Kahn v. Kaskel, 73 Civ. 4039-LFM

• Decision Date: 04 December 1973
• Docket Number: 73 Civ. 4976-LFM.,73 Civ. 3486-LFM,No. 73 Civ. 4039-LFM,73 Civ. 4039-LFM
• Citation: 367 F. Supp. 784
• Parties: Malcolm KAHN et al., on behalf of themselves and all other shareholders of 360 East 72nd Street Owners Incorporated similarly situated, Plaintiffs, v. Doris KASKEL et al., Defendants. Dorothy CRASTO et al., on behalf of themselves and all other shareholders of 360 East 72nd Street Owners Incorporated, Plaintiffs, v. Estate of Alfred L. KASKEL et al., Defendants. Michael WALLACK et al., Plaintiffs, v. Richard DAVIS et al., Defendants.
• Court: U.S. District Court — Southern District of New York

367 F. Supp. 784

Malcolm KAHN et al., on behalf of themselves and all other shareholders of 360 East 72nd Street Owners Incorporated similarly situated, Plaintiffs, v. Doris KASKEL et al., Defendants.

Dorothy CRASTO et al., on behalf of themselves and all other shareholders of 360 East 72nd Street Owners Incorporated, Plaintiffs, v. Estate of Alfred L. KASKEL et al., Defendants.

Michael WALLACK et al., Plaintiffs, v. Richard DAVIS et al., Defendants.

Nos. 73 Civ. 4039-LFM, 73 Civ. 3486-LFM, 73 Civ. 4976-LFM.

United States District Court, S. D. New York.

December 4, 1973.

COPYRIGHT MATERIAL OMITTED

Marvin J. Goldstein, New York City, for plaintiffs in 73 Civ. 4039.

Bennett Frankel, P. C., New York City, for plaintiffs in 73 Civ. 4976.

Olitt, Friedberg & Kagel, New York City, for plaintiffs in 73 Civ. 3486.

Kuh, Goldman, Cooperman & Levitt, New York City, for defendant 360 East 72nd Street Owners Inc.

Finley, Kumble, Underberg, Roth & Grutman, New York City, for defendants Doris Kaskel and others, as Executors of Estate of Alfred L. Kaskel.

Leon Brickman, Brooklyn, N. Y., for defendant Douglas Gibbons-Hollyday & Ives, Inc.

MacMAHON, District Judge.

These are separate applications for preliminary injunctions in a stockholders' derivative suit and two purported class actions now pending in this court against the defendants. We deny the applications.

The factual background which spawned these actions is detailed fully in Richards v. Kaskel, 32 N.Y.2d 524, 347 N.Y.S.2d 1, 300 N.E.2d 388 (1973). It appears from that opinion and papers submitted here that in 1970 the Estate of Alfred L. Kaskel, then owner of an apartment building at 360 East 72nd Street, New York City, sponsored a plan for conversion of the building to co-operative ownership. Such a conversion would permit the co-operative to evict all non-subscribing tenants who would otherwise have been entitled to renewals of their leases under the Rent Stabilization Law of 1969. The conversion could not be accomplished, however, unless 35% of the tenants subscribed to the plan.¹ Neither the original plan, nor subsequent amendments designed to make it more attractive, garnered the required number of subscribers, despite more than a year's sales promotion by the sponsor.

Confronted with failure and in order to induce the requisite number of tenants to subscribe, the sponsor employed the false and fraudulent representation that the required 35% had already been obtained. The results were spectacular and within a week the plan had gone "over the top." Discovering the fraud, Richards et al. brought a class action in the New York courts on behalf of 124 non-subscribing tenants for a declaratory judgment that they still had the right to renewal of their leases because the conversion to a co-operative was vitiated by fraud. The Court of Appeals agreed that the sponsor had perpetrated a fraud upon the non-purchasing tenants.

Following that court's decision, the directors of the co-operative sought the advice of counsel. Two separate and independent law firms were retained to study the case and give written opinions regarding the rights and liabilities of all parties concerned. While the directors waited for legal guidance, the first of the purported class actions (73 Civ. 3486) was commenced on August 9, 1973.

