Pruitt v. Rockefeller Center Properties, Inc.

• Decision Date: 21 May 1991
• Citation: 574 N.Y.S.2d 672,167 A.D.2d 14
• Parties: , Fed. Sec. L. Rep. P 96,017 Philip PRUITT, Plaintiff-Appellant, v. ROCKEFELLER CENTER PROPERTIES, INC., David Rockefeller, Benjamin D. Holloway, Peter G. Peterson, Paul Reichmann, Richard A. Voell, Goldman, Sachs & Co., Shearson Lehman Brothers, Inc., Arthur Young & Company and L.W. Ellwood & Company, Defendants-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 672

574 N.Y.S.2d 672

167 A.D.2d 14, Fed. Sec. L. Rep. P 96,017

Philip PRUITT, Plaintiff-Appellant, v. ROCKEFELLER CENTER PROPERTIES, INC., David Rockefeller Benjamin D. Holloway, Peter G. Peterson, Paul Reichmann Richard A. Voell, Goldman, Sachs & Co., Shearson Lehman Brothers, Inc., Arthur Young & Company and L.W. Ellwood &amp Company, Defendants-Respondents.

Supreme Court, Appellate Division First Department.

May 21, 1991.

Sidney B. Silverman, of counsel (Silverman, Harnes & Obstfeld, New York City, attorneys) for plaintiff-appellant.

Russell E. Brooks, of counsel (Melanie L. Cyganowski and Steven T. Potts, with him on the brief, Milbank, Tweed, Hadley & McCloy, New York City, attorneys) for defendants-respondents Rockefellers, Holloway, Peterson and Voell.

Marvin Schwartz, of counsel (Steven L. Holley, with him on the brief, Sullivan & Cromwell, New York City, attorneys), for defendants-respondents Goldman, Sachs and Shearson Lehman.

Robert G. Cohen, of counsel (Carl D. Liggio, New York City, attorney) for defendant-respondent Arthur Young.

Joseph Di Benedetto, of counsel (Irma Nimetz, with him on the brief, Winston & Strawn, New York City, attorneys) for defendant-respondent L.W. Ellwood & Co.

Before SULLIVAN, J.P., and ROSENBERGER, WALLACH, KUPFERMAN and SMITH, JJ.

SULLIVAN, Justice.

On the September 1985 public offering of such shares at $20 per share, plaintiff purchased 100 shares of the common stock of Rockefeller Center Properties, Inc. (RCPI), a Delaware corporation owning two promissory notes in the total face amount of $1.3 billion issued by the two partnerships which own twelve buildings forming the core of Rockefeller Center, as well as an option, exercisable on December 31, 2000, to convert such notes into a 71.5% interest in the partnerships.

On December 13, 1985, three months after the public offering, plaintiff commenced this action against RCPI, its directors, the legal underwriters of the public offering and the independent certified accountant and real estate appraiser involved therein, alleging violations of sections 11 and 12 of the Securities Act of 1933 (15 U.S.C. §§ 77k, 77l). Specifically, plaintiff charged that a September 12, 1985 prospectus, issued in connection with the public offering, was materially false and misleading in that it contained financial projections which improperly assumed that one of the Rockefeller Center tenants, the National Broadcasting Co. (NBC), would renew its lease, when, in fact, it was known that NBC wished to relocate. The complaint also alleged that the prospectus' projections of the returns to be realized by purchasers of RCPI shares were based upon the unreasonable and false assumptions that NBC would renew its lease at projected fair market rents which would increase at 6% per annum, resulting in a $103.08 per square foot rate for leases signed in 2000, and that there would be a 1% vacancy rate. The complaint also challenged the prospectus' unreliable and faultily premised $1.6 billion appraised value of the property, which was substantially higher than defendants' own independent appraiser's valuation. Finally, the complaint alleged that the prospectus failed to disclose the RCPI's status as a real estate investment trust (REIT) under the federal tax laws was in jeopardy because, inter alia, the property securing RCPI's notes, i.e., the twelve Rockefeller Center buildings, does not have a fair market value in excess of the $1.3 billion face amount of the notes, a REIT requirement. If it did not qualify for REIT status, RCPI's income would be taxed at the corporate level, thereby reducing stockholder dividends. Defendants answered, denying the material allegations of the complaint and asserting several affirmative defenses.

