CPC Intern. Inc. v. McKesson Corp.

• Decision Date: 15 September 1987
• Parties: , 514 N.E.2d 116, Blue Sky L. Rep. P 72,641, 56 USLW 2187, Fed. Sec. L. Rep. P 93,419 CPC INTERNATIONAL INC., Appellant, v. McKESSON CORPORATION, et al., Defendants, and Morgan Stanley & Co., Inc., et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 804

519 N.Y.S.2d 804

70 N.Y.2d 268, 514 N.E.2d 116, Blue Sky L.

Rep. P 72,641,

56 USLW 2187, Fed. Sec. L. Rep. P 93,419

CPC INTERNATIONAL INC., Appellant, v. McKESSON CORPORATION, et al., Defendants, and Morgan Stanley & Co., Inc., et al., Respondents.

Court of Appeals of New York.

Sept. 15, 1987.

Stephen Rackow Kaye, Claire P. Gutekunst, Mary C. Mone and William S. Wells, New York City, for appellant.

Moses Silverman, Arthur L. Liman, Stuart Robinowitz, Abby L. Jennis and Jeffrey J. Wild, New York City, for McKesson Corp. and others, defendants.

Lewis B. Kaden, Lisa A. Huestis and Timothy J. Mayopoulos, New York City, for Morgan Stanley & Co., Inc., respondent.

OPINION OF THE COURT

HANCOCK, Judge.

This action arises from defendant McKesson's sale of the stock of its wholly owned subsidiary, C.F. Mueller Corporation, a leading producer of pasta, to plaintiff CPC International. Plaintiff has sued McKesson Corporation, ¹ Morgan Stanley, McKesson's investment advisor, and individual defendants Blattman, Merrick and Brounstein, former Mueller and McKesson employees, on a complaint containing causes of action for damages based on breach of warranty, violations of the Martin Act (General Business Law § 352-c), violations of section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q), and common-law fraud. Supreme Court granted defendants' motion to dismiss the cause of action based on section 17(a) of the Securities Act and granted the motions of Morgan Stanley and the individual defendants to dismiss the common-law fraud action as to them. It denied defendants' motion to dismiss the Martin Act claim and denied the motions of Blattman and Merrick, residents of California and Connecticut, respectively, to dismiss the complaint against them upon the ground that the court lacked personal jurisdiction.

The Appellate Division, 120 A.D.2d 221, 507 N.Y.S.2d 984, modified and granted the motions to dismiss in their entirety with the exception of the causes of action alleging breach of warranty and common-law fraud against McKesson. The Appellate Division added that it agreed with Supreme Court's denial of Blattman's and Merrick's motions to dismiss for lack of personal jurisdiction.

This appeal presents four questions: (1) whether plaintiff has a cause of action for violations of section 352-c of the Martin Act; (2) whether plaintiff has a cause of action for violations of section 17(a) of the Securities Act of 1933; (3) whether plaintiff has stated a cause of action against Morgan Stanley and the individual defendants based on common-law fraud; and (4) whether Supreme Court has personal jurisdiction over defendants Blattman and Merrick for this action.

The Complaint

The crux of plaintiff's complaint is that the defendants deliberately and fraudulently prepared false projections of revenues, operating expenses and profits of Mueller and intentionally withheld other accurate projections for the purpose of selling Mueller for more than it was worth. Plaintiff alleges that, as part of a review of Mueller's expected economic performance in early June 1983, Mueller's executives made a presentation to McKesson's executives predicting a sharp decline in Mueller's profitability; that following this prediction the individual defendants and others attended a conference on June 27 and 28, 1983 at the New York offices of Morgan Stanley to formulate a program for the sale of Mueller at an inflated price; that at McKesson's and Blattman's direction defendants Merrick and Brounstein, a Mueller vice-president, and others, from June 30, 1983 through July 1, 1983, created fictitious projections overstating Mueller's business prospects which they knew were at odds with the unfavorable projections of future business prepared by Mueller's executives approximately two weeks earlier; that Morgan Stanley knowingly incorporated such fictitious projections into a confidential addendum to a memorandum offering Mueller to interested buyers; that Morgan Stanley distributed the offering memorandum and the confidential addendum containing these overstated projections in soliciti bids from CPC and others for purchase of the Mueller stock; that although the offering memorandum prepared by Morgan Stanley contained a disclaimer of any express or implied warranties, it also contained the statement, "Morgan Stanley believe[s] that the financial and other information contained herein is accurate"; that the confidential addendum prepared by Morgan Stanley stated that the projections were "based on estimates of Mueller's management, which in the opinion of management, are reasonable in light of historical results and present trends"; that the defendants concealed from plaintiff the facts that the projections incorporated in the confidential memorandum had been especially prepared for use by Morgan Stanley and McKesson in selling the Mueller stock and that these projections were unwarranted and contrary to management's earlier authentic projections; that plaintiff submitted its successful bid for the stock of Mueller in reliance on the projections distributed by Morgan Stanley which McKesson had warranted in the purchase and sale agreement to be authentic and to have been made in good faith in the ordinary course of business using the assumptions of market growth, market share and product share set forth in the contract; and that as a result, on December 1, 1983, CPC purchased Mueller for an amount $61,300,000 higher than its actual fair market value.

