The opinion of the court was delivered by: FORMAN
This is a sequel to the financial saga of two toll bridges across the Delaware River, once owned by the Burlington-Bristol Bridge Company and the Tacony-Palmyra Bridge Company, as told by the New Jersey Supreme Court in the case of Driscoll v. Burlington-Bristol Bridge Co., 1952, 8 N.J. 433, 86 A.2d 201. The plaintiffs named in the complaint are Charles Street Mills
and Harry B. Williams, stockholders of the Tacony-Palmyra Bridge Company, the former having held 10 shares of Class 'A' participating no par value stock and the latter 50 shares of that stock and 450 shares of common, no par value stock.
The defendants, for the most part, are the same characters portrayed in the New Jersey suit aforesaid consisting of: the Sarjem Corporation, an Illinois corporation, Tacony-Palmyra Bridge Company, a New Jersey corporation, Burlington-Bristol Bridge Company, a New Jersey corporation, Burlington County Bridge Commission,
a public body of Burlington County, New Jersey, Tuthill Ketcham, Richard C. Nongard and Rowland H. Murray, individually and trading as the firm of Ketcham & Nongard, a partnership, Robert M. Sherritt, Robert R. Greig, John E. Weinstock, William C. Mulligan, Clifford R. Powell, Irene Powell, Mildred Powell Meader, Robert K. Bell, Theodore R. Hanff, T. R. Hanff & Co., Inc., a Pennsylvania corporation, Thomas J. Christensen, Rickard W. Parks, Gladys Parks, Fitzgerald & Co., B. J. Van Ingen & Co., Inc., a corporation, Buckley Securities Corporation, John A. Meyer, Frank A. Snover, and Chemical Bank and Trust Company.
This action is said to be brought not only for the plaintiffs above named but also on behalf of all other former stockholders of the Tacony-Palmyra Bridge Company similarly situated, based on the Securities Exchange Act of 1934, as amended, 15 U.S.C.A. § 78a et seq., including, without being limited to, Section 10(b) thereof, 15 U.S.C.A. § 78j(b) and Rule X-10B-5 promulgated thereunder; Section 15(c), 15 U.S.C.A. § 78o(c), and Rules X-15C 1-2, X-15c 1-5, and Section 78cc; and also under the Securities Act of 1933 as amended, 15 U.S.C.A. § 77a et seq., including, without being limited to, Section 5 thereof, 15 U.S.C.A. § 77e.
In October of 1947 a syndicate consisting of Ketcham and Nongard, Thomas J. Christensen, Rickard W. Parks, Herbert K. Bell, Clifford R. Powell and Theodore R. Hanff, with an aggregate investment of $ 25,000, acquired the entire ownership of the Burlington-Bristol Bridge Company. Shortly thereafter Messrs. Ketcham and Nongard, Theodore Hanff and Clifford R. Powell took steps toward the acquisition of all of the stock of the Tacony-Palmyra Bridge Company to the end that the syndicate that had purchased the Burlington-Bristol Bridge Company would be able to transfer the stock of both companies to a bridge commission which would issue revenue bonds in a large amount assuring substantial returns to the syndicate members with little investment of funds upon their part. The interests of the members of the syndicate in the ultimate profits so to be realized were fixed at 25% each for Messrs. Hanff and Powell, 25% for the firm of Messrs. Ketcham and Nongard; and Messrs. Bell, Parks and Christensen were to divide the remaining 25%.
Some time in 1947 the group retained Mr. William C. Mulligan, a member of the firm of Winston, Strawn and Shaw, Chicago attorneys, as its chief counsel. Mr. Robert C. Sherritt and his Sarjem Corporation, a concern which specialized in gathering together outstanding shares in the hands of scattered stockholders, were engaged to solicit the stockholders of the Tacony-Palmyra Bridge Company, of which there were about 1500 scattered about the country, to agree to sell their shares. Meanwhile legislation had been passed by the New Jersey Legislature favorable to the plan by way of Chapter 318 of the New Jersey Laws of 1946, Chapter 401 of the New Jersey Laws of 1947 and Chapter 288 of the New Jersey Laws of 1948 so that no later than March, 1948, there was no doubt that the necessary bridge commission would come into existence when called for by Mr. Powell.
