Appeal from order of the United States District Court for the Southern District of New York, Charles M. Metzner, J., disallowing claim to participate in a class action settlement fund. Affirmed.
Kaufman, Chief Judge, Clark, Associate Justice*fn* and Jameson, District Judge.*fn**
In this case, the respective rights of rival claimants to participate in a fund created by settlement of a securities class action depends upon who owned certain securities on a specific day, November 2, 1971. A careful analysis of the complex dealings between the parties has convinced us that the appellees, Spingarn & Co. and Satnick-Japha, Inc., were, on that day, the beneficial owners of the Westinghouse Electric Interim Certificates at issue here. Accordingly, we affirm the order of the district court, upholding the appellees' claim to share in the fund.
A brief summary of the essential facts will facilitate understanding of the legal issue presented to us.
In the autumn of 1970, a stock-for-stock merger was negotiated between two of the nation's lesser known rental car companies: Americar and Westcar.*fn1 Since Westcar was a wholly owned subsidiary of Westinghouse Electric Co., Americar shareholders received Westinghouse stock. A portion, however, of the consideration to be paid to the Americar shareholders was placed into escrow for one year*fn2 to secure Westinghouse against certain contingent liabilities. The Americar shareholders received, in lieu of the reserved stock, Interim Certificates evidencing the right to receive Westinghouse shares upon termination of the escrow.
On October 9, 1970, Americar sent a proxy statement to its stockholders, announcing a special meeting to consider the merger and detailing the terms of the merger agreement. Years later it would be alleged that this proxy statement inadequately disclosed the reasons for the escrow arrangement and the likelihood that a claim would be made against the fund. But in the halcyon autumn of 1970, this discontent lay far in the future. On October 20, the Americar-Westcar merger was overwhelmingly approved, to be consummated ten days later. The escrow period ran until October 31, 1971.
Abraham & Co., a securities dealer and owner of Americar stock, received Interim Certificates under the merger agreement. Abraham evidently regarded them a promising investment, since it bought additional Certificates during the course of 1971 on the flourishing secondary market. By the eve of the expiration of the escrow agreement, Abraham had become the owner of 606 Interim Certificates.
Abraham's hopes of turning a profit on its investment were dashed on Friday afternoon, October 29, 1971, when Westinghouse asserted claims against the escrow that exceeded its value. The news of this action, which rendered the Interim Certificates worthless, spread slowly. It is possible, therefore, that Abraham was ignorant of this event when it determined, early Monday morning, November 1, to dispose of its entire holding of Interim Certificates.
Quickly upon receipt of Abraham's instructions, its agent, Brukenfeld, Mitchell & Co., telephoned two other securities dealers, the appellees, and sold the Certificates at a price of $65. Spingarn & Co. bought 200; Satnick-Japha, Inc., took the remaining 406. The aggregate selling price was $39,390. This transaction, hastily concluded, was no less speedily disavowed: within the hour Spingarn and Satnick discovered the worthlessness of the Interim Certificates and called Brukenfeld to extricate themselves from the contract. Brukenfeld was accused of concealing the Westinghouse claim against the escrow and of misrepresenting its reasons for the sale.
Brukenfeld declined to regard these telephone calls as effecting a valid cancellation of the contract of sale. Accordingly, when it failed to receive confirmation notices from Spingarn and Satnick, Brukenfeld delivered "Don't Know Notices" (NASD Form 101) to the buyers, who returned them with the notation "Don't Know". This procedure would have permitted Brukenfeld and its principal, Abraham, to repudiate the transaction if they wished, without fear of future liability in the event the buyers subsequently sought to enforce the agreement. See NASD Uniform Practice Code § 9(c)(3). Abraham, however, had absolutely no interest in undoing the contract; since no market for the Interim Certificates survived, Abraham's only chance of avoiding serious losses was to insist on its agreement and extract payment from Spingarn and Satnick.
On November 8, therefore, Brukenfeld, by letter from its attorneys, advised Spingarn and Satnick of its intention to deliver the Certificates the following day. The letter affirmed the "sale concluded November 1" and announced that Brukenfeld had been informed by counsel that the buyers' refusal to honor the transaction was "unjustified in both fact and law." Notwithstanding this warning, Spingarn and Satnick rejected tender.
Abraham & Co. promptly commenced arbitration proceedings to enforce its contractual rights. It vigorously maintained that a sale had taken place on November 1. By rejecting delivery, Abraham asserted, the appellees had "arbitrarily and capriciously breached [their] contractual commitment". ...