The opinion of the court was delivered by: TENNEY
Plaintiff Stuart A. Jackson ("Jackson") brings this action against defendant Jack Oppenheim ("Oppenheim") pursuant to Section 22 of the Securities Act of 1933, 15 U.S.C. § 77v, Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa and the rules and regulations issued thereunder, and pursuant to the pendent jurisdiction of this Court.
In the first count of the complaint plaintiff alleges that defendant, in violation of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q, Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 promulgated thereunder, "for his own advantage and personal benefit, willfully failed to disclose the deteriorating financial condition of Chelsea House to plaintiff and others prior to the sale of his Chelsea House stock to them." (Complaint, para. 14). In the second count plaintiff alleges that defendant, in violation of Section 12 of the Securities Act of 1933, 15 U.S.C. § 77 l and the rules and regulations promulgated thereunder, "offered to and did sell his Chelsea House stock to plaintiff and others, by the use of means or instruments of transportation or communication in interstate commerce and the mails, by means of certain oral communications that omitted to state material facts about the fast declining financial situation at Chelsea House which were necessary in order to make the statements, made by defendant, in light of the circumstances under which they were made, not misleading." (Complaint, para. 20).
Defendant interposes two affirmative defenses and three counterclaims. These will be discussed in detail after a presentation of the facts.
Chelsea House Educational Communications, Inc., a New York corporation, was organized on November 3, 1966, for the purpose of engaging in the publication and distribution of books and other audio-visual materials.
Defendant Oppenheim was a vice president and director of Chelsea House and was one of its major shareholders. Defendant became increasingly critical of the management of Chelsea House, especially its president, Harold Steinberg, during the early months of 1970. He evidenced his dissatisfaction and proffered several suggestions in the form of a memorandum, prepared in March 1970, and distributed to several members of Chelsea's Board of Directors and to several officers. No action was taken as a result of this memorandum and, presumably, as a result of his frustration, defendant resigned as vice president on March 6, 1970. He subsequently resigned as a director on April 10, 1970.
Plaintiff Jackson, an attorney and a partner in the law firm of Royall, Koegel & Wells (now Rogers & Wells), was at all times material an officer and director of Chelsea House.
On April 7, 1970, defendant agreed to convey to plaintiff and others his shares of common stock in Chelsea House. Specifically, plaintiff agreed to purchase from defendant 14,618 shares at $3.00 per share. The terms of the sale called for an initial cash payment of $10,002.00 to be made at the closing on April 10, 1970, and also called for the delivery at the closing of two promissory notes, each in the amount of $16,926.00, to become due on April 10, 1971 and April 10, 1972, respectively. Defendant was to deliver 3,334 shares of stock to plaintiff at the closing with the balance of the shares to be held in escrow to secure payment of the notes. The closing took place as scheduled.
On July 2, 1970, Chelsea House filed a petition pursuant to Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq., in the United States District Court for the Southern District of New York. The instant action followed and was tried to the Court.
It is plaintiff's contention that defendant, as an officer and director of Chelsea House, was active in the day-to-day business of that company, and that by reason of this activity defendant had knowledge of certain alleged problems at Chelsea House. These problems included financial difficulty and mismanagement. In plaintiff's view, these difficulties were stated in explicit detail in defendant's March 1970 memorandum of which he (plaintiff) was not possessed. In addition, plaintiff states that as an "outside director" he did not participate in the daily operation of Chelsea House and, consequently, had no knowledge of the financial condition of the company prior to or at the time of his purchase of defendant's stock, and further, that defendant knew that plaintiff was not in possession of this information. Plaintiff maintains that this information was intended to be available for the corporate purpose of Chelsea House and not for the personal benefit of defendant.
It is alleged that once defendant knew that plaintiff was a potential purchaser of the stock, defendant had a duty to disclose any material facts within his knowledge prior to the sale, but that defendant willfully failed to make these disclosures. Specifically, plaintiff alleges that defendant failed to deliver the March 1970 memorandum and that had he (plaintiff) possessed this information, he would not have purchased the stock. It was only in July of 1970, plaintiff states, that he learned of the true financial condition of Chelsea House.
Plaintiff concludes that the failure of defendant to disclose the material facts concerning the financial condition of Chelsea House constituted a willful omission which, in light of the circumstances, operated as a fraud and deceit upon the plaintiff in violation of the various sections of the 1933 and 1934 Acts cited supra.
Plaintiff recites a payment by his agent in the amount of $10,002.00 to defendant on April 10, 1970, as well as delivery of the promissory notes, and also, receipt by his agent of the 3,334 shares of stock called for in the April 7 agreement.
Plaintiff seeks: (1) a rescission of the agreement dated April 7, 1970 between defendant and himself for the purchase and sale of the shares in question, (2) a return of all monies previously paid to defendant, and (3) a cancellation and rescission of the two promissory notes given by plaintiff to defendant in consideration of the sale.
On March 13, 1970, defendant was in the offices of the Royall, Koegel firm and visited plaintiff in his office. This was an unscheduled meeting which lasted approximately 15 to 30 minutes. Defendant contends that during this meeting he gave plaintiff his general opinion about many of the problems then existing at Chelsea House. The thrust of defendant's discussion went to the problems in upper-level management which defendant perceived at Chelsea House, particularly with its president, Harold Steinberg. Defendant stated that in his view Steinberg had to be replaced since the company was unable to secure financing under Steinberg's leadership. In defendant's opinion this difficulty was the direct result of Steinberg's presence and the lack of confidence of many members of the financial community in Steinberg. It was defendant's alleged purpose to secure plaintiff's aid in bringing about the needed change in leadership.
Following the March 13, 1970 meeting defendant then wrote the March memorandum in a last attempt to persuade others on the management team of the need for change at Chelsea House. The March memorandum was, according to defendant, a restatement and an amplification of the subject matter discussed at the March 13th meeting. It contained much criticism, some suggestions for improvement, and a request that a meeting of the Board of Directors be called for April 5, 1970 to discuss the various proposals. The memorandum was given to Leon Friedman, an officer of Chelsea House, with the request that it be distributed. Defendant believes that the memorandum was seen and/or read by several officers and board members.
Defendant next states that sometime during the end of March 1970 he was approached by William Poten, an employee of Chelsea House, who represented to defendant that a management group was interested in the purchase of defendant's shares of common stock. Defendant agreed to sell at $3.00 per share. The initial group of purchasers grew from three persons to eleven by the date of the closing on April 10.
Defendant alleges that plaintiff had access to all of the pertinent information, including the information contained in the March memorandum, relevant to the purchase of shares. Defendant argues that plaintiff was an officer and director of the company, served as general counsel to Chelsea House, had access to all financial statements, and had supervised the preparation of the registration statement. Defendant maintains that plaintiff had a duty to act as a reasonable investor and to investigate all facts available to him which were relevant to the transaction, and that plaintiff failed in this duty. Defendant suggests that plaintiff knew or should have known all of the facts relevant to the transaction through the exercise of due diligence and that plaintiff's alleged failure to exercise due diligence should now bar his claim. Defendant argues ...