Opinion
No. 02 Civ. 7751 (SAS).
March 25, 2005
Charles H. Lichtman, Esq., Berger, Singerman, P.A., Florida, for Plaintiff.
Susan G. Rosenthal, Esq., Brown, Raysman, Millstein, Felder Steiner, L.L.P., New York.
John A. Borek, Esq., Michael R. Bromwich, Esq., Tommy P. Beaudreau, Esq., Fried, Frank, Harris, Shriver Jacobson, L.L.P., New York, for Defendant.
MEMORANDUM OPINION AND ORDER
American Tissue, Inc. ("ATI"), a Chapter 11 bankruptcy debtor-in-possession, sued its former accountant Arthur Andersen, L.L.P. ("Andersen") for Andersen's allegedly negligent certification of certain ATI financial misstatements. By Opinion and Order dated May 5, 2003, I granted Andersen's motion to dismiss ATI's claims without prejudice. I subsequently granted ATI leave to replead. By Opinion and Order dated December 9, 2003, I granted Andersen's motion to dismiss ATI's amended complaint with prejudice. ATI now moves for relief from judgment pursuant to Federal Rule of Civil Procedure 60(b)(2), (5) and (6), and for leave to file a second amended complaint. For the reasons that follow, plaintiff's motion is denied.
See American Tissue, Inc. v. Arthur Andersen, L.L.P., 275 F.Supp.2d 398, 406 (S.D.N.Y. 2003) (" American Tissue I").
See American Tissue, Inc. v. Arthur Andersen, L.L.P., No. 02 Civ. 7751, 2003 WL 22909155, at *4 (S.D.N.Y. Dec. 9, 2003) ( "American Tissue II").
See 12/14/04 Plaintiff's Verified Rule 60(b) Motion for Relief from Judgment ("Pl. Motion") at 1-2.
I. Background
The core allegations of ATI's initial complaint are fully described in my prior Opinion and Order in American Tissue I, familiarity with which is presumed. "In short, ATI retained Andersen to audit its year-end consolidated financial statements for the years 1998, 1999 and 2000, and to review its 2001 quarterly financials. Nonetheless, ATI's financial statements for 1999, 2000 and the first three quarters of 2001 `were riddled with inaccuracies.'" On September 5, 2001, ATI announced the financial statement inaccuracies. ATI declared bankruptcy later that month.
See American Tissue I, 275 F.Supp. 2d at 400-04.
American Tissue II, 2003 WL 22909155, at *1 (quoting American Tissue I, 275 F.Supp. 2d at 402).
See American Tissue I, 275 F.Supp. 2d at 401.
See id. at 402.
On August 1, 2002, prior to filing the instant action against Andersen, ATI had filed a complaint (the "Insider Complaint") against ATI's former directors Mehdi Gabayzadeh and Nourallah Elghanayan. The Insider Complaint alleged that Gabayzadeh and Elghanayan "participated in and allowed" the financial misstatements, and sought damages for breach of fiduciary duty and unjust enrichment.
See id.
Id. (quoting Insider Complaint ¶¶ 2, 46).
In American Tissue I, I dismissed ATI's initial complaint for want of subject matter jurisdiction because the complaint ran afoul of the Second Circuit's Wagoner rule, which provides that in New York a "debtor-in-possession lacks standing to sue third parties for defrauding the debtor if the debtor's principals had a hand in the misconduct." In light of ATI's binding admissions in the Insider Complaint that Gabayzadeh and Elghanayan, among others, were responsible for the misstatements alleged, I concluded that under the Wagoner rule, ATI lacked standing to sue Andersen for malpractice. I therefore held that ATI "could have saved its case only by showing that (a) Andersen's alleged malpractice was unrelated to the misconduct charged in the Insider Complaint, or (b) that the insiders' misconduct is not fairly attributable to ATI."
Id. at 404 (citing Wight v. Bankamerica Corp., 219 F.3d 79, 86-87 (2d Cir. 2000); Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir. 1991)).
Id. at 405, n 8.
Id. at 406.
Although my Opinion in American Tissue I specified what ATI could plead to avoid a dismissal under the Wagoner rule, ATI failed to make sufficient allegations in its Amended Complaint to prevent a second dismissal. Indeed, the Amended Complaint emphasized Gabayzedeh and Elghanayan's primary responsibility for the fraud. Instead, ATI "bizarrely . . . argue[d] that I should simply discard the Wagoner rule" and in its place apply principles of comparative negligence to apportion fault among Andersen and ATI. I therefore dismissed ATI's amended complaint in American Tissue II.
See American Tissue II, 2003 WL 22909155, at *2.
Id. at *3.
