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January 12, 1990


The opinion of the court was delivered by: Lasker, District Judge.

The Harvey Group, Inc. ("HGI") and Components Plus, Inc. ("CPI") (collectively "Harvey") move for summary judgment against Plaintiffs Arnold D. Goodridge and his wholly-owned company New Wave, Inc. ("New Wave") and Third-Party Defendant Frank Fernandez. Fernandez and Goodridge cross-move for summary judgment against each other. The grounds for these motions are set forth following a brief summary of the complicated series of events surrounding this litigation. For the reasons discussed below Harvey's motion is denied; Fernandez's cross-motion against Goodridge is denied, and Goodridge's cross-motion against Fernandez is granted.


In October 1980 Goodridge and Fernandez were each 50% shareholders and officers of Components Plus, Inc. ("Old CPI"), a New Jersey electronics corporation which distributed semiconductors and other electronic components for military use. Although the company had experienced substantial growth, Fernandez sought to merge with a large public company and told Goodridge that another company had expressed interest in such a merger provided Goodridge would sell his interest in Old CPI. Goodridge agreed and entered into a Stock Purchase Agreement dated October 22, 1980 (the "Stock Purchase Agreement") by which Fernandez and Old CPI purchased Goodridge's interest in the company for $1,444,000. As part of the transaction Goodridge and Old CPI also entered into an agreement (the "Employment Agreement") by which Old CPI would employ Goodridge for ten years at a salary of $20,000 per year and provide him with health insurance and the use of two leased automobiles in exchange for unspecified business services. Old CPI also agreed to maintain an employee stock option plan ("ESOP") for Goodridge during his employment and to pay him his share upon termination of the plan. Under a third agreement (the "Consulting Agreement") Goodridge's company, New Wave, was to receive $65,000 per year through 1986 and $40,000 per year from 1987 until December 31, 1990 for consulting services. In exchange for "value received" Old CPI gave Goodridge a promissory note in the sum of $141,108 (the "Note"), made payable in monthly installments of $6,520. Finally, Fernandez executed a personal guarantee (the "Guarantee") of "prompt and unconditional payment" of any debts or obligations due under the Note, the Employment Agreement, the Consulting Agreement and the Stock Purchase Agreement.*fn1

On June 26, 1981 Old CPI, Fernandez and Alfonse Daula, Old CPI's president, entered into a merger agreement (the "Merger Agreement") with another electronics company, Neboc, Inc. ("Neboc"), and its parent, HGI, pursuant to which a new company was formed, CPI. Fernandez and Daula exchanged their Old CPI stock for shares of CPI and received five-year employment contracts. On August 5, 1981 CPI entered into an agreement (the "Assumption Agreement") to assume the liabilities and obligations which Old CPI had incurred under the agreements with Goodridge. Goodridge received compensation pursuant to the Employment Agreement, the Consulting Agreement and the Note until CPI terminated payments to him in August 1982.

In March and again in May 1982 a federal grand jury (in St. Louis, Missouri) investigating corruption in the military contracting industry served CPI with subpoenas duces tecum to testify and produce business and financial records of Old CPI for the period 1975-1980. Old CPI had been a subcontractor to two targets of the investigation, the McDonnell-Douglas Corporation ("McDonnell-Douglas") and the Emerson Electric Company, Inc. ("Emerson Electric"). In reviewing the records requested by the grand jury, counsel for CPI became aware of irregularities and improprieties in Old CPI's operations. By August 1982 Harvey suspected that Old CPI's records had been falsified to conceal payments made to individual officers and employees of Old CPI and that the concealed funds had been used in part to bribe purchasing agents at McDonnell-Douglas and Emerson. CPI officers also believed that invoices for parts testing necessary to show compliance with military specifications had been falsified by Old CPI officials. CPI suspected that Goodridge was involved in the alleged wrongdoing, and suspended payments which were due to him under the obligations it had assumed from Old CPI.

Goodridge instituted two actions in state court on December 3, 1982 to recover money allegedly owed him by Harvey under the Note, the Employment Agreement and the Consulting Agreement. The actions were removed to this court and consolidated. Harvey counterclaimed against Fernandez and Daula. Fernandez and Daula in turn counterclaimed against Harvey, asserting securities and common law fraud arising out of two allegedly false promises made by Harvey in connection with the Merger Agreement: 1) that Fernandez and Daula would have complete control over CPI following the merger and 2) that the combined sales of HGI and CPI would exceed $100,000,000. Goodridge's complaint against Harvey was dismissed by endorsement dated June 24, 1983.

