Sundstrand Corp. v. Standard Kollsman Industries, Inc.

Decision Date18 October 1973
Docket NumberNo. 72-1426,72-1427.,72-1426
Citation488 F.2d 807
PartiesSUNDSTRAND CORPORATION, a Delaware corporation, Plaintiff-Appellant, v. STANDARD KOLLSMAN INDUSTRIES, INC., an Illinois corporation, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit


W. Donald McSweeney, Chicago, Ill., Richard M. Schilling, Rockford, Ill., for Sundstrand Corp.

Frank F. Fowle, Paul E. Freehling, Pope, Ballard, Shepard & Fowle, Chicago, Ill., for Standard Kollsman Industries, Inc., and John Huarisa.

Albert E. Jenner, Jr., Donald R. Harris, Lynne E. McNown, Jenner & Block, Chicago, for Henry W. Meers.

Before SWYGERT, Chief Judge, KILEY and CUMMINGS, Circuit Judges.

SWYGERT, Chief Judge.

Appeal No. 72-1426 arises out of an action brought by Sundstrand Corporation to secure redress for alleged violations of Section 10(b) of the Securities Exchange Act of 19341 and the related Rule 10b-52 by Standard Kollsman Industries, Inc. (SKI), John B. Huarisa, and Henry W. Meers in connection with the transfer to Sundstrand of an option held by Huarisa to purchase stock of SKI. Sundstrand sought as relief a recission of the transfer and the assessment of damages against the named defendants. At the close of Sundstrand's case, the district judge granted motions of the several defendants to dismiss the case under Rule 41(b) of the Federal Rules of Civil Procedure. Sundstrand has appealed, taking particular issue with the refusal of the trial judge to allow an amendment of its complaint and his refusal to admit a considerable volume of evidence offered by Sundstrand.

Appeal No. 72-1427 is based upon a counterclaim filed by Huarisa against Sundstrand for specific performance, alleging that Sundstrand owed and had failed to honor a monetary obligation to Huarisa due in connection with the stock option transfer agreement. This claim was dismissed on Sundstrand's motion, the judge having found that Huarisa had failed to demonstrate his lack of an adequate remedy at law. Huarisa argues that Sundstrand had no standing to object, midway through trial, to his relief in equity, that the trial judge clearly erred in finding an adequate remedy at law, and that the trial judge should have awarded damages in any event rather than dismissing the case. Sundstrand also raises a contractual defense under 15 U.S.C. § 78cc(b).


Sundstrand is a Delaware corporation with its principal place of business in Illinois. SKI is an Illinois corporation with numerous subsidiaries, the most prominent of which is the Kollsman Instrument Corporation (KIC). At all times pertinent to this suit, Huarisa and Meers held positions of responsibility at SKI: Huarisa as president and chairman of the board, Meers as a director.

Sometime in the middle of November 1968, Huarisa met with executives of Sundstrand to discuss the possibility of merger between Sundstrand and SKI. In late December 1968, following considerable discussion and negotiation, Meers and Huarisa were presented by Sundstrand with a written proposal providing for the acquisition of SKI's assets and liabilities in exchange for Sundstrand common stock having an approximate value of $38.25 per share of SKI stock. The proposal was subject to approval by the boards of SKI and Sundstrand and by the stockholders of SKI. On January 2, 1969, Huarisa agreed to open SKI's books and records to Sundstrand without reservation and, on January 7, a survey team from Sundstrand began an exhaustive investigation of SKI and its subsidiaries. The results of the survey put an end to the merger negotiations. Officers of Sundstrand met with Huarisa and Meers on January 20. As the trial judge found, Sundstrand represented:

. . . that both the survey team and they had concluded that (a) the product compatibility which Sundstrand had anticipated prior to the survey as a likely result of a combining of the two companies was no longer anticipated; (b) the combined companies might experience problems with their labor unions; and (c) SKI\'s earnings projections were overestimated.

As a result, the two firms agreed to discontinue merger negotiations.

