Source: https://m.openjurist.org/949/f2d/42
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Matched Legal Cases: ['§ 12', '§ 12', '§ 12', '§ 12', '§ 12', '§ 12', '§ 12', '§ 12', '§ 12', '§ 12', '§ 771', '§ 12', '§ 12', '§ 12', '§ 12', '§ 12', '§ 77', '§ 12', '§ 12', '§ 12', '§ 12', '§ 12', '§ 12']

949 F2d 42 Cortec Industries Inc v. Sum Holding Lp | OpenJurist
949 F. 2d 42 - Cortec Industries Inc v. Sum Holding Lp
949 F2d 42 Cortec Industries Inc v. Sum Holding Lp
949 F.2d 42
Fed. Sec. L. Rep. P 96,406, 21 Fed.R.Serv.3d 75
CORTEC INDUSTRIES, INC. and Cortec Holdings, Inc.,
SUM HOLDING L.P., Dubin Clark & Company, Inc., Dubin Clark
Capital Corp., Ronald N. Dubin, J. Thomas Clark, Jean Pierre
Dammann, Norman J. Yerke, Michael Canipe, Woodlawn
Foundation, Westinghouse Credit Corporation, Bowles
Hollowell Conner & Co., Ernst & Young, Defendants,
No. 1456, Docket 91-7099.
This appeal from a dismissal made pursuant to Fed.R.Civ.P. 12(b)(6) in a securities fraud action asks what documents a district court judge may consider when disposing of a motion to dismiss a complaint for failure to state a claim. Here in drafting their complaint plaintiffs relied upon documents transmitted to them by defendants, though they neglected to attach these papers to, or incorporate them by reference in, the complaint. When defendants made a Rule 12(b)(6) motion to dismiss utilizing the same documents, plaintiffs insisted the district court not consider them, but instead was required to limit its inquiry regarding the complaint's viability to its four corners. Plaintiffs' failure to include matters of which as pleaders they had notice and which were integral to their claim--and that they apparently most wanted to avoid--may not serve as a means of forestalling the district court's decision on the motion.
All the defendants moved under Fed.R.Civ.P. 12(b)(6) to dismiss the complaint for failure to state a claim. The district court's January 3, 1991 opinion consisted of several parts, only one of which is the subject of this appeal, that is, the part that granted dismissal without leave to replead plaintiffs' claim against Westinghouse under § 12(2). Based solely on its perusal of the complaint the district court expressed its view of plaintiffs' claim as follows:
The district court rejected plaintiffs' argument that this set of facts could result in any § 12(2) liability for Westinghouse as a seller, stating Westinghouse was at most a seller to plaintiffs' seller, i.e., "old" Cortec, which is insufficient for § 12(2) liability, citing Pinter v. Dahl, 486 U.S. 622, 644 n. 21, 108 S.Ct. 2063, 2077 n. 21, 100 L.Ed.2d 658 (1988). The court then considered as an alternative that Westinghouse could be liable under § 12(2) for soliciting plaintiffs' purchase of old Cortec, but rejected the solicitation theory, observing that there was no allegation in the complaint of such solicitation by Westinghouse. The trial court also held without further explanation that plaintiffs' claim under § 12(2) against Westinghouse should be dismissed without leave to replead. A judgment dismissing plaintiffs' claim against Westinghouse under § 12(2) with prejudice was entered accordingly on January 31, 1991. We reverse and remand to allow plaintiffs an opportunity to replead the solicitation aspect of their § 12(2) claim against Westinghouse, and otherwise affirm the judgment of the district court.
In arguing that it could not be characterized as a statutory seller for § 12(2) purposes, defendant Westinghouse attached to its motion papers copies of its warrant, the Bowles' offering memorandum, and the Stock Purchase Agreement. Plaintiffs argued, relying on our opinion in Cosmas v. Hassett, 886 F.2d 8 (2d Cir.1989), that these documents could not be considered by the district court on a motion to dismiss because they were referred to--but not attached to nor incorporated by reference--in plaintiffs' complaint. Westinghouse argued that these documents could be considered under Field v. Trump, 850 F.2d 938 (2d Cir.1988), cert. denied, 489 U.S. 1012, 109 S.Ct. 1122, 103 L.Ed.2d 185 (1989). Noting the seemingly contradictory positions taken by our decisions, the district court neatly avoided the difficulty by relying solely on plaintiffs' complaint.
