Hoover v. Allen

• Decision Date: 17 June 1965
• Citation: 241 F. Supp. 213
• Parties: Loring R. HOOVER, Somers H. Smith, G. A. Buder, Jr., Frances Lamer, Clare F. Slutzkin, Howard V. Scotland, Howard V. Scotland, Trustee for Howard V. Scotland, Jr., U.D.T. January 1, 1955, M. Jack Breitbart and Mrs. Dorothy Bliss Breitbart, Plaintiffs, v. George E. ALLEN, Willard W. Keith, Hal A. Kroeger, Samuel H. Moerman, James H. Sharp, M. J. Frechie, H. J. Coyle, C. Russell Feldman, Daniel K. Ludwig, National Bulk Carriers, Inc., American Tankers Corp. of Delaware, William K. Warren, the William K. Warren Foundation and American-Hawaiian Steamship Company, Defendants.
• Court: U.S. District Court — Southern District of New York

241 F. Supp. 213

Loring R. HOOVER, Somers H. Smith, G. A. Buder, Jr., Frances Lamer, Clare F. Slutzkin, Howard V. Scotland, Howard V. Scotland, Trustee for Howard V. Scotland, Jr., U.D.T. January 1, 1955, M. Jack Breitbart and Mrs. Dorothy Bliss Breitbart, Plaintiffs, v. George E. ALLEN, Willard W. Keith, Hal A. Kroeger, Samuel H. Moerman, James H. Sharp, M. J. Frechie, H. J. Coyle, C. Russell Feldman, Daniel K. Ludwig, National Bulk Carriers, Inc., American Tankers Corp. of Delaware, William K. Warren, the William K. Warren Foundation and American-Hawaiian Steamship Company, Defendants.

United States District Court S. D. New York.

April 22, 1965.

Motion for Reargument Denied June 17, 1965.

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Loring R. Hoover, New York City, for plaintiffs.

Hughes, Hubbard, Blair & Reed, New York City, for defendants Willard W. Keith, Samuel H. Moerman, James H. Sharp and Daniel K. Ludwig, Otis Pratt Pearsall and Amalya L. Kearse, New York City, of counsel.

Hill, Betts, Yamaoka, Freehill & Longcope, New York City, for defendant American-Hawaiian Steamship Co., Jay H. Schafrann, New York City, of counsel.

Robert W. Ginnane, Gen. Counsel, Interstate Commerce Commission, Washington, D. C., Clarence William Vandegrift, Washington, D. C., of counsel, amicus curiae.

Philip A. Loomis, Jr., Gen. Counsel, Walter P. North, Assoc. Gen. Counsel, Securities and Exchange Commission, Washington, D. C., Meyer Eisenberg, Sp. Counsel and Allan S. Mostoff, Atty., Washington, D. C., amicus curiae.

HERLANDS, District Judge.

Defendants Keith, Moerman, Sharp, Ludwig and the American-Hawaiian Steamship Company (hereinafter sometimes referred to as the Company), a New Jersey corporation, have moved, pursuant to Rules 56 and 43(e) of the Federal Rules of Civil Procedure, for summary judgment.

This is an action brought by stockholders of the Company both derivatively, in the right of the Company, and representatively, in behalf of themselves and other stockholders similarly situated.

The voluminous Final Amended Supplemental Complaint (hereinafter referred to as the Complaint) was originally challenged by defendants in a motion to dismiss, under Rule 12(b) (1), (6) of the Federal Rules of Civil Procedure, for lack of jurisdiction over the subject matter and for failure to state a claim upon which relief can be granted.

In ruling on that motion, this court, in an unreported oral decision rendered on November 23, 1962 (hereinafter referred to as the Prior Decision), dismissed a number of claims contained in the Complaint, but upheld certain claims as pleaded in the first four causes of action based upon alleged violations of sections 14(a) and 18(a) of the Securities Exchange Act of 1934, 48 Stat. 895, 897 (1934), 15 U.S.C. §§ 78n(a), 78r(a) (1958) (hereinafter the 1934 Act), and sections 7(a) (2), 7(a) (4), 20(a), 34(b), and 36 of the Investment Company Act of 1940, 54 Stat. 802, 822, 840, 841 (1940), 15 U.S. C. §§ 80a-7(a) (2), 80a-7(a) (4), 80a-20(a), 80a-33(b), 80a-35 (1958) (hereinafter the 1940 Act).

The relief sought in the first four causes of action is dissolution of the Company, partial liquidation of the Company, an accounting to the Company for assets utilized solely for the benefit of defendants, and an accounting to the Company for the losses sustained by the Company as a result of its failure to register with the Securities and Exchange Commission (SEC) as an investment company, as a result of its failure to liquidate in 1955, and as a result of defendants' waste of the Company's assets.

The present motion for summary judgment is addressed to all of the claims enumerated above except those based on section 36 of the 1940 Act.

Defendants make this motion on affidavits pursuant to Rule 56(e) of the Federal Rules of Civil Procedure on the ground that there is no genuine issue as to any material fact and that they are entitled to judgment as a matter of law.

