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United States District Court, Western District of Pennsylvania

March 24, 1999


The opinion of the court was delivered by: D. Brooks Smith, District Judge.


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 (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

  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.


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 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.


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.

Defendants assert that counts five and six are based upon the same conduct that plaintiff claims amounted to a breach of contract and that plaintiff's success would be entirely dependent on the terms of the SPA. As such, they maintain that the contract and both common law tort claims are intertwined and duplicative, precluding plaintiff as a matter of law from pursuing its fraud and negligent misrepresentation claims. Sunquest responds that "a plaintiff may maintain both fraud and contract claims in the same action when the plaintiff asserts that the defendant breached both specific contractual terms and a duty of care owed to the plaintiffs. . . ." Dkt. no. 13, at 10. According to Sunquest, which thereby all but concedes that its negligent misrepresentation claim is not maintainable, defendants fraudulently induced it to enter the SPA, which breached an independent, extracontractual duty.

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 rights." Id. at 609. Yet even this case provides only modest support for the result Sunquest seeks here, asserting a fraud claim based upon representations made before the SPA was signed and which were excluded by its integration clause.

Additionally, plaintiff maintains that another case, C.P. Cook Coal Co., militates in favor of permitting its misrepresentation claims to go forward. That court applied the gist of the action doctrine to bar plaintiff's negligence claim, 1995 WL 251341 at *4-*5, but, in a separate section of the opinion and without either analysis or citation of authority, it opined that issues of fact precluded granting summary judgment on plaintiff's fraud and negligent misrepresentation theories. Id. at *7. Once again, while the result favors plaintiff's desired outcome, the reasoning of the case is not persuasive.

Thus, it appears that none of plaintiff's cases provides substantial support for its position. Any remaining doubt is removed when the effect of the SPA's integration clause is examined. I turn now to that issue.


Paragraph 9.6 of the SPA contains the following integration clause:

    Entire Agreement. This Agreement, together with the
  Exhibits and Schedules hereto and the Confidentiality
  Agreement dated July 27, 1996, constitute the entire
  agreement between the parties with respect to the
  subject matter of this Agreement, and is a complete
  and exclusive statement of those terms. It supersedes
  all understandings and negotiations concerning the
  matters specified herein, both oral and written.

Dkt. no. 1, Exh. A, ¶ 9.6. Defendants argue that this clause, and the parol evidence rule it triggers, seal the fate of plaintiff's fraudulent misrepresentation theory, while plaintiff strenuously contends that fraud in the inducement is an exception to inadmissibility of parol evidence and that those claims should survive. I agree with defendants.

Pennsylvania law on this point is not a model of clarity, having evolved in fits and starts over the last half century. See 1726 Cherry St. Partnership v. Bell Atl. Properties, Inc., 439 Pa. Super. 141, 653 A.2d 663, 666-70 (1995); Betz Labs., Inc. v. Hines, 647 F.2d 402, 405 (3d Cir. 1981). As a result, both parties have dredged up a number of reported, and apparently conflicting, cases to support their positions.

In 1726 Cherry St., plaintiffs owned a parcel of land in Center City Philadelphia which they sold to defendant under the terms of an integrated writing. During the negotiations, plaintiff alleged that defendant misrepresented its intentions concerning another parcel, and plaintiffs argued that they would have insisted upon a higher price for their land had they known the true state of affairs. Id. at 664-65. After exhaustively analyzing two seemingly conflicting lines of Pennsylvania decisional authority, the superior court barred plaintiffs' fraudulent inducement claim, opining:

  In sum, [Pennsylvania law] permits the admission of
  parol evidence of representations concerning a
  subject dealt with in an integrated written agreement
  and made prior to or contemporaneous with the
  execution of the agreement to modify or avoid the
  terms of that agreement only where it is alleged that
  the parties agreed that those representations would
  be included in the written agreement but were omitted
  by fraud, accident or mistake. This is commonly
  referred to as "fraud in the execution" because the
  party proffering the evidence contends that he or she
  executed the agreement because he or she was
  defrauded by being led to believe that the document
  he or she was signing contained terms that were
  actually omitted therefrom. Such a case is to be
  distinguished from a "fraud in the inducement" case
  such as the instant one, where the party proffering
  evidence of additional prior representations does not
  contend that the parties agreed that the additional
  representations would be in the written agreement,
  but rather claims that the representations were
  fraudulently made and that but for them, he or she
  never would have entered into the agreement.

