Opinion ID: 378864
Heading Depth: 1
Heading Rank: 1

Heading: facts

Text: 4 Teleservice, whose business was processing and distributing television commercials in New York and California, began as a division of Modern Talking Picture Service, Inc. (Talking Picture), a corporation founded by Frank Arlinghaus in 1937. Ritenour and Lipsky joined Talking Picture in the late 1940's, and, when Teleservice was spun off as an independent New York corporation in 1952, were appointed its president and vice president respectively. Their services were considered essential to Teleservice's success. Pepper, who had handled most of Talking Picture's legal work, likewise became counsel to Teleservice as well as continuing to serve as attorney for Frank Arlinghaus and, after his death, for Mrs. Arlinghaus and the estate. 5 When Frank Arlinghaus died in August, 1964, appellant became the owner, in practical effect, of the majority of Teleservice's 58,800 outstanding shares. As of April 25, 1967, she held 4,000 shares (6.8%) individually, 20,360 shares (34.6%) as executrix of Frank Arlinghaus' estate, and 8,400 shares (14.3%) distributed among three custodian accounts for her children. The seven remaining shareholders together owned 26,040 shares (44.3%), of which 1,540 belonged to Ritenour and 700 to Lipsky. 6 From Teleservice's inception, its shares were restricted by a buy-back agreement which provided inter alia that the estate of a deceased shareholder could require the corporation to purchase its shares at a formula price for a period of three years after the shareholder's death. 1 Because Frank Arlinghaus' estate faced a large tax assessment, Mrs. Arlinghaus, Pepper and Clemens Arlinghaus, appellant's brother-in-law and a member of Teleservice's board of directors, met in late December, 1966 to discuss whether the funds needed to pay the tax assessment should be raised by exercising the estate's put option under the buy-back agreement. However, this course was rejected, in part because the formula price of $16.00 per share fell below the $20.00 price that the participants considered attainable, the agreement provided for full payment over a lengthy four-year term, and, according to Pepper's deposition, Teleservice might not have been able to afford to purchase the estate's shares in any event. 7 The estate's decision not to offer its shares for purchase by either the corporation or the remaining shareholders frustrated Ritenour and Lipsky's longstanding ambition to increase their Teleservice holdings. 2 By apparent coincidence, however, the Teleservice board of directors authorized a search for potential merger or acquisition partners sometime during 1966, in the expectation that Teleservice alone might not be able to meet its growing capital needs. Ritenour and Lipsky not only carried out this mandate but simultaneously investigated arrangements that might also increase their holdings in Teleservice. On October 14, 1966, Ritenour spoke to Seymour Mintz, a business broker, about the prospect of obtaining financing for the purchase of Teleservice on Ritenour's behalf. Although the Mintz contact eventually led to more promising ones with other brokers, it produced only one company, Filmways, with a serious interest in Teleservice. According to Ritenour, Filmways was willing to consider placing a price on Teleservice of between five and eight times average earnings over the previous five years, that is, between $875,000 and $1,400,000 or $14.88 to $23.81 per share. 3 In addition to the Filmways negotiations, Teleservice was approached on a yearly basis by Chet Ross, the president of Bonded Film Services, a Teleservice competitor, to discuss a possible merger or acquisition deal. The record lacks any indication of the value placed on Teleservice by Ross until August 18, 1967, when Ross' company itself had been acquired by another firm; at that point, Ritenour related that Ross had also mentioned a price range between five and eight times average earnings. When Ritenour was asked whether he had responded to Ross' probes with a figure that Teleservice might find satisfactory, he stated (i)f I did, it would have been around the 3,000,000 mark (or $51 per share) a proposal that, if made, would have been at some unidentified date between March 14 and August 18, 1967. 4 8 In April, 1967, Ritenour's investigations began to bear some fruit. Through circuitous contacts beginning with Mintz, Teleservice was called to the attention of another broker, Harris Shapiro, who in turn organized a small syndicate of investors headed by one Lewis Stat (the syndicate). After brief negotiations, the syndicate agreed to finance a tender offer in the names of Ritenour and Lipsky for all outstanding shares of Teleservice. The agreement, embodied in a letter from Stat dated April 23, 1967, provided that if Ritenour and Lipsky could persuade Teleservice's shareholders to sell, the syndicate would merge Teleservice into a new corporation; that Ritenour and Lipsky would each receive a 12.5% interest in this corporation; and that, in addition, they would be gifted with 25% of the difference between the purchase price paid to Teleservice shareholders and $1,200,000 (in other words, the lower the price paid to the shareholders, the larger the cash bonus to Ritenour and Lipsky). A separate understanding with the syndicate provided inter alia that if the deal succeeded, Ritenour and Lipsky would receive five-year employment contracts with the new corporation at their established salaries. 