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GRANBERY v. E. L. BRUCE CO. (INCORPORATED) (06/10/69)
SUPREME COURT OF NEW YORK, TRIAL TERM, NEW YORK COUNTY
1969.NY.41943 <http://www.versuslaw.com>; 308 N.Y.S.2d 963; 62 Misc. 2d 406
June 10, 1969
GRANBERY, MARACHE & CO., PLAINTIFF,v.E. L. BRUCE CO. (INCORPORATED), ET AL., DEFENDANTS
Reavis & McGrath (Dennis C. Cronin and John Lowe of counsel), for plaintiff.
Webster Sheffield Fleischmann Hitchcock & Brookfield (Thomas Fried and Sander Lehrer of counsel), for Coraloc Industries, Inc., and another, defendants.
Miller & Seeger (Israel Seeger of counsel), for Fio Rito, defendant.
Stanley J. Reiben for Edward L. Gilbert, witness.
Arnold L. Fein, J.
Plaintiff stockbroker sues to recover damages sustained as a result of the failure and refusal of Coraloc Industries, Inc. (Coraloc) to accept and pay for 3,500 shares of E. L. Bruce Co. (Incorporated) (Bruce) stock purchased by plaintiff, as a broker, at a price range of $19 to $19 3/8 per share on the morning of June 12, 1962, pursuant to instructions allegedly given by Edward M. Gilbert (Gilbert), over the telephone, to plaintiff's customers' man, Geist Ely (Ely), at approximately 9:45 a.m. that day to make such purchase for the account of Coraloc.
Coraloc's defenses are that: (1) Gilbert was not authorized to place the order; (2) only Robert C. Leonhardt (Leonhardt) was authorized to do so; (3) Gilbert did not place the order on behalf of Coraloc, but only designated Coraloc as the purchaser later in the day, after the order had been wholly or partly executed; (4) plaintiff cannot recover because its procedures in taking, recording and executing the order, violated the rules of the Securities and Exchange Commission and the rules of the New York and American Stock Exchanges.
Gilbert was neither an officer, nor a director, nor an employee of Coraloc. However, he was then president, director and owner of over 50% of the stock of Bruce, which owned over 80% of the stock of Coraloc. At that hour in the morning of that day, and prior thereto, Gilbert controlled and dominated both Bruce and Coraloc and their respective boards of directors, although some time later in the day the situation drastically changed.
At approximately midday or early in the afternoon, Gilbert was compelled to resign as president and director of Bruce. That afternoon his whereabouts were unknown. In the evening, he fled to Brazil. By the end of the day, the price of Bruce stock on the market had fallen to $15 3/8. Trading in the stock was suspended the next morning and was not resumed for five months. Gilbert subsequently returned and pleaded guilty to an indictment arising out of his activities in Bruce stock, for which he was sentenced to a term in the Federal penitentiary. It is obvious that these events motivated defendant's refusal to accept and pay for the stock and much of the testimony and argument on its behalf. It is equally obvious that they are irrelevant, except as they bear on credibility.
The determination must be made on the basis of what occurred that morning, prior to Gilbert's resignation, flight and fall from grace. Some time prior to 10 a.m. that morning, Gilbert and three of the five directors of Coraloc, Messrs. William A. Fio Rito (Fio Rito), president and director of Coraloc, Vincent De Sousa (De Sousa), director of Coraloc and vice-president of Bruce, and Irwin Polivy (Polivy), director of Coraloc and officer and director of Bruce, conferred. Coraloc then had available approximately $225,000 in cash, acquired in an acquisition, sale and lease-back transaction (the Sunset transaction). It was agreed that all or a substantial part of the cash would be used to buy 10,000 to 12,000 shares of Bruce stock on the market that morning, and that a Coraloc board of directors' meeting would be held forthwith to adopt the appropriate resolution.
Both Coraloc and Gilbert desired that the purchases be made that morning. Gilbert's purpose was to attempt to "dry up" the market for Bruce stock in a shaky market, which jeopardized Gilbert's financial condition. He had pledged his Bruce stock to obtain funds, in connection with purchases of Celotex stock on margin, in an attempt to acquire control of Celotex and to effect a merger of Celotex and Bruce.
