Marth v. Industrial Incomes Incorporated of North America

• Decision Date: 31 July 1968
• Docket Number: No. 67 Civ. 1317.,67 Civ. 1317.
• Citation: 290 F. Supp. 755
• Parties: Margarethe MARTH and Rosemarie Lippmann, Plaintiffs, v. INDUSTRIAL INCOMES INCORPORATED OF NORTH AMERICA, United States Trust Fund Management Corporation, Industrial Growth Fund of North America, Peter M. Bekeny and Ilona M. Bekeny, Defendants.
• Court: U.S. District Court — Southern District of New York

290 F. Supp. 755

Margarethe MARTH and Rosemarie Lippmann, Plaintiffs, v. INDUSTRIAL INCOMES INCORPORATED OF NORTH AMERICA, United States Trust Fund Management Corporation, Industrial Growth Fund of North America, Peter M. Bekeny and Ilona M. Bekeny, Defendants.

No. 67 Civ. 1317.

United States District Court S. D. New York.

July 31, 1968.

Windels, Merritt & Ingraham, New York City, for plaintiffs.

Wofsey, Certilman & Haft, New York City, for defendants Industrial Incomes Incorporated of North America, United States Trust Fund Management Corp., Peter M. Bekeny and Ilona M. Bekeny; Harvey M. Sklaver, New York City, of counsel.

MANSFIELD, District Judge.

This is a Rule 12(f), F.R.C.P., motion that seeks to strike affirmative defenses.

Plaintiffs, two West German citizens, purchased 5,000 shares of Industrial Incomes Incorporated of North America (Industrial) on or about June 28, 1964. Alleging violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, and state common law fraud, they have tendered their shares and endeavor to rescind the transaction. They assert that defendants, Industrial, Peter Bekeny (Peter), its president, Ilona Bekeny, Peter's wife, and an Industrial officer, United States Trust Fund Management Corporation (Trust), Industrial's wholly-owned subsidiary, and Industrial Growth Fund of North America (Growth), an open-end mutual fund managed by Industrial, which is named as a party but has not yet been served, delivered to plaintiffs a number of writings that defendants knew to be false and misleading, and which they knew to omit to state material facts. Plaintiffs further allege that these writings induced them to purchase their shares.

Prior to filing their answer, defendants moved for summary judgment principally on the basis of an agreement dated November 6, 1965 entered into between plaintiffs and Peter which, defendants contended, constituted a settlement and relinquishment of plaintiffs' claims. Under the terms of the agreement,

(a) Peter undertook to purchase 3,000 shares of Industrial stock from plaintiffs at $8.50 per share, thereby obligating himself to purchase and pay for 1,000 shares by December 1st in each of the years 1966, 1967, and 1968 (Par. 1).

(b) Plaintiffs had the right to "terminate" the agreement by notice at any time (Par. 9(a)).

(c) Upon "completion" of the agreement or its "termination" by plaintiffs no further claim could be made by plaintiffs against Peter or Trust on account of the purchase by plaintiffs of their shares and plaintiffs agreed to "deliver a general release to Bekeny" (Par. 9 (b)); and

(d) Upon the "faithful performance and completion of this agreement by Peter" or "termination" by plaintiffs, "then the parties are hereby released" of all claims each against the other (Par. 11(c)). (Emphasis supplied.)

In denying the motion for summary judgment, Judge Wyatt found, on the undisputed facts, that Peter did not pay for 1,000 Industrial shares of plaintiffs by December 1, 1966. Second, Judge Wyatt found that only Peter was a party to the agreement, so that only he could rely upon the agreement on a motion for summary judgment. Third, it was found that plaintiffs have not "terminated" the November 6, 1965 agreement. In all, it was concluded that there had been no "completion," no "termination" and no "faithful performance and completion" of the agreement by Peter. Defendants' motion was found to be wholly without merit, and accordingly was denied. Marth v. Industrial Incomes Inc. of North America, 291 F.Supp. 994. (S.D.N.Y.1967).

Thereafter, in their answer, defendants denied the allegations contained in the complaint, and set forth six affirmative defenses, including estoppel, waiver, laches, and the statute of limitations. Plaintiffs, by way of a Rule 12(f), F.R. C.P., motion, endeavor to strike defendants' affirmative defenses as insufficient.

