Dopp v. Franklin National Bank

• Citation: 461 F.2d 873
• Decision Date: 30 May 1972
• Docket Number: No. 606,Docket 71-2214.,606
• Parties: Paul S. DOPP, Plaintiff-Appellee, v. FRANKLIN NATIONAL BANK, Defendant-Appellant, and Butler Aviation International, Inc., et al., Defendants.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

461 F.2d 873 (1972)

Paul S. DOPP, Plaintiff-Appellee, v. FRANKLIN NATIONAL BANK, Defendant-Appellant, and Butler Aviation International, Inc., et al., Defendants.

No. 606, Docket 71-2214.

United States Court of Appeals, Second Circuit.

Argued April 5, 1972.

Decided May 30, 1972.

COPYRIGHT MATERIAL OMITTED

Milton Kunen, New York City (Sidney Kwestel, Theodore J. Fischkin, Kaye, Scholer, Fierman, Hays & Handler, New York City, of counsel), for defendant-appellant.

Robert W. Gottlieb, New York City (Rosenman, Colin, Kaye, Petscheck, Freund & Emil, New York City, of counsel), for plaintiff-appellee.

Before CLARK, Associate Justice,^* LUMBARD and KAUFMAN, Circuit Judges.

IRVING R. KAUFMAN, Circuit Judge:

This appeal presents another example of the burgeoning impact of the federal securities laws on the courts. Paul S. Dopp, the largest individual shareholder of Butler Aviation International, Inc.,¹ has used § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder as a wedge to block the sale of 51,500 shares of Butler stock pledged by him to Franklin National Bank as collateral for a loan of $380,000. Ordinarily, this action, which involves little more than a dispute between a debtor and creditor over the disposition of collateral upon default, would be grounded on alleged violations of state commercial or contract law. But Dopp, asserting that Franklin had misrepresented to him that he would have a right of first refusal on any sale arranged by Franklin and that Franklin failed to disclose that it was negotiating for the sale of shares, obtained a preliminary injunction from Judge Brieant restraining Franklin from honoring an option to purchase the shares which Franklin had granted to John and Michael Galesi. Judge Brieant granted this preliminary injunction without holding any evidentiary hearing, relying solely on the affidavits and depositions submitted by the parties.² Franklin has appealed. We cannot agree with Judge Brieant that Dopp established a likelihood of success on the merits of his 10b-5 claim or that he will suffer irreparable injury if the shares are sold pursuant to the option agreement. Accordingly, we reverse. This result, contrary to the implications of the dissenting opinion, in no way turns upon our views of plaintiff's wisdom in pursuing his claims under the federal securities laws.³ We rely solely on established principles of equitable remedies and standards of appellate review. Our extended discussion, due in no small measure to the broadside attack by our dissenting brother, should not indicate that we consider this a novel case or, indeed, one where the result was ever in doubt.

The facts, which present the intriguing story of a shareholder fighting foreclosure so that he could retain leverage in a proxy contest, are essential to this appeal which hinges in the final analysis on the weighing of equities.⁴ On July 17, 1969, Dopp borrowed $380,000 from Franklin, executing a demand promissory note secured by a pledge of 51,500 shares of Butler common stock.⁵ At that time (and until January, 1971) Dopp was the President and Chairman of the Board of Butler, a Delaware corporation whose stock is traded on the American Stock Exchange. The promissory note, which included the pledge agreement, provided that upon any default of the borrower the bank could "forthwith sell, assign, give option or options to purchase, and deliver any and all securities" pledged as collateral. The note further provided that "no waiver whatsoever of the bank's rights shall be valid unless in writing, signed by the Bank, and then only to the extent therein set forth."

By July, 1970, although Franklin had been pressing for repayment, Dopp still owed $351,000 in unpaid principal. On July 14 Dopp presented a plan whereby he would repay Franklin in full by August 15 out of the proceeds of a $2,500,000 advance he expected from a Swiss company. But, not untypical of the many promises he would make to Franklin, Dopp did not meet this self-imposed deadline. At this point, Franklin transferred collection responsibility from its commercial loan department to its euphemistically termed "salvage" department, and when Dopp made only a few small partial payments in the ensuing months,⁶ Franklin secured a default judgment against Dopp on December 16, 1970, for $369,447.61.

The very next day Dopp and Franklin entered into negotiations which ultimately resulted in a written stipulation, signed by both parties on January 20, 1971, providing that Dopp would have until February 26 to pay Franklin the reduced sum of $325,045.25 plus interest at the rate of 7½% from the date of judgment. If the stipulated amount was not repaid, the judgment was to become immediately enforceable. In return, Dopp executed as additional security second mortgages on two Pepsi-Cola bottling plants he owned in Michigan.⁷ But once again Dopp failed to meet his obligation and by May 14, 1971, he had made only sporadic payments totaling $20,000.

