Gannett Co., Inc. v. Register Pub. Co.

• Citation: 428 F. Supp. 818
• Decision Date: 07 February 1977
• Docket Number: Civ. No. B-74-123.
• Court: U.S. District Court — District of Connecticut
• Parties: GANNETT CO., INC. v. The REGISTER PUBLISHING COMPANY.

428 F. Supp. 818

GANNETT CO., INC. v. The REGISTER PUBLISHING COMPANY.

Civ. No. B-74-123.

United States District Court, D. Connecticut.

February 7, 1977.

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COPYRIGHT MATERIAL OMITTED

John S. McGeeney, Cummings & Lockwood, Stamford, Conn., for plaintiff.

Curtiss K. Thompson, Thompson, Weir & Barclay, New Haven, Conn., for defendant.

RULING ON AVAILABILITY OF RESCISSION

NEWMAN, District Judge.

On October 20, 1976, the Hartford Times ceased publication. Its obituary notice stated that the paper had been "strangled by litigation." The controversy has not ended with its demise. The issue now pending concerns whether Gannett Co., Inc. ("Gannett") or The Register Publishing Company ("the Register") owns what remains of the paper. In lawyer's language, the question is whether the Register is entitled to rescind the contract by which it agreed to purchase from Gannett more than 99% of the shares of The Hartford Times, Inc.

I. INTRODUCTION

Prior to September 30, 1973, and for many years before that date, the Hartford Times had been owned and operated¹ by Gannett Co., Inc., a major publisher of newspapers in many cities across the country. After negotiations culminating in a closing on October 10, 1973, Gannett entered into a Purchase Agreement for the sale of the Times to The Register Publishing Company, which publishes two newspapers in New Haven, Connecticut. The Purchase Agreement provided that Gannett would sell its shares of the common stock of The Hartford Times, Inc. together with all outstanding stock of Community Offset, Inc. to the Register for an aggregate purchase price of $7,000,000, with appropriate adjustments in the purchase price to be made based on the difference between current assets and liabilities as reflected on the consolidated balance sheet to be prepared for the Times.

Shortly after the closing the Register became aware of discrepancies in the circulation statistics and financial statements of the Times as provided by Gannett. It learned of overvaluation of assets and of a series of devices that had been used for several years to conceal the reporting of inflated circulation figures. Consequently the Register decided not to pay Gannett the amount due under the net current asset adjustment provisions of the Purchase Agreement. Audits conducted over the next several weeks confirmed the Register's suspicions that the information supplied to it by Gannett prior to the execution of the Purchase Agreement had been false and misleading in many respects.

Settlement negotiations began in December of 1973 and continued for some months with a view toward a resolution of the dispute between the Register and Gannett short of litigation. When these efforts fell through, Gannett filed this federal court action against the Register on April 15, 1974, for failure to pay the amount due under the net current asset adjustment provision. On June 12, 1974, the Register filed its counterclaim, alleging breach of contract, common law fraud, and securities law violations. In its counterclaim the Register sought compensatory and exemplary damages, or in the alternative, rescission of the Purchase Agreement and restitution of all benefits conferred by it on Gannett.

The present issue concerns the affirmative defenses Gannett has raised to the claim for rescission. Gannett has admitted for the limited purpose of obtaining a ruling on its affirmative defenses that:

On October 10, 1973 facts and circumstances existed which both under the common law and under the provisions of the Securities Exchange Act of 1934 and S.E.C. Rule 10b-5 entitled The Register Publishing Company to rescind the Purchase Agreement between the parties dated October 10, 1973.

In effect, Gannett has demurred to the counterclaim and seeks an adjudication of its defenses to the rescission claim. The essence of the affirmative defenses is that regardless of the existence or extent of frauds rendering the contract voidable at the option of the Register, the Register's conduct since October 10, 1973, and the changes it has made in the operation of the Times bar the Register from seeking rescission. The Court held a severed trial on the affirmative defenses to rescission, and received extensive evidence on the disputed factual issues.² The parties have thoroughly briefed the legal issues bearing on the sufficiency of the affirmative defenses and the availability of rescission. After full and careful consideration, it is the conclusion of the Court that rescission is unavailable.

