United States District Court, Southern District of New York
December 5, 1990
METROMEDIA COMPANY, PLAINTIFF,
WILLIAM D. FUGAZY, TRAVELCO, INC., FUGAZY INTERNATIONAL CORPORATION, AND ROY D. FUGAZY, DEFENDANTS AND THIRD-PARTY PLAINTIFFS, V. JOHN W. KLUGE, THIRD-PARTY DEFENDANT. METROMEDIA COMPANY, PLAINTIFF, V. WILLIAM D. FUGAZY, SR., AND ROY D. FUGAZY, DEFENDANTS.
The opinion of the court was delivered by: Robert L. Carter, District Judge.
The facts of this case up to December 22, 1988, are set out
in the court's earlier opinion, Metromedia Co. v. Fugazy, No.
87 Civ. 2597 (RLC) (S.D.N.Y. Dec. 22, 1988) (1988 WL 140773,
1988 U.S.Dist.LEXIS 14645) (Carter, J.). However, in light of
subsequent developments, and for the convenience of the reader,
they are repeated here.
On March 21, 1985, plaintiff Metromedia Company
("Metromedia") entered a stock purchase agreement with
defendants William D. Fugazy, Travelco, Inc. ("Travelco"), and
Fugazy International Corporation ("International"), whereby
800 newly issued shares of common stock in Fugazy Express, Inc.
("Express"), representing an 80% interest in Express.*fn1 In
July, 1986, Express filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy
Code, 11 U.S.C. § 1101 et seq., and in March, 1987, it
converted its Chapter 11 reorganization proceeding to a
liquidation under Chapter 7 of the Bankruptcy Code. Id. §§ 701
Alleging that the defendants wrongfully misrepresented and/or
failed to state material facts regarding the financial
condition of Express, Metromedia filed the two actions
consolidated here. Metromedia claimed damages for violations of
§ 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2); §
10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j;
Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5; and the Racketeer
Influenced and Corrupt Organizations statute ("RICO"),
18 U.S.C. § 1962(b)-(d), as well as for common-law fraud,
negligent misrepresentation, and breach of warranty. The
predicate offenses alleged in support of the RICO claim were
bankruptcy fraud under 18 U.S.C. § 152, mail fraud under
18 U.S.C. § 1341, wire fraud under 18 U.S.C. § 1343, and
securities fraud under § 10(b), Rule 10b-5, and § 12(2).
Defendants asserted various defenses, and William Fugazy
alleged a counterclaim for breach of an employment agreement
between himself and Express on the theory that Express was an
alter ego of Metromedia.*fn2 Defendants also impleaded
third-party defendant John W. Kluge, claiming that he had
signed a "hold harmless" agreement promising to indemnify
defendants, and that he was a controlling person of Express
liable under § 15 of the Securities Act and § 20 of the
Securities Exchange Act. 15 U.S.C. § 70o, 78t.
The case came on for jury trial beginning on May 16, 1990.
The court granted a directed verdict for Metromedia against
William Fugazy, Travelco and International on the claim of
breach of warranty, Tr. 2089, 2091, dismissed William Fugazy's
counterclaim, Tr. 2087, and dismissed the defendants'
controlling-person claim against Kluge. Tr. 2090. The other
claims were submitted to the jury.
With respect to the predicate offense of bankruptcy fraud
under the RICO claim, the bankruptcy court for this district
had ruled on May 15, 1990, that William Fugazy and Roy Fugazy
had engaged in acts constituting that offense. In re Fugazy
Express, Inc. (Shimer v. Fugazy), 114 B.R. 865 (Bankr.S.D.N Y
1990).*fn3 This court ruled that the bankruptcy court's
findings collaterally estopped William and Roy Fugazy from
denying the bankruptcy fraud, Tr. 2091, and instructed the jury
to find that the defendants had committed bankruptcy fraud.