Id. at 666. It continued:

  Under these circumstances what the [plaintiffs] seek
  to do is exactly what the Pennsylvania parol evidence
  rule forbids: to admit evidence of a prior
  representation in a fully integrated written
  agreement. If the [plaintiffs] intended to rely on
  what they now contend was a

  centrally important representation conveyed by Bell
  Atlantic in the course of the negotiations over a
  multimillion dollar commercial real estate
  transaction, then the [plaintiffs] should have
  insisted that the representation be set forth in
  their integrated written agreement. They are now
  barred from eliciting parol evidence that they were
  fraudulently induced into entering the contracts.

Id. at 670.

In another case decided on the same day as 1726 Cherry St., the Supreme Court of Pennsylvania, held essentially the same way. In HCB Contractors v. Liberty Place Hotel Assocs., 539 Pa. 395, 652 A.2d 1278 (1995), a contractor asserted mechanics' liens despite having signed waivers of the right to do so, contending that its agreement to those waivers was fraudulently induced. The court, however, held that the integration clause barred plaintiff from successfully arguing fraud in the inducement because its "claims relate[d] to subjects that were specifically addressed in the written contract." Id. at 1279.

A year-and-a-half later, the Third Circuit applied HCB and 1726 Cherry St. in a case in which plaintiff's candy distributorship was terminated and plaintiff asserted claims for breach of contract and fraud in the inducement. See Dayhoff, Inc. v. H.J. Heinz Co., 86 F.3d 1287 (3d Cir. 1996). The court applied the parol evidence rule and held that the integrated contract precluded relief on plaintiff's fraud claim. Id. at 1299-1301. Other recent district court decisions have reached similar holdings. See Regent Nat'l Bank v. Dealers Choice Automotive Planning, Inc., No. 96-7930, 1997 WL 786468, *5-*6 (E.D.Pa. Nov. 26, 1997) (barring tort claim for fraud and noting that Pennsylvania's approach to parol evidence is "peculiar" to that jurisdiction); Falbo v. State Farm Life Ins. Co., No. 96-5540, 1997 WL 116988, *4-*5 (E.D.Pa. Mar. 13, 1997) (barring fraud in the inducement asserted in breach of contract claim, but not passing on whether parol evidence rule likewise bars independent fraud claim); Stamford, Inc. v. Color Works, Inc., No. 94-6278, 1996 WL 557328, *2 (E.D.Pa. Sep. 30, 1996) (barring fraud claim and noting that parol evidence rule applies to bar both representations that contradict the contract and those that "would add to the terms of the agreement[]").

More recently, in Horizon Unlimited, Judge Shapiro in the Eastern District of Pennsylvania dismissed claims for fraud and negligent misrepresentation under similar circumstances, 1998 WL 88391 at *4-*6. There, plaintiff had purchased an airplane in kit form and sued when it allegedly failed to perform as promised in the sales brochure. The contract, however, was integrated and disclaimed any reliance on the promotional literature. Id. at *4, *6. While the Horizon court followed HCB, it appeared to hold that its result would have been different had plaintiff alleged fraud in the inducement, a pronouncement that Sunquest seizes upon. It is evident from a close reading of the opinion, however, that the court misspoke, confusing fraud in the inducement with fraud in the execution:

  [I]t is not sufficient for a plaintiff to allege that
  defendants made fraudulent misrepresentations; the
  plaintiff must allege fraud in the inducement, that
  is, "the representations were fraudulently or by
  accident or mistake omitted from the integrated
  written contract." HCB Contractors, 652 A.2d at 1279.
  "`[I]f it were otherwise, the parole evidence rule
  would become a mockery, because all a party to a
  written contract would have to do to avoid, modify
  or nullify it would be to aver (and prove) that the
  false representations were fraudulently made.'"
  Nicolella v. Palmer, 432 Pa. 502, 248 A.2d 20, 23

1998 WL 88391 at *4. The HCB court never refers to this as fraud in the inducement, but, as stated supra, the 1726 Cherry St. opinion clearly refers to the fraudulent omission of agreed-upon terms from the final writing as fraud in the execution. 653 A.2d at 666; accord Dayhoff, 86 F.3d at 1300.*fn3 Thus, Horizon Unlimited, rather than aiding Sunquest, actually supports defendants' position.

