Bound Brook Water Company v. Jaffe

• Decision Date: 29 April 1968
• Docket Number: Civ. A. No. 109-68.
• Citation: 284 F. Supp. 702
• Parties: BOUND BROOK WATER COMPANY, a corporation, et al., Plaintiffs, v. Sidney L. JAFFE et al., Defendants.
• Court: U.S. District Court — District of New Jersey

284 F. Supp. 702

BOUND BROOK WATER COMPANY, a corporation, et al., Plaintiffs, v. Sidney L. JAFFE et al., Defendants.

Civ. A. No. 109-68.

United States District Court D. New Jersey.

April 29, 1968.

COPYRIGHT MATERIAL OMITTED

Frohling & Gaulkin, by John B. M. Frohling, Newark, N. J., for plaintiffs.

Hannoch, Weisman, Stern & Besser, by Albert Besser, Newark, N. J., for defendants.

OPINION

WORTENDYKE, District Judge:

This Court's jurisdiction in this action is predicated upon Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa and 28 U.S.C. § 1331. Plaintiff Bound Brook Water Company is a New Jersey corporation and plaintiffs, Senesy, Oak, Conroy, Brush, Fitzpatrick, Radcliffe, Van Nest and Perone are stockholders of that corporation owning 13,301 shares of stock therein out of a total of 72,000 shares.

The defendants, Jaffe, are stockholders of Middle Atlantic Utilities Co. The complaint alleges that the Jaffes, the corporation in which they are stockholders, Middle Atlantic Utilities Co., and Mayflower Securities, Inc., on or about December 1, 1967, solicited tenders by Bound Brook stockholders for the purchase of their stock in that corporation at a price of $10 per share and also solicited proxies for the purpose of voting said proxies at a certain stockholders' meeting to be held on January 10, 1968.

The first of the Eight Counts of the Complaint rests upon Sections 10(b) and 14 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j and 78n, and alleges that in their solicitations of tenders and proxies, the defendants made fraudulent misrepresentations, misstatements of material fact and material omissions respecting the condition of the affairs of Bound Brook, the value of its stock, the competency of its management, its financial status and other circumstances of and surrounding Bound Brook and the tender solicited. Count 2 is predicated upon the jurisdictional grounds asserted in Count 1 and, in addition thereto, upon 15 U.S.C. § 78cc(b) and alleges that the practices complained of in Count 1 rendered null and void the solicitations of proxies and the purchases of shares referred to therein. Count 3 rests upon 15 U.S.C. §§ 78aa and 78j and 17 C.F.R. 240.10b-5 and seeks relief against the defendant Mayflower Securities, Inc., for its alleged participation in assisting Middle Atlantic and the Jaffes in the consummation of the violations alleged in Counts 1 and 2. In Count 4 plaintiffs allege that the conduct complained of in the preceding counts amounted to a tortious corporate raid against Bound Brook. Count 5 alleges common law fraud and seeks recission of the stock sales made pursuant to the tender offer. Count 6 charges that all of the plaintiffs except Perone and Bound Brook were libeled by the defendants. Count 7 charges slander by the defendants of all the plaintiffs except Perone and Bound Brook. In Count 8 plaintiff Perone seeks damages based upon the violations asserted in Counts 1 and 2 and also seeks a declaration that the shares of stock which he tendered to Middle Atlantic are rightfully his by reason of the fraudulent practices employed in securing such tender from him.

The defendants have addressed three motions to the complaint: (1) for a dismissal for failure to state a claim upon which relief can be granted; (2) for a declaration that this action may not proceed as a class action under F.R.Civ.P. 23(1); and, (3) for a stay of this action pending the determination of an action between the same parties involving similar facts and legal questions pending in the Superior Court of New Jersey.

Since both parties have presented affidavits supportive of their respective positions in this cause, the provisions of F.R.Civ.P. 12(b) require that the present motion to dismiss be treated as a motion for summary judgment under Rule 56.

