Harrison v. Enventure Capital Group, Inc., CIV-86-585E.

• Decision Date: 04 August 1987
• Docket Number: No. CIV-86-585E.,CIV-86-585E.
• Citation: 666 F. Supp. 473
• Parties: Milo HARRISON, Martin R. Kaiden, Peter T.B. Schaefer, John P. Kelly, Robert J. Meisner, Michael Cavalcanti, David E. Meyers, Sadashiu S. Shenoy, Gabriel Diamond, David J. Kincaid, Jr., John J. Lenahan and Robert H. Henley, Plaintiffs, v. ENVENTURE CAPITAL GROUP, INC., a New York corporation, Enventure Energy, Inc., a New York corporation, Enventure Energy Enhanced Oil Recovery Associates — Charco Redondo Propane, a New York limited partnership, Ronald E. Allen, an individual, Marine Midland Bank, National Association, a National banking association, the Mutual Fire, Marine and Inland Insurance Company of Philadelphia, Pennsylvania, a Pennsylvania corporation, and Freed, Maxich, Sachs & Murphy, P.C., Defendants.
• Court: U.S. District Court — Western District of New York

666 F. Supp. 473

Milo HARRISON, Martin R. Kaiden, Peter T.B. Schaefer, John P. Kelly, Robert J. Meisner, Michael Cavalcanti, David E. Meyers, Sadashiu S. Shenoy, Gabriel Diamond, David J. Kincaid, Jr., John J. Lenahan and Robert H. Henley, Plaintiffs, v. ENVENTURE CAPITAL GROUP, INC., a New York corporation, Enventure Energy, Inc., a New York corporation, Enventure Energy Enhanced Oil Recovery Associates — Charco Redondo Propane, a New York limited partnership, Ronald E. Allen, an individual, Marine Midland Bank, National Association, a National banking association, the Mutual Fire, Marine and Inland Insurance Company of Philadelphia, Pennsylvania, a Pennsylvania corporation, and Freed, Maxich,¹ Sachs & Murphy, P.C., Defendants.

No. CIV-86-585E.

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

August 4, 1987.

COPYRIGHT MATERIAL OMITTED

Joseph A. Ables, Buffalo, N.Y., for plaintiffs.

Ellen M. Baratz, New York City, for defendants.

MEMORANDUM and ORDER

ELFVIN, District Judge.

The plaintiffs are twelve investors who bought limited partnership interests in Enventure Energy Enhanced Oil Recovery Associates-Charco Redondo Propane ("Charco Redondo"), a tax shelter program. They have brought this action against various corporate, partnership and individual defendants charging them with fraud in connection with the offer and sale of those interests. The Mutual Fire, Marine and Inland Insurance Company of Philadelphia, Pennsylvania ("Mutual Insurance") provided the surety bond that enabled the partnership to obtain the needed financing from Marine Midland Bank, National Association. Mutual Insurance now moves to dismiss the counts against it for violations of the securities laws, for misrepresentation and for RICO² violations, as well as that count which seeks a declaratory judgment regarding the rights of the plaintiffs under certain assumption agreements.

Section 12(2) of the Securities Act of 1933³ ("the 1933 Act") creates a private right of action on behalf of purchasers as against "any person who * * * (2) offers or sells a security * * * by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statements * * * not misleading * * *." 15 U.S.C. 77l(2). The movant was neither the purchasers' "immediate offeror or seller" nor one who "significantly participated in the transaction so as to warrant imposition of liability." See, Brick v. Dominion Mortg. & Rlty. Trust, 442 F.Supp. 283, 292 (W.D.N.Y.1977). The plaintiffs maintain rather that Mutual Insurance is subject to liability under section 12(2) as an aider and abettor of the principal sellers of the partnership units. Complaint at ¶ 56.

Imposition of secondary liability on an aider and abettor has been recognized in this Circuit. See Katz v. Amos Treat & Co., 411 F.2d 1046, 1052-1053 (2d Cir.1969). The United States Court for the Southern District of New York interpreted the standard set by the Katz case to be "extremely liberal," requiring "only some indicia of participation or solicitation on the part of an individual to warrant the imposition of liability." In Re Caesars Palace Securities Litigation, 360 F.Supp. 366, 380 (1973). However, in a series of recent United States Supreme Court decisions, a stricter standard has been formulated for determining when a private cause of action may be implied under a statute that does not explicitly provide such. In light of these cases, the liberal tendency expressed in Katz v. Amos Treat & Co. merits reconsideration. See Akerman v. Oryx Communication, Inc., 609 F.Supp. 363, 373 (S.D.N.Y. 1984). See also Judge Goldberg's dissent in Rogers v. Frito-Lay, Inc., 611 F.2d 1074, 1088 (5th Cir.), cert. denied, 449 U.S. 889, 101 S.Ct. 246, 66 L.Ed.2d 115 (1980) ("there has been a remarkable change of attitude by the Supreme Court regarding the inference of private rights of action").

