UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
March 8, 1984
STEVEN J. GLUSBAND, as Receiver for MICHAEL STARBUCK, INC. AND ASSOCIATES, Plaintiff, against FITTIN CUNNINGHAM LAUZON, INC., JAMES J. ARMENAKIS, as Receiver for MICHAEL STARBUCK INC., MICHAEL STARBUCK INC., JOHN STARBUCK, PAUL CARMEL, BEVERLY ANN MINGOLA, THOMAS J. FITTIN, JR., JOSEPH LAUZON, FRANK EARL KUNKER, III, INSURANCE COMPANY OF NORTH AMERICA, INC., and NATIONAL GRANGE MUTUAL INSURANCE COMPANY, Defendants.
The opinion of the court was delivered by: SPRIZZO
OPINION AND ORDER
Plaintiff, as receiver for Michael Starbuck, Inc. and Associates ("Associates"), commenced this action to recover assets of Associates which were lost, allegedly due to the fraudulent activities of the defendants. Amended Complaint para. 15.
Associates is a limited partnership.
The defendants are James Armenakis, as receiver for Michael Starbuck, Inc. ("MSI"), the general partner of Associates, Fittin Cunningham Lauzon Inc. ("Fittin, Inc."), a broker and dealer in securities with whom Associates had a brokerage account; John Starbuck ("Starbuck"), an accounts executive and registered representative at Fittin, Inc. who allegedly effected transactions for the Associates account; Paul Carmel ("Carmel"), and accounts executive and registered representative for Associates employed by Fittin, Inc.; Beverly Ann Mingola ("Mingola"), a Fittin, Inc. and MSI employee; Thomas J. Fittin ("Fittin"), Chief Executive Officer and Compliance Officer of Fittin, Inc.; Joseph Lauzon ("Lauzon"), Chairman of the Board and Secretary of Fittin, Inc.; Frank Earl Kunker III ("Kunker"), manager of the Albany office of Fittin, Inc.; Insurance Company of North America ("INA"); and National Grange Mutual Insurance Company ("National Grange").
Associates was formed in late 1977 for the purpose of investing in securities. MSI, the general partner, was an investment management corporation organized under the laws of New York, and at all relevant times was registered with the Securities and Exchange Commission ("SEC") as an Investment Advisor pursuant to section 203 of the Investment Advisors Act of 1940, 15 U.S.C. §§ 80b-1 to 80b-21. Amended Complaint para. 4. MSI was wholly owned by Michael Starbuck. Beginning in late 1977 MSI, allegedly with the help of Fittin, Inc., began to solicit investors to buy limited partnership interests in Associates. Some 270 persons invested approximately $2,920,225.00 in Associates. Amended Complaint paras. 19-20.The general partner, MSI, apparently exercised exclusive control over the management and business of Associates. Amended Complaint para. 6.
On January 11, 1980 the SEC commenced an action against Michael Starbuck MSI, and Associates, alleging violations of section 5(a) and (c) and section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a) & (c), 77q(a), and section 10(b) of the Securities Exchange Act of 1934 ("Securities Exchange Act"), 15 U.S.C. § 78j(b).Thereafter, the defendants entered into a consent judgment before Judge Werker, enjoining them from future violations of the securities laws, see Final Judgment of Permanent Injunction and Order Appointing A Receiver and Granting Other Relief, 80 Civ. 231 (HFW) (S.D.N.Y. Jan. 11, 1980). At the same time, Judge Werker appointed plaintiff as receiver for Associates. Id.
Plaintiff commenced this action on December 29, 1080, seeking damages under sections 5(a), 5(c), 12(1), 12(2), 15 and 17(a) of the Securities Act, 15 U.S.C. §§ 77e(a) & (c), 771(1) & (2), 77o, 77q; section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5; section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t; section 352 of New York's General Business Law; and for common law fraud, negligence, and breach of contract.
Defendants moved to dismiss plaintiff's fraud allegations for failure to plead fraud with the requisite particularity, as prescribed by Fed. R. Civ. P. 9(b), and to dismiss the negligence claims pursuant to Fed. R. Civ. P. 12(b) (6) for failure to state a claim upon which relief can be granted.
