that it provides no support for the plaintiffs' position. In GICC, the primary injured party was TFG, the debtor of the plaintiff, but there was no realistic possibility that TFG would bring suit "for the law's vindication." Holmes, 503 U.S. at 273. As the Court of Appeals noted, "TFG released [the defendant] from all claims that TFG might have had against [the defendant]. TFG's officers and directors resigned. TFG thus was cast adrift without recourse against" the defendant, its subsidiaries, or controlling persons. GICC, 30 F.3d at 291. GICC thus represents the anomalous case where the primary injured party lacks the ability to sue. Suit by the derivatively injured party may be the only means to an equitable resolution in such a case; significantly, there exists no risk of double recovery. In the present case, however, no danger exists that IPM Products Corporation, IPM Products Company, or HIG will be unable or unwilling to bring suit; as mentioned above, the directly injured parties have already commenced arbitration proceedings against the defendants.
At oral argument, plaintiffs' counsel belatedly indicated that plaintiffs were relying on Department of Economic Development v. Arthur Andersen & Co., 924 F. Supp. 449 (S.D.N.Y. 1996) and cases cited therein in support of his contention that remotely injured shareholders can maintain a cause of action if the fraud induces them to make their initial purchase of shares. See id. at 464 (citing In re Colonial Ltd. Partnership Litig., 854 F. Supp. 64, 105 (D.Conn. 1994); Friedman v. Hartmann, 1994 U.S. Dist. LEXIS 3404, No. 91 Civ. 1523, 1994 WL 97104, at *3 (S.D.N.Y. March 23, 1994); Dayton Monetary Assoc. v. Donaldson, Lufkin & Jenrette Secs. Corp., 1993 U.S. Dist. LEXIS 14435, No. 91 Civ. 2050, 1993 WL 410503, at *2 (S.D.N.Y. October 14, 1993)). Each of these four cases, however, represents nothing more than the courts' allegiance to the rule stated in Ceribelli v. Elghanayan, 990 F.2d 62 (2d Cir. 1993) that a plaintiff can maintain an action if he suffers an injury that is separate and distinct from the injury sustained by the directly injured corporation. I have no quarrel with that rule, or its application in the cited cases, but it is simply not applicable in the present case.
In Dayton Monetary Assocs. v. Donaldson, Lufkin & Jenrette, for example, Judge Stanton distinguished plaintiffs' RICO claims from their claims based on fraudulent misrepresentation. 1993 U.S. Dist. LEXIS 14435, 1993 WL 410503, at *1, *2. The reason for this distinction is clear: the fraudulent misrepresentation caused no injury to the limited partnership (which could actually have been flattered at the overstatement of its worth) but did damage the purchasers. Id. at *2. The RICO causes of action, by contrast, arose from injuries directly to the limited partnership which damaged the shareholders only by decreasing the value of their investment. Id. at *1. The plaintiffs therefore lacked standing to sue under RICO but had the necessary standing to bring suit on the basis of the allegedly fraudulent misrepresentations.
Each of the other cases cited by plaintiffs involves a similar paradigm: the defendant allegedly made misrepresentations concerning the value of a corporation as an investment, and the plaintiffs purchased shares in the very entity whose worth was misrepresented, to their detriment. See Department of Economic Development, 924 F. Supp. at 454-55; In re Colonial Limited Partnership Litig., 854 F. Supp. at 78-79; Friedman v. Hartmann, 1994 U.S. Dist. LEXIS 3404, 1994 WL 97104, at *1. In such a case, because there is no identity of interest between the entity and the investors, there exists no risk of double recovery. This case is manifestly distinct. Here, accepting plaintiffs' allegations as true, the defendants misrepresented the value of the IPM Entities. Plaintiffs, in reliance on that misrepresentation, made loans to and bought a minority of the shares of IPM Products Corporation and IPM Products Company. Those intermediary companies, and not plaintiffs, were the direct purchasers of the IPM Entities and are the directly injured parties in this transaction. Because plaintiffs have plainly suffered no injury that is separate and distinct from the alleged damage to IPM Corporation and IPM Company, they lack standing to sue.
Under the unique circumstances of the present case, Jackson National should await the outcome of the arbitration brought by the directly injured parties. I believe that several factors counsel against the maintenance of an independent suit by Jackson National at this time, another of which will be discussed below. Primarily, however, I hearken back to the concern that has always troubled me in this action -- the potential for duplicative recoveries. As no less venerable an authority than Justice Holmes has counseled, "The general tendency of the law, in regard to damages at least, is not to go beyond the first step." Southern Pacific Co. v. Darnell Taenzer Lumber Co., 245 U.S. 531, 533, 62 L. Ed. 451, 38 S. Ct. 186 (1918). Jackson National has failed to present any justification for taking the perilous "second step" in this case, and the risks of doing so are apparent.
III. Jackson National's Damages Are Speculative and Unprovable
Closely linked to the problems created by the derivative nature of the plaintiffs' claims are the difficulties created by the speculative character of their damages at this time. Any funds recovered by IPM Products Corporation and IPM Products Company will presumably be available to satisfy Jackson National's claim and will reduce its compensable injury correspondingly. Moreover, none of the notes at issue is due before the year 2002. Plaintiffs have not pleaded that any acceleration has taken place; the extent of their loss at this time is thus even more nebulous.
In Bankers Trust, for example, the Court of Appeals examined the RICO claims of a creditor who alleged that it suffered injury as a result of the fraud committed by its debtor's officers in connection with the bankruptcy of the debtor. Although the court did hold that the plaintiff "had standing to bring a RICO claim, regardless of the fact that a bankrupt BAC [the debtor] might also have suffered an identical injury for which it has a similar right of recovery," Bankers Trust, 859 F.2d at 1101,
the Court of Appeals went on to dismiss "any claim for relief based on the lost-debt injury." Id. at 1106. The court based the dismissal not on the allegedly derivative nature of the plaintiff's claims, but on the fact that "damages in this category are 'unrecoverable,' at least at this time, because 'their accrual is speculative" and 'their amount and nature unprovable.'" Id. (quoting Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 339, 28 L. Ed. 2d 77, 91 S. Ct. 795 (1971)).
In particular, the court noted that any recovery of the fraudulently transferred assets by the bankruptcy trustee would reduce Bankers Trust's injury. Under the circumstances, the Court of Appeals held that:
At this time, it is impossible to determine the amount of damages that would be necessary to make plaintiff whole, because it is not known whether some or all of the fraudulently transferred funds will be recovered by the corporation. Should they be recovered, Bankers would benefit along with BAC's other creditors and its injury would decrease. As a result, the damages in this area are "speculative" and "unprovable". . .; any claim for relief based on the lost-debt injury must therefore be dismissed without prejudice.