Fromer v. Yogel
| Decision Date | 23 March 1999 |
| Docket Number | No. 97 CIV. 8829(SAS).,97 CIV. 8829(SAS). |
| Citation | 50 F.Supp.2d 227 |
| Parties | David M. FROMER and the Four Daughters Trust, Plaintiffs, v. Larry D. YOGEL, Mrs. Larry D. Yogel, NTG Partners, Omni Financial, L.P., Leo S. Schwartz, Wilmington Trust Company and William T. Saunders, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Victor A. Sahn, Brian G. Lustbader, Jerry D. Bernstein, Michael Donofrio, Michele D'Avolio, Wachtel & Masyr, New York City, for Plaintiffs.
Laurence J. Kaiser, Karen M. Klein, Law Office of Laurence J. Kaiser, New York City, for Defendants Larry D. Yogel, Mrs. Larry D. Yogel, NTG Partners and Omni Finance, L.P.
Joseph Milano, Schwartz Levin & Milano, LLP, New York City, for Defendant Leo S. Schwartz.
Stanley S. Arkin, Hyman L. Schaffer, Rebecca S. Walker, Arkin Schaffer & Kaplan LLP, New York City, for Defendants Wilmington Trust Co. and William T. Saunders.
Having invested in excess of $1.3 million in several product arbitrage companies, Plaintiff David M. Fromer ("Fromer") allegedly discovered that these companies were actually part of an elaborate "Ponzi" scheme. Having then been sued in a class action by other third-party investors caught up in the scheme (the Restifo action), Fromer and the other Restifo defendants negotiated a settlement agreement, ending the Restifo action as to all parties.1 Then, having paid the Restifo plaintiffs approximately $2.3 million to settle their claims, Fromer and the Four Daughters Trust ("FDT") (together "Plaintiffs" in this action) allege that the other Restifo defendants refused to reimburse Plaintiffs for amounts allegedly due them under the settlement agreement.2
Plaintiffs are now seeking both the return of their initial investments in the arbitrage companies and the reimbursement of money they paid to settle the Restifo lawsuit. Plaintiffs bring federal claims for contribution based on violations of § 10(b) of the 1934 Securities Exchange Act and Rule 10b-5 promulgated thereunder against Defendants Larry D. Yogel ("Yogel"), Mrs. Larry D. Yogel ("Mrs.Yogel"), Leo S. Schwartz ("Schwartz"), Wilmington Trust Company ("Wilmington"), William T. Saunders ("Saunders") and Omni Financial, L.P. ("Omni"), and federal claims for indemnity based on Exchange Act violations against Yogel, Mrs. Yogel, Wilmington, Saunders and Omni. Plaintiffs also assert numerous pendent state law claims under theories of contract, fraud, negligence and equitable principles.3
Subject matter jurisdiction is premised upon a federal question, 28 U.S.C. § 1331, and principles of supplemental jurisdiction, 28 U.S.C. § 1367(a).
Defendants move to dismiss the claims against them pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6), claiming that the Complaint fails to plead fraud with particularity, fails to state a claim upon which relief can be granted, or states claims which are timebarred.
In considering a Rule 12(b)(6) motion to dismiss, a district court must limit itself to "facts stated in the complaint or in documents attached to the complaint as exhibits or incorporated in the complaint by reference." Newman & Schwartz v. Asplundh Tree Expert Co., 102 F.3d 660, 661 (2d Cir.1996). Dismissal of a complaint pursuant to Rule 12(b)(6) is proper "only where it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle him to relief." Scotto v. Almenas, 143 F.3d 105, 109-10 (2d Cir.1998) (quoting Branham v. Meachum, 77 F.3d 626, 628 (2d Cir.1996)(internal quotations omitted)). "The task of the court in ruling on a Rule 12(b)(6) motion `is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.'" Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir.1998) (quoting Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir.1984)). Thus, in deciding such a motion, the court must accept as true all material facts alleged in the complaint and draw all reasonable inferences in the nonmovant's favor. See Thomas v. City of New York, 143 F.3d 31, 36 (2d Cir.1998). Nevertheless, "[a] complaint which consists of conclusory allegations unsupported by factual assertions fails even the liberal standard of Rule 12(b)(6)." De Jesus v. Sears, Roebuck & Co., 87 F.3d 65, 70 (2d Cir.1996) (internal quotations omitted).
The facts described in this section are drawn exclusively from the allegations in the Complaint. At this time, they are presumed to be true. Plaintiff Fromer invested more than $1.3 million in several companies, including the Premium Sales Corporation ("PSC"), Premium Sales LDL ("LDL") and Premium Sales RMS ("RMS") (together, the "Premium Sales entities"). See Complaint ("Cmplt.") at ¶ 1. With this investment, Fromer became one of three shareholders in PSH Management, Inc. ("PSH"), the corporate general partner of LDL and RMS. See Cmplt. at ¶¶ 14, 36. Apparently, Fromer was also involved in the management of the Premium Sales entities. See Cmplt. at ¶ 55. These companies engaged in the arbitrage of food, health and beauty products, a practice known as "diverting."4 While these entities engaged in some amount of legitimate diverting, their primary source of funds came from monies received from subsequent investors and constituted a Ponzi scheme. See Cmplt. at ¶ 19.
