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EUROPEAN AMERICAN RESOURCES v. GERMAN AMERICAN INVESTORS

United States District Court, S.D. New York


May 24, 2004.

EUROPEAN AMERICAN RESOURCES, INC., Plaintiff, -against- GERMAN AMERICAN INVESTORS, INC., MARTIN SPORTSHUETZ, WALTRAUD WOLFER, DIETER FALKE, CHARLOTTE WEZEL, WERNER WOLFER, ROEMER BLUM, MELANIE WOLFER, and WOLGANG RUOFF, Defendants

The opinion of the court was delivered by: RICHARD CASEY, District Judge

MEMORANDUM OPINION & ORDER

Plaintiff, European American Resources, Inc. ("EPAR"), commenced this action by filing suit against its former CEO and President, Martin Sportschuetz ("Defendant") and others, alleging fraud and unjust enrichment related to a settlement agreement. Defendant Sportscheutz moves to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a legally-cognizable claim.*fn1 I. Background

In evaluating a motion to dismiss, a court takes as true the facts stated in the complaint. Those facts are briefly set forth below.

  In or about 1990, through a fund known as Trent, Ltd., a group of German investors purchased shares in plaintiff EPAR which was then incorporated under the name Merlin Mining, Inc. ("Merlin"). Trent purchased 7 million shares of Merlin for a total investment of $2.4 million.

  In or about 1993, defendants Roemer Blum and Wolfgang Ruof purchased EPAR shares from Trent. Blum purchased 363,196 shares, for a total value of $726,392.25. For the convenience of the parties, Blum became the beneficial owner of the shares and Trent remained the owner of record. Also in or about 1993, defendant Ruof purchased 151,331 shares at a total price of $302,663.43. For this transaction, Trent similarly remained the owner of record.

  In or about 1997, the German shareholders that had invested in Trent allegedly tendered their holdings in EPAR back to the corporation. In exchange, these investors would receive a percentage of the profits obtained from the exploitation of mining leases which EPAR believed it controlled. In 1998, EPAR and Sportschuetz discovered that there were significant defects in EPAR's claims to the leases.

  Defendant Sportscheutz, who at the time was a member of EPAR's Board of Directors, informed EPAR that he represented a group of EPAR's original German investors from whom EPAR had repurchased their shares. Sportschuetz further informed EPAR that this group of investors had formed defendant German American Investment, Ltd., ("GAT) for the purpose of rescinding the exchange agreement and recovering their shares from plaintiff.

  On August 5, 1998, GAI initiated a securities fraud lawsuit in this court entitled German American Investments, Ltd. v. European American Resources, 98 Civ. 5557. This case was settled before the Honorable Harold Baer on November 5, 1998. Pursuant to the terms of the settlement, GAI was to receive 1.3125 million shares of common stock tendered by the individual defendants, plus an additional 2.8435 million shares of restricted stock. These shares were issued and held in trust by the Royal Bank of Canada. The settlement was fully consummated and the shares issued to GAI in August of 1999.

  II. Discussion

  Defendant Sportscheutz moves to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a legally-cognizable claim. A complaint should be dismissed for failure to state a claim only "if it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Valmonte v. Bane, 18 F.3d 992, 998 (2d Cir. 1994) (internal quotation marks and citations omitted).

  Federal Rule of Civil Procedure 60(b) allows a party to file a motion in the original action to set aside a judgment for certain reasons, including "fraud . . . misrepresentation, or other misconduct of an adverse party." Fed.R.Civ.P. 60(b). When proceeding under this provision, a party must file the motion within one year after the judgment was issued. See id. Rule 60(b) also notes, however, that it doesnot prevent a court from setting aside a judgment for "fraud upon the court." Here, EPAR filed this action more than one year after the entry of judgment. It argues, however, that the complaint alleges fraud upon the court under the second part of Rule 60(b), and that the one year statute of limitations therefore does not apply.

  Because an independent action pursuant to Rule 60(b) serves as an indefinite exception to the rule of finality, "the type of fraud necessary to sustain [such an action] is narrower in scope than that which is sufficient for relief by timely motion." Hazel-Atlas Glass Co. v. Hartford Empire Co., 322 U.S. 238, 244-46 (1944); Hadges v. Yorkers Racing Corp., 48 F.3d 1320, 1325 (2d Cir. 1995). Accordingly, the Second Circuit has held that fraud upon the court is limited to fraud that "seriously affects the normal process of adjudication" and that "does or attempts to, defile the court itself, or is a fraud perpetrated by officers of the court so that the judicial machinery cannot perform in the usual manner its impartial task of adjudging cases." Hadges, 48 F.3d at 1325 (internal citations and quotation marks omitted).

  The complaint in this case alleges that GAI was created by defendant Sportschuetz to fraudulently represent shareholders of plaintiff EPAR, Sportschuetz allegedly convinced counsel for both GAI and EPAR that he represented the interests of old EPAR shareholders, who had invested in EPAR through Trent, Ltd. Relying on Sportschuetz's representations, EPAR agreed to settle the case and entered a Stipulation of Discontinuance before Judge Baer.

  The facts in the complaint specifically allege a scheme by Sportschuetz to defraud EPAR of stocks to which he was not entitled. While allegations of fraud upon an adverse party may properly constitute a claim for fraud under Rule 60(b)(3), the Second Circuit has consistently held that such fraud does not rise to the level of fraud upon the court pursuant to Rule 60(b)'s "savings clause". See, e.g., Weldon, 70 F.3d 1, 5 (2d Cir. 1995); Sieck v. Russo, 869 F.2d 131, 135 (2d Cir. 1989); Pfotzer, 548 F.2d 51, 52 (2d Cir. 1977). Rather, an independent action for fraud upon the court requires an element of fraud directed at and involving the court itself. Hadges, 48 F.3d at 1325 ("[f]raud upon the court as distinguished from fraud on an adverse party is limited to fraud which seriously affects the integrity of the normal process of adjudication") (quoting Gleason, 860 F.2d 556, 559 (2d Cir. 1998); Transaero, Inc. v. La Fuerza Area Boliviana, 24 F.3d 457, 460 (2d Cir. 1994)).

  Furthermore, relief under Rule 60(b) is generally unavailable to a party that settled the original action or otherwise had an opportunity to litigate the underlying claim, but declined to do so. See, e.g. Gleason, 860 F.2d at 559 (dismissing action to set aside judgment where plaintiff discovered witnesses committed perjury at depositions because plaintiff voluntarily chose to settle action rather than pursue his opportunity to uncover the alleged fraud); Pfotzer, 548 F.2d at 52 ("it sufficed for the court to know the parties had decided to settle without inquiring why") (internal citations and quotation marks omitted).

  Although EPAR had the opportunity to litigate the issue of whether GAI represented the original shareholders, it chose to settle the action instead. Because the issue of fraud could have been litigated in the underlying action, EPAR cannot now challenge the settlement that it voluntarily entered into. III. Conclusion

  For the foregoing reasons, Defendant's motion to dismiss is GRANTED.


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