Levine v. Seilon, Inc.

• Decision Date: 01 March 1971
• Docket Number: Docket 35226.,No. 379,379
• Citation: 439 F.2d 328
• Parties: Florence K. LEVINE, as Executrix of the Last Will and Testament of Irving Levine, Deceased, Plaintiff-Appellant, v. SEILON, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

439 F.2d 328 (1971)

Florence K. LEVINE, as Executrix of the Last Will and Testament of Irving Levine, Deceased, Plaintiff-Appellant, v. SEILON, INC., Defendant-Appellee.

No. 379, Docket 35226.

United States Court of Appeals, Second Circuit.

Argued January 13, 1971.

Decided March 1, 1971.

Stanley Nemser, New York City (Mortimer A. Shapiro, Nemerov & Shapiro, and Nemser & Nemser, New York City, of counsel), for plaintiff-appellant.

William S. Greenawalt, New York City (James B. Weidner, Royall, Koegel & Wells, New York City, of counsel), for defendant-appellee.

Theodore Sonde, Asst. Gen. Counsel, S.E.C. (Philip A. Loomis, Jr., Gen. Counsel, Walter P. North, Associate Gen. Counsel, S.E.C., Washington, D. C., of counsel), for Securities and Exchange Commission as amicus curiae.

Before WATERMAN, FRIENDLY and KAUFMAN, Circuit Judges.

FRIENDLY, Circuit Judge:

This appeal from an order of the District Court for the Southern District of New York, dismissing a stockholder's complaint against a corporation for failure to state a claim upon which relief can be granted, F.R.Civ.P. 12(b) (6), presents a novel contention which again demonstrates the astonishing inventiveness of counsel in invoking the SEC's Rule 10b-5 issued pursuant to § 10(b) of the Securities Exchange Act, and a related claim for the same relief under § 14(e) added to the Act in 1968. The arguments have taken an exceedingly wide range; indeed, the SEC as amicus urges that we utilize this unusual case as a vehicle for overruling the purchaser-seller requirement of Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2 Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), despite our several recent refusals to do so, see, e. g., Iroquois Industries, Inc. v. Syracuse China Corp., 417 F.2d 963 (2 Cir. 1969), cert. denied, 399 U.S. 909, 90 S.Ct. 2199, 26 L.Ed.2d 561 (1970). We find it unnecessary to consider most of these arguments since affirmance is required even if we were to assume arguendo that most of appellant's contentions are correct.

Although this appeal questions the dismissal both of the original complaint — with leave to amend as to the § 10(b) and Rule 10b-5 claim but not as to the § 14(e) claim — and of the amended one, it will be convenient to state the case in terms of the amended complaint, which is fuller and better pleaded. It will also simplify matters if we disregard the death of the original plaintiff, Irving Levine, and the substitution of Mrs. Levine, his executrix.

On May 31, 1968, defendant Seilon, Inc., a Delaware corporation, had outstanding 1,438,121 shares of Common, 12,521 shares of Prior Preferred carrying a $4.50 cumulative dividend, 18,792 shares of Class A Preferred stock, with a $5.00 cumulative dividend, and 31,238 Common Stock Warrants. The Common was traded on the New York Stock Exchange. The Prior Preferred was redeemable at any time at $100 per share and the Class A Preferred at $102, in each instance together with unpaid accumulated dividends. Neither class of preferred carried a conversion privilege. Levine owned 500 shares of Class A Preferred from May 1965 until the redemption in January 1969, of which more hereafter.

Seilon's certificate of incorporation contained various restrictions for the benefit of the preferred stockholders. Without the affirmative vote at a meeting or the written consent with or without a meeting of two-thirds of the Prior Preferred shares, Seilon could not take any of the acts set forth in the margin.¹ Without like vote or consent of both classes of preferred, it could not take action of the sort described in the accompanying footnote.²

The amended complaint alleged that about June 6, 1968, Seilon conceived a fraudulent scheme to acquire all the preferred stock by redemption so as to release itself from these restrictions. The fraudulent scheme was allegedly necessitated by the fact that "Seilon on said date did not have sufficient cash funds available or obtainable for said redemption." Thus, the amended complaint continued,

"In order to induce the said preferred stockholders to consent to the creation of new funded debt and to proceed thereafter with a program to create additional new funded debt for acquisitions of interests in other companies and the public sale and issuance of stock by its subsidiaries, Seilon publicly announced and represented to its preferred stockholders on or about June 6, 1968 and thereafter until December 10, 1968, that it would honor the commitment previously made to give the preferred stockholders of Seilon the opportunity to exchange their preferred shares for Common shares of Seilon; that the Board of Directors had authorized Seilon to proceed with an exchange offer to exchange shares of its Common Stock for all of the outstanding preferred stock; that Seilon would not call any of said preferred shares for redemption prior to the effectiveness of said exchange offer and the termination of the period to accept said offer; and that it was required to and would register under the Securities Act of 1933 a sufficient number of shares of Common Stock to effect the exchange at the publicly announced ratio of 6½ shares of Common Stock for each share of preferred stock (Prior Preferred and Class A Preferred) under the invitation for Tenders."

