The opinion of the court was delivered by: PLATT
Plaintiffs seek a preliminary injunction pursuant to 28 U.S.C. § 2283 restraining defendant from prosecuting a counterclaim for breach of employment contract in an action commenced by the plaintiffs in the Supreme Court, Nassau County, for common law fraud on the ground that the action here involves some of the same facts and alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Securities Act") and Rule 10-b-5 promulgated thereunder and this Court has exclusive jurisdiction thereof.
Plaintiffs' complaint in the State Court which was dismissed at the end of their case sought (i) a declaration that they need not continue to honor the contract whereby defendant was employed for a five year period at a salary of $16,000 per annum, (ii) a rescission of their purchase of defendant's beauty supply business and cancellation of the balance of the $100,000 promissory notes due to him, and (iii) damages of $100,000 allegedly sustained because of the defendant's "fraud".
In 1971 defendant owned and operated a beauty supply business under the name of Metro Beauty Supply Co., Inc. ("Metro"). At that time plaintiffs Lefferts and Weisenberg were associated with the plaintiff L. S. Amster & Co., Inc. ("Amster"), a corporation which was engaged in the drug business and opened negotiations with defendant for the purchase of his business. These negotiations resulted in two contracts, one dated March 27, 1972 between Metro and the plaintiffs Silverstein, Lefferts and Weisenberg by which the former would sell to the latter "all assets of Metro (with the exception of accounts receivable, an automobile currently used by Silverstein owned by Metro), including but not limited to good will, its lease on premises occupied by it" and certain specified tangible assets and the parties agreed to comply with the New York State Bulk Sales Law.
It was further agreed that (i) Metro and the defendant would execute bills of sale conveying the assets covered by the agreement, (ii) defendant would execute a non-competitive agreement, and (iii) the price for the assets would be $25,000 "plus Metro's inventory at the time of title closing at the lower or cost of market" with the parties to take a physical count of the inventory and evaluate it not more than 24 hours prior to title closing.
At the time of title closing the parties apparently agreed that the total price of $100,000 was based upon inventory valued at $80,000, lease valued at $20,000 and furniture and fixtures valued at $5,000.
At the same time, defendant and Amster executed a second contract in which it was provided that after the payment of all creditors of Metro and the assignment of any remaining assets to the defendant, he would then assign and deliver all of the capital stock of Metro to Amster, Lefferts and Weisenberg.
Between the execution of the aforesaid agreements and the closing, the plaintiffs formed a new corporation, Metro Beauty & Barber Supply Co., Inc., and Messrs. Lefferts and Weisenberg assigned to it their contract with Metro so that all of Metro's assets were transferred to such new corporation.
After defendant had spent some six months educating the plaintiffs in the business under his employment contract, the plaintiffs terminated the same claiming that he had misrepresented the gross annual business done by Metro in the fiscal year ending October 31, 1971.
The sole question for this Court to determine is whether the further trial of the action commenced by the plaintiffs in the Nassau County, Supreme Court (namely the trial of defendant's counterclaim therein) must be restrained on the ground that such issues must first be determined in the action under the Securities Act instituted by the plaintiffs here after their complaint based on common law fraud in the State Court had been dismissed at the end of their case.
Plaintiffs' theory appears to be that "Rule 10-b-5 requires a higher standard of disclosure and honesty" than the common law standard of fraud and hence (i) the Nassau County, Supreme Court decision is not binding on this Court under the doctrine of res judicata, collateral estoppel, election of remedies, or otherwise and (ii) this Court should first decide all of the issues on a trial under the Securities Act.
At least one Federal court has taken exception to plaintiffs' premise and has held that the Securities Act does not require a higher standard than the common law standard of fraud under the law of Ohio (Connelly v. Balkwill, 174 F. Supp. 49 (N.D. Ohio, E.D. 1959), aff'd 279 F.2d 685 (6th Cir. 1960)). There the Court said (at pp. 56 and 59):
". . . In Loss on Security Regulations, at 819, the author says: 'The extent to which the Security Exchange Acts go beyond common law fraud depends upon the ...