First Fed. Sav. & Loan v. Oppenheim, Appel, Dixon & Co.

• Citation: 629 F. Supp. 427
• Decision Date: 24 February 1986
• Docket Number: No. 85 Civ. 4163 (MEL).,85 Civ. 4163 (MEL).
• Parties: FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF PITTSBURGH; Wichita Federal Savings and Loan Association: City of Farmington, New Mexico; and Federal Savings and Loan Insurance Corporation, Plaintiffs, v. OPPENHEIM, APPEL, DIXON & CO., a partnership, Defendant.
• Court: U.S. District Court — Southern District of New York

629 F. Supp. 427

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF PITTSBURGH; Wichita Federal Savings and Loan Association: City of Farmington, New Mexico; and Federal Savings and Loan Insurance Corporation, Plaintiffs, v. OPPENHEIM, APPEL, DIXON & CO., a partnership, Defendant.

No. 85 Civ. 4163 (MEL).

United States District Court, S.D. New York.

February 24, 1986.

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Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for plaintiffs; of counsel: Harvey Kurzweil, David B. Howorth, Jonathan W. Miller, Neil Tublin.

Solinger Grosz & Goldwasser, P.C., New York City; of counsel: Dan L. Goldwasser, Lee S. Wasserman, Linda J. Pittleman, Vici L. Safran, Rosenfeld Parnell & Shames, Inc., Los Angeles, Cal.; of counsel: Edward M. Rosenfeld, Franklin R. Wurtzel, Roberta M. Klein, for defendant.

LASKER, District Judge.

Defendant Oppenheim, Appel, Dixon & Co. moves pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) to dismiss the complaint in this action for failure to state a claim upon which relief can be granted and for failure to plead the fraud claims with sufficient particularity. For the reasons explained below, the motion is granted in part and denied in part.

I.

The present action arises out of the complex of facts which formed the basis of a previous litigation before this court, Wichita Federal Savings and Loan Association v. Comark, 586 F.Supp. 940 (S.D.N. Y.). In that action five savings and loan associations and a municipality sued Comark, a dealer in government securities, and Marine Midland Bank, N.A. ("Marine"), Comark's clearing agent, for losses of $17 million in government securities sustained in June 1982.

The plaintiffs in the Wichita action were former customers of Comark who alleged

that Comark represented to the plaintiffs that securities which they had purchased from Comark would be segregated in safekeeping accounts; that the securities were instead deposited and integrated in a Marine account with other securities owned either by Comark or by other customers; that Comark used the plaintiffs' securities as collateral for a loan from Marine; and that Marine sold the plaintiffs' securities to satisfy debts owed by Comark.

Wichita Federal Savings and Loan Association v. Comark, 586 F.Supp. 940, 942 (S.D.N.Y.1984). The Wichita action was tried to a jury in the spring of 1985, with the jury returning a verdict for fraud and the court directing a verdict for conversion against Comark. Plaintiffs settled their claims against Marine during the trial.

The plaintiffs in the present action are four of the five savings and loan associations or their successors in interest who were plaintiffs in the Wichita action and the City of Farmington, New Mexico.¹ In this action the plaintiffs seek to hold Comark's accountants, Oppenheim, Appel, Dixon & Co. ("OAD"), liable on a variety of legal theories for the losses they incurred.²

The amended complaint, the factual averments of which must be accepted as true on this motion to dismiss, alleges that between July 1981 and May 1982 the plaintiffs purchased³ securities through Comark which were left on deposit for safekeeping and deposited other securities for safekeeping with Comark. As part of its role as Comark's clearing agent during this period, Marine regularly made overnight loans to Comark to finance Comark's inventory positions in government securities. These overnight loans were covered by a security agreement under which Comark granted Marine a floating security interest in all securities in Comark's account at Marine that Comark owned or in which it had an interest. Although Comark had represented to plaintiff customers that their securities would be held in safekeeping, Comark deposited the plaintiffs' securities in an account at Marine with securities that Comark owned, thereby pledging or hypothecating plaintiffs' securities as collateral for the overnight clearance loans. From June 1981 forward Comark's overnight loans almost always exceeded the value of the securities held by Marine that were owned by Comark itself. From August 1981 forward Comark continued its operations insolvent, with its liabilities exceeding its assets. On June 3, 1982 Comark informed Marine of its financial problems and its pledging of customer-owned securities. Marine responded by foreclosing on its loans to Comark and on June 4, 1982 liquidated plaintiffs' securities, among others, in order to satisfy Comark's then outstanding overnight loan. Those securities had a value at the time of liquidation of over $16 million.

