Opinion
Civil Action No. 99-3313, Section "G"
July 27, 2000
MEMORANDUM AND ORDER
Background
plaintiffs, Allyson May Sanderson and David Israel, in their capacity as co-trustees for the Sanderson Children's Trust, commenced this action by filing a petition for damages in the 24th Judicial District Court for the Parish of Jefferson against Defendants H.I.G. Capital Management ("Capital Management") and H.I.G. P-XI Holding, Inc. ("P-XI"). plaintiffs allege common law claims for breach of contract, breach of fiduciary duty, and breach of the duty of good faith and fair dealing. Plaintiffs also allege violations of the federal securities laws. plaintiffs seek damages in the amount of $235,896.00.
The parties agree that New York law governs the common law claims.
Defendant Capital Management removed the action to federal court on October 29, 1999, based on federal question and diversity of citizenship jurisdiction. According to the notice of removal, and the record as of this date, only Defendant Capital Management has been served with the lawsuit. Federal question jurisdiction is supported by Plaintiffs' claims under the Securities Exchange Act of 1934, 15 U.S.C. § 78j and 17 C.F.R. § 240.10b-5. Diversity jurisdiction is supported by the allegations that Plaintiffs are citizens of Louisiana; Defendant P-XI was a Delaware corporation whose name changed to Co-Source Corporation, whose successor is NCO Group, a Pennsylvania corporation with its principal place of business in Pennsylvania and Defendant Capital is a Delaware corporation with its principal place of business in Florida; and the amount in controversy is $235,896.00.
Plaintiffs Allyson Sanderson and David Israel are co-trustees for the Sanderson Children's Trust, created to benefit the four children of Michael Sanderson. This action arises out of Michael Sanderson's donation to Co-Trustees of certain stock appreciation rights ("SARs") he was granted by Defendant P-XI. Co-Trustees claim they were entitled to more value than they received upon the sale of P-XI, and the reason they did not receive such value was PXI's overpayment of Defendant Capital Management for services rendered in connection with the sale of P-XI.
The alleged facts, which are accepted as true for purposes of this motion, are as follows. By written agreement dated April 15, 1997, P-XI granted Michael Sanderson 10,030 stock appreciation rights ("SARs") in P-XI, which represented 10.03% of the issued and outstanding common stock of P-XI. The SAR Agreement was executed in connection with the sale by Michael Sanderson to P-XI of assets in corporations that he owned and operated prior to 1997. The SARs obligated P-XI to pay Sanderson an amount equal to the increase in value of PX-I's common stock when P-XI sold its stock to third parties, or pursuant to other terms, as set forth in the SAR Agreement.
The SAR Agreement is atttached to the Plaintiffs' Petition for Damages.
By Act of donation dated October 5, 1998, Michael Sanderson donated 9,829 of his SARs to Co-Trustees in their capacity as Co-Trustees of the Sanderson Children's Trust. The terms of the SAR Agreement permitted such a transfer.
In 1999, P-XI effected a private sale of its stock to a third party, NCO Group, Inc. ("NCO"). Upon this sale, the SARs vested, plaintiffs exercised their SARs, and P-XI paid them a value for each SAR. In connection with the acquisition of P-XI, Defendant Capital Management performed certain services for which it was paid a fee of $2.4 million by P-XI. The value assigned to the SARs was net of closing costs, including the fee paid to Capital Management.
Plaintiffs take issue with the $2.4 million fee paid to Capital Management, and claim that P-XI and Capital Management violated their "contractually imposed fiduciary duties and obligations of good faith and fair dealing" when they reduced the fair market value of the proceeds from the sale of the company by overpaying Capital Management. Plaintiffs further allege that absent an express contractual duty, there was a legally-imposed fiduciary duty or obligation of good faith and fair dealing prohibiting self-dealing that diluted the value of the SARs. Finally, plaintiffs allege a violation of federal securities laws. Plaintiffs seek $235,896.00 in damages, allegedly representing 9.829% of Capital Management's $2.4 million fee (the 9.829% representing the percentage of outstanding and unissued P-XI stock represented by plaintiffs' SARs).
