CITIBANK, NA v. KH Corp.

• Decision Date: 22 August 1990
• Docket Number: No. 89 Civ. 3609 (PKL).,89 Civ. 3609 (PKL).
• Citation: CITIBANK, NA v. KH Corp., 745 F. Supp. 899 (S.D. N.Y. 1990)
• Parties: CITIBANK, N.A., Plaintiff, v. K-H CORPORATION and Kelsey-Hayes Company, Defendants.
• Court: U.S. District Court — Southern District of New York

745 F. Supp. 899

CITIBANK, N.A., Plaintiff, v.K-H CORPORATION and Kelsey-Hayes Company, Defendants.

No. 89 Civ. 3609 (PKL).

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

August 22, 1990.

Latham & Watkins(John D. Shyer, New York City, James A. Cherney, Robert L. Stout and Stephen M. McJohn, Chicago, Ill., of counsel), for plaintiff.

Cahill Gordon & Reindel(Thomas J. Kavaler, Howard G. Sloane, Jonathan D. Thier, Katherine B. Harrison and Daniel Cantor, of counsel), New York City, for defendants.

ORDER AND OPINION

LEISURE, District Judge:

This matter is before the Court on a motion filed by defendantsK-H Corporation("K-H Corp.")(formerly known as Fruehauf Corporation("Fruehauf"))¹ and Kelsey-Hayes Company("Kelsey-Hayes") to dismiss plaintiffCitibank, N.A.'s ("Citibank") third amended complaint for failure to state a claim upon which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(6).

BACKGROUND

This litigation arises from a commercial lending transaction involving plaintiff Citibank and Grabill Aerospace Industries, Ltd.("GAIL"), which was entered into, in part, to fund a stock purchase agreement involving GAIL and defendants Fruehauf and Kelsey-Hayes.Citibank brought suit against Fruehauf and Kelsey-Hayes claiming common law fraud and violations of Section 10(b) of the Securities Exchange Act of 1934,15 U.S.C. § 78j, arising out of the lending transaction.The jurisdiction of this Court is predicated on both federal question jurisdiction and diversity of citizenship.

On June 25, 1987, GAIL entered into a stock purchase agreement with Fruehauf and Kelsey-Hayes, a wholly-owned subsidiary of Fruehauf, to purchase the stock of four subsidiaries of Fruehauf for $150 million.Third Amended Complaint ("Complaint"), ¶ 8, and Exhibits A and B.The Fruehauf subsidiaries, SPECO Corporation, Heintz Corporation, Utica Corporation, and Compositek Holdings, Inc.(collectively, the "Fruehauf subsidiaries"), were engaged in various aspects of the aerospace industry.The stock purchase agreement provided that GAIL would deliver the acquisition price of $150 million in cash to Fruehauf via wire transfer at the closing, on or about July 31, 1987.²

To finance this acquisition, GAIL entered into a secured credit agreement with Citibank on August 3, 1987, whereby Citibank agreed to lend GAIL up to $147.5 million, consisting of $50 million from the issuance of mezzanine acquisition notes, a term loan of $75 million, and a revolving line of credit of up to $22.5 million.Complaint, ¶ 11, and Exhibit C. One-hundred thirty million dollars ($130 million) of the loan was earmarked to finance GAIL's acquisition of the Fruehauf subsidiaries, while the remaining $17.5 million of the loan was available for GAIL's working capital needs on a revolving credit basis.As collateral security for the loan, William J. Stoecker("Stoecker"), the sole shareholder of GAIL, pledged the stock of GAIL, and GAIL pledged the stock of the Fruehauf subsidiaries, to Citibank.Complaint, ¶ 12.

As a condition precedent to Citibank's financing obligations, the secured credit agreement required Stoecker to make a $20 million cash contribution to GAIL which would be utilized by GAIL to fund a portion of the acquisition purchase price.Complaint, ¶ 13, and Exhibit C, Article XI, § 11.1.1.Thus, GAIL would obtain $130 million of the acquisition funds from a portion of its Citibank loan, and $20 million of the acquisition funds from Stoecker's equity contribution.

The complaint alleges that during the week prior to the closing, Stoecker telephoned Richard Darke("Darke"), Fruehauf's general counsel, and told him that he would be unable to provide the entire $20 million cash capital contribution to GAIL before closing.Complaint, ¶ 16.Darke and Stoecker allegedly agreed that, at the closing, Fruehauf would accept $143 million cash from GAIL and a $7 million promissory note in Fruehauf's favor executed by Stoecker.Complaint, ¶ 17.The complaint further alleges that at the closing on August 6, 1987, Fruehauf accepted Stoecker's $7 million promissory note, and wired $7 million of its own funds into the bank account designated for receipt of the $150 million purchase price for the acquisition.Complaint, ¶¶ 18-19.Kelsey-Hayes allegedly had knowledge of Fruehauf's $7 million loan to Stoecker.Complaint, ¶ 19.Stoecker, Fruehauf and Kelsey-Hayes did not disclose to Citibank the $7 million loan.Complaint, ¶ 19.

