Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_05-cv-01330/USCOURTS-cand-4_05-cv-01330-8/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1441 Petition For Removal--Other Contract

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United States District Court

For the Northern District of California

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1In this Order, all references to "Defendants" connote the

moving Defendants only. Defendant Putnam Lovell NBF Securities,

Inc., does not join in the motion to dismiss. 

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

DONALD H. PUTNAM,

Plaintiff,

v.

PUTNAM LOVELL GROUP NBF SECURITIES,

INC., a Delaware corporation;

NATIONAL BANK OF CANADA, a Canadian

chartered bank; NATIONAL BANK

FINANCIAL, INC., a Quebec

corporation; and DOES 1-20,

inclusive,

Defendants.

 /

No. C 05-1330 CW

ORDER DENYING

DEFENDANTS'

MOTION TO DISMISS

Defendants National Bank of Canada (NBC) and National Bank

Financial, Inc., (NBF) (collectively, Defendants1) move pursuant to

Federal Rules of Civil Procedure 12(b)(6) and 9(b) to dismiss

Plaintiff Donald Putnam's First Amended Complaint (FAC). Plaintiff

opposes this motion. 

The matter was taken under submission on the papers. Having

considered all of the papers filed by the parties, the Court DENIES

the motion to dismiss, for the reasons explained below.

Case 4:05-cv-01330-CW Document 95 Filed 06/30/06 Page 1 of 15
United States District Court

For the Northern District of California

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2

The Court has taken judicial notice of the entire Merger

Agreement; see October 5, 2005 Order at 2 n.1. 

2

BACKGROUND

Unless otherwise noted, the facts are drawn from Plaintiff's

FAC and the July 23, 2003 memo attached as an exhibit to the

original complaint, and are taken as true. Plaintiff's allegations

are discussed in somewhat greater detail in the Court's October 5,

2005 Order Granting in Part and Denying in Part Defendants' Motion

to Dismiss (the October 5, 2005 Order). 

Plaintiff is a founder and ex-CEO of the former Putnam Lovell

Group (Putnam Lovell). In April, 2002, Putnam Lovell was acquired

by NBF, a Canadian corporation and subsidiary of NBC, a Canadian

bank. The surviving entity was named PLNBF. Plaintiff retained

managerial control of certain business, known collectively as the

Global FIG Business. 

The merger was governed by an April 13, 2002 Agreement and

Plan of Merger.2 Its choice-of-law section provides that it shall

be "construed in accordance with and governed by the law of the

State of New York (except insofar as mandatory provisions of

Delaware Law are applicable), without regard to the conflicts of

law principles thereof." Merger Agreement (MA) § 11.8. 

The Merger Agreement divided the Putnam Lovell shareholders

into two groups. One group, termed the FIG Shareholders, was to

receive shares in NBC, which were deposited into escrow for release

in installments. Plaintiff was the FIG Shareholder who held the

majority of the escrow and the Managing Member of a limited

liability corporation governing the interests of the FIG

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United States District Court

For the Northern District of California

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Shareholders. The last installment, termed the Global FIG

Installment, constituted a substantial portion of the consideration

for the merger and was scheduled to be released from escrow on

December 31, 2004. The release and size of the Global Release

Installment depended in part upon the amount of revenue generated

by the FIG Business during this "Earn Out" period. 

Plaintiff retained responsibility for hiring and firing FIG

Business personnel. After the merger was completed, NBF executives

negotiated with Plaintiff to terminate twelve PLNBF employees. 

Because the proposed personnel reduction would affect the ability

of the FIG Business to meet the agreed-upon revenue targets, NBF

and NBC agreed, as set forth in the July 23, 2003 memo, to revise

the Earn Out formula. The memo, authored by NBF executive Kym

Anthony and sent to FIG Shareholders, stated in full,

I understand that Don [Plaintiff] and Ian [Brimecome, another

PLNBF manager] have had discussions with you regarding

contemplated changes to the arrangements regarding the

contingent Earn Out arrangements, i.e., Global FIG

Installment, agreed to in the context of the purchase by NBF

of Putnam Lovell. I understand that your discussions have

taken place in the context of focusing on the role of the FIG

leadership team relative to profitability, expense control and

retention issues regarding Global FIG as opposed to just

revenues. 

I wish to confirm that these Earn Out arrangements

regarding each of you, other than Don and Ian, will be

modified so that the test for your being able to earn your

share of the Global FIG Installment will change from a revenue

and time contingency test to a time contingency test only,

(i.e., NB will waive the revenue hurdle test, and the

condition for you being entitled to your share of the

Installment will only be a function of your continued

employment through to the end of the Earn Out Period, i.e.

