Vertical Computer Systems, Inc. v. Ross Systems, Inc.

11 A.D.3d 375, 784 N.Y.S.2d 499, 2004 N.Y. App. Div. LEXIS 12460
CourtAppellate Division of the Supreme Court of the State of New York
DecidedOctober 26, 2004
StatusPublished
Cited by3 cases

This text of 11 A.D.3d 375 (Vertical Computer Systems, Inc. v. Ross Systems, Inc.) is published on Counsel Stack Legal Research, covering Appellate Division of the Supreme Court of the State of New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Vertical Computer Systems, Inc. v. Ross Systems, Inc., 11 A.D.3d 375, 784 N.Y.S.2d 499, 2004 N.Y. App. Div. LEXIS 12460 (N.Y. Ct. App. 2004).

Opinion

Order, Supreme Court, New York County (Richard B. Lowe, III, J.), entered November 24, 2003, which, to the extent appealed from as limited by the brief, granted defendant Ross Systems, Inc.’s motion to dismiss the second, fifth, sixth and [376]*376seventh causes of action of the amended complaint, unanimously-reversed, on the law, with costs and disbursements, the motion denied and the said causes of action reinstated.

In the amended complaint at issue, plaintiff Vertical Computer Systems, Inc. asserts direct claims on its own behalf and derivative claims on behalf of NOW Solutions, LLC against, among others, Ross Systems, Inc. arising out of the 2001 sale by Ross of its Human Resource-Payroll Unit Division (HR-Payroll Unit) to NOW. At all times relevant, HR-Payroll Unit’s business was assembling software components into custom designed packages and providing the continuing maintenance that these packages required. There are three nonappealing defendants, Arglen Acquisitions, LLC, a member of NOW, Gary Gyselen, a principal of Arglen and NOW’s chairman, and J. Patrick Tinley, president and CEO of Ross.

In 2000, Ross entered into negotiations to sell its HR-Payroll Unit to Arglen, pursuant to which Ross and Arglen entered into a letter agreement dated November 1, 2000 whereby Arglen would act as a “nonexclusive financial advisor” to Ross in connection with the sale of the HR-Payroll Unit to an investment group formed by Arglen for which, as compensation, Arglen would receive the amount by which the purchase price exceeded $5.5 million, but not more than $600,000. The payment of such compensation was contingent upon the closing of the sale by March 1, 2001. Ross also promised Arglen options in Ross common stock to be earned at the closing of the sale. Gyselen thereafter arranged for financing for the proposed transaction from Coast Business Credit, a then-current lender to Ross. The loan proposed, however, required Gyselen to find another participant to provide additional working capital and security for the Coast loan. This led Arglen and Gyselen to form NOW with, initially, one member, Arglen, through which the HR-Payroll Unit would be acquired. By the time of the February 28, 2001 closing, Vertical and Arglen had agreed that Vertical would contribute $1 million in cash as working capital, guarantee the Coast Business Credit loan and pledge an additional $1.5 million as cash collateral for that loan for which Vertical was to receive 60% of the membership interest in NOW. Arglen and NOW management would split the balance, 35% to Arglen and 5% to management. Meanwhile, in early February 2001, NOW and Arglen, its only member, entered into an agreement requiring NOW to pay all of Arglen’s expenses in the HR-Payroll transaction and a finder’s fee of $150,000 or 3.5% of the total transactional financing provided to NOW Arglen failed to disclose either the February 2001 or the November 2000 letter agreement to NOW’s postclosing management.

[377]*377At the February 28, 2001 closing, Gyselen as chairman of NOW and defendant Tinley as chief executive officer of Ross signed the asset purchase agreement (APA) for a purchase price of $6.1 million, subject to a number of adjustments. $5.1 million was paid in cash from the Coast Business Credit loan and a $1 million purchase-money note, payable $250,000 on February 28, 2002 and the balance one year later, on February 28, 2003, given for the remainder. The most significant adjustment, contained in section 2.4 (iii) of the APA, involved fees for maintenance contract renewals continuing in effect after the closing. Ultimately, the balance due for this adjustment was determined to be in excess of $3.5 million, none of which was credited to NOW. The February 28, 2002 note payment was set off against certain adjustments due NOW under the APA. By February 28, 2003, when the final payment under the note was due, the balance of the purchase price adjustments for prepaid maintenance fees remained outstanding and NOW’s management and Vertical had discovered the hidden fee arrangements benefiting Arglen and Gyselen. As a result, no payment was made.

In early 2003, as a result of Ross’s failure to implement the adjustments due under the APA, a majority of NOW’s executive committee favored the commencement of an action against Ross to collect these amounts. Since the NOW operating agreement required a supermajority of 75% of the members to consent to litigation, the issue was presented to a special meeting of members on February 27, 2003. Gyselen, acting for Arglen, which controlled over 30% of the membership interest, demanding veto power over the choice of counsel and a detailed preparation of claims, refused to authorize the litigation. Consequently, Vertical commenced this action, asserting seven causes of action against Ross, and additional causes of action against Tinley, Arglen and Gyselen. Only the first seven causes of action are the subject of this appeal.

The first, third and fourth causes of action seek damages for Ross’s failure to disclose two side agreements between Arglen and Ross on theories of breach of a covenant to disclose, breach of warranty that all material facts had been disclosed and fraud. The second cause of action was based on Ross’s alleged failure to credit NOW with closing adjustments equal to at least $3.5 million for maintenance contract fees received preclosing relating to contracts extending beyond the closing date. The fifth, sixth and seventh alleged that, based on the alleged breaches and fraud, NOW was entitled to a right of setoff against the promissory note in the amount of $750,000, indemnification and attorneys’ fees.

[378]*378Defendants moved to dismiss the complaint pursuant to CPLR 3211.

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Cite This Page — Counsel Stack

Bluebook (online)
11 A.D.3d 375, 784 N.Y.S.2d 499, 2004 N.Y. App. Div. LEXIS 12460, Counsel Stack Legal Research, https://law.counselstack.com/opinion/vertical-computer-systems-inc-v-ross-systems-inc-nyappdiv-2004.