An attempt was made by Mr. Sherritt to deal with Mr. Leo Niessen, the president of the Tacony-Palmyra Bridge Company in 1947 for the stock of those in charge of its management. Nothing came of this then, and he turned to the Fidelity-Philadelphia Trust Company, which owned 2000 shares of the company and whose President, Mr. S. W. Cousley, was a director of the bridge company. In early 1948 he succeeded in interesting the Trust Company in the sale of its stock and negotiations were commenced by Mr. Sherritt with Messrs. Leo Niessen, Arthur Niessen, Grover C. Richman, Harry Sherman and Mr. Cousley, who were officers, directors and large stockholders of the bridge company, and known in this litigation as the Niessen group.
These negotiations culminated in the late summer of 1948 with a price agreed upon of $ 88.50 for the Class A and common shares and $ 154.87 1/2 for the preferred stock. The book value of the preferred stock was $ 100 per share and for the Class A and common, $ 32.67 per share. The latter two were listed on the Philadelphia Exchange at 72 and 70 respectively, and the preferred was listed at 111. By September 7, 1948, the holders of 35% of the Class A and 60% of the common stock had signed agreements with Sarjem Corporation for the sale of their shares. On that date Sarjem Corporation mailed the letter and form of purchase agreement appended hereto as Annexes 1 and 2 to all the stockholders who had not already executed agreements. Just before this time, Sarjem Corporation engaged six other brokers and dealers including the defendant, Buckley Securities Corporation, to begin a campaign in several cities by personal interview, telephone, and mail to secure additional acceptances for which they were to receive $ 1 for each share of Class A and common stock and $ 1.75 for each share of preferred stock sold to Sarjem at their solicitation. A copy of the form of letter used by the defendant, Buckley Securities Corporation, is appended hereto as Annex 3.
By early October, 1948, the holders of more than 80% of the shares of each class of stock had signed agreements to sell to Sarjem Corporation. Among them were the plaintiffs, the late Mr. Mills and Mr. Williams. The form of sales agreement, Annex 2, contained provisions whereby each stockholder gave Sarjem Corporation the right to purchase his shares of stock at any time on or before November 1, 1948, but Sarjem Corporation was not required to take the stock unless prior to November 1, 1948, it had acquired similar purchase agreements from the holders of not less than 80% of each class of stock. Sarjem Corporation was authorized to designate individuals to vote the shares covered by the agreements at any stockholders' meeting which might be held after $ 6,487,500 had been deposited in escrow with the Continental Illinois National Bank and Trust Company, which sum represented all the money necessary for the purchase or redemption of all the capital stock of the Tacony-Palmyra Bridge Company that was outstanding.
The circular letter, Annex 1, which accompanied Annex 2, among other things, advised each stockholder that the offer contained in the form was identical with that which had been accepted by 'the holders of approximately 35% of the Class A stock and 60% of the common stock.'
On October 6, 1948, Sarjem Corporation assured the management of the bridge company that it had agreements in hand in excess of 80% of the outstanding shares of stock and that it could perform all the other conditions surrounding its agreement to purchase the stock. After calling the preferred stock for redemption the directors of the bridge company resigned and Mr. Sherritt and other nominees of Sarjem Corporation were elected as officers and directors of the Tacony-Palmyra Bridge Company.
On October 11, 1948, the new directors gave notice of a meeting of the stockholders to be held October 22, 1948, to vote to recapitalize the Company by reclassifying Class A and common stock as preferred stock, redeemable at the purchase price named in the form of agreement, Annex 2, and by the issuance of a new class of common stock.
Incidental to the negotiations with the Niessen group in July of 1948, Sarjem Corporation agreed that certain sums should be paid out of the capital funds of the Tacony-Palmyra Bridge Company, including the following: $ 75,000 for repairs to the bridge, $ 25,000 in counsel fees to Mr. Richman and two other attorneys who represented the Company at that time and $ 33,000 as severance pay to employees of the Company of which $ 8,000 was to go to officers and directors of the Company. No disclosure of this arrangement was made by Sarjem Corporation or others soliciting the remaining stockholders to sign agreements for the sale of their shares.
Mr. William C. Laemmel, a Vice President of the Chemical Bank and Trust Company and other officers of the Bank were informed of the proposed transactions as early as February of 1948 by Mr. Ketcham who from time to time reported as to the progress that was being made toward the ultimate consummation of the project. Mr. Ketcham had introduced Mr. Sherritt to Mr. Laemmel and later he met Messrs. Nongard and Hanff as well as Mr. Powell.
