Mittendorf v. JR Williston & Beane Incorporated

• Decision Date: 11 March 1974
• Docket Number: No. 73 Civ. 3286 (MP).,73 Civ. 3286 (MP).
• Parties: Alfred D. MITTENDORF, Jr., Plaintiff, v. J. R. WILLISTON & BEANE INCORPORATED et al., Defendants.
• Court: U.S. District Court — Southern District of New York

372 F. Supp. 821

Alfred D. MITTENDORF, Jr., Plaintiff, v. J. R. WILLISTON & BEANE INCORPORATED et al., Defendants.

No. 73 Civ. 3286 (MP).

United States District Court, S. D. New York.

March 11, 1974.

Casey, Lane & Mittendorf, New York City, for plaintiff; by Preben Jensen, Charles M. Pratt, John T. Morin, New York City.

Shea, Gould, Climenko & Kramer, New York City, for defendant J. R. Williston & Beane, Inc., by Martin I. Shelton, New York City.

Sullivan & Cromwell, New York City, for defendant Alpheus C. Beane, by William R. Norfolk, New York City.

Colton, Weissberg, Hartnick & Yamin, New York City, for defendant Marvin D. Kantor; by Alan J. Hartnick, New York City.

Baer & Marks, New York City, for defendants Frederick S. Todman & Co. and Frederick S. Todman; by George H. Colin, Gerald S. Maltz, New York City.

OPINION

POLLACK, District Judge.

This claim is made under Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Rules promulgated thereunder, 17 C.F.R. § 240.10b-5. Common law allegations are added as claims pendent to the federal question jurisdiction.

I.

The plaintiff instituted this suit on July 26, 1973, seeking damages from the defendants in respect to a subordinated loan made by the plaintiff on August 9, 1963 to defendant Williston & Beane, Inc. (W&B hereafter). The loan consisted of common stocks owned by plaintiff which were then worth $103,000; the loan carried interest at 4% per annum. The return of the securities was subordinated in interest to obligations of the firm due to its general creditors. By the terms of the loan plaintiff was entitled to continue to receive any dividends payable on the stocks and was privileged to trade the stocks and substitute others. Around the same period of time W&B added to its senior capital by obtaining other loans, likewise subordinated to obligations payable to general creditors.

Due to circumstances to be related hereafter, W&B went out of business on December 1, 1963 and commenced marshalling and liquidating its assets and paying off its creditors; the liquidation is still incomplete. In the interim all general creditors and others entitled to priority over the plaintiff's class of subordinated lenders have obtained satisfaction of their claims against W&B. However, the subordinated loans mentioned have been only partially satisfied to date. A final liquidating distribution is expected to be made in the near future but some deficiency will remain unsatisfied on these subordinated loans. Plaintiff claims that W&B still owes him 91 shares of the stock of Congress Fund which he loaned in August 1963 as well as $82,718.67 which represents the proceeds of some stock loaned in 1963 and sold in 1966 by W&B to pay an indebtedness from W&B to bank (general) creditors.

Plaintiff seeks by this case, in effect, to undo his August 1963 loan and to recover damages thereon from W&B and its principal officers, and accountants, claiming that at the time of the loan these defendants failed to disclose information concerning W&B to which he was entitled to properly evaluate the investment he was then making in W&B.

The defendants severally deny plaintiff's allegations and deny liability to the plaintiff. They affirmatively assert, among other things, that in June 1968 plaintiff executed and delivered a general release in favor of the corporate defendant and the defendant-officers and directors thereof, concluding an attempt on behalf of plaintiff to obtain a general creditor's status and precluding any further criticism of the said defendants in respect to the customer's account which underlies this case. Defendants also assert that the claims herein are barred by the applicable statutes of limitation.

The case was tried to the Court, without a jury, and decision was reserved after the parties rested.

If plaintiff is entitled to a recovery herein against W&B he would become entitled to a priority in the distribution of the remaining assets of W&B this might give him substantially all of the assets remaining in the liquidation instead of only his aliquot share thereof as one of the subordinated creditors. Speaking of the release which he furnished to W&B five and a half years ago, he testified that he thought he was settling the whole matter at that time.

