Jersey State Board of Tax Appeals, on March 12, 1968 (DD-18, Tab 25), had affirmed a valuation of $1,360,000.00; and that Zakin testified it was worth at least $1,000,000.00. What the Court found persuasive was that in their contract of February 28, 1969, Giffen, Lesser and Zakin placed a value of $1,250,000.00 on the property (DD-18, Tab 2, para. 5-7), and that Monroe Cooperman, himself a registered real estate broker (Tr. 3000), testified to the Court that this was a reasonable and appropriate valuation of the property. (Tr. 2974).
Accordingly, the Court finds that Zakin and Lesser on July 24, 1970, received $1,677,150.0011a in value, and that Thomas is entitled to recover 45 1/2% of $1,677,150.00, less the $109,892.81 which he received for his stock in November of 1968, for a total of $653,210.44, plus interest from July 24, 1970.
Inasmuch as the conduct of Lesser and Zakin throughout the Thomas stock transaction is clearly within the purview of Rule 10b-5, and inasmuch as they deliberately shunned the Rule's obligation of full disclosure of all material facts related to the securities transaction, Lesser and Zakin bear personal liability jointly and severally for any damage suffered by the plaintiffs as a result of their failure to make full and fair disclosure of all material facts relevant to the securities transaction.
The question now arises as to whether Duralite is liable as well.
The underlying purpose of the Securities Exchange Act of 1934 was to insure some degree of equalization of bargaining position in securities transactions. This goal applies not only to majority stockholders of corporations, but equally to the corporations when represented by their officers, directors or agents. Kohler v. Kohler Co., 319 F.2d 634, 638 (7th Cir. 1963).
Backed by their combined ownership of over 50% of the Randolph and Duralite stock, Lesser and Zakin proceeded to negotiate and consummate the Thomas stock purchase as the agents of both corporations, and in the name of Randolph, without fear of repudiation by their principals.
Plaintiffs are entitled to impute the fraud of the directors and officers of Randolph Avenue Corporation
for the purposes of their claim against the corporation. Affiliated Ute Citizens v. United States, supra, 406 U.S. at 154; Heilbrunn v. Hanover Equities Corporation, 259 F. Supp. 936, 938 (S.D.N.Y.1966). Cf. S.E.C. v. North American Research and Development Corp., 424 F.2d 63, 79 (2nd Cir. 1970); S.E.C. v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2nd Cir. 1972).
Thus, Randolph's conduct, through its officers and directors, in its purchase of Thomas' stock, violated Section 10(b) of the Securities Exchange Act of 1934 and its regulatory corollary, Rule 10b-5.
Duralite's liability, however, is not co-extensive with that of Lesser and Zakin. Duralite and not reap the windfall profits garnered by Lesser and Zakin. Its passive participation in the defrauding of Thomas was orchestrated by Lesser and Zakin, its majority shareholders. There was no community of interest, sharing of benefit, or joint undertaking between Lesser and Zakin, on the one hand, and the Duralite-Randolph corporate complex, on the other. With these considerations in mind, it is the Court's view that an equitable application of the Janigan doctrine demands that Duralite not be requested to disgorge fraudulent enrichment it never received.
As the Court has found, the rescission agreement dated July 24, 1970 was the result of threats by Lesser and Zakin to bring a lawsuit against Giffen based on Giffen's inability to honor the basic contract of February, 1969.
There was no effort here by Giffen to shift windfalls into the pockets of Lesser and Zakin, nor to frustrate Thomas. Rather, Giffen found itself unable to honor its earlier agreement to issue Giffen stock, and simply could not afford to give the Duralite and Randoph stock back to Lesser and Zakin.
Under these circumstances, Giffen was in fact compelled by Lesser and Zakin to pay them in cash and an exceedingly favorable net lease, far more than Duralite and Randoph were actually worth.
In such circumstances, the judgment would be fundamentally unjust if it were to go beyond stripping Lesser and Zakin of their windfall profits, and were also to require Duralite (Giffen) to pay an exorbitant price for its own stock twice.
Moreover, such a ruling would not advance the purposes intended by the Supreme Court of the United States in Affiliated Ute. There the Court, in a further effort to chill executive fraud and chicanery, adopted a judge-made alternative rule of damages which went beyond merely compensating a defrauded party to the extent of that party's loss, but also reached out, as it were, even to the pocket of the perpetrator of the fraud, beyond that extent necessary merely to recompense the victim, to the end that not only would the victim be made whole but the guilty party would derive no undue benefit, windfall or otherwise, from the product of his fraud.
There has been absolutely no showing made that Duralite (Giffen) was the beneficiary of any windfall. It is this Court's view that in imposing a judgment upon Lesser and Zakin which goes beyond the mere compensation of Thomas, and which additionally strips them of all windfall profits which they received, the Court has applied the policy, spirit and letter of the law as enunciated by the Supreme Court of the United States.
