The opinion of the court was delivered by: Sweet, District Judge.
Defendants, William Belzberg, Hyman Belzberg, Samuel
Belzberg, Marc Belzberg, First City Financial Corporation Ltd.,
First City Trust Company, Roxboro Investments 91976) Ltd.,
Bel-Fran Investments Ltd., Bel-Cal Holdings Ltd. and Bel-Alta
Holdings Ltd. (collectively "First City") have moved pursuant
to Federal Rule 56(c) for summary judgment, and Federal Rules
9(b) and 12(b)(6) for dismissal (the "First City Motion") of
the Consolidated Amended Class Action and Shareholders'
Derivative Complaint ("the Complaint"). Defendant Ashland Oil,
Inc. ("Ashland"), and defendants John R. Hall, Robert T.
McCowan, William R. Seaton, Charles J. Luellen, Samuel C.
Butler, Eugene W. Erickson, James B. Ferley, Robert D. Gordon,
Jr., Walter W. Hillenmeyer, Jr., Don T. McKone, Harold S.
Mohler, Grover E. Murray, Jane C. Pfeiffer, Robert S.
Reigeluth, James R. Rinehart, F.H. Ross, Jr., Robert B.
Stobaugh, Richard L. Terrell, and James W. Vandeveer (the
"Directors") have also moved (the "Ashland Motion") pursuant to
Federal Rule 12(b)(6) for dismissal of the derivative claims
contained in the Consolidated Amended Complaint. For the
reasons set forth below, these motions are granted in part and
denied in part as set forth below.
Plaintiff A. Jacques Lou ("Lou") bought 1,000 shares of
Ashland common stock on March 27, 1986. Lou was a shareholder
of Ashland at the time the transactions complained of herein
took place and continues to hold shares of Ashland common
Plaintiff Joan Stahl ("Stahl") was the owner of Ashland's
common stock (in her representative capacity as Custodian for
Danielle Stahl) during the time of the challenged transaction
and she continues to hold Ashland shares.
The First City defendants, include certain members of the
Belzberg family and the companies they control as listed above.
First City is an investment corporation with financial,
manufacturing, and real estate subsidiaries in the United
States and Canada.
The Ashland defendants ("Ashland"), include members of the
Board of Directors, listed above, and Ashland, as the nominal
defendant in the derivative claims. Ashland is a corporation
organized and existing under the laws of the Commonwealth of
Stahl initially filed an action (the "Stahl Action") in the
Eastern District of Kentucky on April 14, 1986. On the same
date, Lou filed an amended complaint ("Lou Action") in
California State Court. After protracted litigation in
California bearing on whether the claims were properly in a
federal court, on May 12, 1986, First City, Ashland Oil, and
Drexel moved to change venue of the Lou Action pursuant to
28 U.S.C. § 1404(a) to the United States District Court for the
Southern District of New York. By order of May 14, 1986 the
motion to transfer was granted. On May 22, 1986 Ashland moved
to transfer the Stahl Action to the United States District
Court for the Southern District of New York and by order of
August 8, 1986 the motion was granted. On October 18, 1988
the Amended Consolidated Complaint (the "Complaint") combining
both the Lou and Stahl Actions was filed. On March 16, 1989
Ashland moved to dismiss the derivative claims in the complaint
and on March 17, 1989 First City moved for dismissal and
Summary Judgment. Oral Argument on both motions was heard on
October 20, 1989, and the motions were considered fully
submitted as of that date.
First City began purchasing Ashland stock in February of
1986. Between February 11, and March 25, First City acquired
approximately 1.4 million shares of Ashland common stock as
well as options to purchase an additional 1.2 million shares.
On March 24, 1986, First City informed Ashland that First
City had accumulated between 8% and 9% of Ashland stock and
that First City was filing a Schedule 13D with respect to these
purchases. First City proposed a meeting between Samuel
Belzberg and Ashland's Chairman, defendant John R. Hall
("Hall"), with respect to a possible transaction involving
Ashland. The next day, Ashland issued a press release
announcing First City's holdings, resulting in a rise in the
market price of Ashland shares.
Also on March 25, Samuel Belzberg sent a letter to Hall
Based on our study of publicly available
information concerning Ashland and our analysis of
its business and prospects, we are prepared today
to enter into an agreement providing for the
acquisition of 100% of the stock of Ashland by
First City at a price of $60.00 per share of
common stock. If you enter into good faith
negotiations with us, we believe that working
together we can negotiate a higher price for
Ashland's stockholders. If you reject out proposal
and our offer to negotiate we will consider all
The closing price of Ashland's stock on March 25, 1986 was $52
per share, an increase of $3.75 per share from the previous
On the morning of March 26, a representative of Ashland
telephoned a representative of First City, stating that, while
Ashland was not interested in discussing any transaction with
First City, Ashland was mindful of its duties to its
stockholders. The Ashland representative further reported that
Hall was not interested in meeting the week of March 25, as had
been requested and suggested the possibility of a meeting at
the end the week of March 31.
