Record and brief — Kalmanovitz v. Gutting

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PAUL KALMANOVITZ,

Petitioner,

vs

FERDINAND J. GUTTING, JAMES

C. McCLELLAN, ALVIN GRIESEDIECK,

JR., JOSEPH GRIESEDIECK: EDWARD

J. GRIESEDIECK, JR.; WILLIAM S.

LOWE; MONTE E. SHOMAKER; and

J. HOWARD WEMHOENER,

Respondents.

ae ae ae ae Se Se Se Se See Se See See Se See See Se See

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

THEODORE F. SCHWARTZ

7701 Forsyth, Suite 560

Clayton, Missouri 63105

(314) 863-4654

Attorneys for Petitioner

QUESTIONS PRESENTED FOR REVIEW

I.

WHAT IS THE CORRECT METHOD OF

DETERMINING THE VALUE OF STOCK

PURCHASED BY A DEFRAUDED BUYER

UNDER RULE 10b-5?

Il.

DOES RULE 10b-5 PROVIDE A

DEFRAUDED PURCHASER THE RIGHT

TO RECOVER CONSEQUENTIAL

DAMAGES?

INDEX

Questions Presented for Review

Statutes Involved

Parties to the Proceedings

In the Court Below

Table of Authorities

Opinions Below

Jurisdiction

Statement of the Case

Reasons for Granting the Writ

What is the Correct Method

of Determining The Value

of Stock Purchased By A

Defrauded Buyer Under

Rule 10b-5?

Does Rule 10b-5 Provide A

Defrauded Purchaser The

Right to Recover

Consequential Damages?

Conclusion

ii

10

16

STATUTORY PROVISIONS INVOLVED

15 U.S.C. §784(b)

Rule 10b-5, 17 C.F.R. §240.10b-5

PARTIES TO PROCEEDINGS

The caption of this case contains

the names of all parties to the

proceeding herein. The other original

defendants listed in the caption of the

District Court's opinion either settled

their cases or were dismissed. The

parties reflected in the caption were the

only parties interested in the appeal

before the United States Court of Appeals

for the Ninth Circuit and the proceeding

before this Court.

iii

TABLE OF AUTHORITIES

Adickes v. Kress & Co., 398

Affiliated Ute Citizens v.

United States, 406 U.S. 128

uu!

Blackie v. Barrick, 524 F. 2d

891, 909 (th. Ctr. 1975),

cert. den. 429 U.S. 816 (1976).

DePinto v. Providence Securit

Life Ins. Co., 274 F. 2d 50,

th. r. 1967) cert. den.

389 U.S. 822 (1968).

Ehrler v. Kellwood Co., 391 F.

upp. ~C. Mo. 1975)

aff'd. 521 F. 2d 1347

(8th. Cir. 1975).

Estate Counseling Services, Inc.

v. Merrill Lynch Pierce Fenner

& Smit h, 303 Fo 7g-S77

(10th. Cir. 1962).

Foster v. Financial Technolo

Inc., 517 F. 2d 1068 (Sth.

Cir. 1975).

Garnatz v. Stifel Nicolaus &

Co., inc. 559 F.

th. Cir. 1977).

Green v. Occidental Petroleum

Corp., 2341 F.

TWth. Cir. 1976)

iv

10,13

10,13

14

Kohler v. Kohler, 208 F. Supp.

‘ s. 1962) aff'd.

319 F. 2d 334 (7th. Cir. 1963).

Madigan, Inc. v. Goodwin, 498

F. 2d 233 (7th. Cir. 1974).

Nickels v. Koehler Management

Corp., 541 F. 2d 611

tothe Cir. 1976).

Sacket v. Beaman, 399 F. 2d

884, BSI (th. Cir. 1968).

Stgatus v. Porter, 179 U.S.

> .

Wolf v. Frank, 477 F. 2d 467

(th. Cir. t973) cert. den.

414 U.S. 975, reh. den.

414 U.S. 1104 (1974).

Zeller v. Bogue Electric Mfg.

Corp., 476 F 2d 795 (2nd.

Cir.

1973).

STATUTES

10,11,12

14

6,7

10

1,5

Rule 10b-5, 17 C.F.R. §240.10b-5 1,5

OTHER AUTHORITIES

Measuring Buyers Damages in

- ases usiness Lawyer

Georgetown Law Journal, 1093

(1977)

Restatment of Torts (Second)

549 (1) (bd).

vi

ll

11

OPINIONS BELOW

The District Court's opinion and the

opinion of the Ninth Circuit are

reproduced in full in the appendix filed

herein.