Defendant Capital Management has filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), arguing that Plaintiffs have failed to state a claim against Capital Management under any theory. Plaintiffs have opposed Defendant's Motion to Dismiss.
Discussion
A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) "is viewed with disfavor and is rarely granted." Kaiser Aluminum Chem. Sales v. Avondale Shipyards, 677 F.2d 1045, 1050 (5th Cir. 1982); see also Beanal v. Freeport-McMoran, Inc., 197 F.3d 161, 164 (5th 1999). A Rule 12(b)(6) motion to dismiss effectively admits the properly pleaded factual allegations of the complaint, but denies that such allegations are legally sufficient to state a claim upon which the court may grant relief. Accordingly, a motion to dismiss will not be granted unless it is clear from the allegations that "the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102 (1957); see also Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994).
When considering a motion to dismiss, the court must accept as true not only the allegations of the complaint, but also "any reasonable inferences that may be drawn therefrom." Watts v. Graves, 720 F.2d 1416, 1419 (5th Cir. 1983); see also Tuchman, 14 F.3d at 1067. However, the court need not accept as true "conclusory allegations or unwarranted deductions of fact" contained in the complaint. Tuchman, 14 F.3d at 1067.
A. Plaintiffs' Common Law Claims
Defendant Capital Management argues that plaintiffs fail to state a claim for breach of contract because there is no privity of contract between Plaintiffs and Defendant Capital Management. Defendant further contends that Plaintiffs cannot state a claim for breach of fiduciary duty because that claim is redundant of the breach of contract claim and there is no legal relationship, i.e., one arising outside the contract, giving rise to such a duty. Finally, Defendant argues that Plaintiffs fail to state a claim for breach of the obligation of good faith and fair dealing because, like the fiduciary duty claim, this claim is redundant of the breach of contract claim, and imposition of such a duty is not consistent with the express terms of the contract.
1. Breach of Contract
Plaintiffs allege that Capital Management breached the provision in the SAR Agreement requiring that "`Fair Market Value' of any proceeds or property shall be determined in good faith by the Board." See Petition at ¶¶ 15-17; SAR Agreement at p. 2.
Capital Management contends that it was not a party to the SAR agreement entered into by Michael Sanderson and P-XI, and, therefore, as a matter of law, no breach of contract claim can lie.
It is beyond dispute that privity between a plaintiff and defendant is necessary to the maintenance of an action on a contract. See Ouinn v. Thomas H. Lee Co., 1999 WL 649006 at *6 (S.D.N.Y. 1999); Sopasis Construction, Inc. v. Solomon, 233 A.D.2d 385, 387 (N.Y.A.D. 1996);Seaver v. Ransom, 120 N.E. 639, 640 (N Y 1918). Review of the SAR agreement, a copy of which is attached to Plaintiffs' complaint, confirms that Capital Management is not a signatory. Further, Plaintiffs do not even argue that Capital Management was a party to the SAR Agreement. Liberal construction of the Petition suggests that plaintiffs instead aim to pierce the corporate veil to hold Capital Management liable as the majority shareholder of P-XI.
"In considering a motion to dismiss for failure to state a claim under Fed.R.civ.P. 12(b)(6), a district court must limit itself to facts stated in the complaint or in documents attached to the complaint as exhibits or incorporated in the complaint by reference." Kramer v. Time Warner, Inc., 937 F.2d 767, 773 (2d Cir. 1991). Here, the court may consider the SAR agreement, in addition to the facts stated in the pleadings, since the agreement is attached to the complaint and the agreement is incorporated by reference in complaint.
Generally, piercing the corporate veil requires a showing, at a minimum, that (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury. See Matter of Morris v. New York State Dept. of Taxation and Finance, 603 N.Y.S.2d 807, 810 (Ct.App.N.Y. 1993) (citations omitted). The plaintiff must show domination to the extent that P-XI had no independent existence. See Ouinn v. Thomas H. Lee Co., 61 F. Supp.2d 13, 20 (S.D.N.Y. 1999).
