Cresswell v. Sullivan & Cromwell
| Decision Date | 31 July 1987 |
| Docket Number | No. 87 Civ. 2685 (RWS).,87 Civ. 2685 (RWS). |
| Citation | 668 F. Supp. 166 |
| Parties | Edward CRESSWELL, et al., Plaintiffs, v. SULLIVAN & CROMWELL and Prudential-Bache Securities, Inc., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Cooper, Brown & Behrle, P.C., New York City, for plaintiffs; Richard B. Cooper, of counsel.
Sullivan & Cromwell, New York City, pro se; Michael A. Cooper, Garrard R. Beeney, Pressly M. Millen, of counsel.
Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for defendant Prudential-Bache; Sanford M. Litvack, Charles Chasin, of counsel.
In this action for fraud and negligent misrepresentation, defendants Sullivan & Cromwell and Prudential-Bache Securities, Inc. have moved for an order pursuant to Rule 12(b)(6), Fed.R.Civ.P., dismissing the amended complaint on the ground that it fails to state a claim upon which relief can be granted. For the reasons discussed below, the motion to dismiss is denied.
In March 1983, a group of plaintiffs, represented by Edward J. Swan, Esq., commenced in this court an action entitled Cresswell, et. al. v. Prudential-Bache Securities, Inc., 83 Civ. 2099 (RWS). Later, in October 1984, a second set of plaintiffs, also represented by Swan, brought a separate action against Prudential-Bache, entitled Wallin, et al. v. Prudential-Bache Securities Inc., 84 Civ. 7192 (RWS). Both suits charged Prudential-Bache with certain misrepresentations and omissions in connection with GNMA/T-Bonds Spread Transactions ("Spread Transactions").1 Plaintiffs in these actions alleged that they had invested in the Spread Transactions and collectively lost $3,561,307.
On April 25, 1983, defendant Prudential-Bache, represented by Sullivan & Cromwell, moved to dismiss the amended complaint in the Cresswell case on various grounds, including failure to plead fraud with particularity and lack of subject matter jurisdiction. After the motion had been granted in part and denied in part, the parties embarked upon the normal pretrial discovery, including substantial document production and numerous depositions. In late 1984, when discovery was largely completed, the parties entered into settlement discussions.
In January 1985, plaintiffs in this action entered into agreements with Prudential-Bache which resolved all their claims for approximately $1,600,000. Following execution of those agreements, this court entered a judgment and order dismissing plaintiffs' claims with prejudice on February 1, 1985.
On April 20, 1987, fifty-six of the prior claimants filed this suit against Prudential-Bache and Sullivan & Cromwell. These plaintiffs now contend that during the pendency of the prior actions, Prudential-Bache and Sullivan & Cromwell intentionally withheld production of documents which purportedly fell within the ambit of a document request served in December 1983. Specifically, plaintiffs' second request for production of documents in the Cresswell action sought documents relating to any investigation by any exchange relating to Prudential-Bache's marketing of the Spread Transactions. According to the amended complaint, a letter from the New York Stock Exchange to the General Counsel of Prudential-Bache, dated four days before the document request, was not produced.
Plaintiffs, asserting two causes of action which allegedly arise under state common law, seek to recover damages from Prudential-Bache and Sullivan & Cromwell based on the alleged failure to produce the documents referred to above. Plaintiffs' theory of the measure of damages is the difference between what they settled for in 1985 ($1,600,000) and what they now say they probably would have been able to achieve by way of settlement ($3,030,000) had they known about documents relating to an exchange investigation that were not produced. Plaintiffs demand a trial by jury, punitive damages and attorneys' fees.
