The opinion of the court was delivered by: CONNER
Plaintiff James Bloor ("Trustee"), Chapter X Trustee for the Investors Funding Corporation of New York ("IFC"), instituted this action against a multitude of defendants alleging fraud in connection with the insolvency of IFC. The principal actors in the tragic drama described in the Trustee's voluminous complaint are Jerome, Norman and Raphael Dansker ("Danskers"), "the principal officers, controlling directors, controlling stockholders and the dominant force of IFC until some time prior to October 21, 1974." Complaint para. 105.
IFC allegedly suffered massive damages at the hands of the Danskers, both as a result of certain management decisions and as a consequence of transactions by which the Danskers misappropriated IFC funds for the personal benefit of themselves and others. See Complaint para. 103 et passim. The Trustee asserts that as these actions, characterized as "the Fraud," Complaint para. 100, progressed, "larger and larger amounts of money were required and were obtained in order (i) to cover up the past fraudulent activities, management malfeasance and business reverses, (ii) to give IFC the false and misleading appearance of legitimacy and success and (iii) to continue the Fraud." See Complaint para. 104. On the basis of this false image of financial health, the Danskers were allegedly able to obtain for IFC huge quantities of funds from creditors, debenture holders, stockholders and other sources, Complaint para. 102, which monies were purportedly utilized to perpetuate and conceal the Fraud.
This case is currently before the Court on the motions of defendants Morris Karp ("Karp"), Hyman Shapiro ("Shapiro"), Peter Grunebaum ("Grunebaum"), Irving Kessler ("Kessler"), Marco Buitoni ("Buitoni"), David W. Katz & Co. ("Katz & Co."), Ely-Cruikshank Co. ("Ely-Cruikshank"), Carro, Spanbock, Londin, Rodman & Fass ("Carro-Spanbock"), Melvin J. Carro ("Carro"), Maurice Spanbock ("Spanbock"), Jerome Londin ("Londin") and a group of individual defendants including the estate of Charles A. Berns, H. Jerome Berns, Eli Bloom, Harry Epstein, Ulu Grosbard, Herbert Jaffe, Stephen Katz, Jack Klatell, H. Peter Kreindler, the estate of Maxwell A. Kreindler, Barbara Londin, Connie E. Naitove, Reginald Rose, Walter Seid, David Shaw, Stephen Solomon, Sheldon J. Tannen, Philip Tonken, the estate of Jess Ward and Dale Wasserman (collectively the "Joint Venture defendants") for judgment on the pleadings pursuant to Rule 12(c), F.R.Civ.P., or, alternatively, for summary judgment pursuant to Rule 56, F.R.Civ.P., dismissing several of the claims against them. The relevant claims of the Trustee, not all of which are advanced against each moving defendant, are as follows:
-- Third Claim Aiding and abetting common law fraud
-- Fourth Claim Sections 10(b) and 20 of the Securities Exchange Act of 1934 (the "Act")
-- Fifth Claim Section 18 of the Act
-- Sixth Claim Section 14 of the Act
-- Seventh Claim Section 352-c of the New York General Business Law
-- Eighth Claim Section 339-a of the New York General Business Law.
-- Seventeenth Claim Common law breach of contract
-- Twenty-first Claim Common law breach of contract
-- Twenty-seventh Claim Fraudulent transfers under Section 67(d) of the Bankruptcy Act, 11 U.S.C. § 107, or §§ 273, 273-a, 274 or 275 of the New York Debtor and Creditor Law.
In an Opinion and Order dated November 19, 1980,
familiarity with which is presumed, this Court granted in part the motions of defendants Peat, Marwick, Mitchell & Co., Jerome Lowengrub, S.D. Leidesdorf & Co. and Robert Saltman (collectively the "Auditors") to dismiss the claims against them. Briefly, the Court held, with respect to the fourth, fifth, seventh and eighth claims, that to the extent the Auditors were alleged to have certified inaccurate IFC financial statements which led to the issuance or sale of IFC securities, the proceeds of which were mismanaged or misapplied by IFC management, such claims did not arise in connection with the purchase or sale of a security, and thus failed to state a claim under § 10(b) or § 18 of the Act or under § 352-c or § 339-a of the New York General Business Law. See IFC I, 523 F. Supp. at 539 (citing Rochelle v. Marine Midland Grace Trust Co., 535 F.2d 523 (9th Cir. 1976)). Moreover, to the extent that the Trustee's allegations of looting of the proceeds by the Danskers and others satisfied the "in connection with" requirement,
the claims against the Auditors failed because of the absence of any proximate causal relationship between the Auditor's alleged acts and the injuries to IFC. See id. at 540.
The Court also rejected the two theories of secondary liability proffered by the Trustee, concluding that the Auditors could not be found liable as aiders and abettors of another's primary violation of § 10(b) or § 18, nor could they be subject to liability as controlling persons under § 20 of the Act. See id. at 542-43. With respect to the Trustee's nineteenth and twenty-seventh claims, the Court ruled that payments for professional services which allegedly failed to meet professional standards, while possibly giving rise to a malpractice action, neither constitute fraudulent transfers nor give rise to a breach of contract claim. Accordingly, the Auditors' motions to dismiss the ...