Greater Continental Corporation v. Schechter

• Decision Date: 26 September 1969
• Docket Number: No. 69 Civ. 3761.,69 Civ. 3761.
• Citation: 304 F. Supp. 325
• Parties: GREATER CONTINENTAL CORPORATION, Plaintiff, v. Marvin SCHECHTER et al., Defendants.
• Court: U.S. District Court — Southern District of New York

304 F. Supp. 325

GREATER CONTINENTAL CORPORATION, Plaintiff, v. Marvin SCHECHTER et al., Defendants.

No. 69 Civ. 3761.

United States District Court S. D. New York.

September 26, 1969.

Kaye, Scholer, Fierman, Hays & Handler, New York City, for plaintiff; Jay G. Strum, Lawrence N. Weiss, New York City, of counsel.

Spencer & Tunstead, New York City, for Marvin Schechter.

OPINION

FRANKEL, District Judge.

Characterized briefly for the purposes immediately at hand, this is an action to rescind a partially executed contract under which plaintiff acquired from two of the individual defendants, Marvin Schechter and Hugo Spatenga, all of the stock of defendant Sea-Land Dredging Corp. Plaintiff has moved for various kinds of injunctive relief pendente lite. As will appear, some of the restraints thus sought are essentially undisputed, if not clearly needed. For the rest, the motion will be denied.¹

I.

The agreement plaintiff seeks to rescind was made on April 3, 1969. It provided that plaintiff Greater Continental Corporation ("GCC") would acquire the two-thirds of Sea-Land's stock held by Schechter and the one-third held by Spatenga in exchange, respectively, for 100,000 and 50,000 GCC shares. In addition, to pay off Sea-Land's indebtedness to its two shareholders, plaintiff agreed to pay Schechter $10,000 plus 5333 GCC shares and an amount comparably computed for Spatenga. There were standard provisions for "investment letters" from Schechter and Spatenga, with undertakings by plaintiff to comply with S.E.C. registration requirements at later times when these individuals wished to sell their GCC stock. Schechter's 100,000 shares were to be held in escrow for two years, and they are so held, by an agent who is counsel for plaintiff.

The stock-purchase agreement went on in familiar and lengthy detail for 25 legal-sized pages, followed by a number of pages of exhibits, covering with characteristically exquisite precision the varieties of large and small things likely to be discovered in painstakingly law-yered documents of this kind. To focus upon the items of interest at this juncture, it contained a warranty and representation by Schechter that there had been no materially adverse changes in Sea-Land's condition between December 31 and April 3, 1968, "except for operating losses not in excess of $10,000 in the aggregate." The primary contention of plaintiff in the lawsuit is that this warranty and representation (speaking under the contract as of the closing on April 14, 1969) was false in that there were actually operating losses of over $90,000 during the period described. In addition, plaintiff counts upon two other items of alleged deception:

(1) That Schechter failed to disclose that late in 1968, Sea-Land had become financially unable to obtain bonding necessary in order to secure new contracts in its dredging business.

(2) That Schechter "represented to GCC that he was experienced and expert in the management of Sea-Land's business and that he had been managing the business" whereas, "upon information and belief sic, this being the only sworn averment on this subject in the moving papers, Schechter was not experienced and expert in the management of Sea-Land's business, and the business had been managed by Spatenga during all or most of the period prior to GCC's agreement to purchase Sea-Land."

Returning briefly to the sales agreement in its possibly material aspects, there was a provision for its interpretation in accordance with New York law. And there was a sweeping and detailed integration provision confining the rights and obligations of the parties to the express terms of their lengthy document:

"(B) This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof. No representation, promise, inducement or statement of fact has been made by Greater Continental or the Stockholders which is not embodied in this Agreement or a written statement, certificate, schedule or other document delivered pursuant hereto or making express reference hereto, and neither Greater Continental nor Stockholders shall be bound or liable for any alleged representation, promise, inducement or statement of fact not so set forth."

The quoted language is of some interest, as will become clearer, in light of the facts that:

(1) there was no representation in the contract that Schechter, repeatedly dealt with as an attorney under

the terms of the agreement itself, professed special expertise in the dredging business; and (2) there was no reference to any employment agreement between plaintiff and Schechter.