STATUTE OF LIMITATIONS

Plaintiffs' action was commenced in April, 1967 with the filing of the complaint and the issuance of an order of attachment. The statute of limitations applicable to New York State common law fraud is six years. N.Y.C.P.L.R. § 213(9). Since the limitations period for a § 10(b) claim is borrowed from the governing state fraud statute, formerly C.P.A. § 48(5) and C.P.L.R. § 213(6), Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 787 (2d Cir. 1951); Glickman v. Schweikart & Co., 242 F.Supp. 670, 674 (S.D.N.Y. 1965); III Loss, Securities Regulation 1774 (1961 ed.), the six-year period is likewise applicable. Having thus determined that the complaint was filed within three years after the plaintiffs' alleged stock purchase, the affirmative defense based upon the statute of limitations is totally lacking in merit, as a matter of law insufficient, and is hereby stricken.

DEFENSES ARISING OUT OF THE AGREEMENT

Defendants contend that the November 6, 1965 agreement constitutes a waiver of plaintiffs' rights (fifth affirmative defense) and that by reason of this agreement they are estopped from maintaining this action. In the recent past, these and similar defenses have been sanctioned as a shield to a 10b-5 action. Royal Air Properties, Inc. v. Smith, 312 F.2d 210 (9th Cir. 1962); see Tobacco and Allied Stocks v. Transamerica Corp., 143 F.Supp. 323, 327 (D.Del.1956), affd., 244 F.2d 902 (3d Cir. 1957); Pitofsky v. Brucker, 291 F.Supp. 321 (S.D.N.Y. 1966); Cartier v. Dutton, 45 F.R.D. 278 (S.D.N.Y.1965); cf. Dale v. Rosenfeld, 229 F.2d 855 (2d Cir. 1956). See also Popper v. Havana Publications, Inc., 122 So.2d 247, 84 A.L.R.2d 476 (Fla.App. 1960) (blue sky law). See generally Note, 73 Yale L.J. 1477 (1964).

Under the terms of the agreement, plaintiffs have given up no claims arising out of their purchase of the Industrial shares because, on the undisputed facts, they have not "terminated" and Peter has neither "completed" nor faithfully performed. Since these conditions precedent for the release have not been fulfilled, even though Peter had ample opportunity to complete his obligations, the defenses related to the agreement are, as a matter of law, futile. See New York Gen. Obligations Law § 15-501(3). Even assuming the applicability of federal law with respect to this issue on the § 10(b) claim, it does not appear that an unperformed executory accord would be any more successful as a defense to a § 10(b) claim than to one arising under New York law, in view of the hostility that has been expressed to agreements waiving rights under the securities legislation. See 15 U.S.C. § 78cc(a); Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953). This is not a case in which on the untried contentions of the parties it is possible to envision victory for either side, see Schine v. Schine, 254 F.Supp. 986 (S.D.N.Y.1966); rather the Court is presented with a situation in which the affirmative defenses based upon the agreement are "wholly without merit," '66-'67 CCH Fed.Sec.L.Rep. at 96,248 and must be stricken as legally insufficient. Boston and Main Corp. v. Chicago, B. & Q. R. R., 258 F.Supp. 930 (S.D.N.Y.1966); Occidental Life Ins. Co. v. Fried, 245 F.Supp. 211 (D.Conn. 1965). Accordingly, the fifth and sixth affirmative defenses are stricken.

DEFENSES RELATING TO PLAINTIFFS' RETENTION OF THEIR SHARES

The first three affirmative defenses are as follows:

(1) Estoppel based upon plaintiffs' exercise of rights as shareholders after having obtained knowledge as to the falsity of the alleged misleading statements and omissions, and defendants' reliance thereon;

(2) Laches based upon the failure of the plaintiffs, upon discovery of the facts, to effect a sale of their shares with reasonable promptness so as to avoid any loss; and

(3) Laches based upon the failure to assert their claims within a reasonable time after discovery, so that defendants could have repurchased these Industrial shares and resold them at a price in excess of current market value.

An estoppel defense based upon plaintiffs' receipt of dividends, see Fitch v. United Royalty Co., 143 Kan. 486, 55 P. 2d 409 (1936), their exercise of voting rights, Straley v. Universal Uranium and Milling Corp., 289 F.2d 370 (9th Cir. 1963), and other assertions of shareholders' rights, see Note, 73 Yale L.J. 1477, 1480 (1964), after the acquisition of knowledge, has been upheld in rescission actions. While Professor Loss has quite properly discredited some of these...