September 30, 2004). For Don's and Ian's share, the same time

test will apply, but will also include certain other tests

relating to the performance of the Global FIG business. All

other terms and conditions regarding the Earn Out will remain

the same, and will continue to apply. The details of these

arrangements and the related paperwork will follow in the next

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few weeks. 

I thank you for your efforts to date, and know that you

will all continue to contribute to the success of Global FIG

and to the firm. 

In or around March, 2004, Plaintiff and Brimecome reached an

oral agreement with NBC and NBF regarding the other tests relating

to the performance of the Global FIG business. FAC ¶ 15. The oral

agreement was subsequently confirmed in numerous emails as well as

draft agreements, and it "replaced and superceded in their entirety

the provisions of the Merger Agreement relating to the Global FIG

Installment." Id. According to this alleged oral agreement,

Plaintiff and Brimecome would earn forty percent of their share of

the Global FIG Installment if they remained as PLNBF employees

through September 30, 2004; twenty-five percent of their share

based on successful cost-cutting measures (i.e., termination of

PLNBF employees); and the remaining thirty-five percent "dependent

upon the FIG Business revenues achieving revised targets, the

details of which the parties agreed to negotiate in good faith." 

Id. 

Documents memorializing this oral agreement were drafted, but

were "not formally executed" in order to avoid increased tax risks

for employee shareholders. Id. ¶ 16. Plaintiff was urged to rely

on the July 23, 2003 memo and related promises "instead of pressing

for formal documentation." Id. Acting in reliance on the alleged

oral agreement, Plaintiff terminated twelve PLNBF employees, as

well as other revenue-producing personnel. In December, 2004,

Plaintiff also terminated Brimecome, likewise in reliance on

promises made regarding adjustments to the Earn Out formula. 

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3In his original complaint, Plaintiff stated that NBC and NBF

told him only that they had never agreed "to modify the earn out

formula associated with" the Global FIG Installment. Complaint

¶ 19. 

5

In November and December, 2004, NBC and NBF told Plaintiff

that they never agreed to "replace and supercede in their entirety

the provisions of the Merger Agreement relating to the Global FIG

Installment."3

 Id. ¶ 19. NBC and NBF failed to release any part

of the Global FIG Installment to Plaintiff or other FIG

Shareholders. When Plaintiff accused NBC and NBF of reneging on

their promises, Defendants terminated Plaintiff without cause and

with no prior notice. 

Plaintiff was denied severance payments upon termination,

thereby depriving him of "compensation rights under his implied

contract with PLNBF, NBC and NBF," in that those entities had

assumed Putnam Lovell's long-standing policy and practice of

providing "substantial severance and benefit payments to executives

and employees upon their retirement." Id. ¶ 21. NBC and NBF had

similar long-standing policies regarding severance payments, and

NBF's Chief Human Resources Executive informed Plaintiff in

January, 2005, that Plaintiff would be entitled to a benefits

package worth approximately $2.2 million if he were terminated. 

Plaintiff was then told that he could obtain these benefits only if

he agreed to forego payment of the Global FIG Installment. 

In his original complaint, Plaintiff brought seven claims, the

first five based on NBC and NBF's alleged failure to release the

Global FIG Installment, and the last two, against NBC, NBF and

PLNBF, based on their alleged failure to provide Plaintiff with a

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severance and benefits package. In its October 5, 2005 Order, the

Court denied Defendants' motion to dismiss Plaintiff's first claim

for breach of an oral contract as well as his sixth and seventh

employment-related claims for breach of an implied contract and

breach of an implied covenant of good faith and fair dealing. The

Court dismissed with leave to amend Plaintiff's second, third,

fourth and fifth claims for breach of an implied contract,

promissory estoppel, fraud and breach of fiduciary duty, relating

to the Global FIG Installment. 

In his FAC, Plaintiff brings six claims. The first four are

again based on NBC and NBF's alleged failure to release the Global

FIG Installment: (1) breach of an express oral contract, against

NBC and NBF; (2) breach of an implied contract, against NBC and

NBF; (3) promissory estoppel, against NBC and NBF; and (4) fraud

and deceit, against NBC and NBF. The last two claims for

(5) breach of an implied contract and (6) breach of the implied

covenant of good faith and fair dealing are brought against NBC,

NBF and PLNBF. 

