author: KEARSE, Circuit Judge.

text:
    Elizabeth SHERLOCK, Plaintiff-Appellant, v. MONTEFIORE MEDICAL CENTER, Defendant-Appellee.
    No. 1355, Docket 95-9128.
    United States Court of Appeals, Second Circuit.
    Argued April 12, 1996.
    Decided May 10, 1996.

      Elizabeth Sherlock, Long Island City, New York, pro se.
    John D. Canoni, New York City (Marde L. Schlanger, Nixon Hargrave, Devans & Doyle, New York City, on the brief), for Defendant Appellee.
    Before: KEARSE and ALTIMARI, Circuit Judges, and MORAN, District Judge.

       Honorable James B. Moran, of the United States District Court for the Northern District of Illinois, sitting by designation.

   KEARSE, Circuit Judge.

Plaintiff pro se Elizabeth Sherlock appeals from a final judgment of the United States District Court for the Southern District of New York, Harold Baer, Jr., Judge, dismissing her complaint alleging that defendant Montefiore Medical Center (“Montefiore”) terminated her employment in violation of, inter alia, 42 U.S.C. §§ 1981, 1983, and 1985(3) (1994); Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq. (1994) (“Title VII”); and the Age Discrimination in Employment Act, 29 U.S.C. § 621 et seq. (1994 & Supp.1995) (“ADEA”). The district court dismissed Sherlock’s claims under §§ 1981,1983, and 1985(3) for failure to state a claim upon which relief can be granted; it dismissed her Title VII and ADEA claims on the ground that they were barred by the statute of limitations by reason of her failure to file suit within 90 days of receiving a right-to-sue letter from the Equal Employment Opportunity Commission (“EEOC”). Sherlock challenges these rulings on appeal. For the reasons below, we conclude that the court applied an inappropriate presumption in order to find Sherlock’s Title VII and ADEA claims time-barred, and we therefore affirm in part and vacate and remand in part.

I. BACKGROUND

Montefiore is a not-for-profit medical institution engaged to provide medical services at New York City’s Rikers Island Correctional Facility. In July 1989, Montefiore hired Sherlock, then age 45, to work as an HIV counselor at that facility. In October 1992, Montefiore terminated Sherlock’s employment. Sherlock filed charges with the EEOC, alleging that Montefiore had discriminated against her on the basis of her age and gender. The EEOC dismissed those charges and issued a right-to-sue letter; the letter, dated February 15, 1995, stated that Sherlock could continue pursuit of her Title VII and ADEA claims by filing a private lawsuit but that “[s]uch a lawsuit must be commenced within 90 days of receipt of this” letter.

Sherlock commenced the present action on May 25, 1995, i.e., 99 days after the date of the EEOC right-to-sue letter. She asserted claims under Title VII, the ADEA, §§ 1981, 1983, 1985(3), and state law. Montefiore moved to dismiss the complaint on the grounds, inter alia, that it failed to state a claim on which relief could be granted and that the claims under Title VII and the ADEA were time-barred because the complaint was filed more than 90 days after receipt of the right-to-sue letter.

In an Opinion and Order, 1995 WL 542458, dated September 11, 1995 (“District Court Opinion”), the district court granted the motion to dismiss, finding that the complaint failed to state a claim (a) under 42 U.S.C. § 1981 because it did not allege that Sherlock was a member of a racial minority, (b) under § 1983 because it did not allege state action, and (c) under § 1985(3) because, inter alia, it did not allege the violation of a right that could serve as the basis for a § 1985(3) claim. The court dismissed the claims asT serted under Title VII and the ADEA on the ground that they were untimely, stating, in pertinent part, as follows:

Sherlock filed this claim ninety-six days after receiving her right-to-sue letter, thus exceeding the ninety-day statute of limitations by six days. The EEOC mailed notice to Sherlock on February 15, 1995. A presumption exists that an EEOC notice is received three days after its mailing. Baldwin County Welcome Center, 466 U.S. at 148 n. 1 [104 S.Ct. at 1724 n. 1], Accordingly, Sherlock is presumed to have received her right-to-sue letter on February 18, 1995. Because Sherlock commenced this action on May 25, 1995 — ninety-six days later — her Title VII and ADEA causes of action must be dismissed as untimely.

District Court Opinion at 4. Having dismissed all of Sherlock’s federal claims, the court also declined to exercise supplemental jurisdiction over her state-law claims. Judgment was entered dismissing the action, and this appeal followed.

II. DISCUSSION

On appeal, Sherlock contends principally that the court erred in finding her Title VII and ADEA claims time-barred. We conclude that, on the basis of the present record, the court erred in so ruling as a matter of law.

A. The Timeliness of the Title VII and ADEA Claims

In order to be timely, a claim under Title VII or the ADEA must be filed within 90 days of the claimant’s receipt of a right-to-sue letter. 42 U.S.C. § 2000e-5(f)(1); see also Baldwin County Welcome Center v. Brown, 466 U.S. 147, 149-50, 104 S.Ct. 1723, 1724-25, 80 L.Ed.2d 196 (1984) (per curiam); Cornwell v. Robinson, 23 F.3d 694, 706 (2d Cir.1994). Normally it is assumed that a mailed document is received three days after its mailing. See, e.g., Baldwin County Welcome Center v. Brown, 466 U.S. at 148 n. 1, 104 S.Ct. at 1724 n. 1 (citing Fed.R.Civ.P. 6(e) (“Whenever a party has the right or is required to do some act or take some proceedings within a prescribed period after the service of a notice or other paper upon the party and the notice or paper is served upon the party by mail, 3 days shall be added to the prescribed period.”))- And normally it may be assumed, in the absence of challenge, that a notice provided by a government agency has been mailed on the date shown on the notice. See Baldwin County Welcome Center v. Brown, 466 U.S. at 148 & n. 1, 104 S.Ct. at 1724 & n. 1.

Although such presumptions are convenient and reasonable in the absence of evidence to the contrary, the Baldwin case, on which the district court in the present case relied, did not suggest that they are irrebuttable. While the Baldwin Court noted the presumed date of receipt, the issue in that case was not the date on which the right-to-sue letter had been received but rather whether the forwarding of that letter by the plaintiff to the district court constituted the commencement of the lawsuit. See, e.g., id. at 150 n. 4, 104 S.Ct. at 1725 n. 4. If a claimant presents sworn testimony or other admissible evidence from which it could reasonably be inferred either that the notice was mailed later than its typewritten date or that it took longer than three days to reach her by mail, the initial presumption is not dispositive. See, e.g., Smith v. Local Union 28 Sheet Metal Workers, 877 F.Supp. 165, 172 (S.D.N.Y.1995) (determining date of receipt on basis of testimonial evidence), aff'd mem., — F.3d-, 1996 WL 53650 (2d Cir. Feb. 8, 1996).

The record in the present case provides clear ground to question the dates on which the EEOC notice, which bore the typed date February 15,1995, was (a) mailed by EEOC and (b) received by Sherlock. There is no evidence from EEOC itself as to the date on which EEOC mailed the letter to Sherlock, but the letter was addressed both to Sherlock and to Montefiore, and the copy received by Montefiore is part of the record. That copy bears two stamped dates, to wit, February 27 on the upper right, and February 28 on the lower right. At oral argument of this appeal, Montefiore’s counsel informed us that these stamps indicate the timing of Montefiore’s own receipt of the letter. Thus, the record indicates that Montefiore itself did not receive the letter until at least February 27. A notation showing an unexpectedly late date of arrival, affixed by a party that has an interest in claiming its earlier arrival, is admissible against that party as an admission. Fed.R.Evid. 801(d)(2). The fact that Montef-iore, as one of two addressees, received the letter at least 12 days after its typewritten date plainly raises a question of fact as to whether Sherlock, the other addressee, received it within three days of its typewritten date.

We hasten to note that we would not regard the presence of a self-serving date-of-receipt notation on the claimant’s copy of a right-to-sue letter (there was no date-of-receipt notation on Sherlock’s copy) as evidence rebutting the presumption that the letter was received three days after its typewritten date, unless the claimant also presented an affidavit or other admissible evidence of receipt on the noted date. We also note that, leaving aside the Montefiore copy of the letter, the evidence that Sherlock proffered to the district court in the present case was not sufficient to rebut the presumption. Sherlock submitted her own affidavit stating, in pertinent part, (a) that she had no recollection of when she received the letter, and (b) that her husband believed that she had received the letter on February 27 or 28. There was no affidavit by Sherlock’s husband, and her representation as to his statement is hearsay. Neither that proffer of inadmissible evidence nor her own lack of recollection sufficed to rebut the presumption that the letter had been received by February 18.

Nonetheless, as discussed above, the evidence that Montefiore did not receive the letter until at least February 27 creates an issue of fact as to whether Sherlock received it at or about the same time, and hence whether her complaint, filed 87 days thereafter, was timely. Accordingly, we vacate the dismissal of Sherlock’s claims under Title VII and the ADEA.

B. The Other Federal Claims

Sherlock’s other federal claims were properly dismissed. Her complaint failed to state a claim under 42 U.S.C. § 1981 because, as the district court noted, it did not allege that she was a member of a racial or ethnic minority. See, e.g., Saint Francis College v. Al-Khazraji, 481 U.S. 604, 613, 107 S.Ct. 2022, 2028, 95 L.Ed.2d 582 (1987); Mian v. Donaldson, Lufkin & Jenrette Securities Corp., 7 F.3d 1085, 1087 (2d Cir.1993) (per curiam).

Sherlock’s claim under § 1983 was properly dismissed because, insofar as Montefiore’s employment practices are concerned, the complaint fails to allege state action. The fact that a municipality is responsible for providing medical attention to persons held in its custody may make an independent contractor rendering such services a state actor within the meaning of § 1983 with respect to the services so provided, see, e.g., West v. Atkins, 487 U.S. 42, 54, 108 S.Ct. 2250, 2258, 101 L.Ed.2d 40 (1988); but that fact does not make the contractor a state actor with respect to its employment decisions, see, e.g., Rendell-Baker v. Kohn, 457 U.S. 830, 840-43, 102 S.Ct. 2764, 2770-72, 73 L.Ed.2d 418 (1982); Wolotsky v. Huhn, 960 F.2d 1331, 1335-36 (6th Cir.1992).

