Vernitron Corporation v. Benjamin

• Decision Date: 27 July 1970
• Docket Number: No. 70 Civ. 2518.,70 Civ. 2518.
• Parties: VERNITRON CORPORATION and American Medical Instrument Corporation, Plaintiffs, v. Paul BENJAMIN, Defendant.
• Court: U.S. District Court — Southern District of New York

317 F. Supp. 185

VERNITRON CORPORATION and American Medical Instrument Corporation, Plaintiffs, v. Paul BENJAMIN, Defendant.

No. 70 Civ. 2518.

United States District Court. S. D. New York.

July 27, 1970.

Marshall, Bratter, Greene, Allison & Tucker, New York City, for plaintiffs; Charles H. Miller, Richard L. Bond, Arthur J. Ginsburg, New York City, of counsel.

Paul, Weiss, Goldberg, Rifkind, Wharton & Garrison, New York City, for defendant; Edward N. Costikyan, Joel S. Taylor, of counsel.

LASKER, District Judge.

Plaintiffs move for an order restraining the defendant and his attorneys from taking any steps or proceedings in the prosecution of a lawsuit now pending in the Supreme Court of the State of New York, County of New York, between the same parties, entitled "Paul Benjamin v. Vernitron Corporation, et al." In order to avoid the confusion which would arise by referring to the parties either as plaintiff or defendant (since Vernitron, et al., are plaintiffs here and defendants in the state court action, whereas Paul Benjamin is defendant here and, with others, plaintiff in the state court), references will be made to the parties by name.

I.

On December 20, 1967, Vernitron (a New York corporation since acquired by Vernitron, a Delaware corporation) and its affiliate entered into a written contract with Benjamin and his whollyowned corporation, American Medical Instruments Corporation ("Amico") for sale of all the assets of Amico to the affiliate of Vernitron New York. The contract provided that Benjamin was to receive $1.5 million worth (later reduced to $1.3 million) of Vernitron common stock which was to be placed in escrow with Vernitron's attorneys, Marshall, Bratter, Greene, Allison & Tucker under prescribed conditions. The contract specified a procedure for the registration by Vernitron of the shares held in escrow for Benjamin. Pursuant to these terms, Benjamin secured the registration of slightly less than $250,000 worth of shares. In February 1969, Benjamin requested (as he had the right to) that the remainder of the shares be registered, but Vernitron refused.

On November 6, 1969, Benjamin brought suit in the Supreme Court of the State of New York, County of New York, against Vernitron, its affiliate, and Marshall, Bratter, Greene, Allison & Tucker as escrow agent. This is the action the prosecution of which Vernitron now asks this court to enjoin. In his state court suit Benjamin set forth causes of action for (1) damages of $1,050,000 for failure to register the remaining shares in escrow; (2) damages for failure to place further stock in escrow in order to total $1.3 million in value; (3) specific performance of the contract, delivery of the shares and dividends thereon; and (4) exemplary damages. Vernitron counterclaimed, alleging breach of warranty by Benjamin and demanding rescission of the contract for failure of consideration. On June 2, 1970, Benjamin served notice of motion in the state court action for summary judgment in the amount of $1,051,085.63 on the first cause of action (together with severance thereof from the remaining causes of action).

On June 16, 1970, Vernitron commenced the instant action against Benjamin and simultaneously or at about the same time moved in the state court for a stay of further proceedings therein pending the determination of the federal court action.

In the case here, Vernitron alleges violations of Sections 10(b) and 29(b) of the Securities Exchange Act of 1934, as well as (under the pendent jurisdiction of this court) common law fraud and breach of contract. The complaint requests rescission of the contract and damages. As stated above, the instant motion asks that Benjamin and his attorneys be stayed from proceeding with the prosecution of the state case. It is Vernitron's contention that a stay of the state court proceedings is proper because a potential conflict between the state and federal jurisdictions exists, since the issues relating to its counterclaim in the state court may be decided there in such a way as to constitute res judicata, or so as collaterally to estop Vernitron from presenting its Securities Exchange Act claims to this court.

In reply, Benjamin argues that whatever determination may be made on his motion for summary judgment in the state court will not constitute res judicata or collaterally estop Vernitron from litigating its Securities Act claims here, and that in any event the anti-injunction statute, set forth in Title 28, U.S.C. § 2283, acts as a bar to this court's granting an injunction against prosecution of the state court action.