It is plaintiffs' contention that, as to certain claims, there are genuine issues of fact which would prevent the court from granting defendants' motion. This contention will be considered, where relevant, in the discussion of each of plaintiffs' claims as to which defendants have moved for summary judgment.

Federal jurisdiction is based on 28 U.S.C. § 1331, as well as section 27 of the 1934 Act, 48 Stat. 902, (1934), 15 U.S.C. § 78aa (1958), and section 44 of the 1940 Act, 54 Stat. 844 (1940), 15 U.S.C. § 80a-43.

I.

CLAIMS BASED ON ALLEGED VIOLATIONS OF SECTION 18(a) OF THE 1934 ACT.

The Prior Decision held that the following allegations stated a claim under section 18(a) of the 1934 Act sufficient to withstand defendants' motion to dismiss under Rule 12(b) (1), (6):

1. March 25, 1955 — Defendants caused the Company to issue an annual report to stockholders which omitted material facts relating to changes in the Company's board of directors and which contained misleading financial statements. Complaint, par. 42; Prior Decision, 18 (page citations to the Prior Decision are to the official reporter's transcript).

2. 1955-1958 — Defendants caused the Company to fail to report to stockholders or to the Securities and Exchange Commission a contingent asset worth about $1,900,000. Complaint, par. 7(d); Prior Decision, 18.

3. 1954-1959 — Defendants caused the Company to give false financial statements to its stockholders and the Government. Complaint, par. 8; Prior Decision, 18.

4. In or before 1955 — Certain purchases of the Company's shares made by defendant Ludwig were not correctly reported to the Securities and Exchange Commission or the New York Stock Exchange in violation of section 16(a) of the 1934 Act and Rule 16a-1 issued thereunder. Complaint, par. 46(a); Prior Decision, 20-22.

The gravamen of the claims based on the alleged violations of section 18(a) are: (1) defendants schemed to gain control of the Company; that is, that by means of false and misleading statements, stockholders other than plaintiffs were induced¹ to sell their stock to the Company, thereby giving defendant Ludwig and his nominee directors, defendants herein, control of the Company; and (2) defendants then committed acts of waste. The alleged waste constitutes the actual damage claimed to have resulted from the alleged violations.

For purposes of this motion for summary judgment, defendants concede arguendo the truth of the above-alleged facts. Thus, as to claims based on section 18(a) of the 1934 Act there are no issues of fact remaining, and the motion must be considered on the merits.

Section 18(a) of the 1934 Act provides as follows:

"(a) Any person who shall make or cause to be made any statement in any application, report, or document filed pursuant to this chapter or any rule or regulation thereunder or any undertaking contained in a registration statement as provided in subsection (d) of section 78o of this title, which statement was at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact, shall be liable to any person (not knowing that such statement was false or misleading) who, in reliance upon such statement, shall have purchased or sold a security at a price which was affected by such statement, for damages caused by such reliance * * *."

Defendants contend that section 18(a) creates a liability only in favor of someone who is able to satisfy all of the following four conditions: that person must have (1) "purchased or sold a security," (2) "in reliance upon such false or misleading statement," (3) "not knowing that such statement was false or misleading," (4) "at a price which was affected by such statement."

Further, defendants argue, a plaintiff satisfying these four conditions is explicitly limited to a suit "for damages caused by such reliance."

Applying the reasoning above to the facts of this case, defendants point out that plaintiffs — who have not alleged that they bought or sold securities of the Company at all, much less in reliance upon alleged false or misleading statements attributable to defendants — have failed to bring themselves within the restricted class of persons specified by section 18(a).

Finally, defendants point to the fact that the damages claimed in this suit — assertedly the result of acts of corporate waste — are not within the explicit ambit of the statute as to recoverable damages.

Defendants contend that a claim which patently cannot satisfy conditions appearing on the very face of the statute upon which it purportedly is based is either so frivolous as to deprive the court of jurisdiction over the subject matter of this suit, or, at least, fails to set forth facts sufficient to support a claim upon which relief can be granted. Under either legal theory, defendants claim, they are entitled to summary judgment.

The legislative history of section 18(a) persuasively confirms defendants' view that the coverage of that section is no broader than that indicated by the plain meaning of its language. See 78 Cong. Rec. 7700-01, 8039, 8040 (1934) (remarks of Representative Rayburn and Representative Hollister); 78 Cong.Rec. 8199 (1934) (remarks of Senator Kean and Senator Norris); Hearings Before the Senate Committee on Banking and Currency, 73d Cong., 2d Sess. 6564-65 (1934) (remarks of Mr. Corcoran, Mr. Redmond and Senator Costigan) (consideration of original Senate Bill S. 2693 containing provisions deleted in final section 18(a)); S.Rep.No. 792, 73d Cong., 2d Sess. 12-13 (1934).

Defendants cite Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951) as supporting their interpretation of section 18(a). The salient feature of Fischman v. Raytheon emphasized by defendants is the fact that plaintiffs therein alleged in their complaint that they had purchased stock in reliance upon statements in a registration statement and prospectus which they had not known...