Wigand v. Flo-Tek, Inc.

• Decision Date: 14 January 1980
• Docket Number: FLO-TE,No. 36,INC,D,36
• Citation: 609 F.2d 1028
• Parties: Fed. Sec. L. Rep. P 97,149 Arthur WIGAND, Individually and suing on behalf of himself and all other stockholders of Flo-Tek, Inc., similarly situated, and in the right of Flo-Tek, Inc., Plaintiffs-Appellees, v., Harold Kiernan and Claire Kiernan, Defendants. Appeal ofand Harold Kiernan, Defendants. ocket 79-7150.
• Court: U.S. Court of Appeals — Second Circuit

Page 1028

609 F.2d 1028

Fed. Sec. L. Rep. P 97,149

Arthur WIGAND, Individually and suing on behalf of himself and all other stockholders of Flo-Tek, Inc similarly situated, and in the right of Flo-Tek, Inc., Plaintiffs-Appellees, v. FLO-TEK, INC., Harold Kiernan and Claire Kiernan, Defendants Appeal of FLO-TEK, INC. and Harold Kiernan, Defendants.

No. 36, Docket 79-7150.

United States Court of Appeals Second Circuit.

Argued Sept. 13, 1979.

Decided Oct. 19, 1979.

As Amended Jan. 14, 1980.

Jack S. Dweck, New York City (Dweck & Sladkus, New York City, Harvey I. Sladkus, Steven J. Mandelsberg, New York City, of counsel), for plaintiff-appellee, Arthur Wigand.

Frank G. Raichle, Buffalo, N. Y. (Raichle, Banning, Weiss & Halpern, Buffalo, N. Y. and Baar, Bennett & Metz, Pearl River, N. Y.), for defendants-appellants, Flo-Tek, Inc. and Harold Kiernan.

Before LUMBARD, MANSFIELD and GURFEIN, Circuit Judges.

LUMBARD, Circuit Judge:

Defendants Harold Kiernan and Flo-Tek, Inc. appeal from a judgment entered against them on January 30, 1979 in the sum of $213,814.44 awarded to plaintiff Arthur Wigand after a nonjury trial before Judge Owen in the Southern District of New York on one count alleging common law fraud and deceit as well as misstatements in the sale of securities, and one count of breach of contract. We affirm the judgment as to liability of the defendants insofar as it is based on the Securities Act of 1933, 15 U.S.C. 77a Et seq., but we vacate and remand as to damages because of error in the legal standard applied by the trial court and because of the insufficiency of the evidence supporting the finding as to the value of consideration paid by the plaintiff. We dismiss the breach of contract count for lack of jurisdiction.

Wigand sued individually and as a representative of other shareholders of Flo-Tek, naming Harold Kiernan, President and controlling shareholder of Flo-Tek, as defendant along with Kiernan's wife, Claire, and Flo-Tek itself. In Count I Wigand alleged that Kiernan made false and misleading statements to him in the course of negotiating the acquisition by Flo-Tek of Mid-Hudson Sheet Metal, Inc. ("Mid-Hudson"), a sheet metal fabricating firm of which Wigand was chief executive officer and major shareholder. In Counts II through V Wigand alleged various breaches of fiduciary duty by Kiernan during the period he controlled Mid-Hudson, and in Count VI Wigand alleged breach of an employment contract. Defendants, after an initial default, made several counterclaims, alleging that Wigand had wrongfully appropriated funds of the company and charging abuse of process. Counts II through V, stating a derivative cause of action, were dismissed by Judge Owen on May 9, 1975, following plaintiff's failure to post the bond required by section 627 of New York's Business Corporation Law. Claire Kiernan was dismissed as a defendant by Judge Owen at the end of the presentation of plaintiff's case. The defendants' counterclaims were dismissed by Judge Owen from the bench at the end of trial. This appeal is not concerned with any of these three matters. After a five day trial beginning on March 22, 1978, Judge Owen found both remaining defendants liable in a decision announced from the bench. On January 25, 1979, Judge Owen filed his findings with respect to damages, assessing the defendants $174,375.00 in damages on Count I and $39,439.44 on Count VI, together with interest from May 1, 1978.

Defendant Flo-Tek is a New Jersey corporation engaged in the production of pollution control equipment. Kiernan has been Flo-Tek's president since its formation in 1961. Along with his family, Kiernan owns more than 500,000 of the approximately 650,000 shares of Flo-Tek that have been outstanding since the company became publicly owned in 1970.

Plaintiff Wigand was chief executive officer of Mid-Hudson, a New York corporation with plant and offices in Hopewell Junction, N.Y. The stock of Mid-Hudson consisted of one share, which was owned by Taconic Holding Co., Ltd. ("Taconic"), a New York corporation. Taconic's stock ownership is a matter of uncertainty. Wigand owned five and a half shares of Taconic. Louis Miller owned two and a half shares. Nicholas Noviello held two shares, one in his own name and one in trust for Joseph Green. Finally, one share had been issued to a Mr. Montaldo and one share to a Mr. Powell, but the status of these shares was unclear. ¹

Mid-Hudson's premises adjoined a machine shop engaged in subcontracting work for Flo-Tek. In January or February of 1971, Kiernan, visiting the machine shop, was introduced by its owner to Wigand. Kiernan discussed with Wigand the possibility that Mid-Hudson could do some contract work for Flo-Tek. Thereafter, Mid-Hudson began to manufacture component parts for a prototype trash compactor Flo-Tek was building.

