First Equity Corp. v. Standard & Poor's Corp.

• Citation: 690 F. Supp. 256
• Decision Date: 22 July 1988
• Docket Number: No. 86 Civ. 5913 (MBM).,86 Civ. 5913 (MBM).
• Parties: FIRST EQUITY CORPORATION OF FLORIDA, Robert Cornfeld and Floyd Watkins, Plaintiffs, v. STANDARD & POOR'S CORPORATION, Defendant.
• Court: U.S. District Court — Southern District of New York

690 F. Supp. 256

FIRST EQUITY CORPORATION OF FLORIDA, Robert Cornfeld and Floyd Watkins, Plaintiffs, v. STANDARD & POOR'S CORPORATION, Defendant.

No. 86 Civ. 5913 (MBM).

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

July 22, 1988.

Eric Seiler, Bruce Kaplan, Friedman & Kaplan, New York City, for plaintiffs.

Steve Lieberman, Cahill Gordon & Reindel, New York City, for defendant.

OPINION AND ORDER

MUKASEY, District Judge.

Defendant Standard & Poor's moves for summary judgment pursuant to Rule 56, Fed.R.Civ.P., dismissing plaintiffs' claim for fraud, the only claim remaining in this action. For the reasons set forth below, that motion is granted.

I.

This action arises out of an alleged error printed in defendant Standard & Poor's publication Standard Corporation Records ("Corporation Records") which contains descriptions of the terms and provisions of corporate bonds. Plaintiff First Equity is a Florida broker and investment advisor which subscribed to Corporation Records; plaintiffs Cornfeld and Watkins are two of First Equity's brokerage clients.

Plaintiffs claim they suffered damages in relying on a purportedly inaccurate description of Pan American Airways, Inc. convertible bonds that appeared in the June 1985 volume of Corporation Records. The portion of the description alleged to be inaccurate reads as follows:

CONVERTIBLE thru maturity on the 15th day preceding earlier/redemption date into Co.'s Com. Stock at $5.50 a share, with no adjustment for interest (unless called for redemption after record date and before interest date) or cash dividends.

This portion of the description was based on the prospectus issued by Pan Am in connection with the bonds which contained the following description of the bonds' conversion features:

When Trust Notes are converted after a record date for an interest payment and before the interest payment date, the amount of such interest must accompany Trust Notes surrendered for conversion; otherwise no adjustments in respect of interest or dividends will be made upon the conversion of Trust Notes.

Plaintiffs claim that based on the description of the bonds published in Corporation Records, they believed that they were entitled to accrued interest to be paid upon conversion of the bonds into common stock if the bonds were called for redemption between the record date and the interest payment date, the period set forth in parentheses. Because Pan Am was required to give 30 days notice before redemption, as discussed elsewhere in the description of the bonds, plaintiffs believed that once July 15 had passed without a call for redemption, the bonds could not be called before the record date of August 15. Plaintiffs claim to have understood that if the bonds were called for redemption during the period set forth in the parentheses, i.e., between August 15 and September 1, they would receive accrued interest upon conversion. Plaintiffs claim that based on the description of the Pan Am bonds in Corporation Records, they decided not to sell their bonds and to buy more of the bonds.

II.

Standard & Poor's made a prior motion before Judge Gerard L. Goettel of this Court to dismiss the complaint which alleged in the alternative negligent misrepresentation and fraud. Judge Goettel declined to dismiss the fraud claim but held that Standard & Poor's could not be held liable for negligent misrepresentation:

It is widely recognized that in the absence of a contract, fiduciary relationship, or intent to cause injury, a newspaper publisher is not liable to a member of the public for a non-defamatory negligent misstatement of an item of news, "unless he wilfully ... circulates it knowing it to be false, and it is calculated to and does ... result in injury to another person."

First Equity Corp. v. Standard & Poor's Corp., 670 F.Supp. 115, 117 (S.D.N.Y.1987) (citation omitted). Judge Goettel cited as a "seminal case for this proposition" Jaillet v. Cashman, 115 Misc. 383, 189 N.Y.S. 743 (Sup.Ct.1921), aff'd mem., 202 A.D. 805, 194 N.Y.S. 947 (App.Div.1922), aff'd mem., 235 N.Y. 511, 139 N.E. 714 (1923).