The insurance company defendants INA and National Grange moved separately to dismiss the complaint against them for lack of privity. Defendants also disputed plaintiffs standing and capacity to bring this action, on the ground that it is not in fact a legal partnership, see note 1, supra.
CAPACITY AND STANDING TO SUE
Given the broad equity powers conferred upon a receiver pursuant to 28 U.S.C. § 754, and by Judge Werker's Order,
it is clear that plaintiff has capacity to bring any action which Associates, as an entity, could have brought. It is also clear that certainly with respect to the federal law claims, plaintiff's capacity to sue under state law is irrelevant.
Under Fed. R. Civ. P. 17(b), "a partnership or other unincorporated association" (emphasis added), which has no capacity to sue under the law of the state in which the district courts sits, "may sue or be sued . . . for the purpose of enforcing for or against it a substantive right existing under the Constitution or laws of the United States, . . ." Therefore, regardless of state law, Associates, as either a partnership or merely an unincorporated association, and hence the Receiver on its behalf, has the capacity to bring its federal claims in this court, see, e.g., Commodity Futures Trading Commission v. Chilcott Portfolio Management, Inc., 713 F.2d 1477, 1482 (10th Cir. 1983), rev'g on other grounds, [1980-82 Transfer Binder] Com. Fut. L. Rep. (CCH) P21,458 at 26,173 (D. Colo. August 30, 1982); cf. Porter v. Sabin, 149 U.S. 473, 478, 37 L. Ed. 815, 13 S. Ct. 1008 (1893); United States v. Franklin National Bank, 512 F.2d 245, 248 (2d Cir. 1975), so long as it has suffered a "distinct and palpable injury", Watt v. Energy Action Educational Foundation, 454 U.S. 151, 161, 70 L. Ed. 2d 309, 102 S. Ct. 205 (1981); Warth v. Seldin, 422 U.S. 490, 501, 45 L. Ed. 2d 343, 95 S. Ct. 2197 (1975), which is "fairly traceable" to the defendants' conduct. Watt, 454 U.S. at 161; Village of Arlington Heights v. Metropolitan Housing Development Corp., 429 U.S. 252, 261, 50 L. Ed. 2d 450, 97 S. Ct. 555 (1977).
Plaintiff alleges that Associates suffered the depletion of partnership assets due to the fraud of defendants. To the extent that plaintiff sufficiently alleges that Associates has suffered such an injury it is asserting Associates' own rights and not those of third parties. See Warth, 422 U.S. at 499; Armstrong v. McAlpin, 699 F.2d 79, 89 (2d Cir. 1983); Chilcott, [1980-82 Transfer Binder] Com. Fut. L. Rep. at 26,172 & 26,175; Canut v. Lyons, 450 F. Supp. 26, 29 (C.D. Calif. 1977).However, it is equally clear that plaintiff has no standing to assert claims which belong solely to the limited partners in Associates, i.e., claims for any damages caused by their being fraudulently induce by defendants to purchase limited partnership interests in Associates.
SUFFICIENCY OF PLAINTIFF'S CLAIMS
Although the Court has determined that Plaintiffs have standing to bring federal claims arising out of injuries to the partnership itself, it does not follow that the federal claims asserted in the amended complaint are legally sufficient. With respect to many of these claims, plaintiff must also sufficiently allege that it is a purchaser of a security within the meaning of the securities laws. This plaintiff has failed to do so. While the limited partnership interests referred to in the complaint are "securities," plaintiff was not a purchaser of those securities and the complaint refers to no other securities which plaintiff allegedly purchased. As a consequence, the claims enumerated in the third, fourth, fifth and sixth counts of the amended complaint must be dismissed.
Count four alleges damages due to defendants' violations of sections 5(a), 5(c) and 12(1) of the Securities Act. Section 12, which expressly creates a private right of action for violations of section 5, specifically states that one who sells a security in violation of section 5 shall be liable in damages to the purchaser of the security.