Sometime in the spring of 1971, Kiernan suggested to Wigand that Flo-Tek acquire Mid-Hudson. In the course of their discussions Kiernan made various representations to Wigand which became, along with later statements, the basis for Wigand's claim that he had been fraudulently misled.

Kiernan sent Wigand a "Memorandum of Understanding" dated June 21, 1971, which called for the "transfer of assets and business" of Mid-Hudson to Flo-Tek (Plaintiff's Exhibit 1). In return, Flo-Tek undertook to issue 25,000 shares of unregistered stock to Mid-Hudson and Taconic. On July 1, 1971, Wigand signed the memorandum.

But Taconic's other shareholders were not happy with the proposed arrangement. Louis Miller, who owned two and a half shares and had loaned Mid-Hudson $15,000, did not want to sell out to Flo-Tek, but he made it clear that he would not interfere. Noviello, who controlled two shares and served as Mid-Hudson's lawyer, wrote a letter on August 16, 1971, rejecting the stock for stock deal proposed by Kiernan but offering to sell his share for $8,000 in cash.

Meanwhile Wigand had visited Flo-Tek's offices in Lodi, New Jersey, and had attended a meeting in August to which Kiernan brought John Poole, who represented Chemical Bank. In the course of this meeting, Wigand testified, Kiernan led him to believe that Flo-Tek had lines of credit from New York banks up to five hundred thousand dollars.

In late August and early September, 1971, floods swept through Lodi, New Jersey, destroying Flo-Tek's offices and records and damaging much of its equipment. With Wigand's permission, Kiernan moved what he could salvage up to Mid-Hudson's premises in Hopewell Junction. In late September, Flo-Tek purchased at auction the machine shop adjoining Mid-Hudson.

On October 1, 1971, Kiernan and Wigand executed an "Agreement" to effect the contemplated acquisition of Taconic and Mid-Hudson by Flo-Tek. The agreement provided for Flo-Tek's acquisition of Wigand's Taconic shares in return for 25,000 shares of Flo-Tek. Wigand warranted in this document that he was the holder of five and a half of nine outstanding shares of Taconic, and that he was under no contractual obligation with regard to voting or selling his Taconic shares. Attached to the agreement were unaudited financial statements of Flo-Tek, Mid-Hudson and Taconic. Among other requirements, the agreement provided that assignments of stock were to be delivered by Wigand to Flo-Tek at a closing, and that Mid-Hudson and Taconic would be kept separate from Flo-Tek for accounting purposes.

Also on October 1, 1971, Wigand and Kiernan signed an employment contract (this contract was called for by the stock acquisition agreement) giving Wigand a salary of $18,200 per year, insurance benefits, business expenses, providing for Flo-Tek to repay Wigand for his loans to Mid-Hudson, and giving Wigand authority to manage Mid-Hudson's business.

Even before the signing of these two agreements on October 1, Kiernan had effectively merged the operations, plant, accounting, work force and materials of Flo-Tek, Flo-Tek's subsidiary Flo-Seal, Taconic, and Mid-Hudson. Wigand retained the authority to sign checks on Mid-Hudson's account, but he regarded Kiernan as his "boss". The day to day obligations of Flo-Tek were met by payments made from Mid-Hudson's account. Employees of Flo-Tek were paid by checks drawn on Mid-Hudson's account. No attempt was made to keep records of time spent by employees on Mid-Hudson's as opposed to Flo-Tek's work. After October 1, Wigand and Kiernan acted as if an acquisition had been effected. On October 19, 1971, Flo-Tek issued a press release describing its acquisition of Mid-Hudson as complete. In his May 5, 1972 letter to stockholders of Flo-Tek, Kiernan again reported the acquisition of Mid-Hudson.

On May 23, 1972, Flo-Tek issued and its transfer company in New Jersey mailed to Wigand in New York a certificate for 25,000 unregistered no-par shares. In mid-August, 1972, Wigand, believing that Kiernan was not fulfilling the terms of his employment contract, withdrew $21,157.47 from Mid-Hudson's account, claiming it as due him under the contract, and deposited the money in a joint escrow account with his lawyer. Wigand notified Kiernan of this withdrawal and Kiernan fired him on August 16, 1972. On September 19, 1972, Wigand filed the instant suit.

I. Jurisdiction.

Federal subject matter jurisdiction in this case was predicated on28 U.S.C. 1332, the general diversity statute, and sections 12(2) and 17 of the Securities Act of 1933, 15 U.S.C. 77L and 77q. On the undisputed facts in the record it is clear there is no diversity. Jurisdiction is to be determined as of the commencement of suit. Smith v. Sperling, 354 U.S. 91, 77 S.Ct. 1112, 1 L.Ed.2d 1205 (1957). When the complaint in this case was filed on September 19, 1972, the offices and operations of Flo-Tek had been located in Hopewell Junction, N.Y., for approximately a year. ² New York was the location of Flo-Tek's "principal place of business" and Flo-Tek was thus a "citizen" of New York under 28 U.S.C. 1332(c), which provides that for...