Kupferman v. Consolidated Research & Mfg. Corp.

• Decision Date: 03 May 1972
• Docket Number: No. 591,Docket 71-2171.,591
• Citation: 459 F.2d 1072
• Parties: Theodore R. KUPFERMAN, as Receiver of Vickers, Christy & Co., Inc., Plaintiff-Appellee, v. CONSOLIDATED RESEARCH AND MANUFACTURING CORPORATION, Defendant, Daniel Jacobson, Petitioner-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

459 F.2d 1072 (1972)

Theodore R. KUPFERMAN, as Receiver of Vickers, Christy & Co., Inc., Plaintiff-Appellee, v. CONSOLIDATED RESEARCH AND MANUFACTURING CORPORATION, Defendant, Daniel Jacobson, Petitioner-Appellant.

No. 591, Docket 71-2171.

United States Court of Appeals, Second Circuit.

Argued April 10, 1972.

Decided May 3, 1972.

As Corrected May 12, 1972.

COPYRIGHT MATERIAL OMITTED

I. Arnold Ross, New York City, for plaintiff-appellee.

Robert S. Warshaw, New York City (Trubin Sillcocks Edelman & Knapp, New York City, of counsel), for petitioner-appellant.

Before FRIENDLY, Chief Judge, and SMITH and OAKES, Circuit Judges.

FRIENDLY, Chief Judge:

This is a troubling appeal. At issue is a 1962 judgment of the District Court for the Southern District of New York awarding the receiver of Vickers, Christy & Co., Inc. (Vickers Christy), an underwriter, damages of $136,500, with interest, against Consolidated Research and Manufacturing Corporation (Consolidated) for the latter's breach of an agreement to file a post-effective amendment with respect to shares issuable to Vickers Christy if the underwriting was successfully completed. Consolidated did not appeal the 1962 judgment. On September 24, 1971, Daniel Jacobson, a former director of Consolidated who has been sued on a related matter in the New York courts, moved, on behalf of Consolidated and himself, to have the 1962 judgment vacated¹ on the ground that the court would not have entered it if the judge had been aware of a release executed by Vickers Christy in favor of Consolidated, which was known to the receiver's attorney but not to the defendant's. Jacobson now appeals from the denial of that motion, 53 F.R.D. 387 (S.D.N.Y.1971). Despite the attractiveness of appellant's argument, close examination of the record has led us to conclude that the strong policy in favor of the finality of judgments justified the court's refusal to grant relief.

I.

The controversy stems from an agreement dated August 22, 1960, wherein Vickers Christy, as underwriter, undertook to use its best efforts to sell 50,000 units, each consisting of one share of Class A and one of Class B stock of Consolidated at $6.50 per unit. If all the shares were sold within 45 days of the date of a post-effective amendment to the registration statement, Vickers Christy was to receive a commission of 65 cents per unit, and $10,000 for expenses. In addition the agreement provided:

You Vickers Christy shall have the right and obligation to purchase from the Company, and the Company shall sell to you, 6,250 shares of Class A stock and 6,250 shares of Class B stock at a price of $1.00 per share. In this connection, the Company agrees that it shall prepare and file at its expense a further post-effective amendment to the Registration Statement and Prospectus so that any of said 12,500 shares may be offered by you in compliance with the applicable provisions of the Act.²

The underwriting was not a peaceful one. Vickers Christy complained that Consolidated had misrepresented that it had commitments for a substantial number of units. Consolidated's financial condition was so poor that it prevailed upon Vickers Christy to release proceeds of subscriptions which, under the underwriting agreement incorporated in the registration statement, were to be held in escrow pending completion of the underwriting. At that time, Consolidated also agreed to remove the 45 day limitation on Vickers Christy's selling period. Some of the checks transmitted by Vickers Christy seem to have bounced. However, all the units were sold by December, 1960. Apparently no one paid much heed at that time to just when the sale of the 12,500 shares to the underwriter should occur.

Vickers Christy had other subjects for concern. On January 25, 1961, the SEC inspected its books and records pursuant to § 17(a) of the Securities Exchange Act. The investigation revealed that the firm's books were not current, that at December 30, 1960, its liabilities exceeded its assets by $71,311 and that an additional $82,820 of capital was needed to comply with the SEC's then operative net capital rule, 17 C.F.R. 240.15c 3-1 (1961). Because of these violations the SEC brought an action, in the District Court for the Southern District of New York, to enjoin the firm from engaging in the securities business. On advice of counsel, Vickers Christy stopped transacting business, and its principals devoted themselves to attempting to correct the deficiencies set forth in the SEC's complaint before the hearing, which had been scheduled for February 22, 1961.

