Opinion
01 Civ. 6600 (RLC), 02 Civ. 0138 (RLC).
April 23, 2007
KOERNER SILBERBERG WEINER, LLP, Attorneys for Internet Law Library, Inc., New York, NY, MARYANN PERONTI, Of Counsel.
CHRISTIAN, SMITH JEWELL, Attorneys for Internet Law Library, Inc., Houston, TX, GARY M. JEWELL, JAMES W. CHRISTIAN, Of Counsel.
TATE ASSOCIATES, Attorneys for Internet Law Library, Inc., Richmond, TX, RICHARD L. TATE, JAMES W. CHRISTIAN, Of Counsel.
DLA PIPER RUDNICK GRAY CARY US LLP, Attorneys for Southridge Capital Management LLC, Cootes Drive, LLC, Stephen Hicks, Daniel Pickett, Christy Constabile, David, Sims, and Navigator Mangement Ltd., New York, NY, PERRIE M. WEINER, CARYN G. MAZIN, PALMINA M. FAVA, Of Counsel.
KRAMER LEVIN NAFTALIS FRANKEL LLP, Attorneys for Citco Group Limited, New York, NY, MICHAEL J. DELL, Of Counsel.
LAW OFFICES OF MICHAEL S. ROSENBLUM, Attorneys for Southridge Capital Management LLC, Cootes Drive LLC, Stephen Hicks, Daniel Pickett, Christy Constabile, David Sims, and Navigator Management Ltd., Los Angeles, CA, MICHAEL S. ROSENBLUM, AMY M. CAVES, Of Counsel.
HANLEY CONROY BIERSTEIN SHERIDAN LLP, Attorneys for Kirwin Drouet, Jack Thompkins and Hunter M.A. Carr, New York, NY, THOMAS I. SHERIDAN, III, Of Counsel.
MORRISON FOERSTER LLP, Attorneys for Mark Valentine, New York, NY, CARL H. LOEWENSON, JR., JAMES E. JOHNSON, JOEL C. HAIMS, Of Counsel.
GIBBONS, DEL DEO, DOLAN, GRIFFINGER VECCHIONE, PC, Attorneys for Thomson Kernaghan Co, Ltd., and TK Holdings, Inc., New York, NY, DEBRA A. CLIFFORD, Of Counsel.
OPINION
BACKGROUND
This case resulted from the consolidation of several actions all arising out of the same set of related financing transactions. In consolidating the original actions, the court named ITIS Holdings Inc. (f/k/a ITIS Inc. and Internet Law Library, Inc.) (hereinafter, "INL"), Hunter Carr, Kerwin Drouet, and Jack Tompkins the plaintiffs in the consolidated case.Internet Law Library, Inc. v. South Ridge Capital Mgmt., LLC, 208 F.R.D. 59 (S.D.N.Y. 2002) (Carter, J.). Accordingly, Southridge Capital Management LLC, Stephen Hicks, Daniel Pickett, Christy Constabile, David Sims, Navigator Management Ltd., The Citco Group Limited, Citco Trustees (Cayman) Limited and Cootes Drive, LLC ("Cootes Drive") were named defendants and Cootes Drive's claims against INL became counterclaims. Id.
On January 12, 2001, INL, its Chief Executive Officer, Hunter M.A. Carr, and several shareholders filed suit against Southridge and a number of its representatives in the Southern District of Texas claiming, among other things, fraud, misrepresentation of material facts, manipulation of INL's stock and breach of contract. See Internet Law Library, Inc., et al. v. South Ridge Capital Mgmt., LLC et al, No. 01 Civ. 6600 (S.D.N.Y. transferred Jul. 20, 2001). Later, some additional shareholders of INL brought suit in the Southern District of Texas alleging much the same facts. See Brewer, et al. v. South Ridge Capital Mgmt., LLC. et al., No. 02 Civ. 0138 (S.D.N.Y. transferred Jan. 8, 2002) (RLC). Finally, Cootes Drive LLC, a Southridge affiliate, brought suit in this court against INL and several of its directors asserting claims for breach of contract and fraud. See Cootes Drive, LLC v. Internet Law Library, Inc., No. 01 Civ. 0877 (S.D.N.Y. filed Feb. 5, 2001) (RLC).
