Laurenzano v. Einbender, 472

• Decision Date: 03 September 1971
• Docket Number: Docket 35405.,No. 472,472
• Citation: 448 F.2d 1
• Parties: Salvatore and Hilda LAURENZANO, Plaintiffs-Appellants, v. Alvin H. EINBENDER et al., Defendants-Respondents, and Retail Centers of the Americas, Inc., Defendant.
• Court: U.S. Court of Appeals — Second Circuit

448 F.2d 1 (1971)

Salvatore and Hilda LAURENZANO, Plaintiffs-Appellants, v. Alvin H. EINBENDER et al., Defendants-Respondents, and Retail Centers of the Americas, Inc., Defendant.

No. 472, Docket 35405.

United States Court of Appeals, Second Circuit.

Argued May 4, 1971.

Decided September 3, 1971.

Sidney B. Silverman, New York City (Joan T. Harnes, New York City, of counsel), for plaintiffs-appellants.

I. Meyer Pincus, New York City (Rapoport, Rubino & Pincus, New York City, Jay W. Seeman, New York City, of counsel), for defendants-respondents.

Before LUMBARD, SMITH and KAUFMAN, Circuit Judges.

J. JOSEPH SMITH, Circuit Judge:

Plaintiffs-appellants, shareholders in Retail Centers of the Americas, Inc. (formerly known as Bargain Town, USA, Inc. and referred to herein as "Bargain Town")¹ appeal from a judgment in the United States District Court for the Eastern District of New York (John F. Dooling, Judge), dismissing their derivative and class actions after a non-jury trial. Plaintiffs had brought this action against National Industries, Inc. ("National"), as majority shareholder in Bargain Town, Bargain Town's former controlling shareholders Solomon S. Dobin and Jack Horne, and all but one of Bargain Town's directors at the time of the challenged transactions.

Plaintiffs alleged that Bargain Town had issued a false and misleading proxy statement, in violation of section 14 of the Securities Exchange Act of 1934, 15 U.S.C. § 78n, and Rule 14a-9 (17 C.F.R. 240.14a-9). It was further charged that the issuance of the false and misleading proxy statement violated Rule 10b-5 (17 C.F.R. 240.10b-5), since it was issued in connection with the purchase and sale of securities. Finally, it was contended that most of the transactions which formed the subject matter of the proxy statement were unfair. Defendants' pretrial motion to dismiss the amended complaint was denied by Judge Dooling.² This court left all issues raised by that motion and the decision thereon for future consideration, without prejudice.³

After trial, Judge Dooling found against plaintiffs on each of their claims, in a thorough and highly detailed opinion. We find no error in either his factual or legal conclusions, and affirm the judgment.

Bargain Town was founded in the early 1950's by defendants Dobin and Horne. At that time it consisted of one discount retail store in Brooklyn, but by 1964 it had five stores in operation — two in Puerto Rico, one on Long Island, one in Norwalk, Connecticut, and the original store in Brooklyn. In 1961 a public offering of Bargain Town shares had been made, but Dobin and Horne and persons affiliated with them retained control (approximately 72% of the shares of common stock outstanding). Although the corporation had been in continual expansion, toward the end of 1964 its management believed that a loss for the year was likely. A significant cause of this decline was the apparent failure of the Brooklyn store. Additionally, the Norwalk store was encountering serious financial and managerial difficulties. Troubles were compounded as a result of the development of a strong difference over the philosophy of management between Dobin and his executive vice-president, King.

Because of these ever-increasing problems, defendant Dobin decided to sell out his stock interest and leave the retail business entirely. After consultation with Bargain Town's counsel (who also served as a director of the corporation), Dobin concluded that his group would sell at $4.00 a share, approximately $2.00 below the price at which Bargain Town's stock was being traded on the American Stock Exchange, and approximately equal to the book value of Bargain Town's stock.

