In re Investors Funding Corp. of NY Sec. Lit., 76 Civ. 4679 (WCC).

• Decision Date: 15 June 1983
• Docket Number: No. 76 Civ. 4679 (WCC).,76 Civ. 4679 (WCC).
• Citation: 566 F. Supp. 193
• Parties: In re INVESTORS FUNDING CORPORATION OF NEW YORK SECURITIES LITIGATION. James BLOOR, as Trustee Pursuant to Chapter X of Title 11 of the United States Code of the Estates of Investors Funding Corporation of New York, etc., Plaintiff, v. Jerome DANSKER, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

566 F. Supp. 193

In re INVESTORS FUNDING CORPORATION OF NEW YORK SECURITIES LITIGATION James BLOOR, as Trustee Pursuant to Chapter X of Title 11 of the United States Code of the Estates of Investors Funding Corporation of New York, etc., Plaintiff, v. Jerome DANSKER, et al., Defendants.

No. 76 Civ. 4679 (WCC).

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

June 15, 1983.

COPYRIGHT MATERIAL OMITTED

Anderson, Russell, Kill & Olick, P.C., New York City, for plaintiff; Richard W. Collins, Nicholas J. Zoogman, New York City, of counsel.

Curtis, Mallet-Prevost, Colt & Mosle, New York City, for defendant Morris Karp; Peter Flemming, Jr., Mark H. O'Donoghue, New York City, of counsel.

Shea & Gould, New York City, for defendant Hyman Shapiro; Martin I. Shelton, New York City, of counsel.

Freedman, Levy, Kroll & Simonds, Washington, D.C., for defendants Peter K. Grunebaum, Irving Kessler and Marco Buitoni; Michael I. Smith, Washington, D.C., of counsel.

Segal & Hundley, New York City, for defendant David W. Katz & Co.; Marvin B. Segal, Edward M. Chikofsky, New York City, of counsel.

Rogers, Hoge & Hills, New York City, for defendant Ely-Cruikshank Co.; W. Hubert Plummer and Thomas C. Junker, New York City, of counsel.

Spengler, Carlson, Gubar & Brodsky, New York City, for defendants Carro, Spanbock, Londin, Rodman & Fass, Melvin J. Carro, Maurice Spanbock and Jerome J. Londin; Edward Brodsky and Alison Rivard, New York City, of counsel.

Rubin, Baum, Levin, Constant & Friedman, New York City, for defendants Estate of Charles A. Berns, H. Jerome Berns, Eli Bloom, Harry Epstein, Ulu Grosbard, Herbert Jaffe, Stephen Katz, Jack Klatell, H. Peter Kreindler, Estate of I. Robert Kreindler, Estate of Maxwell A. Kreindler, Barbara Londin, Connie E. Naitove, Reginald Rose, Walter Seid, David Shaw, Stephen Solomon, Sheldon J. Tannen, Philip Tonken, Estate of Jess Ward and Dale Wasserman; Max Wild, New York City, of counsel.

OPINION AND ORDER

CONNER, District Judge:

Plaintiff James Bloor ("Trustee"), Chapter X Trustee for the Investors Funding Corporation of New York ("IFC"), instituted this action against a multitude of defendants alleging fraud in connection with the insolvency of IFC. The principal actors in the tragic drama described in the Trustee's voluminous complaint are Jerome, Norman and Raphael Dansker ("Danskers"), "the principal officers, controlling directors, controlling stockholders and the dominant force of IFC until some time prior to October 21, 1974." Complaint ¶ 105.¹ IFC allegedly suffered massive damages at the hands of the Danskers, both as a result of certain management decisions and as a consequence of transactions by which the Danskers misappropriated IFC funds for the personal benefit of themselves and others. See Complaint ¶ 103 et passim. The Trustee asserts that as these actions, characterized as "the Fraud," Complaint ¶ 100, progressed, "larger and larger amounts of money were required and were obtained in order (i) to cover up the past fraudulent activities, management malfeasance and business reverses, (ii) to give IFC the false and misleading appearance of legitimacy and success and (iii) to continue the Fraud." See Complaint ¶ 104. On the basis of this false image of financial health, the Danskers were allegedly able to obtain for IFC huge quantities of funds from creditors, debenture holders, stockholders and other sources, Complaint ¶ 102, which monies were purportedly utilized to perpetuate and conceal the Fraud.

The case is currently before the Court on the motions of defendants Morris Karp ("Karp"), Hyman Shapiro ("Shapiro"), Peter Grunebaum ("Grunebaum"), Irving Kessler ("Kessler"), Marco Buitoni ("Buitoni"), David W. Katz & Co. ("Katz & Co."), Ely-Cruikshank Co. ("Ely-Cruikshank"), Carro, Spanbock, Londin, Rodman & Fass ("Carro-Spanbock"), Melvin J. Carro ("Carro"), Maurice Spanbock ("Spanbock"), Jerome Londin ("Londin") and a group of individual defendants including the estate of Charles A. Berns, H. Jerome Berns, Eli Bloom, Harry Epstein, Ulu Grosbard, Herbert Jaffe, Stephen Katz, Jack Klatell, H. Peter Kreindler, the estate of Maxwell A. Kreindler, Barbara Londin, Connie E. Naitove, Reginald Rose, Walter Seid, David Shaw, Stephen Solomon, Sheldon J. Tannen, Philip Tonken, the estate of Jess Ward and Dale Wasserman (collectively the "Joint Venture defendants") for judgment on the pleadings pursuant to Rule 12(c), F.R.Civ.P., or, alternatively, for summary judgment pursuant to Rule 56, F.R.Civ.P., dismissing several of the claims against them. The relevant claims of the Trustee, not all of which are advanced against each moving defendant, are as follows:

— Third Claim Aiding and abetting common law fraud

— Fourth Claim Sections 10(b) and 20 of the Securities Exchange Act of 1934 (the "Act")

— Fifth Claim Section 18 of the Act

— Sixth Claim Section 14 of the Act

— Seventh Claim Section 352-c of the New York General Business Law

— Eighth Claim Section 339-a of the New York General Business Law.

— Seventeenth Claim Common law breach of contract

— Twenty-first Claim Common law breach of contract

— Twenty-seventh Claim Fraudulent transfers under Section 67(d) of the Bankruptcy Act, 11 U.S.C. § 107, or §§ 273, 273-a, 274 or 275 of the New York Debtor and Creditor Law.

In an Opinion and Order dated November 19, 1980,² familiarity with which is presumed, this Court granted in part the motions of defendants Peat, Marwick, Mitchell & Co., Jerome Lowengrub, S.D. Leidesdorf & Co. and Robert Saltman (collectively the "Auditors") to dismiss the claims against them. Briefly, the Court held, with respect to the fourth, fifth, seventh and eighth claims, that to the extent the Auditors were alleged to have certified inaccurate IFC financial statements which led to the issuance or sale of IFC securities, the proceeds of which were mismanaged or misapplied by IFC management, such claims did not arise in connection with the purchase or sale of a security, and thus failed to state a claim under § 10(b) or § 18 of the Act or under § 352-c or § 339-a of the New York General Business Law. See IFC I, 523 F.Supp. at 539 (citing Rochelle v. Marine Midland Grace Trust Co., 535 F.2d 523 (9th Cir.1976)). Moreover, to the extent that the Trustee's allegations of looting of the proceeds by the Danskers and others satisfied the "in connection with" requirement,³ the claims against the Auditors failed because of the absence of any proximate causal relationship between the Auditor's alleged acts and the injuries to IFC. See id. at 540.

The Court also rejected the two theories of secondary liability proffered by the Trustee, concluding that the Auditors could not be found liable as aiders and abettors of another's primary violation of § 10(b) or § 18, nor could they be subject to liability as controlling persons under § 20 of the Act. See id. at 542-43. With respect to the Trustee's nineteenth and twenty-seventh claims, the Court ruled that payments for professional services which allegedly failed to meet professional standards, while possibly giving rise to a malpractice action, neither constitute fraudulent transfers nor give rise to a breach of contract claim. Accordingly, the Auditors' motions to dismiss the twenty-seventh claim and the breach of contract portion of the nineteenth claim were also granted.⁴ See id. at 549-50.

In the instant motions, each defendant seeks to obtain dismissal of the claims asserted against him by riding on the coattails of the Auditors. Each moving defendant argues that his situation is sufficiently analogous to that of the Auditors to require similar treatment. Because the outcome of each motion depends upon the particular circumstances of each defendant or group of defendants, each will be considered separately.

Morris Karp

Karp has moved to have the Court dismiss the Trustee's fourth, fifth, seventh and eighth claims for relief against him. In its November 1980 Opinion, this Court ruled that the "in connection with" requirement is a necessary element of both the federal securities law violations alleged in the Trustee's fourth and fifth claims, see IFC I, 523 F.Supp. at 537, and the state securities law violations asserted in his seventh and eighth claims. See id. at 544. The Court later found that the Trustee's allegations of a scheme to loot IFC of the proceeds from the sale of securities could, under Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), satisfy this requirement, and accordingly held that the Complaint sufficiently pleads securities law claims against the Danskers. See IFC II, slip op. at 7-9. In view of that ruling, Karp's motion must be denied.

Paragraphs 110 through 133 of the Trustee's Complaint set forth Karp's alleged contribution to the Fraud. The Trustee asserts that pursuant to certain secret agreements between Karp and Norman Dansker, IFC entered into a continuing series of sham real estate transactions with Realty Equities, a company controlled by Karp, which enabled IFC to report a false and rosy picture of its financial health. Unlike the involvement of the Auditors, whose contribution was limited to the negligent or reckless preparation of financial statements, the Trustee has plausibly alleged that Karp knowingly engaged in fraudulent schemes with the Danskers, which schemes enabled the Danskers to perpetuate the Fraud by hiding the fact of IFC's financial illness. In such a situation, the continuous looting of IFC by the Danskers, which forms the basis of the securities law violations alleged by the Trustee, was a direct and arguably foreseeable consequence of Karp's involvement, and thus does not suffer from the lack of causal linkage that was fatal to the Trustee's claims against the Auditors. The reasoning of this Court's ruling in IFC I is accordingly inapplicable to Karp. His motion to dismiss is therefore denied.

Hyman Shapiro

Shapiro has moved for judgment on the...