Court Opinion

ID: 9464281
Source: CourtListenerOpinion
Date Created: 2023-08-04 23:29:40.457556+00
Date Added: 2024-06-11T17:38:33.142241
License: Public Domain

CONTI, District Judge,
dissenting:
I respectfully dissent to that portion of the majority’s opinion which reverses the district court’s order dismissing plaintiff’s seventh claim for relief based on section 10(b) of the 1934 Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10(b)-5 thereunder (17 CFR § 240.10b-5). In all other respects, I concur with the majority.
*614As to the seventh claim for relief, the majority held that allegations of an undisclosed purpose of a secured party (Macmillan) to gain control of a debtor’s company (Coinart) by having the debtor pledge its controlling shares of stock to the secured party as security for a loan while the debtor was in financial difficulty, rather than the secured party merely financing the debtor with a view toward helping the debtor gain financial stability, states a claim for relief under Rule 10(b)-5. Such allegations cannot and do not state a claim. If they did, every business transaction between sophisticated business persons involving stock as security, could give rise to a securities fraud claim when default by the debtor required foreclosure of the security. Under the majority’s holding, a debtor need only make allegations of an undisclosed purpose and a secured party would be forced to trial since summary judgment would be an unlikely method for resolution of such allegations. As presented below, the record establishes that Macmillan’s purpose was fully known by Coinart and, even if it was not, such an undisclosed purpose is not a material omission giving rise to a Rule 10(b)-5 violation.
To state a claim under Rule 10(b)-5, a plaintiff must plead and prove as an essential element that defendant made either an untrue statement of a material fact or omitted to state a material fact. 17 CFR § 240.10b-5(b); Affiliated Ute Citizens v. United States, 406 U.S. 128, 153, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972). In the instant case, we are faced with an alleged omission, that is, Macmillan’s alleged failure to disclose its true purpose of take over when the pledge of stock was taken as security for the loan. However, the record in this case establishes that there was not an omission at all. To use the majority’s own words:
“The record clearly shows that plaintiffs and their attorney examined each document at the time it was executed, discussed at length with Macmillan representatives those terms and conditions about which there were differences between the parties, and fully understood what was being signed. The parties dealt at arm’s length and were represented by counsel throughout the negotiations, and had full knowledge of all facts surrounding the transaction.” p. 610. (Emphasis supplied)
This being so, it is clear that Coinart knew that if it did not make good on its obligations, Macmillan, in turn, would exercise its rights, foreclose on the security and take over control of Coinart. The purpose of the security was obvious.
Even if there was an omission on the part of Macmillan, it was not material. It is necessary “that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision.” Id. 406 U.S. at 153-54, 92 S.Ct. at 1472. Here, we are not dealing with gullible, defenseless business people unable to protect themselves from the machinations of a vastly superior opposite party. Under these circumstances, this circuit has recognized that the duties under Rule 10(b)-5 are not as demanding as they might be in other situations. Hughes v. Dempsey-Tegeler & Co., Inc., 534 F.2d 156, 177 (9th Cir. 1976). It does not make sense to hold Macmillan potentially liable for not disclosing a purpose which was obvious. Coinart knowingly agreed to post its controlling shares of stock as security for a loan. Coinart knew that Macmillan might very well foreclose on the security if Coin-art failed to meet its obligations. So what if Macmillan’s true purpose was to take over Coinart; Coinart’s destiny was in its own hands and was determined by its own knowledgeable business decisions.
Furthermore, the cases cited by the majority support this dissent. Dopp v. Franklin National Bank, 374 F.Supp. 904 (S.D.N.Y.1974), held that an alleged conspiracy to shift voting power by selling pledged stock in violation of an alleged oral agreement while concealing the identity of the prospective purchaser from a party to the alleged oral agreement, did not state a claim for relief under Rule 10(b)-5. Id. at 909-10. Molever v. Levenson, 539 F.2d 996 (4th Cir. 1976), although not directly on point, is relevant since it deals with a pledge of stock in return for a loan. There, the *615Fourth Circuit reversed a jury verdict in favor of plaintiff, as the alleged failure to disclose in that case did not amount to a violation of Rule 10(b) — 5. Id. at 1000. Cooper v. North Jersey Trust Co., 226 F.Supp. 972, 978 (S.D.N.Y.1964), by its broad language appears to support the majority’s position; however, it is inapposite. That case dealt with the wrongful conversion of stock, not a failure to disclose in a pledge of stock situation.
I would affirm the district court in all respects.