Plaintiffs allege in their Petition that Capital Management was the "majority shareholder" of P-XI, and had "ultimate control" over P-XI, and "forced" the sale of P-XI, in connection with which it was paid a non-disclosed $2.4 million fee which lowered the value of plaintiffs' SARs. Plaintiffs' allegations include no details whatsoever concerning the manner in which Capital Management controlled P-XI, the facts underlying the sale, or the nature of and appropriate value of the services performed by Capital Management in connection with the sale.
I am not completely satisfied with Plaintiffs' allegations concerning domination and control of P-XI by Capital Management. Plaintiffs invoke the legal terms "control" and "domination." While the court on a Rule 12 (b)(6) motion must accept plaintiffs' factual allegations as true, the court need not accept as true conclusory allegations or legal conclusions masquerading as fact. Plaintiffs' breach of contract claim therefore will be dismissed unless plaintiff is able to amend the complaint to allege circumstances supporting piercing of the corporate veil.
In their opposing memoranda, Plaintiffs, perhaps out of fear of dismissal of their breach of contract claim, attempt to convert their claim for breach of contract into a claim for tortious interference with a contract, i.e., Capital Management's tortious interference with the Sanderson/P-XI SAR Agreement. Even liberal construction of plaintiffs' petition does not support such a claim. Plaintiffs weakly contend that the allegation that Defendant Capital Management violated its "contractually-imposed fiduciary duties and obligations of good faith and fair dealing," somehow establishes not only a breach of contract claim, but also a claim for tortious interference with contract.
Plaintiffs' allegations are insufficient to state a claim for tortious interference with contract. The language of Plaintiffs' Petition, specifically the allegation upon which Plaintiffs rely to establish the tortious interference claim, supports only the claim expressly asserted in the complaint — that Defendant Capital Management was bound by contract. A party to a contract cannot tortiously interfere with its own contract. CIBC Bank Trust Co. (Cayman), Ltd. v. Bance Central do Brasil, 886 F. Supp. 1105, 1119-20 (S.D.N.Y. 1995).
In any event, Plaintiffs may not salvage an otherwise defective breach of contract claim by converting it to a tort cause of action in their opposition memorandum. A complaint may not be amended by the plaintiff's briefs in opposition to a motion to dismiss. Burch v. City of Nacogdoches, 174 F.3d 615, 617 n. 5 (5th Cir. 1999). Plaintiffs nowhere in their petition plead a claim for tortious interference and cannot amend their pleadings via their opposition brief.
Accordingly, the breach of contract claim will be dismissed unless Plaintiffs are able to amend their pleadings to allege circumstances supporting piercing of the corporate veil. In amending the pleadings, plaintiffs are not precluded from attempting to allege an alternative claim for tortious interference with contract.
2. Breach of Fiduciary Duty
Capital Management contends that, as a matter of law, no fiduciary relationship exists between Plaintiffs and Capital Management, under the contract or by operation of law.
Under New York law, the elements of a claim for breach of fiduciary duty are (1) breach of a duty owed to the plaintiffs; (2) defendants' knowing participation in the breach of fiduciary duty; and (3) damages suffered by the plaintiff which were proximately caused by the alleged breach. See Scholastic Inc. v. Harris, 80 F. Supp.2d 139, 151 (S.D.N.Y. 1999) (citations omitted) Concerning the existence of Capital Management's duty, Plaintiffs cite two sources giving rise to a fiduciary duty: contract and law.
Under New york law, Plaintiffs' claim for breach of a contractually imposed fiduciary duty is considered redundant of the breach of contract claim, and essentially merges with the breach of contract claim.Scholastic Inc. v. Harris, 80 F. Supp.2d 139, 152 (S.D.N.Y. 1999);O'Hearn v. Bodyonics, Ltd., 22 F. Supp.2d 7, 12-13 (E.D.N.Y. 1998).