In September 1987, plaintiff moved for certification of a plaintiff class consisting of all purchasers of RCPI stock or debentures in the public offering and the aftermarket through December 13, 1985. Defendants cross-moved to have plaintiff post a $250,000 undertaking pursuant to section 11(e) of the Securities Act of 1933. On January 12, 1988, while the motions were pending, after it had been publicly disclosed that NBC was negotiating a renewal of its Rockefeller Center lease, the court requested additional submissions with respect thereto. Defendants' submission indicated that under its new lease NBC had obtained terms so favorable as to be substantially equivalent to those available in New Jersey, to which NBC had been actively seeking relocation. Plaintiff's papers demonstrated that the newly negotiated lease's economic effect was as adverse to him and the other class members as would NBC's relocation elsewhere. By order of May 6, 1988, leave was granted to plaintiff to serve an amended complaint and, on the basis thereof, to move for class action status.

Promptly after service of the repleaded complaint, plaintiff moved for class action certification and served a demand for document discovery as well as a notice to take depositions. Defendants renewed their request for a $250,000 undertaking and cross-moved for a protective order with respect to plaintiff's discovery demands on the ground that discovery as to class issues should precede discovery as to substantive issues. The court refused defendants' request for an undertaking and denied class certification with respect to purchasers of RCPI debentures. The motion with respect to RCPI stock purchasers, however, was held in abeyance, pending defendants' deposition of plaintiff on the issues relevant to class action certification.

At his deposition plaintiff testified that he had attended Northwestern University, majoring in business administration and accounting, after which he was employed by various businesses as well as several New York City brokerage firms. In 1969, he was appointed an assistant administrator of the Small Business Administration, in charge of minority enterprise, from which, in 1970, he resigned when, he claims, he realized that the position was merely ceremonial. He then founded an insurance company in Philadelphia, serving as its president and treasurer until its merger with another company in 1973. He also developed an advisory company providing consulting services to Opportunity Industrial Center, a Philadelphia-based black self-help organization. He thereafter returned to New York as executive director, in communications, of Health Providers Association, which represented 500 physicians specializing in Medicare and Medicaid health care services. He was also president of the accounting firm of Thompson and Pruitt, which represented an association of New York City private ambulance owners. In 1982, he was appointed executive director of Central Harlem Meals on Wheels, a provider of food and other necessities to senior citizen shut-ins. In 1984, plaintiff started an investment counselling service, whose primary client was Percy Sutton, an individual with substantial media interests, particularly in television and radio. Since 1986, plaintiff has been employed full time by Mr. Sutton's various enterprises, advising on investments, arranging the financing of television productions and negotiating contracts.

Plaintiff also testified at his deposition about his purchase of 100 shares of RCPI stock from defendant Shearson Lehman Brothers, Inc. on the public offering. According to plaintiff, he learned shortly thereafter from a major New York City realtor that the appraisal contained in the prospectus was highly overstated and that the projections of annual 6% or 7% increase in the market rent for office space were, due to a glut in office space, irresponsible, causing him to seek legal redress. Plaintiff answered, "yes", when questioned about whether he still owned 100 shares of RCPI stock. In fact, he had already sold 90 of his shares. Prior to signing the deposition, plaintiff noted the error, corrected the transcript and promptly advised defendants. He was also asked about his willingness and ability to pay the litigation expenses if class status were granted, and responded that he was committed to an expenditure of $25,000 and that if more were required he would consult further with counsel.

After the completion of his deposition, plaintiff renewed his class certification motion in supplemental papers setting forth his educational and business background, basis for bringing the action and familiarity with the claims and asserting that he was a person "of substantial means", who was "able" to finance the litigation. He indicated that since RCPI had issued 9,910 stock certificates in its first three months as a public company the number of class members would exceed the number required for class action certification. The IAS court denied class certification, holding that plaintiff had not shown that any holders of RCPI stock had incurred damages similar to those allegedly sustained by him, that his self-imposed $25,000 limitation on litigation expenses and his less than forthright testimony indicated he would not be an adequate class representative and that the evidence failed to show the superiority of class action over other methods as a dispute-resolution mechanism. We reverse and grant class action certification.

Article 9 of the CPLR (Class Actions) is modeled on Rule 23 of the Federal Rules of Civil Procedure, the policy of which "is to favor the maintenance of class actions and for a liberal interpretation." (Brandon v. Chefetz, 106 A.D.2d 162, 168, 485 N.Y.S.2d 55). Appellate courts in this state have repeatedly held that the class action statute should be liberally construed. (Matter of Colt Indus. Shareholder Litig., 155 A.D.2d 154, 158-159, 553 N.Y.S.2d 138; modified on other grounds, 77 N.Y.2d 185, 565 N.Y.S.2d 755, 566 N.E.2d 1160.) Thus, "any error, if there is to be one, should be ... in favor of allowing the class action." (Esplin v. Hirschi, 10 Cir., 402 F.2d 94, 101, cert. den., 394 U.S. 928, 89...