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Sound of Music, Ltd. v. Muzak Holdings

February 28, 2006


The opinion of the court was delivered by: David H. Coar United States District Judge



This case arises from an asset purchase agreement apparently gone awry. Both firms were involved in the commercial music transmission business. Plaintiff Sound of Music, Ltd. ("SOM") was an Illinois corporation doing business in Illinois and Wisconsin. Defendant Muzak, LLC ("Muzak") was a Delaware limited liability company operating in Illinois. At all relevant times to this litigation, Muzak was a wholly owned subsidiary of Defendant Muzak Holdings, LLC ("Holdings"), also a Delaware limited liability company doing business in Illinois. The majority of the stock of Holdings was beneficially owned by ABRY Broadcast Partners II and ABRY Broadcast Partners III (collectively, "ABRY"). Defendant Rob MacInnis was an officer of ABRY with access to undisclosed information about the company's financial position. Because Plaintiff attached a number of exhibits to its amended complaint, this Court will provide a more detailed background than is customary on a motion to dismiss. These facts are taken from the record and accepted as true for the purposes of this motion only.

On or about February 15, 2001, Muzak offered to purchase the business assets of SOM for approximately $2 million in cash and stock. Muzak mailed a Letter of Intent ("LOI") dated February 15, 2001, to SOM, in which it stated that Muzak would pay "total cash consideration of 45 times the monthly recurring billings" under the accounts transferred at closing. "This purchase price would represent cash of $1,025,000 (assuming monthly recurring billings of $45,000) and Muzak LLC Stock of $1,000,000 (143 Units)." (Am. Compl., Ex. 1, at 2). Muzak's vice president and general counsel, Michael Zendan, then sent a letter to SOM on May 17, 2001, "to provide [SOM] with information regarding the Class A Units, Muzak and Holdings that is relevant to an investment in the Class A Holdings." (Am. Compl., Ex. 4, at 1) (hereafter "Warning Letter"). In this letter, which Defendants characterize as a "warning letter," Muzak advised SOM that Holdings had authorized two series of equity units, common and preferred, and two classes of common units, Class A and Class B. Class A Units carried voting and distribution rights. Receiving Class A Units as consideration for the asset purchase carried risks. Holdings had no operations or assets other than Muzak, but rather relied on dividends from its subsidiaries to meet its obligations and make any distributions. Id. at 4. Muzak's ability to make distributions to Holdings was limited by its agreements and by state law. Id. In addition, as of March 31, 2001, Holdings had "approximately $385.0 million of debt outstanding," approximately $83.9 million of which carried variable interest rates, and might have to incur more debt in order to meet its obligations. Id. at 5-6. As a result, "the terms of [Holdings'] debt impose operational and financial restrictions on our company." Id. at 6. Holdings had net losses in both the previous quarter and previous year, and expected to continue to incur net losses because of acquisitions and debt payments. Thus, Muzak might not attain profitability. Additionally, Muzak was dependent on third-party-owned satellites for the majority of its broadcast transmissions. Potential mergers between Muzak's primary industry competitors also might harm Muzak's performance. Rapid technological change in production and music delivery might render Muzak's technology obsolete. Muzak could lose its license to music rights, might lose key personnel, or face detrimental regulatory changes. Id. at 7-11. Further, the Class A Units were not registered under the Securities Act of 1933 or any state securities laws; therefore, they could not be readily offered or sold. There was no secondary trading market for the Class A Units and "none [was] expected to develop." Id. at 12. Finally, Holdings did not anticipate making distributions on the Class A Units.

The parties entered an Asset Purchase Agreement ("APA") on May 31, 2001, whereby Plaintiff was to receive $938,696.20 in cash, adjusted as set forth on an attached schedule ("Schedule 2.1"), and 143 Class A Units of Holdings. The APA also included clauses in which Plaintiff's owners represented that they were "sophisticated in financial matters and able to evaluate the risks and benefits of the investment in the Units," (Am. Compl., Ex. 2, ¶ 4.A.2), and that they were "able to bear the economic risk of ... investment in the Units for an indefinite period of time because the Units have not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered ... or [unless] an exemption ... is available." (Id. at ¶ 4.A.3). Finally, Plaintiff warranted that it had "had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of Units and has had full access to such other information concerning Buyer and Holding as it or he has requested." (Id. at ¶ 4.A.4).

