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VERNITRON CORP. v. BENJAMIN

July 27, 1970

VERNITRON CORPORATION and American Medical Instrument Corporation, Plaintiffs,
v.
Paul BENJAMIN, Defendant


Lasker, District Judge.


The opinion of the court was delivered by: LASKER

LASKER, District Judge.

Plaintiffs move for an order restraining the defendant and his attorneys from taking any steps or proceedings in the prosecution of a lawsuit now pending in the Supreme Court of the State of New York, County of New York, between the same parties, entitled "Paul Benjamin v. Vernitron Corporation, et al." In order to avoid the confusion which would arise by referring to the parties either as plaintiff or defendant (since Vernitron, et al., are plaintiffs here and defendants in the state court action, whereas Paul Benjamin is defendant here and, with others, plaintiff in the state court), references will be made to the parties by name.

 I.

 On December 20, 1967, Vernitron (a New York corporation since acquired by Vernitron, a Delaware corporation) and its affiliate entered into a written contract with Benjamin and his wholly-owned corporation, American Medical Instruments Corporation ("Amico") for sale of all the assets of Amico to the affiliate of Vernitron New York. The contract provided that Benjamin was to receive $1.5 million worth (later reduced to $1.3 million) of Vernitron common stock which was to be placed in escrow with Vernitron's attorneys, Marshall, Bratter, Greene, Allison & Tucker under prescribed conditions. The contract specified a procedure for the registration by Vernitron of the shares held in escrow for Benjamin. Pursuant to these terms, Benjamin secured the registration of slightly less than $250,000 worth of shares. In February 1969, Benjamin requested (as he had the right to) that the remainder of the shares be registered, but Vernitron refused.

 On November 6, 1969, Benjamin brought suit in the Supreme Court of the State of New York, County of New York, against Vernitron, its affiliate, and Marshall, Bratter, Greene, Allison & Tucker as escrow agent. This is the action the prosecution of which Vernitron now asks this court to enjoin. In his state court suit Benjamin set forth causes of action for (1) damages of $1,050,000 for failure to register the remaining shares in escrow; (2) damages for failure to place further stock in escrow in order to total $1.3 million in value; (3) specific performance of the contract, delivery of the shares and dividends thereon; and (4) exemplary damages. Vernitron counterclaimed, alleging breach of warranty by Benjamin and demanding rescission of the contract for failure of consideration. On June 2, 1970, Benjamin served notice of motion in the state court action for summary judgment in the amount of $1,051,085.63 on the first cause of action (together with severance thereof from the remaining causes of action).

 On June 16, 1970, Vernitron commenced the instant action against Benjamin and simultaneously or at about the same time moved in the state court for a stay of further proceedings therein pending the determination of the federal court action.

 In the case here, Vernitron alleges violations of Sections 10(b) and 29(b) of the Securities Exchange Act of 1934, as well as (under the pendent jurisdiction of this court) common law fraud and breach of contract. The complaint requests rescission of the contract and damages. As stated above, the instant motion asks that Benjamin and his attorneys be stayed from proceeding with the prosecution of the state case. It is Vernitron's contention that a stay of the state court proceedings is proper because a potential conflict between the state and federal jurisdictions exists, since the issues relating to its counterclaim in the state court may be decided there in such a way as to constitute res judicata, or so as collaterally to estop Vernitron from presenting its Securities Exchange Act claims to this court.

 In reply, Benjamin argues that whatever determination may be made on his motion for summary judgment in the state court will not constitute res judicata or collaterally estop Vernitron from litigating its Securities Act claims here, and that in any event the anti-injunction statute, set forth in Title 28, U.S.C. § 2283, acts as a bar to this court's granting an injunction against prosecution of the state court action.

 In passing, it should be noted that at the time of the argument in this court of the motion for a stay of the state court proceeding the state court had rendered no decision on Benjamin's motion for partial summary judgment, nor on Vernitron's motion for a stay. On July 16, 1970, Mr. Justice Helman filed an opinion granting Benjamin substantially the relief requested in his motion, and denying Vernitron a stay. No judgment has yet been entered pursuant to the opinion. In his decision Justice Helman found that Vernitron's damages, if any, were not, as alleged, indeterminable but, rather, ascertainable. Without a detailed explanation he ruled "as being properly placed in issue the sum of $42,487.36 as the sum in dispute"; as to Benjamin's alleged breach of warranties, that the alleged breach of warranty even in the claimed amount of $65,000 could "hardly be said to constitute failure of consideration"; that there was insufficient factual data contained in Vernitron's affidavits to warrant rescission, and that the Vernitron-Benjamin contract price was not computed on the basis of a multiple of Amico's earnings. His award was in the amount of the relief requested ($1,051,085.63) less the contested claim of $42,487.36 for breach of warranty.

 II.

 The issues before me are (A) whether the anti-injunction statute stands as a bar to granting an injunction against prosecution of the state court proceeding; and (B) whether, even if there is no such bar, an injunction should be granted in accordance with general equitable considerations.

 (A) The Anti-Injunction Statute

 Title 28, U.S.C. § 2283, reads:

 
"A court of the United States may not grant an injunction to stay proceedings in a State Court except as expressly authorized by Act of Congress, or where necessary in aid of its ...

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