SEC v. Toomey

• Decision Date: 10 August 1992
• Docket Number: No. 92 Civ. 1492 (RJW).,92 Civ. 1492 (RJW).
• Citation: 866 F. Supp. 719
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Robert TOOMEY and William Merrigan, Defendants.
• Court: U.S. District Court — Southern District of New York

866 F. Supp. 719

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Robert TOOMEY and William Merrigan, Defendants.

No. 92 Civ. 1492 (RJW).

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

August 10, 1992.

COPYRIGHT MATERIAL OMITTED

Bruce A. Hiler, Herbert F. Janick, III, S.E.C., and Mark J. Kreitman, Paul V. Gerlach, and Thomas F. Shine, Washington, DC, for plaintiff.

Elliot G. Sagor, Squadron, Ellenoff, Plesent & Lehrer, New York City, for defendants.

MEMORANDUM DECISION

ROBERT J. WARD, District Judge.

Plaintiff Securities and Exchange Commission ("the SEC") has moved, pursuant to Rule 12(f), Fed.R.Civ.P., to strike eight of the eleven affirmative defenses asserted by defendant Robert Toomey. For the reasons that follow, plaintiff's motion is granted in part and denied in part.

BACKGROUND

Robert Toomey is a former Vice President of The Great Atlantic and Pacific Tea Company, Inc. ("A & P"). William Merrigan is a former employee of A & P. The instant case concerns the involvement of Merrigan and others in securities transactions in the stock of Shopwell, Inc. ("Shopwell") and Waldbaum, Inc. ("Waldbaum").¹

On or about May 15, 1986, A & P and Shopwell reached a tentative agreement that A & P would acquire all of Shopwell's outstanding shares at $39 per share. The agreement was not publicly disclosed. Merrigan purchased 1,500 shares of Shopwell stock at prices ranging between $28- 7/8 and $31- 1/8 per share on May 15 and May 16, 1986. When Shopwell announced that it was engaged in merger negotiations on May 20, its stock climbed to $35- 1/8 . Complaint ¶¶ 5, 6.

According to the SEC, on or about May 23, 1986, Toomey notified Merrigan that negotiations between A & P and Shopwell had broken down. Toomey received this information in connection with his employment at A & P. On May 23, 1986, Merrigan sold his Shopwell stock at prices ranging between $33-½ and $33-¾ per share. On the next trading day, May 27, Shopwell stock closed at $29 per share. The SEC claims that the material, nonpublic information Merrigan received from Toomey allowed him to avoid losses of $6,288.34. Complaint ¶ 6.

Thereafter, on or about November 21, 1986, A & P and Waldbaum entered into negotiations that culminated in a November 25, 1986 tender offer by A & P for all outstanding Waldbaum stock at $50 per share. The SEC claims that Toomey told Merrigan that A & P was planning to make a tender offer for Waldbaum on November 25, 1986 when this information was not yet public. Complaint ¶ 7.

Merrigan purchased 2,500 shares of Waldbaum at prices ranging from $24-¼ to 24-½ per share on November 26, 1986. After the tender offer was made public, on November 28, 1986, Merrigan sold his stock for $49 per share, realizing a profit of $59,388.30. Complaint ¶¶ 8, 9.

Moreover, the SEC claims that both Toomey and Merrigan tipped others who purchased and profited from Waldbaum stock. Complaint ¶ 10.

The SEC asserts that Toomey passed material information to Merrigan and that he knew or had reason to know such information was nonpublic and that communication of the information would result in a violation of Rule 14e-3 17 C.F.R. § 240.14e-3, promulgated under Section 14(e) of the Exchange Act 15 U.S.C. § 78n(e). Complaint ¶ 11.

Defendant Toomey has responded with eleven affirmative defenses.

DISCUSSION

A. Standards for Striking Affirmative Defenses Pursuant to Rule 12(f)

The SEC moves, pursuant to Rule 12(f), to strike defendant's first, second, third, fourth, fifth, sixth, ninth, and tenth affirmative defenses. Rule 12(f) allows the Court to "order stricken from any pleading any insufficient defense or any redundant, immaterial, or impertinent ... matter." Motions to strike are generally not favored and will be denied unless it is clear that under no circumstances could the defenses succeed. William Z. Salcer, Panfeld, Edelman v. Envicon Equities Corp., 744 F.2d 935, 939 (2d Cir.1984), vacated on other grounds 478 U.S. 1015, 106 S.Ct. 3324, 92 L.Ed.2d 731 (1986); Carter-Wallace, Inc. v. Riverton Laboratories, Inc., 47 F.R.D. 366, 368 (S.D.N.Y.1969). Three prerequisites must be satisfied before the Court grants any motion to strike defenses.

First, there may be no question of fact which might allow the defense to succeed. A motion to strike defenses "will not be granted `unless it appears to a certainty that plaintiffs would succeed despite any state of the facts which could be proved in support of the defense'" William Z. Salcer, Panfeld, Edelman v. Envicon Equities Corp., 744 F.2d at 939 (quoting Durham Industries v. North River Insurance Co., 482 F.Supp. 910, 913 (S.D.N.Y.1979)); Morse/Diesel v. Fidelity and Deposit Co. of Md., 763 F.Supp. 28, 34 (S.D.N.Y.1991). To this effect, defendant's pleadings will be liberally construed. Bennett v. Spoor Behrins Campbell & Young, 124 F.R.D. 562, 564 (S.D.N.Y.1989); Oliner v. McBride's Industries, 106 F.R.D. 14, 17 (S.D.N.Y.1985); Oppel v. Empire Mutual Insurance Company, 92 F.R.D. 494, 496 (S.D.N.Y.1981).