On June 6, 1990, by special verdict, the jury found William
Fugazy liable under § 12(2) and RICO. As for the requisite
predicate acts for the RICO claim, the jury found that William
Fugazy had committed mail fraud, wire fraud, securities fraud
under § 12(2) and (as instructed by the court) bankruptcy
fraud. The jury rejected the
plaintiff's other claims and the defendants' third-party claim.
The jury awarded $15,553,930.89 in damages. Tr. 2301, 2304.
The court trebled the verdict as to William Fugazy, as provided
in the RICO statute, 18 U.S.C. § 1964(c), to $46,661,792.67.
Tr. 2308. The judgment was approved by the court on June 27,
1990, and entered on the docket on July 6, 1990.
On July 16, 1990, William Fugazy filed a voluntary petition
with the bankruptcy court for relief under Chapter 11 of the
Bankruptcy Code. 11 U.S.C. § 1101 et seq. Consequently, the
present action was automatically stayed under 11 U.S.C. § 362.
Nonetheless, on July 20, the defendants (except Roy Fugazy)
filed a motion with this court for judgment notwithstanding the
verdict or, alternatively, a new trial. On September 4, the
bankruptcy court entered an order modifying the automatic stay
to the extent necessary . . . (A) to permit the
Debtor to pursue Debtor's post-trial motion for
judgment n.o.v. in the Metromedia action . . . and
(B) to permit all other parties to pursue
post-trial motion practice in the Metromedia
Action in connection with Debtor's motion for
judgment n.o.v. . . .
In re Fugazy, No. 90 B 20688 (HS), slip order at 1-2
(Bankr.S.D.N.Y. Sept. 4, 1990). With respect to Fugazy's motion
for judgment n.o.v., the modification is retroactive to July
20, 1990. Id. at 2.
In considering a motion for judgment n.o.v., the court must
view the evidence in the light most favorable to the non-moving
party. Simblest v. Maynard, 427 F.2d 1, 4 (2d Cir. 1970);
Unijax, Inc. v. Champion Int'l, Inc., 516 F. Supp. 941, 950
(S.D.N.Y. 1981) (Carter, J.), aff'd, 683 F.2d 678 (2d Cir.
1982). The motion "will be granted only if (1) there is a
complete absence of probative evidence to support the verdict
for the non-movant[,] or (2) the evidence is so strongly or
overwhelmingly in favor of the movant that reasonable and fair
minded [jurors] in the exercise of impartial judgment could not
arrive at a verdict against [the movant]." Armstrong v.
Commerce Tankers Corp., 423 F.2d 957, 959 (2d Cir.), cert.
denied, 400 U.S. 833, 91 S.Ct. 67, 27 L.Ed.2d 65 (1970). See,
e.g., Unijax, supra, 683 F.2d at 684; Simblest, supra, 427 F.2d
A motion for a new trial will not be granted "unless it is
reasonably clear that prejudicial error has crept into the
record or that substantial justice has not been done." 11 C.
Wright & A. Miller, Federal Practice and Procedure § 2803 at 32
(1973). See, e.g., Dixon v. Maritime Overseas Corp.,
490 F. Supp. 1191, 1194 (S.D.N.Y.) (Cooper, J.), aff'd mem.,
646 F.2d 560 (2d Cir. 1980), cert. denied, 454 U.S. 838, 102 S.Ct.
145, 70 L.Ed.2d 120 (1981). In considering a motion for a new
trial, the court may weigh the evidence and need not view it in
the light most favorable to the non-movant. Bevevino v.
Saydjari, 574 F.2d 676, 684 (2d Cir. 1978). Nonetheless, the
court must "'abstain from interfering with the verdict unless
it is quite clear that the jury has reached a seriously
erroneous result. The judge's duty is essentially to see that
there is no miscarriage of justice.'" Id. (quoting 6A J. Moore,
Moore's Federal Practice ¶ 59.08 at 59-160, -161 (1973)).