The complaint failed to state a claim under § 1985(3) because, inter alia, that section creates no substantive rights but merely “provides a remedy for violation of the rights it designates,” Great American Federal Savings & Loan Association v. Novotny, 442 U.S. 366, 372, 99 S.Ct. 2345, 2349, 60 L.Ed.2d 957 (1979), and the Supreme Court has held that in light of the enforcement and conciliation mechanism created by Congress for claims under Title VII, see 442 U.S. at 372-78, 99 S.Ct. at 2349-52, the “deprivation of a right created by Title VII cannot be the basis for a cause of action under § 1985(3),” id. at 378, 99 S.Ct. at 2352. The similar mechanism for enforcement and conciliation of claims under the ADEA, e.g., compare 42 U.S.C. § 2000e-5(b) with 29 U.S.C. § 626(b), persuades us that a violation of the ADEA likewise cannot be the basis for a claim under § 1985(3). Cf. Zombro v. Baltimore City Police Department, 868 F.2d 1364, 1366-68 (4th Cir.1989) (claim under § 1983 may not be predicated on violation of ADEA), cert. denied, 493 U.S. 850, 110 S.Ct. 147, 107 L.Ed.2d 106 (1989).

C. The State-Law Claims

The district court also dismissed Sherlock’s state-law claims, declining to exercise supplemental jurisdiction over them because it had dismissed all of her federal claims. In light of the reinstatement of Sherlock’s Title VII and ADEA claims, we also vacate the dismissal of the state-law claims.

CONCLUSION

The judgment of the district court is affirmed insofar as it dismissed the claims asserted under 42 U.S.C. §§ 1981, 1983, and 1985(3). The judgment is vacated insofar as it dismissed the claims asserted under Title VII, the ADEA, and state law, and the matter is remanded for further proceedings not inconsistent with this opinion.

The parties shall bear their own costs with respect to this appeal.


source: Caselaw Access Project

author: WINTER, Circuit Judge:

license: Public Domain

text:
    In re JC’S EAST, INC., doing business as Lolabelle, Debtor, JC’S EAST, INC., Plaintiff-Appellee, v. Susan TRAUB and Murray Traub, Defendants-Appellants.
    No. 1307, Docket 95-5073.
    United States Court of Appeals, Second Circuit.
    Argued April 4, 1996.
    Decided May 16, 1996.

      Martin F. Brecker, Anderson Kill Olick & Oshinsky, New York City, for Defendants-Appellants.
    Jeffrey A. Mitchell, Fischbein Badillo Wagner Harding, New York City (Caryn L. Marcus, Joelle S. Weiss, of counsel), for Plaintiff-Appellee.
    Before WINTER, JACOBS, and CABRANES, Circuit Judges.
   WINTER, Circuit Judge:

This appeal arises out of an adversary bankruptcy proceeding brought by the debt- or, JC’s East. Susan and Murray Traub appeal from the affirmance by Judge Cedarbaum, Traub v. JC’s East, Inc., No. 95 Civ. 1870 (MGC), 1995 WL 555765 at *4 (S.D.N.Y. Sept. 19, 1995) (hereinafter “District Court Opinion”), of Chief Bankruptcy Judge Lifland’s grant of summary judgment in favor of the debtor, JC’s East, Inc. v. Traub (In re JC’s East, Inc.), Adv.Proc.No. 94-8449A, slip op. at 7 (Bankr.S.D.N.Y. Aug. 23, 1994) (hereinafter “Bankruptcy Court Opinion”). We affirm and order appellants to show cause why they should not be sanctioned pursuant to Federal Rule of Appellate Procedure 38.

The dispute arises out of the following events. On September 20, 1993, debtor JC’s East filed a voluntary petition for relief under Chapter 11 of the federal bankruptcy code, 11 U.S.C. §§ 1101-1174. Pending the approval of a reorganization plan, the debtor continued to operate its business, a restaurant on the Upper East Side of Manhattan called Lolabelle, until January 1994.

Susan Traub became interested in buying the restaurant, and she, her father, and the debtor proposed a reorganization plan to the bankruptcy court. The plan involved two proposed contracts, the “Funding Agreement” and the “Management Agreement.” Under the Funding Agreement, Susan Traub was to be designated the sole stockholder of the debtor’s business in exchange for funding the reorganization plan, an obligation that her father, Murray Traub, personally guaranteed. Pursuant to the Management Agreement, Susan Traub was to assume responsibility for the management of the restaurant as of January 28,1994.

The bankruptcy judge was highly skeptical of the plan. The proposed agreements provided for funding over time, and he feared that the Traubs would renege if the restaurant failed to prosper. Accordingly, at a hearing on January 25, 1994, the judge refused to approve the transaction. He stated:

... the Traub[s] ... are not making a representation that they waive or disclaim any rights based upon statements or their understanding of the condition of the restaurant.... There is nothing in here that says that Ms. Traub has either done her due diligence or waives any due diligence, that she wants this property come hell or high water and she is not about to reconsider at some point in time after she has gained control of the operations.... I can conceive that there would be continuing lo[s]ses and would come to a point where she might find it economically feasible to walk away from the transaction. I don’t want to be left hanging, especially since all of the assets of the estate are being turned over.

After discussion with attorneys for the Traubs and the debtor, the bankruptcy judge stated:

Subject to a representation by the purchaser that there are no warrant[i]es and representations, that she has fully examined the operations and is satisfied to take the restaurant as is, where is, and understands that there may be substantial lo[s]ses continuing in the future, and that she has done her [ ] due diligence or they have done their due diligence and that they are the responsible parties to make the payments under the proposed Plan, I will approve the applications that are made here today.

On January 27, 1994, in response to the bankruptcy court’s concerns and in order to induce the court’s approval of the transaction, Susan Traub executed an affidavit, bearing the caption of the bankruptcy proceeding. The affidavit stated:

Susan Tkaub, being duly sworn, deposes and says:
1. That I am the “Buyer” as defined under a Funding Agreement and Management Agreement with the above captioned debtor, for which approval is sought as referred to in the Order to Show Cause and accompanying application heard by this court on January 25, 1994. This Affidavit is made in support of the application authorizing the debtor to enter into the Funding Agreement with your deponent as well as for approval of the Management Agreement.
2. That prior to execution of the aforesaid agreements I conducted and completed a due diligence investigation of the assets, operation, financial records and other information relating to the debtor and its business and engaged my accountants to participate in such inquiry. I am satisfied with the results of the due diligence investigation. Except as specifically stated in the Bankruptcy Petition and funding agreement I am relying upon no representations, warranties, documents or information supplied by the debtor, or its principal, Michael Schwartz in connection with my decision to execute said agreements and consummate the transaction contemplated thereunder.
3. I acknowledge that I am accepting the debtor’s business in a “w[h]ere [i]s” and “as is” condition and not subject to any further warranties or representations by the debtor or Michael Schwartz.
4. I acknowledge that the debtor is required to file monthly operating statements in accordance with the guidelines of the United States Trustee’s office from the date I assume management of the debtor’s business and agree to undertake this task. Furthermore, in the event there are any losses from the operation of the debtor’s business I agree to utilize my own funds to pay such losses as they are incurred and will not permit any losses to accumulate.
5. Based upon my own financial resources and as a result of my due diligence investigation I am confident of my ability to comply with my obligations under the funding agrément [sic] as well as provide the necessary capital to cover any losses which may occur from the date I assume management.
6. In short, I have every intention to close and consummate the transaction contemplated under the Funding Agreement and Management Agreement.

Murray Traub also executed a similarly captioned affidavit that stated:

Murray Traub, being duly sworn, deposes and says:
1. That I have read the accompanying Affidavit of my daughter, Susan Traub, and concur with the statements and representations contained therein.
2. This affidavit is submitted in my capacity as a Guarantor of the obligations of Susan Traub in connection with the proposed management agreement and funding agreement which was [sic] submitted to this court for approval by Order to Show Cause on January 25,1994.

The bankruptcy court approved the agreements on January 28, 1994. Within a week after Susan Traub took over the restaurant, Lolabelle, the hostess and namesake of the restaurant, resigned. Within two months, the general manager, Manuel Pantones, also left. On May 6,1994, counsel for the Traubs confirmed the prescience of the bankruptcy judge by informing counsel for the debtor that “misleading and/or fraudulent” representations concerning the restaurant had been made by its principal and that, as a result, the Traubs would not honor their commitments.

JC’s East thereafter brought an adversary proceeding against the Traubs for breach of the Funding Agreement. The bankruptcy court granted the debtor’s motion for summary judgment and denied the Traubs’ motion for reargument. It stated that the Traubs were acting in bad faith but denied a motion for sanctions. On September 1,1994, the Traubs filed a motion for reargument and reconsideration of the bankruptcy court’s order granting summary judgment. After a hearing on October 19, 1994, the bankruptcy court denied the motion. The Traubs appealed from the bankruptcy court’s rulings to the district court, which affirmed.

On appeal to this court, the Traubs contend that granting summary judgment was improper because material issues of fact exist concerning allegedly fraudulent representations about the financial condition of the restaurant made to them by the debtor’s principal. Appellants further assert the existence of issues of fact concerning whether the departure of Lolabelle and Pantones constituted a “material and adverse change affecting the business prospects or financial condition” of the restaurant, which, under the Funding Agreement, would excuse the Traubs from performance. Finally, appellants argue that issues of fact regarding the enforceability of Murray Traub’s guarantee of the Funding Agreement preclude summary judgment against him. Their arguments are entirely baseless.

In granting relief to the debtor, both the bankruptcy court and the district court relied upon Susan Traub’s affidavit, which expressly states that she did not rely on “representations, warranties, documents or information supplied by the debtor, or its principal.” Bankruptcy Court Opinion at 5; see also District Court Opinion at * 3. Nevertheless, appellants contend that they did not waive the defense of fraud in the inducement under New York law, and that disputed issues of fact exist regarding representations made on behalf of the debtor to induce them to buy the restaurant. We agree, however, with the bankruptcy judge that “Susan Traub took an oath in the form of an affidavit and announced in the plainest language that she was not relying on any documents, warranties or representations as to the very matter by which she now claims she was defrauded.” Bankruptcy Court Opinion at 5. New York law supports the entry of judgment against the Traubs. See Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 320, 184 N.Y.S.2d 599, 602, 157 N.E.2d 597, 599 (1959).

