The opinion of the court was delivered by: MUKASEY
MICHAEL B. MUKASEY, U.S.D.J.
David W. Allard, Jr. ("Trustee"), the bankruptcy trustee for DeLorean Motor Company ("DMC"), brings this securities fraud action against the bankrupt company's former auditors, the accounting firm Arthur Andersen & Co. ("AA"). AA has moved for summary judgment on all 12 claims in the Trustee's Second Amended Complaint. As explained below, the motion is granted in part and denied in part.
In a companion case also before the court, Department of Economic Dev. v. Arthur Andersen & Co. ("the DED Action"), the British government has sued AA for damages arising from investments in DMC's Northern Ireland manufacturing plant. The facts giving rise to both actions are summarized in an opinion ("the DED Opinion") also issued today addressing AA's motion for summary judgment on all claims in the DED Action. See No. 85 Civ. 1292, Slip. Op. at 1-5 (S.D.N.Y. Apr. 2, 1996). Familiarity with the DED Opinion is assumed for present purposes.
The Trustee commenced this action in October 1984. The Trustee's Second Amended Complaint (Zirin Aff. Ex. 3), filed in September 1988, asserts 12 claims: (1) malpractice, (2) negligence, (3) breach of contract, (4) unjust enrichment, (5) common law fraud, (6) aiding and abetting common law fraud and/or breach of a fiduciary duty, (7) securities fraud under Rule 10b-5, (8) aiding and abetting securities fraud under Rule 10b-5, (9) violation of 18 U.S.C. § 1962(c) (RICO), (10) violation of 18 U.S.C. § 1962(a) (RICO), (11) aiding and abetting RICO violations, and (12) violation of Mich. Comp. Laws § 600.2919a (1992).
The parties disagree as to whether Michigan or New York law governs the state common law claims. The Trustee insists that Michigan law applies because DMC was a Michigan corporation and because most of the audit work under scrutiny here was performed by Michigan-based AA partners in AA's Detroit office. (Pl. Mem. at 117-19) AA argues that New York law should apply, primarily because most of the commercial transactions incident to the GPD contract occurred in New York. (Def. Rep. Mem. at 19-22) As explained below, resolution of the issues raised here is unaffected by any relevant differences between New York and Michigan law. Therefore it is not necessary at this time to choose the applicable law.
AA argues for summary judgment on the issue of damages on several grounds equally applicable to all or most of the claims in the Second Amended Complaint.
First, AA argues that the Trustee cannot prove loss causation for any of his claims because economic recession, not the alleged fraud, caused the demise of DMC. (Def. Mem. at 5) For the reasons stated in the DED Opinion, Slip. Op. at 26-29, I find that material issues of fact preclude summary judgment on that ground.
Second, AA asks the court to grant summary judgment as a sanction against the Trustee for the Trustee's allegedly unresponsive answers to AA's interrogatories. (Def. Mem. at 6-12) AA complains that the Trustee has refused to explain how he calculated the $ 100 million ad damnum figure in the complaint. (Second Am. Compl. P 159)
Under Fed. R. Civ. P. 37(b)(2), a court may sanction a party who "fails to obey an order to provide or permit discovery" by ordering a judgment against that party. However, that provision has no application here because AA has not moved to compel the Trustee to provide more information. See Salahuddin v. Harris, 782 F.2d 1127, 1131 (2d Cir. 1986) (court may not order a dismissal under Rule 37(b)(2) unless a court order is in effect and has been violated). Of course, the Trustee still is subject to Fed. R. Civ. P. 56(e), which requires a nonmovant plaintiff to "set forth specific facts showing that there is a genuine issue for trial" to defeat a motion for summary judgment. But that provision does not compel a plaintiff to provide an exact dollar figure for his damages before trial; the plaintiff need show only that he did in fact suffer some damages. See V.S. International, S.A. v. Boyden World Corp., No. 90 Civ. 4091, 1993 U.S. Dist. LEXIS 2586, *20, 1993 WL 59399, *7 (S.D.N.Y. Mar. 4, 1993) ("if plaintiffs demonstrate a genuine issue of fact as to the existence of actual damages . . ., then summary judgment . . . is inappropriate even if the precise amount or extent of the damages is still somewhat uncertain"); Carswell Trucks, Inc. v. International Harvester Co., 334 F. Supp. 1238, 1239 (S.D.N.Y. 1971) ("it is not necessary that the precise amount of damages be readily ascertainable").
