In re Haas

• Decision Date: 19 January 1984
• Docket Number: Adv. No. 83 A 2661.,Bankruptcy No. 82 B 06226
• Citation: 36 BR 683
• Parties: In re Duane and Kay HAAS, Debtors. WIEBOLDT STORES, INC., Plaintiff, v. Duane V. HAAS, Christopher A. Jansen, a/k/a Christopher Jankowski, d/b/a A.J. Christopher & Co., Arthur C. Reck, and Frank H. Gildner, Jr., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

36 B.R. 683 (1984)

In re Duane and Kay HAAS, Debtors WIEBOLDT STORES, INC., Plaintiff, v. Duane V. HAAS, Christopher A. Jansen, a/k/a Christopher Jankowski, d/b/a A.J. Christopher & Co., Arthur C. Reck, and Frank H. Gildner, Jr., Defendants.

Bankruptcy No. 82 B 06226, Adv. No. 83 A 2661.

United States Bankruptcy Court, N.D. Illinois, E.D.

January 19, 1984.

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Catherine A. Sazdanoff, Isham, Lincoln & Beale, Chicago, Ill., for plaintiff.

Robert F. Klimek, Remington, Kirkland & Klimek, Chicago, Ill., for defendants.

MEMORANDUM OPINION

FREDERICK J. HERTZ, Bankruptcy Judge.

Plaintiff, Wieboldt Stores, Inc., filed this two-count complaint seeking injunctive and monetary relief against defendants, Duane V. Haas, Christopher A. Jansen, a/k/a Christopher Jankowski, d/b/a A.J. Christopher & Co., Arthur C. Reck, and Frank H. Gildner, Jr. In Count I Plaintiff charged that the Defendants, while engaged in a conspiracy and alleged scheme to defraud, violated Sections 10 and 14 of the Securities Exchange Act of 1934 (U.S.C. § 78j, 78n(a) (1981)), and Rules 10b-5 and 14a-9, promulgated by the United States Securities and Exchange Commission (SEC) pursuant to the above statutory provisions. 17 C.F.R. § 240.10b-5, 240.14a-9 (1983).

In Count II Defendants are alleged to have tortiously interfered with Plaintiff's prospective economic advantage, in violation of Illinois common law. Jurisdiction of this court over Plaintiff's securities law claims is predicated upon Section 27 of the Securities Exchange Act of 1934 (15 U.S.C. § 78aa (1981)). In addition, Plaintiff asserts that this court possesses pendent jurisdiction to entertain its state law claim against the Defendants.

Prior to the transfer of this litigation to this court,¹ Defendants filed a motion to dismiss Plaintiff's complaint for failure to state a claim upon which relief can be granted, or in the alternative, to strike certain portions of the complaint, and for a more definite statement, pursuant to Rules 12(b)(6), 12(e) and 12(f) of the Federal Rules of Civil Procedure. The issues pertaining to Defendants' motion to dismiss are fully briefed, and the merits of that motion are now before this court for decision.

In Plaintiff's complaint, it is alleged that the Defendants "conspired" to undertake various measures to defeat a proposed merger between Plaintiff and the QPO Corporation (QPO). That proposal was scheduled to be placed before Plaintiff's shareholders for their approval at a special shareholders meeting set for May 28, 1982. Plaintiff's former management solicited proxies approving the merger from Plaintiff's shareholders on April 30, 1982.

Defendants, pursuant to their alleged conspiracy, distributed a counter-proxy solicitation in opposition to the merger to Plaintiff's shareholders on May 12, 1982. Those counter-proxy solicitation materials are alleged to contain false or misleading statements, in violation of federal securities laws, which include:

1. an alleged false representation of QPO\'s legal right to unilaterally terminate the merger proposal after receiving the outstanding shares of Plaintiff corporation without paying for those shares;

2. an alleged misrepresentation of the highest trading price of Plaintiff\'s common stock in the first quarter of the company\'s 1981 fiscal year (January 1980-January 1981);

3. an alleged misrepresentation that the merger proposal, as tentatively approved by QPO and Plaintiff\'s management, would prevent Plaintiff from entertaining other "possible" merger/buy-out offers;

4. an omission of material fact, in that Defendant\'s counter-proxy statement represented that no "participant" in the counter-proxy solicitation had been convicted "in any criminal proceedings of any sort during the past 10 years," while in fact Defendant Christopher Jansen, an alleged paid consultant to Defendants, had been found to have breached certain anti-fraud provision of federal securities laws by an administrative law judge in October 1981;

5. an omission of material fact in that the Defendants\' counter-proxy solicitation failed to identify Defendants Haas, Jansen, and Reck as "participants" in the scheme to defeat "the Proposal";

6. an alleged false representation that Defendant Jansen\'s consulting fee in connection with the counter-proxy effort would be limited to $10,000 when in fact, Defendant Gildner publicly stated on May 24, 1982, that the amount of Jansen\'s fee was undetermined; and

7. that the counter-proxy statements, without basis in fact, attacked the impartiality of the firm of Duff and Phelps, Inc., which concluded in a report that the purchase price of $5.50 per share offered by QPO for Plaintiff\'s outstanding common stock was a fair price.

