Rosen v. Dick
| Decision Date | 10 February 1981 |
| Docket Number | No. 3,D,3 |
| Citation | 639 F.2d 82 |
| Parties | Irving M. ROSEN, Trustee in Reorganization of Bermec Corporation, Plaintiff- Appellee, v. Lynda DICK, Executrix of the Estate of Jack R. Dick, Deceased, Herman L. Meckler, Herbert R. Degnan, John Doe I and John Doe II as Executors or Administrators of the Estate of Bernard Kaye and Audrey Kaye, Deceased, Robert D. Byrnes, Jerome S. Katzin, Hal A. Kroeger, Thibaut deSaint Phalle, Charles H. Harff, Chadbourne, Parke, Whiteside & Wolff, Joseph Bonura, Peat, Marwick, Mitchell & Co., Arthur Andersen & Co. and Empire National Bank, Defendants. ARTHUR ANDERSEN & CO., Defendant and Third-Party Plaintiff-Appellant, v. ARISTOCRAT ANGUS RANCH, Ben R. Houston, and Charles D. Alexander, Third-Party Defendants. ocket 79-7844. |
| Court | U.S. Court of Appeals — Second Circuit |
Richard I. Donner, New York City (Graubard, Moskovitz, McGoldrick, Dannett & Horowitz, New York City, Martin S. Siegel and Kenneth S. Dannett, New York City, of counsel), for plaintiff-appellee.
Peter Fleming Jr., New York City (Curtis, Mallet-Prevost, Colt & Mosle, New York City, John E. Sprizzo and Mark D. Speed, New York City, and Wilson & McIlvaine, Chicago, Ill., Charles W. Boand, Chicago, Ill., of counsel), for defendant and third-party plaintiff-appellant.
Before MOORE, KEARSE, Circuit Judges, and TENNEY, District Judge. *
This interlocutory appeal under 28 U.S.C. § 1292(b) represents one small part of the complex bankruptcy reorganization of Bermec Corporation ("Bermec"). In May 1973, Bermec's Trustee in Reorganization ("Trustee") brought this plenary action centering on Bermec's acquisition of Black Watch Farms ("Black Watch"), a cattle tax shelter. 1 The principal problem raised here,
as the case heads for trial, is the extent to which one defendant, who has not demanded a jury trial, may rely on another's jury demand. We modify the district court's order and remand for trial in accordance with this opinion.
Factual History. In the spring of 1968, Bermec began negotiations to buy Black Watch. Trustee's Second Amended Complaint ("Complaint") P 22, Joint Appendix ("Appendix") at 62; Answer of Defendants Meckler and Degnan to the Complaint ("Meckler's Answer") 2 P 17, Appendix at 168; Answer of Arthur Andersen & Co. to the Complaint ("Andersen's Answer") P 22, Appendix at 112. Pursuant to a letter dated May 27, 1968, Arthur Andersen & Co. ("Andersen"), a public accounting firm, conducted a limited investigation of certain balance sheet accounts of Black Watch as of March 31, 1968. On June 14, Andersen delivered to Bermec a letter and report on its findings. On June 21, Bermec entered into a purchase agreement for a large portion of the ownership interests in Black Watch. On July 11, the agreement was executed by exchanging the farm's assets for a substantial amount of Bermec stock. Complaint PP 22-23, 163, Appendix at 62, 94-95; Meckler's Answer PP 17-18, Appendix at 168; Andersen's Answer PP 22-23, 162-63, Appendix at 112, 119-20.
In the fall of 1968, Andersen examined the consolidated financial statements of Bermec for the twelve-month period ending June 30, 1968. The records examined included the financial statements of the Black Watch partnership before Bermec's purchase. In a certification dated September 11, 1968, Andersen stated:
In our opinion, the financial statements (of Black Watch Farms) present fairly the financial position of (the farms) as of June 30, 1968, and the results of its operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the year ended December 31, 1967.
Complaint PP 178-79, Appendix at 97-98; Andersen's Answer PP 178-79, Appendix at 121.
