Koppel v. 4987 Corp.

• Decision Date: 05 February 1999
• Docket Number: Docket Nos. 98-7026,98-7048
• Citation: 167 F.3d 125
• Parties: Fed. Sec. L. Rep. P 90,418 Jay H. KOPPEL and Arnold E. Greenberg, Plaintiffs-Appellants, v. 4987 CORPORATION; 498 Seventh Avenue Associates; Peter L. Malkin; Stanley Katzman; John L. Loehr; Martin D. Newman; Wien, Malkin & Bettex and Donald A. Bettex, Defendants-Appellees, Garment Capitol Associates, Nominal-Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

Page 125

167 F.3d 125

Fed. Sec. L. Rep. P 90,418

Jay H. KOPPEL and Arnold E. Greenberg, Plaintiffs-Appellants, v. 4987 CORPORATION; 498 Seventh Avenue Associates; Peter L Malkin; Stanley Katzman; John L. Loehr; Martin D. Newman; Wien, Malkin & Bettex and Donald A. Bettex, Defendants-Appellees Garment Capitol Associates, Nominal-Defendant-Appellee.

Docket Nos. 98-7026, 98-7048.

United States Court of Appeals Second Circuit.

Argued Nov. 12, 1998.

Decided Feb. 5, 1999.

Edward Labaton, Goodkind Labaton Rudoff & Sucharow LLP, New York, N.Y. (Joseph Sternberg, Goodkind Labaton Rudoff & Sucharow LLP, New York; Alan E. Bandler, New York, NY; Gregory K. Arenson, Kaplan, Kilsheimer & Fox LLP, New York, NY; Mark W. Gaffney, Oyster Bay, NY; Philip Gordon, Gordon Law Offices Chartered, Boise, ID, of counsel), for Plaintiffs-Appellants.

Richard P. Swanson, Thelen Reid & Priest LLP, New York, N.Y. (Eli R. Mattioli and Susan L. Bedford, Thelen Reid & Priest LLP, New York, NY; William J. Schwartz and Stephen A. Wieder, Kronish, Lieb, Weiner & Hellman LLP, New York, NY, of counsel), for Defendants-Appellees and Nominal-Defendant-Appellee.

(Harvey J. Goldschmid, David M. Becker, Jacob H. Stillman, Katharine Burdell Gresham, Nathan A. Forrester, and Paul Gonson, Washington, DC, submitted a brief for amicus curiae Securities and Exchange Commission).

Before: CALABRESI and STRAUB, Circuit Judges, and TSOUCALAS, Judge. ^*

STRAUB, Circuit Judge:

The Plaintiffs-Appellants, Jay H. Koppel and Arnold E. Greenberg, appeal from a judgment of the United States District Court for the Southern District of New York (Robert L. Carter, Judge ) dismissing their complaints for failure to state a claim upon which relief may be granted. Both complaints allege violations of § 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78n(a), and several of the rules promulgated thereunder by the Securities and Exchange Commission (the "SEC"). Specifically, Koppel and Greenberg allege that the Defendants-Appellees--a partnership in which the two owned shares, the partnership's agents, and entities related to the partnership--unlawfully solicited shareholder votes in violation of SEC Rules 14a-9, 14a-4(a)(3), and 14a-4(b)(1). We conclude that although the District Court was correct to dismiss some of Koppel and Greenberg's claims under Rule 14a-9, it erred in dismissing both complaints in their entirety. First, we hold that both complaints sufficiently allege a material misrepresentation in a proxy statement in violation of Rule 14a-9 and therefore survive a motion to dismiss. Second, we hold that there is an implied right of action for shareholders under Rules 14a-4(a)(3) and 14a-4(b)(1) and that Greenberg has stated a valid claim for such an action in his complaint.

Accordingly, although we affirm the District Court's dismissal of certain of the Rule 14a-9 claims, we reverse the District Court's

dismissal of the complaints in their entirety and remand for further proceedings.

BACKGROUND

At the outset, we note that in reviewing a District Court's dismissal under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim, we take as true all well-pled facts alleged in the complaints. See, e.g., King v. Town of Hempstead, 161 F.3d 112, 114 (2d Cir.1998) (per curiam); Leeds v. Meltz, 85 F.3d 51, 53 (2d Cir.1996). Accordingly, this opinion's recitation of the facts derives from the most recent complaints and documents referenced therein. See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 46-48 (2d Cir.1991) (permitting consideration of certain documents referred to in the complaint on a motion to dismiss under Rule 12(b)(6)), cert. denied, 503 U.S. 960, 112 S.Ct. 1561, 118 L.Ed.2d 208 (1992).