The moving party bears the burden of establishing that it is
entitled to judgment n.o.v. or a new trial. For the reasons
stated below, the defendants have not met this burden, and
their motion must be denied.
Section 12 of the Securities Act of 1933 provides, in
Any person who . . .
(2) offers or sells a security . . . by means of a
prospectus or oral communication, which includes
an untrue statement of a material fact or omits to
state a material fact necessary in order to make
the statements, in the light of the circumstances
under which they were made, not misleading (the
purchaser not knowing of such untruth or omission)
shall be liable to the person purchasing such
security from him, who may sue . . . to recover
the consideration paid for such security with
interest thereon, less the amount of any income
received thereon, upon the tender of such
security. . . .
15 U.S.C. § 77l. The defendants allege that there is no
evidence to support a claim that the sale of securities in
question was "by means of a prospectus or oral communication"
so as to be subject to § 12(2). Stuart Subotnick, one of
Metromedia's general partners, testified before the jury that
he had several telephone conversations with William Fugazy, in
which Fugazy's object was
[t]o convince us [i.e., Metromedia] to continue
the acquisition of Fugazy Express, to explain to
me about the various prospects that Fugazy Express
had in various other areas that would improve the
business. Generally, all of the conversations were
to convince us to go forward and acquire Fugazy
Tr. 148. This evidence is sufficient to support the jury's
finding that the sale was "by means of . . . oral
communication" within § 12(2). There is also sufficient
evidence in the record to establish that William Fugazy never
adequately informed plaintiff of the financial condition of
Fugazy Express, so that the jury could have found that the
communications at issue "omit[ted] to state a material fact
necessary in order to make the statements . . . not
Defendants also argue that there was no causal relationship
between the misleading statements and the plaintiffs' loss.
However, causation is not required to establish a seller's
liability under § 12(2). Akerman v. Oryx Communications, Inc.,
810 F.2d 336, 344 (2d Cir. 1987). It is sufficient that the
defendants made the misleading statements in furtherance of the
sale, that the plaintiff did not know of their falsity, and
that the plaintiff purchased the securities.
Defendants' further contention that § 12(2) applies only to
public offerings is plainly without merit. See Pinter v. Dahl,
486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988); Gould v.
Ruefenacht, 471 U.S. 701, 105 S.Ct. 2308, 85 L.Ed.2d 708
To maintain a civil action under RICO, the plaintiff must
show that it was "injured in [its] business or property by
reason of a violation of [18 U.S.C.] section 1962." 18 U.S.C. § 1964(c).
Section 1962 prohibits certain activities related to
a "pattern of racketeering activity." A "pattern of
racketeering activity" requires at least two acts of
"racketeering activity," id. § 1961(5), which is defined to
include, among other things, the offenses of "mail fraud" and
"wire fraud," and "any offense involving fraud connected with a
case under title 11 [i.e., the Bankruptcy Code], [or] fraud in
the sale of securities . . . punishable under any law of the
United States." Id. § 1961(1)(B), (D).
Defendants argue that there is no basis for the jury's
findings that Metromedia was injured "by reason of" mail fraud
and wire fraud, because there was no "causal nexus" between the
racketeering activity and the alleged injury. Defendants' Mem.
at 17. Specifically, defendants claim that the plaintiff did
not rely on the fraudulent statements themselves, but only on
the incorrect corroboration of those statements by plaintiff's
counsel. See Ashe v. 1907 Ditmas Ave. Realty Corp., 125 A.D.2d 432,
509 N.Y.S.2d 364, 365 (1986); Arnold Constable Corp. v.
Chase Manhattan Mortgage & Realty Trust, 59 A.D.2d 666, 398
N YS.2d 422, 423 (1977).
