Indiana Nat. Corp. v. Rich

• Decision Date: 05 October 1983
• Docket Number: No. 83-1038,83-1038
• Citation: 712 F.2d 1180
• Parties: Fed. Sec. L. Rep. P 99,432 INDIANA NATIONAL CORP., Plaintiff-Appellant, v. Martin D. RICH, Norman Rich, Herbert M. Spector, Solomon Weisgal, Morris Polack, Jack Polack, MR Investment Associates, NR Investment Associates and Rich Investments, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1180

712 F.2d 1180

Fed. Sec. L. Rep. P 99,432

INDIANA NATIONAL CORP., Plaintiff-Appellant, v. Martin D. RICH, Norman Rich, Herbert M. Spector, Solomon Weisgal, Morris Polack, Jack Polack, MR Investment Associates, NR Investment Associates and Rich Investments, Inc. Defendants-Appellees.

No. 83-1038.

United States Court of Appeals Seventh Circuit.

Argued Feb. 23, 1983.

Decided July 19, 1983.

As Corrected July 21 and Oct. 5, 1983.

Roy L. Reardon, Simpson, Thacher & Bartlett, New York City, David A. Sirignano, S.E.C., Washington, D.C., for plaintiff-appellant.

Steven L. Bashwiner, Friedman & Koven, Chicago, Ill., for defendants-appellees.

Before CUDAHY and ESCHBACH, Circuit Judges, and GRAY, Senior District Judge. ^*

CUDAHY, Circuit Judge.

This case requires us to decide whether there is an implied private right of action for an issuer corporation to seek injunctive relief under Section 13(d) of the Securities Exchange Act (the "Act"), 15 U.S.C. § 78m(d) (1976). Section 13(d) requires any person acquiring more than 5% of a class of registered securities of a corporation to send to the issuer and to file with the S.E.C. a statement disclosing certain information about the person's identity and purposes. The other federal courts of appeal which have considered this question have concluded that an issuer corporation has an implied right of action to obtain injunctive relief against violations of Section 13(d). We agree, and in so doing reverse the judgment of the district court 554 F.Supp. 864 in this case.

I

Plaintiff, Indiana National Corporation ("Indiana National"), is a bank holding company which engages principally in the banking business through its wholly owned subsidiary, Indiana National Bank. Indiana National's stock is registered pursuant to Section 12 of the Securities Exchange Act, 15 U.S.C. § 78l, and is traded in the over-the-counter market. The defendants are a group of investors who acquired more than 5% of Indiana National's stock during 1981 and 1982. As required by Section 13(d) of the Act, they filed a Schedule 13D on September 4, 1981, and subsequently amended it six times between then and August 10, 1982.

On July 21, 1982, Indiana National filed a complaint in which it was alleged that the defendants' Schedule 13D contained materially false and misleading information, in that it failed to disclose the defendants' intention to acquire control of Indiana National, the Federal Reserve Bank's prior denial of an application by certain of the defendants for control of another bank, certain information concerning the members of the group and the true source of the funds used to acquire the shares. The plaintiffs sought a court order compelling defendants to file an amended Schedule 13D with full disclosure in the respects noted, as well as enjoining defendants from acquiring more shares of Indiana National, and compelling them to divest themselves of the shares they already held, which were alleged to have been unlawfully acquired.

In response, the defendants filed a motion to dismiss the complaint on the grounds, in relevant part, that Indiana National, as the issuer of the stock, had no standing to assert a claim under Section 13(d) of the Act. On December 30, 1982, the district court granted the defendants' motion to dismiss on the ground that an issuer corporation does not have an implied right of action under Section 13(d) of the Act. Since we must accept all well-pleaded allegations of the complaint as true for purposes of evaluating a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the sole issue before us on this expedited appeal is whether an implied right of action exists in favor of an issuer under Section 13(d).

II

In the course of the last decade, the Supreme Court has given us substantial guidance about when to imply a private right of action in the face of statutory silence. In 1975, the Court outlined a four-part test to determine the appropriateness of such a remedy: (1) whether the plaintiff is a member of a class for whose especial benefit the statute was enacted; (2) whether there is any explicit or implicit indication of congressional intent to create or deny a private remedy; (3) whether a private remedy would be consistent with the underlying purposes of the legislative scheme; and (4) whether the cause of action is one traditionally relegated to state law. Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 2088, 45 L.Ed.2d 26 (1975). Several years later, however, the Court indicated that these factors were not of equal weight but that the central inquiry, at which the first three factors were all directed, was one of congressional intent. Touche Ross & Co. v. Redington, 442 U.S. 560, 575, 99 S.Ct. 2479, 2489, 61 L.Ed.2d 82 (1979); Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 15-16, 100 S.Ct. 242, 245, 62 L.Ed.2d 146 (1979); see also Allison v. Liberty Savings, 695 F.2d 1086, 1088 (7th Cir.1982).