It would serve no purpose to make Duralite (Giffen) responsible for windfall profits when it received no windfall.
Accordingly, the judgment to be presented should reflect this Court's decision that Duralite's (Giffen's) liability be limited to the foregoing first measure of damages, that is, the difference between what Thomas received on November 21, 1968 and the real value of the property on that date, with interest from that date. Janigan v. Taylor, supra, 344 F.2d at 786. The Court has found that the market value of the Duralite-Randolph complex in 1968 was approximately $530,000.00, and that the true value of Thomas' interest in 1968 was 45 1/2% of that figure. Duralite's liability to Thomas is 45 1/2% of $530,000.00, or $241,150.00, less the $109,892.81 which Thomas received for his stock in November of 1968, for a total of $131,257.19, plus interest from November 21, 1968.
Duralite, Lesser and Zakin are thus liable jointly and severally to Thomas for the damages incurred by the defendants' violation of Rule 10b-5.
Duralite, however, has cross-claimed against Lesser and Zakin in the event the plaintiffs recover a judgment against it:
Duralite's cross-claim is predicated on the legal proposition that if Thomas succeeds in establishing a violation of Rule 10b-5, it follows as a matter of law that the individuals, in committing such fraudulent and unauthorized acts as to Thomas and causing injury to Duralite reflected in the form of an adverse judgment, breached their fiduciary duties to Duralite, entitling Duralite to a judgment over against them.
(Duralite Company, Inc. Post-Trial Brief, pp. 151-152)
A corporation is a principal which can be liable for fraud only through the conduct of its agents. Duralite's liability to Thomas, however, attaches only through operation of law; it was not itself in pari delicto with its officers and directors, who acted only in their personal interests, albeit in the corporate name. Thus, Duralite is not barred from seeking indemnification from those whose unlawful conduct has saddled it with this vicarious liability. De Haas v. Empire Petroleum Company, 286 F. Supp. 809, 816 (D.Colo.1968); Handel-Maatschappij H. Albert de Bary and Co. N.V. v. Faradyne Electronics Corp., 37 F.R.D. 357, 359 (S.D.N.Y.1964). Cf. Wilshire Oil Company of Texas v. Riffe, 409 F.2d 1277 (10th Cir. 1969).
As directors and officers of Randolph, Lesser and Zakin were fiduciaries and quasi-trustees of the corporation. Hill Dredging Corp. v. Risley, 18 N.J. 501, 114 A.2d 697 (1955). The entire management of corporate affairs was committed to their charge, upon the trust and confidence that those affairs would be managed within the limits of the powers conferred by law upon the corporation, and for the benefit of the corporation. Despite their fiduciary duty to the corporation, Lesser and Zakin, having been exposed to the Kaltsas forecast of Giffen's acquisition of Duralite and after digesting the probable feast available to Duralite shareholders if Giffen did acquire Duralite, deliberately embarked on a course of conduct to mislead Thomas as to the financial prospects of Duralite and Randoph.
This conduct was undertaken not to benefit Duralite or Randolph, on whose behalf they were purportedly acting, but solely to benefit themselves.
The acquisition of Thomas' shares was only for the benefit of Lesser and Zakin; no benefit accrued thereby to Duralite or to Randolph. Under these circumstances we find that Lesser and Zakin breached their fiduciary duty and that Duralite's liability to Thomas is a direct result of this unauthorized and unlawful action. Accordingly, Lesser and Zakin are jointly and severally liable to Duralite for any damages payable by Duralite to Thomas resulting from their unlawful conduct as agents of Duralite.
Duralite has also counterclaimed for goods sold and delivered to Edco and Temco, and for breach of contract for failing to accept certain raw materials and finished goods pursuant to the contracts dated June 18, 1968 and December 31, 1968. By stipulation, the parties have agreed to final judgment in favor of Duralite against Edco and Temco in the amount of $17,175.88 for the goods sold and delivered. The parties have also stipulated that, in the event the contracts are enforceable against Edco and Temco for failure to accept the raw materials, the final judgment in this case will include a judgment against Edco and Temco in favor of Duralite in the amount of $20,000.00. (Tr. 3559)
Edco and Temco resist the obligations imposed under the June 18, 1968 agreement under a claim of invalidity pursuant to Section 29 of the Securities Exchange Act of 1934.
Section 29, 15 U.S.C. § 78cc(b) provides in relevant part:
(b) Every contract made in violation of any provision of this chapter or of any rule or regulation thereunder, and every contract (including any contract for listing a security or an exchange) heretofore or hereafter made, the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter or any rule or regulation thereunder, shall be void (1) as regards the rights of any person who, in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any such contract, and (2) as regards the rights of any person who, not being a party to such contract, shall have acquired any right thereunder with actual knowledge of the facts by reason of which the making or performance of such contract was in violation of any such provision, rule, or regulation . . . .