There is, however, no evidence in the record to suggest that
Metromedia's attorneys independently corroborated the
information contained in the purchase agreement. An essential
part of the testimony that the defendants cite on this point is
contained in a deposition not admitted into evidence. Cooper
Aff. ¶¶ 75-76 (deposition testimony of Stuart Subotnick). The
record does contain evidence that the misrepresentations were
made to Metromedia, Tr. 126-32, 145-48, that Metromedia went
through with the purchase, and that Metromedia would not have
gone through with the purchase if it had known the true facts.
Tr. 133, 260. From this evidence, a reasonable jury could infer
that Metromedia relied on defendants' representations to its
detriment. Even if only a third party, and not the plaintiff,
was deceived, the requirement of reliance is met if the
plaintiff was injured by the fraud. Shaw v. Rolex Watch USA,
Inc., 726 F. Supp. 969, 973 (S.D.N.Y. 1989) (Conner, J.).
Defendants argue that the plaintiffs have waived the right to
assert the collateral-estoppel effect of the earlier judgment
by not raising the claim of collateral estoppel in a timely
manner. The bankruptcy court's decision, however, was handed
down the day before the present case went to trial. Plaintiff's
counsel made reference to the decision in his opening statement
to the jury, Tr. 45, and raised the issue of collateral
estoppel with the court before plaintiff had rested. Tr. 842.
By contrast, in the cases cited by the defendants, the party
held to have waived the preclusive effect of a prior judgment
had raised that issue only after a full trial on the merits and
entry of a judgment against it. See Harbeson v. Parke-Davis,
Inc., 746 F.2d 517 (9th Cir. 1984) (first raised on appeal);
Southern Pac. Communications Co. v. American Tel. & Tel. Co.,
740 F.2d 1011 (D.C. Cir. 1984) (first raised on motion for
relief from judgment).*fn4
The fact that plaintiff also presented evidence of bankruptcy
fraud to the jury does not indicate that it intended to waive
the benefit of collateral estoppel and relitigate the issue.
Indeed, although the defendants were estopped from denying the
bankruptcy-fraud claim, it was still necessary for the jury to
determine whether the bankruptcy fraud was part of a pattern of
racketeering activity. See Tr. 2243 (charge to the jury).
Defendants further argue that the violation of § 12(2) is not
an "offense involving . . . fraud in the sale of securities."
In particular, they argue that a violation of § 12(2) is a
criminal offense under § 24 of the 1933 Securities Act,
15 U.S.C. § 77x, only if the violation is "willful," and that the
court failed to instruct the jury on willfulness. While this
argument may be correct, defendants should have raised this
matter with the court before the jury retired to begin its
deliberations. The court will not grant a new trial on the
basis of an erroneous jury charge when a party might have
obtained the correct jury charge by specifically bringing the
matter to the attention of the court at the proper time. See
Rule 51, F.R.Civ.P.; Palmer v. Hoffman, 318 U.S. 109, 119-120,
63 S.Ct. 477, 483, 87 L.Ed. 645 (1943); 11 C. Wright & A.
Miller, supra, § 2805 at 39.
Defendants also argue that, by its very nature, § 12(2) does
not involve "fraud." Again, the defendants should have raised
this point at trial. Moreover, it hardly seems possible that a
criminal (that is, "willful") violation of § 12(2), which the
Court of Appeals for this circuit has characterized as an
"anti-fraud measure," Akerman, supra, 810 F.2d at 344, might
not involve "fraud." Even if it is possible, defendants have
not explained how, in this particular case, they could have
violated § 12(2) without engaging in fraud. In general, "the
penalties allowed under . . . law are to be applied not in
abstraction but to the specific facts and conditions involved."
United States v. Simon, Crim.No. 90-143, slip op. at 9 (D.V.I.
