The opinion of the court was delivered by: GURFEIN
An action was begun in the Supreme Court, New York County by the plaintiffs, Byrnes and Santangelo ("Byrnes") against the defendants Faulkner, Dawkins & Sullivan ("Faulkner") for breach of contract. That complaint alleged that on June 7, 1971, the plaintiffs, through their broker, Tobey & Kirk ("Tobey"), sold, pursuant to a registration statement and prospectus, 44,000 shares of the common stock of White Shield Corporation ("White Shield") to Faulkner at a price of $14 per share, and 1,500 shares to Singer & Mackie, Inc. ("Singer") at 13 1/4 and 13 1/8 per share. It alleged that "without just cause or excuse" each defendant purported to cancel the transaction in breach of its contract and that the plaintiffs were compelled to sell the rejected shares at a loss aggregating $219,180.79 against Faulkner and $5,964.51 against Singer.
The defendants, denying that their refusal to accept the shares tendered was "without just cause or excuse," interposed nine affirmative defenses, of which six related to claimed violations by plaintiffs or their broker Tobey of various provisions of the Securities Act of 1933 (15 U.S.C. § 77a et seq.) and the Securities and Exchange Act of 1934 (15 U.S.C. § 78a et seq.). No counterclaim was interposed in the State Court action.
The plaintiffs, being unwilling to have the affirmative defenses based on alleged violations of the federal securities laws passed on by the State Court, brought this action for a declaratory judgment, and to recover the same amounts they had alleged in their State Court complaint (28 U.S.C. §§ 2201, 2202; Fed. R. Civ. P. 57).
The declaratory relief sought is a judgment declaring that each of the affirmative defenses asserted by the defendants in the State action is insufficient in law.
In its answer, the defendant Faulkner realleged the affirmative defenses that had been interposed in the State action, and, in addition, interposed three counterclaims. Faulkner also joins Tobey as a counterclaim-defendant. In its amended answer, the defendant Singer withdrew the counterclaims it had interposed in its original answer.
The first counterclaim alleges that Faulkner is entitled to a declaratory judgment that the affirmative defenses set forth in the answer of Faulkner in the State action are valid and sufficient in law and preclude plaintiffs from any right of recovery in the State action or herein.
The second counterclaim alleges that the counterclaim-defendants engaged in a plan to sell White Shield common stock owned by the plaintiffs and others in a distribution to Faulkner and other broker-dealers making a market in that common stock in violation of the rules and regulations of the Securities and Exchange Commission ("SEC") (presumably Rule 10b-6); that without knowledge of the plan or that the White Shield stock owned by the plaintiffs was being sold in a registered distribution, Faulkner on June 7, 1971 agreed to purchase from Tobey the 44,000 shares at $14 per share; that shortly thereafter, Faulkner sold 20,000 of the shares at an average price of $14 3/32 per share; that on June 15, 1971, when Faulkner discovered that the stock which it had agreed to purchase was part of a registered distribution, it cancelled the agreement and was forced to cancel its own sale of 20,000 shares which had shown a profit of $1,875.00.
The third counterclaim charges that the counterclaim-defendants violated Section 17 of the 1933 Act, § 10(b) of the 1934 Act and Rule 10b-5 thereunder, § 352-c of the New York General Business Law, and the rights of purchasers at common law in that they represented that the stock being sold was not part of a registered distribution; that they failed to disclose that they were effecting an illegal distribution by selling large blocks of the stock to broker-dealers making a market therein; that they failed to disclose that Tobey was acting as an underwriter in connection with the distribution; that the confirmation delivered to Faulkner constituted a "prospectus" which did not meet the requirements of § 10 of the 1933 Act; and that the confirmation was not marked "prospectus enclosed" or "registered," nor was there any indication that the shares to be delivered were part of a registered distribution.
On these two counterclaims Faulkner seeks a judgment of $1,875 for compensatory damages, plus interest from June 15, 1971, and $1,000,000 as punitive damages. It also seeks the costs and disbursements of ...