Haberman v. Murchison, 68 Civ. 3791.

• Decision Date: 14 December 1971
• Docket Number: No. 68 Civ. 3791.,68 Civ. 3791.
• Citation: 335 F. Supp. 286
• Parties: Simon V. HABERMAN, Plaintiff, v. John D. MURCHISON et al., Defendants.
• Court: U.S. District Court — Southern District of New York

335 F. Supp. 286

Simon V. HABERMAN, Plaintiff, v. John D. MURCHISON et al., Defendants.

No. 68 Civ. 3791.

United States District Court, S. D. New York.

December 14, 1971.

Bennett Frankel, New York City, for plaintiff.

Debevoise, Plimpton, Lyons & Gates, New York City, for defendants John D. Murchison, Clint W. Murchison, Jr. and Murchison Brothers by J. Asa Rountree, Hugh Rowland, Jr., Bruce R. Kohler, New York City, of counsel.

Cahill, Gordon, Sonnett, Reindel & Ohl, New York City, for defendant Donald D. Harrington by Paul W. Williams, Raymond L. Falls, Jr., Joel C. Balsam, New York City, of counsel.

GURFEIN, District Judge.

SUPPLEMENTAL OPINION

A motion for reargument is made by the plaintiff under Rule 9(m) of the General Rules. The motion is granted and the briefs and letters submitted will be treated as the reargument.

Plaintiff moves, upon reargument, for summary judgment on two grounds: (1) that the recent decision of the Supreme Court in Supt. of Insurance v. Bankers Life, 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128, 1971, requires holding valid the federal claims previously dismissed by Judge Bryan and myself¹; and (2) that the Court misinterpreted the stipulation of the parties and failed to consider evidence before the SEC favorable to the plaintiff.

1. The Bankers Life case.

The original first cause of action herein charged a sale of "control" of the Alleghany Corporation by the defendants to Gamble-Skogmo (Gamble) under circumstances allegedly constituting fraud under Section 10(b) and Rule 10b-5 of the 1934 Act, as well as antecedent fraud in a proxy statement in violation of Sections 13(a), 14(a) and 16(a) of that Act. Judge Bryan dismissed the claim. He held that (1) the transaction complained of was not "in connection with the purchase or sale of any security by the corporation" under Birnbaum v. Newport Steel Corp., 193 F.2d 461, 463 (2 Cir. 1952) and Greenstein v. Paul, 400 F.2d 580 (2 Cir. 1968); and that (2) there was no allegation of loss to the corporation flowing directly from the purchase and sale under Hoover v. Allen, 241 F.Supp. 213 (S.D.N.Y.1965); Cohen v. Colvin, 266 F.Supp. 677 (S.D.N.Y.1967); Supt. of Ins. v. Bankers Life, 300 F.Supp. 1083 (S.D.N.Y.1969), aff'd, 430 F.2d 355 (2 Cir. 1970). The latter case has now been reversed.

In the cross-motions for summary judgment that came before me the plaintiff did not seek a reargument of Judge Bryan's decision on the non-existence of a federal claim but merely sought to sustain the first count under Maryland law. In fairness to the present position of the plaintiff with respect to the recent Bankers Life decision of the Supreme Court, however, I shall treat the motion as directed to Judge Bryan's original opinion and my own concurrence with it.

The Bankers Life decision does not affect the prior decisions of this Court that there is not a Section 10(b) case here. In the present case, the allegation is that the defendants sold stock in the Alleghany Corporation to a third party. Alleghany was not a party to the sale. In the Bankers Life case, while it is true that Bankers Life sold the shares in the Manhattan Casualty Company (Manhattan) to one Begole, the similarity to our case ends there. For the essence of the Section 10(b) fraud was the compelled sale by Manhattan of five million dollars worth of U. S. Treasury Bonds for which it did not receive the proceeds and which were converted to the use of Begole. The Supreme Court held that Manhattan was a seller of the Treasury Bonds—which it surely was— and hence could be defrauded "in connection with the purchase or sale of a security." Mr. Justice Douglas wrote: "The crux of the present case is that Manhattan suffered an injury as a result of deceptive practices touching its sale of securities as an investor" (Slip. Op. p. 6). If the "crux of the case" was injury to Manhattan there is no allegation, in this derivative suit, of comparable injury to Alleghany, the real plaintiff.