9 On, or slightly before, April 25, 1967, Ritenour and Lipsky in consultation with Pepper drafted the terms of an offer for the syndicate to purchase Teleservice's shares at $15 per share. By his own admission, Pepper had hoped that a successful deal would yield him a commission from the selling group, presumably the Teleservice shareholders. Shortly before the April 25 offer, he suggested that he might pressure his client, Mrs. Arlinghaus, into acceptance by threatening that Ritenour and Lipsky would resign otherwise. The district court credited Ritenour's and Lipsky's testimony that they had flatly declined this invitation. Nevertheless, Mrs. Arlinghaus claimed, and Judge Werker found, that Pepper made such threats on numerous occasions, and, indeed, that rumors of their impending resignation circulated back to Ritenour and Lipsky. Although the record indicates that both Mrs. Arlinghaus and her brother-in-law, Clemens, learned that the syndicate or something like it existed, there is no suggestion that they knew the terms of its agreement with Ritenour and Lipsky or of the substantial interest of Ritenour and Lipsky in consummating the deal. 10 With one exception, Teleservice's minority shareholders accepted the $15 offer. On May 10, 1967, Mrs. Arlinghaus met with Pepper, Clemens Arlinghaus, Ritenour and Lipsky to discuss the offer in a meeting, about which there was conflicting testimony at trial. Ritenour claimed that he had expressly denied rumors that he and Lipsky would resign if the syndicate deal failed; Mrs. Arlinghaus could recall no such denial; and Clemens asserted that, far from assuring loyalty, Ritenour and Lipsky had actually threatened resignation. The district court credited Ritenour's testimony, but thought that appellant might have mistaken the evident enthusiasm of Ritenour and Lipsky for consummating the deal as an implicit threat to resign if it fell through. In any event, the meeting ended inconclusively and was immediately followed by a second discussion among Mrs. Arlinghaus, Clemens, and Pepper, during which it was decided to make a counteroffer to sell to Ritenour and Lipsky at $20 per share. Appellant testified that but for the threats of resignation she would never have agreed to the $20 price. However, the district court discounted this claim in light of both Mrs. Arlinghaus' need to raise funds for the estate tax assessment and earlier discussion of the $20 figure as a desirable price to receive for the estate's shares from the corporation. 11 The counteroffer was made and accepted, the remaining shareholders assented, and a closing was set for June 9, 1967. Given the terms of the syndicate's separate agreement to give Ritenour and Lipsky a 25% share of the corporation, the $20 offer to Teleservice's shareholders represented an actual cost to the syndicate of $26.80 per share. As the closing approached, the syndicate scrambled to raise the necessary.$1,182,000 ($1,176,000 for Teleservice's outstanding shares and $6,000 in bonuses for Ritenour and Lipsky). A June 6 telegram from Stat to Ritenour gave assurances that the funds were available, in part because Lehigh Valley Industries, a possible source of financing, would contribute its own stock on the basis of a future earnings formula that estimated Teleservice's total value in excess of two million dollar(s). There is little to substantiate Stat's account of the Lehigh Valley formula, since the syndicate ultimately failed to raise necessary funds by the day of the closing. 12 The failure of the syndicate deal initiated a flurry of activity. On June 11 or 12, two days after the aborted closing, Ritenour met with John Stevenson, a friend and wealthy investor, to explore the possibility of financing the purchase of Teleservice shares at a $20 price and on terms similar to those offered by the syndicate. On June 14, the Teleservice board authorized Ritenour and Lipsky to retain a financial consultant to represent Teleservice in a sale of assets. With this mandate, Ritenour contacted Smith, Barney & Co., which, as Ritenour recalled, indicated a price yardstick for Teleservice assets of between five and twelve times earnings or from $14.88 to $35.70 per share. 5 In addition, beginning as early as June 9 and continuing through the following weeks, Ritenour and Lipsky began to explore the possibility of a direct purchase of Teleservice's stock a possibility that was the subject of several discussions with, inter alios, Pepper who expressed interest in becoming a participant in any deal that was afoot. These discussions culminated in a successful offer to Teleservice shareholders. 13 In the case of Mrs. Arlinghaus, the terms of the Ritenour-Lipsky-Pepper offer are contained in three letters drafted by Pepper. Two letters authorized the respective transfers of 4,000 shares of Teleservice, appellant's entire personal holdings, and 9,104 shares, or approximately 45% of her holdings as executrix of Frank Arlinghaus' estate, to Lipsky, Ritenour's wife, and Miriam Pepper at a total price of $10 per share $3 payable immediately and $7 payable within a year after transfer. 