Mr. B. J. Van Ingen, President and Mr. James G. Couffer, Vice President of B. J. Van Ingen & Co., Inc., as well as the officers of Chemical Bank and Trust Company were shown opinions, reports and surveys from experts in the fields of law and engineering concerning the value of the properties, the legality of various phases of the project designed to lodge the bridges in a governmental commission and on other matters.
By October 22, 1948, the date set for the stockholders meeting, better than 90% of the holders of each class of stock of the Tacony-Palmyra Bridge Company had executed agreements like Annex 2, and they had been forwarded to Sarjem. On that date all of the many steps to place the bridges in the ownership of a governmental commission were taken with speed. Sarjem had obligated itself to pay the stockholders of the Tacony-Palmyra Bridge Company the aggregate sum of $ 6,487,500. It agreed to sell it all to Burlington-Bristol Bridge Company for $ 6,700,000 of which Burlington was required to advance $ 6,487,500 by depositing it with the Continental Illinois Bank and Trust Company of Chicago in escrow in order to validate the proxies contained in the purchase agreements. Burlington borrowed this sum from Chemical. The reclassification of the stock of Tacony was effected by the vote of the proxies validated by the establishment of the escrow fund. There were 64,875 shares of the new common stock of Tacony and these were purchased by Sarjem for $ 6,487,500 which Sarjem had borrowed from Chemical, and Tacony immediately used these funds to redeem the outstanding preferred stock created in the classification. Sarjem delivered the 64,875 shares of new common stock of Tacony to Burlington and its loan from Chemical for $ 6,487,500 was discharged with the funds released from the escrow deposit with the Continental Bank. The balance of the purchase price to be paid by Burlington of $ 212,500 was delivered by it to Sarjem.
Meanwhile as a result of Mr. Powell's efforts beginning on the evening of October 20th the Board of Freeholders of Burlington County conceived the Burlington County Bridge Commission by selecting its personnel, the members of which, in turn, on October 21, embryonically met to prepare themselves for the events of October 22. On the morning of that day the Commission was actually born when the Board of Freeholders of Burlington County in public meeting adopted a resolution creating the Burlington County Bridge Commission and naming their selections of the evening of October 20th as members. They were awaiting this action nearby and as soon as they were so informed they organized themselves, adopted by-laws, reports, and resolutions which had been prepared in advance for them and in less than an hour executed the vast number of documents pertaining to the transactions whereby bonds of their Commission in the sum of $ 12,400,000 would be issued. They immediately journeyed to the banking house of Chemical in New York where they went with the others through the intricate labyrinth of the final closing to bring title to the bridges into the Commission, described in great detail in the case of Driscoll v. Burlington Bristol Bridge Co., supra.
After the closing, B. J. Van Ingen & Co. organized a syndicate to dispose of the bonds consisting of 16 or 17 other brokerage firms, many of which were defendants in this suit but as to which the plaintiffs have suffered summary judgment.
As a result of the maze of transactions of the October 22 closing the Burlington County Bridge Commission obtained title to the two bridges and issued its revenue bonds in the sum of $ 12,400,000. These went into the hands of the Chemical Bank as security for loans made to the underwriting syndicate. Sarjem was left with $ 212,500, the difference between the price paid the stockholders of the Tacony-Palmyra Bridge Company and the selling price to the Burlington-Bristol Bridge Company. The original syndicate came away with a net of $ 1,894,637 after the payment of fees, expenses, discounts and a fund to cover possible tax liability.
The gist of Counts 1 and 2 of the complaint as amended
is that prior to July 1, 1948, all of the defendants conspired to obtain ownership of the stock of the Tacony-Palmyra Bridge Company in violation of the provisions of the Securities and Exchange Act and the regulations above quoted and that the unlawful acts consisted in the main of the following:
(1) That a scheme was conceived whereby the defendant Sarjem Corporation should obtain transfer of the said stock at arbitrary prices fixed by the defendants, knowing that the stock would be transferred to the Burlington-Bristol Bridge Company, and thereafter ownership of the bridges of both companies would be placed in a Burlington County Bridge Commission and that the defendants thereby would reap large profits, all of which knowledge was concealed from the plaintiffs and the other stockholders of the Tacony-Palmyra Bridge Company in like situation.
(3) That the defendants caused further untrue statements of material facts to be made, or omitted to state material facts, in that Annex 1 purported to state that all of the stockholders were to receive equal compensation for their shares, when in fact certain stockholders comprising the Niessen group were favored by receiving a greater compensation for their shares than the remaining stockholders.
