Ingenito v. Bermec Corp.

• Decision Date: 03 November 1977
• Docket Number: 70 Civ. 5306 and 70 Civ. 5644.,No. 70 Civ. 4077,70 Civ. 4077
• Citation: 441 F. Supp. 525
• Parties: Robert INGENITO and James F. Cear, Plaintiffs, v. BERMEC CORPORATION et al., Defendants. Edward O'SHEA et al., Plaintiffs, v. STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA et al., Defendants. Morton BICKART et al., Plaintiffs, v. BERMEC CORPORATION et al., Defendants.
• Court: U.S. District Court — Southern District of New York

441 F. Supp. 525

Robert INGENITO and James F. Cear, Plaintiffs, v. BERMEC CORPORATION et al., Defendants.

Edward O'SHEA et al., Plaintiffs, v. STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA et al., Defendants.

Morton BICKART et al., Plaintiffs, v. BERMEC CORPORATION et al., Defendants.

Nos. 70 Civ. 4077, 70 Civ. 5306 and 70 Civ. 5644.

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

October 21, 1977.

As Amended November 3, 1977.

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Powers & Gross, New York City, for plaintiffs.

Wachtell, Lipton, Rosen & Katz, New York City, for State Mutual Life Assur. Co. of America, Richard H. Wilson and C. John McCloughan, Jr.

Rubin, Baum, Levin, Constant & Friedman, New York City, for Herman L. Meckler, Herbert R. Degnan & Eugene V. Freed.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Collateral Factors Corp. and Benjamin Cohen.

Aranow, Brodsky, Bohlinger, Benetar & Einhorn, New York City, for Budget Financial Corp.

White & Case, New York City, for Civic Southern Factors Corp.

Nemeroff, Jelline, Danzig, Paley & Kaufman, New York City, for West End Livestock, Inc.

Demov, Morris, Levin & Shein, New York City, for Jack Dick.

Morton Ginsberg, New York City, for Herbert Prentice, Robert Segal and Sheldon Bendit.

Glass, Greenberg, Irwin, Pellman & Slade, New York City, for Citor Puig and Victor Puig.

Burns, Jackson, Miller, Summit & Jacoby, New York City, for Trustee for Black Watch Farms, Inc. and Black Watch Herds Corp.

Graubard, Moskovitz, McGoldrick, Dannett & Horowitz, New York City, for Trustee for Bermec Corp.

Curtis, Mallet-Prevost, Colt & Mosle, New York City, for Arthur Andersen & Co.

Cadwalader, Wickersham & Taft, New York City, for Empire National Bank.

Lankenau Kovner, Bickford & Abrons, New York City, for William C. Ragals, Jr.

Joseph Bonura, pro se.

LASKER, District Judge.

Plaintiffs Robert Ingenito and James Cear (hereinafter jointly referred to as Ingenito), Martin Yarvis (Yarvis) and Morton Bickart (Bickart) are (or were) losing investors in the Black Watch Farms, Inc. (Black Watch) enterprise. Our earlier opinion, Ingenito v. Bermec Corporation, 376 F.Supp. 1154 (S.D.N.Y.1974), describes the nature of Black Watch, which offered for sale herds of cattle. Purchased herds were maintained by Black Watch; under Black Watch's care, they increased and multiplied. Purchaser-investors hoped for gains in the form of tax avoidance and high resale prices for their animals. These plaintiffs gained nothing: Black Watch filed a petition in bankruptcy in September, 1970. Ingenito, Yarvis and Bickart allege that they consequently lost substantial sums of money.

In late 1970, these plaintiffs and others commenced suit against, among others, Herbert Meckler (Meckler), Eugene Freed (Freed) and State Mutual Life Assurance Company of America (State Mutual). More than a year later, certain plaintiffs amended their complaints and added Arthur Andersen & Co. (Andersen) as a defendant. Meckler and Freed sat on Black Watch's board. Freed was also, at one time, an officer of the corporation. State Mutual was a principal creditor of Black Watch. Andersen acted as Black Watch's independent public accountant.

The complaints alleged that the federal securities laws had been variously violated, by various defendants, in connection with a number of ill-defined transactions. Some of the claims did not survive defendants' motion to dismiss. See, Ingenito v. Bermec Corporation, supra, 376 F.Supp. at 1184. On certain of the claims that did survive the earlier motion (and, remarkably, on some that did not) plaintiffs now seek summary judgment against the defendants named above. State Mutual and Andersen cross-move for partial summary judgment against the plaintiffs, urging dismissal of a number of their claims. For reason stated below, the plaintiffs' motions are, in all respects, denied. Defendants' cross-motions are granted in part and denied in part.

