The opinion of the court was delivered by: BROTMAN
Plaintiff James R. Roberts has filed this class action complaint against Magnetic Metals Company (hereinafter Metals), Magmetco, Inc., Butcher & Singer, Inc., and D.C. Langworthy, president of both Metals and Magmetco, for alleged violations of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78aa Et seq. (hereinafter the 1934 Act). Various pendent state claims are also alleged.
Prior to June 25, 1975, plaintiff was the record holder of 600 shares of Metals common stock. At that time Metals was a publicly-held company, eighty-four percent of whose common stock was owned by defendant Langworthy and members of his family. In early May 1975, Langworthy announced a proposed merger of Metals with a newly-formed corporation, Magmetco, of which he was also the president. Under the proposed merger, the non-Langworthy shareholders were to receive $ 6.50 in cash for each share of Metals stock. The merger was contingent upon two-thirds approval of these 194,330 non-Langworthy shares. After approval by the S.E.C., the defendants mailed proxy materials to each record holder of Metals stock as of May 22, 1975. At the meeting of the stockholders on June 25, 1975, the merger was approved with only 37,426 of the non-Langworthy shares voting in the negative. This action was commenced on January 5, 1978, two and one half years after the merger vote.
There are three counts to the complaint. Count I alleges that the May 31 proxy statement was false and misleading and caused the plaintiff to approve the merger despite grossly inadequate consideration in violation of section 14(a) of the 1934 Act and Rule 14a-9.
Count II incorporates the factual allegations of Count I by reference. It is alleged that such facts also state a claim under section 10(b) of the 1934 Act and Rule 10b-5.
Count III alleges that the same actions of defendants Metals and Langworthy violated their fiduciary duties to plaintiff. It is finally claimed that the merger amounted to common law and statutory fraud.
Defendants Metals, Magmetco, and Langworthy have moved for summary judgment pursuant to Fed.R.Civ.P. 56 on the ground that the federal securities claims are barred by the statute of limitations. Defendant Butcher & Singer, a broker and dealer in securities which rendered a pre-merger opinion concerning the fair value of the Metals common stock, joins in this motion for summary judgment. Additionally, Butcher urges the court to dismiss the complaint for plaintiff's failure to plead adequately fraudulent concealment and for failure to allege the requisite scienter. In each instance a violation of Fed.R.Civ.P. 9(b) is claimed. All defendants urge that, because the federal claims are time-barred, the court lacks pendent jurisdiction over the state claims. Both sides have submitted extensive and thorough briefs. Oral argument was heard on April 21, 1978. The court will deal with the various counts of the complaint seriatim.
Unlike other federal securities statutes, section 10(b) of the 1934 Act does not contain its own statute of limitations.
In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n.29, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976), the Supreme Court indicated that, in the absence of a relevant federal statute of limitations, the law of limitations of the forum state should be applied in actions under the 1934 Act. In this case, the parties agree that New Jersey law controls but differ over which is the appropriate law. Although the Court did not address this issue in Ernst & Ernst, other Supreme Court decisions have indicated that the "most analogous" or "most appropriate" statute should be used. See Occidental Life Ins. Co. v. E. E. O. C., 432 U.S. 355, 53 L. Ed. 2d 402, 97 S. Ct. 2447, 2455 (1977); Johnson v. Railway Exp. Co., 421 U.S. 454, 462, 95 S. Ct. 1716, 44 L. Ed. 2d 295 (1975). In a section 10(b) action, the Court of Appeals for the Second Circuit has indicated that the court should apply the most similar statute which best effectuates the purpose of the federal legislation. Berry Petroleum Company v. Adams & Peck, 518 F.2d 402, 407 (2nd Cir. 1975); Brick v. Dominion Mortg. & Rlty. Trust, 442 F. Supp. 283, 301 (W.D.N.Y.1977); See Gelman v. Westinghouse Electric Corp., 556 F.2d 699, 701 (3rd Cir. 1977). In this case, the parties are at loggerheads as to whether the limitations provision governing the New Jersey Uniform Securities Law (commonly known as the blue sky law)
or common law fraud
applies. The former statute limits the time for commencing an action to "2 years after the contract of sale" whereas the latter allows an action to be commenced within six years of the date of the fraud.
The defendants point to a large number of cases holding that a state's blue sky provision, rather than a statute governing common-law fraud, applies to actions brought under section 10(b). See, e. g., Forrestal Village, Inc. v. Graham, 179 U.S.App.D.C. 225, 551 F.2d 411 (1977); Dupuy v. Dupuy, 551 F.2d 1005 (5th Cir. 1977); Fox v. Kane-Miller Corp., 542 F.2d 915 (4th Cir. 1976); Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir. 1972); Vanderboom v. Sexton, 422 F.2d 1233 (8th Cir.), Cert. denied, 400 U.S. 852, 91 S. Ct. 47, 27 L. Ed. 2d 90 (1970); Brick v. Dominion Mortg. & Rlty. Trust, supra. Defendants stress the similarities between the New Jersey blue sky statute and the federal action under section 10(b). They argue that scienter is a necessary element of both the state and federal securities action. Brick, supra at 304; Cf. Garnatz v. Stifel, Nicolaus & Co., 559 F.2d 1357, 1363 (8th Cir. 1977). They emphasize the similarity in language between the New Jersey Uniform Securities Law and 10(b), and, perhaps most importantly, urge that:
"(t)he (blue sky) statute promotes the full and accurate disclosure of information in connection with stock sales, precisely the same purpose as that of Rule 10b-5."
Dupuy, supra at 1024 n.31; See Brick, supra at 304.
The plaintiff attempts to distinguish the cases relied on by the defendants and also puts forward a not insubstantial number of cases holding that a general fraud provision is more appropriate for section 10(b) than a state's blue sky law. See, e. g., IDS Progressive Fund v. First Michigan Corp., 533 F.2d 340 (6th Cir. 1976); Arneil v. Ramsey, 550 F.2d 774 (2nd Cir. 1977); Jenne v. Amrep Corp., No. 77-0487 (CCH Fed.Sec.Rptr. P 96,343) (D.N.J., filed February 14, 1978); Klapmeier v. Peat, Marwick, Mitchell & Co., 363 F. Supp. 1212 (D.Minn.1973). The plaintiff disputes defendants' proposition that the intent requirements of both statutes are the same. He urges that the New Jersey's Uniform Law provides no relief to a seller of securities who is defrauded in the sale, that damages are more restricted in New Jersey than under section 10(b), and that the New Jersey statute contains a privity requirement. He contends that the purpose of the federal securities laws is remedial and thus, irrespective of which statute is superficially more analogous, federal courts should apply the longer statute of limitations. Taking into account these distinguishing factors, plaintiff urges application of N.J.S.A. 2A:14-1.
The court is impressed with plaintiff's well-reasoned attempts to distinguish the current situation from the cases relied on by the defendants. Undoubtedly, there are several important differences between a section 10(b) action and the remedy provided by the New Jersey Uniform Securities Law. Most notably, the New Jersey law provides no cause of action for an aggrieved seller of securities. In fact the legislative history of section 102(a) of the Uniform Securities Act, upon which the New Jersey law was modeled,
disputes the need for a statutory provision:
Although the lower federal courts have uniformly implied a civil cause of action against fraudulent buyers under the SEC rule, the federal courts when applying federal law do not have at their disposal all of the common-law and equitable remedies of deceit and ...