Zucker v. Katz

• Decision Date: 01 March 1989
• Docket Number: No. 87 CIV. 7595 (SWK).,87 CIV. 7595 (SWK).
• Citation: 708 F. Supp. 525
• Parties: Irwin A. ZUCKER, Plaintiff, v. Stanley KATZ, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

708 F. Supp. 525

Irwin A. ZUCKER, Plaintiff, v. Stanley KATZ, et al., Defendants.

No. 87 CIV. 7595 (SWK).

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

March 1, 1989.

COPYRIGHT MATERIAL OMITTED

Stephen N. Dratch, Greenberg, Margolis, Ziegler, Schwartz, Dratch, Fishman, Franzblau & Falkin, Roseland, N.J., for plaintiff.

Leslie Gordon Fagen, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendants.

MEMORANDUM OPINION AND ORDER

KRAM, District Judge.

This action arises from an alleged promise to pay plaintiff ten percent of the stock in the nine defendant Archer corporations. The defendants are Stanley Katz, the sole owner of the stock in the Archer Companies at the time of the alleged agreement, Judith Katz, the secretary of all the named defendant corporations, and the nine Archer Companies. Plaintiff's complaint enumerates twenty claims, including breach of contract, federal securities and common law fraud, intentional or reckless misrepresentation, intentional infliction of emotional distress, prima facie tort and several other state law claims. Presently before this Court is defendants' motion pursuant to 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the complaint, and for costs under Federal Rule of Civil Procedure 41(d). For the reasons stated below, defendants' motion to dismiss is granted in part and denied in part. Defendants' motion for costs of a similar prior action under Rule 41(d) is granted, and this action is stayed until payment of such costs is made.

Background

Plaintiff Irwin Zucker was hired by the Archer Companies in October 1966, and later became Vice President of each of the Archer Companies. According to the complaint,¹ plaintiff became President of defendant Can Carriers, Inc. "Can Carriers" in approximately 1982, and later, in April 1983, he became President of defendant Archer Services. The gravamen of plaintiff's action is an oral promise allegedly made by defendant Stanley Katz — the Chairman of the Board and sole stockholder of the defendant corporations — to pay plaintiff ten percent of the shares of stock outstanding in "each and all of the Archer Companies," at the rate of one percent per year for ten years. Complaint ¶ 21. This promise was allegedly made "in or about 1979" after thirteen years of employment by the Archer Companies. Id. Plaintiff alleges that this oral promise constituted additional compensation and consideration for agreeing to remain in defendants' employ.

Plaintiff never received shares, or any indicia of stock ownership, in the Archer Companies pursuant to this alleged agreement, or any other means. He contends that he made several inquiries regarding this agreement over the next eight years to which defendants suggested other methods of compensation, including a stock appreciation plan. Plaintiff asserts that he refused these proposals and demanded payment of the full ten percent, not one percent per year over ten years as was previously agreed. In response, plaintiff alleges that Katz then agreed "in or about 1981" to give plaintiff "his full 10 percent at once, rather than one percent per year for 10 years." Id. ¶ 26. Plaintiff alleges that the defendants continued to represent "every few months" that he would receive his stock. Id. ¶ 27. Furthermore, Mr. Zucker claimed that his interest in the stock under the alleged agreement was recognized in informal writings. Id. ¶ 28. Even though plaintiff received no shares, he alleges that defendants represented that he had been issued ten percent of the shares in at least some of the Archer Companies. Finally, plaintiff claims that the defendants represented "in or about December 1986" that he would receive the stock as soon as in-house counsel completed drafting a formal stock agreement. Id. ¶ 29.

During the period of these continued promises, the plaintiff also alleges that the involvement of outside consultants in the management of the Archer Companies grew, apparently displacing and usurping his authority. Plaintiff allegedly objected to their burgeoning responsibilities within the company as "demeaning and embarrassing to Zucker." Id. ¶ 31. Defendant Katz disagreed with plaintiff over the propriety of delegating certain managerial responsibilities to consultants, and the plaintiff resigned.

At a pre-trial conference held on March 18, 1988, this Court granted leave to file a second amended complaint. Defendants now move under Rule 41 of the Federal Rules of Civil Procedure for costs incurred in attempting to settle and in defense of the present complaint. The defendants also move to dismiss the complaint under Rule 12(b)(6), arguing that the fraud-based claims are not pleaded with sufficient particularity under Rule 9(b) of the Federal Rules of Civil Procedure, that no enforceable contract for the sale of securities has been pleaded, and that the complaint fails to state a claim in regard to the remaining state law actions.

