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S.E.C. v. THRASHER
March 28, 2001
SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
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.
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.
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
"(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
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
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.
The Court holds that the SEC's motion for partial summary
judgment is not authorized under Federal Rule of Civil ...