Leoni v. Rogers
| Decision Date | 13 July 1989 |
| Docket Number | Civ. A. No. 80-CV-74875-DT. |
| Citation | 719 F. Supp. 555 |
| Parties | Joanne LEONI, William 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, Donald E. Schmaltz and Paul A. Gusho d/b/a Schmaltz & Company, and Lawrence Rogers, Jointly and Severally, Defendants. |
| Court | U.S. District Court — Western District of Michigan |
George R. Hamo, Flint, Mich., for plaintiffs.
Lawrence R. Donaldson, Detroit, Mich., for defendants Donald E. Schmaltz and Paul Gusho, d/b/a Schmaltz & Co.
Lee C. Patton, Southfield, Mich., for defendant Gleeson.
Daniel Organ, Farmington Hills, Mich., in pro per.
Lawrence Rogers, Bloomfield, Mich., in pro per.
On October 21, 1980, the instant lawsuit was filed by Joanne and William Leoni (hereinafter Leonis) and three corporations which the Leonis own, Lero Industries, Charles J. Rogers Construction Co. (hereinafter Construction Co.), and Charles J. Rogers, Inc. (hereinafter CJR Inc.). In the complaint, it is alleged that defendants Charles K. Rogers, Michael Gleeson, Daniel Organ, and Lawrence Rogers (hereinafter collectively referred to as the operating defendants), and Donald E. Schmaltz and Paul Gusho d/b/a Schmaltz & Co. (hereinafter Schmaltz & Co.) violated the federal securities laws embodied in section 17(a) of the Securities Act of 1933 (1933 Act), 15 U.S.C. sec. 77q(a), and section 10(b) of the Securities Exchange Act of 1934 (1934 Act), 15 U.S.C. sec. 78j(b), as well as Rule 10b-5 of the Securities and Exchange Commission (hereinafter SEC) and the Michigan blue sky laws. Various state law claims are also raised against the defendants.
The alleged securities violations arise out of a May 20, 1975 agreement between the Leonis and defendants Charles K. Rogers, Michael Gleeson, Daniel Organ, and Lawrence Rogers, among others. Pursuant to this agreement, all shareholders in CJR Inc. and Construction Co. except the Leonis sold their shares back to the corporations. Subsequent to this redemption agreement, on May 30, 1975, the former shareholders, the Leonis, CJR Inc., Construction Co., and the Michigan National Bank executed a mutual general release in which they agreed to release each other from all causes of action arising out of "any matter, act or transaction including, without limitation, any claim for failure to make full or complete disclosures of information relating to CJR Inc. and Construction Co., or for any other reason of any kind, nature or description arising prior to the date of the mutual general release."
At the time of the May 20, 1975 agreement, plaintiff William Leoni operated and managed both corporations. Mr. Leoni had managed Construction Co., which was located in Flint, Michigan, since well before Charles J. Rogers' death. He assumed management of CJR Inc., located in Detroit, Michigan, by August 1974 pursuant to a May 1974 agreement between himself and the directors and shareholders of CJR Inc. and Construction Co.1 The May 1974 agreement also gave Mr. Leoni "full and complete management operating control" of CJR Inc. and Construction Co. "with complete authority over the operation of said Corporations." The agreement specifically defined "full and complete management control" as "carrying out responsibilities for completion of all contracts and making decisions as to the method of implementation of the general policies established by the Boards of Directors." Further, Mr. Leoni was given "the authority to do all things that he deems necessary, expedient and prudent in his judgment to the beneficial and profitable operation of the Corporations whether or not specifically set forth." Although the boards of directors of the two corporations were retained, this retention was pursuant to the explicit written provision that any action on the boards' parts which substantially affected Mr. Leoni's managerial authority constituted a breach of the May 1974 agreement.
The May 1974 agreement was reached in part due to the losses which CJR Inc. had suffered by 1974. These losses were substantial enough that CJR Inc.'s banker was close to calling in its loans. If the loans were called in, CJR Inc. would have lost its bonded status, thus making it ineligible for many construction projects. To forestall this serious consequence, Mr. Leoni obtained a loan from the Michigan National Bank in Flint.2 The loan commitment was provided subject to the conditions that the shareholders of the corporations would form a voting trust with Mr. Leoni as the trustee and that they would sign the May 1974 agreement. After formation of the voting trust, Charles K. Rogers, Charles J. Rogers' son, stepped down from the presidency of CJR Inc. The other officers of the two corporations also stepped down from their positions. Mr. Leoni thereafter had sole managerial responsibility for the two corporations.
