The opinion of the court was delivered by: Kram, District Judge.
MEMORANDUM OPINION AND ORDER
In this action involving a claim on a subordinated
convertible bridge note, defendants have moved, pursuant to
Rules 12(b)(6) and 9(b) of the Federal Rules of Civil
Procedure, for an order dismissing plaintiff's first, second
and third claims based on § 10(b) of the Securities Exchange
Act of 1934 and § 12(2) of the Securities Act of 1933. In
addition, defendants have moved to dismiss plaintiff's fourth,
fifth and sixth claims on the ground that there is no
independent basis for federal jurisdiction over these common
In 1989, the plaintiff, Drexel Burnham Lambert Group, Inc.
("Drexel"), an underwriter, loaned $1,000,000 to the defendant,
MicroGeneSys, Inc. ("MicroGeneSys"), a biotechnology company.
This money was provided after Drexel failed to accomplish an
initial public offering (the "IPO") of MicroGeneSys' shares. To
evidence the obligation, MicroGeneSys executed a Senior
Subordinated Convertible Bridge Note (the "Note"), in the
amount of $1,000,000, payable to Drexel. Drexel and
MicroGeneSys simultaneously entered into a Senior Subordinated
Convertible Bridge Note and Warrant Purchase Agreement, dated
February 27, 1989 (the "Agreement"). The Agreement and Note
were later amended to provide that principal and interest would
become due and payable on January 1, 1990, unless all unpaid
interest which had accrued through that date was paid.
As of January 2, 1990, MicroGeneSys had not paid any of the
accrued interest due, and the Note became payable under the
terms of the Agreement. By letter dated December 11, 1990, from
Drexel Associate Counsel Carla Volpe Porter, Esq. ("Porter") to
MicroGeneSys, Drexel demanded payment of the Note. After
sending the demand letter to MicroGeneSys, Porter discussed the
matter with the defendant's attorneys, Cummings & Lockwood.
Speaking on behalf of MicroGeneSys, William Narwold, Esq.
("Narwold") of Cummings and Lockwood informed Porter that
MicroGeneSys did not owe Drexel any money because defendant
viewed the Note as payment for expenses it incurred during the
unsuccessful IPO. Complaint, at ¶ 23.
Subject matter jurisdiction is based on Section 22 of the
Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77v,
Section 27 of the Securities Exchange Act of 1934 (the
"Exchange Act"), 15 U.S.C. § 78aa, and principles of pendent
MicroGeneSys now moves to dismiss Drexel's Complaint.
MicroGeneSys contends that Drexel's first and second claims,
based on § 10(b) of the Exchange Act, and its third claim,
based on § 12(2) of the Securities Act, should be dismissed for
failure to state a claim upon which relief may be granted, and
failure to plead securities fraud with the requisite
particularity. In addition, MicroGeneSys contends that Drexel's
three common law claims should be dismissed as there is no
independent basis for jurisdiction once the federal question
claims are dismissed. Drexel opposes the motion.
I. Claims under § 10(b) and Rule 10b-5
MicroGeneSys has moved to dismiss Drexel's first and second
claims (based on § 10(b)*fn2 of the Exchange Act [15 U.S.C. § 78j(b)]
and Securities Exchange Commission Rule 10b-5*fn3
[C.F.R. § 240.10b-5]), for failure to state a claim. In
considering a motion to dismiss pursuant to Rule 12(b)(6), a
complaint must be read generously and every inference drawn in
favor of the plaintiff. Pross v. Katz, 784 F.2d 455, 457 (2d
Cir. 1986); Metzner v. D.H. Blair & Co., 663 F. Supp. 716, 719
(S.D.N.Y. 1987). A complaint should be dismissed only if it
"appears beyond a doubt that the plaintiff can prove no set of
facts in support of his claim that would entitle him to
relief." Frasier v. General Elec. Co., 930 F.2d at 1007
(quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99,
101-02, 2 L.Ed.2d 80 (1957)).
To state a claim under § 10(b) and Rule 10b-5, the plaintiff
must allege the following: (1) material misstatements or
omissions (2) indicating an intent to deceive or defraud
(scienter) (3) in connection with the sale or purchase of any
security (4) upon which plaintiffs detrimentally relied. Luce
v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986) (citing Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d
The Complaint alleges that MicroGeneSys never intended to
repay the Note delivered and executed on or about February 27,
1989. Since Drexel contends that the provisions of the
Agreement, Note and Amendment were representations by
MicroGeneSys that it intended to repay the Note, and
MicroGeneSys never communicated to Drexel any intention not to
repay the Note prior to the time the Note was made, Complaint,
at ¶¶ 24-26, Drexel asserts that the representations were
fraudulent, specifically, that:
These representations were materially false and
misleading, in that defendant intentionally
concealed and failed to disclose
the material fact of ...