Coraloc's purpose is revealed in the minutes of its board of directors meeting, which recite: (1) Fio Rito, president of Coraloc, and De Sousa, in his capacity as vice-president of Bruce, had negotiated the Sunset transaction on behalf of Coraloc, with the requisite consent, authorization and guarantee of Bruce, obtained through Gilbert; (2) the subject property had been pledged to Bruce as security for the balance due Bruce on Coraloc's purchase from Bruce of 17,500 shares of Bruce stock, at $32 per share, used in acquiring the property; (3) the Sunset transaction, with the approval of Gilbert, "was designed to provide Coraloc with funds to pay off the major part of the balance due to Bruce"; (4) the market on Bruce stock "had reached a low of about $20 per share"; (5) Coraloc "could buy in at that price and return to Bruce a good part of the shares (xxx) purchased at $32.00"; (6) Fio Rito had obtained an opinion of counsel that "there was no impropriety in the purchase by Coraloc of Bruce stock in the open market for the purpose of hedging on its prior purchase of stock from Bruce"; (7) Fio Rito had arranged with Leonhardt to handle the purchases of Bruce stock for Coraloc's benefit.
Resolutions were set forth in the minutes, approving the sale and lease-back, subject to the consent and agreement of Bruce, and authorizing Leonhardt to purchase Bruce stock for the account of Coraloc "at approximately $20.00 per share, to a sum not exceeding $180,000". Defendant relies on these recitals and the testimony of Fio Rito, De Sousa and Polivy to show that Gilbert had no authority to place the orders on behalf of Coraloc. However, the minutes are not dispositive. The court finds that it was agreed and understood at the early morning conferences that Gilbert had authority to order the stock on behalf of Coraloc and that Gilbert had every reason to believe that the board of directors of Coraloc would adopt the necessary formal resolution to that effect. In addition to the 3,500-share order placed with plaintiff, Gilbert placed orders with two other brokers to purchase 2,500 shares each. These orders were also executed and are the subject of similar lawsuits in this court.
The conflicting testimony of Fio Rito, De Sousa and Polivy, that Gilbert agreed and understood that only Leonhardt would place the purchase orders on behalf of Coraloc, strains the bounds of credulity. It is inconceivable that Gilbert would have concurred in this course, or accepted the reasons now urged as the basis for the alleged designation of Leonhardt as the sole agent of Coraloc to make the purchases, namely that: (1) it would look better; (2) Leonhardt would be able to buy the stock at lower prices because of his knowledge of the market and because he had no dual loyalty; or (3) as stated in the minutes, "Coraloc had no brokerage accounts and its officers were not well versed in stock trading."
Obviously Gilbert hardly would have agreed to a procedure designed to delay or space the orders in such a manner as to take advantage of possible further drops in the market price. This would serve no purpose of Gilbert's. He still controlled both Bruce and Coraloc and their boards of directors. As even the minutes of Coraloc's board of directors meeting recognize, his consent was essential to Coraloc's corporate purpose in buying the Bruce stock, which would be a fruitless exercise unless there was a commitment by Bruce through Gilbert that Bruce would accept its own stock, purchased in the open market at approximately $20 per share, in liquidation of Coraloc's obligation to pay cash for the Bruce stock purchased by it from Bruce at $32 per share. It is significant that the minutes fixed the purchase price at "approximately $20.00".
As events later in the day demonstrated, it was essential to Gilbert's financial survival, and perhaps to his staying out of jail, that the stock be bought as near to the opening of the market as possible and at prices which would support the market. He was not interested in a waiting game. Leonhardt was not present at the early morning conferences. It is not clear whether he arrived after the Coraloc board meeting or just as it was ending. Gilbert interrupted the meeting at least once, to determine whether the resolution had yet been adopted. The court finds he was not told that only Leonhardt could place the orders, although he was advised that Leonhardt would act as well as himself. Gilbert's obvious concern was to insure that a corporate resolution be adopted so that the brokers could open the necessary accounts. Coraloc had no account with plaintiff or the other brokers, nor had it ever purchased or sold any stock through plaintiff or any other brokers. Leonhardt was not known to any of them as a representative of Coraloc. His own troubles with the SEC were known.
The orders to make up the 3,500 shares were executed by plaintiff between 10:04 a.m. and 11:24 a.m. that morning. The minutes of the Coraloc board of directors meeting, which was held in the offices which it shared with Bruce at 660 Madison Avenue, New York, N. Y., state that it took place at 9:45 a.m. Whether this time was set forth inadvertently or by design does not appear.
The testimony of Fio Rito, De Sousa and Polivy, who were present, is in conflict as to the time and duration of the meeting, although all finally agreed it did not take place until later in the morning. The waiver of notice of the meeting signed only by the absent director, who was out of the country, is undated. It is not without significance that the waiver is consistent with plaintiff's version as to the amount of stock authorized to be purchased and not with that of the defendant. It does not appear when the waiver and the minutes were physically prepared. The inclusion of Leonhardt's name in the minutes, as the person to make the purchases, suggests that the resolution may have been put in that form when it became apparent that Gilbert's empire was collapsing. It would serve no useful purpose of Coraloc to buy or pay for any Bruce stock, for which it was not already irrevocably committed, after it became known Gilbert ...