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January 29, 1952


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

  The above matters have been consolidated for the purposes of defendants' motions setting up grounds for dismissal and summary judgment which are applicable to both complaints.

The plaintiffs have filed separate complaints alleging an action arising under the Securities Exchange Act of 1934, Section 10(b), 15 U.S.C.A. § 78j(b). It is alleged that pursuant to an agreement of October 20, 1945 the defendant corporation through its president and director, Edwin Silverman, purchased from plaintiff executors and Emil Stern 290 and 250 shares of capital stock, respectively, of Essaness Theatres Corporation out of a total capital stock of 915 shares, for the sum of $540,000 and $583,000 respectively; that said sale was made by the plaintiffs in reliance on certain statements and representations made by defendants with respect to the assets and business of the defendant corporation; that in connection with said sale and purchase defendants "employed and made use of means and instrumentalities of interstate commerce and the United States mails" and "employed in connection with said purchase manipulative and deceptive devices and contrivances in contravention of the rules and regulations prescribed by the Securities and Exchange Commission"; that at the time of the negotiations defendants "were without plaintiffs' knowledge carrying on active negotiations with other persons for the acquisition by defendant, Essaness Theatres Corporation, or a substantial interest in a large and important theatre business in Chicago carried on under the name of the Oriental Theatre * * * for the management of said Oriental Theatre business by Essaness Theatres Corporation on terms very favorable to said corporation" and on December 17, 1945 at the time the purchase was consummated the defendant corporation had an equitable interest in the Oriental Theatre and in the corporation which was to own and operate said business; that it was the duty of the defendants to disclose the aforesaid negotiations to avoid a fraud and deceit upon the plaintiffs, said facts having a material bearing on the value of the shares purchased; that at the time of the purchase the defendants had consummated the negotiations in connection with the Oriental Theatre and acquired an interest having an estimated value of $100,000 to $250,000 and received $500,000 by way of fees, commissions and profits therefrom; that in consequence of defendants' failure to perform its duty plaintiffs are entitled to an accounting and to recover from the defendants the difference between the fair value of said shares and the price received for them, such difference being estimated at not less than $636,000 and $500,000 respectively.

In 1944, at the time of Spiegel's death, the officers, directors and stockholders of defendant corporation were as follows:

  Edwin Silverman, President, director and owner of
    375 shares of stock;
  Emil Stern, Vice-president, director and owner of
    250 shares of stock;
  Sidney M. Spiegel, Jr., Secretary and treasurer,
    director and owner of 375 shares of stock.

Morris Glasser, the certified public accountant of the defendant corporation was elected as a director upon the death of Spiegel and is also one of the executors of his estate.

The defendants, Essaness Theatres Corporation and Edwin Silverman, have filed motions to dismiss the complaints with prejudice, or in the alternative for a judgment in favor of the defendants, or to make the complaints more certain, and support said motions by numerous affidavits and exhibits. This motion by leave of court is now being presented as a motion for summary judgment on the ground there are no genuine issues of fact to be determined.

The grounds for the motions can be classified into four main divisions: (1) that the affidavits and exhibits show a full and complete disclosure to plaintiffs of the possible management of the Oriental Theatre; (2) that as a matter of law since the value of the theatre stock was passed upon by the Probate Court of Cook County on November 15, 1945, the plaintiffs are barred from maintaining this action by this prior adjudication; (3) that the Securities Exchange Act of 1934 does not give this court jurisdiction since (a) the present transaction did not involve a security traded on a securities exchange or an "over-the-counter" market, (b) there was no use of the United States mails or means or instrumentalities of interstate commerce in connection with the purchase of said stock, (c) the Act does not provide a civil right of action, and (d) Section 9(e) of the 1934 Act and Section 29(b) thereof, 15 U.S.C.A. §§ 78i(e), 78cc(b), bar said action by expiration of time; and (4) the action is barred by the Illinois Statute of Limitations, Smith-Hurd Ann.Stats., Chapter 83, Section 16. Other grounds are urged but these are the principal contentions. Plaintiffs have objected to said motion and move to strike certain portions thereof.

As to the first ground of the defendants' motion, the court is of the opinion that it presents genuine controversial issues of fact, which if the action is proper, go to the merits of the suits. It is not the function of a court on a motion for summary judgment to resolve factual issues, but only to determine whether a controversy as to the facts exists between the parties.

The defense of res judicata has been raised with respect to the proceedings in the Probate Court in connection with the Estate of Sidney M. Spiegel, Jr.

This doctrine embodies two main rules: (1) the judgment or decree of a court of competent jurisdiction on the merits concludes the parties and privies to the litigation and constitutes a bar to a new action or suit involving the same cause of action either before the same or any other tribunal, and (2) any right, fact, or matter in issue, and directly adjudicated on, or necessarily involved in, the determination of an action before a competent court in which a judgment or decree is rendered on the merits is conclusively settled by the judgment therein and cannot again be litigated between the parties and privies whether or not the claim or demand, purpose or subject matter of the two suits is the same.

The Probate Court proceedings and the present suit, while they allegedly stem from the same sales of stock, are based upon different causes of action. The Probate Court concerned itself with the contract by the estate to sell its shares of stock and not with the question of whether the defendants were guilty of a fraud. Causes of action which are distinct and independent although growing out of the same contract, transaction or state of facts may be sued upon separately and the recovery of a judgment will not bar subsequent actions. 34 C.J. p. 847; 50 C.J.S., Judgment, § 674.