I. Plaintiffs' Motions Against Meckler, Freed, and State Mutual

The factual and legal contentions of the plaintiffs' motions against the respective defendants are discussed in turn.¹

A. Yarvis' 10b-5 Claims

Yarvis purchased his herd in September, 1968. At the time he purchased, the Black Watch offering was unregistered. Yarvis saw no prospectus. He was contacted by a Black Watch salesman, who explained the Black Watch program and made representations concerning expected tax savings and profits. At least some of these representations were contained in a "projection sheet," which estimated the resale value of a herdowner's animals.

Completion of the underlying purchase did not mark the end of Yarvis' transactions with Black Watch. The purchase contract gave rise to mutual obligations (for example, in return for additional animals, Yarvis was bound to pay increased maintenance charges), some of which were played out over an extended period of time. In addition, the contract accommodated — either expressly or implicitly — the changing needs and desires of the individual investor. The modifications and periodic fulfillment of obligations are referred to as "late transactions."

Claims Arising From the Initial Purchase

Yarvis' motion for summary judgment is based on claims arising from both the initial purchase and the late transactions. With respect to the former set of claims, he alleges violations of § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. In sum, he alleges that: 1) he was not informed of his statutory right to rescind his original contract (which right existed because the herd offering had not been registered in accordance with the pertinent provisions of the Securities Act of 1933) and 2) he relied on a projection sheet that was materially false and misleading. Non-disclosure of the right to rescind needs no further mention in this opinion; it was earlier held that such an alleged non-disclosure did not give rise to a Rule 10b-5 claim. Ingenito v. Bermec Corporation, supra, 376 F.Supp. at 1177.

The Projection Sheet

Like the other moving plaintiffs, Yarvis argues that his initial decision to participate in the Black Watch program, made in September, 1968, was induced by the use of a delusive, deceptively glowing projection sheet (¶ 69 et seq., Yarvis Affidavit). The sheet represented profitable resale rates, which Yarvis claims were false. On this branch of his claim, he seeks summary judgment against Meckler only, on the theory that he was liable for the use of these misleading sheets, either as a control person, under § 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78t, or as an aider and abettor.

The projection sheets were blank forms, apparently filled in by individual salesmen in the course of oral presentations made to prospective investors. (See Exhibit 62, Yarvis Class Action Affidavit; ¶ 19(f), Marshall Affidavit).

It seems that — and this can only be established at trial — the salesmen used the sheets as a device to demonstrate the economics of herd ownership. Plaintiffs concede that the use of the projection sheets constituted only a part of the sales presentation that was routinely offered to investors. "The salesman," claims plaintiffs' counsel "gave his `pitch' in the living room . . . and the projection sheet . . . was the keystone in a personalized sales talk." (Amended Brief at 142). Oral representations accompanied the "documentary" presentation. As was noted in our earlier opinion, the sheets had no meaning without the oral and written representations that an individual salesman made to the individual investor:

"As plaintiffs' supporting affidavits make clear, (and indeed, as the complaints claim on their face) a Black Watch salesman made his sales presentation in person. Consequently, not only the various figures embodied in the projection sheet, but also their context and significance would present individual issues of fact . . ." Ingenito v. Bermec Corporation, supra, 376 F.Supp. at 1166-7.

Some of the factual issues raised by claims arising from use of the projection sheets have already been mentioned:

"Quite apart from the fact that the sales were made over a period of time, while cattle prices (and consequently the accuracy of any projections) fluctuated, the precise quality of the representations — which might range from a solid guarantee or representation of fact to a carefully hedged, highly contingent opinion — would have to be separately proven at trial as to each plaintiff to establish liability." Id. at 1169.

None of the papers submitted subsequent to our earlier opinion obviates the need for a trial of this claim. Defendants' responsive papers raise a host of triable issues: the manner and context in which the projection sheets were used; what, if any, representations were made during the oral presentation; whether the projection sheets were in fact false; whether the information contained in those sheets was material; and whether Yarvis relied on that information. The list is meant to exemplify, not exhaust, the triable issues.

Other issues are open here. Liability of Meckler is said to attach by virtue of his being a control person. The determination of whether control person liability exists necessarily involves a series of factual inquiries. Under § 20(a) a control person may be liable for the misdeeds of those who act under his direction. However, § 20(a) does not impose liability automatically; it is not a statutory incarnation of the common law theory of respondeat superior. Only those "who are in some meaningful sense culpable participants in the fraud perpetrated by controlled persons," Lanza v. Drexel Co., 479 F.2d 1277, 1299 (2d Cir. 1973) (en banc), are meant to come within the ambit of the provision for vicarious liability. Accord, Gordon v. Burr, 506 F.2d 1080 (2d Cir. 1974). If...