Emmi v. First-Manufacturers Nat. Bk. of Lewiston & Auburn

• Citation: 336 F. Supp. 629
• Decision Date: 30 December 1971
• Docket Number: Civ. No. 12-72.
• Parties: Adrienne C. EMMI, on behalf of herself and on behalf of others similarly situated, Plaintiff, v. FIRST-MANUFACTURERS NATIONAL BANK OF LEWISTON AND AUBURN, et al., Defendants.
• Court: U.S. District Court — District of Maine

336 F. Supp. 629

Adrienne C. EMMI, on behalf of herself and on behalf of others similarly situated, Plaintiff, v. FIRST-MANUFACTURERS NATIONAL BANK OF LEWISTON AND AUBURN, et al., Defendants.

Civ. No. 12-72.

United States District Court, D. Maine, S. D.

December 30, 1971.

COPYRIGHT MATERIAL OMITTED

Jack H. Simmons, Robert A. Laskoff, Paul A. Cote, Lewiston, Me., for plaintiff.

Robert J. Hallisey, Francis H. Fox, Joseph F. Hunt III, Peter M. Saparoff, Joseph P. Rooney, Boston, Mass., Charles H. Abbott, Lewiston, Me., for defendants.

OPINION AND ORDER OF THE COURT

GIGNOUX, District Judge.

This action arises under the Securities Act of 1933 ("The Securities Act"), the Securities Act of 1934 ("The Exchange Act"), and the Maine Blue Sky Law. Plaintiff Adrienne C. Emmi is a citizen of the State of Maine, formerly a stockholder of defendant First-Manufacturers National Bank of Lewiston and Auburn ("First Bank"), and presently a stockholder of defendant Northeastern Bankshares Association ("The Association"). First Bank is a national bank with its principal place of business at Lewiston, Maine. The Association is a Maine bank holding company with its principal place of business at Lewiston. The individual defendants are all citizens of Maine and at times relevant to this litigation were all officers and/or directors of one, or both, of the corporate defendants. Presently before the Court are defendants' motions for summary judgment and defendants' motions to dismiss, or in the alternative to strike portions of, the Complaint.

I THE COMPLAINT

The Complaint was filed March 9, 1971, shortly after the complaint was filed in this Court in Dyer v. Eastern Trust and Banking Co., et al, 336 F.Supp. 890 ("Dyer"). It is substantially a "Chinese copy" of those portions of the Dyer complaint relating to the 1970 acquisition by the Association, in a stock-for-stock exchange, of shares of stock in First Bank, The Peoples National Bank of Farmington, Maine ("Peoples Bank") and Westbrook Trust Company of Westbrook, Maine ("Westbrook Trust"), ("The 1970 Acquisitions"). The transactions upon which the present Complaint is based are described in the opinion filed by the Court this date in Dyer; they will not again be set forth here. Plaintiff alleges that prior to the 1970 Acquisitions she was the owner of 507 shares of common stock of First Bank and that at the time of the 1970 Acquisitions she exchanged her First Bank shares for 1,212 shares of common stock of the Association in accordance with the exchange ratio set forth in the statutory prospectus ("The 1970 Prospectus") delivered to the stockholders of the banks to be acquired (in the ratio of 2.4 shares of the Association for 1 share of First Bank). Plaintiff purports to bring this action as a class action on behalf of all former shareholders of First Bank who exchanged their stock for Association stock in the 1970 Acquisitions.

The six remaining counts of the Complaint¹ are brought, respectively, under Section 11 of the Securities Act (15 U.S.C. § 77k) (Count I); Sections 12(2) and 17(a) of the Securities Act (15 U.S.C. §§ 77l(2) and 77q(a)) (Count II); Section 15 of the Securities Act (15 U.S.C. § 77o) (Count III); Section 10(b) of the Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. § 240.10b-5) promulgated thereunder by the Securities and Exchange Commission (Count IV); Section 14(e) of the Exchange Act (15 U.S.C. § 78n(e)) (Count V); and the Maine Blue Sky Law (32 M.R.S.A. § 881) (Count VI). All six counts are based upon the same alleged untruths and omissions in the 1970 Prospectus. The alleged untruths and omissions are: (1) the failure to disclose that the 1968 "merger" of Eastern Trust and Banking Company ("Eastern Trust") and the Association ("The 1968 Reorganization") was not a valid statutory merger under Maine law and that therefore the exchange of securities in connection therewith was not exempt from registration under the Securities Act; and (2) the failure to disclose that the figures on which were based the "exchange ratio" used in the 1970 Acquisitions were out of date and inaccurate, resulting in the overvaluation of certain First Bank assets and the apportionment of a substantially larger share of ownership to the former stockholders of First Bank.²

Under the First Count of the Complaint, plaintiff on behalf of the class seeks money damages in the amount of $4,062,500. Under the Second Count, plaintiff tenders her Association shares and on behalf of the class seeks the value of their former First Bank shares in the sum of $12,500,000. Under the Third, Fourth, Fifth and Sixth Counts, she seeks the relief sought under the First Count or, alternatively, the relief sought under the Second Count. With respect to so much of the Second Count as states a claim under Section 17(a) of the Securities Act, plaintiff also seeks punitive damages on behalf of the class in the amount of $1,000,000. Plaintiff further seeks her costs, interest, and expense of litigation, including reasonable attorneys' fees.