To make it clear that all the Court was deciding was the Section 10(b) claim relating to Manhattan's sale of the Treasury Bonds and nothing else, Mr. Justice Douglas wrote in footnote 10:

"Petitioner's complaint bases his single claim for recovery alternatively on three different transactions alleged to confer jurisdiction under § 10(b); Manhattan's sale of the Treasury bonds; the sale of Manhattan stock by Banker's Life to Bourne and Begole; and the transactions involving the certificates of deposit. We only hold that the alleged fraud is cognizable under § 10(b) and Rule 10b-5 in the bond sale and we express no opinion as to Manhattan's standing under § 10(b) and Rule 10b-5 on other phases of the complaint. See Kellogg, The Inability to Obtain Analytical Precision Where Standing to Sue under Rule 10b-5 is Involved, 20 Buff.L.Rev. 93 (1970); Lowenfels, The Demise of the Birnbaum Doctrine: A New Era For Rule 10b-5, 54 Va.L.Rev. 268 (1968)."

Accordingly, Birnbaum is left where it was. As to the earlier requirement of direct loss to the corporation, as exemplified in Hoover v. Allen, supra, the Supreme Court may have made the requirement less rigid. Indirect loss may now be enough to found federal jurisdiction under Section 10(b) but loss there must be to the plaintiff corporation in any event. Here there is no allegation that Alleghany itself lost any money.²

Rosenfeld v. Black involved neither the question of who is a purchaser or seller under the 1934 Act nor the question of direct loss to one who was not a seller. It has no special application to the facts of this case.

2. The stipulation.

The stipulation, freely entered into by the parties, came about in the following way.³ At the oral argument of the cross-motions for summary judgment it was suggested that the Court could read the testimony taken before the SEC in the Investors Mutual proceeding. When I came to read the papers I wanted to make certain that the parties were agreed upon what the stipulation embraced. I, accordingly, asked for a written stipulation, in no way suggesting what it should be. There resulted a signed stipulation which is the first paragraph set out in the margin. Not being certain of its meaning, I asked the parties to clarify it in whatever way they wished. The second paragraph was then tendered to the Court.

The plaintiff now contends that the Court's finding is not based "on the record as a whole" and is an inequitable application of the "credibility" stipulation. In view of the circumstance that the plaintiff has now sharpened his brief, and, by his own statement, included references he had previously failed to call to the attention of the Court, I have reviewed again all the testimony and documents that were before the SEC. The plaintiff suggests that a proper reading of the stipulation means that the Court should reach its conclusion by finding the preponderance of credible evidence.

Whether there was a premium paid for the sale of "control" is the ultimate fact question. There is direct testimony by Gamble that he knew the Murchison shares he had bought did not represent control; he also denied buying control. Moreover, the SEC and Judge Friendly⁴ found that "the put-call agreement does not grant Gamble the power to vote the additional Murchisons' stock." Against this, the plaintiff urges that a statement by Callahan, Gamble's attorney, to Kirby & Ireland, his attorney, on August 1, 1962, that Gamble had made a deal with the Murchison brothers to acquire approximately 3½ million shares of Alleghany common stock and their entire holdings in IDS, and statements by Gamble to Kirby and Ireland that he had acquired control, preponderate over Gamble's contrary testimony. The issue of fact thus posed is very much like that posed in the SEC proceeding which was reviewed in Phillips v. SEC, 388 F.2d 964 (2 Cir. 1968). There Judge Friendly noted, as I do, independently, that "the plaintiff relies also on various statements by Gamble and his lawyer that Gamble had acquired control and the Murchisons were `out', and upon the language of several documents that Phillips plaintiff there believed to allow but one construction" (388 F.2d at 969). Judge Friendly commented that "the oral statements as to control when taken in context are not inconsistent with the terms of the written agreement—Gamble had the power to get the additional votes whenever he wanted and was willing to pay; and the documents upon which Phillips relies do not unambiguously point in his direction" (id. at p. 970).⁵ Judge Friendly went on to say: ". . . Gamble's lack of power to obtain a majority of the board is nonetheless significant unless the directors were acting as dummies for him, and the Commission was justified in finding they were not. Four of the six Murchison directors were associated in other businesses with the two brothers, who were themselves directors, and there is substantial evidence to support the Commission's finding that a majority of the Board remained responsive to the Murchisons rather than to Gamble. Though Gamble was elected President on December 13, the chief operating executive continued to report to John D. Murchison" (id. at p. 971).⁶

The ultimate issue before the Court of Appeals was whether control of Alleghany had been transferred to Gamble so as to create an assignment of the investment advisory contract of IDS, concededly a "controlled subsidiary of Alleghany." Here the issue is whether the same "control" of Alleghany passed to the same third party, Gamble, so that a "premium" paid for such control is recoverable by Alleghany.

"Control" of an investment company is defined by the statute. The Investment Company Act of 1940 (15 U.S.C. § 80a-2(a) (9)) provides that "`control' means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position within such company." The section provides further that ownership of more than 25...