Shofstall v. Allied Van Lines, Inc.

• Decision Date: 08 August 1978
• Docket Number: No. 74 C 2067.,74 C 2067.
• Citation: 455 F. Supp. 351
• Court: U.S. District Court — Northern District of Illinois
• Parties: Richard B. SHOFSTALL, Jr., on behalf of himself and all others similarly situated, Plaintiff, v. ALLIED VAN LINES, INC., and Price Waterhouse & Co., et al., Defendants.

455 F. Supp. 351

Richard B. SHOFSTALL, Jr., on behalf of himself and all others similarly situated, Plaintiff, v. ALLIED VAN LINES, INC., and Price Waterhouse & Co., et al., Defendants.

No. 74 C 2067.

United States District Court, N. D. Illinois, E. D.

August 8, 1978.

COPYRIGHT MATERIAL OMITTED

Stuart K. Taussig, Steven H. Mora, Stuart Smith and Judith L. Libby, Taussig, Wexler & Shaw, Ltd., Chicago, Ill., for plaintiff.

William F. Koegel, James M. Ringer, Richard A. Cirillo, Rogers & Wells, New York City, for Allied Van Lines, Inc.

Frank Cicero, Steven D. McCormick and Thomas Y. Davies, Kirkland & Ellis, Chicago, Ill., for Price Waterhouse & Co.

BUA, District Judge.

ORDER

This cause comes before the court on plaintiff's motion for summary judgment pursuant to Rule 56(c), Fed.R.Civ.P., on the issue of the defendants' liability under: 1) Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b) (1977)); and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5 (1977)); 2) Sections 214 and 20a(11) of the Interstate Commerce Act of 1920 (49 U.S.C. §§ 314, 20a(11) (1978)), and; 3) Section 12 of the Illinois Securities Law of 1953 (Ill.Rev.Stat., ch. 121½, § 137.12 (1978)). The defendant Price Waterhouse & Co. (hereafter Price Waterhouse) has filed a cross motion for summary judgment on the issue of its liability under the above statutory provisions as well as under the plaintiff's common law claims of fraud and breach of fiduciary duty.

Count I of the plaintiff's complaint was brought pursuant to Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, to recover damages allegedly sustained by the plaintiff and persons similarly situated as a result of the defendants' alleged omissions and misrepresentations of material fact in connection with the sale of Allied Van Lines, Inc.'s Class B stock during the period December 31, 1969 to April 1, 1974. In Counts II and V of his complaint plaintiff alleges that the issuance and sale of the Class B stock failed to comply with Sections 214 and 20a(11) of the Interstate Commerce Act of 1920 and Section 12 of the Illinois Securities Law of 1953, respectively. Plaintiff further alleges in Counts III and IV, respectively, that the defendants violated their common law fiduciary duty to him and perpetrated a common law fraud upon him in connection with the sale of the above-mentioned stock.¹

The Class B common stock of Allied Van Lines, Inc. (hereafter Allied) was issued to its agents on December 31, 1969 pursuant to a recapitalization plan approved by its shareholder agents on May 24, 1969 and by the Interstate Commerce Commission (hereafter I.C.C.) on October 2, 1969 subject to ". . . a restriction against the payment of dividends until the overcapitalization of nearly three million dollars has been eliminated, unless hereafter authorized by this Commission." 334 I.C.C. 726, 732 (1969); Exhibit Book: A Part of Plaintiffs' Motion for Summary Judgment, Exhibit A. Allied then filed a Form 10 Registration Statement covering its Class B stock with the Securities and Exchange Commission pursuant to § 12(g) of the Securities Exchange Act of 1934 (15 U.S.C. § 78l (g) (1977)). The registration statement did not, however, disclose the existence of the restriction on dividends and affirmatively described the Class B stock as ". . . entitled to dividends, if any, when declared by the Board of Directors . . ." See Plaintiffs' Exhibit Book, Exhibit B at 12. The Annual Reports disseminated by Allied to its shareholders and made available to the public for the years 1970 through 1972 similarly stated in a section entitled "Notes to Financial Statements" that Class B stock was entitled to dividends if and when declared by the board of directors but failed to mention the dividend restriction. See Plaintiffs' Exhibit Book, Exhibits C-1, C-2 and C-3. The defendant Price Waterhouse certified Allied's financial statements for said three year period but failed to disclose the existence of the dividend restriction until March 29, 1974 (the publication date of Allied's 1973 Annual Report) in spite of the fact that it had requested and received a copy of the I.C.C. order in March of 1970 and was required by its own auditing standards to report such restrictions. See Exhibit Book: A Part of Plaintiffs' Motion for Summary Judgment, Exhibit I-5 at 69 (deposition of Aidan I. Mullett, a partner of Price Waterhouse & Co.).

