United States District Court, E.D. New York
April 6, 2004.
MEIR BABAEV and MICHAEL ARBIV, Plaintiffs, -against- RICHARD GROSSMAN, RICHARD STUART CATERERS, LTD. and RICHARD STUART KOSHER CATERERS, LTD., Defendants
The opinion of the court was delivered by: THOMAS PLATT, JR., Senior District Judge
MEMORANDUM AND ORDER
Defendants Richard Grossman, Richard Stuart Caterers, and Richard
Stuart Kosher Caterers move under the Federal Rules of Civil Procedure,
the Private Securities Litigation Reform Act of 1998 ["PSLRA"] and the
Sarbanes-Oxley Act of 2002 to dismiss the Amended Complaint of Plaintiffs
Meir Babaev and Michael Arbiv. Plaintiffs sued Defendants for fraud under
the Securities Exchange Act of 1934, and for State claims of breach of
contract, common law fraud and negligent misrepresentation. Oral argument
was heard April 2, 2004. For the following reasons, Defendants' motion is
A. Factual background
This case involves the proprietors of a catering service who are
alleged to have fraudulently induced the proprietors of a waiter service
to purchase a 10% interest in the catering business. Both businesses
served religious celebrations at Jewish temples. Defendants allegedly promised Plaintiffs more frequent use of
the waiter service by the catering service in exchange for Plaintiffs'
investment in Defendants' business, as well as returns upon the
investment itself. See Defendants' Memorandum of Law in
Support of their Motion to Dismiss at 2-4.
Defendants allegedly told Plaintiffs that the business of the catering
service was about to expand and to become "a cash cow." However, the
catering service's business was in fact about to contract. Known to
Defendants, but unbeknownst to Plaintiffs, was the fact that a large
temple was severing its relationship with Defendants because the caterers
allegedly served non-kosher food to the temple's congregants. Plaintiffs
now seek a return of their investment of $133,609, plus interest, as well
as their costs. See id.; see also Plaintiffs' Brief in
Opposition to Defendant's Motion to Dismiss at 2-8.
B. Procedural background
The events at issue took place in 2001. Plaintiffs filed their original
Complaint in October 2003, and an Amended Complaint in December 2003. The
Complaint states that an employee of Defendants informed Plaintiffs that
Defendants "had defrauded them, in or about August/September 2001."
Complaint at ¶ 23. The Amended Complaint states that "about the first
week or so of November 2001," the same employee indicated "that he believed that all of Grossman's
representations were intentionally false and made to induce Plaintiffs to
make the required capital investment." Amended Complaint at ¶¶ 48, 51.
A. Regulations, rules and statutes
Federal Rule of Civil Procedure 12(b)(6) provides that a complaint may
be dismissed for failure to state a claim upon which relief may be
Section 10(b) of the Securities Exchange Act provides that it shall be
unlawful for a defendant, acting with scienter, to use in connection with
the sale of a security a deceptive device in contravention of the rules
of the Securities and Exchange Commission, such as a false statement or
the omission of a material fact. See 15 U.S.C. § 78j(b);
17 C.F.R. § 240.10b-5. The PSLRA provides that in alleging falsehoods or
omissions, a complaint shall specify the falsehood or omission, why its
is misleading, and state facts strongly inferring fraudulent intent.
See 15 U.S.C. § 78u-4(b). And Sarbanes-Oxley provides that no
securities fraud claim may be brought later than two years after the
discovery of the violation. See 28 U.S.C. § 1658(b)(2).
Sections 1332 and 1367 of Title 28 of the United States Code provide
that district courts have original jurisdiction of civil actions where
the matter in controversy exceeds $75,000 and is between citizens of different
States, and also have supplemental jurisdiction over related claims
forming part of the same controversy. District courts may decline to
exercise supplemental jurisdiction over such related claims if the court
dismisses the claims over which it has original jurisdiction.
See 28 U.S.C. § 1332(1), 1367(a).
(I) The statute of limitations
Sarbanes-Oxley is clear: no securities fraud claim may be brought later
than two years after the discovery of the violation. Plaintiffs filed
their Complaint in October 2003, and their Amended Complaint in December
2003. The question is whether the Court should consider Plaintiffs'
Complaint, alleging the discovery of the fraud in September 2001, to be a
binding judicial admission that places Plaintiffs' claims beyond the
statute of limitations. Alternatively, the Court may instead consider
Plaintiffs' Amended Complaint, alleging the discovery of the fraud in
November 2001, to be controlling, and through the doctrine of "relation
back" to the Complaint of October 2003, bringing Plaintiffs' claims
within the statute of limitations.
As a general rule, a party is bound by its judicial admissions.
