The opinion of the court was delivered by: MICHAEL B. MUKASEY
MICHAEL B. MUKASEY, U.S.D.J.
Plaintiffs Vartkes Barsam, George Chamchikian, Elkay Investments, Cornell J. Lazar, Burton Saltzman, Soonja Sue Enterprises, John J. Parven, John N. Parven, Rita Parven, and Parkra Investments, Inc. (collectively "plaintiffs") sue defendants Pure Tech International, Inc., Yitz Grossman, and Werner Haase under RICO and state law. Plaintiffs allege breach of contract, fraudulent inducement of contract, breach of fiduciary duty, improper termination of preemptive rights and related claims arising out of various alleged wrongdoings. Plaintiffs ask also that defendant American Stock Transfer & Trust Company, the escrow agent for defendants Pure Tech, be directed to release escrowed shares to plaintiffs.
Defendants have submitted a motion to dismiss claims five through seven, nine, ten, and twelve for failure to state a claim upon which relief may be granted, pursuant to Fed. R. Civ. P. 12(b)(6), and for failure to plead fraud with particularity, pursuant to Fed. R. Civ. P. 9(b). For the reasons set forth below, defendants' motion is denied with respect to claims five through seven, ten, and twelve, but granted with respect to claim nine. Plaintiffs George Chamchikian and Elkay Investments have moved, pursuant to Fed. R. Civ. P. 56(c), for summary judgment on claim eleven, seeking restoration of their preemptive rights. For the reasons set forth below, plaintiffs' motion is granted.
Plaintiffs, who were holders of 10.7% of the outstanding shares of Pure Tech, assert in their complaint various fraud claims against the defendants. Plaintiffs are all investors in Pure Tech, a company that, among other things, recycles plastic bottles and other used plastic receptacles, as well as glass and metals. (Complt. P 13) All of plaintiffs' allegations stem from Pure Tech's March 1989 public offering, underwritten by D. H. Blair & Co. ("Blair"). The complaint alleges that in August and September 1988, defendants Grossman and Haase told plaintiffs that Blair required 75% of their shares to be deposited with an escrow agent on the date of the public offering. (Complt. P 25) One of the alleged purposes of the public offering was to raise money for the construction of a new plastics recycling plant. (Complt. PP 22-23) The Prospectus proclaimed that the "majority of the Company's resources will be devoted to the development and construction of the commercial plant." (RICO Case Statement, Exh. 2 at 13)
The Complaint asserts further that on March 29, 1989, the day before the offering was to commence, defendant Haase, on behalf of Pure Tech, insisted that plaintiffs (other than Parkra) "waive" their preemptive rights. (Complt. P 36) Plaintiffs (other than George Chamchikian and Elkay investments) agreed to do this. On the eve of the public offering, Pure Tech amended its Certificate of Incorporation to eliminate shareholders' preemptive rights. Plaintiffs allege that the amendment was "invalid, unlawful, and ultra vires." (Complt. P 38)
On March 30, 1989, the offering was complete, and plaintiffs simultaneously escrowed their shares. The Escrow Agreement provided for the release of the shares upon the occurrence of certain events:
(i) 600,000 shares will be released to the stockholders if during the 18 months after the date of this Prospectus, the closing bid price of the Common Stock, as hereinafter defined, for 10 consecutive trading days is in excess of $ 1.25 per share.
(ii) 2,800,000 shares will be released to the Stockholders if and when the Company achieves Minimum Pre-tax Income, as hereinafter defined, of either $ 4,000,000 during the year ending December 31, 1991, or $ 5,000,000 during the year ending December 31, 1992.
(iii) 5,850,000 shares (less any shares released under (i)) will be released to the Stockholders if and when (A) the Company achieves Minimum Pre-tax Income of either $ 3,500,000, $ 5,000,000 or $ 6,000,000 during the years ending December 31, 1991, 1992 or 1993, respectively, or (B) during the 18 months after the date of this Prospectus the closing bid price of the Common Stock, as hereinafter defined, for 20 consecutive trading days is in excess of $ 2.50 per share.
