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THORNOCK v. KINDERHILL CORP.

October 19, 1990

RUSSELL THORNOCK, ET AL., PLAINTIFFS,
v.
KINDERHILL CORPORATION, ET AL., DEFENDANTS. FIRST CITY NATIONAL BANK AND TRUST COMPANY, PLAINTIFF, V. DONALD J. RATKOWSKI, DEFENDANT. FIRST CITY NATIONAL BANK AND TRUST COMPANY, PLAINTIFF, V. ANDRE DAWSON AND VANESSA DAWSON, DEFENDANTS. FIRST CITY NATIONAL BANK AND TRUST COMPANY, PLAINTIFF, V. SCOTT D. SANDERSON AND CATHLEEN C. SANDERSON A/K/A CATHY SANDERSON, DEFENDANTS. FIRST CITY NATIONAL BANK AND TRUST COMPANY, PLAINTIFF, V. RICHARD M. MOSS AND CAROL E. FREIS, DEFENDANTS. FIRST CITY NATIONAL BANK AND TRUST COMPANY, PLAINTIFF, V. RIK AALBERT BLYLEVEN AND PATRICIA ANN BLYLEVEN, DEFENDANTS. FIRST CITY NATIONAL BANK AND TRUST COMPANY, PLAINTIFF, V. DWP INVESTMENT LIMITED PARTNERSHIP AND DAVID W. PALMER, DEFENDANTS.



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

OPINION

The Parties

The plaintiffs in Thornock are individual investors in various limited partnerships which were involved in the business of buying, breeding and selling thoroughbred racehorses. In both this case and Bruce v. Martin, 87 Civ. 7737, the investors have sued those who organized, promoted, and managed the partnerships, alleging securities fraud and other misdeeds. The numerous parties and their claims are described in further detail in earlier opinions in both cases. See, e.g., Bruce v. Martin, 712 F. Supp. 442 (S.D.N.Y. 1989); Thornock v. Kinderhill Corp., 712 F. Supp. 1123 (S.D.N.Y. 1989).

FCNB provided financing to some of the Thornock plaintiffs for the Kinderhill investments, in exchange for the borrowers' promissory notes ("the Notes"). The claims against FCNB in Thornock are based on allegations that the Bank was an aider and abettor in the primary securities violations. In the FCNB actions, the borrowers seek to defend against enforcement of the Notes based on FCNB's alleged fraudulent inducement of the investments.*fn1

Prior Proceedings

A complete description of the events and activities which led up to this litigation is set forth in the May 22, 1989 Opinion, 712 F. Supp. 1123 (S.D.N.Y. 1989). In the original Thornock complaint, filed on June 8, 1988, FCNB was not named as a defendant. On July 9, 1988, the Bank sued seven individual borrowers, six of whom were already plaintiffs in Thornock, in New York state court to enforce the Notes. Six of these seven actions were subsequently removed to federal court and consolidated.*fn2 In October, 1988, the investors filed an amended complaint in Thornock in which FCNB was added as a defendant.

The Bank moved to dismiss the amended complaint, and the motion was granted with the investors given leave to refile. Following the filing of the Second Amended Complaint in May, 1989, FCNB again moved to dismiss, and also for summary judgment in the FCNB actions. On June 9, 1989, the investors' law firm sought to withdraw from all representation in both Thornock and the FCNB actions because of a conflict of interest. Because of the delay and confusion caused by the change of counsel, the investors and borrowers failed to respond to any of FCNB's pending motions, and default judgments were entered in the Bank's favor on the summary judgment motions on July 10 and on the motion to dismiss on July 17, 1989.

One month later, the investors moved to vacate the default judgments on the grounds of excusable neglect. In January, 1990, the motion to set aside the judgment of dismissal in Thornock was granted, but the motions to vacate the default summary judgments in the FCNB actions were denied, because "no sufficient showing of merit ha[d] yet been made in opposition to the summary judgment motions" in those cases. Thornock v. Kinderhill Corp., 88 Civ. 3978, slip op. at 7, 1990 WL 3924 (S.D.N.Y. January 12, 1990). The borrowers were, however, granted leave to submit further papers on their motions in the FCNB actions. Following another round of briefing, the (reopened) motion to dismiss and the motions to vacate the default summary judgments were argued on June 22, 1990. Subsequent to this argument, both sides submitted further material relating to the New York state court activity in the single collection action which had not been removed.

I. The Motion To Dismiss

A. The Standard

A court should dismiss a complaint for failure to state a claim under Rule 12(b)(6), Fed.R.Civ.P., only if it appears beyond doubt that the plaintiff can prove no set of facts in support of its claim that would entitle it to relief. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984); Thornock, 712 F. Supp. at 1127 (S.D.N.Y. 1989). The complaint's allegations must be construed in the light most favorable to the plaintiff and accepted as true. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Dacey v. New York County Lawyers' Assoc., 423 F.2d 188, 191 (2d Cir. 1969), cert. denied, 398 U.S. 929, 90 S.Ct. 1819, 26 L.Ed.2d 92 (1970).

B. Analysis

As explained more fully in the April, 1989 opinion granting FCNB's first motion to dismiss, the test in this circuit for a claim of aiding and abetting a securities violation is that described in IIT v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980) (Friendly, J.). This test requires that the plaintiff show: (1) a securities violation by the primary offender; (2) knowledge by the alleged aider and abettor of the underlying violation; and (3) substantial assistance by the aider and abettor in achieving the underlying violation. IIT, 619 F.2d at 922.

In the April 1989 opinion, the investors' (first) amended complaint was found to satisfy the first two prongs of the IIT test for aider and abettor liability, but was dismissed because it did not adequately allege "substantial assistance" by FCNB in the underlying securities violation. Thornock v. Kinderhill Corp., 88 Civ. 3978 slip op at 5-6, 1989 WL 40079 (S.D.N.Y. April 13, 1989). In their ...


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