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Kaye v. Funding Systems Corp.

June 20, 1977


Appeals from orders of the United States District Court for the Southern District of New York, Robert L. Carter, Judge, dismissing complaint on grounds of mootness. Affirmed in part; reversed in part and remanded.

Author: Knapp

Before: LUMBARD and TIMBERS, Circuit Judges, and KNAPP, District Judge.*fn*

KNAPP, District Judge:

Plaintiff Richard S. Kaye appeals from an order of the Southern District dismissing as moot his claim for injunctive relief under the securities laws. Because we conclude that the district court should not have dismissed while there remained a substantial issue of fact whether the case was moot, we are constrained to reverse in part and remand for further proceedings.


Plaintiff Kaye is the owner of 5000 shares of stock in defendant Funding Systems Corporation ("FSC"). In 1971 defendant Equimark Corporation acquired stock of FSC which, added to Equimark's existing holdings, allowed the latter to control FSC. Kaye brought suit against defendants on December 20, 1974, claiming that Equimark's control of FSC had been acquired in violation of federal law and exercised to the detriment of FSC and its minority shareholders.

Kaye sought no money damages against either defendant. His complaint*fn1 alleged that Equimark, a bank holding company registered under section 5 of the Bank Holding Company Act, 12 U.S.C. § 1844, had, in violation of section 4(a) of the Act, 12 U.S.C. § 1843(a) and Regulation Y promulgated thereunder, 12 C.F.R. § 225, acquired its fifty-four percent control of FSC without the prior approval of the Board of Governors of the Federal Reserve System.*fn2 An injunction was sought restraining Equimark from voting its FSC stock or "[exercising] any control over the affairs of FSC".

Against FSC, the complaint alleged that it had violated section 14 of the Securities Exchange Act of 1934, 15 U.S.C. § 78n, by failing, in a proxy statement distributed to its shareholders prior to the annual meeting of shareholders held on December 27, 1974, to make disclosure of pertinent facts concerning Equimark's allegedly illegal control of FSC. According to the complaint, the necessary disclosure has still not been made. Prior to amendment, the complaint sought an injunction against the holding of the December 1974 meeting; the district court granted the injunction, but this court reversed on appeal, and the meeting was held. Accordingly, the amended complaint requested not a prohibitory injunction against the December 1974 meeting but a mandatory injunction requiring the holding of a new meeting to reconsider the actions then taken under the controlling hand of Equimark.

FSC answered the complaint on January 15, 1975. Equimark filed its answer on January 22, 1975. On February 14, Equimark moved for summary judgment dismissing the complaint on the merits. As originally filed, the motion was returnable on February 28, but by a series of stipulations the motion was adjourned until March 18, 1975.*fn3 Although the motion was not formally withdrawn, it has never been decided, for on April 23, 1975, Equimark's counsel directed a letter to the court asserting that Equimark had sold its entire holdings of FSC stock to G. Gray Garland, Jr., and Floyd R. Ganassi, and suggesting that as a consequence the litigation had become moot.

In the interim, by a notice dated February 28, 1975, and filed on March 5, 1975, Kaye had announced his intention to take depositions of representatives of Equimark and FSC and requested production of documents relating to the litigation. By a series of five stipulations and orders signed by the district court,*fn4 discovery was adjourned until September 1975. On the appointed dates for discovery, however, none took place.*fn5 In an attempt to resolve their dispute concerning the proper scope of discovery, the parties met with the district judge on November 5, 1975. Defendant Equimark apparently claimed that further discovery was inappropriate because the action had become moot; plaintiff rejoined that the sale by Equimark of its FSC stock, which gave rise to the mootness claim, had been a sham because the circumstances of the sale were such as would allow Equimark to retain its control of FSC. Equimark offered Kaye an opportunity to depose Robert F. Kastelic, its Executive Vice President, which offer was renewed by letter dated November 10, 1975. Kaye rejected the offer and insisted instead on being allowed to depose M. A. Cancelliere, Chairman and Chief Executive Officer of Equimark. Although Equimark represented that Kastelic was the officer most knowledgeable concerning the circumstances of the sale of the FSC stock, Kaye believed that Cancelliere had participated directly in that sale and in others which might have borne on the continued existence of control by Equimark over the affairs of FSC.*fn6 When the parties were unable to resolve this dispute, Kaye, on January 12, 1976, moved pursuant to Rule 37 for an order compelling Equimark to make Cancelliere available for a deposition and to produce documents which related to the question of continued control over FSC by Equimark, including copies of certain loan agreements between the companies.

The district court denied plaintiff Kaye's motion but provided that "[plaintiff] will be afforded the opportunity to depose Mr. Kastelic but that deposition must be taken within thirty (30) days [of publication of the court's order]; and, within that period, plaintiff is ordered (1) to conclude discovery in respect of the issue before the court, which is the validity of the FSC sale of stock...".*fn7 Within the stated time limitations, Kaye took Kastelic's deposition but conducted no other discovery. Kaye sought additional time to conduct further discovery but the request was denied by the court. Defendants thereupon moved to dismiss on mootness grounds; the motions were granted and plaintiff has appealed.


Clearly, the litigation is not moot against Equimark if, as Kaye contends, the circumstances surrounding the sale of Equimark's FSC stock to Garland and Ganassi were such that Equimark retained actual, if not nominal, control of Funding Systems. Against Equimark, the complaint requests an injunction prohibiting the "exercise of any control over the affairs of FSC." In determining whether plaintiff's claim has been mooted, it matters not whether Equimark votes stock registered in its own name or exercises control through "nominees" who may be independent in appearance but who in reality are subservient to the commands and interests of Equimark. If indeed Equimark has surrendered only the outward incidents of ownership, nothing has transpired which would prevent the district court from awarding substantially the relief demanded in the complaint. As this court has stated it, the test of mootness where a plaintiff seeks equitable relief without a claim for monetary damages is whether the suit, "if successful, would... change anyone's behavior." Browning Debenture Holders' Committee v. DASA Corp. (2d Cir. 1975) 524 F.2d 811, 816. So long as Equimark actually controlled FSC, an injunction compelling the former to relinquish control would, by hypothesis, force it to mend its ways, and thus "change" its "behavior".

Proceeding for the moment on the same assumption that Equimark retains control of FSC through "nominees", we confront the question whether plaintiff's suit is also not moot as against FSC. Although the question is a closer one, we hold that, on the ...

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