that violated both Rule 14a-6 and § 14(a) by voting proxies that were solicited by a proxy statement containing material misrepresentations and omissions of material facts. Thus, they qualify to bring an action under this Rule, and the allegations set forth in the Amended Complaint satisfy the particularity requirement of Rule 9(b).
C. The Rule 14a-9 Allegations
When a proxy statement containing material misstatements and omitting material facts is distributed to investors for the purpose of seeking approval of a merger, and is followed by a purportedly curative amendment mailed so late that the persons entitled to vote do not receive it in time to affect their vote, a claim is stated pursuant to Rule 14a-9 and § 14(a). In Bradshaw v. Jenkins, [1983-1984 Transfer Binder]Fed. Sec. L. Rep. (CCH) P 99,719 (W.D. Wash. Mar. 9, 1984), the court considered the application of Rule 14a-9 to a Rule 12(b)(6) motion to dismiss when the complaint alleged the solicitation of proxies for approval of a merger proposal pursuant to a materially defective proxy statement. The defective statement was followed by a subsequent amendment mailed to the shareholders six days before the special shareholders' meeting. The court denied the Rule 12(b)(6) motion on the ground that the plaintiff must be given a chance to prove its claim that the supplemental proxy statement was mailed too late to reach a large number of shareholders in time to affect their vote on the merger. See Bradshaw, P 99,719 at 97,908 ("At this stage of the proceedings, the court cannot say as a matter of law that the supplemental proxy statement was distributed early enough to allow shareholders a meaningful opportunity to make an informed decision based upon its contents.").
In P 41 of their Amended Complaint, the Damson Limited Partners allege facts similar to those alleged in Bradshaw regarding the mailing of the First and Second Supplements immediately before the Special Meeting; and as was the case in Bradshaw, such facts are sufficient to allege a violation of Rule 14a-9. Therefore, the Amended Complaint alleges violations of § 14(a) that are statutorily sound and adequately pleaded, and the Defendants' motions to dismiss these claims are denied.
VII. The Rule 10b-5 Allegations Against Smith Barney Are Inadequate
The two critical allegations made by the Damson Limited Partners against Smith Barney to support their Rule 10b-5 claim are that the fairness opinion issued by Smith Barney and made a part of the Original Prospectus "did not adequately disclose that Smith Barney's compensation was contingent upon the approval of the Exchange Agreement by the limited partners," Am. Compl. P 37; and "Smith Barney . . . allowed its opinion to remain unmodified, despite the revaluation of the gas treatment plants by more than $ 100 million and the other material changes in the financial information," id. at P 55.
Contrary to the first allegation, Smith Barney unambiguously and adequately disclosed all details concerning Smith Barney's compensation, including the contingent payment in the Original Prospectus. The Original Prospectus explained the compensation provided to Smith Barney for previous advisory financial services and disclosed that it had been retained effective December 1989 "to act as financial advisor to the DOC Independent Directors on behalf of the Damson Voting Partnerships" in return for which
DOC and the Damson Voting Partnerships agreed to pay Smith Barney a transaction fee equal to 1% of the transaction value (as defined) of any such business combination concluded within six months . . . . No fee would be payable if a business combination were not consummated.
Original Prospectus 91. The fact that this disclosure came at page 91 of the 214-page prospectus does not adversely affect the adequacy of the disclosure. Smith Barney is correct in characterizing the Plaintiffs' objection that the disclosure was "buried on page 91 of the Prospectus," Am. Compl. P 37, as "a contention that the Prospectus disclosed too much information, i.e., that it was too long." Smith Barney Mem. 9-10. See Spielman v. General Host Corp., 402 F. Supp. 190, 205 (S.D.N.Y. 1975) ("'difficult decisions must be made as to what information to place toward the beginning and what to place further toward the end (of the document), what to emphasize and what to state more blandly. It is, of course, impossible to emphasize everything, and every fact can not be contained at the beginning.'"), aff'd, 538 F.2d 39 (2d Cir. 1976) (per curiam).
The second prong of the Damson Limited Partners' Rule 10b-5 claim against Smith Barney is that Smith Barney allowed its opinion to remain unmodified despite the changes made in the First and Second Supplements. However, the Amended Complaint fails to assert that Smith Barney had knowledge of the information subsequently disclosed in the Supplements at the time that it issued its fairness opinion. In fact, the allegations of the Amended Complaint concede that if Smith Barney came to have knowledge of this information at all, it was only after the fairness opinion was issued.
