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APEX OIL CO. v. DIMAURO

August 15, 1990

APEX OIL COMPANY, PLAINTIFF,
v.
JOSEPH DIMAURO, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Kimba M. Wood, District Judge.

MEMORANDUM OPINION AND ORDER

Plaintiff Apex Oil Company ("Apex") moves for summary judgment dismissing the remaining counterclaims of Coastal States Marketing, Inc. ("Coastal States Marketing"), the Belcher Company of New York, Inc. and Belcher New Jersey, Inc. ("Belcher NY/NJ")*fn1 (which entities are referred to collectively as "Coastal/Belcher"*fn2). The counterclaims, alleging common law fraud and violations of the Commodity Exchange Act ("CEA") are discussed in Judge Walker's thorough opinion in this case, Apex Oil Co. v. DiMauro, 713 F. Supp. 587, 606-607 (S.D.N Y 1989), in which he, inter alia, granted summary judgment with respect to Coastal/Belcher's other counterclaims but denied summary judgment with respect to the instant counterclaims based on the existence of material factual disputes, see id. at 606-608.*fn3 I assume familiarity with the complex procedural history and facts of this protracted litigation, as well as an understanding of the commodity futures market which provides its background, all of which have been discussed in detail not only in Judge Walker's 1989 opinion but also in his earlier opinion and a subsequent Second Circuit opinion, see Apex Oil Co. v. DiMauro, 641 F. Supp. 1246 (S.D.N.Y. 1986), aff'd in part and rev'd in part, 822 F.2d 246 (2d Cir.), cert. denied, 484 U.S. 977, 108 S.Ct. 489, 98 L.Ed.2d 487 (1987). For the reasons set forth below, Apex's current motion is granted in part and denied in part.

DISCUSSION

As Judge Walker made clear in his earlier discussion of these counterclaims, to prevail under New York law on a claim of common law fraud, "a plaintiff must prove that 1) the defendant made a false representation of a material fact; 2) the defendant intended to deceive; 3) the plaintiff justifiably relied upon the misrepresentation; and 4) the plaintiff was injured on account of such reliance." Apex, 713 F. Supp. at 607 (emphasis added) (citing Mallis v. Bankers Trust Co., 615 F.2d 68, 80 (2d Cir. 1980), cert. denied, 449 U.S. 1123, 101 S.Ct. 938, 67 L.Ed.2d 109 (1981)). Furthermore, with respect to the CEA, the Supreme Court has stated that an implied right of action exists for the benefit of those "who can prove injury from . . . violations." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 392, 102 S.Ct. 1825, 1846, 72 L.Ed.2d 182 (1982) (emphasis added).

Belcher NY/NJ actually profited from the alleged fraudulent and manipulative activities of Apex. According to Coastal/Belcher's own figures, when losses during the relevant time period are offset by profits reaped during the same time period, Belcher NY/NJ netted $1,277,850. Coastal States Marketing lost $485,030. See Defendant's Exhibit ("Ex.") NQ, Ex. A to Affidavit of John Hoffman ("Hoffman Aff.") (April 18, 1990) and Hoffman Aff. at ¶¶ 3-4. Indeed, Coastal/Belcher explicitly admits that "if they are required collectively to offset gains and losses, the Belcher Counterclaimants, as a group, will have no damages." Belcher's Response to Apex's Statement Pursuant to Local Rule 3(g) at ¶ 1. Coastal/Belcher argues that each counterclaimant should be able to recover for each of its losses, without offsetting those losses against its gains,*fn4 relying on Randall v. Loftsgaarden, 478 U.S. 647, 106 S.Ct. 3143, 92 L.Ed.2d 525 (1986). Coastal/Belcher argues further that, even if offset is required, it would be an inappropriate "piercing of the corporate veil" to offset Coastal States Marketing's losses with the collective profits of Belcher NY/NJ.

A. Offsetting Gains and Losses Within Each Entity

In Loftsgaarden, the Supreme Court held that the recovery available to a defrauded tax shelter investor, entitled under § 12(2) of the Securities Act of 1933 or § 10(b) of the Securities Exchange Act of 1934 to rescind the fraudulent transaction or obtain rescissionary damages, did not have to be reduced by any tax benefits the investor had received from the tax shelter investment. While noting that § 28(a) of the Securities Exchange Act of 1934 limits recovery in a private damages action to "`"actual damages,"'" id. at 663, 106 S.Ct. at 3153 (quoting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 734, 95 S.Ct. 1917, 1924, 44 L.Ed.2d 539 (1975)), the Court also explained that, pursuant to the holding in Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), "`where the defendant received more than the seller's actual loss . . . damages are the amount of the defendant's profit,'" 478 U.S. at 663, 106 S.Ct. at 3153 (quoting Affiliated Ute Citizens, 406 U.S. at 155, 92 S.Ct. at 1473). The Loftsgaarden Court explained the rationale of the "alternative" damages principle articulated in Affiliated Ute Citizens:

