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FROMER v. YOGEL
March 23, 1999
DAVID M. FROMER AND THE FOUR DAUGHTERS TRUST, PLAINTIFFS,
LARRY D. YOGEL, MRS. LARRY D. YOGEL, NTG PARTNERS, OMNI FINANCIAL, L.P., LEO S. SCHWARTZ, WILMINGTON TRUST COMPANY AND WILLIAM T. SAUNDERS, DEFENDANTS.
The opinion of the court was delivered by: Scheindlin, District Judge.
Having invested in excess of $1.3 million in several product
arbitrage companies, Plaintiff David M. Fromer ("Fromer")
allegedly discovered that these companies were actually part of
an elaborate "Ponzi" scheme. Having then been sued in a class
action by other third-party investors caught up in the scheme
(the Restifo action), Fromer and the other Restifo defendants
negotiated a settlement agreement, ending the Restifo action as
to all parties.*fn1 Then, having paid the Restifo plaintiffs
approximately $2.3 million to settle their claims, Fromer and the
Four Daughters Trust ("FDT") (together "Plaintiffs" in this
action) allege that the other Restifo defendants refused to
reimburse Plaintiffs for amounts allegedly due them under the
Plaintiffs are now seeking both the return of their initial
investments in the arbitrage companies and the reimbursement of
money they paid to settle the Restifo lawsuit. Plaintiffs bring
federal claims for contribution based on violations of § 10(b) of
the 1934 Securities Exchange Act and Rule 10b-5 promulgated
thereunder against Defendants Larry D. Yogel ("Yogel"), Mrs.
Larry D. Yogel ("Mrs.Yogel"), Leo S. Schwartz ("Schwartz"),
Wilmington Trust Company ("Wilmington"), William T. Saunders
("Saunders") and Omni Financial, L.P. ("Omni"), and federal
claims for indemnity based on Exchange Act violations
against Yogel, Mrs. Yogel, Wilmington, Saunders and Omni.
Plaintiffs also assert numerous pendent state law claims under
theories of contract, fraud, negligence and equitable
Subject matter jurisdiction is premised upon a federal
question, 28 U.S.C. § 1331, and principles of supplemental
jurisdiction, 28 U.S.C. § 1367(a).
Defendants move to dismiss the claims against them pursuant to
Fed.R.Civ.P. 9(b) and 12(b)(6), claiming that the Complaint fails
to plead fraud with particularity, fails to state a claim upon
which relief can be granted, or states claims which are
I. Standards of Review Under Rule 12(b)(6)
In considering a Rule 12(b)(6) motion to dismiss, a district
court must limit itself to "facts stated in the complaint or in
documents attached to the complaint as exhibits or incorporated
in the complaint by reference." Newman & Schwartz v. Asplundh
Tree Expert Co., 102 F.3d 660, 661 (2d Cir. 1996). Dismissal of
a complaint pursuant to Rule 12(b)(6) is proper "only where it
appears beyond doubt that the plaintiff can prove no set of facts
in support of the claim which would entitle him to relief."
Scotto v. Almenas, 143 F.3d 105, 109-10 (2d Cir. 1998)
(quoting Branham v. Meachum, 77 F.3d 626, 628 (2d Cir.
1996) (internal quotations omitted)). "The task of the court in
ruling on a Rule 12(b)(6) motion `is merely to assess the legal
feasibility of the complaint, not to assay the weight of the
evidence which might be offered in support thereof.'" Cooper v.
Parsky, 140 F.3d 433, 440 (2d Cir. 1998) (quoting Ryder Energy
Distribution Corp. v. Merrill Lynch Commodities, Inc.,
748 F.2d 774, 779 (2d Cir. 1984)). Thus, in deciding such a motion, the
court must accept as true all material facts alleged in the
complaint and draw all reasonable inferences in the nonmovant's
favor. See Thomas v. City of New York, 143 F.3d 31, 36 (2d Cir.
1998). Nevertheless, "[a] complaint which consists of conclusory
allegations unsupported by factual assertions fails even the
liberal standard of Rule 12(b)(6)." De Jesus v. Sears, Roebuck &
Co., 87 F.3d 65, 70 (2d Cir. 1996) (internal quotations
The facts described in this section are drawn exclusively from
the allegations in the Complaint. At this time, they are presumed
to be true. Plaintiff Fromer invested more than $1.3 million in
several companies, including the Premium Sales Corporation
("PSC"), Premium Sales LDL ("LDL") and Premium Sales RMS ("RMS")
(together, the "Premium Sales entities"). See Complaint
("Cmplt.") at ¶ 1. With this investment, Fromer became one of
three shareholders in PSH Management, Inc. ("PSH"), the corporate
general partner of LDL and RMS. See Cmplt. at ¶¶ 14, 36.
