Mann v. Levy, 91 Civ. 2792 (WK).

• Decision Date: 01 November 1991
• Docket Number: No. 91 Civ. 2792 (WK).,91 Civ. 2792 (WK).
• Citation: 776 F. Supp. 808
• Parties: Rony MANN, Plaintiff, v. Roy G. LEVY, Bernard Beyda, Larry Silverstein, Steven Cohn and Republic Factors Corporation, Defendants.
• Court: U.S. District Court — Southern District of New York

776 F. Supp. 808

Rony MANN, Plaintiff, v. Roy G. LEVY, Bernard Beyda, Larry Silverstein, Steven Cohn and Republic Factors Corporation, Defendants.

No. 91 Civ. 2792 (WK).

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

November 1, 1991.

COPYRIGHT MATERIAL OMITTED

Michael S. Etkin, Gold & Wachtel, New York City, for plaintiff Rony Mann.

Roy G. Levy and Donna F. Yanofsky, Shulman & Levy, Ossining, N.Y., for defendant Roy G. Levy.

Donald Stuart Bab, Bresler and Bab, New York City, for defendant Lary Silverstein.

Andrew S. O'Connor, Liddle O'Connor, Finkelstein & Robinson, New York City, for defendant Republic Factors Corp.

OPINION AND ORDER

WHITMAN KNAPP, District Judge.

Invoking diversity jurisdiction, plaintiff brings this action to recover damages resulting from defendants allegedly fraudulently inducing it to invest in Genesis Marketing Corporation ("Genesis"), a clothing manufacturing company which became worthless one month after plaintiff purchased 49% of its common stock. Defendants Roy Levy, Larry Silverstein and Republic Factors Corporation ("Republic") move to dismiss the action on various grounds. Pursuant to Fed.R.Civ.P. 12(b) and Rule 9(b), all three move to dismiss the complaint for failure to state a claim upon which relief can be granted, for failure to allege fraud with particularity, and as barred by the statute of limitations. Levy and Silverstein also move pursuant to Rule 19 to dismiss for failure to join an indispensable party, namely David Cohn. Pursuant to Local Rule 39 Republic and Levy also move for an order requiring plaintiff to file a bond for costs prior to proceeding with this action. For the reasons that follow these motions are granted in part and denied in part.

We address each of defendants' motions in turn. However, we note at the outset that although the complaint alleges several securities law violations, see First Count, Second Count, plaintiff now concedes that such claims are barred by the applicable statute of limitations. Accordingly only plaintiff's state law fraud claims are presently before us, specifically: common law fraud, aiding and abetting common law fraud, and fraudulent concealment. See Third Count; Fourth Count; Fifth Count.¹

Defendants' Motions to Dismiss

BACKGROUND

Accepting, as we must, all allegations as true, the facts are as follows.

In November 1987 defendant Bernard Beyda introduced plaintiff to David Cohn, and to defendants Steven Cohn and Roy Levy², officers and directors of Genesis, for the purpose of discussing the possibility of plaintiff's investing in Genesis³. During this initial meeting, defendants "made numerous unqualified representations and statements concerning the growth and future profit potential of Genesis." In particular, the complaint states that "David Cohn and the other individual defendants":

a) "depicted Genesis as a company with `great potential' which had solved all of its financial difficulties and had `turned the corner' toward financial success";

b) represented that "the financial difficulty Genesis had experienced in the past was due to an overstock of poor quality winter merchandise", and that Genesis "had solved this problem by discontinuing purchases from these particular manufacturers";

c) represented that much of Genesis' financial problems were also the result of the large operating expenses it had incurred from owning an overseas manufacturing plant which it intended to sell; and,

e) represented that Genesis was going to substantially alter its marketing strategy in the future.

Plaintiff at this time declined to invest in Genesis.

Sometime prior to this meeting Republic, Genesis' sole factor since 1984, had notified it of an intention to cancel as of January 23, 1988 its factoring agreement due to its poor financial condition. Plaintiff had no knowledge of this fact. On the contrary, several days after the November meeting, "at the specific request of the Genesis defendants" Republic phoned plaintiff's attorney in order to convince plaintiff that Genesis was still a good investment. During this call, Republic made numerous representations to the effect that:

a) "it had great `confidence' in Genesis and viewed it as a company with tremendous potential for the future",

b) "David Cohn was a `capable administrator'", and

c) Republic was going to carefully monitor all aspects of Genesis' finances.

