Baldwin v . Kulch CV-98-333-M 09/29/00 UNITED STATES DISTRICT COURT DISTRICT OF NEW HAMPSHIRE

William R. Baldwin; and Joan S . Baldwin, Plaintiffs

v. Civil N o . 98-333-M Opinion N o .

Kulch Associates, Inc.; and Charles Kulch, Defendants

O R D E R

Having reviewed the defendants’ “Motion for Findings

Pursuant to 15 U.S.C. § 78u-4(c) and for Award of Attorneys’

Fees,” as well as the host of memoranda, affidavits, rebuttals,

supplemental memoranda, and sur-replies filed, it would appear

that defendants’ motion is not meritorious.

First, defense counsel appear to assert that plaintiffs’

amended complaint alleges, without factual basis, the seemingly

impossible: that before Kulch ever met with, or spoke t o ,

plaintiffs, he personally made false material statements to

plaintiffs that induced them to purchase NPW stock. But, the

amended complaint actually makes clear that plaintiffs alleged that false material statements were made by defendants (Kulch and

his corporation) “and their agents and intermediaries.” See,

e.g., First Amended Complaint (document n o . 1 3 ) , paragraphs 7 , 8 ,

9, 1 5 , and 1 6 . Given plaintiffs’ counsel’s affidavit, it would

also appear that defendants’ counsel (and presumably defendants

themselves) were not confused on that point since, very early on

they were informed as to just who the “agent” and “intermediary”

was (Donald J. McCarthy), and why plaintiffs believed his

statements were legally attributable to defendants. Nothing

inconsistent appears in the discovery cited by defendants, nor

does it appear that plaintiffs’ factual allegations lacked

evidentiary support – they swear under oath, and presumably would

have testified at trial, that McCarthy held himself out as an

apparent agent of defendants, soliciting investors on their

behalf.

If a jury credited McCarthy’s alleged comments as true, it

could well have been found that defendants sent him out to

encourage investments in NPW by people like plaintiffs (his

family members), and to relate defendants’ encouraging factual

2 representations, derived from their alleged superior knowledge

gained from their stock ownership i n , and the accounting services

provided to NPW (i.e., statements to the effect that NPW was

financially solid and poised for growth). Indeed, it is

reasonably plain from the Report of the Parties’ Planning Meeting

(document n o . 10) that defense counsel were fully aware of

plaintiffs’ agency allegations and theory, as well as the facts

they believed supported that theory.

Defendants also appear to be wrong in arguing that

plaintiffs “do not and cannot dispute the sworn statements of

both M r . Kulch and Donald McCarthy.” Actually, plaintiffs very

unambiguously contest both. See Affidavit of Plaintiff Joan S .

Baldwin, attached as an exhibit to document n o . 29 (“Finally,

Donald McCarthy acknowledged that defendants had encouraged him

to seek out investors, including friends and family members, to

take advantage of this ground floor opportunity.”).1

1 Plaintiffs’ counsel had informed defendants’ counsel that McCarthy was Mrs. Baldwin’s brother-in-law.

3 And, of course, the complaint’s federal claims were

dismissed for failure to satisfy the heightened pleading

requirements mandated by the Private Securities Litigation Reform

Act, 15 U.S.C. § 78u-4(b), and Federal Rule of Civil Procedure

9(b). The failure was one of pleading, not necessarily the

absence of a factual basis for bringing the complaint. Since

plaintiffs alleged only that NPW failed after the rosy

representations were made, the complaint was inadequate. But

every dismissal of a securities fraud case based on failure to

meet the applicable heightened pleadings standards does not, ipso

facto, establish frivolity within the meaning of Fed. R. Civ. P.

11(b). See, e.g., Kalnit v . Eichler,

(S.D.N.Y. 2000).

Defendants also suggest they raised issues related to Rule

11(b) and the complaint’s lack of facial merit with plaintiffs’

counsel early in the litigation, but they apparently did not

invoke the provisions of Rule 11(c)(1)(A); that i s , they did not

formally put plaintiffs on notice of their position and extend

the 21 day opportunity provided by the Rule to withdraw or

4 correct any perceived deficiencies in the complaint. And, it

does not appear that defendants complied with Local Rule

16.2(b)(10), which provides that final pretrial statements shall

contain “a statement of a claim for attorney’s fees, if

applicable.” See document n o . 1 0 . S o , it does not appear that

defense counsel was of the view that the complaint was frivolous

as of the filing of the final pretrial statement.