The Damson Limited Partners cannot rely on post-December 31, 1990 developments to support their Rule 10b-5 claim against Smith Barney because Smith Barney explicitly stated that "our opinion is based upon circumstances existing as of the date hereof." Original Prospectus G-1. The Original Prospectus also disclosed that Smith Barney's fairness opinion was "as of" the date of the Prospectus. Id. at 89.
Furthermore, Smith Barney did not make any representations concerning the valuation of the Damson Limited Partnership assets. The fairness opinion and the Prospectus stated that the principals involved in the transaction, not Smith Barney, were responsible for providing the asset valuations.
Thus, the Plaintiffs' Rule 10b-5 claim against Smith Barney cannot withstand this Rule 12(b)(6) motion to dismiss, and the motion is granted.
VIII. State Law Claims
The Damson Limited Partners assert three pendant state common law claims against the Defendants: breach of fiduciary duty, negligent misrepresentation, and common law fraud. The sufficiency of each of these claims is considered in turn.
A. Breach of Fiduciary Duty
1. The DOC Defendants
The Sixth Claim for Relief in the Amended Complaint asserts a claim for breach of fiduciary duty against the DOC Defendants. This claim goes beyond the Defendants' characterization of it as merely alleging waste and mismanagement by the DOC Defendants. The underlying allegations assert the deliberate, reckless, and/or negligent issuance of the materially defective Original Prospectus and the voting of the ill-gotten proxies to ratify the Agreement under which the DOC Defendants benefitted at the direct expense of the Plaintiffs. The harm alleged was not harm to partnerships, but to the Damson Limited Partners themselves. Thus, the claims being asserted are of a direct and not derivative nature.
The DOC Defendants contend that this claim must be dismissed because the duty implied in the Amended Complaint is not recognized in the relevant jurisdictions, and because the Damson Limited Partners have no standing to assert a class action on this claim. However, the class action is appropriate in this instance because the claims asserted are direct and not derivative. See Kramer v. Western Pac. Indus., Inc., 546 A.2d 348, 351 (Del. 1988). This leaves only the question of the legal cognizability of the claim to be decided.
The law of the state in which an entity is formed or incorporated governs the nature and extent of that entity's fiduciary obligations and liability for violations of the law. See Zimmerman v. Prime Medical Servs., Inc., 729 F. Supp. 23, 26 (S.D.N.Y. 1990); Caballero v. Anselmo, 720 F. Supp. 1088, 1098 (S.D.N.Y. 1989); Strain v. Seven Hill Assocs., 75 A.D.2d 360, 429 N.Y.S.2d 424, 426 (1st Dep't 1980). Damson Energy, Damson Income, and Damson Institutional were Texas limited partnerships. Damson 1985-1 and Damson 1985E-1 were Pennsylvania limited partnerships. Thus, Texas and Pennsylvania law, respectively, controls these state law claims.
Under Texas law, a fiduciary relationship generally exists only between the general partner and the limited partners. See Crenshaw v. Swenson, 611 S.W.2d 886, 890 (Tex. App. -- Austin 1980, writ ref'd n.r.e.). This fiduciary relationship creates a right for a limited partner to bring an action only against the general partner, not the officers and directors of the general partner. See Tex. Rev. Civ. Stat. Ann. art. 6132-1, Article 10, Bar Committee Comment at 68. The one exception to this general rule arises when the actions of a shareholder of the general partner are such that it is appropriate to "pierce the partnership veil" to hold him personally liable to the limited partners. See Remenchik v. Whittington, 757 S.W.2d 836, 839 (Tex. App. -- Houston 1988, no writ); see also Curley v. Brignoli Curley & Roberts Assocs., 746 F. Supp. 1208 (S.D.N.Y. 1989); Tobias v. First Nat'l Bank & Trust Co., 709 F. Supp. 1266 (S.D.N.Y. 1989); In Re USACafes, L.P. Litig., 600 A.2d 43 (Del. Ch. 1991).
The Amended Complaint alleges behavior on the part of the DOC Defendants which parallels that of corporate officers whose actions justify piercing the corporate veil. Thus, under Texas law, the Damson Limited Partners who owned investment units in Damson Energy, Damson Income, and Damson Institutional have stated a valid cause of action for breach of fiduciary duty against the individual DOC Defendants.
