Defendants Moric Ostreicher, Ostreicher Family Partnership, Norman Rabenstein, Allied Extruders, Inc., Eugen Gluck, Gluck Family Partnership, Armin Kaufman, Evan Litton and Arthur Cohen ("defendants") have moved for an order, pursuant to Rule 12(b)(6)
and Rule 56, Fed. R. Civ. P., dismissing the complaint in the above-captioned action and granting summary judgment to defendants. For the reasons that follow, the motion is denied.
In April 1986, defendants allegedly embarked on a scheme to fraudulently sell Favorite Plastics Corp. ("Favorite") at an artificially high price. This scheme was based on the general business principle that the price a potential buyer is willing to pay for a company is based on a multiple of that company's reported earnings. It is alleged that defendants fraudulently inflated Favorite's earnings, thereby ensuring that Favorite would sell at a higher price and increasing defendants' profits from the sale of Favorite.
In the spring of 1986, Lawrence M. Powers ("Powers" or "plaintiff"), then Chairman of the Board and Chief Executive Officer of Spartech Corporation ("Spartech") entered into negotiations for Spartech to purchase Favorite. For reasons not relevant to this decision, these negotiations eventually broke off.
In the spring and summer of 1987, negotiations for the purchase of Favorite by Spartech resumed. At a meeting in July, 1987, Powers provided defendants with a Spartech proxy statement, dated March 12, 1987 and a Spartech prospectus, dated April 22, 1987, which described Powers' role and control position in Spartech.
The prospectus indicated that, as a result of a voting agreement between a major stockholder, TCW Fund, and Powers ("the Voting Agreement"), plaintiff's approval
was necessary before Spartech could enter into any merger, acquisition, new business endeavor, new stock issuance or other like transaction.
In July 1987, defendants furnished Powers with unaudited financial statements for Favorite. These statements showed a marked increase in operating earnings from the previous year and were subsequently certified by Favorite's auditors, Laventhol and Horwath. Spartech's outside auditors reviewed and accepted the certified results. On November 3, 1987, Spartech purchased Favorite for $ 19,750,000.
The parties disagree as to whether Powers was acting solely in a corporate capacity, on behalf of Spartech, or in a corporate as well as an individual capacity during the negotiations for the purchase of Favorite. Furthermore, they disagree whether, assuming Powers was acting in a corporate as well as an individual capacity, defendants were made aware of this fact.
Neither plaintiff nor Spartech became aware of the alleged scheme to artificially inflate Favorite's earnings until late 1990.
On July 2, 1991, Spartech commenced an action before this Court, Spartech Corp. v. Ostreicher, 91 Civ. 4526 (RJW) (the "Spartech Action"), against all of the defendants in the instant action except Evan Litton and Arthur Cohen, asserting RICO and fraud claims. Approximately two months later, Spartech's major investors removed plaintiff from his position as Chairman and Chief Executive Officer, giving as their primary reason the decline in the value of their investments in Spartech. Plaintiff's settlement agreement made in connection with the termination of his employment agreement with Spartech (the "Settlement Agreement") included a provision that plaintiff would supervise the Spartech Action. The Settlement Agreement also provided that plaintiff would receive for these services 40% of the net proceeds of the Spartech Action.
In July 1992, the Spartech Action was settled for $ 2 million. Of this amount, Powers received $ 529,370.28 as compensation for supervising the Spartech Action.
A. Standards for Granting Summary Judgment Pursuant to Rule 563
Summary judgment may be granted when the moving party establishes "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." Fed. R. Civ. P. 56(c); Rosen v. Thornburgh, 928 F.2d 528, 532 (2d Cir. 1991). If no rational fact-finder could find in the nonmovant's favor, there is no genuine issue of material fact and summary judgment is appropriate. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). In making this determination, the court should not resolve disputed issues of fact, but rather, while resolving ambiguities and drawing reasonable inferences against the moving party, must assess whether material factual issues remain for the trier of fact. Western World Ins. Co. v. Stack Oil, Inc., 922 F.2d 118, 121 (2d Cir. 1990) (quoting Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986), cert. denied, 480 U.S. 932, 94 L. Ed. 2d 762, 107 S. Ct. 1570 (1987)).
B. Powers' Standing to Sue
Defendants assert that Powers lacks standing to sue in his individual capacity because, during the course of the Favorite acquisition, he was acting solely as an officer and agent of Spartech and therefore no fraud was directed at him individually. In support of this argument, defendants cite to a number of New York cases
which establish the general rule that one acting solely as officer or agent for a corporation does not have standing, as an individual, to sue for fraud.
