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IN RE LIVENT

February 4, 2005.

In re LIVENT, INC. NOTEHOLDERS SECURITIES LITIGATION.


The opinion of the court was delivered by: VICTOR MARRERO, District Judge

DECISION AND ORDER

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 Page 2 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 Page 3 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 Page 4 for summary judgment.

  I. BACKGROUND

  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 Page 5 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 Page 6 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 Page 7 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 Page 8 claiming the protection of the due diligence defense.

  II. DISCUSSION

  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 Page 9 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 Page 10 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 Page 11 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 Page 12 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 Page 13 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 ...


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