Ciro, Inc. v. Gold

• Decision Date: 02 March 1993
• Docket Number: Civ. A. No. 92-155-JLL.
• Citation: 816 F. Supp. 253
• Parties: CIRO, INC. and Ciro of Bond Street, Inc. by Edward L. Schuman, Alix Cassaday, Theodore Rosen, John H. Burrows and Eunice Caplan, suing derivatively on its behalf, Plaintiffs, v. Abraham GOLD, Jack B. Levine and Intermediate Securities Limited, Defendants, and Ciro, Inc. and Ciro of Bond Street, Inc., Nominal Defendants.
• Court: U.S. District Court — District of Delaware

816 F. Supp. 253

CIRO, INC. and Ciro of Bond Street, Inc. by Edward L. Schuman, Alix Cassaday, Theodore Rosen, John H. Burrows and Eunice Caplan, suing derivatively on its behalf, Plaintiffs, v. Abraham GOLD, Jack B. Levine and Intermediate Securities Limited, Defendants and Ciro, Inc. and Ciro of Bond Street, Inc., Nominal Defendants.

Civ. A. No. 92-155-JLL.

United States District Court, D. Delaware.

March 2, 1993.

COPYRIGHT MATERIAL OMITTED

Irving Morris and Patrick Morris of Morris and Morris, Wilmington, DE, Timothy J. Dennin of Timothy J. Dennin, P.C., of counsel, for plaintiffs.

Bruce M. Stargatt and Bruce L. Silverstein of Young, Conaway, Stargatt & Taylor, Wilmington, DE, for defendants.

OPINION

LATCHUM, Senior District Judge.

I. INTRODUCTION

Defendants Abraham Gold, Jack B. Levine, and Intermediate Securities Limited ("Intermediate") along with nominal defendants Ciro, Inc. ("Ciro") and Ciro of Bond Street, Inc. ("Ciro of Bond Street") have moved to dismiss plaintiffs' second amended complaint. Docket Items ("D.I.") 48 & 49. Plaintiffs Edward L. Schuman, Alix Cassaday, John H. Burrows, and Eunice Caplan are minority shareholders of Ciro. On March 19, 1992, they commenced this shareholder derivative suit on behalf of Ciro and its wholly-owned subsidiary Ciro of Bond Street. D.I. 1. In their original complaint, plaintiffs named Gold, Levine, Intermediate, and Howard Wydham PLC ("H & W") as defendants and, in addition, named Ciro, Inc. and Ciro of Bond Street, Inc. as nominal defendants. Id.

Thereafter, defendants moved to dismiss the complaint. While defendants' motion was still pending before the Court, Theodore Rosen, also a minority shareholder of Ciro, moved to intervene as a plaintiff. D.I. 31. On July 13, 1992, Rosen's motion to intervene as a plaintiff was granted by an order of this Court. D.I. 33. A revised briefing schedule was then set by the Court, D.I. 34, and defendants' motion to dismiss was scheduled for oral argument.

On October 30, 1992, days before the scheduled oral argument, plaintiffs amended their complaint as of right without the approval of the Court as permitted under Federal Rule of Civil Procedure 15(a). Because of the jurisdictional ambiguities in the first amended complaint and because the first amended complaint failed to comply with Local Rule 15.1, the Court ordered the plaintiffs to serve and file a second amended complaint curing the jurisdictional ambiguities and complying with Local Rule 15.1.¹ Plaintiffs then served and filed a second amended complaint in which plaintiffs dropped H & W as a defendant. D.I. 46. Now, defendants Gold, Levine, and Intermediate have moved to dismiss the second amended complaint for: (1) failure to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6); (2) lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1); and (3) lack of personal jurisdiction over Intermediate pursuant to Federal Rule of Civil Procedure 12(b)(2). D.I. 48 & 49.

II. JURISDICTION

Plaintiffs' second amended complaint alleges three Counts against defendants Gold, Levine, and Intermediate. Count I alleges that Gold and Levine violated §§ 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder by the Securities Exchange Commission ("SEC"). Count II alleges that Gold and Levine breached their fiduciary duties as directors of Ciro under Delaware law. Count III alleges that Gold and Levine violated § 14(c) and Rule 14c-6 promulgated thereunder by the SEC.

Plaintiff's second amended complaint avers that subject matter jurisdiction over the federal securities claims is founded on 15 U.S.C. § 78aa and 28 U.S.C. § 1331. The second amended complaint avers that subject matter jurisdiction over the state law claim in Count II for breach of fiduciary duties is premised upon the doctrine of supplemental jurisdiction codified at 28 U.S.C. § 1367. Section 78aa states, inter alia, that "the district courts of the United States ... shall have exclusive jurisdiction of violations of this chapter i.e. the Securities Exchange Act of 1934 or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules or regulations thereunder." 15 U.S.C. § 78aa. Section 1331 confers upon the district courts subject matter jurisdiction over "all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. Thus, plaintiff's second amended complaint clearly alleges a jurisdictional basis for the federal securities claims in Counts I and III.