Apparently, Fromer was also involved in the management of the
Premium Sales entities. See Cmplt. at ¶ 55. These companies
engaged in the arbitrage of food, health and beauty products, a
practice known as "diverting."*fn4 While these entities engaged
in some amount of legitimate diverting, their primary source of
funds came from monies received from subsequent investors and
constituted a Ponzi scheme. See Cmplt. at ¶ 19.
Defendants Yogel and Schwartz were the remaining two
shareholders of PSH, with Yogel as President and CEO. See
Cmplt. at ¶¶ 14, 34. Yogel, Mrs. Yogel and Schwartz made material
misrepresentations and omissions regarding the business practices
of the entities to induce Fromer to make his initial investments
in the Premium Sales entities. See Cmplt. at ¶ 2. Defendants
portrayed the entities as a legitimate enterprise when they knew
or should have known that it was a Ponzi scheme. See Cmplt. at
¶¶ 3, 20-23.
Mrs. Yogel worked with Yogel at the Pennsylvania offices of PSH
Management, allegedly running much of the day-to-day operations
of the Premium Sales entities. See Cmplt. at ¶¶ 8, 47-48. In
that capacity she signed false confirmations of purchases and
sales of goods that she knew or should have known did not
actually take place, thereby perpetrating and/or aiding and
abetting the fraud and Exchange Act violations committed by
Yogel. See Cmplt. at ¶¶ 49-50. In addition, Yogel has attempted
to hide his assets from current and potential creditors by
transferring substantial amounts of personal assets to Mrs.
Yogel. See Cmplt. at ¶ 51.
Defendants NTG Partners and Omni Finance, L.P. are Pennsylvania
entities owned and/or controlled by Yogel. Cmplt. at ¶¶ 10, 11.
Yogel purchased his way into the PSC scheme through payments
passed through Omni and NTG to other principals of PSC. See
Cmplt. at ¶ 22. Yogel also solicited investments in PSC through
Omni. See Cmplt. at ¶ 24.
Ultimately, the Premium Sales scheme collapsed. See Cmplt. at
¶¶ 3, 24. On June 9, 1993, the SEC placed PSC into receivership,
resulting in the loss of investments by Fromer and numerous
others. In 1993, several investors commenced the Restifo action
against Fromer, Yogel and Schwartz. See Cmplt. at ¶¶ 4, 45. In
December 1996, all defendants settled the Restifo action for
approximately $2.3 million. See Cmplt. at ¶¶ 4, 46. Fromer
agreed to pay and allegedly did pay the full amount of the
settlement, plus associated fees. See Cmplt. at ¶ 46. During
the settlement negotiations, Yogel and Schwartz acknowledged to
Fromer that they would compensate him for the sums he paid to the
Restifo Plaintiffs. See Cmplt. at ¶ 4. Fromer now alleges
that Yogel and Schwartz breached this purported promise to
reimburse him for the entirety of the settlement. See Cmplt. at
¶¶ 4, 46.
Defendants Wilmington and Saunders (together "the Wilmington
Defendants") were not named as defendants in the Restifo
action. Nevertheless, to preclude the possibility of being sued,
Wilmington and Saunders settled any claims that the Restifo
plaintiffs may have had against them for $1 million and obtained
a release. See Wilmington Defendants' Memorandum of Law
("Wilmington Defs.' Memo.") at 3.
Defendant Wilmington is a commercial bank and trust company
organized under Delaware law. See Cmplt. at ¶ 12. Wilmington
never entered into any contractual relationship with the Premium
Sales entities, Fromer, FDT, Yogel or Schwartz. Its involvement
arose when a Wilmington client asked Saunders, a Wilmington Vice
President in its Business Development Division, to review certain
documents relating to LDL and RMS and advise him as to whether
they would be suitable investments. Saunders reviewed these
materials and also asked Wilmington lawyers to review the LDL and
RMS partnership agreements. See Cmplt. at ¶¶ 13, 25. This
client eventually invested in LDL and RMS and later became a
plaintiff in the Restifo action against Fromer, Yogel and
Schwartz. The documents reviewed by Saunders contained numerous
false and misleading statements regarding the Premium Sales
entities. While Saunders knew or should have known of the falsity
of these statements, he nevertheless disseminated them with the
Fromer and others rely on their truth. See Cmplt. at ¶¶ 25-32.
III. Analysis of Plaintiffs' Federal Claims
Settling defendants in a federal securities action may sue for
contribution. See, e.g., In re Del-Val Financial Corp.