In order to apply the principle of judicial estoppel two requisites must be present, (1) identity of parties, that is, the party sought to be bound should be a party to both actions, and must have appeared in both in the same character or capacity; and (2) identity of issues, that is, a fact or question which was in issue in a former suit and was there judicially passed on and determined is conclusively settled by the judgment therein and it is immaterial that the question alleged to have been settled by such former adjudication was determined in a different kind of proceeding or a different form of action or for different purposes.

As to identity of parties the defendants assert that neither Essaness nor its president were parties to the Probate Court proceedings. The action of the Probate Court arose in the Estate of Sidney M. Spiegel, Jr. in connection with an offer of October 20, 1945, made by Essaness Theatres Corporation through its president to the executors of the Estate who were the Northern Trust Company, Kathryn Spiegel and Morris Glasser. The Court approved the sale of the estate shares for a price at which they were subsequently sold. It is not denied that the record in the Probate Court shows appearances on behalf of the executors of the Estate, Essaness Theatres Corporation, minor defendants, and Mr. Stern. So far as Emil Stern is concerned it is apparent his appearance was as a stockholder of the corporation and not as a seller of his shares of stock. The decree entered in the Probate Court would not foreclose his rights as a seller of his own shares from bringing any action for rights accruing to him thereunder. It is not clear in what status Edwin Silverman is made a party defendant in the present suit, but from the allegations of the complaint it appears his joinder is on the basis of his status as president of corporate defendant, the same position in which he executed the offer of October 20, 1945 for the corporate defendant forming the basis of the contract of sale which the Probate Court considered, and it appears that the executors and the corporate defendant acted in the same capacity in the Probate Court as purchaser and seller as they do here.

The rule is often stated in general terms that a judgment is conclusive not only upon the questions actually contested and determined but upon all matters which might have been litigated and decided in that suit. However, there is a refinement in the rule of judicial estoppel which makes such a generalization inapplicable. As was stated in Cromwell v. County of Sac, 1876, 94 U.S. 351, 352, 24 L.Ed. 195:

    "* * * there is a difference between the effect
  of a judgment as a bar or estoppel against the
  prosecution of a second action upon the same
  claim or demand, and its effect as an estoppel in
  another action between the same parties upon a
  different claim or cause of action. In the former

  case, the judgment if rendered upon the merits,
  constitutes an absolute bar to a subsequent
  action. It is a finality as to the claim or
  demand in controversy, concluding parties and
  those in privity with them, not only as to every
  matter which was offered and received to sustain
  or defeat the claim or demand, but as to any
  other admissible matter which might have been
  offered for that purpose. * * *
    "But where the second action between the same
  parties is upon a different claim or demand, the
  judgment in the prior action operates as an
  estoppel only as to those matters in issue or
  points controverted, upon the determination of
  which the finding or verdict was rendered. In all
  cases, therefore, where it is sought to apply the
  estoppel of a judgment rendered upon one cause of
  action, the inquiry must always be as to the
  point or question actually litigated and
  determined in the original action, not what might
  have been thus litigated and determined. * * *"

Baldwin v. Hanecy, 1903, 204 Ill. 281, 288, 68 N.E. 560; In re Estate of Coleman, 1944, 321 Ill.App. 552, 561, 53 N.E.2d 329.

The alleged fraud existent here was not disclosed in the Probate Court and therefore could not have been adjudicated there.

From the foregoing statements of the rule, it appears that where different causes of action are involved, as here, the doctrine of res judicata is limited to issues actually adjudicated. The issue of fraud not having been adjudicated, plaintiff executors are not barred from asserting it here.

The court comes next to the contention that the allegations of the complaints do not establish that a violation of the Securities Exchange Act occurred. The litigants and the Securities & Exchange Commission, as amicus curiae, have dealt extensively and thoroughly with the question of the application and interpretation of the provisions of the Act. The statutory section involved is Section 10(b), 15 U.S.C.A. § 78j(b), which reads as follows:

    "It shall be unlawful for any person, directly
  or indirectly, by the use of any means or
  instrumentality of interstate commerce or of the
  mails, or of any facility of any national
  securities exchange — * * *
    "(b) To use or employ, in connection with the
  purchase or sale of any security registered on a
  national securities exchange or any security not
  so registered, any manipulative or deceptive
  device or contrivance in contravention of such
  rules and regulations as the Commission may
  prescribe as necessary or appropriate in the
  public interest or for the protection of

The pertinent rule promulgated by the Commission is Rule X-10B-5 which reads as follows:

    "It shall be unlawful for any person, directly
  or indirectly, by the use of any means or
  instrumentality of interstate commerce or of the
  mails, or of any facility of any national
  securities exchange,
    "(a) To employ any device, scheme or artifice
  to defraud;
    "(b) To make any untrue statement of a material
  fact or to omit to state a material fact
  necessary in order to make the statements made,
  in the light of the circumstances under which
  they were made, not misleading, or
    "(c) To engage in any act, practice, or course
  of business which operates or would operate as a
  fraud or deceit upon any person.
  "in connection with the purchase or sale of any

It is urged by the defendants that the application of Section 10(b) is limited to securities which are traded on a securities exchange or on an "over-the-counter" market. It is conceded by the parties that the present stock was not registered on a securities exchange. Defendants have exhaustively surveyed the legislative and committee discussions with regard to the term "over-the-counter" and rely upon the definition that "over-the-counter" market refers to a "market maintained off a regular exchange by ...

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