Many of the other cases cited by Sunquest for the proposition that fraud in the inducement claims may be brought despite the presence of an integrated writing disclaiming prior oral evidence were decided under the law of New York, not Pennsylvania. See Turkish v. Kasenetz, 27 F.3d 23, 28 (2d Cir. 1994) (citing N Y cases); Manufacturers Hanover Trust Co. v. Yanakas, 7 F.3d 310, 315-17 (2d Cir. 1993); Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 184 N.Y.S.2d 599, 601-02, 157 N.E.2d 597 (1959). Other cases have permitted such claims in disputed residential real estate sales, where defects were hidden and not readily discoverable by the buyer's inspection. See Bowman v. Meadow Ridge, Inc., 419 Pa. Super. 511, 615 A.2d 755, 759 (1992) (applying parol evidence rule because "[t]his is not a case where the misrepresentation concerned the physical condition of the home and could not have been discovered by an inspection . . ."); Myers v. McHenry, 398 Pa. Super. 100, 580 A.2d 860, 864 (1990); Ward v. Serfas, 387 Pa. Super. 425, 564 A.2d 251, 253-54 (1981); Glanski v. Ervine, 269 Pa. Super. 182, 409 A.2d 425, 428-30 (1979); LeDonne v. Kessler, 256 Pa. Super. 280, 389 A.2d 1123, 1126-1129 (1978).*fn4 These cases are sui generis within that context, however, and have no applicability when residential real estate is not involved. See HCB, 652 A.2d at 1280; 1726 Cherry St., 653 A.2d at 669-70 n. 6.

Sunquest cites Betz and Berger v. Pittsburgh Auto. Equip. Co., 387 Pa. 61, 127 A.2d 334 (1956), for the proposition that fraud in the inducement acts as an exception to the parol evidence rule even outside the residential property context. In Berger, plaintiff leased a building to store auto parts based upon the oral representation that the flooring could stand the weight, and the court held the parol evidence rule did not apply. 127 A.2d at 335. Betz, coincidentally enough, also involved fraudulent misrepresentations concerning the strength of a floor. There, in a thorough exposition of Pennsylvania caselaw authored by Judge Weis, the court concluded that the "premise that evidence of fraud should be to the issue of execution of the agreement is not a sound one today." 647 F.2d at 407. Instead, it predicted "that if this case were presented to the Pennsylvania Supreme Court, it would hold that evidence of fraud in the inducement is outside the parol evidence rule and, consequently, admissible." Id. at 408.

Unfortunately for Sunquest, Berger was subsequently rejected by both 1726 Cherry St., 653 A.2d at 668-69, and HCB, 652 A.2d at 1280. Similarly, the Third Circuit in Betz was noted by the 1726 Cherry St. court as having reached a contradictory result to the holding adopted by the superior court. 653 A.2d at 668 n. 4. That observation, particularly when coupled with the similar holding of the supreme court in HCB issued the same day, completely undermines whatever predictive value Betz may have had; indeed, when the Third Circuit revisited the issue in Dayhoff, Betz went uncited. See 86 F.3d at 1298-1301.*fn5

Accordingly, I conclude that the integration clause bars whatever fraud in the inducement claims Sunquest may have otherwise had against Compucare.*fn6 It does not, however, bar those claims against Dean Witter, which was not a party to the SPA.*fn7 For that reason, and because Sunquest also alleges that Compucare made fraudulent omissions, I will analyze defendants' remaining arguments.


Sunquest argues that, whatever result may obtain on defendants' affirmative misrepresentations, they should still be held liable for their omissions. According to plaintiff, defendants failed to disclose facts about Antrim that were peculiarly within their knowledge and not susceptible of easy discovery by Sunquest during its due diligence review.

It is axiomatic, of course, that silence cannot amount to fraud in the absence of a duty to speak. E.g., Drapeau v. Joy Tech., Inc., 447 Pa. Super. 560, 670 A.2d 165, 171 (1996) (Beck, J., concurring) (citing Sevin v. Kelshaw, 417 Pa. Super. 1, 611 A.2d 1232 (1992); Wilson v. Donegal Mut. Ins. Co., 410 Pa. Super. 31, 598 A.2d 1310 (1991); Smith v. Renaut, 387 Pa. Super. 299, 564 A.2d 188 (1989)). This duty does not normally arise unless there is a confidential or fiduciary relationship between the parties. See Drapeau, 670 A.2d at 171 (citing Federal Land Bank v. Fetner, 269 Pa. Super. 455, 410 A.2d 344 (1979); City of Harrisburg v. Bradford Trust Co., 621 F. Supp. 463 (M.D.Pa. 1985)). A typical business relationship does not form the basis for such a relationship unless "one party surrenders substantial control over some portion of his affairs to the other." Drapeau, 670 A.2d at 172 (citing In re Scott's Estate, 455 Pa. 429, 316 A.2d 883 (1974)).

