Mallis v. Bankers Trust Co., s. 783

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Citation717 F.2d 683
Docket NumberD,987,Nos. 783,s. 783
PartiesFed. Sec. L. Rep. P 99,479 Samuel MALLIS and Franklyn B. Kupferman, Plaintiff-Appellees, Cross-Appellants, v. BANKERS TRUST COMPANY, Defendant-Appellant, Cross-Appellee. ockets 82-7734, 79-7780.
Decision Date01 September 1983

Noel W. Hauser, P.C., New York City, for plaintiff-appellees, cross-appellants.

Paul J. Bschorr, New York City (White & Case, New York City, Laura B. Hoguet, Richard G. Greco, Dorothea W. Regal, New York City, of counsel), for defendant-appellant, cross-appellee.

Before LUMBARD, OAKES and NEWMAN, Circuit Judges.

LUMBARD, Circuit Judge:

This is the third time that we have been asked to review a judgment of the Southern District of New York in this action brought by plaintiffs Samuel Mallis and Franklyn Kupferman to recover losses suffered as a result of what we have termed on a prior review "a somewhat unusual securities transaction." 1 Mallis v. Bankers Trust Co., 615 F.2d 68, 70 (2d Cir.1980), cert. denied, 449 U.S. 1123, 101 S.Ct. 938, 67 L.Ed.2d 109 (1981). The present appeal arises from the second trial of this case before Judge Carter, after which, on June 7, 1982, the jury awarded the plaintiffs $106,000 on their claims of federal securities fraud, common law fraud, and negligent misrepresentation. On July 1, ten days after entry of judgment on June 21, 2 defendant Bankers Trust Company, arguing that the evidence was insufficient to support the jury's verdict, moved pursuant to Fed.R.Civ.P. 50(b) & 59(a)(1) for judgment notwithstanding the verdict or, in the alternative, for a new trial. On July 6, plaintiffs, who had requested prejudgment interest in their amended complaint, moved pursuant to Fed.R.Civ.P. 59(e) & 60(a) to amend the judgment to, inter alia, include such interest on the jury's award.

On September 29, Judge Carter denied the motions in all respects. Bankers Trust, on October 4, then filed a notice of appeal from both the June 21 judgment and the September 29 order. 3 On October 18, plaintiffs filed a cross-notice of appeal which expressly appealed only from the September 29 order.

Because there was sufficient evidence to support the jury's verdict, rendered after an uncontested charge by Judge Carter which fairly and correctly instructed the jury with respect to the controlling issues, we affirm the judgment against Bankers Trust. However, we conclude that prejudgment interest should have been added to the judgment, and we remand for computation of such interest in accordance with New York law.


Most of the facts are discussed at some length in our prior opinion directing a new trial. 4 See Mallis v. Bankers Trust Co., 615 F.2d at 71-74. A brief summary of the events leading up to the flawed deal is necessary here for discussion of the relevant issues.

The focus of this case concerns two large blocks, totaling 40,384 shares, of unregistered Equity National Industries, Inc. securities. The stock had been conditionally issued to Jerome Kates and his wife in August, 1970, pursuant to the acquisition by a wholly-owned shell subsidiary of Equity National of a corporation owned by the Kateses. The condition, stated in an escrow agreement appended to the merger plan, provided in relevant part that the shares must be returned if the Kateses' corporation failed to show a profit for calendar year 1970. A typewritten legend on the back of the two certificates representing the Kateses' Equity National shares cautioned that they were "subject to the terms of an Escrow Agreement ...." 5

The Kateses' corporation showed a net loss for calendar year 1970, and it filed a petition for bankruptcy on February 18, 1971. Between March 1 and April 14, 1971, Equity National sent three letters to Bankers Trust, which had been holding the Equity National stock since late 1970 as collateral on loans to the Kateses, demanding in increasingly urgent terms that the stock be returned pursuant to the escrow agreement. 6 The last letter, dated April 14, 1971, was referred to Nathan Silverman, a house attorney for Bankers Trust. Equity National's demand was soon repeated by one of its attorneys in a telephone conversation with Silverman. After receiving a letter dated April 21, 1971, from Kates' attorney threatening legal action if the stock were returned, Silverman, in a letter to the Equity National attorney dated May 24, 1971, denied Equity National's request.

