Ingenito v. Bermec Corporation

• Decision Date: 08 May 1974
• Docket Number: No. 70 Civ. 4077,70 Civ. 5306 and 70 Civ. 5644.,70 Civ. 4077
• Parties: Robert INGENITO and James F. Cear, Plaintiffs, v. BERMEC CORPORATION et al., Defendants. Edward O'SHEA et al., Plaintiffs, v. STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA et al., Defendants. Morton BICKART et al., Plaintiffs, v. BERMEC CORPORATION et al., Defendants.
• Court: U.S. District Court — Southern District of New York

376 F. Supp. 1154

Robert INGENITO and James F. Cear, Plaintiffs, v. BERMEC CORPORATION et al., Defendants.

Edward O'SHEA et al., Plaintiffs, v. STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA et al., Defendants.

Morton BICKART et al., Plaintiffs, v. BERMEC CORPORATION et al., Defendants.

Nos. 70 Civ. 4077, 70 Civ. 5306 and 70 Civ. 5644.

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

May 8, 1974.

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Powers & Gross, New York City, for plaintiffs.

Wachtell, Lipton, Rosen & Katz, New York City, for State Mutual Life Assurance Co. of America, Richard H. Wilson and C. John McCloughan, Jr.

Rubin, Wachtel, Baum & Levin, New York City, for Bermec Corp., Herman L. Meckler, Herbert R. Degnan and William C. Ragals, Jr.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for Collateral Factors Corp. and Benjamin Cohen.

Baar, Bennett & Fullen, New York City, for Budget Financial Corp.

White & Case, New York City, for Civic Southern Factors Corp.

Natanson & Reich, New York City, for West End Livestock, Inc.

Garey & Garey, New York City, for Jack Dick.

Albert E. Martin, New York City, for William Gladstone.

Hoffberg, Margolies & Ginsberg, New York City, for Herbert Prentice, Robert Segal and Sheldon Bendit.

Glass & Greenberg, New York City, for Victor Puig.

Schwartz, Mermelstein, Burns, Lesser & Jacoby, New York City, for Trustee for Black Watch Farms, Inc. and Black Watch Herds Corp.

Graubard, Moskovitz, McGoldrick, Dannett & Horowitz, New York City, for Trustee for Bermec Corp.

Dunnington, Bartholow & Miller, New York City, for Arthur Andersen & Co.

Amend and Amend, New York City, for Empire National Bank.

MEMORANDUM

LASKER, District Judge.

These three actions arise out of the activities of Defendant Black Watch Farms, Inc. ("Black Watch") which was between 1963 and 1970 in the business of selling Aberdeen Angus breeding cattle and maintaining the animals for the accounts of the purchasers. The purchasers were primarily well-to-do professional and business people who seem to have bought the cattle not out of any particular yearning for the wild west, but as tax shelters. The hoped-for advantages never materialized since Black Watch ran into financial difficulties and allegedly defaulted on its maintenance agreements covering the cattle, resulting in substantial losses for many investors. Black Watch filed in bankruptcy in September, 1970, and these lawsuits followed.

Plaintiffs in O'Shea (the pre-prospectus action) are herdowners who purchased their cattle prior to the time (in May 1969) Black Watch effected a registration statement under the Securities Act of 1933. Plaintiffs in Bickart and Ingenito (the post-prospectus actions) bought their herds pursuant to a prospectus dated May 26, 1969.¹ Defendants, in addition to Black Watch itself,² are a varied group including Black Watch's shareholders, officers and directors, some of its salesmen, its accountants, most of its lenders, and Bermec Corp. and State Mutual Life Assurance Co. of America ("State Mutual") alleged controlling persons of Black Watch.

The extensive and somewhat diffuse complaints allege violations of the securities laws (?? 5, 12 and 17(a) of the Securities Act, 15 U.S.C. ?? 77e, 77l and 77q and ? 10(b) of the Exchange Act, 15 U.S.C. ?? 78j(b)) as well as common law fraud and usury. Before us are parallel motions by the pre-prospectus plaintiffs and the post-prospectus plaintiffs for an order consolidating the three cases and for a determination pursuant to Rule 23, Federal Rules of Civil Procedure that the entire lawsuit proceed as a class action with two subclasses (pre- and post-prospectus purchasers). Also before us is a motion by defendants State Mutual, Richard H. Wilson and C. John McLoughan, Jr. (officers of State Mutual as well as directors of Black Watch) and West End Livestock, Inc., ("West End") to dismiss the complaints as against them. We refer to all plaintiffs as a group unless otherwise specified.

A. The Class Action Motion.

I.

