The opinion of the court was delivered by: VICTOR MARRERO, District Judge
Lead plaintiffs Dorian and Diane King ("Plaintiffs"), on behalf
of themselves and a class of investors who purchased some of the
$125 million in 9 3/8% Senior Unsecured Notes Due 2004 ("the
Notes") issued by Livent, Inc. ("Livent"), have filed for summary
judgment on their claims against defendants Garth Drabinsky
("Drabinsky") and Myron Gottlieb ("Gottlieb") under Section 11 of
the Securities Act, 15 U.S.C. § 77k ("Section 11").*fn1 In
brief, Plaintiffs allege that Drabinsky and Gottlieb violated
Section 11(a) by signing a Registration Statement for the Notes
filed with the Securities and Exchange Commission on November 17,
1997 (see Amendment No. 1 to Form F-4, Registration Statement
Under the Securities Act of 1933, ("Registration Statement"),
attached as Ex. 1 to the Affidavit of Murielle J. Steven in
Support of Lead Plaintiffs' Motion
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for Summary Judgment on Liability and Damages, dated November 12,
2004 ("Steven Aff.")), that was rife with material misstatements
concerning the company's financial results, and by serving as
directors of Livent at the time that the misleading Registration
Statement was issued.*fn2 They have submitted extensive
documentary evidence in support of the instant motion.
Drabinsky and Gottlieb, after refusing to answer the
allegations of Plaintiffs' Complaint or produce documents in this
litigation for more than six years in reliance on their Fifth
Amendment right against self-incrimination, now assert that they
cannot be held liable for any misleading statements because they
qualify for the "due diligence" defense enumerated by Section
11(b) of the Securities Act.*fn3
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Plaintiffs resist Drabinsky's and Gottlieb's efforts to assert
the defense of due diligence at this late stage of the
proceedings, but argue in the alternative that the defendants
fail to introduce sufficient evidence in support of their due
diligence defense to survive summary judgment.
The Court concludes that while Drabinsky and Gottlieb should
not be deemed to have waived the due diligence defense to
liability under Section 11, evidence of the misleading nature of
the Registration Statement is overwhelming and essentially
uncontested, while evidence introduced in support of Drabinsky
and Gottlieb's due diligence defense is woefully insufficient.
Therefore, the Court grants Plaintiffs' motion
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for summary judgment.
Plaintiffs' suit is one of a constellation of related
litigation and criminal prosecutions arising out of the collapse
of Livent. The Court has issued numerous decisions adjudicating
issues related to suits by former Livent shareholders,
noteholders, and other parties injured by the company's descent
into bankruptcy. The alleged causes of the company's collapse are
fully discussed in those rulings.*fn4 In addition, the
Securities and Exchange Commission ("SEC") and the United States
of America have brought civil and criminal securities fraud
charges against Drabinsky and Gottlieb related to the company's
collapse.*fn5 These charges have not
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yet been resolved, in part due to the defendants' fugitive
status.*fn6 Familiarity with the extensive background on the
company described in the SEC releases and decisions cited above
is assumed.
The Court will provide only brief background to the instant
motion. Livent is a now-defunct company based in Toronto, Canada,
that produced live theatrical entertainment. It became a public
company in Canada in 1993, and registered its common stock for
trading in the United States in May of 1995. The company raised
substantial amounts of debt in the United States through various
vehicles, including the Notes. In August of 1998, the company
announced in a press release that it had discovered pervasive
accounting irregularities and revenue recognition violations in
prior published financial information. (See Lead Plaintiffs'
Statement of Undisputed Facts Pursuant to Local Rule 56.1, dated
November 12, 2004 ("Plaintiffs' Rule 56.1 Statement") ¶ 8.) This
led Livent, on November 18, 1998, to withdraw its original
financial statements for 1995 through the first quarter of 1998
and to submit restated financials showing that the company had
earned far less than the original financials had led investors to
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believe. (Id. ¶¶ 9-11.) On the same day that it submitted
restated financials, Livent filed for bankruptcy in the United
States and sued Drabinsky and Gottlieb.
