Thomas v. Roblin Industries, Inc., 75-1008

• Decision Date: 31 July 1975
• Docket Number: No. 75-1008,75-1008
• Citation: 520 F.2d 1393
• Parties: Fed. Sec. L. Rep. P 95,259 Harry K. THOMAS, Successor Trustee in Bankruptcy of Erie Forge & Steel Corporation, Bankrupt, Appellant, v. ROBLIN INDUSTRIES, INC., a New York Corporation.
• Court: U.S. Court of Appeals — Third Circuit

Page 1393

520 F.2d 1393

Fed. Sec. L. Rep. P 95,259

Harry K. THOMAS, Successor Trustee in Bankruptcy of Erie Forge & Steel Corporation, Bankrupt, Appellant, v. ROBLIN INDUSTRIES, INC., a New York Corporation.

No. 75-1008.

United States Court of Appeals, Third Circuit.

Argued June 6, 1975.

Decided July 31, 1975.

Harry D. Martin, Elderkin, Martin, Kelly, Messina & Zamboldi, Robert N. Spaeder, March, Spaeder, Baur, Spaeder & Schaaf, Erie, Pa., for appellant; Louis Loss, Cambridge, Mass., of counsel.

John G. Gent, Donald C. Buseck, Erie, Pa., for appellee.

Before SEITZ, Chief Judge, and ALDISERT and GIBBONS, Circuit Judges.

OPINION OF THE COURT

SEITZ, Chief Judge.

Plaintiff is Trustee in Bankruptcy of Erie Forge & Steel Corporation ("Erie"), a Delaware corporation. He brought this action against its former majority stockholder, Roblin Industries ("Roblin"), a New York corporation. Plaintiff alleged violations of the federal securities law and breaches of Roblin's state law fiduciary duty to Erie. Judgment in the non-jury trial was entered in defendant's favor and plaintiff appeals.

At the time plaintiff's cause of action is alleged to have arisen, the stock of both Erie and Roblin was traded on the American Stock Exchange. In January 1968, Roblin took direct control of Erie after acquiring 55% of the Erie common stock. Erie's net worth, as of April 1968, was $5,598,000, and its working capital was $3,500,000. However, Erie had a record of substantially unprofitable financial operations, which continued into the fiscal year beginning May 1, 1968. Thus, the last publicly disclosed figures released on March 16, 1969, showed a loss of $1,541,000 for the nine month period ending January 31, 1969. Erie had its largest one month loss to date in January 1969: approximately $518,000. This loss was included in the nine month report but not separately indicated. Erie suffered losses of $317,000 in February and $128,000 in March. At least the February loss was known to Roblin but was not publicly reported.

By February 1969, Erie's cash position had worsened and Roblin decided that $2,000,000 in cash was needed immediately if operations were to continue. Roblin's board approved such a loan but it was not implemented. On March 6, 1969, Roblin found it necessary to lend Erie $200,000 to meet its payroll. In late March 1969, Roblin's business consultants advised that $2,000,000 was insufficient to assist Erie and that at least $5,000,000 was required.

Between February 12, 1969, and April 10, 1969, Roblin sought the consent of Erie's secured creditors to gain a secured status for its contemplated $2,000,000 loan. During this period Roblin sought to locate a large investor who could provide Erie with both the money required and experienced management. Several substantial companies were approached about buying Roblin's Erie stock. After investigation, each declined to make an offer. On April 5, 1969, the Roblin directors considered and rejected the possibility of a chapter XI bankruptcy proceeding for Erie.

About April 10, 1969, Roblin entered into an agreement for the sale of Erie stock with Peter Gruber ("Gruber") and Martin Hoffinger ("Hoffinger"). Gruber had a record in the financial community for "turning around" financially troubled companies. Under the agreement Roblin transferred 850,000 shares of Erie's stock to Gruber and Hoffinger who paid $50,000 cash for 100,000 shares and gave two notes for the remaining 750,000 shares. The notes did not bear interest and gave no recourse against Gruber and Hoffinger. The 750,000 shares were held in escrow as the collateral for the payment of the additional $2,375,000. The agreement also provided that Gruber and Hoffinger were required to supply $500,000 of borrowed money for the benefit of Erie under certain limited conditions. Roblin retained 129,934 Erie shares. The sale to Gruber and Hoffinger was announced by Roblin to the Wall Street Journal and published on April 14, 1969.

On April 12, 1969, Gruber and Hoffinger appointed a majority of the Erie Board. On April 28, 1969, Erie announced its intention to file a chapter XI petition. Such a petition was filed on April 30, 1969, and Erie was permitted by the court to continue as a debtor in possession. On May 2, 1969, Roblin began to sell its retained 129,934 shares of Erie stock through the American Stock Exchange. By May 22, 1969, Roblin had sold all of its Erie stock for $488,790.25.

