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STRATTON GROUP v. SPRAYREGEN

February 12, 1979

The STRATTON GROUP, LTD., Plaintiff,
v.
Gerald SPRAYREGEN, Herman Sprayregen and Seymour Sprayregen, Defendants. Gerald SPRAYREGEN, Herman Sprayregen and Seymour Sprayregen, Defendants-Third-Party Plaintiffs, v. MARSHALL, BRATTER, GREENE, ALLISON & TUCKER, Milton Hausen, Laventhol Horwath Accountants, f/k/a Laventhol, Krekstein, Horwath and Horwath, Moe Bordwin,Stanley Gruber, Lawrence N. Hurwitz, and David Cohen, Third-Party Defendants



The opinion of the court was delivered by: DUFFY

This action was originally brought by the Stratton Group Ltd., (hereinafter referred to as "Stratton") against Gerald, Herman and Seymour Sprayregen, three officers and/or directors thereof, (hereinafter collectively referred to as "the Sprayregens") alleging violations of Section 10(b) of the Securities Act of 1934, 15 U.S.C. ┬ž 78j(b), and Rule 10b-5 promulgated thereunder, as well as claims of common law fraud and breach of fiduciary duty. The defendants, as third party plaintiffs, have individually filed complaints, pursuant to Rule 14, Fed.R.Civ.P., against seven third party defendants. Four of the third party defendants Marshall, Bratter, Greene, Allison and Tucker ("Marshall Bratter"), Laventhol and Horwath Accountants ("Laventhol"), Moe Bordwin ("Bordwin") and Stanley Gruber ("Gruber"), have moved, pursuant to Rules 12 and 9 of the Fed.R.Civ.P., to dismiss the complaints for failure to state a claim upon which relief can be granted or, in the alternative, for failure to plead fraud with the requisite particularity. A fifth third party defendant, Milton Hausen ("Hausen"), has moved for summary judgment.

The main action, as well as the third party action, emanate from an agreement, executed in April 1970, between John's Bargain Stores, as predecessor of Stratton, and N.L.P. Fredi Inc., a newly formed subsidiary of Stratton. Pursuant to said agreement, Fredi agreed to issue all of its common stock to Stratton and all of its preferred shares to the Sprayregen & Co., Inc. shareholders, which included only one of the third-party plaintiffs herein Gerald Sprayregen. These preferred shareholders were given the option to put all their shares, staggered over a three-year period, to Stratton. The contract also imposed certain restrictions upon which funds were to be used by Stratton to pay the agreed consideration of $ 15,000,000 for the put:

 
3. (a) John's obligation to purchase Preferred Stock pursuant to paragraph 2 will be limited to monies available to John's and obtainable by it from its cash, notes, checks, drafts, treasury bills or any other cash item or current assets readily transferable and convertible into cash in excess of funds required by John's for the operation of its business as it is presently conducted ("Excess Cash") . . . .
 
Funds necessary to operate John's business shall be determined by management prior to January 31 of the years 1971 through 1974, inclusive. Such determination of Excess Cash shall require the written approval and verification of independent public accountants selected by the Board of Directors of John's.

 The Stratton complaint charges that Gerald and Herman Sprayregen, as officers and directors of Stratton, together with Seymour Sprayregen, as a Stratton director, engaged in a variety of fraudulent conduct calculated to induce Stratton to enter into the Agreement of April, 1970, which provided for a grossly inflated price to be paid for the shares to be put by the shareholders of Sprayregen & Co., Inc. thereunder. It was further charged that upon inducing the Agreement the defendants, to complete their fraudulent scheme, caused Stratton to pay for the put shares out of funds other than "excess cash," in violation of the conditions set forth in the Agreement. Plaintiffs argue that defendants' activities were violative of Section 10(b) and Rule 10b-5, as well as constituting common law fraud and breach of their respective fiduciary relationships with Stratton. *fn1" Suffice it to say that the complaint alleges intentional fraud and deception attributable to the Sprayregens.

