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September 4, 1990


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


Plaintiffs Gennaro Mecca and Florence Warehouse, Inc., brought this action against defendants Gibraltar Corporation of America ("Gibraltar") and Irwin Schwartz (collectively, the "Gibraltar Defendants") and Joseph P. Contreras, alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("R.I.C.O."), Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, Sections 12(2) and 15 of the Securities Act of 1933, and common law fraud and misrepresentation, negligent misrepresentation, breach of duty to disclose and breach of contract. After a nine-week trial, from January 9 through March 14, 1990, the jury returned a verdict in favor of the plaintiffs on only their Sections 12(2) and 15 claims, finding Contreras primarily liable and the Gibraltar defendants liable as control persons. The jury awarded plaintiffs $900,000 in damages. In a supplemental. proceeding on the Gibraltar Defendants' claim for contribution from Contreras, the jury apportioned the damages among the defendants as follows: 60% to Gibraltar, 20% to Schwartz, and 20% to Contreras.

All three defendants now move for judgment notwithstanding the verdict ("j.n.o.v.") pursuant to Rule 50(b) of the Federal Rules of Civil Procedure, or in the alternative, for a new trial pursuant to Rule 59 of the Federal Rules of Civil Procedure. In addition, the plaintiffs move for an award of prejudgment interest. For the reasons set forth below, the motions are denied.



"Judgment n.o.v. may be entered only if, without weighing the credibility of the witnesses or otherwise considering the weight of the evidence, there can be but one conclusion as to the verdict that reasonable [persons] could have reached." Heller v. Champion Int'l Corp., 891 F.2d 432, 434 (2d Cir. 1989) (quotation marks and citations omitted). Thus, a motion for j.n.o.v. should be granted when:

  "(1) there is such a complete absence of evidence
  supporting the verdict that the jury's findings
  could only have been the result of sheer surmise
  and conjecture, or
  (2) there is such an overwhelming amount of
  evidence in favor of the movant that reasonable
  and fair minded men [and women] could not arrive
  at a verdict against him."

Katara v. D.E. Jones Commodities, 835 F.2d 966, 970 (2d Cir. 1987) (quoting Mattivi v. South African Marine Corp., "Huguenot", 618 F.2d 163, 167-68 (2d Cir. 1980)). In ruling on the j.n.o.v. motions, we must "consider the evidence in the light most favorable to the party against whom the motion was made and . . . give that party the benefit of all reasonable inferences that the jury might have drawn in his favor from the evidence." Smith v. Lightning Bolt Productions, 861 F.2d 363, 367 (2d Cir. 1988).

A. Gibraltar Defendants

We note at the outset that, as a general matter, the Gibraltar Defendants paint a very rosy picture of the trial, fully crediting Irwin Schwartz's testimony and highlighting their "full[] exonerat[ion] on all claims other than control person liability," Gibraltar Defendants' Reply Memorandum in Support of Their Post-Trial Motions and Memorandum in Opposition to Plaintiffs' Cross-Motion for Pre-Judgment Interest ("Gibraltar Defendants' Reply Mem.") at 28, which the Gibraltar Defendants characterize as a "strict liability" claim. Id. at 3, n. 1 and 28. As the plaintiffs point out, however, the Gibraltar Defendants were not necessarily "fully exonerated" of wrongdoing on the claims where liability was not found, as those claims required plaintiffs to prove reliance and causation, elements that are not required on a Section 12(2) claim. Plaintiffs' Reply Memorandum of Law in Further Support of Their Cross-Motion for Prejudgment Interest ("Pltf. Reply Mem.") at 5, n. 4. Moreover, control person liability in connection with Section 12(2) is not a "strict liability" provision; the Gibraltar Defendants could have avoided liability if they had proven to the jury by a preponderance of the evidence either that they lacked knowledge of or reasonable ground to believe the existence of the facts by reason of which Contreras's liability was found to exist, or that they acted in good faith. As discussed below, the jury reasonably rejected both of these defenses. Thus, the Gibraltar Defendants' depiction of the trial as a nearly complete vindication that somehow entitles them to credit all of Irwin Schwartz's testimony is inaccurate and incomplete.

First, the evidence was sufficient to support a finding that the Gibraltar Defendants controlled Contreras. As the Court instructed the jury, control means possession of direct or indirect power over the primary violator, so that "[e]ven indirect means of discipline or influence short of actual direction fulfill the requirement" of control. Tr. 5711.*fn1 There was ample evidence of the Gibraltar defendants' influence over Contreras. Even before learning of Contreras's prebilling and unauthorized movement of equipment, Gibraltar had power over him, because Corona needed financing, and Gibraltar retained discretion as to how much financing to provide. Tr. 4254. Had Gibraltar ceased financing, Corona would have been unable to continue doing business, rendering Contreras personally liable on his guarantees to Gibraltar and to the noteholders of Contreras Enterprises. Tr. 1676-77, 1839, 4254-55, 4370-71.

According to the Gibraltar Defendants, such influence was no different from the influence any lender exercises over its debtors. After the Gibraltar Defendants' discovery of Contreras's misconduct on Washington's Birthday in 1985, however, the evidence showed that their power over Contreras intensified, as they became more of a partner to Contreras than a lender. As Contreras was no doubt aware, his frauds, which constituted crimes, entitled Gibraltar to declare an immediate default and to have criminal charges brought against him. Tr. 1839. Instead, Schwartz told Contreras he would not go to the Attorney General "if [they] worked together and [Contreras told] the truth." Tr. 1793. Consequently, Contreras submitted to the occupation by Harvey Friedman of Corona's Denville offices, and he permitted Sheldon Stein to oversee the inventory at Corona's Whippany facility. Tr. 1821-22. Moreover, Gibraltar required Estee Lauder to pay for a shipment in advance, although Contreras thought this would hurt relations with Corona's most important customer. Tr. 1835-36, 2086-87, 4265-68. Contreras also depended on Gibraltar's consent to the shipment of additional equipment to Mexico, which was crucial to the survival of his business. Tr. 201-02, 3565, 3681-82. Finally, during Contreras's negotiations with Mecca and his representatives, he failed to disclose the reasons for Gibraltar's termination of funding, behavior consistent with Gibraltar's control and Schwartz's own misleading conduct. Tr. 251-54, 3024-25. The jury was entitled, based on these examples, to find that Gibraltar exercised control over Contreras much more threatening and pervasive than that of an ordinary lender.

Third, the jury was entitled to find, based on evidence that the Gibraltar Defendants gave the plaintiffs misleading answers to inquiries about Corona and Contreras, that the Gibraltar Defendants did not prove their good faith defense. We recognize that Schwartz told plaintiffs that Contreras was "a high liver," Tr. 322-23, 3851-52, and that Gibraltar would no longer lend to Corona because the company's losses were leading to a point where Gibraltar would no longer be secure, Tr. 324. Schwartz was nevertheless far from "brutally honest," Memorandum in Support of Gibraltar Defendants' Motion for Judgment Notwithstanding the Verdict or, in the Alternative, for a New Trial ("Gibraltar Defendants Mem.") at 24, with the plaintiffs, as he "admittedly did not tell plaintiffs about the pro forma invoicing." Id. In addition, Schwartz's testimony about having informed Jay Benenson about the unauthorized movement of equipment to Mexico was contradicted. Tr. 3851-53. Thus, the jury could reasonably have rejected the ...

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