Even if the statements in the Traubs’ affidavits do not constitute a waiver of fraud in the inducement under New York law applicable to private contracts, the result would not be altered. New York contract law does not govern the interpretation or legal effect of affidavits given to a federal bankruptcy court in order to induce the court to approve a reorganization plan. The bankruptcy judge had declined to approve the plan without such a waiver, and the affidavits were executed solely for the purpose of assuaging the court’s concerns. Any claim by the Traubs that their affidavits were not intended to waive such claims is itself an implied confession of fraud on the bankruptcy court. We decline to entertain what is in essence a bold claim by the Traubs that their fingers were crossed when they executed their affidavits.

Appellants next assert that material issues of fact exist regarding whether the departure of the two restaurant employees constituted a “material and adverse change affecting the business prospects or financial condition” of the business that would excuse the Traubs from performing under the agreements. The bankruptcy court declined to entertain this argument because appellants did not make it in opposition to the debtor’s motion for summary judgment but instead offered it only in their motion for reargument. The bankruptcy court was well within its discretion in refusing to consider this argument. See Fed.R.Civ.P. 59; S.D.N.Y. Local Bankr.R. 13(j) (1986); superseded by S.D.N.Y. Local Bankr.R. 9023-1 (1996); S.D.N.Y. Local R. 3(j) (on a motion for reargument, “[n]o affidavits shall be filed by any party unless directed by the court”); United States v. Certain Funds, 998 F.2d 129, 132 (2d Cir.1993) (purpose of local rule is to prevent party, on a motion for reargument, from “advanc[ing] new facts, issues, or arguments”) (internal quotation marks and citations omitted). We also note that Lola-belle’s departure occurred almost immediately after Susan Traub took control. If her departure was that catastrophic, the time to raise it was in early February 1994, not in the motion for reargument. Indeed, in the March 6,1994 letter to counsel for the debtor stating that the Traubs would not honor their commitments, the Traubs’ attorney mentioned only misleading and fraudulent representations, not the departure of employees as their reason for reneging.

Finally, appellants argue that genuine issues of material fact concerning Murray Traub’s liability preclude summary judgment. This argument is entirely meritless. In Section 14 of the Funding Agreement, Murray Traub “personally guarantee[d] the Buyer’s fulfillment and satisfaction in full of the Ongoing Obligations and any and all other obligations hereunder.” Murray Traub also executed his own affidavit, on January 25, 1994, “in [his] capacity as a Guarantor of the obligations of Susan Traub” in the agreements, in which he “concur[red] with the statements and representations” in Susan Traub’s affidavit.

We address another issue sua sponte. This appears to be a frivolous appeal brought solely to delay the fulfillment of appellants’ obligations under the Funding Agreement. Appellants have reneged on sworn statements they made to induce bankruptcy court approval of the reorganization plan. The bankruptcy court found that appellants were acting in bad faith but declined to award sanctions in the adversary proceeding. Nevertheless, two appeals by the Traubs have followed, and the orderly course of the bankruptcy proceedings has been delayed. We therefore order that appellants and their attorney, who are in the best position to allocate responsibility for bringing this appeal, see United States v. Potamkin Cadillac Carp., 689 F.2d 379, 382 (2d Cir.1982), show cause within thirty days why they should not be sanctioned, with joint and several liability, in the amount of $10,000 and double costs pursuant to Federal Rule of Appellate Procedure 38. Fed.R.App.P. 38. (“If a court of appeals determines that an appeal is frivolous, it may, after ... notice from the court and reasonable opportunity to respond, award just damages and single or double costs to the appellee.”); Knipe v. Skinner, 999 F.2d 708, 711 (2d Cir.1993).

We affirm the judgment and order that the mandate be issued forthwith. The sanctions issue is severed and will be resolved after appellants have had an opportunity to show cause why they should not be sanctioned.

      . Chief Judge Lifland apparently was not available, and a different bankruptcy judge signed the order approving the transaction.

      . Appellants make much of the fact that the approval was by a different judge. See supra Note 1. We fail to see any significance whatsoever in that fact.

      . The departures of the two employees were mentioned in an affidavit in opposition to the motion for summary judgment. However, the departures were not touted in any opposition papers as vitiating the Traubs’ obligations under the Funding Agreement until the motion for rear-gument. In any event, the argument is frivolous on the merits.

      . The Southern District of New York bankruptcy rule then in effect, Rule 13(j), tracked the language of Local Rule 3(j). It was superseded by Rule 9023-1 in the new local bankruptcy rules, which became effective on March 28, 1996.


author: PARKER, Circuit Judge: JACOBS, Circuit Judge,

text:
    Joseph Mercidieu LUCAS, Plaintiff-Appellant, v. Ronald MILES, Thomas A. Coughlin, III, Dr. Robert B. Greifinger, M.D., Dr. Shah, M.D., Terry-Bolar, R.N., Correction Officer Mellis, and Dr. Milki Bhat, M.D., Defendants-Appellees.
    No. 446, Docket 94-2718.
    United States Court of Appeals, Second Circuit.
    Argued Nov. 3, 1995.
    Decided May 16, 1996.

      Adam J. Safer, New York City (Douglas F. Broder, Coudert Brothers, New York City, of counsel), for Plaintiff-Appellant.
    (Dennis C. Vacco, Attorney General of the State of New York, Peter H. Schiff, Deputy Solicitor General, Wayne L. Benjamin, John McConnell, Assistant Attorneys General, Albany, NY, on the brief), for Defendants-Appellees.
    Before: VAN GRAAFEILAND, JACOBS and PARKER, Circuit Judges.
   PARKER, Circuit Judge:

This is an appeal from two rulings of the United States District Court for the Western District of New York (Judge John Elfvin): (1) the dismissal of a supplemental complaint because it was filed after a court-specified deadline, and (2) the granting of summary judgment because the statute of limitations barred the claims in the original complaint. We vacate the dismissal of the supplemental complaint as contrary to circuit precedent. Because we vacate the dismissal, we do not address the statute of limitations question since the district court decided that issue only as to the original complaint.

BACKGROUND

I.

Joseph Lucas is a prisoner in the New York state prison system. Acting pro se, he filed a civil action against various New York prison officials in April, 1993. His original complaint charged violations of 42 U.S.C. § 1983 and sought damages and injunctive relief. The complaint alleged a policy of providing inadequate health care, and was predicated on the mistreatment of an ankle injury which Lucas incurred on October 9, 1989, while he was an inmate at the South-port Correctional Facility.

On June 17, 1993, Lucas filed a “Motion for Leave to File Supplemental Complaint and Add Defendants.” Attached to this motion was a proposed Supplemental Complaint. The Supplemental Complaint added counts relating to medical treatment received from February 1992 to May 1993 for dizziness, head pains and facial numbness. This treatment was rendered at another prison, Midstate Correctional Facility. The state opposed Lucas’ June 17 motion, arguing that “there is no connection between events alleged in the original complaint and those of the proposed supplemental complaint.”

On October 21, 1993, before the district court had taken any action on Lucas’ June 17 motion to file a supplemental complaint, Lucas filed another motion. This motion was for “Leave to Amend Complaint and Add Defendant for Clarity.” Attached to this motion was a proposed Amended Complaint which added claims relating to a beating Lucas suffered on June 26, 1990, and the resulting denial of medical care while incarcerated at Southport Correctional Facility. The state opposed this motion as well, arguing, again, that the events alleged in the proposed amended complaint were unrelated to the events alleged in the original complaint.

On February 17, 1994, the district court ruled on the motions described above. The court denied the June 17 motion to file a supplemental complaint. The court agreed with the state that the allegations in the June 17 proposed supplemental complaint were not sufficiently related to the original complaint to warrant merging the two into a single suit. The court also denied the October 21 motion to amend, “but without prejudice to the plaintiffs filing and serving a ‘supplemental complaint’ setting forth the other Southport claims.” The court reasoned that the new claims alleged in the October 21 motion were sufficiently similar to those alleged in the original complaint to warrant merging the allegations into the same suit. Significantly for the purposes of this appeal, Judge Elfvin specified that Lucas was to file any such supplemental complaint “within 60 days of the filing of this Memorandum and Order.”

Lucas filed a supplemental complaint, but after the 60 day deadline. Other than missing the deadline, the supplemental complaint appears to conform to the district court’s February 17 order. All of the defendants answered the supplemental complaint without objecting to its tardiness. In July and August 1994 defendants moved to dismiss the complaint, arguing inter alia that the complaint failed on statute of limitations grounds. Defendants never moved for dismissal due to the late filing.

On November 23, 1994, the district court, on its own motion, dismissed the supplemental complaint because Lucas “failed to file this Complaint within the time period prescribed by the [February 17] order.” Having dismissed the supplemental complaint, the court then turned to the original complaint and dismissed the claims contained therein on statute of limitations grounds. It is this November 23 ruling that is now before us.

DISCUSSION

II.

A. Standard of Review

Rule 41(b) of the Federal Rules of Civil Procedure authorizes the district court to dismiss an action when a plaintiff fails to comply with “any order of the court.” We review such dismissals for an abuse of discretion in light of the whole record. Alvarez v. Simmons Market Research Bureau, Inc., 839 F.2d 930, 932 (2d Cir.1988). Generally, appellate review for an abuse of discretion suggests great deference. In this context, however, we have recognized that dismissal is a harsh remedy and is appropriate only in extreme situations. Id. We have also explained that district courts should be especially hesitant to dismiss for procedural deficiencies where, as here, the failure is by a pro se litigant. Minnette v. Time Warner, 997 F.2d 1023, 1027 (2d Cir.1993). Furthermore, this court has repeatedly detailed factors (discussed below) to be considered before dismissal for failure to comply with a court order. See Alvarez, 839 F.2d at 932 (citing cases). See also Jackson v. City of New York, 22 F.3d 71, 74-76 (2d Cir.1994). These parameters suggest that deference is due to the district court’s decision to dismiss a pro se litigant’s complaint only when the circumstances are sufficiently extreme. See Nita v. Connecticut Dept. of Envtl. Protection, 16 F.3d 482, 487 (2d Cir.1994) (reversing dismissal of complaint as an “abuse of discretion”).

