Colonial Realty Corporation v. Brunswick Corporation

• Citation: 257 F. Supp. 875
• Decision Date: 22 August 1966
• Docket Number: No. 64 Civ. 110.,64 Civ. 110.
• Parties: COLONIAL REALTY CORPORATION, Plaintiff, v. BRUNSWICK CORPORATION et al., Defendants.
• Court: U.S. District Court — Southern District of New York

257 F. Supp. 875

COLONIAL REALTY CORPORATION, Plaintiff, v. BRUNSWICK CORPORATION et al., Defendants.

No. 64 Civ. 110.

United States District Court S. D. New York.

August 10, 1966.

As Amended August 22, 1966.

Spear & Hill, New York City, for plaintiff.

White & Case, New York City, for defendant Brunswick.

Sullivan & Cromwell, New York City, for defendant Lehman.

Dunnington, Bartholow & Miller, New York City, for defendant Anderson.

OPINION

EDELSTEIN, District Judge.

This is a motion by defendants for summary judgment on the first count of plaintiff's thirty-nine count complaint. Plaintiff is a corporation which purchased a substantial quantity of the common stock¹ of the defendant Brunswick Corp. The defendants are: Brunswick Corp.; Brunswick's directors and principal officers; sixty-seven brokerage firms which were connected with the underwriting and distribution of Brunswick convertible debentures; together with the accounting firm named in the Brunswick registration statement. Plaintiff's first count, brought expressly to enforce a liability created by Section 11 of the Securities Act of 1933, 48 Stat. 82 (1933), as amended, 15 U.S.C. § 77k (1964), alleges in effect that on January 11, 1961, the defendants offered, through a registration statement, $25,634,400 of convertible subordinated debentures and the common stock issuable upon conversion thereof at a price of approximately $51 per share. The plaintiff further alleges that the registration statement (and the prospectus included therein) contained untrue statements of material facts and omitted to state material facts required to be stated therein or necessary to make the statements not misleading. The principal defect alleged is that the prospectus's consolidated balance sheet, instead of treating a financing agreement with C.I.T. Corporation as a long-term debt and revealing the interest charges being paid thereon, treated the C.I.T. debt as a current liability and did not reveal the relevant interest charges. These unrevealed interest charges amounted approximately to 10½ percent on an outstanding indebtedness totaling in excess of 126 million dollars. (The consolidated prospectus did include, within the long-term debt category a detailed analysis of the interest charges being paid on other long-term notes totaling less than 11.5 million dollars with interest charges thereon varying between 4% and 5¾%.) The prospectus also allegedly failed to disclose that the rate being paid to C.I.T. was substantially greater than the interest rate being paid for similar credit by Brunswick's major competitor. Plaintiff claims as damages the difference between the price paid for the shares purchased and the amount received for the shares sold (or the market value of the shares retained), which is alleged to be $1,176,710² plus interest, costs and reasonable attorneys' fees.

The following facts relevant to defendants' motion are not in dispute:

1. On January 11, 1961, the relevant registration statement became effective.

2. Only 209 shares of Brunswick common stock were issued on conversion of the debentures subject to the registration statement.

3. Plaintiff never acquired any of the common stock issued upon conversion of the debentures.

Section 11, insofar as relevant, provides:

"(a) in case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security (unless it is proved that at the time of such acquisition he knew of such untruth or omission) may, * * * sue * *." 15 U.S.C. § 77k(a) (1964) (Italics added.)

Plaintiff in effect urges that the permissible class of plaintiffs ("any person acquiring such security") includes persons who acquired a security of the same class as the security issued under the registration statement. Defendants urge that the phrase "such security" refers only to the particular securities registered under the registration statement. Since it is not disputed that the plaintiff did not acquire any of the common stock which were in fact issued on conversion of the registered debentures, plaintiff, it is urged, has no cause of action under Section 11.