Because Associates was not the purchaser of the limited partnership interests, Associates, and hence plaintiff, as its receiver, has no claim against defendants under sections 5(a), 5(c) or 12(1). The fifth count alleges damages due to violations of section 12(2) of the Securities Act, and the sixth count alleges damages pursuant to section 15 of the Securities Act. Under both section 12(2)
and section 15
only purchasers of a security may sue. Therefore, plaintiff may not properly bring a cause of action on behalf of Associates under either sections 12(2) or 15 of the Securities Act.
Finally, the third count alleges damages pursuant to section 17(a) of the Securities Act.
While the Second Cirucit has held that a private right of action will lie under section 17(a), see Kirshner v. United States of America, 603 F.2d 234, 241 (2d Cir. 1978), it has also held that only purchasers may sue under section 17(a). See, e.g., Adato v. Kagan, 599 F.2d 1111, 1115, (2d Cir. 1979); Superintendent of Insurance of New York v. Bankers Life and Casualty Company, 430 F.2d 355, 359 (2d Cir. 1970), rev'd on other grounds, 404 U.S. 6, 30 L. Ed. 2d 128, 92 S. Ct. 165 (1971). Therefore, plaintiff may not properly bring an action on behalf of Associates under section 17(a).
FAILURE TO PLEAD FRAUD WITH THE REQUISITE PARTICULARITY
Plaintiff also alleges fraud in violation of section 10(b)(5) of the Securities Exchange Act and the regulations promulgated thereunder.
Fed. R. Civ. P. 9(b) provides that "[i]n all averments of fraud . . ., the circumstances constituting fraud . . . shall be stated with particularity." Defendants contend that the fraud allegations in plaintiff's amended complaint fail to meet this standard.
In Decker v. Massey-Ferguson, Limited, 681 F.2d 111 (2d Cir. 1982), the Second Circuit emphasized that generalized allegations of fraud are insufficient. Id. at 116; see also Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972). Therefore, a complaint must be dismissed if it "fails to provide an adequate factual substantiation for its accusations and fails to concretize acceptably the alleged fraud," 681 F.2d at 118, and does not "specifically allege the acts or omissions upon which" the claim rests. Ross v. A.H. Robins Company, Inc., 607 F.2d 545, 557 (2d Cir. 1979); see Decker, 681 F.2d at 121. Plaintiff must set forth with particularity "acts indicating an intent to deceive, manipulate, or defraud," Decker, 681 F.2d at 115, citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 192, 47 L. Ed. 2d 668, 96 S. Ct. 1375 n.7 (1976). See also Crystal v. Foy, [1982-83 Transfer Binder] Fed. Sec. L. Rep. (CCH) P99,180 at 95,697 (S.D.N.Y. April 26, 1983).
Although plaintiff's amended complaint may contain some sufficient allegations of fraud, those allegations refer to frauds perpetrated against the limited partners of Associates, rather than against the partnership itself. As noted above, the receiver has no standing to sue for damages to the limited partnership investors.
The amended complaint is bereft of sufficient specific factual allegations demonstrating that a fraud was committed against Associates, which caused damage to the assets of the partnership itself. In fact, it is not even clear from the amended complaint what the precise nature of the fraud allegedly committed against Associates is, nor are any specific facts alleged which support any inference of knowledgable participation in that fraud by each defendant. See Ross, 607 F.2d at 558. Without such allegations, the amended complaint must be dismissed for failure to comply with Rule 9(b).
On oral argument, however, counsel for plaintiff articulated to the Court additional facts which he asserted could be pleaded in a second amended complaint, that might well satisfy the requirements of Rule 9(b). Therefore, in view of the liberal standard for amending pleadings set forth in Fed. R. Civ. P. 15(a), the Court will dismiss plaintiff's fraud claims without prejudice and with leave to replead those claims.
PLAINTIFF'S NEGLIGENCE CLAIM
Plaintiff has alleged that certain conduct of the defendants Fittin, Inc., MSI, Starbuck, Carmel, Mingola, Fittin, Lauzon, Kunker, INA and National Grange, constitute negligence with respect to Associates. Defendants attack these allegations as failing to state a claim upon which relief can be granted, and move to dismiss the negligence allegations pursuant to Fed. R. Civ. P. 12(b) (6). Defendants contend that plaintiff's amended complaint at best states only a claim of negligent misrepresentation to the limited partners, and that Associates, as a distinct entity, has no such claim.
