Bozsi Ltd. Partnership v. Lynott

• Decision Date: 22 December 1987
• Docket Number: No. 86 Civ. 2997 (RLC).,86 Civ. 2997 (RLC).
• Citation: 676 F. Supp. 505
• Parties: BOZSI LIMITED PARTNERSHIP, et al., Plaintiffs, v. Frank B. LYNOTT, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

676 F. Supp. 505

BOZSI LIMITED PARTNERSHIP, et al., Plaintiffs, v. Frank B. LYNOTT, et al., Defendants.

No. 86 Civ. 2997 (RLC).

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

December 22, 1987.

Milberg Weiss Bershad Specthrie & Lerach, New York City (Richard M. Meyer, Michael C. Spencer, George A. Bauer, III, of counsel), and (Alan Schulman, Clyde A. Platt, San Diego, Cal., of counsel), for plaintiffs.

Cravath, Swaine & Moore, New York City (John R. Hupper, James Buchal and Rodman W. Benedict, Asst. Gen. Counsel, Price Waterhouse, New York City, of counsel), for defendant Price Waterhouse.

Davis, Polk & Wardwell, New York City (Howard A. Ellins, Luigi L. De Ghenghi, of counsel), for defendant Ernst & Whinney.

Sharfman, Shanman, Poret & Siviglia, P.C., New York City (Alan D. Handler, of counsel), for defendant and third-party plaintiff Walter Taibleson.

Milbank, Tweed, Hadley & McCloy, New York City (Joseph S. Genova, Richard Jones, of counsel) and Perkins Coie, Seattle, Wash. (Ronald L. Berenstain, of counsel), for defendant and third-party plaintiff Frank B. Lynott.

Dewey, Ballantine, Bushby, Palmer & Wood, New York City (John M. Friedman, Rolan M. Bissell, of counsel), for defendant and third-party plaintiff Charles B. Hall.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City (Lewis A. Kaplan, Mary Crowley, of counsel), for defendants and third-party plaintiffs Karel Wahrsager and Hugh Knowlton, Jr., in their representative capacities as executors of the Estate of Sigmund Wahrsager.

Stein, Zauderer, Ellenhorn, Frischer & Sharp, New York City (Robin Kaufman, of counsel), and Shulkin, Hutton & Bucknell, Seattle, Wash. (James S. Munn, of counsel), for defendants and third-party plaintiffs Lowe, Fox and Williams.

Mudge, Rose, Guthrie, Alexander & Ferdon, New York City (Douglas M. Parker, Robert Sidorski, of counsel), and Hallmark, Griffith & Keating, P.C., Portland, Or. (William A. Davis, of counsel), for defendant and third-party plaintiff Ralph M. Davis.

Richenthal, Birnbaum & Beck, P.C., New York City (Stuart J. Beck, of counsel), for third-party defendants Machinist and Stanfield.

OPINION

ROBERT L. CARTER, District Judge.

On November 6, 1986, the court denied motions by each of the defendants under Rules 9(b) and 12(b)(6), F.R.Civ.P., to dismiss Counts I and II of the complaint for failure to plead fraud with the requisite particularity and for failure to state a claim upon which relief can be granted. Bozsi Ltd. Partnership v. Lynott, No. 86 Civ. 2997 (RLC), slip. op. (S.D.N.Y. filed Nov. 12, 1986) (Carter, J.) "November 12 opinion". Two of the defendants, Price Waterhouse & Co. and Ernst & Whinney, now urge the court, pursuant to Civil Rule 3(j), Local Rules for the United States District Courts for the Southern and Eastern Districts of New York, to grant reargument of their motions. In addition, Robert B. Machinist and Michael R. Stanfield, recently named as third-party defendants to this action, urge the court to dismiss the third-party complaint against them.

BACKGROUND

This suit was filed on April 14, 1986, by eighteen individual and institutional investors who purchased over six million shares of common stock in Tacoma Boatbuilding Company "Tacoma Boat" or "the company". Tacoma Boat is a Washington corporation that designs, builds, and repairs medium-sized ships for the United States Navy, the United States Coast Guard, foreign governments, and commercial customers. Complaint, ¶ 12. The plaintiffs contend that in November and December, 1984, they met with members of Tacoma Boat management to discuss the possibility of investing in the company. Id., ¶ 18. In January, 1985, a group of investors, including the plaintiffs and Midland Capital Corporation "Midland Capital", entered into a Stock Purchase Agreement under which the plaintiffs invested over $12.5 million in Tacoma Boat common stock. Id. Tacoma Boat filed for bankruptcy in September, 1985. Id., ¶ 6. The plaintiffs now contend that they were deceived by the defendants as to the true financial condition of the company, and remained deceived until April 15, 1985, when the company released its 1984 Form 10-K Report revealing a $48 million net loss. Id., ¶ 23.