Pennsylvania law recognizes a fiduciary relationship between general partners and limited partners. See Pa. Stat. Ann. tit. 15, § 8591; Clement v. Clement, 436 Pa. 466, 260 A.2d 728, 729 (1970). However, unlike the exception recognized by the Texas courts, the Pennsylvania Supreme Court has refused to pierce the partnership veil and find the shareholders of corporate general partners liable to limited partners for breach of fiduciary duty. See In re Estate of Hall, 517 Pa. 115, 535 A.2d 47, 54 (1987). Therefore, the Damson Limited partners who owned investment units in Damson 1985-1 and Damson 1985E-1 do not have standing to bring a cause of action for breach of fiduciary duty against the DOC Defendants under Pennsylvania law, and this claim must be dismissed.
2. The PPPC Defendants
The Damson Limited Partners have failed to state a cause of action against the PPPC Defendants on the theory of breach of fiduciary duty. While the Amended Complaint alleges liability as a result of certain indemnification agreements in which Parker & Parsley agreed to indemnify the DOC Defendants against claims arising out of the Transaction, these agreements do not give the Plaintiffs standing to bring this claim. The Plaintiffs fail to provide any authority to support the proposition that they have standing to bring such a claim against the PPPC Defendants. Instead, they assert policy reasons that it would work judicial inefficiency if this claim were dismissed.
The Damson Limited Partners correctly assert that potentially it would require two trials in order to recover against the PPPC Defendants on this claim. However, this inefficiency is neither inevitable nor necessary because the DOC Defendants could implead the PPPC Defendants as third-party defendants pursuant to Rule 14, Fed. R. Civ. P., and the DOC Defendants have a genuine interest in doing so. The policy concerns raised by the Plaintiffs are adequately addressed through the procedural mechanism of third-party practice under Rule 14. While this procedure remains within the discretion of the DOC Defendants, the Plaintiffs have provided no justification for this Court to intervene and circumvent the Rule 14 mechanism.
B. Negligent Misrepresentation
"Under New York law, plaintiffs may not sue for negligent misrepresentation unless they are in some kind of privity or similar relationship with defendants. Foreseeable reliance on the misrepresentations is not enough." Crazy Eddie, 702 F. Supp. at 982. See also Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 551-53, 493 N.Y.S.2d 435, 443-44, 483 N.E.2d 110, 118 (1985); White v. Guarente, 43 N.Y.2d 356, 361, 401 N.Y.S.2d 474, 477, 372 N.E.2d 315, 318 (1977).
According to the allegations of the Amended Complaint, the Damson Limited Partners had just the sort of special relationship with the PPPC Defendants, as statutory sellers pursuant to § 12(2) of the 1933 Act, as well as the DOC Defendants, which gives rise to liability for negligent misrepresentation.
Therefore, the Damson Limited Partners claims alleging negligent misrepresentation by both the PPPC and DOC Defendants are sufficient, and the Defendants' motions to dismiss these claims are denied.
C. Common Law Fraud
In light of the sufficiency of the Plaintiffs' statutory allegations of common law fraud against the PPPC and DOC Defendants, the motions to dismiss the pendant state common law claim for fraud based on these same allegations are denied. Similarly, because the statutory fraud allegations against Smith Barney are insufficient, the pendant state common law claim for fraud based on these same allegations also are dismissed.
For the foregoing reasons, Smith Barney's motion to dismiss all claims against it is granted; the DOC and PPPC Defendants' motions to dismiss the claims brought pursuant to the 1933 and 1934 Acts are denied; the PPPC Defendants' motion to dismiss the pendant state law claim for breach of fiduciary duty is granted; the PPPC Defendants' motions to dismiss the pendant state law claims for negligent misrepresentation and fraud are denied; the DOC Defendants' motions to dismiss the pendant state law claims for breach of fiduciary duty is granted as to those Damson Limited Partners who owned investment units in Damson 1985-1 and Damson 1985E-1, and is denied as to those Damson Limited Partners who owned investment units in Damson Energy, Damson Income, and Damson Institutional; and the DOC Defendants' motions to dismiss the pendent state law claims for negligent misrepresentation and fraud are denied.
It is so ordered.
New York, N. Y.
December 9, 1992
ROBERT W. SWEET