decided: October 19, 1979; As Amended January 14, 1980.
Appeal from a judgment of the United States District Court for the Southern District of New York entered on January 30, 1979, after a trial before Robert Owen, Judge, holding defendants Harold Kiernan and Flo-Tek, Inc., liable for fraud and breach of contract in the amount of $213,814.44. The judgment is affirmed as to the liability of defendants under section 12(2) of the Securities Act of 1933, vacated and remanded as to damages for further findings by the district court, and dismissed for want of jurisdiction as to the breach of contract claim.
Before Lumbard, Mansfield and Gurfein, Circuit Judges.
Defendants Harold Kiernan and Flo-Tek, Inc. appeal from a judgment entered against them on January 30, 1979 in the sum of $213,814.44 awarded to plaintiff Arthur Wigand after a nonjury trial before Judge Owen in the Southern District of New York on one count alleging common law fraud and deceit as well as misstatements in the sale of securities, and one count of breach of contract. We affirm the judgment as to liability of the defendants insofar as it is based on the Securities Act of 1933, 15 U.S.C. 77a Et seq., but we vacate and remand as to damages because of error in the legal standard applied by the trial court and because of the insufficiency of the evidence supporting the finding as to the value of consideration paid by the plaintiff. We dismiss the breach of contract count for lack of jurisdiction.
Wigand sued individually and as a representative of other shareholders of Flo-Tek, naming Harold Kiernan, President and controlling shareholder of Flo-Tek, as defendant along with Kiernan's wife, Claire, and Flo-Tek itself. In Count I Wigand alleged that Kiernan made false and misleading statements to him in the course of negotiating the acquisition by Flo-Tek of Mid-Hudson Sheet Metal, Inc. ("Mid-Hudson"), a sheet metal fabricating firm of which Wigand was chief executive officer and major shareholder. In Counts II through V Wigand alleged various breaches of fiduciary duty by Kiernan during the period he controlled Mid-Hudson, and in Count VI Wigand alleged breach of an employment contract. Defendants, after an initial default, made several counterclaims, alleging that Wigand had wrongfully appropriated funds of the company and charging abuse of process. Counts II through V, stating a derivative cause of action, were dismissed by Judge Owen on May 9, 1975, following plaintiff's failure to post the bond required by section 627 of New York's Business Corporation Law. Claire Kiernan was dismissed as a defendant by Judge Owen at the end of the presentation of plaintiff's case. The defendants' counterclaims were dismissed by Judge Owen from the bench at the end of trial. This appeal is not concerned with any of these three matters. After a five day trial beginning on March 22, 1978, Judge Owen found both remaining defendants liable in a decision announced from the bench. On January 25, 1979, Judge Owen filed his findings with respect to damages, assessing the defendants $174,375.00 in damages on Count I and $39,439.44 on Count VI, together with interest from May 1, 1978.
Defendant Flo-Tek is a New Jersey corporation engaged in the production of pollution control equipment. Kiernan has been Flo-Tek's president since its formation in 1961. Along with his family, Kiernan owns more than 500,000 of the approximately 650,000 shares of Flo-Tek that have been outstanding since the company became publicly owned in 1970.
Plaintiff Wigand was chief executive officer of Mid-Hudson, a New York corporation with plant and offices in Hopewell Junction, N.Y. The stock of Mid-Hudson consisted of one share, which was owned by Taconic Holding Co., Ltd. ("Taconic"), a New York corporation. Taconic's stock ownership is a matter of uncertainty. Wigand owned five and a half shares of Taconic. Louis Miller owned two and a half shares. Nicholas Noviello held two shares, one in his own name and one in trust for Joseph Green. Finally, one share had been issued to a Mr. Montaldo and one share to a Mr. Powell, but the status of these shares was unclear.*fn1
Mid-Hudson's premises adjoined a machine shop engaged in subcontracting work for Flo-Tek. In January or February of 1971, Kiernan, visiting the machine shop, was introduced by its owner to Wigand. Kiernan discussed with Wigand the possibility that Mid-Hudson could do some contract work for Flo-Tek. Thereafter, Mid-Hudson began to manufacture component parts for a prototype trash compactor Flo-Tek was building.
Sometime in the spring of 1971, Kiernan suggested to Wigand that Flo-Tek acquire Mid-Hudson. In the course of their discussions Kiernan made various representations to Wigand which became, along with later statements, the basis for Wigand's claim that he had been fraudulently misled.
Kiernan sent Wigand a "Memorandum of Understanding" dated June 21, 1971, which called for the "transfer of assets and business" of Mid-Hudson to Flo-Tek (Plaintiff's Exhibit 1). In return, Flo-Tek undertook to issue 25,000 shares of unregistered stock to Mid-Hudson and Taconic. On July 1, 1971, Wigand signed the memorandum.
But Taconic's other shareholders were not happy with the proposed arrangement. Louis Miller, who owned two and a half shares and had loaned Mid-Hudson $15,000, did not want to sell out to Flo-Tek, but he made it clear that he would not interfere. Noviello, who controlled two shares and served as Mid-Hudson's lawyer, wrote a letter on August 16, 1971, rejecting the stock for stock deal proposed by Kiernan but offering to sell his share for $8,000 in cash.
Meanwhile Wigand had visited Flo-Tek's offices in Lodi, New Jersey, and had attended a meeting in August to which Kiernan brought John Poole, who represented Chemical Bank. In the course of this meeting, Wigand testified, Kiernan led him to believe that Flo-Tek had lines of credit from New York banks up to five hundred thousand dollars.
In late August and early September, 1971, floods swept through Lodi, New Jersey, destroying Flo-Tek's offices and records and damaging much of its equipment. With Wigand's permission, Kiernan moved what he could salvage up to Mid-Hudson's premises in Hopewell Junction. In late September, Flo-Tek purchased at auction the machine shop adjoining Mid-Hudson.
On October 1, 1971, Kiernan and Wigand executed an "Agreement" to effect the contemplated acquisition of Taconic and Mid-Hudson by Flo-Tek. The agreement provided for Flo-Tek's acquisition of Wigand's Taconic shares in return for 25,000 shares of Flo-Tek. Wigand warranted in this document that he was the holder of five and a half of nine outstanding shares of Taconic, and that he was under no contractual obligation with regard to voting or selling his Taconic shares. Attached to the agreement were unaudited financial statements of Flo-Tek, Mid-Hudson and Taconic. Among other requirements, the agreement provided that assignments of stock were to be delivered by Wigand to Flo-Tek at a closing, and that Mid-Hudson and Taconic would be kept separate from Flo-Tek for accounting purposes.
Also on October 1, 1971, Wigand and Kiernan signed an employment contract (this contract was called for by the stock acquisition agreement) giving Wigand a salary of $18,200 per year, insurance benefits, business expenses, providing for Flo-Tek to repay Wigand for his loans to ...