Over the years the court has dealt with various issues, (see e.g., Internet Law Library Inc. v. South Ridge Capital Mgmt., LLC, 223 F. Supp. 2d 474 (S.D.N.Y. 2002) (Carter, J.) (hereinafter "Internet Law I")), with which familiarity is assumed. The court dismissed the plaintiffs' claims with prejudice pursuant to Rule 37(b)(2), F.R. Civ. P., due to plaintiffs' abuse of the discovery process and persistent refusal to abide by the court's discovery orders. Internet Law Library Inc. v. South Ridge Capital Mgmt., LLC, No. 01 Civ. 6600, 2003 WL 21537782 (S.D.N.Y. 2003) (Carter, J.) (hereinafter Internet Law II). Subsequently, the court granted Cootes Drive summary judgment against counterclaim defendant INL on its third counterclaim for breach of contract for failure to redeem preferred stock and its fourth counterclaim for failure to honor a note. Internet Law Library, Inc. v. Southridge Capital Mgmt., LLC, No 01 Civ. 6600, 2005 WL 3370542 (S.D.N.Y. Dec. 12, 2005) (hereinafter Internet Law III). Then, on December 27, 2005 and June 7, 2006, the court determined to conduct a sua sponte assessment of whether summary judgment is warranted for Cootes Drive's remaining claims and required the parties to submit affidavits and briefs. (Carter Endorsement Dec. 27, 2005; Carter Endorsement June 6, 2006). Cootes Drive has settled its claims against Eugene Cernan ("Cernan"), W. Allyn Hoaglund ("Hoaglund"), Kelley V. Kirker ("Kirker"), George A. Roberts ("Roberts"), W. Paul Thayer ("Thayer") and David P. Harriman ("Harriman"). Cootes Drive is no longer pursuing counterclaims one, two or seven for breach of contract against INL for violation of Section 3.9 of the Convertible Preferred Stock Purchase Agreement dated May 11, 2000 (the, "May Stock Purchase Agreement"), breach of contract against INL for failure to convert preferred stock and breach of fiduciary duty against Carr respectively. Therefore, these counterclaims are dismissed as abandoned.
The Fifth, Sixth, Eighth and Ninth counterclaims for: fraud in connection with the agreements against INL and Hunter Carr ("Carr"); fraud in connection with the note against INL; violation of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 against all Counterclaim defendants; and violation of Section 20 of the Securities Exchange Act of 1934 against Carr respectively remain at issue here.
DISCUSSION
Under Rule 56(c), F. R. Civ. P., summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." It is well established that a court may grant summary judgment sua sponte. SHL Imaging, Inc. v. Artisan House, Inc., 117 F. Supp. 2d 301, 305 (S.D.N.Y. 2000). In deciding whether to grant summary judgment, the court is simply determining whether or not there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). There is not a genuine issue for trial if there is not sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. Id. at 249. Summary judgment may be granted if the evidence presented by the party against whom summary judgment would be entered is merely colorable or is not significantly probative. Id. In order to defeat summary judgment, the party against whom summary judgment may be entered "must `do more than simply show there is some metaphysical doubt as to the material facts,'" Id. at 304 (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)). The court looks to the substantive law governing the claim in order to determine what factual disputes are material.Anderson, 477 U.S. at 248.
I. Cootes Drive's Fraud Counterclaims
Cootes Drive's Fifth, Sixth and Eighth counterclaims are based on the same set of facts — INL's failure to disclose Carr and Thayer's status as convicted criminals. (Countercl. Pl.'s Br. at 2, 12). Therefore, in order to avoid unnecessary repetition, those claims will all be addressed together.
Section 10(b) provides that:
It shall be unlawful for any person, directly or indirectly, . . . .
To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.15 U.S.C. § 78j(b).
Securities and Exchange Commission Rule 10b-5 provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(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, in connection with the purchase or sale of any security.17 C.F.R. § 240.10b-5.
To state a claim for securities fraud under § 10(b) and Rule 10b-5, counterclaim plaintiff must allege that INL "(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury." Lentell v. Merrill Lynch Co., Inc., 396 F.3d 161, 172 (2d Cir. 2005) (quoting In re IBM Securities Litigation, 163 F.3d 102, 106 (2d Cir. 1998)), cert. denied, 126 S.Ct. 421 (2005); see also, e.g., Dura, 544 U.S. at 341-42; Lattanzio v. Deloitte Touche LLP, 476 F.3d 147, (2d Cir. Jan. 31, 2007). Causation in this regard has two elements: "transaction causation" and "loss causation."Lattanzio, 436 F.3d at 157; Lentell, 396 F.3d at 172; Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003)). Transaction causation refers to the straightforward requirement that the alleged misstatements or omissions caused the claimant to engage in the transaction in question. Lattanzio, 476 F.3d at 157; Lentell, 396 F.3d at 172;Emergent Capital, 343 F.3d at 197.