ATI now seeks to reopen its action against Andersen pursuant to Rule 60(b). ATI's motion is premised on the assertion that, having completed its investigation of the claims against Elghanayan, and following the appointment of new counsel, "ATI has come to the conclusion that Elghanayan is innocent of committing insider fraud." ATI asserts that because of Elghanayan's innocence, the controversial `innocent insider' exception to the Wagoner rule is applicable here, and ATI therefore has standing to bring its claims against Andersen.
Pl. Motion at 2.
See, e.g., Breeden v. Kirkpatrick Lockhart, 268 B.R. 704, 710 (S.D.N.Y. 2001) (recognizing an `innocent insider' exception to the Wagoner rule where "at least one decisionmaker in a management role or amongst the shareholders is innocent and could have stopped the fraud"). But see In re C.B.I. Holding Co., 311 B.R. 350, 372 (S.D.N.Y. 2004) (rejecting `innocent insider' exception). The Second Circuit has expressly declined to approve or disapprove the `innocent insider' exception. See In re Bennett Funding Group, Inc., 336 F.3d 94, 101 (2d Cir. 2003).
II. Legal Standard
A. Rule 60(b)
Rule 60(b) provides in relevant part that a court may relieve a party from an order for the following reasons:
(2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b) . . . or (6) any other reason justifying relief from the operation of the judgment.
Fed.R.Civ.P. 60(b). ATI also seeks relief under Rule 60(b)(5). That section of the Rule has no relevance here. Rule 60(b)(5) provides that a court may relieve a party from a judgment imposing ongoing injunctive relief, as equity requires. It is not applicable to a simple dismissal. See DeWeerth v. Baldinger, 38 F.3d 1266, 1275 (2d Cir. 1994).
"Properly applied, [Rule 60] preserves a balance between serving the ends of justice and ensuring that litigation reaches an end within a finite period of time." To strike this balance, "[a] motion for relief from judgment is generally not favored and is properly granted only upon a showing of exceptional circumstances." In a Rule 60(b) motion, "[t]he burden of proof is on the party seeking relief from judgment."
Paddington Partners v. Bouchard, 34 F.3d 1132, 1144 (2d Cir. 1994) (quotation omitted).
United States v. International Bhd. of Teamsters, 247 F.3d 370, 391 (2d Cir. 2001) (citations omitted). Accord State Street Bank Trust Co. v. Inversiones Errazuriz Limitada, 374 F.3d 158, 178 (2d Cir. 2004) ("To prevail on a motion for relief pursuant to Rule 60(b)(2), a movant must demonstrate that he was justifiably ignorant of the newly discovered evidence despite due diligence.").
Teamsters, 247 F.3d at 391.
1. Rule 60(b)(2)
In the Second Circuit, a party seeking relief from judgment under Rule 60(b)(2), on the basis of newly discovered evidence, must demonstrate that:
(1) the newly discovered evidence was of facts that existed at the time of trial or other dispositive proceeding, (2) the movant must have been justifiably ignorant of them despite due diligence, (3) the evidence must be admissible and of such importance that it probably would have changed the outcome, and (4) the evidence must not be merely cumulative or impeaching.
Id. at 392.
The Second Circuit has described the moving party's burden as "an onerous standard to meet." "A motion for relief from judgment is not a vehicle for providing details previously available about claims properly dismissed."
Id.
Mills v. State of New York, No. 98 Civ. 1326, 2004 WL 433788, at *1-2 (S.D.N.Y.Mar. 10, 2004).
2. Rule 60(b)(6)
A court may vacate a judgment under Rule 60(b)(6) "whenever such action is appropriate to accomplish justice," although Rule 60(b)(6) "should only be applied `in extraordinary circumstances.'" Rule 60(b)(6) and the other clauses of Rule 60(b) are mutually exclusive: when "the reasons offered for relief from judgment can be considered in one of the more specific clauses of Rule 60(b), such reasons will not justify relief under Rule 60(b)(6)."
Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847, 863 (1988) (citation omitted).
Id. Accord DeWeerth, 38 F.3d at 1272 (holding that Rule 60(b)(6) is "properly invoked where there are extraordinary circumstances or where the judgment may work an extreme and undue hardship.").
Teamsters, 247 F.3d at 391-92.
III. DISCUSSION
A. Rule 60(b)(2)
ATI's motion to reopen on the basis of newly discovered evidence of Elghanayan's innocence fails for two reasons. First, the evidence on which ATI relies is not newly discovered. ATI has not identified any specific evidence or information that it "discovered" after the dismissal with prejudice in American Tissue II. ATI instead points to certain "red flag issues" that have caused it to reconsider its belief that Elghanayan was involved in the fraud, including: (1) that Elghanayan, unlike Gabayzadeh and a number of other ATI employees, was never indicted on criminal fraud charges or named as a civil defendant by the SEC in the criminal and civil proceedings arising out of ATI's bankruptcy; (2) that "at no time did Elghanayan ever assert his Fifth Amendment privilege in any deposition or court proceeding;" (3) that Elghanayan has consistently proclaimed his innocence; and (4) that no private party has ever obtained a judgment against Elghanayan. However, ATI was either directly or indirectly involved in all relevant proceedings, prior to my ruling in American Tissue II. Therefore, all of these "red flag issues" were either known to ATI, or readily available from the public record, prior to dismissal. Indeed, ATI does not even claim that it lacked knowledge of these issues prior to my ruling. Rather, ATI claims that further consideration of these "red flag issues" has caused it to reinterpret the significance of the evidence already in its possession. This is not a proper basis for a Rule 60(b)(2) motion. The motion must be denied on this ground alone.