In 1957, three individuals formed a general partnership, Garment Capitol Associates ("Associates"), to raise money to acquire the land and the commercial building located at 498 Seventh Avenue in Manhattan. The three original general partners financed their participation in Associates by selling portions of their respective partnership interests for $10,000 per share to public participants ("Participants") who, by 1995, numbered approximately 908. ¹ Under the Participation Agreements, the general partners agreed to serve as agents and trustees for their respective Participants.

By 1978, both Greenberg and Koppel had become Participants. In the years since 1957, the identity of the general partners of Associates has changed, and at various times relevant to the instant litigation, each of the individual Defendants-Appellees was a general partner. The three original partners of Associates as well as the individual Defendants-Appellees have all been partners of the law firm of Wien Malkin & Bettex ("WMB"), also a Defendant-Appellee in the instant case.

The Participation Agreements dictate that the Participants share in the profits and losses of Associates in proportion to their respective interests. The agreements further provide that consent of all Participants is required to sell, mortgage, or transfer either a general partner's partnership interest or any partnership asset. If Participants owning ninety percent or more of a general partner's shares consent to such an action, however, the Participation Agreement permits the general partner to buy out the remaining Participants at a price determined by the balance of their capital contribution.

Also in 1957, Associates had executed a long-term net lease of the entire property to Defendant-Appellee 498 Seventh Avenue Associates (the "Original Lessee"), a partnership formed to manage the operations of the property. Under the lease, the Original Lessee paid Associates a fixed monthly rent as well as a commission on the Original Lessee's net income from the property above a certain level. In addition, the lease obligated the Original Lessee to pay all operating expenses of the property, including real estate taxes. At times relevant to this litigation, Defendant-Appellee Peter L. Malkin, one of the general partners of Associates, held a majority interest in the Original Lessee and its successor.

Between 1994 and 1996, the Original Lessee's financial situation deteriorated. Vacancies and low rent rolls resulted in the generation of less income from the property, thereby jeopardizing the Original Lessee's ability to maintain the building and to pay property taxes. Associates concluded that the only viable course of action was to sell the building, and in 1995, it began planning for the sale. As part of the preparations, Associates hired consultants to determine how much of the sale price should be allocated to the Original Lessee to account for its giving up the right to operate the building. The consultants concluded in a report (the "Consensus Report") that a sizable percentage should be transferred to the Original On December 29, 1995, to insulate its partners from liability, the Original Lessee assigned the net lease to a new corporate entity, 4987 Corporation (the "New Lessee"). The New Lessee's shareholders and their interests corresponded identically with the Original Lessee's partners and therefore included Malkin--also a general partner of Associates--as a majority shareholder. The next business day, January 2, 1996, the New Lessee defaulted on the payment of nearly $1 million in real estate taxes. In July, the New Lessee defaulted again, bringing the total amount of missed tax payments to $2 million.

Lessee in compensation for its leasehold interest.

In response to the defaults, Associates did not cancel the lease, though the defaults constituted clear grounds for doing so. Instead, in order to avoid foreclosure on the property, ² Malkin and the principals of the New Lessee approached the mortgagee and convinced it to provide a loan to cure the tax default and not to foreclose on the property. In exchange, the mortgagee received first priority on any proceeds from the sale of the building.

On July 26, 1996, Associates distributed to the Participants a letter and a Statement Issued by the Agents in Connection with the Solicitation of Consents of the Participants (the "Solicitation"), both prepared by WMB. The Solicitation sought consent for: (1) continued forbearance from terminating the lease with the New Lessee, (2) sale of the building, (3) distribution of millions of dollars in proceeds from the sale to the New Lessee, and (4) liquidation of Associates after the distribution of the remaining proceeds. Although the Solicitation sought permission in a separate question for the liquidation of Associates, the first three proposals were treated as a single question: whether the Participants approved of the "Sale Program." In support of its allocation of proceeds from the sale of the building, the Solicitation relied on the Consensus Report. While the Participants could access the Consensus Report at the offices of WMB, Associates did not attach a copy to the Solicitation. Eventually over ninety percent of the Participants approved the sale, permitting the general partners to buy out any dissenting Participants and to go forward with the liquidation and the Sale Program.

In October of 1996, Koppel filed his complaint in the Southern District of New York, alleging violations of § 14(a) of the Exchange Act and rules promulgated thereunder as well as state law claims based on fraud and fiduciary breach theories. In March of 1997, Greenberg filed in the same court a similar complaint, which he amended three months later, alleging essentially the same causes of action as Koppel.

In their complaints, Koppel and Greenberg first allege that the Solicitation was misleading in several ways in violation of § 14(a) and Rule 14a-9, 17 C.F.R. § 240.14a-9, promulgated thereunder. Most importantly, they contend that the Solicitation cited to and relied on the Consensus Report misleadingly by using it as support for Associates' proposal to distribute sale proceeds...