The opinion of the court was delivered by: CROAKE
By this action plaintiffs seek recission and damages for certain alleged violations of the Securities Exchange Act of 1934 (The 1934 Act), §§ 10(b) and 29(b), 15 U.S.C. 78(j)(b), 78(cc)(b); and Rule 10B5 of the Securities and Exchange Commission, promulgated thereunder, 17 C.F.R. 240-10b-5. They also seek, under an asserted pendent jurisdiction, similar equitable and legal relief from the same alleged acts, characterized as fraudulent and negligent misrepresentations and breaches of contract. The action also seeks an injunction of a pending consolidated action in a New Jersey state court, essentially between the same parties and concerning the same transaction. The essential facts and the present procedural posture are set out below.
On November 4 and 5, 1969, Abraham Reichman (Reichman), President and sole stockholder of Blue Ribbon Corp. (Blue Ribbon), a New Jersey corporation, agreed with the management of Essex Systems, Inc. (Essex), a New York corporation, to sell all the stock of Blue Ribbon to Essex. As part of the agreement, Essex guaranteed a five-year employment contract between Blue Ribbons and Reichman. The parties also agreed that upon consummation of the transaction, Richard Harte (Harte), a "finder," was to receive a stock option and employment as Vice-President of Blue Ribbon.
Essex, after paying $100,000 down on the tentative purchase price of $1,100,000, refused to attend the closing, and Reichman brought suit on April 30, 1970, in the Superior Court, Chancery Division, Bergen County, New Jersey (Docket number C-2373-69), for specific performance of the agreement.
Essex responded by initiating suit in Supreme Court, New York, against Reichman, Blue Ribbon, Harte, and Abraham Steinberg (Steinberg), a New York resident and Blue Ribbon's certified public accountant, for recission and damages for negligence and fraud. Essex alleged that an understatement of inventory had resulted in inflation of Blue Ribbon's reported net earnings for 1969 which, in turn, under the terms of the agreement, had resulted in an unjustified increase in the purchase price contracted for, by the amount of $252,000.
Within the next month after Essex's New York action was commenced, Harte sued Reichman, Essex, and Leonard Clark (Clark), President of Essex, in the state court of New Jersey (Docket number C-2543-69), for specific performance of the agreement and an injunction against any compromise of their dispute which would impair Harte's rights; for payment of his fee or the value of his services; and for damages. Reichman and Harte then sought and obtained an order from the New Jersey court consolidating their actions, allowing Blue Ribbon's intervention in both, and staying Essex from proceeding with the New York suit. Steinberg's companion motion to intervene was not acted on and therefore presumably is still pending. The petition of Essex for leave to appeal this order was denied. Subsequently, Essex and Clark counterclaimed against the plaintiffs in the consolidated New Jersey actions, and requested essentially the same relief as they had previously sought in the New York action.
The next event was the initiation of the action presently before this court, the fourth involving the same transaction, brought by Essex on October 27, 1970, against Reichman, Harte, Steinberg and Blue Ribbon. The relief requested has been described above; it is essentially the same as that sought in New York and counterclaimed for in New Jersey. The plaintiffs in the New Jersey actions, who, with the addition of Steinberg, are defendants herein, moved the New Jersey court to issue a stay of this court's proceedings; the motion was denied. They then answered, asserting the lack of personal and subject matter jurisdiction, and improper venue. The present motion is by Essex and requests a preliminary injunction staying the New Jersey proceedings pending the resolution of this action. The motion will be denied, as indicated below.
A federal court may only stay a state court proceeding in the specific situations enumerated by the "anti-injunction statute," 28 U.S.C. § 2283, which states:
"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 jurisdiction, or to protect or effectuate its judgments."
Of the three situations in which the statute permits an injunction to be issued, one is clearly inapplicable: there is at present no suggestion that any judgment this court might render in this case would require injunctive support for its protection. The effect of collateral estoppel or res judicata on this court's process of arrival at a judgment is a different matter. Recourse to this clause of the statute is premature until there are, in fact, inconsistent judgments, and even then until the second one has been appealed without success.
A second ground for injunctive relief is "as expressly authorized by Act of Congress." The 1934 Act does empower the Securities and Exchange Commission to seek injunctions against persons "engaged or about to engage" in violations of the 1934 Act; 15 U.S.C. § 78u(e). And the case of Studebaker Corp. v. Gittlin, 360 F.2d 692, 698 (2d Cir. 1966), does suggest that in some circumstances, private persons might succeed to the Commission's authority. However, the factual context of that case, which involved imminent violations of the Commission's proxy rules, is entirely distinguishable from the present situation, involving a completed transaction. Furthermore, the present case involves the sale of a business rather than professional trading in securities; it presents no potential or present activities of interest to the Commission. See Vernitron Corp. v. Benjamin, 317 F. Supp. 185, 188 (SDNY 1970).
A third situation in which a court may grant an injunction under the statute is "where necessary in aid of its jurisdiction." The only way in which this court's jurisdiction could be alleged to be in danger of being impaired in this case is by the preclusive effect of a prior New Jersey decision, should the New Jersey case be decided first. The theory is that, the facts to be determined in the New Jersey action being identical to those in this action, the breadth of collateral estoppel flowing from a New Jersey decision in favor of defendants herein will be such as to vitiate the federal claim, in contravention of this court's exclusive jurisdiction; 15 U.S.C. § 78aa. In support of this position, plaintiff cites the Vernitron case, supra. However, in that case, a New York Supreme Court Justice had already granted summary judgment against the federal suitor, and had specifically found certain facts essential to the federal cause of action against the federal suitor. Here, there is no evidence that the New Jersey action will be decided first, or in favor of the defendants herein. And in any event, the issue has been foreclosed by the case of Klein v. Walston & Co., Inc. (2d Cir.) 432 F.2d 936 decided on October 26, 1970, subsequent to the Vernitron case. In the Klein case, the district court had stayed the federal action grounded on the 1934 Act, pending resolution of the companion state action. A previous state action, related in some way to the federal action, had already been resolved in favor of the federal defendant, so some collateral estoppel or res judicata effect was a virtual certainty, not a mere possibility, as here. In those circumstances the Second Circuit stated, per curiam:
"While because of the exclusive jurisdiction of the federal courts to enforce the Securities Exchange Act of 1934, § 27, the state court will not be able to determine certain claims asserted in the federal suit but not advanced in the state action, it can authoritatively determine the common law claims ...