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February 19, 1991


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


In September 1987, The Travelers Insurance Company and The Travelers Indemnity Company (collectively "Travelers") loaned $35 million to Crowthers McCall. The loan was evidenced by long term Senior Notes (the "Notes"). In September 1988, Crowthers McCall defaulted on the Notes and on December 9, 1988, Crowthers McCall filed a petition for reorganization under Chapter 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York.

Travelers asserts that at the time of the loan, it was led to believe that virtually all of McCall's revenues were derived from sales to consumers and concluded, based on that belief, that McCall's cash flow and operating profit were reasonably stable and sustainable. According to Travelers, it was not until December 1988, shortly before McCall's filed for bankruptcy, that it first learned that McCall's had two distinct forms of profit, one of which was called Trading Profit (derived from sales to the ultimate consumers) and the other Non-Trading Profit (arising from McCall's inventory practices and charges to its retailers). Non-Trading Profit comprised approximately 92% of McCall's total operating profit in 1986. Travelers alleges that had this information been disclosed during its due diligence inquiry, it would not have purchased the Notes which it now claims are worth substantially less than the $35 million it paid for them.

Lewis moves for summary judgment on the grounds that he did not and could not have had anything to do with or any knowledge of the alleged inaccuracies and omissions in the financial disclosures to Travelers. Because Travelers has failed to demonstrate the existence of a material dispute with regard to Lewis' role in Travelers' purchase of the Notes, summary judgment is granted in favor of Lewis.


A. Travelers' Claim

Travelers seeks to hold Lewis liable for its loss based on its claims that Lewis (1) controlled Crowthers McCall and its management in connection with their allegedly misleading statements and omissions relating to the sale of the Notes, thereby violating § 12(2) of the Securities Act of 1933 ("1933 Act") and § 20(a) of the Securities Exchange Act of 1934 ("1934 Act"); (2) aided and abetted Crowthers McCall's alleged violation of § 10(b) and Rule 10b-5 of the 1934 Act; and (3) concealed certain financial information from Travelers prior to its purchase of the Notes.

Travelers asserts that from January 1984 when he acquired McCall until June 1987 when it was sold, Lewis dominated McCall. He was Chairman of the Board, owned a significant amount of stock in McCall and held positions of authority in its parent company. He took an active role in business planning and pricing strategies, was intimately familiar with McCall's finances, internal accounting and operational reports and performance. He was also senior partner of Lewis & Clarkson, McCall's outside general counsel.

Travelers asserts that the sale of McCall in June 1987 did not sever Lewis' connection with the company. Lewis remained one of four directors of McCall and an owner of 20% of its common (voting) stock. Lewis' law firm continued its representation of McCall. A Stockholders' Agreement dated June 30, 1987 required McCall to give Lewis prior notice of, and consult with him concerning, a number of significant corporate actions, including, inter alia, the declaration or payment of dividends, redemption of securities, payments to stockholders, and the incurring of certain types of indebtedness.

The heart of Travelers' complaint against Lewis involves what Travelers claims was Lewis' continuing influence over Robert L. Hermann, who prior to the June 1987 acquisition was Executive Vice President of McCall. During Lewis' tenure as Chairman of the Board, Hermann developed certain internal financial reports called "Functional P & L [Profit and Loss] Statements." The Functional P & L Statements demonstrated that McCall's operating profit was derived mostly from "Non-Trading Profit" resulting from charges and price increases to dealers who held inventory on consignment and not from "Trading Profit" based upon sales to consumers.

Travelers maintains that according to Hermann, one could not truly understand how McCall worked without understanding the information contained in the Functional P & L Statements. Travelers relies heavily on the fact that when Hermann disclosed the Functional P & L Statements to McCall's Board of Directors, Lewis chastised him at length and ordered him never again to disclose the Functional P & L Statements to anyone. According to Travelers, even after June 1987 when Lewis was no longer Chairman of the Board and ceased to exercise day-to-day responsibility at McCall, "[t]hat order remained in place." Plaintiffs' Memorandum of Law at 3. Indeed, when Hermann disclosed the Functional P & L Statements to Travelers in December 1988, Hermann indicated that he had not disclosed them earlier because Lewis had ordered him never to disclose them to anyone. Travelers alleges that the Functional P & L Statements contained critical information concerning the source and sustainability of McCall's revenues, operating profit and cash flow which was not included in the Private Placement Memorandum relied upon by Travelers in its purchase of the Notes. Travelers claims that had it been aware of this information, it would not have purchased the Notes because it would have known that the Notes were worth significantly less than the $35 million it paid for them. Lewis should be held responsible for the loss, Travelers asserts, because he reviewed the Private Placement Memorandum and was or should have been aware of its materially misleading omissions.

B. Lewis' Grounds for Summary Judgment

A motion for summary judgment shall be granted if "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). "[T]he burden on the moving party [to show the absence of a genuine issue concerning any material fact] may be discharged by `showing' — that is, pointing out to the district court — that there is an absence of evidence to support the nonmoving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986).

"[T]h[e] standard [for granting summary judgment] mirrors the standard for a directed verdict under Federal Rule of Civil Procedure 50(a) . . ." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). Accordingly, to establish a genuine issue for trial on a motion for summary judgment, the non-moving party must show more than "some metaphysical doubt as to the material facts." Matsushita Electric Industrial Co. v. Zenith Radio Co., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party there is no `genuine issue for trial.'" Id.

Lewis asserts that there is no genuine issue of material fact as to his complete lack of involvement in the offering and sale of the Notes to Travelers. Lewis points out that in negotiating for the loan, Travelers had no dealings with him. He neither offered, negotiated, nor secured the sale of the Notes and he received none of the proceeds. He alleges that he was told nothing about the negotiations and had no contact concerning the transaction with any of the persons or entities involved and therefore he did not and could ...

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