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Leder v. Shinfeld

April 14, 2009

RONALD LEDER, ET AL.
v.
JEROME SHINFELD, ET AL.



The opinion of the court was delivered by: Surrick, J.

MEMORANDUM

Presently before the Court are Defendant Samuel DeAngelis's Motion to Dismiss Plaintiffs' Complaint Pursuant to Federal Rules of Civil Procedure 12(b)(1) and (6) (Doc. No. 17), and Defendant Jerome Shinfeld, CPA's Rule 12(b)(6) Motion to Dismiss All Claims (Doc. No. 14). For the following reasons, Defendants' Motions will be granted in part and denied in part.

I. BACKGROUND

Plaintiffs brought this action on April 28, 2006, alleging violation of Section 10b-5 of the Securities Exchange Act of 1934, and ten state law tort and contract claims. (Doc. No. 1 (hereinafter, "Compl.").) Defendants filed motions to dismiss (Doc. Nos. 14, 17), and Plaintiffs responded thereto (Doc. No. 20). On May 22, 2008, we filed a Memorandum and Order dismissing the Rule 10b-5 claim. See generally Leder v. Shinfeld, No. 06-1805, 2008 U.S. Dist. LEXIS 40925 (E.D. Pa. May 22, 2008). While the Order of May 22, 2008 disposed of the sole federal claim, we retained jurisdiction over the case pursuant to 28 U.S.C. § 1367(c) for purposes of considering the remainder of Defendants' motions to dismiss.*fn1 In the interest of clarity, we will restate the relevant background from the May 22, 2008 Memorandum.

This case arises out of a series of alleged misrepresentations concerning a Stock Purchase Agreement (the "SPA") entered into by Plaintiffs Ronald Leder and James Boyle and Defendant DeAngelis and his business partner, Joseph Ehrenreich (collectively "Seller"),*fn2 for the purchase of 75% of the combined stock of Seller's companies, Independence Motor Cars, Inc., and Metro Motorcars, Inc. (the "Companies").*fn3 The Complaint alleges that in the Spring of 2004, Plaintiffs made several arrangements to facilitate the purchase of the Companies' stock, including purchasing the real estate where the Companies' operations were conducted (Compl. ¶ 13) and entering into financing agreements with Manufacturers and Traders Trust Company ("M&T Bank"), (id. ¶¶ 26, 28). Plaintiffs made three sets of arrangements in anticipation of purchasing the Companies.

A. The First Arrangement: Plaintiffs' Real Estate Purchase

In anticipation of purchasing the real estate where the Companies' conducted their operations, Plaintiffs Leder and Boyle formed two business organizations to effectuate the transactions. On March 11, 2004, Boyle and Leder formed Boyleder LLC. (Id. ¶ 12.) On May 13, 2004, Leder and Boyle formed Boyleder LP, naming Boyleder LLC as the managing partner. (Id. ¶ 13.) Boyleder LP then purchased the real estate for $7.7 million dollars. (Id. ¶¶ 13-14.) Plaintiffs financed the purchase through two mortgages obtained from M&T Bank in the amounts of $2,212,500.00 and $3,562,500.00. (Id. ¶ 14 n.4.)

B. The Second Arrangement: Plaintiff's Stock Purchase

On May 27, 2004, Plaintiffs Leder and Boyle signed the SPA with Seller for the purchase of 75% of the combined shares of the Companies in exchange for $3,404,504.00. (Id. ¶¶ 14, 25-26.) Plaintiffs agreed to pay Seller $2 million in cash, $1.5 million of which was secured by a loan with M&T Bank. (Id. ¶¶ 25-26.) The remaining balance was paid for with a promissory note given by Plaintiffs to Seller. (Id. ¶ 25.) Under section 1.2(b) of the SPA, the purchase price was to reflect the Closing Date Book Value of the Companies as determined by the Parties. (Id. ¶ 17.) Section 1.2(b) provides:

To determine the Closing Date Book Value, prior to the Closing, the Seller's accountant and Buyers on a basis consistent with each Company's factory statements attached hereto as Schedule 1.2(b), shall make a determination as to the Closing Date Book Value. (Id.,Ex. A § 1.2(b).) However, the Closing Date Book Value was not intended to be the final purchase price. (Id.) The parties agreed that the purchase price would be subject to adjustment after the signing of the SPA based on the Final Book Value of each Company as of May 31, 2004. (Id.) This value was to be determined by Seller's accountant, Defendant Jerome Shinfeld. (Id.) Section 1.2(c) of the SPA states:

Within thirty (30) days after Closing, Seller shall have prepared, by its regular accountants, a determination of the final book value of each Company as of the May 31, 2004 (the "Final Book Value"). The Final Book Value shall be prepared in conformity with generally accepted accounting principles applied on a basis consistent with the Companies' regularly prepared factory statements. If buyers dispute Seller's accountant's determination of the Final Book Value, Buyer's and Seller's accountant shall attempt to agree, within thirty (30) days, upon the determination of Final Book Value, however; if the Buyers and Seller's accountant are unable to agree within such thirty (30) day period, thereafter either party may demand the dispute be resolved by Arbitration in accordance with the rules of the American Arbitration Association. (Id. § 1.2(c).) Moreover, section 2.1 of the SPA also set forth a detailed series of conditions outlining the Parties' duties to close the stock purchase. (Id. § 2.1.) Section 2.1 states:

Closing. The closing ("Closing") with respect to the acquisition of the Purchased Stock under this Agreement and all other transactions contemplated hereby shall take place at 10:00 am local time at the office of Robert L. Arangio, Esquire within five (5) days after satisfaction of the conditions precedent. However, if Closing fails to occur within _____________ (__) days from the date of this Agreement, then either party may terminate this Agreement upon ten (10) days prior written notice to the other. The date of the Closing is hereinafter called the "Closing Date."

In the event that Closing shall fail to occur because of the inability to secure manufacturers' approval in accordance with Paragraph 7.7 to this Agreement and Closing shall have occurred on the real estate as set forth on Schedule 2.1 hereto (the "Real Estate"), then in that event, Seller and Buyer shall:

(a) treat buyer hereunder as beneficial owners for all purposes of those shares of Purchased Stock for which legal title cannot be passed to Buyer as a result of the failure to receive manufacturer's approval of the transfer; and

(b) exert their best efforts to seek to resolve the lack of manufacturers [sic] approval, whether by restructuring their ownership of the Purchased Stock, or by sale of some or all of the assets of the Companies, or through some other means. Any such resolution of the failure to receive manufacturer's approval shall provide that:

(i) the Buyer shall be relieved of all their obligations to M&T Bank and Seller incurred in connection with the transactions contemplated hereunder; and (ii) Buyer shall be indemnified by Seller against all tax liabilities incurred in such a solution; and (iii) the amount paid by the Buyer pursuant to Paragraph 2.2(a) hereof shall be returned to Buyer (collectively items (i), (ii) and (iii) are the "minimum terms") or shall be subject to Buyer's approval. If no such resolution is achieved within one (1) year of the date hereof, Seller shall enter into an agreement with Buyer that satisfies the Minimum Terms, at Seller's expense.

(d) [sic] Until such time as Buyer is released from any and all debt obligations of Buyer to M&T Bank and Seller, Buyer shall be entitled to seventy-five percent (75%) of the profits of Companies as determined by Companies' regularly employed accountant. (Id. § 2.1.) Despite Seller's failure both to obtain the Manufacturers' approvals prior to Closing and to tender the Companies' stock certificates to Plaintiffs, Plaintiffs consummated the transaction sometime in 2004. (Compl. ¶¶ 30-31.)

