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POLYCAST TECH. CORP. v. UNIROYAL

May 4, 1992

POLYCAST TECHNOLOGY CORPORATION and UNIROYAL PLASTICS ACQUISITION CORP., Plaintiffs,
v.
UNIROYAL, INC., CDU HOLDING, INC., JOSEPH P. FLANNERY, JOHN R. GRAHAM, ALEXANDER R. CASTALDI, ROBERT ALVINE, DONALD L. NEVINS, JR., ALFRED WEBER, CLAYTON & DUBILIER, INC., THE CLAYTON & DUBILIER PRIVATE EQUITY FUND LIMITED PARTNERSHIP, CLAYTON & DUBILIER ASSOCIATES LIMITED PARTNERSHIP, MARTIN H. DUBILIER, JOSEPH L. RICE III, and ALAN R. ELTON, MARTIN H. DUBILIER, JOSEPH P. FLANNERY, JOHN R. GRAHAM, and JOSEPH L. RICE III as Trustees of CDU HOLDING, INC. LIQUIDATING TRUST, Defendants.



The opinion of the court was delivered by: CHARLES S. HAIGHT, JR.

 HAIGHT, District Judge :

 The genesis of this action is the sale and purchase of a corporation. The purchaser repents of its bargain, and seeks to undo it and recover compensatory and punitive damages. Subject matter jurisdiction in this Court is founded upon claims under the federal securities laws and the civil RICO statute, to which state and common law claims are appended. Following extensive discovery, defendants move under Rule 56, Fed.R.Civ.P., for summary judgment dismissing the complaint.

 Background

 The action was originally assigned to District Judge Walker (as he then was). Much of the factual background appears in his two prior opinions, reported at [1988-89 Transfer Binder] Fed.Sec.L.Rep. (CCH) P94,005 (S.D.N.Y Aug. 25, 1988) and 728 F. Supp. 926 (S.D.N.Y 1989), familiarity with which is assumed.

 The litigation arises from the allegedly fraudulent sale by defendant Uniroyal, Inc. ("Uniroyal") of its wholly-owned subsidiary Uniroyal Plastics Company, Inc. ("Plastics") to plaintiffs Polycast Technology Corporation ("Polycast") and Uniroyal Plastics Acquisition Corp. ("UPAC"), a company formed by Polycast to consummate the sale. I will refer to the plaintiffs collectively as "Polycast." In substance, Polycast alleges that in valuing and pricing the shares of Plastics and in consummating the transaction, it relied on materially misleading information furnished by defendants with respect to the financial status, earnings potential, and operating condition of Plastics, and that as a result it paid a grossly excessive price for the stock.

 Judge Walker's prior opinions dealt with challenges to the legal sufficiency of various pleadings. Since that time the parties have completed extensive discovery. All defendants now move for summary judgment dismissing all of plaintiffs' claims against them.

 The operative pleading is plaintiffs' fourth amended complaint (hereinafter the "Complaint"). The defendants are Uniroyal; its parent, CDU Holding, Inc.; six officers of Uniroyal and Plastics; Clayton & Dubilier, Inc., its two principals and related investment entities (the "C&S defendants"); and the trustees of the CDU Holding, Inc. Liquidating Trust.

 CDU Holding, Inc. owned all of Uniroyal's common stock from September 24, 1985 to December 2, 1986. CDU Holding, Inc. Liquidating Trust is the successor in interest to Uniroyal and CDU Holding, Inc.

 The trustees of the CDU Holding, Inc. Liquidating Trust are the individual defendants Alan R. Elton, Martin H. Dubilier, Joseph P. Flannery, John R. Graham, and Joseph L. Rice III.

 At the pertinent times Flannery was chairman of the board, chief executive officer, and president of Uniroyal, as well as a stockholder. Flannery is also alleged to be a beneficiary of the Liquidating Trust.

 Defendant Graham was chief financial officer and a stock holder of Uniroyal, and is a beneficiary of the Liquidating Trust. Defendant Alexander R. Castaldi was vice-president, controller, and a stockholder, and a beneficiary of the Liquidating Trust.

