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RELIANCE INS. CO. v. EISNER & LUBIN

April 21, 1988

Reliance Insurance Company, Reliance Capital Group, L.P., Reliance Capital Group, Inc., Drexel Reliance Capital Group Partnership, George E. Bello, Lowell C. Freiberg, Henry R. Silverman, Howard E. Steinberg, and Michael J. Blake, Plaintiffs,
v.
Eisner & Lubin, Defendant



The opinion of the court was delivered by: WOLIN

 I. JURISDICTION.

 In their amended complaint, plaintiffs allege that defendant has violated the antifraud provisions of the securities laws of the United States, the Racketeer Influenced and Corrupt Organizations Act ("RICO") of the United States and the common law of the State of New Jersey. Specifically, plaintiffs allege that this court has federal question jurisdiction under 28 U.S.C. § 1331 pursuant to Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa; Section 4 of RICO, 18 U.S.C. § 1964 and principles of pendent jurisdiction.

 II. RELIEF.

 Defendant moves (i) for summary judgment in its favor with respect to the amended complaint pursuant to Rule 56 of the Federal Rules of Civil Procedure ("Fed.R.Civ.P."), or (ii) for summary judgment in its favor with respect to the federal securities and RICO counts of the amended complaint and thereafter, pursuant to Fed.R.Civ.P. 12(b), for dismissal of the state common law counts for lack of subject matter jurisdiction, or in the alternative, (iii) pursuant to Fed.R.Civ.P. 12(c), for judgment on the pleadings with respect to the RICO count.

 III. FACTS.

 Defendant, Eisner & Lubin, an accounting firm, performed auditing services for Supermarket Services, Inc. ("SSI") *fn1" and its subsidiary, Jakwel Sales Corporation ("Jakwel") for the years 1981-1984, inclusive.

 In connection with its audit activities, Eisner & Lubin audited and subsequently issued reports on certain financial statements *fn2" of SSI and Jakwel for the fiscal years ended March 27, 1982, March 26, 1983 and March 31, 1984. Eisner & Lubin also performed a review of the interim consolidated balance sheets and interim consolidated income statements of SSI and Jakwel as of September 24, 1983. Each of these reports was accompanied by an opinion signed by Eisner & Lubin which stated that the information contained therein was fairly represented in all material respects. Eisner & Lubin certified these reports without qualification.

 In December of 1983, plaintiffs *fn4" and SSI executed a stock purchase agreement and a note purchase agreement, each dated as of December 7, 1983, whereby $ 6.6 million was invested in SSI in exchange for certain stock and promissory notes of SSI. Thereafter, in 1984, SSI negotiated the purchase of the Ross-Viking Merchandise Corporation for a purchase price of roughly $ 6.8 million in cash and notes and $ 1 million in SSI stock. As part of this transaction, which was consummated on December 31, 1984, the Reliance Investors executed an Intercreditor and Subordination Agreement (the "Subordination Agreement") which, among other things, subordinated SSI's indebtedness held by the Reliance Investors to that of SSI's newly incurred indebtedness held by General Electric Credit Corporation ("GECC").

 For SSI's 1985 audit, Eisner & Lubin was succeeded by the accounting firm of Touche Ross & Co. ("Touche Ross"). After commencing its audit for the fiscal year ending March 31, 1985, Touche Ross withdrew its services and it did not certify the 1985 SSI financial statements.

 On or about November 29, 1985, SSI filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. *fn5" In 1986, the accounting firm of Rose, Feldman, Radin, Feisod & Skehan issued a report based on a compilation of the financial statements of SSI on behalf of the SSI Trustee in Bankruptcy in which it was estimated that the book value of SSI inventory had been overstated by $ 15 million.

 Plaintiffs filed their original complaint in 1986, followed by an amended complaint in 1987, in which they claim violations of federal securities laws, RICO and common law. The gravamen of plaintiffs' complaint is that Eisner & Lubin provided plaintiffs with financial reports which were allegedly the basis upon which plaintiffs relied, and by which they were subsequently induced, to purchase SSI stock and notes in 1983 and also to subordinate their SSI debt to GECC in 1984. At the heart of the complaint is the allegation that Eisner & Lubin performed its annual audits and interim reviews of SSI in either a knowingly or recklessly fraudulent manner, *fn6" thus overstating SSI's annual earnings. *fn7" Plaintiffs aver that if they had been supplied with a more accurate picture of the financial state of SSI in 1983, they would not have purchased SSI's stock.

 Defendant now responds with a motion for summary judgment as noted supra in Part II of this opinion.

 IV. ANALYSIS.

 As a threshold matter, "Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment 'shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled a judgment as a matter of law.'" Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S. Ct. 2505, 2510, 91 L. Ed. 2d 202 (1986). Moreover, when as in the instant case defendant has supplemented its summary judgment motion with affidavits, depositions and interrogatories, plaintiff's opposition, in order to survive defendant's motion for summary judgment, "must set forth specific facts showing that there is a genuine issue for trial. If [they] [do] not so respond, summary judgment, if appropriate, shall be entered against [them]." Fed.R.Civ.P. 56(c). The Supreme Court further clarified the requirements of Rule 56(c) in Celotex Corp. v. Catrett :

 
Rule 56(e) therefore requires the nonmoving party to go beyond the pleadings and by her own affidavits, or by the 'depositions, answers to interrogatories, and admissions on file,' designate 'specific facts showing that there is a genuine issue for trial.'"

 477 U.S. 317, 324, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986), citing Fed.R.Civ.P. 56(e). A plaintiff does not meet this standard when he "fails to establish the existence of an element essential to [plaintiff's] case, and on ...


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