In January 1986 the United States Attorney's Office for the Eastern District of New York indicted Goodridge, Fernandez and Roslyn Frank, the former bookkeeper for Old CPI, on several counts charging their participation in a criminal conspiracy to defraud the United States through tax fraud and bribery. On April 11, 1986 Goodridge pled guilty to one count of conspiracy to commit tax evasion and one count of conspiracy to commit tax fraud. Fernandez pled guilty on June 20th of that year to one count of conspiracy to defraud the United States through the payment of unlawful bribes and kickbacks and to one count of tax evasion.

On May 8, 1987 Goodridge and New Wave filed an amended complaint against Harvey seeking recovery of funds due under the Note and damages for breach of the Employment Agreement and the Consulting Agreement. Goodridge also sought to enforce the Guarantee signed by Fernandez of payments due under the Assumed Obligations. Harvey filed an answer and counterclaimed against Goodridge, New Wave and additional defendants Fernandez and Daula. In his answer to plaintiffs' amended complaint, Fernandez asserted additional counterclaims against Goodridge and three new counterclaims against Harvey 1) for indemnification by HGI pursuant to section 6.7 of the Merger Agreement 2) for indemnification by HGI pursuant to the Assumption Agreement and 3) for breach of HGI's agreement to obtain Fernandez's release from his Guarantee of the CPI obligations to Goodridge.

Harvey now moves for summary judgment on all claims asserted against it by Goodridge and New Wave in the amended complaint and by Fernandez in the original and amended complaints. Harvey argues that Fernandez and Goodridge are collaterally estopped from asserting their claims because their pleas of guilty, allocutions and convictions establish that each of them committed federal securities law violations which render the Merger Agreement and all ancillary agreements unenforceable. Goodridge cross-moves for summary judgment against Fernandez for payment under the Guarantee. Fernandez cross-moves to dismiss Goodridge's claim on the Guarantee.


Harvey argues that a criminal conviction, whether by jury verdict or by guilty plea, estops the convicted defendant from contesting in a subsequent civil proceeding those matters determined by the conviction. While for some years it has been established in this Circuit that guilty pleas "constitute[ ] estoppel in favor of the United States in a subsequent civil proceeding as to those matters determined by the judgment in the criminal case," United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978) (emphasis added), only recently, in Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 43 (2d Cir. 1986), cert. denied, 480 U.S. 948, 107 S.Ct. 1608, 94 L.Ed.2d 794 (1987), did the Court of Appeals hold that a criminal conviction could also have estoppel effect in a civil case in which the Government was not a party. The Gelb court held:

  Because mutuality of estoppel is no longer an
  absolute requirement under federal law,
  Parklane Hosiery Co. v. Shore, 439 U.S. 322, 99
  S.Ct. 645, 58 L.Ed.2d 552 (1979); Blonder-Tongue
  Laboratories, Inc. v. University of Illinois
  Foundation, 402 U.S. 313, 91 S.Ct. 1434, 28 L.Ed.2d
  788 (1971), a party other than the Government may
  assert collateral estoppel based on a criminal
  conviction. See United States v. Frank,
  [494 F.2d 145, 160 (2d Cir.), cert. denied, 419 U.S. 828 [95
  S.Ct. 48, 42 L.Ed.2d 52) (1974)]. The criminal
  defendant is barred from relitigating any issue
  determined adversely to him in the criminal
  proceeding, provided that he had a full and fair
  opportunity to litigate the issue.

798 F.2d at 43. See State of New York v. Hendrickson Bros., Inc., 840 F.2d 1065, 1080 (2d Cir. 1988) (district court had authority to accord criminal convictions estoppel effect in subsequent civil suit); Dorman v. Higgins, 821 F.2d 133, 135-36 (2d Cir. 1987).

However, "[j]ust as it is clear that a guilty plea can collaterally estop the relitigation of certain issues in subsequent civil litigation, it also is clear that the estoppel extends only to those issues that were essential to the plea." Alsco-Harvard Fraud Litigation, 523 F. Supp. 790, 802 (D.D.C. 1981) (citing Emich Motors v. General Motors, 340 U.S. 558, 569, 71 S.Ct. 408, 414, 95 L.Ed. 534 (1951)). In Hendrickson Bros., 840 F.2d at 1080, the Second Circuit Court of Appeals stated that judgments of conviction may have estoppel effect in subsequent civil litigation with respect to issues necessarily determined in the criminal proceedings. See Dorman, 821 F.2d at 136. The party asserting collateral estoppel based on a guilty plea has the burden of showing precisely which facts the plea establishes. Appley v. West, 832 F.2d 1021, 1026 (7th Cir. 1987).