 Defendant Elton was vice-president and general counsel of Uniroyal. He is named as a defendant in this action solely in his capacity as a trustee of the Liquidating Trust.

 Defendant Robert Alvine was group vice-president of the Engineered Products Group -- Worldwide of Uniroyal, a Uniroyal stockholder, and president of Plastics until October 31, 1986. He is a beneficiary of the Liquidating Trust.

 Defendant Donald L. Nevins, Jr., was controller of the Engineered Products Group of Uniroyal.

 Defendant Alfred Weber was vice-president and the general manager of Plastics until November 1, 1986, a stockholder of Uniroyal, and is a beneficiary of a Liquidating Trust.

 The "C&D defendants," as they are collectively referred to in the litigation, consist of Clayton & Dubilier, Inc., the Clayton & Dubilier Private Equity Limited Partnership, the Clayton & Dubilier Associates Limited Partnership, and the individual defendants Dubilier and Rice. The relationship of the C&D defendants to Uniroyal and Plastics came about in this fashion. Confronted with a hostile tender offer in 1985, Uniroyal executed a merger agreement later that year with CDU Acquisition, Inc. and CDU Holding, Inc. A leveraged buyout was consummated through a merger transaction. Following completion of that transaction, all of Uniroyal's common stock was held by CDU Holding, Inc., whose shareholders included Flannery, Graham, and Weber. But the largest beneficial shareholder of CDU Holding, Inc. was the Clayton & Dubilier Private Equity Fund Limited Partnership ("C&D Private Equity"), which held 32.5% of the common stock of CDU Holding, Inc. The general partner of C&D Private Equity was Clayton & Dubilier Associates Limited Partnership ("C&D Associates"). Dubilier and Rice were the general partners of C&D Associates.

 At the times pertinent to this litigation, Uniroyal's three-man executive committee consisted of Flannery, Rice and Dubilier.

 Defendants Flannery, Graham, Castaldi, Alvine, Clayton & Dubilier, Inc., the Clayton & Dubilier Private Equity Fund Limited Partnership, the Clayton & Associates Limited Partnership, Dubilier and Rice are alleged to have been at the pertinent times controlling persons of Uniroyal and of CDU Holding, Inc. under section 15 of the Securities Act of 1933, 15 U.S.C. § 77(o) and section 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78t.

 Polycast agreed to purchase Plastics from Uniroyal in a Stock Purchase Agreement (hereinafter "SPA") dated as of July 23, 1986. The transaction closed on October 31, 1986. Plaintiffs now regret that purchase, regard themselves as the victims of fraud, and commenced this action which they summarize in their brief at 2:

 
The core of this case is a fraud claim -- that defendants deliberately misrepresented what [Plastics] would earn in 1986 and subsequent years and that plaintiffs relied upon those false representations in purchasing Plastics for $ 110 million.

 That core finds expression in nine claims for relief set forth in the complaint, as follows:

 The first claim, against all defendants, alleges violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78(j)(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Complaint, PP34-148. The second claim, against all defendants, alleges violation of section 12(2) of the Securities Act of 1933, 15 U.S.C. § 771 (2). Complaint, PP 149-159.

 The third claim, against the C&D defendants, charges them as principals in violating section 12(2) of the Securities Act. Complaint, PP160-161.

 The fourth claim, against all defendants, charges violations of the RICO statute, 18 U.S.C. § 1962(c). Complaint, P162-181.

 The fifth claim, against all defendants, alleges common law fraud. Complaint, PP182-189.

 The sixth claim, against all defendants, alleges negligent misrepresentation. Complaint, PP190-195.

 The seventh claim, against Uniroyal and the trustees of the Liquidating Trust, alleges breach of warranty. Complaint, PP196-202.

 The eighth claim, against Uniroyal and the trustees of the Liquidating Trust, is for indemnity. Complaint, PP203-208.

