Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

HEALTH-CHEM CORP. v. HYMAN

January 27, 1981

HEALTH-CHEM CORPORATION, Herculite Protective Fabrics Corporation, Leon C. Baker and Marvin M. Speiser, Plaintiffs,
v.
Seymour HYMAN a/k/a Sy Hyman, Defendant



The opinion of the court was delivered by: MOTLEY

MEMORANDUM OPINION

This opinion arises out of defendant's application for attorneys' fees and costs in the wake of his successful defense against plaintiffs' claims. The application is premised on plaintiffs' alleged bad faith in bringing and maintaining this action. Some factual and legal recapitulation is necessary to create a proper backdrop for the court's discussion.

 FACTUAL BACKGROUND AND PRIOR PROCEEDINGS

 In 1976, defendant Hyman was discharged from his positions as President, Chief Executive Officer and Chairman of the Board of Health Chem Corporation (Health-Chem). Hyman was forced out of Health-Chem by two of his business partners, Leon C. Baker and Marvin M. Speiser, both of whom are plaintiffs in this action; Hyman's expulsion allegedly resulted from the discovery that he had diverted company funds to pay for personal expenses. Hyman contends the dismissal resulted from his opposition to certain corporate transactions engaged in, or contemplated by, Health-Chem. In December, 1976, Hyman brought suit in New York State Supreme Court against Health-Chem and various other parties alleging that he had been wrongfully discharged. See Hyman v. Health Chem-Corporation, Index No. 23715/76 (Sup.Ct.N.Y. County) (the New York action).

 In March 1977, the parties settled the New York action. As part of the settlement, Health-Chem purchased Hyman's holdings in another corporation known as Medallion. Health-Chem purchased this stock by giving Hyman $ 1,565,000 of Health-Chem Series B Convertible preferred stock. Hyman also received an option to sell the stock to Speiser and Baker for $ 1,150,000, which he subsequently exercised. Speiser and Baker purchased the preferred stock on May 11, 1977, by delivering cash and letters of credit in the agreed upon amount.

 On May 26, 1977, a derivative action was commenced in federal court against various members of Health-Chem's management. See Goldberger v. Baker, 442 F. Supp. 659 (S.D.N.Y.1977). The derivative suit was subsequently dismissed by Judge Goettel of this court. On November 4, 1977, plaintiffs filed a complaint beginning the instant action. The complaint alleged a violation of Rule 10b-5 of the Securities and Exchange Commission along with other pendent state law claims.

 The alleged violation of Rule 10b-5 was premised on the theory that Hyman knew about, and had participated in the preparation of, the derivative action when he entered into the settlement ending the New York action. According to plaintiffs' theory, Hyman had a duty to disclose to them the imminent derivative action. His failure to do so, coupled with his sale to Baker and Speiser of the convertible preferred stock, supposedly violated Rule 10b-5.

 On June 16, 1978, defendant moved to dismiss the complaint. Defendant argued that, assuming arguendo he had knowledge of the imminent derivative action, his non-disclosure could not have been material because Health-Chem, Baker and Speiser were already on notice of the possibility of a derivative suit. This court denied the motion on December 1, 1978, finding that materiality was a disputed issue of fact which should not normally be determined on a motion to dismiss.

 On December 10, 1979, the instant case came on for trial. During the course of the trial plaintiff attempted to introduce testimony from a Mr. Arthur Kanter concerning a conversation between Kanter and Hyman in which Hyman allegedly admitted to knowledge of the derivative action at the time he was engaged in settlement negotiations in the New York action. Mr. Kanter is a lawyer who was retained by Speiser and Baker to represent them in a small claims action against Hyman. This court ruled Kanter's testimony inadmissible under Federal Rule of Evidence 408 because the conversation took place in the course of negotiations to settle the small claims matter.

 On December 11, 1979, at the close of plaintiff's case, this court dismissed plaintiff's claim. The court found that the plaintiffs knew, or should have known, about the possibility of a derivative suit. Thus, any non-disclosure by Hyman could not have been material. The court also found that there was no direct proof of any knowledge on Hyman's part about a derivative suit at the point when he was engaged in settlement discussions in the New York action. The dismissal was appealed and the Second Circuit Court of Appeals heard argument on June 6, 1980. This court's decision was affirmed by unreported memorandum decision on the following day, June 7, 1980.

 DISCUSSION

 Comparison of the memoranda of law submitted by both sides reveals agreement on the applicable legal standard to be applied in determining this motion. The standard is found in the Second Circuit's recent decision in Nemeroff v. Abelson, 620 F.2d 339 (2d Cir. 1980) (Nemeroff ). Nemeroff involved an appeal from an order awarding fees and costs because one of the parties was found to have proceeded in bad faith. The underlying litigation in Nemeroff, as here, involved alleged violations of federal securities law. The Second Circuit ruled that in order for fees and costs to be awarded on grounds of bad faith

 
... there must be "clear evidence" that the claims are "entirely without color and made for reasons of harassment or delay or for other improper purposes."
 
A claim is colorable, for the purpose of the bad faith exception, when it has some legal and factual support, considered in light of the reasonable beliefs of the individual making the claim. The question is whether a reasonable attorney could have concluded that facts supporting the claim ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.