Nov. 1, 1990) (1990 WL 174602, 1990 U.S. Dist.LEXIS 14985, *11)
(Carter, J.). By its terms, RICO applies to "any offense
involving . . . fraud in the sale of securities,"
18 U.S.C. § 1961(1)(D) (emphasis added), and thus encompasses the offense
The parties are in agreement that the terms of the warranties
in the stock-purchase
agreement were not fulfilled. Although "reliance" is an element
of breach of warranty, the only reliance that is necessary is
the buyer's belief that it was purchasing the seller's promise
as to the truth of the matters stated in the warranty. CBS Inc.
v. Ziff-Davis Publishing Co., 75 N.Y.2d 496, 503,
553 N.E.2d 997, 1001, 554 N.Y.S.2d 449, 453 (1990). In other words,
reliance is established if "the express warranties are
bargained-for terms of the seller." Id. at 506 n. 5, 553 N.E.2d
at 1002 n. 5, 554 N.Y.S.2d at 454 n. 5. Reliance, in this
sense, is not negated by the fact that the buyer questioned or
disbelieved the accuracy of the statements prior to agreeing to
the contract. Id. at 505-06, 553 N.E.2d at 1002, 554 N.Y.S.2d
at 454. Rather, a warranty "'is intended precisely to relieve
the promisee of any duty to ascertain the fact for himself.'"
Id. at 503, 553 N.E.2d at 1001, 554 N.Y.S.2d at 452 (quoting
Metropolitan Coal Co. v. Howard, 155 F.2d 780, 784 (2d Cir.
1946) (L. Hand, J.)).
Defendants argue that there is a triable issue as to whether
the warranties were "bargained for." Even if the warranties
were not the subject of explicit discussions, however, their
inclusion in the written contract establishes that they were
part of the bargain reached between the plaintiff and the
defendants. Defendants have not alleged that they agreed to the
warranties as a result of fraud, mistake or duress, and they
have offered no theory that would explain how the warranties
could possibly be included in the contract if Metromedia did
not intend to obtain the benefit of them. Under these
circumstances, it is utterly impossible that the warranties
could be anything other than "bargained-for terms" of the
There is no basis for defendants' contention that the jury's
damage award applies only to the RICO claim against defendant
William Fugazy, and not to the breach of warranty claim against
all the defendants. The court specifically instructed the jury
to award damages on the breach of warranty claim, Tr. 2238, and
later repeated the instruction to be sure that the jury
remembered to award damages for breach of warranty. Tr. 2280.
Defendants renew their objections, stated on the record, to
the jury charge. Tr. 2092-2115, 2272-78. The objections remain
overruled, and the court stands by its charge.
Defendants also renew their arguments, stated on the record,
opposing the court's dismissal of their counterclaim and
third-party claim. Tr. 2074-76. For the reasons stated on the
record, the court rejects these arguments. Tr. 2087-88,
Defendants also argue that plaintiff's counsel should have
been disqualified. The court has previously ruled on this issue
and has no reason to reconsider its decision. Metromedia,
supra, slip op. at 14.
Defendants' contention that the jury verdict was contrary to
the weight of the evidence is meritless.
The court observes that the judgment contains two errors due
to oversight or clerical mistake. First, three times the jury's
verdict of $15,553,930.89 is $46,661,792.67, not $46,661,819.67
as stated in the judgment. Second, the judgment assesses treble
damages against the corporate defendants as well as against
William Fugazy, although the jury did not find the corporate
defendants liable under the RICO statute. Rather, the corporate
defendants are liable only for breach of warranty, and
therefore the judgment against them should be for single
The court is empowered to correct such mistakes on its own
initiative. Rule 60(a), F.R.Civ.P. Accordingly, the judgment
will be amended to hold William Fugazy, Travelco and
International jointly and severally liable for $15,553,930.89,
and to hold William Fugazy solely liable for the remaining
For the reasons stated above, the defendants' motion for
judgment notwithstanding the verdict or alternatively a new
is denied. On the court's own initiative, the judgment
previously entered in this case is set aside, and a new
judgment shall be entered in the form approved by the court.
IT IS SO ORDERED.