Goldberg v. Meridor

• Decision Date: 21 October 1977
• Docket Number: D,No. 1289,1289
• Citation: 567 F.2d 209
• Court: U.S. Court of Appeals — Second Circuit
• Parties: Fed. Sec. L. Rep. P 96,162 David GOLDBERG, suing derivatively in right and for the benefit of Universal Gas & Oil Company, Inc., Plaintiff-Appellant, v. Yaacov MERIDOR, Mila Brener, David Meridor, S. Erell, Gideon Ben Aaron, Ara A. Cambere, H. Struve Hensel, Haim Rafaeli, Martin Siem, Jacob Sutton, Henry A. Singer, Maritimecor, S.A., Maritime Fruit Carriers Company, Ltd., Hornblower& Weeks, Hemphill Noyes, Inc., Laventhol & Horwath a/k/a Laventhol Krekstein, Horwath& Horwath, Dr. Jacobo Damm, Dr. Max Lebedkin, Elie Housman, H. L. Federman, William J. Friedman, Merril M. Halpern, Per Hy-Sing-Dahl, Andre Montell, Fritz Konig, Zev Levin, Raymond Caliezi, Defendants-Appellees, and Universal Gas & Oil Company, Inc., Nominal Defendant. ocket 77-7146.

Page 209

567 F.2d 209

Fed. Sec. L. Rep. P 96,162

David GOLDBERG, suing derivatively in right and for the

benefit of Universal Gas & Oil Company, Inc., Plaintiff-Appellant, v. Yaacov MERIDOR, Mila Brener, David Meridor, S. Erell, Gideon

Ben Aaron, Ara A. Cambere, H. Struve Hensel, Haim Rafaeli,

Martin Siem, Jacob Sutton, Henry A. Singer, Maritimecor,

S.A., Maritime Fruit Carriers Company, Ltd., Hornblower&

Weeks, Hemphill Noyes, Inc., Laventhol & Horwath a/k/a

Laventhol Krekstein, Horwath& Horwath, Dr. Jacobo Damm, Dr.

Max Lebedkin, Elie Housman, H. L. Federman, William J.

Friedman, Merril M. Halpern, Per Hy-Sing-Dahl, Andre

Montell, Fritz Konig, Zev Levin, Raymond Caliezi, Defendants-Appellees,

and

Universal Gas & Oil Company, Inc., Nominal Defendant.

No. 1289, Docket 77-7146.

United States Court of Appeals,

Second Circuit.

Argued June 9, 1977.

Decided Sept. 8, 1977.

As Modified on Denial of Rehearing Oct. 21, 1977.

Morton J. Turchin, New York City (Turchin & Topper, and James H. O'Hare, New York City, of counsel), for plaintiff-appellant.

William Rand, Jr., Thomas J. Kane, and Andrew Berger, New York City, for defendants-appellees.

Coudert Brothers, New York City, of counsel, for defendant-appellee H. Struve Hensel.

Cichanowicz & Callan, and Michael G. Chalos, New York City, of counsel, for defendants-appellees David Meridor, S. Erell, Gideon Ben Aaron, Haim, Rafaeli, Jacob Sutton, Maritimecor, S.A., and Maritime Fruit Carriers Co. Ltd.

Wender, Murase & White, and Peter J. Gartland, New York City, of counsel, for Universal Gas & Oil Co. Inc.

Willkie, Farr & Gallagher, and Armando T. Belly, New York City, of counsel, for defendants-appellees Yaacov Meridor and Mila Brener.

Singer, Hutner, Levine & Seeman, Jay W. Seeman, and Robert J. Kaplan, New York City, of counsel, for defendant-appellee Henry A. Singer.

Mudge, Rose, Guthrie & Alexander, and Laurence V. Senn, Jr., New York City, of counsel, for defendant-appellee Ara A. Cambere.

Before FRIENDLY, TIMBERS and MESKILL, Circuit Judges.

FRIENDLY, Circuit Judge:

In this derivative action in the District Court for the Southern District of New York, David Goldberg, a stockholder of Universal Gas & Oil Company, Inc. (UGO), a Panama corporation having its principal place of business in New York City, sought to recover damages and to obtain other relief against UGO's controlling parent, Maritimecor, S.A., also a Panama corporation; Maritimecor's controlling parent, Maritime Fruit Carriers Company Ltd., an Israel corporation; a number of individuals who were directors of one or more of these companies; the investment firm of Hornblower & Weeks, Hemphill, Noyes, Inc.; and the accounting firm of Laventhal & Horwath, with respect to transactions which culminated in an agreement providing for UGO's issuance to Maritimecor of up to 4,200,000 shares of UGO stock and its assumption of all of Maritimecor's liabilities (including a debt of $7,000,000 owed to UGO) in consideration of the transfer of all of Maritimecor's assets (except 2,800,000 UGO shares already held by Maritimecor). It suffices at this point to say that the complaint, filed February 3, 1976, alleged that the contract was grossly unfair to UGO and violated both § 10(b) of the Securities Exchange Act and the SEC's Rule 10b-5 and common law fiduciary duties. By notice of motion filed June 2, 1976, the nominal defendant UGO moved for a stay pending plaintiff's posting security for expenses and costs under § 627 of the N.Y. Business Corporation Law. By order filed July 30, 1976, the district court ruled that following receipt of UGO's shareholder list, Goldberg was required either to meet the exemptions from posting security under § 627, post the security otherwise required in an amount to be determined, or "amend his complaint in this action to eliminate any and all claims based on or arising out of state common law or state statutory law."