Sunquest does not argue that there was a fiduciary or confidential relationship between the parties here. Instead, relying upon Fox's Foods,*fn8 it posits a duty arising under section 551(b)(2) of the Restatement (Second) of Torts.*fn9 In Fox's Foods, a case involving assurances to complete construction of a building when the defendant actually held other projects in higher priority, the court opined that a party making an "incomplete" representation that could be misleading if left to stand alone is under a duty to disclose such other facts as may be necessary to make the initial statement clear. See 870 F. Supp. at 611

Fox's Foods and section 551(b)(2) of the Restatement are both inapposite to the case at bar. Again, Sunquest tries to pretend that the integration clause either does not exist or has no legal force. As I have already concluded after discussion, supra, the integration clause and the parol evidence rule preclude any evidence of affirmative misrepresentations. For purposes of this legal analysis, then, there were no partial or ambiguous statements that would be misleading absent disclosure of other facts. Thus, no duty to speak ever arose within the meaning of section 551(b)(2). Plaintiff's argument, properly considered, is nothing more than an attempted bootstrap around the integration clause. Accordingly, plaintiff's fraud claim based upon omissions by Compucare fails.*fn10


In order to assert a claim for either fraud or negligent misrepresentation, the plaintiff must show justifiable reliance on the allegedly untrue statement or omission. Gibbs, 647 A.2d at 889, 890. In the context of Sunquest's claims against Compucare, that showing is impossible to make. As a matter of basic logic, Sunquest simply cannot be said to have relied upon representations specifically excluded by the integration clause.

The same cannot be said for Sunquest's claims against Dean Witter. There, the integration clause does not apply, but both defendants also argue that because Sunquest is a sophisticated party that had the opportunity to inspect Antrim before the closing, it cannot, as a matter of law, assert misrepresentation or omission claims. See Wittekamp v. Gulf & W., Inc., 991 F.2d 1137, 1144-45 (3d Cir. 1993) (sophisticated party with access to information); Mellon Bank Corp. v. First Union Real Estate Equity & Mortgage Inv., 750 F. Supp. 711, 718 (W.D.Pa. 1990) (Smith, J.) (sophisticated party), aff'd, 951 F.2d 1399 (3d Cir. 1991); Josephs v. Pizza Hut, Inc., 733 F. Supp. 222, 227 (W.D.Pa. 1989) (Smith, J.) (sophisticated party), aff'd mem., 899 F.2d 1217 (3d Cir. 1990); Forms, Inc. v. American Std., Inc., 546 F. Supp. 314, 319 (E.D.Pa. 1982) (access to information), aff'd mem., 725 F.2d 667 (3d Cir. 1983); In re Gross, 48 B.R. 674 (Bankr. E.D.Pa.) (access to information), modified on other grounds, 51 B.R. 480 (Bankr. E.D.Pa. 1985), modified sub. nom. Gross v. Schnepper, 62 B.R. 323 (E.D.Pa. 1986); Emery v. Third Nat'l Bank, 314 Pa. 544, 171 A. 881 (1934). All of these cases, however, were decided on more fully developed factual records at or beyond the summary judgment stage; none was adjudicated on a motion to dismiss. I therefore conclude that defendants' argument is premature, as the level of plaintiff's sophistication and the opportunity it was given to perform its due diligence review are factual issues inappropriate for resolution upon only the face of the complaint and the SPA.


Defendants also urge me to dismiss plaintiff's misrepresentation claims under the economic loss doctrine. This issue has not been well briefed by any of the parties, and it is mostly argued in a series of dueling footnotes. Nevertheless, because the economic loss doctrine, if it applies, would result in the dismissal of Sunquest's fraud and negligent misrepresentation claims against Dean Witter, I will analyze its applicability.

