Tully v. Mott Supermarkets, Inc.

• Decision Date: 02 February 1972
• Docket Number: Civ. A. No. 835-71.
• Citation: 337 F. Supp. 834
• Parties: John TULLY et al., Plaintiffs, v. MOTT SUPERMARKETS, INC., et al., Defendants.
• Court: U.S. District Court — District of New Jersey

337 F. Supp. 834

John TULLY et al., Plaintiffs, v. MOTT SUPERMARKETS, INC., et al., Defendants.

Civ. A. No. 835-71.

United States District Court, D. New Jersey.

February 2, 1972.

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Robinson, Wayne & Greenberg, by Donald A. Robinson, Robert A. Wayne, W. Hunt Dumont, Newark, N. J., for plaintiffs.

Riker, Danzig, Scherer & Brown, by Everett M. Scherer, Newark, N. J., Wilentz, Goldman & Spitzer by Frederick K. Becker, Perth Amboy, N. J., for director-defendants.

Hughes, McElroy, Connell, Foley & Geiser by Adrian M. Foley, Jr., Kenneth F. Kunzman, Newark, N. J., for stockholder-defendants.

OPINION

WHIPPLE, District Judge:

This matter is before the Court pursuant to what I have styled to be plaintiffs' application for a preliminary injunction. The complaint alleges an illegal and secret conspiracy to usurp voting control of Wakefern Corporation. Plaintiffs predicate their right to relief upon the Federal Securities laws,¹ particularly Rule 10b-5, 17 C.F.R. 240.10b-5, the New Jersey Securities Act, N.J. S.A. 49:3-47 et seq., wrongful interference with existing contractual relations, and breach of fiduciary duties.

This motion seeks an order, pending final determination on the merits, invalidating the purchase of certain control stock, declaring invalid an election of directors and officers, ordering a new election of directors, at which election the stock allegedly acquired illegally would not be voted, and declaring invalid a resolution accelerating plaintiffs' withdrawal from Wakefern.

FACTUAL BACKGROUND

Wakefern Food Corporation is a New Jersey Corporation engaged in the business of warehousing, buying, distributing and selling general produce and food products to its stockholders. Wakefern stockholders own and operate approximately 185 supermarkets in New Jersey, New York, Pennsylvania, Connecticut and Massachusetts. Most of these supermarkets are served by Wakefern and operate under the "Shop-Rite" name. All of them sell the "Shop-Rite" brand merchandise. As a result of the economies of size inherent in Wakefern purchasing power, the stockholders pay less for their goods than if they were to purchase them on their own. Additionally, the stockholders receive the benefit of using numerous grocery and non-food items bearing the "Shop-Rite" label. It is undisputed that all of the plaintiffs rely heavily on Wakefern for their profitable business existence.

This case is essentially a story of former "ins" who are now "outs" and, by this motion, are seeking to become "ins" once again. Plaintiffs Tully, Henry, Saker and Foodarama own and operate numerous supermarkets, drug stores and gasoline stations and were among the originators and early stockholders of Wakefern. As of April 8, 1971 they held 250 Class A shares out of a total of 333 1/3 which were issued and outstanding. The Class A is the most valuable stock because its owners, pursuant to the Certificate of Incorporation and bylaws, have the right to nominate and elect 12 of the 20 man Board of Directors. With this power plaintiffs controlled the destiny of Wakefern because an affirmative vote of only 12 members is required to effectuate most corporate action.

The defendants are in two categories: (a) 14 Directors of Wakefern, and (b) Stockholders of Wakefern. All defendants prior to April 8, 1971 owned Class C stock, but none owned Class A stock. With their Class C stock they had the collective right to elect the remaining eight members to the Board of Directors.

In 1967 a large bloc of Wakefern, which now operates under the "Pathmark" name, withdrew. As part of its orderly withdrawal the "Pathmark" group sold its 666 2/3 shares of Class A stock to Wakefern which shares ultimately reverted to Wakefern's Treasury. The plaintiffs allege that the director-defendants, who had majority control of the Board, sought a means of shifting the voting control of Wakefern by passing a resolution offering these 666 2/3 shares of Class A Treasury stock to themselves and other Class B and C stockholders. A touch of irony is added to this drama since it was plaintiffs who elected several defendants to the Board and were, therefore, singularly responsible for vesting control in defendants, thus unwittingly facilitating their own dilemma. It is the purchase of this stock, pursuant to the resolution, which plaintiffs contend was fraudulent and in breach of certain contractual and fiduciary duties, thus entitling them to the relief requested. The destiny of Wakefern is presently in the hands of the defendants because the stock gives them voting control and, thereby, a power of self-perpetuation which they would not have otherwise had.

