Martin v. Pepsi-Cola Bottling Co.

Decision Date28 May 1986
Docket NumberCiv. No. Y-84-3654,Y-85-2948.
Citation639 F. Supp. 931
PartiesMargaret H. MARTIN v. PEPSI-COLA BOTTLING CO., et al. Margaret H. MARTIN v. Robert LAPPIN, et al.
CourtU.S. District Court — District of Maryland

Paul M. Vettori and Bruce G. Harris, Baltimore, Md., for plaintiff.

Ira L. Oring and Matthew W. Nayden, Baltimore, Md., for defendant Pepsi-Cola.

Dana N. Pescosolido and Meryl W. Rosen, Baltimore, Md., for defendants Robert T. Shircliff, Robert T. Shircliff and Associates, Inc., and Robert Lappin.


JOSEPH H. YOUNG, District Judge.

Plaintiff Margaret Martin originally filed this lawsuit in 1984 (the 84 action) with two other party plaintiffs against Pepsi-Cola Bottling Company of Hartford-Springfield, Inc., ("PHS"), and Pepsi-Cola Bottling of New Haven, Inc. ("PNH"). Plaintiff alleges that the two companies reacquired stock from her without informing her of the pending sale of the two companies to Alistar Beverage Corporation. In May of 1985, plaintiff moved for leave to amend the complaint, seeking to delete the other party plaintiffs, and to add the following defendants, whom she alleges participated in the scheme to withhold material information about the negotiations and eventual sale to Alistar: Robert Lappin, Robert T. Shircliff and Robert T. Shircliff and Associates, Inc., and Pepsico, Inc. After the original defendants opposed her motion to amend, plaintiff filed a new suit (the 85 action) against the same defendants she sought to add by amendment in the 84 action, presumably to avoid limitations problems.

Plaintiff failed to demand a jury trial within ten days after defendants answered her original complaint in the 84 action, thus waiving her right to a jury trial under Federal Rule of Civil Procedure 38(d). Her amended complaint in the 1984 action and her 85 action complaint demanded jury trials. The 84 action defendants moved to strike her demand for a jury trial. The Court granted leave to amend the 84 action complaint, but the motion to strike demand for a jury trial is still pending. Plaintiff has also moved the Court to order trial by jury on her claims against the original defendants in the 84 action, pursuant to Rule 39(b).

Defendant's motion to strike demand for a jury trial will be denied, and the Court will order trial by jury on all issues raised in both cases under Rule 39(b). A Rule 39(b) motion is committed to the sound discretion of the district court. Justice v. Pennzoil Co., 598 F.2d 1339, 1345 (4th Cir. 1979), cert. denied, 444 U.S. 967, 100 S.Ct. 457, 62 L.Ed.2d 380. The Fourth Circuit has noted that the courts weigh four factors when considering a Rule 39(b) motion. Malbon v. Pennsylvania Millers Mutual Insurance Co., 636 F.2d 936, 940 n. 11 (4th Cir.1980).

1. "whether the issues are more appropriate for determination by a jury or a judge"

The complaint does not present issues so complex as to make jury resolution difficult. And allegations of fraud and failure to disclose will probably turn on the credibility of the parties, where resolution by a jury may be particularly appropriate.

2. "any prejudice that granting a jury trial would cause the opposing party"

Defendants have made no showing of prejudice.

3. "the timing of the motion"

Discovery will not be completed until October, and trial is scheduled for December. The defendants have ample time to prepare for a jury trial.

4. "any effect a jury trial would have on the court's docket and the orderly administration of justice"

Defendants apparently concede that plaintiff is entitled to a jury trial on her claims against the additional defendants named in the amended complaint and the 85 action. Because the claims against all the defendants involve a common set of transactions, bifurcated proceedings would greatly increase administrative expenses.

Accordingly, plaintiff's motion under Rule 39(b) will be granted.

Plaintiff has moved to consolidate the 85 and 84 actions. Defendant has moved to stay the 85 action. Because leave to amend has been granted in the 84 action, and because plaintiff now has a right to a jury trial on all claims in the 84 action, the Court cannot perceive any reason not to dismiss the 85 action. Plaintiff will have fifteen days after this Order to amend the first amended 84 complaint to include any additional material from the 85 complaint.

Defendants Robert Shircliff and his company Robert Shircliff Associates, Inc. (collectively referred to as Shircliff) have moved to dismiss. Plaintiff's first amended complaint in the 84 action alleges that Shircliff acted as a broker for defendant Robert Lappin in the sale of Lappin's two Pepsi Bottling companies to Alistar. The complaint alleges that Shircliff knew that Lappin and his two companies were negotiating with plaintiff for the sale of her minority interest in the companies, and that plaintiff was unaware of the simultaneous negotiations with Alistar that would have enhanced the value of her shares. The complaint alleges that "Shircliff knowingly agreed with PNH, PHS and defendant Lappin to follow and engage in this course of conduct, participated in this conduct and aided and abetted this deliberate concealment." First amended complaint, paragraph 21.

