467 F.2d 602 (2nd Cir. 1972), 600, Segal v. Gordon

Docket Nº:600, 71-2146.
Citation:467 F.2d 602
Party Name:David SEGAL, Plaintiff-Appellant, v. Lawrence GORDON et al., Defendants-Appellees, and Coburn Corporation of America et al., Defendants.
Case Date:August 03, 1972
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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467 F.2d 602 (2nd Cir. 1972)

David SEGAL, Plaintiff-Appellant,


Lawrence GORDON et al., Defendants-Appellees, and Coburn Corporation of America et al., Defendants.

No. 600, 71-2146.

United States Court of Appeals, Second Circuit.

Aug. 3, 1972

Argued May 8, 1972.

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[Copyrighted Material Omitted]

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Avrom S. Fisher, Brooklyn, N. Y., for plaintiff-appellant.

Anthony F. Phillips, New York City (Willkie, Farr & Gallagher, Stephen Greiner, New York City, of counsel), for defendants-appellees Harold Linden and Lawrence Gordon.

David B. Pollack, New York City (Pearlman & Pollack, Kenneth D. Pearlman, New York City, of counsel), for defendant-appellee Colonial Commercial Corp.

Before FRIENDLY, Chief Judge, and MOORE and ANDERSON, Circuit Judges.

MOORE, Circuit Judge.

Plaintiff-appellant, David Segal, appeals from two judgments, entered pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, dismissing his complaint against three defendants, Lawrence Gordon (Gordon), Harold Linden (Linden) and Colonial Commercial Corporation (Colonial). 1 The action remains pending against the fourteen other defendants. The appeals have been consolidated by order of this court. The issues considered relate to, and this opinion applies to, these three appellees.

This action is brought by a plaintiff, who alleges that he is a stockholder of Coburn Corporation of America (Coburn), and brings the action for the benefit of Coburn. On information and belief Segal alleges (1) that "in or about early 1970 Colonial . . . threatened to obtain control of Coburn and oust management of Coburn from control of it," (2) that the defendants "pursuant to a common plan, scheme, and conspiracy directly and indirectly through the use of the mails and other instrumentalities of interstate commerce . . . engaged in artifices, schemes, and devices to defraud Coburn and its stockholders in connection with the purchase and sale of securities," and (3) that pursuant to the conspiracy Coburn sold securities to

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Colonial for less than adequate consideration. Damages "in excess of $5,000,000" are claimed. A plethora of specified sections of the Securities Acts are cited as the bases for his claim. 2

Solely at issue on appeal are (1) the sufficiency of the complaint and (2) the granting of summary judgments in favor of Linden, Gordon and Colonial under motions to dismiss as converted by the parties themselves by their numerous affidavits and memoranda into summary judgment motions. Narrow issues are thus presented on this appeal.


This case (and appeal) must be considered in the light of the individual calendar system in effect in the Eastern District of New York (as in many other districts) whereby the case, as soon as filed, is placed under the complete control of a particular judge, who is responsible for it from filing to ultimate disposition. By this efficient system the judge is in a position at all times to observe the status of each case, procedurally as well as substantively. The system also permits conferences, formal and informal, and the submission of such motions, affidavits and memoranda as may be appropriate and as the court may permit. As a result, the stage at which disposition of the pending proceedings can be made should be largely within the Court's discretion.

Prior to the time the motions now on appeal were made, a complaint had been filed. The defendant Coburn and other defendants had answered. The court had held a conference and had filed a "Conference Memorandum." On November 30, 1970, the court held a pre-trial conference. Thereafter, on December 28, 1970, defendants Linden and Gordon moved to dismiss the complaint pursuant to Rule 12(b)(6) ("failure of the pleading to state a claim upon which relief can be granted") together with required memoranda. 3 However, in addition to the motion, the defendants Linden and Gordon submitted affidavits in support thereof wherein they asserted, inter alia, that they were residents of Puerto Rico, that they had become directors of Coburn on August 15, 1969, that they had resigned on May 13, 1970, that they had not participated in any proposed transaction with Colonial as alleged in the complaint, that they were never members of Coburn's executive committee, never voted for any proposed sale to Colonial of Coburn's accounts receivable, that they were never officers of Coburn, and had voiced their opposition to any sale until further information was furnished to enable a proper evaluation thereof.

