Gordon v. Burr

Decision Date20 November 1974
Docket NumberNos. 179,D,310 and 311,s. 179
Citation506 F.2d 1080
PartiesFed. Sec. L. Rep. P 94,874 Irving GORDON, Plaintiff-Appellant, v. Robert L. BURR and Elpac, Inc., Defendants-Appellees, and Arnold Lord and Philips, Appel & Walden, Inc. (sued herein as Philips, Appel & Walden), Defendants-Appellees- Appellants. ockets 74-1749, 74-1865 and 74-1840.
CourtU.S. Court of Appeals — Second Circuit

John C. Klotz, New York City, (Leonard Loewinthan, New York City, of counsel), for plaintiff-appellant Gordon.

Michael C. Devine, New York City, (Butowsky, Schwenke & Devine, New York City), for defendant-appellee, cross-appellant Lord.

Steven H. Lipsitz, New York City, (Bressler, Meislin, Tauber & Lipsitz, Neil M. Berson, New York City, of counsel), for defendant-appellee, cross-appellant Philips, Appel & Walden, Inc.

Harry Balterman, New York City, for defendant-appellee Elpac, Inc.

Before KAUFMAN, Chief Judge, and SMITH and TIMBERS, Circuit Judges.

J. JOSEPH SMITH, Circuit Judge.

Irving Gordon, a purchaser of securities issued by Elpac, Inc., sued for rescission of his purchase and restitution of his $45,000 payment against: Robert L. Burr, as seller of the shares; Arnold Lord, as the salesman; Philips, Appel & Walden, Inc. (P.A.W.), as Lord's brokerage firm; and Elpac, Inc., as the issuer. After a non-jury trial, Judge Arnold Bauman of the Southern District of New York, in an opinion reported at 366 F.Supp. 156 (1973), accepted Gordon's claims that Burr and Lord had violated 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), 1 by misrepresenting material facts in the transaction with Gordon and that P.A.W. had violated 20(a) of the Act, 15 U.S.C. 78t(a), 2 as a 'controlling person' of a 10(b) violator, Lord. The court rejected Gordon's attempt to implicate Elpac in the fraud as a controlling person of Burr, Elpac's president during most of the negotiations preceding Gordon's purchase and a director alone for the remainder of the period relating to the transaction. Judge Bauman granted the requested rescission relief against Burr but held that as a matter of law such relief was inapplicable to persons not in privity of contract with the defrauded purchaser. Thus, although he went on to find that Lord and P.A.W. had violated the securities laws, Judge Bauman deemed them immune from a rescission remedy. He held that damages, if proven, would lie against Lord and P.A.W., but that Gordon had made no effort to establish damages, despite the indication in the complaint (later orally disavowed) that he would and the court's invitation at trial to do so. In light of this conscious by-passing of a damages theory at trial, the court then rejected Gordon's post-trial motions under Fed.R.Civ.P. 59(a), 60(b), to amend the judgment to reflect Lord's and P.A.W.'s liability to Gordon in damages or, in the alternative, to hold a new trial limited to the issue of damages.

On appeal, Gordon contests the district court's understanding of rescission as a remedy available only against the fraudulent seller. Alternatively, he renews his request for an opportunity to prove damages against those who fraudulently induced his purchase. In addition, by challenging the court's conclusion that Elpac was not guilty of securities fraud, Gordon seeks to enlarge the group from which he might recover under either a rescission or damages theory. Burr does not appeal from the judgment against him; Elpac defends the finding in its favor; and Lord and P.A.W. cross-appeal from the adjudication of their violations, which would become relevant in the event that this court either accepts the appellant's characterization of the scope of rescission relief or orders a new trial on damages.

For the reasons detailed below, we disagree with the district court's view of the remedy of rescission and find it applicable against persons not in privity with the defrauded purchaser but who are party to the fraud. Because we also differ with the district court as to the liability of P.A.W., this reversal on the issue of rescission adds only Lord to those from whom Gordon may seek restitution of his purchase price. In all other respects, we affirm.

I. THE FACTS

Gordon became interested in purchasing Elpac stock as a result of a fortuitous encounter in June, 1968, with Howard Mann, an old acquaintance who had recently bought 5,000 shares of Elpac. Both Mann and his companion at the time, Lord, spoke highly to Gordon of Elpac stock. Shortly thereafter, Gordon received a telephone call from Lord inviting him to a meeting of prospective purchasers of a new Elpac offering. Gordon attended the select gathering, which included two brokers from P.A.W. in addition to Lord; all present, except Lord, were strangers to Gordon. At the meeting, Burr, president of Elpac at the time, offered to sell 20,000 shares of his holdings in Elpac. He asserted, however, that he would sell no shares to the group unless they agreed to purchase all 20,000. By reference to subsequent events, the district court found that this statement constituted a material misrepresentation in violation of 10(b) of the 1934 Act. 366 F.Supp. at 164.