Plaintiff requested both temporary and permanent injunctive relief under Count I, requiring Defendants to correct their alleged false representations to its shareholders at Defendants' expense, and further restraining Defendants or their agents from making additional false statements to Plaintiff's shareholders in connection with the merger proposal, "or any subsequent proposal that QPO may make." In addition, Plaintiff requested an award of $400,000 actual damages, representing both the cost of its original April 30, 1982, proxy solicitation in favor of the merger proposal, as well as a later solicitation mailed in response to Defendants' proxy solicitation of May 12, 1981.

In Count II, Plaintiff alleged that in addition to the false and misleading statements contained in the counter-proxy solicitation materials, the Defendants employed other devices, including the filing of five sham lawsuits against the Plaintiff, QPO, and others, which suits are identified by docket number in Count II. Also, Defendants are alleged to have made false statements in the "media" to the effect that 1) Plaintiff's management, motivated by conflict of interest, had rejected other bona fide offers of purchase for Plaintiff's common stock; 2) that Plaintiff's management had undervalued its corporate book assets, and that the $5.50 per share price offered by QPO in connection with the merger proposal was too low; and 3) that Defendants opposed the merger proposal in good faith.

These activities, according to Plaintiff, eventually led QPO to withdraw its proposal to merge with Plaintiff, apparently before Plaintiff's shareholders had the opportunity to vote in favor or against the merger proposal. In their memorandum of law, Plaintiff contends that these activities of Defendants are chargeable under Illinois law as a tortious interference with Plaintiff's prospective economic advantage. As damages under Count II, Plaintiff requested injunctive and monetary relief similar to that requested in Count I. In addition, however, Plaintiff has requested actual damages of $1,188,402.50, allegedly caused when the value of its common stock was depressed on May 28, 1982, allegedly as a result of the Defendants' activities. Plaintiff further sought actual damages of $15 million, in the event Plaintiff became insolvent due to "financial problems which the merger Proposal was designed to solve." Finally, Plaintiff requested punitive damages in the amount of $20 million on account of the "willful and fraudulent nature of defendants' acts."

DISCUSSION

The obligation of the court when reviewing a motion to dismiss is to examine the pleadings in a light most favorable to the non-movant, taking well pleaded allegations as true, and the motion should not be granted unless it clearly appears that plaintiff can prove no set of facts under its pleadings which would entitle it to the relief requested. Mathers Fund, Inc. v. Colwell Co., 564 F.2d, 780, 783 (7th Cir.1977); McIntosh v. Magna Systems, Inc., 539 F.Supp. 1185, 1189 (N.D.Ill.1982). Nonetheless, the above rule does not require that the parties proceed to trial where the cause of action alleged is substantively deficient. Havoco of America, Ltd., v. Shell Oil Co., 626 F.2d 549, 553 (7th Cir.1980). In this case, the court concludes that Plaintiff's complaint is substantively deficient in several respects, and that the Defendant's motion to dismiss shall be granted.

Section 10(b) and Rule 10b-5

In their motion to dismiss directed toward Count I, Defendants contend that such Count fails to state a claim under either Section 10(b) of the Securities Exchange Act of 1934 (the Act) or Rule 10b-5 as promulgated by the SEC, because that Count does not contain an allegation that Plaintiff was defrauded in connection with its purchase or sale of a security, by any action taken by Defendants. Defendants correctly observe that both Sections 10(b) and Rule 10b-5 were enacted to remedy fraud in connection with the purchase or sale of securities. Frischling v. Priest Oil & Gas Corp., 524 F.Supp. 1107, 1111 (N.D.Ill. 1981). Plaintiff does not allege in Count I that it was defrauded in its purchase or sale of securities by any misstatements of fact or false representations attributed to the Defendants. Absent such an allegation, Plaintiff would lack standing to sue Defendants under Section 10(b) of the Act, or Rule 10b-5, even if Plaintiff's shareholders could take action against Defendants under those sections. Wright v. Heizer Corp., 560 F.2d 236, 246 (7th Cir.1977), cert. denied, 434 U.S. 1066, 98 S.Ct. 1243, 55 L.Ed.2d 767 (1978). Accordingly, Count I of Plaintiff's complaint fails to state a claim upon which relief can be granted under Section 10(b) of the Act or Rule 10b-5, and that portion of Count I which is predicated upon those provisions is dismissed.

Section 14 and Rule 14a-9

In attempting to charge Defendants with violation of Section 14 of the Act as well as violation of Rule 14a-9, Count I of Plaintiff's complaint suggests that the Defendants committed fraud, rather than negligence, in their inclusion of allegedly false representations and omissions of material fact in their May 13, 1982,...