Osadchy v. Gans

• Decision Date: 20 July 1977
• Docket Number: Civ. A. No. 76-800.
• Citation: 436 F. Supp. 677
• Parties: Paul OSADCHY and Norma Osadchy, Plaintiffs, v. Joseph GANS, Irene Gans, John Walson and Service Electric Cable T.V., a corporation of the State of Pennsylvania, Defendants.
• Court: U.S. District Court — District of New Jersey

436 F. Supp. 677

Paul OSADCHY and Norma Osadchy, Plaintiffs, v. Joseph GANS, Irene Gans, John Walson and Service Electric Cable T.V., a corporation of the State of Pennsylvania, Defendants.

Civ. A. No. 76-800.

United States District Court, D. New Jersey.

July 20, 1977.

COPYRIGHT MATERIAL OMITTED

Pessin & Holopigian by L. Steven Pessin, Hackensack, N. J., for plaintiffs.

Harper & O'Brien by Thomas R. O'Brien, Morris Plains, N. J., for defendants Gans.

Schenck, Price, Smith & King by David B. Rand, Morristown, N. J., for defendants Walson and Service Elec. Cable T.V.

COOLAHAN, Senior District Judge.

Defendants move pursuant to Fed.R. Civ.P. 56(b) for summary judgment on the grounds that plaintiffs' action is barred (1) by the statute of limitations and (2) by the doctrines of res judicata and/or collateral estoppel. Jurisdiction is predicated on both diversity, 28 U.S.C. § 1332, and § 22 of the Securities Act of 1933, 15 U.S.C. § 77v(a), and § 27 Securities Exchange Act of 1934, 15 U.S.C. § 78aa. Plaintiffs claim they were defrauded by defendants into selling their 50% interest in Garden State C.A.T.V., Inc., a cable television corporation (hereinafter Garden State).

Defendants, Joseph and Irene Gans, John Walson, and Service Electric Cable T.V., argue that the present action is merely an attempt to relitigate issues resolved by the New Jersey Superior Court in an action filed in 1969. Plaintiffs, Paul and Norma Osadchy, contend that the discovery of new facts previously unknown to them and the New Jersey trial court precludes summary judgment in this action.

On June 2, 1969, Paul Osadchy and his wife, Norma, filed an action in the Chancery Division of the Superior Court of New Jersey in Sussex County. The action was docketed as Paul Osadchy and Norma Osadchy, his wife, v. Joseph Gans, Irene Gans, John Walson, Garden State C.A.T.V., Inc., a corporation of the State of New Jersey, and Service Electric Cable T.V., Inc., a corporation of the State of Pennsylvania, Docket No. C-2632-68. See, Exhibit A to Rand affidavit in support of motion for summary judgment. The action charged that Irene Gans, Paul Osadchy's sister, and her husband, Joseph, breached their fiduciary duty to plaintiffs and induced plaintiffs through misrepresentation, fraud and deceit to sell their closely held family corporation. John Walson, the principal shareholder of the purchasing corporation, Service Electric Cable T.V., Inc. (hereinafter Service Electric), and the purchasing corporation itself were added as defendants on a conspiracy theory. Additionally, Walson and Service Electric were sued for breach of a two-year employment contract with plaintiff Paul Osadchy. Plaintiffs sued defendants on such other theories as unjust enrichment and violation of § 5 of the Uniform Securities Law (1967). Plaintiffs also alleged that the Gans concealed their relationship to the purchaser, John Walson, in order to defraud plaintiffs into selling their interest at a price much below its worth.

Judge Joseph H. Stamler, New Jersey Superior Court, ordered on May 7, 1971, that plaintiffs brief the SEC standard of fraud. His order noted that "plaintiff abandons claim under SEC Act." On May 25, 1971, he ordered that those portions of plaintiffs' complaint which constituted a shareholders' derivative action were dismissed. He also ordered:

". . . With consent of the plaintiffs, the Fifth Count of the Complaint, based upon alleged violations of the Securities Exchange Act of 1934 and the Rules promulgated thereunder, is dismissed. The Court recognizes that this dismissal is without prejudice to plaintiffs attempting to introduce at trial the aforesaid statutes and rules as evidence of fraud . . .."¹

See Exhibit E to Rand affidavit.

It was undisputed that the parties entered into a contract of sale of Garden State on June 23, 1967. The closing was held two months later, on August 22, 1967. According to the terms of the sale, the Osadchys would receive the first $20,000 of the proceeds, the remaining proceeds to be divided equally between the Gans and the Osadchys, each of whom owned half of the corporation. The contract called for the sale of all Garden State issued and outstanding capital stock for $290,000, less the liabilities of the corporation. Osadchy received additional compensation in the form of an oral agreement of employment with Garden State.

