Shochat v. Weisz

• Decision Date: 21 February 1991
• Docket Number: No. CV-87-0935 (ADS).,CV-87-0935 (ADS).
• Citation: 757 F. Supp. 189
• Parties: Sam SHOCHAT, Phoebe Shochat, Isidore Shochat and Rose Shochat, Plaintiffs, v. Stanley WEISZ, Defendant.
• Court: U.S. District Court — Eastern District of New York

757 F. Supp. 189

Sam SHOCHAT, Phoebe Shochat, Isidore Shochat and Rose Shochat, Plaintiffs, v. Stanley WEISZ, Defendant.

No. CV-87-0935 (ADS).

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

February 21, 1991.

Haas, Greenstein, Samson, Cohen & Gerstein, P.C., New York City, for plaintiffs; Robert I. Cantor, Leslie S. Soclof, of counsel.

Michael F. Dennis, Garden City, N.Y., for defendant; Saul I. Weinstein, of counsel.

MEMORANDUM DECISION AND ORDER

SPATT, District Judge.

The defendant in this securities litigation moves pursuant to Fed.R.Civ.P. 12(c) for judgment on the pleadings and also for summary judgment under Fed.R.Civ.P. 56(b) and (c), as to all of the causes of action asserted against him in the complaint. The plaintiffs cross-move pursuant to Fed.R.Civ.P. 15(a), for leave to amend the complaint to withdraw one of the causes of action and also to increase the amount alleged in the ad damnum clause.

For the reasons that follow, the defendant's motion for judgment on the pleadings is granted, and the motion for summary judgment is denied. The plaintiffs' cross-motion to amend the complaint is also granted.

I. FACTUAL BACKGROUND

The following facts have been gleaned from the complaint, all of which are deemed true for purposes of the motion for judgment on the pleadings:

The plaintiffs, who are related to each other,¹ have been and continue to be associated together in various business ventures. The defendant Stanley Weisz ("Weisz"), is a certified public accountant, engaged in the practice of professional accounting. Among the various accounting services performed by Weisz is the preparation of tax returns and the furnishing of advice relative to tax matters and planning.

Weisz began to perform accounting services for the plaintiffs sometime prior to 1977, and continued to do so until approximately 1983. The plaintiffs allege that during the course of rendering these services, Weisz represented to the plaintiffs that he regularly receives and reviews offerings by third parties of investment opportunities which are or could be recognized as "tax shelters". Weisz regularly communicated this information relative to various tax shelters to the plaintiffs. The plaintiffs further allege that being "inexpert and unsophisticated" (Complaint ¶ 7), they relied on Weisz' purported skill and expertise in such matters.

During this time, the plaintiffs made a series of passive investments believed to be tax shelters, allegedly based on the advice, representations and recommendations made by Weisz. According to the plaintiffs, they made these investments at the behest and encouragement of Weisz. As a result of these investments, the plaintiffs contend that "no income, and no return of investment was ever received by any plaintiff from any of the aforesaid `Tax Shelters'.... All such ventures in which plaintiffs were induced to invest capital through the representations of the defendant aforesaid are and have long since been nonoperational and the financial investment of all investors has been lost" (Complaint ¶ 12).

Sometime in 1984, the plaintiffs were advised by the Internal Revenue Service ("IRS"), that the "tax shelters" that they invested in were disallowed, resulting in an alleged substantial underpayment of taxes, plus interest and penalties. The IRS offered a compromise to the plaintiffs if they acted within a prescribed time period. Acting with dispatch, the plaintiffs allege that they immediately advised Weisz of this, and claim that he assured the plaintiffs that he would take the necessary steps to rectify the situation with the IRS.

The plaintiffs allege that Weisz thereafter failed and/or refused to take the necessary steps to accept the offer of settlement by the IRS. As a result, the plaintiffs allegedly became liable to the IRS for substantial sums.

The plaintiffs commenced this action against Weisz on March 26, 1987, alleging the following causes of action (listed as "counts") in the complaint: (I) violations of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Rules of the Securities and Exchange Commission; (II) common-law fraud under New York law; (III) violation of New York General Business Law; and (IV) negligence (professional malpractice).

