AFP Imaging Corp. v. Ross

• Decision Date: 23 December 1985
• Docket Number: D,No. 175,175
• Citation: 780 F.2d 202
• Parties: Fed. Sec. L. Rep. P 92,443 AFP IMAGING CORPORATION, Plaintiff-Appellant, v. Alexander ROSS, James L. Melcher, Ivan Bloch, Vincent Giovinco, Bruce Male, Frederick M. Myers, John C. Fitch, and Lewis W. Siegel, Individually and as representative of all others similarly situated, Defendants-Appellees. Cal.ocket 85-7494.
• Court: U.S. Court of Appeals — Second Circuit

Page 202

780 F.2d 202

Fed. Sec. L. Rep. P 92,443

AFP IMAGING CORPORATION, Plaintiff-Appellant, v. Alexander ROSS, James L. Melcher, Ivan Bloch, Vincent Giovinco, Bruce Male, Frederick M. Myers, John C. Fitch, and Lewis W. Siegel, Individually and as representative of all others similarly situated, Defendants-Appellees.

Cal. No. 175, Docket 85-7494.

United States Court of Appeals Second Circuit.

Argued Oct. 9, 1985.

Decided Dec. 23, 1985.

Stuart A. Summit, New York City (Burns Summit Rovins & Feldesman, New York City, of counsel), for plaintiff-appellant.

Leo Kayser, III, New York City (Raggio, Jaffe & Kayser, New York City, of counsel), for defendants-appellees.

Anthony E. Davis, New York City (Kaplan Russin Vecci Kirkwood, New York City, of counsel), for defendant-appellee Alexander Ross.

Before FEINBERG, Chief Judge, and VAN GRAAFEILAND and MESKILL, Circuit Judges.

VAN GRAAFEILAND, Circuit Judge:

AFP Imaging Corporation appeals from a summary judgment of the United States District Court for the Southern District of New York (Brieant, J.). The judgment dismissed Count I of AFP's partial-defendant class action complaint, which alleges violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5 of the Securities & Exchange Commission's Rules, 17 C.F.R. Sec. 240.10b-5, and directed arbitration of the remaining issues between the parties. For the reasons that follow, we reverse the part of the judgment that dismissed the securities fraud claim, affirm the part that ordered arbitration of the claim of appellant Ross, and vacate and remand the remainder of the judgment without prejudice.

AFP and Xenon Industries, Inc. are New York corporations. The members of the putative defendant class are the twenty-nine shareholders of Xenon. On August 8, 1984, AFP and Xenon executed a written contract, which provided, among other things, that Xenon would "cause the sale" of all the shares of its capital stock to AFP and would transfer all the shares to AFP on the closing date "duly endorsed for transfer". The agreed consideration for this sale was 225,000 letter shares of AFP stock plus warrants for an additional 400,000 shares. AFP now seeks to hold Xenon's shareholders responsible under both the securities laws and the common law for alleged fraudulent misrepresentations in the written contract. It demands the return of its stock, damages, and certain incidental relief.

Although the contract described Xenon as the "seller" of its stock, the district court stated that Xenon was not the seller and that it was appellees who sold their stock pursuant to the contract. We agree. New York follows the majority American rule, which treats shares of stock as the personal property of the shareholders. Allen v. Biltmore Tissue Corp., 2 N.Y.2d 534, 540-41, 161 N.Y.S.2d 418, 141 N.E.2d 812 (1957). Obviously, a New York corporation, acting solely on its own, cannot "cause" the sale of all its corporate shares for a consideration fixed by the corporation.

There is no reason, however, why Xenon could not have acted as appellees' agent in effecting the sale of their stock. Although, ordinarily, a corporation does not act in the capacity of agent for its shareholders, Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 440, 63 S.Ct. 1132, 1134, 87 L.Ed. 1499 (1943), the shareholders may involve the corporation in their own business affairs to such an extent as to constitute it their agent. Hollander v. Henry, 186 F.2d 582, 584 (2d Cir.), cert. denied, 341 U.S. 949, 71 S.Ct. 1017, 95 L.Ed. 1373 (1951); Walkovszky v. Carlton, 18 N.Y.2d 414, 417, 276 N.Y.S.2d 585, 223 N.E.2d 6 (1966); Rapid Transit Subway Construction Co. v. City of New York, 259 N.Y. 472, 488, 182 N.E. 145 (1932). A jury well might find that this is what occurred in the instant case.

Because Xenon was not the seller and could not unilaterally effect the sale of its own stock, a jury might conclude that Xenon was acting in some sort of representative capacity for appellees, who were the sellers and who clearly benefited from Xenon's acts. Moreover, it is undisputed that appellees accepted those benefits with full knowledge of the warranties and representations contained in the written contract of sale. Each appellee was required to execute and deliver to AFP an "Investment Representation Letter", in which he acknowledged that he had received and reviewed a copy of the contract. We conclude from the foregoing that this case presents factual issues concerning apparent and implied authority, authority by estoppel, and ratification, that do not lend themselves to summary disposition. See Hedeman v. Fairbanks, Morse & Co., 286 N.Y. 240, 248-49, 36 N.E.2d 129 (1941); Cavic v. Grand Bahama Development Co., 701 F.2d 879, 887 n. 4 (11th Cir.1983); Songbird Jet Ltd. v. Amax Inc., 581 F.Supp. 912, 920 (S.D.N.Y.1984); Cullen v. BMW of North America, Inc., 490 F.Supp. 249, 252-54 (E.D.N.Y.1980). If, in fact, Xenon was acting as appellees' agent in making what AFP alleges to be false warranties and representations, appellees, having accepted the benefits with knowledge of the inducements, will be hard put to disassociate themselves from Xenon's allegedly wrongful acts. See American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556, 565-70, 102 S.Ct. 1935, 1942-44, 72 L.Ed.2d 330 (1982); Weitnauer Trading Co. v. Annis, 516 F.2d 878, 880 (2d Cir.1975); Radiation Dynamics, Inc. v. Goldmuntz, 323 F.Supp. 1097, 1099 (S.D.N.Y.1971), aff'd, 464 F.2d 876 (2d Cir.1972).

Because of AFP's...