Erie's chapter XI proceedings were unsuccessful and it was adjudicated bankrupt on July 15, 1969, at which time the Erie stock had no value. Erie's trustee than sued to recover the amount Roblin received for the sale of its stock to the public. The first count alleges a violation of Rule 10b-5, 17 C.F.R. § 240.10b-5 (1974), the second a violation of Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e (1970), in failing to file a registration statement, and the third a state law breach of fiduciary duty claim. A fourth claim based on alleged mismanagement has not been pursued before us.

I. VIOLATION OF RULE 10b-5

Plaintiff's first count seeks to recover the amount received from the sale of Roblin's Erie shares on the ground that the sales of such shares were the result of a scheme by Roblin which violated Rule 10b-5. The district court in effect found no violation of the Rule, apparently without addressing the issue of plaintiff's standing to assert a claim based on a 10b-5 violation. We find the issue of standing to be controlling.

The record does not suggest and plaintiff trustee does not contend that he or the parties he represents are complaining about a transaction in which any of them was either a buyer or a seller of Erie's securities. This is a critical deficiency, since the United States Supreme Court has recently held that only a buyer or seller of securities has standing to assert a claim based on a 10b-5 violation. Blue Chip Stamps v. Manor Drug Stores, --- U.S. ---, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Based on Blue Chip Stamps, we find that the judgment of the district court dismissing the 10b-5 claim asserted in the first count must be affirmed because of plaintiff's lack of standing.

II. VIOLATION OF THE SECTION 5 REGISTRATION REQUIREMENT

The second count of the amended complaint seeks to recover the amounts received from the public sale of the Erie shares on the ground that defendant violated Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e, when it failed to file a registration statement with the S.E.C. and to deliver the requisite prospectus to each buyer in conjunction with its May 1969 sales of Erie stock. The district court concluded that plaintiff trustee lacked standing to assert this claim because he was neither a purchaser nor a representative of a purchaser. It is apparently plaintiff's contention that unjust enrichment will result unless a civil remedy is granted it.

Civil liability for a violation of Section 5 arises under Section 12 of the Securities Act of 1933 which provides in pertinent part:

Any person who

(1) offers or sells a security in violation of Section 5 . . .

. . . shall be liable to the person purchasing such security from him who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.

When securities are offered or sold in violation of Section 5, Section 12 explicitly affords a civil remedy only to a purchaser of such securities. Furthermore, our court, in construing Section 12 for possible Section 10(a) violations under the 1933 Act, has stated: "But they (referring, inter alia, to Section 12) afford no right of action to the corporation herein as much as it was not a purchaser." Slavin v. Germantown Fire Ins. Co., 174 F.2d 799 (3rd Cir. 1949); 6 L. Loss, Securities Regulation 3840 (Supp.1969). Slavin is dispositive on the issue of plaintiff's standing to assert a claim under Section 12.

We therefore are in agreement with the district court's holding that plaintiff trustee, not being a purchaser or representing a purchaser of the stock in question, lacked standing to assert the claim contained in the second count.

III. CONTROLLING STOCKHOLDER'S BREACH OF FIDUCIARY DUTY

¹

Plaintiff asserts that Roblin bore a fiduciary relationship to Erie (1) immediately prior to the Gruber-Hoffinger transaction and (2) at the time it sold its retained Erie shares. The second assertion is based on the argument that the financial arrangement between Gruber-Hoffinger and Roblin amounted to an option rather than a sale because of the no recourse provision. We think the facts show, as the district court found, that Gruber-Hoffinger took over control of Erie in fact and that the nature of the financial arrangement did not give Roblin control at the date of the sale of the retained Erie shares. Consequently, we conclude that no fiduciary relationship existed between Erie and Roblin at the date of the sale of the retained shares. We turn then to the real issue here of whether Roblin sold such shares on the basis of information acquired while a fiduciary.

The district court did not purport to consider what state law applied to the state law claim. Rather, it dismissed the claim because it found that Roblin was not in fact the controlling stockholder of Erie after the Gruber-Hoffinger transaction; that Roblin was not a controlling stockholder of Erie at the time the stock in question was sold in view of the fact that a chapter XI petition had previously been granted; and that Roblin did not benefit from the sale of its retained shares on the basis of essential undisclosed information concerning Erie's financial status.

Preliminarily, had the district court looked to Pennsylvania law to determine what state law its courts would apply, we believe it would have found that...