The opinion of the court was delivered by: POLLACK
This claim is made under Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Rules promulgated thereunder, 17 C.F.R. § 240.10b-5. Common law allegations are added as claims pendent to the federal question jurisdiction.
The plaintiff instituted this suit on July 26, 1973, seeking damages from the defendants in respect to a subordinated loan made by the plaintiff on August 9, 1963 to defendant Williston & Beane, Inc. (W&B hereafter). The loan consisted of common stocks owned by plaintiff which were then worth $103,000; the loan carried interest at 4% per annum. The return of the securities was subordinated in interest to obligations of the firm due to its general creditors. By the terms of the loan plaintiff was entitled to continue to receive any dividends payable on the stocks and was privileged to trade the stocks and substitute others. Around the same period of time W&B added to its senior capital by obtaining other loans, likewise subordinated to obligations payable to general creditors.
Due to circumstances to be related hereafter, W&B went out of business on December 1, 1963 and commenced marshalling and liquidating its assets and paying off its creditors; the liquidation is still incomplete. In the interim all general creditors and others entitled to priority over the plaintiff's class of subordinated lenders have obtained satisfaction of their claims against W&B. However, the subordinated loans mentioned have been only partially satisfied to date. A final liquidating distribution is expected to be made in the near future but some deficiency will remain unsatisfied on these subordinated loans. Plaintiff claims that W&B still owes him 91 shares of the stock of Congress Fund which he loaned in August 1963 as well as $82,718.67 which represents the proceeds of some stock loaned in 1963 and sold in 1966 by W&B to pay an indebtedness from W&B to bank (general) creditors.
Plaintiff seeks by this case, in effect, to undo his August 1963 loan and to recover damages thereon from W&B and its principal officers, and accountants, claiming that at the time of the loan these defendants failed to disclose information concerning W&B to which he was entitled to properly evaluate the investment he was then making in W&B.
The defendants severally deny plaintiff's allegations and deny liability to the plaintiff. They affirmatively assert, among other things, that in June 1968 plaintiff executed and delivered a general release in favor of the corporate defendant and the defendant-officers and directors thereof, concluding an attempt on behalf of plaintiff to obtain a general creditor's status and precluding any further criticism of the said defendants in respect to the customer's account which underlies this case. Defendants also assert that the claims herein are barred by the applicable statutes of limitation.
The case was tried to the Court, without a jury, and decision was reserved after the parties rested.
If plaintiff is entitled to a recovery herein against W&B he would become entitled to a priority in the distribution of the remaining assets of W&B; this might give him substantially all of the assets remaining in the liquidation instead of only his aliquot share thereof as one of the subordinated creditors. Speaking of the release which he furnished to W&B five and a half years ago, he testified that he thought he was settling the whole matter at that time.
However, plaintiff was recently advised to bring this suit. He testified that he had believed that things were coming along all right for him in the liquidation. As the liquidation neared final distribution, it seemed to the plaintiff that there would be a shortfall in the recovery on his loan. Meanwhile, a Court decision made on May 1, 1972 in favor of one Maher against the defendant Beane came to the attention of plaintiff. Maher, a former employee of W&B, had bought some of the W&B stock in 1963 and he charged that the sale was induced by misrepresentations. In the course of the Court's opinion, a letter from W&B's accountant, Todman, dated January 8, 1963 was recited in part. Although plaintiff never saw the letter and Mr. Henry never actually ever read it, this was pointed to as having generated this suit.
For the reasons shown hereafter, under all the relevant facts and circumstances, there is neither merit, equity or vitality in the claims asserted. There is no doubt that before the plaintiff executed and delivered the settlement agreement and general release in 1968, negotiated by his attorneys, he was sufficiently informed of the material facts connected with and arising out of the matters underlying the claims herein as to which the so-called Todman letter of January 8, 1963 is only a further detail. That general release and settlement were intended to cover and conclude claims of the sort made herein and are a bar to them. Moreover, the limitary period for commencement of this suit, even if a fraud statute were to be applied, expired before suit was filed.