 The ninth claim, against Uniroyal and the trustees of the Liquidating Trust, is for reformation of the purchase agreement. Complaint, PP209-225.

 In their prayers for relief, pleaded in the alternative, plaintiffs seek rescission or reformation of the contract, and compensatory and punitive damages, with compensatory damages to be trebled under RICO.

 The parties have engaged in extensive discovery. The deposition transcripts and documents produced are voluminous. It is difficult to imagine that trial will give rise to additional evidentiary material of any significance. All defendants now move for summary judgment.

 Discussion

 Under Fed. R. Civ. P. 56(c), the moving party is entitled to summary judgment if the papers "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." On such a motion, "a court's responsibility is to assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party." Coach Leatherware Co., Inc. v. Ann Taylor, Inc., 933 F.2d 162, 167 (2d Cir. 1991) (citing Knight v. U.S. Fire Insurance, 804 F.2d 9 (2d Cir. 1986), cert. denied, 480 U.S. 932, 94 L. Ed. 2d 762, 107 S. Ct. 1570 91987)). The responding party "must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). "The non-movant cannot 'escape summary judgment merely by vaguely asserting the existence of some unspecified disputed material facts,' . . . or defeat the motion through 'mere speculation or conjecture.'" Western World Ins. Co. v. Stack Oil, Inc., 922 F.2d 118, 121 (2d Cir. 1990) (citations omitted). While the party resisting summary judgment must show a dispute of fact, it must also be a material fact in light of the substantive law. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 91986). That is because "a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Celotex Corp. v. Catrett, 477 U.S. 317 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 91986).

 The Fraud Claims

 I will first consider plaintiffs' claims for securities fraud and common law fraud. While defendants' brief discusses plaintiffs' section 12(2) claims under the fraud heading, that is inappropriate given the quite different theory of liability that obtains, and I will discuss the section 12(2) claims separately.

 As noted, the "core" of plaintiffs' fraud claim is that defendants deliberately misrepresented "what Plastics would earn in 1986 and subsequent years," namely 1987-1990; and that plaintiffs relied upon those false representations in purchasing Plastics for $ 110 million.

 The complaint's reference to a "revised bid" requires some review of the events leading up to the purchase, which in significant measure are not disputed.

 Plastics was one of several wholly owned subsidiaries of Uniroyal. Uniroyal decided to sell Plastics pursuant to an auction process conducted by Drexel, Burnham, Lambert, Inc. of New York ("Drexel"). Uniroyal and Drexel produced an offering memorandum which Drexel circulated to potential purchasers, including Polycast. The offering memorandum included a projection that Plastic's income for 1986 would be approximately $ 24 million. Uniroyal delivered the offering memorandum to potential purchasers in March 1986.

 In a meeting on May 8, 1986 at Uniroyal's headquarters in Oxford, Connecticut, Alvine, Nevins and Weber met with representatives of Polycast and told them that Uniroyal had lowered its 1986 earnings forecast for Plastics from $ 24.0 million to $ 22.5 million. Complaint at P60.

 On June 12, 1986, Uniroyal informed Polycast that Uniroyal had again lowered its 1986 earnings forecast for Plastics, this time from $ 22.5 million to $ 20.5 million. Id. at P67. On June 24, 1986, Uniroyal informed Polycast that Uniroyal now estimated 1986 earnings for Plastics to be $ 17.6 million. Id. at P69.

 On or about July 23, 1986 Polycast submitted to Uniroyal the winning bid of $ 134 million to purchase Plastics. The SPA was executed that date. It was accompanied by a disclosure letter in which Uniroyal reiterated a 1986 earnings forecast for Plastics of $ 17.5 million. Id. at PP79-81.

 On August 27, 1986, Castaldi, Alvine and Weber informed Polycast that Uniroyal had again lowered its forecast of Plastics' 1986 earnings to approximately $ 15.5 million. Polycast, in accordance with its rights under the SPA, withdrew its offer to purchase Plastics and terminated the SPA.

