The opinion of the court was delivered by: DEBEVOISE
Named as defendants in the action are: Edward J. Butler, Jr., seller of the assets and good will of the dealership and co-trustee of a trust (the "Butler Trust") which owned and leased the dealership premises; George Butler, Gordon Butler, Robert Butler and Charles Oldakowski, remaining trustees of the Butler Trust; World-Wide Volkswagen Corp., the regional distributor; and Michael Sweeney, a former World-Wide Volkswagen employee. Jurisdiction is founded upon Section 22 of the Securities Act of 1933 (1933 Act), 15 U.S.C. § 77v and Section 27 of the Securities Exchange Act of 1934 (1934 Act), 15 U.S.C. § 78aa. Jurisdiction over the state law claims is founded upon the court's pendent jurisdiction or, in the alternative, diversity of citizenship of the parties, 28 U.S.C. § 1332(a).
Defendants Edward J. Butler, George Butler, Gordon Butler, Robert Butler and Charles Oldakowski
(the "Butler trustees") assert counterclaims against plaintiff: (1) to recover on state court judgments for payments due under the dealership lease agreement; (2) for damages resulting from plaintiff's alleged default on the lease; (3) for additional sums owing under the lease agreement; (4) for attorneys' fees and costs in connection with the counterclaims; and (5) for sanctions against plaintiff for commencing the action in bad faith. Jurisdiction over the counterclaims is founded upon diversity of citizenship and the court's ancillary jurisdiction.
The matter is now before the court on motions by the Butler trustees: (1) to dismiss the federal securities laws counts for failure to state a claim upon which relief may be granted; (2) to dismiss the federal securities laws counts as barred by the relevant statutes of limitation; and (3) for summary judgment, under principles of res judicata and collateral estoppel, on all counts of the complaint and on their first counterclaim. Because matters outside the pleadings have been presented to and not excluded by the court, all motions will be treated as motions for summary judgment, pursuant to Rule 12(b) of the Federal Rules of Civil Procedure, and will be disposed of as provided in Rule 56. All parties have had a reasonable opportunity to present materials pertinent to the summary judgment motions. See Switlik v. Hardwicke Company, Inc., 651 F.2d 852 (3d Cir. 1981).
In order to prevail on a motion for summary judgment, the moving party must make an affirmative showing based upon the pleadings, depositions, answers to interrogatories, admissions on file, affidavits and uncontested exhibits that "there is no genuine issue of material fact and that he is entitled to judgment as a matter of law." Rule 56, Federal Rules of Civil Procedure. The opposing party "may not rest upon the mere allegations or denials of his pleadings, but his response, by affidavits or as otherwise provided in (Rule 56) must set forth specific facts showing that there is a genuine issue for trial." DeLong Corporation v. Raymond International, Inc., 622 F.2d 1135 (3d Cir. 1980). Once the party opposing the motion has met this burden, all reasonable inferences of fact must be drawn in his favor. Adickes v. Kress & Co., 398 U.S. 144, 147, 90 S. Ct. 1598, 1602, 26 L. Ed. 2d 142 (1970); Small v. Seldows Stationery, 617 F.2d 992, 994 (3d Cir. 1980).
The focus of the controversy is an automobile dealership located in Buffalo, New York. Defendant Edward J. Butler purchased the dealership in 1968 from Chrysler Motors Corporation and began doing business on the premises as a retail seller of Volkswagens under the name, Butler Volkswagen, Inc. Butler was the sole shareholder, director and officer of the corporation.
In 1971, Butler executed a trust agreement and deed conveying the dealership premises, but not the business itself, in trust for the benefit of his children. The premises were then leased by the trust to Butler Volkswagen, Inc., which continued to operate a Volkswagen dealership at the site under Butler's sole ownership. Butler originally named himself and a single co-trustee as trustees of the Butler Trust. In early 1976, the co-trustee resigned and Butler named as successors three of his brothers, George Butler, Gordon Butler and Robert Butler, and a personal friend, Charles Oldakowski. These four individuals have been named as defendants in the action in their capacity as trustees of the Butler Trust.