Under the law of New York, a negligence claim will survive a motion to dismiss for failure to state a claim where plaintiff pleads "the existence of a duty, the breach of which may be considered the proximate cause of the damages suffered by" plaintiff. Becker v. Schwartz, 46 N.Y.2d 401, 410, 386 N.E.2d 807, 811, 413 N.Y.S.2d 895, 899 (1978). More specifically, New York law requires plaintiff to plead (1) a duty owing from defendant to plaintiff; (2) a breach of that duty by defendant; and (3) damages suffered by plaintiff as a proximate result of the defendant's breach. See, e.g., Barr v. County of Albany, 69 A.D.2d 914, 195, 415 N.Y.S.2d 471, 473 (3rd Dept. 1979), modified on other grounds, 50 N.Y.2d 247, 406 N.E.2d 481, 428 N.Y.S.2d 665 (1980); Donohue v. Copiague Union Free School District, 64 A.D.2d 29, 32, 407 N.Y.S.2d 874, 877 (2d Dept. 1978), aff'd, 47 N.Y.2d 440, 391 N.E.2d 1352, 418 N.Y.S.2d 375 (1979).
In order to sufficiently state a negligence claim against any of the defendants, plaintiff must allege a factual predicate from which the Court can infer that Associates was damaged by that defendant's negligent conduct. While it is true that averments of negligence need not meet the strict particularity requirements of Fed. R. Civ. P. 9(b) and need only comply with the more liberal pleading requirements of Fed. R. Civ. P. 8, see Conley v. Gibson, 355 U.S. 41, 45-46, 47-48, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980); that circumstance does not render plaintiff's amended complaint sufficient with respect to the negligence claims.Even assuming arguendo that the negligence allegations made are sufficient under Rule 8, plaintiff still must sufficiently allege that the limited partnership itself, as opposed to the limited partners, was damaged by defendant's negligent conduct. This the amended complaint fails to do. Therefore the negligence claims as presently drafted are insufficient.
At oral argument, however, counsel for plaintiff informed the Court of additional facts which could be pleaded in a second amended complaint which might satisfy these requirements. Therefore, plaintiff's negligence claims, like the fraud claims, are dismissed without prejudice and with leave to replead.
THE CLAIMS AGAINST THE INSURANCE COMPANY DEFENDANTS
Plaintiff's amended complaint also includes claims against two insurance companies, INA and National Grange, for breach of contract arising out of indemnity bonds issued to the general partner MSI by the insurance companies
which covered losses due to, inter alia, the fraudulent or dishonest acts of MSI employees. Plaintiff claims that since these bonds were intended to be for the benefit of Associates and the investors in Associates, the insurance companies have breached the terms of the policies by refusing to pay the proceeds of those policies to Associates, and by failing to represent Associates in the instant action.
INA and National Grange have moved to dismiss these claims pursuant to Fed. R. Civl. P. 12(b) (6), claiming that there is no privity between Associates and the insurance companies, and that the policies at issue were not intended to be for the benefit of Associates or the limited partners. INA nad National Grange argue that the type of bonds involved here indemnify only the insured itself against loss, and do not encompass liability to third parties, see, e.g., 175 East 74th Corp. v. Hartford Accident & Indemnity Co., 51 N.Y.2d 585, 592-93, 416 N.E.2d 584, 587 435 N.Y.S.2d 584, 587-88 (1980). Furthermore, they assert that a third party cannot enforce an insurance contract unless it clearly appears that the contract was intended to be for the benefit of that third party, see, e.g., Tomaso, Feitner & Lane, Inc. v. Brown, 4 N.Y.2d 391, 393, 151 N.E.2d 221, 222, 175 N.Y.S. 2d 73, 75 (1958); Bernal v. Pinkerton's Inc., 52 A.D.2d 760, 760, 382 N.Y.S.2d 769, 770 (1st Dept. 1976), aff'd, 41 N.Y.2d 938, 363 N.E.2d 362, 394 N.Y.S.2d 638 (1977). They assert further that this is clearly not the case here because the policies at issue do not state in any form that they are to benefit, nor were they ever intended to benefit, Associates or the limited partners. See, e.g., Skinner Bros. Mfg. Co. v. Shevlin Engineering Co., 231 A.D. 656, 659, 248 N.Y.S. 380, (1st Dept. 1931), aff'd, 257 N.Y. 562, 178 N.E. 795 (1931); Mars v. Flatiron Services, Inc., 34 Misc.2d at 581, 226 N.Y.S.2d at 250.