Discussion

Failure to Plead Fraud with Particularity

Defendants move for dismissal of the misrepresentation claims — in particular counts one, five through eight, and thirteen through seventeen — for failure to comply with Rule 9(b), which requires that:

In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.

Fed.R.Civ.P. 9(b). This rule exists to protect defendants from frivolous suits and to provide defendants in a fraud action "fair notice of what the plaintiff's claim is and the grounds upon which it rests." LaRoe v. Elms Securities Corporation, 700 F.Supp. 688, 694 (S.D.N.Y.1988) (quoting Ross v. A.H. Robins, 607 F.2d 545, 557 (2d Cir.1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980)). In order to satisfy Rule 9(b), allegations of fraud must specify time, place, speaker and content of the alleged misrepresentations. DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir. 1987).

Defendants first argue that the complaint does not adequately identify facts supporting scienter. They argue that the complaint fails to state "a single factual assertion to suggest that the supposed promise was false when made." Defendants Memorandum in Support at 10. Additionally, defendants contend that plaintiff has failed to make specific allegations of fraud as to the time, place and substance of the misrepresentations. For the purposes of this motion, the Court considers only the complaint.

This Circuit has recognized that "`great specificity is not required with respect to ... allegations of scienter.' The absence of a requirement that scienter be alleged with `great specificity' is based on the premise that a plaintiff realistically cannot be expected to plead a defendant's actual state of mind." Connecticut Nat. Bank v. Fluor Corp., 808 F.2d 957, 962 (2nd Cir. 1987) (citations omitted). On the other hand, plaintiff must allege facts from which scienter can be inferred, and this Court recognizes that the mere allegation that defendants did not intend to honor the contract at issue does not alone create a basis for alleging fraud. Murray v. Xerox Corp., 811 F.2d 118, 122 (2nd Cir.1987) (mere failure to perform a single promise does not plead scienter in case where condition precedent to promise was not satisfied and promisor was no longer in position to perform); see also Value Time v. Windsor Toys, 700 F.Supp. 6, 7 (S.D.N.Y.1988).

Plaintiff further alleges that defendants' acts were in furtherance of a fraudulent scheme to induce Zucker "to continue his employment by: (a) promising him 10 percent of the shares of the Corporations; (b) delaying the formal issuance of Zucker's shares in the corporations; and (c) repeatedly making knowing or reckless false representations that the transaction would occur in the near future." Complaint ¶ 35. Plaintiff alleges that defendants never intended to honor their repeated promises to transfer the shares, and only made such representations to encourage plaintiff to remain in their employ until plaintiff could be "squeezed" out of his position. Id. Finally, the plaintiff has alleged that he and Katz had been friends for a long time, thus making his reliance on Katz's continued representations a plausible contention of fact. See Complaint ¶ 74.

In Value Time, this Court dismissed a counterclaim for fraud based solely on a breach of contract and the allegation that the plaintiff had no intention of performing at the time of contracting. 700 F.Supp. at 7. In contrast, this Court finds that the plaintiff here does plead facts, other than the mere allegation of intent, that tend to support the inference that defendants had no intention to perform the alleged contract, either at the time the first promise allegedly was made "in or around 1979," or at the time of later alleged misrepresentations by defendants. This Circuit has held that "making a specific promise to perform a particular act in the future while secretly intending not to perform that act may violate Section 10(b)" as long as it is more than merely a generalized promise to act as a faithful fiduciary. Pross v. Katz, 784 F.2d 455, 457-58 (2d Cir.1986). Thus, plaintiff's allegation that defendant never intended to perform may satisfy the scienter pleading requirements as long as the allegation is plausible considering the circumstances pleaded. See Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir.1986) (plausible allegation that defendants secretly intended to dishonor agreement adequately states scienter in 10(b)(5) claim). After considering the entire complaint, the series of alleged misrepresentations, the allegation that defendants acted with intent to squeeze him out, and the apparently long-standing business and personal relationship between Zucker and Katz, this Court concludes that the plaintiff has plead scienter.

On the other hand, the Court is...