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December 18, 1991


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


Plaintiff Sanford Brass ("Brass") initiated this action in July 1991, to recover losses suffered when defendant American Film Technologies, Inc. ("AFT") failed to issue warrants for 65,000 shares of unrestricted AFT stock allegedly purchased by Brass in 1987 and 1989.*fn1 AFT moved to dismiss the complaint pursuant to Fed. R.Civ.P. 12(b)(6). Because both parties relied on evidence outside the complaint in addressing the motion to dismiss, on October 28, 1991, the Court, on its own initiative, converted that motion into one for summary judgment, and the parties submitted supplemental briefs. For the reasons stated at oral argument and below, AFT's motion for summary judgment is denied in part and granted in part.


In April 1987, Brass attended a meeting with George Jensen ("Jensen"), Chairman and Chief Executive Officer of AFT, and Dennis Abert ("Abert"), an AFT consultant, to discuss Brass's possible purchase of AFT stock. (Brass Aff. ¶ 3). AFT had previously allocated 65,000 warrants for AFT stock to Abert, some of which Abert, apparently in need of cash, desired to sell. (Id.). According to Brass, neither Jensen nor Abert ever informed him that the shares of stock to be received upon exercise of the warrant purchase rights were originally part of a private placement and thus were not freely transferable. (Brass Aff. ¶ 3). As a result, after this meeting, Brass purchased 10,000 of the warrants allocated to Abert, paying $1.00 per warrant. (Brass Aff. ¶ 4).*fn2

At the time of his initial warrant purchase, Brass did not receive certificates or any other formal documents representing his purchase of the 10,000 warrants. (Brass Aff. ¶ 6). Brass did, however, receive a letter from Jensen dated May 7, 1987, "confirming" that Brass would receive "warrants on AFT common stock from those allocated to . . . Abert." (Brass Aff.Ex. A). Jensen further stated that the 10,000 warrants "are exercisable at $2.00 per share, and are exercisable for a five year period." (Id.).

Subsequent to this purchase, Jensen continued to solicit Brass's business, sending him the preliminary prospectus for a public offering of AFT stock in July 1987 (Brass Aff. ¶ 7, Hartel Aff. ¶¶ 4-5), as well as other prospectuses. (See Brass Aff.Ex. C, Hartel Aff. ¶ 6). Although Brass did not purchase any additional AFT stock during the public offering, in June or July 1989, he did purchase the remaining 55,000 warrants allocated to Abert. (Brass Aff. ¶ 9). As part of that sale, Abert provided Brass with documents evidencing Abert's entitlement to the warrants, including a document labelled a "Stock Purchase Right." (Brass Aff.Ex. D). In September 1989, AFT faxed Brass a copy of his own Stock Purchase Right form for 65,000 shares of AFT stock. (Brass Aff.Ex. E). That document states that the "stock purchase right is transferable only with the consent of [AFT]," but does not mention the transferability of the shares to be purchased upon exercise of the purchase right. (Id.).


Under Fed.R.Civ.P. 56, summary judgment is only appropriate where "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." In determining motions for summary judgment, the Court must view the evidence in the light most favorable to the party opposing the motion — in this case, Brass. Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). Although the precise nature of his claims is not apparent from the face of the complaint, in opposing the motion for summary judgment, Brass asserts that AFT's conduct constitutes conversion, breach of contract, securities fraud, common law fraud, and a violation of New York Uniform Commercial Code § 8-204. We will address the sufficiency of each of those claims individually.

1. Conversion/U.C.C. § 8-204

AFT argues that Brass cannot prove a claim for conversion because he cannot prove "title" to the property allegedly converted. (Motion at 3). It is well-established that in order to prove a conversion claim, a plaintiff must show (1) title to the property converted, or his right to possession of that property; (2) an act of conversion by the defendant; and (3) damages caused by the conversion. 23 N.Y.Jur.2d, Conversion and Action for Recovery of Chattel § 78 at 314-15.

Relying on case law interpreting § 8-204 of the Uniform Commercial Code (the "U.C.C."), Brass contends he has a right to possess warrants covering unrestricted AFT stock, and thus, a legitimate claim for conversion. Section 8-204 provides that "[a] restriction on transfer of a security imposed by the issuer even though otherwise lawful is ineffective against any person without actual notice of it unless . . . the security is certificated and the restriction is noted conspicuously thereon . . ." U.C.C. § 8-204. The Tenth Circuit has interpreted the statute's reference to restrictions "imposed by the issuer" to include restrictions on transferability arising by operation of the Securities Act of 1933 (the "33 Act"), and suggested that failure to comply with the U.C.C.'s notice requirements gave rise to a claim for conversion:

  We are convinced . . . that § 8-204 [requires] that
  the issuer conspicuously note the restriction on
  the certificate for the protection of others. The
  bank as pledgee [of the securities] was among the
  persons protected generally by § 8-204 against a
  restriction not conspicuously noted on the
  security, except as to a person with actual
  knowledge. The wrongful refusal to transfer gave
  rise to a right to sue as for conversion by the
  bank as transferor. We conclude that under the
  facts as found and shown by [the] record, the state
  law in § 8-204 of the Code supports the bank's
  right to recover against the issuer which failed to
  comply with the strict requirement of the statute.

Edina State Bank v. Mr. Steak, Inc., 487 F.2d 640, 644 (10th Cir. 1973), cert. denied, 419 U.S. 883, 95 S.Ct. 150, ...

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