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S.E.C. v. THRASHER

March 28, 2001

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
HUGH THRASHER, JOHN H. ANDERSON, EZRA CHAMMAH, STANLEY ELBAUM, SCOTT FORBES, GUILLERMO GOMEZ A/K/A/ WILLIAM GOMEZ, STEPHEN V.R. GOODHUE, JR. IRA GORMAN, GORMAN COMMODITIES & SECURITIES, INC., JONATHAN S. HIRSH, DONALD KUZNETSKY, DARRELL SANDY MARSH, JACK P. MARSH, MICHAEL R. NEWMAN, ROGER K. ODWAK, ANGELO PETROTTO, LEE ROSENBLATT, ROBERT SACKS, JEFFREY A. SANKER, DAVID SCHAEN, LEONARD SCHAEN, JULIAN SCHOR, GREGG R. SHAWZIN, AND MARK R. SHAWZIN, DEFENDANTS.



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

    OPINION AND ORDER

Before the Court are Plaintiff Securities and Exchange Commission's Motion for Partial Summary Judgment (which Defendants Hugh Thrasher and Jonathan Hirsh oppose) and Defendant Jonathan Hirsh's Cross-Motion for Summary Judgment or, in the alternative, Partial Summary Judgment. For the reasons outlined below, both motions are denied in their entirety.

BACKGROUND

The Court assumes familiarity with its earlier opinions in this case, and provides below only a rudimentary recitation of the facts as needed for this decision.

Plaintiff Securities and Exchange Commission ("SEC") has brought this civil enforcement action alleging a nationwide insider trading scheme by persons who possessed material, nonpublic information concerning the proposed acquisition of Motel 6, L.P. ("Motel 6"), a Dallas-based national chain of owner-operated economy motels, by Accor, S.A. ("Accor"), a French-based company. The Amended Complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)], Section 14(e) of the Exchange Act [15 U.S.C. § 78n(e)], and Rules 10b-5 and 14e-3 promulgated thereunder [17 C.F.R. § 240.10b-5 and 240.14e-3]. In short, the SEC alleges that in 1990 Defendant Hugh Thrasher ("Thrasher"), then an executive vice president of Motel 6, conveyed material nonpublic information to his friend, Carl Harris ("Harris"), concerning a tender offer for Motel 6 by Accor; through Harris, who is now deceased, this information was allegedly leaked to numerous individuals across the country.

In January, 1990, Accor, a French hotel company, began discussions with representatives of Motel 6's majority shareholder, Kohlberg, Kravis, Roberts & Co ("KKR") regarding a possible acquisition of Motel 6 by Accor. Thrasher first learned about Accor's interest in Motel 6 at a meeting on May 21, 1990. The SEC alleges that Thrasher told Harris about Accor's interest in acquiring Motel 6 in order to make a gift of any profits Harris might earn by using the information.*fn1 The following weekend, Harris, who was dying of AIDS, allegedly concocted a scheme whereby he and others could capitalize on the information provided by Thrasher. Jeffrey A. Sanker ("Sanker"), Harris' roommate, learned about the potential deal from Harris, and he, too, allegedly sought to make money by disclosing information about the deal to others who had money to invest and receiving kickbacks from his tippees. Sanker met with one of his tippees, Defendant Jonathan S. Hirsh ("Hirsh") and allegedly told him that he had inside information regarding an upcoming tender offer. He initially told Hirsh that his source in the target company was Harris' father, and revealed to Hirsh the name of the target company and the anticipated sale price. Sanker then asked his broker, Roger K. Odwak ("Odwak") of the New York brokerage firm Bear, Stearns and Co. Inc., to research Motel 6; Odwak discovered that there were considerable rumors pegging Motel 6 as a takeover target. He also discovered that there was no "Harris" on the Motel 6 board, indicating that Sanker's statement that the tip came from Harris' father was false. Sanker eventually invested $220,000 in Motel 6 securities and call options, both individually and with a friend, Lee Rosenblatt ("Rosenblatt"), and together they earned approximately $360,000 in profits. While the negotiations between Accor and Motel 6 did not always proceed smoothly, (the deal was actually called off at one point), a deal between Accor and Motel 6 was finalized and made public on July 12, 1990, six weeks after Thrasher first tipped Harris that a deal was imminent.

SEC'S MOTION FOR PARTIAL SUMMARY JUDGMENT

The SEC now seeks partial summary judgment not on particular claims charged but on elements of those claims, arguing that if the Court settles certain issues before trial "the jury will be free to focus on the only true issues of material fact in this case . . . thereby eliminating the need to focus on the historical aspects of the tender offer negotiations." Pl.'s Mem. in Supp. of Pl.'s Mot. for Partial Sum. J. at 8. The SEC seeks to establish:

"(i) that, as of May 21, 1990, Accor had taken `substantial steps'-as that term is used in Exchange Act Rule 14e-3-to commence a tender offer for Motel 6 units (hereinafter "shares"); (ii) that, as of May 21, 1990, Thrasher possessed material, nonpublic information concerning the proposed bid for Motel 6 by Accor; and (iii) that Thrasher, as executive vice president of Motel 6, had a duty not to disclose information regarding the proposed tender offer for Motel 6 to Carl Harris."