However, plaintiff was recently advised to bring this suit. He testified that he had believed that things were coming along all right for him in the liquidation. As the liquidation neared final distribution, it seemed to the plaintiff that there would be a shortfall in the recovery on his loan. Meanwhile, a Court decision made on May 1, 1972 in favor of one Maher against the defendant Beane came to the attention of plaintiff. Maher, a former employee of W&B, had bought some of the W&B stock in 1963 and he charged that the sale was induced by misrepresentations. In the course of the Court's opinion, a letter from W&B's accountant, Todman, dated January 8, 1963 was recited in part. Although plaintiff never saw the letter and Mr. Henry never actually ever read it, this was pointed to as having generated this suit.

For the reasons shown hereafter, under all the relevant facts and circumstances, there is neither merit, equity or vitality in the claims asserted. There is no doubt that before the plaintiff executed and delivered the settlement agreement and general release in 1968, negotiated by his attorneys, he was sufficiently informed of the material facts connected with and arising out of the matters underlying the claims herein as to which the so-called Todman letter of January 8, 1963 is only a further detail. That general release and settlement were intended to cover and conclude claims of the sort made herein and are a bar to them. Moreover, the limitary period for commencement of this suit, even if a fraud statute were to be applied, expired before suit was filed.

There was no factual or legal justification for the inclusion as defendants in this suit of the accountants, Frederick Todman & Co.¹ or Messrs. Beane and Kantor. There was neither conspiracy to commit any wrong nor control or direction of Norman J. Marsh who conducted the transaction on behalf of the plaintiff and of W&B Inc. Indeed none of the individual defendants were personally aware of the August 1963 transaction made by plaintiff until a time subsequent thereto. There was no transaction with or reliance by plaintiff, either in fact or law, on the individual defendants.

II.

In more detail, the facts are as follows.

Williston & Beane, a stock and commodity brokerage partnership, incorporated its business on May 24, 1963. One of its customers with whom the firm had done business since 1958, Allied Crude Vegetable Oil and Refining Co. ("Allied" hereafter) carried contracts for commodities futures in cottonseed and soy bean oil, and a spot account in the commodity, both accounts being carried on margined loans. In November 1963 the market price of futures contracts declined sharply and Allied was called for additional deposits of margin of about $600,000. It failed to respond and on November 19, 1963, Allied filed in bankruptcy. The following day W&B liquidated Allied's position in accordance with directions of the New York Produce Exchange. This resulted in a deficit due the brokers of $1,200,000.

The Allied accounts were collateralized by warehouse receipts for soy bean oil believed to be worth about $1,800,000., issued by a subsidiary of American Express Company, the American Express Field Warehousing Corp., as well as by six-figure equities existing in Allied's spot commodity account. However, the sudden impact on the W&B capital account by the cash deficit in its customer's futures account caused the New York Stock Exchange and allied exchanges on November 20, 1963 to temporarily suspend W&B's memberships. W&B promptly raised additional capital and was reinstated on the Exchanges on November 22, 1963. Shortly thereafter the business and customers' accounts of W&B were transferred to another brokerage firm, Walston & Co., and W&B went into liquidation on December 1, 1963.

The ostensibly adequate collateral securing the Allied futures account turned out to be fictitious—in fact there was no oil represented by the warehouse receipts therefor. This was the famous "Salad Oil" swindle which was shortly uncovered resulting in a widespread chain of losses and disasters to firms in the Street and in criminal proceedings which sent the principal perpetrator, Tino De Angelis, to prison from which he emerged on parole about a year and a half ago after serving seven years of a 20 year sentence on a guilty plea.²

III.

The plaintiff's relationship with W&B so far as material here was as follows. Plaintiff was a long time stock brokerage customer of the parthership predecessor of W&B and had maintained his business with them through his personal friend and advisor, Norman J. Marsh. Marsh was a general partner in the predecessor of W&B and on its incorporation became one of the senior vice-presidents as well as an 11% stockholder therein and he and his wife contributed to the capital of W&B as subordinated lenders. Marsh had been the co-executor of the estate of plaintiff's mother. When plaintiff was overseas from 1944 to 1954 Marsh exercised complete discretion over plaintiff's investments. From 1954 until Marsh's illness in 1968, while plaintiff was located in Washington, Marsh would check with him on the transactions made on his behalf. After W&B went into liquidation, Marsh became associated successively with Walston & Co. and then Gude, Winmill & Co. and the plaintiff's account went with Marsh and was handled by him at each firm.

The plaintiff made two subordinated loans to W&B, one already mentioned, that of August 9, 1963, shortly after W &B was incorporated, and a second and larger subordinated loan of securities on or about November 22, 1963 on the occasion of the business...