Fuller v. Dilbert

Majority - Weinfeld, District Judge

No, a sophisticated purchaser and their guarantors do not have valid defenses to void their contractual obligations under these circumstances. The court found no actionable fraud or conspiracy, and the alleged securities law violations either did not apply or were not grounds for rescission by the plaintiffs, and technical non-compliance issues were not material or excusable. First, regarding the claims of fraud and concealment, the court found no actionable misrepresentations or fraudulent concealments by the sellers. The plaintiffs (Fuller partners) were sophisticated investment bankers and directors of Dilbert's, and were aware of the company's deteriorating financial condition and Cohen's mismanagement. Their primary objective in purchasing the stock was to gain control of the company and remove Cohen, not a standard investment in a healthy company. Many alleged concealed facts were either known to the plaintiffs, discussed during negotiations, or discoverable, and the plaintiffs' attorney, who also represented them in the transaction, was privy to discussions about the company's poor financial state. The plaintiffs' subsequent actions, such as continuing with the transaction after learning of larger losses, accepting stock, and using proxies to oust Cohen, were inconsistent with claims of having been misled. Second, concerning the alleged violation of Section 5 of the Securities Act of 1933, the transaction was structured as a private offering for investment, which is exempt from registration under Section 4(1). The purchaser and designees (Fullers and North River Securities) were sophisticated, few in number, and had access to information. While Abraham Dilbert's undisclosed sale of 3,500 shares to Sol Davis, who then publicly resold them, constituted a breach of Abraham's investment covenant and a Section 5 violation, public policy, as argued by the SEC, does not permit Abraham Dilbert (the wrongdoer) or his guarantors to use this self-created violation to void the contract. Doing so would provide a 'built-in defense' for purchasers and undermine private offerings, while the Act's purpose is to protect innocent investors. Third, regarding the alleged violation of Section 16(c)(1) of the Securities Exchange Act of 1934 (prohibiting sales by officers/directors who don't 'own' the security), the court held that Arthur and Samuel Dilbert 'owned' the bequeathed shares still in their father's estate and the convertible preferred shares for the purposes of the statute. They possessed a substantial property interest, and no particular form of legal or equitable title is required. The purpose of the statute, to prevent insider misuse of information, was not implicated. The failure to file Section 16(a) reports was not a basis to void the contract. Fourth, as for Section 16(c)(2) (requiring delivery within 20 days), the court found 'undue inconvenience' due to delays in estate administration and retrieving pledged securities. Moreover, the delivery timing was arranged to suit the purchaser's and guarantors' purposes, precluding their complaint. Finally, the court rejected claims of sellers' non-performance related to delayed delivery of the initial shares (the amendment consenting to acceleration was delivered late), untimely distribution of estate shares (they were in escrow before due date), stock transfer taxes (failure to affix stamps did not invalidate title or allow the defaulting party to invoke the tax law to void the contract), invalid proxies (accepted and used by plaintiffs, thus waived), and inadequate tender (the tender only covered one installment when the acceleration clause made the full balance due). The court concluded that the sellers were ready, willing, and able to perform, and the guarantors and purchaser breached their obligations without cause.