The named plaintiffs entered into agreements with Black Watch during the period 1967-68³ by which each herd-owner purchased a herd of cattle from Black Watch, receiving certificates of title covering each animal, and entered into a maintenance contract under which Black Watch was to provide complete care for the herdowner's animals. In addition, almost all plaintiffs financed the purchase price for the animals by a cash down payment and a set of promissory notes payable to Black Watch, generally over a three year period. In the period before mid-1968, when defendant Bermec acquired control of Black Watch, the basic selling unit was a herd of ten female animals for $35,000; after mid-1968, a herd consisted of 36 female animals and a 1/3 interest in a breeding bull for $100,000. Maintenance fees were $500. per animal per year for a ten animal herd, and $350. per animal per year for a 36 animal herd. There were, evidently, certain minor variations in the terms of the contracts between herdowners and Black Watch, the relevance of which will appear later in the discussion. Black Watch pledged most of the herdowner notes given in payment for the cattle to several lending institutions; the principal noteholders have been named as defendants in these actions, and plaintiffs seek, among other things, a mandatory injunction to prevent enforcement of the notes by the holders.

Black Watch, which began selling herds in 1963, took the position until 1968 that its transactions with herdowners (consisting of a purchase contract, maintenance contract and note) did not constitute securities within the meaning of the Securities Act and did not register its contracts with the SEC until March 20, 1969, the date of the first prospectus. After Bermec acquired control in mid-1968, counsel for both Bermec and Black Watch sought a no-action letter from the SEC; the SEC advised that the sale of cattle together with a maintenance contract constituted a security in the nature of an investment contract, which would require registration. Black Watch then suspended its selling program until a registration became effective. The Bickart plaintiffs purchased their herds pursuant to the prospectus and issued notes in full or part payment for their herds; the Ingenito plaintiffs paid entirely by cash. Otherwise, the "package" of transactions entered into by plaintiffs in all three actions appears to have been substantially identical.

II.

The parties have extensively briefed, and orally argued before the court, the question whether plaintiffs have satisfied the several prerequisites to the grant of class action status specified in Rule 23. However, merely reading the complaints and surveying the roll of defendants indicates that plaintiffs' most difficult hurdle is to meet the requirement of Rule 23(b)(3) that questions of law or fact common to the class predominate over individual questions and that a class action is the superior method for adjudication of the disputes between the parties.

The O'Shea plaintiffs allege that all members of the proposed class of pre-prospectus purchasers had the right to rescind their contracts because (a) Black Watch's sales constituted sales of unregistered securities, in violation of ? 12(1) of the Securities Act, 15 U.S.C. ? 77l(1); and (b) the Black Watch defendants and control persons, in connection with the sales, allegedly employed both oral and written misleading representations or omissions of material facts, in violation of ? 12(2) and ? 17(a) of the Securities Act, 15 U.S.C. ? 77l(2), and 77q(a); and ? 10(b) of the Securities Exchange Act, 15 U.S.C. ? 78j(b). Plaintiffs number among the claimed misrepresentations and omissions the true value of the herds, future selling prices of the cattle, expected progeny rates; and the facts that the animals would be scattered over many different farms, that there was no present market for the securities, and that there was a risk of near-total loss if Black Watch failed to honor its maintenance obligations.

The O'Shea plaintiffs further allege that the Black Watch defendants took certain actions from January 3, 1969 (when the SEC refused a no-action letter) to September 4, 1970 (when Black Watch filed in bankruptcy) to conceal from plaintiffs, and deprive them of their alleged right to rescind their transactions. They assert that Black Watch was already in serious financial trouble by mid-1969 and in danger of defaulting on its herd maintenance obligations. The Black Watch defendants allegedly failed to inform herdowners of the SEC's advice to register any new offerings and of the material in the May 26, 1969 prospectus (which evidently was not mailed to the pre-prospectus herdowners) stating that prior investors had a right to demand rescission, and that Black Watch might be forced into liquidation because of severely decreased cash flow.

Additionally, the Black Watch defendants are claimed to have engaged, during the twenty month period spanning the issuance of the prospectus and the filing in bankruptcy, in a course of conduct intended to forestall the complaints of herdowners and to keep them paying on their contracts. Among the acts and devices complained of are an alleged "buy-out" proposal, offered to some unhappy herdowners by which they could pay a substantial sum to Black Watch in return for a release on their notes; the offer of new notes containing extended payment terms and release and waiver provisions in exchange for the original notes; and reduced maintenance charges or other modifications of the existing contracts. In short, the O'Shea plaintiffs claim the Black Watch defendants carried out an orderly program to assuage the doubts and complaints of unhappy herdowners and conceal from them their alleged right to rescind.

The O'Shea plaintiffs' claims against...