There was no factual or legal justification for the inclusion as defendants in this suit of the accountants, Frederick Todman & Co.
or Messrs. Beane and Kantor. There was neither conspiracy to commit any wrong nor control or direction of Norman J. Marsh who conducted the transaction on behalf of the plaintiff and of W&B Inc. Indeed none of the individual defendants were personally aware of the August 1963 transaction made by plaintiff until a time subsequent thereto. There was no transaction with or reliance by plaintiff, either in fact or law, on the individual defendants.
In more detail, the facts are as follows.
Williston & Beane, a stock and commodity brokerage partnership, incorporated its business on May 24, 1963. One of its customers with whom the firm had done business since 1958, Allied Crude Vegetable Oil and Refining Co. ("Allied " hereafter) carried contracts for commodities futures in cottonseed and soy bean oil, and a spot account in the commodity, both accounts being carried on margined loans. In November 1963 the market price of futures contracts declined sharply and Allied was called for additional deposits of margin of about $600,000. It failed to respond and on November 19, 1963, Allied filed in bankruptcy. The following day W&B liquidated Allied's position in accordance with directions of the New York Produce Exchange. This resulted in a deficit due the brokers of $1,200,000.
The Allied accounts were collateralized by warehouse receipts for soy bean oil believed to be worth about $1,800,000., issued by a subsidiary of American Express Company, the American Express Field Warehousing Corp., as well as by six-figure equities existing in Allied's spot commodity account. However, the sudden impact on the W&B capital account by the cash deficit in its customer's futures account caused the New York Stock Exchange and allied exchanges on November 20, 1963 to temporarily suspend W&B's memberships. W&B promptly raised additional capital and was reinstated on the Exchanges on November 22, 1963. Shortly thereafter the business and customers' accounts of W&B were transferred to another brokerage firm, Walston & Co., and W&B went into liquidation on December 1, 1963.
The ostensibly adequate collateral securing the Allied futures account turned out to be fictitious -- in fact there was no oil represented by the warehouse receipts therefor. This was the famous "Salad Oil" swindle which was shortly uncovered resulting in a widespread chain of losses and disasters to firms in the Street and in criminal proceedings which sent the principal perpetrator, Tino De Angelis, to prison from which he emerged on parole about a year and a half ago after serving seven years of a 20 year sentence on a guilty plea.
The plaintiff's relationship with W&B so far as material here was as follows. Plaintiff was a long time stock brokerage customer of the partnership predecessor of W&B and had maintained his business with them through his personal friend and advisor, Norman J. Marsh. Marsh was a general partner in the predecessor of W&B and on its incorporation became one of the senior vice-presidents as well as an 11% stockholder therein and he and his wife contributed to the capital of W&B as subordinated lenders. Marsh had been the co-executor of the estate of plaintiff's mother. When plaintiff was overseas from 1944 to 1954 Marsh exercised complete discretion over plaintiff's investments. From 1954 until Marsh's illness in 1968, while plaintiff was located in Washington, Marsh would check with him on the transactions made on his behalf. After W&B went into liquidation, Marsh became associated successively with Walston & Co. and then Gude, Winmill & Co. and the plaintiff's account went with Marsh and was handled by him at each firm.
The plaintiff made two subordinated loans to W&B, one already mentioned, that of August 9, 1963, shortly after W&B was incorporated, and a second and larger subordinated loan of securities on or about November 22, 1963 on the occasion of the business difficulty described above. To meet its need to replenish its capital in the November circumstances W&B obtained a number of subordinated loans in addition to the one made by plaintiff. Although this suit was filed by plaintiff to recover in respect of both the August and November loans, the proof established that the second loan has been fully satisfied and consequently the claim thereon has now been abandoned. The November loans obtained by W&B were entitled to and accorded priority over loans made earlier and the loans of the November lenders have all been satisfied in the liquidation proceedings. Nonetheless, the circumstances under which plaintiff made the November loan and plaintiff's knowledge thereof bear on the questions raised by the defenses of settlement and release and of the statutes of limitation and will be referred to again.
