AFP Imaging Corp. v. Ross, 175

• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
• Citation: 780 F.2d 202
• Docket Number: D,No. 175,175
• 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.
• Decision Date: 23 December 1985

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.

Page 203

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

Page 204

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,...