Defendants now argue that Plaintiff has failed to cure the

defects identified in his original complaint, and move to dismiss

Plaintiff's second, third and fourth claims in their entirety. 

Defendants also move for the second time to dismiss the fifth and

sixth employment-related claims against NBC and NBF. The standards

used to evaluate Defendants' motion to dismiss were set forth in

the Court's prior order. 

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DISCUSSION

I. Fraud and Deceit Claim

Defendants move to dismiss Plaintiff's claim for fraud and

deceit on the grounds that Plaintiff has failed to amend his

complaint to show that New York law is not applicable and that he

has failed to state a claim for fraud under New York law. 

Plaintiff opposes the motion, and further argues that even if the

Merger Agreement's choice-of-law provision was not superceded,

California law should apply. 

A. Survival of Choice-of-Law Provision

In its prior order, the Court found that the validity of

Plaintiff's fraud claim depended in part on whether New York or

California law applied to it. See October 5, 2005 Order at 15-17. 

The Court also found that the Merger Agreement's choice-of-law

provision selecting New York law would apply to the alleged oral

agreement between Plaintiff and Defendants, unless Plaintiff could

truthfully allege that the later oral contract "did indeed entirely

supercede all portions of the Merger Agreement which pertain to

Plaintiff's share of the Global FIG Installment, including its

choice-of-law provision." Id. at 9. 

Plaintiff now alleges in the FAC that the oral agreement

"replaced and superceded in their entirety the provisions of the

Merger Agreement relating to the Global FIG Installment." FAC

¶ 15. The parties debate whether the phrasing of the FAC indeed

states that the choice-of-law provision was superceded, or whether

it merely alleges that the oral agreement superceded the portion of

the Merger Agreement which deals directly with the Global FIG

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Installment, i.e. Article 2. Although the language of the FAC is

fairly susceptible to both interpretations, it is clear from the

briefing that Plaintiff intends to allege that the choice-of-law

provision was superceded. Whether the alleged oral agreement did,

in fact, supercede the New York choice-of-law provision is a

question of fact that cannot be decided on a motion to dismiss. 

Defendants' reliance on the Escrow and LLC Agreements to prove

their point illustrates why this is so. Defendants argue that

Plaintiff's current position is untenable because, if the

"provisions of the Merger Agreement relating to the Global FIG

Installment" are interpreted to include the choice-of-law

provision, then they must also include those portions of the Merger

Agreement that provided for the delivery of shares to the FIG

shareholders, because it is the Merger Agreement that incorporates

the agreements which govern those issues, i.e. the Escrow Agreement

and the LLC Agreement. However, the Court cannot conclude that

Plaintiff's allegations are indeed untenable without knowing more

about the alleged oral contract than is shown by the pleadings. 

For instance, if the oral contract also incorporated the Escrow and

LLC Agreements, then Plaintiff's allegations would be reasonable. 

Therefore, the Court again concludes that the time is not yet ripe

for a final decision as to whether New York or California law

applies to Plaintiff's fraud claim. 

B. Scope of Choice-of-Law Provision Under New York Law

Plaintiff argues that even if the Merger Agreement's choiceof-law provision was not superceded by the alleged oral agreement,

under New York law the provision would not cover his claim of

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4

Plaintiff additionally argues that California law should

apply because New York law has no substantial relationship to the

transaction. Defendants state that the drafters of the Merger

Agreement resided in New York. The Court finds that adjudication

of New York's relationship to the transaction would be premature at

this time. 

9

fraud. 

As stated in the October 5, 2005 Order, in assessing the

Merger Agreement, the Court applies the "choice of law rules of

California, the forum state." Gen. Signal Corp. v. MCI Telecomm.

Corp., 66 F.3d 1500, 1505 (9th Cir. 1995) (citing Day & Zimmerman,

Inc., v. Challoner, 423 U.S. 3, 4 (1975)). California law

construes contractual choice-of-law provisions broadly, reflecting

"a strong policy favoring enforcement" of such agreements. 

Nedlloyd Lines B.V. v. Superior Court, 3 Cal. 4th 459, 465 (1992). 

The exceptions to application of choice-of-law provisions are if

"(1) the chosen state has no substantial relationship to the

parties or transaction, or (2) such application would run contrary

to a California public policy or evade a California statute."4

Gen. Signal Corp., 66 F.3d at 1506. Therefore, if the alleged oral

agreement modified the Merger Agreement but did not supercede the

Merger Agreement's choice-of-law provision, then New York law would

apply to the alleged oral agreement. 