In Emich Motors the Supreme Court stated that "estoppel extends only to questions `distinctly put in issue and directly determined' in the criminal prosecution." 340 U.S. at 569, 71 S.Ct. at 414 (quoting Frank v. Magnum, 237 U.S. 309, 334, 35 S.Ct. 582, 590, 59 L.Ed. 969 (1915)).

  In the case of a criminal conviction based on a
  jury verdict of guilty, issues which were
  essential to the verdict must be regarded as
  having been determined by the verdict.
  Accordingly, we think plaintiffs are entitled to
  introduce the prior judgment to establish prima
  facie all matters of fact and law necessarily
  decided by the conviction and the verdict on which
  it is based.
    The difficult problem, of course, is to
  determine what matters were adjudicated in the
  antecedent suit. A general verdict of the jury or
  judgment of the court without special findings
  does not indicate which of the means charged in
  the indictment were found to have been used in
  effectuating the conspiracy.

340 U.S. at 569, 71 S.Ct. at 414 (citation omitted). In Emich the Court held that it is the responsibility of the trial judge in a subsequent civil case to ascertain what was determined in a prior criminal trial for the purpose of determining the extent to which estoppel applies in a civil case under § 5 of the Clayton Act, 15 U.S.C. § 16. The Court reversed the Court of Appeals, which had ruled that a criminal conviction alone established prima facie evidence of a civil conspiracy. The rationale for compelling a close examination by the trial court of what issues were essential to or necessarily decided by a jury verdict in a criminal trial for civil estoppel purposes is even more persuasive where the court must decide what issues were essential to a guilty plea made without any of the charges in the indictment actually being tried. In sum, Harvey must demonstrate that the facts upon which he asserts estoppel were essential to the pleas of Fernandez and Goodridge.

A. The Fernandez Guilty Plea

Harvey argues first that the cross-claims of Fernandez are barred by estoppel because the necessarily determined elements of Fernandez's plea constitute, inter alia, a violation of Section 10(b) of the Securities and Exchange Act, 15 U.S.C. § 78j(b), and Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5,*fn2 which renders the Merger Agreement, the Assumption Agreement and all ancillary agreements unenforceable against Harvey because under New York Law Fernandez cannot benefit from his own fraud. McConnell v. Commonwealth Pictures Corp., 7 N.Y.2d 465, 199 N.Y.S.2d 483, 166 N.E.2d 494 (1960). Fernandez answers that the facts essential to and the issues determined by his guilty plea relate only to his filing of false personal income tax returns and supporting documents for the years 1979-81 and that, accordingly, the plea does not establish any of the elements of a 10b-5 violation. Fernandez pled guilty to counts One and Twelve of the Indictment. Count One charged Fernandez and Goodridge with conspiracy to defraud the United States in violation of 41 U.S.C. § 51*fn3 by preventing the Internal Revenue Service from discovering the actual business expenses of Old CPI and the actual taxable personal income of Fernandez and Goodridge. It alleged that Fernandez and Goodridge set up fictitious corporations with friends and relatives as officers and that Goodridge and Fernandez then issued Old CPI checks to these corporations for fictitious services. The Indictment alleges that the monies would then be paid to Goodridge and Fernandez in cash or by check. It also charged the defendants with preparing false tax returns for Old CPI which improperly deducted these payments as legitimate business expenses, and with preparing false personal income tax returns which did not include the payments as income.

Count Twelve of the Indictment charged Fernandez with knowingly and wilfully attempting to evade federal income taxes by filing a false return in violation of 26 U.S.C. § 7201 and 18 U.S.C. § 2.

The five elements of a Rule 10b-5 violation which must be established by Harvey are: 1) a fraudulent scheme or misleading or untrue statement or omission with regard to a material fact, 2) in connection with the purchase of a security, 3) upon which the defrauded party detrimentally relies, 4) which is made with scienter and 5) promulgated through the use of the mails or any facility of a national securities exchange. Freschi v. Grand Coal Venture, 767 F.2d 1041, 1047-48 (2d Cir. 1985); Drobbin v. Nicolet ...

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