Defendants Yogel and Schwartz were the remaining two shareholders of PSH, with Yogel as President and CEO. See Cmplt. at ¶¶ 14, 34. Yogel, Mrs. Yogel and Schwartz made material misrepresentations and omissions regarding the business practices of the entities to induce Fromer to make his initial investments in the Premium Sales entities. See Cmplt. at ¶ 2. Defendants portrayed the entities as a legitimate enterprise when they knew or should have known that it was a Ponzi scheme. See Cmplt. at ¶¶ 3, 20-23.
Mrs. Yogel worked with Yogel at the Pennsylvania offices of PSH Management, allegedly running much of the day-to-day operations of the Premium Sales entities. See Cmplt. at ¶¶ 8, 47-48. In that capacity she signed false confirmations of purchases and sales of goods that she knew or should have known did not actually take place, thereby perpetrating and/or aiding and abetting the fraud and Exchange Act violations committed by Yogel. See Cmplt. at ¶¶ 49-50. In addition, Yogel has attempted to hide his assets from current and potential creditors by transferring substantial amounts of personal assets to Mrs. Yogel. See Cmplt. at ¶ 51.
Defendants NTG Partners and Omni Finance, L.P. are Pennsylvania entities owned and/or controlled by Yogel. Cmplt. at ¶¶ 10, 11. Yogel purchased his way into the PSC scheme through payments passed through Omni and NTG to other principals of PSC. See Cmplt. at ¶ 22. Yogel also solicited investments in PSC through Omni. See Cmplt. at ¶ 24.
Ultimately, the Premium Sales scheme collapsed. See Cmplt. at ¶¶ 3, 24. On June 9, 1993, the SEC placed PSC into receivership, resulting in the loss of investments by Fromer and numerous others. In 1993, several investors commenced the Restifo action against Fromer, Yogel and Schwartz. See Cmplt. at ¶¶ 4, 45. In December 1996, all defendants settled the Restifo action for approximately $2.3 million. See Cmplt. at ¶¶ 4, 46. Fromer agreed to pay and allegedly did pay the full amount of the settlement, plus associated fees. See Cmplt. at ¶ 46. During the settlement negotiations, Yogel and Schwartz acknowledged to Fromer that they would compensate him for the sums he paid to the Restifo Plaintiffs. See Cmplt. at ¶ 4. Fromer now alleges that Yogel and Schwartz breached this purported promise to reimburse him for the entirety of the settlement. See Cmplt. at ¶¶ 4, 46.
Defendants Wilmington and Saunders (together "the Wilmington Defendants") were not named as defendants in the Restifo action. Nevertheless, to preclude the possibility of being sued, Wilmington and Saunders settled any claims that the Restifo plaintiffs may have had against them for $1 million and obtained a release. See Wilmington Defendants' Memorandum of Law ( ) at 3.
Defendant Wilmington is a commercial bank and trust company organized under Delaware law. See Cmplt. at ¶ 12. Wilmington never entered into any contractual relationship with the Premium Sales entities, Fromer, FDT, Yogel or Schwartz. Its involvement arose when a Wilmington client asked Saunders, a Wilmington Vice President in its Business Development Division, to review certain documents relating to LDL and RMS and advise him as to whether they would be suitable investments. Saunders reviewed these materials and also asked Wilmington lawyers to review the LDL and RMS partnership agreements. See Cmplt. at ¶¶ 13, 25. This client eventually invested in LDL and RMS and later became a plaintiff in the Restifo action against Fromer, Yogel and Schwartz. The documents reviewed by Saunders contained numerous false and misleading statements regarding the Premium Sales entities. While Saunders knew or should have known of the falsity of these statements, he nevertheless disseminated them with the intention that Fromer and others rely on their truth. See Cmplt. at ¶¶ 25-32.
Settling defendants in a federal securities action may sue for contribution. See, e.g., In re Del-Val Financial Corp. Securities Litigation, 868 F.Supp. 547, 553-4 (S.D.N.Y.1994) (citing Musick, Peeler & Garrett v. Employers Insurance of Wausau, 508 U.S. 286, 113 S.Ct. 2085, 124 L.Ed.2d 194, (1993)). Contribution provides that one of two or more joint wrongdoers should not be required to pay more than its share of a common burden. See Epstein v. Haas Securities Corp., 731 F.Supp. 1166 (S.D.N.Y.1990); Stratton Group, Ltd. v. Sprayregen, 466 F.Supp....
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