The reduction of these questions to one of congressional intent imposes on us the challenging task of divining, as of a moment in the past, the collective state of mind of a body of legislators. But on this question as well, recent Supreme Court cases have shed additional light. In perusing the legislative history for signs of congressional intent, we are directed to pay particular attention to the contemporary legal context in which the statute was enacted. See Cannon v. University of Chicago, 441 U.S. 677, 694-703, 99 S.Ct. 1946, 1956-1961, 60 L.Ed.2d 560 (1979); Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 378-82, 102 S.Ct. 1825, 1839-1841, 72 L.Ed.2d 182 (1982). Thus in Cannon the Supreme Court, in finding that there was a private right of action implied in Title IX of the Education Amendments of 1972, emphasized that Title IX was patterned after Title VI of the Civil Rights Act of 1964 and was enacted at a time when Title VI had been construed as creating a private remedy. 441 U.S. at 694-703, 99 S.Ct. at 1956-1961. Thus, the Court reasoned, Congress must be presumed to have been aware of the previous five years of judicial interpretation of Title VI and to have expected its enactment (Title IX) to be interpreted in conformity with those precedents. Id. at 696-99, 99 S.Ct. at 1957-1958. In Merrill Lynch, the Court described this approach in more detail:

In determining whether a private cause of action is implicit in a federal statutory scheme when the statute by its terms is silent on that issue, the initial focus must be on the state of the law at the time the legislation was enacted.... When Congress acts in a statutory context in which an implied private remedy has already been recognized by the courts, [ ] the inquiry logically is different. Congress need not have intended to create a new remedy, since one already existed; the question is whether Congress intended to preserve the pre-existing remedy.

456 U.S. at 378-79, 102 S.Ct. at 1839. Thus the Court was led to conclude that, when Congress undertook reexamination and significant amendment of a statute while leaving intact the provisions under which the federal courts had implied a cause of action the evidence was that Congress had affirmatively intended to preserve that remedy. Id. at 381-82, 102 S.Ct. at 1840-1841. This approach, construing a statute in light of the contemporary legal context in order to determine whether Congress intended that a private right of action be implied, has recently been reaffirmed by the Supreme Court in Herman & MacLean v. Huddleston, --- U.S. ----, 103 S.Ct. 683, 689, 74 L.Ed.2d 548 (1983); and we shall make use of it in analyzing the case at hand.

III

The Williams Act amendments to the Securities Exchange Act were passed in 1968 in response to the growing use of cash tender offers as a means for achieving corporate takeovers. Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 22, 97 S.Ct. 926, 939-940, 51 L.Ed.2d 124 (1977). The purpose of the Williams Act was to insure that public shareholders facing a tender offer or the acquisition by a third party of a large block of shares possibly involving a contest for control be armed with adequate information about the qualifications and intentions of the party making the offer or acquiring the shares. See Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58, 95 S.Ct. 2069, 2075-2076, 45 L.Ed.2d 12 (1975); S.Rep. No. 550, 90th Cong., 1st Sess. 2 (1967). Whereas corporate acquisitions by proxy solicitations or by exchange offers of securities were subject to registration and disclosure requirements, see 15 U.S.C. §§ 78n, 77e, tender offers or acquisitions of substantial amounts of stock having a potential for control were not subject to similar requirements.

The Williams Act was intended by its sponsors to remedy this "gap" in federal regulation. In introducing the legislation on the Senate floor, for example, Senator Williams stated:

This legislation will close a significant gap in investor protection under the Federal securities laws by requiring the disclosure of pertinent information to stockholders when persons seek to obtain control of a corporation by a cash tender offer or through open market or privately negotiated purchases of securities.

113 Cong.Rec. 854 (1967) (emphasis supplied). See also H.R.Rep. No. 1711, 90th Cong., 2d Sess. 4, reprinted in 1968 U.S.Code Cong. & Ad.News 2811, 2814. Section 13(d) was to help fill the gap by requiring persons who acquired substantial interests in the equity securities of a company and (thus might be attempting to acquire control) to file a statement with the S.E.C. disclosing, among other things, the identities of all persons on whose behalf the purchases had been made, the number of shares acquired, the source and amount of funds used in making the purchase and the purpose of the purchases in relation to the acquisition of control; the statement was to be sent to the issuer corporation as well. 15 U.S.C. § 78m(d)(...