Robinson v. Cupples Container Co.

• Decision Date: 14 September 1970
• Docket Number: No. C 69 14.,C 69 14.
• Citation: 316 F. Supp. 1362
• Parties: L. S. ROBINSON, Plaintiff, v. CUPPLES CONTAINER CO., a corporation, and Cupples Manufacturing Co., a corporation, Defendants.
• Court: U.S. District Court — Northern District of California

316 F. Supp. 1362

L. S. ROBINSON, Plaintiff, v. CUPPLES CONTAINER CO., a corporation, and Cupples Manufacturing Co., a corporation, Defendants.

No. C 69 14.

United States District Court, N. D. California.

September 14, 1970.

Anthony P. Brown, of Pillsbury, Madison & Sutro, San Francisco, Cal., for plaintiff.

Morrison, Foerster, Holloway, Clinton & Clark, San Francisco, Cal., and Armstrong, Teasdale, Kramer & Vaughan, St. Louis, Mo., for defendants.

MEMORANDUM OF DECISION

SWEIGERT, District Judge.

This action arises under the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78jj, Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. 240.10b-5, and the provisions of the California Corporations Code.

Jurisdiction in this court is founded upon Title 15 U.S.C. § 78aa which provides that the district courts shall have exclusive jurisdiction of violations of the Securities Exchange Act.¹

Plaintiff is a citizen of the State of California; defendants are citizens of states other than California and have their principal places of business in the State of Missouri. It is alleged that defendant Cupples Company Manufacturers (Manufacturers) own the majority of the outstanding stock in defendant Cupples Container Corporation (Container).

The action is now before this court on motions by each defendant to dismiss on the ground that each count of the Second Amended Complaint fails to state a claim upon which relief can be granted. Federal Rules of Civil Procedure 12(b).

In the first count of the Second Amendment Complaint it is alleged that on March 24, 1967, plaintiff and defendant Container entered into a contract whereby Container agreed to sell 21,307 shares of Container common stock to plaintiff in consideration of the sale by plaintiff to Container of 785 shares of common stock of the "Magi-Cup Corp.", a California corporation; that the 785 shares of Magi-Cup represented the majority of the outstanding stock of that corporation and had a fair market value of $210,000.

It is alleged that defendants, in connection with negotiations leading to the execution of that contract, represented that plaintiff would be elevated to the management position of Container's cup operation, that plaintiff would be given management responsibility in order that he might protect his investment, and that defendants would provide capital to increase the ability of Magi-Cup to maintain national marketing.

It is further alleged that these representations were untrue in that defendants had no such intent as evidenced by the fact that plaintiff was never given the promised management responsibilities in Container and, in November, 1967, plaintiff was relieved of all management responsibility, even in Magi-Cup; that plaintiff knew he could protect his investment if he was given such responsibility; that plaintiff relied upon the false representations and was induced thereby to sell his Magi-Cup stock; and that plaintiff would not have entered into the contract but for the false representations.

Finally, it is alleged that as a direct and proximate result of such false representations plaintiff has been denied the opportunity to protect his investment and the stock received in the exchange has become substantially worthless.

In Count Two it is alleged that Container offered to sell, attempted to sell, and solicited the sale of stock in California; that the sale was made without a permit authorizing the transaction from the California Commissioner of Corporations and that the sale is therefore void.

MOTION TO DISMISS COUNT ONE

Defendants contend that Count One fails to state a claim against defendants upon which relief can be granted because no damage is alleged to have resulted from the alleged misrepresentations; that Count One fails to allege a causal connection between the alleged misrepresentations and the alleged damage; that Count One seeks recovery for an alleged breach of fiduciary duty by management and controlling shareholders and that such recovery is not possible under the Securities Exchange Act of 1934.

Count One of the Complaint is based essentially upon Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. 240.10b-5² in that it alleges a misrepresentation of material fact in connection with the purchase of securities.

Defendants argue that in order to state a claim under Rule 10b-5 a complaint must contain, inter alia, (a) an act or acts allegedly violative of Rule 10b-5 performed in connection with a transfer of stock, (b) an injury to the plaintiff, and (c) a causal nexus between the act or acts allegedly violative of the Rule and the injury to plaintiff. Bound Brook Water Co. v. Jaffe, 284 F.Supp. 702, 709 (D.N.J.1968); List v. Fashion Park, 340 F.2d 457, 462 (2d Cir. 1965); Barnett v. Anaconda, 238 F.Supp. 766, 770, 775 (S.D.N.Y.1965); Smith v. Murchison, 310 F.Supp. 1079 (S.D.N.Y.1970).