However, as Plaintiff notes, application of Nedlloyd also

means that if the agreement is ambiguous in its scope, then the law

of the forum identified in the choice-of-law provision, New York

law, is used to determine whether that choice extends to the tort

claim at issue. 3 Cal. 4th at 469, n.7. Plaintiff cites a series

of New York cases for the proposition that New York law does not

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construe contractual choice-of-law clauses broadly to encompass

tort claims. See, e.g., Knierieman v. Bache Halsey Shields Inc.,

427 N.Y.S. 2d 10, 12-13 (App. Div. 1980) (holding that contract's

choice of law provision did not apply to claims sounding in tort),

overruled on other grounds, Rescildo v. R.H. Macy's, 594 N.Y.S.2d

139 (App. Div. 1993). Here, however, as discussed in Section I(C)

below, Plaintiff's fraud claim may be brought under New York law as

an alternative to his contract claims. None of the cases cited by

Plaintiff suggest that New York law would so narrowly construe a

choice-of-law provision that it would exclude from coverage a tort

claim that could be plead as an alternative to a breach of contract

claim. To the contrary, the rationale behind these cases is that a

forum selection clause should not cover a tort cause of action

based on "activities, which were unrelated to [the defendant's]

duties" under the contract. Twinlab Corp. v. Paulson, 724 N.Y.S.2d

496, 497 (App. Div. 2001). 

Therefore, the Court concludes that if the Merger Agreement's

choice of law provision is not superceded, its choice of New York

law would apply to Plaintiff's claim for fraud. 

C. Fraud Claim Under New York Law

As explained in the October 5, 2005 Order, a misrepresentation

of intent to perform under a contract cannot support a fraud claim

under New York Law. Manning v. Utils. Mut. Ins. Co., 254 F.3d 387,

401 (2nd Cir. 2001) (citing Bridgestone/Firestone, Inc., v.

Recovery Credit Servs., Inc., 98 F.3d 13, 19-20 (2nd Cir. 1996)). 

In order to maintain a tort claim for fraud based on an alleged

breach of contract, a plaintiff must "either (i) demonstrate a

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legal duty separate from the duty to perform under the contract; or

(ii) demonstrate a fraudulent misrepresentation collateral or

extraneous to the contract; or (iii) seek special damages that are

caused by the misrepresentation and unrecoverable as contract

damages." Bridgestone/Firestone at 20 (internal citations

omitted). 

In the October 5, 2005 Order, the Court found that the

allegedly fraudulent acts committed by Defendants (e.g., acquiring

Putnam Lovell, forcing Plaintiff to terminate his employees and

failing to release the Global FIG Installment) all involved either

Plaintiff's performance in reliance upon, or Defendants' nonperformance of, the alleged oral contract. The Court concluded

that Plaintiff had not sufficiently alleged the type of

misrepresentations or special damages that would allow him to

recover in tort under Bridgestone/Firestone. The Court granted

Plaintiff leave to amend "if he can allege, truthfully and without

contradicting the original complaint, conduct that constitutes

breach of a duty independent of the contract or special damages." 

October 5, 2005 Order at 17. 

Plaintiff now argues that he has stated a claim for fraud even

if New York law applies because (1) he has alleged

misrepresentations that are collateral or extraneous to the

contract, and (2) his fraud claim is plead as an alternative to his

contract claim. Because the Court finds that Plaintiff may proceed

with his fraud claim as an alternative to his breach of contract

claims, it need not reach the question of whether he has alleged

misrepresentations that are sufficiently collateral or extraneous. 

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A plaintiff may not convert a breach of contract claim into a

fraud claim under New York's Bridgestone/Firestone rule because

otherwise he or she could "plead two independent claims, and

recover twice, for the same conduct." Blank v. Baronowski, 959 F.

Supp. 172, 180 (S.D. N.Y. 1997). In Champion Motor Group v. Visone

Corvette, 992 F. Supp. 203 (E.D. N.Y. 1998), the court found that a

fraud claim stated a "valid alternative to the breach of contract

claim," where one fair reading of the complaint was that no

contract existed, and thus the defendant's statements that it would

enter into a contract were "extraneous" to the contract claim. As

Defendants note, Plaintiff's fraud claim here is not explicitly

plead in the alternative. However, Defendants identify no reason

why Plaintiff may not bring his fraud claim in the alternative, in

the event no contract is found to exist. 