In early February, 1972, John Fowler, a broker specializing in the placement of unregistered securities, learned that the Kateses owned the unregistered Equity National shares. Fowler was also informed that Kates held 110,000 unregistered shares of Merck & Co., a blue-chip pharmaceutical manufacturer. Fowler testified by deposition that Kates informed him that he was willing to sell the Merck stock at sixty percent of market value, thereby allowing the buyer to realize a $500,000 or more profit on resale, if the buyer would first purchase the Equity National shares. Fowler then contacted Jack Arnold, an associate of Fowler's and an experienced attorney, who agreed to purchase the Equity National shares in exchange for a share of the profits anticipated from the Merck deal. On February 24, 1972, Arnold, for a downpayment of $25,000, entered into a written agreement with Kates to purchase all the Kateses' Equity National shares for $181,000 and thereby acquired a written thirty day option to purchase the Merck stock, the resale proceeds of which were to be split with Fowler. The closing date for the Equity National purchase was set for February 28, later extended to March 3.

It is undisputed that on February 24, neither Fowler nor Arnold knew that the Equity National stock was worthless. Both Fowler and Arnold testified that prior to the closing date, they had telephoned Equity National's transfer agent, the National Bank of Georgia, and were told that the relevant Equity National certificates had no encumbrances other than those stemming from their unregistered status under the Securities Act of 1933. 7 Arnold also testified that Kates had only showed him a photostatic copy of the front side of the Equity National certificates during the negotiations that led to the purchase agreement but had assured Arnold that the reverse side contained nothing unusual. Fowler testified, however, that on February 25, he telephoned the president of Equity National, C.H. Childs, to inquire whether Equity National would be interested in repurchasing the Kateses' shares. According to Fowler, Childs stated that Equity National was suing Kates for return of the shares and that those shares could not be transferred. Fowler recalled that Childs had cautioned: "Bankers Trust will not deliver the stock to you. You check with Bankers Trust. We are suing to get this stock back." Fowler asserted that he immediately called Arnold and informed him of the conversation and that they both met with Kates, who admitted being sued by Equity National but denied that the specific shares he was selling were involved. Arnold, though conceding that he was present at the meeting with Kates and Fowler, denied that he was told of Fowler's conversation with Childs. Fowler then telephoned the National Bank of Georgia and again was told that there were no unusual restrictions on the shares. Fowler also testified that he telephoned Silverman on February 28, and, after telling Silverman some of the details of his conversation with Childs (though he did not inform Silverman that it was Childs who gave him this information), Silverman answered that he knew of no litigation concerning the Equity National shares and stated: "You come up with money and we will deliver the stock."

Now enter the plaintiffs Mallis and Kupferman, brothers-in-law and both practicing dentists. Arnold, who was acting as an attorney for Mallis in an unrelated securities transaction, met with Mallis on March 1 to discuss this matter. During the meeting, Arnold, who stood to lose the Merck stock option and the $25,000 deposit if he did not raise the additional $156,000 required to close the purchase of the Equity National shares, told Mallis the broad outlines of the deal with Kates and, without mentioning the Merck stock, commented that the deal would bring "skyscraper[ ]" profits. Arnold then offered to pay $50,000 if Mallis would finance the balance of the deal.

Mallis relayed this information to Kupferman, who also became interested in the deal. Plaintiffs had never heard of Equity National prior to this time. They knew nothing about its line of business, earnings, or management; they knew only that the stock being sold was unregistered. On March 2, Kupferman sought financing from Franklin National Bank through his business and social acquaintance John Murfitt, then an Assistant Vice-President at Franklin National and manager of the bank's Uniondale branch. Desiring additional information, Murfitt called Arnold and Silverman. Murfitt testified that Silverman told him that the Equity National stock was "negotiable and saleable." Silverman denied this conversation. After these conversations, Murfitt agreed that Franklin National would lend plaintiffs the necessary $156,000.

On the morning of March 3, the closing day, plaintiffs obtained the loan from Franklin National, and in response to Mallis' concern for further assurance of repayment, Arnold sent Mallis a letter, which Mallis later approved, confirming the plaintiffs' "participation" in the Equity National deal and offering the Equity National stock to Mallis as collateral for Arnold's obligation to pay "within thirty days or less ... the funds advanced by you plus a profit of fifty ($50,000.00) thousand dollars." 8

The sale of the Equity National shares occurred at Bankers Trust in the afternoon of March 3. Present were Arnold, Fowler, Kates, Silverman, and Murfitt. Plaintiffs did not attend the closing. There was conflicting testimony...

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