In December 1968 and January 1969, Bermec acquired the outstanding Black Watch interests which were not covered by the first transaction. In addition, between July 1968 and September 1970, Bermec allegedly extended credit to Black Watch, performed some unspecified services for the farm, and made cash advances. Although the particulars of these transactions are in dispute, both Meckler and Andersen have admitted that Bermec's affairs with Black Watch extended beyond the two purchases. Complaint PP 26-27, Appendix at 63; Meckler's Answer PP 21-22, Appendix at 168-69, Andersen's Answer PP 26-27, Appendix at 112. In September 1970 Black Watch filed a petition under Chapter XI of the Bankruptcy Act and was adjudicated bankrupt on April 30, 1971, as a result of which Bermec suffered substantial injury.
At some point in the history of these business affairs a date which is crucial to the defendants' liabilities, if any the corporate directors, accountants, and commercial lenders of Bermec discovered that Black Watch was not worth what Bermec had paid, that money had been wrongfully withdrawn from the farm through a series of improper transactions (the "defalcations"), and that the owners of Black Watch had misrepresented its financial condition in selling their interests to Bermec (the "misrepresentations"). 3 Complaint PP 31-40 Procedural History. In his original complaint, the Trustee alleged several violations of the federal securities laws and breaches of common law duties owed to the corporation. The named defendants were officers and directors of Bermec, including Herman Meckler, the former chairman and chief executive officer; as well as Empire National Bank; Peat, Marwick, Mitchell & Co., a public accounting firm which acted as Black Watch's independent auditor prior to its acquisition by Bermec; and Jack Dick, described as the "moving force" behind Black Watch at the time of Bermec's purchase. 4 Appellant's Brief at 3; Complaint PP 3-12, Appendix at 3-4. The Trustee's claims against the corporate directors sounded in fraud and failure to exercise proper care in purchasing Black Watch. He alleged that prior to Bermec's second purchase from Black Watch, the corporate directors learned of Dick's defalcations, but they failed to investigate them properly or to reveal them to the corporation, as a result of which Bermec continued to sink more and more money into a losing venture. Original Complaint PP 48-58, Appendix at 12-14.
Appendix at 63-67. The defendants have denied knowledge or information sufficient to judge the truth of the Trustee's allegations about Black Watch's financial background, but they admit on information and belief that the defalcations and misrepresentations did occur. Meckler's Answer PP 26-35, Appendix at 169-72; Andersen's Answer PP 31-40, Appendix at 113-15.
In September 1973, Meckler answered the complaint, asserted several cross-claims, and made a general jury demand. In November of that year, the Trustee served an amended complaint which particularized his allegations, but which is otherwise immaterial to this appeal. Then in March 1974, plaintiff Trustee was granted leave to file his second amended complaint, adding several defendants, including appellant Andersen, another public accounting firm. Andersen was charged with breaching its professional duties in connection with its investigation and financial reports on Black Watch, Complaint PP 160-70, Appendix at 94-96, and plaintiff further alleged that Andersen aided and abetted the corporate defendants' wrongdoing, Complaint PP 193-99, Appendix at 101-02. Andersen denied any grounds for liability; asserted various cross-claims, including claims against Meckler and the other corporate defendants; and filed a third-party complaint against several other persons and entities involved in the Black Watch transactions. Appendix at 110-54. After Andersen filed its answer and cross-claims, Meckler responded to the Complaint, answered Andersen's cross-claims, and asserted its own cross-claims against Andersen. Appendix at 164-84. The cross-claims between Andersen and Meckler seek contribution and indemnification for any liability suffered under the federal securities law or under the common law. Andersen's Answer PP 287-88, Appendix at 141; Meckler's Answer PP 89-91, Appendix at 180-81.
(1) Is defendant Arthur Andersen & Co. entitled to a trial by jury of the issues between plaintiff and itself based on the jury demand filed by defendant Meckler?
(2) If it is so entitled, is the opinion of this court correct that nevertheless a jury trial in this case is...
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