Case Title: Schein v. Chasen

Citation: 313 So. 2d 739

Docket Number: 

State: florida

Court: Florida Supreme Court

Date: 1975-03-13T00:00:00Z

Document:
313 So. 2d 739 (1975)
Jacob SCHEIN and Marvin H. Schein, Plaintiffs-Appellants,
v.
Melvin CHASEN et al., Defendants-Appellees.
Antone F. GREGORIO, Plaintiff-Appellant,
v.
LUM'S, INC., et al., Defendants-Appellees.
No. 45803.

Supreme Court of Florida.
March 13, 1975.
Sidney B. Silverman of Silverman & Harnes, New York City, for plaintiffs-appellants.
Richard Y. Holcomb and James V. Hayes of Donovan, Leisure, Newton & Irvin, Stephen P. Duggan, Jr., James J. Hagan, Lindsay A. Lovejoy, Jr., of Simpson, Thacher & Bartlett, and David Hartfield, Jr., and Laura Banfield, of White & Case, New York City, for defendants-appellees.
ROBERTS, Justice.
This cause is before us for consideration of questions certified to us by the United States Court of Appeals for the Second Circuit pursuant to Rule 4.61, Florida Appellate Rules. The following questions have been certified:
As appears from the certificate, the pleadings, the decision of the United States District Court, S.D.New York, reported as Gildenhorn v. Lum's Inc., et al.; Gregorio v. Lum's, Inc., et al. and Schein v. Chasen, 335 F. Supp. 329 (U.S.D.C., 1971), the opinion of the United States Court of Appeals, Second Circuit, reported as Schein v. Chasen; Gregorio v. Lum's, Inc., et al., 478 F.2d 817 (U.S.C.A., 2 Cir., 1973), and the United States Supreme Court decision reported as Lehman Bros. v. Schein; Simon v. Schein; Investors Diversified Services, Inc., et al. v. Schein, 416 U.S. 386, 94 S. Ct. 1741, 40 L. Ed. 2d 215 (1974),[1] the nature of the parties, status of the cases, and essential factual background are hereinafter detailed.
The plaintiffs, appellants, Schein, Schein and Gregorio, are shareholders of Lum's, Inc., a Florida corporation (which has subsequent to the filing of their complaints been renamed Ceasar's World, Inc.) and sue derivatively on behalf of Lum's, Inc. Invoking the diversity jurisdiction of the court, they sued derivatively in the Southern District of New York alleging that defendants were jointly and severally liable to Lum's for actionable wrongs committed against Lum's. Lum's, Inc. is a nominal defendant in each of the cases. Chasen was, at the time of the events in issue, the chief operating officer of Lum's, Inc. Lehman Brothers (defendant-appellee) was a stock brokerage firm, and Benjamin Simon (defendant-appellee) was a registered representative employed by it in its Chicago office. Investors Diversified Services, Inc. (defendant-appellee) was the investment advisor for Investors Variable Payment Fund, Inc. and IDS New Dimensions Fund, Inc., two mutual funds based in Minneapolis. Eugene Sit was portfolio manager for IDS New Dimensions Fund, Inc., and James Jundt was portfolio manager for Investors Variable Payment Fund, Inc.  both were employees of Investors Diversified Services, Inc. The defendants Chasen, Sit and Jundt were dismissed by the Federal District Court, Southern District of New York, for lack of personal jurisdiction. These dismissals were not appealed and these defendants are no longer involved in the suit.
The District Court dismissed the complaints in these cases, holding that they failed to state a claim under Florida law. The opinion of the District Court is reported sub nom. Gildenhorn v. Lum's, Inc. at 335 F. Supp. 329 (S.D.N.Y. 1971). On appeal by the plaintiffs, the Second Circuit Court of Appeals, in a two to one decision, reversed in an opinion reported at 478 F.2d 817 (2d Cir.1973). The judgment of the Second Circuit Court of Appeals was vacated by the Supreme Court of the United States on April 29, 1974, in an opinion reported at 94 S. Ct. 1741 (1974). The cases were remembered so that the Second Circuit Court of Appeals might reconsider whether the controlling issue of Florida law should be certified to the Supreme Court of Florida.
The only question before the United States Court of Appeals is the sufficiency of the complaints to state a cause of action under Florida law.
The following explication of the factual situation alleged in the pleadings as the basis for the controversy sub judice is found in the decision of the Circuit Court of Appeals, 478 F.2d 817:
"In November of 1969 Chasen, who was president and chief operating officer at Lum's, addressed a seminar of about sixty members of the securities industry with reference to Lum's earning prospects for *741 its fiscal year ending July 31, 1970. He informed them that Lum's earnings would be approximately $1.00 to $1.10 per share. On January 5, 1970 he learned that this estimate was too optimistic and that, in fact, Lum's earnings would be only approximately $.76 per share. Three days later, prior to announcing the information to the public, Chasen telephoned Simon in Chicago and told Simon that Lum's would not have as profitable a year as had been expected. He specified to Simon that earnings would be approximately $.76 per share rather than the $1.00 per share which he had earlier announced. Simon knew the information was confidential corporate property which Chasen had not given out publicly. Simon immediately telephoned this information to Sit, an employee of defendant Investors Diversified Services, Inc. (IDS), and Sit immediately telephoned it to Jundt, another employee of IDS. Sit and