983 F.2d 350 (2nd Cir. 1992), 1120, Metromedia Co. v. Fugazy

Docket Nº:1120, Docket 91-7049.
Citation:983 F.2d 350
Party Name:, RICO Bus.Disp.Guide 8180 METROMEDIA COMPANY, Plaintiff-Appellee, v. William D. FUGAZY, Travelco, Inc., Fugazy International Corporation, Roy D. Fugazy, Defendants, William D. Fugazy, Travelco, Inc., Fugazy International Corporation, Defendants-Appellants. William D. FUGAZY, Travelco, Inc., Fugazy International Corporation, Roy D. Fugazy, Third Pa
Case Date:December 17, 1992
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 350

983 F.2d 350 (2nd Cir. 1992)

, RICO Bus.Disp.Guide 8180

METROMEDIA COMPANY, Plaintiff-Appellee,


William D. FUGAZY, Travelco, Inc., Fugazy International

Corporation, Roy D. Fugazy, Defendants,

William D. Fugazy, Travelco, Inc., Fugazy International

Corporation, Defendants-Appellants.

William D. FUGAZY, Travelco, Inc., Fugazy International

Corporation, Roy D. Fugazy, Third Party Plaintiffs,

William D. Fugazy, Travelco, Inc., Fugazy International

Corporation, Third Party Plaintiffs-Appellants,


John W. KLUGE, Third Party Defendant-Appellee.

METROMEDIA COMPANY, Plaintiff-Appellee,


William D. FUGAZY, Sr. and Roy D. Fugazy, Defendants,

William D. Fugazy, Sr., Defendant-Appellant.

No. 1120, Docket 91-7049.

United States Court of Appeals, Second Circuit

December 17, 1992

Argued April 24, 1992.

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Martin I. Shelton, New York City (Peter C. Neger, Mary Gail Gearns, Shea & Gould, on the brief), for plaintiff-appellee and third-party-defendant-appellee.

Anthony Princi, New York City (Steven Cooper, Jordan W. Siev, Anderson Kill Olick & Oshinsky, P.C., on the brief), for defendants-third-party-plaintiffs-appellants.

Before: OAKES [*], KEARSE, and WALKER, Circuit Judges.

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KEARSE, Circuit Judge:

Defendants-third-party-plaintiffs William D. Fugazy ("William" or "William Fugazy"), Travelco, Inc. ("Travelco"), and Fugazy International Corporation ("International") appeal from so much of a final judgment, entered in the United States District Court for the Southern District of New York following a jury trial of consolidated actions before Robert L. Carter, Judge, as awarded plaintiff Metromedia Company ("Metromedia") a total of $46,661,792.67 in damages. 753 F.Supp. 93. The award included $15,553,930.89 on Metromedia's claim against William Fugazy, Travelco, and International for breach of warranty, the same amount against William on a claim under § 12(2) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77l (2) (1988), and $46,661,792.67 in treble damages against William for violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. (1988). On appeal, appellants contend that the district court improperly deprived them of a jury trial on the breach-of-warranty claim; William contends that Metromedia's other claims should have been dismissed as a matter of law and that the trial court erred in its instructions to the jury with respect to the fraud and RICO claims. For the reasons below, we reject appellants' contentions and affirm the judgment of the district court.


At all pertinent times, William Fugazy was, directly or indirectly, the owner of a number of concerns engaged in the ground transportation business, including International, Travelco, and Fugazy Express, Inc. ("Express"). He owned all of the stock of International, a holding company for the other Fugazy companies. International owned 100% of Travelco and 60% of Express; Travelco owned the remaining 40% of Express. William was president of Travelco and International; he was chairman of the board of directors of Express.

Metromedia, noncorporate successor-in-interest in 1986 to Metromedia, Inc., was a large conglomerate operating a number of diversified businesses, primarily in the communications and entertainment industries, and had assets of approximately $600,000,000. Third-party-defendant John W. Kluge was chairman and chief executive officer of Metromedia, Inc., until its liquidation, and in 1986 he became a general partner and 97.5% owner of Metromedia. Stuart Subotnick, an executive of Metromedia, Inc., was Metromedia's other general partner.

  1. The Investment in and Bankruptcy of Express

    In December 1984, the Fugazy companies were in dire need of capital, and William asked his then-friend Kluge to consider having Metromedia purchase an interest in one or more of them. In January 1985, Kluge asked Subotnick to sign a letter of intent expressing an interest in purchasing Express, a radio-dispatched car business. After signing such a letter, Subotnick and his staff began to explore the financial viability of Express, and conducted, inter alia, an audit, a market analysis, and a "due diligence" investigation.