In early 1975, Butler alleges, he became interested in selling his Volkswagen dealership business. For assistance in locating a suitable buyer, he called upon World-Wide Volkswagen Corporation, the regional Volkswagen distributor and dealership franchisor. Late in 1975 or early in 1976 defendant Michael Sweeney, then a field representative for World-Wide Volkswagen, telephoned Butler to inform him that prospective purchasers had been located: Miklos Mohacsi, an Illinois resident who had previously been employed by Fiat Motors and other automotive companies, and Zoltan Somogyi, a New Jersey businessman. Shortly afterward negotiations commenced between Butler, Mohacsi, Somogyi and World-Wide Volkswagen which culminated in Mohacsi's and Somogyi's agreement, in April, 1976, to purchase the business.
It is plaintiff Somogyi's contention that, during the course of the negotiations, misrepresentations were made and material facts omitted which induced him to purchase the business and ultimately to incur substantial business losses. Butler, however, claims that Somogyi was a hard bargainer and, with full knowledge of all relevant details, purchased the business on highly favorable terms. The events which took place during the negotiations are a subject of considerable dispute.
Butler alleges that he explained to Somogyi and Mohacsi, during an initial meeting on the dealership premises in Buffalo in late 1975 or early 1976, that Butler Volkswagen had done poorly as a business in the past. He claims to have told them, however, that the dealership had the potential to be more lucrative; that its poor performance could not be attributed to a poor Volkswagen product line or to any weakness in the Buffalo economy, but primarily to the fact that he had run the business as an absentee owner and had not exercised adequate supervision over his management; and that, specifically, both his general manager, who had day-to-day responsibility for all dealership operations, and his service manager were inadequate and should not be retained by Mohacsi and Somogyi if they purchased the business.
Butler further alleges that, during the negotiations leading up to the signing of a purchase agreement, he had no substantive discussions with Somogyi, Mohacsi or anyone else on their behalf regarding the dealership's earning history, nor did he furnish anyone with Butler Volkswagen's past financial statements. He states that he did, however, authorize World-Wide Volkswagen to permit Somogyi and Mohacsi to inspect the dealership's financial and business records on file with the distributor. Somogyi must have availed himself of the opportunity to inspect these records, Butler contends, because he subsequently produced, in response to a document request by defendant Oldakowski, copies of Butler Volkswagen's financial statements for the years, 1974 and 1975. These statements, Butler points out, show net losses for the years, 1974 and 1975, of $ 40,000.28 and $ 21,608.31 after deductions for his salaries of $ 17,600 and $ 14,400. (See Defendants' Exhibit B).
In addition to reviewing financial data, Butler alleges, Somogyi and Mohacsi personally inspected the day-to-day operations of Butler Volkswagen, Inc. Shortly after the initial meeting in Buffalo, he states, Mohacsi paid a visit to the dealership and spent several days observing its operations and taking inventory of its parts, accessories and equipment.
World-Wide Volkswagen, represented by defendant Sweeney, played an active role in the negotiations from beginning to end, apparently exercising considerable control over the terms of the final agreement in its capacity as the exclusive area dealership franchisor. Butler contends that World-Wide Volkswagen, as an automobile distributor, was more interested in the economic well-being of a future dealer than of an outgoing dealer, and that it exercised its control to obtain the best possible deal and lowest possible price for Somogyi. In his affidavit, Butler recites a number of concessions as to price and other terms of purchase allegedly imposed upon him by World-Wide Volkswagen. He claims, for example, that contrary to his original wishes, he was persuaded to grant Somogyi and Mohacsi not only a lease but also an option to purchase the dealership premises and to substantially lower his asking price for the dealership assets.
Somogyi, on the other hand, tells a very different tale. He claims that when he was first contacted by Sweeney about the possibility of purchasing Butler Volkswagen, Inc., he was "very hesitant" to undertake such a venture, particularly since the business was far from his home and he would be an absentee owner. He contends, however, that Butler and Sweeney, by supplying him with false and misleading financial data, ultimately convinced him that the Buffalo dealership could be "very profitable" and that he should make the purchase despite his initial reservations.
Somogyi denies that Butler ever revealed that his business had performed poorly in the past. "To the contrary," Somogyi avers, "his representations were always that BVW (Butler Volkswagen, Inc.) was a successful dealership, had a long history of being profitable, had an excellent reputation in the Buffalo area and a fine staff of employees, all of whom he recommended we retain." (Affidavit of Zoltan Somogyi, P 10). As for Butler Volkswagen's past financial statements, Somogyi acknowledges having received the 1975 financial statement but denies ever having seen the 1974 statement. Somogyi alleges that both Butler and Sweeney explained to him that the 1975 statement showed a slight loss only because of "the salaries taken by Mr. Butler during 1975," without which the business would have made a net profit.
