The opinion of the court was delivered by: CONNER
Plaintiff James Bloor ("the trustee"), chapter X trustee for the Investors Funding Corporation of New York ("IFC"), commenced 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 ("the Danskers"), "the principal officers, controlling directors, controlling stockholders and the dominant force of IFC until sometime prior to October 21, 1974." Complaint P 105.
IFC allegedly suffered massive damages at the hands of the Danskers, both as a result of certain mismanagement decisions and as a consequence of transactions by which the Danskers misappropriated IFC funds for the personal benefit of themselves and others. Id. § 103 passim. The trustee alleges that as these actions, characterized as "the [f]raud," id., P 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 [f]raud." Id. P 104. On the basis of this false image of financial health, the Danskers were allegedly able to obtain for IFC large quantities of funds from creditors, debenture holders, stockholders, and other sources. Id. P 102. These sums were purportedly used to perpetuate and conceal the fraud.
Three motions are presently before the Court. Defendants Norman Dansker and Suro Corporation have moved pursuant to rule 403, Fed. R. Evid., to exclude certain evidence. Defendants Jerome Dansker and Henelo Corporation have moved pursuant to rules 20(b), 21, and 42(b), Fed. R. Civ. P., for a severance or, alternatively, pursuant to rule 403, Fed. R. Evid., to exclude the same evidence that Jerome Dansker and Suro Corporation seek to exclude. Defendant Carro Spanbock Londin Rodman & Fass ("Carro Spanbock"), IFC's outside legal counsel, has moved for judgment on the pleadings pursuant to rule 12(c), Fed. R. Civ. P., with respect to counts three, fifteen, and sixteen of the trustee's complaint. In addition, Carro Spanbock and three Carro Spanbock partners, Melvin J. Carro ("Carro"), Maurice Spanbock ("Spanbock"), and Jerome J. Londin ("Londin"),
have moved for a severance pursuant to rules 20(b), 21, and 42(b), Fed. R. Civ. P. For the reasons set forth below, the motions to exclude are granted and the motions for a severance are denied. Carro Spanbock's motion to dismiss counts three, fifteen, and sixteen is granted.
Although familiarity with my earlier opinions in this matter is presumed, I think it useful to summarize the highlights. In an Opinion and Order dated November 19, 1980, In re Investors Funding Corp. of New York Securities Litigation (IFC I), 523 F. Supp. 533 (S.D.N.Y. 1980), I granted in part the motions of defendants Peat, Marwick, Mitchell & Co., Jerome Lowengrub, S.D. Leidesdorf & Co., and Robert Saltman, IFC's auditors, to dismiss the claims against them. I held that to the extent that the auditors were alleged to have certified inaccurate financial statements which led to the issuance or sale of IFC securities, the proceeds of which were mismanaged or misapplied by IFC management, that mismanagement was not "in connection with the purchase or sale of a security," and the trustee had therefore failed to state a claim under sections 10(b) and 18 of the Securities Exchange Act of 1934 ("the '34 Act), 15 U.S.C. §§ 78j(b), 78r (1982), and under sections 339-a and 352-c of the New York General Business Law, N.Y. Gen. Bus. Law §§ 339-a, 353-c (McKinney 1984). 523 F. Supp. at 539. Moreover, to the extent that the trustee's allegations that the Danskers and others had looted the proceeds of securities transactions did satisfy the "in connection with" requirement, I held that the securities law claims against the auditors failed because of the absence of any proximate causal link between the auditors' alleged acts and any injuries to IFC. Id. at 540.
I also rejected the trustee's allegations of secondary liability, concluding that the auditors could not be held liable as aiders and abettors of another's primary securities law violation, nor could they be subject to liability as controlling persons under section 20 of the '34 Act, 15 U.S.C. § 78t (1982). Id. at 542-43. With respect to the trustee's nineteenth and twenty-seventh claims, I ruled that payments for professional services that 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 action. Id. at 549-50.