Suits by others, including Plaintiffs, followed soon
afterwards. Plaintiffs first filed suit in 1998 against Drabinsky
and Gottlieb, Deloitte & Touche ("Deloitte"), Livent's auditors
at the time the Registration Statement was issued, and several
other parties on the basis of material misstatements allegedly
contained within the Registration Statement. As described in SEC
releases and alleged in Plaintiffs' Complaint, Drabinsky, who was
Livent's CEO and the Chairman of its Board of Directors, and
Gottlieb, who was President and, for a time, Chief Operating
Officer of Livent, masterminded a scheme to produce a misleading
financial picture of the company. Plaintiffs alleged that
Drabinsky's and Gottlieb's corrupt activities resulted in the
inclusion of materially misleading financial information in the
Registration Statement. They sought class certification under
Section 10(b) and Section 11 on behalf of a class of investors
who had purchased the Notes between the date of their issuance
and August of 1998, when the misleading nature of the company's
previous financial information was revealed.
After the Court dismissed claims against certain named
defendants in Livent Noteholders I, and denied class
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certification for Plaintiffs Section 10(b) claims but granted
class certification for Plaintiffs' Section 11 claims in Livent
Noteholders III and Livent Noteholders IV, all remaining
defendants other than Drabinsky and Gottlieb settled with
Plaintiffs. Current members of the class have submitted proofs of
claim for $40,583,146. According to Plaintiffs and as uncontested
by Drabinsky and Gottlieb, these damages were calculated
according to the damages formula for Section 11 violations
established by Section 11(e), 15 U.S.C. § 77k(e). Of those
demonstrated losses, $17,250,000 has been obtained from settling
defendants. Thus, class members seek $23,333,146 in damages from
Drabinsky and Gottlieb.
On November 12, 2004, Plaintiffs moved for summary judgment
against Drabinsky and Gottlieb. In that motion, Plaintiffs
voluntarily dismissed their remaining Section 10(b) claim against
the two defendants and sought summary judgment on the remaining
class-certified Section 11 claim. In papers submitted in support
of the motion, Plaintiffs argue that the Registration Statement
contained material misstatements and that Drabinsky and Gottlieb
were not entitled to the due diligence defense articulated by
Section 11(b), either because they have waived the defense by not
asserting it earlier in the litigation or because no material
facts support the defense. Drabinsky and Gottlieb have opposed
the motion by
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claiming the protection of the due diligence defense.
A. WAIVER OF DEFENDANTS' DUE DILIGENCE DEFENSE
The Court begins its analysis of Plaintiffs' summary judgment
motion with the threshold question of whether Defendants may
assert the due diligence defense to liability enumerated by
Section 11(b) of the Securities Act. Until Drabinsky and Gottlieb
filed their opposition to the instant motion, they had never
before specifically indicated to Plaintiffs or to the Court that
they were seeking to rely on a Section 11(b) due diligence
defense. Rather, Drabinsky and Gottlieb had declined to answer
all of the allegations of the Complaint on the basis of their
Fifth Amendment right against self-incrimination, and had also
failed to assert any affirmative defenses to liability in their
Answer. Furthermore, they had refused to produce discovery on
that basis throughout the more than six years that this
litigation has been pending.
Plaintiffs now assert that Drabinsky and Gottlieb have waived
their right to assert the due diligence defense by failing to
plead it in their Answer, as required by Fed.R.Civ.P. 8(c).
That rule requires an answering party to "set forth affirmatively
. . . any . . . matter constituting an avoidance or affirmative
defense." Second Circuit cases have
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held that failure to comply with the requirements of Rule 8(c) by
asserting an affirmative defense in a responsive pleading may
result in waiver of that affirmative defense. See, e.g.,
Doubleday & Co. v. Curtis, 763 F.2d 495, 503 (2d Cir. 1985)
("[Rule 8(c)] is intended to notify a party of the existence of
certain issues, and its mandatory language has impelled us to
conclude that a party's failure to plead an affirmative defense
bars its invocation at later stages of the litigation."). Under
this doctrine, according to Plaintiffs, Drabinsky and Gottlieb
should be barred from asserting, and introducing evidence in
support of, their due diligence defense in order to avoid summary
judgment.
