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FAREY-JONES v. BUCKINGHAM

March 4, 2001

ALWYN V.H. FAREY-JONES PLAINTIFF,
V.
RICHARD G. BUCKINGHAM, DOUGLAS H. WOLF; FREDERICK FORSTER, ICA SERVICES AND SIGNAL CAPITAL HOLDING CORPORATION, DEFENDANTS



The opinion of the court was delivered by: Spatt, District Judge.

AMENDED MEMORANDUM OF DECISION AND ORDER

This lawsuit arises out of business disputes. Over the years, Alan V.H. Fairy-Jones ("Jones" or the plaintiff), Richard G. Buckingham ("Buckingham" or a defendant), Douglas H. Wolf ("Wolf" or a defendant), and Frederick Forster ("Forster" or a defendant) (collectively, the "individual defendants") have had a series of business relationships and have conducted numerous business transactions. Some of those transactions involved ICA Services ("Services" or a defendant) and Signal Capital Holding Corporation ("SCHC" or a defendant) (collectively "the corporate defendants"). Eventually, Jones, Wolf, and Buckingham disagreed about virtually every aspect of their business dealings and relationships. As a result, they executed an Agreement in which each of them resolved to take certain actions, pay certain moneys, and release all claims against one another. Disputes then arose regarding the Agreement, and on June 29, 1999, Wolf and Buckingham filed an action in the Supreme Court of the State of New York, Westchester County, seeking a declaration of the Court to establish the parties' rights and obligations under the Agreement. On July 26, 1999, Jones filed the complaint in this action, and on March 23, 2000, Jones filed the amended complaint. Presently before the Court are Buckingham and Wolf's motion to dismiss pursuant to Rule 12(b)(1), and Forster's motion to dismiss pursuant to Rule 12(b)(6).

I. BACKGROUND

A. Counts I, II, and III

During and prior to 1994, Buckingham, Wolf, and John van Merkensteijn ("van Merkensteijn") were working under the trade name and style ICA International ("ICA"). They bought, sold, transferred, and otherwise dealt in the stock and assets of various businesses.

In May 1994, Buckingham, Wolf, and van Merkensteijn invited Jones and Howard B. Teig ("Teig") to work with ICA to acquire all of the issued and outstanding shares of stock in SCHC, a Delaware corporation with a principal place of business in Jericho, New York. It was understood that after its acquisition, SCHC would sell equipment trust interests that it owned. In connection with the acquisition of SCHC, the following business entities were formed: (1) Acorn Leasing Partners, L.P. ("Acorn"). a Delaware limited partnership; (2) Signal Capital Associates, Inc. ("SCAI"), a Delaware corporation; and (3) Signal Capital Associates, L.P. ("SCALP"), a Delaware limited partnership. In 1994, the stock of SCHC was acquired, and SCHC sold its equipment trust interests.

As of October 1, 1996, Jones and Buckingham were the only partners in Acorn. Jones was the general partner, and Buckingham was the limited partner. Acorn was a shareholder in SCAI; SCAI was one of several partners in SCALP; and SCALP was a shareholder in SCHC. In addition, SCHC was the nominal title holder to rights in contingent profits from rail car leases ("Additional Rent"). Pursuant to an oral agreement, Buckingham, Wolf, van Merkensteijn, Teig, and Jones ("Rent Owners") became the beneficial owners of the Additional Rent.

In October 1996, Buckingham and Jones had a series of conversations both in person and over the telephone. During those conversations, Buckingham told Jones that "he did not believe that Acorn's interest in SCAI could be exploited to any great advantage, but that he would like to `draw a line' under the SCHC transaction and have Acorn and the other shareholders of SCAI dispose of their shares" (Amended Complaint ¶ 18). Buckingham also told Jones that he thought SCAI, SCALP, and SCHC should be restructured to create an advantageous federal tax basis in (1) the SCHC stock and (2) a foreign currency deposit that would be held by some of the partners in SCALP but not including SCAI. Buckingham also said that the values of the SCHC stock and the currency deposit as tax planning tools could then be marketed to other people. Buckingham indicated that Forster would market the SCHC stock, and Joseph Campagna ("Campagna") would market the currency deposit.

Buckingham proposed that Acorn sell its stock in SCAI to Forster for a sum of $1,000,000. Forster would pay Acorn a sum of $100,000 in cash and would pay the balance by a nonrecourse note, payable only out of the proceeds of the SCAI stock. According to Buckingham, "$500,000 would be payable on the completion of a transaction with the SCHC stock and $500,000 on completion of a transaction with the currency deposit." The amended complaint contends that Acorn therefore remained at risk for the success of Forster and Campagna's efforts.

