Leoni v. Rogers
Decision Date | 23 December 1985 |
Docket Number | Civ. A. No. 80-74875. |
Parties | Joanne LEONI, William H. Leoni, Lero Industries, Inc., a Michigan Corporation, Charles J. Rogers Construction Company, a Michigan Corporation, and Charles J. Rogers, Inc., a Michigan Corporation, Plaintiffs, v. Charles K. ROGERS, a/k/a Ron Rogers, Michael Gleeson, Daniel Organ, and Donald E. Schmaltz, and Paul Gusho, d/b/a Schmaltz & Company, Lawrence Rogers, Jointly and Severally, Defendants. |
Court | U.S. District Court — Western District of Michigan |
George R. Hamo, Flint, Mich., for plaintiffs.
Lee C. Patton, Detroit, Mich., for Gleeson.
Larry Donaldson, Detroit, Mich., for Donald Schmaltz and Paul Gusho.
Charles J. Rogers, Inc. (hereinafter Incorporated) and Charles J. Rogers Construction Company (hereinafter Construction) are Michigan corporations of which the founder, Charles J. Rogers, was the sole stockholder until his death. Mr. Rogers was also the chief operating officer of Incorporated, in Detroit, Michigan, while his son-in-law, defendant William Leoni (husband of daughter Joanne Leoni), served as chief operating manager of the Construction Company, in Flint, Michigan.
On the 1971 death of Charles J. Rogers his nine children succeeded to ownership of the stock in both companies. Charles K. Rogers, son of the founder, assumed the presidency of both corporations, and various other heirs assumed positions as officers and directors of the corporations, but William Leoni continued to manage the Construction company in Flint.
By 1974, Incorporated had suffered such substantial losses that its banker was about to call in its loan, which would have resulted, inter alia, in loss of its bonded status. Thereupon, Leoni stepped in and obtained a loan commitment from a Flint bank to cover the exigency, but with the condition that all shareholders of both corporations form a voting trust, of which Leoni would become trustee. This was accomplished by August of 1974, after which Charles K. Rogers was relieved of the presidency of Incorporated by Leoni, who then assumed managerial responsibility for both corporations.
On May 20, 1975, an agreement was entered by which all stockholders (except William and Joanne Leoni) sold all of their stock in both corporations to the corporations or, in effect, to Leoni. This sale of stock led to the present action. Plaintiffs claim relief under § 10(b) of the Securities Exchange Act of 1934 and Section 17 of the Securities Act of 1933. Plaintiffs also allege violations of Michigan's Blue Sky laws and common law.
Defendants argue that these very same parties were involved in litigation before Judge Taylor involving issues arising out of the same facts in issue here. In Judge Taylor's case, the roles were reversed. For the most part, defendants therein are plaintiffs herein and vice versa. Because a final judgment was entered in Judge Taylor's case, defendants contend that the issues cannot be relitigated here. Further, defendants maintain that plaintiffs claims here should have been pleaded in the prior litigation as compulsory counterclaims. For these reasons, defendants argue, plaintiffs' complaint should be dismissed.
For the reasons stated below, defendants' contentions are rejected:
1. Plaintiffs herein requested consolidation with Judge Taylor's case and the requests were denied. It would be patently unfair to hold that plaintiffs cannot bring their claims now when their requests for consolidation in the earlier case were denied. This would deny them their day in Court.
2. There are plaintiffs involved in this case who were not present as defendants in the original case.
3. There are factual distinctions between the two cases. The original plaintiffs alleged that certain of the current plaintiffs failed to disclose knowledge of a forthcoming large judgment which was rendered and affirmed by the Michigan Supreme Court after the sale in issue. Here, plaintiffs allege, inter alia, the failure to disclose certain accounts payable by defendants herein. Because the factual bases differ, there has been no final judgment on the merits of this case.
4. As to the issue of collateral estoppel, defendants fail to disclose which issues were tried in the prior case which should be estopped here. Without such information, the Court can hardly invoke collateral estoppel. Further, in light of plaintiffs' attempts to consolidate the actions, invocation of collateral estoppel would be unjust.
For the aforesaid reasons, the Court finds that plaintiffs' complaint is barred neither by res judicata nor collateral estoppel.
15 U.S.C. § 77b(1). For all intents and purposes, the Securities and Exchange Act of 1934 defines "security" the same way. See 15 U.S.C. § 78c(a)(10).
The problem has arisen because the Supreme Court has held that the fact something is labeled "stock" does not automatically mean that it is a "security" under the Securities Acts. United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975). Forman stated, "Congress intended the application of these statutes to turn on the economic realities underlying a transaction, and not on the name appended thereto." Id. at 849, 95 S.Ct. at 2059. This Court's role, then, is to determine the "economic realities" of the transaction in question.
The "economic reality" test for determining whether the transaction involves a "security", as defined in Forman, Id. at 852, 95 S.Ct. at 2060, involves three elements: (1) an investment in a common venture; (2) premised on a reasonable expectation of profits; (3) to be derived from the entrepreneurial or managerial efforts of others. Because plaintiff Leoni became the sole shareholder of the corporations and because he was the manager of the corporations, prong (3) of the test above is not met. Any profits were to be derived from his own doing. Thus, the economic reality of this transaction is that it did not involve a "security" for purposes of the federal securities acts.
This comports with Congressional intent. The Securities Acts were meant to protect the passive investor and not one who purchases stock for purposes of control and management. Congress intended to protect the purchaser of stock who lacks the ability to make independent evaluations and who must rely upon the representations of the sellers of the securities. From this...
To continue reading
Request your trial-
Leoni v. Rogers
...Court of Appeals. The previous district court judge handling this case had dismissed it on jurisdictional grounds. Leoni v. Rogers, 636 F.Supp. 530 (E.D. Mich.1985), vacated, 815 F.2d 704 (6th Cir. 1987). Specifically, the previous judge held that the "sale of business" doctrine placed the ......