Fuller v. Dilbert

• Decision Date: 07 August 1965
• Citation: 244 F. Supp. 196
• Parties: Stephen D. FULLER, Paul A. Fuller, Volney Righter, as Executor of the Last Will and Testament of Brewster Righter, deceased, and Martin Davis, Plaintiffs, v. Arthur DILBERT, Samuel Dilbert and Abraham Dilbert, Defendants. Abraham DILBERT, Defendant, v. Arthur DILBERT and Samuel Dilbert, Co-Defendants.
• Court: U.S. District Court — Southern District of New York

244 F. Supp. 196

Stephen D. FULLER, Paul A. Fuller, Volney Righter, as Executor of the Last Will and Testament of Brewster Righter, deceased, and Martin Davis, Plaintiffs, v. Arthur DILBERT, Samuel Dilbert and Abraham Dilbert, Defendants.

Abraham DILBERT, Defendant, v. Arthur DILBERT and Samuel Dilbert, Co-Defendants.

United States District Court S. D. New York.

August 7, 1965.

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Breed, Abbott & Morgan, New York City, for plaintiffs, Thomas A. Shaw, Jr., Walter R. Shepard, New York City, of counsel.

Schwartz, Nathanson & Frank, New York City, for defendants Arthur Dilbert and Samuel Dilbert, George H. Schwartz, Paul E. Gelbard, New York City, of counsel.

John R. Peddy, New York City, for defendant Abraham Dilbert.

WEINFELD, District Judge.

This litigation revolves about a contract for the sale of a block of unregistered stock of Dilbert's Quality Supermarkets, Inc., a corporation which had been engaged in the supermarket and food store business in the Metropolitan New York area. The litigants are (1) Arthur and Samuel Dilbert, the sellers of the stock; (2) Abraham Dilbert, their cousin, the purchaser of the stock; and (3) the partners of an investment and underwriting concern, S. D. Fuller & Co.,¹ who jointly and severally guaranteed the performance by Abraham Dilbert of the purchase contract.

Under the terms of the contract entered into on March 10, 1961, Abraham Dilbert agreed to purchase from his cousins, Arthur and Samuel, 164,540 shares of common stock, including the common stock to be obtained on conversion of preferred shares, at a price of $6 per share, for a total of $987,240. Upon execution of the contract $210,000 was paid for 35,000 shares, which were delivered on May 9, 1961. The balance of the shares as they came into the sellers' possession were to be deposited in escrow, and the purchaser was obligated to draw these down in five equal annual installments beginning on March 10, 1962, delivery to be made upon payment at the agreed price per share.

No registration statement was in effect as to the 164,540 shares, which respresented approximately twenty-seven per cent of the then outstanding stock. However, "Abraham Dilbert and his designees" agreed that the purchased shares were being acquired for investment so that the transaction would come within the exemption provision of Section 4(1) of the Securities Act of 1933.²

The Fullers, upon execution of the contract and as required by its terms, signed the following guaranty: "Performance of the foregoing agreement by Abraham Dilbert is hereby guaranteed." Simultaneously, the Fullers entered into a separate agreement (referred to as the designation agreement) with the purchaser under which (as permitted by the stock purchase agreement) they, the Fullers, purchased 8,500 shares of Abraham Dilbert's initial acquisition of 35,000 shares, for which they paid $51,000; in addition, they agreed to purchase fifty-five per cent of the balance of the shares that Abraham was to take down in installments.³

In March 1962 the sellers, upon the failure of the purchaser or the guarantors to take down and pay for the first installment, declared a default; in April 1962, by reason thereof, they claimed the entire purchase price and gave notice they intended to sue. But before the sellers instituted any action, the guarantors commenced this suit for a declaratory judgment that the contract for the sale of the stock was void and unenforceable on the grounds that the sale was not for investment, but was a public distribution in violation of Section 5 of the Securities Act of 1933,⁴ and that the sellers did not own all of the stock contracted to be sold, a violation of Section 16(c) of the Securities Exchange Act of 1934.⁵ The initial pleading asserted no charge of fraud or conspiracy on the part of Abraham, Arthur and Samuel Dilbert.