    Subotnick returned to Kluge with a report that, though "optimistic" about Express, advised against the acquisition because Subotnick believed "this was not the kind of business we should be in." Kluge responded by having Subotnick inform William that Metromedia would not purchase Express. William urged Kluge to reconsider, however, and after additional analysis Subotnick and his staff concluded that Express was a potentially sound acquisition that could be made profitable with expanded operations and improved management.

    As a result, on March 21, 1985, Metromedia and appellants entered into a Stock Purchase Agreement ("Agreement") pursuant to which Metromedia acquired newly issued common stock representing an 80% interest in Express. In exchange, Metromedia agreed principally to (1) pay $2,000,000 cash to Express or others on Express's behalf, (2) make a $4,000,000 subordinated loan to Express, (3) guarantee up to $3,000,000 in promotional advances from an automobile company to Express,

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    and (4) cure any default on a loan previously made by Citibank, N.A., to William ("Citibank loan") in the original principal amount of $3,500,000. As discussed in greater detail below, the Agreement contained a section entitled "Representations and Warranties of Express and the Stockholders" with respect to, inter alia, Express's outstanding contracts, its exposure to pending or threatened litigation, and its financial condition.

    In July 1986, Express filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. (1988). In March 1987, the proceeding was converted into one under Chapter 7 for liquidation, 11 U.S.C. § 701 et seq. (1988). In the course of the bankruptcy proceeding, Metromedia discovered that in or about January 1987, William had transferred one of Express's assets, to wit, a Federal Communications Commission ("FCC" or "Commission") license and two radio frequencies (collectively "License"), to Fugazy Limousine Limited ("Limousine"), a company owned by William's son, defendant Roy D. Fugazy ("Roy" or "Roy Fugazy"). William had transferred the asset without notice to or permission from the bankruptcy court, and without consideration. Limousine had then obtained approval of the transfer from the FCC by failing to inform the FCC that Express was in bankruptcy. Eventually, in a Memorandum Decision dated May 14, 1990, and filed on May 15 ("Bankruptcy Court Decision"), the bankruptcy court ruled that William had improperly transferred the license "in direct, willful contravention" of the automatic stay imposed at the commencement of the bankruptcy proceeding, see 11 U.S.C. § 362 (1988), and it ordered, inter alia, that William pay attorneys' fees to the bankruptcy trustee. Matter of Fugazy Express, Inc., 114 B.R. 865 (Bankr.S.D.N.Y.1990), aff'd, 124 B.R. 426 (S.D.N.Y.1991), appeal dismissed for lack of jurisdiction, 982 F.2d 769 (2d Cir.1992).

  2. The Present Actions

    In April 1987, Metromedia commenced the first of the present actions, asserting claims against William, International, Travelco, and Roy Fugazy for misrepresentations and nondisclosure of material facts in connection with the issuance of the Express stock, in violation of, inter alia, § 12(2) of the 1933 Act, § 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j (1988), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, along with claims of common-law fraud, negligent misrepresentation, and breach of warranty. It sought, inter alia, $35,000,000 in compensatory damages and $250,000,000 in punitive damages. Defendants asserted various counterclaims against Metromedia and brought third-party claims against Kluge, contending, inter alia, that he had entered into written agreements entitling them to contribution or indemnification for any judgment Metromedia might recover against them.

    In 1989, Metromedia commenced a second action against William and Roy, alleging that they had engaged in, and conspired to engage in, a pattern of racketeering activity in violation of RICO, 18 U.S.C. § 1962(b)-(d). The complaint alleged that the predicate RICO crimes were bankruptcy fraud, in violation of 18 U.S.C. § 152 (1988); mail fraud, in violation of 18 U.S.C. § 1341 (1988); wire fraud, in violation of 18 U.S.C. § 1343 (1988); and securities fraud, in violation of § 12(2), § 10(b), and Rule 10b-5. It sought damages in the amount of $35,000,000, trebled pursuant to 18 U.S.C. § 1964(c). The district court ordered the actions consolidated.

    Prior to trial, the court issued a "Joint Consolidated Pre-Trial Order" ("Pretrial Order") itemizing, inter alia, facts that the parties agreed were not in dispute. In it, defendants admitted that as of the date of the Agreement, (1) there were at least six litigations pending against Express or companies for which Express could be held liable, (2) that Express had entered four confessions of judgment, (3) that Express and/or William were in default on certain franchise notes, (4) that the $3,500,000 Citibank loan was in default, (5) that William was aware that Express could be liable for certain liabilities of other Fugazy companies,

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    and (6) that William had represented to others that Metromedia would arrange for the cancellation of prior loan guarantees. Appellants conceded that these facts were not disclosed in their "Representations and...

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