All of these representations, the complaint alleged, were false and misleading since Seilon's real intention was to sell its stockholdings in certain subsidiaries and the assets of certain of its divisions in order to raise the cash needed for the redemption. Seilon, we are told, never intended to make effective the invitation to the preferred stockholders to exchange their shares for common stock.

The amended complaint proceeded to allege that although the preferred shareholders had earlier declined to approve the creation of new funded debt, "Seilon by means of these misrepresentations fraudulently induced the Prior Preferred and Class A Preferred stockholders to give their requisite two-thirds consent on June 21, 1968 to new credit arrangements for Seilon, which Seilon entered into on or about July 8, 1968." The complaint, however, did not further identify these "new credit arrangements." Other paragraphs alleged various transactions by Seilon, none of which are claimed to have required or to have received the consent of the preferred stockholders:

1) About June 28, 1968, Seilon sold its stock in Copolymer Rubber & Chemical Corporation, which had been pledged to John Hancock Mutual Life Insurance Company, for $5,500,000. Seilon applied $1,981,878 to notes payable to banks and $445,709 to accounts payable to Copolymer. The balance, $3,072,413, was pledged with John Hancock in place of the Copolymer stock.

2) In June, 1968, Seilon transferred the assets of its Lockwood Division to a newly organized subsidiary, Lockwood Corporation, for 1,000,000 shares of the latter\'s Class A stock.

3) About October 21, 1968, Seilon sold certain assets of its Plastics Division for $2,400,000. Of this, $400,000 was used to reduce the accounts payable of the Plastics Division. As a result of this sale Seilon\'s cash balance, excluding the amount pledged with John Hancock, was $2,017,542, an amount insufficient to redeem the preferred stock.

About September 10, 1968, Seilon filed a Form S-1 Registration Statement with the SEC in respect of 203,534 shares of Common Stock, to be offered in exchange for the preferred in a ratio of 6½ shares to one. The common stock had attained a price of 21 3/8 on September 6 and stayed in that general area through the December redemption announcement; the market prices of the preferred stocks advanced to reflect the anticipated exchange. Seilon represented in the Registration Statement that it did not intend to call any preferred stock prior to the expiration of the invitation for tenders, which it proposed to commence as soon as practicable after the registration had become effective.³

Seilon also caused Lockwood to file, about September 27, a Form S-1 Registration Statement for the public sale and issuance of an unstated amount of common stock — the actual issuance of which would apparently be prohibited without the affirmative vote or written consent of the Prior Preferred, see fn. 1, item (3). As we read the complaint and appellant's brief, this had not been given. Thereupon, Seilon arranged with John Hancock to substitute as security Seilon's holdings of Lockwood stock in lieu of the $3,072,413 previously pledged as collateral to replace the Copolymer stock. With the cash needed for the redemption thus in hand, Seilon, about December 10, 1968, announced a call of both classes of preferred and an intention to make a public offering of the common shares then in course of registration. The amended complaint concluded by alleging that

"The plaintiff and all the other members of the class were either misled into retaining their preferred stock of Seilon which they could have sold at a substantially higher price than the redemption acquisition price, or were misled into purchasing Prior Preferred and Class A Preferred during the period between June 6, 1968 and December 9, 1968, and upon such purchases were misled into retaining said preferred shares so purchased which they could have resold at a substantially higher price than the redemption acquisition price; * * *"⁴

and that

"But for the frauds culminating in the redemption acquisition, the plaintiff and all the other members of the class would have accepted the Invitation for Tenders and would have tendered their preferred shares."

The initial complaint, which was much less detailed, had invoked not only § 10(b) of the Securities Exchange Act and Rule 10b-5 but also § 14(e).⁵ Judge McLean dismissed the claim of the original complaint under § 10(b) and Rule 10b-5 on the ground that Levine's purchase prior to May 1965 could not have been induced by Seilon's alleged fraud in the summer and fall of 1968 and there was no...