Drabinsky and Gottlieb respond to Plaintiffs' argument by
noting that prior decisions interpreting Section 8(c) in the
context of motions for summary judgment have refused to deem an
affirmative defense waived unless a plaintiff demonstrates
prejudice as a result of the waiver.*fn7 See, e.g.,
Steinberg
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v. Columbia Pictures Industries, Inc., 663 F. Supp. 706, 715
(S.D.N.Y. 1987) ("[A]bsent prejudice to the plaintiff, a
defendant may raise an affirmative defense in a motion for
summary judgment for the first time.") (quoting Rivera v.
Anaya, 726 F.2d 564, 566 (9th Cir. 1984)).
Despite Drabinsky and Gottlieb's inexcusable delay in asserting
the due diligence defense, the Court declines to exercise its
discretion to deem the defense waived because Plaintiffs' motion
papers and evidence indicate that they suffered no surprise or
other prejudice as a result of the defendants' late assertion of
due diligence.*fn8 It is well established in this Circuit
that an affirmative defense may be asserted even at summary
judgment where the party opposing the affirmative defense has the
opportunity to respond effectively to that defense, and has
otherwise suffered no prejudice as a result of its late pleading.
See, e.g., Astor Holdings, Inc. v. Roski,
325 F. Supp. 2d 251, 260-261 (S.D.N.Y. 2003) ("a
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district court may consider the merits of an affirmative defense
even one explicitly listed as such in Fed R. Civ. P. 8(c)
raised for the first time at the summary judgment stage, so long
as the plaintiff has had an opportunity to respond") (citing
Curry v. City of Syracuse, 316 F.3d 324, 330-31 (2d Cir.
2003)); Devito v. Pension Plan of Local 819 I.B.T. Pension
Fund, 975 F. Supp. 258, 263 (S.D.N.Y. 1997) ("[N]umerous courts
have held that absent prejudice to the plaintiff, a defendant may
raise an affirmative defense in a motion for summary judgment for
the first time.") (brackets and quotation marks omitted).
Plaintiffs cannot argue here that they were unfairly prejudiced
by, or lacked an opportunity to respond to, Drabinsky and
Gottlieb's assertion of the due diligence defense for two
reasons. First, Plaintiffs thoroughly addressed the defendants'
potential due diligence defense in their initial brief in support
of their motion for summary judgment, even before the defense was
formally raised by the defendants, as well as in their reply
brief. (See Plaintiffs' Mem. of Law at 14-18; Lead Plaintiffs'
Reply Memorandum in Support of their Motion for Summary Judgment
against Defendants Drabinsky and Gottlieb, dated Dec. 23, 2004
("Plaintiffs' Reply Mem. of Law") at 8-21.) They thus cannot
argue that they lacked the opportunity to respond to Drabinsky
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and Gottlieb's due diligence defense. Moreover, the Court doubts
that Plaintiffs' extensive discussion of an anticipated due
diligence defense was the result of mere guesswork (see
Plaintiffs' Reply Mem. of Law at 8), given that Section 11
establishes due diligence as the primary and logical defense to
what would otherwise be Drabinsky and Gottlieb's strict liability
under the statute for making misleading statements in the
Registration Statement.
Second, while the Court would likely reach a different
conclusion if Plaintiffs were unable to gather discovery
necessary for them to resist the due diligence defense as a
result of Drabinsky and Gottlieb's excessive delay in raising it,
the record indicates that Plaintiffs have known for some time
that the defendants' state of mind, and their efforts to
facilitate or resist publication of misleading disclosures, would
be relevant to the outcome of the litigation. Although prima
facie liability under Section 11(a) requires no proof of the
defendants' state of mind, Plaintiffs would have needed to
affirmatively establish the defendants' scienter in order to
recover under Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder, 15 U.S.C. § 78j(b) &
17 C.F.R. § 240.10b-5. See Herman & MacLean v. Huddleston,
459 U.S. 375, 382 (1983) ("[A] Section 10(b) plaintiff carries a
heavier burden than a Section 11 plaintiff. Most
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significantly, he must prove that the defendant acted with
scienter, i.e., with intent to deceive, manipulate, or
defraud."). Until Plaintiffs voluntarily withdrew their Section
10(b) claims upon filing the instant motion, they had every
reason to gather evidence concerning Drabinsky's and Gottlieb's
affirmative acts and state of mind relative to the disclosures
contained in or omitted from the Registration Statement, either
to establish the elements of their Section 10(b) claim or ...