Catizone v. Memry Corp.

• Citation: 897 F. Supp. 732
• Decision Date: 25 July 1995
• Docket Number: No. 91 Civ. 8023 (RLC).,91 Civ. 8023 (RLC).
• Parties: Pat CATIZONE, Plaintiff, v. MEMRY CORP., American Stock Transfer & Trust Co., and Neil E. Rogen, Defendants.
• Court: U.S. District Court — Southern District of New York

897 F. Supp. 732

Pat CATIZONE, Plaintiff, v. MEMRY CORP., American Stock Transfer & Trust Co., and Neil E. Rogen, Defendants.

No. 91 Civ. 8023 (RLC).

United States District Court, S.D. New York.

July 25, 1995.

Arnold Davis, New York City, for Plaintiff.

Rubin, Hay & Gould, P.C., Framingham, Massachusetts (Rodney E. Gould) of counsel, for Defendant Neil E. Rogen.

Whitman & Ransom, Greenwich, Connecticut (James C. Riley, of counsel), for Defendants Memry Corp. and American Stock Transfer & Trust Co.

ROBERT L. CARTER, District Judge.

Defendants Memry Corp. ("Memry") and American Stock Transfer & Trust Co. ("AST & T") move for summary judgment on each count of plaintiff's complaint, with respect to their affirmative defense, and with respect to their counterclaim for interpleader. Defendant Neil E. Rogen moves for summary judgment on plaintiff's cause of action alleging that Rogen blocked the transfer of stock to plaintiff.

I. Background

Defendant Rogen founded defendant Memry in 1981, and he served as the chairman of Memry's board and an officer of Memry until October, 1986. In March, 1983, Memry issued a certificate (the "certificate") to Rogen representing 100,000 shares of common stock and bearing the following legend:

The securities represented hereby were issued in a transaction not registered under the Securities Act of 1933 in reliance on exemptions from registration under section 3(b) and 4(2) thereof and regulation D thereunder, and said securities may not be sold or transferred unless under an effective registration statement under said act or, in the written opinion of counsel acceptable to the company, exempt from the registration provisions of said Act.

(Riley Aff.Ex. 1.).

In 1984, in preparation for a public offering of Memry's stock, Rogen asked Pericles Constantinou to help locate an underwriter and arrange for financing during the registration process. In November, 1984, Rogen gave Constantinou 240,000 shares of restricted stock in Memry which had been issued in Rogen's name, including those represented by the certificate. Rogen insists that he gave Constantinou the shares in response to a threat by Constantinou to kill the public offering unless he received shares in Memry, while Constantinou has averred that he received the stock as compensation for the services he performed in connection with the offering.¹ In March, 1987, Rogen commenced a lawsuit against Constantinou in New York state court seeking title to the shares.

On February 13, 1987, Constantinou gave plaintiff the certificate as collateral for a loan. Constantinou subsequently defaulted on the loan, and in April, 1990, his counsel wrote to AST & T requesting that the certificate be cancelled and a new, unrestricted certificate be issued in Constantinou's name. (Letter from Gary Wolff to Debra McAuliffe of 4/27/90.) In response, Memry requested an opinion letter stating that the transfer from Rogen to Constantinou was exempt from the registration provisions of the Securities Act of 1933 (the "1933 act"). Counsel for Constantinou and Catizone then provided a letter stating that the transfer from Rogen to Constantinou fell under § 4 of the 1933 act and was thus exempt from registration requirements. (Letter from Wolff to Memry of 6/21/90 at 2, Markham Aff.Ex. A.) On July 10, 1990, Memry requested an additional opinion letter identifying the provision of act under which the transaction was exempt and explaining the basis for the exemption. (Letter from Edwin T. Markham to Wolff of 7/10/90 at 1, Markham Aff.Ex. B.) No such explanation was provided. In June, 1991, plaintiff tendered the certificate and Rogen's stock transfer power to defendant AST & T, Memry's transfer agent, and demanded that the shares be transferred to plaintiff. (Letter from Arnold Davis to AST & T of 6/24/91, Catizone Aff.Ex. B.) Memry again refused the request, and plaintiff commenced this action.

