The opinion of the court was delivered by: PIERCE
As this matter is being prepared for trial, defendant Pitney-Bowes, Inc. and certain individual defendants move for partial summary judgment against plaintiff's claims under Rule 10b-5. Despite the fact that the record on this motion is in excess of 1300 pages, there is one issue of law which immediately arises untrammeled by any question of material fact. That issue is whether the forced "wind-down" of Pitney-Bowes Alpex, Inc. ("PBA"), accomplished by defendants over the objections of plaintiff, constituted a "purchase or sale" of securities as that term is defined under the Securities Exchange Act of 1934. Having concluded that this issue is appropriate for summary disposition, the Court grants the motion for summary judgment to that extent, and reserves decision on the remainder of defendants' motion. The following facts are not in dispute.
Beginning in late 1969, the parties hereto began negotiations towards the formation of a joint venture to develop plaintiff's concept of a computerized retail store cash register, known as the SPICE system. Plaintiff Alpex Computer Corp. brought to the venture its SPICE system, as well as some start-up funds. Defendant Pitney-Bowes was able to provide much greater financial resources, as well as marketing and manufacturing expertise. Under the joint venture agreement, the parties formed a third company, PBA, which issued common stock and notes to each of the parent firms; each parent held an initial interest of fifty percent.
At the beginning of PBA's history, plaintiff successfully bargained for operating control of PBA despite defendants' larger commitment to finance the venture. However, the extent of this commitment was delineated by contract.
Despite a hopeful beginning and despite no lack of a market for its product, PBA was not a successful venture. Its performance was always below predictions and the firm continually consumed funds far beyond any predictions. As more financing was required, the agreement between plaintiff and defendants was repeatedly revised, providing for more financing from Pitney-Bowes in return for various concessions by plaintiff. First, plaintiff lost its control of the board of directors; then defendants gained a majority. Later an officer of Pitney-Bowes was installed in operating control of PBA. However, for a variety of reasons, PBA continued to move steadily downhill.
A major modification of the agreement between the parties, effected in April 1973, provided that Pitney-Bowes would assist in desperately needed financing in return for the option to increase its stock position in PBA to majority control upon the occurrence of any of a number of adverse financial events. By June 1973, PBA was again in troubled financial waters and under the provisions of the April 1973 agreement, Pitney-Bowes increased its stock ownership in PBA to sixty-four percent.
When defendants took control of PBA, they undertook studies to determine PBA's prospects for the future. After reaching the conclusion that PBA could not be expected to operate profitably on its own, defendants began to seek a purchaser for PBA. However, by November 1973, defendants had abandoned this alternative.
It is against this background that the "wind-down" of PBA was accomplished. At a meeting of the PBA Board held November 12, 1973, the defendant directors voted for, and plaintiff's directors voted against, a resolution which read as follows:
"RESOLVED, That the business of this Company be wound up as soon as possible; and that the officers are authorized to take such action, to the extent permitted by the Company's resources, as they may deem necessary or appropriate in connection with such winding-up, including the conclusion of arrangements with customers concerning the cancellation, revision or fulfillment of unfilled orders." (Plf.App. at 680-84).
The above resolution marked the end of PBA as an active corporate entity. However, that action did not terminate the corporation's existence. While Pitney-Bowes states that it lost 30 million dollars through the PBA venture, and while plaintiff asserts it lost 9.5 million, it is not disputed that PBA still exists, that it still owns its principal asset, the SPICE system, and that each party still holds stock in the venture. In fact, PBA is a party to this lawsuit, represented by counsel separate from counsel for the movants.
In this action, plaintiff asserts essentially three separate Rule 10b-5 claims. First, plaintiff claims that the initial issuance of PBA shares was induced by defendants' fraud. Second, plaintiff claims that the increase in Pitney-Bowes' stock position to 64% was also procured by fraud. Finally, plaintiff asserts that the "wind-down" of PBA was fraudulent and was a "forced sale" of securities, since it transformed plaintiff's stock ownership from a share in an ongoing concern to a share in a dormant company. Only the third claim is the subject of this opinion.
In order for fraud to be actionable under the anti-fraud provisions of the 1934 Act, or under Rule 10b-5, the alleged fraud must have occurred in connection with the purchase or sale of a security; see Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S. 956, 96 L. Ed. 1356, 72 S. Ct. 1051 (1952). Any doubts as to the continuing vitality of the Birnbaum rule have been lain to rest by the Supreme Court's decision in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975).
Plaintiff urges that the "wind-down" of PBA constituted a forced sale of securities, citing a line of case-law beginning with Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir.), cert. denied, 389 U.S. 970, 19 L. Ed. 2d 460, 88 S. Ct. 463 (1967). In that case the Circuit Court held that Vine was a "seller" of his stock in Crown Financial Co. as a result of a short-form merger of that company into Beneficial Finance Co. Judge Feinberg reasoned that although Vine still held his stock certificates, he had no choice but to accept Beneficial's cash offer or pursue his right of cash appraisal in order to ever achieve any value for his stock. Thus, the court concluded, Vine eventually must become a party to a sale, and it would be a "needless formality" to require such a sale as a precondition to suit.
"Due to defendant's acts, Crown has now disappeared and plaintiff's stock has, in effect, been involuntarily converted into a claim ...