B. Review

The correctness of a Rule 41(b) dismissal is determined in light of five factors. They are: (1) the duration of the plaintiffs failure to comply with the court order, (2) whether plaintiff was on notice that failure to comply would result in dismissal, (3) whether the defendants are likely to be prejudiced by further delay in the proceedings, (4) a balancing of the court’s interest in managing its docket with the plaintiffs interest in receiving a fair chance to be heard, and (5) whether the judge has adequately considered a sanction less drastic than dismissal. Jackson, 22 F.3d at 74-76; Alvarez, 839 F.2d at 932.

We note at the outset that there is nothing'in the record to suggest that Judge Elfvin considered any of the above factors. While we do not now require the court to discuss the factors on the record, a decision to dismiss stands a better chance on appeal if the appellate court has the benefit of the district court’s reasoning. Furthermore, notions of simple fairness suggest that a pro se litigant should receive an explanation before his or her suit is thrown out of court.

We now do the factor analysis which the district court should have done. While no single factor is generally dispositive, Nita, 16 F.3d at 485, it is readily apparent that the district court erred in dismissing the supplemental complaint.

First, Lucas’ non-compliance was no more than 39 days. While it is possible to imagine how such a delay could be significant, not in this ease. The defendants never even complained about the tardiness of the supplemental complaint; instead they answered it under the assumption that the litigation would proceed to adjudication on the merits.

Second, the district court never warned Lucas that failure to comply would result in dismissal. Indeed, had Lucas received such a warning, it is difficult to imagine how dismissal for unexplained non-compliance could be an abuse of discretion. Defendants argue in their brief, that the district court’s denial of the motion but without prejudice to refile a supplemental complaint constitutes adequate notice. This might be the case if plaintiff were represented by counsel. But Lucas prosecuted his case pro se. A warning to a pro se litigant must be more specific before it will constitute a warning for the purpose of this analysis.

Third, as already discussed, there is absolutely no evidence that Lucas’ delay in filing the supplemental complaint has prejudiced the defendants in any way.

Fourth, Lucas’ late filing did not further congest the district court’s docket. His initial complaint had been pending for nearly 22 months. There must be compelling evidence of an extreme effect on court congestion before a litigant’s right to be heard is subro-gated to the convenience of the court. No such evidence is present here.

Lastly, there is no indication that Judge Elfvin considered lesser sanctions as an alternative to the dismissal of the supplemental complaint.

CONCLUSION

In short, none of this court’s oft-repeated considerations suggest that dismissal was appropriate. Accordingly, we vacate the dismissal of Lucas’ supplemental complaint and remand the case for further proceedings in light of the discussion herein. We express no opinion regarding the merits of defendants’ motions to dismiss.

JACOBS, Circuit Judge,

dissenting:

I respectfully dissent from the majority opinion, and would affirm the district court’s rejection of Lucas’s supplemental pleading for failure to comply with the court’s order. I would also affirm the district court’s dismissal of Lucas’s initial complaint as time-barred, because it alleges acts that took place (if at all) more than three years before the initial complaint was filed.

BACKGROUND

Lucas’s several pleadings allege events on several dates at two different prisons; in tracking the procedural history, it is useful to keep in mind that Lucas was evidently transferred from the Southport Correctional Facility (“Southport”) to the Mid-State Correctional Facility (“Mid-State”) in approximately 1991.

A. The Pleadings.

The initial complaint was filed in district court in April 1993, alleging (pursuant to 42 U.S.C. § 1983) that officers and medical personnel at Southport discriminated against Lucas on the basis of race in October 1989 by confining him to medical keeplock and by inadequately treating an ankle injury that he sustained in a soccer match. On June 17, 1993, Lucas filed a motion for leave to supplement his complaint, accompanied by a proposed supplemental pleading which sought to add as new defendants several Mid-State corrections personnel who allegedly gave inadequate treatment to Lucas in March 1992 for a “headache and swelling of the head.” On October 21, 1993, Lucas filed (i) a motion for leave to amend his complaint and to add another Southport corrections officer as a defendant, together with (ii) a proposed amended complaint, and (iii) a supporting affidavit. Those documents alleged that Lucas was beaten by a corrections officer at the Southport facility in June 1990.

B. The February 17 Order.

Both of Lucas’s motions were denied in an order dated February 17, 1994. As to Lucas’s June 17,1993 motion to supplement, the district court ruled that the mistreatment alleged in the proposed pleading was insufficiently related to the 1989 ankle problem at Southport alleged in the initial complaint. That order has not been challenged on appeal.

As to Lucas’s October 21, 1993 motion for leave to file an amended complaint, the district court concluded that the proposed pleading alleged conduct sufficiently similar to that alleged in Lucas’s initial complaint. The district court denied Lucas’s motion to amend but granted Lucas an opportunity to plead all of his allegations concerning his mistreatment at Southport in an additional pleading if such a pleading were filed within 60 days. That order has not been challenged on appeal. It is undisputed that Lucas did not file that pleading (which he titled a “supplemental complaint”) until May 26, 1994— well after the court’s 60-day deadline had passed.

C. The November 23 Order.

On November 23, 1994, the district court sud sponte “vacated and nullified” the late-filed supplemental pleading. The district court then dismissed Lucas’s initial complaint on the grounds that it did not allege incidents occurring within the applicable three-year limitations period. That order, rejecting the late-filed pleading and dismissing the initial complaint on limitations grounds, is the subject of this appeal.

DISCUSSION

In my view, the district court did not abuse its discretion in rejecting Lucas’s supplemental pleading. First, the sanction imposed for Lucas’s failure to comply with the conditional February 17 order was the rejection of the supplemental pleading filed out of compliance with the condition — not dismissal of Lucas’s entire action. Although the court also dismissed the initial complaint in the same order, the court did so on other sufficient grounds (the statute of limitations) rather than by way of a sanction. This appeal therefore does not resemble cases (such as those relied upon in the majority opinion) in which the sanction imposed was the dismissal of the action. See, e.g., Jackson v. City of New York, 22 F.3d 71, 74-75 (2d Cir.1994) (case dismissed for failure to submit joint pre-trial order); Nita v. Connecticut Dep’t of Envtl. Protection, 16 F.3d 482, 485 (2d Cir.1994) (case dismissed for failure to submit to discovery); Minnette v. Time Warner, 997 F.2d 1023, 1027 (2d Cir.1993) (case dismissed for failure to respond to motion to dismiss); Alvarez v. Simmons Mkt. Research Bureau, Inc., 839 F.2d 930, 932 (2d Cir.1988) (case dismissed for failure to submit proposed pretrial order); Harding v. Federal Reserve Bank, 707 F.2d 46, 49 (2d Cir.1983) (case dismissed for failure to comply with deadline for filing amended complaint).

Second, the district court’s decision to reject the supplemental pleading was by no means an abuse of discretion. The majority opinion holds that the district court should have applied the five-factor test, set forth in Harding, 707 F.2d at 50, for reviewing a dismissal made pursuant to Fed.R.Civ.P. 41(b). I believe that the Harding test is inapplicable, because the rejection of Lucas’s proposed supplemental pleading is not tantamount to dismissal of a complaint by entry of judgment under Rule 41(b). But even if one reviews the Harding factors, they militate in favor of dismissal here.

Duration. Lucas was given 60 days in which to file his supplemental pleading, and delayed between nine and thirty-eight days in filing that pleading. This period cannot be deemed insignificant. Cf. Harding, 707 F.2d at 51 (reversing dismissal under Rule 41 where district court gave plaintiff only twenty days in which to file amended complaint, and denied plaintiffs motion to extend time by three days). Moreover, when it arrived, the supplemental pleading sought to reliti-gate claims that had already been fully litigated in the New York State Court of Claims.

Notice. The February 17 order denied Lucas’s motion for leave to amend his initial complaint, “but "without prejudice to his filing, within sixty days of the filing of this Memorandum and Order, a ‘supplemental complaint’ setting forth additional claims.” Lucas was thereby made aware that, unless he complied within the 60-day time period, this opportunity might be lost and his supplemental pleading might be rejected. Cf. Nita, 16 F.3d at 486 (reversing dismissal where plaintiff received no notice that “case was on the brink of dismissal if she failed to respond” to the defendants’ motions to dismiss); Alvarez, 839 F.2d at 932-33 (reversing dismissal where “[t]he district court gave no warning that missing the February 13 deadline ... would result in such drastic action as dismissal”); Harding, 707 F.2d at 52 (reversing dismissal where record provided no indication that dismissal would result from noncompliance with court order). A pro se litigant is afforded leniency in asserting his claims, see Branum v. Clark, 927 F.2d 698, 705 (2d Cir.1991), but the indulgence afforded to a pro se litigant should not extend to the disregard of a judge’s plain directives. The concept of “sixty days” can be understood and appreciated without a legal education. (One would have to be a lawyer to believe that “sixty days” is an elusive concept.)

Prejudice To Defendants. Lucas filed a total of four pleadings with the district court. The last three sought either to relitigate claims that he had brought in state court or to allege facts concerning incidents not alleged in the initial complaint. I think that the defendants suffered a detriment by this cascade of pleadings, and had a strong interest in the court’s enforcement of some discipline on this pro se litigant, but it would be difficult to say that the period of delay in filing the supplemental pleading worked a separate and distinct prejudice on them.

Opportunity To Be Heard. Lucas’s right to due process was unaffected by dismissal because Lucas had already been afforded an opportunity to fully litigate his claims in state court, and because Lucas’s initial federal complaint was not the object of the sanction imposed. Cf. Harding, 707 F.2d at 51 (reversing dismissal where district court dismissed entire complaint because amended pleading was not timely filed).

Efficacy Of Lesser Sanctions. The district court in fact imposed a lesser sanction than outright dismissal. Only Lucas’s supplemental pleading was rejected for non-compliance with the court order, and his initial complaint remained to be considered (and ultimately dismissed) on its own terms. I can think of no lesser sanction that the court could have imposed on Lucas, particularly since the February 17 order afforded Lucas substantial leniency in permitting him to file a supplemental pleading in the first place. See id. at 51 (suggesting that, where amended pleading was not timely filed, court should have “considered simply denying the requested extension and allowing the case to proceed on the existing pleadings”).