In late May, after G. Norman Widmark, the new Chairman of Butler, informed Franklin that Dopp's shares were no longer control stock, Franklin decided to sell the 51,500 shares. Bruce Sutherland, the Franklin vice-president who had been overseeing the Dopp account, began negotiating with John and Michael Galesi.⁸ The Galesis apparently were friends of Widmark and had made investments with him on previous occasions. On June 15, 1971, Franklin gave Dopp formal written notice that it intended to sell the shares at a private sale on or after June 25.

Just as he was spurred to action by the default judgment entered the previous December, Dopp again sought to buy time from Franklin. Accordingly, on June 28 he and Sutherland reached an oral agreement whereby Franklin would not sell the Butler shares if Dopp made a $20,000 payment in four days (July 2), delivered an additional 10,000 shares of Butler stock as collateral and made arrangements for the sale of all the Butler shares by July 21. Although Dopp paid the $20,000 (but not until July 26 instead of July 2), he never posted the additional collateral, nor did he make any arrangements for the sale of the 51,500 shares.⁹

The foregoing facts are virtually undisputed. The factual dispute with which we are concerned and which is the crux of this action grows out of an August, 1971, telephone call. After hearing from an obviously misinformed source that Franklin actually had sold the shares, Dopp immediately telephoned Sutherland, who assured him that this was not the case. Dopp claims, however, and so stated in his deposition, that Sutherland also gave him oral assurance that before Franklin sold the shares, it would give him the opportunity to produce a third person of his choice who would be ready to purchase on the same terms available to Franklin for the disposition of the stock, or, in the alternative, it would permit him to redeem the shares himself at the same price. He admits that Sutherland did not agree to any time period within which he would have to exercise this alleged right of first refusal, but says that he assumed "it would be a reasonable period of time, at least a few hours . . . ." Sutherland vehemently disputes any such agreement. Indeed, he testified in his deposition:

"Q. I don\'t understand. Nowhere in these entries in Franklin\'s Credit File is it stated that Mr. Dopp told you in the event you were going to sell the shares he would arrange for the purchase.

Now, just show me where it says that. A. It doesn\'t say that in here because I never agreed to anything like that."

In the meantime, negotiations between Franklin and the Galesis continued, culminating in a written option agreement dated September 21.¹⁰ One week later Franklin advised Dopp of this agreement, but did not disclose the names of the third parties. (Sutherland, on instructions from the Galesis, never had informed Dopp that he was negotiating with them.) Dopp instituted this action in the Southern District of New York on October 12, against Franklin, the Galesis, Widmark and Butler, primarily seeking rescission of the option agreement and an unspecified amount of damages. As his brief before this Court characterizes it, the amended complaint asserts essentially three claims: that Franklin's misrepresentation concerning his right of first refusal and its failure to disclose that it was negotiating with the Galesis violated § 10(b) of the Securities Exchange Act and Rule 10b-5; that the option agreement violated § 7 of the Securities Exchange Act and Regulation U thereunder which establishes margin requirements; and that Franklin, in entering into the option agreement, did not act in a "commercially reasonable" manner in violation of § 9-504 of the Uniform Commercial Code.¹¹

On October 18 Dopp moved for a preliminary injunction, alleging that he would be irreparably injured if the sale to the Galesis were consummated because he was involved in a proxy fight with Butler management and the share "could mean the difference between victory and defeat." Judge Brieant, although he did not hold an evidentiary hearing, found that "plaintiff shows reasonable probability of success" on his securities claim and that he would suffer irreparable injury because the block of Butler stock is "unique" and has "no ascertainable market value." Accordingly, he issued his preliminary injunction on November 19.¹²

I.

It is axiomatic that because a preliminary injunction is a drastic remedy, it will not be granted unless the plaintiff can make a clear showing of probable success. See, e. g., Intercontinental Container Transport Corp. v. New York Shipping Ass'n, 426 F.2d 884, 887 (2d Cir.1970); Checker Motors Corp. v. Chrysler Corp., 405 F.2d 319, 323 (2d Cir.), cert. denied, 394 U.S. 999, 89 S.Ct. 1595, 22 L.Ed.2d 777 (1969). On the record as we review it, Judge Brieant was not justified in concluding that Dopp made the requisite showing of probable success.¹³

Before...