 This set the stage for the September 5, 1986 meeting, at which the representatives for Uniroyal and Plastics told Polycast of the $ 13.3 million "rock bottom" 1986 earnings forecast for Plastics. Further negotiations between the parties ensued. Eventually, on September 23, 1986, Polycast agreed to purchase Plastics for $ 111.6 million. The SPA was amended on that date to reflect the new purchase price and a new closing date. Id. at 122.

 The purchase price was reduced one more time following a telephone conversation on October 27, 1986, between Weber and Richard Schneider, Polycast's president. In that conversation Weber acknowledged that Plastics would not achieve its sales forecast for the month of October 1986. Polycast then negotiated a reduction in the purchase price from $ 111.6 to $ 110 million. The parties executed a further amendment to the SPA reflecting that reduction. Unlike the prior amendment reducing the purchase price to $ 111.6 million, the amendment did not refer to or change Uniroyal's previous 1986 earnings forecast for Plastics. The transaction closed on October 31, 1986, at the $ 110 million purchase price. Id. at P123.

 As for the projections of Plastics' earnings for 1987 through 1990, the complaint alleges at P72 that on or about July 2, 1986, Donald A. Ware, the assistant corporate controller of Uniroyal, sent to Drexel documents forecasting Plastics' earnings before interest and taxes of $ 17.6 million during 1986, and forecasts of $ 20.7 million, $ 22.7 million, $ 24.9 million, and $ 27.0 million for 1987, 1988, 1989, and 1990 respectively. Plaintiffs allege that these forecasts for the later years were based in part on the then-existing $ 17.6 million forecast for 1986, which defendants knew to be false. Complaint at P74.

 Plaintiffs place primary emphasis upon the $ 13.3 million estimate of Plastics' 1986 earnings articulated at the September 5, 1986 meeting. All defendants argue that as a matter of law Polycast cannot establish reliance, cognizable damages or loss causation with respect to that earnings estimate. The C&D defendants also argue that they are entitled to summary judgment on the element of scienter.

 The appropriateness of summary judgment depends in part upon the "governing law," Anderson at 250. The trial judge must "view the evidence through the prism of the substantive evidentiary burden." Id. at 254.

 In order to establish a claim for securities fraud under section 10(b) of the 1934 Act, a plaintiff must allege and prove "that, in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that plaintiff's reliance on defendant's actions caused him injury." Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61 (2d Cir. 1985). In federal securities cases the plaintiff's burden of proof is the "preponderance-of-the-evidence standard generally applicable in civil actions." Herman and MacLean v. Huddleston, 459 U.S. 375, 390, 74 L. Ed. 2d 548, 103 S. Ct. 683 91983). As the Second Circuit observed in Weinberger v. Kendrick, 698 F.2d 61, 78 (2d Cir.), cert. denied, 464 U.S. 818, 78 L. Ed. 2d 89, 104 S. Ct. 77 91983), "the plaintiff's burden of proof in a common law fraud case -- clear and convincing evidence -- is more demanding than in a Rule 10b-5 case." (construing New York law).

 Defendants at bar acknowledge that the forecasts of Plastics' 1986 earnings were given "in connection with the purchase or sale of securities," namely, the Plastics stock which Polycast bought. Defendants argue, however, that the September 5, 1986 forecast of $ 13.3 million in 1986 earnings was a forecast, and not a guarantee. Defendants cite Second Circuit authority for the propositions that "economic prognostication, though faulty, does not, without more, amount to fraud," Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 117 (2d Cir. 1982) (quoting Polin v. Conductron Corp., 552 F.2d 797, 805 (8th Cir.), cert. denied, 434 U.S. 857, 54 L. Ed. 2d 129, 98 S. Ct. 178 91977)); and "the sole factual elements of a projection should be that it represents management's view, that it was reached in a rational fashion and that it is a sincere view." Marx v. Computer Sciences Corp., 507 F.2d 485, 490 n.7 (9th Cir. 1974). However, as the cases cited by defendants themselves suggest, economic estimates, forecasts or projections are not insulated from claims for fraud if they were put forward in bad faith, with awareness of their inaccuracy, and an intent to deceive. "Liability may follow where management intentionally fosters a mistaken belief concerning a material fact, such as its evaluation of the company's progress and earnings prospects in the current year." Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 164 (2d Cir. 1980).