C. The Third Arrangement: Loan Agreements with M&T Bank

On May 27, 2004, Plaintiffs signed two loan agreements with M&T Bank in connection with their purchase of the Companies. Plaintiffs Metro Chrysller and Metro Nissan entered into the first agreement, a $14.6 million loan used to finance the Companies' automobile inventory (hereinafter, "the Dealer Floor Plan"). (Id. ¶¶ 28-29.)*fn4 The amount of the Dealer Floor Plan was based on the Companies' stated inventory as of May 31, 2004, which, in turn, was based on records prepared by Defendant Shinfeld. (Id. ¶¶ 34-35.) The Dealer Floor Plan required that the Companies maintain a certain minimum level of inventory to remain in compliance with terms of the loan. (Id. ¶ 29.) Failure to do so would result in default. (Id. ¶ 41.) In addition, Plaintiffs Leder and Boyle took out a $1.5 million term loan to finance their purchase of the Companies's stock. (Id. ¶ 26.) Defendant DeAngelis and Mr. Ehrenreich served as guarantors of this loan in addition to all Plaintiffs.

D. The Aftermath

By October 2004, the Companies were so financially extended that they had to borrow additional capital from M&T Bank in order to continue operations. (Id. ¶ 32.)*fn5 By the end of 2004, the Companies had suffered a $2 million loss. (Id. ¶ 33.) In 2005, M&T Bank audited Plaintiffs' inventory to ensure that it complied with the terms of the Dealer Floor Plan. (Id. ¶ 34.) The audit revealed that Metro Chrysler and Metro Nissan had overstated their existing inventory by $800,000, as of May 31, 2004, placing the Companies "out of trust" on the Dealer Floor Plan and in default. (Id. ¶¶ 34, 41.)

In May 2005, Plaintiffs hired Larson Allen, an independent certified public accounting firm, to audit the Companies' books and records. (Id. ¶ 38.) On May 20, 2005, Larson Allen issued an opinion letter to Plaintiffs outlining its findings. (Id., Ex. C.) Larson Allen concluded, inter alia, that Defendants misstated the Companies' net worth by $2.13 million by overstating the Companies' earnings by $276,504.00 and by failing to account for downward adjustments and writeoffs totaling at least $1,857,000.*fn6 (Id.) Based on Larson Allen's letter, Plaintiffs concluded that they had overpaid for the Companies' stock by at least $2 million. (Compl. ¶ 47.) On May 31, 2005, Plaintiffs notified Defendants that they wished to rescind the deal as provided for in the SPA. (Id., Ex. F.)

On July 1, 2005, M&T Bank required the Companies to enter into Forbearance Agreements as a result of its audit, requiring Plaintiffs to put the Companies up for sale. (Compl. ¶ 41.) In connection with these Forbearance Agreements, Plaintiffs entered into a Asset and Real Estate Purchase Agreement with a third party in the Fall of 2005 for the sale of both the Companies and the real estate. (Id. ¶ 43.)

On April 28, 2006, Plaintiff filed an eleven-count Complaint asserting claims arising out of their arrangements to purchase the Companies. (See Compl.) On May 22, 2008, we dismissed Count I, alleging violation of Rule 10b-5, for failure to state a claim. Leder, 2008 U.S. Dist. LEXIS 40925, at *20-29. Ten counts remain:

Count Two: Leder, Boyle, and Boyleder against Shinfeld and DeAngelis for Violation of the Pennsylvania Securities Act of 1972;

Count Three: Leder, Boyle, and Boyleder against Shinfeld for Common Law Fraud;

Count Four: Metro Chrysler and Metro Nissan against Shinfeld for Breach of Contract; Count Five: Metro Chrysler and Metro Nissan against Shinfeld for Professional Negligence;

Count Six: Leder, Boyle, and Boyleder against Shinfeld for Breach of Fiduciary Duty;

Count Seven: Leder and Boyle against Shinfeld and DeAngelis for Defamation;

Count Eight: Boyle against Shinfeld and DeAngelis for ...


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