Brass v. American Film Technologies, Inc., No. 37

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Writing for the CourtCARDAMONE
Parties19 UCC Rep.Serv.2d 1148 Sanford BRASS; Joyce Mericle Brass; Gustave E. Chew; Fred Suther; John Tomaszewski; Stephen D.E. Mitchell, as Trustee for Giles David Edwin Mitchell and Neville Arthur Thomas Mitchell, Plaintiffs-Appellants, v. AMERICAN FILM TECHNOLOGIES, INCORPORATED, Defendant-Appellee. ocket 92-7328.
Decision Date08 March 1993
Docket NumberD,No. 37

Page 142

987 F.2d 142
19 UCC Rep.Serv.2d 1148
Sanford BRASS; Joyce Mericle Brass; Gustave E. Chew; Fred
Suther; John Tomaszewski; Stephen D.E. Mitchell, as
Trustee for Giles David Edwin Mitchell and Neville Arthur
Thomas Mitchell, Plaintiffs-Appellants,
v.
AMERICAN FILM TECHNOLOGIES, INCORPORATED, Defendant-Appellee.
No. 37, Docket 92-7328.
United States Court of Appeals, Second Circuit.
Argued Sept. 4, 1992.
Decided March 8, 1993.

Page 144

Raymond A. Connell, New York City (Connell Losquadro & Zerbo, of counsel), for plaintiffs-appellants.

Robert Knuts, New York City (Darrell K. Fennell, Fennell & Minkoff, of counsel), for defendant-appellee.

Before: FEINBERG, NEWMAN and CARDAMONE, Circuit Judges.

CARDAMONE, Circuit Judge:

This securities law action was brought against a defendant-corporation that was selling warrants for the purchase of its common stock. Plaintiff's suit alleging conversion, breach of contract and fraud arose when he met with defendant's chief executive officer to inquire about the business and ended up purchasing 65,000 of the warrants transferable into the company's common stock. Unknown to plaintiff, and untold by defendant's CEO, was the existence of a two-year holding period in which public trading of the common stock was prohibited. Despite the obvious effectiveness of defendant's sales pitch, the district court ruled in dismissing plaintiff's complaint that defendant had no duty to explain the restriction to plaintiff because of the absence of a fiduciary or other type of relationship between the parties that should have induced the plaintiff to rely on the CEO's investment advice.

Whatever validity the aphorism "speech is silver, silence is golden" may have in general, in this securities fraud action it should be restated to "speech is golden" because the CEO's silence broadcasted a misleading impression to plaintiff. To remain silent when one might have been supposed to speak is sufficiently alleged in the present complaint for plaintiff's suit to escape dismissal.

BACKGROUND

Defendant, American Film Technologies, Incorporated (AFT), is a modern-day business that has developed a special process for adding color to black-and-white films. The plaintiff, Sanford Brass, was attracted to the company as an investment, though he had no prior knowledge of it, its plans, or the prospects for the colorizing industry in general. To learn something about the company he attended a meeting in April 1987 with George Jensen, AFT's chairman and chief executive, and with Dennis Abert, a consultant to the same firm. Jensen laid out the company's business plans and told plaintiff that AFT had warrants available that could be used to purchase AFT common stock, which was expected soon to rise in value. The warrants Jensen referred to were the 65,000 warrants that had been allocated to Abert, who was in need of cash.

Following this April meeting Brass agreed to buy 10,000 of Abert's warrants for $1 per warrant. Jensen confirmed the purchase in a letter dated May 7, 1987 that set out the material elements of the transaction, stating that the warrants were exercisable for a five-year period at $2 per share. According to plaintiff, neither the

Page 145

seller, Abert, nor Jensen told him that the warrants and the underlying common stock were part of a private placement and thus for two years were not freely transferrable. See Securities and Exchange Commission (S.E.C.) Rule 144, 17 C.F.R. § 230.144 (1992). Brass declares that had he known of the restriction he would not have purchased $10,000 worth of warrants.

Jensen continued to solicit Brass with respect to AFT securities. In July 1987 plaintiff received a Red Herring Preliminary Prospectus regarding the impending public offering of AFT common stock. The prospectus identified certain shares of common stock derived from the exchange of outstanding warrants as subject to a two-year resale limitation, without identifying precisely which shares were so restricted. Two years later plaintiff purchased the remaining 55,000 warrants allocated to Abert on the same basis as the original 10,000 warrants. In the summer of 1989 Abert faxed evidence to Brass of his entitlement to the warrants and included in the transmission a "Stock Purchase Right" certificate. Although this certificate did not disclose the restrictions on the common stock, it did state that the warrants were transferable only with AFT's approval, which AFT gave to allow Abert to sell his warrants.