Jundt managed the stock portfolios of defendant mutual funds Investors Variable Payment Fund, Inc. (Investors) and IDS New Dimensions Fund, Inc. (Dimensions). Upon receiving the information Sit and Jundt directed the Funds to sell their entire stock holdings in Lum's and, on the morning of January 9, 1970, prior to any public announcement, Investors sold 43,000 shares of Lum's and Dimensions sold 40,000 shares. The sales were executed on the New York Stock Exchange at about 10:30 A.M. at a price of approximately $17.50 per share. At 1:30 P.M. on the same day, the New York Stock Exchange halted further trading in Lum's stock pending a company announcement. At 2:45 P.M. Lum's issued a release which appeared on the Dow Jones News Wire Service and announced that the corporation's projected earnings would be lower than had been anticipated. When trading in Lum's was resumed on Monday, January 12, 1970, volume was heavy and the stock closed at a price of $14.00 per share  $3.50 per share lower than the Funds had realized from the sales of their shares on the previous Friday.
"The present defendants in this case are Lehman Brothers, Simon, and the two Mutual Funds. Chasen, Sit, and Jundt have been dismissed as defendants in that they have not been validly served under the New York State Long Arm Statute. Plaintiffs-appellants' theory of recovery is that the participants in this chain of wrongdoing are jointly and severally liable to the corporation under Florida law for misusing corporate information to their own advantage in violation of the duty they owed to Lum's, and that they must account to Lum's for the profits realized by the Mutual Funds. They do not allege in these complaints that defendants have violated any of the federal securities laws, and they concede that the substantive law of Florida governs the rights and liabilities of the parties. They urge, however, that inasmuch as there are no Florida cases directly in point, the Florida court, if it were deciding the case, would look to other jurisdictions and would take a particular and special interest in the decision of Diamond v. Oreamuno, 29 A.D.2d 285, 287 N.Y.S.2d 300 (1st Dep't. 1968), aff'd. 24 N.Y.2d 494, 301 N.Y.S.2d 78, 248 N.E.2d 910 (1969), a case which plaintiffs contend supports the position they urge on this appeal."
Defendants moved to dismiss the consolidated actions upon the ground that the complaints failed to state a claim upon which relief could be granted. Citing Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941) as authority, the United States District Court looked to the choice of law rules of the State of New York, and found that New York follows the general choice of law principle that the law of the state of incorporation governs the existence and extent of corporate fiduciary obligations. Hausman v. Buckley, 299 F.2d 696, 703 (2d Cir., 1962); Diamond v. Oreamuno, 24 N.Y.2d 494, 301 N.Y.S.2d 78, 248 N.E.2d 910 (1969). The United States District Court proceeded to examine Florida law and concluded that although the Florida Supreme Court has not considered the question *742 presented in the instant cause, several Florida District Courts of Appeal have indicated that a complaint in a stockholders' derivative action which fails to allege both wrongful acts and damage to the corporation must be dismissed. Palma v. Zerbey, 189 So. 2d 510, 511 (Fla.App.3, 1966), cert. denied 200 So. 2d 814 (Fla.); James Talcott, Inc. v. McDowell, 148 So. 2d 36 (Fla. App.3, 1962); Maronek v. Atlantis Hotel, Inc., 148 So. 2d 721 (Fla.App.3, 1963); Citizens National Bank of St. Petersburg v. Peters, 175 So. 2d 54 (Fla.App.2, 1965). Specifically, the United States District Court asserted:
The United States District Court considered the possibility that Florida courts might follow the rationale of the New York decision in Diamond v. Oreamuno, supra, and therefore considered whether defendants would be liable under the rationale of Diamond and concluded, as follows:
*743 With regard to Chasen, the District Court opined that as a corporate officer, he may come within the holding of Diamond, but that this question need not be reached because service of process on him was improper. The Circuit Court of Appeals by divided vote reversed the District Court and found that although Florida law was controlling, it could find none that was decisive, and, therefore, it turned to the law of New York, in particular Diamond, supra. The Circuit Court of Appeal stated its objective to be to interpret Diamond as the Florida Court would probably interpret it and apply it to the facts sub judice. The Court of Appeals concluded that defendants had engaged with Chasen to misuse corporate property although the Circuit Court recognized that there was no allegation in the complaints that a prior agreement existed between Chasen and the defendants, and that Diamond, supra, encompassed such a situation, and determined that such a construction of Diamond would have the "prophylactic effect of providing a disincentive to insider trading." The Circuit Court opined that the cleansing effect of the Diamond rationale ought to reach third parties who, through breach of fiduciary relationship, become traders advantageously possessed of confidential insider knowledge, and declared:
Judge Kaufman dissented to this decision and explained:
We quote with approval the dissent of Judge Kaufman and we hold it to be responsive and to be dispositive of the controlling questions posited by the United States Circuit Court of Appeals, which we answer in the negative. Not only will we not give the unprecedented expansive reading to Diamond sought by appellants but furthermore, we do not choose to adopt the innovative ruling of the New York Court of Appeals in Diamond, supra.[2] We adhere to previous precedent established by the courts in this state that actual damage to the corporation must be alleged in the complaint to substantiate a stockholders' derivative action. Palma v. Zerbey, supra, and Citizens National Bank of St. Petersburg v. Peters. In James Talcott, Inc. v. McDowell, supra, the court opined:
Cf. Maronek v. Atlantis Hotel, Inc., supra; Orlando Orange Groves Co. et al. v. Hale, 119 Fla. 159, 161 So. 284 (1935); Seestedt v. Southern Laundry, Inc. et al., 149 Fla. 402, 5 So. 2d 859 (1942); Nelson v. Miller, 212 So. 2d 66 (Fla.App.3, 1968); Conlee Construction Co. v. Cay Construction Co., 221 So. 2d 792 (Fla.App.4, 1969). See also, Stone et al. v. Holly Hill Fruit Products, Inc. et al., 56 F.2d 553 (C.C.A.5, 1932); Duchaine et al. v. Grosco Realty, Inc., 121 So. 2d 679 (Fla.App.2, 1960).
We note with interest that the Securities and Exchange Commission filed a civil complaint for injunction alleging violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5 against Lum's, Inc., Chasen, Lehman Bros., Simon, Investors Diversified, Sit and Jundt. The United States District Court, Southern District of New York in Securities and Exchange Commission v. Lum's, Inc., et al., 365 F. Supp. 1046 (U.S.D.C., SDNY, 1973), determined that Chasen, although apparently through negligence, breached his duty by transmitting information to Simon and should be liable for the foreseeable consequences of that act, and that the chain of acts outlined by the court in its opinion were sufficient to establish Chasen's liability as a non-trading tipper under Section *747 10(b) and Rule 10b-5. The District Court concluded that Chasen's act should be imputed to Lum's and held that Lum's was also liable for violation of Section 10(b) and Rule 10b-5. However, the court found that Lehman Bros. was not liable as alleged. Relative to the liability of Lum's for violation of Section 10(b) and Rule 10b-5 and the necessity for an injunction to be directed against Lum's, the District Court explained:
Accordingly, we find that the rationale of Judge Kaufman in his dissent and the opinion of the United States District Court comport with Florida law and we would approve Judge Kaufman's reasoning as dispositive of the issues presented sub judice which we answer in the negative. Cf. Beach v. Williamson, 78 Fla. 611, 83 So. 860 (1920); Logan et al. v. Arnold, 82 Fla. 237, 89 So. 551 (1921); Quinn v. Phipps, 93 Fla. 805, 113 So. 419 (1927); Chipola Valley Realty Co. v. Griffin et al., 94 Fla. 1151, 115 So. 541 (1927); Connelly v. Special Road & Bridge Dist. No. 5, 99 Fla. 456, 126 So. 794 (1930); McGregor v. Provident Trust Co. of Philadelphia, 119 Fla. 718, 162 So. 323 (1935); News Journal Corp. et al. v. Gore, 147 Fla. 217, 2 So. 2d 741 (1941); Pure Foods, Inc. v. Sir Sirloin, 84 So. 2d 51 (Fla. 1955); Pan American Trading & Trapping, Inc. v. Crown Paint, Inc., 99 So. 2d 705 (1958); Flight Equipment and Engineering Corporation v. Shelton, 103 So. 2d 615 (Fla. 1958); Doeg v. Thornton, 174 So. 2d 570 (Fla.App.3, 1965); Etheredge v. Barrow, 102 So. 2d 660 (Fla.App.2, 1958); Independent Optical Co. of Winter Haven et al. v. Elmore, 289 So. 2d 24 (Fla.App.2, 1974); Renpak, Inc. v. Oppenheimer, 104 So. 2d 642 (Fla.App.2, 1958). We would not extend the innovative ruling of the New York Court of Appeals in Diamond, supra.
We conclude that under the facts alleged in the complaint, Florida law does not permit the maintenance of shareholders' derivative suit on behalf of Lum's.
ADKINS, C.J., and McCAIN and OVERTON, JJ., concur.
ENGLAND, J., concurs specially with opinion.
ENGLAND, Justice (concurring specially).
I would answer both certified questions in the negative on the narrow grounds (i) that Florida law requires an allegation of corporate damage as a predicate to the maintenance of a shareholder's derivative suit,[1] and (ii) that an action for civil damages *748 must allege more than merely speculative damages.[2] In this case plaintiffs' allegation of damage is to the effect that Lum's, Inc. sustained immeasurable damages as a result of open market transactions in its stock by defendant-tippee investor, acting on inside information furnished by defendant-tipped stockbroker. It is speculative at best to find corporate financial loss in the market price depression occasioned by these transactions.[3]
[1]  Rule 4.61(e), Florida Appellate Rules, provides that "The Supreme Court may, in its discretion, require the original or copies of all or any portion of the record before the federal court to be filed with said certificate where, in its opinion, such record may be necessary in the determination of said cause."
[2]  See Sections 517.01 et seq., Florida Statutes, particularly Section 517.301, F.S., and Section 517.23, F.S., Blau v. Lehman, 368 U.S. 403, 411, 82 S. Ct. 451, 7 L. Ed. 2d 403. In Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 92 S. Ct. 596, 30 L. Ed. 2d 575 (1972) the Supreme Court of the United States expressly stated:

"As we said in Blau v. Lehman, 368 U.S. 403, 411, 82 S. Ct. 451, 456, 7 L. Ed. 2d 403, one `may agree that .. . the Commission present[s] persuasive policy arguments that the Act should be broadened ... to prevent `the unfair use of information' more effectively than can be accomplished by leaving the Act so as to require forfeiture of profits only by those specifically designated by Congress to suffer those losses.' But we are not free to adopt a construction that not only strains, but flatly contradicts, the words of the statute."
See Haberman v. Murchison, 468 F.2d 1305 (U.S.C.A. 2d Cir., 1972). Cf. Fordham Law Review, 480 Notes, 1970 Wisconsin Law Review 576 Notes.
[1]  Decisions of the Florida district courts of appeal are conclusive on questions of Florida law when not in conflict with other decisions of this Court. Fla. Const., art. V, §§ 4(b)(1) and 3(b)(3); Ansin v. Thurston, 101 So. 2d 808 (Fla. 1958). There being no decisions of this Court on the elements of a shareholder's derivative suit, their identification in decisions of the district courts of appeal are determinative. Conlee Constr. Co. v. Cay Constr. Co., 221 So. 2d 792 (4th Dist.Ct.App.Fla. 1969) (dictum); Nelson v. Miller, 212 So. 2d 66 (3d Dist.Ct.App.Fla. 1968); Palma v. Zerbey, 189 So. 2d 510 (3d Dist.Ct.App.Fla. 1966), cert. denied, 200 So. 2d 814 (Fla. 1967); Citizens Nat'l Bank v. Peters, 175 So. 2d 54 (2d Dist.Ct.App.Fla. 1965); Maronek v. Atlantis Hotel, Inc., 148 So. 2d 721 (3d Dist.Ct.App. Fla. 1963); James Talcott, Inc. v. McDowell, 148 So. 2d 36 (3d Dist.Ct.App.Fla. 1962).
[2]  See Gilliland v. Mercantile Inv. & Holding Co., 147 Fla. 613, 3 So. 2d 148 (1941).
[3]  The speculative nature of possible corporate damage is compounded by the fact that trading in the company's stock was suspended on the very afternoon of defendant's sales for a company announcement, which proved to be the "tipped" news of reduced corporate earnings.