To the extent that plaintiffs are attempting to state a separate claim for breach of a contractually imposed fiduciary duty, then, the breach of fiduciary duty claim is dismissed, leaving the breach of contract claim, which, as discussed above, hinges on plaintiffs' ability to amend the complaint to allege circumstances supporting piercing of the corporate veil.
Plaintiffs also allege that Capital Managment breached a legally-imposed fiduciary duty, i.e. one arising outside the contract. Such a non-contractual duty arises when there is a relationship between the parties characterized by the vulnerability of one party to another, the empowerment of the stronger party by the weaker one, the solicitation or acceptance of empowerment by the stronger party, and the prevention of the weaker party from effectively protecting itself. Langford v. Roman Catholic Diocese of Brooklyn, 677 N.Y.S.2d 436, 438 (N.Y.Sup. 1998).
Plaintiffs allege that Capital Management, as controlling shareholder of P-XI, empowered itself to sell the company; the SAR holders placed their confidence in Capital Management to maximize stock value; and Capital Management breached that trust by taking an undeserved fee that diluted the value of the SARs. Plaintiffs allege that as the controlling shareholder, Capital Management essentially acted as the corporation. Thus, the "relationship" relied on by plaintiffs to support imposition of a non-contractual fiduciary duty is that of a corporation toward its shareholders.
Capital Management apparently concedes that a corporation owes a fiduciary duty to its shareholders, but maintains that plaintiffs, as SAR holders, do not enjoy the rights of shareholders. Defendant cites Lorenz v. CSX Corp., 1 F.3d 1046 (3d Cir. 1993), as addressing an issue comparable to the one at hand. In Lorenz the Third Circuit, applying New York law, upheld the district court's dismissal of a claim for breach of fiduciary duty brought by holders of debentures in a corporation against the corporation's controlling shareholders. Upholding the dismissal, theLorenz court reasoned:
It is well-established that a corporation does not have a fiduciary relationship with its debt security holders, as with its shareholders. The relationship between a corporation and its debentureholders is contractual in nature. . . . [A] corporation is under no duty to act for the benefit of its debentureholders, or to refrain from action which dilutes their interest, except as provided in the [contract of] indenture.Lorenz, 1 F.3d at 1406.
As debenture holders, the Lorenz plaintiffs held long-term, unsecured debt securities in the corporation. Id. at 1409 n. 1. The debentures were convertible into the corporation's common stock at any time prior to the year 2010, when the debentures matured. Id. at 1409. The conversion option did not affect the court's disposition of the issue; the court stated that "[e]ven if the debentures are convertible, the debentureholder is merely a creditor who is owed no fiduciary duty until conversion takes place," i.e. when the debenture holders become shareholders. Id. at 1417.
The Lorenz case is persuasive authority that there is no legally-imposed fiduciary duty toward SAR holders. Created by contract, SARs "involve the right to receive the appreciation on a specified number of shares of a company's securities (generally common stock) which occurs within a specified time period." Bloomenthal, 3B Securities and Federal Corporate Law § 10.07[2] at 10-24.1 (1983). The holder of the SAR does not own stock, and, unlike stock option rights, SARs do not require the purchase or sale of stock. Id. The grantee receives the value of the appreciation in the stock without ever having to convert his interest into stock.
Like the Lorenz plaintiffs, whose rights to future corporate gain were created by contract, Plaintiffs herein contracted for the right to receive the value realized by appreciation of corporate stock. In both situations the rights of the holders, as well as the duties of the corporate sellers, are defined by contract. Further, unlike the debentureholders in Lorenz, who the court acknowledged would be owed a fiduciary duty by the corporation once their rights were converted and they became stockholders, here, the SAR Agreement did not provide for conversion of the SARs to stock, but for direct payment of appreciation in stock value to the SAR holders. Plaintiffs' status as SAR holders did not confer upon them any equity ownership in P-XI, nor did it confer any voting rights. The SAR indicates on its face that the SARs, unlike stock, cannot be sold, traded or alienated in any way other than bequest. SAR Agreement at ¶ 9.