Loss causation for a private securities fraud cause of action requires "the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff' be established in order for the claim to be successful. See Lattanzio, 476 F.3d at 157; Lentell, 396 F.3d at 172; Emergent Capital, 343 F.3d at 197. The private securities litigation reform act requires that "[i]n any private action arising under this chapter, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this chapter caused the loss for which the plaintiff seeks to recover damages. 15 U.S.C.A. § 78u-4(b)(4). Loss causation is analogous to the tort law concept of proximate causation. Lattanzio, 476 F.3d at 157. This court requires that the loss actually sustained by defendants "be foreseeable and that the loss be caused by the materialization of the concealed risk." In re Initial Public Offering Securities Lit., 399 F. Supp. 2d 298, 306-07 (S.D.N.Y. 2005) (Scheindlin, J.) (reconciling loss causation precedent) (citing Lentel, 396 F.3d at 174). Stated differently, the concealed negative information must cause the claimant's loss because "the concealed information eventually cause[s] the transaction to fail." Id. at 305. The risk that caused the loss must be within the zone of risks concealed by the misstatement.Lattanzio, 476 F.3d at 157 (citing Lentel, 396 F.3d at 174). In contrast, "if the loss was caused by an intervening event . . . the chain of causation will not have been established." Emergent Capital Inv. Mgmt., 343 F.3d at 197; accord, e.g., Lentell., 396 F.3d at 174; see also, e.g., Dura, 544 U.S. at 341. Summary judgment is appropriate if the party asserting a private claim for securities fraud cannot produce sufficient evidence upon which a reasonable jury could conclude both that the misstatement or omission caused the claimant to enter into the transaction (transaction causation) and that subject matter of the misstatement or omission caused the loss (loss causation).See In re Northern Telecom Ltd. Securities Lit., 116 F. Supp. 2d 446 (S.D.N.Y. 2000) (Cedarbaum, J.). Similarly, it is not sufficient for a claim of common law fraud by a lender to show merely that "(a) it would not have financed a transaction but-for the alleged misrepresentation, and (b) the financing was not repaid." See Citibank, N.A. v. K-H Corp., 968 F.2d 1489 (2d Cir. 1992) (dismissing common law fraud claims in addition to securities fraud claims because claimant failed to adequately allege "that the damages it suffered were proximately caused by the alleged misrepresentations").
Here, counterclaimant has not presented the court with sufficient evidence for a reasonable jury to conclude that counterclaim defendants' failure to disclose Carr and Thayer's criminal convictions (which were both well over five years old at the relevant time) caused counterclaim plaintiffs' economic loss. Stated another way, counterclaimant has not provided sufficient evidence for a reasonable jury to be able to conclude that the concealment of Thayer and Carr's criminal convictions "caused [its] loss when the concealed information eventually caused the transaction to fail." See In re Initial Public Offering Securities Litigation, 399 F. Supp. 2d at 305. In fact, the "Cootes Drive Suffered Damages" portion of their brief in response to the court's June 7, 2006 Endorsement simply discusses losses that arose from INL's breach of the stock purchase agreement by only converting 138.92 of counterclaimant's 300 preferred shares. Indeed, counterclaimant has not provided any evidence indicating a casual connection between counterclaim defendant's failure to disclose Carr and Thayer's criminal backgrounds and the loss that resulted from INL's failure to convert 138.92 preferred shares in breach of the agreement. Although counterclaimant argues that "[h]ad Cootes Drive been aware of Carr's or Thayer's criminal activities or convictions, Cootes Drive never would have invested in INL nor entered into any agreements with INL, including the May and November Agreements"(Answer and Counterclaims ¶ 51), that is insufficient as a matter of law to establish loss causation for a securities fraud claim or proximate causation for a common law fraud claim.
II. Cootes Drive's for Control Person Liability
Counterclaimant's Ninth cause of action is that Carr violated Section 20 of the Securities and Exchange Act of 1934. Section 20(a) provides that any person who, either directly or indirectly, controls another person liable for a securities violation can himself be held jointly and severally liable. See 15 U.S.C. § 78t(a). Since summary judgment has been granted on Cootes Drive's primary violation counterclaim above, summary judgment is also appropriate on its control person liability counterclaim. See Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir. 1983) ("as the individual defendants were not held liable for violating the federal securities laws, Morgan Stanley could not be held derivatively liable under section 20(a) of the 1934 Act"); see also High View Fund, L.P. v. Hall, 27 F. Supp. 2d 420, 428 (S.D.N.Y. 1998) (Scheindlin, J.); Press v. Chemical Inv. Services Corp., 988 F. Supp. 375, 390 (S.D.N.Y. 1997) (Cote, J.) ("that claim for derivative liability fails a foriori in light of the Court's dismissal of Press's claims under Section 10(b) and Rules 10b-5 and 10b-10").
CONCLUSION
For the above mentioned reasons, summary judgment is granted against defendant/counterclaimant on its Fifth, Sixth, Eighth and Ninth causes of action for: fraud in connection with the agreements against INL against INL and Hunter Carr ("Carr"); fraud in connection with the note against INL; violation of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 against all counterclaim defendants; and violation of Section 20 of the Securities Exchange Act of 1934 against Carr respectively. The parties are directed to submit papers on the issue of the proper amount of damages to be awarded to defendants counterclaim plaintiff Cootes Drive on their Third and Fourth counterclaims pursuant to the court's opinion and order in Internet Law III within forty-five (45) days.