Securities Litigation, 868 F. Supp. 547, 553-4 (S.D.N.Y. 1994)
(citing Musick, Peeler & Garrett v. Employers Insurance of
Wausau, 508 U.S. 286, 113 S.Ct. 2085, 124 L.Ed.2d 194, (1993)).
Contribution provides that one of two or more joint wrongdoers
should not be required to pay more than its share of a common
burden. See Epstein v. Haas Securities Corp., 731 F. Supp. 1166
(S.D.N.Y. 1990); Stratton Group, Ltd. v. Sprayregen,
466 F. Supp. 1180, 1185 (S.D.N.Y. 1979).
In Musick, the Supreme Court noted that "parties against whom
contribution is sought are, by definition, persons or entities
alleged to have violated existing securities laws and who share
joint liability for that wrong under a remedial scheme
established by the federal courts." Musick, 508 U.S. at 292,
113 S.Ct. 2085. Accordingly, as in common law claims,
contribution for a § 10(b) violation is allowed only among "joint
tortfeasors". See also, In re Leslie Fay Companies, Inc.
Securities Litig., 918 F. Supp. 749, 756 (S.D.N.Y. 1996);
Stratton, 466 F. Supp. at 1185 ("The essence of contribution,
therefore, is the presence of joint tortfeasors").
1. Plaintiffs fail to allege they are joint tortfeasors
The definition of a joint tortfeasor is fairly broad. A finding
of liability is not required. Therefore, the fact that the
Restifo action settled, making an ultimate determination of
liability unavailable, does not preclude a contribution action.
See, e.g., In re Del-Val, 868 F. Supp. at 554 ("A party need not
actually be adjudged liable to the injured party to be a joint
tortfeasor.") (citing Stratton, 466 F. Supp. at 1185). Indeed, a
party need not even be sued by the plaintiff in the underlying
action in order to be liable for contribution. See Musick, 508
U.S. at 286, 113 S.Ct. 2085 (settling defendants' subrogated
insurers may sue non-parties for contribution).
What is required, however, is that the Complaint allege that
the parties — the Plaintiff and those Defendants from whom
contribution is sought — committed a tort, in this case
securities fraud. Yet this Complaint fails to allege that
Plaintiffs are tortfeasors. Nor does the Complaint allege that
Plaintiffs and any of the Defendants are joint tortfeasors. See
Cmplt. at ¶ 67 ("[r]esponsibility for the damages caused by the
plaintiffs herein rests on these defendants by reason of
their violations of Section 10(b) and Rule 10b-5 as alleged
herein.") (emphasis added). It is insufficient to claim, as
Plaintiffs do, that Yogel and the other Defendants are the
tortfeasors and that Fromer was merely an unwitting participant
in the scheme.*fn5
What is unusual here is that Plaintiffs steadfastly insist that
they did not violate the securities laws. Disputes over the term
"joint tortfeasor" typically arise when a defendant in a
securities fraud action seeks contribution from third parties:
The defendant becomes a third-party plaintiff but fails to allege
that the injuries suffered by plaintiffs in the underlying action
were caused by the third-party defendants' violation of the
securities laws. See, e.g., Monisoff v. American Eagle
Investments, Inc., 955 F. Supp. 40, 41-42 (S.D.N.Y. 1997); Ades
v. Deloitte & Touche, 90 Civ. 4959, 90 Civ. 5056, 1993 WL
362364, at *10 (S.D.N.Y. Sept.17, 1993); Department of Economic
Development v. Arthur Andersen & Co. (U.S.A.), 747 F. Supp. 922,
933 (S.D.N.Y. 1990). As stated in Ades:
A claim for contribution under the federal securities
laws . . . requires a third-party plaintiff to allege
all the elements of the offense[,] . . . namely that
the Third-Party Defendants either knowingly or
reckless[ly] made material misrepresentations to the
[injured parties] on which [these parties] relied in
the purchase of the [securities] and which
proximately caused loss to [the parties].
Here, the problem is that there is nothing in the Complaint
that can be read as an allegation or concession of fraudulent
conduct by the Plaintiffs. All that is alleged is Defendants'
fraud in the original Restifo action, see Cmplt. at ¶¶ 18-44,
and an independent fraud by Defendants on Plaintiffs in refusing
to contribute to the settlement. See Cmplt. at ¶ 46. These
allegations will not support a claim for contribution. Under the
federal securities laws, such a claim must be based on
allegations that all the parties violated securities laws, not
based on allegations that the Defendants defrauded Plaintiffs.
See Arthur Andersen, 747 F. Supp. at 934 ("claim for
contribution under the federal securities laws must be based on
allegations that the third-party defendant violated securities
laws, not based on allegations that the third-party defendants
defrauded [the third-party plaintiff]").