The APA included a clause which stated "[t]his Agreement constitutes and contains the entire agreement of the parties and supersedes any and all prior negotiations, correspondence, understandings and agreements between the parties respecting the subject matter hereof. This Agreement may only be amended by written instrument signed by the parties." (Id. at ¶ 13.9). Schedule 2.1, which was a "Preliminary Cash Analysis Sheet" dated May 31, 2001,*fn1 provided a calculation of the net cash portion of the purchase price. The total consideration was given as 45 times recurring billings, or $2,038,696.20. From this total, the value of "Units MLLC," listed as $1,000,000.00 was subtracted, along with $100,000 in pre-settlement escrow payment.

Plaintiff was represented by counsel during the sale of its assets to the defendants. SOM contends that at all relevant times, Defendants represented that the 143 Units of Class A Stock had a present value of $1 million, or approximately $6,900 per unit. In October 2002, after learning that Defendants had issued Class A units to other buyers at values less than $6,900 per unit, Plaintiff asked Muzak how the $1 million aggregate value was calculated and requested confirmation that the value was true as of the dates of the LOI and that APA. SOM also put the same questions to MacInnis, who responded, in January 2003, that he had used a standard model to compute the valuation of the 143 Units but no longer had physical or electronic copies of the model nor was he able (or willing) to reconstruct the model. In a letter dated March 21, 2003, MacInnis described the "'$1 million' in our deal [as] the value that we expected the Units would ultimately deliver to Sound of Music." (Am. Compl., Ex. 6, at 2). The financial model MacInnis used to project the value of the units included assumptions about "Muzak's anticipated cash flows and organic and acquisition-driven growth, and our 'best-guess' as to the timing of a liquidity event and the valuation multiple that would apply in that liquidity event." Id. at 1.

Plaintiff brought suit in this Court, alleging violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (2000), breach of contract, and fraudulent misrepresentation. Plaintiffs allege that Defendants have engaged in similar misrepresentations about the true value of the purchase price paid in other acquisitions in the industry by conveying securities "which were not worth the promised value." This constitutes the "dissemination of materially false and misleading information and failure to disclose material facts" under § 10(b).

This Court has subject matter jurisdiction over SOM's § 10(b) claim because it arises under federal law, 28 U.S.C. § 1331. Supplemental jurisdiction exists over plaintiff's state law claims in Counts II and III pursuant to 28 U.S.C. § 1367(a). Defendants have brought a motion to dismiss pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 et seq. (2004) ("PSLRA"). That motion is fully briefed and now before this Court.*fn2


Before turning to the motion to dismiss, this Court addresses Defendants' motion to strike paragraphs 20 and 28 and exhibit 7 from Plaintiff's amended complaint. Paragraph 20 and 28 of the amended complaint include allegations about business transactions between Defendant Muzak and other entities which are not parties to this litigation. Exhibit 7 is a portion of an affidavit by Holdings' CEO, William Boyd, in other, unspecified litigation involving defendants.

This Court will strike paragraphs 20 and 28 and Exhibit 7 as impertinent and unduly prejudicial. This is an individual securities fraud lawsuit; there are no allegations about a class action. The allegations in paragraphs 20 and 28 and Exhibit 7 relate to dealings between Muzak and third parties. Plaintiff has failed to allege facts that connect the statements in these paragraphs to the instant litigation. As such, they are impertinent and serve to confuse the issues. See, e.g., Cumis Ins. Soc., Inc. v. Peters, 983 F. Supp. 787, 798 (N.D. Ill. 1997). Defendants' motion to strike is GRANTED.


A. Standard of ...

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