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August 28, 1981


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


The latest skirmish in this battle*fn1 between plaintiffs Phillip Issen ("Issen"), in No. 74 C 0346, Seymour Abrams ("Abrams"), in No. 74 C 2215, and a host of corporate and individual defendants related to GSC Enterprises, Inc. ("GSC") and its wholly-owned subsidiaries, The Bank of Lincolnwood ("the Bank"), Steinway Drug Company and Ford Hopkins Drug Company, involves plaintiffs' renewed motion for class certification of certain of their pre-merger*fn2 claims and defendants' motion to dismiss or, in the alternative, for summary judgment with respect to those claims as raised in Abrams' amended complaint.*fn3 In addition, Issen has moved to amend his amended complaint by adding Miller, Cooper and Company, certified public accountants, as an additional party defendant in No. 74 C 0346 so as to align that case with No. 74 C 2215, and Abrams has moved to amend his amended complaint by adding allegations of scienter and that he purchased GSC stock as a result of the nondisclosures alleged so as to properly make out a claim for securities fraud after Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), and Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), both decided after this case was filed in 1974.

For the reasons set forth more fully below, defendants' motion for summary judgment will be granted in part and denied in part, and a narrow class of purchasers of GSC stock will be certified with Abrams as class representative. Abrams' motion to amend his amended complaint will be allowed and Issen's motion to amend will be deferred pending Issen's reporting to the Court as to his willingness to join in the class represented by Abrams as suggested in Part IV of this opinion. We will turn to a comprehensive discussion of the motions currently pending before the Court following a brief review of the issues involved in the pre-merger aspect of these cases.


The pre-merger portion of these consolidated cases involves, in the first instance, plaintiffs' allegations that the defendants failed to disclose the details of various loans made to certain officers and/or directors of the Bank and GSC, or to entities affiliated with those persons, in GSC's annual reports, proxy statements and SEC filings from roughly the beginning of 1969 through early 1974 in violation of sections 10(b) and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), 78n(a). Both Issen and Abrams assert that they purchased shares of GSC stock during this period*fn4 in reliance upon documents from which the disclosure of the loan detail was omitted. They maintain that information such as the amount of each individual loan, the collateral securing the loan, the interest charged, and the solvency of the borrower would have been material to the decisionmaking process of reasonable investors like themselves interested in purchasing GSC stock. Many of the loans were repaid in full, but some were not and the Bank suffered a loss thereby. Although plaintiffs' amended complaints contain other allegations of nondisclosures of assertedly material information during this period,*fn5 the plaintiffs have not sought class certification with respect to these additional claims and the defendants have not addressed themselves to these claims in their motion to dismiss or for summary judgment on the stated assumption that plaintiffs have abandoned these claims. Plaintiffs, however, deny that they have abandoned any of their claims by moving for class certification of the claim involving the nondisclosure of the loan detail or limiting their response to defendants' motion to the issues raised therein.

Accordingly, while the Court's discussion in the remainder of this opinion will be limited to the alleged nondisclosure of sufficient loan detail for purposes of the pending motions, such limitation should not be taken to mean by implication that plaintiffs have abandoned their allegations of additional nondisclosures in violation of the securities laws. The Court will address those claims when they are properly before us.


Abrams' motion to amend his amended complaint by adding allegations that defendants acted with scienter and that there is a nexus between defendants' acts and his purchase of GSC stock must be considered at the outset since the amended complaint would admittedly be fatally defective without such allegations after the Supreme Court's rulings in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), and Blue Chip Stamps v. Manor Drug Stores, Inc., 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Under Rule 15(a) of the Federal Rules of Civil Procedure, once a defendant has answered, the plaintiff may amend the complaint "only by leave of the court or by written consent of the adverse party." Rule 15(a) directs that leave to amend be granted liberally. Foman v. Davis, 371 U.S. 178, 181, 83 S.Ct. 227, 229, 9 L.Ed.2d 222 (1962); Stern v. United States Gypsum, Inc., 547 F.2d 1329, 1334 (7th Cir.), cert. denied, 434 U.S. 975, 98 S.Ct. 533, 54 L.Ed.2d 467 (1977). Such leave, however, is inappropriate where there is "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance of the amendment, futility of amendment, etc." Foman, 371 U.S. at 192, 83 S.Ct. at 230; Mertens v. Hummell, 587 F.2d 862, 865 (7th Cir. 1978); Conroy Datsun Ltd. v. Nissan Motor Corporation in U.S.A., 506 F. Supp. 1051, 1053 (N.D.Ill. 1980). The determination as to whether leave to amend should be granted is committed to the discretion of the trial court. Zenith Radio Corporation v. Hazeltine Research, Inc., 401 U.S. 321, 330, 91 S.Ct. 795, 802, 28 L.Ed.2d 77 (1971). Mertens, id.

Undue prejudice has been found in cases where the amendment "brings entirely new and separate claims, adds new parties, or at least entails more than an alternative claim or a change in the allegations of the complaint" and where the amendment would require expensive and time-consuming new discovery. A. Cherney Disposal Co. v. Chicago & Suburban Refuse Disposal Corp., 68 F.R.D. 383, 385 (N.D.Ill. 1975). In such instances, a motion for leave to amend should be denied because the prejudice to the defendant outweighs plaintiff's right to have the case tried on its merits. Conroy Datsun Ltd. v. Nissan Motors Corporation in U.S.A., supra, 506 F. Supp. 1054; Hess v. Gray, 85 F.R.D. 15, 20 (N.D.Ill. 1979). Undue delay has been found to bar an amendment in extreme cases, such as when the proposed amendment changed the plaintiff's theory of the case over three years after the case began and after the Supreme Court affirmed the trial court's dismissal. Doe v. McMillan, 566 F.2d 713, 720 (D.C.Cir. 1977) (but see Judge Leventhal's dissent on this issue, 566 F.2d at 721). Ordinarily, however, mere delay in seeking to amend a complaint will not bar the amendment absent a showing of undue prejudice resulting from the delay.