Defendants say that the complaint in this action fails to adequately allege either injury to plaintiff or causal nexus between the alleged violation and the alleged injury.

In each of the above cited cases the courts found, either after a full trial or from the face of the complaint, that there was an insufficient connection between the alleged 10b-5 violation and the injury claimed.

In Bound Brook, supra, the court noted that the complaint failed to adequately specify either the alleged damage to plaintiffs or the causal nexus between the allegedly violative acts and the alleged damage.

In List v. Fashion Park, supra, involving a failure of disclosure by a corporate insider prior to purchase of minority shares, the court found, after a full trial, that the conduct of defendant did not actually cause plaintiff's injury because plaintiff would not have been influenced by the undisclosed facts and because the disclosed facts were not material at the time of the sale.

In Barnett v. Anaconda, supra, involving the use of misleading proxy statements to effect the dissolution of a corporation, the court found no causal connection between the alleged violation of the Securities Exchange Act and injury to plaintiff because the defendants owned sufficient shares to have affected the dissolution without plaintiff's approval.

In Smith v. Murchison, supra, the court stated that "In order to state a claim under Rule 10b-5, however, it must appear not only that a purchase or sale took place, but that there was a loss and that the loss flowed directly from the purchase or sale."

It becomes apparent from a study of the above cited authorities that the courts are taking great care to insure that cases brought under Rule 10b-5 are, in fact, based on violations of federal law; i. e., that the conduct of the defendant which is alleged to be in violation of the Rule actually caused plaintiff's injury.

The problem in the instant case appears to have arisen out of the confusion surrounding the treatment of "causal nexus" in the various cases.

A great deal of this confusion is cleared away by the recent case of Chasins v. Smith, Barney & Co., Inc., 305 F.Supp. 489 (S.D.N.Y.1969); aff'd (2d Cir. July 7, 1970), 39 Law Week 2037.³

In Chasins, a case involving non-disclosure by a broker-dealer of his position as market-maker to a purchaser of stock at the time of sale, the court held that the question is not whether the defendant sold to plaintiff at a fair price but whether disclosure of defendant's position as market-maker might have influenced plaintiff's decision to buy the stock.

The court in Chasins found that the position of market-maker was a material fact that should have been disclosed; that plaintiff relied upon defendant's recommendations without disclosure of the material fact; that plaintiff purchased the securities and suffered a loss on resale; and that "Causation in fact or adequate reliance was sufficiently shown by Chasins." 39 L.W. 2038.

The court went on to discuss damages finding that, since defendant violated Rule 10b-5 with respect to the sale of securities, the plaintiff was entitled to recover his damages resulting from such violation; "The issue is not whether Smith, Barney was actually manipulating the price on Chasins or whether he paid a fair price, but rather the possible effect of disclosure * * * on Chasins' decision to purchase * * *." 39 L.W. 2038.

Chasins was awarded damages equalling the difference between the purchase price of the shares and the price at which he sold them a year later; the court did not require that the loss be proximately caused by the defendant's violation of the Rule, as defendants would have this court require, but rather the court required that defendant be shown to have engaged in activity in violation of the Rule, that plaintiff be shown to have relied upon such violation and that loss ultimately result therefrom.

Therefore, it is clear that the "causation" required is simply that the action on defendant's part, which is alleged to have violated Rule 10b-5, must have been relied upon by plaintiff when he entered the transaction. Chasins v. Smith, Barney, supra; List v. Fashion Park, supra 340 F.2d at 462.

It is our opinion that the allegations in the instant complaint, which are generally to the effect that defendants made untrue statements concerning their intent to deny plaintiff the promised management responsibility, are sufficient to allege a misrepresentation of a material fact.

Promised management responsibility is, in the context of the allegations of this complaint, a material fact and any untrue statement concerning such promised responsibility may well constitute a violation of Rule 10b-5. It may be assumed at this stage of the action that, if defendants had indicated to plaintiff that he would not be given management responsibility in the Container cup operation, the plaintiff would not have entered into the transaction.

We recognize that it must also be established that plaintiff relied upon such untrue statement in deciding to enter the...