The opinion of the court was delivered by: WILLIAM M. SKRETNY
Plaintiff William S. Flickinger brought this action against defendants Harold C. Brown & Co. ("Brown") and Bradford Broker Settlement, Inc., n/k/a Fidata Brokerage, Inc. ("BBSI"), for violation of the federal securities laws, fraud, breach of contract and breach of fiduciary duty. After a nonjury trial, I found in favor of defendants on all plaintiff's claims. 759 F. Supp. 992.
All parties submitted memoranda of law addressing these matters. I also heard oral argument on February 5, 1992.
My findings of fact after trial are set forth in detail in my previous Decision and Order, with which familiarity by the parties is assumed. 759 F. Supp. at 994-96. The Second Circuit did not disturb these findings.
Further, I make the following findings of fact relevant to the questions of damages and Brown's cross-claims:
1) Plaintiff first became aware in April 1988 that the stock certificates representing 1,500 shares of Lubrizol Corporation stock had not been delivered to him. Sometime in April or May 1988, plaintiff notified his attorney and defendant Brown that he was missing the shares of Lubrizol.
2) After purchasing the 1,500 shares of Lubrizol on or about June 1, 1983, plaintiff received a dividend payment of $ 405.00 on the stock in 1983. He thereafter received no further dividend payments.
3) Brown gave BBSI prompt Notice of Brown's claim for indemnity against BBSI, pursuant to paragraph 6.3 of the Agreement between Brown and BBSI.
Two issues must be resolved to determine the amount of damages to which plaintiff is entitled: (1) the time at which the value of the 1,500 shares of Lubrizol is to be measured, and (2) the extent, if any, to which plaintiff is entitled to recover dividends on the 1,500 shares.
Plaintiff argues that a successful plaintiff in a contract action may recover ". . . the amount necessary to put [him] in the same economic position he would have been in had the defendant fulfilled his contract." Adams v. Lindblad Travel, Inc., 730 F.2d 89, 92 (2d Cir. 1984). From this general principle, plaintiff argues that had defendants performed the respective contracts he would still be the registered owner of 1,500 shares of Lubrizol Corporation stock and would have received all dividends paid on the stock since October 1983. Therefore, he argues that to be made whole, he must recover: (1) the current market value of 1,500 shares of Lubrizol stock;
(2) the aggregate dividends paid on Lubrizol stock between October 1, 1983 and the date of judgment;
and (3) prejudgment interest at 9 percent per annum on each dividend he did not receive.
responds that where the breach of contract is non-delivery of shares of stock, the proper measure of damages "is determined by loss or gain prevented at the time and place of breach." Simon v. Electrospace Corp., 28 N.Y.2d 136, 320 N.Y.S.2d 225, 269 N.E.2d 21 (1971). Accordingly, BBSI argues that plaintiff may recover only the value of the stock at the time of the breach, which occurred in September 1983 upon defendants' failure to deliver the stock certificates. (BBSI's memo at 12). BBSI further argues that plaintiff may not recover dividends earned on the stock because he failed to mitigate his damages under § 2-711 of New York's Uniform Commercial Code ("UCC"). BBSI argues that pursuant to this "cover" provision of the UCC, plaintiff was required to purchase replacement stock upon the failure to deliver. (BBSI's memo, at 14). If plaintiff had done so, he would thereafter have received the dividends himself and at his own risk. BBSI argues that awarding plaintiff over eight years of dividends would enable plaintiff to have speculated on the market for that period entirely at the risk of the seller. (Id., at 15).
Plaintiff replies that a requirement that he "cover" the lost stock by purchasing an additional 1,500 shares when he became aware of the nondelivery would have forced him to pay twice for 1,500 shares of Lubrizol, thereby increasing his damages rather than mitigating them. (Plaintiff's reply). Plaintiff also argues that the cases BBSI cites for the proposition that plaintiff was required to cover the stock are factually distinguishable for various reasons. However, plaintiff cites no case in which a plaintiff, entitled to recover pursuant to any legal theory for a wrongful non-delivery of stock, was awarded the full value of the stock at the time of judgment. Therefore, absent a case directly on point, I find that Schultz v. Commodity Futures Trading Comm'n, 716 F.2d 136, 139 (2d Cir. 1983) is controlling.
a. Valuation of the Stock
Schultz articulated the rule for "measuring damages where stock or 'properties of like character' . . . were converted, not delivered according to contractual or other legal obligation, or otherwise improperly manipulated." 716 F.2d at 141. (citation omitted). There, respondents effected an unauthorized sale of futures contracts from petitioner's commodity futures trading account, allegedly in violation of section 4b of the Commodity Exchange Act (7 U.S.C. § 6b).
The court stated that the proper measure of damages is the greater of either: (1) the value of the stock at the time of conversion, or (2) its highest intermediate value between notice of the conversion and a reasonable time thereafter during which the stock could have been replaced had that been desired. Schultz, supra, 716 F.2d at 141.
The Second Circuit has determined in the instant case that Brown breached its contract with plaintiff when it failed to deliver the Lubrizol shares to him. Further, BBSI breached its contract with Brown when it failed to deliver the shares to plaintiff, and plaintiff may recover damages for that breach as a third party beneficiary to the Brown/BBSI contract. 947 F.2d at 600. Thus, the damages rule enunciated in Schultz is applicable in this case insofar as plaintiff's stock was ". . . not delivered according to [a] contractual . . . obligation." Schultz, supra, 716 F.2d at 141.
Plaintiff testified at trial that he first discovered sometime in April 1988 that the stock certificate representing 1,500 shares of Lubrizol stock had not been delivered to him. (Transcript of proceedings before Hon. William M. Skretny, January 3, 1991 (hereinafter, "T"), at 79). Thus, applying the rule stated above, plaintiff may recover the value of the stock at the time of the non-delivery, or the highest value of the stock between the time plaintiff became aware of the non-delivery and a reasonable time thereafter, whichever value is greater.
What constitutes a "reasonable time" will vary from case to case. Schultz, supra, 716 F.2d at 140.
The purpose of the reasonable time rule is to allow the plaintiff "reasonable opportunity to consult counsel, to employ other brokers and to watch the market for the purpose of determining whether it is advisable to purchase on a particular day or when the stock reaches a ...