A few weeks later, the directors received opinion letters advising them of the co-operative's rights and liabilities. Counsel advised that the co-operative was exposed to possible liability at common law, as well as under federal securities laws, for damages to purchasers of its stock and that the purchasers could possibly rescind and recover the consideration paid to the co-operative. The directors were further advised that the co-operative possessed possible claims against the sponsor for (1) damages for violations of the securities laws; (2) profits earned by the sponsor through a breach of fiduciary duties owed the co-operative and the subscribers; (3) rescission and damages for common law fraud; (4) damages in the amount of $100,000 owed for real estate taxes; (5) damages for another $100,000 owed for repair work on the building; (6) damages in the amount of $250,000 owed for increases in the building's annual operating expenses; and (7) rescission of the entire sale of the property from the sponsor to the co-operative. Furthermore, the co-operative had potential claims over against the sponsor for indemnity for any liability it had incurred to third parties including all tenants. Counsel noted, however, that certain of the claims under the securities laws may have been barred by the statute of limitations. Finally, the opinion letters noted that the co-operative might have claims against Mr. Schragis (the sponsor's nominee on the board of directors) for any liability the co-operative incurred to purchasers from him and that, in any event, the shareholders might have actions against Schragis for securities law violations.

The directors received the second opinion letter on September 18, 1973, and two days later the second purported class action (73 Civ. 4039) was commenced. Both purported class actions are brought on behalf of all the shareholders of the co-operative and claim violations of the securities laws, alleging that defendants made false and fraudulent representations of material facts to members of the class in selling or offering to sell them shares of the co-operative. Among the misrepresentations allegedly made by defendants were that: (1) the co-operative plan would be offered only to New York residents; (2) the necessary 35% subscribers had been legally obtained; (3) an income tax deduction would be available to shareholders of the co-operative and (4) the plan would permit the co-operative to avoid the Rent Stabilization Law. The complaints differ only in the relief sought. Plaintiffs seek damages in 73 Civ. 3486 and rescission in 73 Civ. 4039. Neither of the plaintiffs has sought class action determination, as required by Rule 23(c)(1), Fed.R.Civ.P., and this district's Civil Rule 11A(c).

Despite advice of its rights and liabilities and notwithstanding the commencement of the class actions, the directors did not commence an action against the sponsor or any of the other defendants, although urged to do so by plaintiffs. Instead, the directors negotiated with the sponsor for a settlement and threatened suit if a settlement were not obtained.

The negotiations culminated in a written proposal, dated October 12, 1973, under which, in exchange for a general release from the co-operative, the sponsor offered to pay the co-operative $180,000; cancel a promissory note of the co-operative in the amount of $100,000; pay a credit of $25,000 toward refurbishment of the building lobby; waive a claim of $39,000 against the co-operative and indemnify the co-operative against claims arising out of the "decision of the Court of Appeals in the action entitled Ethel Richards et al. against Doris Kaskel et al. or any affirmative action taken by the sponsor in connection with its sponsorship of the Offering Plan. . . ."

Significantly, by its express terms, the proposal does not "impair or adversely affect any individual right a shareholder of the co-operative may have against the sponsor or any other party, firm or entity."² Nevertheless, the proposal goes on to offer to pay each shareholder of record uncertain sums calculated under a confusing formula in return for a general release.

A shareholders' meeting for the purpose of voting on the proposal was held on October 17, 1973, but, on motion of the derivative plaintiff, was adjourned to an indefinite future date. The meeting has since been scheduled for December 5, 1973, a fact which precipitated the filing of the derivative suit on November 20, 1973 and these applications which primarily seek to enjoin both the meeting and the settlement.

The complaint is far from a model pleading. As best we can glean, however, it alleges that the defendants, by use of the mails and interstate telephone lines, use of a false and fraudulent prospectus, and by other fraudulent and negligent acts, caused the cooperative to sell its shares in violation of the securities laws, thus exposing it to substantial liability. These actions among others, plaintiff claims, breached the defendants' fiduciary duty to the co-operative.

The facts stated, we turn now to the applications at hand.

It is fundamental that a preliminary injunction is an extraordinary remedy granted only upon a clear showing of probable success upon a plenary trial, irreparable injury to the applicant if the injunction is denied, and the absence of an adequate remedy at law.³ An application for a preliminary injunction is always addressed to the discretion of the court.⁴

With these principles in mind, we now examine whether the applicants have met their burden of proof.

PROBABILITY OF SUCCESS

As we have seen, all the plaintiffs, whether suing derivatively or as a class, allege that along with other wrongful conduct the sponsor made false and fraudulent representations that the requisite 35% of the tenants had subscribed to the plan. Ultimately, proof of that fact appears certain in view of Richards and, without more, is a sufficient showing of probable but not certain success by at least some of the plaintiffs upon trial of these actions.

IRREPARABLE INJURY

Plaintiffs in the purported class actions contend that they will be irreparably injured by a settlement because the co-operative's principal asset lies in its right to make a claim over against the sponsor if plaintiffs are successful on the merits in their claims against the co-operative and that the right to claim over will be extinguished by the co-operative's general release of the sponsor, as contemplated by the proposal. The short answer to this contention is that the broad indemnity rights to be contained in the proposed settlement are not only the equivalent of the putative...