In Palco Linings, Inc. v. Pavex, Inc., 755 F. Supp. 1269, 1271 (M.D.Pa.), adhered to on reconsideration, 755 F. Supp. 1278 (M.D.Pa. 1990), the court explained that "[t]he rationale of the economic loss rule is that tort law is not intended to compensate parties for losses suffered as a result of a breach of duties assumed only by agreement. . . . A buyer, contractor, or subcontractor's desire to enjoy the benefit of his bargain is not an interest that tort law traditionally protects." (citation and internal quotation marks omitted); accord Factory Market, 987 F. Supp. at 395-96. Palco was an action by a subcontractor against an engineering firm under contract to the City of Philadelphia. The subcontractor argued that the engineering firm, with which it did not stand in privity of contract, committed negligent misrepresentation which caused the subcontractor to suffer additional expenses. The court granted summary judgment for defendant on the ground that the economic loss doctrine precluded the negligent misrepresentation claim, even though because of lack of privity plaintiff had no remedy for breach of contract. Id. at 1277.*fn11

The Palco court noted, however, that two exceptions exist to the economic loss rule. First, if the misrepresentation is intentionally false, that is, fraudulent, the plaintiff's fraud claim may proceed. Id. at 1274. Second, under section 552 of the Restatement (Second) of Torts, if the defendant is "in the business of supplying information for the guidance of others [and] makes negligent misrepresentations[,]" plaintiff's claim is not barred.*fn12 Accord Auger v. Stouffer Corp., No. 93-2529, 1993 WL 364622, *5 (E.D.Pa. Aug. 31, 1993). At this stage of the proceedings, I conclude that both exceptions could apply, depending upon the factual record developed during discovery.

First, Sunquest expressly pleads that Dean Witter*fn13 made fraudulent misrepresentations, so the first exception is triggered. See Auger, 1993 WL 364622 at *5. Second, given the role of an investment banker like Dean Witter in bringing parties together in mergers and acquisitions, it may well be that Dean Witter will be shown to have been in the business of supplying information about Antrim that potential buyers, such as Sunquest, could be expected to rely upon. Thus, while Dean Witter might prevail at the summary judgment stage after the record is developed, it is premature to dismiss the fraud and negligent misrepresentation claims under the economic loss doctrine on a Rule 12(b)(6) motion. See Forest Elec. Corp. v. HCB Contractors, No. 91-1732, 1992 WL 233371, *3 (E.D.Pa. Sept. 8, 1992).


Count VII sets forth federal claims under section 10(b) of the 1934 Exchange Act, while count VIII asserts similar claims under the Pennsylvania Securities Act. These two statutory claims have the same elements, and will be treated together. See Feret v. Corestates Financial Corp., No. 97-6759, 1998 WL 426560, *17 n. 17 (E.D.Pa. July 27, 1998); Raykhman v. Digital Elevator Co., No. 93-1347, 1993 WL 370988, *3 (E.D.Pa. Aug. 30, 1993). Indeed, the elements of both are almost identical to those of common law fraud, Raykhman, 1993 WL 370988 at *5, and hence, I will discuss only those issues unique to securities fraud.


With respect to Sunquest's securities fraud claims against Compucare, the analysis is straightforward. I have already concluded that, because of the integration clause in the SPA, Sunquest could not have justifiably relied upon any of Compucare's misrepresentations or omissions. Because justifiable reliance is manifestly an element of any securities fraud action, see Braunstein v. Benjamin Berman, Inc., No. 89-5344, 1990 WL 192547, *7 (D.N.J. Sept. 12, 1990), Sunquest's securities fraud claims against Compucare must fail. See id. at *8-*9; Jackvony v. RIHT Fin. Corp., 873 F.2d 411, 416 (1st Cir. 1989) (Breyer, J.) (integration clause negated reasonable reliance in securities fraud action); One-O-One Enters. Inc. v. Caruso, 848 F.2d 1283, 1286-87 (D.C.Cir. 1988) (Ruth Bader Ginsburg, J.) (same).


