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IN RE CRAZY EDDIE SECURITIES LITIGATION

June 19, 1990

IN RE CRAZY EDDIE SECURITIES LITIGATION.


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

MEMORANDUM AND ORDER

This consolidated action was the subject of a Memorandum and Order, dated December 30, 1988, published Bernstein v. Crazy Eddie, Inc., 702 F. Supp. 962 (E.D.N.Y. 1988), vacated in part on other grounds, 714 F. Supp. 1285 (E.D.N.Y. 1989), familiarity with which is assumed.

The present matter concerns the claims of the shareholder plaintiffs (plaintiffs) against Peat Marwick Main & Co. (Peat Marwick), and its third party claims against others.

Plaintiffs' claims against Peat Marwick allege violations of Section 11 of the Securities Act of 1933, 15 U.S.C. § 77a et seq. (1982 & Supp. IV 1986) (the Securities Act), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (1982 & Supp. IV 1986) (the Exchange Act), and common law fraud and negligent misrepresentation. The claims assert deficiencies in Peat Marwick's audits of Crazy Eddie's audited financial statements in 1984, 1985 and 1986 and Peat Marwick's participation in the preparation of allegedly misleading securities offering registration statements in 1985 and 1986.

Peat Marwick thereafter served and filed a third party complaint against Oppenheimer-Palmieri Fund, L.P., (the Fund), the Palmieri Company, Victor Palmieri, Entertainment Marketing, Inc., and Elias Zinn for indemnification, contribution under federal and state law. The Fund, Victor Palmieri and the Palmieri Company (third party defendants) move to dismiss the Complaint for failure to state a claim.

The first count of the third party complaint alleges, in substance, the following. Upon taking control of Crazy Eddie, Inc. (Crazy Eddie), on November 6, 1987, third party defendants failed to amend, correct or modify the misrepresentations contained in Crazy Eddie's documents serving as a predicate for the plaintiffs' claims. Those claims allege that plaintiffs continued to be misled by false and misleading information relating to the financial statements of Crazy Eddie through January 18, 1988, after third party defendants took control. As a result of the third party defendants' conduct, Peat Marwick has been named as defendant in this and other actions, incurring expenses in defending against suits, and possibly requiring the payment of damages to the plaintiffs. It is therefore entitled to indemnification or contribution.

The first count thus suggests by implication that third party defendants intentionally or negligently overstated the value of Crazy Eddie to the detriment of the plaintiffs who relied on the representations.

The second count of the third party complaint asserts, in substance, the following. Peat Marwick observed a physical inventory conducted by Crazy Eddie employees in November 1987. Following the inventory, but before Peat Marwick completed the engagement, the third party defendants announced on November 19, 1987 a $45 million shortfall and shortly thereafter fired Peat Marwick. The announcement was negligently, recklessly, or fraudulently made and caused a decline in the price of Crazy Eddie securities.

Apparently by these allegations Peat Marwick seeks to suggest that the third party defendants by the announcement intentionally or negligently understated the value of Crazy Eddie so that shareholders relying on the announcement sold their stock at less than true value. Peat Marwick seeks contribution or indemnification for any liability and expenses attributable to this conduct of third party defendants.

In addition, the second count claims that after the November 19, 1987 announcement third party defendants recklessly or fraudulently destroyed all documentation supporting their calculation of the purported $45 million shortfall, and refused to assist and interfered with Peat Marwick's attempts to determine the reason for it. Third party defendants thus are said to have deliberately deprived Peat Marwick of evidence crucial to its defense against plaintiffs' claims.

I. Impleader

Rule 14(a), Fed.R.Civ.P., provides that "[a]t any time after commencement of the action a defending party, as a third-party plaintiff, may cause a summons and complaint to be served upon a person not a party to the action who is or may be liable to the third-party plaintiff for all or part of the plaintiff's claim against the third party plaintiff." A third party claim is permissible only if the "third party's liability is" "dependent upon the out come of the main claim" or the third party is "potentially secondarily liable as a contributor to the defendant." See Kenneth Leventhal & Co. v. Joyner Wholesale Co., 736 F.2d 29, 31 (2d Cir. 1984).

In form the claims for indemnification and contribution purport to be dependent on the outcome of the plaintiffs' claims against Peat Marwick. Whether the second count to the extent it seeks "compensatory damages" for destruction of evidence states a permissible third party claim is a more difficult question. The court ...


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