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In re OSG Sec. Litig.

United States District Court, S.D. New York

February 7, 2014

IN RE OSG SECURITIES LITIGATION

For Lead, Plaintiffs: Samuel H. Rudman, Esq., David A. Rosenfeld, Esq., Mark T. Millkey, Esq., Christopher M. Barrett, Esq., Robbins Geller Rudman & Dowd LLP, Melville, NY.

For Morten Arntzen, Defendants: Scott B. Schreiber, Esq., Craig A. Stewart, Esq., Arnold & Porter, Washington, DC.

For Myles R. Itkin, Defendant: David H. Kistenbroker, Esq., Joni S. Jacobsen, Esq., Ashley J. Burden, Esq., Neil A. Steiner, Esq., Dechert LLP, Chicago, IL.

OPINION

Page 620

MEMORANDUM OPINION AND ORDER

Shira A. Scheindlin, U.S.D.J.

On January 28, 2014, plaintiffs submitted a letter apprising this Court of new developments in Overseas Shipping Group's (" OSG's" ) bankruptcy proceedings. Specifically, on November 18, 2013, OSG filed a malpractice lawsuit against its outside counsel, Proskauer Rose LLP (" Proskauer" ), in Delaware Bankruptcy Court. On January 17, 2014, Proskauer filed a motion to dismiss OSG's claims. Plaintiffs argue that Proskauer's motion reveals factual information that strengthens plaintiffs' scienter allegations against two of the defendants here, Morten Arntzen and Myles Itkin, former officers of OSG. Therefore, they request another opportunity to amend their complaint if the Court is inclined to grant Arntzen and Itkin's pending motion to dismiss. Although the Court has not yet considered defendants' motion to dismiss and expresses no opinion on its merits, plaintiffs' request to amend their complaint is granted.

Proskauer's motion to dismiss OSG's malpractice action does not mention Arntzen or Itkin byname. However, it does allege that another top officer of OSG withheld from Proskauer a number of documents relevant to the company's tax liability under Section 956.[1] It also alleges that OSG asked Proskauer to issue a formal tax opinion about the company's Section 956 liability despite knowing there were contradictory documents in its files.[2]

Defendants point out that some district courts in this Circuit have adopted the broad rule that a complaint may never reference allegations from a separate proceeding that has not been decided on the merits.[3] However, no Second Circuit precedent indicates such a broad rule. In 1976, in Lipsky v. Commonwealth United Corporation, the Second Circuit held that " neither a complaint nor references to a complaint which results in a consent judgment may properly be cited in the pleadings under the facts of this

Page 621

case." [4] However, Lipsky relied on the fact that Federal Rule of Evidence (" FRE" ) 410 " prohibits a plea of nolo contendere from being later used against the party who so pleaded," and noted that " nolo pleas have been equated with consent decrees" for purposes of the provision at issue.[5] Because the consent decree could not be used as evidence in a subsequent lawsuit, the court reasoned that the complaint from that action was also immaterial under Federal Rule of Civil Procedure 12(f).[6]

However, Lipsky emphasized the general rule that motions to strike pleadings as immaterial should be denied " unless it can be shown that no evidence in support of the allegation would be admissible." [7] Lipsky did not hold that a complaint may never reference allegations from a separate proceeding under any circumstances.[8] Instead, its holding was limited to complaints that ultimately resulted in a consent decree or nolo contendere plea protected by FRE 410.

The Second Circuit later clarified in United States v. Gilbert that civil settlements and consent decrees are governed by FRE 410, not FRE 408.[9] While settlements are inadmissible as evidence of liability, they are admissible for other purposes, including proof of knowledge.[10] It follows that reference to the complaints or allegations in such actions would be permissible for the same reasons. Thus, it would make little sense to strike references to pleadings in ongoing actions, which do not trigger the protections or policy concerns of FRE 410 or FRE 408.[11]

Page 622

While allegations from another lawsuit are not evidence and cannot be " introduced in a later trial for collateral estoppel purposes," [12] plaintiffs need not provide admissible proof at this stage. The Federal Rules of Civil Procedure permit discovery on relevant matters that appear " reasonably calculated to lead to the discovery of admissible evidence." [13] Similarly, plaintiffs may plead facts contained in the Proskauer motion upon information and belief, and find admissible evidence to support those allegations at a later stage.[14] Even allegations of fraud can be made upon information and belief where the matters alleged are " peculiarly within the opposing party's knowledge," [15] as long as plaintiffs " provide a statement of facts upon which the belief is founded." [16]

Therefore, plaintiffs' request to amend is granted.[17] Plaintiffs may amend their complaint to add factual allegations from the Proskauer lawsuit by February 14, 2014. Arntzen and Itkin may submit a supplemental memorandum of law on their pending motion to dismiss, limited to five (5) double-spaced pages, by February 21, 2014. Plaintiffs may submit a response of the same length by February 28, 2014.

SO ORDERED.


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