The eight individual defendants are former officers or directors of Tacoma Boat.¹ The two corporate defendants, Price Waterhouse and Ernst & Whinney, are accounting firms that performed audits and certified financial statements for Tacoma Boat.² Each defendant is charged with violating Section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2) "Section 12(2)"; Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) "Section 10(b)"; and Rule 10b-5, 17 C.F.R. § 240.10b-5 "Rule 10b-5". Moreover, each defendant is alleged to have committed various state-law violations.³

The plaintiffs allege that they were furnished a September, 1984 Confidential Memorandum and a December, 1984 Supplement that contained false and misleading information about the company's financial condition. Complaint, ¶¶ 30-31. These reports were allegedly "prospectuses" within the meaning of Section 12(2). Id., ¶ 30. The plaintiffs further allege that reports issued by Price Waterhouse and Ernst & Whinney concerning the company's finances were materially false and misleading. Id., ¶¶ 39, 44.

In its November 12 opinion, the court held that the Section 12(2) claims were sufficient to withstand motions to dismiss. Rule 9(b), F.R.Civ.P., was held inapplicable on the ground that Section 12(2) allegations are averments of negligence, not of fraud. With respect to the Section 10(b) and Rule 10b-5 claims, the court found that Rule 9(b), F.R.Civ.P., requirements of specificity had been met. The defendants' motions to dismiss pursuant to Rules 12(b)(6) and 9(b), F.R.Civ.P., were denied.

I. MOTIONS FOR RECONSIDERATION

Price Waterhouse and Ernst & Whinney argue that recent case law not previously put before the court by either party, and in fact handed down after the parties had fully briefed their motions to dismiss,⁴ requires the court to amend its previous opinion.⁵

"A request for reargument is not an occasion to reassert arguments previously raised, but dismissed by the court." Morgan Guar. Trust Co. of New York v. Garrett Corp., 625 F.Supp. 752, 756 (S.D.N.Y. 1986) (Goettel, J.). In order to prevail, the moving parties "must demonstrate that the court has overlooked controlling decisions or factual matters" that properly bore on the original opinion and that might reasonably be expected to have altered the outcome had they been considered at the time of decision. Ashley Meadows Farm v. Am. Horse Shows Ass'n, 624 F.Supp. 856, 857 (S.D.N.Y.1985) (Sweet, J.). The standard to be applied to Rule 3(j) motions was enunciated by Judge Edelstein in the following terms:

The strong interests in finality and the procedural directions of Local General Rule 9(m) Rule 3(j)'s predecessor lead this court to conclude that the only proper ground for a motion for reargument is that the court has overlooked "matters or controlling decisions" which, had they been considered, might reasonably have altered the result reached by the court.

United States v. Int'l Business Machines Corp., 79 F.R.D. 412, 414 (S.D.N.Y.1978) (Edelstein, J.) (footnotes omitted). This standard has been widely acknowledged and applied. E.g., United States v. Payden, 623 F.Supp. 1148, 1152 n. 9 (S.D.N.Y. 1985) (Edelstein, J.); Wm. Passalucqua Bldrs., Inc. v. Resnick Developers South, Inc., 611 F.Supp. 281, 283 (S.D.N.Y.1985) (Caffrey, J.); New York Guardian Mortgagee Corp. v. Cleland, 473 F.Supp. 409, 420 (S.D.N.Y.1979) (Lasker, J.).

The substantive basis for the instant motions is Mayer v. Oil Field Systems Corp., 803 F.2d 749 (2d Cir.1986), in which the Court of Appeals stated the following:

It is well-established that in order to prove a Section 10(b) claim, the plaintiff must prove the defendant's scienter. Ernst & Ernst v. Hochfelder, 425 U.S. 185 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Similarly, when, as is true here, the person who made the misrepresentation is not the immediate and direct seller of the securities, the imposition of liability on him, under Section 12(2) as a participant, aider and abettor, or coconspirator also requires proof of scienter.

Id. at 756 (citations omitted). Price Waterhouse and Ernst & Whinney argue that Mayer renders scienter a requisite element of a Section 12(2) violation in this case as to them; that the particularity requirements of Rule 9(b), F.R.Civ.P., must therefore be met; and that the November 12 opinion to the contrary is at odds with Mayer.

Mayer establishes the requirement that scienter be alleged against any defendant charged with a Section 12(2) violation who is not also alleged to have been the "immediate and direct seller"⁶ of the securities at issue. The plaintiffs argue, and correctly so, that the definition of "seller" under Section 12(2) has been expanded to encompass some third-party participants in a sale.

See, e.g., Pharo v. Smith, 621 F.2d 656, 666-667 (5th Cir.1980). The phrase "immediate and direct seller," however, appears to be an intentional extension of the scienter requirement to parties other than the actual seller. In any event, neither Price Waterhouse nor Ernst & Whinney could be classified as an "immediate and direct seller" under even the most expansive definition of that phrase.⁷

A proper averment of scienter under Section 12(2) requires an allegation of knowing or reckless conduct in violation of the statute.⁸ Mayer, 803 F.2d at 756 ("scienter requires at least knowing misconduct"). The complaint in this case alleges that Price Waterhouse and Ernst & Whinney violated Section 12(2) "with knowledge of the wrongs alleged herein or in reckless disregard thereof." Complaint, ¶¶ 28, 29, 37, 38. A complaint must do more, however, than merely echo the terms of the scienter requirement. It must "allege facts from which an inference of ... scienter may be drawn."...