Robbins v. Banner Industries, Inc.

• Decision Date: 21 December 1966
• Docket Number: No. 66 Civ. 2367.,66 Civ. 2367.
• Citation: 285 F. Supp. 758
• Parties: Hazel ROBBINS, a stockholder of Banner Industries, Inc., etc., Plaintiff, v. BANNER INDUSTRIES, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

285 F. Supp. 758

Hazel ROBBINS, a stockholder of Banner Industries, Inc., etc., Plaintiff, v. BANNER INDUSTRIES, INC., et al., Defendants.

No. 66 Civ. 2367.

United States District Court S. D. New York.

December 21, 1966.

Stull & Stull, New York City, for plaintiff, Richard J. Stull, New York City, of counsel.

Lowenstein, Pitcher, Hotchkiss & Parr, New York City, for defendant Joseph Friedman, Robert S. Newman, New York City, of counsel.

MEMORANDUM

COOPER, District Judge.

Pursuant to Rule 12(b), F.R.Civ.P., defendant Joseph Friedman moves to dismiss the complaint against him. Motion granted.

Plaintiff alleges representative and derivative claims arising under the Securities Exchange Act of 1934, 15 U.S.C. sec. 78a et seq. and state law. The only pertinent facts alleged in the complaint are: (1) the "defendant directors" issued stock to themselves "without fair consideration" (complaint para. 3); (2) the "defendant directors" breached their fiduciary obligation to the corporation in a real estate transaction and in other "non-arms length transactions with Banner for their own profit * * *." (complaint para. 6). Defendant Friedman is not alleged to be one of the "defendant directors." His only connection with these acts is as an "aider and abettor." (complaint para. 1).

We note at the outset that plaintiff's complaint casts aside the imperatives of essential pleading clearly stated in Rule 8, F.R.Civ.P. The complaint does not follow the requirements of notice pleading, the averment of a single set of facts while separately stating in separate counts the various legal theories upon which recovery is claimed. See Cooper v. North Jersey Trust Co., 250 F.Supp. 237, 241 (S.D.N.Y.1965). Despite the liberality of modern pleading practice, the complaint must still give the defendant and the court at least a fair idea of what the plaintiff complains. See 2 Moore, Federal Practice, para. 8.13, p. 1705.

Construing the complaint in the most liberal fashion and giving plaintiff every interpretive benefit, the complaint fails to state a cause of action under the Exchange Act. We reach this conclusion by applying to the complaint each of the sections of the Exchange Act allegedly violated.

Section 7

The complaint demands damages pursuant to section 7 of the Exchange Act.¹ (complaint para. 17). The only intimation in the complaint of any violation of this section is found in paragraph 8. This paragraph alleges that a proxy statement was in violation of Section 14, 15 U.S.C. sec. 78n, because it omitted the information that shares "were pledged to secure a loan that was previously arranged by one or more of the defendants in violation of Regulations T and U of the Federal Reserve Board * * *."² Paragraph 8 of the complaint requests relief under, and charges a violation of, section 14 of the Exchange Act. However, even if we regard this as alleging a substantive violation of section 7, plaintiff still has failed to state a cause of action.

The margin requirements are imposed only upon certain professionals. Plaintiff has not alleged that the loan involved a broker, dealer, or any other person to whom the margin requirements of section 7 and Regulations T and U apply.

Moreover, plaintiff has not shown herself to be a member of the class protected by section 7. The courts have developed a civil remedy for violation of section 7(c). See Smith v. Bear, 237 F.2d 79, 60 A.L.R.2d 1119 (2d Cir. 1956); Remar v. Clayton Securities Corp., 81 F.Supp. 1014 (D.Mass.1949); Reader v. Hirsch & Co., 197 F.Supp. 111 (S.D.N.Y. 1961). However, "the principle of these decisions is that Section 7(c) was passed for the benefit of customers * * *." Meisel v. North Jersey Trust Co., 218 F.Supp. 274, 277 (S.D.N.Y. 1963). Plaintiff does not allege—nor do the facts permit our inferring—that either she or the corporation was the customer of a person bound by the margin requirements of section 7. Thus, assuming there was a transaction in which section 7 was violated, plaintiff, as a stranger to the transaction, has no cause of action. Meisel v. North Jersey Trust Co., supra, 218 F.Supp. at 277; cf. Bronner v. Goldman, 361 F.2d 759 (1st Cir. 1966).

Section 9(a) (4)

Plaintiff claims damages under this section of the Exchange Act.³ It prohibits the use of a false or misleading statement in connection with the purchase or sale of a security registered upon a national exchange. The only sale of stock alleged in the complaint is the issuance of Banner's stock to the "defendant directors," allegedly without "fair consideration." (complaint, para. 3).

