Universal American Corp. v. Partners Healthcare Solutions Holdings, L.P.
Docket: Civil Action No. 13-1741-RGA
Court: District Court, D. Delaware; March 31, 2016; Federal District Court
Defendants’ Motion to Dismiss Universal’s First Amended and Supplemental Complaint has been reviewed by the Court, which has granted the motion in part and denied it in part. The case arises from a merger between Universal American Corporation and Partners Healthcare Solutions, Inc. APS, with Universal providing insurance primarily for Medicare enrollees and APS offering specialty healthcare services to Medicaid agencies. Following the merger, Universal alleges APS's performance was significantly below expectations due to a fraud scheme, prompting the suit against individuals and entities involved with APS.
Key individuals include Gregory Scott (CEO), Jerome Vaccaro (President and COO), and John McDonough (CFO), all named defendants and limited partners of APSLP, a partnership formed to hold APS. David Katz, a Managing Director of GTCR Golder Rauner II, which was involved with APS prior to the merger, is also a defendant. Universal's complaint includes fifteen counts, such as securities fraud and unjust enrichment, with the defendants seeking dismissal of several counts for failure to state a claim.
The legal framework for the motion includes Federal Rules of Civil Procedure 8(a) and 9(b), which require a clear statement of claims and detailed allegations of fraud. The Court must accept factual allegations as true while disregarding legal conclusions, ensuring that claims are plausible and not merely speculative. The complaint's factual content must allow the Court to infer reasonable liability on the part of the defendants.
Universal alleges securities fraud under Section 10(b) of the Securities Exchange Act of 1934 against Scott, Vaccaro, McDonough, and APSLP. To establish a claim, the plaintiff must demonstrate: 1) a material misrepresentation or omission; 2) scienter; 3) a connection between the misrepresentation or omission and the purchase or sale of a security; 4) reliance on the misrepresentation or omission; 5) economic loss; and 6) loss causation. These elements must be pled with particularity as per Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (PSLRA), requiring a strong inference of the defendants' state of mind. Plaintiffs must provide essential factual background akin to the 'who, what, when, where, and how' of the events.
Defendants argue that Universal has not sufficiently pled specific misrepresentations or omissions and failed to establish a strong inference of scienter and reliance. The court previously stated that the amended complaint must detail each fraudulent statement, including the specific defendant responsible, its materiality, the timing, reasons for its falsity, and how Universal relied on it. Defendants claim Universal's grouping of defendants in the complaint results in vague assertions that do not meet the PSLRA's particularity requirement. However, the court emphasizes that the PSLRA mandates a clear specification of each defendant's role in the alleged fraud. Only the "maker" of a fraudulent statement can be held liable under Section 10(b), defined as a person or entity with ultimate authority over the statement's content and communication. Multiple parties can be considered makers of a single statement, but the roles must be distinctly outlined in cases involving multiple defendants.
The Court finds that Universal's complaint sufficiently alleges specific misrepresentations made by APSLP, Scott, and McDonough, detailing each fraudulent statement, the respective defendants responsible, and the timing of these representations. Scott is identified as having signed the Merger Agreement and the Officer’s Certificate on behalf of both APSLP and APS, certifying the representations therein. The complaint also outlines the fraudulent nature of these representations. Regarding McDonough, the complaint claims he made multiple oral misrepresentations on December 13, February 14, and February 29. The defendants argue that McDonough cannot be considered the 'maker' of his statements since they were made on behalf of APS and APSLP, citing Janus. However, the Court clarifies that Janus does not preclude corporate insiders from being held liable if they have ultimate authority over the statements made. The Court asserts that McDonough can be deemed to have made misrepresentations based on the allegations presented. Conversely, the complaint does not sufficiently allege misrepresentations by Vaccaro, as it fails to provide specific allegations against him, instead grouping him with McDonough and Scott in vague references to their joint activities, which do not meet the required specificity.
Attribution of statements lies with individuals or entities that possess ultimate authority over them, as established in *Janus*. Universal has not provided specific facts showing that Vaccaro held such authority regarding any statements, resulting in Vaccaro's dismissal from liability under Section 10(b). Merely collecting and spreading false information does not make a defendant the maker of misrepresentations.
In terms of scienter, defendants argue Universal's claims rely on improper group pleading and overlook that the defendants had significant stock interests, which reduced the likelihood of deliberate misrepresentation. However, the complaint sufficiently alleges scienter for APSLP, Scott, and McDonough. For instance, Scott falsely certified that no material adverse effects had occurred since the Merger Agreement, while McDonough had actual knowledge of multiple adverse events that would significantly impact forecasts.
Universal also claims that a series of promised business opportunities were misleadingly presented, with only two out of over thirty contracts generating revenue, leading to a significant shortfall. The timing of misrepresentations relative to their revelation, coupled with personal financial incentives for Scott and McDonough to conceal the truth, supports a strong inference of scienter. These factors, including the drastic reduction in EBITDA forecasts shortly after the merger, reinforce the allegations of intentional misconduct.