In the case at bar, certain defendants strenuously oppose Abrams' motion to amend on the ground that they will be unduly prejudiced by an amendment that comes over seven years after the original complaint was filed. But the defendants have failed to establish that they would be unduly prejudiced by this amendment which, though it is chronologically late in the litigation, comes before the close of discovery, before trial, and before rulings on the pending motions to dismiss or for summary judgment and for class certification. The amendment does not contain an entirely new claim or theory nor should it entail a substantial amount of additional discovery, if indeed it generates any additional discovery at all. The primary reason for the amendment is to take account of developments in federal securities law since this case was originally docketed and to formally plead issues that the parties have implicitly acknowledged to be part of this case for some time. To the extent that the defendants believe that Abrams will be unable to muster factual support for his amended complaint, their concerns are more appropriately addressed in the context of a motion to dismiss or for summary judgment. Moreover, it should be noted that although Abrams' amended complaint has been technically deficient since the Supreme Court's decisions in Ernst & Ernst v. Hochfelder and Blue Chip Stamps v. Manor Drug Stores, Inc., the defendants have not moved to dismiss the complaint on this ground until now.

It is also clear that the plaintiffs are not entirely to blame for the delays that have plagued these cases from their inception. As noted earlier,*fn6 these cases have thus far been before four federal judges. Virtually all of the defendants have changed counsel at one point or another. The motion practice on both sides has generated a substantial amount of paper along with attendant delay in ruling on motions to quash, dismiss, certify a class, or for temporary restraining orders and preliminary injunctions. Hopefully, the case is now proceeding apace and allowance of Abrams' motion to amend will further facilitate resolution on the merits.


The parties have simultaneously briefed plaintiffs' motion for class certification of the pre-merger claims and defendants' motion to dismiss or, in the alternative, for summary judgment without any indication as to which of these motions they wish the Court to address first. Although the United States Court of Appeals for the Seventh Circuit has interpreted the requirement in Fed.R.Civ.P. 23(c)(1) that class certification be determined "[a]s soon as practicable after the commencement of an action" to imply that certification of a Rule 23(b)(3) class should generally precede any ruling on the merits, Jimenez v. Weinberger, 523 F.2d 689, 697 (7th Cir. 1975), cert. denied, 427 U.S. 912, 96 S.Ct. 3200, 49 L.Ed.2d 1204 (1976); Peritz v. Liberty Loan Corp., 523 F.2d 349, 353 (7th Cir. 1975), the "as soon as practicable" requirement begins to lose much of its meaning in cases such as these in which there have been a number of rulings on earlier motions to dismiss, to stay, for temporary and permanent injunctive relief, and a prior denial of class certification during the course of more than seven years of litigation at the district court level.

The principal concern of both the Seventh Circuit and the Supreme Court*fn7 in requiring early determination of the class certification question is the need to avoid so-called "one-way intervention" whereby absent potential class members might await the outcome of a decision on the merits before deciding whether or not to join the class and be bound by the class judgment. In the case at bar, however, the defendants have filed a number of motions to dismiss various aspects of these cases prior to class certification seemingly without any concern for the one-way intervention problem.*fn8 Moreover, our ruling on the pending motion to dismiss or, in the alternative, for summary judgment does not completely resolve the merits of the instant controversy. It merely directs the parties' attentions to those claims that are legally cognizable under the federal securities laws and the extent of those claims. In such circumstances, resolution of the motion simultaneously with a determination of the class certification question will enable the Court to define the proper scope of an action that has been pending for an inordinate amount of time and will not do injury to the concerns underlying the "as soon as practicable" requirement. See, e.g., Garcia v. Rush-Presbyterian — St. Lukes Medical Center, 80 F.R.D. 254, 260 (N.D.Ill. 1978) (ruling on defendant's motion for partial summary judgment appropriate prior to class certification in order to properly define scope of action).

In Mills v. Electric Auto-Lite Company, 396 U.S. 375, 381, 90 S.Ct. 616, 620, 24 L.Ed.2d 593 (1970), the Supreme Court stated, citing the appropriate legislative history, that section 14(a) of the Securities Exchange Act "was intended to promote `the free exercise of the voting rights of stockholders' by ensuring that proxies would be solicited with `explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought.'" Since Mills, lower courts have reiterated the principle that in order to state a claim for relief under section 14(a), "plaintiffs must allege an injury to their corporate suffrage rights or an injury stemming from a corporate transaction whose approval was obtained by a misleading proxy statement." Wachovia Bank & Trust Co. v. National Student Marketing Corp., 461 F. Supp. 999, 1007 (D.D.C. 1978), reversed on other grounds, 650 F.2d 342 (D.C.Cir. 1980); In re Penn Central Securities Litigation, 347 F. Supp. 1327, 1342 (E.D.Pa. 1972), affirmed, 494 F.2d 528 (3d Cir. 1974). See also Hoover v. Allen, 241 F. Supp. 213, 230 (S.D.N.Y. 1965). In order to establish a sufficient causal relationship between the asserted violation of section 14(a) and the injury for which the plaintiff seeks redress, he must show ...

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