Plaintiff has not stated a cause of action under 9(a) (4). She has alleged no facts which could constitute a false or misleading statement. Moreover, this section requires that the misleading information be made by the purchaser to the seller or vice-versa. Elfenbein v. Yaeger, CCH 64-66 Fed.Sec.L.Rep. ¶ 91, 368 (S.D.N.Y.1964). Under the most liberal reading of the complaint, there is no allegation that defendant Friedman was either a purchaser or a seller of any securities. The alleged misrepresentations of the stock transaction to the shareholders of Banner does not state a cause of action under section 9(a) (4) because the misleading statements alleged were not made to a purchaser or seller. See Elfenbein v. Yaeger, supra.

Section 10(b) and Rule 10b-5

Plaintiff's request for relief under this section⁴ and Rule must be dismissed for failure to state a cause of action. There is liability under these provisions only if the alleged fraud or deceit is "in connection with the purchase or sale of a security." O'Neill v. Maytag, 339 F.2d 764, 768 (2d Cir. 1964); Howard v. Levine, 262 F.Supp. 643 (S.D. N.Y.1965); Heit v. Weitzen, 260 F.Supp. 598 (S.D.N.Y.1966). The only transaction involving the transfer of securities alleged in the complaint is the "issuance" of stock to the directors without "fair consideration." (complaint para. 3).

However, it is clear that not every transaction involving securities, even if in violation of state law, states a cause of action under Rule 10b-5. Thus, our Court of Appeals has stated:

Where the duty allegedly breached is only the general duty existing among corporate officers, directors and shareholders, no cause of action is stated under Rule 10b-5 unless there is an allegation of facts amounting to deception. O'Neill v. Maytag, 339 F.2d 764, 767-768 (2d Cir. 1964). (Emphasis supplied).

The complaint is thus defective as to defendant Friedman in that it nowhere alleges any fraud or deceit by him. See O'Neill v. Maytag, 230 F.Supp. 235, 239 (S.D.N.Y.), aff'd. 339 F.2d 764 (2d Cir. 1964); Howard v. Levine, supra; Weber v. C. N. P. Corp., 242 F.Supp. 321, 325 (S.D.N.Y.1965).

Section 14(a)

Plaintiff alleges various omissions and misstatements in Banner's proxy statements, and charges that these constitute violations of this section of the Exchange Act.⁵ (complaint para. 4-8). It is alleged that these violations of the proxy rules were caused by the defendant directors. Defendant Friedman's only connection with these alleged proxy violations is found in the allegation that "the remaining defendants" (which would include Friedman) "aided and abetted the acts and practices complained of." (complaint para. 1).

Section 14(a) imposes liability for the solicitation of proxies in violation of the Securities and Exchange Commission's Rules. There is no allegation that Friedman solicited any proxies. In fact, plaintiff's attorney has conceded that Friedman was not the author of the offending proxies. (Stull Affidavit, Oct. 3, 1966, para. 3). We thus cannot regard the complaint as either stating a violation of section 14(a) or adequately apprising Friedman of the acts for which he is being asked to account.

If we read the complaint as implying that Friedman was in some way part of a group soliciting proxies in contravention of the Commission's Rules, plaintiff has still failed to state a cause of action. Her attorney asserts that the proxies failed to reveal the defendants' (including Friedman) fraudulent activity, i. e. the various breaches of their fiduciary duties. We find nothing, and have been shown nothing, in the Exchange Act or the Regulations thereunder which requires such material be revealed in the proxy statements. See Regulation 14a-3; Schedule 14A; Mills v. Sarjem Corp., 133 F.Supp. 753 (D.N.J. 1955). Cf. Hoover v. Allen, 241 F.Supp. 213, 230 (S.D.N.Y.1965).

Even if these omissions are violations of section 14(a), plaintiff has still not made out a cause of action under this section. There is no insurer liability under section 14(a); the alleged violation of the proxy rules does not give rise to a cause of action under this section unless there is some causal connection between the violation and the injury. Barnett v. Anaconda Co., 238 F.Supp. 766, 770-774 (S.D.N.Y.1965). See Mills v. Sarjem Corp., supra; Lapchak v. Sisto, CCH, Fed.Sec.L.Rep. ¶ 90, 721 (S.D.N.Y. 1955).

The complaint as a whole fails to allege any damage that could result from the alleged proxy violations. Plaintiff claims that shareholders relied upon the proxy statements by selling their shares to defendants. (complaint para. 4). In Hoover v. Allen, 241 F.Supp. 213, 230-231 (S.D.N.Y.1965), Judge Herlands dismissed the exact claim presented here. He noted:

The only claimed injury is said to have resulted from the circumstances that statements in the proxies caused stockholders other than plaintiffs to sell stock. The fact that the piece of paper upon which the allegedly misleading statements appeared was a proxy statement is irrelevant to the damage claimed. * * *

In the absence of some allegations of infringement upon corporate suffrage rights or some corporate action taken as a result of such infringement, no cause of action under section 14(a) has been made out.

We are in accord. A proxy is neither a prospectus nor a registration statement. The sale or purchase of stock in reliance upon an...