so far as to recharacterize
a stock purchase as an asset sale and a sale of goods under the
In sum, I conclude that Sunquest purchased a 100% interest in
the stock of Antrim, not, as plaintiff argues, "a property
interest in defective goods. . . ." Dkt. no. 13, at 9. Its
implied warranty claim at count four will accordingly be
The more difficult question is whether, under Pennsylvania law,
plaintiff can maintain claims for tortious misrepresentation
where the underlying transaction was governed by a voluminous,
detailed, integrated writing negotiated by sophisticated parties
with the assistance of counsel and with the opportunity to
perform due diligence. Count five asserts a claim for fraud,
while count six pleads negligent misrepresentations and
omissions. The elements of both claims are similar, except for
the higher level of scienter and burden of proof for fraud. See
Weisblatt v. Minnesota Mut. Life Ins. Co., 4 F. Supp.2d 371, 377,
384 (E.D.Pa. 1998); Gibbs v. Ernst, 538 Pa. 193, 647 A.2d 882,
889-90 (1994). Thus, I will address these two theories together.
Defendants argue that plaintiff's misrepresentation claims
should be dismissed because this action fundamentally sounds in
contract, not in tort, and under Pennsylvania's "gist of the
action" doctrine, tort claims cannot be maintained when they
essentially duplicate an action for breach of an underlying
contract. I agree, but only as to defendant Compucare.
When a plaintiff alleges that the defendant committed a tort in
the course of carrying out a contractual agreement, Pennsylvania
courts examine the claim and determine whether the "gist" or
gravamen of it sounds in contract or tort; a tort claim is
maintainable only if the contract is "collateral" to conduct that
is primarily tortious. Wood & Locker, Inc. v. Doran & Assoc.,
708 F. Supp. 684, 689 (W.D.Pa. 1989) (Smith, J.) (dismissing
negligence claim, but not reaching question whether fraud claim
maintainable under gist of the action doctrine); Accord Factory
Market, Inc. v. Schuller Int'l, Inc., 987 F. Supp. 387, 394
(E.D.Pa. 1997) (dismissing both fraud and negligence claims);
Redevelopment Auth. of Cambria County v. International Ins. Co.,
454 Pa. Super. 374, 685 A.2d 581, 590 (1996) (negligence), alloc.
denied, 548 Pa. 649, 695 A.2d 787 (1997); Phico Ins. Co. v.
Presbyterian Medical Serv. Corp., 444 Pa. Super. 221,
663 A.2d 753, 757 (1995) (same).
To further elaborate, contract actions arise from breach of
duties mutually agreed to, while torts have their basis in
violations of duties imposed as a matter of social policy. Phico,
663 A.2d at 757. Thus, the gist of the action doctrine cannot be
evaded by the mere expedient of pleading that the defendant acted
negligently, recklessly, wantonly or intentionally, if the
gravamen of the claim is that the plaintiff failed to fulfill a
promise. Factory Market, 987 F. Supp. at 394. Nor may a plaintiff
"disrupt the expectations of the parties by supplanting their
agreement with a tort action that claims that the party
misperformed the agreement in question." Id. Put simply, a
plaintiff cannot assert a fraud or negligent misrepresentation
claim when that theory is "merely another way of stating its
breach of contract claim[,]" id. at 395, or when its success
"would be wholly dependent upon the terms of the contracts. . .
." C.P. Cook Coal Co. v. Browning Ferris, Inc., No. 93-7085, 1995
WL 251341, *5 (E.D.Pa. Apr. 26, 1995) (negligence); accord USX
Corp. v. Prime Leasing, Inc., 988 F.2d 433, 440 (3d Cir. 1993)
(dismissing tortious misrepresentation claim when same conduct
formed basis for alleged breach of contract); Horizon Unlimited,
1998 WL 88391 at *5.
Plaintiff relies upon five cases for the proposition that fraud
and contract theories may coexist. See Roadmaster Indus.,
Inc. v. Columbia Mfg. Co., 893 F. Supp. 1162, 1172 (D.Mass. 1995);
Piezo Crystal Co. v. Uddeholm Corp., 870 F. Supp. 589, 594-98
(M.D.Pa. 1994); Fox's Foods, Inc. v. Kmart Corp., 870 F. Supp. 599,
608-10 (M.D.Pa. 1994); Westmont Indus., Inc. v. Weinstein,
762 F. Supp. 646, 650 (M.D.Pa. 1989); Boulevard Airport v.
Consolidated Vultee Aircraft Corp., 85 F. Supp. 876, 878-79
In Piezo Crystal, the plaintiff purchased defective metal from
the defendant and sued for breach of contract and fraud. The
court considered these claims on defendant's motion for summary
judgment and permitted both to proceed. 870 F. Supp. at 596, 598.
Absent from its discussion, however, was any analysis of whether,
under the gist of the action doctrine, tort and contract claims
could be maintained in the context of fraudulent inducement.
Thus, the court's holding is at best sub silentio, and hence, of
little persuasive value.*fn2 The Westmont case is similarly
unpersuasive in that it also omitted to discuss the gist of the
action doctrine, holding only that legal malpractice can sound in
both contract and negligence at the same time. 762 F. Supp. at
650. Boulevard Airport is simply inapposite, as that case dealt
only with the issue of whether it was improper, inconsistent
pleading under the Federal Rules of Civil Procedure to assert
fraud and breach of contract simultaneously.
Fox's Foods, however, meets the issue more directly. There, the
plaintiff entered into a lease arrangement with the defendant,
under which the latter was to construct a supermarket for
plaintiff to occupy. Repeated assurances were made concerning the
timely completion of the project, but delay nevertheless
occurred, and plaintiff sued for breach of contract and fraud.
Defendant argued that its assurances, "even if knowingly false
when made, [could] not support a fraud claim since they relate to
existing contractual obligations." 870 F. Supp. at 608. The court
rejected this contention, in part because the case upon which
defendant relied involved a mere unperformed promise, not fraud,
and in part because some of the representations were made after
the contract plaintiff "gave notice of default under the Lease,
and may thus be viewed as intending to induce [plaintiff] to
delay asserting contractual ...