 The defendants have in turn charged, in their third party complaints, that should they be held liable to Stratton they are entitled to "indemnity, reimbursement and contribution" from third party defendants based upon the roles played by the various third party defendants in the execution of the April Agreement and the subsequent put made pursuant thereto.

 Marshall, Bratter

 Marshall Bratter, a partnership engaged in the practice of law, was apparently acting as legal counsel to both Stratton and Gerald Sprayregen during the time period relevant to this action. *fn2" It is upon this relationship that the three Sprayregens bring their third party actions against Marshall Bratter. More particularly, the complaints, each parroting the identical language, charge that:

 
Marshall rendered legal services in connection with the execution of the Agreements and the exercise of rights thereunder. Marshall was primarily responsible for the form in which the Agreements and the exercise of rights thereunder was structured, and Marshall drafted all documents pertaining thereto, including the documents by which the payments alleged in the Complaint were made. Third-Party Plaintiff relied on Marshall's expertise in connection with said matters and Marshall advised that said transactions were legal and proper, which advice Third-Party Plaintiff relied upon.
 
Third-Party Plaintiff believes that said transactions were legal and proper, but in the event that any Court determines that said transactions were not legal and proper, any and all liability imposed upon Third-Party Plaintiff in connection therewith would have been caused by Marshall's failure to exercise due diligence or reasonable care in the performance of its services. If Third-Party Plaintiff is subject to any liability because any condition was not fulfilled in connection with the exercise of rights and the making of payments under the Agreements, then Marshall is liable to Third-Party Plaintiff with regard thereto by reason of Marshall's failure to advise Third-Party Plaintiff with regard to said condition or the non-fulfillment thereof.
 
The damages, if any, which Third-Party Plaintiff may be subject to herein have been caused or brought about by the misfeasance, non-feasance, and negligence of Marshall in the performance of its services, and specifically in rendering advice that the Agreements and the exercise of rights thereunder were lawful and proper, without fault, negligence or fraud on the part of Third-Party Plaintiff contributing thereto. Therefore, if it is so determined that Plaintiff may recover as against Third-Party Plaintiff, then Third-Party Plaintiff demands indemnity, full and complete contribution, and reimbursement from Marshall in any amount Plaintiff may recover, plus costs and expenses and reasonable counsel and accounting fees.

 A complaint should be dismissed for failure to state a claim only when it can be demonstrated beyond doubt that the plaintiff can prove no set of facts in support of his claim entitling him to relief. Cruz v. Beto, 405 U.S. 319, 322, 92 S. Ct. 1079, 31 L. Ed. 2d 263 (1972).

 Applying this standard to the complaints lodged against Marshall Bratter I find all three complaints unable to survive the instant motion.

 It is undisputed that the three Sprayregen complaints in issue stem solely from the attorney/client relationship between Marshall Bratter, Gerald Sprayregen and the Stratton Corp. Moreover, in this regard the complaints allege claims founded exclusively upon the law of negligence.

 In order to state a valid claim for negligence, sufficient to withstand a motion to dismiss, a plaintiff must allege (i) the existence of a duty owed by defendant to plaintiff; (ii) breach of this duty; (iii) resultant injury to plaintiff; and, (iv) a causal relationship between defendant's conduct and plaintiff's injury.

 Applying these elements to the individual complaints of Herman and Seymour Sprayregen, I find them woefully deficient. The complaints are void of any allegations whatsoever concerning what, if any, relationship existed between Herman, Seymour and the law firm of Marshall Bratter. Indeed, they do not contend, nor could they on the facts of this case, that there existed any attorney/client relationship between them and Marshall Bratter. *fn3" Absent such relationship they have failed to allege any basis upon which a duty owed by Marshall Bratter to Herman and Seymour may be founded. Consequently, their complaints, as against Marshall Bratter, must fall.

 Turning to Gerald Sprayregen a different analysis obtains. It appears that Marshall Bratter represented Gerald Sprayregen between September 1970 through February 1971. (See Third-Party Plaintiff's Exhibit A). Thus, he has established a relationship sufficient to state a claim for negligence. The question remains, however, whether a theory of negligence is sufficient to support a claim of ...


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