See In re Initial Pub. Offering Sec. Litig., 241 F. Supp.2d 281,
324 (S.D.N.Y. 2003). Yet "pleadings are not binding if properly withdrawn or amended,"
id., and a "statement in a withdrawn complaint that is
superseded by an amended complaint without the statement is no longer a
conclusive judicial admission." Tran v. Alphonse Hotel Corp.,
281 F.3d 23, 32 (2d Cir. 2002).
But, in securities fraud cases, the date of actual knowledge of the
fraud is crucial. Courts within this jurisdiction have found that
plaintiffs' affidavits admitting actual knowledge of frauds at dates
certain may be treated as judicial admissions leading to the dismissal,
under the statute of limitations, of even amended complaints that later
attempt to place the knowledge of the fraud within the confines of the
relevant statute. See Ainbinder v. Kelleher, 1997 U.S. Dist.
LEXIS 10832 at *13 (S.D.N.Y. July 25, 1997); Klein v. Adams &
Peck, 1973 U.S. Dist. LEXIS 14937 at *4 (S.D.N.Y. Feb. 13, 1973).
In this case, Plaintiffs' Amended Complaint does not explicitly
withdraw the statement in their original Complaint that they knew of
Defendants' alleged fraud in September 2001. Rather, Plaintiffs' Amended
Complaint instead discusses in greater detail a similar conversation with
Defendants' employee that is now, conveniently, alleged to have taken
place in November 2001. The Amended Complaint seems intended to gloss
over the problematic admission. The Court is reluctant to allow Plaintiffs to use their Amended
Complaint as an end-run around Sarbanes-Oxley's statute of limitations.
The toothpaste of an admission of actual knowledge of fraud should not so
easily be squeezed back into the tube. The Court is tempted to dismiss
Plaintiffs' suit sua sponte.
However, Defendants' Reply Memorandum of Law specifically states that
"After receiving the Amended Complaint, Defendants agreed to withdraw
those branches of this motion seeking dismissal on the grounds of the
statute of limitations." Id. at 1 n.1. And defense counsel
twice, at oral argument, declined the undersigned's suggestion that the
case against his client could be dismissed upon these grounds.
Defendants in Rule10(b) securities fraud cases may agree to waive their
statute of limitations defenses. See ESI Montgomery Co., Inc. v.
Montenay Int'l Corp., 899 F. Supp. 1061, 1066 (S.D.N.Y. 1995). Such
waiver by a defendant cures the relevant defect in a plaintiff's
complaint. Defendants here having thus waived the protection of the
statute of limitations, the Court will turn to Defendants' remaining
(ii) Federal securities fraud and related State law claims
Defendants' remaining arguments are without merit. Defendants assert, inter alia, that Plaintiffs' Amended Complaint fails to
meet the heightened pleading standards for Rule 10(b) claims set forth by
the PSLRA. Securities laws prohibit the making of false statements and
the omission of material facts in connection with the sale of securities.
See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Suits
alleging such fraudulent practices must specify the falsehoods or
omissions, why they are misleading, and state facts strongly inferring
fraudulent intent. See 15 U.S.C. § 78u-4(b).
To take the most serious of Plaintiffs' allegations, the Amended
Complaint asserts that in July 2003, Defendants' employee informed
Plaintiffs that Defendants' business received notice from its most
important customer concerning the termination, for material breach, of
that temple's contracts with Defendants. The stated grounds were that
Defendants' served non-kosher meat to that temple's observant
congregants. See id. at ¶¶ 57-59.
The materiality of this omission is obvious not only were
Defendants about to lose a main source of revenue, but they could also
face prosecution under New York State law. And this skeleton in
Defendants' closet made false their representations about the
profitability of their business. Far from being a proverbial "cash cow,"
id. at ¶ 10, Defendants' business perhaps more closely
resembled a steer being led to slaughter. The inference of fraudulent intent, in the
context of a securities offering, is clear.
Even under the enhanced pleading standards for Rule 10(b) claims set
forth by the PSLRA, the standard for granting a motion to dismiss under
FED. R. CIV. P. 12(b)(6) for lack of a claim upon which relief may be
granted is still high. Defendants bear the burden of showing that even if
Plaintiffs' allegations are accepted as true, and all reasonable
inferences are drawn in Plaintiffs' favor, Plaintiffs are still not
entitled to relief. See In re: Scholastic Corp. Secs. Litig.
F.3d 63, 69 (2d Cir. 2001) (stating that "dismissal is proper only if it
is clear that no relief could be granted under any set of facts that
could be proved consistent with the allegations") (internal citations and
question marks omitted).
Assuming the truth of the allegation that Defendants intentionally hid
from Plaintiffs the fact that Defendants' main customer was terminating
its contracts with Defendants on the grounds of the breach of contract
and illegal activity, and assuming that Defendants knowingly made
contemporaneous misleading statements about the robust financial health
of their company, Plaintiffs have pleaded a valid cause of action under
Rule 10(b) and the PSLRA.
Defendants' motion to dismiss under Rule 12(b)(6) is accordingly DENIED. The Court chooses to exercise its supplementary
jurisdiction over Plaintiffs' related State law claims of breach of
contract, common law fraud and negligent misrepresentation, and to allow
discovery on both the federal and State claims to go forward. Conclusion
For the foregoing reasons, Defendants' motion to dismiss is
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