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DREXEL BURNHAM LAMBERT v. MICROGENESYS

October 15, 1991

DREXEL BURNHAM LAMBERT GROUP, INC., PLAINTIFF,
v.
MICROGENESYS, INC., DEFENDANT.



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 law claims.

BACKGROUND*fn1

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.

In its Complaint, Drexel asserts federal securities claims and state law contract claims. Drexel contends that at the time MicroGeneSys executed and delivered the Note it had no intention of repaying it. Drexel further alleges that MicroGeneSys never informed Drexel of its intention not to repay the Note prior to executing and delivering the Note.

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 jurisdiction.

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.

DISCUSSION

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 668 (1976)).

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 ...

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