Accordingly, I would affirm the district court’s rejection of Lucas’s supplemental pleading. I would also affirm dismissal of Lucas’s initial complaint as time-barred. Having voided the untimely supplemental pleading, the November 23 order proceeded to consider the claims set forth in Lucas’s initial complaint, and dismissed them on the ground that they were untimely under N.Y. Civ. Prac. L. & R. 214.2. That provision fixes a three-year period of limitations for actions arising under a statute, and applies here. See Owens v. Okure, 488 U.S. 235, 236, 109 S.Ct. 573, 574, 102 L.Ed.2d 594 (1989) (state limitation period governs actions brought under 42 U.S.C. § 1983). Lucas’s initial complaint was filed on April 19, 1993, and the incidents alleged therein occurred (at the latest) in January 1990. The claims set forth in that complaint therefore were time-barred.

It may (or may not) be true that, under the relation-back doctrine expressed in Havens Realty Corp. v. Coleman, 455 U.S. 363, 380-81, 102 S.Ct. 1114, 1125-26, 71 L.Ed.2d 214 (1982), the claims contained in Lucas’s initial complaint (concerning events occurring prior to January 1990) would have become viable if the district court had accepted the untimely supplemental pleading, which alleged a beating on June 26, 1990. But that does not support the majority’s implicit conclusion that the dismissal of the time-barred initial complaint was a sanction for Lucas’s failure to comply with the February 17, 1994 order. Although both dispositions (rejection of the supplemental pleading and dismissal of the initial complaint) were accomplished in a single order, Lucas cannot expect that his noncompliance with the order on supplementation would insulate his initial complaint from dismissal on any otherwise applicable ground. In my view, Lucas should not be able to avail himself of the relation-back doctrine embodied in Fed. R. Civ. Proc. 15(c), because I would hold that the supplemental pleading was properly rejected. The district court therefore properly held that Lucas’s initial complaint was time-barred under the applicable three-year statute of limitations.

      . We suspect Judge Elfvin did not simply accept the June 17 proposed amendments because those amendments, on their own, were not sufficiently clear.

      . There is some dispute over how late this complaint was filed. The supplemental complaint was received by the district court 38 days after the deadline. The complaint was dated nine days after the deadline. In light of our disposition of this case, we need not decide the exact degree of tardiness.

      . While Lucas was ably represented at oral argument by counsel appointed by this court, no lawyer appeared on behalf of defendants to defend Judge Elfvin’s decision to dismiss. Defense counsel have not provided this court with any explanation for the failure to appear.

      . Lucas neglected to inform the district court that he had brought an action in the State Court of Claims seeking compensatory damages for assault and battery arising from the same conduct on which his supplemental complaint was based. On November 24, 1992, the Court of Claims found that the defendants were not negligent in initially treating Lucas’s ankle injury, but were negligent in confining Lucas to his cell without reassessing his medical condition, and awarded Lucas $250 for pain and discomfort.

      . The majority asserts that the district court "should have” walked through each of the five factors set forth in Harding. However, those are "the factors that an appellate court, viewing the record as a whole, need assess in ruling on the district court’s dismissal for failure to prosecute.” Romandette v. Weetabix Co., 807 F.2d 309, 312 (2d Cir.1986) (emphasis added). There is no requirement that a district court consider each factor, either on or off the record, in dismissing an action under Rule 41(b) or in rejecting a supplemental pleading that was filed out of time. See Nita, 16 F.3d at 485; Alvarez, 839 F.2d at 932; Harding, 707 F.2d at 50.


author: JON 0. NEWMAN, Chief Judge:

text:
    Jeffrey FEINMAN and Gary Kosseff, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. DEAN WITTER REYNOLDS, INC.; Oppenheimer & Co.; Smith Barney, Inc.; Merrill Lynch & Company; Merrill Lynch Pierce Fenner & Smith Incorporated, on behalf of themselves and all others similarly situated, Defendants-Appellees.
    No. 1242, Docket 95-9081.
    United States Court of Appeals, Second Circuit.
    Argued March 25, 1996.
    Decided May 17, 1996.
    Roger W. Kirby, New York City (Ira M. Press, Kaufman Malchman Kirby & Squire, New York City, on the brief), for plaintiffs-appellants.
    Charles A. Gilman, New York City (Jonathan Sherman, Cahill Gordon & Reindel, New York City, on the brief), for defendants-appellees.
    Before NEWMAN, Chief Judge, and FEINBERG and PARKER, Circuit Judges.
   JON 0. NEWMAN, Chief Judge:

This appeal challenges the practices of several of the nation’s largest stock brokerage firms in the labeling of their fee charges in connection with securities transactions. Jeffrey Feinman and Gary Kosseff appeal from the September 30, 1995, judgment of the District Court for the Southern District of New York (Denise Cote, Judge), dismissing their suit alleging securities fraud. Appellants alleged that the firms charged hidden commissions on every transaction, mislabeling their charges as transaction fees on confirmation slips supplied to the customer. The District Court ruled as a matter of law that appellants had failed to show both materiality and reliance. We agree and therefore affirm.

Background

After every securities transaction, stock brokers are required to provide the customer with a confirmation slip disclosing, among other things, the nature and amount of the transaction and any additional charges. See 17 C.F.R. § 240.10b-10 (1995) and NYSE Rule 409. Each of the defendants routinely charges a transaction fee, ranging from $2.35 to $4.85, for each purchase or sale processed. On the confirmation slips, the fees are variously identified as covering “handling, postage and insurance if any” (Dean Witter Reynolds, Inc.); “handling” (Oppenheimer & Co., Inc.); “service” (Smith Barney, Inc.); and “processing” (Merrill Lynch & Co.).

Feinman and Kosseff, who dealt with each of the defendant firms for eight years, received confirmation slips identifying transaction fees for every purchase and sale. They alleged that the fees charged far exceed the cost to the firms of such items and instead represent hidden, fixed commissions, disguised to circumvent rules prohibiting fixed rates and to prevent customers from negotiating the fees. Feinman and Kosseff sought to represent a class of similarly situated securities customers against a class of brokerage firms charging excessive transaction fees.

The District Court granted summary judgment for the defendants, ruling that deceptive labeling of the transaction fees was not material as a matter of law to the plaintiffs’ decisions to purchase and sell securities and that the plaintiffs could not as a matter of law show that they relied on this mislabeling. We agree.

Discussion

To bring a successful complaint for securities fraud under section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b) (1994), a plaintiff must allege that, “in connection with the purchase or sale of securities, the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that plaintiffs reliance on defendant’s action caused plaintiff injury.” In re Time Warner Inc. Securities Litigation, 9 F.3d 259, 264 (2d Cir.1993) (quotation omitted), cert. denied, - U.S. -, 114 S.Ct. 1397, 128 L.Ed.2d 70 (1994).

I. Materiality

Appellants contend that, correctly identified as commissions, the transaction fees would have been material to their decisions, made over the course of their eight-year dealings with the defendants, to purchase or sell securities.

In TSC Industries, Inc. v. Northway, 426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976), the Supreme Court, defining materiality in the proxy rules context, stated that information is material if it would have “assumed actual significance in the deliberations of the reasonable shareholder.” Id. at 449, 96 S.Ct. at 2132. The Court later adopted this rule in the context of a securities fraud claim under section 10(b) and Rule 10b-5. Basic Inc. v. Levinson, 485 U.S. 224, 231, 108 S.Ct. 978, 983, 99 L.Ed.2d 194 (1988). The Court noted that in TSC Industries it had been “careful not to set too low a standard of materiality” lest it “lead management ‘simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking.’ ” Id. (quoting TSC Industries, 426 U.S. at 448-49, 96 S.Ct. at 2132). Further, where the alleged misstatements are “so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance,” a court may find the misstatements immaterial as a matter of law. Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985); see also TSC Industries, 426 U.S. at 450, 96 S.Ct. at 2133 (discussing standard for summary judgment on issue of materiality).

We believe the District Court properly concluded that no reasonable investor would have considered it important, in deciding whether or not to buy or sell stock, that a transaction fee of a few dollars might exceed the broker’s actual handling charges. Each of the defendants’ confirmation slips itemized the amount of the fee; the appellants were never charged more than the amounts reported on these slips. See Levine v. NL Industries, Inc., 926 F.2d 199, 203 (2d Cir. 1991) (affirming grant of summary judgment where, under defendants’ indemnity agreement with Department of Energy, “there was no plausible way that NL’s shareholders could suffer financially from the consequences of the alleged [undisclosed] environmental violations”).

Cases in which we have refused to find that representations were not material as a matter of law have involved misstatements or omissions that did, or at least had the potential to, cause the plaintiff financial harm. See Azrielli v. Cohen Law Offices, 21 F.3d 512, 519 (2d Cir.1994) (alleged misrepresentation could have affected plaintiffs’ share purchase price or misstated market value of corporation’s only asset); Goldman, 754 F.2d at 1067 (undisclosed “problems” in marketing defendants’ product could have affected value of stock); cf. Saxe v. E.F. Hutton & Co., Inc., 789 F.2d 105, 111-12 (2d Cir.1986) (by analogy to securities law, in case under Commodities Exchange Act, commodities broker’s allegedly false assurances as to account management may have led to plaintiff’s investment in overly risky commodities).

Simply stated, reasonable minds could not find that an individual investing in the stock market would be affected in a decision to purchase or sell a security by knowledge that the broker was pocketing a dollar or two of the fee charged for the transaction. Cf. Burke v. Jacoby, 981 F.2d 1372, 1381 (2d Cir.1992) (affirming grant of summary judgment on grounds of immateriality where no reason to believe that issue of stock to secretaries rather than executives could have affected plaintiffs position in merger), cert. denied, 508 U.S. 909, 113 S.Ct. 2338, 124 L.Ed.2d 249 (1993). If brokerage firms are slightly inflating the cost of their transaction fees, the remedy is competition among the firms in the labeling and pricing of their services, not resort to the securities fraud provisions.