Prior to discussion of the controlling legal standards and the application of the facts to them, a pending motion should be considered. On May 21, 1976, almost two years after the filing of the counterclaim, the Register moved to amend its counterclaim to add claims under §§ 12(2) and 17 of the Securities Act of 1933, 15 U.S.C.A. §§ 77l(2) and 77q, and the Connecticut Securities Act, Conn.Gen.Stat. §§ 36-338 and 36-346. The original counterclaim had pleaded only breach of contract, common law fraud, and violation of § 10b of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission. Gannett has vigorously resisted the motion to amend on the grounds that the amendment would enlarge the Register's substantive rights to Gannett's prejudice at a time when the right to rescission granted by these statutes would ordinarily have terminated by virtue of the statute of limitations, and that the amendment would prejudicially inject vast new issues into the case and result in a waste of the efforts to date to narrow the trial issues.

For reasons that will become apparent after consideration of the causes of action the Register seeks to plead by this amended counterclaim, Gannett's fears are unwarranted. The defenses Gannett seeks to prove to prevent the Register from obtaining rescission are available under the new statutory sections as well. Thus the argument of prejudice evaporates. Further, the essential elements of the Register's cause of action under the new claims have all been in the case from the beginning. S.E.C. Rule 10b-5, pleaded in the original counterclaim, makes it unlawful in connection with the sale of any security

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person . . .

The wording of § 17 of the 1933 Act and § 36-338(a) of the Connecticut Act is substantially similar, and § 12(2) of the 1933 Act creates civil liability where a prospectus or oral communication in connection with the sale of a security "includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading." Clearly the allegations of the original counterclaim, which repeatedly refer to material falsifications and misleading statements and omissions, set forth a state of facts that can support the new causes of action as well.³ No new transaction is involved, and no new discovery is necessary. Further, though Gannett argues that the amendment lacks the allegations necessary to supply jurisdiction under either the 1933 Act or the Connecticut Act, these jurisdictional prerequisites are implicit from a fair reading of the original counterclaim taken as a whole.⁴ Accordingly, the motion to amend is granted.⁵

II. LEGAL STANDARDS

A number of legal questions bear on the availability of rescission. These questions are analyzed in this Part prior to a full discussion of the facts in order to illuminate the significance of the facts adduced. The sections in this Part deal with the legal claims in turn, beginning with the breach of contract and common law fraud causes of action and proceeding to the causes of action derived from the federal and state securities regulation statutes. Then Part III will apply the legal principles to the facts as they have been developed at trial.

A. Breach of Contract and Common Law Fraud Claims

Since jurisdiction over the common law contract and fraud claims is based on diversity of citizenship, this Court must apply to those claims the choice of law rules of the forum state, Connecticut. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Connecticut law will give effect to a goodfaith stipulation of the parties to a contract selecting the substantive law to govern the interpretation and enforcement of their agreement. Pollak v. Danbury Mfg. Co., 103 Conn. 553, 131 A. 426 (1925); Fairfield Lease Corp. v. Pratt, 6 Conn.Cir. 537, 278 A.2d 154 (1971); Vending Credit Corp. v. Trudy Toys Co., 5 Conn.Cir. 629, 260 A.2d 135 (1969). The parties made such a stipulation in § 15(c) of the Purchase Agreement, which provides that "this Agreement shall be construed and governed by the Laws of the State of New York." By virtue of this provision, the substantive law of the State of New York governs the contract claims.⁶

New York law, like the law of most states, gives an injured party the option to rescind a contract induced by fraud. But the right does not persist indefinitely. New York law is very clear that the right to rescind for fraud must be exercised within a reasonable time after the injured party learns of the wrong.⁷ If the injured party neglects to notify the other party promptly of his intention to rescind, or if he accepts benefits under the contract and thereby affirms it, he loses his right to rescind. New York Tel. Co. v. Jamestown Tel. Corp., 282 N.Y. 365, 26 N.E.2d 295 (1940); Richard v. Credit Suisse, 242 N.Y. 346, 152 N.E. 110 (1926); Gravenhorst v. Zimmerman, 236 N.Y. 22, 139 N.E. 766...