Second, there may be no substantial question of law, a resolution of which could allow the defense to succeed. William Z. Salcer, Panfeld, Edelman v. Envicon Equities Corp., 744 F.2d at 939; Essex Music v. ABKCO Music and Records, 743 F.Supp. 237, 240 (S.D.N.Y.1990). It is particularly important to refrain from considering disputed questions of law when, as in this case, there has been no significant discovery. William Z. Salcer, Panfeld, Edelman v. Envicon Equities Corp., 744 F.2d at 939.

Third, plaintiff must show that it is prejudiced by the inclusion of the defense. Bennett v. Spoor Behrins Campbell & Young, 124 F.R.D. at 564; Oliner v. McBride's Industries, 106 F.R.D. at 18; Sample v. Gotham Football Club, 59 F.R.D. 160, 169 (S.D.N.Y.1973); see also 5A C. Wright & A. Miller, Federal Practice & Procedure § 1381, at 672 (1990).

Increased time and expense of trial may constitute sufficient prejudice to warrant granting plaintiff's Rule 12(f) motion. Metric Hosiery Co. v. Spartans Industries, 50 F.R.D. 50, 51, 52 (S.D.N.Y.1970); 2A J. Moore, Federal Practice, ¶ 12.213, p. 12-181 (1987). When "the defense is insufficient as a matter of law, the defense should be stricken to eliminate the delay and unnecessary expense from litigating the invalid claim." FDIC v. Eckert Seamans Cherin & Mellott, 754 F.Supp. 22, 23 (E.D.N.Y.1990). The court in Eckert granted a motion to strike defenses based on the finding that "the extensive pre-trail discovery concerning the additional defenses ... could take many months."

The SEC also argues that prejudice results when "the proof necessary to establish the challenged defenses ... will evoke the jury's sympathy for the defendants." Plaintiff's Reply, ¶ 7. For this argument, plaintiff relies entirely on Narragansett Tribe of Indians v. Southern Rhode Island Land Development Corp., 418 F.Supp. 798, 802 (D.R.I. 1976). In Narragansett Tribe, however, the court pointed out that there were nearly forty parties to the action and that its primary goal in striking defenses was to diminish the complexity of the suit. Id. at 801-802. It is unlikely that the court would have stricken defenses based on the possible prejudicial quality of supporting evidence alone. In any event, case law in the District of Rhode Island does not bind this Court.

This Court has held that the Rule 12(f) motion may not be utilized to directly strike "allegations ... which supply background or historical material or which are of an evidentiary quality ... unless unduly prejudicial to defendant." Fuchs Sugars & Syrups, Inc. v. Amstar Corporation, 402 F.Supp. 636, 638 (S.D.N.Y.1975). Accordingly the Court is reluctant to strike pleadings which threaten to bring in background or historical evidence unless such information would be unduly prejudicial.

B. Affirmative Defenses

(1) First Affirmative Defense: The complaint fails to state claims upon which relief may be granted

Plaintiff moves to strike the first affirmative defense on the grounds that it is "a motion to dismiss" under which his claim for relief must be given "the most favorable construction." Notice of Motion ¶ 3. However, in this instance, defendant has not made a motion to dismiss. Instead, defendant asserted an affirmative defense merely using the wording of Rule 12(b)(6), Fed.R.Civ.P.

The SEC argues that as a matter of law it has introduced claims that, if accepted, constitute a violation of Sections 10(b) and 14(e) of the Exchange Act sufficient to establish a claim upon which relief can be granted. Plaintiff labels defendant's defense "a motion to dismiss," under which "the pleader is entitled to the most favorable construction of the complaint." Notice of Motion ¶ 3.

Defendant contends, however, that he has made no motion to dismiss. In his view, the wording of this defense is appropriate and constitutes a "general denial." Defendant relies on Oppel v. Empire Mutual Ins. Co., 92 F.R.D. 494 (S.D.N.Y.1981), and states that he "merely wishes to preserve this argument for a later date." Defendant's Response ¶ 10.

Toomey's use of the language of Rule 12(b)(6) in his defensive pleadings is appropriate. This language can be used in either a motion to dismiss or an affirmative defense "at the option of the pleader". 5A C. Wright & A. Miller, Federal Practice & Procedure § 1349, at 190 (1990).

Furthermore, it is well settled that the failure-to-state-a-claim defense is a perfectly appropriate affirmative defense to include in the answer. Rosenblatt v. United Air Lines, 21 F.R.D. 110, 111 (S.D.N.Y.1957); Mendrala v. Crown Mortgage Company, No. 88-C-7366, 1990 WL 60705, at *2, 1990 U.S.Dist. LEXIS 4658, at *5 (N.D.Ill. Apr. 20, 1990). The Court adopts the reasoning of the Mendrala and Rosenblatt courts in this regard. As the Mendrala court wrote, "the affirmative defense of failure to state a claim upon which relief may be granted is specifically set forth as a possible defense in the Appendix of Forms of the Federal Rules of Civil...