Glusband v. Fittin Cunningham Lauzon, Inc.

• Decision Date: 08 March 1984
• Docket Number: 80 Civ. 7387 (JES).
• Citation: 582 F. Supp. 145
• Parties: Steven J. GLUSBAND, as Receiver for Michael Starbuck, Inc. and Associates, Plaintiff, v. FITTIN CUNNINGHAM LAUZON, INC., James J. Armenakis, as Receiver for Michael Starbuck Inc., Michael Starbuck Inc., John Starbuck, Paul Carmel, Beverly Ann Mingola, Thomas J. Fittin, Jr., Joseph Lauzon, Frank Earl Kunker, III, Insurance Company of North America, Inc., and National Grange Mutual Insurance Company, Defendants.
• Court: U.S. District Court — Southern District of New York

582 F. Supp. 145

Steven J. GLUSBAND, as Receiver for Michael Starbuck, Inc. and Associates, Plaintiff, v. FITTIN CUNNINGHAM LAUZON, INC., James J. Armenakis, as Receiver for Michael Starbuck Inc., Michael Starbuck Inc., John Starbuck, Paul Carmel, Beverly Ann Mingola, Thomas J. Fittin, Jr., Joseph Lauzon, Frank Earl Kunker, III, Insurance Company of North America, Inc., and National Grange Mutual Insurance Company, Defendants.

80 Civ. 7387 (JES).

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

March 8, 1984.

COPYRIGHT MATERIAL OMITTED

Sage, Gray, Todd & Sims, New York City, for plaintiff; Stuart Krause, John F.X. Peloso, New York City, of counsel.

Bigham, Englar, Jones & Houston, New York City, for defendant Ins. Co. of North America; William P. Sullivan, New York City, of counsel.

Lunney & Crocco, New York City, for defendants Fittin Cunningham Lauzon, Inc., Thomas J. Fittin, Jr. and Joseph Lauzon, Charles A. Crocco, Jr., Stephen P. McLaughlin, New York City, of counsel.

James J. Armenakis, New York City, for receiver for Michael Starbuck Inc.

Jeffrey S. Rovins, New York City, for defendant Beverly Ann Mingola.

Kleinberg, Kaplan, Wolff & Cohen, P.C., New York City, for defendant Frank Earl Kunker, III; Norris D. Wolff, Terri S. Feinstein, New York City, of counsel.

Leonard Sheft & Associates, New York City, for defendant Nat. Grange Mut. Ins. Co.; Susan Perrotta, New York City, of counsel.

OPINION AND ORDER

SPRIZZO, District Judge:

Plaintiff, as receiver for Michael Starbuck, Inc. and Associates ("Associates"), commenced this action to recover assets of Associates which were lost, allegedly due to the fraudulent activities of the defendants. Amended Complaint para. 15.

Associates is a limited partnership.¹ The defendants are James Armenakis, as receiver for Michael Starbuck, Inc. ("MSI"), the general partner of Associates; Fittin Cunningham Lauzon Inc. ("Fittin, Inc."), a broker and dealer in securities with whom Associates had a brokerage account; John Starbuck ("Starbuck"), an accounts executive and registered representative at Fittin, Inc. who allegedly effected transactions for the Associates account; Paul Carmel ("Carmel"), an accounts executive and registered representative for Associates employed by Fittin, Inc.; Beverly Ann Mingola ("Mingola"), a Fittin, Inc. and MSI employee; Thomas J. Fittin ("Fittin"), Chief Executive Officer and Compliance Officer of Fittin, Inc.; Joseph Lauzon ("Lauzon"), Chairman of the Board and Secretary of Fittin, Inc.; Frank Earl Kunker III ("Kunker"), manager of the Albany office of Fittin, Inc.; Insurance Company of North America ("INA"); and National Grange Mutual Insurance Company ("National Grange").²

Associates was formed in late 1977 for the purpose of investing in securities. MSI, the general partner, was an investment management corporation organized under the laws of New York, and at all relevant times was registered with the Securities and Exchange Commission ("SEC") as an Investment Advisor pursuant to section 203 of the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-1 to 80b-21. Amended Complaint para. 4. MSI was wholly owned by Michael Starbuck. Beginning in late 1977 MSI, allegedly with the help of Fittin, Inc., began to solicit investors to buy limited partnership interests in Associates. Some 270 persons invested approximately $2,920,225.00 in Associates. Amended Complaint paras. 19-20. The general partner, MSI, apparently exercised exclusive control over the management and business of Associates. Amended Complaint para. 6.

On January 11, 1980 the SEC commenced an action against Michael Starbuck, MSI, and Associates, alleging violations of section 5(a) and (c) and section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a) & (c), 77q(a), and section 10(b) of the Securities Exchange Act of 1934 ("Securities Exchange Act"), 15 U.S.C. § 78j(b). Thereafter, the defendants entered into a consent judgment before Judge Werker, enjoining them from future violations of the securities laws, see Final Judgment of Permanent Injunction and Order Appointing A Receiver and Granting Other Relief, 80 Civ. 231 (HFW) (S.D.N.Y. Jan. 11, 1980). At the same time, Judge Werker appointed plaintiff as receiver for Associates. Id.³

Plaintiff commenced this action on December 29, 1980, seeking damages under sections 5(a), 5(c), 12(1), 12(2), 15 and 17(a) of the Securities Act, 15 U.S.C. §§ 77e(a) & (c), 77l(1) & (2), 77o, 77q; section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t; section 352 of New York's General Business Law; and for common law fraud, negligence, and breach of contract.