JURISDICTION

The judgment of the United States

Court of Appeals for the Ninth Circuit

was entered on June 10, 1981. The Court

of Appeals denied a Petition for

Rehearing or Rehearing En Banc on August

5, 1981.

The jurisdiction of this Court is

invoked under 28 .S.C. §1251(1).

vii

IN THE

SUPREME COURT OF THE UNITED STATES

PAUL KALMANOVITZ,

Petitioner,

vs

FERDINAND J. GUTTING, JAMES

C. McCLELLAN, ALVIN GRIESEDIECK,

JR., JOSEPH GRIESEDIECK: EDWARD

J. GRIESEDIECK, JR.; WILLIAM S.

LOWE; MONTE E. SHOMAKER; and

J. HOWARD WEMHOENER,

Respondents.

NN SSeS Se

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

STATEMENT OF THE CASE

Plaintiff below, Paul Kalmanovitz,

hereinafter "Kalmanovitz" filed a

complaint in the United States District

Court for the Northern District of

California against the former officers

and directors of Falstaff Brewing

Corporation and others. The suit

asserted a cause of action for common law

fraud and for violation of Section 10(b)

of the Securities Exchange Act of 1934,

15 U.S.C. §78j(b) and Rule 10b-5, 17

C.F.R. §240.10b-5. The basic allegations

contained in the Complaint were that

Kalmanovitz was defrauded in connection

with his purchase of 100,000 shares of

Falstaff Brewing Company stock.

The complaint alleged a conspiracy

between the various lending institutions

(the banks and insurance companies),

accountants and former directors and

officers of Falstaff. The object of the

conspiracy was to obtain a substantial

equity investor in Falstaff Brewing

Corporation who would contribute enough

capital to keep the corporation out of

bankruptcy until the lending

institutions’ security interest became

perfected. The Complaint further alleged

that as a result of the aforementioned

conspiracy, Kalmanovitz was fraudulently

induced to to invest Ten Million Dollars

in Falstaff by purchasing 100,000 shares

of preferred Falstaff stock and further

was induced to guarantee up to Ten

Million Dollars of Falstaff's accounts

payable.

In his Complaint, Kalmanovitz

alleged that as a result of the

misrepresentations and schemes

perpetrated by the defendants and others,

ofa

Kalmanovitz “was damaged thereby in that

at the time of his purchase, the

consideration he received was

substantially less than that which he

gave .. .". The Complaint then set

forth eleven areas in which the damages

were specified. Kalmanovitz then prayed

for compensatory damages, “in a sum

calculated based on the difference

between the consideration given by

plaintiff and that which he received

which he believes to be in excess of Five

Million Dollars, for interest on said sum

at the rate of seven percent per annum,

commencing April, 1975, through the

present. . .".

The record in the case revealed that

Kalmanovitz purchased the Falstaff stock

at a price of $100.00 per share in April,

1975. In March of 1975, Kalmanovitz

advanced Three Million Dollars of the

agreed price and thereafter paid the

remaining Seven Million Dollars on April

28, 1975. The final payment consisted in

part of a Five Million Dollar loan which

Kalmanovitz had procurred from City

National Bank in Beverly Hills,

California. The defendants thereafter

filed a motion for summary judgment

contending that the record showed that

Kalmanovitz bought the stock for $100.00

per share and that within a few months

thereafter, he sold it to the second

purchasers at the same price. They

argued that this showed that there were

no damages suffered by Kalmanovitz and

that they were entitled to judgment as a

matter of law. The Court thereafter

granted the motion for summary judgment

on the sole ground that plaintiff

suffered no damages. The Ninth Circuit

Court of Appeals without elaboration

-4-

followed the District Court's finding

that there were no damages suffered by

plaintifێ.

REASONS FOR GRANTING THE WRIT

WHAT IS THE CORKECT METHOD

OF DETERMINING THE VALUE

OF STOCK PURCHASED BY A

DEFRAUDED BUYER UNDER

RULE 10b-5?

There is very little question today

that the prevailing measure of damages in

the federai courts under Section 10b of

the Securities Act of 1934, 15 U.S.C.

§78(j)(b) and Rule 10b-5, is the

difference between the purchase price and

oS

the value of the stock at the date of

purchase. Green v. Occidental Petroleum

Corp., 541 F. 2d 1335, 1344 (9th. Cir.

1976), concurring opinion; Blackie v.

Barrick, 524 F. 2d 891, 909 (9th. Cir.

1975) cert. den. 429 U.S. 816 (1976);

Sacket v. Beaman, 399 F. 2d 884, 891

(9th. Cir. 1968).

Cases from other circuits have

applied the identical rule. Wolf v.

Frank, 477 F. 2d 467 (Sth. Cir. 1973)

cert. den. 414 U.S. 975, rehearing den.

