Issen v. GSC Enterprises, Inc.

• Decision Date: 28 August 1981
• Docket Number: 74 C 2215.,No. 74 C 0346,74 C 0346
• Citation: 522 F. Supp. 390
• Parties: Phillip ISSEN, on behalf of himself and all others similarly situated, and Derivatively on behalf of GSC Enterprises, Inc., Plaintiffs, v. GSC ENTERPRISES, INC., et al., Defendants. Seymour ABRAMS, individually and on behalf of himself and all other persons similarly situated, and Derivatively on behalf of GSC Enterprises, Inc. and the shareholders thereof, Plaintiffs, v. GSC ENTERPRISES, INC., a corporation, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

522 F. Supp. 390

Phillip ISSEN, on behalf of himself and all others similarly situated, and Derivatively on behalf of GSC Enterprises, Inc., Plaintiffs, v. GSC ENTERPRISES, INC., et al., Defendants.

Seymour ABRAMS, individually and on behalf of himself and all other persons similarly situated, and Derivatively on behalf of GSC Enterprises, Inc. and the shareholders thereof, Plaintiffs, v. GSC ENTERPRISES, INC., a corporation, et al., Defendants.

Nos. 74 C 0346, 74 C 2215.

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

August 28, 1981.

COPYRIGHT MATERIAL OMITTED

Pressman & Hartunian, Chicago, Ill., for Issen.

John T. Coleman, Norman J. Barry, Baker & McKenzie, Edward A. Gorenstein, Lieb, Pedian, Eiden and Gorenstein, Jerome H. Torshen, Torshen, Fortes & Eiger, William N. Weaver, Jr., Jack L. Block, Sachnoff, Schrager, Jones & Weaver, Hubachek, Kelly, Rauch & Kirby, Charles Pressman, Pressman & Hartunian, Peterson, Ross, Rall, Barber & Seidel, Stephen M. Merrick, Fishman, Merrick & Perlman, Chicago, Ill., for defendants.

Harry A. Young, Jr., Neistein, Richman, Hauslinger & Young, Ltd., Chicago, Ill., for Abrams.

Richard Goodman, pro se.

MEMORANDUM OPINION AND ORDER

ASPEN, District Judge:

The latest skirmish in this battle¹ between plaintiffs Phillip Issen ("Issen"), in No. 74 C 0346, Seymour Abrams ("Abrams"), in No. 74 C 2215, and a host of corporate and individual defendants related to GSC Enterprises, Inc. ("GSC") and its wholly-owned subsidiaries, The Bank of Lincolnwood ("the Bank"), Steinway Drug Company and Ford Hopkins Drug Company, involves plaintiffs' renewed motion for class certification of certain of their pre-merger² claims and defendants' motion to dismiss or, in the alternative, for summary judgment with respect to those claims as raised in Abrams' amended complaint.³ In addition, Issen has moved to amend his amended complaint by adding Miller, Cooper and Company, certified public accountants, as an additional party defendant in No. 74 C 0346 so as to align that case with No. 74 C 2215, and Abrams has moved to amend his amended complaint by adding allegations of scienter and that he purchased GSC stock as a result of the nondisclosures alleged so as to properly make out a claim for securities fraud after Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), and Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), both decided after this case was filed in 1974.

For the reasons set forth more fully below, defendants' motion for summary judgment will be granted in part and denied in part, and a narrow class of purchasers of GSC stock will be certified with Abrams as class representative. Abrams' motion to amend his amended complaint will be allowed and Issen's motion to amend will be deferred pending Issen's reporting to the Court as to his willingness to join in the class represented by Abrams as suggested in Part IV of this opinion. We will turn to a comprehensive discussion of the motions currently pending before the Court following a brief review of the issues involved in the pre-merger aspect of these cases.

I.

The pre-merger portion of these consolidated cases involves, in the first instance, plaintiffs' allegations that the defendants failed to disclose the details of various loans made to certain officers and/or directors of the Bank and GSC, or to entities affiliated with those persons, in GSC's annual reports, proxy statements and SEC filings from roughly the beginning of 1969 through early 1974 in violation of sections 10(b) and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78n(a). Both Issen and Abrams assert that they purchased shares of GSC stock during this period⁴ in reliance upon documents from which the disclosure of the loan detail was omitted. They maintain that information such as the amount of each individual loan, the collateral securing the loan, the interest charged, and the solvency of the borrower would have been material to the decisionmaking process of reasonable investors like themselves interested in purchasing GSC stock. Many of the loans were repaid in full, but some were not and the Bank suffered a loss thereby. Although plaintiffs' amended complaints contain other allegations of nondisclosures of assertedly material information during this period,⁵ the plaintiffs have not sought class certification with respect to these additional claims and the defendants have not addressed themselves to these claims in their motion to dismiss or for summary judgment on the stated assumption that plaintiffs have abandoned these claims. Plaintiffs, however, deny that they have abandoned any of their claims by moving for class certification of the claim involving the nondisclosure of the loan detail or limiting their response to defendants' motion to the issues raised therein.

