Willcox v. Harriman Securities Corporation

• Decision Date: 08 December 1933
• Citation: 10 F. Supp. 532
• Parties: WILLCOX et al. v. HARRIMAN SECURITIES CORPORATION et al.
• Court: U.S. District Court — Southern District of New York

10 F. Supp. 532

WILLCOX et al. v. HARRIMAN SECURITIES CORPORATION et al.

District Court, S. D. New York.

December 8, 1933.

Sheppard, Jones & Seipp, of New York City (Henry G. Seipp and Henry F. Herbermann, both of New York City, of counsel), for plaintiffs.

Gresser, Starr & Walker, of New York City, for defendant Harriman Securities Corporation.

Rushmore, Bisbee & Stern, of New York City, for defendants Harriman National Bank & Trust Co. of City of New York and Henry E. Cooper as conservator of Harriman National Bank & Trust Co. of City of New York.

Cardozo & Nathan, of New York City, for defendants John E. Noble, Evan W. Hughes, Frederick E. Goldman, and Liberty National Bank & Trust Company in New York.

PATTERSON, District Judge.

This is one of numerous suits arising out of the failure of the Harriman National Bank & Trust Company. The suit is in this court because the conservator of a national bank is one of the defendants. The present motions are by the defendants to dismiss the bill for defects said to be apparent on its face.

The suit is in equity, brought by three former stockholders of the Liberty National Bank & Trust Company against Harriman Securities Corporation, Harriman National Bank & Trust Company and its conservator, four individual defendants, and Liberty National Bank & Trust Company. In the first part of the bill the plaintiffs aver that they formerly owned stock in the Liberty Bank; that an agreement was made between certain other stockholders of the Liberty Bank and the Harriman Company whereby stock in the Liberty Bank was to be exchanged for stock in the Harriman Bank; that the Harriman Company and the Harriman Bank at the time maintained a fictitious and artificial market in Harriman Bank stock at prices in excess of its true value, for the purpose of misleading the plaintiffs and others into believing that the artificial market quotations represented the real value of the stock; that the plaintiffs were led by such fraudulent conduct to become parties to the agreement and to exchange their Liberty Bank stock for Harriman Bank stock; that thereafter 69,000 out of a total of 90,000 shares of Liberty Bank stock were exchanged for Harriman Bank stock; and the plaintiffs offer to surrender their Harriman Bank stock as a condition of the rescission of the exchange. In the second part of the bill it is alleged that the Harriman Bank then made an agreement with the Liberty Bank under which the former assumed the liabilities of the latter, took possession of its assets, and agreed to transfer back to the Liberty Bank any surplus remaining after payment of the liabilities; that the Liberty Bank was placed in liquidation and a liquidating committee appointed by the stockholders, all of the members of the committee being officers or employees of the Harriman Bank and being also the individual defendants in the suit; that these defendants entered into a conspiracy to deliver the surplus assets to the Harriman Company and made an agreement to that effect, in violation of their duties to the stockholders of the Liberty Bank; and that the Harriman Bank thereafter received such assets, charged with a trust in favor of the Liberty Bank and its stockholders. It is further alleged that the plaintiffs do not know who the directors of the Liberty Bank are, if there are any, and hence have been unable to make any demand on them for a suit by the Liberty Bank; and that any demand made on the liquidating committee would be futile. The relief sought includes a rescission of the exchange of stock, so that the plaintiffs will receive back their Liberty Bank stock; a receivership for the Liberty Bank, in place of the liquidating committee; an accounting by the Harriman Company, Harriman Bank, and the individual defendants; and the impressing of a trust on all the surplus assets of the Liberty Bank in the hands of these defendants.

One further feature of the bill will be noted. It is styled as brought by the plaintiffs in their own behalf and in behalf of all other parties to a certain deposit agreement. It is stated that the subject-matter of the suit is of common interest to all Liberty stockholders who exchanged their stock for Harriman Bank stock and who have deposited or may hereafter deposit their stock under the deposit agreement with the plaintiffs as a committee, and that such stockholders are very numerous. The deposit agreement itself is not pleaded.

The motions to dismiss the bill are on the grounds that no cause of action is set forth, and alternatively that there is an improper joinder of causes of action in one suit. Before discussing these points, however, I deem it appropriate to analyze the bill and determine the status of the plaintiffs.