On appeal, plaintiffs renew their contention that reliance on these outside materials was improper and insist the district court implicitly did rely on them in dismissing their claims. In light of the trial court's clear statement disavowing any reliance on the documents in question, and the lack of any indication in its opinion to cast that statement into doubt, we reject plaintiffs' assertion. We next address whether the trial court could examine and rely on the Westinghouse warrant, the Bowles' offering memorandum, and the Stock Purchase Agreement in deciding the Rule 12(b)(6) motion before it.
A brief discussion of the Federal Rules will be helpful in placing this subject in perspective. Every defense to a claim for relief must be asserted in a responsive pleading, if one is required, with seven enumerated exceptions. The seven exception list matter that may be challenged by motion, of which the "failure to state a claim upon which relief can be granted" is the sixth. Fed.R.Civ.P. 12(b)(6). The Rule goes on to state that when a motion is made under Rule 12(b)(6) and "matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56," giving all parties a reasonable opportunity to present pertinent material under that Rule. See Rule 12(b)(6).
The problem arises when a party seeks to introduce affidavits, depositions or other extraneous documents not set forth in the complaint for the court to consider on a Rule 12(b)(6) motion. We suggested nearly 50 years ago that such motions be treated as motions for summary judgment and disposed of as such. See Samara v. United States, 129 F.2d 594, 597 (2d Cir.), cert. denied, 317 U.S. 686, 63 S.Ct. 258, 87 L.Ed. 549 (1942); Boro Hall Corp. v. General Motors Corp., 124 F.2d 822, 823 (2d Cir.1942), cert. denied, 317 U.S. 695, 63 S.Ct. 436, 87 L.Ed. 556 (1943); Fed.R.Civ.P. 12, 1946 Amendment, Notes of Advisory Committee. This provision of the Rules relating to extraneous material that causes a Rule 12(b)(6) motion to be translated into a Rule 56 motion is now mandatory. See Carter v. Stanton, 405 U.S. 669, 671, 92 S.Ct. 1232, 1234, 31 L.Ed.2d 569 (1972) (per curiam).
Case law engrafted some flesh on the bare bones of Rule 12(b)(6). Complaints, for example, are not dismissed unless it appears "beyond doubt 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, 2 L.Ed.2d 80 (1957); accord Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984). Because a Rule 12(b)(6) motion challenges the facts alleged on the face of the complaint, see Ryder Energy Distribution Corp. v. Merrill Lynch Commodities, Inc., 748 F.2d 774, 779 (2d Cir.1984), or, more accurately, the sufficiency of the statements in the complaint, the question is what matters are to be considered in assessing the complaint's sufficiency.
Rule 10(c) provides: "Statements in a pleading may be adopted by reference in a different part of the same pleading or in another pleading or in any motion. A copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes." Fed.R.Civ.P. 10(c). Relying on Rule 10(c), we have held that the complaint is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference. See Cosmas, 886 F.2d at 13; Goldman v. Belden, 754 F.2d 1059, 1065-66 (2d Cir.1985).
In addition, we have held that when a plaintiff chooses not to attach to the complaint or incorporate by reference a prospectus upon which it solely relies and which is integral to the complaint, the defendant may produce the prospectus when attacking the complaint for its failure to state a claim, because plaintiff should not so easily be allowed to escape the consequences of its own failure. See I. Meyer Pincus and Assoc. v. Oppenheimer & Co., Inc., 936 F.2d 759, 762 (2d Cir.1991) (prospectus). Similarly, when a district court decides a motion to dismiss a complaint alleging securities fraud, it may review and consider public disclosure documents required by law to be and which actually have been filed with the SEC, particularly where plaintiff has been put on notice by defendant's proffer of these public documents. See Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir.1991); Fed.R.Evid. 201(e) (party entitled upon timely request to opportunity to be heard regarding propriety of court taking judicial notice).
A finding that plaintiff has had notice of documents used by defendant in a 12(b)(6) motion is significant since, as noted earlier, the problem that arises when a court reviews statements extraneous to a complaint generally is the lack of notice to the plaintiff that they may be so considered; it is for that reason--requiring notice so that the party against whom the motion to dismiss is made may respond--that Rule 12(b)(6) motions are ordinarily converted into summary judgment motions. Where plaintiff has actual notice of all the information in the movant's papers and has relied upon these documents in framing the complaint the necessity of translating a Rule 12(b)(6) motion into one under Rule 56 is largely dissipated.
We begin with a statement of the rule. A party may amend its pleading once as a matter of right before a responsive pleading has been served, otherwise by leave of the court, and such "leave shall be freely given when justice so requires." Fed.R.Civ.P. 15(a). It is the usual practice upon granting a motion to dismiss to allow leave to replead. See, e.g., Ronzani v. Sanofi S.A., 899 F.2d 195, 198 (2d Cir.1990); Devaney v. Chester, 813 F.2d 566, 569 (2d Cir.1987); Pross v. Katz, 784 F.2d 455, 459-60 (2d Cir.1986). Although leave to replead is within the discretion of the district court, refusal to grant it without any justifying reason is an abuse of discretion. See Ronzani, 899 F.2d at 198.
