Klitzman v. Bache Halsey Stuart Shields, Inc.

• Decision Date: 05 September 1980
• Docket Number: No. 79 Civ. 6249 (KTD).,79 Civ. 6249 (KTD).
• Citation: 499 F. Supp. 255
• Parties: Charles B. KLITZMAN and Abraham R. Klitzman, Plaintiffs, v. BACHE HALSEY STUART SHIELDS, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

499 F. Supp. 255

Charles B. KLITZMAN and Abraham R. Klitzman, Plaintiffs, v. BACHE HALSEY STUART SHIELDS, INC., Defendant.

No. 79 Civ. 6249 (KTD).

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

September 5, 1980.

Baskin & Sears, New York City, for plaintiffs; Lawrence A. Mandelker, New York City, of counsel.

Ullman, Miller & Wrubel, P.C., New York City, for defendant; Joel M. Miller, David F. Wrubel, New York City, of counsel.

OPINION

KEVIN THOMAS DUFFY, District Judge:

Plaintiffs Charles and Abraham Klitzman commenced this action against defendant, Bache Halsey Stuart Shields, Inc. hereinafter referred to as "Bache" for: (1) violation of Section 10(b) of the Securities Exchange Act of 1934 hereinafter referred to as "1934 Act", 15 U.S.C. § 78j(b); and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1975); (2) violation of Art. III, Sections 1, 2 and 18 of the National Association of Securities Dealers Rules of Fair Practices NASD; (3) common law fraud; and (4) breach of fiduciary duty. Defendant moves to dismiss plaintiffs' first and second claims under Fed.R.Civ.P. 12(b)(6), and argues that the federal abstention doctrine applies to plaintiffs' claims of fraud and breach of fiduciary duty, and that there would thus be more appropriately resolved in the state court action presently pending.

For purposes of this motion, the facts alleged by plaintiffs are taken to be true and all inferences construed in their favor. Plaintiffs held Class B common stock of Resorts International hereinafter referred to as "Resorts B" in two margin accounts with Bache. Defendant required that such accounts maintain equity or "margin" of at least 35 percent. Following a severe decline in the value of plaintiffs' Resort B stock, equity fell below the requisite 35 percent and plaintiffs' accounts were partially liquidated. As Resort B declined further, plaintiffs failed to maintain a 35 percent "margin," and thus, Bache sued the plaintiffs in Supreme Court, New York County, for breach of contract, seeking to recover approximately $130,000, plus interest, representing the debit balance of two margin accounts held by Bache for Charles B. Klitzman (individually) and Charles and Abraham Klitzman (jointly). Three weeks later, plaintiffs commenced the instant action.

