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October 29, 1998

OLIVER R. GRACE, LORRAINE GRACE, MORGAN H. GRACE and GERALD I. WHITE, Trustee of the JOHN E. GRACE TRUST, individually, and as stockholders of BRIGGS LEASING CORPORATION suing on behalf of themselves and for the benefit of said corporation and for the class of all other stockholders of said corporation similarly situated, Plaintiffs, against ROBERT ROSENSTOCK, ROBERT GENSER, EDWARD ROSENSTOCK, BRIGGS LEASING CORPORATION and BRIGGS ACQUISITION CORPORATION, Defendants.

The opinion of the court was delivered by: LEVY


 LEVY, United States Magistrate Judge:

 Plaintiffs *fn1" are minority shareholders of defendant Briggs Leasing Corporation, *fn2" a public corporation that was in the business of leasing automobiles to individuals and businesses. They commenced this action individually, as a class, and derivatively to rescind and reform a "freeze-out" merger, under federal and state law, and for money damages and other appropriate relief. Plaintiffs' amended complaint, filed on July 1, 1985, *fn3" alleges that the merger violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated thereunder, N.Y. Bus. Corp. Law ยง 605(a), and the exception stated in Section 623, subd. (K) of the N.Y. Bus. Corp. Law. *fn4" Plaintiffs also seek damages for breach of fiduciary obligation under New York state law.

 By order dated August 14, 1986, the Honorable Mark A. Costantino, United States District Judge, granted plaintiffs' motion to certify this action as a class action, pursuant to Rules 23(a) and 23(b) of the Federal Rules of Civil Procedure. By order dated March 17, 1994, the Honorable Sterling Johnson, Jr., United States District Judge, entered a default judgment on the issue of liability against defendants Briggs Leasing Corporation ("Briggs") and Briggs Acquisition Corporation. Judge Johnson further ordered that plaintiffs be permitted to conduct discovery as necessary and directed that an inquest on damages be held. On August 12, 1997, pursuant to a stipulation so ordered by the Honorable David G. Trager, United States District Judge, judgment was entered against Briggs in the amount of $ 4,028,000 and against Robert Rosenstock, the Vice President and a Director of Briggs, in the amount of $ 6,912,288. Defendant Edward Rosenstock, the former Chairman, Chief Executive Officer, and President of Briggs, is deceased and no estate has been substituted for him. By stipulation dated November 7, 1997, the remaining parties consented to refer this case to a Magistrate Judge for all purposes, including the entry of judgment.

 The primary transaction charged in the amended complaint is the alleged freeze-out merger, on or about February 26, 1985, of the minority shareholders of Briggs. Plaintiffs claim that the self-interested defendants effectuated the merger through the use of a materially false proxy statement, thereby freezing out the minority shareholders at the allegedly inadequate price of $ 1.50 per share. Specifically, the amended complaint charges that the proxy statement was materially misleading in that it failed to disclose, among other things, the improper diversion of corporate opportunities by Robert Rosenstock ("Rosenstock") and Robert Genser ("Genser"), who collectively owned seventy-two percent of the outstanding stock of Briggs. The bench trial against Robert Genser, the sole remaining defendant in this case, commenced on March 30, 1998 and ended on April 2, 1998.


 Robert Genser was a Vice President, Secretary-Treasurer and Director of Briggs. (Trial Transcript ("Tr.") at 352; Plaintiffs' Exhibit 1 at 2.) On January 10, 1985, Genser and Rosenstock each contributed all of their shares in Briggs (29,961 and 384,350 shares, respectively) to Briggs Acquisition Corporation ("BAC"), a shell corporation, and received one share of common stock of BAC in exchange for each share of Briggs. As a result of that transaction, Genser and Rosenstock became the sole shareholders of BAC. After an additional contribution of 17,516 shares of Briggs stock by Rosenstock (which he purchased from his father, Edward Rosenstock, for $ 1.50 per share), BAC owned approximately seventy-two percent of the outstanding common stock of Briggs.

