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LANK v. NEW YORK STOCK EXCH.

December 29, 1975

Aubrey B. LANK, as Receiver of Pickard & Company, Incorporated, Plaintiff,
v.
The NEW YORK STOCK EXCHANGE, Defendant


Lasker, District Judge.


The opinion of the court was delivered by: LASKER

LASKER, District Judge.

Aubrey B. Lank (Lank) sues the New York Stock Exchange (the Exchange) as Receiver of Pickard & Company, Incorporated (Pickard), a defunct brokerage firm which was a member of the Exchange prior to its liquidation in the Spring of 1968. The complaint alleges violation of Section 6 of the Securities Exchange Act of 1934, 15 U.S.C. § 78f, *fn1" and seeks damages in excess of $2,000,000., a sum comprised of amounts lost both by Pickard and by various creditors of Pickard when the corporation went under. The Exchange counterclaims for expenses it incurred in the liquidation of Pickard, for amounts expended by its Special Trust Fund to meet Pickard's obligations to its customers and, as a general creditor of Pickard, the Exchange counterclaims against Lank, personally, for waste of corporate assets in pursuing this litigation.

 The Exchange moves to dismiss the complaint and for summary judgment on its counterclaims.

 The decision to liquidate Pickard was made in May, 1968, after a routine audit revealed substantial deficiencies in its books and records and Exchange employees had unsuccessfully attempted to put the books in order. The Exchange appointed its Chief Examiner, Lloyd W. McChesney, as Liquidator to take control of the company and wind up its business. Pickard executed agreements with the Exchange to reimburse it and its Special Trust Fund for certain expenses incurred in the liquidation and for sums paid to protect Pickard's customers against loss. The agreements provide the basis for the Exchange's counterclaims here.

 Accountants, Exchange employees and the Liquidator uncovered evidence of serious wrongdoing by certain officers and employees of Pickard. The President and Vice President of the corporation, John and Peter Sackville-Pickard, were found to have withdrawn in excess of $650,000. of Pickard's funds without the knowledge of the other officers and directors. They were also found to have participated in numerous violations of the securities laws and rules and regulations of the Exchange. *fn2" The Pickard brothers were expelled from the Exchange and their registrations were revoked and lesser disciplinary action was taken against other officers and directors.

 In March, 1969, the Exchange petitioned the Delaware Court of Chancery (Pickard is a Delaware corporation) for the appointment of a receiver. According to the affidavit of McChesney submitted in support of the Delaware receivership petition, Pickard's obligations to its customers had been fulfilled and the only remaining general creditors were the Exchange and its Special Trust Fund, whose claims were based on the agreements to reimburse them executed by Pickard at the outset of the liquidation; *fn3" the only other claimants of Pickard's assets were the subordinated lenders and stockholders.

 Lank was duly appointed Receiver by the Delaware Court in late April, 1969. On December 17, 1971 he filed this action. *fn4" The thrust of the complaint is that the Exchange knew or should have known as early as October, 1966 that Pickard was in violation of its net capital and other rules and that if the Exchange had fulfilled its obligations under § 6 to enforce compliance with the securities laws and its own rules, the losses suffered by Pickard's customers, subordinated lenders, shareholders and creditors who advanced money subsequent to October, 1966 would have been prevented.

 As stated above, the Exchange moves to dismiss the complaint and for summary judgment on its counterclaims. The motion to dismiss alleges lack of prosecution (Rule 31(b)), lack of capacity as Receiver to raise these claims (Rule 12(b) (6)) and that the action is time barred (Rule 12(b) (6)). Summary judgment on the first and second counterclaims is sought on Pickard's contractual obligation to reimburse the Exchange and its Special Trust Fund and on the third counterclaim because this action is so patently unmeritorious as to constitute a waste of corporate assets. For the reasons which follow, the motion to dismiss for lack of capacity is granted in part, summary judgment is granted as to liability on the first two counterclaims, and the motion is denied in all other respects.

 I.

 The motion to dismiss for failure to prosecute is based on the fact that apart from a request for production of documents filed in early 1972, Lank took no action in the litigation from its inception, in December, 1971, until February 1975.

 The long period of inertia did not go unnoticed by the court. In fact, on February 11, 1975 we filed an order statistically closing the case. *fn5" This action prompted a letter from Lank's counsel in which he represented that the reason for the inactivity was an agreement between the parties not to press the litigation because of a related pending arbitration proceeding. He informed the court that there was also another related case pending between the same parties in the Southern District of New York and that he expected rapid settlement of both cases upon the conclusion of the arbitration. He requested that the case be restored to the docket lest prejudice to the overall settlement be incurred and his request was granted.

 The Exchange takes issue with this explanation for the delay. It denies knowledge of any related suit between the parties *fn6" and flatly denies the existence of an understanding not to litigate the case.

 A close reading of the affidavits of Lank's counsel, J. Edward Meyer, III, reveals that apart from his initial letter to the court requesting that the case be reactivated, he never directly avers that an agreement to settle was reached. Rather, he asserts that after discussions with attorneys for the Exchange, he concluded that the case would be settled by an exchange of releases at the close of the arbitration. To rebut Meyer's contention, or intimation, of an agreement to settle, the Exchange attorneys have submitted a copy of a letter dated March 3, 1972 from Meyer's partner which appears to reject a settlement offer and demand that the litigation be commenced in earnest. Meyer, in turn, produced a letter from him to the court dated July 17, 1973, a copy of which was sent to the opposition, in which he represented his belief that the case would be settled at the conclusion of the arbitration.

 The affidavits and exhibits submitted in connection with this motion suggest that, at best, a rather serious misunderstanding existed as to the status of this litigation. We confess some surprise that Meyer would jeopardize a claim he alleges to be worth two million dollars on the strength of an unwritten agreement to settle at some indeterminate future date, much less on a hunch that the Exchange would settle if he simply lay low for several years. On the other hand, the very fact of his inactivity can be viewed as evidence of a good faith belief on his part that an agreement to settle had been made. Further, his letter to the court of July, 1973, indicates that the ...


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