Southern Advanced Materials, LLC v. Abrams
151 A.D.3d 451
| N.Y. App. Div. | 2017Background
- SAM invested in CV Holdings, LLC (CVH) and claimed entitlement to a 10% preferred return on a sale or dissolution per the Operating Agreement (notably §§9.7, 13.1, 13.3, 14.4).
- CVH was sold to nonparty Wendel S.A.; before closing, the Abrams parties executed a "Pre-Closing Restructuring" that transferred valuable assets (including one subsidiary) to themselves.
- SAM alleges the restructuring and sale amounted to a "dissolution" or disposition of substantially all assets entitling it to the preferred return; Abrams parties contend the Wendel deal was an equity sale governed by §14.4.
- SAM also asserted contract claims against Abrams individually based on a Promoter Agreement and a Make Good Agreement (claiming Smart Plastics received additional preferred shares but SAM did not).
- Abrams moved to dismiss multiple causes of action; the motion court sustained SAM’s breach claim under §§9.7/13.3, dismissed the Promoter and Make Good Agreement claims and dismissed SAM’s fraud counterclaim; the Appellate Division affirmed in part and vacated the holding that §14.4 was inapplicable as a matter of law.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Wendel transaction constitutes a "dissolution"/disposition entitling SAM to a 10% preferred return under §§9.7 and 13.3 | The Pre-Closing Restructuring and transfers of subsidiaries amount to disposition of substantially all assets / dissolution triggering the preferred return | The Wendel transaction was an equity sale governed by §14.4, not a dissolution | Court sustained breach claim under §§9.7 and 13.3 (transaction unclear at pleading stage; SAM plausibly alleged a disposition) |
| Whether §14.4 (equity sale/fairness opinion) is inapplicable as a matter of law because condition precedent not met | SAM alleged it requested a fairness opinion | Abrams argued no Class B or Preferred Members requested a fairness opinion, so §14.4 applies and limits SAM | Appellate Division vacated the court’s ruling that §14.4 was inapplicable as a matter of law; issue of fact exists whether condition precedent was satisfied |
| Whether the Promoter Agreement claim can be pursued against Abrams individually despite the Operating Agreement’s integration clause | SAM: Promoter Agreement is separate because Abrams signed individually | Abrams: Integration clause in Operating Agreement bars the separate promoter claim; agreement covered same subject matter and parties | Dismissed: integration clause bars the claim; alternatively, no personal obligation by Abrams was plausibly alleged |
| Whether the Make Good Agreement claim survives regarding alleged additional shares to Smart Plastics | SAM: Smart Plastics received additional preferred shares; SAM entitled to half as many under Make Good Agreement | Abrams: Allegations are speculative and lack factual basis | Dismissed: SAM’s assertions are too speculative to state a breach claim |
| Whether SAM’s fraud counterclaim (re: Seller Payoff Schedule and alleged concealment) states a claim under Delaware law | SAM: Abrams misrepresented or concealed distributions, inducing SAM to forgo True-Up Option | Abrams: Disclosure obligations limited by Retained Claims Agreement; no overt misrepresentation or actionable concealment | Dismissed: SAM failed to plead fraud by overt misrepresentation, duty-to-speak, or active concealment under Delaware law |
Key Cases Cited
- Leon v. Martinez, 84 N.Y.2d 83 (N.Y.) (pleading standard and inference rule cited for evaluating claims at motion to dismiss)
- Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 901 A.2d 106 (Del.) (no duty to disclose beyond contractually required terms; misleading impression requires additional qualifying information)
- Metro Communication Corp. BVI v. Advanced Mobilecomm Tech., 854 A.2d 121 (Del. Ch.) (limits on using fiduciary/contract theories to convert nonfraudulent conduct into actionable fraud)