In September 1989 AFT faxed at plaintiff's request a new Stock Purchase Right--similar to the one Brass received during the summer--certifying that Brass had the right to buy 65,000 shares of "unissued common stock." AFT insists that a letter accompanying the certificate disclosed the S.E.C. Rule 144 limitation on the sale of the common stock. Brass denies receiving the letter.

During early 1990 AFT warrants and common stock rose substantially in value on the Philadelphia Stock Exchange, prompting AFT to effect a two-for-one reverse stock split. This meant that plaintiff's warrants entitled him now to buy 32,500 shares of common stock. In April 1990 when AFT stock was selling at $9 per share and the warrants were trading at $5.50, Brass decided to distribute his warrants to his wife and several valued business colleagues (the transferees), who are now named plaintiffs. The transferees paid Brass the $65,000 he had paid Abert to acquire the warrants.

AFT consented to the transfer and sent Brass a revised Stock Purchase Right for 32,500 warrants, requesting him to list his transferees. In a letter accompanying this new Stock Purchase Right AFT informed Brass that "the warrants are now exercisable at four dollars ($4.00) per share," to reflect the reverse stock split, "and the common stock will remain restricted for two years after the date of exercise of the purchase rights." This, Brass avers, was the first notice he had that the warrants covered restricted shares of stock. On April 26, 1990 plaintiff signed the new Stock Purchase Right certificate and on the following day, AFT returned his old certificate marked "cancelled," and forwarded new certificates to the seven designated plaintiff transferees. On May 3, 1990 AFT sent a clarification letter to the transferees, disclosing that both the Stock Purchase Rights and the underlying common stock were issued as part of an AFT private placement. Thus, neither was freely tradeable.

On July 18, 1991 Brass and the transferees commenced the instant action against AFT in New York State Supreme Court alleging that defendant's actions constituted a wrongful conversion of the warrants, and of the right of Brass and his distributees to exercise the purchase option evidenced by those warrants. Plaintiffs demanded $290,550 damages. AFT removed the case to the United States District Court for the Southern District of New York on diversity grounds and made a Fed.R.Civ.P. 12(b)(6) motion to dismiss. The district court, Louis J. Freeh, Judge, converted that motion sua sponte to one for summary judgment. See Brass v. American Film Technologies, Inc., 780 F.Supp. 1001, 1002 (S.D.N.Y.1991).

In opposing summary judgment, plaintiffs asserted that AFT's conduct constituted conversion, breach of contract, securities fraud and common law fraud. To

Page 146

make out a conversion claim, Brass contended that he was entitled to receive unrestricted AFT common stock. He based this argument on U.C.C. § 8-204 and a Tenth Circuit case interpreting it. See Edina State Bank v. Mr. Steak, Inc., 487 F.2d 640, 644 (10th Cir.), cert. denied, 419 U.S. 883, 95 S.Ct. 150, 42 L.Ed.2d 123 (1974).

In an order dated December 18, 1991, the district court rejected Brass' conversion claims. It disagreed with the holding in Edina State Bank and did not think § 8-204 required issuers of securities to include notices regarding limitations on transfer arising under the federal securities laws. See Brass, 780 F.Supp. at 1004. It granted AFT summary judgment on the Brass contract claims as well, finding that the contract was between Brass and Abert, not between plaintiff and the defendant AFT. Id. Because there were relevant unresolved factual issues, both fraud claims were left in place and plaintiff was granted leave to amend his pleadings with respect to them. See id. at 1004-05.

Later plaintiffs filed an amended complaint pursuing only a claim for common law fraud, which AFT moved to dismiss. On February 28, 1992 the district court granted this motion because plaintiffs had failed to state a claim upon which relief could be granted under Rule 12(b)(6) and to plead fraud with sufficient particularity under Fed.R.Civ.P. 9(b). The trial court observed that plaintiffs had two fraud claims: fraudulent misrepresentation and fraudulent concealment. As to the Brass transferees, these plaintiffs had dealt only with Brass and not with AFT. Hence, they had no claim under either theory. With respect to Brass, there was no misrepresentation because the complaint never alleged that Jensen made false statements, and there was no case for concealment because AFT and Jensen were not in a fiduciary relationship with Brass and therefore had no duty to disclose restrictions. Following a motion by the plaintiffs, the district court reconsidered its December 18 decision with respect to plaintiffs' contract claim, and reaffirmed its prior ruling. Although it now agreed with Brass that the Stock Purchase Rights constituted a continuing offer by AFT to sell securities, it concluded that these rights created no contractual obligation to provide unrestricted stock to any party.

