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RUBINBERG v. HYDRONIC FABRICATIONS

October 1, 1991

MICHAEL RUBINBERG, FRANCIS LEE AND FRANK COULTON, PLAINTIFFS,
v.
HYDRONIC FABRICATIONS, INC., IRWIN P. MATTES, JOSEPH SACKS AND MORTON E. CYTRYN, DEFENDANTS.



The opinion of the court was delivered by: Spatt, District Judge.

  OPINION AND ORDER

This action arises out of a dispute concerning the alleged omissions and misrepresentations made by the defendants in connection with the sale of all of the issued and outstanding shares of common stock of a close corporation, Hydronic Fabrications, Inc. Based on violations of the federal securities laws as well as pendent state law claims, the complaint alleges that the defendants failed to disclose the true financial condition of the business at the time of closing, which ultimately led the plaintiffs to file for bankruptcy protection.

Before the Court at this time is the defendants' motion for summary judgment dismissing the complaint, and granting judgment on their counterclaims. The defendants also seek sanctions pursuant to Fed.R.Civ.P. 11.

For the reasons that follow, the Court grants the motion of the defendants for summary judgment dismissing the complaint, and denies the defendants' motion for summary judgment on their counterclaims and for sanctions.

FACTUAL BACKGROUND

The following facts are undisputed, except where otherwise noted.

Defendant Hydronic Fabrications, Inc. ("Hydronic"), organized and existing under the laws of New York, maintained its principal office in Oceanside, Long Island, New York. Hydronic was in the business of manufacturing and installing fabricated pipe for industrial use.

Prior to October 1988, the defendants Irwin P. Mattes ("Mattes") and Joseph Sacks ("Sacks"), each owned fifty shares of Hydronic, which together constituted 100% of the then-outstanding shares of stock.

Plaintiff Michael Rubinberg ("Rubinberg"), was also in the business of industrial pipe fabrication since approximately 1962. For some uncertain time period, Rubinberg and defendants Sacks and Mattes conducted business together in a partnership known as "Rubicon", which operated out of the Hydronic facility. Rubinberg ultimately purchased the interests of Mattes and Sacks in the partnership approximately fifteen years ago.

Some time prior to October 1988, defendant Sacks, who managed Hydronic, became ill and was unable to generate the sales necessary to maintain Hydronic's profitability. In early 1988, Rubinberg expressed an interest in purchasing Hydronic, resulting in several meetings held between Rubinberg, Sacks and Mattes.

The plaintiffs allege that during the course of these meetings, the defendants Sacks, Mattes and Morton Cytryn ("Cytryn"), an accountant for Hydronic for approximately thirty years, made certain representations as to the financial viability of Hydronic. Specifically, the plaintiffs allege that the defendants falsely represented that the state sales tax liabilities were approximately $43,000, and that the inventory of the business was worth approximately $110,000.

After entering into negotiations, the parties reached an agreement, which was reduced to writing and signed by the parties on October 18, 1988 ("the Agreement"). Essentially, the Agreement provides in substance, as follows:

(1) Plaintiffs Rubinberg and Francis Lee ("Lee"), the purchasers, agreed to purchase all of the outstanding shares of Hydronic Fabrications, Inc. which would include all right, title and interest to the inventory of the corporation and its accounts receivables, miscellaneous equipment and furnishings, for an aggregate purchase price of $135,000;

(2) The plaintiffs would pay only the sum of $43,512 of the outstanding sales tax obligations of the corporation and would hold harmless the individual defendants (i.e., sellers), should the sellers be obligated to pay any portion of that amount, and agreed to pay reasonable attorney's fees should the sellers be sued in regard to such matter;

(3) The plaintiffs agreed to pay any and all additional sales tax obligations of the corporation, over and above the sum of $43,512 shown on the corporate books, and agreed to hold harmless and indemnify the defendants for that amount;

(4) The defendants agreed to hold harmless the plaintiffs for any financial obligation or payment resulting from any misstatement or omission in the contract of sale, with such additional obligation to be paid by the defendants to the purchasers on demand (Agreement ¶ 10); and,

(5) The defendants would hold harmless the purchasers from all obligations not otherwise provided for or shown on the financial statements of the corporation accruing prior to June 30, 1988, and only those obligations accruing after June 30, 1988 that were not accrued in the regular course of business (Agreement ¶ 10).

Pursuant to the Agreement, plaintiffs Rubinberg and Lee, each purchased 50% of the issued and outstanding shares of common stock of Hydronic. Thereafter, Rubinberg and Lee assigned a 25% interest in Hydronic to plaintiff Frank Coulton ("Coulton"). At the closing, Lee and Rubinberg paid the following consideration: two checks each in the sum of $1,406.25, and tendered two promissory notes, one payable to Sacks in the principal sum of $66,093.75 and one in the same sum payable to Mattes, for a total consideration paid at the time of closing of $135,000.

Each of the promissory notes provided for forty-seven equal monthly installments of $1,406.25 each, due on the 18th day of each month beginning on November 18, 1988 through and including October 18, 1992.

Once the plaintiffs were in possession and control of Hydronic, they allegedly discovered shortly thereafter that the aggregate liabilities of Hydronic had been grossly understated, particularly as to its state sales tax liabilities which were assessed in excess of $311,000. The plaintiffs also contend that it was later discovered that both Sacks and Mattes allegedly converted and diverted corporate assets and that there was an ongoing investigation of Hydronic by the New York State Sales Tax authorities.

On November 7, 1988, Hydronic filed a petition in bankruptcy in the Eastern District of New York under Chapter 11 seeking reorganization. The proceeding was later converted to a Chapter 7 liquidation.

On August 4, 1989, the plaintiffs commenced this securities fraud litigation, alleging the following six causes of action:

  (1) Violation of section 10(b) of the Securities
  and Exchange Act of 1934, 15 U.S.C. § 78j(b) and
  Rule 10b-5 of the Securities and Exchange
  Commission, 17 C.F.R. § 240.10-5, against all
  defendants.

(2) Common-law fraud, against all defendants.

  (3) Breach of contract, against defendants Sacks
  and Mattes.
  (4) An accounting based upon breach of fiduciary
  duty, against ...

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