Applying Lorenz as persuasive authority, then, the SAR Agreement determines the rights and duties of the contracting parties. Thus, assuming for purposes of this claim that Defendant Capital Management was bound by the terms of the SAR agreement, under New York law, Defendant owed no extra-contractual fiduciary duty to Plaintiffs.
3. Breach of Obligation of Good Faith and Fair Dealing
Defendant Capital Management contends that because Capital Management is not a party to the SAR agreement, Plaintiffs cannot point to any source imposing a duty of good faith and fair dealing upon Capital Management.
Again, assuming plaintiffs can pierce the corporate veil to impose contractual liability on Capital Management, breach of the duty of good faith and fair dealing does not provide a cause of action separate from a breach of contract claim. "Parties to an express contract are bound by an implied duty of good faith, but breach of that duty is merely a breach of the underlying contract." Fasolino Foods Co., Inc. v. Banca Nazionale del Lavoro, 961 F.2d 1052, 1056 (2d Cir. 1992); see also Lorenz, 1 F.3d at 1415.
Further, even assuming that the contract here contains an implied covenant, the "law does not allow the implied covenant of good faith and fair dealing to be an everflowing cornucopia of wished-for legal duties" or "to insert new terms that were not bargained for. A covenant is implied only when it is consistent with the express terms of the contract." Lorenz, 1 F.3d at 1415; Comprehensive Care Corp. v. Rehabcare Corp., 98 F.3d 1063, 1066 (8th Cir. 1996).
Though the SAR Agreement contains no provision which explicitly prohibits the disputed fee, an implicit restriction may be found in the broad requirement of the agreement that the "fair market value" of the proceeds received in connection with the sale of P-XI be determined in good faith. Plaintiffs allege that, under the terms of the SAR agreement, Defendant Capital Management, as the alleged majority and controlling shareholder of P-XI, was obligated to determine in good faith the "fair market value" of the proceeds received in connection with the sale of P-XI. Plaintiffs contend that Capital Management violated this duty of good faith by "paying itself" the disputed $2.4 million service fee in conjunction with the sale of P-XI, thereby reducing the "fair market value" of the proceeds from the sale and, in turn, reducing the value of Plaintiffs' SARs.
Pet. ¶ 15.
Pet. ¶ 16.
The breadth of the "fair market value" provision is such that a prohibition against any form of self-dealing may be inferred without impermissibly adding a new term to the SAR agreement. Accordingly, Plaintiffs' claim for breach of an implied duty of good faith and fair dealing should not be dismissed, provided plaintiffs are able to amend their pleadings to allege circumstances indicating the existence of a contract binding Defendant Capital Management.
B. Plaintiffs' Federal Securities Law Claims
With respect to Plaintiffs' claims for violations of federal securities laws, Defendant Capital Management asserts the following in support of its Motion to Dismiss under Rule 12(b)(6) : (1) SARs are not "securities;" (2) even assuming that SARs are securities, Plaintiffs did not "purchase or sell" the SARs and thus lack standing to assert a Rule 10b-5 claim; (3) Plaintiffs fail to plead the requisite elements of a 10b-5 claim; and (4) Plaintiffs fail to satisfy the heightened Rule 9(b) pleading standards for fraud.
Plaintiffs allege violations of the Securities Exchange Act of 1934, specifically 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5. They allege that Defendants had a duty to disclose to Michael Sanderson any and all material facts that might affect the value of the SARs, including any actual, anticipated or planned self-dealing such as the payment to Capital Management of a $2.4 million fee in connection with the ultimate sale of the SARs. 1. SARs as Securities
Pet. ¶¶ 19-21.
Defendant Capital Management contends that the federal securities laws have no application to the case at hand because the SARs at issue herein are not "securities" for purposes of the Securities Exchange Act.
