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SUNQUEST INFO. SYS. v. DEAN WITTER REYNOLDS

March 24, 1999

SUNQUEST INFORMATION SYSTEMS, INC., A PENNSYLVANIA CORPORATION, PLAINTIFF,
v.
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.

I.

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 (SPA).

The SPA is a thirty-nine page, single-spaced document setting forth the representations of Sunquest and Compucare. See dkt. no. 1, Exh. A. It contains an integration clause, as well as a choice of law provision reciting that the contract is to be "governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. . . ." Id. ¶¶ 9.6, 9.7. Plaintiff contends that some of Compucare's representations did not comport with the actual condition of Antrim; these form the basis for counts I-III of the complaint and are not specifically at issue here. Sunquest also avers, however, that defendants made a variety of oral misrepresentations about Antrim, specifically:

  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
  beta-tested.
  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
  blood centers.
  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.

II.

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).

III.

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 with defendant.

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 them here.

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 UCC.

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 dismissed.

IV.

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.

A.

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 (E.D.Pa. 1949).

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 ...


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