The Holdings

For reasons which will appear, the court holds in part I that there is no implied private cause of action for violations of the antifraud provisions of the Martin Act (General Business Law § 352-c); in part II that there is no implied private cause of action under section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q); and in part III that plaintiff has sufficiently pleaded a cause of action for common-law fraud. Additionally, in part IV, we reject Blattman and Merrick's argument that we should affirm the dismissal of the complaint as to them on the alternative ground that New York courts do not have personal jurisdiction. The order of the Appellate Division should be modified accordingly. ²

I

General Business Law § 352-c prohibits various fraudulent and deceitful practices in the distribution, exchange, sale and purchase of securities. ³ This provision is part of the Martin Act, New York's version of the blue sky laws which, in various forms, have been enacted by every State in the country. In all the other States, except one, the Legislature has expressly recognized a private civil action for violations of the corresponding provision. Under the Martin Act, however, no private action has been expressly authorized. A majority of this court now holds that there is no cause of action impliedly created under section 352-c.

The rules for determining when a violation of a statutory provision gives rise to an implied private cause of action for damages have evolved in the decisional law of this State over more than 100 years. (See, e.g., Atkin v. Hill, Darlington & Grimm, 12 N.Y.2d 940, 238 N.Y.S.2d 516, 188 N.E.2d 790; Pine Grove Poultry Farm v. Newton By-Products Mfg. Co., 248 N.Y. 293, 162 N.E. 84; Abounader v. Strohmeyer & Arpe Co., 243 N.Y. 458, 154 N.E. 309; and Willy v. Mulledy, 78 N.Y. 310, contrast with Carpenter v. City of Plattsburgh, 66 N.Y.2d 791, 497 N.Y.S.2d 909, 488 N.E.2d 839; Stoganovic v. Dinolfo, 61 N.Y.2d 812, 473 N.Y.S.2d 972, 462 N.E.2d 149; Drinkhouse v. Parka Corp., 3 N.Y.2d 82, 164 N.Y.S.2d 1, 143 N.E.2d 767; Steitz v. City of Beacon, 295 N.Y. 51, 64 N.E.2d 704; see also, Restatement [Second] of Torts §§ 286, 874A, comments h, i.)

Recently, in Burns Jackson Miller Summit & Spitzer v. Lindner, 59 N.Y.2d 314, 464 N.Y.S.2d 712, 451 N.E.2d 459, we held that a violation of the Taylor Law did not give rise to an independent cause of action not expressly granted, because such would be inconsistent with that statute's purpose, legislative history, and underlying scheme. We explained that: "Whether a private cause of action was intended will turn in the first instance on whether the plaintiff is 'one of the class for whose especial benefit the statute was enacted' [citations omitted]. But the inquiry does not * * * end there * * * Important also are what indications there are in the statute or its legislative history of an intent to create (or conversely to deny) such a remedy and, most importantly, the consistency of doing so with the purposes underlying the legislative scheme [citations omitted]" (supra, at 325, 464 N.Y.S.2d 712, 451 N.E.2d 459). In short, a private cause of action is implied where it can be shown that plaintiff belongs to the class of legislatively intended beneficiaries and that a right of action would be "clearly in furtherance of the legislative purpose" (supra, at 329, 464 N.Y.S.2d 712, 451 N.E.2d 459).

The majority of this court holds that an implied private action is not consistent with the legislative scheme underlying the Martin Act and, specifically, section 352-c; that the specific purpose of the statute was to create a statutory mechanism in which the Attorney-General would have broad regulatory and remedial powers to prevent fraudulent securities practices by investigating and intervening at the first indication of possible securities fraud on the public and, thereafter, if appropriate, to commence civil or criminal prosecution; and that consistency of purpose with the statute includes consistency with this enforcement mechanism (see, General Business Law §§ 352, 353, 353-a, 354, 358; Kaufmann, Practice Commentaries, McKinney's Cons.Laws of N.Y., Book 19, General Business Law art. 23-A, at 19-20).

Judge Simons and I have a different view. We believe that the underlying purpose of section 352-c is not to grant various powers to the Attorney-General. Rather, as we see it, the ultimate aim to be achieved by the statute is the...