Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

BAILEY v. MEISTER BRAU

December 21, 1970

THOMAS B. BAILEY, PLAINTIFF,
v.
MEISTER BRAU, INC., JAMES H. BLACK COMPANY, WILHELMINA M. HARRE, CONTINENTAL ILLINOIS NATIONAL BANK & TRUST CO., ROBERT G. MULLEN, CHARLES F. SCHAEFFER, ROBERT S. FOSTER, RONALD T. CAPPADOCIA, JAMES H. BLACK, JR., MARGARET H. BLACK, ARTHUR F. HARRE, AND BERNARD M. BERRY, DEFENDANTS.



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

MEMORANDUM OPINION AND ORDER

Plaintiff Thomas Bailey, a 3,000 share stockholder in the James H. Black Company, and, until May, 1969, an officer and director thereof, alleges a contract with James H. Black, now deceased, giving him a "sixty day right of first refusal" on the majority of the Black Company stock, which contract he alleges is enforceable against James Black's estate.

After James Black's death on October 31, 1968, the Continental Bank, as executor and owner of his 57,000 shares of stock, participated in a transaction which resulted in the transfer to Meister Brau, Inc. of the assets of the Black Company and all of the stock of the Black Company except plaintiff's 3,000 shares.

The Black Company received in ultimate exchange for the transfer of its assets, 70,000 shares of the stock of Meister Brau, Inc., and plaintiff Bailey remained a minority shareholder in Black Company, now no longer a going concern, but rather a company whose sole asset is Meister Brau stock of an alleged value of $440,000 or less, as contrasted with the alleged value of the Black Company as a going concern, said by plaintiff to be $1,870,000.

The complaint alleges that the Continental Bank, Meister Brau, the directors of the Black Company and others conspired to interfere with his contractual rights and to defraud him. He further alleges a conspiracy to defraud the Black Company in violation of the federal security laws and, as a shareholder, asserts a derivative action on behalf of the Black Company.

It is clear that plaintiff's claims based upon the 1966 Black-Bailey contract do not constitute a federally cognizable cause of action sounding in contract. Unless the facts alleged support the allegations of violations of Section 17(a) of the Securities Act of 1933 and Rule 10b-5 of the Securities Exchange Commission, there would appear to be no federal jurisdiction.

It is plaintiff's position that he has asserted a cause of action in either or both of Counts I and II cognizable under the federal security laws and supportive of federal jurisdiction, thus giving this court jurisdiction over the remaining count or counts under the doctrine of pendant jurisdiction. Defendants contend that neither Count I nor II states a federally cognizable cause of action, but rather are contrived to bring plaintiff's suit, on his alleged contract right to purchase Black stock, into the federal court.

Count I is a derivative action alleging that the Black Company was fraudulently induced to transfer assets worth $1,870,000 for 70,000 shares of Meister Brau stock worth $440,000. It is alleged that this was accomplished by means of a conspiracy among the defendants to defraud and deceive the Black Corporation and that the actions of the conspirators and the result they accomplished were in violation of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a); Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b); and Rule 10b-5 of the Securities and Exchange Commission.

Defendants argue that the cause of action set out in the complaint cannot constitute a violation of the 1933 or 1934 Securities Acts, or the rules thereunder, since the sections alleged to have been transgressed by defendants' conduct in each instance are addressed to fraudulent or deceptive practices. The Black Company, it is argued, could not have been deceived since the entire transaction, from beginning to end, was known to and acquiesced in by the Black Company Board of Directors.

Plaintiff counters that every member of the Board, to a greater or lesser degree, was involved in a conflict of interest situation, with the result that his or her knowledge cannot be imputed to the corporation. If this be the case, it is argued, the corporation could have been and was deceived.

In considering this argument, the threshold question is whether the conflicts of interest alleged are apparent on the face of the complaint sought to be dismissed, so that it can be said that allegations presumed to support federal jurisdiction are adequate to do so. The detailed allegations of the complaint are deemed adequate to support the theory of conflict of interest, and therefore, for purposes of the motion to dismiss, the allegation may be taken as fact that the directors participated in the transactions described in the complaint with divided loyalties.

In arguing the unavailability of 15 U.S.C. § 77q, 15 U.S.C. § 78j and Rule 10b-5 to the plaintiff in Count I, defendants make two major points. The first of these is that deception is the essential ingredient of a valid cause of action under these provisions, and that no deception is here alleged. The second argument is that these statutes and rule were designed for the protection of the investor in securities, and applicable only to the trading of securities in the market, as distinguished from the transfer of securities as a vehicle for the sale of a going business.

As to Count II, defendants urge that the securities laws and rule relied upon are available only to purchasers or sellers of ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.