DeWitt v. American Stock Transfer Co.

• Citation: 440 F. Supp. 1084
• Decision Date: 04 November 1977
• Docket Number: No. 76 Civ. 4126 (GLG).,76 Civ. 4126 (GLG).
• Parties: Laurence F. DeWITT, Plaintiff, v. AMERICAN STOCK TRANSFER COMPANY, Michael Karfunkel and George Karfunkel, doing business as partners of American Stock Transfer Company, and Alrac Corporation, Defendants.
• Court: U.S. District Court — Southern District of New York

440 F. Supp. 1084

Laurence F. DeWITT, Plaintiff, v. AMERICAN STOCK TRANSFER COMPANY, Michael Karfunkel and George Karfunkel, doing business as partners of American Stock Transfer Company, and Alrac Corporation, Defendants.

No. 76 Civ. 4126 (GLG).

United States District Court, S. D. New York.

November 4, 1977.

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Butzel & Kass, New York City, for plaintiff by Stephen L. Kass, New York City, of counsel.

Snow & Becker, New York City, for defendants, American Stock Transfer Co. and Karfunkel by Charles Snow, New York City, of counsel.

Carro, Spanbock, Londin, Rodman & Fass, New York City, for defendant, Alrac Corp. by Reginald Leo Duff, New York City, of counsel.

OPINION

GOETTEL, District Judge.

Defendant, Alrac Corp. ("Alrac"),¹ moves pursuant to Rule 9(m) of the General Rules of this Court to reargue the denial of its Fed.R.Civ.P. 12(b)(2)² motion to dismiss plaintiff DeWitt's complaint. Alternatively, defendant requests that the Court certify the questions raised for an interlocutory appeal under 28 U.S.C. § 1292(b).

The theory of plaintiff's damage action is that defendant, American Stock Transfer Co. ("A.S.T."), Alrac's New York stock transfer agent, acted unreasonably in refusing to transfer shares of Alrac into plaintiff's name unless A.S.T. added a restrictive legend to the certificate or received a letter from counsel vouching for the legality of the transfer. The shares represented approximately 13% of Alrac's outstanding stock and were incorporated into a single certificate. DeWitt's seller, Athena Communications Corp. ("Athena"), is not a party to this action. The original opinion of this Court was issued on June 20, 1977. 433 F.Supp. 994 (S.D.N.Y.1977). The facts underlying this action are set out at some length in the original opinion and will not be repeated here.

The original opinion refused to dismiss the case against defendant Alrac for lack of in personam jurisdiction. Plaintiff was held to have stated a claim for wrongful refusal to transfer the stock. Since matters outside the pleadings were submitted in support of the Fed.R.Civ.P. 12(b)(6) ground, the motion was appropriate for treatment as one for summary judgment. It was held, however, that the reasonableness of defendant's conduct in refusing to transfer the shares without restrictions on resale presented a genuine issue of material fact which precluded judgment for the defendants. Distinct from the issue of the reasonableness of their conduct was their potential liability under the applicable state provision of the Uniform Commercial Code, Section 8-204, as construed by the Tenth Circuit in Edina State Bank v. Mr. Steak, Inc., 487 F.2d 640 (10th Cir.), cert. denied, 419 U.S. 883, 95 S.Ct. 150, 42 L.Ed.2d 123 (1974). The rationale of that case and its application to this one will be explored later.

Defendant Alrac raises two claimed errors in the former opinion, characterizing them as one of law and one of fact. The claimed legal error stems from equating an "investment representation" contained in a Schedule 13D filed pursuant to the Williams Act provision, 15 U.S.C. § 78m(d), with an "investment representation" under the Securities Act of 1933. The representations are made for different purposes. The former involves a denial that the securities were obtained for the purpose of acquiring control. The latter involves a disclaimer that the purchase was made "with a view to distribution" of the securities so as to avoid the need for registration of the transfer under Section 5 of the 1933 Act, 15 U.S.C. § 77e. The acceptance of this distinction should resolve any ambiguities in the former opinion's treatment of the significance of Athena's "investment representation" contained in its Schedule 13D filing.

Defendant's second claim of error — characterized as one of fact — involves what defendant would describe as this Court's "implied holding" that Athena's certificate should have been legended. The prior decision recognized the difference between restrictions on the sale of securities and the need for legending. Restrictions on the sale of securities under the Securities Act of 1933 arise by operation of law, often without affording the issuer or his transfer agent an opportunity to legend the shares. Legending is simply a device through which an issuer or its transfer agent can inhibit the free transferability of securities known in advance to have restrictions on resale. While recent rules promulgated by the Securities and Exchange Commission encourage legending as a prophylactic device (see, e. g., Rule 146(h)(2); Rule 147(f)(1)(i)), the Securities Act of 1933 does not by its terms require it.

One case, Edina State Bank v. Mr. Steak, Inc., supra, interpreting Section 8-204³ of the Uniform Commercial Code, did impose liability for failure to note restrictions on resale arising by operation of the Securities Act of 1933 on the face of the security. Discussed more fully in the former opinion, that case held that restrictions on resale of shares received in a private offering from the issuer were restrictions "imposed by the issuer" as that phrase is used in Section 8-204.

On reconsideration, it would appear that the rationale of Edina State Bank should not be extended to the circumstances presented here.⁴ Research has disclosed no other case equating restrictions "imposed by the issuer" with restrictions arising from the federal securities acts. For this reason, it would appear unwise to extend the rationale of that case beyond the context in which it was decided — a private placement by the issuer of its own securities, a situation which clearly gives the issuer an opportunity to legend the shares. Therefore, that portion of the former opinion stating that Edina State Bank applies to this case is withdrawn.

The Court is not prepared, however, to grant the relief which the defendant again requests—dismissal of the complaint. It adheres to that portion of its opinion which held that the reasonableness of defendant's conduct in refusing to transfer an unrestricted certificate raises a triable issue of fact. In so doing, the Court is not, as defendant claims, rejecting as "inapposite" those cases relied upon by defendant and distinguished in the former opinion, 433 F.Supp. at 1000-01. It is simply saying...