 Defendants do not suggest that the $ 13.3 million earnings forecast was not a material fact in the context of the proposed purchase. There is sufficient evidence to permit a jury to find that a number of Uniroyal and Plastics officers deliberately concocted false earnings forecasts, including the $ 13.3 million estimate, in order to induce Polycast to purchase Plastics. Defendants argue in their briefs that these charges of falsity and scienter depend solely on the testimony of T. Oliver Kirrane, a former Plastics officer. In point of fact, there is more evidence in plaintiffs' favor on the issues than that; but even if plaintiffs' case depended entirely upon the testimony of Kirrane, who the jury could find refused to go along with the fraud, his credibility would be for the jury to evaluate.

 Sensibly enough, defendants do not press these points. Rather, they focus upon reliance and causation.

 Defendants argue that Polycast did not rely on the $ 13.3 million estimate. They find support for that proposition in disclaimers Polycast included in a private placement memorandum it prepared in October 1986 with a view towards financing its purchase of Plastics. Polycast included in that memorandum the earnings projections provided by Plastics and Uniroyal, and said of them:

 
The projections are based upon estimates and assumptions about circumstances and events that have not yet taken place, are subject to customary uncertainties inherent in making projections and may be materially affected by changes in circumstances and numerous other variables, many of which are difficult to predict and beyond the control of Polycast and Uniroyal Plastics. Therefore, the actual results achieved will vary from the projections, these variation may be material and there can be no assurance that the projected results will be attained.

 Secondly, defendants rely upon communications between Uniroyal and Plastics on the one hand and Polycast on the other between September 5, 1986 and the October 31, 1986 closing. Fulfillment of the $ 13.3 million estimated earnings during 1986 depended in part upon Plastics' earnings during September and October 1986. Defendants point to the allegation in P123 of the complaint that "in response to repeated inquiries from plaintiffs, during October 1986 Uniroyal disclosed to plaintiffs certain preliminary financial information purporting to record business activity at Plastics during September 1986", which "suggested that Plastics had not met certain financial targets for September." Defendants in their main brief at 33 omit the next sentence from P123 of the complaint, which reads: "However, defendants did not withdraw Uniroyal's 1986 earnings forecast for Plastics of $ 13.3 million and failed to disclose that Plastics' earnings would be materially lower than $ 13.3 million." That omitted language undermines the effectiveness of any admission that might otherwise be derived from the pleading.

 On the reliance issue, defendants stress particularly the telephone conversation on October 27, 1986, between Weber and Schneider. In the October 27, 1986 telephone conversation between Schneider and Weber, Weber told Schneider that Plastics anticipated a shortfall of approximately $ 2 million in projected sales for October, with a corresponding decline of approximately $ 760,000 in earnings that month. Weber and Schneider did not discuss the $ 13.3 million estimate in their October 27 conversation. Schneider became angry. He told Weber that Polycast was paying too much for Plastics and would "take the price down." Weber Dep. at 1782. On October 29, 1986 Polycast demanded and ultimately received a $ 1.6 million reduction on the purchase price for Plastics: from $ 111.6 million to $ 110 million, the figure at which the deal closed on October 31. Polycast advised its potential investors that the reduction in the purchase price resulted from reductions in Plastics' projected earnings.

 These facts are for the most part undisputed. The question is whether, as defendants contend, they establish that Polycast did not rely on the $ 13.3 estimate conveyed on September 5, 1986 in deciding to purchase Plastics at the reduced price of $ 110 million on October 31. Defendants say that "as a result of information provided by Uniroyal for days before the closing, Polycast did not in fact reply upon the $ 13.3 million projection." Reply Brief at 5.