On the afternoon of March 26, First City filed its Schedule
13D, disclosing that First City had acquired 9.2% of Ashland's
common stock. First City also stated that, had the requested
meeting taken place, First City intended to propose, subject to
the approval of Ashland's Board of Directors, the acquisition
of Ashland by First City at a price of $60 per share. A copy of
Samuel Belzberg's letter to Hall was attached as an exhibit to
the Schedule 13D.
The Schedule 13D also disclosed that First City was
considering a number of available options with respect to its
future course of action:
First City's future course of conduct will depend
upon the receptivity of the management and Board
of Directors of the Issuer, the availability of
other opportunities for the use of the resources
of First City, market conditions and other
relevant developments. . . . Pending a
determination by First City as to its future
course of conduct with respect to the Issuer, it
may increase or decrease or continue to hold or to
dispose of its position in the Issuer and may seek
to obtain representation on the Issuer's board of
On March 27, First City filed a Hart-Scott-Rodino Notification
and Report Form with the Federal Trade Commission and the
Department of Justice seeking antitrust clearance to acquire
more than 50% of Ashland's stock.
On March 31, 1986, Ashland's financial advisor, First Boston,
proposed to First City's financial advisor, Drexel Burnham,
that Ashland purchase the shares held by First City. After
discussions, First City agreed to sell its stock to Ashland at
a price of $51 per share (the "Agreement"). This price was $.50
per share less than the price of Ashland common stock at the
close of the market on March 31.
First City agreed to sell its shares to Ashland, and Ashland
undertook to provide value to all shareholders. A
representative of Ashland stated that management would
recommend to the Ashland Board that Ashland purchase, apart
from First City's shares, an additional fifteen to twenty
percent of Ashland's common stock from other stockholders in
the open market. In addition, First City agreed to a standstill
arrangement, under which it promised not to acquire any voting
shares of Ashland for a period of ten years, and Ashland
released First City from any liability arising out of the stock
The Ashland Board approved the Agreement and stated the
following reasons in the minutes of the Board meeting:
(1) That the Corporation and its shareholders
would be better served by remaining independent
than by having the Corporation acquired at a price
of $60 per share. In reaching this conclusion, the
Board considered the Corporation's business as a
whole (including, among other things, management's
own internal evaluations and outside advice
indicating that a price of $60 for the
Corporation's Common Stock did not reflect the
full value of the Corporation), the Corporation's
financial position, its borrowing capacity, the
replacement cost of its fixed asets [sic] and
inventories, and its future prospects. In
addition, the Board noted that a $60 price was
below the value which many investment analysts
have publicly given to the Corporation's Common
(2) That this is an imprudent time for the
Corporation to be acquired. In reaching this
conclusion, the Board considered factors referred
to above, as well as general economic conditions
and current conditions in the petroleum
exploration, production, marketing and refining
industries, both in the United States and
(3) That in addition to the above factors as well
as the First City Parties' past record, the Board
strongly believed that it was in the long-term
interests of the shareholders to repurchase the
First City Parties' shares at this time. Any
continuation of or increase in the First City
Parties' investment was also felt likely to have a
disruptive effect on the customers and employees
of the Corporation.
On April 2, 1986, the Agreement was consummated in New York.
The terms of the Agreement, as well as the background of its
negotiation, were disclosed in an amendment to First City's
Schedule 13D filed with the SEC on April 2, 1986. That same
day, Ashland announced a major restructuring pursuant to which
it would purchase 7.5 million shares of its stock on the open
market and transfer an additional 5.3 million shares to an
employee stock ownership plan (ESOP).
After the Agreement was announced the price of Ashland stock
on the New York Stock Exchange dipped to $49 3/4 per share on
April 1. With the exception of the nine days following the
October 1987 stock market crash, Ashland stock has traded for
more than $51 per share continuously since late April 1986.
Adjusted for a two-to-one stock split effected last July,
Ashland stock, at the filing of these motions, was trading for
more than $70 per share.
Lou's claims, brought individually and on a derivative basis,
allege violations of Sections 10(b) and 13(d) of the Securities
Exchange Act of 1934, 15 U.S.C. § 78j(b) & 78m(d) and Rule
10b-5, Sections 1962(a), (c) and (d) of the Racketeer
Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961-1968
("RICO"), and the common law of fiduciary duty and
fraud. Of the four derivative claims asserted by Lou on
Ashland's behalf, two — those alleging violations of Section
10(b) of the 1934 Act and RICO — are asserted only against
First City. The two remaining derivative claims, for "Breach of
Fiduciary Duty" and "Waste and Usurpation of Corporate Assets,"
are asserted against both First City and Ashland.