Defendants moved to dismiss plaintiff's fraud allegations for failure to plead fraud with the requisite particularity, as prescribed by Fed.R.Civ.P. 9(b), and to dismiss the negligence claims pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted.⁴ The insurance company defendants INA and National Grange moved separately to dismiss the complaint against them for lack of privity. Defendants also disputed plaintiffs standing and capacity to bring this action, on the ground that it is not in fact a legal partnership, see note 1, supra.

CAPACITY AND STANDING TO SUE⁵

Given the broad equity powers conferred upon a receiver pursuant to 28 U.S.C. § 754, and by Judge Werker's Order,⁶ it is clear that plaintiff has capacity to bring any action which Associates, as an entity, could have brought. It is also clear that certainly with respect to the federal law claims, plaintiff's capacity to sue under state law is irrelevant.

Under Fed.R.Civ.P. 17(b), "a partnership or other unincorporated association" (emphasis added), which has no capacity to sue under the law of the state in which the district court sits, "may sue or be sued ... for the purpose of enforcing for or against it a substantive right existing under the Constitution or laws of the United States, ..." Therefore, regardless of state law, Associates, as either a partnership or merely an unincorporated association, and hence the Receiver on its behalf, has the capacity to bring its federal claims in this court, see, e.g., Commodity Futures Trading Commission v. Chilcott Portfolio Management, Inc., 713 F.2d 1477, 1482 (10th Cir. 1983), rev'g on other grounds, 1980-82 Transfer Binder Com.Fut.L.Rep. (CCH) ¶ 21,458 at 26,173 (D.Colo. August 30, 1982); cf. Porter v. Sabin, 149 U.S. 473, 478, 13 S.Ct. 1008, 1010, 37 L.Ed. 815 (1893); United States v. Franklin National Bank, 512 F.2d 245, 248 (2d Cir.1975), so long as it has suffered a "distinct and palpable injury", Watt v. Energy Action Educational Foundation, 454 U.S. 151, 161, 102 S.Ct. 205, 212, 70 L.Ed.2d 309 (1981); Warth v. Seldin, 422 U.S. 490, 501, 95 S.Ct. 2197, 2206, 45 L.Ed.2d 343 (1975), which is "fairly traceable" to the defendants' conduct. Watt, 454 U.S. at 161, 102 S.Ct. at 212; Village of Arlington Heights v. Metropolitan Housing Development Corp., 429 U.S. 252, 261, 97 S.Ct. 555, 561, 50 L.Ed.2d 450 (1977).

Plaintiff alleges that Associates suffered the depletion of partnership assets due to the fraud of defendants. To the extent that plaintiff sufficiently alleges that Associates has suffered such an injury it is asserting Associates' own rights and not those of third parties. See Warth, 422 U.S. at 499, 95 S.Ct. at 2205; Armstrong v. McAlpin, 699 F.2d 79, 89 (2d Cir.1983); Chilcott, 1980-82 Transfer Binder Com. Fut.L.Rep. at 26,172 & 26,175; Canut v. Lyons, 450 F.Supp. 26, 29 (C.D.Cal.1977). However, it is equally clear that plaintiff has no standing to assert claims which belong solely to the limited partners in Associates, i.e., claims for any damages caused by their being fraudulently induced by defendants to purchase limited partnership interests in Associates.

SUFFICIENCY OF PLAINTIFF'S CLAIMS

Although the Court has determined that plaintiffs have standing to bring federal claims arising out of injuries to the partnership itself, it does not follow that the federal claims asserted in the amended complaint are legally sufficient. With respect to many of these claims, plaintiff must also sufficiently allege that it is a purchaser of a security within the meaning of the securities laws. This plaintiff has failed to do so. While the limited partnership interests referred to in the complaint are "securities," plaintiff was not a purchaser of those securities and the complaint refers to no other securities which plaintiff allegedly purchased. As a consequence, the claims enumerated in the third, fourth, fifth and sixth counts of the amended complaint must be dismissed.⁷

Count four alleges damages due to defendants' violations of sections 5(a), 5(c) and 12(1) of the Securities Act. Section 12, which expressly creates a private right of action for violations of section 5, specifically states that one who sells a security in violation of section 5 shall be liable in damages to the purchaser of the security.⁸ Because Associates was not the purchaser of the limited partnership interests, Associates, and hence plaintiff, as its receiver, has no claim against defendants under sections 5(a), 5(c) or 12(1). The fifth count alleges damages due to violations of section 12(2) of the Securities Act, and the sixth count alleges damages pursuant to section 15 of the Securities Act. Under both section 12(2)⁹ and section 15¹⁰ only purchasers of a security may sue. Therefore, plaintiff may not properly bring a cause of action on behalf of Associates under either sections 12(2) or 15 of the Securities Act.

Finally, the third count alleges damages pursuant to section 17(a) of the Securities Act.¹¹ While the Second Circuit has held that a private right of action will lie under section 17(a), see Kirshner v. United States of America, 603 F.2d 234, 241 (2d Cir.1978), it has also held...