In passing, it should be noted that at the time of the argument in this court of the motion for a stay of the state court proceeding the state court had rendered no decision on Benjamin's motion for partial summary judgment, nor on Vernitron's motion for a stay. On July 16, 1970, Mr. Justice Helman filed an opinion granting Benjamin substantially the relief requested in his motion, and denying Vernitron a stay. No judgment has yet been entered pursuant to the opinion. In his decision Justice Helman found that Vernitron's damages, if any, were not, as alleged, indeterminable but, rather, ascertainable. Without a detailed explanation he ruled "as being properly placed in issue the sum of $42,487.36 as the sum in dispute"; as to Benjamin's alleged breach of warranties, that the alleged breach of warranty even in the claimed amount of $65,000 could "hardly be said to constitute failure of consideration"; that there was insufficient factual data contained in Vernitron's affidavits to warrant rescission, and that the Vernitron-Benjamin contract price was not computed on the basis of a multiple of Amico's earnings. His award was in the amount of the relief requested ($1,051,085.63) less the contested claim of $42,487.36 for breach of warranty.

II.

The issues before me are (A) whether the anti-injunction statute stands as a bar to granting an injunction against prosecution of the state court proceeding; and (B) whether, even if there is no such bar, an injunction should be granted in accordance with general equitable considerations.

(A) The Anti-Injunction Statute

Title 28, U.S.C. § 2283, reads:

"A court of the United States may not grant an injunction to stay proceedings in a State Court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments."

There is no contention that any judgment of this court exists, and consequently the third exception to the rule is inapplicable here.

Vernitron contends, under the authority of Studebaker Corporation v. Gittlin, 360 F.2d 692 (2d Cir. 1966), that there is a basis for private plaintiffs to come within the "expressly authorized" exception of 28 U.S.C. § 2283. Benjamin vigorously contests this reading of Studebaker, which held that under the provision of Section 21(e) of the Securities Exchange Act (15 U.S.C. § 78u) authorizing the SEC to obtain injunction against persons "engaged or about to engage" in acts in violation of the Securities Exchange Act, circumstances could exist constituting a basis for private plaintiffs to come within the "expressly authorized" exception to 28 U.S.C. § 2283.

In view of the disposition of the case set forth below, I find it unnecessary to determine whether the rule of Studebaker applies here except to note my skepticism that it does, in view of the substantial factual differences between the instant case and Studebaker.

This brings me to the determination of whether an injunction to stay the state court proceeding is authorized here as "necessary in aid" of this court's jurisdiction. I start from the significant proposition that exclusive jurisdiction to determine matters arising under the Securities Exchange Act of 1934 is vested in the federal courts. 15 U.S.C. § 78aa. It follows that, although the subject matter presented to the state court is for all practical purposes identical with the subject matter of the case before me, Vernitron has not had and cannot have the opportunity to present to the state court its claims under Sections 10(b) and 29(b) of the Securities Act.

In the state court proceeding Justice Helman has already held that, under New York Law even if Vernitron can prove a case of fraud, there is no ground for rescission of the contract, and that damages for substantially the full amount requested by Benjamin are payable. He has also found that the parties did not enter into the contract on the basis upon which Vernitron claims they both relied. In this regard, Justice Helman's conclusion that there was no multiple-of-earnings basis for the contract price is especially significant, since the underpinning of Vernitron's federal claim for rescission is based on its allegation that the sales price was premised on an earnings multiple. Vernitron claims that its damages have been so multiplied by Benjamin's alleged misstatement of earnings that rescission is the only adequate remedy.

If Benjamin is permitted to proceed to enter judgment on the basis of the state court's opinion, the question arises as to whether Vernitron will be collaterally estopped from establishing its right, under federal law, to rescission and damages. It seems to me that in these circumstances Vernitron would be estopped from establishing its multiple-of-earnings/multiple-of-damages theory, and that the consequence of such estoppel would be to deprive this court of its exclusive jurisdiction to determine claims arising under the federal securities laws and to fashion an appropriate remedy under those laws. Connelly v. Balkwill, 174 F.Supp. 49 (N.D.Ohio 1959), aff'd 279 F.2d 685 (6th Cir. 1960); Kaufman v. Shoenberg, 154 F. Supp. 64 (D.Del.1954) (relating to res judicata as distinguished from collateral estoppel); Boothe v. Baker Industries, Inc., 262 F.Supp. 168 (D.Del.1966).

The situation here presented is similar to the one...