Third, AA argues that DMC may not recover the allegedly misappropriated GPD contract proceeds because the limited partners of DRLP, not DMC, supplied those funds to GPD. DMC was DRLP's controlling general partner, but did not supply the funds in question. The limited partners of DRLP were several individual investors. See DED Opinion, Slip. Op. at 2. The Trustee, reasoning by analogy to the corporate law doctrine of "piercing the corporate veil," responds that DRLP was the alter ego of DMC, and that therefore DMC can recover for the losses suffered by the DRLP limited partners. (Pl. Mem. at 121)
The Trustee's analogy is unpersuasive. The Trustee correctly observes that DRLP was dominated by DMC, and that domination by a controlling shareholder can be grounds for disregarding a corporation's separate existence. But DRLP was a partnership, not a corporation. DRLP was organized under Michigan law, which provides that limited partners must refrain from "taking part in the control of the business" in order to enjoy limited liability for the obligations of the partnership. Mich. Camp. Laws § 449.1303 (1992). Contrary to the Trustee's argument that the general partner's control over the partnership amounts to an abuse of the partnership form, that control is in fact mandated by state law. Accordingly, there is no reason to disregard the entity's separate existence and attribute all of the assets of the limited partners to the unrelated general partner DMC.
As noted above, the funds supplied to GPD ostensibly for research and development were contributed by DRLP's limited partners. See DRLP Private Placement Mem., Zirin Aff. Ex. 17 at 37. The limited partners never assigned their claims against AA to DMC or to the Trustee, and in fact prosecuted their own securities fraud action against AA. See Rudolph v. Arthur Andersen & Co., 800 F.2d 1040 (11th Cir.), reh'g denied, 806 F.2d 1070 (11th Cir. 1986), cert. denied, 480 U.S. 946, 94 L. Ed. 2d 790, 107 S. Ct. 1604 (1987). It follows that the Trustee has no standing to assert the rights of the DRLP limited partners, and that summary judgment must be granted in favor of AA to the extent the Trustee attempts to recover on their behalf.
Fourth, AA asserts that it cannot be liable for damages caused by misappropriations occurring after November 30, 1980. That was the last day of the fiscal year covered by AA's final audit report, which was issued in early 1981.
Although accountants may have a duty to "correct their own statements which later become false or misleading," In re MTC Electronic Technologies Shareholders Litig., 898 F. Supp. 974, 988 (E.D.N.Y. 1995), an accountant's mere possession of nonpublic information as to client misconduct does not necessarily give rise to a duty to disclose. Cf. Basic, Inc. v. Levinson, 485 U.S. 224, 238 n.17, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988) ("silence, absent a duty to disclose, is not misleading under Rule 10b-5"). However, the Trustee does not argue here that AA had a continuing duty to disclose new misconduct after the conclusion of the audit engagement. Instead, the Trustee argues that the post-1980 misappropriations were a foreseeable consequence of AA's failure to make adequate disclosures in its earlier audit reports. As explained in the DED Opinion, there is an issue of fact as to whether AA's pre-1981 audit reports were fraudulently silent as to serious misconduct. See Slip. Op. at 24-26. DeLorean had the opportunity to misappropriate funds after 1980 only because his earlier misconduct was not fully disclosed to persons such as the directors of DMC who were in a position to stop it. If the Trustee can prove at trial that AA fraudulently or negligently failed to disclose knowledge of DeLorean's misconduct in its pre-1981 audit reports, then AA may be liable for later misappropriations. That conclusion follows from the common law principle that tortfeasors generally are responsible for all injuries proximately caused by their breaches of duty. See, e.g., Steitz v. Gifford, 280 N.Y. 15, 20, 19 N.E.2d 661, 664 (1939); Law Offices of Lawrence J. Stockler, P.C. v. Rose, 174 Mich. App. 14, 436 N.W.2d 70, 81 (Mich. Ct. App. 1989). Summary judgment as to damages caused by post-1980 misappropriations therefore is not appropriate.
Fifth, AA contends that the Trustee cannot recover lost profits because he has offered only vague speculation as to how DMC would have fared absent the alleged misconduct. The Trustee answers that he is not required to provide precise estimates of DMC's lost profits.
Federal securities fraud plaintiffs generally may recover only "actual damages." 15 U.S.C. § 78bb(a) (§ 28(a) of the Securities Exchange Act of 1934) (1994). The Second Circuit has allowed "benefit of the bargain" damages under Rule 10b-5 only in the limited context "where misrepresentation is made in . . . tender offer and proxy solicitation materials as to the consideration to be forthcoming upon an intended merger." Osofsky v. Zipf, 645 F.2d 107, 114 (2d Cir. 1981). Otherwise, "a plaintiff's lost future profits are not recoverable in Rule 10b-5 actions." Three Crown Ltd. Partnership v. Salomon Bros., Inc., 906 F. Supp. 876, 890 (S.D.N.Y. 1995).
Lost profits are similarly unavailable in fraud actions under New York law; plaintiffs may recover only "out of pocket" damages that can be ascertained with reasonable certainty. Three Crown, 906 F. Supp. at 891; Nager Elec. Co. v. E.J. Electric Installation Co., 128 A.D.2d 846, 846-47, 513 N.Y.S.2d 766, 767 (2d Dep't 1987). It does not appear that any Michigan court has specifically considered the recoverability of lost profits in fraud actions, but Michigan courts do follow the general rule that damages in fraud cases must be ...