Appeal from a judgment in the United States District Court for the Southern District of New York, Ryan, J., awarding damages to appellants. Affirmed in part, reversed in part and remanded.
Mansfield, Van Graafeiland, Circuit Judges, and Mishler, District Judge.*fn*
VAN GRAAFEILAND, Circuit Judge:
This appeal arises from a consolidated class action brought by non-converting holders of the Boeing Company's 4 1/2% convertible subordinated debentures due July 1, 1980. The amended complaint alleges that appellants had received inadequate notice of Boeing's intention to call the convertible debentures in question and were therefore unable to exercise their conversion rights prior to the deadline for the call which was midnight, March 29, 1966. The redemption price for each $100 of principal amount of debentures was $103.25. However, if appellants had been able to meet the call deadline, they could have converted each $100 of principal amount of debentures into at least two shares of common stock. On March 29, 1966 the common stock obtainable for each $100 of debentures was worth $316.25. Within thirty days thereafter the stock was worth $364. Damages demanded by appellants are based on the difference between the redemption price and the value of the common stock.
Originally, the District Court dismissed the complaint. On appeal, this Court reversed that judgment and remanded to the District Court for a determination of damages. Van Gemert v. Boeing Co., 520 F.2d 1373 (2d Cir.), cert. denied, 423 U.S. 947, 46 L. Ed. 2d 282, 96 S. Ct. 364 (1975). District Judge Ryan has now made that determination, and the case is once again before this Court.
Judge Ryan awarded damages based on the value of Boeing's common stock on March 29, 1966 which, as noted previously, was the cut-off date for the exercise of conversion privileges. He awarded no pre-judgment interest. Appellants take exception to both of these rulings. They contend that, under New York's "fluctuating value" test, Judge Ryan should have valued the Boeing common stock as of April 14, 1966, when two shares of that stock were worth $364. Additionally, appellants assert that the District Court should have awarded pre-judgment interest. We believe that Judge Ryan properly valued the stock as of March 29, 1966. However, we agree with appellants that they are entitled to pre-judgment interest.
We are satisfied that New York law controls both of these questions. In our prior opinion, we found that appellants' federal claims were sufficient to provide the District Court with jurisdiction over the case. Id. at 1382. However, the relief granted appellants was founded on State law. In finding that Boeing had failed to provide the debenture holders with reasonably adequate notice of the redemption, we held that:
The duty of reasonable notice arises out of the contract between Boeing and the debenture holders, pursuant to which Boeing was exercising its right to redeem the debentures.
Id. at 1383. It is the source of the right, not the basis of federal jurisdiction, which determines the controlling law. United Mine Workers v. Gibbs, 383 U.S. 715, 726, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966); Maternally Yours, Inc. v. Your Maternity Shop, Inc., 234 F.2d 538, 540 n.1 (2d Cir. 1956); see 13 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3567, at 462 (1975). Consequently, in determining the proper measure of damages, New York State law is controlling.
Appellants urge us to apply the "fluctuating value" rule formulated by the New York courts for situations where there has been a conversion of stock. Succinctly stated, this rule provides that:
The measure of damages for conversion of stock certificates is the cost of replacement within a reasonable period after the discovery of the conversion, regardless of when the conversion may have occurred. . . . (Citations omitted).
Hartford Accident & Indemnity Co. v. Walston & Co., 22 N.Y. 2d 672, 673, 291 N.Y.S.2d 366, 238 N.E.2d 754 (1968). This rule does not apply to the facts of the instant case, however.
In both Baker v. Drake, 53 N.Y. 211 (1873) and Mayer v. Monzo, 221 N.Y. 442, 117 N.E. 948 (1917), cases relied upon by appellants, it was alleged that stockbrokers sold their principal's stock without authorization. The owners of the stock were holding these securities, hoping to realize a profit from their sale. Baker v. Drake, supra, 53 N.Y. at 216. The Baker court explained the theory on which damages would be awarded when stock held for this purpose was converted.
If, upon becoming informed of the sale, he desired further to prosecute the adventure and take the chances of a future market, he had the right to disaffirm the sale and require the defendants to replace the stock. If they failed or refused to do this, his remedy was to do it himself and charge them with the loss reasonably sustained in doing so. The advance in the market price of the stock from the time of the sale up to a ...