JURISDICTION

The defendants have levelled a multipronged attack against the jurisdiction of this Court. These contentions will be treated seriatim.

Rule 10b-5 Jurisdiction

Plaintiffs contend that this Court has exclusive jurisdiction by virtue of the provisions of Section 10(b) and 27 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j and 78aa, and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated by the Securities and Exchange Commission. Defendants contend that the requisites of a 10b-5 claim are not present, thus, depriving this Court of subject matter jurisdiction.

The thrust of defendants' jurisdictional argument seeks to revive the spectre of the Birnbaum buyer-seller doctrine² at a point in time when both courts and legal scholars are seeking to bury it. Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952). They suggest that because plaintiffs were neither buyers nor sellers with respect to the stock purchase in question they are without standing to sue under Rule 10b-5. Before proceeding to deal with each contention raised by defendants, there is a general principle which militates against recognition and acceptance of the Birnbaum rule.

The limitation on standing to sue which defendants seek to impose is nowhere to be found in the language of either Section 10b or Rule 10b-5.³ To imply such a requirement ignores the recent edict by the Supreme Court mandating a flexible as opposed to a technical or restrictive construction of the Rule. Superintendent of Insurance of the State of New York v. Bankers Life and Casualty Company, 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971); accord, Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967). Defendants' position, furthermore, is directly opposed to the present trend in the law. Rather than broadly construing Rule 10b-5 so as to expand its domain, defendants read into the Rule language which is not present so as to limit its application. Disdain for this approach was heralded by Judge Wortendyke in Bound Brook Water Company v. Jaffe, 284 F.Supp. 702, 708 (D.N.J.1968), when he stated:

"By the same token, the trend of recent decisions indicates that the Court should not preclude a plaintiff from seeking relief under Rule 10b-5 merely because he was not, in the ordinary sense, a purchaser or seller of securities. Such a limitation on standing to sue is not explicitly contained in either Section 10(b) of the Act or in its implementing Rule. The question of standing to sue must be determined in the light of the statutory language invoked, the legislative history of that statute, the case law development surrounding that statute and, most importantly of all, the facts and circumstances surrounding the particular claim presented."

In light of the foregoing, this Court will look with a doubting eye at any effort to resurrect the Birnbaum doctrine.

Defendants' initial and principal argument is that a buyer or seller must be present where injunctive relief of a retrospective nature is sought.⁴ To support their contention defendants evoke this Circuit's recent opinion in Kahan v. Rosenstiel, 424 F.2d 161 (3d Cir. 1970), cert. denied, 398 U.S. 950, 90 S.Ct. 1870, 26 L.Ed.2d 290 (1970), and, in the alternative, the absence of any 10b-5 case granting retrospective injunctive relief without the presence of a buyer or seller.

Defendants have apparently confused subject matter jurisdiction with the notion of remedy. They argue that while Kahan has discarded the purchaser-seller requirement, its holding is limited strictly to situations where prospective injunctive relief is sought. In this Court's opinion, the abandonment of the purchaser-seller distinction in Kahan turns not on the nature of the injunctive remedy sought but rather upon the showing of a causal connection between the violations alleged and plaintiff's loss. As the Court stated:

"Neither the language of § 10(b) and Rule 10b-5 nor the policy they were designed to effectuate mandate adherence to a strict purchaser-seller requirement so as to preclude suits for relief if a plaintiff can establish a causal connection between the violations alleged and plaintiff's loss." (424 F.2d at 173). See, Rekant v. Desser, 425 F.2d 872, 881 (5th Cir. 1970).⁵

This Court, as it will subsequently elaborate upon, believes that such a "causal connection" exists.

As to defendants' alternative attack, this Court's synthesis of cases indicates that a purchaser-seller is not required even where the relief sought seeks to undo a completed transaction. Defendants strenuously argue that Crane Company v. Westinghouse Air Brake Company, 419 F.2d 787 (2d Cir. 1969), cert. denied, 400 U.S. 822, 91 S.Ct. 41, 27 L. Ed.2d 50 (1970)⁶ is not pertinent because a seller, albeit forced, existed. This Court does not limit the impact of Crane to the "forced seller" theory.

In Kahan v. Rosenstiel, supra, 424 F. 2d at 171-73, the Court cited Crane with approval and refused to restrict its holding to the "forced seller" concept. This Court agrees with Kahan's interpretation of Crane. Although portions of the Crane opinion, taken out of context, support the "forced seller" theory, the following remarks illustrate the...