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BORDEN v. SPOOR BEHRINS CAMPBELL & YOUNG

April 26, 1990

BORDEN, INC., ET AL., PLAINTIFFS,
v.
SPOOR BEHRINS CAMPBELL & YOUNG, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: William C. Conner, District Judge:

OPINION AND ORDER

This securities action is presently before the Court on the motion of defendants First Interstate Bank, Ltd. and First Interstate Services, Inc. to dismiss the complaint as against them for failure to state a claim upon which relief may be granted pursuant to Fed.R.Civ.P. 12(b)(6). For the following reasons, defendants' motion is denied.

BACKGROUND

DISCUSSION

I. Motion to Dismiss Standard

A motion to dismiss for failure to state a claim tests only the sufficiency of a complaint, see Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974), and should not be granted "unless it appears beyond a 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, 102-103, 2 L.Ed.2d 80 (1957); Anderson v. Coughlin, 700 F.2d 37, 40 (2d Cir. 1983). A court must accept as true the allegations of the complaint and draw all reasonable inferences in favor of the plaintiff. See Scheuer, 416 U.S. at 236, 94 S.Ct. at 1686. Viewing plaintiff's complaint in such favorable light, the Court denies defendants' motion to dismiss.

II. Sufficiency of the Allegation of "Controlling Person"
    Liability under Section 20(a) of the Exchange Act

Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), provides that,

  [e]very person who, directly or indirectly,
  controls any person liable under any provision of
  [the Exchange Act] or of any rule or regulation
  thereunder shall also be liable jointly and
  severally with and to the same extent as such
  controlled person to any person to whom such
  controlled person is liable, unless the
  controlling person acted in good faith and did not
  directly induce the act or acts constituting the
  violation or cause of action.

The purpose of this provision is to impose secondary liability on one who controls a violator of the securities laws, and who fails to show that he acted in "good faith." Defendants argue that plaintiffs have failed to plead sufficiently the necessary elements of scienter and culpable participation to establish a prima facie claim of controlling person liability. Plaintiffs first refute the necessity of pleading these elements and, alternatively, maintain that they have satisfied those requirements if they do exist. For the following reasons, the Court agrees with plaintiffs that neither scienter nor culpable participation must be pleaded to state a claim for controlling person liability. Stating such a claim in the Second Circuit requires the pleading only of control status, i.e., that the controlling person directly or indirectly held the power to exercise control over the primary violator.

This question was resolved authoritatively in this Circuit by Marbury Management, Inc. v. Kohn, 629 F.2d 705, 716 (2d Cir.), cert. denied, 449 U.S. 1011, 101 S.Ct. 566, 66 L.Ed.2d 469 (1980), which held that in controlling person liability cases, once control status is established, it becomes the defendant's burden to prove that he acted in good faith. On the basis of this Second Circuit Court ruling, four district court decisions have explicitly rejected the argument defendants now advance.

The most recent decision, In re Citisource, Inc. Secur. Litigation, 694 F. Supp. 1069, 1076 (S.D.N.Y. 1988), crystallized the impact of Marbury Management that "the burden is on the defendant to show that he is not culpable, rather than on the plaintiff to show that the defendant is culpable" and rejected the alleged controlling party's claim that scienter is a necessary pleading element of Section 20(a) liability.

Another case which rejected defendants' proposition is Terra Resources I v. Burgin, 664 F. Supp. 82 (S.D.N.Y. 1987), in which Judge Sweet's response, later quoted with approval ...


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