II THE MOTIONS FOR SUMMARY JUDGMENT

Defendants have moved for summary judgment dismissing the claims alleged in Paragraphs 17 and 18 of the First Count of the Complaint and those portions of the remaining Counts which incorporate by reference Paragraphs 17 and 18 of the First Count. Paragraphs 17 and 18 of the First Count are those which allege the failure of the 1970 Prospectus to disclose that the 1968 Reorganization was not a valid statutory merger under Maine law and that therefore the exchange of securities in connection therewith was not exempt from registration under the Securities Act. The sole basis of defendants' motions is that plaintiff may not in this proceeding show that the 1968 Reorganization was not a valid statutory merger under Maine law because of the Certificate of Merger issued on March 19, 1969 by the Maine Bank Commissioner. Defendants contend that this Certificate conclusively established the validity of the merger by reason of 9 M.R.S.A. § 1227. The same argument was presented by defendants and rejected by the Court in Dyer. For the reasons stated in the Dyer opinion, it must again be rejected here.

Defendants' motions for summary judgment are denied.

III THE MOTIONS TO DISMISS

Defendants' motions to dismiss raise questions with respect to each of the six remaining counts of the Complaint.³ These questions will be separately considered with respect to each count as to which they are asserted.

A. COUNT I.

Count I of the Complaint is brought under Section 11 of the Securities Act and is based upon alleged untruths and omissions in the 1970 Prospectus as contained in the Registration Statement filed with the Securities and Exchange Commission in connection with the 1970 Acquisitions. Defendants' motions seek dismissal only of Paragraphs 13, 14, 15 and 16 of this count. These are the paragraphs ("the Exchange Ratio Paragraphs") which allege the failure of the 1970 Prospectus to disclose that the figures on which were based the "exchange ratio" used in the 1970 Acquisitions were out of date and inaccurate, resulting in the overvaluation of certain First Bank assets and the apportionment of a substantially larger share of ownership to the former stockholders of First Bank. In other words, the essence of plaintiff's allegations in these paragraphs is that the assets of her bank were overvalued and that as a result she, together with the other First Bank shareholders, received too much in exchange for her First Bank shares.

Defendants assert that the Exchange Ratio Paragraphs fail to state a cause of action under Section 11 because on their face they show that plaintiff was benefited rather than harmed by the alleged omissions in the Prospectus. Section 11, which is set out in pertinent part in the margin,⁴ is, however, an "express liability" provision. Weber v. C. M. P. Corp., 242 F.Supp. 321, 325 (S.D.N.Y.1965). Subject to enumerated defenses, Section 11 imposes an almost absolute liability for material misstatements or omissions in a registration statement; neither reliance on the untruths or omissions⁵ nor causation of damage⁶ need be shown by plaintiff in order to establish a cause of action thereunder. 3 Loss, Securities Regulation 1721-29 (2d ed. 1961); Cohen, "Truth in Securities" Revisited, 79 Harv. L.Rev. 1354-55 (1966). The allegation of a material misstatement or omission in a registration statement is sufficient to state a prima facie case under Section 11.⁷E. g., Montague v. Electronic Corp. of America, 76 F.Supp. 933, 935 (S.D. N.Y.1948).

Defendants' motions to dismiss Paragraphs 13, 14, 15 and 16 of Count I of the Complaint are denied.

B. COUNT II.

Count II of the Complaint is brought under Sections 12(2) and 17(a) of the Securities Act and is based upon alleged untruths and omissions in the 1970 Prospectus.

1. The Section 17(a) Claim. With respect to so much of Count II as asserts a claim under Section 17(a) of the Securities Act, defendants, by these motions, assert two defenses: first, that there is no implied private damage remedy under Section 17(a); and second, that if an action does lie under Section 17(a), that portion of Count II which incorporates by reference the Exchange Ratio Paragraphs of Count I fails to state a claim under Section 17(a). In its consideration of the Section 17(a) claims in Dyer, the Court has held that there is no implied private damage remedy under Section 17(a). That conclusion is sufficient to dispose of the Section 17(a) claim in the present action. In addition, for the reasons stated by the Court in its discussion of Counts IV and V of the present complaint, the Court holds that, even if a private action would lie under Section 17(a), the Exchange Ratio Paragraphs fail to state a claim upon which relief may be granted thereunder.

Defendants' motions to dismiss the Section 17(a) claim in Count II of the Complaint are granted.

2. The Section 12(2) Claim. With...