II. Reliance

Appellants did not attempt to plead that the mislabeling of the fees “induced [them] to enter into the transaction[s].” Citibank, N.A v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir.1992). In most cases, reliance, also known as transaction causation, Burke, 981 F.2d at 1378, is an essential element of a section 10(b) and Rule 10b-5 claim. In re Time Warner, 9 F.3d at 264. Plaintiffs, however, principally relying on Basic Inc. v. Lev-inson, supra, argue that reliance may be presumed in any class action suit.

Basic does not support this contention. In that ease, the Supreme Court held that reliance on material misrepresentations may be presumed in open-market transactions because such investors rely on the integrity of the market to set a fair price and in that sense rely on any misrepresentations that distort the market price. Id. at 241-47, 108 S.Ct. at 988-92.

Basic attempts to avoid practical problems of proof in impersonal market transactions. Id. at 245, 108 S.Ct. at 990-91. Neither Basic nor any other decision invoking a presumption of reliance extends this presumption to all cases alleging class-wide injury. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972) (total nondisclosure of material information). This case presents no problems of proof like those in Basic and Affiliated Ute to justify a presumption of reliance. Plaintiffs do not allege that the market price for the securities was distorted or that the transaction fees were not disclosed.

Moreover, those decisions made clear that the presumption would apply only where the defendant has misrepresented or omitted a mateñal fact. Basic, 485 U.S. at 247, 108 S.Ct. at 991-92; Affiliated Ute, 406 U.S. at 153-54, 92 S.Ct. at 1472. As we have discussed, mislabeling of the fees to disguise the defendants’ commission or profit is not a material misrepresentation for purposes of a securities fraud claim.

III. Leave to Amend

Finally, the District Court did not err in refusing to permit plaintiffs to replead. Denial of leave to amend is left to the broad discretion of the District Court and will be reversed only for abuse of discretion. Zahra v. Town of Southold, 48 F.3d 674, 685-86 (2d Cir.1995). The District Court ruled as a matter of law that no material misrepresentation was made. Such a defect cannot be cured by repleading. Denial of leave to amend in these circumstances does not approach an abuse of discretion.

Conclusion

Plaintiffs have failed as a matter of law to show that misrepresentation of the fees was material to their securities transactions or that they relied on those misrepresentations. The judgment of the District Court is affirmed.

      . Defendants also urge that plaintiffs have failed to meet the requirement of section 10(b) that the misrepresentations have occurred “in connection with" the purchase or sale of securities. See SEC v. Rana Research, Inc., 8 F.3d 1358, 1361— 63 (9th Cir.1993). They argue that the charges at issue are related to the delivery of confirmation slips, not the plaintiffs’ decisions to buy or sell stocks. Because we agree with the District Court’s conclusion that plaintiffs have failed to satisfy the materiality and reliance elements of a section 10(b) claim, we need not decide whether the misrepresentations at issue were “in connection with” the purchase or sale of securities.


author: VAN GRAAFEILAND, Circuit Judge: JACOBS, Circuit Judge,

text:
    GORDON & CO., Plaintiff-Appellant, v. Arthur H. ROSS, Defendant-Appellee.
    No. 1625, Docket 94-9205.
    United States Court of Appeals, Second Circuit.
    Argued June 28, 1995.
    Decided May 17, 1996.

      Steven L. Herrick, Garden City, NY, for Plaintiff-Appellant.
    Jack David, New York City (Steven Finell, New York City, of counsel), for Defendant Appellee.
    Before: VAN GRAAFEILAND, JACOBS and LEVAL, Circuit Judges.
   VAN GRAAFEILAND, Circuit Judge:

Gordon & Co. (“Gordon”) appeals from a judgment of the United States District Court for the Southern District of New York (Ger-shon, M.J.) dismissing Gordon’s complaint alleging fraud against Arthur H. Ross, the former Chief Executive Officer of Hanover Square Securities Group, Inc. (“Hanover”). The judgment was based in part upon a grant of summary judgment in Ross’s favor and in part upon a verdict in Ross’s favor following a bench trial before Magistrate Judge Gershon. We vacate and remand to the district court for further proceedings.

At all times relevant to this action, Gordon was a broker-dealer in publicly traded securities. Its principal business was selling put and call options. If a customer exercised an option before it expired, Gordon would sell to the customer (in the case of a call) or buy from the customer (in the ease of a put) a specified number of shares of a particular stock at a set price. Gordon hedged itself in these transactions by creating a margin account which held covering securities. Gordon financed its securities purchases in part by borrowing from the brokerage firm in which its margin account was maintained.

Hanover was Gordon’s principal clearing broker for executing Gordon’s trades on the New York Stock Exchange, and Gordon maintained a margin account with Hanover. On October 21, 1983, Gordon had securities worth approximately $13 million in this account, with a debit balance representing its borrowings against these securities in the approximate amount of $4.7 million.

On Monday, October 17, 1983, the New York Stock Exchange informed Hanover’s principals that their brokerage business would be closed on Friday, October 21st unless they raised substantial capital, stopped hypothecating fully-paid securities and corrected shoddy bookkeeping practices. On the 21st, Gordon learned of Hanover’s problems and attempted without success to withdraw $4.5 million from its margin account, which was the amount in excess of that needed to satisfy margin requirements. Instead of receiving the money, Gordon was asked to meet over the weekend with representatives of Hanover and other securities brokers who dealt with Hanover to explore the possibility of raising sufficient capital for Hanover to permit it to open its business on Monday, October 24th.

In the course of these meetings, Gordon agreed to loan Hanover $1,950,000 by increasing its debit balance to Hanover in this amount. To induce the making of this loan, Hanover representatives, including Ross, promised that, if the New York Stock Exchange permitted Hanover to open on the 24th, all of Gordon’s securities in Hanover’s margin account would be delivered on that day to Bear Stems, Gordon’s designee, upon Gordon’s payment to Hanover of the debit balance in its Hanover account. To satisfy Gordon that this transfer was possible, Ross represented that none of Gordon’s fully-paid securities in its margin account with Hanover had been hypothecated by Hanover to secure repayment of any borrowings that Hanover had made.

Hanover was permitted to open for business on October 24th, but did not transfer Gordon’s securities, as it had promised to do. It began the transfers on October 26th, but ultimately failed to deliver $1,890,796 of fully-paid securities because, contrary to Ross’s representations, it had hypothecated these securities to two banks to secure $1,034,347 in loans from the banks. In order to recover its $1,890,796 in securities, Gordon loaned Hanover an additional $1,034,347 with which to pay its bank indebtedness. On December 8, 1983, Hanover was forced to liquidate. Not surprisingly, neither loan was repaid.

In 1987, Gordon commenced this action in New York Supreme Court alleging that the fraudulent misrepresentations by Ross led to the making of both loans. After the action was removed to the Southern District of New York, it was referred by stipulation to Magistrate Judge Gershon for disposition pursuant to 28 U.S.C. § 636(c). Magistrate Judge Gershon rejected Gordon’s claim based on the second loan by granting Ross’s motion for summary judgment directed to that cause of action. Thereafter, she conducted a bench trial of Gordon’s claim respecting the first loan, and, at the conclusion thereof, held in favor of Ross.

In the course of these proceedings, Magistrate Judge Gershon made a number of factual findings that have full support in the record. She found that Ross misrepresented that, if Gordon made the $1,950,000 loan, all of the over $13 million of Gordon’s securities held by Hanover would be delivered to Gordon on October 24th, against payment by Gordon of its debit balance of approximately $4.7 million. She found that Ross also misrepresented that none of Gordon’s fully-paid securities had been hypothecated for loans to Hanover, and that these misrepresentations were deliberate and material. She found that, as of November 4, 1983, Gordon could not obtain delivery of $1,890,796 of its fully-paid securities because Hanover had hy-pothecated them to secure loans from the two banks, and as a result, Gordon was required to pay off Hanover’s loans from the two banks in the amount of $1,034,347 to free the hypothecated securities.

Gordon seeks recovery of the balance owing on both the $1,950,000 loan (“Loan # 1”) and the $1,034,347 loan (“Loan #2”). Because the issues with respect to the two loans are not identical, we discuss them separately.

Loan # 1

In denying Gordon recovery on Loan # 1, the magistrate judge focussed on the fact that Gordon’s wrongfully hypothecated stock eventually was transferred to Gordon’s designee. She said that “even if Ross’s statements had been true, and all of Gordon & Co.’s securities had been delivered on October 24,1983, the $1,950,000 loan would still have been outstanding.” This may be an interesting hypothetical, but it is not the issue in the case. Ross’s statements were not true, and the starting point for determination is whether the untrue statements induced Gordon to make the $1,950,000 loan. If they did, the issue of Ross’s liability hinges upon the relationship between Ross’s fraudulent statements and Gordon’s loss. In analyzing this relationship, it was important that the trial judge follow the law of New York. In New York, “[a] cause of action for fraud may arise when one misrepresents a material fact, knowing it is false, which another relies on to its injury.” Graubard Mollen Dannett & Horowitz v. Moskovitz, 86 N.Y.2d 112, 122, 629 N.Y.S.2d 1009, 1014, 653 N.E.2d 1179, 1184 (1995); see also Barclay Arms, Inc. v. Barclay Arms Assocs., 74 N.Y.2d 644, 646-47, 542 N.Y.S.2d 512, 514, 540 N.E.2d 707, 709 (1989) (no fraud where, inter alia, plaintiff did not rely on misrepresentation); Orbit Holding Corp. v. Anthony Hotel Corp., 121 A.D.2d 311, 314, 503 N.Y.S.2d 780, 782 (1986) (final element of fraud is showing “that the party to whom the representation was made relied upon it to its injury or damage”).

In Channel Master Corp. v. Aluminium Ltd. Sales, Inc., 4 N.Y.2d 403, 407, 176 N.Y.S.2d 259, 151 N.E.2d 833 (1958), the Court, citing 3 Restatement, Torts, § 525, at 59, said:

Accordingly, one “who fraudulently makes a misrepresentation of * * * intention * * * for the purpose of inducing another to act or refrain from action in relance thereon in a business transaction” is hable for the harm caused by the other’s justifiable reliance upon the misrepresentation.

Sections 546 and 548A of the Restatement (Second) of Torts also 'emphasize the importance of relance:

§ 546. Causation in Fact

The maker of a fraudulent misrepresentation is subject to labilty for pecuniary loss suffered by one who justifiably re-les upon the truth of the matter misrepresented, if his relance is a substantial factor in determining the course of conduct that results in his loss.