Approximately one month later, plaintiff was informed by David Cohn that defendants were in a position to offer a better deal, because he had arranged for Genesis to buy back shares from certain other shareholders which would enable him to offer plaintiff 49% of the stock in the company in return for his investment therein. In January 1988, plaintiff again met with David and Steven Cohn and Levy to discuss this matter, and at this time defendants "reaffirmed and reiterated their earlier representations regarding what a `terrific company' Genesis was". More specifically, Levy and David Cohn stated that:

since their last meeting, they had been in contact with additional investors who were prepared to infuse capital in Genesis, and that they had initiated negotiations with Republic to provide Genesis with the necessary cash flow for its daily operating costs.

At or about this time plaintiff was advised by his attorney that he should make this investment in the form of loans rather than capital. Thereafter plaintiff's attorney met with a representative of Mast Inc. ("Mast"), a company to which Genesis had in 1984 issued two promissory notes totalling more than $3.4 million, to negotiate an agreement to subordinate these notes to any note Genesis might issue to plaintiff. At this meeting plaintiff was informed that the Mast notes were in default and was offered the option of purchasing them at a discount, namely for $550,000. Later that day, Beyda, David Cohn and Levy phoned "and persuaded plaintiff to purchase the Notes by reducing the level of cash required to purchase the 49% stock interest in Genesis".

In February plaintiff met with David Cohn, Republic, and Levy. Republic then represented to plaintiff that it "would resume its factoring agreement with Genesis so long as plaintiff provided it with additional security or collateral".

Sometime prior to February 3 plaintiff was provided with the financial statements of Genesis, which had been prepared by defendant Larry Silverstein, Genesis' chief financial officer. On February 3 plaintiff entered into an "Agreement of Purchase and Sale" ("Agreement") with David Cohn and Genesis, whereby plaintiff agreed to purchase 485 shares (approximately 49%) of the common stock of Genesis in exchange for $500,000 in cash and loans to Genesis. Annexed to the Agreement were the financial statements of Genesis, prepared by Silverstein, which covered the period up to and including August 31, 1987. The Agreement contained the express representations that:

a) the financials "were prepared in accordance with generally accepted accounting principles and fairly reflected the current financial position of Genesis";

b) "as of the date of the closing ... there had been no materially adverse change in the financial condition of Genesis as disclosed in the financial statements"; and

c) "as of the date of the closing there had not been, nor would there be, any event or condition of any character which would have a material and adverse affect on the financial condition, business assets or prospects of Genesis".

The Agreement was contingent upon plaintiff establishing an irrevocable Standby Letter of Credit in the principal amount of $750,000 with a bank for the benefit of Republic and his purchasing a promissory note in the principal amount of $2,084,389.22 from Mast at the discounted price of $550,000. On March 21 plaintiff established the letter of credit, and on March 23 he purchased the promissory note. On March 24 Republic drew down $375,000 on the letter of credit, and notified Genesis that it would resume its factoring agreement.

In May Levy phoned plaintiff's attorney and informed him that Republic had notified Genesis that it was again terminating its factoring agreement because Genesis had "unexpectedly" in a single week received $2 million worth of returned merchandise. Republic then drew down the remaining $375,000 of the letter of credit, and foreclosed on all of Genesis' assets. Shortly thereafter, Genesis ceased its operations.

The complaint alleges that "through an elaborate scheme of material misrepresentations and omissions, defendants induced plaintiff to invest a substantial sum of money into Genesis". More specifically it asserts that Levy and Silverstein "wilfully and intentionally made misrepresentations of material facts and/or omissions of material facts concerning the true financial condition and prospects of Genesis to plaintiff to induce him to enter into the Agreement", and pleads "upon information and belief" that defendants were aware of the $2 million loss represented by the returned merchandise at the time they were negotiating with plaintiff but failed to disclose this information to him.

DISCUSSION

Silverstein

Silverstein prepared the financial statements which revealed the condition of Genesis up to and including August 31, 1987, and were annexed to the February Agreement. The complaint does not allege that Silverstein was either present at, or participated in, any direct conversation with plaintiff when alleged misrepresentations of facts by other defendants occurred, nor does it allege that the financial statements which he prepared were either false or misleading. Although the complaint does allege that the Agreement contained false or misleading representations relating to the financial statements, there is no allegation that Silverstein knew the financial statements would be used in this manner or that such warranties would be made.

Accordingly, we find that plaintiff has failed to state a cognizable claim for relief against Silverstein. S...