Ashland moves to dismiss the derivative claims contained in
the Complaint for failure to make a demand on Ashland's Board
of Directors pursuant to Fed.R.Civ.P. 23.1.
First City moves pursuant to Federal Rule 56(c), for summary
judgment in favor of First City on the derivative and
individual claims brought under Section 10(b) and Rule 10b-5 on
the ground that First City's disclosures in its Schedule 13D
were sufficient as a matter of law and that neither the Ashland
Directors nor any reasonable investor could have been misled;
pursuant to Federal Rule 9(b), to dismiss the Section 10(b) and
Rule 10b-5 claims for failure to plead fraud with
particularity; pursuant to Federal Rule 56(c), for summary
judgment for First City on the common law fraud claim on the
ground that First City's disclosures in its Schedule 13D were
sufficient as a matter of law and that no reasonable investor
could have been misled; pursuant to Federal Rule 9(b),
dismissing the common law fraud claim for failure to plead
fraud with particularity; pursuant to Federal Rule 56(c), for
summary judgment in favor of First City on the derivative
claims as against First City on the ground that the claims are
precluded by the release given by Ashland to First City as part
of the Agreement; pursuant to Federal Rule 23.1 to dismiss the
derivative claims as against First City for failure to make a
pre-suit demand on the Ashland Board of Directors; pursuant to
Federal Rule 12(b)(6) to dismiss the aiding and abetting breach
of fiduciary duty and corporate waste claims for failure to
state a claim upon which relief may be granted; pursuant to
Federal Rule 12(b)(6) to dismiss the individual and derivative
claims brought under RICO for failure to state a claim upon
which relief can be granted insofar as the claims are based on
predicate acts of Section 13D and Hart-Scott-Rodino reporting
violations; pursuant to Federal Rule 56(c) to grant summary
judgment to First City on the individual and derivative RICO
claims insofar as they are based on violations of Section 10(b)
on the ground that there is no genuine issue of fact with
respect to whether First City committed the alleged Section
10(b) predicate offenses; pursuant to Federal Rule 9(b) to
dismiss the individual and derivative claims for failure to
allege fraud with particularity with respect to each of the
underlying predicate offenses; pursuant to Federal Rule
12(b)(6) to dismiss the individual and derivative RICO claims
for failure to allege certain additional essential elements of
a RICO claim.
1. Legal standards governing motions
On a motion to dismiss under Rule 12(b)(6), the factual
allegations of the Complaint are construed in the light most
favorable to the plaintiff and are presumed to be true. See
Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40
L.Ed.2d 90 (1974); Meyer v. Oppenheimer Management Corp.,
764 F.2d 76, 79 (2d Cir. 1985). The court should not dismiss the
unless it appears "beyond doubt that the plaintiff can prove no
set of facts in support of his claim which would entitle him to
relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99,
101-02, 2 L.Ed.2d 80 (1957). Accord, Hishon v. King &
Spaulding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59
(1984), quoted in H.J. Inc. v. Northwestern Bell Tel. Co., ___
U.S. ___, 109 S.Ct. 2893, 2906, 106 L.Ed.2d 195 (1989).
To grant summary judgment the court must determine that no
genuine issue of material fact exists and that the moving party
is entitled to judgment as a matter of law. See Fed.R.Civ.P.
56(c). The court's responsibility is not to resolve disputed
issues of fact, Donahue v. Windsor Locks Bd. of Fire Comm'rs,
834 F.2d 54, 57 (2d Cir. 1987), but to determine whether there
are any factual issues to be tried, while resolving ambiguities
and drawing inferences against the moving party. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2510,
91 L.Ed.2d 202 (1986) (citing Adickes v. S.H. Kress & Co.,
398 U.S. 144, 158-59, 90 S.Ct. 1598, 1609, 26 L.Ed.2d 142 (1970)).
Summary judgment enables the court to dispose of meritless
claims before becoming entrenched in a frivolous and costly
trial. Donahue, 834 F.2d at 58, (citing Knight v. U.S. Fire
Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986) cert. denied,
480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987)).
Rule 9(b) requires that "[i]n all averments of fraud or
mistake, the circumstances constituting fraud or mistake shall
be stated with particularity. Malice intent, knowledge, and
other condition of mind of a person may be averred generally."
Fed. R.Civ.P. Rule 9(b). Although Rule 9(b) allows intent to be
pleaded generally, the complaint must allege facts sufficient
to support an inference of fraudulent intent. "[C]ircumstances
must be pleaded that provide a factual foundation for otherwise
conclusory allegations of scienter." Stern v. Leucadia Nat'l
Corp., 844 F.2d 997, 1004 (2d Cir. 1988) (reports of ...