In Woodward v. Metro Bank of Dallas, the Fifth Circuit noted that "[a] preliminary task in every 10b-5 case is to find some `security' that was the object of the activities in question." 522 F.2d 84, 91 (5th Cir. 1975). If no security is implicated by Plaintiffs' allegations, then the federal securities laws do not apply. See Matassarin v. Lynch, 174 F.3d 549, 559-60 (5th Cir. 1999) (reasoning that a claim implicates federal securities laws only if the interest involved constitutes a `security' under § 3(a) (10) of the "34 Act.). Accordingly, my first task is to determine whether the SARs at issue can be considered "securities" under any circumstances. See Bank of Louisiana v. D A Funding Corp., 1997 WL 639012, at *12 (E.D. La. Oct. 15, 1997) (holding that because the interest "cannot be considered a security under any circumstances, all claims based on the security laws have no merit").
The applicable provision of the Securities Exchange Act, section 3(a) (10), does not specifically include SARs within the definition of "security." See 15 U.S.C. § 78c(10). However, as the Fifth Circuit noted in Woodward, the term "security" is broadly defined to include an "investment contract." See Woodward, 522 F.2d at 91; 15 U.S.C. § 78c(10). The prevailing definition of an "investment contract" was introduced in SEC v. W.J. Howey Co., wherein the Supreme Court provided that: "[A] n investment contract . . . means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1103 (1946).
This definition was extended to the Securities Exchange Act inTcherepin v. Knight, 389 U.S. 332, 88 S. Ct. 548 (1967), and reaffirmed by the court in United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S. Ct. 2051 (1975). See Woodward, 522 F.2d at 92 n. 17.
The Fifth Circuit has read the Supreme Court's test to require the existence of the following four elements in order to find an "investment contract": "(1) the presence of an investment; (2) a common venture; (3) a reasonable expectation of profits; and (4) such profits derive from the entrepreneurial or managerial efforts of others." United American Bank of Nashville v. Gunter, 620 F.2d 1108, 1114 (5th Cir. 1980).
Defendant Capital Management's memoranda do not address these elements. Instead, Defendant contends simply that "[t]he SARs at issue here are not securities because, by the express terms of the SAR Agreement, they were inalienable and not subject to trading." Although transferability is a common characteristic of a security, it is but one factor tending to show the existence of a security; it is not dispositive. Neither is it dispositive that the transaction at issue may be characterized as a "unique agreement, negotiated one-on-one by the parties." Although the Supreme Court characterized the guaranty agreement at issue in Marine Bank v. Weaver as such, and determined that the agreement was not a security, the Court noted that "[i]t does not follow that a . . . business agreement between transacting parties invariably falls outside the definition of a `security' as defined by the federal statutes." Marine Bank, 455 U.S. 551, 560-61 n. 11, 102 S.Ct. 1220, 1225-26 n.h.11. The determination of whether an agreement is an "investment contract," and therefor a "security," must be determined on a case-by-case basis. Id. at 560 n.h,11 102 S.Ct. at 1225 n.ll.
Def. Mem. in Support p. 10.
Given that Defendant has failed to address the applicable test governing the existence of an "investment contract," Defendants argument concerning plaintiffs' failure to implicate a "security" must fail. Defendant has failed to show that Plaintiffs can prove no set of facts in support of their claim that the SARs are "securities" under the Act.
2. Rule 10b-5 Violation
The Securities Exchange Act, section 78j, prohibits, "in connection with the purchase or sale of any security," the use or employment of "any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j. Such "rules and regulations" are set forth in 17 C.F.R. Part 240. Rule 10b-5 provides that is unlawful for any person, "in connection with the purchase or sale of any security":
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.17 C.F.R. § 240.10b-5.
Plaintiffs allege that Defendant Capital Management violated Rule 10b-5 by failing to "make full and complete disclosure of any and all material facts that may affect the value of securities, and to disclose all actual or planned self-dealing."
Pet. ¶¶ 19-21.
Capital Management contends that Plaintiffs lack standing to bring a claim under Rule 10b-5 and that Plaintiffs have failed to allege essential elements of such a claim.
a. Rule 10b-5 Standing
The "federal 10b-5 remedy is only available to purchasers or sellers of securities." Rathbone v. Rathbone, 683 F.2d 914, 921 (5th Cir. 1982). Even assuming that the SARs are "securities," Defendant Capital Management contends that Plaintiffs were not the purchasers or sellers of the SARs.