The more substantial issue is whether Sunquest's securities fraud claims against Dean Witter survive the instant motion to dismiss. Defendant argues that those claims, as pleaded, fail to meet the standards applicable under Fed.R.Civ.P. 9(b) or the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b). Under that section, "the complaint shall specify each statement alleged to have been misleading, [and] the reason or reasons why the statement is misleading[.]" 15 U.S.C. § 78u-4(b)(1). Moreover, if the securities fraud claim at issue requires a showing of scienter, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). 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." Plaintiff and defendants fail to address whether the PSLRA imposed a higher standard of pleading than already existed under Rule 9(b) and how the two standards differ,*fn14 although, in many respects, they appear to be identical.*fn15

In order to properly plead securities fraud, Rule 9(b) requires

  plaintiffs [to] plead with particularity the
  circumstances of the alleged fraud in such a way as
  to inject "precision and some measure of
  substantiation into their allegations of fraud." By
  way of example, allegations of "who, what, when,
  where and how: the first paragraph of any newspaper
  story," would satisfy the particularity requirement
  of Rule 9(b). In re Westinghouse Securities Litig.,
  832 F. Supp. 948, 965 (W.D.Pa. 1993) (citing, inter
  alia, Seville Indus. Machinery Corp. v. Southmost
  Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984)),
  rev'd in part on other grounds, 90 F.3d 696 (3d Cir.

In re Crown Am. Realty Trust Sec. Litig., No. 95-202J, 1997 WL 599299, *7 (W.D.Pa. Sep. 15, 1997) (Smith, J.); accord In re Advanta Corp. Sec. Litig, No. 97-4343, 1998 WL 387595, *3 (E.D.Pa. Jul. 9, 1998) (post-PSLRA), aff'd, ___ F.3d ___, 1999 WL 395997 (3d Cir. 1999); Walish v. Leverage Group, Inc., No. 97-5908, 1998 WL 314644, *2 (E.D.Pa. Jun. 15, 1998) (post-PSLRA). Although Burlington Coat cautions that application of the rule prior to discovery may permit sophisticated defrauders to successfully conceal the details of their fraud, 114 F.3d at 1418 (citations and internal quotation marks omitted), that court also recognized that "even under a relaxed application of Rule 9(b), boilerplate and conclusory allegations will not suffice." Id. Here, defendant argues that Sunquest has failed to meet this standard. I agree.

Plaintiff's pleading regarding Dean Witter's alleged fraud is sparse indeed. In paragraph 10, it alleges that:

  During the negotiations in September, October and
  November 1996, Dean Witter . . . made various
  representations to Sunquest regarding Antrim's
  products and operations. Those representations were
  made in written form in promotional materials
  supplied to Sunquest by Dean Witter. . . .

These promotional materials are not attached to the complaint, nor are they further identified or referenced. Paragraph 11, however, does contain a very general description of the nature (or, "what") of the misrepresentations allegedly made by both defendants, both orally and in writing:

  a. Antrim's most recent laboratory and financial
  information system 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. . . .

It is also alleged in paragraph 13 that defendants made certain fraudulent omissions, most significantly that Antrim's software installations "were highly customized for each individual site[,]" "that there was virtually no technical documentation for the custom-designed systems[,]" that the "systems were not Year 2000 compliant," that the "multi-site laboratory information system was plagued by serious functionality and design deficiencies[,]" and "had not been successfully installed at Antrim's customers' sites." Finally, in paragraph 33, plaintiff avers that a Dean Witter employee, Andrew Lipsky, along with representatives of Compucare, orally "represented to Sunquest that Antrim's net operating loss carry-forward was $4.9 million."

This is problematic, at a minimum, because it is impossible to sort out from these allegations exactly what misrepresentations were made by Dean Witter in the promotional materials and what may have been misrepresented or omitted only by Compucare, as to which I have dismissed the securities fraud counts. The "who, when and where" are therefore insufficiently pleaded, and it is not reasonable to expect Dean Witter to frame a responsive pleading to these allegations. See Klein, 1998 WL 372559 at *4; Walish, 1998 WL 314644 at *3.

Moreover, Sunquest's allegations of scienter are insufficient. Scienter is properly pleaded by alleging facts giving rise to an inference that the defendant "knew or was reckless in not knowing" that its representations were false when made. Burlington Coat, 114 F.3d at 1422. This is accomplished by "(1) identify[ing] circumstances indicating conscious or reckless behavior by defendant[ ] or (2) alleg[ing] facts showing both a motive and a clear opportunity for committing the fraud." Id. "It is not enough for plaintiff[ ] to allege generally that defendant[ ] knew or recklessly disregarded each of the false and misleading statements for which they were sued. . . ." Id. (citation and internal quotation marks omitted). "[R]ote allegations that Defendant[ ] knowingly made false statements of material fact with intent to deceive and defraud the Plaintiff[ ] do not meet the standards for pleading scienter. . . ." Walish, 1998 WL 314644 at *4.