 By letter dated January 28, 1985, Briggs notified its shareholders that a special meeting would be held on February 25, 1985 for the purpose of voting on the proposed merger of BAC and Briggs, with Briggs to be the surviving company wholly owned by Genser and Rosenstock. The letter informed the shareholders, however, that "irrespective of the vote" of the minority shareholders, approval of the merger was assured because BAC, as the majority stockholder, planned to vote in favor of the merger. The notice also informed the shareholders that they would be bought out at $ 1.50 per share upon consummation of the merger.

 The purported reason for the merger was to relieve Rosenstock and Genser of the burden of personally guaranteeing the debt of a public corporation. Briggs had obtained a fair amount of credit from General Motors Acceptance Corporation ("GMAC") in connection with its purchases of automobiles and, in order to induce GMAC to extend such credit -- which in January 1985 was in the amount of approximately $ 14 million -- both Rosenstock and Genser had executed personal guarantees on the debt. As Briggs began to suffer reduced profits, allegedly as a result of increased competition in the auto leasing business from the major automobile manufacturers, Rosenstock and Genser decided to take the company private, purportedly in the hopes of turning it into a franchise for one of the major automobile manufacturers. (Trial Memorandum of Robert Genser at 3-4.)

 Attached to the notice of the special meeting was a proxy statement which explained, inter alia :

It is proper for Rosenstock and Genser to have the total ownership, and receive all of the earnings, of the Company [because they personally guaranteed the company's debt incurred by purchasing automobiles]. . . . Rosenstock and Genser believe that they should receive the full benefit of any future increase in the equity and earnings of the Company.

 (Plaintiffs' Exhibit 1 at 6.) The proxy statement further explained that Briggs had hired Prudential-Bache Securities to render an opinion on the appropriate price for shares owned by the minority shareholders, who would lose their interests in Briggs as a result of the merger. Based on its review of the corporate records, Prudential-Bache gave the Board of Directors an opinion that $ 1.50 per share would be a fair price for the minority stock. (Id. at 10.)

 In addition, the proxy statement listed the book value of Briggs's real estate as $ 884,503, but disclosed an accumulated appreciation of $ 419,031 and noted that the company had recently obtained a first mortgage loan on the property in the face amount of $ 1 million. With regard to the real estate, the financial statement disclosed that there had been some preliminary discussions with architects and community officials about development of the property, but that no such plans had been finalized and that land use regulations "may restrict or totally eliminate the company's ability to continue to conduct its business at such premises." (Id. at 15.)

 Finally, the proxy statement revealed that any shareholders dissenting from the merger had the right, pursuant to section 623 of New York's Business Corporation Law, to seek an appraisal by filing a written objection with the company prior to the vote. The proxy statement described the appraisal process in detail, and the full text of section 623 was annexed to it. (Id. at 11-13; C-1-C-5.)

 At the meeting on February 26, 1985, plaintiffs voted against the merger. Nonetheless, based solely on BAC's vote, the proposal was adopted and the merger became effective, with Genser and Rosenstock remaining as the sole shareholders of Briggs, Genser owning seven percent (7%) and Robert Rosenstock owning ninety-three percent (93%) of the common stock.

 All of the above facts are undisputed. (See Joint Pretrial Order, dated June 27, 1997, at 1-3.) The parties' dispute centers around the valuation of the shares of Briggs and whether or not the proxy statement accompanying the notice of special meeting contained materially misleading misrepresentations and omissions concerning the value of the shares. According to plaintiffs, the fair value of Briggs, based on the true value of its real estate holdings at the time, was in excess of $ 5.00 per share. They claim, based on an appraisal of the real estate that was conducted in 1987, that Rosenstock and Genser deliberately "timed the merger to take advantage of the upward surge in the value of its real estate, and thus to deprive the plaintiffs from participating in that dramatic improvement value."

 Plaintiffs also contend that the proxy statement accompanying the notice of special meeting contained materially misleading representations and omissions because it

failed to disclose that the individually named defendants voted for and approved the merger because it was a necessary step in the consummation of a plan and scheme to divert to the individually named defendants, as sole shareholders of BRIGGS, the real property owned by BRIGGS which, once diverted to their sole control, ...

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