(iv) all shares held in escrow will be released to the Stockholders if and when (A) the Company achieves Minimum Pre-tax Income of $ 6,000,000, $ 8,000,000 or $ 9,500,000, during the years ending December 31, 1991, 1992, or 1993, respectively or (B) during the 36 months after the date of this Prospectus, the closing bid price of the Common Stock shall average in excess of $ 3.50 per share for 20 consecutive trading days.
If shares are released under (ii), no more than 3,050,000 shares will be released under (iii) . . . .
If none of the foregoing earnings or market price levels are attained, the Escrow Shares will be contributed to the capital of the Company on the later of 39 months after the date of this Prospectus or May 31, 1994.
Rico Case Statement, Exh. 2 at 25-26.
Plaintiffs contend that defendants did not, and never intended to build the recycling plant, and that as a result of this inaction, the shares were not released from escrow and plaintiffs suffered monetary damages.
The fifth claim alleges that Pure Tech, Grossman and Haase made several false representations in the Prospectus and in personal communications with plaintiffs "concerning the building of the Plant through the use of $ 2,500,000 of the $ 5,126,000 net proceeds of the Offering, including . . . the representation that the Plant would be constructed in late 1989 utilizing the aforesaid net proceeds, and the representations that Pure Tech was currently developing engineering plans for the Plant." (Complt. P 105) Plaintiffs claim further that in mid-September 1988, Grossman and Haase informed two plaintiffs that there was a "95% probability" that the escrow conditions would be met. (Complt. P 106) Plaintiffs allege that these representations were "material and false when made, and known to be false by Pure Tech, Grossman and Haase when made . . . since each of [the] Defendants knew at all times . . . that Pure Tech would not in fact build the Plant, as promised." (Id.)
In support of this claim, plaintiffs allege that the money ear-marked for the plant was never used, no land or building for the plant was ever purchased or leased, engineering plans were never developed, no steps were taken to solicit bids for the plant, and Pure Tech never sought local zoning or other regulatory permission to build the plant. (Complt. P 110)
The sixth claim alleges fraudulent concealment of defendants' knowledge that the plant would not be built, and defendant Grossman's alleged New York Stock Exchange violations and his permanent bar from the securities industry. Plaintiffs claim that if they had known of these facts they "would not have escrowed their shares." (Complt. P 123)
The seventh claim alleges that "in view of the confidential and fiduciary relationship" between plaintiffs and defendants Grossman and Haase, and considering defendants' superior knowledge and concealment of material facts, "the material and false representations" made by defendants to plaintiffs, relied upon by plaintiffs to their detriment, constituted "constructive" fraud. (Complt. P 127) As a result of this constructive fraud, plaintiffs allegedly suffered damages.
The tenth claim alleges that defendants Pure Tech, Grossman and Haase, through false misrepresentation, induced plaintiffs (other than Chamchikian and Elkay Investments) to waive preemptive rights and enter into the escrow agreements. (Complt. PP 150-53) Plaintiffs reassert that if they had known that the representations were false, they would not have agreed to waive their preemptive rights. Plaintiffs seek either monetary damages or full restoration of preemptive rights.
The twelfth claim alleges that defendants Grossman and Haase made material false misrepresentations to plaintiff Parkra that induced Parkra to agree to receive a promissory note rather than 200,000 shares of Pure Tech common stock. (Complt. PP 164-67) Plaintiff Parkra seeks either monetary damages or 200,000 shares of Pure Tech common stock in exchange for the promissory note. (Complt. P 168)
Fed. R. Civ. Proc. 9(b) provides that "in all averments of fraud . . . the circumstances constituting fraud . . . shall be stated with particularity. Malice, intent, knowledge and other conditions of mind of a person may be averred generally." To comply with Rule 9(b), a "complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where the statements were made, and identify those responsible for the statements." Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989); see DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir. 1987).