The parties do not dispute that Plaintiffs obtained the SARs through donation and did not themselves purchase the SARs. Rather, the parties are in disagreement as to whether donation of the SARs conferred standing upon Plaintiffs to sue for breach of a duty owed to Mr. Sanderson. Capital Management contends that the passage of securities through a trust is insufficient to confer standing, while Plaintiffs maintain that this rule "does not preclude an action by a surrogate plaintiff who legitimately steps into the shoes of a direct purchaser" such as Mr. Sanderson.
Pl. opp. at 6.
In order to set forth a valid 10b-5 cause of action, a plaintiff must allege that there has been wrongdoing in connection with the purchase or sale of a security. Thus, a valid 10b-5 complaint must allege facts which could support a finding that any alleged wrongdoing has been in connection with the purchase or sale of securities. Further, in order to bring a private damage action under Rule 10b-5, a plaintiff must allege that he himself was an actual purchaser or seller of securities. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917 (1975). Thus, even if it can be established that there has been wrongdoing "in connection with the purchase or sale of a security," a private party lacks standing to recover under Rule 10b-5 unless he can allege and establish that he is the purchaser or seller of the security. See Rathbone v. Rathbone, 683 F.2d 914 (5th Cir. 1982).
Rule 10b-5 rights are not automatically assigned by the transfer of the underlying security. See Smith v. Ayres, 977 F.2d 946, 949 (5th Cir. 1992); In re Saxon Securities Litigation, 644 F. Supp. 465 (S.D.N.Y. 1985). The Ayres court reasoned that the Supreme Court's decision to "tightly restrict the availability of Rule 10b-5 actions" was based principally on two policy considerations:
First, the Court looked to Congressional intent behind section 10(b) of the Securities Exchange Act of 1934. The Court found that Congress was concerned with blackmail, nuisance, and strike suits, and drafted the Act to circumscribe the class of plaintiffs who may sue under the Act for the very purpose of eliminating such suits. The Court's second concern centered on the evidentiary problems inherent in allowing a non-purchaser or non-seller to bring a Rule 10b-5 action.Id. at 950 (citations omitted).
The Ayres court rejected the plaintiff's argument that he had standing to sue based upon his status as a "putative assignee" of securities fraud claims against the defendant.
Although the Fifth Circuit, in Ayres, declined to address whether there are any circumstances in which there may be an express assignment of 10b-5 rights, this case does not present a situation of express assignment of 10b-5 rights; plaintiffs merely argue that as donees of the SARs, they succeeded to Sanderson's 10b-5 rights. Further, the concerns justifying restriction of 10b-5 rights, at least those relating to evidentiary problems, are implicated here. The allegations are therefore insufficient to overcome Defendant's Motion to Dismiss for lack of standing.
Because I find that plaintiffs lack standing to assert the 10b-5 claim, I need not address the remaining arguments of Capital Management concerning plaintiffs' failure to sufficiently allege the elements of the 10b-5 claim.
Accordingly,
IT IS ORDERED that defendant's motion to dismiss plaintiffs' breach of contract claim WILL BE GRANTED unless plaintiffs are able to amend their pleadings by not later than August 15, 2000 to sufficiently allege circumstances justifying piercing of the corporate veil to hold Capital Management liable.
IT IS FURTHER ORDERED that defendant's motion to dismiss plaintiffs' claim for breach of a contractually imposed fiduciary duty IS GRANTED and the claim IS DISMISSED as redundant of the breach of contract claim, and the motion to dismiss plaintiffs' claim for breach of a legally imposed fiduciary duty IS GRANTED and the claim IS DISMISSED for failure to state a claim.
IT IS FURTHER ORDERED that defendant's motion to dismiss plaintiffs' claim for breach of the obligation of good faith and fair dealing WILL BE GRANTED unless plaintiffs are able to amend their pleadings to allege circumstances justifying piercing of the corporate veil to hold Capital Management liable.
IT IS FURTHER ORDERED that defendant's motion to dismiss plaintiffs' federal securities claims IS GRANTED.