In an Opinion and Order dated January 12, 1982, In re Investors Funding Corp. of New York Securities Litigation (IFC II), No. 76 Civ. 4679 (S.D.N.Y. Jan. 12, 1982), I answered a question I had left open in IFC I -- namely, whether the trustee's allegations of a scheme on the part of the Danskers to loot the proceeds from the sale of IFC securities were adequate to satisfy the "in connection with" requirement of the federal and state securities laws. I concluded that the trustee's allegations were sufficient to satisfy that requirement, and I therefore denied the Danskers' motion to dismiss the trustee's securities law claims. Id., slip op. at 7-9.
In an Opinion and Order dated June 15, 1983, In re Investors Funding Corp. of New York Securities Litigation (IFC III), 566 F. Supp. 193 (1983), aff'd. 754 F.2d 57 (2d Cir. 1985), I considered additional motions to dismiss from numerous other defendants, including Carro Spanbock. Because I found that the trustee's securities law claims against Carro Spanbock suffered from the same causation defects as his claims against IFC's auditors, I granted the law firm's motion to dismiss those claims. Id. at 201. With respect to the trustee's claim that Carro Spanbock had breached its agreement to provide legal services to IFC because of the deficient manner in which those services were performed, I reaffirmed my earlier holding that under New York law, allegations of a professional's failure to perform his job in accordance with the standards required of one in his field state a claim in tort or malpractice, but not in contract. I therefore dismissed the trustee's seventeenth claim against the law firm. With respect to the trustee's claim that between 1972 and 1974 Carro Spanbock had been the recipient of fraudulent transfers totalling nearly $650,000, I reaffirmed my earlier ruling that fraudulent transfers under both the Bankruptcy Act and New York law do not encompass payments to a professional for services that failed to meet professional standards of performance. I therefore dismissed the trustee's twenty-seventh claim against the law firm. Id.
I also considered motions on behalf of Carro to dismiss the trustee's claims against him in his individual capacity, and on behalf of Spanbock and Londin to dismiss the trustee's claims against them in their capacities as investors in certain real estate ventures also named as defendants in the complaint. Id. at 202-03. I observed that unlike the allegations against the Carro Spanbock law firm, which arose in the context of legal advice it provided to IFC, the claims against Carro, Spanbock, and Londin concerned their alleged involvement in the very mechanism by which the Danskers and others were allegedly able to loot IFC's funds. I held that the causation requirement that was absent from the securities law claims asserted against IFC's auditors and legal counsel was satisfied with respect to Carro, Spanbock, and Londin, and I therefore denied their motion to dismiss the claims against them. Id. at 202-03.
As I noted above, three motions are currently before the Court. Defendants Norman Dansker and Suro Corporation have moved to exclude certain evidence relating to an event that the parties refer to as "the Fort Lee bribery incident." Defendants Jerome Dansker and Henelo Corporation have moved for a severance based on the prejudice that would result from a joint trial in which the bribery evidence were introduced. In the alternative, Jerome Dansker and Henelo Corporation have moved to exclude the bribery evidence. Defendant Carro Spanbock has moved to dismiss certain claims against it. In addition, all the Carro Spanbock defendants have moved for a severance.
The Exclusion and Severance Motions
The Fort Lee bribery incident was the culmination of IFC's dealings with Arthur Sutton, a contractor, in connection with a real estate development in Fort Lee, New Jersey. Complaint PP 154-70. Various defendants are alleged to have diverted IFC funds from the company by causing it to make improper loans to Sutton in connection with the Fort Lee project. Id. P 155. The diverted funds were allegedly used (1) to purchase certain IFC property, generating paper profits, Id. PP 154-58; (2) to bail out a partnership in which the Danskers were investors, Id.; (3) to make improvements on Norman Dansker's properties, Id. P 160; (4) to compensate certain other defendants, id.; and (5) to bribe two local officials of Fort Lee, New Jersey, in an attempt to obtain zoning variances for the Fort Lee complex, Id. PP 161-70. The bribery scheme was discovered and eventually ...