§ 548A Legal Causation of Pecuniary Loss

A fraudulent misrepresentation is a legal cause of a pecuniary loss resulting from action or inaction in relance upon it if, but only if, the loss might reasonably be expected to result from the relance.

Obviously then, in New York, as in any other state whose common law accords with the view of the Restatement, labilty is determined by whether the plaintiff justifiably reled upon the defendant’s misrepresentations and suffered a loss that reasonably might have been anticipated to result from the relance. See Manufacturers Hanover Trust Co. v. Drysdale Sec. Corp., 801 F.2d 13, 20-21 (2d Cir.1986), cert. denied sub nom. 479 U.S. 1066, 107 S.Ct. 952, 93 L.Ed.2d 1001 (1987); Marbury Management, Inc. v. Kohn, 629 F.2d 705, 708 (2d Cir.), cert. denied sub nom. 449 U.S. 1011, 101 S.Ct. 566, 66 L.Ed.2d 469 (1980).

Gordon’s claim of recoverable damage with regard to Loan # 1 is not based upon the difficulties it encountered in securing the return of its wrongfuly hypothecated securities. It is based on the contention that Gordon would not have made the loan if Ross had not deceived it concerning Hanover’s stock machinations. In paragraph 21 of Gordon’s amended complaint, it aleged that “[t]o induce plaintiff to close and consummate the Cash Subordination Agreement,” (the $1,950,000 loan) Ross represented that Hanover would promptly return Gordon’s securities. In paragraph 25, Gordon alleged that it relied upon this representation “by consummating and closing” the Cash Subordination Agreement. In paragraph 26, Gordon alleged that no part of the subordinated loan had been repaid except $31,145.34 in interest.

We believe that if New York law is properly applied, the issue for determination is whether Gordon justifiably relied upon Ross’s misrepresentations in making the $1,950,000 loan and whether the loss sustained by Gordon might reasonably have been anticipated by Ross. We note that this is not a case where a victim is fraudulently induced to advance money to a company that becomes insolvent several years later from unrelated causes. Cf. Citibank N.A v. K-H Corp., 968 F.2d 1489 (2d Cir.1992). Hanover was teetering on insolvency when Gordon’s fraudulently induced loan was made. No one knew this better than did Ross. Upon remand, the trier of fact will have to decide whether Ross, after fraudulently securing $1,950,000 from Gordon to save the sinking ship, may validly contend that Gordon’s loss was attributable only to the sinking of the ship and was not a reasonably foreseeable result of the fraud.

Loan # 2

In discussing the second loan, the magistrate judge said:

Plaintiff established that, as of November 4,1983, Gordon & Co. could not obtain delivery of $1,800,000 of its fully paid securities held by Hanover because Hanover had hypothecated them to secure loans to Hanover. As a result, Gordon & Co. was required to pay off Hanover’s loans to those two banks, in an amount totalling $1,034,347.

Magistrate Judge’s Second Opinion at 10.

The magistrate judge nevertheless summarily denied Gordon’s claim for recovery of the $1,034,347, stating her reason as follows:

It is undisputed that, by the time of this second loan, Gordon & Co. knew both that the $13,000,000 worth of securities had not been fully returned to it and that Hanover had hypothecated $1,800,000 worth of securities to two banks for loans made to Hanover. Thus, Gordon & Co. could not have reasonably relied upon the alleged misrepresentations as to delivery of the securities and the absence of hypothecation in making the second loan. Since the plaintiff cannot establish that there is a fact issue as to reasonable reliance, these counts must be dismissed.

Magistrate Judge’s First Opinion at 16.

Here, the magistrate judge erred, not once, but twice. The proper test of reliance in a fraud case is not “reasonable” reliance, it is “justifiable” reliance, a clearly less burdensome test. See Field v. Mans, — U.S.-, -, 116 S.Ct. 437, 443-446, 133 L.Ed.2d 351 (1995); Corva v. United Serv. Automobile Ass’n, 108 A.D.2d 631, 632, 485 N.Y.S.2d 264 (1985) (mem.).

Secondly, in looking for the requisite reliance, the magistrate judge looked in the wrong place. The reliance that put Gordon in the position where, as the magistrate judge found, it was “required” to expend an additional $1,034,347 to secure the return of its securities was the reliance that induced Gordon to make the initial loan of $1,950,000. After making this loan in reliance on Ross’s false representation that the loan would free all of Gordon’s securities, Gordon found that $1,890,796 of its securities had been hypothecated and would not be returned unless Gordon came up with another $1,034,347. Thus, once Gordon had relied on Ross’s false assurance of non-hypothecation in extending the loan of $1,950,000, it had no choice but to extend the further loan to secure recovery of a part of the fraudulently induced first loan. We conclude that under these circumstances, the grant of summary judgment in Ross’s favor was error, and accordingly vacate the grant and remand for trial.

For the benefit of the trier of fact on remand, we suggest that there are two separate, but somewhat overlapping, lines of New York authority which it should consider. In the case of Kraut v. Morgan & Brother Manhattan Storage Co., 38 N.Y.2d 445, 381 N.Y.S.2d 25, 343 N.E.2d 744 (1976), a quantity of valuable Russian enamels stored by Kraut in defendant’s warehouse was stolen. Kraut recovered most of the enamels by paying a ransom to an unidentified intermediary of the thief. A portion of the ransom was included in his verdict against Morgan & Brother. Relying upon the seminal case of Jones v. Morgan, 90 N.Y. 4 (1882), the New York Court of Appeals held that the ransom was a proper item of damage as an expense of recovery. In Jones, the plaintiff, suing for the loss caused by the theft of her stored furniture, was allowed recovery, not only for the entire value of her unreeovered furniture, but also for the expense of hiring detectives and bringing legal proceedings which aided in the partial recovery.

In the instant case, Ross fraudulently asserted that none of Gordon’s fully-paid securities had been hypothecated by Hanover. In order to secure the return of $1,890,796 of its wrongfully hypothecated securities, Gordon “ha[d] to come up with the $1,034,000.” (Testimony of Gordon’s negotiating attorney Warren Miller). In the light of the above-cited New York cases, the finder of fact might well treat the $1,034,347 as a legitimate expense of the recovery of the $1,890,-796 in securities and a proper item of damage.

Another possible theory of recovery is a “natural corollary” of the doctrine of mitigation of damages as expressed in the leading New York case of Den Norske Ameriekalinje Actiesselskabet v. Sun Printing & Publishing Ass’n, 226 N.Y. 1, 8, 122 N.E. 463 (1919):

Then it is held as a natural corollary to this rule of duty, not only that the injured party who makes a successful effort to avoid or reduce damages will be allowed to recover the expenses necessarily incurred in so doing, but also that he will be allowed to recover the expenses of a proper effort even though it proves unsuccessful.

See also Ostano Commerzanstalt v. Telewide Sys., Inc., 684 F.Supp. 1172, 1176 (S.D.N.Y.1988), aff'd in part, modified in part on other grounds, 880 F.2d 642 (2d Cir.1989):

Such damages include expenses reasonably incurred by the victim which would not have been incurred had there been no fraud. Thus costs incurred in an attempt to achieve the transaction’s objectives constitute covered expenses.

A finder of fact would be justified in finding that Gordon’s expenditure of the additional $1,034,347 was a natural corollary of its attempt to mitigate damages, i.e., $1,034,347 expended to avoid a probable $1,890,796 loss. This was not a claim to be dismissed by summary judgment.

We will not prolong this opinion by discussing our dissenting colleague’s factual and theoretical arguments made in attempted justification of the magistrate judge’s grant of summary judgment. If on the trial that we now direct Ross’s counsel believes that one or more of these arguments might receive a favorable response from the trier of fact, counsel will have an opportunity to make them. They may not be made at this time to support a grant of summary judgment, which is appropriate only if there is no genuine issue of material fact and the district court has correctly applied the law. National Union Fire Ins. Co. v. Turtur, 892 F.2d 199, 203 (2d Cir.1989).

Summary

We do not hold that Gordon is entitled to recover for the loss it sustained on either loan. With regard to Loan # 1, we hold that the magistrate judge did not follow established principles of New York law with respect to fraud. With regard to Loan # 2, we hold that the magistrate judge misapplied the test of reliance and therefore the claim was not properly one for summary disposition. Accordingly, we vacate the judgment below and remand for further proceedings consistent with this opinion.

JACOBS, Circuit Judge,

dissenting:

There is no question that Gordon & Co. was the victim of a fraudulent misstatement by Ross. I respectfully dissent, however, because I agree with Magistrate Judge Ger-shon that Gordon cannot show reasonable and detrimental reliance upon that misstatement in incurring the loss for which it seeks recovery in this action.

BACKGROUND

At the outset of events, Gordon & Co. had approximately $13 million worth securities in a margin account at Hanover. Gordon had a right to demand that Hanover deliver all the securities in its account, less any debit balance that it owed Hanover. As of October 21, 1983, that debit balance was $4.7 million; so Gordon had a right to immediate delivery of $8.3 million in securities.

On Friday, October 21, Hanover was informed by the New York Stock Exchange (“NYSE”) that it would not be permitted to open for business on Monday, October 24 unless it could shore up its finances. Concerned that all its securities in the Hanover account might be lost if Hanover failed, Gordon agreed on October 23 to lend Hanover $1.95 million by increasing the debit balance it owed to Hanover. In turn, Ross (a Hanover principal) agreed on behalf of Hanover that it would return all of Gordon’s securities on Monday, October 24. Ross also represented that none of Gordon’s securities had been hypothecated to third parties. Ross and two other Hanover principals issued personal guarantees on the loan, and agreed to cause the debts that Hanover owed to them to be subordinated to the Gordon loan. In addition, Rooney Pace, Inc. (“RPI”), a brokerage house and creditor of Hanover, tentatively agreed to purchase certain assets of Hanover and to guarantee payment of the Gordon loan. RPI retained the right to rescind the purchase of Hanover’s assets.

Hanover opened for business on Monday, October 24. By November 2, Hanover had returned all but $1.8 million of Gordon’s fully paid securities. On or about that date, Hanover informed Gordon that the remaining securities could not be delivered because Hanover had hypothecated them to two banks. As the magistrate judge found, Ross’s prior statements to Gordon — that all of Gordon’s securities would be returned, and that none of those securities had been hy-pothecated — were therefore fraudulent.

