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PUTNAM v. PUTNAM LOVELL GROUP NBF SECURITIES

October 5, 2005.

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.



The opinion of the court was delivered by: CLAUDIA WILKEN, District Judge

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS
Defendants Putnam Lovell Group NBF Securities, Inc., (PLNBF), National Bank of Canada (NBC) and National Bank Financial, Inc., (NBF) (collectively, Defendants) move pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) to dismiss Plaintiff Donald Putnam's complaint. Plaintiff opposes this motion.

The matter was heard on August 12, 2005. Having considered all of the papers filed by the parties and oral argument on the motion, the Court GRANTS Defendants' motion in part and DENIES it in part, as explained below. BACKGROUND

  Unless otherwise noted, the facts are drawn from Plaintiff's complaint and the July 23, 2003 memo attached as an exhibit to the complaint, and are taken as true.

  Plaintiff is a founder and ex-CEO of the former Putnam Lovell Group (Putnam Lovell), a boutique investment banking firm. In April, 2002, Putnam Lovell was acquired by NBF, a Canadian broker-dealer and subsidiary of NBC, a large chartered Canadian bank. The surviving entity was named PLNBF. Plaintiff retained managerial control of certain businesses, known collectively as the Global FIG Business. The April 13, 2002 Agreement and Plan of Merger*fn1 provides that decisions regarding "hiring or termination of senior professional staff of the Global FIG Business . . . will, in each case, be subject to prior review and approval by the Chief Executive Officer of NBF." Merger Agreement (MA) § 8.4.4.2.3. Plaintiff was to be "subject to the supervision and direction" of NBF, but retained "day to day responsibility for the management of the Global FIG Business on a basis consistent with that division's business plan and NBF's general operating procedures." MA § 8.4.4.2.1. Plaintiff contends that his management responsibilities were such that "he and only he could hire or fire personnel within [the FIG Business] so long as he was employed by PLNBF." Complaint ¶ 9.

  The Merger Agreement's choice-of-law section provides that it shall be construed in accordance with New York law. MA § 11.8.

  The Merger Agreement divided the Putnam Lovell shareholders into two groups, one to receive cash at closing and a second, termed the FIG Shareholders, to receive shares in NBC, which were deposited into escrow for release in installments. Plaintiff was a FIG Shareholder holding the majority of the escrow and the Managing Member of the limited liability corporation governing the interests of the FIG Shareholders. The last installment (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.

  After the merger transaction 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, is short enough to be quoted in its entirety,
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 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, Putnam and Brimecome reached an oral agreement with NBC and NBF regarding the other tests relating to the performance of the Global FIG business. Complaint ¶ 15. According to this alleged oral agreement, forty percent of the Global FIG Installment would be earned by Plaintiff and Brimecome if they remained as PLNBF employees through September 30, 2004; twenty-five percent of the Global FIG Installment would be earned based on successful cost cutting measures (i.e., termination of PLNBF employees); and the remaining thirty-five percent of Plaintiff and Brimecome's Global FIG Installment would be "dependent upon the FIG Business revenues achieving revised targets, the details of which the parties agreed to negotiate in good faith." Id. (Emphasis in original.)

  Documents memorializing this oral agreement were drafted, but were "not formally executed" because of a recommendation by counsel for NBF that doing so would increase 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 the twelve PLNBF employees originally targeted, 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.

  In November and December, 2004, NBC and NBF told Plaintiff that they never agreed to modify the Earn Out formula associated with the Global FIG Installment. 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." Complaint ¶ 24. NBC and NBF had similar long-standing policies regarding severance payments, and NBF's Chief Human Resources Executive informed Plaintiff in January, 2005, that he 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.

  Plaintiff brings seven claims. The first five are based on NBC and NBF's alleged failure to release the Global FIG Installment, as follows: (1) breach of express oral contract, against NBC and NBF; (2) breach of implied contract, against NBC and NBF; (3) promissory estoppel, against NBC and NBF; (4) fraud and deceit, against NBC and NBF; and (5) breach of fiduciary duty, against NBC only. The last two claims for (6) breach of implied contract and (7) breach of the implied covenant of good faith and fair dealing are brought against NBC, NBF and PLNBF, and relate to their alleged failure to provide Plaintiff with a severance and benefits package.

  LEGAL STANDARDS

  I. Failure to State a Claim

  A motion to dismiss for failure to state a claim will be denied unless it is "clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Falkowski v. Imation Corp., 309 F.3d 1123, 1132 (9th Cir. 2002), citing Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002). All material allegations in the complaint will be taken as true and construed in the light most favorable to the plaintiff. See NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). A complaint must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a). "Each averment of a pleading shall be simple, concise, and direct. No technical forms of pleading or motions are required." Fed.R.Civ.P. 8(e). These rules "do not require a claimant to set out in detail the facts upon which he bases his claim. To the contrary, all the Rules require is `a short and plain statement of the claim' that will give the defendant fair notice of what the plaintiff's claim is and the grounds on which it rests." Conley v. Gibson, 355 U.S. 41, 47 (1957).

  When granting a motion to dismiss, a court is generally required to grant a plaintiff leave to amend, even if no request to amend the pleading was made, unless amendment would be futile. Cook, Perkiss & Liehe, Inc. v. N. Cal. Collection Serv. Inc., 911 F.2d 242, 246-47 (9th Cir. 1990). In determining whether amendment would be futile, a court examines whether the complaint could be amended to cure the defect requiring dismissal "without contradicting any of the allegations of [the] original complaint." Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th Cir. 1990). Leave to amend should be liberally granted, but an amended complaint cannot allege facts inconsistent with the challenged pleading. Id. at 296-97.

  II. Rule 9(b)

  "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). The allegations must be "specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong." Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985). Statements of the time, place and nature of the alleged fraudulent activities are sufficient, Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987), provided the plaintiff sets forth "what is false or misleading about a statement, and why it is false." In re GlenFed, Inc., Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994). Scienter may be averred generally, simply by saying that it existed. See id. at 1547; see Fed.R.Civ.P. 9(b) ("Malice, intent, knowledge, and other condition of mind of a person may be averred generally"). As to matters peculiarly within the opposing party's knowledge, pleadings based on information and belief may satisfy Rule 9(b) if they also state the facts on which the belief is founded. Wool, 818 F.2d at 1439 (9th Cir. 1987).

  DISCUSSION

  I. Choice of Law

  In diversity actions such as this, federal courts must apply the conflict of law principles of the forum State, here California. S.A. Empresa De Viacao Aerea Rio Grandense v. Boeing Co., 641 F.2d 746, 749 (9th Cir. 1981). California law applies the principles of Restatement § 187, which "reflect a strong policy favoring enforcement" of contractual ...


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