To present a valid claim that the parties are joint tortfeasors
subject to contribution, the use of certain words is not
required. All that is required are "allegations that the
[parties] were joint participants in the fraud alleged." In re
Del-Val, 868 F. Supp. at 554 (quoting Greene v. Emersons, Ltd.,
102 F.R.D. 33, 36 (S.D.N.Y. 1983), aff'd on other grounds sub
nom. Kenneth Leventhal & Co. v. Joyner Wholesale Co.,
736 F.2d 29 (2d. Cir. 1984); see also, Stratton, 466 F. Supp. at 1185 n.
6 (S.D.N.Y. 1979) ("The term `joint tortfeasors' means that two
or more persons are the joint participants or joint actors in the
wrongful production of an injury to a third person."); In re
Crazy Eddie Securities Litigation, 740 F. Supp. 149, 152
(S.D.N.Y. 1990) (same).
2. Plaintiffs fail to satisfy the scienter requirement
In this case, however, Plaintiffs try to have it both ways.
They acknowledge that they knowingly acted jointly with
Defendants but refuse to concede that they themselves knowingly
committed fraud. Plaintiffs argue that they are "not required to
concede [their] liability in order to assert a claim for
contribution." Plaintiffs' Memorandum of Law ("Pls.' Memo.") at
8, (quoting Epstein, 731 F. Supp. at 1186-87). Plaintiffs'
argument fails for several reasons.
Second, simply claiming to be an unwitting participant is
insufficient in a fraud claim. In failing to concede liability,
Fromer suggests that he did not knowingly participate in the
fraud, but relied on the other Defendants to supply him and other
investors with truthful and accurate information. An essential
element of a claim under § 10(b), and therefore any claim for
contribution arising thereunder, is scienter. See Ernst & Ernst
v. Hochfelder, 425 U.S. 185, 214, 96 S.Ct. 1375, 47 L.Ed.2d 668
(1976). The scienter element requires a showing that the party —
in this case Plaintiffs — knowingly or recklessly violated the
federal securities laws. See, e.g., In re Leslie Fay, 918
F. Supp. at 756 (S.D.N.Y. 1996). Each party must be liable for the
injury to third persons to be considered a joint tortfeasor.
Accordingly, to be considered a joint tortfeasor, the requisite
elements must be alleged or conceded by every party, Plaintiffs
Third, by arguing that one can knowingly act jointly to
unwittingly commit fraud, Plaintiffs appear to confuse one issue
— knowingly acting jointly — about which there is some dispute in
this circuit, with another issue — scienter as an element of
fraud — about which there is no dispute. District courts in this
circuit have defined "joint tortfeasors" in one of two ways. A
contribution claim may be based either on a fraud committed
jointly (and thus participants were acting jointly knowingly), or
on individual acts of fraud lumped together and considered
jointly (and thus participants were not acting jointly knowingly,
though each was still committing fraud knowingly).
The majority view appears to be that contribution among joint
tortfeasors is limited to "joint participants" in the fraud
alleged by the plaintiff. See, e.g., Advanced Magnetics, Inc. v.
Bayfront Partners, Inc. v. Painewebber Inc., 92 Civ. 6879, 1998
WL 647167, at *4 (S.D.N.Y. Sept.22, 1998); see also, In re Crazy
Eddie, 740 F. Supp. at 152 (E.D.N.Y. 1990); Connecticut National
Bank v. Reliance Insurance Co., 704 F. Supp. 506, 509 (S.D.N Y
1989); Greene, 102 F.R.D. at 36; Stratton, 466 F. Supp. at
1185. Other district courts have applied a more expansive
definition, holding that contribution among joint tortfeasors is
available among independent tortfeasors so long as the parties
are concurrently liable for damages. See, e.g., In re Leslie
Fay, 918 F. Supp. at 756; In re Del-Val, 868 F. Supp. at 554;
Ades, 1993 WL 362364, at *15; McCoy v. Goldberg, 778 F. Supp. 201
(S.D.N.Y. 1991). The Second Circuit has not resolved the
split. See Kenneth Leventhal & Co. v. Joyner Wholesale Co.,
736 F.2d 29, 31 n. 1 (2d Cir. 1984) ("We do not reach this issue" of
the definition of joint participants in fraud).
Fourth, and finally, Plaintiffs display a fundamental
misunderstanding of the theory of contribution, which is designed
to achieve "a fair distribution of fault among parties involved
in a wrong." See Greene, 102 F.R.D. at 36. As currently
alleged, however, Plaintiffs' ...