Manchester Mfg. Acquisitions v. Sears, Roebuck

• Decision Date: 30 September 1992
• Docket Number: Civ. No. 91-752-SD.
• Citation: 802 F. Supp. 595
• Court: U.S. District Court — District of New Hampshire
• Parties: MANCHESTER MANUFACTURING ACQUISITIONS, INC.; Gary A. Dinco; Felix J. Weingart, Jr. v. SEARS, ROEBUCK & CO.; Dylex Limited; Dylex (Nederland) B.V.; 293483 Ontario Ltd.; Harold R. Levy; Mac Gunner; Kenneth Axelrod.

802 F. Supp. 595

MANCHESTER MANUFACTURING ACQUISITIONS, INC.; Gary A. Dinco; Felix J. Weingart, Jr. v. SEARS, ROEBUCK & CO.; Dylex Limited; Dylex (Nederland) B.V.; 293483 Ontario Ltd.; Harold R. Levy; Mac Gunner; Kenneth Axelrod.

Civ. No. 91-752-SD.

United States District Court, D. New Hampshire.

September 30, 1992.

COPYRIGHT MATERIAL OMITTED

Randall F. Cooper, North Conway, N.H., for plaintiffs.

James P. Bassett, Concord, N.H., Eugene J. Kelley, Jr., Chicago, Ill., for Sears.

Kenneth H. Merritt, Burlington, Vt., John L. Putnam, Hanover, N.H., Steven J. Kantor, Burlington, Vt., for other defendants.

ORDER

DEVINE, Senior District Judge.

This litigation arises out of the 1988 sale to plaintiffs of a distribution warehouse business, Manchester Manufacturing, Inc. ("MMI"), located in Colebrook, New Hampshire. Plaintiffs, Manchester Manufacturing Acquisitions, Inc. ("Acquisitions"), Gary A. Dinco, and Felix J. Weingart, Jr.,¹ bring this civil action against Sears, Roebuck and Company ("Sears"), Dylex Limited, Dylex (Nederland) B.V., 293483 Ontario Ltd., Harold Levy, Mac Gunner, and Kenneth Axelrod, alleging that defendants violated federal and state securities laws and made fraudulent and/or negligent misrepresentations to plaintiffs in connection with said sale.² Jurisdiction is alleged under 28 U.S.C. §§ 1331 and 1332. Presently before the court are motions to dismiss³ filed by defendants under Rule 12(b)(6), Fed. R.Civ.P.

BACKGROUND

When ruling on a motion to dismiss under Rule 12(b)(6), the court must follow the requirement that facts alleged in the complaint are to be construed in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Correa-Martinez v. Arrillaga-Belendez, 903 F.2d 49, 51 (1st Cir.1990). Also, the following allegations made by plaintiff must be accepted as true. Roth v. United States, 952 F.2d 611, 613 (1st Cir.1991).

MMI, founded in 1973 as a joint venture among defendants Sears, Dylex Limited, and 293483 Ontario to manufacture clothing for Sears, subsequently became a distribution center for Sears. Plaintiffs Dinco and Weingart were employed by MMI, Dinco as plant manager, and Weingart as financial comptroller. Dinco and Weingart, after learning that MMI was to be sold, were advised by defendants Levy, Gunner, and Axelrod⁴ "that the sale of MMI would not affect MMI's distribution business with Sears." Complaint ¶ 20.

Although it refused to give certain specific volume guarantees, Sears also promised, through "written and oral communications", Complaint ¶ 22, that it would continue its distribution business with MMI "at substantially the same level."⁵ At this time, although not disclosed to plaintiffs, Sears was actually planning to terminate all distribution business with plaintiffs. All other defendants are alleged to have known this fact without revealing it to plaintiffs. While plaintiffs desired to purchase the business entirely as a stock acquisition, ultimately part of the sale was allocated as an asset sale for the convenience of the defendants. Shortly after the sale, Sears decreased, and by the end of 1989 terminated, its distribution business with MMI. MMI's business volume and profits were thereby suddenly and substantially decreased, which ultimately led to First New Hampshire Bank's November 1990 foreclosing on the loans obtained by Acquisitions to finance the purchase of MMI.

DISCUSSION

I. Count I—Securities Act of 1933, 15 U.S.C. § 77q(a)

Count I alleges a violation of the Securities Act of 1933, 15 U.S.C. § 77q(a).⁶ Defendants object on the ground that there is no private right of action under section 77q(a). Since section 77q does not explicitly state any private right of action, the issue at hand is whether the court may imply one. While the First Circuit has not established a clear precedent,⁷ the majority of other circuits appear to deny a private right of action under section 77q(a).⁸

This court, relying upon the view expressed in Dyer v. Eastern Trust & Banking Co., 336 F.Supp. 890, 903-05 (D.Me. 1971), that "the statute was intended only to afford a basis for injunctive relief and, if willfulness is present, for criminal liability, and was not intended to provide a civil remedy for damages," previously held that there is no private right of action under section 77q. Manchester Bank v. Connecticut Bank & Trust Co., 497 F.Supp. 1304, 1314 (D.N.H.1980). Furthermore, this court, considering the question of a private right of action in securities fraud cases under the balancing factors of Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1974),⁹ stated that it "remains unconvinced that Section 17(a) implies a private right of action." Gilman v. Shearson/American Express, Inc., 577 F.Supp. 492, 497 (D.N.H.1983).