Defendants INA and National Grange also contend that under the common law of New York, an injured party such as Associates has not right of action directly against an insurer, see, e.g., Thrasher v. U.S. Liability Insurance Co., 19 N.Y.2d 159, 166, 225 N.E.2d 503, 506, 278 N.Y.S.2d 793, 798 (1967); Spier v. American Surety Co., 270 N.Y. 596, 597, 1 N.E.2d 347, 347 (1936), because there is no privity between the plaintiff and the insurers, see Mars v. Flatiron Services, Inc., 34 Misc.2d 579, 580, 226 N.Y.S.2d 247, 249 (N.Y.Co.Ct., Special Term 1962); Burke v. London Guarantee & Accident Co., 47 Misc. 171, 173, 93 N.Y.S. 652, 653 (N.Y.Sup.Ct. 1905), aff'd mem., 199 N.Y. 557, 93 N.E. 1117 (1910). They claim, therefore, that in no event may plaintiff sue the insurer until the injured party has obtained a judgment against the insured and that judgment remains unsatisifed for thirty (30) days, see N.Y. Insurance Law § 167.1(b); Thrasher, 19 N.Y.2d at 166, 225 N.E. 2d at 506, 278 N.Y.S.2d at 798.
Plaintiff replies that in fact Associates and its investors were intended beneficiaries under the insurance contracts, and that furthermore this action fits within a narrow exception under New York law which allows a direct action against an insurer before judgment has been obtained against the principal insured. Plaintiff contends that this exception applies where the circumstances evidence a clear intent to protect the third party, despite the fact that they are not directly named on the bond, see Newin Corp. v. Hartford Accident and Indemnity Co., 37 N.Y.2d 211, 219, 333 N.E.2d 163, 167, 371 N.Y.S.2d 884, 891 (1975); McClare v. Massachusetts Bonding & Ins. Co., 266 N.Y. 371, 375, 195 N.E. 15, 16 (1935), and that this issue may not therefore be properly resolved on a motion to dismiss. The Court agrees.
The New York Court of Appeals has stated that, even where an indemnity bond is involved, "it is the intent of the parties as revealed in the "circumstances under which the bond was written" . . . that governs the legal result, not the formal label which is inserted at the top of the document. The mere absence in a contract of any provision either excluding or including such coverage does not necessarily preclude proof that unnamed third-party beneficiaries were intended to be benefited; . . ." Newin, 37 N.Y.2d at 219, 333 N.E.2d at 168, 371 N.Y.S.2d at 891, citing Daniel-Morris Co. v. Glens Falls Ind. Co., 308 N.Y. 464, 468, 126 N.E.2d 750, 752 (1955). Thus, in a case where the plaintiff sufficiently alleged third party beneficiary status, even where that status was not apparent from the bond itself, the Court of Appeals held that a motion to dismiss should be denied.37 N.Y.2d at 219, 333 N.E.2d at 168, 371 N.Y.S.2d at 891.
The Court is not persuaded by defendants argument that this exception applies under the law of New York only where a quasi-regulatory or official body of the State requires that a bond be obtained to protect creditors. See Reply Memorandum of Defendants Insurance Company of North America and National Grange Mutual Insurance Company 6-10 (May 2, 1983); Transcript of Oral Argument on December 28, 1983 at 66-67. For this reason it is not clear as a matter of law that Associates cannot bring these claims against INA and National Grange. Therefore, defendants motion to dismiss is denied.
Plaintiff's amended complaint is dismissed, with leave to file a second amended complaint within thirty days of the date of this Opinion and Order. Any motions directed to the Second Amended Complaint shall be filed in accordance with a scheduling order to be proposed by the parties and submitted to the Court.
It is SO ORDERED.