(4) That the letter of the Buckley Securities Corporation, Annex 3, constituted a similar device in that it appraised the price offered to stockholders for their shares as 'fair and adequate' and that it was to the 'distinct advantage of each holder' to accept the offer, when, in fact, the plaintiffs allege such advice was knowingly false.
(5) That the defendants, or some of them, caused articles to appear in editions of the New York Times and the Wall Street Journal of September 8, 1948, wherein it was erroneously reported that Annex 1 contained a statement to the effect that an escrow deposit of $ 6,487,500 had already been made.
(6) That no proxy statements were submitted to the plaintiffs or other stockholders in like situation in connection with the solicitation for the execution of Annex 2, nor was such a statement filed or registered with the Securities and Exchange Commission, nor were the proxies prepared in the form specified by Regulation 14 of the Securities and Exchange Commission.
In Count 1 the plaintiffs demand damages for themselves and other stockholders in like situation in the sum in excess of $ 3,459,000, representing all profits, fees and emoluments achieved by the defendants plus exemplary damages, costs, expenses and attorneys' fees, pursuant to the provisions of the Securities and Exchange Act of 1934 as amended.
In Court 2 they demand a decree effecting the rescission of the agreements and sales of stock by the plaintiffs and the class they seek to represent, with restitution of all profits pursuant to the provisions of the Securities Exchange Act of 1934 as amended, and if such rescission cannot be decreed because of intervening equities of bona fide purchasers for value of bonds, the plaintiffs seek a decree impressing an equitable lien upon the Tacony-Palmyra Bridge and revenues from the operation thereof from October 22, 1948.
In Court 3 they seek damages similar to those claimed in Count 1, based on the failure of defendants to register with the Securities and Exchange Commission solicitation letter, Annex 1, which they charge was in the nature of a certificate of deposit, in violation of the Securities Act of 1933, as amended, 15 U.S.C.A. § 77a et seq.
In Count 4 they claim the same relief, rescission, etc., as in Count 2, alleging violation of the Securities Act of 1933, as aforesaid.
Motions to dismiss the complaint and for summary judgments have been made by the defendants as follows:
(1) Chemical Bank & Trust Company and B. J. Van Ingen & Co., Inc.;
(2) The Sarjem Corporation, Tuthill Ketcham, Richard C. Nongard and Rowland H. Murray, individually and trading as the firm of Ketcham and Nongard, Robert M. Sherritt, Robert R. Greig, John E. Weinstock, William C. Mulligan, Clifford R. Powell, Paul A. Powell, Irene Powell, Mildred P. Meader, Theodore R. Hanff, T. R. Hanff & Co., Inc., Thomas J. Christensen, Rickard W. Parks, Gladys Parks, and Robert K. Bell;
(3) Buckley Securities Corporation and John A. Meyer;
(4) Fitzgerald and Company;
On behalf of the plaintiffs there have been the following motions:
(1) To substitute testamentary representatives for the plaintiff Charles Street Mills who died after the complaint was filed;
(2) To amend the complaint against certain defendants and to add the Burlington County Bridge Commission as an additional party defendant;
(3) For summary judgment against the defendants.
One of the plaintiffs, Charles Street Mills, died on April 7, 1954. Subsequently, his executors, Mildred E. Gale and Howard Conover, moved to be substituted as plaintiffs pursuant to Rule 25(a), F.R.C.P. This motion is resisted by defendants Chemical Bank & Trust Co. and B. J. Van Ingen & Co. on the theory that the cause of action abated upon the death of the deceased Mills.
It is claimed that since the action is in tort it must abate upon the death of a party. The defendants submit that in Wogahn v. Stevens, 1940, 236 Wis. 122, 294 N.W. 503, 133 A.L.R. 1033, a suit involving the very legislation in this case, the cause of action was held to abate upon the death of the plaintiff. Since the tests of assignability and survivability are ordinarily the same, it is interesting to observe that all of the case authority appearing in the annotation to that case in the American Law Reports, 133 A.L.R. 1038-1040, is contra.
In the absence of statutory pronouncement in this regard the federal common law will be applied. Van Choate v. General Electric Co., D.C.Mass. 1917, 245 F. 120; Moore v. Backus, 7 Cir., 1935, 78 F.2d 571, 101 A.L.R. 379.
