Metromedia Co. v. Fugazy

• Decision Date: 05 December 1990
• Docket Number: 89 Civ. 1185 (RLC).,No. 87 Civ. 2597 (RLC),87 Civ. 2597 (RLC)
• Citation: 753 F. Supp. 93
• Parties: METROMEDIA COMPANY, Plaintiff, v. William D. FUGAZY, Travelco, Inc., Fugazy International Corporation, and Roy D. Fugazy, Defendants and Third-Party Plaintiffs, v. John W. KLUGE, Third-Party Defendant. METROMEDIA COMPANY, Plaintiff, v. William D. FUGAZY, Sr., and Roy D. Fugazy, Defendants.
• Court: U.S. District Court — Southern District of New York

753 F. Supp. 93

METROMEDIA COMPANY, Plaintiff, v. William D. FUGAZY, Travelco, Inc., Fugazy International Corporation, and Roy D. Fugazy, Defendants and Third-Party Plaintiffs, v. John W. KLUGE, Third-Party Defendant.

METROMEDIA COMPANY, Plaintiff, v. William D. FUGAZY, Sr., and Roy D. Fugazy, Defendants.

Nos. 87 Civ. 2597 (RLC), 89 Civ. 1185 (RLC).

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

December 5, 1990.

Shea & Gould (Martin I. Shelton, Mary Gail Gearns, of counsel), Hutton Ingram Yuzek Gainen Carroll & Bertolotti (Daniel L. Carroll, David G. Ebert, Scott A. Silverstein, of counsel), New York City, for plaintiff and third-party defendant.

Anderson Kill Olick & Oshinsky, P.C. (Anthony Princi, Steven Cooper, Jordan W. Siev, Robert H. Pees, of counsel), New York City, for defendants and third-party plaintiffs.

OPINION

ROBERT L. CARTER, District Judge.

I.

The facts of this case up to December 22, 1988, are set out in the court's earlier opinion, Metromedia Co. v. Fugazy, No. 87 Civ. 2597 (RLC) (S.D.N.Y. Dec. 22, 1988) (1988 WL 140773, 1988 U.S.Dist.LEXIS 14645) (Carter, J.). However, in light of subsequent developments, and for the convenience of the reader, they are repeated here.

On March 21, 1985, plaintiff Metromedia Company ("Metromedia") entered a stock purchase agreement with defendants William D. Fugazy, Travelco, Inc. ("Travelco"), and Fugazy International Corporation ("International"), whereby Metromedia acquired 800 newly issued shares of common stock in Fugazy Express, Inc. ("Express"), representing an 80% interest in Express.¹ In July, 1986, Express filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. §§ 1101 et seq., and in March, 1987, it converted its Chapter 11 reorganization proceeding to a liquidation under Chapter 7 of the Bankruptcy Code. Id. §§ 701 et seq.

Alleging that the defendants wrongfully misrepresented and/or failed to state material facts regarding the financial condition of Express, Metromedia filed the two actions consolidated here. Metromedia claimed damages for violations of § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2); § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j; Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5; and the Racketeer Influenced and Corrupt Organizations statute ("RICO"), 18 U.S.C. § 1962(b)-(d), as well as for common-law fraud, negligent misrepresentation, and breach of warranty. The predicate offenses alleged in support of the RICO claim were bankruptcy fraud under 18 U.S.C. § 152, mail fraud under 18 U.S.C. § 1341, wire fraud under 18 U.S.C. § 1343, and securities fraud under § 10(b), Rule 10b-5, and § 12(2).

Defendants asserted various defenses, and William Fugazy alleged a counterclaim for breach of an employment agreement between himself and Express on the theory that Express was an alter ego of Metromedia.² Defendants also impleaded third-party defendant John W. Kluge, claiming that he had signed a "hold harmless" agreement promising to indemnify defendants, and that he was a controlling person of Express liable under § 15 of the Securities Act and § 20 of the Securities Exchange Act. 15 U.S.C. §§ 70o, 78t.

The case came on for jury trial beginning on May 16, 1990. The court granted a directed verdict for Metromedia against William Fugazy, Travelco and International on the claim of breach of warranty, Tr. 2089, 2091, dismissed William Fugazy's counterclaim, Tr. 2087, and dismissed the defendants' controlling-person claim against Kluge. Tr. 2090. The other claims were submitted to the jury.

With respect to the predicate offense of bankruptcy fraud under the RICO claim, the bankruptcy court for this district had ruled on May 15, 1990, that William Fugazy and Roy Fugazy had engaged in acts constituting that offense. In re Fugazy Express, Inc. (Shimer v. Fugazy), 114 B.R. 865 (Bankr.S.D.N.Y.1990).³ This court ruled that the bankruptcy court's findings collaterally estopped William and Roy Fugazy from denying the bankruptcy fraud, Tr. 2091, and instructed the jury to find that the defendants had committed bankruptcy fraud.

On June 6, 1990, by special verdict, the jury found William Fugazy liable under § 12(2) and RICO. As for the requisite predicate acts for the RICO claim, the jury found that William Fugazy had committed mail fraud, wire fraud, securities fraud under § 12(2) and (as instructed by the court) bankruptcy fraud. The jury rejected the plaintiff's other claims and the defendants' third-party claim.