II. THE MOTIONS

The defendant moves pursuant to Fed.R. Civ.P. 12(c) for judgment on the pleadings and also for summary judgment under Fed. R.Civ.P. 56(b) and (c), as to all of the causes of action asserted against him in the complaint. The plaintiffs oppose these motions and, in turn, cross-move pursuant to Fed.R.Civ.P. 15(a) for leave to amend the complaint to withdraw count III and also to increase the amount alleged in the ad damnum clause.

III. DISCUSSION

The Court first will discuss the motions made by the defendant and then will address the plaintiffs' cross-motion for leave to amend.

1. DEFENDANT'S MOTION FOR JUDGMENT ON THE PLEADINGS:

(a) Standard of Review.

The applicable standard of review on a motion for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c) is the same as that on a motion to dismiss under Fed.R. Civ.P. 12(b)(6) (see Shaw v. Rolex Watch U.S.A., Inc., 745 F.Supp. 982, 984 S.D.N.Y. 1990, citing 5A C. Wright & A. Miller, Federal Practice and Procedure § 1367, at p. 518-19 2d ed. 1990). That is, "the court should not dismiss the complaint ... unless it appears `beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief'" (Goldman v. Belden, 754 F.2d 1059, 1065 2d Cir.1985, quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 1957). The allegations of the complaint, of course, are to be accepted as true and all reasonable inferences are to be drawn favorably to the plaintiff (see Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 1974). The Court's function is merely to assess the legal sufficiency of the complaint and not to weigh evidence that might be adduced at trial (see Goldman v. Belden, supra, 754 F.2d at p. 1065).

With these principles in mind, the Court turns to the merits of the defendant's motion.

(b) Count I: Section 10(b) and Rule 10b-5.

Section 10(b) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78j(b), provides as follows:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —

* * * * * *

(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Rule 10b-5, promulgated by the Securities and Exchange Commission in 1948 pursuant to section 10(b) (reprinted in 17 C.F.R. § 240.10b-5 1990), provides as follows:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security."

To state a claim under section 10(b) or Rule 10b-5, the plaintiffs must allege the following essential elements:

"(1) damage to plaintiff, (2) caused by reliance on defendant's misrepresentations or omissions of material facts, or on a scheme by defendant to defraud, (3) made with an intent to deceive, manipulate or defraud, (4) in connection with the purchase or sale of securities and (5) furthered by defendant's use of the mails or any facility of a national securities exchange" (Baum v. Phillips, Appel & Walden, Inc., 648 F.Supp. 1518, 1524 S.D.N.Y.1986, aff'd, 867 F.2d 776 2d Cir., cert. denied, ___ U.S. ___ 110 S.Ct. 114 107 L.Ed.2d 75 1989, quoting Lloyd v. Industrial Bio-Test Laboratories, Inc., 454 F.Supp. 807, 810 S.D. N.Y.1978).

See also Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977).

In sum, the plaintiff must plead that "in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that plaintiff's reliance on defendant's action caused him injury" (Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61 2d Cir.1985; see also Connecticut Nat'l Bank v. Fluor Corp., 808 F.2d 957, 961-62 2d Cir.1987; A. Burton White, M.D., P.C. v. Beer, 679 F.Supp. 207, 211-12 E.D.N.Y.1988).

When pleading a claim under section 10(b), the plaintiff must aver the alleged fraudulent acts with particularity as required by Fed.R.Civ.P. 9(b) (see Luce v. Edelstein, 802 F.2d 49, 54 2d Cir.1986). Although "knowledge" and "condition of mind" may be stated in general terms (see Fed.R.Civ.P. 9b), the circumstances surrounding the alleged fraud must be pled with particularity (Farley v. Baird, Patrick & Co., 750 F.Supp. 1209, 1217 S.D.N. Y.1990, quoting Eickhorst v. American Completion & Dev. Corp., 706 F.Supp. 1087, 1091 S.D.N.Y.1989).

To satisfy the particularity requirement of Rule 9(b), the "complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements" (Cosmas v. Hassett, 886...