In a federal case concerned with damages as authorized under the anti-trust laws, the question, otherwise similar, was considered two years later by the Court of Appeals for the Fourth Circuit in Barnes Coal Corp. v. Retail Coal Merchants Ass'n, 4 Cir., 1942, 128 F.2d 645, 649, in which it said:
'The modern rule as to survivability, we think, is that actions for torts in the nature of personal wrongs, such as slander, libel, malicious prosecution, etc., die with the person, whereas, if the tort is one affecting property rights, the action survives. * * * Underlying the distinction between actions that die with the person and those that survive is the basic thought that the reason for redressing purely personal wrongs ceases to exist either when the person injured cannot be benefited by a recovery or the person inflicting the injury cannot be punished, whereas, since the property or estate of the injured person passes to his personal representatives, a cause of action for injury done to these can achieve its purpose as well after the death of the owner as before. * * * 'The real test, so far as tort actions were concerned, seems to have been whether the injury on which the cause of action was based affected property rights, or affected the person alone. In the former case the cause of action survived, while in the latter it abated." Citing Sullivan v. Associated Billposters and Distributors, 2 Cir., 1925, 6 F.2d 1000, at page 1004, 42 A.L.R. 503.
It is further contended by these defendants that the action is penal in nature and as such cannot survive the death of a party thereto. However, 15 U.S.C.A. § 78bb clearly limits recovery under any section of the 1934 Securities Exchange Act to the actual damages sustained by a plaintiff. This relief appears to be remedial and actions for similar damages have been held to be assignable and capable of survival. See Auslen v. Thompson, 1940, 38 Cal.App.2d 204, 101 P.2d 136; Spiller v. Atchison, Topeka & Santa Fe Ry. Co., 1920, 253 U.S. 117, 135, 40 S. Ct. 466, 64 L. Ed. 810.
In Van Choate v. General Electric Co., supra (245 F. 121), the court noted the distinction between mere injuries not resulting in profit to the wrongdoer and situations where the plaintiff might 'waive the tort and sue in assumpsit', holding the latter to survive.
The complaint does not allege injury which is personal in its nature, but is generally grounded on a theory sounding in unjust enrichment. The measure of damages sought is that profit allegedly made by the defendants to which plaintiffs claim to be entitled. The injury upon which the cause of action was based affected property rights. In the light of the extensive survey of the common law regarding survivability and the logical and persuasive ultimate holding in the Barnes Coal Corporation case, I am constrained to follow it here, and hence the motion to amend for the purpose of substituting his executors in the place of the deceased plaintiff,
Some of the defendants object to the complaint on the ground that there is no provision for civil remedy for violations of Section 10(b) of the Securities Exchange Act, 15 U.S.C.A. § 78j(b) and Rule X-10B-5 of the Regulations of the Securities and Exchange Commission, CFR 240.10b(5). Early consideration of this objection should be given, for the disposition of the objection will affect all defendants.
It is true that there is no express provision for civil remedy in the particular section of the Act with which we are concerned. The objecting defendants stress that other sections of the Act, which make other practices not in issue here unlawful, provide for redress for aggrieved persons. They argue that this is a demonstration that Congress did not intend that violations of the section concerned in this allegation should be the basis for such claims. However, the argument is rejected in the case Fratt v. Robinson, 9 Cir., 1953, 203 F.2d 627, 37 A.L.R.2d 636, wherein it is held that the weight of authority sustains the proposition that there is available a civil remedy for violations of the section of the Act and the regulations here in question. The Court said:
'We can think of nothing that would tend more toward discouraging trading off the established business markets and out of governmental regulation or that would more certainly tend to deter fraudulent practices in security transactions and thus make the Act more 'reasonably complete and effective' than the right of defrauded sellers or buyers of securities to seek redress in damages in federal courts.' 203 F.2d at page 632.
The authorities supporting its decision are cited in Note 15 on page 632 of the opinion. See also Slavin v. Germantown Fire Ins. Co., 3 Cir. 1949, 174 F.2d 799, 805. I am persuaded that the objection to the complaint on this ground must be overruled.
Defendants also contend that the complaint does not allege facts which are appropriate for a class action, and that the number of disclaimers that have been filed and the failure of other stockholders to join the plaintiffs by intervention in the suit, bar the maintenance by the plaintiffs of the suit as a class action. Buttressing the last view the case of Oppenheimer v. F. J. Young & Co., 2 Cir., 1944, 144 F.2d 387, was cited in which it was held:
'If it shall later appear that the plaintiffs are not able within a reasonable time to obtain others to intervene in the class action it may properly be dismissed as a class action because of lack of adequate ...