"The court's function on a Rule 12(b)(6) motion is not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Festa v. Local 3 Int'l Bd. of Elec. Workers, 905 F.2d 35, 37 (2d Cir. 1990). Thus, a motion to dismiss must be denied "unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Scheuer v. Rhodes, 416 U.S. 232, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Morales v. New York State Dep't of Corrections, 842 F.2d 27, 30 (2d Cir. 1988). In deciding a motion to dismiss, the court must accept the plaintiff's allegations of fact as true, together with such reasonable inferences as may be drawn in his favor. Papasan v. Allain, 478 U.S. 265, 283, 92 L. Ed. 2d 209, 106 S. Ct. 2932 (1986). Nevertheless, the complaint must set forth enough information to suggest that relief would be based on some recognized legal theory. Telectronics Proprietary, Ltd. v. Medtronic, Inc., 687 F. Supp. 832, 836 (S.D.N.Y. 1988). "The District Court has no obligation to create, unaided by plaintiff, new legal theories to support a complaint." District of Columbia v. Air Florida, Inc., 243 U.S. App. D.C. 1, 750 F.2d 1077, 1081-82 (D.C. Cir. 1984).
In addition, in deciding a motion to dismiss, a court in the Second Circuit may consider documents which form the basis of allegations of fraud if the documents are "integral to the complaint." I. Meyer Pincus & Assocs., P.C. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d. Cir. 1991) (affirming dismissal of complaint where prospectus was considered); see also Kramer v. Time Warner Inc., 937 F.2d 767 (2d Cir. 1991); Sable v. Southmark/Envicon Capital Corp., 819 F. Supp. 324, 328 (S.D.N.Y. 1993); Adler v. Berg Harmon Assocs., 816 F. Supp. 919, 922 n. 3 (S.D.N.Y. 1993); Ferber v. Travelers Corp., 785 F. Supp. 1101, 1103-04 n. 6 (D. Conn. 1991); United States v. District Council, 778 F. Supp. 738, 749 n. 3 (S.D.N.Y. 1991).
In New York, the elements of a claim for fraudulent inducement are: (1) representation of a material fact; (2) falsity of that representation; (3) scienter; (4) reliance; and (5) damages. Mallis v. Bankers Trust Co., 615 F.2d 68, 80 (2d Cir. 1980), cert. denied, 449 U.S. 1123, 67 L. Ed. 2d 109, 101 S. Ct. 938; (1981.); Channel Master Corp. v. Aluminium Limited Sales, Inc., 4 N.Y.2d 403, 176 N.Y.S.2d 259, 262, 151 N.E.2d 833 (1958);. Tyson v. Cayton, 784 F. Supp. 69, 72 (S.D.N.Y. 1992)
Defendants' motion to dismiss the fifth claim attacks most strongly the third and fifth elements: scienter and damages. Allegations of scienter "are not subjected to the more exacting consideration applied to the other components of fraud." Ouaknine v. MacFarlane, 897 F.2d 75, 81 (2d Cir. 1990). Despite the requirement that fraud be pleaded with particularity, allegations may be based on information and belief "when facts are peculiarly within the opposing party's knowledge." Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990). Such a relaxed position is warranted when the defendant is a corporation because plaintiffs will often know "little of the ways in which the corporation's internal affairs are conducted." DiVittorio, 822 F.2d at 1248. The scienter element can be satisfied by alleging facts that reveal a motive for committing fraud and a clear opportunity for doing so. Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir.), cert. denied, 484 U.S. 1005, 98 L. Ed. 2d 650, 108 S. Ct. 698 (1987).
Plaintiffs set forth sufficient actions by defendants to support the scienter requirement. The complaint alleges that Pure Tech failed to take the "customary and necessary steps" to open the plant on schedule, including negotiations for construction contracts, feasibility studies, and preparatory budgets. (Complt. P 110) Plaintiffs' allegations are supported by the statements of former directors of the corporation, Frank Tammera, Sr. and Stanley Levy. (RICO Case Statement at 31-35, 37-38) The complaint establishes also a motive, such as defendants' interest in taking control of the company from the Tammera family, Complt. P 56, and the alleged "showering" of options and warrants granted ...