Universal's complaint does not invoke the group pleading doctrine, which allows plaintiffs to attribute misstatements in group-published documents to company officers without specific allegations tying them to the fraud. The Third Circuit holds that this doctrine did not survive the Private Securities Litigation Reform Act (PSLRA). Universal's complaint lacks allegations attributing statements to defendants based solely on their titles or general involvement.
Defendants' claim that their receipt of Universal stock negates an inference of scienter is also countered. The Individual Defendants exchanged their APS stock for Universal stock, which holds independent value, thereby not supporting the inference that they would act against their own interests. Consequently, the complaint provides sufficient facts to establish a strong inference of scienter.
Regarding reliance on misrepresentations prior to the Merger Agreement, Universal asserts it would not have acquired APS had it known the true circumstances. The complaint claims reliance on the Individual Defendants' misrepresentations in deciding to acquire APS and in the transaction's closure. These allegations adequately suggest that Universal entered the transaction based on the claimed misrepresentations, preventing dismissal of this count. The court grants the motion to dismiss Count I concerning Vaccaro but denies it for Scott, McDonough, and APSLP.
Control person liability is alleged under Section 20(a) of the Securities Exchange Act against Scott, Vaccaro, McDonough, and APSLP (Count II), and against Katz and the GTCR Defendants (Count III). Section 20(a) holds that individuals who control a person liable for securities violations can also be held jointly liable, unless they acted in good faith and did not induce the violation. To establish a Section 20(a) claim, a plaintiff must demonstrate: 1) an underlying violation by a controlled entity; 2) the defendants are 'controlling persons'; and 3) the defendants were culpable participants in the fraud. The PSLRA requires particularity in detailing the defendants’ control and culpability. Culpable participation can arise from inaction only if the plaintiff shows knowledge of the fraud and intentional inaction to further it. Merely being a director does not suffice to prove control. Universal claims that APS violated Section 10(b) through misrepresentations related to the Merger Agreement and that Katz, Scott, Vaccaro, McDonough, and APSLP were controlling persons. Defendants argue the complaint lacks sufficient detail regarding Katz's control. However, the court found that Universal adequately alleges Katz’s significant role in the merger, including personal negotiation of terms and extensive communication with Universal's management, qualifying him as a major player in APS's operations and fulfilling the control requirement.
Katz is alleged to have played a culpable role in APS's fraud, specifically by intentionally concealing crucial information and preventing the discovery of fraudulent activities. Evidence includes Katz's actions in obscuring material deficiencies in a contract and obstructing a meeting with the Chief Compliance Officer, whom he suspected might report the fraud. The court finds these allegations sufficient to uphold claims against Katz, rejecting the motion to dismiss Count III.
The Individual Defendants, including Scott, Vaccaro, and McDonough, argue that the complaint improperly asserts they are both primary violators of fraud and controlling persons under Section 20(a). They claim this duality warrants dismissal of the 20(a) claim, as one cannot be both controller and controlled. However, the court notes that there is no prohibition against alleging both violations against the same defendant and highlights that the presence of multiple misrepresentations allows for different defendants to be held liable in distinct roles.
Defendants also challenge the specificity of Universal's claims regarding control, arguing that mere reference to their positions as officers is insufficient. Nonetheless, Universal counters that it has detailed the active roles of Scott, Vaccaro, and McDonough in executing fraudulent actions, aligning its arguments with precedents that support its position. The court finds that Universal's allegations adequately establish the control of these individuals over APS, allowing the case to proceed without dismissal based on the defendants' claims.
Universal's complaint lacks specific allegations against the defendants, particularly regarding control over the transactions questioned. General claims about 'management responsibilities' do not meet the legal standard of demonstrating actual control. The complaint also falls short in adequately pleading 'culpable participation' in securities violations, as mere knowledge of misrepresentations is insufficient. For culpable participation to be established, Universal must show that the defendants' inaction was intentional and aimed at furthering the fraud, which it has not done.
Additionally, Universal's claims of common law fraud require proof of several elements: false representation or omission of facts, knowledge of falsity, intent to induce action, justifiable reliance by the plaintiff, and injury resulting from that reliance. Delaware law stipulates that sophisticated parties cannot rely on statements outside the contractual agreement if they have explicitly stated that such statements were not the basis for their decision to enter into the contract. A clear anti-reliance clause is necessary for a successful fraud claim in this context. Overall, Count II is dismissed for failure to adequately state a claim, and Universal's fraud claims against the defendants are similarly deficient.
The Court granted Universal the opportunity to amend its complaint after dismissing the initial motion, citing that Section 3.34 of the contract does not feature an express waiver regarding the accuracy or completeness of the information provided by the Defendants. This position aligns with the ruling in *Trans-Digm Inc. v. Alcoa Global Fasteners, Inc.*, where the Delaware Court of Chancery rejected a motion to dismiss for fraudulent concealment due to an anti-reliance clause that did not disclaim reliance on omissions or claim accuracy of the information provided. The Court noted distinctions from *RAA Mgmt. LLC v. Savage Sports Holdings, Inc.*, which included explicit disclaimers regarding reliance on omissions. Initially, *Trans-Digm* was viewed as the key precedent on extra-contractual omissions, but a recent ruling in *Prairie Capital III, L.P. v. Double E Holding Corp.* clarified that in arms-length contracts, claims of fraud cannot arise solely from omissions, and any anti-reliance clause encompasses omissions. The *Prairie Capital* court disagreed with *Trans-Digm*'s implication that specific language regarding omissions is necessary for enforcement. It concluded that once parties define the contractual representations, they cannot claim fraud based on extra-contractual omissions. Section 3.34 of the Merger Agreement specifically states that no representations or warranties, other than those expressly made in that section, are authorized, emphasizing that reliance is limited to the representations articulated therein.
An integration clause in the Merger Agreement establishes that it and related written agreements represent the entire agreement between the parties, superseding all prior understandings. Universal's reliance is limited to the information specified in the Merger Agreement’s Article 3 and the Officer’s Certificate, forming a clear anti-reliance clause. Universal contends that statements made post-signing but pre-closing are not covered by this clause; however, the explicit mention of the Officer’s Certificate in the Merger Agreement implies that its representations are subject to the anti-reliance provision. If only pre-existing statements were applicable, the unique mention of the Officer’s Certificate would be unnecessary, leading to an interpretation that would render parts of the contract meaningless, which is contrary to contract interpretation principles. Consequently, the anti-reliance clause is not ambiguous, and Universal's interpretation is rejected. Universal's common law fraud claims largely rely on extra-contractual representations, which are excluded from the scope of the agreement, thus failing to support their fraud claims. To substantiate their reliance on those representations, Universal should have incorporated them into the agreement.
A party may not assert a fraudulent inducement claim by relying on representations outside of a clearly integrated agreement while simultaneously promising not to rely on such external promises. Consequently, Count VII is dismissed, along with Count X to the extent it relies on extra-contractual statements. Counts VII, IX, XI, and XIII, which derive from underlying fraud claims, are also dismissed if they depend on extra-contractual representations. The court previously acknowledged that fraud claims can be based on representations in the Merger Agreement and the Officer's Certificate, aligning with Delaware public policy that prevents contracting parties from avoiding liability for fraudulent acts. Defendants claim Universal’s fraud allegations are merely breaches of contract disguised as fraud, which is not permissible. However, Universal alleges that certain statements were false, not just that the defendants failed to disclose information. The court finds that Universal has adequately alleged common law fraud based on these contractual misstatements. There is a dispute regarding the inclusion of individual defendants Vaccaro and McDonough, who did not sign the Officer’s Certificate. Universal contends these claims should proceed based on the Anvil Holding case, where individual defendants' knowledge of false representations and active concealment were deemed sufficient to possibly attribute liability to them. This reasoning has been supported by other Delaware court decisions.
In ITW Global Invs. Inc. v. Am. Indus. Partners Capital Fund IV, L.P., the court addresses allegations against McDonough and Vaccaro, asserting they knowingly made false contractual representations regarding APS. The complaint indicates that these senior managers actively concealed APS's true state and participated in meetings leading up to the merger, suggesting they caused APS to issue false representations in the Merger Agreement. The court finds sufficient factual basis to support Counts IV, V, X, and XIII against them, denying the defendants' motion to dismiss related to these counts.
Count XV, a declaratory judgment claim against Vaccaro, faces a challenge from the defendants, who argue for jurisdictional abstention due to a parallel state action. However, with the state case stayed, the court finds no justification to abstain and denies the motion to dismiss this count as well.
Ultimately, the court partially grants and partially denies the defendants' motion to dismiss: Counts II, VII, VIII, and IX are dismissed; Counts III, IV, V, VI, and XV survive; and the motion regarding Count I is granted for Vaccaro but denied for other defendants. Additionally, Counts X, XI, and XIII are dismissed concerning extra-contractual statements but not for contractual statements. The defendants are categorized into groups, with the GTCR entities referred to collectively as "GTCR Defendants."
Katz and APSLP are identified as distinct categories of defendants, with Katz representing the second category and APSLP the third. Together with the GTCR Defendants, they form the fourth category, termed the "Individual Defendants." The Court references the decision in Janus, affirming that it does not limit the accountability of legally separate entities. The analysis pertains to whether defendants can be liable for the misstatements of co-defendants, hinging on the concept of "ultimate authority," which is influenced by the degree of separation between entities. The Court had previously determined that allegations against the GTCR Defendants were adequately presented.
An anti-reliance provision related to what APS may depend on is found in Article 4, which addresses the representations and warranties of the parent and merger sub. Notably, within the 109-page agreement, only one other section, besides a quote, is written entirely in capital letters—this section pertains to the waiver of the right to a jury trial. The Court distinguishes the contractual language in this case from that in Prairie Capital, where the Buyer relied on its independent investigation and the specific representations of the Double E Parties, which included disclaimers of other representations. Despite the differences in language, the Court sees no reason to diverge from the rationale in Prairie Capital, emphasizing that the key distinction lies between information included in the contract and information outside it, rather than between misrepresentations and omissions.