The amended complaint also alleges that as early as the summer of 1981 Comark informed OAD and Stephen Rubenstein, the OAD partner in charge of the Comark account, about its financial problems and its pledging of customer-owned securities. Subsequently, Rubenstein together with employees of OAD and Comark engaged in an attempt (known as the Board Room Project) to reconcile Comark's records. The Board Room Project also specifically reviewed the accounts of Richard Tisdale, a Comark salesman whose customers included all but one of the plaintiffs. In late October 1981 Rubenstein prepared a memorandum (the "Illegal Acts Memo") (attached to Amended Complaint as Exhibits A & B) for OAD's national management committee in which he detailed Comark's difficulties and discussed OAD's disclosure obligations.

The amended complaint alleges three distinct instances of OAD's involvement in Comark's fraud and conversion:

Throughout September and October, 1981 and ... continuously thereafter, Rubenstein and OAD advised Comark that Comark did not need to disclose to anyone that customer-owned securities were commingled or hypothecated with Comark's securities in one account at Marine.

In December, 1981, Rubenstein met with Tisdale at Comark's offices in California and informed Tisdale that there would be no material problems with Comark's financial statement for the year ending December 31, 1981.

During the course of its audit of Comark in January and February, 1982, OAD drafted, issued and mailed to plaintiffs, or caused to be drafted, issued and mailed to plaintiffs, letters on Comark stationery ... representing that Comark was holding their securities in safekeeping, and requesting that plaintiffs confirm directly to OAD their understanding that such securities were being held in safekeeping.

Amended Complaint at ¶¶ 58, 61, 66.

The plaintiffs claim that as a result of this course of conduct OAD is liable for negligent misrepresentation (count II); fraudulent misrepresentation (count I); violation of the federal and New Mexico securities fraud statutes (counts III & IX); aiding and abetting and conspiracy to commit Comark's fraudulent misrepresentation, conversion and violation of the federal and New Mexico securities fraud statutes (counts VI, VII, IV, & X); and violation of the federal and New Mexico racketeering statutes (counts VIII & XI).⁴ The plaintiffs seek in the aggregate compensatory damages of over $16 million (or treble damages on the racketeering causes of action) as well as punitive damages of $20 million. OAD moves to dismiss the entire complaint for failure to state any claim upon which relief can be granted.

II.

A. Negligent Misrepresentation

OAD argues that the complaint fails to state a claim for negligent misrepresentation by OAD because OAD owed plaintiffs no duty of care under the law of either New York or California. OAD adds that even if plaintiffs were owed a duty of care by OAD, OAD owed Comark a higher legal duty not to disclose without Comark's consent any information learned by OAD in the course of the accountant/client relationship.

The leading case in New York on the subject of accountants' liability for negligence to third parties absent privity of contract is Credit Alliance Corporation v. Arthur Andersen & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 483 N.E.2d 110 (1985). In Credit Alliance the Court of Appeals refined the privity rule of Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931) (Cardozo, C.J.), stating:

Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties' reliance.

Credit Alliance, 65 N.Y.2d at 551, 493 N.Y.S.2d at 443, 483 N.E.2d at 118. The Credit Alliance opinion decided two cases. In the first, the court found that even though the accountants knew or should have known that their client was showing their financial reports to plaintiffs, creditors of the client, in order to induce their reliance on them, the complaint did not allege either a particular purpose for the reports' preparation or any word or action on the part of the accountants directed at the plaintiffs. Id. at 553-54, 493 N.Y.S.2d at 444, 483 N.E.2d at 119. In the second case, in contrast, the court found that the accountants were aware that the primary, if not exclusive, purpose of their audit of the client was to provide the plaintiff bank with the financial information it required, and that the accountants communicated with the bank orally and in writing and in person on numerous occasions. Id. at 554, 493 N.Y.S.2d at 445, 483 N.E.2d at 120. The court dismissed the negligence cause of action in the first case and found the complaint sufficient in the second.

Applying the Credit Alliance criteria to the facts in the case at hand, the motion to dismiss is denied. The financial reports in this case were the oral representations made by Rubenstein to...