Coan v. Bell Atlantic Systems Leasing Intern., Inc.

• Decision Date: 20 November 1990
• Docket Number: Civ. No. N-89-322(AHN).
• Citation: 813 F. Supp. 929
• Parties: Richard COAN as Trustee for Estate of HITK Financial Group, Inc. v. BELL ATLANTIC SYSTEMS LEASING INTERNATIONAL, INC., et al.
• Court: U.S. District Court — District of Connecticut

813 F. Supp. 929

Richard COAN as Trustee for Estate of HITK Financial Group, Inc. v. BELL ATLANTIC SYSTEMS LEASING INTERNATIONAL, INC., et al.

Civ. No. N-89-322(AHN).

United States District Court, D. Connecticut.

November 20, 1990.

COPYRIGHT MATERIAL OMITTED

Richard M. Coan, Coan, Lewendon & Royston, New Haven, CT, Stuart D. Perlman, Perlman & Horvitz, Chicago, IL, for plaintiff.

Sanford M. Aderson, Aderson, Frank & Steiner, Pittsburgh, PA, David L. Belt, Alice S. Miskimin, Jacobs, Grudberg, Belt & Dow, P.C., New Haven, CT, Norman M. Block, Spengler, Carlson, Gubar, Brodsky & Frischling, New York City, Linda M. Fogler, Law Offices of Linda M. Fogler, Milford, CT, Robert A. Izard, Jr., Robinson & Cole, Erin Marie Kallaugher, Mark B. Seiger, Halloran & Sage, Scott P. Moser, Day, Berry & Howard, Hartford, CT, Frank J. Silvestri, Jr., Zeldes, Needle & Cooper, Bridgeport, CT, Richard Paul Swanson, Reid & Priest, New York City, Kathleen C. Stone, Boston, MA, Lawrence Wallach, Tacoma, WA, for defendants.

NEVAS, District Judge.

After review and over objections, the Magistrate's Recommended Ruling is ratified and approved.

So Ordered.

RECOMMENDED RULING ON PENDING MOTIONS

MARGOLIS, United States Magistrate Judge.

Plaintiff Richard M. Coan is the duly appointed Trustee for the Estate of HITK Financial Group, Inc. "HITK Financial", a Connecticut corporation which has filed a bankruptcy petition pending in the United States Bankruptcy Court for the District of Connecticut, Case No. 5-87-961. On July 6, 1989, Coan commenced this action which arises out of a complicated two-tiered sale/leaseback arrangement for computer equipment against eleven defendants involved in this transaction. These defendants include Bell Atlantic Systems Leasing International, Inc. "BASLI", a New York corporation with its principal place of business in Phoenix, Arizona (Complaint ¶ 6) and JMA Leasing Corp., a Delaware corporation with its principal place of business in New York, New York or East Haddam, Connecticut (id. ¶ 7), with whom HITK Financial entered into this arrangement.¹

The three other corporate defendants include: Equitable Leasing Company, Inc. "Equitable", a Delaware corporation with its principal place of business in New York City, which is JMA's parent corporation (id. ¶ 8); GICC Capital Corp. "GICC", a Delaware corporation with its principal place of business in New York City, and Matrix Leasing Corp. "Matrix", a Delaware corporation with its principal place of business in New York City or Dallas, Texas, both of which are affiliated with JMA and Equitable (id. ¶¶ 11-12). Six individuals also are named as defendants: Wayne U. Smith, an Arizona resident who is an officer of defendant BASLI and who negotiated the transaction at issue here (id. ¶ 16); Stanley Scheinman, a Connecticut resident with an office in Manhasset, New York, who was the executive vice president and chief operating officer of HITK and an officer of HITK Financial until March 1987 (id. ¶ 13); Jeffrey Auslander, a resident of Pittsburgh, Pennsylvania, who served as a vice president of HITK and HITK Financial until March 1987 (id. ¶ 14); Joel Hasen, a New York resident who served as counsel for certain parties to this transaction (id. ¶ 15); Joel Mallin, a New York resident who is the sole shareholder of Equitable and the controlling person of JMA and Equitable (id. ¶ 9); and Richard Gangel, a New York resident who is an owner and chief executive officer of GICC and Matrix (id. ¶ 10). The complaint traces in great detail the events occurring in the latter half of 1986 which culminated in a closing held in late December 1986 (id. ¶¶ 28-46), as well as the events which occurred thereafter (id. ¶¶ 47-65). The complaint rests on four counts — violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 (First Count); violation of § 12(2) of the Securities Act of 1933 against defendants BASLI, JMA, Matrix, GICC, Smith, Mallin and Gangel only (Second Count); common law fraud and deceit (Third Count); and negligent misrepresentation (Fourth Count).