It is clear that there is no genuine issue as to any material fact, accordingly if defendants' interpretation of the statute is correct they are entitled to judgment as a matter of law, on the first count of the complaint only. Fed.R.Civ. P. 56(c). See e. g., Fed.R.Civ.P. 56(e); Waldron v. Cities Service Co., 361 F.2d 671 (2d Cir. 1966); Schwartz v. Associated Musicians, 340 F.2d 228, 232-233 (2d Cir. 1964); Dressler v. The M. V. Sandpiper, 331 F.2d 130, 132-33 (2d Cir. 1964).³

The Act does not, in terms, define what is meant by "such security." See Section 2, 48 Stat. 74-75 (1933), as amended, 15 U.S.C. § 77b (1964). But Section 6(a), 48 Stat. 78 (1933), as amended, 15 U.S.C. § 77f(a) (1964) provides that "A registration statement shall be deemed effective only as to the securities specified therein as proposed to be offered." And Section 6(b), 48 Stat. 78 (1933) as amended, 15 U.S.C. § 77f(b) (1964), as amended, 15 U.S.C. § 77f(b) (Supp. I, 1965) requires a fee of "one-fiftieth of 1 per centum of the maximum aggregate price at which such securities are proposed to be offered * * *." (Italics added.) The statutory language leaves little doubt that at least in Section 6 the phrase "such securities" means the securities specified in the registration statement. In the instant case the only common stock registered, at least for the purposes of the calculation of the registration fee under Section 6, was "such indeterminate number of shares of Common Stock as may be issuable upon conversion of the Debentures being registered hereunder." (Defendants' Exhibit "A"—S.E.C. Form S-1 Registration Statement.)

The phrase "such securities" also appears in Subsection (e) of Section 11:

"The suit authorized under subsection (a) of this section may be to recover such damages as shall represent the difference between the amount paid for the security (not exceeding the price at which the security was offered to the public) and (1) the value thereof as of the time such suit was brought, or (2) the price at which such security shall have been disposed of in the market before suit, or (3) the price at which such security shall have been disposed of after suit * * *." Section 11(e), 15 U.S.C. § 77k(e) (1964) (Italics added.)

Unless it is urged that the phrase "the security" and the phrase "such security" refers to different security lots (and the necessity of determining a mathematical "difference" as well as the underscored "thereof" makes such contention untenable) it seems clear that the phrase "such security" refers only to securities offered to the public under the registration statement. The proviso found in the statute following the above-quoted language confirms such an interpretation.

"Provided, that if the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from such part of the registration statement, with respect to which his liability is asserted * * * such portion of or all such damages shall not be recoverable." Ibid. (Italics added.)

Plaintiff, in effect, concedes that the phrase "such security" when used in Section 11 (e) refers to the particular securities offered to the public under the registration statement, but contends that when used in Section 11(a) the phrase "such security" refers to all securities of the same class as those offered under the registration statement. Such a construction of the statute, while not impossible, is certainly strained.

The legislative history of the 1933 Act reveals that the underlying purpose of the Act was "to protect the public with the least possible interference to honest business." S.Rep.No. 47, 73rd Cong., 1st Sess. 6-7 (1933); H.R.Rep.No. 85, 73rd Cong., 1st Sess. 5 (1933). See, e. g., H.R.Rep.No.152, 73rd Cong., 1st Sess. (1933) (Conference Report); Douglas and Bates, The Federal Securities Act of 1933, 43 Yale L.J. 171, 172-173 (1933). The Senate House Conference Report, although nominally accepting the Senate bill rejected that portion of the Senate bill which would have placed an insurer's liability on persons responsible for the flotation of a new issue and accepted the House bill's version which increased the number of potential defendants but placed on the defendants only the burden of showing that they had used reasonable care. See H.R. Rep.No.152, 73rd Cong., 1st Sess. 24-29; H.R.Rep.No. 85, 73rd Cong., 1st Sess. 6 (1933). The registration statement's basic importance was seen not only as a source of information to the prospective buyer but also "as a foundation for civil liability." H.R.Rep.No.85, supra at 7.

"Fundamentally, these sections 11 and 12 entitle the buyer of securities sold upon a registration statement including an untrue statement * * * to sue for recovery of his purchase price, or for damages not exceeding such price. * * *" H.R.Rep. 85, supra at 9. (Italics added.) See Id. at 7, 15-16; S.Rep.No.47, supra at 6.

A fair reading of the legislative history leads to the conclusion that by the term "such security" Congress meant the securities issued and sold pursuant to the registration statement and not all securities of the same class as those registered.⁴

The cases decided under Section 11 have reached the same conclusion. In Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951) the court held, inter alia, that a shareholder's civil action could be maintained under Section 10b of the 1934 Securities Exchange Act. The court rejected the argument that such a civil remedy should not be implied since it would duplicate the remedy provisions of Section 11 of the Securities Act but omit the restrictions Congress...