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ANNECCA INC. v. LEXENT

November 16, 2004.

ANNECCA INC., et al., Plaintiff,
v.
LEXENT, INC., Defendant.



The opinion of the court was delivered by: MILTON SHADUR, Senior District Judge

MEMORANDUM OPINION AND ORDER

Following this Court's grant of summary judgment in favor of Lexent, Inc. ("Lexent") as to all claims asserted against it by Annecca, Inc. and its co-plaintiffs*fn1 (collectively "Annecca," treated after this sentence as a singular noun for convenience), Lexent has moved for summary judgment under Fed.R.Civ. P. ("Rule") 56 as to its Counterclaim.*fn2 Lexent seeks through the Counterclaim to recover expenses it incurred in preparing to acquire ownership interests in Annecca, Inc. and its affiliated companies pursuant to a 29-page Stock Purchase Agreement ("Agreement"). Lexent terminated the Agreement before completing the acquisition because of Annecca's failure to fulfill conditions precedent as to (1) Annecca's net worth and (2) the accuracy of material representations and warranties in the Agreement.

Counterclaim Counts I and II seek to recover fees that Lexent incurred in reliance on Annecca's anticipated fulfillment of its obligations under the Agreement on alternative theories that Annecca's failure to do so (1) gives rise to a claim under the Agreement's indemnification provision or (2) constitutes a breach of contract. Counts III and IV are based on Annecca's refusal to return certain computer equipment that Lexent provided Annecca in anticipation of the acquisition. Annecca has cross-moved for summary judgment as to the latter two counts on the ground that Lexent is equitably estopped from asserting claims relating to that equipment. With Lexent's motion now having been fully briefed,*fn3 this opinion deals with the Counterclaim counts sequentially.

  Rule 56 Standards

  Every Rule 56 movant bears the burden of establishing the absence of any genuine issue of material fact (Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). For that purpose courts consider the evidentiary record in the light most favorable to nonmovants and draw all reasonable inferences in their favor (Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir. 2002)). But to avoid summary judgment a nonmovant "must produce more than a scintilla of evidence to support his position" that a genuine issue of material fact exists (Pugh v. City of Attica, 259 F.3d 619, 625 (7th Cir. 2001)) and "must set forth specific facts that demonstrate a genuine issue of triable fact" (id.). Ultimately summary judgment is appropriate only if a reasonable jury could not return a verdict for the nonmovant (Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).

  Where parties have cross-moved for summary judgment, the same principles apply (Int'l Bhd. of Elec. Workers, Local 176 v. Balmoral Racing Club, Inc., 293 F.3d 402, 404 (7th Cir. 2002)). That is, summary judgment is proper in favor of either movant if the record, when viewed from the nonmovant's perspective, demonstrates that there is no genuine issue of material fact and that the movant would be entitled to a judgment as a matter of law (id.). Background

  This Court's opinion issued in March of this year ("Opinion," 307 F. Supp.2d 999, 1003-05) sets out the background of the parties' dispute in some detail. There being no need to repeat that discussion in its entirety, the facts having relevance to the current motions are set out below.

  On February 14, 2001 Lexent executed the Agreement with all of the owners of the stock of Annecca, Inc. and its related companies, pursuant to which Lexent was to acquire all of the ownership interests in those entities (again for convenience collectivized as "Annecca") (L. St. ¶ 9; Agreement Art. II). Before entering into the Agreement Lexent had engaged the services of the law firm of Schenck, Price, Smith & King, LLP ("Schenck Price") to assist in satisfying its obligations under the Agreement (L. St. ¶ 21).

  To perform the necessary due diligence review and to audit Annecca's financial statements, books and records, Lexent retained the services of the PricewaterhouseCoopers LLP ("Pricewaterhouse") accounting firm (L. St. ¶ 23). Pricewaterhouse began its in-depth review of Annecca's financial records, and on February 23, 2001 it sent Lexent a memorandum outlining some "preliminary observations" as to its analysis (A. Ex. E). That memorandum set out some perceived flaws in Annecca's records and financial statements, stating in part that "[d]ue to the focus on growth, there has not been a focus on accounting policies, procedures, controls and general organization of financial source documents" (id.), and concluding with a promise to continue the analysis "as more information becomes available."

  While the parties were still in the executory phase of the Agreement, Lexent requested that Annecca's computer server be replaced because of its belief that the existing server was inadequate to perform the operations that Lexent anticipated to be necessary following the acquisition (A. St. ¶ 11). Lexent purchased various pieces of computer equipment, at least some of which were delivered to Annecca (A. St. ¶ 12; L. Ex. D). Annecca hired an outside consultant to install the new equipment (L. St. ¶ 27). After installing the new equipment, which included two new network servers and related hardware and software, the consultant discarded various computer components that had been part of Annecca's old computer server (L. St. ¶ 28; A. St. ¶¶ 14, 15).

  On March 29, 2001 Lexent notified Annecca by letter that it was exercising its Agreement § 9.1(b) termination option, asserting two main reasons for its choice (Opinion at 1004-05):
1. Annecca's net worth was "very substantially and materially less than the $9 million threshold at the end of 2000," as required by the Agreement.
2. Annecca's records and financial statements were so incomplete, and in some instances inaccurate, that they could not provide Lexent with a sufficient understanding of Annecca's current financial condition.
Two weeks later, on April 16, 2001, Lexent demanded that Annecca reimburse it for the cost of the computer equipment Lexent had provided (L. St. ¶ 29). In response Annecca sent Lexent a letter stating that it would not return the new computer equipment, as the equipment was "in operation and critical to [Annecca's] business" (L. Ex. D). It did state however that if Lexent wanted the equipment returned it would have to pay Annecca for the cost of installing the equipment provided by Lexent and for the cost of obtaining replacement equipment (L. St. ¶ 30; L. Ex. D). To date Lexent has not received any payment for the equipment, which is still being used by Annecca (L. St. ¶ 31).

  Annecca commenced this lawsuit in July 2002, asserting that Lexent had wrongfully terminated the Agreement. Lexent in turn asserted various counterclaims and moved for summary judgment as to Annecca's claims. Applying New York law as called for by the Agreement § 11.9 choice of law provision, this Court granted Lexent's motion for summary judgment as to Annecca's claims, finding that Lexent was entitled to terminate the Agreement because Annecca had failed to satisfy certain conditions precedent (Opinion at 1005-09) and because offering Annecca an opportunity to cure those failures would have been futile (Opinion at 1009-12).

  Of particular relevance here, Opinion at 1006-07 held that Annecca had failed to satisfy the conditions precedent (1) that Annecca have a net worth of $9 million as of the closing date (Agreement § 7.11) and (2) that all of Annecca's representations and warranties would have to be true, complete and correct as of the closing date (Agreement § 7.1). Opinion at 1007-08 further held that the failure of the latter condition occurred because Annecca had both (1) failed to produce 2000 Financial Statements (a defined term) that complied with the requirements of Agreement § 4.4(a) (i) and (2) "clearly breached its Agreement § ...


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