Pross v. Katz, 1296

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Writing for the CourtBefore FRIENDLY, OAKES and WINTER; WINTER
Citation784 F.2d 455
Parties, Fed. Sec. L. Rep. P 92,497 Arnold PROSS, Plaintiff-Appellant, v. Curtis KATZ, Roxann Management, Corp., and Jadam Equities, Ltd. Defendants-Appellees. ocket 85-7204.
Docket NumberNo. 1296,D,1296
Decision Date28 February 1986

Frank L. Amoroso, Garden City, N.Y. (Gary D. Centola, Rivkin, Leff, Sherman & Radler, Garden City, N.Y., of counsel), for plaintiff-appellant.

Daniel J. Beller, New York City (Martin Klotz, Kevin McNulty, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, Kalman V. Gallop, Gallop, Dawson & Clayman, New York City, Michael L. Faltischek, Ruskin, Schlissel, Moscou & Evans, P.C., Mineola, N.Y., of counsel), for defendants-appellees.

Before FRIENDLY, OAKES and WINTER, Circuit Judges.

WINTER, Circuit Judge:

This case involves claims of fraud in the handling of plaintiff's investments. Judge Wexler dismissed the complaint in the instant case for failing to state a claim for relief under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1982), under SEC Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1985), or under Section 17(a) of the Securities Act of 1933, 15 U.S.C. Sec. 77q(a) (1982). He viewed Pross' complaint as merely alleging that Katz and other defendants broke a promise to perform future acts and held that such a failure to perform did not violate Section 10(b) or Section 17(a). Having thus disposed of Pross' federal claims, he declined to exercise pendent jurisdiction, United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966), and dismissed the state claims as well. We also believe the complaint to be deficient but on somewhat different grounds. We conclude that the purported fraud as presently alleged was not "in connection with the purchase or sale" of securities, as required by Section 10(b), or "in the offer or sale of any securities," as required by Section 17(a). Therefore, the complaint does not allege a violation of the anti-fraud provisions of the federal securities laws. However, we remand to permit Process to amend his complaint.


Because Pross' complaint was dismissed for failure to state a claim, we are of course obliged to assume the facts it alleges to be true. Our task in this respect is not made easy by the length of the complaint, consisting of some 259 paragraphs comprising 70 pages, a prolixity seemingly designed to obscure rather than to illumine the events giving rise to this lawsuit.

The pertinent allegations may be summarized as follows. Pross, a practicing dentist who is not without prior experience in similar litigation, Pross v. Baird, Patrick & Co., 585 F.Supp. 1456 (S.D.N.Y.1984), purchased a limited partnership interest in 1974 in a real estate partnership, ILTIT Associates, at the behest of Katz, an attorney and real estate developer who "controlled" the partnership. Pross' investment was based on Katz's promises that he would manage the partnership faithfully and reinvest the proceeds on Pross' behalf. Between 1976 and 1981, Katz induced Pross to make further investments involving a complex series of sales of real estate in various legal forms, followed by purchases of other real estate in various legal forms.

The ILTIT limited partnership was thus converted in 1976 to stock in a cooperative corporation, 444 CPW, managed and controlled by Katz. Proceeds from the sale of Pross' stock in that corporation were reinvested in another cooperative corporation, 50 Park, also controlled by Katz. In 1981, Katz induced Pross to invest in three limited partnerships that also owned various real estate, in part using proceeds from the sale of stock in 50 Park. The limited partnerships constituted Pross' last investment in Katz-related ventures.

During late 1983 and early 1984, Katz, allegedly misusing his position as the manager of Pross' investments and as Pross' attorney, is said to have taken various

fraudulent actions that divested Pross of his ownership interest in the three limited partnerships and of his remaining stock in the cooperative corporations. Ownership was transferred to Katz and other defendants in on his supposed scheme

Although Pross' brief claims otherwise, there is no forthright allegation that, prior to 1983, Katz's conduct, in contrast to his future intentions, was either fraudulent or injurious with regard to Pross. The complaint alleges that Katz had from the outset a secret plan to divest Pross of his holdings. It also alleges ongoing promises by Katz to manage Pross' investments faithfully. Nevertheless, there is no allegation that, at the time of the final investment transaction in 1981, Pross had been fraudulently deprived of any property or otherwise injured.

Nor is there a forthright allegation that, when Katz sprung the "fraud trap," Brief of Appellant at 11, the fraudulent inducements employed to deprive Pross of his investments in 1983 purported to be part of a transaction in securities rather than the management of the particular real estate ventures. There is a three-page paragraph alleging that "in connection with the acquisition and management" of the various ventures, Katz took "at least" certain steps, including the securing of numerous blank signature pages from Pross. However, the complaint does not state with particularity which transactions involved blank signature pages, when the signatures were obtained, or how Pross was induced to sign them.

Finally, we note that various allegations in the complaint suggest that the real estate transactions at issue were undertaken in Dr. Pross' name at a time when Katz was disabled from doing so in his name under New York law. The underlying dispute may thus be over Pross' true ownership position. However, that goes to Pross' ability to prove his allegations, which must at this stage be assumed to be true.


To violate the anti-fraud provisions of the federal securities laws, the fraud must be either in connection with the purchase or sale of a security, Section 10(b), or in the offer or sale of a security, Section 17(a). Distilling the relevant from this seemingly endless complaint, we perceive two allegations of fraud upon which liability under those sections might be premised. First, Katz repeatedly represented that he would manage Pross' investments faithfully while harboring a secret intent to convert Pross' assets to his own use in the future. Second, Katz fraudulently induced Pross to sign blank signature pages and other documents that were used to effectuate the conversion. Reading the complaint with generosity and drawing every reasonable inference in favor of the appellant, Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 558 (2d Cir.1985), we believe that these theories of liability fail to meet the statutory requirements stated above. However, we remand to allow Pross to amend his complaint with regard to the second theory of liability. Another question briefed by the parties--whether Pross' investments are "securities" within the meaning of the relevant statutes--cannot be resolved on these pleadings, and we do not reach it.

1. Breach of the Promise of Faithful Management

Pross alleges that Katz repeatedly promised to perform faithfully what amounted to his duties as a fiduciary while secretly intending to carry out a plan to divest Pross of his interests. This does not allege a fraud "in connection with the purchase or sale" of securities. Making a specific promise to perform a particular act in the future while secretly intending not to perform may violate Section 10(b) or Section 17(a) if the promise is part of the consideration for a sale of securities. McGrath v. Zenith Radio Corp., 651 F.2d 458, 466 (7th Cir.) (fraudulent promise to employ plaintiff as corporate officer if plaintiff would sell his stock to defendant), cert. denied, 454 U.S. 835, 102 S.Ct. 136, 70 L.Ed.2d 114 (1981); A.T. Brod & Co. v. Perlow, 375 F.2d 393 (2d Cir.1967) (promise to pay for securities violates Section 10(b) when the customer's secret intention is to pay only if the price of securities appreciated). We thus disagree with the district court's view that the complaint is deficient because it alleges only that Katz failed to live up to promises of future action.

However, generalized promises to act as a faithful fiduciary stand on a different footing than other promises of future performance. It is clear that a breach of a fiduciary duty by itself is not sufficient to make out a federal claim. Santa Fe Industries v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977). Given that rule, the failure to perform a promise not to breach such a duty also does not violate federal law. That conclusion follows from the nature of fiduciary relationships and the implications of Santa Fe.

Fiduciary duties are based on notions of contract, but they are judicial creations rather than the product of private bargaining. In many contractual relationships the...

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