6 The third letter detailed the terms of the transaction including separate repurchase option agreements between appellant and Ritenour. These agreements provided that if Mrs. Arlinghaus failed to receive at least $20 per share for the 2,800 shares held in each of the custodian accounts for her three children within a year, Ritenour would return the 4,000 shares sold by appellant personally at the $10 sale price; and that if appellant failed to receive at least $31.64 per share for the estate's remaining holdings, the stock sold by the estate would be returned on the same terms. In short, Mrs. Arlinghaus was to sell 40% of the total Arlinghaus holdings at $10 per share on the condition that she would receive an average price of $27 per share for the stock remaining in the custodian and estate accounts. 7 She was thus assured of an average price for her entire holdings of at least $20 per share the same price which she had proposed in the aborted syndicate transaction. Teleservice's minority shareholders (other than Ritenour and Lipsky) each received similar offers for 40% of their holdings. A separate understanding allotted 37.5% of the outstanding shares purchased to Ritenour, 37.5% to Lipsky, and 25% to Miriam Pepper. 14 Appellant's acceptance of the offer was manifested by her signed approval of the June 30 letters of agreement drafted by Pepper and by her written consent, dated July 26, 1967, to the release of these letters. 8 However, the basis for her decision is clouded by her testimony that she had in mind the prospect of resignation by Ritenour and Lipsky if she refused; by the district court's finding that she acted in total reliance on Pepper; and by that court's finding that Ritenour and Lipsky failed to provide any assurance of loyalty after May 10. 9 15 Following the in-house sale of 40% of Teleservice, the search for a sale or merger partner for the entire company continued unabated. On September 13, 1967, Screen Gems, a company that had previously negotiated with Ritenour, offered $1,500,000 in stock for Teleservice, with an additional maximum of $1,000,000 in stock payable over a five-year period if certain earnings requirements were met. Similarly, negotiations with another potential purchaser, Fuqua Industries, began as early as the last week of August, 1967, and culminated on November 17, when Fuqua offered roughly $3,000,000 of its own stock, equivalent in value to $51 for each share of Teleservice. Although this offer was accepted, Fuqua withdrew it shortly before the scheduled March 5, 1968 closing date upon learning that Teleservice's earnings for the preceding year had failed to match Ritenour's forecast. 10 Ironically, however, Harris Shapiro, the organizer of the unsuccessful syndicate deal, stepped into the breach by arranging negotiations with yet another potential purchaser, the Sonderling Broadcasting Company. 11 On March 25, 1968, Sonderling agreed to purchase Teleservice in exchange for 130,000 of its shares, worth $29.75 each on the date of closing. As Shapiro received 10,000 Sonderling shares for his brokerage fee, the Teleservice shareholders netted 120,000 shares of Sonderling an equivalent of $60.71 per share of Teleservice. Mrs. Arlinghaus obtained 22,971 shares of Sonderling for the 11,256 shares of Teleservice held by Frank Arlinghaus' estate and presumably obtained an additional 17,143 shares of Sonderling for the remaining Teleservice stock in her children's custodian accounts. Thus the average price that appellant obtained for the sale of her entire holdings including the earlier sale to Lipsky, Ritenour and Pepper, was $41.03 per share. The Decision Below and the Appeal 16 The district court dismissed all claims against Ritenour and Lipsky after concluding that they had never threatened Mrs. Arlinghaus with resignation; that they had made routine reports on all negotiations bearing on Teleservice's value to the directors and to Pepper as Mrs. Arlinghaus' attorney, and were under no further obligation to report to Mrs. Arlinghaus herself; and that they had not conspired with Pepper, either expressly or tacitly, to defraud Mrs. Arlinghaus and were therefore not liable for Pepper's actions. With respect to Pepper, by contrast, the court found liability for breach of fiduciary duty on two grounds: that he had intentionally misrepresented the prospects of Ritenour and Lipsky's resignation in order to encourage a sale and thereby acquire either a commission or an interest in Teleservice and that he had concealed from Mrs. Arlinghaus 17 the fact that negotiations for the sale of (Teleservice) indicated a probable corporate value of two to three million dollars. 18 Any such knowledge on Pepper's part could only have come from Ritenour and Lipsky. 19 As previously noted, Mrs. Arlinghaus settled her claims against Pepper while this appeal was pending. She now attacks the district court's dismissal of her claims against Ritenour and Lipsky, urging, first, that the district court erred in concluding that adequate disclosure to Pepper also constituted disclosure to Mrs. Arlinghaus; second, that Ritenour and Lipsky, as officers and directors of Teleservice, owed a duty of full disclosure of Teleservice's value to appellant under both the doctrine of Strong v. Repide, 213 U.S. 419, 29 S.Ct. 521, 53 L.Ed. 853 (1909), as incorporated in New York law and § 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder; and, third, that Ritenour and Lipsky are jointly liable for Pepper's breach of his fiduciary duty to Mrs. Arlinghaus under New York law so long as they both knew of and benefited from that breach.