 The jury could find that Uniroyal and Plastics officers fraudulently concocted the $ 13.3 million forecast, which bore no resemblance to economic reality, for the express purpose of luring Polycast into going through with the deal. The jury could find this to be a modus operandi, infecting and tainting the prior earning estimates. For example, there is evidence from which the jury could find that in August 1986 Flannery threatened to fire Weber after Weber told Polycast at a meeting that Plastics would earn less than the then existing estimate, and that Flannery explicitly rejected the advice of house counsel, including Elton, that all business data be disclosed to Polycast.

 The jury could further find, as plaintiffs argue in their briefs, that Plastics earned only $ 5.2 million in 1986, and that had plaintiffs known of the depth of the deception practiced upon them, they would not have closed the deal.

 I do not say that the jury will make these findings. However, viewing the evidence in the light most favorable to the non-moving party, as required by the cases, the jury could do so.

 What does "reliance" mean in this context? No rational jury could find that at the time of closing plaintiffs relied on the $ 13.3 million projection as "bankable ", in the sense represented during the September 5 meeting: "not subject to reduction." That perception could not, and did not, survive Schneider's October 27 conversation with Weber. Schneider, content to pay $ 111.6 million for Plastics on the basis of the September 5 $ 13.3 million projection, was content no longer. Concern for the earnings projection fueled that discontent, and led to a reduced purchase price.

 But the jury could find that at the time of closing Polycast believed that the $ 13.3 million projection, while no longer "bankable" in that precise amount, had nonetheless been calculated and communicated in good faith by Uniroyal and Plastics. The jury could find, in other words, that Polycast continued to rely on the integrity of the process, although it no longer relied on the particular end figure. The distinction is pragmatic and accords with common sense. Plaintiffs' fraud claim is not so much that the particular $ 13.3 million was inaccurate, but that the process producing the projection was corrupt: a conclusion the jury could easily reach if it accepts the testimony of Kirrane, arguably corroborated by other evidence.

 Polycast was entitled to rely on the defendants' good faith in projecting Plastics' earnings. It was entitled to rely on the integrity of the $ 13.3 million projection, even if probable cause had arisen to doubt its accuracy. If Polycast had known then what discovery has arguably revealed about the corruption of the process, it is not fanciful to suggest that plaintiffs would have cancelled the deal. At least the jury could draw that inference. Therefore, in a real sense, Polycast continued to rely on the $ 13.3 million estimate; or so a jury could find.

 Was that continued reliance reasonable? "Whether or not reliance was justifiable is ordinarily a question of fact to be determined by the trier of fact on all of the facts and circumstances proven at trial." Stratford Group Ltd. v. Interstate Bakeries, 590 F. Supp. 859, 865 (S.D.N.Y. 1984) (construing New York law). The contentions of the parties with respect to reliance raise issues of fact for trial.

 As for cancellation of the Northrop contract, Uniroyal and Plastics chose not to disclose the cancellation to Polycast before the closing. Accordingly "positive proof of reliance is not a prerequisite for recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of [the] decision." Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972). The jury could find that cancellation of the Northrop contract was material. The jurors could consider the doomsday expressions of alarm voiced by Plastics and Uniroyal officers when contemplating the possibility of a cancellation. To be sure, defendants now contend that the Northrop cancellation was a blessing in disguise because the contract was losing Plastics money. Plaintiffs dispute that proposition. The question is one of considerable cost accounting and economic complexity. It poses a triable issue of fact.

 Defendants argue that since plaintiffs' investment bankers at the Boston office of Drexel Burnham Lambert formulated their own reduced projection for 1987 through 1990 earnings, Polycast cannot be said in law to have relied upon the higher estimates furnished by defendants on July 2, 1986. It is true that Drexel Boston performed such calculations in connection with the private placement memorandum issued by plaintiffs in October 1986. But the jury could find that all plaintiffs and their advisers did was to reduce the 1987-1990 forecasts proportionately to Uniroyal's reduction of Plastics' 1986 earnings to $ 13.3 million, so that in practical effect defendants were also responsible for these later projections by the other side.