It was at that time that the 12,500 Consolidated shares began to appear as the pot of gold at the end of the rainbow which might solve the underwriter's problems. Apparently the issue had become "hot"; by February 10, 1961, the bid price in the OTC market had risen to $18 per share. Vickers' special counsel advised that the 12,500 shares could be carried in its trading account at a 30% discount, even though they could not be then sold to the public. Vickers seems to have lacked the wherewithal to buy them. Daniel Lieberman, an accountant, agreed to provide $9,500 of the total purchase price in consideration of being allowed to retain 4,500 shares. Consolidated, however, was dragging its feet with respect to issuing the shares, avowedly because of its belief that Vickers had violated the underwriting agreement. In an effort to overcome Consolidated's reluctance, Vickers, on February 3, 1961, wrote:³

We wish to further advise you that it was not the intention heretofore or hereafter to make a public distribution of these units. Therefore, it will not be necessary to file a post-effective amendment as outlined on the cover page of the said Prospectus.

The sale of the 12,500 shares to Lieberman and his partial transfer to Vickers Christy were consummated on February 10, 1961. A number of documents were exchanged. Vickers Christy addressed a letter to Consolidated stating:

This is to inform you that we have assigned to Mr. Daniel Lieberman our 12,500 shares of Consolidated Research & Manufacturing Corporation which we are entitled to purchase at $1.00 per share as per the prospectus, and we have released Consolidated Research & Mfg. Corp. from all obligations and liabilities.

Lieberman wrote both the other parties that he was buying the 12,500 shares pursuant to an assignment from Vickers Christy. Consolidated's transfer agent authorized issuance of the 12,500 shares to Lieberman. Vickers' attorney rendered a hand-written opinion to Consolidated stating that Lieberman understood that the sale of the shares was restricted and that the issuance of the shares to him was not a public offering requiring registration under the Securities Act of 1933. Finally, and most important, Vickers Christy and Vickers individually executed a release to Consolidated. This was the usual printed form of general release to which Consolidated's attorney had added in typewriting:

and more particularly referring to any obligations which Consolidated Research and Manufacturing Corporation may have to Vickers, Christy and Co., Inc., arising out of an underwriting agreement dated August 22nd, 1960, and also referring to any obligations which Consolidated Research and Manufacturing Corporation may have to the said Vickers, Christy and Co., Inc., for the issuance to Vickers, Christy and Co., Inc., of 12,500 shares of Consolidated Research and Manufacturing Corporation stock at $1.00 per share as noted on the cover sheet of the Prospectus and also as noted in Part Two of the Prospectus in the paragraph which refers to "UNDERTAKINGS".

Although these maneuvers resulted in Vickers Christy preparing a revised balance sheet, dated as of February 10, 1961, which showed 7,155 Consolidated shares at a value of $18 per share, or $128,790,⁴ they did not produce the desired result. Toward the end of March, 1961, the late Judge Dawson granted the SEC's motion for a preliminary injunction and appointed Theodore R. Kupferman as receiver of the assets of Vickers Christy. In October, 1961, after various unsuccessful demands on Consolidated to file a post-effective amendment with respect to 6,000 shares still held by him, the receiver, represented by I. Arnold Ross, as attorney, began this action against Consolidated, seeking damages for breach of its agreement to do so.

Meanwhile Consolidated's affairs had been rapidly deteriorating. The Bridgeport, Conn., law firm of Friedman & Friedman, which had acted as counsel for Consolidated in February, 1961, withdrew from representing the company during the spring or summer of that year. When the receiver's action was instituted, Consolidated was represented by Breed, Abbott & Morgan, of New York City. However, that firm withdrew after filing an answer, which advanced no claim of release, and was replaced by Francis J. Purcell, of Manning, Hollinger & Shea, also of New York City. By the time he entered the case, Consolidated was defunct; its president, Marvin Botwick, who had been in active charge of the stock issue, died shortly after Purcell was retained; and Purcell's main source of information was Salvatore Cuomo, then a Vice President and director, who apparently had little knowledge of the facts. The files Purcell received from Breed, Abbott & Morgan did not contain the February 10 release, and Purcell did not communicate with the Friedman firm, which had prepared it. Ross, on the other hand, was far more diligent; in April 1962, he obtained from the Friedman firm copies of all the papers exchanged at the February 10, 1961 closing. In the course of pre-trial proceedings in May, 1962, Purcell did obtain a copy of the February 10, 1961 Vickers Christy letter to Consolidated which we have quoted above. Construing this as merely a consent by Vickers Christy that the shares be issued to Lieberman rather than itself, he made no inquiry whether there was any other instrument of release. Ross offered...