Nevertheless, although the motion probably will not be

successful, the court has not decided the merits of the motion

because a preliminary issue related to the court’s jurisdiction

presents itself – one that has not been addressed or briefed by

the parties. Specifically, the record discloses that judgment

was entered on August 2 7 , 1999 (without any factual findings

having been made under § 78u-4(c)). The time for filing a motion

under Fed. R. Civ. P. 59 to open the judgment, amend findings of

fact and conclusions of law, or to make new findings and

conclusions, expired on or about September 1 0 , 1999, without any

such motion having been filed. And, no motion for attorneys’

fees was filed within 14 days of the entry of judgment as

5 required by Fed. R. Civ. P. 54(d)(2)(B). Finally, the period in

which an appeal could have been taken by defendants expired on

September 2 7 , 1999, without an appeal having been filed.

Defendants’ motion for findings pursuant to 15 U.S.C. § 78u-4(c)

and for attorneys’ fees was not filed until October 2 9 , 1999, or

some two months after judgment had entered.

All of which raises a question as to the court’s

jurisdiction since, although the findings required by 15 U.S.C.

§ 78u-4(c) were not included in the record “upon final

adjudication,” no timely motion to amend the judgment under Rule

59 was filed. Moreover, no timely appeal was taken by defendants

on grounds that the judgment was legally insufficient or in

error, and no motion for sanctions under Rule 11 or otherwise was

pending when judgment entered, and no timely motion for

attorneys’ fees had been filed. Whether under these

circumstances a “motion” filed two months later is either timely

or falls within the court’s jurisdiction to resolve is probably

open to some debate, and at least should be explored before

resolving the merits of the motion. A brief review suggests that

6 there is scant precedent discussing jurisdiction under these

circumstances, but some cases seem to suggest, implicitly, that

defendants’ failure to timely move to amend the judgment, file a

Rule 11 or other sanction motion prior to entry of judgment, take

a timely appeal, or file a timely motion for attorneys’ fees

might result in the absence of jurisdiction. But, it is by no

means clear.

That i s , the judgment was arguably legally deficient for

failure to comply with § 78u-4(c), but counsel did not raise the

issue by timely Rule 59 motion or by a timely appeal, and there

were no pending motions related to post-judgment relief. See

e.g. Gurary v . Winehouse,

(2d Cir. 1999)(timely

appeal was taken from judgment not in compliance with § 78u-

4(c)); see generally Hallwood Realty Partners, L.P. v . Gotham

Partners, L.P.,

(S.D.N.Y. May 2 , 2000)(premature

motion under § 78u-4(c) denied without prejudice to “renewing at

an appropriate time”); Goldstein v . Malcolm G. Fries & Assoc.,

Inc.,

(E.D.Va. 1999)(§ 78u-4(c) issue raised

in the motion to dismiss complaint); Cooter & Gell v . Hartmarx

7 Corp.,

(1990) (court’s jurisdiction to consider Rule

11 motion filed with motion to dismiss extends beyond voluntary

dismissal of complaint); Inter-County Resources, Inc. v . Medical

Resources, Inc.,

(S.D.N.Y. 1999)(motion for

fees unnecessary under PSLRA as it is self-executing); Richter v .

Achs,

(S.D.N.Y. 1997)(implicitly suggests timely

motion to amend judgment filed where court did not include § 78u-

4(c) findings in judgment). Certainly, the time available to

raise issues related to judgments entered without complying with

§ 78u-4(c) is not unlimited, and the question here is whether two

months is too long.

The motion for findings and attorneys’ fees (document n o .

27) is denied without prejudice to refiling after the

jurisdictional and timeliness issues raised herein are resolved.

Counsel for defendants may, but are not required t o , file a

thorough legal brief within 30 days of this order establishing

the legal bases for this court’s exercise of jurisdiction over

their motion for findings and attorneys’ fees. If such a brief

is filed, plaintiffs shall respond within 30 days of the filing

8 of defendants’ brief, providing their position on the

jurisdictional issues raised. If defendants elect not to file a

further brief within the prescribed time, the case will be

closed. If the court finds, after considering the briefs that

may be filed, that it has jurisdiction to consider defendants’

motion, it will be deemed refiled nunc pro tunc, without the need

for counsel to physically refile any pleadings.

SO ORDERED.

Steven J. McAuliffe United States District Judge September 2 9 , 2000

cc: Leonard W . Foy, Esq. Andrew W . Serell, Esq.

9