During the period of December 31, 1969 to April 1, 1974, Allied's Class B stock was traded in the over-the-counter market by Allied agents and employees and was bought and sold by members of the general public. See Memorandum of Law In Support of Motion for Summary Judgment as to the Liability of Allied Van Lines, Inc., Its Officers and Directors and Price Waterhouse & Co. at 2; Memorandum of Law on Behalf of Defendant Allied Van Lines, Inc. and the Individual Defendants In Opposition to Plaintiff's Motion for Summary Judgment at 10. Plaintiff Richard B. Shofstall, Jr. is one of the persons who purchased Allied's Class B stock during this period, stating that he would not have purchased the stock if he had been aware of the I.C.C.'s restriction against dividends.²

Rule 56(c), Fed.R.Civ.P., provides that summary judgment is appropriate only if there is no genuine issue of material fact in dispute and the moving party is entitled to judgment as a matter of law. Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 467, 82 S.Ct. 486, 7 L.Ed.2d 458 (1962); Staren v. American National Bank & Trust Company of Chicago, 529 F.2d 1257, 1260 (7th Cir. 1976). The question before this Court is thus whether the facts established by the parties in their affidavits, depositions and exhibits entitle either side to judgment as a matter of law on the issue of liability.

I.

The first question raised by the parties in their respective motions is whether summary judgment is appropriate on Count I of the complaint with respect to the issue of the defendants' liability under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

In order to grant summary judgment on the issue of the defendants' liability under § 10(b) and Rule 10b-5 it must be shown that the statements they made in connection with the sale of Allied's Class B stock contained material misrepresentations or omitted facts which rendered them materially misleading as a matter of law. Sundstrand Corporation v. Sun Chemical Corporation, 553 F.2d 1033, 1040 (7th Cir. 1977), cert. denied, 434 U.S. 875, 98 S.Ct. 225, 54 L.Ed.2d 155 (1977). See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 453, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). It is undisputed that Allied's Registration Statement and 1970, 1971 and 1972 Annual Reports stated that its Class B stock was entitled to dividends if and when declared by the board of directors but did not disclose that the payment of dividends was prohibited by the I.C.C. Plaintiffs also allege that oral misrepresentations regarding the feasibility of declaring dividends were made by Allied defendants during the period that the dividend restriction was imposed. See Plaintiffs' Memorandum of Law In Support of Motion for Summary Judgment at 3-4; Plaintiffs' Exhibit Book, Exhibits D (affidavit of Ralph Wanger) and E (affidavit of William Goldstein).

In determining whether the statements that the stock was entitled to or likely to generate dividends are untrue or the omission of the dividend restriction is misleading, the standard to be used is whether, in light of the facts existing at the time the reports were made, the reasonable investor would have been mislead by them. Securities and Exchange Commission v. Texas Gulf Sulphur Co., 401 F.2d 833, 863 (2nd Cir. 1968), cert. denied sub nom. Coates v. Securities and Exchange Commission, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969).

Applying the "reasonable investor" standard to the facts of this case, it appears that the defendants' omission of the I.C.C.'s restriction against dividends was misleading in light of the defendants' affirmative representations that the stock was entitled to dividends when declared by the board of directors. But even if the defendants' statements and omissions are held misleading as a matter of law, summary judgment is inappropriate since a question remains as to whether the representations and omissions are "material" within the meaning of Rule 10b-5.

The issue of materiality under the Securities Exchange Act of 1934 has been characterized by the Supreme Court as a mixed question of law and fact. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct. 2126, 2133, 48 L.Ed.2d 757 (1976).³ Because the determination of materiality requires "delicate assessments of the inferences a `reasonable investor' would draw from a given set of facts and the significance of those inferences to him . . . these assessments are peculiarly ones for the trier of fact." Id. Hence, the issue of materiality can be resolved "as a matter of law" by summary judgment "only if the established omissions or representations are `so obviously important to an investor, that reasonable minds cannot differ on the question of materiality . . .'" TSC Industries, Inc. v. Northway, Inc., 426 U.S. at 450, 96 S.Ct. at 2133; quoting John Hopkins University v. Hutton, 422 F.2d 1124, 1129 (4th Cir. 1970).

Applying the above standard to the facts of this case, it is evident that summary judgment is inappropriate on the issue of the defendants' liability under Rule 10b-5 since a genuine question regarding the materiality of the defendants' statements and omissions is raised by the parties. Plaintiffs allege that they would not have purchased the Class B stock if they had been aware of the fact that Allied was prohibited from paying dividends on the stock for an indefinite period. See Plaintiffs' Memorandum of Law In Support of Motion for Summary...