The nonjury trial took 32 days. On September 25, 1972, Judge Stamler filed an extensive opinion setting forth his findings of fact and conclusions of law. On October 10, 1972, a final judgment was entered against plaintiffs on all claims. On June 26, 1974, the Appellate Division of the Superior Court, in a short per curiam opinion, affirmed Judge Stamler for the reasons stated in his opinion. See, Exhibit I to Rand affidavit. Certification to the New Jersey Supreme Court was denied with costs on December 11, 1974, 66 N.J. 336, 331 A.2d 36. Judge Stamler found that plaintiffs and defendants Joseph and Irene Gans resigned as officers and directors of the company and delivered their shares of Garden State as required by the contract. Exhibit F to Rand affidavit, Judge Stamler's September 25, 1972, opinion, pp. 7R-S. He also found that there were no false misrepresentations as to material facts, that the contract was made at arms length, and that the purchase price was adequate and, in fact, was above fair market value. Judge Stamler noted that Osadchy received $20,000 more than Gans from the sale of the corporation, which further belied Osadchy's contention of fraud.

Plaintiffs now seek to relitigate these issues on the ground that they have recently discovered new facts supporting their allegations of fraud. The Osadchys argue that it was not until August of 1975 that they realized how they had been defrauded. Paul Osadchy stated in his affidavit in support of his motion for summary judgment (¶ 4):

". . . It was not until late August, 1975, when my attorney showed me the documents annexed to his affidavit that I realized how I had been defrauded."

Paul Osadchy states in his affidavit, ¶ 5, that "the possibility that Joseph Gans only pretended to sell his stock and John Walson pretended to buy it was never seriously considered in the prior litigation." (Emphasis added.) According to the affidavit of L. Steven Pessin, Osadchy's attorney, the check drawn on Walson's account to the order of Joseph Gans bears no notation or mark on its face indicating that it was canceled. The endorsement reads "Joseph and Irene Gans," yet it is payable to Joseph Gans alone. The endorsement, plaintiffs claim, if made crosswise, is wider than the check. This check, dated August 22, 1967, appears on Fidelity Union Trust Company's cash disbursement ledger as having been drawn on it on September 1, 1967.

The inference plaintiffs seek to draw from this newly discovered evidence is that the Gans never really sold, or at least later sold, their interest in Garden State. Additionally, plaintiffs claim that the Gans only pretended to sell their interest when the Osadchys sold theirs in order to eliminate the Osadchys from the business. The purpose of this alleged deception was to defraud the Osadchys of their interest in the corporation, whose value greatly exceeded that received by the plaintiffs.

Defendants' first contention is that they are entitled to summary judgment based on the fact that the present action is barred by the applicable statute of limitations. The defense of statute of limitations is one properly resolved on a motion for summary judgment. Turner v. Lundquist, 377 F.2d 44, 46 (9th Cir. 1967), citing 3 Barron & Holtzoff, Federal Practice & Procedure, Rules edition, § 1245, p. 206.

The principal allegations of the present complaint seek recovery under federal securities law. See, 15 U.S.C. § 77q(a) (§ 17(a) Securities Act of 1933); 15 U.S.C. § 78j(b) (10(b) Securities Exchange Act of 1934); Rule 10(b)-5. There is no federal statute of limitations which applies to actions based on securities fraud. Consequently, this Court must look to analogous State law of the forum to determine if suit is timely brought. Holmberg v. Armbrecht, 327 U.S. 392, 395, 66 S.Ct. 582, 90 L.Ed. 743 (1946); Berry Petroleum Co. v. Adams & Peck, 518 F.2d 402, 406 (2d Cir. 1975); Saylor v. Lindsley, 391 F.2d 965, 970 (2d Cir. 1968). The federal court should select the forum State's statute of limitations which corresponds to a State cause of action most similar to the federal one and which best effectuates its purpose. Berry Petroleum Co. v. Adams & Peck, at 407; Hudak v. Economic Research Analysts, 499 F.2d 996, 999 (5th Cir. 1974), cert. denied, 419 U.S. 1122, 95 S.Ct. 805, 42 L.Ed.2d 821 (1975).

We turn then to the law of New Jersey, the forum. Movants claim that whether this Court looks to N.J.S.A. 49:3-71(e), which states that suit under the Uniform Securities Law, N.J.S.A. 49:3-47, et seq., must be commenced within two years of the contract of sale, or to N.J.S.A. 2A:14-1, which permits suit within six years,² the present action is barred. Clearly, the cause of action arose in 1967, some nine years before suit was commenced in the present action. Therefore, movants are correct in their assertion that whichever statute of limitations the Court chooses to apply, the present action appears barred.

However, plaintiffs contend that the statute of limitations was tolled by defendants' fraudulent concealment of the facts in this case. Additionally, plaintiffs contend that if the Court looks to N.J.S.A. 2A:14-1, the operative language is "accrues," see fn. 2, supra, and plaintiffs contend that New Jersey law does not recognize an action for fraud to have accrued until the discovery of the fraud.³

In order to take advantage of the doctrine of fraudulent concealment, plaintiffs must show sufficient evidence to warrant the conclusion that defendants concealed the basic facts disclosing the existence of the cause of action and that plain...