Accordingly, while the Court's discussion in the remainder of this opinion will be limited to the alleged nondisclosure of sufficient loan detail for purposes of the pending motions, such limitation should not be taken to mean by implication that plaintiffs have abandoned their allegations of additional nondisclosures in violation of the securities laws. The Court will address those claims when they are properly before us.

II.

Abrams' motion to amend his amended complaint by adding allegations that defendants acted with scienter and that there is a nexus between defendants' acts and his purchase of GSC stock must be considered at the outset since the amended complaint would admittedly be fatally defective without such allegations after the Supreme Court's rulings in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), and Blue Chip Stamps v. Manor Drug Stores, Inc., 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Under Rule 15(a) of the Federal Rules of Civil Procedure, once a defendant has answered, the plaintiff may amend the complaint "only by leave of the court or by written consent of the adverse party." Rule 15(a) directs that leave to amend be granted liberally. Foman v. Davis, 371 U.S. 178, 181, 83 S.Ct. 227, 229, 9 L.Ed.2d 222 (1962); Stern v. United States Gypsum, Inc., 547 F.2d 1329, 1334 (7th Cir.), cert. denied, 434 U.S. 975, 98 S.Ct. 533, 54 L.Ed.2d 467 (1977). Such leave, however, is inappropriate where there is "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance of the amendment, futility of amendment, etc." Foman, 371 U.S. at 192, 83 S.Ct. at 230; Mertens v. Hummell, 587 F.2d 862, 865 (7th Cir. 1978); Conroy Datsun Ltd. v. Nissan Motor Corporation in U. S. A., 506 F.Supp. 1051, 1053 (N.D.Ill.1980). The determination as to whether leave to amend should be granted is committed to the discretion of the trial court. Zenith Radio Corporation v. Hazeltine Research, Inc., 401 U.S. 321, 330, 91 S.Ct. 795, 802, 28 L.Ed.2d 77 (1971). Mertens, id.

Undue prejudice has been found in cases where the amendment "brings entirely new and separate claims, adds new parties, or at least entails more than an alternative claim or a change in the allegations of the complaint" and where the amendment would require expensive and time-consuming new discovery. A. Cherney Disposal Co. v. Chicago & Suburban Refuse Disposal Corp., 68 F.R.D. 383, 385 (N.D.Ill. 1975). In such instances, a motion for leave to amend should be denied because the prejudice to the defendant outweighs plaintiff's right to have the case tried on its merits. Conroy Datsun Ltd. v. Nissan Motors Corporation in U. S. A., supra, 506 F.Supp. 1054; Hess v. Gray, 85 F.R.D. 15, 20 (N.D. Ill.1979). Undue delay has been found to bar an amendment in extreme cases, such as when the proposed amendment changed the plaintiff's theory of the case over three years after the case began and after the Supreme Court affirmed the trial court's dismissal. Doe v. McMillan, 566 F.2d 713, 720 (D.C.Cir.1977) (but see Judge Leventhal's dissent on this issue, 566 F.2d at 721). Ordinarily, however, mere delay in seeking to amend a complaint will not bar the amendment absent a showing of undue prejudice resulting from the delay.

In the case at bar, certain defendants strenuously oppose Abrams' motion to amend on the ground that they will be unduly prejudiced by an amendment that comes over seven years after the original complaint was filed. But the defendants have failed to establish that they would be unduly prejudiced by this amendment which, though it is chronologically late in the litigation, comes before the close of discovery, before trial, and before rulings on the pending motions to dismiss or for summary judgment and for class certification. The amendment does not contain an entirely new claim or theory nor should it entail a substantial amount of additional discovery, if indeed it generates any additional discovery at all. The primary reason for the amendment is to take account of developments in federal securities law since this case was originally docketed and to formally plead issues that the parties have implicitly acknowledged to be part of this case for some time. To the extent that the defendants believe that Abrams will be unable to muster factual support for his amended complaint, their concerns are more appropriately addressed in the context of a motion to dismiss or for summary judgment. Moreover, it should be noted that although Abrams' amended complaint has been technically deficient since the Supreme Court's decisions in Ernst & Ernst v. Hochfelder and Blue Chip Stamps v. Manor Drug Stores, Inc., the defendants have not moved to dismiss the complaint on this ground until now.

It is also clear that the plaintiffs are not entirely to blame for the delays that have plagued these cases from their inception. As noted earlier,⁶ these cases have thus far been before...