Plaintiff, arguing that he does have standing to sue in his individual capacity, asserts that defendants have applied the incorrect legal standard and that this Court should look to Restatement (Second) of Torts § 531, which provides that:
one who makes a fraudulent misrepresentation is subject to liability to the persons or class of persons whom he intends or has reason to expect to act . . . in reliance upon the misrepresentation, for pecuniary loss suffered by them through their justifiable reliance in the type of transaction in which he intends or has reason to expect their conduct to be influenced.
Powers contends that, because defendants had "reason to expect" that he would subsequently act in his individual capacity, § 531 establishes the requisite standing to sue. Defendants respond that the New York courts have never adopted the "reason to expect" standard.
The "reason to expect" standard included in § 531 has not always been an element of fraud law. At one time, actions for fraud under the common law required proof that the defendant intended to cause the plaintiff to rely on the misrepresentation. See Globe Communications Corp. v. R.C.S. Rizzoli Periodici, S.p.A., 729 F. Supp. 973, 977 (S.D.N.Y. 1990) (citing Harper, James & Gray, The Law of Torts § 7.2 (1986)). Indeed, Judge Cardozo's landmark opinion in Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), which held that privity was not a necessary element of a fraud claim did not adopt the reason to expect test. However, as the terms of the Restatement (Second) of Torts § 531 make clear, the grounds for liability for fraud have expanded. Under § 531, a defendant who has reason to expect an entity to rely on a fraudulent misrepresentation is now liable to that person, even if the defendant did not intend for the person to rely.
Contrary to defendants' assertions, New York courts and federal courts applying New York law have adopted the reason to expect standard. "Reliance upon fraudulent representations by persons who are not the direct addressees thereof but who may be intended or expected to learn of and act upon such representations will found an action in fraud and deceit." Wechsler v. Hoffman-La Roche, Inc., 198 Misc. 540, 99 N.Y.S.2d 588, 590 (Sup. Ct. 1950), aff'd as modified, 108 N.Y.S.2d 990 (App. Div. 1951); see also RMS International Shipping GmbH v. Stemcor USA, Inc., No. 90 Civ. 4918, 1991 U.S. Dist. LEXIS 9852 at *5, 1991 WL 136035, at *2 (S.D.N.Y. July 18, 1991) ("there is . . . no requirement that the plaintiff plead that the defendant intended specifically to defraud it"); Berkowitz v. Baron, 428 F. Supp. 1190, 1196 (S.D.N.Y. 1977) ("in order for [defendant] to be liable to these plaintiffs, they must be within the class of persons that [defendant] should reasonably have expected to rely on the [discredited financial] statements"); American Elec. Power Co. v. Westinghouse Elec. Corp., 418 F. Supp. 435, 450 (S.D.N.Y. 1976) (a third-party beneficiary to a contract "may recover for defendant's alleged fraudulent misrepresentation upon a showing that such plaintiff was within the class of persons whom the defendant should reasonably have expected would rely on the statements") (citing Restatement (Second) of Torts § 531 (Tent. Draft No. 10 (1964))).
Defendants do not dispute that, under New York law, the intent prong of § 531 creates liability for a fraudulent misrepresentation. For example, the Second Circuit has held, applying New York law, that "[a] third party can recover damages for a fraudulent misrepresentation if he can establish that he relied upon it to his detriment, and that the defendants intended the misrepresentation to be conveyed to him." Peerless Mills, Inc. v. American Tel. & Tel. Co. v. Hertz, Warner & Co., 527 F.2d 445, 450 (2d Cir. 1975) (emphasis added) (citing Restatement (Second) of Torts § 531 (Tent. Draft No. 10 (1964))); see Rosen v. Spanierman, 894 F.2d 28, 33 (2d Cir. 1990) (quoting Peerless Mills); Mergentime/White v. Metcalf & Eddy of New York, Inc., No. 89 Civ. 7188, 1993 WL 72902, at *6 (S.D.N.Y. March 11, 1993) (quoting Peerless Mills); see also Ultramares Corp. v. Touche, 255 N.Y. at 187 ("[a] representation, even though knowingly false, does not constitute ground for an action of deceit unless made with the intent to be communicated to the persons . . . who act upon it to their prejudice").
Moreover, the "intent" standard of § 531 has been given an expansive reading in the context of a fraudulent misrepresentation claim:
A result is intended if the actor either acts with the desire to cause it or acts believing that there is a substantial certainty that the result will follow from his conduct. Thus one who believes that another is substantially certain to act in a particular manner as a result of a misrepresentation intends that result, although he does not act for the purpose of causing it and does not desire to do so.