414 U.S. 1104 (1974); Kohler v. Kohler,

208 F. Supp. 808 (D.C. Wis. 1962), aff'd.

319 F. 2d 334 (7th. Cir. 1963); Ehrler v.

Kellwood Co., 391 F. Supp. 927 (D.C. Mo.

1975), aff'd. 521 F. 2d 1347 (8th. Cir.

1975). See also, Measuring Buyers

Damages in 10b-5 Cases, 31 Business

Lawyer 1839 (1976).

This remedy has provided that

a§e

“damages under what may be called an out

of pocket rule, and namely the difference

between the real value of the property

purchased at the date of its sale and the

price paid for it, together with interest

and associated outlays by the purchaser".

Sacket, supra at 891.

This remedy and measure of damages

was borrowed from the early case of

Sigafus v. Porter, 179 U.S. 116 125

(1900) and has consistently been applied

toward damages to a defrauded purchaser

of securities coming within the coverage

of Section 10b and Rule 10b-5.

In the case below, the only evidence

of the value of the Falstaff securities

purchased by Kalmanovitz on the date of

sale was the reasoning of the Court,

without factual support, that a later

sale as a matter of law fixed the value

of stock as of the date of purchase.

Fe

There was not anything in the record to

support this and it clearly was a

misapplication of the law. For the court

to have declared as a matter of law that

the value of the stock on the date of

purchase was to be determined by the sale

price some months later denied

Kalmanovitz his right to a trial. The

fair market value of the stock as of the

date of purchase is perhaps the most

classic example of a legal fact which can

only be subjectively determined.

Subjective determination like opinions

cannot be shown to be true as a matter

of law and thus cannot sustain motions to

dismiss or motions for summary judgment.

Depinto v. Providence Security Life Ins.

Co., 274 F. 2d 50, 55 (9th. Cir. 1967)

cert. den. 389 U.S. 822 (1968). In this

instance, it is clear that summary

judgment was not properly granted since

alin

there was a material fact issue in

dispute and the court was not able to

grant judgment as a matter of law upon

the record before it. Adickes v. Kress &

Co., 398 U.S. 144, 157 (1970).

Under no circumstances has any court

ever abandoned the "out of pocket" or

“date of sale" rule to defeat the claim

of a defendant for damages. For the

district court below and the Ninth

Circuit Court of Appeals to do this

results in a clear violation of the

teachings of this Court as well as the

dictates of Congress. This Court in

Affiliated Ute Citizens v. United States,

406 U.S. 128 (1972), stated,

"[C]ongress intended securities

legislation enacted for the

purpose of avoiding frauds to be

construed not technically and

restrictively but flexibly to

effectuate its remedial purpose."

For the courts below to ignore the "out

of pocket" measure of damages and apply a

measure of damages that denies plaintiff

relief is both contrary to the law of the

many courts of appeals that have decided

the question and contrary to the

legislative interest embodied in the

securities laws. This Court should issue

its Writ of Certiorari to the Ninth

Circuit Court of Appeals to review the

issues contained in this matter to

examine the application of the law by the

Ninth Circuit as it relates to the

interpretation of the Congressional

intent embodied in the securities law.

Il.

DOES RULE 10b-5 PROVIDE A

DEFRAUDED PURCHASER THE RIGHT

TO RECOVER CONSEQUENTIAL

DAMAGES?

-10-

In addition to out of pocket damages

the law is well established that the

defrauded buyer is entitled to recover

“consequential damages". Foster v.

Financial Technology, Inc., 517 F. 2d

1068 (9th. Cir. 1975); Madigan, Inc. v.

Goodwin, 498 F. 2d 233 (7th. Cir. 1974);

Zeller v. Bogue Electric Mfg. Corp., 476

F. 2d 795 (2nd. Cir. 1973); cert. den.

414 U.S. 908 (1973); Estate Counseling

Service, Inc. v. Merrill Lynch Pierce

Fenner & Smith, Inc., 303 F. 2d 527

(10th. Cir. 1962); Accord Restatement of

Torts (Second) 549 (1)(b).

