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January 28, 1981


The opinion of the court was delivered by: LASKER

Kay Corporation moves (1) to dismiss the complaint for failure to state a claim on which relief may be granted, (2) to strike the claim under section 17(a) of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77q(a), and related language, and (3) to strike the claim for punitive damages. The motions are denied.


On March 29, 1977, Anschutz Corporation purchased from Kay a 50% interest in Metal Traders, Inc. ("MTI"). MTI trades in metal ores and concentrates, and operates a Bolivian antimony mine. Anschutz alleges that during the negotiations leading up to the sale, Kay's representatives intentionally and knowingly or recklessly made materially false and misleading statements and omitted facts necessary to make those statements not false or misleading.

 Specifically, Anschutz complains of two sets of alleged misrepresentations. First, Anschutz claims that Kay's president "stated that reserves (of the Bolivian mine) were difficult to ascertain but that a "major discovery was made in late 1975', and that "within 3 years this may result in an increase from 80 tons per month to 240 tons per month', an increase that would make MTI the "3rd largest' antimony producer in the world." (Amended Complaint, P 13). Anschutz further alleges that Kay's president was reported as stating that "management placed a two million dollar value on the mine" (Amended Complaint P 13). Anschutz claims that these statements were false and misleading in that, inter alia, Kay's management did not in fact value the mine at $ 2 million, and indeed had actively but unsuccessfully sought from its accountants an upward evaluation of the mine, that the 1975 discovery was merely an exploitation of an old area already exhausted of its lumpy ore deposits and which was not expected to increase the rate of production at all, let alone to 240 tons per month, that "there was doubt" as to the rate of continued production of lumpy ore, and that the only "certain future production" was concentrates which are less profitable than lumpy ore (Amended Complaint P 14).

 The second incident of alleged misrepresentations occurred on March 6, 1977 when Kay's representatives told Anschutz that MTI had just declared a $ 2 million cash dividend (Amended Complaint P 17). Anschutz alleges that Kay did not disclose that to declare the dividend, Kay had to use a substantial portion of its unsecured line of credit, making it unlikely that MTI could continue at its then current volume of trading and that MTI's banks "looked with disfavor upon the dividend." (Amended Complaint P 18).

 Anschutz alleges in its first cause of action that these actions violated section 17(a) of the 1933 Act, 15 U.S.C. § 77q(a), and section 10b-5 of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b) and Rule 10b-5. In its second cause of action, Anschutz alleges that the same facts constitute common law fraud.


 Kay moves to dismiss both causes of action on the grounds that, as a matter of law, the alleged misrepresentations may not be relied upon and are immaterial under the circumstances alleged in the complaint.

 Kay contends that the statement as to the value of the mine was an expression by a seller of its opinion as to the value of the object being sold. Kay argues that Anschutz could not have reasonably relied upon that statement which was allegedly made during arm's length bargaining five months before the closing date, and which was followed by an invitation to return for further details, if any were needed.

 Kay relies primarily on Vulcan Metals Co. v. Simmons Mfg. Co., 248 F. 853 (2d Cir.), (L. Hand, J.) cert. denied, 247 U.S. 507, 38 S. Ct. 427, 62 L. Ed. 1241 (1918). Vulcan had purchased a vacuum cleaner manufacturing business from Simmons. Vulcan claimed that Simmons' representatives made false representations regarding the quality and capability of the vacuum cleaner manufactured by it. The court affirmed the granting of a directed verdict for Simmons on this claim. Vulcan had had the opportunity to examine and test the machines and "ha(d) no right to treat as material in his determination statements like these." Id. at 857.

"The reason of the rule lies, we think, in this: There are some kinds of talk which no sensible man takes seriously, and if he does he suffers from his credulity. If we were all scrupulously honest, it would not be so; but, as it is, neither party usually believes what the seller says about his own opinions, and each knows it. Such statements, like the claims of campaign managers before election, are rather designed to allay the suspicion which would attend their absence than to be understood as having any relation to objective truth. It is quite true that they induce a compliant temper in the buyer, but it is by a much more subtle process than through the acceptance of his claims for his wares."

 Id. at 856.

 Anschutz argues that the knowing statement of an opinion not actually held is actionable under the securities laws. However, this contention does not address the issue of justifiable reliance which was the basis of the Vulcan opinion. Indeed, the Vulcan court recognized that the statement of a false opinion is actionable. Id.

 Nevertheless, the validity of the Vulcan rule as applied to the present context is subject to serious question. First, we strongly doubt whether Judge Hand would have adopted the same approach today in view of the heightened standards of disclosure established by the federal securities laws enacted fifteen and sixteen years after the Vulcan decision. Second, the statements in Vulcan which concerned the capabilities, efficiency and ease of use of the vacuum cleaners and were deemed seller's "puffing" are distinguishable from the more objective statement here as to the value of the mine (although in dicta, the court stated that the same rule applied ...

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