Kronfeld v. First Jersey Nat. Bank

• Decision Date: 20 June 1986
• Docket Number: Civ. No. 85-2929.
• Citation: 638 F. Supp. 1454
• Court: U.S. District Court — District of New Jersey
• Parties: Aaron KRONFELD, et al., Plaintiffs, v. FIRST JERSEY NATIONAL BANK, First National State Bank of NJ, Flagship Securities, Inc. Halpert, Oberst & Co., Gibralter Securities Co., Liss, Tenner & Goldberg, Inc. McDonald & Co. Securities, Inc., et al., Defendants.

638 F. Supp. 1454

Aaron KRONFELD, et al., Plaintiffs, v. FIRST JERSEY NATIONAL BANK, First National State Bank of NJ, Flagship Securities, Inc. Halpert, Oberst & Co., Gibralter Securities Co., Liss, Tenner & Goldberg, Inc. McDonald & Co. Securities, Inc., et al., Defendants.

Civ. No. 85-2929.

United States District Court, D. New Jersey.

June 20, 1986.

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Neal F. Hooley, Hooley, Butler, Di Francesco & Kelly, Westfield, N.J., for plaintiffs.

Robert M. Axelrod, Sills, Beck, Cummins, Zuckerman, Radin, Tishman & Epstein, Newark, N.J., for First Nat. State Bank of N.J., Flagship Securities, Halpert, Obsert & Co., Liss, Tenner & Goldberg, Inc., Mid-State Securities, R.W. Peters, Rickel & Co., Inc., Municipal Investors & McDonald & Co. Securities, Inc.

James R. Van Horn, First Jersey Nat. Corp., Jersey City, N.J., for defendant First Jersey Bank.

Brian N. Lokker, Williams, Caliri, Miller & Otley, Wayne, N.J., for defendants Ryan, Beck & Co., Inc. and John J. Ryan Co.

Zulima V. Farber, Lowenstein, Sandler, Brochin, Kohl Fisher, Boylan & Meanor, Roseland, N.J., for Gibraltar Securities and J.B. Hanauer & Co.

OPINION

HAROLD A. ACKERMAN, District Judge.

This litigation arises from the largest default on municipal bonds in American history. The bonds, $2.25 billion of which were sold on the public market, were issued by the Washington Public Power Supply System ("WPPSS") from 1977 to 1981 to finance two nuclear power plants in the State of Washington. Approximately 1400 purchasers of the bonds have brought suit here and in 21 similar actions across the nation against the underwriters and sellers of the bonds. The factual background as alleged by plaintiffs can be briefly stated. The WPPSS is a municipal corporation which constructs and operates electric power generating and transmission plants and facilities in the State of Washington. In 1968, WPPSS, the Bonneville Power Administration ("BPA"), a federal agency, and some local utilities undertook the construction of three nuclear power plants and financed them through the issuance of WPPSS revenue bonds. The bonds were through a "net billing" arrangement, effectively guaranteed by BPA. In 1973, the group decided to build a fourth and fifth nuclear plant ("Plants 4 and 5") which would be financed by WPPSS bonds, backed by "Participants Agreements" between the utilities — but not the BPA — to guarantee them. These bonds were marketed approximately form 1977 to 1981, during the time when the bonds financing the first three nuclear plants were also marketed. Despite the differences in the guarantees of the bonds, the bonds for Plants 4 and 5 were issued and marketed in a way similar to the other bonds. Almost from their inception, the Plant 4 and 5 projects were beset by poor planning, scheduling delays, cost overruns and ineffective management. In January 1982, the participating utilities terminated construction on Plants 4 and 5 before they were completed. Then, in June 1983, the Washington Supreme Court ruled that certain of the participating utilities lacked authority to guarantee the debts on Plants 4 and 5. Shortly, thereafter, the Participating Agreements were held to be unenforcible and the utilities were relieved of their obligation to guarantee the bonds relating to the projects. The project were formally dissolved in July 1983. BPA later informed the bondholders that it had not guaranteed the bonds for Plants 4 and 5. See Amended Complaint ¶¶ 8-25.

This suit has been brought by 1400 plaintiffs from across the nation who purchased Plant 4 and 5 bonds from 1977 to 1983. Defendants are the sellers and underwriters of the bonds who transacted business in this district, or who sold bonds to purchasers residing in this district. The proposed amended complaint asserts claims for conspiracy to violate and violations of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (1981) and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1985), for violations of the Racketeer Influenced and Corrupt Organizations Act of 1970 ("RICO"), 18 U.S.C. § 1962(a) through (d), and for negligent representation, fraud and deceit, and breach of fiduciary duties in violation of state law. Similar suits have been brought by the plaintiffs against other defendants in districts all over the nation.