Of course, where a plaintiff is unable to allege any fact sufficient to support its claim, a complaint should be dismissed with prejudice. See, e.g., Spain v. Ball, 928 F.2d 61, 62-63 (2d Cir.1991) (per curiam). Before deciding therefore whether the district court abused its discretion in denying plaintiffs leave to replead their § 12(2) claim, we must first decide whether plaintiffs can allege any facts sufficient to support that claim. In order to do so we explore the bases for § 12(2) liability.
A. "Seller" Liability
15 U.S.C. § 771(2) (1988). In Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988), the Supreme Court clarified the meaning of the phrase "offers or sells" under § 12(1) of the 1933 Act. As the language of §§ 12(1) and 12(2) is identical, the Pinter analysis applies to claims arising under § 12(2) as well. See Wilson v. Saintine Exploration and Drilling Corp., 872 F.2d 1124, 1126 (2d Cir.1989); Capri v. Murphy, 856 F.2d 473, 478 (2d Cir.1988). The Supreme Court observed: "At the very least, ... the language of § 12(1) contemplates a buyer-seller relationship not unlike traditional contractual privity. Thus, it is settled that § 12(1) imposes liability on the owner who passed title, or other interest in the security, to the buyer for value." Pinter, 486 U.S. at 642, 108 S.Ct. at 2076. The Court explored further what kinds of activity may fall within the definition of "offer" or "sell" in the statute.
To do that it looked to the statute itself, which defines "sale" or "sell" to include "every contract of sale or disposition of a security or interest in a security, for value," and the terms "offer to sell," "offer for sale," or "offer" to include "every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value." 15 U.S.C. § 77(b)(3) (1988). The Court therefore concluded that "the range of persons potentially liable under § 12(1) is not limited to persons who pass title." 486 U.S. at 643, 108 S.Ct. at 2076.
The Supreme Court acknowledged that focusing on these introductory terms--to define the extent of seller liability--discussed only a portion of the topic. See id. The second clause of § 12(1) provides that only a defendant from whom the plaintiff purchased securities may be liable, and this provision circumscribes the number of potential sellers. Id. at 643-44, 108 S.Ct. at 2076-77. As noted in a footnote, "[o]ne important consequence of this provision is that § 12(1) imposes liability on only the buyer's immediate seller; remote purchasers are precluded from bringing actions against remote sellers. Thus, a buyer cannot recover against his seller's seller." Id. at 644 n. 21, 108 S.Ct. at 2077 n. 21 (emphasis added).
B. Solicitation Liability
Pinter declined to read the purchase requirement of § 12 as restricting liability simply to the owner of the security. See id. at 644, 108 S.Ct. at 2077. The statutory definition does not exclude, it noted, solicitation of a sale as conduct that may result in liability: Section 12 liability has since the enactment of the Securities Act been applied to brokers and others who solicit securities purchases on a regular basis. So construing § 12's statutory seller language furthers the purpose of the Act, and a party that successfully solicits a purchase is subject to liability as a statutory seller. Id. at 646, 108 S.Ct. at 2078. Such liability "extends only to the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner." Id. at 647, 108 S.Ct. at 2079. Thus, an offeror of securities may be liable under § 12(2) if it sought to sell the security to benefit itself or the securities' owner financially. See Wilson, 872 F.2d at 1126. In applying these principles to the case at hand, the district court dismissed plaintiffs' claim, finding that aside from the fact that Bowles issued the offering memorandum on behalf of the owners of old Cortec, there was no allegation that Westinghouse solicited plaintiffs in any fashion or participated in the fraudulent action alleged.
Obviously, where a defect in the complaint cannot be cured by amendment, it would be futile to grant leave to amend. See Leonelli v. Pennwalt Corp., 887 F.2d 1195, 1198-99 (2d Cir.1989). But, we think it an abuse of discretion to deny leave to replead on the solicitation aspect of plaintiffs' complaint. Here, there was a plain allegation that Westinghouse solicited the sale for its own financial interests. The district court's contrary conclusion incorrectly caused it to vary from the usual practice. Moreover, there is no suggestion from the averments of the complaint that an amendment would not supply the facts required to support the allegations and to cure the defect. Under these circumstances, plaintiffs should be granted leave to replead to assert facts, if such exist, that would show that Westinghouse solicited the purchase of old Cortec for its own financial gain.