Summary
The Second Circuit addressed what materials a court may consider when deciding a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), holding that documents integral to the complaint and known to the plaintiff may be considered even if not attached or incorporated by reference. The court also held that the defendant could not face Securities Act § 12(2) seller liability as a seller's seller, but reversed the denial of leave to replead allegations that it solicited the purchase for its own financial gain.
Topics
Practice areas
Questions Presented
- Whether a district court deciding a Rule 12(b)(6) motion may consider documents not attached to or incorporated by reference in the complaint when the plaintiff had actual notice of the documents and relied on them in framing the complaint.
- Whether Westinghouse could be liable under Securities Act § 12(2) as the seller of securities to plaintiffs when Westinghouse sold its warrant to plaintiffs' seller rather than directly to plaintiffs.
- Whether plaintiffs should have been granted leave to replead a § 12(2) claim alleging that Westinghouse solicited their purchase for its own financial interest.
Holdings
- A district court may consider documents outside the complaint on a Rule 12(b)(6) motion when the plaintiff had undisputed notice of the documents, possessed or knew of them, and relied on them in framing the complaint; under those circumstances, the documents are integral to the complaint and the motion need not be converted into one for summary judgment.
- Westinghouse was not liable as a statutory seller under Securities Act § 12(2) because it sold its warrant to old Cortec, not to plaintiffs; a purchaser may not recover under § 12 against the seller's seller.
- The district court abused its discretion by denying plaintiffs leave to replead their § 12(2) claim insofar as it alleged that Westinghouse successfully solicited plaintiffs' purchase for its own financial interest.
Key quotations
“Consequently, though the district court, in light of what it viewed as conflicting precedents in this Circuit, declined to consider these exhibits, it could have viewed them on the motion to dismiss because there was undisputed notice to plaintiffs of their contents and they were integral to plaintiffs' claim.” (¶ 23)
“One 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.” (¶ 32)
“We affirm the order to dismiss the complaint and to deny leave to replead on § 12(2) seller liability, but reverse the portion of the order insofar as it denied plaintiffs leave to replead their § 12(2) claim alleging Westinghouse solicited their purchase.” (¶ 39)
Factual background
Plaintiffs purchased all of the stock and outstanding debt of Cortec in a transaction involving an offering memorandum, a stock purchase agreement, and a warrant held by Westinghouse. Westinghouse held no Cortec shares; it surrendered its warrant to old Cortec and was compensated from transaction proceeds before plaintiffs acquired the stock. Plaintiffs alleged that defendants made fraudulent or negligent misrepresentations and omissions concerning Cortec's financial condition and prospects, and alleged that Westinghouse both sold its warrant and solicited plaintiffs' purchase.
Procedural history
The Southern District of New York dismissed plaintiffs' § 12(2) claim against Westinghouse with prejudice and without leave to replead. The district court concluded that Westinghouse was not a statutory seller because it had sold a warrant to old Cortec rather than securities directly to plaintiffs, and it found no allegation that Westinghouse solicited plaintiffs' purchase. The Second Circuit affirmed dismissal insofar as the claim was based on seller liability, reversed the denial of leave to replead the solicitation theory, and remanded.
Remand instructions
Affirm the dismissal with prejudice insofar as the § 12(2) claim was based on Westinghouse's seller liability, but allow plaintiffs to replead the solicitation aspect of the § 12(2) claim by alleging facts, if such facts exist, showing that Westinghouse solicited the purchase of old Cortec for its own financial gain.