Citibank advanced $130 million to GAIL for the acquisition price at the closing, pursuant to the secured credit agreement.Complaint, ¶ 27.Approximately three weeks later, Stoecker repaid the $7 million loan to Fruehauf.Defendants' Reply Memorandum of Law, at 5.Eventually, GAIL defaulted on its loan from Citibank.Defendants' Memorandum of Law, at 2.Citibank attempted to realize $150 million from the stock pledged to it as collateral — the GAIL stock and the stock of the Fruehauf subsidiaries — it was unable to do so.Plaintiff's Memorandum of Law, at 7.

Citibank commenced this action against Fruehauf on May 23, 1989, alleging common law fraud.The Court's jurisdiction arises out of the diversity of citizenship of the parties, as Citibank is a national banking association located in New York, and Fruehauf is a Delaware corporation with its principal place of business in Michigan.On June 26, 1989, Fruehauf moved to dismiss the complaint for failure to plead fraud with particularity, pursuant to Fed. R.Civ.P. 9(b).Following a pre-trial conference on July 7, 1989, Fruehauf withdrew its motion to dismiss, and on July 14, 1989, Citibank served its first amended complaint.On March 5, 1990, Citibank filed a second amended complaint, adding claims under Section 10(b) of the Securities Exchange Act of 1934.Citibank filed a third amended complaint on April 10, 1990, adding Kelsey-Hayes as a defendant.³On April 12, 1990, Fruehauf and Kelsey-Hayes filed the instant motion to dismiss the complaint for failure to state a claim upon which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(6).

DISCUSSION

The well-known standard on a Rule 12(b)(6) motion dictates that "`a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'"Dahlberg v. Becker,748 F.2d 85, 88(2d Cir.1984), cert. denied,470 U.S. 1084, 105 S.Ct. 1845, 85 L.Ed.2d 144(1985)(quotingConley v. Gibson,355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80(1957)).The purpose of a motion to dismiss under Rule 12(b)(6) is to assess the legal feasibility of the complaint, not to weigh the evidence which the plaintiff offers or intends to offer.Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc.,748 F.2d 774, 779(2d Cir.1984).The district court should not grant the motion simply because the possibility of ultimate recovery is remote.Id. at 779(citingScheuer v. Rhodes,416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90(1974)).

"In deciding a motion to dismiss, the Court must accept the plaintiff's allegation of facts as true together with such reasonable inferences as may be drawn in its favor."Landy v. Mitchell Petroleum Technology Corp.,734 F.Supp. 608, 615(S.D.N.Y.1990)(citingMurray v. City of Milford, Connecticut,380 F.2d 468, 470(2d Cir.1967))."The district court must limit itself to a consideration of the facts alleged on the face of the complaint, and to any documents attached as exhibits or incorporated by reference."Cosmas v. Hassett,886 F.2d 8, 13(2d Cir.1989)(citations omitted);see alsoWright and Miller, Federal Practice and Procedure, § 1356, at 298-99.Thus, this Court has dismissed a complaint where the necessary factual allegations in support of a Section 10(b) claim were contained in the plaintiff's memorandum of law, but were not adequately pled in the complaint.Goldman v. McMahan, Brafman, Morgan &Co., 1987 Transfer Binder Fed.Sec.L.Rep. (CCH)¶ 93,354, at 96,809, 1987 WL 12820(S.D.N.Y.1987).

A.Section 10(b) Claims

Fruehauf and Kelsey-Hayes argue that the complaint does not adequately allege Section 10(b) claims against them, as the alleged fraud did not occur "in connection with" the purchase or sale of securities, and Citibank has not adequately pled loss causation.Each of these issues will be discussed in turn.⁴

1.The "In Connection With" Requirement

In order to bring a suit under Section 10(b) of the Securities Exchange Act of 1934, the alleged fraud must have occurred "in connection with the purchase or sale of securities."15 U.S.C. § 78j.The "purchase or sale" of securities which Citibank alleges in the complaint is Stoecker's pledge of GAIL's stock, and GAIL's pledge of the Fruehauf subsidiaries' stock, as collateral for Citibank's loan to GAIL.Complaint, ¶¶ 12, 38.It is clear under the law that a pledge of securities may under certain circumstances be a "purchase or sale" of securities under Section 10(b).SeeChemical Bank v. Arthur Andersen & Co.,726 F.2d 930, 939(2d Cir.1984);Mallis v. Federal Deposit Insurance Corp.,568 F.2d 824, 830(2d Cir.1977).⁵

More specifically, to recover on a Section 10(b) claim, a plaintiff"`must allege material misstatements or omissions indicating an intent to deceive or defraud in connection with the purchase or sale of a security.'"McMahan & Company v. Wherehouse Entertainment, Inc.,900 F.2d 576, 581(2d Cir.1990)(quotingLuce v. Edelstein,802 F.2d 49, 55(2d Cir.1986))(emphasis added)."The purpose of § 10(b)andRule 10b-5 is to protect persons who are deceived in securities transactions — to make sure that buyers of securities get what they think they are getting and that sellers of securities are not tricked into parting with something for a price known to the buyer to be inadequate or for a consideration known to the buyer not to be what it purports to be."Chemical Bank, supra,726 F.2d at 943;see...