  This alternative standard aims at preventing the unjust
  enrichment of a fraudulent buyer, and it clearly does more than
  simply make the plaintiff whole for the economic loss
  proximately caused by the buyer's fraud. Indeed, the accepted
  rationale underlying this alternative is simply that `[i]t is
  more appropriate to give the defrauded party the benefit even
  of windfalls than to let the fraudulent party keep them.'
  Thus, the mere fact that the receipt of tax benefits, plus a
  full recovery under a rescissory measure of damages, may place
  a § 10(b) plaintiff in a better position than he would have
  been in absent the fraud, does not establish that the flexible
  limits of § 28(a) have been exceeded.
    . . . Congress' aim in enacting the 1934 Act was not confined
  solely to compensating defrauded investors. Congress intended
  to deter fraud and manipulative practices . . . . This
  deterrent purpose is ill served by a too rigid insistence on
  limiting plaintiffs to recovery of their `net economic loss.'
  The effect of allowing a tax benefit offset would often be
  substantially to insulate those who commit securities frauds
  from any appreciable liability to defrauded investors.

478 U.S. at 663, 106 S.Ct. at 3153 (citations omitted) (emphasis added).

Belcher NY/NJ and Coastal States Marketing argue in this case that forcing each of them to offset its own gains against its losses would shield Apex from appreciable liability, unjustly enrich Apex and impair the deterrent value of private rights of action.

Apex, arguing that offset is required, relies on Minpeco, S.A. v. Conticommodity Servs., Inc., 676 F. Supp. 486 (S.D.N Y 1987). In that case, in which plaintiff claimed damages for losses sustained in the silver futures market, Judge Lasker held that "Minpeco's claimed damages on its silver futures positions must be offset by the measure of the increase in value which accrued to its own physical silver holdings. . . ." Id. at 490.

The court in Minpeco noted that "[d]efendant's `offset' argument has considerable force. Under most circumstances, it is clear that a plaintiff both injured and enriched by illegal activity cannot choose to recover for his injuries yet retain his windfall." Id. at 488. While the court rejected defendant's further argument that the Supreme Court's Loftsgaarden holding should be construed narrowly, stating that "Loftsgaarden may be fairly read as supporting the proposition that there is no rigid requirement that a plaintiff must always be limited to its net economic injury where such a limitation would be inequitable or contrary to deterrent goals," id. at 490, the court concluded that Minpeco had "made no showing that if an offset is imposed here defendants will be either unjustly enriched or sheltered from any `appreciable liability' as in Loftsgaarden," id. at 490.

Likewise, in this case, requiring each counterclaimant to net out its gains and losses will neither unjustly enrich Apex, nor shelter it from any appreciable liability, nor undermine the goal of deterrence. There is no unjust enrichment where a claimant has actually benefited from the alleged wrongdoing of another. New York law, for example, permits a recovery for unjust enrichment where a plaintiff has shown that "(1) defendant was enriched, (2) the enrichment was at plaintiff's expense and (3) the circumstances were such that equity and good conscience require defendant to make restitution." Hutton v. Klabal, 726 F. Supp. 67, 72 (S.D.N.Y. 1989). In this case, of course, far from being at the defendants' expense, the circumstances that led to Apex's enrichment also benefited Belcher NY/NJ. I note further that Apex does not avoid appreciable potential liability by having those counterclaims dismissed. Stinnes, also a counterclaimant, has alleged that it suffered "cumulative" damages of $1,519,186. See Defendants' Exhibit NR, Ex. D to Hoffman Aff. (April 18, 1990). (The figure claimed by Stinnes as cumulative damages is derived by subtracting Stinnes' net profits from its net losses. See id.) Furthermore, as discussed below, the counterclaims of Coastal States Marketing also remain. Thus, dismissal of Belcher NY/NJ's $1,090,286 damage claim does not get Apex off the hook. I agree with Apex that Stinnes, who has suffered net damages, is an appropriate claimant against Apex in this case,*fn5 and I also find, for the reasons discussed infra, that Coastal States Marketing is an appropriate claimant. Finally, I do not agree with Coastal/Belcher that deterrence goals are undermined by dismissal of ...


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