II. Choice of Law

Plaintiff relies on New York law, while defendants assert that Delaware law applies. Since this is a diversity action, the court will apply the choice of law rules of New York, the state in which the court sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). New York has adopted section 8-106 of the Uniform Commercial Code, which requires that in actions regarding the rights and duties of an issuer of securities with respect to registration of transfer of a certificated security a court should apply the substantive and choice of law rules of the jurisdiction in which the issuer is incorporated. N.Y.U.C.C. § 8-106 (McKinney 1990); see also DeWitt v. American Stock Transfer Co., 433 F.Supp. 994, 1000 n. 3, modified on other grounds, 440 F.Supp. 1084 (S.D.N.Y.1977) (Goettel, J.). Memry was incorporated in Delaware, which has also adopted section 8-106. Del.Code Ann. tit. 6, § 8-106 (1993). Therefore, the court will apply Delaware law regarding the rights and duties of Memry with respect to registration of the transfer.

III. Summary Judgment Standard

Defendants will be entitled to summary judgment if "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact." Rule 56(c), F.R.Civ.P. They can carry their burden "merely by pointing out that there is an absence of evidence to support the non-moving party's claims," Pressman v. Estate of Steinvorth, 860 F.Supp. 171, 176 (S.D.N.Y.1994) (Carter, J.) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986)), and then plaintiff will be able to defeat the motion only by "setting forth specific facts showing that there is a genuine issue for trial." Rule 56(e), F.R.Civ.P. For the purposes of these motions for summary judgment, the court will view the facts in the light most favorable to the plaintiff. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1355, 89 L.Ed.2d 538 (1986).

IV. Duty to Register Transfer

Under Del.Code Ann. tit. 6, § 8-401 (1993), an issuer of a security has a duty to register the transfer of that security upon request if:

(a) The security is indorsed or the instruction was originated by the appropriate person or persons ...;

(b) Reasonable assurance is given that those indorsements or instructions are genuine and effective ...;

(c) The issuer has no duty as to adverse claims or has discharged the duty ...;

(d) Any applicable law relating to the collection of taxes has been complied with; and

(e) The transfer, pledge or release is in fact rightful or is to a bona fide purchaser.

Del.Code Ann. tit. 6, § 8-401(1) (1993); see also Bender v. Memory Metals, Inc., 514 A.2d 1109 (Del.Ch.1986). The same standard governs a transfer agent's duty. Del.Code Ann. tit. 6, § 8-406 (1993); see also DeWitt, 433 F.Supp. at 1000. Defendants Memry and AST & T argue that plaintiff has not shown that the transfer from Rogen to Constantinou was exempt from the registration requirements of the 1933 act and that therefore he has not shown that the transaction was rightful.

The subject shares were not registered when they were issued to Rogen by Memry, so a transfer by Rogen would be permissible only if it fell under one of the exemptions in the Securities Act. 15 U.S.C. § 77e (1988). The transaction occurred in connection with a public offering, so it is not exempt under § 4(2) of the act. 15 U.S.C. § 77d(2) (1988). Section 4(1) of the act exempts sales made by "any person other than an issuer, underwriter, or dealer." 15 U.S.C. § 77d(1) (1988). An underwriter is

any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking....

15 U.S.C. § 77b(11) (1988). Rogen purchased the subject shares from Memry, the issuer, and a year and a half later transferred them to Constantinou, in connection with the distribution to the public of Memry's stock. Thus, Rogen was an underwriter under the meaning of the act, and the transaction would be exempt only if it fell under the safe harbor provision of Rule 144.

Defendants claim that the transaction did not fall under the safe harbor provision because, among other reasons,² no Form 144 notice was filed, as required by Rule 144(h), 17 C.F.R. § 230.144(h) (1994), and the transaction exceeded the amount limitation of Rule 144(e), 17 C.F.R. § 230.144(e) (1994), under which the transaction cannot exceed the greater of 1) one percent of outstanding shares, or 2) the average weekly volume of trading during the month prior to the transaction. Plaintiff concedes that no Form 144 notice was filed. (Wolff Aff. p. 5.) Furthermore, the prospectus shows that there were at most approximately 6,295,500 shares outstanding after the public offering, (Riley Aff. Ex. 2 at 4), so the sale constituted more than 1% of the outstanding shares. Plaintiff argues, however, that a genuine dispute of fact exists regarding whether the volume limitation was violated because "no particulars have been disclosed from which to determine whether the charge has substance." (Wolff Aff. at 5.) This assertion is not sufficient to raise a genuine issue of fact regarding whether the amount limitations were in fact exceeded. Therefore, plaintiff has not met its burden of showing that a genuine dispute of fact exists regarding whether the transaction was in fact rightful.

Defendants argue that Rogen was also an issuer not entitled to a § 4(1) exemption because as the chairman of the board of Memry, its chief executive officer ("CEO"), and owner of approximately one-third of its shares immediately prior to the public offering, he exercised control over the corporation sufficient to fall within the definition...