Plaintiffs initially moved to consolidate all cases in one district for pre-trial proceedings under 28 U.S.C. § 1407. On October 2, 1985, the Judicial Panel on Multidistrict Litigation denied the motion to transfer, not persuaded that common questions of fact predominate over individual questions of fact. Meanwhile, two defendants, Gibralter Securities and J.B. Hanauer & Co., filed answers.

Defendants Flagship Securities, Municipal Investors Service, Inc.; Mid-State Securities Corp.; First Fidelity Bank; Fiss Tenner & Goldberg, Inc.; R.W. Peters, Rickel Co., Inc.; Halpert, Oberst and Co.; McDonald & Co. Securities ("Flagship Securities defendants") originally moved to dismiss the complaint under Rule 12(b)(6) and 9(b) and for the award of attorneys' fees under Rule 11. First Jersey National Bank joined this motion. Defendants Ryan, Beck & Co. and John J. Ryan & Co. made essentially the same motion, as did defendants J.B. Hanauer & Co. and Gibralter Securities Co. Most recently, plaintiffs have moved to amend their complaint under Rule 15(a). Flagship Securities defendants have refiled their motion to dismiss under Rule 12(b)(6). Since the proposed amended complaint may cure some of the defects raised by the defendants' motion to dismiss, the Court will first address the motion to amend.

Federal Rule of Civil Procedure 15(a) provides that a party may amend a pleading once as a matter of course before a responsive pleading is served; otherwise, a party may amend only by leave of court or by consent. Such leave "shall be freely given when justice so requires." Fed.R. Civ.Pro. 15(a). The Supreme Court has enumerated the circumstances under which leave to amend may be denied: "In the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, etc. — the leave sought should, as the rules require, be "freely given." Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962).

Only defendants J.B. Hanauer & Co. and Gibralter Securities Co. have filed answers before the motion to amend. The motions to dismiss filed by other defendants do not constitute a "responsive pleading" so as to bar a party from amending as a matter of course. Fed.R.Civ.Pro. 7(a); Neifeld v. Steinberg, 438 F.2d 423, 425 n. 3 (3d Cir.1971). Thus, the plaintiffs may, as a matter of right, amend their claims against those defendants who have not answered.

They must have leave of the court, however, to amend their claims against the two defendants who have answered. It does not appear that the amendment would cause undue delay or that plaintiffs have a dilatory motive. This litigation is in its earliest stages and hardly any discovery or pre-trial preparation has taken place. Plaintiffs assert that the amendments incorporate new evidence they became aware of after the filing of the complaint and simplify the complaint as a whole. The only conceivable prejudice to defendants is that two defendants may have to file an additional answer and defendants had to file an unnecessary motion to dismiss. Defendants seek the award of such costs. But the motion to dismiss is not rendered moot by the amendment, as defendants themselves state in their memorandum in opposition to the motion for leave to amend, which states: "The amended complaint suffers from exactly the same defects as the original complaint ..." (Joint Memorandum of Defendants, at p. 2.) Defendants raise the same legal argument in this memorandum as they did in their memoranda in support of their original motion to dismiss and rely on previous briefs submitted on some issues. The Court finds no significant prejudice to defendants who have not answered if leave to amend is granted. But the costs of defendants Gibralter Securities and J.B. Hanauer in preparing their first answer shall be compensated by plaintiffs. Movants primary opposition is that this proposed amended complaint also cannot withstand the motion to dismiss, and therefore leave to amend would be futile. See Massarsky v. General Motors Corp., 706 F.2d 111, 125 (3d Cir.1983), cert. denied 464 U.S. 937, 104 S.Ct. 348, 78 L.Ed.2d 314 (1984). Since the same basic legal challenges are raised to the first complaint and the proposed amendments, the Court will treat the motions to dismiss as addressed to the proposed amended complaint. Plaintiffs' leave to amend is granted.

The proposed amended complaint consists of six counts. Count 1 is brought on behalf of all (approximately) 1400 plaintiffs, against defendants J.B. Hanauer & Co.; Halpert, Oberst & Co.; Gibraltar Securities Co.; R.W. Peters, Rickel & Co., Inc.; and John J. Ryan & Co. (referred to in amended complaint as "conspirator defendants"). It alleges that these defendants who were members of the underwriting group that directly marketed the bonds at issue to the public, conspired with 52 "co-conspirators" (listed in Exhibit 3 to the Amended Complaint), who were also members of the underwriting group but are not defendants in this suit, to violate Section 10(b) and Rule 10b-5 of the Securities Act. The gravamen of the claim is that these conspirators practiced fraud on plaintiffs by knowingly or recklessly making misrepresentations of material facts and omissions to state material facts about the bonds and the status of the Plant 4 and 5 projects in connection with the sale of the bonds. Specifically, conspirators misrepresented or omitted to...