The opinion of the court was delivered by: GOETTEL
In these two actions, which have been treated as consolidated for purposes of these motions, plaintiffs allege that they were injured by a "multinational fraud" consisting of the issuance, sale, and subsequent dishonoring of approximately $ 10,000,000 of fraudulent notes. They also allege that those responsible for the fraud include not only Roland Staempfli ("Staempfli"), a Swiss citizen, and his employer, Honeywell Bull (Schweiz) AG ("HBS"), the Swiss corporation whose notes were involved, but also Companie Honeywell Bull S.A. ("CHB"), HBS's French parent; Honeywell Information Systems, Inc. ("HISI"), CHB's American parent; and Honeywell Inc., HISI's parent.
The first of these two actions was brought by Fidenas AG ("Fidenas"), a Swiss corporation, which served as underwriter for the fraudulent notes; Sidesco International Ltd. ("Sidesco"), a Bahamian corporation, which purchased some of the notes from Fidenas; and G.P. Jurick ("Jurick"), a German residing in Switzerland, who was managing executive of Fidenas and Sidesco (collectively, "the Fidenas plaintiffs"). The second action was brought by Bishops International Bank Ltd. ("Bishops"), a Bahamian corporation, whose predecessor, Bishops Bank and Trust Company Ltd., purchased some of the notes from and/or through the Fidenas plaintiffs. In both of these actions, the only defendants are Honeywell Inc., a manufacturer and distributor of computers and control systems organized as a corporation in Delaware and headquartered in Minneapolis, Minnesota; and HISI, a Delaware corporation headquartered in Minneapolis, which handles the computer side of the business of Honeywell Inc. and is majority-owned by Honeywell Inc.
In December 1972, Staempfli, who was then the finance manager of HBS, in Zurich, Switzerland, prepared four purported promissory notes of HBS for a total of DM 3,500,000. He arranged with plaintiff Jurick for plaintiff Fidenas to underwrite the notes, which were then purchased by plaintiff Sedesco and, within a few days, sold to Bishops,
the plaintiff in the second action. A similar financing, in the amount of DM $ 4,000,000, was arranged by Staempfli through Fidenas in November 1973, with Bishops again being the purchaser. From 1973 to early 1975, under an underwriting agreement between Fidenas and Staempfli, purportedly on behalf of HBS, several more loans were arranged, with the notes being purchased principally by the Merban Corporation, a New York customer of Fidenas.
It was later revealed that the notes were fraudulent, since Staempfli had had no authority to prepare and issue them on behalf of HBS. HBS fired Staempfli in 1975, and he was later convicted of criminal fraud in Zurich, Switzerland. HBS refused to honor the fraudulent notes and, as a result, was sued in Switzerland by Bishops
and other noteholders. Meanwhile, the Fidenas plaintiffs and Bishops brought the instant actions in the United States against Honeywell Inc. and HISI. In addition, Fidenas, Sidesco, and Jurick brought another action in this district against HBS and its French parent, CHB, which was dismissed on August 14, 1978, on grounds of lack of standing, lack of subject matter jurisdiction, and lack of in personam jurisdiction. Fidenas AG v. Compagnie Internationale Pour L'Informatique CII Honeywell Bull S.A., No. 78-545 (S.D.N.Y. Aug. 14, 1978), aff'd, 606 F.2d 5 (2d Cir. 1979).
The original complaint in the Fidenas action was filed in September 1977, and the Bishops complaint was filed in November 1977. Defendants answered neither complaint, but instead, on November 23, 1977, moved to dismiss pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. The grounds for the motions to dismiss were that plaintiffs in both actions had failed to allege fraud with sufficient particularity and had failed to state a claim, since defendants did not dominate and control HBS so as to be held answerable for its torts. Pursuant to a recommendation of Magistrate Harold J. Raby on May 2, 1978, which was approved by Judge Marvin E. Frankel on August 7, 1978, the motions to dismiss were held in abeyance so that plaintiffs could conduct discovery on the issue of domination and control and thus, respond to defendants' motions on that issue. After the conclusion of discovery, defendants renewed their motions to dismiss, and argument on the motions was heard on November 15, 1979.
