Opinion ID: 597807
Heading Depth: 2
Heading Rank: 2

Heading: The Present Actions

Text: 9 In April 1987, Metromedia commenced the first of the present actions, asserting claims against William, International, Travelco, and Roy Fugazy for misrepresentations and nondisclosure of material facts in connection with the issuance of the Express stock, in violation of, inter alia, § 12(2) of the 1933 Act, § 10(b) of the Securities Exchange Act of 1934 (1934 Act), 15 U.S.C. § 78j (1988), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, along with claims of common-law fraud, negligent misrepresentation, and breach of warranty. It sought, inter alia, $35,000,000 in compensatory damages and $250,000,000 in punitive damages. Defendants asserted various counterclaims against Metromedia and brought third-party claims against Kluge, contending, inter alia, that he had entered into written agreements entitling them to contribution or indemnification for any judgment Metromedia might recover against them. 10 In 1989, Metromedia commenced a second action against William and Roy, alleging that they had engaged in, and conspired to engage in, a pattern of racketeering activity in violation of RICO, 18 U.S.C. § 1962(b)-(d). The complaint alleged that the predicate RICO crimes were bankruptcy fraud, in violation of 18 U.S.C. § 152 (1988); mail fraud, in violation of 18 U.S.C. § 1341 (1988); wire fraud, in violation of 18 U.S.C. § 1343 (1988); and securities fraud, in violation of § 12(2), § 10(b), and Rule 10b-5. It sought damages in the amount of $35,000,000, trebled pursuant to 18 U.S.C. § 1964(c). The district court ordered the actions consolidated. 11 Prior to trial, the court issued a Joint Consolidated Pre-Trial Order (Pretrial Order) itemizing, inter alia, facts that the parties agreed were not in dispute. In it, defendants admitted that as of the date of the Agreement, (1) there were at least six litigations pending against Express or companies for which Express could be held liable, (2) that Express had entered four confessions of judgment, (3) that Express and/or William were in default on certain franchise notes, (4) that the $3,500,000 Citibank loan was in default, (5) that William was aware that Express could be liable for certain liabilities of other Fugazy companies, and (6) that William had represented to others that Metromedia would arrange for the cancellation of prior loan guarantees. Appellants conceded that these facts were not disclosed in their Representations and Warranties of Express and the Stockholders in the Agreement. 12 Appellants also admitted that in mid-March 1985, William sent a letter to a Fugazy Continental Corp. creditor in whose favor Express had confessed judgment, urging him to be patient because the Metromedia purchase was within a week of consummation. In the letter, which was introduced in evidence at trial, William asked the creditor not to upset the apple cart and stated: As I explained to you, the auditors played games with ... Express in order to make Express's statement look better. 13 William and Roy admitted in the Pretrial Order that at the time William transferred the Express License to Roy, both had actual knowledge that Express was in bankruptcy. They admitted that the transfer was not authorized by the bankruptcy court. 14 At trial, in support of its securities fraud and RICO claims, Metromedia presented evidence that, inter alia, in January 1985, it had received by mail from Express financial statements for Express and one of its subsidiaries. Subotnick testified that these financial statements contained material misrepresentations on which Metromedia relied in deciding to purchase Express. In particular, a Consolidating Income Statement for the 9 Months Ended Nov [sic ] 30, 1984 showed Fugazy Express with a nine-month net loss of $2,683,256. While Metromedia's analysts speculated that the loss might perhaps be as high as $4,700,000, they did not anticipate that Express's eventual audited financials would in fact reveal a net loss of $9,912,802 for the fiscal year. Similarly, though appellants gave Metromedia an unaudited consolidated balance sheet as of November 30, 1984, which showed Express as having a net worth of $2,869,890, the audited balance sheet as of February 28, 1985, received by Metromedia months after the purchase was consummated, revealed a net worth of minus $5,530,468. 15 Prior to the purchase, Subotnick wondered whether Express might have liabilities or obligations that had not been disclosed. He testified that William assured him in a face-to-face conversation that there were no oral obligations. There was nothing that we didn't know about. In fact, he sent me a memo I think the very next day, 10 pages long, that he is disclosing everything; we know about everything; there isn't anything that he hasn't told us about this company. In addition, Subotnick testified that William, whose office was in New York, telephoned him in New Jersey on at least a half-dozen occasions to press for the acquisition. Subotnick's telephone logs, reflecting several conversations with William, were also introduced. Subotnick testified that when Metromedia entered into the Agreement it was unaware of the extent of Express's losses or of its negative net worth of more than $5.5 million. He stated that if he had known the truth as to Express's financial status, Metromedia would not have entered into the Agreement. 16 With respect to documents that defendants contended that Kluge had signed, agreeing to indemnify them, Metromedia introduced expert testimony that the documents had not in fact been signed, and that the alleged Kluge signatures had likely been added by means of xerography. Defendants eventually conceded at trial that most of the documents were not authentic. 17