Pl. Motion at 17.
See Hemric v. City of New York, et al., No. 99 Civ. 213, 2002 WL 1203850, at *8 (S.D.N.Y. June 3, 2002) ("In general, documents in the public record are not considered newly discovered evidence.").
Second, ATI fails to show that the evidence "probably would have changed the outcome" if it had been presented in a timely fashion. Those courts that have recognized the `innocent insider' exception have held that the exception is applicable only where "at least one decisionmaker in a management role or amongst the shareholders is innocent and could have stopped the fraud," or " would . . . have taken steps to bring the fraudulent conduct to an end." In Bennett, the Second Circuit, assuming arguendo that the `innocent insider' exception would be available in an appropriate case, observed that the exception is not applicable where the alleged innocent insiders were "impotent to actually do anything" to stop the fraud.
Teamsters, 247 F.3d at 392.
Bennett, 336 F.3d at 101 (emphasis added).
Breeden, 268 B.R. at 710 (emphasis added).
Bennett, 336 F.3d at 101.
It is unlikely that the evidence ATI now seeks to present would have affected the outcome of my prior rulings, because ATI has not established that Elghanayan could and would have stopped the fraud had he known of it. Although Elghanayan, as ATI's chairman and controlling shareholder, would in principle have been able to prevent the fraud, it is undisputed that Elghanayan was "for all intents and purposes . . . in retirement," and was largely a "figurehead." Given Elghanayan's abdication from active involvement in the company, the weight of the evidence establishes that Elghanayan was "impotent to actually do anything" about the fraud, and that effective control of the company was in the hands of Gabayzadeh and others. ATI's mere unsubstantiated speculation that Elghanayan could and would have stopped the fraud if he had known about it is not sufficient to establish the applicability of the `innocent insider' exception. As the Second Circuit has emphasized, "the Wagoner rule [cannot be] defeated by a would-a, could-a, should-a test." To apply the `innocent insider' exception in this case would perversely reward ATI for having selected a chairman who played almost no role in policing the activities of the corporation.
The burden is on ATI, as the party asserting subject matter jurisdiction, to prove that jurisdiction exists by a preponderance of the evidence. See Luckett v. Bure, 290 F.3d 493, 496-97 (2d Cir. 2002).
Pl. Motion at 11 (quoting Proposed Second Amended Complaint at ¶ 22).
Bennett, 336 F.3d at 101.
Id.
Those courts which have rejected the `innocent insider' exception outright have observed that the exception removes an important incentive for "the innocent managers, board members and owners [to] polic[e] the guilty." C.B.I. Holding, 311 B.R. at 372 (citing Cenco, Inc. v. Seidman Seidman, L.L.P., 686 F.2d 449, 454-56 (7th Cir. 1982)).
B. Rule 60(b)(6)
Additionally, ATI argues that the Court should vacate the dismissal pursuant to Rule 60(b)(6) since "this is an extraordinary case" and ATI would suffer "hardship" if it cannot bring an action against Andersen. However, the Court cannot grant relief under Rule 60(b)(6) if the motion "can be considered in one of the more specific clauses of Rule 60(b)." Because ATI's motion can be considered under Rule 60(b)(2), it is not appropriately brought under Rule 60(b)(6). In any case, ATI has failed to show any extraordinary circumstances requiring relief under Rule 60(b)(6), other than ATI's own belated desire to change its litigation strategy; but "Rule 60 will not afford plaintiff relief from the consequences of its litigation strategy. Movant's interest in undoing the results of a litigation strategy which, in hindsight, appears unwise fails to outweigh the judiciary's interest in the finality of judgments." Finally, I note that denying ATI's motion does not necessarily leave ATI entirely without a remedy; as I previously explained in American Tissue II, "ATI can seek a judgment from Gabayzadeh who may, in turn, seek contribution from Andersen."
Teamsters, 247 F.3d at 392.
Romania v. Wildenstein Co., 147 F.R.D. 62, 65 (S.D.N.Y. 1993).
See American Tissue II, 2003 WL 22909155, at *4.
IV. CONCLUSION
For the reasons set forth above, plaintiff's motion for relief from judgment is denied. The Clerk of the Court is directed to close this motion [docket # 40] and this case.
SO ORDERED.