Section 14 of the Securities Exchange Act of 1934, 15 U.S.C. 78n, provides, inter alia, that:

"(a) It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national securities exchange or otherwise, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered pursuant to Section 78l of this title."

It is nowhere alleged in the complaint before the Court that the securities which are the subject of this litigation are registered pursuant to 15 U.S.C. § 78l so as to fall within the jurisdictional confines of Section 14. Indeed, the defendants appear to contend in their brief, although not in any of the sworn statements made on behalf of their position, that just the opposite is true. If the latter is the case, then, of course, such an impediment to the statutory basis of this Court's jurisdiction of this aspect of the case cannot be remedied by amendment. If the former be true, then the complaint should be amended to allege that fact in the manner outlined below. Assuming the requisite jurisdictional elements to be present on the proxy issue, I pause to add further comment on another insufficiency in this regard which should be rectified so as to avoid the spawning of the usual protracted and fragmented motion practice which appears to be prevalent in securities cases.

Unlike the state of flux which presently marks the question of standing to sue under Section 10(b), the law is relatively clear that both a corporation and its individual stockholders have the proper standing to maintain an action under Section 14 of the Act. See J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964) and Studebaker Corporation v. Gittlin, 360 F.2d 692 (2 Cir. 1966). However, corporate and individual standing to sue under Section 14 arises from the legitimate interests of both the corporation and its stockholders in protecting against an infringement upon corporate suffrage rights or to protect against some corporate action taken as a result of that infringement. Cohen v. Colvin, 266 F. Supp. 677, 685 (S.D.N.Y.1967). The complaint in this case is barren of any such allegations and is, therefore, fatally deficient in that regard. Therefore, it must, if indeed it can, be amended to correct that deficiency also. Finally on this proxy aspect, it appears from the facts presently before the Court that any dispute may now be academic since the stockholders meeting has been held and because there was a subsequent purchase by the defendants of the shares concerning which they had previously made proxy solicitations. However, because of the favored position of the plaintiffs at this posture of the litigation, the Court is precluded from dismissing this portion of the complaint upon those grounds.

Section 10(b) of the Act, 15 U.S.C. 78j, provides that:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —

* * * * * *

(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."

Rule 10b-5, 17 C.F.R. 240.10b-5, implementing the above mentioned statutory section states that:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security."

The defendants assert that neither the corporation nor the individual non-selling shareholder plaintiffs has the requisite standing to sue under Rule 10b-5. They rely, inter alia, upon Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2 Cir. 1952); O'Neill v. Maytag, 339 F.2d 764 (2 Cir. 1964) and Greater Iowa Corporation v. McLendon, 378 F.2d 783 (8 Cir. 1967). The plaintiffs, on the other hand, contend that the strength of the holdings in those cases has been greatly sapped by later decisions in the Second Circuit and they point to Vine v. Beneficial Finance Company, 374 F.2d 627 (2 Cir.) cert. den. 389 U.S. 970, 88 S.Ct. 463, 19 L.Ed.2d 460 (1967); A. T. Brod & Co. v. Perlow, 375 F.2d 393 (2 Cir. 1967); Symington Wayne Corporation v. Dresser Industries, Inc., 383 F.2d 840 (2 Cir. 1967) and Entel v. Allen, 270 F.Supp. 60 (S.D.N.Y.1967) in support of their contention that both the corporation and non-selling stockholders of the corporation to whom a tender offer has been made by outsiders utilizing techniques which allegedly violate Rule 10b-5 have the requisite standing to sue under Section 10(b) of the Act.

In Vine v. Beneficial Finance Company, supra, the Court found that, as a result of a merger, Vine had become an involuntary "seller" whose original stockholdings in the corporation had been reduced to a claim for cash. In A. T. Brod & Co. v. Perlow, supra, the Court found that Brod was a "purchaser" under Rule 10b-5 even though, as a broker, Brod had made his purchases on behalf of others and not for his own investment purposes. I read those cases not as indicative of the proposition that a non-selling stockholder has...