The opinion of the court was delivered by: Leisure, District Judge:
This matter is before the Court on a motion filed by
defendants K-H Corporation ("K-H Corp.") (formerly known as
Fruehauf Corporation ("Fruehauf"))*fn1 and Kelsey-Hayes
Company ("Kelsey-Hayes") to dismiss plaintiff Citibank, N.A.'s
("Citibank") third amended complaint for failure to state a
claim upon which relief can be granted, pursuant to
This litigation arises from a commercial lending transaction
involving plaintiff Citibank and Grabill Aerospace Industries,
Ltd. ("GAIL"), which was entered into, in part, to fund a stock
purchase agreement involving GAIL and defendants Fruehauf and
Kelsey-Hayes. Citibank brought suit against Fruehauf and
Kelsey-Hayes claiming common law fraud and violations of
Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j,
arising out of the lending transaction. The jurisdiction
this Court is predicated on both federal question jurisdiction
and diversity of citizenship.
On June 25, 1987, GAIL entered into a stock purchase
agreement with Fruehauf and Kelsey-Hayes, a wholly-owned
subsidiary of Fruehauf, to purchase the stock of four
subsidiaries of Fruehauf for $150 million. Third Amended
Complaint ("Complaint"), ¶ 8, and Exhibits A and B. The
Fruehauf subsidiaries, SPECO Corporation, Heintz Corporation,
Utica Corporation, and Compositek Holdings, Inc. (collectively,
the "Fruehauf subsidiaries"), were engaged in various aspects
of the aerospace industry. The stock purchase agreement
provided that GAIL would deliver the acquisition price of $150
million in cash to Fruehauf via wire transfer at the closing,
on or about July 31, 1987.*fn2
To finance this acquisition, GAIL entered into a secured
credit agreement with Citibank on August 3, 1987, whereby
Citibank agreed to lend GAIL up to $147.5 million, consisting
of $50 million from the issuance of mezzanine acquisition
notes, a term loan of $75 million, and a revolving line of
credit of up to $22.5 million. Complaint, ¶ 11, and Exhibit C.
One-hundred thirty million dollars ($130 million) of the loan
was earmarked to finance GAIL's acquisition of the Fruehauf
subsidiaries, while the remaining $17.5 million of the loan was
available for GAIL's working capital needs on a revolving
credit basis. As collateral security for the loan, William J.
Stoecker ("Stoecker"), the sole shareholder of GAIL, pledged
the stock of GAIL, and GAIL pledged the stock of the Fruehauf
subsidiaries, to Citibank. Complaint, ¶ 12.
As a condition precedent to Citibank's financing obligations,
the secured credit agreement required Stoecker to make a $20
million cash contribution to GAIL which would be utilized by
GAIL to fund a portion of the acquisition purchase price.
Complaint, ¶ 13, and Exhibit C, Article XI, § 11.1.1. Thus,
GAIL would obtain $130 million of the acquisition funds from a
portion of its Citibank loan, and $20 million of the
acquisition funds from Stoecker's equity contribution.
The complaint alleges that during the week prior to the
closing, Stoecker telephoned Richard Darke ("Darke"),
Fruehauf's general counsel, and told him that he would be
unable to provide the entire $20 million cash capital
contribution to GAIL before closing. Complaint, ¶ 16. Darke and
Stoecker allegedly agreed that, at the closing, Fruehauf would
accept $143 million cash from GAIL and a $7 million promissory
note in Fruehauf's favor executed by Stoecker. Complaint, ¶ 17.
The complaint further alleges that at the closing on August 6,
1987, Fruehauf accepted Stoecker's $7 million promissory note,
and wired $7 million of its own funds into the bank account
designated for receipt of the $150 million purchase price for
the acquisition. Complaint, ¶¶ 18-19. Kelsey-Hayes allegedly
had knowledge of Fruehauf's $7 million loan to Stoecker.
Complaint, ¶ 19. Stoecker, Fruehauf and Kelsey-Hayes did not
disclose to Citibank the $7 million loan. Complaint, ¶ 19.
Citibank advanced $130 million to GAIL for the acquisition
price at the closing, pursuant to the secured credit agreement.
Complaint, ¶ 27. Approximately three weeks later, Stoecker
repaid the $7 million loan to Fruehauf. Defendants' Reply
Memorandum of Law, at 5. Eventually, GAIL defaulted on its loan
from Citibank. Defendants' Memorandum of Law, at 2. Citibank
attempted to realize $150 million from the stock pledged to it
as collateral — the GAIL stock and the stock of the Fruehauf
subsidiaries — it was unable to do so. Plaintiff's Memorandum
of Law, at 7.
Citibank commenced this action against Fruehauf on May 23,
1989, alleging common law fraud. The Court's jurisdiction
arises out of the diversity of citizenship of the parties, as
Citibank is a national banking association located in New York,
and Fruehauf is a Delaware corporation with its principal place
of business in Michigan.
On June 26, 1989, Fruehauf moved to dismiss the complaint for
failure to plead fraud with particularity, pursuant to
Fed.R.Civ.P. 9(b). Following a pre-trial conference on July 7,
1989, Fruehauf withdrew its motion to dismiss, and on July 14,
1989, Citibank served its first amended complaint. On March 5,
1990, Citibank filed a second amended complaint, adding claims
under Section 10(b) of the Securities Exchange Act of 1934.
Citibank filed a third amended complaint on April 10, 1990,
adding Kelsey-Hayes as a defendant.*fn3 On April 12, 1990,
Fruehauf and Kelsey-Hayes filed the instant motion to dismiss
the complaint for failure to state a claim upon which relief
can be granted, pursuant to Fed.R.Civ.P. 12(b)(6).
The well-known standard on a Rule 12(b)(6) motion dictates
that "`a complaint should not be dismissed for failure to state
a claim 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.'" Dahlberg v. Becker, 748 F.2d 85, 88
(2d Cir. 1984), cert. denied, 470 U.S. 1084, 105 S.Ct. 1845, 85
L.Ed.2d 144 (1985) (quoting Conley v. Gibson, 355 U.S. 41,
45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957)). The purpose of a
motion to dismiss under Rule 12(b)(6) is to assess the legal
feasibility of the complaint, not to weigh the evidence which
the plaintiff offers or intends to offer. Ryder Energy
Distribution Corp. v. Merrill Lynch Commodities, Inc.,
748 F.2d 774, 779 (2d Cir. 1984). The district court should not grant
the motion simply because the possibility of ultimate recovery
is remote. Id. at 779 (citing Scheuer v. Rhodes, 416 U.S. 232,
236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974)).
"In deciding a motion to dismiss, the Court must accept the
plaintiff's allegation of facts as true together with such
reasonable inferences as may be drawn in its favor." Landy v.
Mitchell Petroleum Technology Corp., 734 F. Supp. 608, 615
(S.D.N.Y. 1990) (citing Murray v. City of Milford, Connecticut,
380 F.2d 468, 470 (2d Cir. 1967)). "[T]he district court must
limit itself to a consideration of the facts alleged on the
face of the complaint, and to any documents attached as
exhibits or incorporated by reference." Cosmas v. Hassett,
886 F.2d 8, 13 (2d Cir. 1989) (citations omitted); see also Wright
and Miller, Federal Practice and Procedure, § 1356, at 298-99.
Thus, this Court has dismissed a complaint where the necessary
factual allegations in support of a Section 10(b) claim were
contained in the plaintiff's ...