Id. at 8. Defendants Thrasher and Hirsh argue, among other things, that Plaintiff's motion is not proper, since it requests disposition of elements of a claim rather than judgment on a claim. This Court agrees. The plain language of Federal Rule of Civil Procedure 56 indicates that it is not appropriate to use summary judgment as a vehicle for fragmented adjudication of non-determinative issues. Subsection (a) of the Rule states that a party "seeking to recover upon a claim, counter-claim, or cross-claim . . ., may . . . move . . . for a summary judgment in the party's favor upon all or any part thereof." F.R.C.P. 56(a) (emphasis added). Furthermore, Subsection (c) states that "[a] summary judgment, interlocutory in character, may be rendered on the issue of liability alone although there is a genuine issue as to the amount of damages", see F.R. Civ. P. 56(c). The clear implication is that the issue of liability is the only non-determinative issue which may be disposed of on summary judgment. See United States v. American Int'l Group, Inc., 1997 WL 66786, *2 (S.D.N.Y. Feb. 14, 1997) (holding that a ruling on a non-dispositive issue would be "inappropriate"); see also City of Wichita, Kan. v. U.S. Gypsum Co., 828 F. Supp. 851, 869 (D.Kan. 1993), rev'd on other grounds, 72 F.3d 1491 (10th Cir. 1996) ("Rule 56(c) authorizes only the entry of judgments on claims, not single issues or elements that are not dispositive of judgment on those claims."); Arado v. General Fire Extinguisher Corp., 626 F. Supp. 506, 509 (N.D.Ill. 1985) ("As this Court has often repeated . . . Rules 56(a) and 56(b) simply do not permit the piece-mealing of a single claim or the type of issue-narrowing sought here.").

The SEC contends that these cases are unpersuasive, maintaining that to interpret Rule 56(a) to forbid motions for summary judgment on elements of claims would be "inconsistent with the very purpose of the Federal Rules of Civil Procedure," Pl.'s Mem. in Supp. of Mot. for Sum. J. at 4.*fn2 This Court has not found, nor has the SEC cited, a single case which endorses Plaintiff's position.*fn3 In a poorly framed argument, the SEC both misreads Rule 56(a) and ignores precedent by claiming that language in Rule 56(a) which authorizes parties to move for summary judgment on a claim or "any part thereof" thereby authorizes a summary judgment motion regarding an element of a claim, since an element is "part" of a claim. Pl.'s Mem. in Supp. of Mot. for Sum. J. at 4, quoting F.R.C.P. 56(a). See also id. at 4 n. 3. The only case cited by the Plaintiff in support of this interpretation of Rule 56(a), United States v. American Int'l Group, Inc., actually holds the opposite, stating that a ruling on a motion for summary judgment on an issue which would not resolve a claim or any part thereof would be "inappropriate." United States v. American Int'l Group, Inc., 1997 WL 66786, *2; see also Kendall McGaw Laboratories, Inc. v. Community Memorial Hospital, 125 F.R.D. 420, 421 (D.N.J. 1989) ("Summary judgment may be had as to one claim among many, but it is well settled that neither subsection [56(a) or (b)] allows such a judgment as to one portion [of] a claim [with the exception of the issue of liability].").*fn4

Plaintiff's attempt to rely on Rule 56(d) is equally unsuccessful. Rule 56(d) provides in part that: "[i]f on motion under this rule judgment is not rendered upon the whole case or for all the relief asked . . . the court . . . shall . . . make an order specifying the facts that appear without substantial controversy." (emphasis added). The rule does not provide a mechanism whereby litigants can request such relief directly. See City of Wichita, Kan. v. U.S. Gypsum Co., 828 F. Supp. 851, 869 (D.Kan. 1993), rev'd on other grounds, 72 F.3d 1491 (10th Cir. 1996) ("This rule does not authorize an independent motion to establish certain facts as true but merely serves to salvage some constructive result from the judicial effort expended in denying a proper summary judgment motion."); see also Arado v. General Fire Extinguisher Corp., 626 F. Supp. 506, 509 (N.D.Ill. 1985) ("Rule 56(d)'s issue-narrowing provision operates only in the wake of an unsuccessful (and proper) motion under Rule 56(a) or 56(b) . . . There is no such thing as an independent motion under Rule 56(d)."); Capitol Records v. Progress Record Distrib., Inc., 106 F.R.D. 25, 30 (N.D.Ill. 1985) ("A fair reading of Rule 56(d), then, is that it does not allow a party to bring a motion for a mere factual adjudication. Rather, it allows a court, on a proper motion for summary judgment, to frame and narrow the triable issues if the court finds that such an order would be helpful to the progress of the litigation.").

Plaintiff disagrees with the reasoning in these cases, stating, without support, that it "is not the law" that "while a court may enter an order under Rule 56(d) specifying facts that appear without substantial controversy, a litigant may not request that relief." Pl.'s Mem. in Supp. of Pl.'s Mot. for Partial Summ. J. at 7, 8. In fact that is precisely the law. The plain language of the Rule is clear, permitting courts to issue orders narrowing trial issues only "[i]f on motion under this rule judgment is not rendered upon the whole case or for all the relief asked," F.R.C.P. 56(d), and the SEC does not point to a single case in which a court interpreted Rule 56(d) to authorize requests from litigants independent of summary judgment motions. In fact, Rule 56(d) actually undermines Plaintiff's reliance on Rule 56(a), since, by permitting factual determinations regarding elements of claims only in the wake of unsuccessful motions for summary judgment, Rule 56(d) "implicitly establishes that summary judgment is available only for an entire claim at minimum." Capitol Records v. Progress Record Distrib., Inc., 106 F.R.D. at 28.

The Court holds that the SEC's motion for partial summary judgment is not authorized under Federal Rule of Civil ...


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