Greenstein v. Paul
| Decision Date | 27 October 1967 |
| Docket Number | No. 66 Civ. 4306.,66 Civ. 4306. |
| Parties | Max GREENSTEIN, Plaintiff, v. Mildred P. PAUL, Harry Lebensfeld, Jack Koenig, Joseph A. Dancewicz, United Industrial Syndicate, Inc. and Sagamore Manufacturing Company, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Louis C. Fieland, New York City, for plaintiff.
Goldstein, Judd & Gurfein, New York City, for defendants Mildred P. Paul, Harry Lebensfeld, Jack Koenig and United Industrial Syndicate, Inc; Edward Brodsky, New York City, William M. Guttman, of counsel.
Plaintiff brings this action "individually and as a representative of all other stockholders and former stockholders of Sagamore similarly situated" to recover damages for alleged violation by defendants of Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j (b)) and Rule 10b-5 thereunder in the purchase by United Industrial Syndicate, Inc. of stock of Sagamore Manufacturing Company by means of allegedly false and misleading "solicitations" which concealed material facts. Defendants Paul, Lebensfeld, Koenig, and United Industrial Syndicate, Inc. move under Rule 12(b) (6) to dismiss for failure to state a claim and under Rule 56 for summary judgment. Although it has served no separate notice of motion, defendant Sagamore Manufacturing Company has filed an affidavit joining in the motion.
The complaint, fairly construed, does not allege that plaintiff sold any Sagamore stock during the time when the defendants committed the alleged wrongs. To remove any conceivable ambiguity in the complaint on this score, defendants have proved by affidavits, which are uncontradicted, that in fact plaintiff acquired his Sagamore stock prior to the acts complained of and has never parted with it. Hence, if it is essential to the maintenance of an action for damages under Section 10(b) and Rule 10b-5 that plaintiff be a seller of the stock, plaintiff may not maintain this action on his individual behalf. And if he has no standing to sue on his own account, he may not maintain a class action on behalf of those stockholders who did sell their stock, because plaintiff is not a member of the class. Bailey v. Patterson, 369 U.S. 31, 82 S.Ct. 549, 7 L.Ed.2d 512 (1962); Chashin v. Mencher, 255 F. Supp. 545 (S.D.N.Y.1965); Wittner v. Ghen, 9 Fed.Rules Serv.2d 10b.21, Case 2 (S.D.N.Y.1966).
The rule in this circuit has been that in order to maintain an action for damages under Section 10(b) by reason of defendants' deception, the plaintiff must have been a seller of the stock in question. Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952); O'Neill v. Maytag, 230 F.Supp. 235 (S.D.N.Y.1964), aff'd, 339 F.2d 764 (2d Cir. 1964). Although some doubt has been cast on this principle (see Entel v. Allen, 270 F.Supp. 60, 70 (S.D.N.Y. 1967)), the Court of Appeals has never overruled it. In recent decisions the question was expressly left open. See Vine v. Beneficial Finance Co., 374 F.2d 627, 636 (2d Cir. 1967); A. T. Brod & Co. v. Perlow, 375 F.2d 393, 397 n. 3 (2d Cir. 1967). Indeed the most recent opinion of the Court of Appeals on the subject can be read as indicating that the court has reaffirmed the doctrine, as far as actions for damages are concerned. Mutual Shares Corp. v. Genesco, Inc., 2d Cir. 1967, 384 F.2d 540.
Vine v. Beneficial Finance Co., supra, did not hold that plaintiff need not be a seller. Rather, the court held that on the facts of that case plaintiff was to be considered a seller within the meaning of Section 10(b). There a so-called short form merger had taken place between the corporation in which plaintiff owned stock and another corporation, and although plaintiff had not actually turned in his stock for the price offered him under the terms of the merger, the court said that he had no other alternative, that his rights had become "frozen," and that actual delivery of the stock certificate was thus "a needless formality." 374 F.2d at 634.
That decision does not control here, for in the present case the once-proposed short form merger of Sagamore into Syndicate was not consummated. Plaintiff still has his stock and is free to sell it to anyone who will buy it. The distinction between a...
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