The initial subordinated loan by plaintiff was supplied in a period when W&B had been considering the expansion of its equity capital base. Its business had weathered the sudden economic storm which had occurred in mid-1962. In 1963, the firm was back on a profitable keel and was engaged in discussions with Clements Evans & Co. of Atlanta with a view to bring them into the firm to effect a desired expansion of equity capital. Initially, therefore, the firm was not interested in any further senior capital. It believed that it had sufficient senior obligations in the shape of subordinated loans from its principal officers and members of their families, including, as already stated, Norman J. Marsh and his wife.
In August 1963 Marsh told plaintiff that W&B was seeking capital for expansion and that he was lending some of his own securities to the firm on an interest bearing basis, subordinated to general creditors. Marsh suggested that plaintiff could do the same if he desired to increase his income. Dividends on the securities would continue to be payable to the lender who also would be free to trade the securities deposited and substitute other securities. It was clear and plaintiff understood that there was a risk involved similar to that in any investment in a good stock exchange firm. Non constat, plaintiff testified that he considered himself fortunate to be able to have this opportunity. A list of stocks worth $103,000 was drawn up and they were loaned to W&B pursuant to a subordinated loan agreement which plaintiff signed. Not too long thereafter plaintiff volunteered to Marsh that he liked the idea of such an arrangement and he offered to increase his loan by deposit of additional stocks, but Marsh told plaintiff that the opportunity to do so was not available at that time.
Except to say that W&B was expanding and was a very good firm and up and coming, Marsh did not, in connection with the loan, discuss with Mittendorf the business or the customers' accounts of the firm and Mittendorf asked no questions and neither requested nor received any financial data on W&B.
Matters stood in this posture until the storm, created by the Allied account, burst in November 1963. Following the suspension of the firm by the Stock Exchange and the need for an immediate infusion of new capital to go back on the Exchange, Marsh communicated with plaintiff and asked him if he was still interested in increasing his subordinated loan and, finding him receptive, Marsh suggested that the securities be loaned to him and in turn to W&B on a subordinated loan basis which plaintiff was willing to do. Marsh told W&B that he was increasing his own subordinated capital contribution. Plaintiff sent Marsh a telegram, worded by Marsh, authorizing the loan to the latter of securities valued at $230,000. Two days later, after again conferring with Marsh, the transaction was changed to a direct loan from plaintiff to W&B, subordinated in interest to its general creditors. Plaintiff admitted that he put up these securities as a subordinated lender after he knew that W&B had been suspended and was in financial trouble and that he understood that he was thereby bolstering its finances.
As indicated above, plaintiff has acknowledged at the trial and in his post trial brief that all of the obligations due him on the November loan have been satisfied (parenthetically, his securities were worth over $300,000 when returned). Consequently, it is unnecessary to go into and resolve the conflicts in the evidence or the issue of credibility with respect to what was or was not disclosed to plaintiff in respect to this later investment or what and when plaintiff learned about the salad oil scandal and its impact on W&B, other than to note the following.
Plaintiff admitted that he learned of Allied's commodity account carried by W&B; that an investigation of the tanks to which W&B looked for security disclosed that the oil was missing from there; that he learned that W&B had suffered a loss in the magnitude of $1,000,000; but that this did not concern him because American Express was involved in it -- by which he meant that W&B was secured against the loss by American Express; and that American Express would take care of its mistake. (American Express ultimately did make good to W&B on the warehouse receipts, to the tune of $1.7 million).
Plaintiff realized his role in November from the letter of Marsh to him reciting the "help you gave us during our most acute hour. We shall ...