Jackson v. Oppenheim

• Decision Date: 05 April 1976
• Docket Number: No. 531,D,531
• Citation: 533 F.2d 826
• Parties: Fed. Sec. L. Rep. P 95,497 Stuart A. JACKSON, Appellant, v. Jack OPPENHEIM, Appellee. ocket 75-7008.
• Court: U.S. Court of Appeals — Second Circuit

Page 826

533 F.2d 826

Fed. Sec. L. Rep. P 95,497

Stuart A. JACKSON, Appellant, v. Jack OPPENHEIM, Appellee.

No. 531, Docket 75-7008.

United States Court of Appeals Second Circuit.

Argued Feb. 20, 1976.

Decided April 5, 1976.

James J. Maloney, New York City (Leonard R. Glass, Lionel A. Barasch, Glass, Greenberg, Irwin & Pellman, New York City, of counsel), for appellant.

Peter Fleming, Jr., New York City (Douglas K. Mansfield, Curtis, Mallet-Prevost, Colt & Mosle, New York City, of counsel), for appellee.

Before FEINBERG, OAKES and VAN GRAAFEILAND, Circuit Judges.

OAKES, Circuit Judge:

Appeal is from an adverse judgment on appellant's federal securities law claims in connection with the sale to him of 10 per cent of the stock owned by appellee in Chelsea House Educational Communications, Inc. (Chelsea House), and from an award of $12,850 attorneys' fees and costs to appellee as "costs of collection" under the terms of two promissory notes for $16,926 each, given in consideration of the purchase, on which appellee successfully counterclaimed below. Judgment denying relief under Section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l (2), and Section 10(b) (and Rule 10b-5) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and awarding judgment on the counterclaim was entered by the United States District Court for the Southern District of New York, Charles H. Tenney, Judge, sitting without a jury. Appellant relies on appeal solely on his Section 12(2) claim and disputes the award of attorneys' fees. We affirm the judgment as to the former and reverse and remand as to the latter.

Chelsea House was a New York City publishing firm founded on a shoestring in 1966 by Harold Steinberg, its president, and Robert Hector, its board chairman. ¹ After a measure of late 1960's success, based primarily on its well-known revival of the 1897 Sears, Roebuck Catalogue, the firm filed a petition for reorganization in bankruptcy on July 2, 1970. ² In early 1969 when Chelsea House was riding the crest of financial success with the Sears, Roebuck Catalogue sales, Steinberg contacted appellant Stuart Jackson's law firm, Rogers & Wells, for the purpose of having an SEC registration statement prepared so as to "go public." Appellant then served as secretary and as an "outside" director of Chelsea House from June, 1969, until July, 1970, when the petition for reorganization was filed.

Appellee Jack Oppenheim owned approximately 20 per cent of Chelsea House stock and had served as a director and a vice president of the firm. During early 1970, Oppenheim was troubled by the unfavorable outlook of Chelsea House finances; his concern was no doubt in part triggered by a January, 1970, audit from Price, Waterhouse, revealing a $30,000 operating loss for fiscal 1969, note 2 supra. This same report also indicated a decrease in net worth from $218,743 on April 30, 1969, to $85,097 on October 31, 1969. This report was, of course, delivered to all directors of Chelsea House, including Jackson. Only Oppenheim, however, decided that the situation was sufficiently critical to require immediate action.

Oppenheim was particularly concerned with a lack of organized procedures for publication decision-making and felt that Steinberg should be removed as president and replaced with an experienced publishing executive. After some unsuccessful efforts to seek changes within management, Oppenheim resigned as a vice president on March 6, 1970, but remained a director. A week later Oppenheim went to Jackson's office to discuss with his fellow director the need for new management. Oppenheim cited examples of cash flow problems, avoidance of creditors and the firm's inability to obtain necessary financing because of alleged mismanagement ³ and asked Jackson's assistance in replacing Steinberg. After a 15- or 30-minute discussion, however, Jackson refused to help and stated only that he would talk about the situation further with other directors if they called him about it.