Applicability of Fed.R.Civ.P. 60(b)
The plaintiffs in this case are seeking damages for an alleged fraud committed upon them in the earlier actions, which they contend induced them to settle their claims for less than they otherwise would have been able to obtain. The issue raised on this motion is whether an action such as this is governed by Rule 60(b) of the Federal Rules of Civil Procedure. Rule 60(b) specifies the procedure for obtaining relief from a judgment when fraud or other misconduct has allegedly been committed in connection with obtaining the judgment. Under that Rule:
The court may relieve a party or his legal representative from a final judgment, order, or proceeding for the following reasons: ... (3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party.... The motion shall be made within a reasonable time, and ... not more than one year after the judgment, order, or proceeding was entered or taken.... This rule does not limit the power of a court to entertain an independent action to relieve a party from a judgment, order, or proceeding, ... or to set aside a judgment for fraud upon the court.
The Rule thus sets forth an express mechanism for a party seeking relief from a judgment. If plaintiffs' action fell under Rule 60, plaintiffs would essentially be suing for rescission and presumably would be required to tender back their part of the settlement to return to the status quo and possibly face preclusion from suing for damages. The plaintiffs here, however, are not seeking "relief" from a "judgment" within the terms of Rule 60(b). Instead, they seek to affirm the judgment of settlement, and sue for additional damages caused only by the fraud involving the failure to produce certain documents. Of course, in trying such a case, the merits of the prior actions will be relevant, but the issue will be different: whether the settlement value of the cases would have been higher absent the fraud, and if so, by how much.
Defendants contend that Rule 60(b) is the exclusive remedy for a party claiming to have been defrauded into agreeing to a settlement leading to entry of a judgment or final order in a federal lawsuit. In support of this proposition they cite two cases which, they contend, require the court to look through plaintiffs' characterization of the action as one arising under state law and see the action for what it is: an action attacking the validity of a judgment. Nevertheless, the cases cited by defendants in support of this proposition are distinguishable. In Black v. Niagara Mohawk Power Corp., 641 F.Supp. 799 (N.D. N.Y.1986), plaintiff commenced a fraud action in state court against defendants, charging that they had obtained summary judgment in an earlier action by means of fraudulent statements in an affidavit submitted in support of their motion. After the action was removed to federal court, the court, in ruling upon plaintiff's motion to remand and defendants' cross-motion for summary judgment, the court held:
Black is necessarily relying upon federal law for the relief sought in his complaint despite his attempt to couch the complaint solely in terms of state law. His claim that the judgment in Black I was obtained by fraud clearly constitutes an attack on the validity of that judgment pursuant to Rule 60(b) of the Federal Rules of Civil Procedure. As such, the viability of the claim must be determined by reference to standards enumerated in cases decided under the rule. Accordingly, his claim involves a general federal question and was properly removed to this Court. See 7 Moore's Federal Practice ¶ 60.381, at 60-402 (1985).
Id. at 801-02 (footnotes omitted).
In Black, it was necessary to grant the plaintiff relief from the prior judgment, since the summary judgment entered against him would preclude any recovery on the prior claim. The new lawsuit brought by the plaintiff there could have established at best that his prior claims had merit, completely contrary to the summary judgment establishing that his claims had no merit. In contrast, this case involves a claim that does not depend on the merits of the prior actions, although the merits of the prior actions are certainly relevant to the claim. The claim is not that, had full disclosure been made, the plaintiffs would have prevailed. Instead, the claim is that, had full disclosure been made, the plaintiffs would have bargained for a greater settlement.
Villarreal v. Brown Express, Inc., 529 F.2d 1219 (5th Cir.1976), although not controlling in this Circuit, is not so easily distinguishable on its facts. In Villarreal, plaintiff and others brought a personal injury action against Brown Express in federal court in connection with a truck accident. The action was settled for approximately $300,000, and the district court entered an order dismissing the case with prejudice. Seven days later, plaintiff sued Brown Express in Texas state court in conversion, alleging that the defendant had fraudulently concealed a tire on the vehicle plaintiff was riding when the accident occurred. Plaintiff claimed that without this important piece of evidence he was forced to settle his earlier action for much less than he would have otherwise obtained, and asked for money damages for conversion. On appeal from the denial of a motion to remand the case to state court and the grant of summary judgment to the defendant, the Fifth Circuit affirmed, holding that Rule 60(b) applied and that removal was proper:
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