The jury awarded $15,553,930.89 in damages. Tr. 2301, 2304. The court trebled the verdict as to William Fugazy, as provided in the RICO statute, 18 U.S.C. § 1964(c), to $46,661,792.67. Tr. 2308. The judgment was approved by the court on June 27, 1990, and entered on the docket on July 6, 1990.

On July 16, 1990, William Fugazy filed a voluntary petition with the bankruptcy court for relief under Chapter 11 of the Bankruptcy Code. 11 U.S.C. § 1101 et seq. Consequently, the present action was automatically stayed under 11 U.S.C. § 362. Nonetheless, on July 20, the defendants (except Roy Fugazy) filed a motion with this court for judgment notwithstanding the verdict or, alternatively, a new trial. On September 4, the bankruptcy court entered an order modifying the automatic stay

to the extent necessary ... (A) to permit the Debtor to pursue Debtor's post-trial motion for judgment n.o.v. in the Metromedia action ... and (B) to permit all other parties to pursue post-trial motion practice in the Metromedia Action in connection with Debtor's motion for judgment n.o.v. ...

In re Fugazy, No. 90 B 20688 (HS), slip order at 1-2 (Bankr.S.D.N.Y. Sept. 4, 1990). With respect to Fugazy's motion for judgment n.o.v., the modification is retroactive to July 20, 1990. Id. at 2.

II.

In considering a motion for judgment n.o.v., the court must view the evidence in the light most favorable to the non-moving party. Simblest v. Maynard, 427 F.2d 1, 4 (2d Cir.1970); Unijax, Inc. v. Champion Int'l, Inc., 516 F.Supp. 941, 950 (S.D.N.Y.1981) (Carter, J.), aff'd, 683 F.2d 678 (2d Cir.1982). The motion "will be granted only if (1) there is a complete absence of probative evidence to support the verdict for the non-movant, or (2) the evidence is so strongly or overwhelmingly in favor of the movant that reasonable and fair minded jurors in the exercise of impartial judgment could not arrive at a verdict against the movant." Armstrong v. Commerce Tankers Corp., 423 F.2d 957, 959 (2d Cir.), cert. denied, 400 U.S. 833, 91 S.Ct. 67, 27 L.Ed.2d 65 (1970). See, e.g., Unijax, supra, 683 F.2d at 684; Simblest, supra, 427 F.2d at 4.

A motion for a new trial will not be granted "unless it is reasonably clear that prejudicial error has crept into the record or that substantial justice has not been done." 11 C. Wright & A. Miller, Federal Practice and Procedure § 2803 at 32 (1973). See, e.g., Dixon v. Maritime Overseas Corp., 490 F.Supp. 1191, 1194 (S.D.N.Y.) (Cooper, J.), aff'd mem., 646 F.2d 560 (2d Cir.1980), cert. denied, 454 U.S. 838, 102 S.Ct. 145, 70 L.Ed.2d 120 (1981). In considering a motion for a new trial, the court may weigh the evidence and need not view it in the light most favorable to the non-movant. Bevevino v. Saydjari, 574 F.2d 676, 684 (2d Cir.1978). Nonetheless, the court must "`abstain from interfering with the verdict unless it is quite clear that the jury has reached a seriously erroneous result. The judge's duty is essentially to see that there is no miscarriage of justice.'" Id. (quoting 6A J. Moore, Moore's Federal Practice ¶ 59.085 at 59-160, -161 (1973)).

The moving party bears the burden of establishing that it is entitled to judgment n.o.v. or a new trial. For the reasons stated below, the defendants have not met this burden, and their motion must be denied.

III.

Section 12 of the Securities Act of 1933 provides, in pertinent part:

Any person who ...

(2) offers or sells a security ... by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission) ... shall be liable to the person purchasing such security from him, who may sue ... to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security....

15 U.S.C. § 771. The defendants allege that there is no evidence to support a claim that the sale of securities in question was "by means of a prospectus or oral communication" so as to be subject to § 12(2). Stuart Subotnick, one of Metromedia's general partners, testified before the jury that he had several telephone conversations with William Fugazy, in which Fugazy's object was

to convince us i.e., Metromedia to continue the acquisition of Fugazy Express, to explain to me about the various prospects that Fugazy Express had in various other areas that would improve the business. Generally, all of the conversations were to convince us to go forward and acquire Fugazy Express.

Tr. 148. This evidence is sufficient to support the jury's finding that the sale was "by means of ... oral communication" within § 12(2). There is also sufficient evidence in the record to establish that William Fugazy never adequately informed plaintiff of the financial condition of Fugazy Express, so that the jury could have found that the communications at issue "omitted to state a material fact necessary in order to make the statements ... not misleading."

Defendants also argue that there was no causal relationship between the misleading statements and the plaintiffs' loss. However, causation is not required to establish a seller's liability under § 12(2). Akerman v. Oryx Communications, Inc., 810 F.2d 336, 344 (2d Cir.1987). It is sufficient...