Defendant Einbender, a director and official of National, agreed to have National purchase the Dobin group's stock, if the Brooklyn and Norwalk operations could be eliminated, and if Executive Vice-President King could be induced to stay on. In order to make a deal, the Dobin group was required to take over the Brooklyn and Norwalk stores at book value in exchange for redemption by Bargain Town of some of the Dobin stock. An option agreement between National and the Dobin group was executed on September 3, 1964. The agreement gave National the option to purchase all of the Dobin shares, less a number equal to the book value of the Brooklyn and Norwalk assets (known collectively as "the Buy-Rite Assets"), divided by $4.00 per share. To exercise this option, National was required to execute a binding purchase agreement for the Dobin shares. Such exercise could not become effective, however, unless the Bargain Town Board, subject to shareholder approval, had agreed to redeem the remaining Dobin shares in exchange for the Buy-Rite Assets. Bargain Town itself was not a party to the option agreement, but the directors of Bargain Town had been made aware of its existence.

On October 7, 1964, National exercised its option, buying 690,100 of the Dobin group's shares. Thereafter National owned a majority interest in Bargain Town. Dobin and his associates resigned from the Bargain Town Board, and the remaining members authorized the execution of the redemption agreement. This agreement provided for the exchange of the Buy-Rite Assets at net book value for the Dobin group shares valued at $4.00 per share. In accordance with the valuation of Peat, Marwick, Mitchell & Co., independent accountants, the net book value of the Buy-Rite Assets was estimated at $1,178,427.90, or 294,606 shares of Bargain Town stock, valuing the stock at $4.00 per share.

Before the proxy statement requesting shareholder approval for this transaction was prepared, the Board obtained an appraisal of its Brooklyn real estate by an independent appraiser, Wittman, who concluded that the value of the property was $360,000 — $39,000 more than its book value. On the same date it approved the Dobin redemption, the Bargain Town Board formally authorized negotiations for the purchase of G.E.S., a corporation which operated three closed-door membership department stores. Patronage at these stores was limited to "members" and their families; membership was obtained by paying what Judge Dooling characterized as a "trifling fee," though it was theoretically limited to select groups of individuals. Store sales were generally made by concessionaires. G.E.S. had been formed by Einbender in 1960, and had been sold to National in June of 1964. National had decided to offer G.E.S. for sale to Bargain Town, apparently believing it preferable to centralize its retail store activities in one entity.

National authorized the sale of G.E.S. at a price to be established by independent appraisers, but in no event less than $2.1 million. Einbender suggested Leonard Marx, of Marx Realty, an independent appraiser of national reputation, as the best qualified individual to make the appraisal. G. A. Saxton & Co., a Wall Street investment house which had done work in the insurance company field for National was also retained. Judge Dooling found that Einbender did not retain Marx until satisfied that his estimate would be sufficiently high to meet National's minimum acceptable price, but he emphasized that "there are no circumstances that suggest that, or evidence that supports an inference that, the opinion Marx expressed did not reflect his considered judgment." Marx's final estimate was that G.E.S. was worth $2.1 million. The Saxton estimated value was $2.2 million. Though Judge Dooling found that "there is every indication that the Saxton opinion was hasty and somewhat superficial," he concluded that "the Saxton opinion was not a procured thing, nor is there any basis for finding it wide of the mark."

The Board of Bargain Town agreed to purchase G.E.S. for $2.1 million. At the same meeting, the Board decided that it would sell convertible debentures in the amount of $2,250,000 at an interest rate not to exceed 5¾%. The Board then directed that both transactions were to be submitted to the shareholders for their approval.

On January 14, 1965, the recommended transactions were approved by the shareholders, National's votes alone, of course, being enough to carry the proposals. Roughly one-fourth of the independent shares were voted by proxy, and of these over 90% approved the proposals. It is plaintiffs' primary contention that the proxy statement provided to the shareholders before the vote was materially misleading and false. First, it is contended that failure of the statement to indicate the existence of the option agreement between the Dobin group and National was unduly misleading. As noted previously, however, Bargain Town was not a party to this agreement, nor was it in any way bound by it. Plaintiffs' claim that as a result of this option agreement National somehow had available the means to guarantee Board approval is groundless. The independent members of the Board continued to serve, and there was no proof of any undue pressure placed upon them by National. The existence of the option agreement was therefore not a material fact requiring disclosure. The further argument, that Bargain Town shareholder approval was meaningless...