In Touche Ross & Co. v. Redington, 442 U.S. 560, 571, 99 S.Ct. 2479, 2486, 61 L.Ed.2d 82 (1979), it was noted that "implying a private right of action on the basis of congressional silence is a hazardous enterprise, at best" and at 578 that "the ultimate question is one of congressional intent * * *." There it was determined that neither the language nor the legislative history of section 17(a) of the Securities Exchange Act of 1934 granted a private right of action. Congress must not have intended to create such a right and therefore the inquiry is at an end. Id. at 576, 99 S.Ct. at 2489. Where a statute does expressly provide a particular remedy (as section 12(2) does against sellers and offerors), "a Court must be chary of reading others into it." Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 19, 100 S.Ct. 242, 247, 62 L.Ed.2d 146 (1979). See also Kissinger v. Reporters Committee, 445 U.S. 136, 100 S.Ct. 960, 63 L.Ed.2d 267 (1980).

The Second Circuit has not as yet reevaluated the expansive position regarding section 12(2)'s aider and abettor liability that it had sanctioned prior to the strict statutory construction approach espoused by the highest court since Touche Ross & Co. v. Redington, supra. The Ninth Circuit declined to decide the issue directly, but noted the "doubtful nature" of both conspirator and aider and abettor liability in section 12(2) cases. Admiralty Fund v. Jones, 677 F.2d 1289, 1294-1295 fn. 4 (1982). Also, the Third Circuit did not squarely confront the issue in Collins v. Signetics Corp., 605 F.2d 110 (1979), because the appellants' evidence did not support their aiding and abetting theory against the appellees. Nevertheless that Court declared section 12(2) to mean "exactly what it says," and that any broader interpretation would "torture" the statute's plain meaning and "frustrate" Congress's intended statutory scheme. Id. at 113. Neither controlling persons nor aiders and abettors are sellers within the meaning of section 12(2) according to Huddleston v. Herman & MacLean, 640 F.2d 534, 551 fn. 27 (5th Cir.1981), aff'd in part, rev'd in part, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548, on remand 705 F.2d 775 (1983). Noting that the Supreme Court has restricted implied causes of action in securities fraud litigation, Benoay v. Decker, 517 F.Supp. 490, 494 (E.D.Mich.1981), aff'd, 735 F.2d 1363 (6th Cir.1984), rejected an aider and abettor theory of liability under section 12(2).

On the basis of the foregoing, as well as the significant additional authority that Mutual Insurance has cited in its commendable memorandum of law, this Court agrees that an aiding and abetting theory to establish liability under section 12(2) would be out of harmony with the strict statutory construction approach to private rights of action under the securities laws which has been embraced by the Supreme Court.

Whereas this Court has declined to acknowledge aider and abettor liability in connection with section 12(2) of the 1933 Act, such a theory is unquestionably recognized⁵ under section 10(b)⁶ of the Securities Exchange Act of 1934 ("the 1934 Act"). The prerequisities for establishing aider and abettor liability thereunder are (1) the violation of a securities law by the primary party, (2) knowledge of the violation by the aider and abettor and (3) substantial assistance by the aider and abettor in achieving the primary violation. IIT, an Intern. Inv. Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir.1980). A complaint alleging securities fraud violations must satisfy the particularity requirement of Fed.R.Civ.P. rule 9(b). Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 114 (2d Cir.1982). Assuming that the fraud claims against the primary violators have been pled with sufficient particularity, there remains to be established the knowledge and the substantial assistance requirements. It is sufficient, per rule 9(b), to aver knowledge only generally, and knowledge may even be inferred at times, as the plaintiffs maintain. See Management Assistance Inc. v. Edelman, 584 F.Supp. 1016, 1018 (S.D.N.Y.1984). However, there must still be contained in the Complaint allegations that will form a sufficient factual basis to support such an inference. Ibid.

Unlike the knowledge element, the acts or omissions that comprise the necessary substantial assistance must be pleaded with specificity. Generalized and conclusory allegations that a defendant aided and abetted the principal wrongdoers will not suffice. See Armstrong v. McAlpin, 699 F.2d 79, 92 (2d Cir.1983).

The "BACKGROUND FACTS" for the section 10(b) claims — the FIFTH COUNT and the SEVENTH COUNT — against Mutual Insurance are found in paragraphs 54-56 of the Complaint:

"54. Upon information and belief, defendants, Mutual Fire Mutual Insurance and Marine Midland, were generally aware that their role in financing and providing a surety bond was part of an overall activity that was improper and in violation of the securities law when such role as lender and surety were included in the activities of Enventure Energy, Eventure Capital, Charco Redondo — Propane and Allen as herein set forth.

"55. Upon information and belief, defendant Mutual Fire and Marine Midland's actions as lender and surety, knowingly and substantially assisted Enventure Energy, Enventure Capital, Charco Redondo — Propane and/or Allen in violating the securities laws as herein set forth.

"56. Upon information and belief, * * Mutual Fire * * * was aware and knew that its involvement with defendants, Enventure Capital, Enventure Energy, Charco Redondo Propane and Allen, was part of an activity that was improper and illegal under the Securities Act the 1933 Act and the Exchange Act the 1934 Act and, as a result, it is alleged that Mutual Fire * * * is liable to the same extent as Enventure Energy, Charco Redondo Propane, Enventure Capital and Allen under all of the securities violations causes

...