 Next the defendants argue that plaintiffs cannot prove causation. With respect to the $ 13.3 million 1986 estimate, they argue, first, that the estimate did not cause Polycast any "cognizable damages"; and second, that even if damages occurred, plaintiffs cannot prove loss causation.

 On the first of these contentions, defendants rely upon particular declarations made by or on behalf of plaintiffs which they regard as admissions against interest. In February 1987 Schneider met with officers of the Continental Illinois Bank and Trust Company of Chicago, a potential lender, and said according to contemporaneous documentary evidence that the $ 110 million purchase price paid "is fair from an historical earnings viewpoint but can be considered a bargain price if the future potential of the company is considered."

 Secondly, defendants point to consolidated financial statements in UPAC's Form 10K for the year ended September 1987. Those financials included an entry for $ 75 million of goodwill arising from the acquisition of Plastics, which defendants say "reflects the difference between the $ 110 million purchase price, plus contingent liabilities recorded, less the value of Plastics' assets." Main brief at 38. The SEC staff, responding to that Form 10K, noted that while UPAC recognized and recorded on its balance sheet in September 27, 1987 $ 75 million in goodwill resulting from the acquisition of Plastics, it had also disclosed that Polycast had commenced suit against Uniroyal for not less than $ 75 million in damages caused by misrepresentations concerning Plastics' financial state, earnings potential and operating conditions. The SEC staff regarded these statements as inconsistent and asked for an explanation. Defendants contend that the reference to goodwill demonstrates as a matter of law that the purchase of Plastics caused plaintiffs no cognizable damage, as that concept is defined in section 10(b) actions by Randall v. Loftsgaardan, 478 U.S. 647, 661-662, 92 L. Ed. 2d 525, 106 S. Ct. 3143 91986) (out-of-pocket measure of damages consists of the difference between the fair value of all that the purchaser received and the fair value of what he would have received had there been no fraudulent conduct).

 Plaintiffs respond that Schneider's statements to the Continental Illinois Bank as reflected in the pertinent exhibit could not have been made later than February 1987, when Schneider made his presentation to that potential investor. Schneider told the bank that, based upon his then existing impressions, Plastics would earn $ 10 million in 1986 and $ 17 million in 1987. These amounts were less than defendants had represented. More significant to the present question, plaintiffs say without contradiction that the field work on the audit of Plastics' financial statements for the ten months ended October 31, 1986 was not completed until May 1987; and it was not until then that Polycast learned that Polycast that Plastics only earned $ 3.709 million for those 10 months. Plaintiffs say that Schneider's statements to the bank in February 1987 prove nothing more than the depth of defendants' deception.

 These declarations are admissible against plaintiffs under Rule 801(d)(2), F.R.Evid. However, they fall well short of establishing as a matter of law that plaintiffs suffered no cognizable economic loss, particularly since economic loss in section 10(b) cases may in certain circumstances be measured by "out-of-pocket loss, the benefit of the bargain, or some other appropriate standard." Osofsky v. Zipf, 645 F.2d 107, 111 (2d Cir. 1981). Conceptually at least, a party's admissions may demonstrate beyond cavil that it has suffered no economic loss; but plaintiffs' explanations for and interpretations of the declarations upon which defendants rely pose triable issues.

 Defendants also note that Polycast sold three of Plastics' businesses for amounts totalling $ 91 million, and indicated to the SEC that it had received offers for others. Defendants say that accordingly the total proceeds of the divesture of Plastics' businesses "would far exceed the price Polycast paid for Plastics," main brief at 40, so that Polycast suffered no loss. Plaintiffs respond that these gross sales prices were acquired at the cost of plaintiffs assuming "immense liabilities" under the SPA, such as unfunded pension liabilities (estimated at approximately $ 75 million before tax or $ 54 million net of tax) and environmental liabilities (estimated at $ 13 million). Defendants reply ...


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