On or about October 30, 1996, prior to accepting Buckingham's offer, Jones asked Buckingham whether he or Wolf was planning to retain control of the high basis SCHC stock or the currency deposit to use in future acquisitions, sales, or other business transactions. If Wolf and Buckingham used the stock or currency deposit in such a fashion, they would earn profits in addition to the money they made from the sale of their stock. Buckingham told Jones "(i) that [he] and Wolf would not make profits other than from the sale of their SCAI stock on the same terms as Acorn; (ii) that all of the other shareholders of SCAI would receive the same price per share for their stock in SCAI as would Acorn; and (iii) as part of the said restructuring of SCAI and SCALP, the rights to the Additional Rent would be separated from SCHC for the benefit of the Rent Owners" (Amended Complaint ¶ 21).

Jones accepted Buckingham's proposal and agreed that Acorn would sell its stock in SCAI to Forster for $1,000,000. Jones received a sum of $112,000.50 in cash. However, the note he received with the documents that gave effect to the sale was only in the amount of $637,500, rather than the expected amount of $887,500. Buckingham told Jones that he was receiving less money than he had anticipated because "`the numbers had not worked out'" (Amended Complaint ¶ 22). Buckingham further assured Jones that he would receive the full balance of the sale price of $1,000,000 "if and when the transaction with the currency deposit was completed" (Amended Complaint ¶ 22). Thereafter, the above-described restructuring occurred, thus eliminating SCAI and SCALP.

In a telephone conversation held in, January 1997, Buckingham told Jones that Forster had "contributed" the SCHC stock to TransTexas Corporation ("TransTexas") and had received TransTexas stock "and/ or" cash in return (Amended Complaint ¶ 24). Subsequently, Forster paid Acorn the amount of the note plus interest.

The amended complaint alleges that the transaction between Forster and TransTexas was "only a preliminary transaction in a business reorganization enabling Wolf, Buckingham, and Forster to realize a substantial profit" (Amended Complaint ¶ 25). According to the amended complaint, Forster knew that the consideration TransTexas had paid for the SCHC stock was "inappropriately low" low conducted the transaction to realize a substantial profit.

In addition, Campagna purportedly used the currency deposit in a subsequent transaction with the Marriott Corporation that enabled Wolf and Buckingham to realize profits as well. Moreover, contrary to Buckingham's statement that the Additional Rent would remain separate from SCHC for the benefit of the Rent Owners, SCHC transferred the rights in the Additional Rent to TransTexas as part of the original transaction between SCHC and TransTexas.

The amended complaint contends that Buckinghan's statements to, Jones were false when he made them and were made to induce Jones, as the general partner of Acorn, to sell Acorn's stock in SCAI to Forster. According to the amended complaint, Buckingham's would therefore be able to use SCAI's assets in a series of transactions that occurred in the months immediate following the transfer of Acorn's stock. Jones allegedly relied upon Buckingham's false statements.

It is alleged that Buckingham, Wolf, and Forster gained control of SCHC by first gaining control of SCAI and, then, by gaining control of SCALP. The three men used the high basis stock of SCHC and the high basis foreign currency deposit in highly profitable transactions without including Jones or Acorn. In May 1999, Teig received a memorandum indicating that the high basis stock had been used in fourteen additional transactions.

As of June 1, 1997, Buckingham assigned his partnership interest in Acorn to Linda L. McDonald ("McDonald"). As of December 29, 1997, McDonald sold that interest to Jones. in March 1998, Acorn assigned its claims against the defendants to Jones.

Count I of the amended complaint alleges that Buckingham, Wolf, and Forster violated Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10(b)-5, thereby causing damage to Jones. In Count II, Jones contends that, based on the above-described factual allegations, Buckingham, Wolf, and Forster are liable to him under a common law fraud theory. Count III contends that Buckingham is liable to Jones for breach of fiduciary duty, because as a partner in Acorn, Buckingham owed Jones and Acorn a fiduciary duty but (1) failed to disclose his plans to use the SCHC stock and the foreign currency deposit in a high profit business restructuring; and (2) acquired Acorn's business opportunity for his own personal gain.

B. Count IV

The amended complaint alleges that GATX Capital Corporation ("GATX") agreed to transfer assets to SCHC to induce TransTexas to enter into the above-describe transaction with SCHC. In return, SCHC assigned GATX rights in the Additional Rent. After SCHC and TransTexas completed their transaction, GATX transferred its rights in the Additional Rent to a corporation controlled by Buckingham, Wolf, van Merkensteijn, and Teig. According to the Amended Complaint, the transfers of the rights in the Additional Rent were made by SCHC and GATX without the know-ledge or consent of Jones, who was a Rent Owner.

C. Counts V, VI, and VII

Count V contends that Buckingham and Wolf have breached a fiduciary duty to Jones by failing to disclose their plans to use the SCHC stock and the currency deposit in high profit business restructuring. According to Jones, Buckingham and Wolf owed him a fiduciary duty because they were partners with him in the business they ...


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