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May 28, 1993



The opinion of the court was delivered by: ROBERT J. WARD

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) *fn1" 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 *fn2" 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. ...

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