Throughout the negotiations, Somogyi alleges, Butler and Sweeney represented to him that Butler Volkswagen, Inc. had been very successful in prior years, especially the years 1971 through 1974.
Somogyi takes issue with Butler's account of the role of defendants Sweeney and World-Wide Volkswagen in the negotiating process. He alleges in his complaint that Butler had made a prior agreement to employ Sweeney in his organization of automobile dealerships "if he could fraudulently induce Somogyi to invest in Somogyi Volkswagen, Inc.," and that Sweeney only appeared to be acting on World-Wide Volkswagen's behalf. In his complaint, however, Somogyi stated that the details of the agreement were "yet unknown" to him, and he has not supported his allegation by affidavit. (Complaint, P 7(e)).
Somogyi claims that the key factor which induced him to purchase Butler's business was a false and misleading pro forma balance sheet and income statement prepared by defendant Sweeney "ostensibly" on behalf of World-Wide Volkswagen, and purportedly based upon Butler Volkswagen's previous operational history and financial performance.
Somogyi contends that "(b)oth defendant Sweeney and defendant Butler repeatedly made reference to the pro forma balance sheet, emphasized the profitability of the dealership and convinced me that BVW was profitable and that SVW (Somogyi Volkswagen, Inc.) would likewise be a successful business." (Affidavit of Zoltan Somogyi, P 7). Specifically, Somogyi alleges, "Butler reviewed the balance sheet with me and informed me that the projections prepared by Sweeney in said statement were accurate and that BVW had always been profitable prior to 1975."
Finally, Somogyi disputes Butler's overall contention that Somogyi and Mohacsi, through hard bargaining and the assistance of World-Wide Volkswagen, ultimately succeeded in purchasing his Buffalo dealership for a highly favorable price. "An overall reading of the circumstances set forth in the Butler affidavit," Somogyi states, "would lead one to believe that I obtained a bargain price for the BVW dealership because BVW was doing so poorly at the time of the sale. This is simply untrue. The price which we negotiated was based on the fact that the equipment and facilities of the dealership were in a state of disrepair. The dealership itself, its reputation and its prior history, were the only reasons that we agreed to pay over $ 175,000 to the Butler group for this business." (Affidavit of Zoltan Somogyi, P 11).
In the April 24, 1976 purchase and sale agreement, Somogyi and Mohacsi agreed to purchase from Butler Volkswagen, Inc. its entire new vehicle inventory, machinery and equipment, motor vehicle parts and accessories, furniture and fixtures, and good will. In addition, it was agreed that Somogyi and Mohacsi could purchase at their option the dealership's used car inventory, company vehicles, work in process and prepaid insurance. The price agreed to for the machinery, equipment, furniture and fixtures was $ 65,000
and for the dealership's good will, an additional $ 10,000. The remaining items to be purchased were, for the most part, valued at either the seller's cost or book value. The aggregate purchase price was to be determined "as soon as practicable" after the execution of the agreement, and a closing was set for May 1, 1976 or when all action required prior to closing had been completed.
The parties also agreed in the April 24, 1976 agreement to a twenty-year lease of the dealership premises. The seller agreed "to cause the Edward J. Butler Jr. Trust to enter into a 20 year net lease ... with either the Buyers or a corporation to which (sic) Buyers shall form ..." and also to cause the Trust to offer an option to purchase the premises. The buyers agreed to enter into the lease and further agreed that, if they elected to do so as a corporation, they would personally guarantee the lease "to a limited extent". (PP 6(b) and 7(a)).
As for the dealership franchise, the parties agreed that Butler Volkswagen, Inc. would terminate its dealer franchise agreement with World-Wide Volkswagen Corporation and use its "best efforts to obtain the consent of World-Wide Volkswagen" to the purchase and sale agreement and to the execution of a dealer franchise agreement with Somogyi and Mohacsi in "its customary form." The consent of World-Wide Volkswagen was made an express condition of the agreement at the option of either buyer or seller. Specifically, the parties agreed in Paragraph 8(c) of the contract that, as a condition of their obligations to each other:
World-Wide Volkswagen Corporation shall have consented to the sale of the Purchased Assets to the Buyers and World-Wide Volkswagen Corporation shall have delivered a letter of intent to issue a Franchise Agreement to Buyer with the only condition to such issuance being (i) successful negotiation of this Agreement; (ii) acquisition of an approved lease; (iii) minutes of the new Corporation authorizing the acquisition; ...