Judge Goettel expressly rejected plaintiffs' contention that they could establish scienter under Florida law by showing that "the alleged misrepresentation was made without knowledge as to its truth or falsity or that it was made under circumstances in which the defendant ought to have known, if it did not know, that the misrepresentation was false." Id. at 118. Judge Goettel ruled that:

notwithstanding that Florida law might under ordinary circumstances allow a negligent misrepresentation to support a claim of fraud, it does not when the charge of fraud is leveled against a newspaper publisher or other defendant in a comparable position.

Because both New York and Florida follow the Jaillet rule, the law of both states precludes the plaintiff's fraud claims except to the extent that they are based on the allegation that the defendant actually knew that the description of the bonds was incorrect.

Id. at 119. Having determined that "a Florida court would, if presented with the question, follow the Jaillet rule," Judge Goettel held that it was unnecessary to decide whether Florida or New York law governed the case, and dismissed the negligent misrepresentation claim.

III.

As a threshold matter on Standard & Poor's current motion, the parties dispute the meaning of Judge Goettel's ruling as to the degree of scienter plaintiffs must establish to prevail on the fraud claim. Defendant argues that under Judge Goettel's ruling, plaintiffs must prove that the description was published with actual knowledge of its falsity; plaintiffs argue, on the other hand, that they need satisfy only the scienter requirement for common law fraud by showing either actual knowledge or recklessness as to falsity. On its face, Judge Goettel's decision appears to hold unambiguously that the Jaillet standard of culpability applies in this case and that accordingly plaintiffs can prevail on their fraud claim only by proving that defendant published the allegedly false description of the bonds with actual knowledge of its falsity. Plaintiffs, however, challenge this interpretation of Judge Goettel's opinion. They claim that at a conference following issuance of the opinion, their counsel advised Judge Goettel that although they had not developed any evidence of actual knowledge, they believed they could establish scienter through proof of recklessness, and that Judge Goettel responded by stating that he had not intended in his opinion to change the common law requirements for fraud. Plaintiffs claim that by making this statement, Judge Goettel was, in effect, clarifying the import of his written opinion.

I find that the high degree of scienter imposed by Judge Goettel in his written decision reported at 670 F.Supp. 115 is consistent with well-established First Amendment principles requiring a plaintiff to demonstrate actual malice when seeking to impose liability on a newspaper for publication of a non-defamatory misstatement. See Time, Inc. v. Hill, 385 U.S. 374, 387, 87 S.Ct. 534, 541, 17 L.Ed.2d 456 (1967); Libertelli v. Hoffman-LaRoche, Inc., 7 Media L.Reptr. 1735 (S.D.N.Y.1981); Tumminello v. Bergen Evening Record, Inc., 454 F.Supp. 1156 (D.N.J.1978) (stating that "New Jersey could not, consistent with the requirements of the First Amendment, impose liability for a negligently untruthful new story. Recovery may be had at best only for knowing or reckless falsehood." (emphasis in original; citation omitted)).

In Libertelli, supra, the plaintiff alleged that she had become addicted to valium and sued defendant, publisher of the Physician's Desk Reference ("PDR"), for negligent omission of certain information from its description of valium published in the PDR. In granting the publisher's motion to dismiss the complaint, Judge Sweet ruled:

the applicable First Amendment standard for imposing liability on publishers for erroneous informational articles is substantively indistinguishable from the tort standard for false advertising set forth in Suarez v. Underwood, 103 Misc.2d 445, 426 N.Y.S.2d 208 (Sup.Ct. Queens Co.1980), holding that a "newspaper is only liable if it publishes a false advertisement maliciously or with intent to harm another or acts with total reckless abandon," 103 Misc.2d at 448, 426 N.Y.S. 2d at 210. Under the line of cases including New York Times v. Sullivan, supra, and Time, Inc. v. Hill, 358 385 U.S.

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