According to the Amended Complaint, plaintiffs made several demands for an accounting, but to no avail. Bache's authorized representative, Melvin Friend, assured plaintiffs that such advice was forthcoming; yet plaintiffs were not informed that a drop in the value of Resort B on October 9, 1979, would adversely affect the equity position of their accounts. (Amended Complaint ¶ 15). Accordingly, plaintiffs conclude that Bache never intended to furnish such advice. (Amended Complaint ¶ 14). On October 10, 1979, defendant informed plaintiffs that 5,000 shares would have to be sold at $41.00 per share in order to maintain the required equity. Apparently, the heart of plaintiffs' claim is defendant's representation that $41.00 was the "best price per share obtainable on that date," when, in fact, Resort B opened and closed in excess of $47.00 on that day. (Amended Complaint ¶ 16). Later that afternoon, plaintiffs were advised that an additional 2,000 shares must be sold at $41.00 per share. When the plaintiffs objected to a $41.00 price, Bache agreed to sell these shares at $43.00, since that "was the best price obtainable." While admitting that they consented to this sale, plaintiffs later attempted to cancel the sale upon learning that Resort B was selling "at between $44.50 and $46.50." Although Bache advised plaintiffs that a sale at $43.00 already had been consummated, (Amended Complaint ¶ 18), there is no record on the AMEX of a sale of 2,000 shares of Resort B at $43.00 per share on the afternoon of October 10, 1979. (Amended Complaint ¶ 20). The value of Resort B appeared to have stabilized as of October 11, 1979. Nonetheless, Bache sent the plaintiffs a telegram advising them to deliver $247,491.00 by 2:00 p.m. the following day or face liquidation. This telegram was not received until the 13th. In the interim, on October 12, 1979, at around 11:00 a. m., Melvin Friend of Bache advised plaintiffs that their accounts had adequate equity and thus, that no liquidation was planned for that day unless plaintiffs were notified otherwise. Plaintiffs allege that Friend's 11:00 a.m. advice was "knowingly false" since he never informed them that Bache intended liquidation at 2:00 p.m. that same day, October 12, 1979. In accordance with this 2:00 p.m. plan for liquidation, Bache sold 20,000 shares at $40.50 per share, and thus, glutted the market for Resort B, diluting plaintiffs' margin accounts. (Amended Complaint ¶¶ 24, 25). Consequently, Bache sent another telegram on October 12, 1979, advising plaintiffs that in order to maintain their two accounts, an additional payment of $224,000 would be required by October 15, 1979. This telegram was found by plaintiffs' secretary on October 13, 1979. Yet, on October 15, 1979, Klitzman was informed that the accounts held "an aggregate $10,000 equity position over defendant's margin requirements." (Amended Complaint ¶ 26). At this time, Bache promised Klitzman that if he and his brother would absolve Bache of any responsibility for the decline in value of plaintiffs' Resort B stock, "defendant would not liquidate the account" pursuant to the October 12th agreement. (Amended Complaint ¶ 27). Plaintiffs agreed and accordingly executed a letter in reliance on Bache's promise and no additional equity was placed in plaintiffs' accounts. (Amended Complaint ¶ 29). Contrary to their promise, Bache threatened liquidation unless $260,000 was delivered by 10:00 a. m., October 17, 1979. No additional funds were paid and Bache thereupon sold 18,250 shares of Resort B at $35.50.

Defendant Bache moves to dismiss plaintiffs' claim under § 10(b) of the 1934 Act on the ground that the Amended Complaint does not adequately allege the necessary elements of scienter and reliance. Bache also argues that the Amended Complaint fails to plead fraud with sufficient particularity to satisfy Fed.R.Civ.P. 9(b).

Taking plaintiffs' allegations to be true for purposes of this motion, I must agree that Rule 9(b) has been satisfied. Bache's deceptive statements about the value of Resort B at the time of liquidation, the inducing of plaintiffs to issue a letter disavowing Bache's liability for plaintiffs' losses, and Bache's inconsistent advice regarding the status of plaintiffs' accounts go beyond mere conclusory allegations of fraud and constitute sufficiently particular allegations of both scienter and reliance. See, e. g., Schonholtz v. American Stock Exchange, Inc., 376 F.Supp. 1089, 1091 (S.D.N.Y.) aff'd, 505 F.2d 699 (2d Cir. 1974). Accordingly, plaintiffs' § 10(b) claim withstands defendant's motion to dismiss.

Since plaintiffs' common law claims for fraud and breach of fiduciary duty arise out of the same operative facts, joint resolution of these claims would best serve judicial economy. I therefore deny Bache's motion to dismiss these claims and the matters will be tried together in this action.

The question that remains is whether the claims for damages for alleged violations of Articles 1, 2 and 18 of the NASD Rules¹ state either a federal claim or a state claim that can also be addressed under this Court's pendent jurisdiction.

In Colonial Realty Corp. v. Bache & Co., 358 F.2d 178 (2d Cir.), cert. denied, 385 U.S. 817, 87 S.Ct. 40, 17 L.Ed.2d 56 (1966), the Second Circuit refused to imply a blanket private right of action for violations of NASD rules, but held instead that each rule must be examined individually and that such an implied remedy might be possible "when the rule imposes an explicit duty unknown to the common law." 358 F.2d at 182. The Court further stated that a party urging the implication of such a private remedy has a heavier burden of persuasion than when the actions complained of allegedly violate the statute or an SEC regulation. Id.

Bache argues that recent Supreme Court decisions, notably Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979) and Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979), demonstrate "a strong disinclination to imply a private right of action for damages under federal statutes."

Plaintiffs argue that the Securities Acts...