On the face of the bill the plaintiffs have stated or attempted to state two grievances. The first is that they were induced to part with their Liberty stock by conduct of the Harriman Company characterized as fraudulent, and because of this they ask for a rescission of the exchange and restoration of their former status. The second is that the assets of the Liberty Bank were wrongfully interfered with by the defendants, and because of this they demand that redress be given to the Liberty Bank. The two matters are bound together, however, in the sense that the first is a necessary preliminary to the second. Should the plaintiffs fail on the first, they fail altogether.

As to the exchange of stock the plaintiffs' rights are personal to them alone. They cannot maintain a suit in behalf of others said to have been similarly defrauded. In such a case there may be enough similarity in the issues to warrant several plaintiffs joining in one suit for rescission (see Akely v. Kinnicutt, 238 N. Y. 466, 144 N. E. 682), but the maintenance of a class suit is quite a different thing. The issues are not identical, and even if they were there is no common subject-matter. Each defrauded person is interested in his own stock, not in that of any other victim. On the authorities it is settled that a representative suit by one of numerous defrauded persons in behalf of himself and others will not lie. Hallows v. Fernie, 3 Ch. App. 467, 471; Clarkson v. Davies, 1923 App. Cas. 100, 112; Churchill v. Whetnall, L. J. R. 1913, 87 Ch. Div. 524; Associated Almond Growers v. Wymond (C. C. A.) 42 F.(2d) 1; Brown v. Werblin, 138 Misc. 29, 244 N. Y. S. 209. See also Baker v. Portland, Fed. Cas. No. 777, 5 Sawy. 566; Bickfords, Inc. v. Federal Reserve Bank, 5 F. Supp. 875, decided by this court November 23, 1933. The plaintiffs therefore cannot obtain rescission for all who exchanged their stock, nor can they obtain it for that more restricted class of former stockholders who happen to deposit certificates or other papers with them. The rights or status of such persons cannot be tried out in this suit unless they become parties to it in the regular way. The allegations as to the formation of a committee and as to the deposit of stock with the committee therefore add nothing to the bill, although I cannot see that the presence of these averments does any harm. The plaintiffs' suit, in so far as it seeks a rescission or a recognition of them as Liberty stockholders, must be viewed as a suit maintained by them in their individual capacities and on their own behalf alone.

The other part of the bill, setting forth a cause of action in favor of the Liberty Bank against the defendants, is plainly an effort by the plaintiffs to show a derivative suit. No damage was done directly to them by the dealings which the defendants are alleged to have had with the Liberty Bank, and as to these things they have no personal grievance. Their only standing is their alleged interest in the Liberty Bank, an interest which they claim is analogous to that of stockholders.

1. The motion based on insufficiency of a cause of action. — There can be no question that a cause of action against the Harriman Company for rescission of the exchange of stock is set forth. If persons boost the quoted price of a stock above its real value by fictitious sales in order to induce the public to take over their stock at the artificial levels, one who acquires stock for value from the manipulators may treat the transaction as one infected by fraud and may rescind. The fact that information as to the sales at artificial figures comes to the victims by reports or quotations published in the newspapers rather than by direct communications from the manipulators does not break the chain of causation. That is the very medium of information contemplated and intended by the operators of the plan. Further discussion of this phase of the case is unnecessary, in view of the recent opinion of Judge Woolsey in United States v. Brown (D. C.) 5 F. Supp. 81, decided November 23, 1933, with which I am in agreement. See, also, Miller v. Barber, 66 N. Y. 558; Scott v. Brown, 1892 2 Q. B. 724; "Liability for Stock Market Manipulation," by A. A. Berle, 31 Columbia Law Review, 264, at pages 270, 271.

The sufficiency of the bill against the defendants other than the Harriman Company is not so plain. The only claim asserted against them is a claim of the Liberty Bank which the plaintiffs seek to avail themselves of along the lines of a "stockholders' suit." The bill in such a suit must ordinarily cover two things: First, a cause of action in favor of the corporation; and, second, the facts entitling the plaintiff to sue in place of the corporation, that he is a stockholder, and that the corporation has refused or unreasonably failed to bring the suit. Kavanaugh v. Commonwealth Trust Co., 181 N. Y. 121, 124, 73 N. E. 562....