Sundstrand, however, did not emerge from the negotiations unscathed. On January 4, 1969, two days after Sundstrand had tendered its contingent merger proposal, Huarisa informed Sundstrand that a problem had arisen with a quantity of SKI stock. At a meeting on January 6, officers of Sundstrand discovered that a large block of SKI stock had been offered for sale to Huarisa, pursuant to an agreement made by Huarisa with the Burke family, large stockholders in SKI. That agreement gave Huarisa a right to purchase SKI stock held by the Burkes once they had received a bona fide offer to purchase and had made a decision to sell. The price to Huarisa was to be the same as that specified in the purchase offer. This "right of first refusal" lapsed thirty days after the receipt of an offer by the Burkes. At the January 6 meeting, Huarisa informed Sundstrand that the Burkes had received an offer from Sun Chemical Corporation some twenty-seven days earlier to purchase a sizeable block of SKI stock. Huarisa stated that he did not intend to purchase the stock for his own account and added that an acquisition of the shares by Sun Chemical would provide a substantial impediment to any merger between SKI and Sundstrand.

Taking this cue, Sundstrand expressed a willingness to purchase Huarisa's rights to the Burke stock and to issue shares in Sundstrand to reimburse Huarisa for his payment of funds due the Burkes within three days. Huarisa accepted this offer. On January 8, he paid the Burkes sufficient funds to hold open his right of first refusal, and executed an agreement with Sundstrand the next day, conveying his purchase rights in return for reimbursement of the monies paid the Burkes.

On February 6, 1969, more than two weeks after it had rejected the possibility of merger with SKI, Sundstrand paid the Burkes $6,360,915 and received the stock of SKI which Sun Chemical had earlier offered to purchase. Huarisa was repaid on March 3, when Sundstrand transferred to him 5,686 shares of its common stock. By its agreement with Huarisa, Sundstrand was to repurchase the shares from him upon fifteen days' notice at any time within two years of the contract date.

This suit was filed August 8, 1969, after SKI published a report of its financial results for the year 1968. Sundstrand alleged that the actual profit picture for the year 1968 — actually not a profit picture at all, SKI having suffered a net loss equivalent to 15 cents per share — had been concealed from it by Huarisa, Meers, and SKI, as individuals and as a conspiracy. The complaint specifically pointed to a public report of SKI for the first three quarters of 1968 which showed an 86 cents per share profit for that period, a representation by defendants that the earnings of SKI for the year 1968 would be about $1.16 per share, and a statement by defendants that the Avionics Division of KIC was not incurring losses. At the end of Sundstrand's case, the trial judge granted motions of the defendants to dismiss under Rule 41(b), F.R.C.P.

Following his dismissal of Sundstrand's action, the district judge proceeded to try Huarisa's counterclaim, wherein Huarisa alleged that Sundstrand had failed to abide by its contractual obligation to repurchase the 5,686 shares of its common stock which had been transferred to Huarisa in repayment for the Burke option. The claim was dismissed after both sides had presented their evidence, the trial judge having found that Huarisa, being possessed of an adequate remedy at law, was not entitled to the specific performance he sought.


As noted, the complaint in No. 72-1426 alleged three specific acts of misconduct on the part of Huarisa and Meers. It also contained a general allegation of wrongdoing, Paragraph 7:

In connection with Sundstrand\'s purchase of the 223,190 common shares of SKI stock, the defendants conspired with each other to violate, and each of them did violate, Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j, and clauses (1), (2) and (3) of Rule 10b-5 of the General Rules and Regulations promulgated thereunder by the Securities and Exchange Commission, 17 C. F.R. § 240.10b-5, by employing a device, scheme or artifice to defraud, by making untrue statements of material facts and omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and by engaging in an act, practice or course of business which operated as a fraud or deceit upon Sundstrand. Such violations were effected by the use of instrumentalities of interstate commerce.

At trial, the district judge ruled that this general statement was limited by the specific claims of fraud made in the complaint and refused to admit evidence which Sundstrand sought to introduce as proof of fraud beyond the specific acts alleged in the complaint. This was error.

Pleading is no longer a procedural game of skill at which counsel must be adept in order to insure the decision of his case on its merits. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). Perhaps the most striking development of modern procedure has been the recognition that pleading is important only to inform the opposing party of what is claimed and the grounds upon which the claim rests. And in deciding whether a complaint fairly notifies a defendant of matters sought to be litigated, courts have often looked beyond the pleadings to the pretrial conduct and communications of the parties. See, e.g., Brennan v. Midwestern United Life Ins. Co., 417 F.2d 147, 155 (7th Cir. 1969); State Farm Mutual Auto Insurance Co. v. Scott, 198 F.2d 152 (5th Cir. 1952); Scruggs v. Chesapeake & Ohio Ry. Co., 320 F.Supp. 1248 (W.D.Va. 1970). The fruits of...

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