All plaintiff has done is to recite, in boilerplate fashion, that "Dean Witter made [its] material misrepresentations and omissions to Sunquest with reckless disregard for the truth or with intention of deceiving and inducing Sunquest to take actions that would benefit . . . Dean Witter, and to induce Sunquest to enter into a purchase of Antrim's stock for an excessive price." Dkt. no. 1, ¶ 16. Neither this conclusory recitation nor any other averment of the complaint identifies any action of Dean Witter that leads to an inference of conscious or reckless, as opposed to merely negligent or mistaken, conduct on the part of Dean Witter. "A plaintiff cannot simply couple a factual statement with a conclusory allegation of fraudulent intent to adequately plead scienter." Walish, 1998 WL 314644 at *3. Accord Advanta, 1998 WL 387595 at *8 (dismissing as insufficient "Plaintiff's catch-all allegation that all speakers knew that their statements were false when made").

Nor can it be successfully argued that plaintiff has successfully alleged motive and opportunity. In Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124 (2d Cir. 1994), the Second Circuit explained:

  Motive would entail concrete benefits that could be
  realized by one or more of the false statements and
  wrongful non-disclosures alleged. Opportunity would
  entail the means and likely prospect of achieving
  concrete benefits by the means alleged.

Id. at 1130. Plaintiff's averments are insufficient. Assuming that Dean Witter's motive was to close the Antrim deal and make money for itself, the allegations against it are too unfocused to even evaluate what misrepresentations and omissions were made (the means) and how and why they were likely to secure a concrete benefit to defendant.

Thus seen, it is evident that plaintiff's allegations of securities fraud are deficient, both as to particularity and scienter. It is quite possible, of course, that plaintiff will be able to cure these pleading defects by amendment. Hence, I will dismiss counts VII and VIII against Dean Witter, but with leave to amend.


Finally, Compucare argues that count IX of the complaint, which pleads rescission, should be dismissed.*fn16 I agree.

First, Sunquest seeks rescission only as a remedy against Compucare's alleged securities fraud and common law misrepresentations and omissions, all of which have been dismissed from this action. For that reason alone, the rescission claim must be dismissed.

Second, rescission is not available because Sunquest never tendered or attempted to tender its shares back to Compucare. It is axiomatic under Pennsylvania law that a party seeking rescission must "tender[ ] back [to the defendant] what [it] has received [so that it may sue] for what it has parted with[.]" Wolgin v. Smith, No. 94-7471, 1996 WL 355338, *2 (E.D.Pa. Jun. 21, 1996) (quoting Associated Hardware Supply Co. v. Big Wheel Dist. Co., 355 F.2d 114, 120 (3d Cir. 1965)); accord Nocito v. Lanuitti, 402 Pa. 288, 167 A.2d 262, 263 (1961); Jiffy Lube Int'l, Inc. v. Jiffy Lube, Inc., 848 F. Supp. 569, 576-77 (E.D.Pa. 1994).*fn17 Plaintiff has not pleaded that any attempt was made to tender the shares back to Compucare. Accordingly, its rescission claim fails and will be dismissed with prejudice.


AND NOW, this 24th day of March 1999, upon consideration of defendants' motions to dismiss portions of plaintiff's complaint, dkt. nos. 6, 11, and the responses thereto, it is hereby ORDERED and DIRECTED that:

1. defendant Compucare's motion to dismiss, dkt. no. 6, is GRANTED;

2. defendant Dean Witter's motion to dismiss, dkt. no. 11, is GRANTED IN PART AND DENIED IN PART;

3. Count IV of plaintiff's complaint is DISMISSED WITH PREJUDICE;

4. Counts V and VI of plaintiff's complaint are DISMISSED WITH PREJUDICE as to defendant Compucare only;

5. Counts VII and VIII of plaintiff's complaint are DISMISSED WITH PREJUDICE under Fed.R.Civ.P. 12(b)(6) as to defendant Compucare, and DISMISSED WITH LEAVE TO AMEND under Fed.R.Civ.P. 9(b) as to defendant Dean Witter;

6. Count IX of plaintiff's complaint is DISMISSED WITH PREJUDICE;

7. plaintiff shall file an amended complaint stating only the remaining claims against the appropriate defendants on or before April 15, 1999;

8. defendants shall answer or otherwise plead on or before May 6, 1999.

9. a case management conference will be held in my Johnstown chambers on Wednesday, May 12, 1999, at 4:15 P.M.

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