In April 1980, before the issuance of a ruling on defendants' motions, plaintiffs in the Fidenas action filed an amended complaint. Defendants promptly moved to dismiss that complaint as well.
The original Fidenas complaint, in 23 pages and 79 numbered paragraphs, presents 7 causes of action: (1) common law fraud in the issuance and sale of notes; (2) federal securities law violations; (3) gross negligence in failing "to supervise, control and monitor" the activities of HBS and CHB; (4) defamation in making false accusations against plaintiffs in a criminal complaint issued in Switzerland against certain employees of HBS; (5) issuance of false financial statements in violation of the General Business Law of New York State; (6) securities fraud in violation of the General Business Law of New York State; and (7) "wilful, wanton, malicious and unlawful" behavior on the part of defendants justifying punitive damages.
The amended complaint of the Fidenas plaintiffs presents 18 causes of action in 59 pages and 171 numbered paragraphs. The first three causes of action are essentially the same as the first three in the original Fidenas complaint. The third, fourth, and fifth causes of action allege breach of contract by HBS and the responsibility of defendants for HBS's breach. The alleged breach concerns HBS's agreements with Sidesco for the purchase of HBS notes and for the issuance of long-term notes to replace short-term notes already purchased and HBS's warranty of merchantability of the notes. The seventh cause of action corresponds to the original fourth cause of action. The eighth and ninth causes of action elaborate on the seventh, separating the effects on Jurick personally-emotional distress-from the effects on Fidenas and Sidesco-interference with business. The tenth cause of action reiterates the defamation cause of action, adding allegations concerning HBS's petition on March 20, 1978, for reconsideration of a determination by the Zurich District Attorney in the Swiss criminal action. The eleventh and twelfth causes of action elaborate on the tenth, again separating the effects on Jurick personally from the effects on Fidenas and Sidesco. The thirteenth cause of action alleges that the 1978 petition amounted to abuse of process. The fourteenth cause of action (denominated as the "eleventh") adds an allegation of defamation in an affidavit of an HBS executive submitted in an action brought by the Fidenas plaintiffs in 1977 in New York State Supreme Court. The fifteenth cause of action specifies the injury-emotional distress-to Jurick caused by the activities alleged in the fourteenth cause of action. The sixteenth, seventeenth, and eighteenth causes of action correspond to the original fifth, sixth, and seventh.
Since defendants never filed an answer in this action, plaintiffs are permitted to amend their complaint "once as a matter of course." Fed.R.Civ.P. 15(a). Furthermore, defendants' motion to dismiss does not terminate plaintiffs' right to amend. See 6 Wright & Miller, Federal Practice and Procedure: Civil § 1483 (1971). The tenth through thirteenth causes of action in the amended complaint, however, are based on events that occurred after the filing of the original complaint and, as such, should be denominated supplemental pleadings, rather than amended pleadings, and require leave of the court.
Although the granting or denial of such leave is within the discretion of the district court, leave is generally granted in the absence of some specific reason for denying it. 6 Wright & Miller, Federal Practice and Procedure: Civil § 1510 (1971). Although an argument can be made that these plaintiffs delayed unnecessarily in filing their amended and supplemental complaint, this Court sees little purpose in denying plaintiffs leave to supplement their pleadings, since the new allegations are sufficiently related to the old as to warrant joint consideration, and since no specific prejudice to defendants has been brought to the attention of the Court. Accordingly, plaintiffs' supplemental pleadings will be permitted to stand, and their legal adequacy will be examined along with that of plaintiffs' other claims.
Defendants have moved to dismiss the complaints in the two actions for failure to allege fraud with particularity and for failure to state a claim, in the absence of domination and control of HBS by defendants. Defendants have filed a statement of material facts they allege to be undisputed on the issue of domination and control, pursuant to Rule 9(g) of the General Rules of this district, and they seek partial summary judgment on that issue. (In addition, defendants now move to dismiss the securities claims for lack of subject matter jurisdiction and the defamation claims as time barred. Finally, they seek attorneys' fees and other sanctions against plaintiffs for their pursuit of allegedly frivolous lawsuits.)