On March 6, 1992 judgment was entered dismissing the plaintiffs' amended complaint and all their claims against AFT. Plaintiffs appeal from the grant of summary judgment in favor of AFT on the conversion and contract claims and from the Rule 12(b)(6) dismissal of their fraud claims. We affirm as to the conversion claim, but...

To continue reading

Request your trial
1548 practice notes
  • Franklin v. X Gear 101, LLC, 17 Civ. 6452 (GBD) (GWG)
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • July 23, 2018
    ...either in plaintiff['s] possession or of which plaintiff[] had knowledge and relied on in bringing suit.Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993); accord Halebian v. Berv, 644 F.3d 122, 130 n.7 (2d Cir. 2011); Portillo v. Webb, 2017 WL 4570374, at *1 (S.D.N.Y. Oct. 11......
  • Republic of Colombia v. Diageo North America Inc., No. 04-CV-4372 (NGG).
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • June 19, 2007
    ...suit." Republic of Ecuador v. Chevron-Texaco Corp., 376 F.Supp.2d 334, 375 (S.D.N.Y.2005) (quoting Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993)); see also Watterson v. Page, Page 451 F.2d 1, 3-4 (1st Cir.1993) (On Rule 42(b)(6) motions, courts will consider "documents the......
  • McConologue v. Smith & Nephew, Inc., Civil Action No. 3:13–CV–00880 VLB.
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Connecticut)
    • March 24, 2014
    ...either in plaintiffs' possession or of which plaintiffs had knowledge and relied on in bringing suit.” Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993) ; Patrowicz v. Transamerica HomeFirst, Inc., 359 F.Supp.2d 140, 144 (D.Conn.2005) (MRK). Here, the Plaintiff has attached to......
  • Christian v. Town of Riga, No. 08-CV-6557.
    • United States
    • United States District Courts. 2nd Circuit. United States District Court of Western District of New York
    • August 17, 2009
    ...or upon which plaintiff relied in drafting the complaint, as well as from public documents. See Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir.1993) (When determining sufficiency of plaintiff's claim for Rule 12(b)(6) purposes, consideration is limited to factual alleg......
  • Request a trial to view additional results
1546 cases
  • Franklin v. X Gear 101, LLC, 17 Civ. 6452 (GBD) (GWG)
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • July 23, 2018
    ...either in plaintiff['s] possession or of which plaintiff[] had knowledge and relied on in bringing suit.Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir. 1993); accord Halebian v. Berv, 644 F.3d 122, 130 n.7 (2d Cir. 2011); Portillo v. Webb, 2017 WL 4570374, at *1 (S.D.N.Y. Oct. 11......
  • Republic of Colombia v. Diageo North America Inc., No. 04-CV-4372 (NGG).
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • June 19, 2007
    ...suit." Republic of Ecuador v. Chevron-Texaco Corp., 376 F.Supp.2d 334, 375 (S.D.N.Y.2005) (quoting Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993)); see also Watterson v. Page, Page 451 F.2d 1, 3-4 (1st Cir.1993) (On Rule 42(b)(6) motions, courts will consider "doc......
  • McConologue v. Smith & Nephew, Inc., Civil Action No. 3:13–CV–00880 VLB.
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Connecticut)
    • March 24, 2014
    ...either in plaintiffs' possession or of which plaintiffs had knowledge and relied on in bringing suit.” Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993) ; Patrowicz v. Transamerica HomeFirst, Inc., 359 F.Supp.2d 140, 144 (D.Conn.2005) (MRK). Here, the Plaintiff has attached to......
  • Christian v. Town of Riga, No. 08-CV-6557.
    • United States
    • United States District Courts. 2nd Circuit. United States District Court of Western District of New York
    • August 17, 2009
    ...or upon which plaintiff relied in drafting the complaint, as well as from public documents. See Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir.1993) (When determining sufficiency of plaintiff's claim for Rule 12(b)(6) purposes, consideration is limited to factual alleg......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT