sum, the Cosgrove Defendants seek the court to hold as a matter
of law that the grant of power of attorney to a surety gives
rise to a fiduciary duty on the part of such surety. They point
to no cases that stand for this proposition. Therefore, as a
matter of law, Northwestern must be granted its motion for
summary judgment dismissing this claim.
C. Control Person Liability
Northwestern seeks summary judgment dismissing the seventh
and ninth counterclaims on the grounds that it was neither a
control person nor a seller under New Jersey Statutes 49:3-71
and § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2)
(the "1933 Act"). Esrine has also moved for summary judgment
dismissing these claims with respect to him.
1. Primary Liability
Control person liability under the 1933 Act requires a
showing that (1) the alleged control person actively
participates in the overall management and operation of the
alleged controlled entity and (2) that such control person
actively participated in the fraud allegedly perpetrated by
that entity. Harrison v. Enventure Capital Group, Inc.,
666 F. Supp. 473, 478 (W.D.N.Y. 1987) (citing Lanza v. Drexel & Co.,
479 F.2d 1277 (2d Cir. 1973) (en banc)). Moreover, Federal
securities law concepts are to be used to define liability
under the New Jersey statute, Cola v. Terzano, 129 N.J. Super. 47,
322 A.2d 195 (1974), as well as "control person" under the
New Jersey statute, Zendell v. Newport Oil Corp., 226
N.J.Super, 431, 544 A.2d 878 (1988).
In opposition to the motion, the Cosgrove Defendants have
adduced memos between Esrine and Reserve in the summer of 1986
discussing the form that the proposed Restructuring was to
take, as well as Northwestern's attorney's comments on drafts
of the Restructuring documents, as evidence of Esrine's and
Northwestern's respective control person status.
Northwestern contends that such evidence relating to
pre-closing events is "irrelevant" to the admitted Reserve
fraud — failing to use the $698,603.88 fund to construct any
pipeline improvements — "since the purpose of the
restructuring was accomplished." This argument, however,
applies only to those claims for which loss causation is a
necessary element. See supra Part I(A)(3), infra Part I(C)(3).
At the heart of the control person liability claims based on
the primary violation is the Letter of December 23 setting
forth the terms of the Restructuring, which, along with other
documents and representations, the Cosgrove Defendants allege,
caused them to participate in the Restructuring.
The evidence of the communications between Esrine and
Reserve, demonstrating as it does that Esrine had a leading
role in structuring the deal, is sufficient to support an
inference that Esrine participated in Reserve's management and
in the fraud for the purposes of the control person liability
test. Moreover, the memos, in which Esrine advocates
Northwestern's interests in the Restructuring (i.e., "the
curing of all defaults, the repayment to [Northwestern] of the
$462,000 odd dollars of interest, the obtaining of liens on the
pipeline and the general releases that would ensue" (Esrine
Memo of November 10, 1986)) and in which Esrine refers to his
efforts effecting collections for Northwestern, is sufficient
to raise a question of fact as to whether Esrine was
Northwestern's agent, and therefore as to whether Esrine's
alleged control person liability may be imputed to
Northwestern cites Zendell for the proposition that entities
that provide professional or other services to the parties to a
transaction cannot be control persons under either Federal
securities law or New Jersey law. In Zendell, a limited
partnership was formed to engage in oil and gas exploration and
production in Oklahoma and Kansas. When the venture turned
unsuccessful, the limited partners sought rescission alleging,
inter alia, violations of federal and New Jersey securities
laws. In dismissing a claim against the seller's counsel, the
court rejected the contention that the seller's attorneys were
liable as "control persons" under the New Jersey Statute.
The court noted that the law firm did not act as broker or
underwriter, and that the law firm did not have a managerial
position with, or investment in, the partnership.
Zendell, 544 A.2d at 883.
Zendell is, however, distinguishable on the facts from the
instant case. In contrast to the court's findings in Zendell,
the Cosgrove Defendants here have pointed to facts sufficient
to establish Northwestern's financial interest in the
Restructuring: the improvement of Northwestern's position by
taking a security interest in the Pipeline. The prospect of
bettering its position in relation to the limited partners
constitutes enough of a stake in the outcome to distinguish
Northwestern's role in the Restructuring from the role of the
attorneys in setting up the partnership in Zendell. Therefore,
as the Cosgrove defendants have established facts from which
Northwestern's and Esrine's control person status may be
inferred, a question of material fact exists to preclude
2. Esrine's Motion to Dismiss the Control Person
In addition to joining in Northwestern's summary judgment
motion with respect to the control person liability claims,
Esrine also seeks dismissal of these claims on statute of
A plaintiff cannot sue a new defendant after the statute of
limitations has expired as to that defendant. Schiavone v.
Fortune, 477 U.S. 21, 25-32, 106 S.Ct. 2379, 2382-86, 91
L.Ed.2d 18 (1986). With respect to the § 12(2) claim, Esrine
asserts as the applicable statute of limitations the
One-Year/Three-Year Rule, which provides that claims are
forever barred unless brought within three years of the date on
which they accrued and within one year of discovery of the
fraud. See Lampf, Pleva, Lipkind, Prupis & Petigrow v.
Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321
(1991) (applying One-Year/Three-Year Rule to actions under §
Assuming, without deciding, that the § 12(2) claim is
governed by the One-Year/Three-Year rule, the relevant dates
for the purposes of such rule are February 12, 1987, the date
of closing of the Restructuring; February 6, 1990, the date the
Cosgrove Defendants filed their motion to add Esrine as a
counterclaim defendant; and the period from November-January
1989-90, when the Cosgrove Defendants say they discovered
Esrine's involvement during the course of depositions. The
First Amended Counterclaim was served on Esrine in October of
When a plaintiff seeks to add a new defendant in an existing
action, the date of the filing of the motion to amend
constitutes the date the action was commenced for statute of
limitations purposes. Derdiarian v. Futterman Corp., 36 F.R.D.
192, 194 (S.D.N.Y. 1964). Therefore, the Cosgrove Defendants'
commencement of the action as against Esrine was within the
three year part of the One-Year/Three-Year rule. Moreover, the
action was brought within one year of the discovery of the
fraud in late 1989. Therefore, as the Cosgrove Defendants
action against Esrine meets both prongs of the
One-Year/Three-Year rule, Esrine's motion to dismiss the §
12(2) claim is denied.
Esrine also seeks dismissal of the claims based on New Jersey
Statutes 49:3-71, which provides a limitations period of "no
more than two years after the contract of sale or within two
years of the time when the person aggrieved know or should have
known of the existence of his cause of action, whichever is
later. New Jersey Statutes 49:3-71(e).
New Jersey law is consistent with the Second Circuit in
establishing the date of the filing of the motion to amend as
the date of the commencement of the Cosgrove Defendants' action
against Esrine. Campbell v. Union Beach, 153 N.J. Super. 434,
379 A.2d 1295 (App. Div. 1977); Ioannou v. Ivy Hill Park Section
Four Inc., 112 N.J. Super. 28, 270 A.2d 295 (Law Div. 1970).
The question thus becomes whether the Cosgrove Defendants
should have known of Esrine's participation before their
discovery of such knowledge late in 1989.
Where, as here, the Cosgrove investors were diligent in
pursuing discovery, and where knowledge of Esrine's involvement
in the restructuring could not be gleaned from an examination
of the Restructuring documents distributed to the Limited
Partners, but requires a familiarity with meetings in which the
Cosgrove Defendants did not participate, Esrine's alleged
participation in the Restructuring could not have been known to
the Cosgrove Defendants before discovery was well underway.
Therefore, Esrine's motion to dismiss the New Jersey securities
fraud claim is denied.
3. Aiding and Abetting
The Cosgrove Defendants allege that in the alternative,
Northwestern and Esrine aided and abetted in Reserve's § 12(2)
violation. The elements of aiding and abetting a fraud under
the federal securities laws consist of (1) securities fraud by
a primary party; (2) knowledge of the fraud; and (3)
substantial assistance in the achievement of its ends. See IIT
v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980). The plaintiff
alleging "substantial assistance" by the aider and abettor must
allege that the acts of the aider and abettor proximately
caused the harm upon which the primary liability is predicated.
Bloor, 754 F.2d 57, 62. As set forth above, the Cosgrove
Defendants have failed to set forth facts sufficient to support
a finding of loss causation, i.e., proximate causation.
Therefore, with respect to the aiding and abetting claims, for
the reasons set forth above, summary judgment is granted
dismissing these claims against both Esrine and Northwestern.
D. Northwestern's Duty to Offset
In the eleventh counterclaim, the Cosgrove defendants seek an
offset against their alleged obligations to Northwestern in the
amount of their proportionate interest in the Pipeline. The
Cosgrove Defendants have not opposed Northwestern's summary
judgment motion with respect to this claim. Therefore, the
motion with respect to this claim is granted.
II. Esrine's Motion to Dismiss
The court's grant of summary judgment dismissing the Cosgrove
Defendants' counterclaims except for the control person
liability counterclaims applies to the counterclaims as they
are asserted as against both Esrine and Northwestern.
Therefore, with the exception of Esrine's motion to dismiss the
control person liability counterclaims, the court need not
consider the remainder of Esrine's motion to dismiss the
III. Northwestern's Liability Claims
Northwestern has also moved for summary judgment of its
liability claims against the Cosgrove Defendants. There are
several issues relevant to the disposition of Northwestern's
claims against the Cosgrove defendants: (1) the Cosgrove
Defendants' affirmative defenses (2) the factual issue of the
valuation of the Pipeline; (3) the legal question as to the
application of the proceeds of the Pipeline.
A. Affirmative Defenses
In Celotex, the Supreme Court set forth the standards to be
met by parties opposing a summary judgment motion:
In our view, the plain language of Rule 56(c)
mandates the entry of summary judgment, after
adequate time for discovery and upon motion,
against a party who fails to make a showing
sufficient to establish the existence of an
element essential to that party's case, and on
which that party will bear the burden of proof at
trial. In such a situation, there can be "no
genuine issue as to any material fact," since a
complete failure of proof concerning an essential
element of the nonmoving party's case renders all
other facts immaterial. The moving party is
"entitled to a judgment as a matter of law"
because the nonmoving party has failed to make a
sufficient showing on an essential element of her
case with respect to which she has the burden of
Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548,
2552, 91 L.Ed.2d 265 (1986).
Thus, it is the Cosgrove Defendant's burden to establish that
there are factual issues with regard to their affirmative
The Cosgrove Defendants have contested this motion with
regard to two affirmative defenses, that based on fraudulent
inducement and that based on failure of condition precedent.
1. Conditions Precedent
In support of its affirmative defense based on the failure of
Northwestern's failure to fulfill conditions precedent to the
agreement, the Cosgrove Defendants cite, among other cases, the
case of Holland Indus., Inc. v. Adamar of New Jersey, Inc.,
550 F. Supp. 646, 648 (S.D.N.Y. 1982) for the proposition that a
contracting party's failure to comply with a condition
precedent to an alleged contract bars its recovery for breach
of that contract.
In Holland, the parties agreed that Holland would provide bus
transportation services to Adamar. The court held the following
language, contained in a "memorandum of understanding" between
the parties to establish a condition precedent:
Holland understands that any service agreement
with Adamar must be approved by the New Jersey
Casino Control Commission and further, that
Holland must apply for a New Jersey Casino Service
Industry License. In the event of a denial of the
above application, the agreement is terminated
immediately at no cost or liability to Adamar.
Id. at 647-48. The other cases cited by the Cosgrove Defendants
similarly concern service, renovation or purchase contracts. In
the instant case, the Cosgrove Defendants point to no language
in any of the documents underlying the Restructuring similar to
that held to state a condition precedent in Holland, i.e.,
which explicitly states that if a condition is not met, then
the agreement is terminated. Therefore, as a matter of law,
summary judgment must be granted to Northwestern on the issue
of the affirmative defense based on condition precedent.
2. Fraudulent Inducement
The affirmative defense based on fraudulent inducement is
based on the claim that the Cosgrove Defendants were
fraudulently induced to enter into the Agreements with Surety,
in which the former limited partners promised to indemnify
Northwestern and thereby made Northwestern subrogee of the
N.Y.U.C.C. § 3-201(1) (McKinney 1964) states that:
Transfer of an instrument vests in the transferee
such rights as the transferor has therein, except
that a transferee who has himself been a party to
any fraud or illegality affecting the instrument .
. . cannot improve his position by taking from a
later holder in due course.
A surety may be a party to fraud for the purpose of barring
his subrogation rights, even where the facts do not support of
finding of loss or of control person or aider and abettor
liability under the securities laws. See National Union Fire
Ins. Co. v. Turtur,