Plaintiff's counsel submitted an affidavit in opposition and a supplemental memorandum. In an endeavor to substantiate the allegation that Colonial threatened to "oust" Coburn's management, plaintiff's counsel in an affidavit sworn to on January 12, 1971, refers to, and places reliance on, an affidavit of Bernard Korn (President of Colonial), dated November 2, 1970, apparently served in support of a motion to dismiss an action entitled Marino v. Coburn Corporation of America et al., Civ. No. 70C960 (E.D.N.Y.). To the Korn affidavit is attached a press release dated January 19, 1970, wherein Korn is purported

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to have announced that "preliminary discussions have been held with such [various members of Coburn's Board] directors looking towards the acquisition by Colonial of approximately 51% of the outstanding shares of Coburn common stock." * * * "The making of such an offer was contingent [Mr. Korn stated] upon general market conditions, the respective prices of Colonial and Coburn stock and other factors which Colonial believed relevant being satisfactory to Colonial." Korn "could not reasonably predict future developments" and cautioned "against present trading in anticipation of the making of any exchange offer by Colonial."

Plaintiff's counsel in his affidavit of January 12, 1971, states that these "preliminary negotiations" form the basis for his allegation in the complaint wherein "Colonial had threatened to obtain control of Coburn and oust the management of Coburn from control of it." Thus, the trial court was advised of the proof upon which plaintiff's counsel relied and was able to draw its own conclusions as to the information which the release conveyed rather than accept counsel's unwarranted intimations and inferences. Plaintiff's counsel avers that he has examined Colonial's Form 8-K for the month of April, 1970, which shows the financial transaction between Colonial and Coburn of which plaintiff complains in his complaint dated June 1, 1970. 4

In addition there was an affidavit of counsel for Linden and Gordon Setting forth copies of relevant minutes of Coburn.

Thus, although the motion had originally been cast as a motion to dismiss the complaint, by the actions of the parties, it had been converted into a summary judgment motion and Judge Dooling so regarded it.


Sufficiency of the Complaint

The complaint against Linden, Gordon and Colonial is clearly deficient. The allegations are wholly conclusory in nature and, in addition, fail to comply with Rule 9(b) of the Federal Rules of Civil Procedure: "In all avernments of fraud . . ., the circumstances constituting fraud . . . shall be stated with particularity." However, this fatal deficiency becomes somewhat academic-at least as to Linden and Gordon-in the light of the undisputed material facts which formed the basis for the trial court's decision. 5 Only the distorted inferences and speculations of plaintiff's counsel supply the grounds for his countervailing hypotheses.

A. The Rationale for Rule 9(b)

One of the concerns behind the specificity requirement of Rule 9(b) has been

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succinctly articulated by Professors Wright and Miller:

When the pleader is asserting that third persons have been defrauded, he may be unable to detail the claim and less particularity should be required. Thus, simple allegations should suffice for claims of fraud in an informer's action or a derivative suit and primary reliance should be placed on the discovery process for uncovering factual details. However, since "strike suits" are especially common in these two contests, the desire to be assured that the action has some merit has motivated the courts to insist on a reasonably high level of specificity. 6

Rule 9(b)'s specificity requirement stems not only from the desire to minimize the number of strike suits but also more particularly from the desire to protect defendants from the harm that comes to their reputations or to their goodwill when they are charged with serious wrongdoing:

It is a serious matter to charge a person with fraud and hence no one is permitted to do so unless he is in a position and is willing to put himself on record as to what the alleged fraud consists of specifically. 7

In response to these considerations this Court and our lower courts have been sensitive to the requirement that the circumstances constituting fraud be alleged with particularity. "Mere conclusory allegations to the effect that defendant's conduct was fraudulent or in violation of Rule 10b-5 are insufficient" Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 444 (2d Cir.1971); ". . . there must be allegation of facts [in a complaint under Rule 10b-5] amounting to deception in one form or another; conclusory allegations of deception of fraud will not suffice" O'Neill v. Maytag, 339 F.2d 764, 768 (2d Cir.1964); "[i]t is now quite clear in this Circuit that allegations with respect to 10b-5 violations will not pass scrutiny if they do not allege with some specificity the statements allegedly constituting the fraud. Mere conclusory allegations to the effect that defendant's conduct was fraudulent or in violation of 10b-5 are insufficient" Matheson v. White Weld & Co., ...

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