On November 7, 1983, Gordon agreed to make a second loan to Hanover in the amount of Hanover’s $1,034 million indebtedness to the two banks. In exchange for their receipt of that sum, the banks agreed to release their claims on the $1.8 million in securities, which were then delivered to Gordon. In early December, Hanover informed the NYSE about a previously undisclosed loan in the amount of $1.2 million owing to yet another bank. That loan was not recorded in Hanover’s books and had been hidden from Ross and the NYSE by one of Ross’s fellow principals. Having exhausted the patience of its creditors, Hanover went into liquidation on December 8,1983, and defaulted on both Gordon loans.

DISCUSSION

The magistrate judge ruled that Gordon could not recover on the first loan because, even if all of Gordon’s securities had been delivered in accordance with Ross’s representations, (i) the initial $1.95 million loan would have remained outstanding, and (ii) Hanover would have defaulted on it anyway. As the court expressed it, relying on our decision in Citibank, N.A. v. K-H Corp., 968 F.2d 1489 (2d Cir.1992), “the misstatements were not causally related to the repayment of the loan.”

The only compensatory damages that Gordon seeks are in respect of the second loan. As to that transaction, the critical juncture is November 2,1983, and the days immediately following — the time that Gordon learned that Ross’s prior representations were materially false and fraudulent. At that point, Gordon was a creditor on a $1.95 million loan to Hanover, and had failed to recover $1.8 million in securities that Hanover had hypothe-cated. Gordon had a couple of options:

A. As to the remaining $1.8 million in securities, Gordon could have sought recovery in an aetion for fraud against Hanover and Ross. As to the first $1.95 million loan, Gordon could have awaited payment and, in the event of Hanover’s default, commenced suit on the personal guarantees issued by Ross and his fellow principals, or on the guarantee issued by RPI. In this way, Gordon could have recovered the full value of its securities and the full amount of the first loan to Hanover, without entering into another transaction with its defrauders.
B. Alternatively, Gordon could have struck a deal with the banks directly by paying them the $1,034 million to discharge Hanover’s debt upon the condition that Hanover direct the banks to release the $1.8 million in shares to Gordon. (If Gordon had taken this course of aetion, I might agree with the majority that the transaction would have been a payment in mitigation of damages and recoverable from Hanover and Ross in fraud.) Again, Gordon could have recovered the $1.95 million loan (in the event of default) by way of actions on the guarantees.

But Gordon instead entered into a new transaction with Hanover and Ross and, after Hanover defaulted on its loans from Gordon, commenced this fraud action. In order to recover in fraud, New York law requires, inter alia, that the allegedly defrauded party show that it relied to its injury on the fraudulent misstatement. Graubard Molten Dan- nett & Horowitz v. Moskovitz, 86 N.Y.2d 112, 122, 629 N.Y.S.2d 1009, 1014, 653 N.E.2d 1179, 1184 (1995); Barclay Arms, Inc. v. Barclay Arms Assocs., 74 N.Y.2d 644, 646-47, 542 N.Y.S.2d 512, 514, 540 N.E.2d 707, 709 (1989) (mem.). However, at the time that Gordon entered into the November 7 transaction, Gordon knew that Ross’s prior representations were false. The magistrate judge was therefore correct in ruling that Gordon could not have reasonably (or justifiably) relied on Ross’s prior misstatements in entering into the November 7 transaction. See Clearview Concrete, 88 A.D.2d at 468, 453 N.Y.S.2d at 755 (“With reliance the key element for such recovery, only prediscovery expenses can be recaptured since expenses incurred after discovery have no root in reliance _” (citations omitted)).

The majority holds that, once Gordon learned of Ross’s fraudulent misstatement on November 2, 1983, “it was ‘required’ to expend an additional $1,034,347 to secure the return of its securities.” Maj. Op. at 546. But I can think of no circumstance that actually compelled Gordon to lend more money to its defrauders.' I have outlined two available alternatives Gordon might have adopted. Gordon chose to forgo those options and instead entered into another transaction the effect of which, in my view, was to abandon by settlement or election any claim for fraud that Gordon might have had against Ross and Hanover. The elements of the November 7, 1983 transaction were as follows:

i. Gordon paid the two banks, on behalf of Hanover, $1,034 million.
ii. The banks delivered the remaining $1.8 million in securities to Gordon.
iii. Hanover delivered a promissory note for $1,034 million to Gordon.
iv. Hanover assigned to Gordon, as security for repayment of the promissory note, Hanover’s interest in all cash and securities on deposit at The Depository Trust Company, Midwest Clearing Corp., Midwest Securities Trust Co., National Securities Clearing Corp., and the Options Clearing Corp.

From that point, Gordon could no longer claim that it was fraudulently dispossessed of its securities, because those securities had been returned. Thus, Gordon’s fraud claim against Hanover and Ross was implicitly released and forgone in exchange for what Gordon then doubtless considered a more satisfactory arrangement.

, Gordon mitigated the risk that its two promissory notes would be discharged in the event of Hanover’s bankruptcy by (i) retaining the personal guarantees of Ross and two other Hanover principals on the first (October 23) loan; (ii) retaining RPI’s guarantee on the first loan; and (iii) taking an interest in Hanover’s deposits with the five depository institutions to secure the second (November 7) loan. Thus, as of November 7, Gordon held guarantees or security interests for each loan.

Gordon then proceeded, for one reason or another, to relinquish each of these guarantees and security interests. For reasons not fully explained in the record, Gordon released Ross from his guarantee of the first loan on November 10, 1983. On November 11, Gordon and Hanover “cancelled, rescinded and revoked” the November 7 promissory note, purportedly at the insistence of the NYSE. On November 14, RPI informed Gordon that it intended to rescind its earlier tentative agreement to purchase the assets of Hanover unless that agreement was modified. Ross, RPI, Gordon, and other creditors of Hanover entered into a modification agreement that, inter alia, released RPI’s guarantee of the first loan from Gordon to Hanover. Also on that date, Gordon, RPI and Citiwide Securities Corporation (another Hanover creditor) entered into an agreement pursuant to which RPI granted Gordon a security interest in expected profits from certain (formerly) profitable Hanover operations that RPI purchased and agreed to operate. However, Hanover was forced into liquidation before any profits from those operations materialized.

But for Gordon’s relinquishment of its guarantees and security interests, the relief sought on the ground of fraud would have been collectible: the first loan would have been recoverable by way of an action on the personal guarantees of Ross, his fellow principals, or perhaps RPI; and the second loan would have been recoverable, at least in part, by way of Gordon’s lien on the secured assets in Hanover’s accounts at the depository institutions. The cause of the loss which Gordon seeks to recover in this appeal was therefore two-fold: (i) the primary obligor (Hanover) became insolvent, and (ii) the security interests in Hanover’s assets held at the depository institutions were released. Moreover, because Gordon had not relied on Ross’s misstatements in making the second loan, Gordon cannot recover that loss in an action for fraud.

The majority analogizes Gordon’s second loan to a ransom payment, which may be recoverable in an action in contract. See, e.g., Kraut v. Morgan & Brother Manhattan Storage Co., 38 N.Y.2d 445, 381 N.Y.S.2d 25, 343 N.E.2d 744 (1976). In Kraut, a bailor who brought a contract action against a commercial bailee was permitted to recover the ransom paid to the thief who stole the bail- or’s property while it was in the bailee’s possession. But even if Hanover could be called a commercial bailee, Gordon has brought a fraud claim against Ross, not a contract claim against Hanover. Moreover, a “ransom” is a “sum paid or agreed to be paid for the redemption of captured property.” Black’s Law Dictionary 1260 (6th ed.1990). Here, Gordon made a secured loan to Hanover, and in return Gordon received a promissory note from Hanover that (on its face) created a good claim in contract. It is undisputed that the loan was made with the expectation that Hanover would pay it back or (if not) that Hanover’s property could be attached in satisfaction. Because Gordon was dealing with Hanover as “bailee” rather than with the holder of the property, and because Gordon had an expectation that the supposed “ransom” would be repaid in accordance with the terms of Hanover’s note (secured as it was Hanover’s assets), this transaction has none of the earmarks of a ransom payment.

The majority’s mitigation argument appears to me unsound for similar reasons. Under Den Norske Ameriekalinje Actiesselskabet v. Sun Printing & Publishing Ass’n, 226 N.Y. 1, 122 N.E. 463 (1919), a fraud victim may recover expenses incurred in mitigating its damages. Indeed, as set forth above, if Gordon had actually paid $1,034 million to the banks in return for its securities, I might agree with the majority that Gordon could recover that sum as an expense to mitigate damages from the original fraud. But instead Gordon entered into a new contractual arrangement with parties it knew to be defrauders, and negotiated the security interests it required for that risky undertaking. It is evident to me that Gordon thereby abandoned and settled its original fraud claim, and took in exchange a new obligation that was rendered worthless by business risks that were either disclosed or (at any rate) are not alleged to have been fraudulently concealed. Because Gordon had a contractual right to repayment of the $1,034 million secured loan, that item cannot properly be deemed a mitigating “expense,” and thus cannot be recovered in an action for fraud.

      . Several other clients also extended credit to Hanover.

      . Although Gordon appeals from that ruling, it seeks a reversal so that a judgment of nominal damages can be entered on remand. See Clearview Concrete Prods. Corp. v. S. Charles Gherardi, Inc., 88 A.D.2d 461, 470, 453 N.Y.S.2d 750, 756 (1982) ("Notwithstanding its failure to establish damages, [a plaintiff]' is still entitled to nominal damages to vindicate its rights deriving from the fraud ... practiced upon it.” (citation omitted)).

        . In fact, Gordon brought actions on the personal guarantees of Les Dubitsky and Laris Milonas, the two other Hanover principals who guaranteed the first loan. Gordon recovered $347,-763.06 in settlement of those actions.

      . Hanover pledged all cash and securities on deposit at the Depositary Trust Company except for $515,777.

      . Unlike the thief to whom the ransom was paid in Kraut, Hanover did not illegally procure Gordon’s property, even though it hypothecated that property to the banks in contravention of Ross’s assurances.