Before granting a motion for summary judgment, a court must determine that there are no material factual issues. Fed.R.Civ.P. 56. Nevertheless, a court is not precluded from granting summary judgment by the existence of frivolous or immaterial factual issues. Williams v. McAllister Brothers Inc., 534 F.2d 19 (2d Cir. 1976) (affirming district court's granting of summary judgment); United States v. Matheson, 532 F.2d 809, 813 (2d Cir.), cert. denied, 429 U.S. 823, 97 S. Ct. 75, 50 L. Ed. 2d 85 (1976) (affirming district court's granting of summary judgment); Keating v. BBDO International, Inc., 438 F. Supp. 676 (S.D.N.Y.1977) (granting summary judgment). In addition to ascertaining that there are no material factual issues, the court must be careful to "resolve all ambiguities and draw all reasonable inferences in favor of the party against whom summary judgment is sought." Heyman v. Commerce and Industry Insurance Co., 524 F.2d 1317, 1320 (2d Cir. 1975).
With these strict standards in mind, we turn to the question of defendants' domination and control of HBS and the factual issues plaintiffs raise with regard to that question.
In their Rule 9(g) statement, defendants list as undisputed facts that, during the time period covered by the complaints: (1) defendant Honeywell Inc. owned between 81.5% and 88.3% of defendant HISI, HISI owned 66% of CHB,
and CHB owned 100% of HBS; (2) defendants and HBS had no directors or officers in common; (3) defendants did not contribute to the capitalization of HBS; (4) defendants paid none of the salaries or other costs or expenses of HBS; (5) defendants did not describe HBS as a department or division of Honeywell Inc. or HISI in any corporate reports or refer to the responsibilities of HBS as those of defendants; (6) defendants did not use the offices or other property of HBS as their own; and (7) all of the formal legal requirements of HBS were observed.
The Fidenas plaintiffs, in their counterstatement pursuant to Rule 9(g), do not controvert defendants' asserted facts of corporate ownership, but assert that those facts are misleading, since "HBS was indisputably a mere branch office of CHB, dominated and controlled by CHB ... (and) CHB was controlled by defendants." As for the asserted facts in paragraphs 2-5 of defendants' statements, the Fidenas plaintiffs controvert them by asserting that defendants had officers on the board of directors of CHB, made capital contributions to CHB, included officers and employees of CHB in defendants' "Corporate Executive Compensation Plan," and described CHB as a department or division of defendants. The Fidenas plaintiffs controvert paragraph 6 by mentioning defendants' use of HBS offices during an audit of HBS in the spring of 1974 and controvert paragraph 7 by stating that HBS "board meetings were not regularly held and that in one important meeting, ... the HBS board merely ratified decisions made by CHB concerning HBS." Finally, the Fidenas plaintiffs list several additional asserted facts, which they claim demonstrate that defendants dominated and controlled CHB and, in turn, CHB dominated and controlled HBS.
Plaintiff Bishops, in its counterstatement pursuant to Rule 9(g), controverts only paragraphs 6 and 7 of defendants' Rule 9(g) statement. Bishops's statement does not specify on what basis those paragraphs are controverted, but instead lists the material issues as to which it contends there are genuine issues to be tried: (1) that CHB "was dominated and controlled by defendants so as to be but an instrumentality of defendants and that the corporate fiction separating such entities should be ignored"; (2) that HBS was similarly dominated and controlled by CHB and by defendants; (3) that defendants were "controlling persons" within the meaning of section 20 of the Securities Exchange Act of 1934; (4) that defendants "held themselves out to the public as a single integrated world-wide operation, controlled and managed by and from the Minneapolis headquarters"; and (5) that "CHB and HBS were consolidated subsidiaries of Honeywell and their sales and profits were included in Honeywell's sales and profits."
The claims of both the Fidenas plaintiffs and Bishops, as will be discussed more fully below, are essentially tort claims. To the extent that the acts constituting the alleged torts were performed by Roland Steampfli, an officer of HBS, in Zurich, in order to demonstrate defendants' liability for those acts, plaintiffs in both actions need to show that defendants dominated and controlled Staempfli-or at least HBS-so that the acts of Staempfli-or HBS-may be viewed as the acts of defendants.
The principal theory used for finding one corporation liable for the acts of another is that of piercing the corporate veil. As stated in Worldwide Carriers, Ltd. v. Aris Steamship ...