The group departed without any commitments made. Within two weeks, however, Lord informed Gordon that the other offerees had already completed documents to expedite their purchase and thus that the ostensibly requisite block purchase awaited only Gordon's completion of these documents for its speedy realization. This statement, belied by later developments, became a basis for Lord's 10(b) liability. 366 F.Supp. at 164.

Approximately one month after Gordon complied with this request, Burr pressed completion of the transaction. On August 20, he offered Gordon by telegram 4,500 shares at $10 per share. After a brief delay, Gordon arranged for the funds to be wired to Burr. On the 22nd, Gordon met with Lord and Burr, who both explained that, despite delays in the arrival of documents approving the sale as well as sundry other apparent irregularities, there were no problems with either the Burr offering or Elpac's business health in general. They specifically reassured Gordon that the other offerees had already made payment for their shares-- a material misrepresentation, in the court's view. 366 F.Supp. at 164.

Subsequently, Gordon fruitlessly sought to locate Lord in order to inquire about the whereabouts of the documents of approval and, now, his stock certificates as well. When he telephoned and visited P.A.W.'s offices in search of Lord, the firm's employees indicated only that Lord was not in-- not, as was in fact the case, that Lord had left the firm in late 1968. Finally, Gordon managed to reach Lord, who told him that the certificates were at P.A.W. On this second trip to the firm's offices, Gordon did not find his certificates. He did meet, however, one of the offerees present at the June, 1968, meeting, and the latter informed Gordon that neither he nor any of the others who attended the meeting had purchased stock from Burr. The certificates did arrive shortly after, but Gordon's attention had turned to procuring a refund of the $45,000 which he had invested in the stock-- already a losing venture. Unable to procure the refund by persuasion alone, Gordon brought the instant suit for rescission based on various alleged misrepresentations made to him by Burr and Lord of facts material to his decision to purchase the stock. The court found 'at least one determinative misstatement' by each, 366 F.Supp. at 164, but as indicated above, held that Lord's violation of the 1934 Act did not give rise to relief against him or P.A.W., which he held qualified as a 'controlling person' within 20(a) of the Act.

II. RESCISSION AGAINST PERSONS NOT IN PRIVITY

Although Judge Bauman concluded that Lord and P.A.W. had violated 10(b) and 20(a) of the 1934 Act respectively, he found them to be outside the scope of an action for rescission. The court regarded rescission as a remedy available only against the tortfeasor who is party to the contract with the victim of the fraud; under this view, therefore, rescission relief would apply only to Burr, the seller. Where an action for rescission is based on a contract theory-- mistake, or breach of contract-- this circumscription of the class from whom restitution may be sought is undoubtedly correct. See generally, 3 A. Corbin, Contracts 613 (1960); 5 id. 1104. But where such a suit is predicated instead on fraud, the authorities do not adhere to a privity theory with the uniformity which the district court-- as one infers from its essentially parenthetical disposition of the issue 3 -- apparently assumed. See cases cited infra. As indicated below, we believe that the district court took too narrow a view of its powers as a court of equity and erred in placing a violator of 10(b) or 20(a) beyond the reach of a rescission remedy. Because we resolve this issue in the appellant's favor, we need not review his alternative claim that the court abused its discretion in not granting his post-trial motions regarding a damages award.

The majority view regarding the availability of rescission against parties not in privity with the defrauded person favors a broad conception of the scope of rescission relief where the theory relied upon is fraud. Thus, the New York courts have long held rescission applicable against a defrauder not in privity of contract with the victim of the fraud. See, Keskal v. Modrakowski, 249 N.Y. 406, 164 N.E. 333 (1928); Kaufman v. Jaffee, 244 App.Div. 344, 279 N.Y.S. 392 (1st Dept. 1935). 4 Iowa's high court was emphatic to similar effect:

Of course, if the principal makes restoration, there is an end. But if he does not restore, why should not the agent be made to return money that would never have reached the principal if the agent had not, by fraud, induced the one he dealt with to part with the money?

Peterson v. McManus, 187 Iowa 522, 546, 172 N.W. 460, 469 (19...

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