The role in which the litigants were eventually cast in consequence of successive amended pleadings has some significance. The purchaser, Abraham Dilbert, in answer to the guarantors' first amended complaint, cross-claimed against the sellers, Arthur and Samuel Dilbert, for rescission of the contract, asserting it had been induced by fraudulent representations and concealments on the part of the sellers as to the financial condition of the company. In response the sellers moved to dismiss the cross-claim and for summary judgment, contending that since Abraham was executive vice president of the company and chargeable with knowledge of its affairs and condition, the claim of fraud was sheer pretense. This motion was denied, as was a motion for summary judgment against the guarantors.⁶ Thereafter, the guarantors, in a second amended complaint, adopted the purchaser's allegations of fraud and sought to void the contract on this additional ground.⁷ The sellers then counter-claimed against the guarantors for breach of their guaranty and sought recovery of the balance due; they also sought recovery from the purchaser for his breach of the contract.

As the pretrial procedure moved forward, the Fullers served a fourth pleading (a third amended complaint) in which they charged, as they had not previously, that Abraham, the purchaser, had conspired with his cousins, the sellers, to defraud them, the guarantors. This fourth and final pleading by the plaintiffs in substance sets up two separate causes of action: (1) that the purchaser and sellers had conspired to induce them to execute the guaranty and designation agreements by means of fraudulent representations and concealments involving common law fraud and a failure to comply with the stricter requirements of fair dealing imposed by the Securities Exchange Act of 1934, and (2) that the purchase agreement and their guaranty of its performance are void and unenforceable as in violation of Section 5 of the Securities Act of 1933, Sections 16(c) (1) and 16(c) (2) of the Securities Exchange Act of 1934, and Section 664(7) of the New York Penal Law. The plaintiffs further, in defense to the sellers' counterclaim for the contract price, allege nonperformance by the sellers.

The issues were sharply contested in an extensive trial, during which almost 2,000 pages of testimony were taken and scores of exhibits running into hundreds of pages received in evidence. The principal litigants were witnesses upon the trial; another important witness was an attorney who had participated in the negotiations and the contract closing. Whether he represented the Fullers or Abraham Dilbert, the purchaser, or both, was a sharply controverted issue—one of some significance, since if the attorney acted for the Fuller interests, his knowledge of certain matters touching upon the fraud charges was attributable to them.

The determination of the fact issues has not been without its difficulties, principally because of the generally unsatisfactory nature of much of the testimony of the interested parties. The testimony of the guarantors with respect to a number of material matters abounded in self-contradictions and, in some respects, was in conflict with the testimony of one another. The purchaser, eventually charged by the guarantors as a conspirator together with the sellers, had himself, as already noted, sought to void the purchase agreement upon allegations of misrepresentation. Thus, to an extent, and at a time when the guarantors had leveled no fraud or conspiracy charges against him, his interests were in large measure allied with theirs — voiding of the contract would release both from their commitments. This identity of interest was abundantly manifested; it was revealed by ready and acquiescent answers to leading questions at once redounding to his as well as to the guarantors' advantage. Then, too, there were instances where the purchaser admitted the falsity of his testimony, both upon his pretrial deposition and at this trial. Finally, one of the sellers, with respect to one matter which the guarantors advance in seeking to void the agreement, had given false testimony in a bankruptcy proceeding and upon his pretrial deposition, which he acknowledged and had corrected prior to the trial.

Out of the welter of this type of testimony the Court has had to sift fact from fiction, truth from untruth. In the situation here presented, events, when viewed in proper perspective against the background of time, setting and circumstance, may be more revealing and shed greater light upon what actually transpired than what the witnesses say,⁸ or they may give support to a witness' testimony as credible or require its rejection as unworthy of belief. The ultimate test in passing upon the credibility of the witnesses after taking into account, among other matters, the inconsistencies whether inadvertent or deliberate, the contradictions, the admitted prior falsities, is, did the witness tell the truth before this Court at the current trial?⁹

Based upon the Court's trial notes, which include its contemporaneous appraisal of each witness, a word by word reading and study of the stenographic transcript of the trial, the demeanor of the witnesses, an evaluation of their credibility and the reasonable inferences to be drawn from established facts and surrounding circumstances, this Court concludes that the plaintiffs have failed to establish either common law fraud or other fraudulent conduct under the Securities Exchange Act or their claim that the sellers and the purchaser engaged in a conspiracy as charged.

To set matters in proper perspective, events preceding the signing of the contract must be considered.

Dilbert's was founded in 1914 by three brothers: Louis, the father of Arthur and Samuel, the sellers; Harry, the father of Abraham, the purchaser; and Charles, a third brother. The business was originally conducted as a partnership, but was incorporated in 1925. By 1957 the enterprise consisted of a retail chain of seventeen supermarkets and twenty-two...