In the following week, Oppenheim prepared a memorandum, couched in terms of a proposal for action by the board of directors, setting forth all his objections to the Chelsea House management and listing several concrete steps he considered necessary for the firm's financial survival. ⁴ Among the dire forecasts made in this memorandum, Oppenheim specifically argued that if the recommended changes were not accepted "(c)ircumstances could contrive shortly which would bankrupt the company, leaving creditors unpaid." Oppenheim gave the memorandum to the board chairman for distribution to all directors and sent it himself to two of the management group, making what Judge Tenney found to be a reasonable effort to circulate the memorandum to all concerned. Jackson, however, never received his copy. ⁵

Steinberg then decided to approach Oppenheim to buy out his holdings of Chelsea House stock and did so through an intermediary employee. Oppenheim agreed to sell out to a management group at $3 per share. Steinberg himself solicited a group of purchasers from among Chelsea's management and eventually found eleven persons, including appellant, both within and without the Chelsea House family who jointly agreed to purchase Oppenheim's 146,618 shares. At no time did Oppenheim solicit any of these buyers, and it is undisputed that he made no statements or representations in connection with the sale. The sale, at $3 per share, was closed on April 10, 1970. Jackson received 14,618 shares for which he paid $10,000 and signed two promissory notes, due one and two years later, for $16,926 each. Three months later Chelsea House was in bankruptcy as Oppenheim had forecast.

Section 12(2) Claim.

Jackson's Section 12(2) claim is that Oppenheim

offered to and did sell his Chelsea House stock to plaintiff and others . . . by means of certain oral communications that omitted to state material facts about the fast declining financial situation at Chelsea House which were necessary in order to make the statements, made by defendant, in light of the circumstances under which they were made, not misleading.

The Section 12(2) violation allegedly occurred when Oppenheim came to appellant's office on March 13, 1970, to discuss Chelsea House and did not, at that time or subsequently, inform him of particular matters mentioned only in appellee's subsequent memorandum. The argument is that certain omitted facts, relating to specific instances of management incompetence and financial distress, ⁶ were necessary in order to make the March 13, 1970, statements of Oppenheim "not misleading." That is, although Oppenheim verbally painted a bleak picture with certain details of the firm's difficulties. Jackson claims he was misled by the absence of further particular details supplied in the subsequent memorandum (which he never received), and that this allegedly misleading oral communication was a causal factor in his decision to participate in the purchase of Oppenheim's stock.

Judge Tenney, without reaching the question whether appellant had proven a prima facie case for liability under Section 12(2), ruled that appellee had sustained his burden of proving that "he did not know, and in the exercise of reasonable care could not have known, of (the alleged) untruth or omission." 15 U.S.C. § 77l (2); see Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680 (5th Cir. 1971). In the judge's view, the efforts made by Oppenheim to circulate fully his late-March memorandum, see note 5 supra, as well as his admitted willingness to pursue further his discussions of Chelsea House with Jackson were proof that he had used reasonable care to avoid omission of material facts which could have misled appellant. While there is a considerable appeal to this view, we choose not to rely upon it. ⁷

Our view is that appellant has wholly failed to prove a cause of action under Section 12(2) because he has not shown that the securities involved here were offered for sale or sold "by means of a prospectus or oral communication" containing a misstatement or misleading statement. There was in fact no statement whatever made by Oppenheim regarding his stock subsequent to his verbal agreement with Steinberg's intermediary to sell for $3 per share. Oppenheim made absolutely no representations to the intermediary or other buyers in connection with the sale. The only communication upon which appellant can rely is his March 13, 1970, discussion with appellee regarding deficiencies in the Chelsea House management. Yet it is undisputed that no sale was contemplated or discussed at the March 13 meeting. While appellant need not prove that the alleged "misleading nature" of his March 13, 1970, discussion with appellee "caused" the eventual purchase of Oppenheim's stock by Jackson, see Hill York Corp. v. American International Franchises, Inc., supra, 448 F.2d at 696, he must still prove that the challenged sale was effected "by means of" the communication viewed as a whole. That is to say, the communication as a whole must have been instrumental in the sale of Oppenheim's shares of Chelsea House stock. ⁸ The findings of the trial court in connection with the 10b-5 claim ⁹ plainly indicate the complete absence of relation between the March 13 communication (or misleading omissions from same) and the appellant's purchase of appellee's stock. The court found that (1) Jackson wholly ignored Oppenheim's warnings about Chelsea House's prospects on March 13, (2) Jackson would not have altered his course of conduct had he seen the late-March memorandum, (3) Jackson and Oppenheim never discussed the possibility of a sale, (4) Oppenheim never represented anything to anyone in connection with the sale except that he would sell for $3 per share, and (5) Jackson decided to buy in the face of Oppenheim's strong warnings of management incompetence and financial difficulties at Chelsea House. Oppenheim's warnings of March 13 (which...