Nevertheless, as part of the interconnected body of transactions accomplished as of the closing date, April 14, 1969, GCC and Schechter did make a separate employment contract. Under this agreement, Schechter became an employee of GCC, not of Sea-Land, for a two-year period at an annual salary of $25,000. His duties were to be prescribed by plaintiff's board and to include, "but not be limited to, management of Sea-Land * * *." He was to devote full time to this employment, but it was agreed that he would for six months be devoting "a portion of his time to the closing out of his existing legal cases." Plaintiff reserved the right to terminate the employment "at any time upon thirty (30) days' prior written notice, but only for cause." By a supplemental letter made part of the employment agreement, it was provided that "any disputes" arising under it would "be settled by arbitration under the rules then prevailing of the American Arbitration Association." This provision is involved in one of the disputed issues now before the court.

The employment agreement contained its own integration clause. It said:

"This instrument contains the entire agreement of the parties. It may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought."

II.

At the closing of the stock purchase agreement, Schechter received the 5333 GCC shares promised him as part payment for Sea-Land's indebtedness to him. He did not receive the $10,000 also promised for the remainder of such indebtedness, nor has he ever been paid that money. As has been noted, the 100,000 GCC shares due him under the agreement are in escrow. And he has received no salary under his contract as a GCC employee although he has performed services both for GCC and for Sea-Land in that capacity.

The explanation is clear from the papers. Within days or weeks of the closing, if not sooner, GCC became disenchanted with its deal and began to urge rescission. Schechter resisted. Late last month, he proceeded to seek enforcement of various rights, of which only those directly interesting here need be mentioned. On August 19, 1969, he filed a demand for arbitration under the employment agreement with GCC, seeking his unpaid salary and other claimed benefits. On or about August 28, he sued under the stock sale agreement in the Supreme Court, New York County, seeking the unpaid $10,000, his 100,000 GCC shares, and other relief. At about the same time, GCC brought the instant action, alleging the deceptions summarized earlier and urging these as grounds for rescission under the Securities Exchange Act of 1934, § 10(b), 15 U.S.C. § 78j(b), and S.E.C. Rule 10b-5 thereunder, 17 C.F.R. § 240-10b-5. A day or so later GCC brought another proceeding, this one in the Nassau County Supreme Court, seeking to stay the arbitration Schechter had demanded on the asserted ground that § 29(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc(a),² under the principles of Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), nullifies the arbitration clause in the separate employment agreement invoked by Schechter.

With the Nassau County proceeding still pending, as it is to this time, plaintiff brought the present motion for a preliminary injunction, again seeking, on the same grounds, to stay the arbitration. In addition, the motion here seeks temporary injunctive relief:

(1) against transfer by Schechter of any GCC stock he has received under the sales agreement;

(2) similarly barring transfer of shares in a company called Paul Samuels Associates, Inc., allegedly received by Schechter as a dividend on his GCC stock; and

(3) enjoining Schechter's further prosecution of his suit in the New York County Supreme Court.

As to the problem of stock transfers, the parties agreed upon oral argument that the equitable resolution would be to maintain the status quo by requiring essentially that the shares in question remain where they are. This means that the 100,000 GCC shares in escrow should stay there — a manageable requirement in light of the escrowee's presence as a party. Likewise, Schechter is to refrain from transferring or otherwise affecting the 5333 shares he has received. There is mystery in the papers and in the oral submissions about the Paul Samuel shares, but counsel have expressed confidence that their ingenuity will suffice to word a requirement that the status quo remain undisturbed in this respect too.

Unlike the readily agreed disposition of the motion as it concerns the foregoing stocks, the remaining prayers for restraints — against the arbitration and the New York County lawsuit — have been sharply contested. These aspects of the motion will be denied for reasons hereinafter developed.

III.

Insofar as plaintiff's likelihood of success has any bearing upon the attempt to enjoin the state action, see Progress Development Corp. v. Mitchell, 182 F.Supp. 681, 711 (N.D.Ill.1960), modified on other grounds, 286 F.2d 222 (7th Cir. 1961); Potter v. Carvel Stores of New York, Inc., 203 F.Supp. 462, 466 (D.Md.1962), aff'd, 314 F.2d 45 (4th Cir. 1963); Texaco, Inc. v. Fiumara, 248 F. Supp. 595, 596 (E.D.Pa.19...