Again, the court is not convinced that it should abandon its own precedent. Accordingly, Count I, alleging violation of section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), is dismissed with prejudice.¹⁰ Rule 12(b)(6), Fed.R.Civ.P.

II. Count II, Statute of Limitations Issue

Plaintiffs allege as Count II that the defendants violated the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78j(b).¹¹ All defendants contend that this count is barred because the limitations period has run and that, consequently, judgment on the pleadings as to this claim should be entered in their favor. Rule 12(c), Fed.R.Civ.P.¹²

The United States Supreme Court established the proper limitations period for securities fraud actions in Lampf, Pleva, Lipkund, Prupis & Petigrow v. Gilbertson, 501 U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). Actions are limited to one year after discovery of the facts constituting the violation, and within three years after the violation itself. Id. 501 U.S. at ___, 111 S.Ct. at 2782.

Herein, plaintiffs allege that defendants misrepresented Sears' intentions for its distribution business with MMI. The sale of the MMI stock at issue was consummated with a closing on December 29, 1988, and the complaint was filed on December 26, 1991. Assuming, as both sides seem to, that the "violation" from which the limitations period runs was the date of the closing, and not the previous negotiations, plaintiffs managed to file the complaint within the applicable three-year period.

The issue is thus whether plaintiffs filed their complaint within one year of discovery of the facts constituting the violation, as Lampf requires. Defendants suggest that the plaintiffs discovered or should have discovered the alleged violation in December of 1989, when Sears canceled their contract. Plaintiffs argue that they in fact did not discover their cause of action simply upon cancellation of the Sears contract, but only when they learned that defendants by their conduct in connection with the sale of stock had committed fraud. See 17 C.F.R. § 240.10b-5.¹³ Plaintiffs' allegations, when construed in their favor and accepted as true, include acts and omissions arguably in violation of 17 C.F.R. § 240.10b-5. However, while plaintiffs contend that it is within their reach to state with more precision when they discovered that defendants allegedly defrauded them, they have not done so. Thus, on the record before it, while the court is unwilling to say that plaintiff can prove no set of facts in support of this claim which would entitle them to relief, it is also unable to resolve the limitations period issue. Accordingly, defendants' motions for judgment on the pleadings are denied. Additionally, for the reasons discussed below, Count II is dismissed without prejudice as to all defendants except Sears¹⁴ for failing to meet the Rule 9(b), Fed.R.Civ.P., threshold of specificity.

III. Pleading Fraud with Particularity

Underpinning the majority of plaintiffs' claims are their allegations that the defendants—the varied individuals and entities involved in the sale of MMI to plaintiffs—fraudulently induced plaintiffs to purchase MMI through misrepresentations and omissions regarding the future of Sears' distribution business with MMI. Arguing that plaintiffs have failed to plead their fraud claims with sufficient particularity to satisfy Rule 9(b), Fed.R.Civ.P., defendants contend that those counts should therefore be dismissed. Having already dismissed Count I, the court considers this argument only as to Counts II, III, and IV.

Rule 9(b) mandates that when pleading fraud, "the circumstances constituting fraud ... shall be stated with particularity." Rule 9(b), Fed.R.Civ.P. Thus, the complaint must contain "factual allegations that would support a reasonable inference that adverse circumstances existed at the time of the allegedly false representations, and were known and deliberately or recklessly disregarded by defendants." Romani v. Shearman Lehman Hutton, 929 F.2d 875, 878 (1st Cir.1991); Vachon v. BayBanks, Inc., 780 F.Supp. 79 (D.Mass. 1991). Furthermore, it is well settled that whether a general fraud or a securities fraud case, Rule 9(b) requires that plaintiffs specify the time, place, and content of an alleged false misrepresentation. New England Data Services, Inc. v. Becher, 829 F.2d 286, 288 (1st Cir.1987) (citing McGinty v. Beranger Volkswagen, Inc., 633 F.2d 226, 228 (1st Cir.1980) as to general fraud); Romani, supra, 929 F.2d at 878 (citing Wayne Investment v. Gulf Oil Corp., 739 F.2d 11, 13 (1st Cir.1984) as to securities fraud). As an additional matter, this court has clarified that where, as here, "multiple defendants are involved, each defendant's role in the fraud must be particularized." Shields v. Amoskeag Bank Shares, Inc., 766 F.Supp. 32, 40 (D.N.H. 1991) (citation omitted). Accord Konstantinakos v. FDIC, 719 F.Supp. 35, 39 (D.Mass.1989). This rule is meant to put "each defendant on notice of what role he is alleged to have played in the fraud." Shields, supra, 766...