I. PENDING MOTIONS

There are six motions pending here. On December 22, 1989, JMA, Equitable, Matrix, GICC, Mallin and Gangel collectively "the JMA Parties" filed a motion to dismiss, on a variety of grounds.² (Dkt. ## 31-32). Similar motions were filed on January 8, 1990 and January 10, 1990 by Scheinman and Auslander,³ respectively. (Dkt. ## 34-35, 39-40). Plaintiff Coan filed his brief in opposition to these motions on January 31, 1990. (Dkt. # 45).⁴ On February 26, 1990, Smith filed a motion to dismiss or for more particular statement, with two exhibits⁵ (Dkt. ## 49-50). Lastly, on March 21, 1990, Hasen filed his motion to dismiss (Dkt. ## 54-55). Coan filed his brief in opposition to both these motions on April 10, 1990. (Dkt. # 59). Hasen and Smith filed reply briefs on April 20, 1990 and April 30, 1990, respectively. (Dkt. ## 61-62).⁶ On January 8, 1990, Scheinman also filed a motion for more definite statement. (Dkt. ## 36-37).

Lengthy oral argument was held on these motions and on the similar motions pending in the BASLI Action on June 18, 1990.

II. DISCUSSION

In ruling on a motion to dismiss, the court presumes all factual allegations of the complaint to be true and makes all reasonable inferences in favor of the opposing party. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974). "A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1959) (footnote omitted).⁷

The ten defendants raised a variety of arguments, only some of which need to be addressed in this ruling.

A. FIRST AND SECOND COUNTS

1. No "Security" is Involved

The JMA Parties, Scheinman, Auslander and Smith argue that Coan's first and second counts should be dismissed, as no "security" is involved here. "Security" is defined in § 3(a)(10) of the Securities and Exchange Act of 1934 as follows:

The term "security" means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, ... or, in general, any interest or instrument commonly known as a "security," or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of or warrant or right to subscribe to or purchase, any of the foregoing.

. . . . .

15 U.S.C. § 78c(a)(10). The United States Supreme Court just recently "reaffirmed" that the definition of "security" in the 1934 Act "is virtually identical" to that found in the 1933 Act, so that for "present purposes, the coverage of the two Acts may be considered the same." Reves v. Ernst & Young, 494 U.S. 56, 61 n. 1, 110 S.Ct. 945, 949 n. 1, 108 L.Ed.2d 47 (1990).

Coan is correct that the term "security" was defined in "sufficiently broad and general terms so as to include within that definition the many types of instruments that in our commercial world fall within the ordinary concept of a security." United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 847-48, 95 S.Ct. 2051, 2058, 44 L.Ed.2d 621 reh. denied, 423 U.S. 884, 96 S.Ct. 157, 46 L.Ed.2d 115 (1975) (citation omitted) ("Forman"). "In searching for the meaning and scope of the word `security' in the Act, form should be disregarded for substance and the emphasis should be on economic reality." Id. 421 U.S. at 848, 95 S.Ct. at 2058 (citations omitted). As the United States Supreme Court recently observed in Reves, supra:

In defining the scope of the market that it wished to regulate, Congress painted with a broad brush.... Congress therefore did not attempt precisely to cabin the scope of the Securities Acts. Rather, it enacted a definition of "security" sufficiently broad to encompass virtually any instrument that might be sold as an investment.... Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.

494 U.S. at 61, 110 S.Ct. at 949 (emphasis in original) (footnote & citations omitted). The broad definition of "security" reflects the remedial nature of the securities legislation passed by Congress. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967). Given the creativity of those who commit securities fraud, the definition of security

embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.

S.E.C. v. W.J. Howey Co., 328 U.S. 293, 299, 66 S.Ct. 1100, 1103, 90 L.Ed. 1244 reh. denied, 329 U.S. 819, 67 S.Ct. 27, 91 L.Ed. 697 (1946) ("Howey"); Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 558 (2d Cir.1985) (Congress intended this legislation to reach "novel, uncommon, or irregular devices, whatever they appear to be, . . . if it be proved as a matter of fact that they were widely offered or dealt in under terms or courses of dealing which established their character in commerce as `investment contracts' ...") (citation omitted). The federal securities acts did not embody a Congressional intention "to provide a broad federal remedy for all fraud." Reves, supra, 494 U.S. at 61, 110 S.Ct. at 949 (citation omitted).

In 1946, the United States Supreme Court issued the Howey decision, regarding an investment scheme whereby individuals purchased a small portion of a 500-acre orange grove and then entered into a service contract to return to the promoters a ten-year leasehold interest in the land; under this contract, the...