Kaiser-Frazer Corp. v. Otis & Co.
| Decision Date | 07 April 1952 |
| Docket Number | Docket 22113.,No. 152,152 |
| Parties | KAISER-FRAZER CORP. v. OTIS & CO. |
| Court | U.S. Court of Appeals — Second Circuit |
Ben Herzberg, New York City, and Arnold, Fortas & Porter, Washington, D. C., (Abe Fortas, Washington, D. C., Ben Herzberg, New York City, Milton V. Freeman, Washington, D. C., and Lawrence R. Eno, New York City, of counsel), for Otis & Co., appellant.
Willkie, Owen, Farr, Gallagher & Walton, New York City, (Mark F. Hughes, Walston S. Brown, Helmer R. Johnson, Vincent R. Fitzpatrick and Richard Owen, all of New York City, of counsel), for Kaiser-Frazer Corp., appellee.
Before AUGUSTUS N. HAND and CLARK, Circuit Judges, and BRENNAN, District Judge.
On February 3, 1948, the plaintiff, Kaiser-Frazer Corporation, an automobile manufacturer, entered into a contract for the sale of 900,000 shares of its unissued common stock at $11.50 per share to Otis & Co., First California Company, and Allen & Co., securities underwriters, who in turn were to offer the stock for sale to the public at $13. per share. The purchasers were to take title to the stock severally, Otis and First California having agreed to purchase 337,500 shares each, and Allen & Co. to purchase the remaining 225,000 shares. The contract made the purchasers' obligation to accept the stock subject to certain conditions which, so far as relevant here, may be summarized as follows: (1) Kaiser-Frazer's counsel was to deliver an opinion satisfactory to the purchasers' counsel that there were no material legal proceedings pending against the issuer; and (2) the registration statement (including the prospectus filed with the Securities & Exchange Commission pursuant to the Securities Act of 1933, 15 U.S.C.A. § 77a et seq.,) was to comply with the Act and the Regulations of the SEC "* * * and neither the Registration Statement nor the Prospectus were to contain any untrue statement of a material fact nor omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading * * *" It is undisputed that the registration statement (including the prospectus) was filed with the SEC and became effective on February 3, 1948, the day the contract was signed. The contract set February 9, 1948 as the closing date, at which time Kaiser-Frazer was to have delivered the stock to the purchasers, and the latter were to have paid the purchase price. On the day of the closing, however, the representatives of Otis and First California refused to accept the proffered stock, assigning as their reason therefor, the rejection of the opinion of Kaiser-Frazer's counsel that no material litigation was then pending which would affect the issue of the stock. Apparently, Otis and First California rejected the opinion of Kaiser-Frazer's counsel because a suit to enjoin the pending stock issue had been instituted in Michigan on the morning of February 9, 1948, by a Kaiser-Frazer stockholder named Masterson.1 Shortly thereafter, Kaiser-Frazer initiated the present action against Otis in the District Court for the Southern District of New York. Federal jurisdiction was invoked on the ground of diverse citizenship of the parties.2 The complaint — which was amended — alleged three claims, the first of which charged that Otis was guilty of a breach of contract for failing to accept and pay for 337,500 shares of stock and asked for damages in the total amount of $17,419,819, composed of $1,856,250 general damages and $15,563,569 special damages arising out of manufacturing profits lost by Kaiser-Frazer on account of Otis' breach. The second claim was stated as an alternative to the first and alleged that Otis had inspired the institution of the stockholders' suit by Masterson and had repudiated the contract without excuse; the damages prayed for were the same as under the first claim. The third claim was that Otis had wrongfully induced First California not to perform the latter's obligation under the contract to purchase 337,500 shares of stock and asked for damages in the amount of $1,856,250.
The defendant's answer to the complaint set forth several affirmative defenses, only two of which are in issue on this appeal: The first, that the purchasers were relieved of any obligation under the contract because of the filing of the suit by Masterson, and the second, that the registration statement contained false and misleading statements. After an extensive trial lasting six weeks, the district judge made findings of fact in favor of the plaintiff on substantially all of the points in issue, and entered judgment for the plaintiff in the amount of $3,120,743.51.
Several errors are assigned by the defendant on this appeal, most of which deal with the findings of fact of the trial judge. However, because of the view we take of the case, we need discuss only one of the alleged errors; namely, whether the district court was correct in finding that the plaintiff had not misrepresented but had adequately disclosed its profit for the month of December 1947 in the statement of earnings which it set forth in the prospectus; for, if the prospectus contained such a misrepresentation, as will appear, neither Otis nor First California was under any obligation on February 9, 1948 to accept the stock and Otis would have a complete defense to all the causes of action stated in the complaint.
The stock issue which was the subject of the contract at bar was to have been the third issue of Kaiser-Frazer stock since its organization in 1945, and its first issue after January 1946. In the early part of 1948, when this issue was contemplated, Kaiser-Frazer was as yet a newcomer to the automobile industry; production of its cars did not get underway until late 1946, and volume production was not achieved until the spring of 1947. While the postwar period in the automobile industry was abnormal in the sense that a strong "sellers'" market prevailed, nevertheless the problems of production and competition confronting one in Kaiser-Frazer's position were of sufficient magnitude to make the venture highly speculative. Under such circumstances it is evident that the prospective purchaser of Kaiser-Frazer stock would rely heavily on the corporation's sales and earnings during the last quarters of 1947 as the best and perhaps the only available indication of its ability to compete with the established automobile manufacturers. Indeed, the defendant contends that without a favorable picture of earnings for that period the proposed stock issue could not have been made. In any event, Kaiser-Frazer elected to set forth in the prospectus a table summarizing its sales and earnings in capsule form and "designed to apprise the investor, in a convenient fashion, of the financial results of the operation of the business * * *" SEC Accounting Series Release No. 62, 3 CCH, Fed. Sec. Law Rep. para. 72,081. It is apparent, then, that the table summarizing earnings was an important factor in the sale of the stock and, that being so, failure to make full disclosure therein of all the facts bearing upon the Corporation's earnings constituted a breach of the contract and violated the Securities Act of 1933 as well. 15 U.S.C.A. § 771.
The following is a quotation of the summary earnings table, with text and footnotes, as it appeared in the prospectus:
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