In sum, Plaintiff may proceed with his fraud claim in the

event California law applies. If New York law applies, Plaintiff

may recover on his claim for fraud only as an alternative to his

breach of contract claims. 

II. Breach of Implied Contract and Promissory Estoppel Claims

Defendants move to dismiss Plaintiff's claims for breach of an

implied contract and for promissory estoppel, on the grounds that

these claims are precluded by the express Merger Agreement. 

In the October 5, 2005 Order, the Court found that the express

terms of the Merger Agreement precluded these claims. Plaintiff

was granted leave to amend his allegations, if he could do so

truthfully and without contradicting his original complaint, to

allege rescission of the portions of the Merger Agreement embracing

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the same subject matter as the alleged implied contract or alleged

promise. 

The FAC now states explicitly that the claims for breach of an

implied contract and for promissory estoppel are plead as

alternatives to each other and to the claim for breach of an

express contract. FAC ¶¶ 33, 40. The FAC does not allege that the

Merger Agreement was rescinded, but instead alleges that NBC and

NBF either "agreed" or "promised" to "replace and supercede in

their entirety the provisions of the Merger Agreement relating to

the Global FIG Installment." Id. ¶¶ 35, 41. 

Defendants argue that these new allegations contradict the

terms of the July 23, 2003 memo, which stated that "all other terms

and conditions regarding the Earn Out will remain the same, and

will continue to apply." However, Plaintiff could prove,

consistent with this memo and the other allegations in his

complaint, that Defendants subsequently either agreed or promised

to replace and supercede the portions of the Merger Agreement

relating to the Global FIG Installment. Although Defendants

complain that Plaintiff has not plead additional facts sufficient

to support the allegations in his alternative claims, such facts

are not necessary at this stage. For the reasons described in

Section I(A) above, the Court finds that Plaintiff's revisions have

cured the deficiencies identified in his initial complaint. 

Defendants also argue, relying on Mike Nelson Co. v. Hathaway,

No. F 05-0208 (AWAI), 2005 WL 2179310, *4 (E.D. Cal. Sept. 8,

2005), that Plaintiff may not plead in the alternative causes of

action which preclude one another. As the district court there

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stated, however, plaintiffs are allowed to plead mutually exclusive

claims in the alternative, but are not allowed to "recover on

inconsistent theories." Mike Nelson, *4 (quoting Brookhaven

Landscape & Grading Co., Inc., v. J.F., 676 F.2d 516, 523 (11th

Cir. 1982)). As Federal Rule of Civil Procedure 8(e)(2) provides, 

A party may set forth two or more statements of a claim or

defense alternately or hypothetically, either in one count or

defense or in separate counts or defenses. . . . A party may

also state as many separate claims or defenses as the party

has regardless of consistency and whether based on legal,

equitable, or maritime grounds.

Plaintiff's current pleading is allowable under Rule 8(e)(2). 

For these reasons, the Court denies Defendants' motion to

dismiss Plaintiff's claims for breach of an implied contract or for

promissory estoppel with respect to the Global FIG Installment. 

III. Breach of Implied Contract and of Implied Covenant of Good 

Faith and Fair Dealing

Defendants move to dismiss Plaintiff's claims against NBC and

NBF for breach of an implied contract to pay severance benefits and

breach of the implied covenant of good faith and fair dealing. 

In the October 5, 2005 Order, the Court denied Defendants'

motion to dismiss these claims, in part because Defendants did not

introduce any authority on the question of whether an entity that

is not an employer, but has promised a severance package, may be

held liable for failure to pay those benefits. 

Defendants now move to dismiss these claims on the grounds

that Plaintiff has not sufficiently alleged that NBC or NBF ever

promised him any severance benefits. However, the FAC alleges that

Plaintiff discussed the former Putnam Lovell's policy and practice

of providing "substantial severance and benefit payments to

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executives and employees upon their termination" with

representatives of NBC and NBF, and that he was assured by them

that "NBC/NBF and PLNBF intended to (and subsequently did) continue

them in the future." No more detailed allegations regarding the

alleged promise to pay a severance package are needed in order to

plead the employment claims adequately. Therefore, the Court

denies Defendants' motion to dismiss these claims. 

CONCLUSION

For the foregoing reasons, the Court DENIES Defendants' motion

to dismiss certain claims in the FAC (Docket No. 46). 

IT IS SO ORDERED.

Dated: 6/30/06

______________________________

CLAUDIA WILKEN

United States District Judge

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