Section 1367(a), which is part of the Judicial Improvements Act of 1990, empowers the district courts to exercise supplemental jurisdiction over state law claims that do not have an independent basis of subject matter jurisdiction when the district court possesses federal question jurisdiction and the state law claims are so related to the federal claims that "they form part of the same case or controversy under Article III of the United States Constitution." 28 U.S.C. § 1367(a); see also Int'l Assoc. of Heat & Frost Insulators & Asbestos Workers Local Union 42 v. Absolute Environmental Services, Inc., 814 F.Supp. 392, at 396 & n. 3, (D.Del.1993). The allegations in Count II that Gold and Levine breached their fiduciary duties under state law are sufficiently related to the federal securities claims in Counts I and III to warrant the exercise of supplemental jurisdiction as to the state law claims pursuant to § 1367(a). However, if none of the plaintiffs' federal securities law claims survive defendants' motion to dismiss, the court may decline to exercise jurisdiction over the supplemental state law claims. 28 U.S.C. § 1367(c)(3); cf. Diceon Electronics, Inc. v. Calvary Partners, L.P., 772 F.Supp. 859, 860-61 (D.Del.1991).²

III. FACTS

A. STANDARD OF REVIEW FOR RULE 12(b)(6) MOTION TO DISMISS

For the limited purpose of considering defendants' defense under Federal Rule of Civil Procedure 12(b)(6) that Counts I and III of the second amended complaint fail to state claims upon which relief can be granted, the Court must accept as true all of the factual allegations in the second amended complaint. Boyle v. Governor's Veterans Outreach & Assistance Center, 925 F.2d 71, 74 (3d Cir. 1991); see also Mortensen v. First Federal Savings & Loan Ass'n, 549 F.2d 884, 890-91 (3d Cir.1977). "However, legal conclusions, deductions or opinions couched as factual allegations are not given a presumption of truthfulness." 2A J. Moore, J. Lucas, & G. Grotheer, Jr., Moore's Federal Practice ¶ 12.-072.-5 (1992); see also Royal Business Group, Inc. v. Realist, Inc., 933 F.2d 1056, 1065-66 (1st Cir.1991); Briscoe v. LaHue, 663 F.2d 713, 723 (7th Cir.1981), aff'd, 460 U.S. 325, 103 S.Ct. 1108, 75 L.Ed.2d 96 (1983). The burden of demonstrating that the second amended complaint fails to a state claim rests with the defendants. Johnsrud v. Carter, 620 F.2d 29, 33 (3d Cir.1980). Finally, in considering defendants' Rule 12(b)(6) defense, "the Court is free to take judicial notice of certain facts mentioned in the complaint that are of public record ..." Diceon Electronics, 772 F.Supp. at 861. The SEC filings alleged in the second amended complaint to contain material misrepresentations and omissions fall within this category of public records that may be judicially noticed. Kramer v. Time Warner Inc., 937 F.2d 767, 773-74 (2d Cir.1991).

B. THE FACTUAL ALLEGATIONS OF THE SECOND AMENDED COMPLAINT

The following recitation of facts is derived from plaintiffs' second amended complaint and will be accepted as true for the limited purpose of considering defendants' Rule 12(b)(6) defense. Nominal defendant Ciro is a Delaware corporation and together with its subsidiaries engages in the business of retailing high quality imitation jewelry. D.I. 46 at 3-4. Nominal defendant Ciro of Bond Street is a wholly-owned subsidiary of Ciro and is also a Delaware corporation. Id. at 4. Defendant Intermediate is a holding company organized under the laws of the Cayman Islands and is the holder of a controlling interest of Ciro's stock and the holder of all of H & W's outstanding stock. Id. at 8. H & W is a Scottish corporation whose principal business is to hold investments. Id.

Defendant Gold serves as chairman of the boards of directors for Ciro, Intermediate, and H & W. Id. at 4 & 8. Gold owns all of the outstanding stock of Intermediate. Id. at 8. As of April 1991, Gold also beneficially owned between 2,614,868 and 2,861,118 shares of outstanding Ciro common stock (including shares subject to options) which is approximately 61.8% of the outstanding common stock of Ciro. Id. at 4. Thus, defendant Gold possesses a controlling interest in Intermediate, H & W, and Ciro.

Defendant Levine serves as an officer of both Intermediate and Ciro of Bond Street, and also serves as a member of the board of directors of Ciro. Id. at 5. As of April 1991, Levine beneficially owned 750,000 shares of Ciro common stock (including shares subject to options) which is approximately 19.4% of the outstanding common stock of Ciro. Id. Levine allegedly obtained his Ciro common stock from defendant Gold without payment or other consideration. Together defendants Gold and Levine own in excess of 80% of the outstanding common stock of Ciro. Id.

The second amended complaint further alleges that defendants Gold and Levine made certain material misrepresentations and omissions in connection with two transactions, the Swarovski Note and the Electra Agreement, in violation of §§ 10(b), 14(c), and 20(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14c-6 promulgated thereunder. In addition, the second amended complaint also alleges that defendants Gold and Levine violated their fiduciary duties under state law with respect to the Swarovski Note, the Electra Agreement, and a...