Count I of the first amended complaint alleges direct violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5 by all the defendants, claiming that the defendants fraudulently omitted to state material facts to plaintiff before she sold her stock to Lappin. Paragraph 24. The direct violation count against Shircliff must be dismissed, because plaintiff has failed to allege facts that would support the existence of a relationship with Shircliff that would impose a duty to disclose upon him. Shircliff was not an officer or director of the two Pepsi Bottling companies, and he did not deal directly with the plaintiff. See Moss v. Morgan Stanley, Inc., 719 F.2d 5, 12-13 (2d Cir.1983), cert. denied sub. nom. Moss v. Newman, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984).

Count I also alleges a conspiracy to violate Section 10(b) and Rule 10(b)-5 on the part of all defendants, and alleges that the defendants aided and abetted the scheme to defraud plaintiff by omitting to state material facts to her before she sold her stock. The Supreme Court has specifically declined to decide whether the Securities Exchange Act permits aider-and-abettor liability, see Herman & MacLean v. Huddleston, 459 U.S. 375, 379, 103 S.Ct. 683, 685 n. 5, 74 L.Ed.2d 548 (1983), but the theory of aider-and-abettor liability has won widespread acceptance in the lower federal courts, and specifically in the Fourth Circuit. See IIT, An International Investment Trust v. Cornfeld, 619 F.2d 909, 922 (2d Cir.1980) (collecting cases); In re Action Industries Tender Offer, 572 F.Supp. 846, 853 (E.D.Va.1983); Rosengarten v. Buckley, 565 F.Supp. 193, 195 (D.Md.1982); Frankel v. Wyllie & Thornhill, Inc., 537 F.Supp. 730, 742-43 (W.D.Va. 1982); Gilbert v. Bagley, 492 F.Supp. 714, 727-28 (M.D.N.C.1980); Kaufman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 464 F.Supp. 528, 535 (D.Md.1978); Pargas, Inc. v. Empire Gas Corp., 423 F.Supp. 199, 240 (D.Md.1976), aff'd, 546 F.2d 25 (4th Cir.1976).

The courts have generally agreed that plaintiff must prove three elements to establish liability under an aiding-and-abetting theory: "(1) primary fraud by principal; (2) the aider's knowledge of or reckless disregard of the possibility of primary fraud; (3) the aider's substantial assistance of the primary fraud." Rosengarten v. Buckley, supra, 565 F.Supp. at 195. Here plaintiff has clearly alleged primary fraud by the two Pepsi Bottling companies and Lappin. The last two prongs are more difficult, especially where, as here, plaintiff has alleged substantial assistance through mere inaction. See IIT, supra, 619 F.2d at 925.

Several cases have suggested that where there is no direct duty to disclose, there can be no aider-and-abettor liability for mere inaction. See, e.g., Wessel v. Buhler, 437 F.2d 279 (9th Cir.1971); Landy v. Federal Deposit Insurance Corp., 486 F.2d 139 (3rd Cir.1973), cert. denied, 416 U.S. 960, 94 S.Ct. 1979, 40 L.Ed.2d 312. Those cases generally do not involve the same level of complicity as is alleged here. For example, the complaint in Landy, supra, did not allege that the defendants had knowledge of the fraudulent scheme. 486 F.2d at 162. Such cases are also in a distinct minority, and the Court finds their reasoning unpersuasive. See discussion of secondary liability in IIT, supra, 619 F.2d at 925-927.

In an able summation of precedent in this area, Judge Friendly's opinion for the Second Circuit in IIT suggested a sliding scale for scienter in aider-and-abettor liability:

When it is impossible to find any duty of disclosure, an alleged aider-abettor should be found liable only if scienter of the high "conscious intent" variety can be proved. Where some special duty of disclosure exists, then liability should be possible with a lesser degree of scienter.

619 F.2d at 925, quoting Woodward v. Metro Bank of Dallas, 522 F.2d 84, 97 (5th Cir.1975). Plaintiff's first amended complaint fairly alleges scienter of "high conscious intent," and thus satisfies the second prong of the test for aider-abettor liability.

Synthesizing precedent from other circuits holding "that mere inaction can constitute substantial assistance even in the absence of an independent duty to disclose if, but only if, there is a `conscious intention' to forward the violation of Rule 10b-5," Judge Friendly wrote:

The cases uphold aider and abettor liability in the absence of some independent duty to act only when there is clear evidence of the required degree of scienter, and a conscious and specific motivation for not acting on the part of an entity with a direct involvement in the transaction.

IIT, supra, 619 F.2d at 926, 927, citing Woodward, supra; SEC v. Coffey, 493 F.2d 1304 (6th Cir.1974), cert. denied, 420...

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