Green v. Ancora-Citronelle Corp.

• Decision Date: 08 June 1978
• Docket Number: ANCORA-CITRONELLE,No. 76-1433,76-1433
• Citation: 577 F.2d 1380
• Parties: Harold GREEN and Ancora Corporation, Plaintiffs-Appellants, v.CORPORATION, a corporation, William P. Johnson, J. Edward Trainer and Touche Ross & Co., a partnership, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1380

577 F.2d 1380

Harold GREEN and Ancora Corporation, Plaintiffs-Appellants, v. ANCORA-CITRONELLE CORPORATION, a corporation, William P.

Johnson, J. Edward Trainer and Touche Ross & Co.,

a partnership, Defendants-Appellees.

No. 76-1433.

United States Court of Appeals, Ninth Circuit.

June 8, 1978.

Rehearing Denied July 11, 1978.

Samuel L. Holmes (argued), Angell, Adams & Holmes, San Francisco, Cal., for plaintiffs-appellants.

Robert K. Schiebelhut (argued), Patrick J. Mahoney (argued), San Francisco, Cal., for defendants-appellees.

Appeal from the United States District Court for the Northern District of California.

Before BROWNING and HUFSTEDLER, Circuit Judges, and BONSAL, ^* District Judge.

BONSAL, District Judge:

This is an appeal from an order and judgment of the district court for the Northern District of California (Orrick, J.) granting summary judgment in favor of defendants-appellees Ancora-Citronelle Corporation ("ACC"), Johnson and Trainer, vice-president and president respectively of ACC, and Touche Ross & Co. ("Touche"), ACC's accountant, and dismissing the complaint of plaintiffs-appellants Green and Ancora Corporation ("Ancora"). We affirm for the reasons stated below.

In June 1969 appellant Green brought about the formation of ACC by the consolidated and merger of four limited partnerships into ACC. All four of the limited partnerships had been established by Green for the purpose of oil exploration and drilling in certain areas of Alabama several years earlier. Green himself was president, director and sole shareholder of Ancora, which was the general partner in each of these partnerships. Upon the formation of ACC in 1969, shares of ACC stock were issued to the members of the limited partnerships, including Green and Ancora, in exchange for the assets of the partnerships. Green thereafter became president of ACC and managed the corporation up until August 1971 when he was ousted from his position as president of ACC as a result of a proxy fight led by appellees Johnson and Trainer.

In November 1971, shortly after Johnson and Trainer had assumed executive control of ACC, ACC brought suit in California Superior Court charging Green with various management and accounting frauds during his tenure as president of ACC dating back to the formation of ACC. The principal allegations of the complaint were that Green had manipulated the books of ACC, that he had illegally diverted assets of ACC and that predecessor partnerships to himself and Ancora, and that he had fraudulently overissued ACC stock to himself and Ancora. Green, in turn, filed a cross-complaint against Johnson and Trainer alleging that they had made false entries in ACC's books after taking over management of ACC which retroactively reversed prior entries made during Green's tenure as president in order to make it appear that he had defrauded ACC and that he and Ancora were substantially indebted to ACC. Both sides thereafter engaged in discovery with respect to these issues. Throughout this period of discovery, Green vigorously denied any wrongdoing and bitterly protested that the charges had been levelled against him by ACC and successor management of Johnson and Trainer in an effort to "get something on him" and to bring about his ruin. The litigation was vigorously pursued by both sides until June 1974, when approximately two and one-half years after commencement of the action and shortly before it was to proceed to trial, Green and Ancora entered into a written settlement with ACC. Pursuant to the terms of this agreement, Green and Ancora transferred certain property including approximately 200,000 shares of ACC stock back to ACC in settlement of the state court litigation.

In early July, 1974, prior to entry of judgment, Green and Ancora moved to rescind the settlement agreement on the grounds that it had been obtained by fraud, deceit and duress on the part of appellees Johnson and Trainer. Finding no support for this contention, the state court judge denied the motion, and on July 18, 1974 a judgment incorporating the settlement agreement was entered. In August 1974 Green and Ancora moved to vacate this judgment on the same grounds that they had previously asserted. This motion was likewise denied and no appeal was taken.

On September 29, 1975, Green and Ancora instituted this action in the district court for the Northern District of California charging appellees ACC, Johnson, Trainer and Touche with violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated thereunder. In invoking the jurisdiction of the federal courts, Green and Ancora alleged that appellees had fraudulently induced them into entering into the state court settlement and transferring their shares of ACC stock by representations in the course of the settlement discussions that were materially false and misleading in violation of section 10(b) and Rule 10b-5. Green and Ancora alleged that they had entered into the state court settlement on the basis of a 1973 audit performed by Touche in which Touche expressed the opinion that, subject to the collectibility of amounts involved in the state litigation, ACC's financial statements fairly presented the corporation's financial condition. Green and Ancora also alleged that they had relied on statements of Johnson and Trainer to the general effect that the Touche audit substantiated their contention that Green and Ancora had defrauded ACC. Green and Ancora further alleged that an audit which they undertook subsequent to the settlement disclosed that the entries made by Johnson and Trainer after Green's ouster were improper and that therefore the Touche audit and the statements made by Johnson and Trainer on the basis of that audit were materially false and fraudulent. In a pendent claim, Green and Ancora sought to have the district court set aside the state court judgment on the ground that it had been obtained by appellees' fraud.

On January 16, 1976, appellees moved for summary judgment dismissing Green and Ancora's complaint on the grounds: (1) that the facts alleged by Green and Ancora did not establish a claim that was actionable under section 10(b) and Rule 10b-5; (2) that the action was barred by the prior state court judgment and that there was no basis for setting aside that judgment; and (3) that the releases executed by Green and Ancora in connection with the settlement of the state court action barred this action in federal court. The district court granted appellees' motion for summary judgment on the ground that the facts alleged by Green and Ancora could not support a claim for relief under section 10(b) and Rule 10b-5. The court ruled that, in view of the circumstances leading to the settlement agreement, the transfer of shares by Ancora and Green to ACC did not constitute a "purchase or sale" of securities and that the alleged misrepresentations were immaterial as a matter of law. With respect to the latter issue of materiality, the court concluded that it would have been unreasonable for Green to have attached importance to appellees' statements inasmuch as these statements pertained to matters within the knowledge of Green who controlled the corporation during the period involved. The district court did not reach the remaining contentions raised by appellees.

Green and Ancora appeal from the order and judgment of the district court, asserting that the court below erred in concluding (1) that the transaction complained of did not constitute a "purchase or sale" and (2)...