Goldberg chose the latter course. The amended complaint, filed August 27, 1976, which was largely repetitive of the original complaint save for the omission of reference to state law claims, made the following principal allegations: The defendants engaged in "a conspiracy or plan" "to cause UGO to raise funds from the public by a public offering and then by various transactions hereafter set forth, including the transfer of UGO stock to Maritimecor for the latter's assets and liabilities, use the proceeds of the offering and the assets of UGO for the benefit of defendants Maritimecor and Maritime Fruit." In May 1972 defendants caused UGO to issue a prospectus offering for sale 11,000 units consisting of 363,000 shares of common stock and $11,000,000 worth of 8% Convertible debentures. The prospectus stated that all the proceeds of the offering would be used to finance the construction and purchase of three tankers for the transportation of liquified gas and that UGO's business would be the transportation of such gas. In 1974 defendants caused UGO to sell the contracts for two of the vessels, for a total price of $25,000,000 of which $14,000,000 was profit. During 1974 and up to August 1975, defendants caused UGO to make loans to Maritimecor so that $7,000,000 was owed by the latter. In August 1975 defendants caused UGO to enter into the agreement described in the first paragraph of this opinion, which was later carried out at least to the extent of the transfer of Maritimecor's assets and liabilities to UGO. The "agreement and transfer was fraudulent and unfair in that the assets of Maritimecor were overpriced and of insufficient value, the liabilities of Maritimecor either exceeded the value of its assets or were so great that the net asset value was insufficient consideration, the liabilities included a $7,000,000 debt to UGO from Maritimecor, and the purpose and intent of said transaction was to cause the dissipation of the substantial assets of UGO for the benefit of defendants, Maritimecor and Maritime Fruit. (T)he defendants knew at the time, or had reasonable cause to know and were negligent in not ascertaining that the agreement and transfer were a fraud and unfair to UGO, and that the net value of the assets of Maritimecor was far less than the value of the shares of UGO to be issued to Maritimecor, or that Maritimecor's liabilities exceeded its assets." Then came paragraph 19, which alleged as follows:

The issuance of the aforesaid prospectus and the foregoing transactions constituted the employment of a device, scheme or artifice to defraud, the making of untrue statements of material fact and the omission to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and the engaging in acts, practices, and courses of conduct which operated as a fraud or deceit upon UGO as the seller of up to 4,200,000 shares of UGO's common stock for Maritimecor's liabilities and assets, and upon UGO's minority stockholders.

Defendants filed motions to dismiss the amended complaint for failure to state a claim under § 10(b) of the Securities Exchange Act and Rule 10b-5. In answer to defendants' argument "that deception and non-disclosure is a requirement for a 10b-5 case" which was disputed as a matter of law, plaintiff's counsel submitted an affidavit asserting that "insofar as plaintiff Goldberg, a minority shareholder is concerned, there has been no disclosure to him of the fraudulent nature of the transfer of Maritimecor assets and liabilities for stock of UGO". Counsel annexed two press releases dated August 1 and December 19, 1975, which described the agreement for and the consummation of the UGO-Maritimecor transaction. Counsel asserted that these press releases failed to disclose the facts noted in the margin ¹ or "the conflicts of interest of the principals". ² Counsel requested that he be given leave to replead should the court find any defect in the manner of pleading. In a further affidavit addressed to the question of damage, counsel averred that at the end of 1974 UGO had current assets of about $41 million and current liabilities of $2 million but that after the transfer Maritimecor's net current liabilities of $42.5 million caused UGO to wind up with a deficit of about.$3.6 million of current liabilities. He also alleged that as a result of the transaction UGO had defaulted in its obligations and its ships were being seized by creditors.

On February 11, 1977, Judge Lasker filed an opinion, 426 F.Supp. 1059, that granted the motions to dismiss. He thought the case was governed by Popkin v. Bishop, 464 F.2d 714 (2 Cir. 1972), rather than by our en banc decisions in Schoenbaum v. Firstbrook, 405 F.2d 215 (2 Cir. 1968), cert. denied, 395 U.S. 906, 89 S.Ct. 1747, 23 L.Ed.2d 219 (1969), and Drachman v. Harvey, 453 F.2d 722 (2 Cir. 1972), and held that Marshel v. AFW Fabric Corp., 533 F.2d 1277 (2 Cir.), vacated and remanded for consideration of mootness, 429 U.S. 881, 97 S.Ct. 228, 50 L.Ed.2d 162 (1976), and Green v. Santa Fe Industries, Inc., 533 F.2d 1283 (2 Cir.), which was pending before the Supreme Court on grant of certiorari, 429 U.S. 814, 97 S.Ct. 54, 50 L.Ed.2d 74 (1976), were limited to the situation of "going private". He denied leave to amend, as hereafter discussed. After the reversal of Green, 462 U.S. 430, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977), the judge filed a memorandum adding to the opinion fn. 4 to the effect that the Supreme Court's decision rendered his analysis of our decision moot but lent substantial support to the result.

I.

Before proceeding further, we must deal with the district court's refusal to permit amendment of the complaint to include reference to the two press releases or otherwise to claim deception. The judge's explanation of this was as follows, 426 F.Supp. at 1064:

There have already been two complaints. . . . Both are prime examples of an attempt to fit the square peg of a state law claim into the round hole of a...