As indicated above, the shareholders of the two corporations were the nine children of Charles J. Rogers, the founder of both corporations, and their spouses. At Mr. Rogers' death in 1971, his children and their spouses succeeded to ownership of the stock in the corporations. Notably, Joanne Leoni was one of Charles J. Rogers' daughters; William Leoni is her husband. The Rogers children, other than the Leonis, were the shareholders who sold their shares back to CJR Inc. and Construction Co. as capital stock. Following the redemption by the other Rogers children, only the Leonis held stock in the two corporations. The Leonis subsequently incorporated Lero Industries as a holding corporation for CJR Inc. and Construction Co.
This matter is presently before this Court subsequent to its remand from the Sixth Circuit 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 transactions involving the CJR Inc. stock and the Construction Co. stock outside the scope of the federal securities laws. On this ground, the previous judge held that the lawsuit lacked a federal jurisdictional basis. The previous judge also dismissed the remaining pendent state claims.
After review of the record, the Sixth Circuit vacated the district judge's decision, remanding this case for consideration in light of Landreth Timber Co. v. Landreth, 471 U.S. 681, 105 S.Ct. 2297, 85 L.Ed.2d 692 (1985), and Gould v. Rufenacht, 471 U.S. 701, 105 S.Ct. 2308, 85 L.Ed.2d 708 (1985). See Leoni v. Rogers, 815 F.2d 704 (6th Cir.1987) (). In those cases, the Supreme Court held that the "sale of business" doctrine was not applicable to sales transactions involving traditional stock possessing the usual characteristics of stock. Upon this Court's assumption of the federal bench in June of 1988, this remanded case was transferred to its docket. The Court now issues its opinion on the motions pending in this matter.
To properly orient the reader as to the claims made in this lawsuit, the Court shall outline those claims. The complaint, which has not been amended in the nearly nine years during which this case has been pending, consists of the following counts:
COUNT DEFENDANT(S) VIOLATION ALLEGED
Count I All Sec. 10(b), 1934 Act; SEC
Rule 10b-5; and sec. 17
1933 Act
Count II Operating Michigan Uniform Securities
defendants Act, M.C.L.A. sec. 451.501
Count III Operating Common law fraudulent inducement
defendants
Count IV Operating Common law good faith and
defendants fair dealing
Count V All Violation of duty to disclose
contrary to sec. 10(b), 1934
Act; SEC Rule 10b-5; and
sec. 17, 1933 Act
Count VI Operating Negligent mismanagement
defendants of corporations
No other claims or counterclaims have been asserted by the parties in this lawsuit.
There are currently three motions pending in this matter. These are defendant Schmaltz & Co.'s renewed motion for summary judgment, defendant Michael Gleeson's renewed motion for summary judgment, and defendants Charles K. Rogers, Lawrence Rogers, and Daniel Organ's renewed motion to dismiss.3 Each of the defendants' motions shall be discussed separately below.
Defendants Schmaltz & Co. and Michael Gleeson have filed timely motions for summary judgment with the Court. These motions shall be fully considered. Additionally, because the Court received the letter indicating in pro per defendants Charles K. Rogers, Lawrence Rogers, and Daniel Organ were resubmitting their motion to dismiss to the Court on August 4, 1988, their motion to dismiss shall also be fully considered.
In accordance with the Court's scheduling order, defendants Schmaltz & Co. and Michael Gleeson have each filed briefs supplementing their motions. Although the Gleeson supplementary brief was submitted after the August 5, 1988 deadline for such briefs, its stated purpose was to present information which was previously unavailable. As such, the Court shall give the supplemental brief full consideration. Plaintiffs have also filed a supplemental brief with the Court, albeit well outside the time limitation imposed by the Court for supplemental briefs. There is no indication that the information contained in this brief was previously unavailable to the...
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