In fact, several circuits have

allowed the award of consequential

damages even if the plaintiff can show no

general damages. Madigan, supra, at 236;

Zeller, supra at 803. See also, Rule

10b-5 Damages, 65 Georgetown Law Journal,

1093, 1144 (1977). In the instant case,

elle

the district court denied any recovery to

Kalmanovitz and granted summary judgment

thereby dismissing the whole case. It

was clear that under the law then

prevailing, Kalmanovitz was entitled to

recover consequential damages even if, as

the Court found, he suffered no actual

damages. The law in the various circuits

supports this right of recovery; however,

it was ignored by the Ninth Circuit Court

of Appeals. The decision by the Ninth

Circuit is directly contrary to the

decision of the Seventh Circuit in

Madigan, Inc. v. Goodman, 498 F. 2d 233

(7th. Cir. 1974). In that case the court

stated that if plaintiff could show that

but for the fraud perpetrated he would

not have expended the money but would

have placed the purchase price in a

savings account, he was entitled to

recover the loss of interest. The

ole

decision of the Ninth Circuit below is

also in conflict with the case of Foster

v. Financial Technology, Inc., 517 F. 2d

1068 (9th. Cir. 1975). In that case the

Ninth Circuit reversed the district

court's summary judgment for defendants.

The Ninth Circuit remanded the cause to

allow for determination of the extent, if

any, of plaintiff's consequential damages

incurred. The Foster case makes specific

reference to the determination of the

“opportunity lost"' damages. These

“opportunity lost" damages are those

which are incurred where because of the

10b-5 violation, the plaintiff has "lost

the extra profits it would have earned

had it reinvested its excess funds in its

own operation instead of using them to

purchase securities from the defendant."

Foster, supra, at 72.

The Tenth Circuit in Estate

o] 3

Counseling Services, Inc., supra,

provided for the recovery of such

consequential damages as the loss of

interest and any other outlay

legitimately attributable to the

defendant's fraudulent conduct. Supra at

533. These decisions are consistent with

the decisions in the other circuits. See

Garnatz v. Stifel Nicolaus & Co., Inc.,

559 F. 2d 1357, 1360 (8th. Cir. 1977).

Nickels v. Koehler Management Corp., 541

F. 2d 611 (6th. Cir. 1976).

In the instant case, the Ninth

Circuit's decision had the effect of

denying Kalmanovitz his entire remedy as

provided by the cases interpreting Rule

10b-5. The Ninth Circuit in affirming

the granting of summary judgment has in

effect stripped Kalmanovitz of his right

to recover for his losses incurred due to

the fraud of the defendants in violation

afte

of Rule 10b-5. As the district court

found, Kalmanovitz expended in excess of

$100,600.00 in interest on a loan which

he incurred as a part of the purchase

price. But for the fraud of the

defendants, Kalmanovitz would not have

incurred this expenditure and as such, he

should have been allowed to seek its

recovery in a court of law.

Additionally, the court foreclosed

Kalmanovitz from recovering the loss of

extra profits he could have earned had he

reinvested the funds used in the purchase

in his own operation instead of using

them to purchase the securities from the

defendants.

It is disturbing to note that the

Ninth Circuit has ignored the case law

emanating out of the other circuits and

has foreclosed a plaintiff from recovery

in circumstances where it is clear he has

=1$-

suffered a

defendants

This Court

Certiorari

Appeals to

below. It

loss due to the fraud of

in violation of Rule 10b-5.

should issue its Writ of

to the Ninth Circuit Court of

examine the decision rendered

is clear that the decision

rendered by the Ninth Circuit conflicts

with the decisions emanating out of the

courts of appeals of other circuits and

as such, this is the proper vehicle for

the court to examine the type of damages

recoverable under Rule 10b-5.

CONCLUSION

For the reasons stated above and the

authorities cited therein, this Court

should issue its Writ of Certiorari to

the Ninth Circuit to review the decision

rendered therein. The decision not only

conflicts with the case law of other

-16-

circuits but concerns an item of

importance, to-wit: the recovery of

damages for the violation of Rule 10b-5.

Respectfully Submitted,

THEODORE F. SCHWARTZ

7701 Forsyth, Suite 560

Clayton, Missouri 63105

(314) 863-4654

Attorney for Petitioner

Sts

CERTIFICATE OF SERVICE

The undersigned certifies that two

complete copies of petitioner's Petition

for Writ of Certiorari and Appendix

thereto was served on the attorneys of

record for respondents by placing same in

the United States Mail with first class

postage thereon fully prepaid at Clayton,

Missouri, on the 3rd day of November,

1981, addressed as follows:

Messrs. Robert E. Gooding, Jr.

and Jay M. Spears

Howard, Prim, Rice,

Nemerovski, Canady and Pollak

650 California Street, Suite 2900

San Francisco, California 94108

oe

Th 3 lyf,

81-869

IN THE

SUPREME COURT OF THE uvureD STATES

“> +

PAUL KALMANOVITZ,

Petitioner,

vs

FERDINAND J. GUTTING, JAMES

C. McCLELLAN, ALVIN GRIESEDIECK,

JR., JOSEPH GRIESEDIECK: EDWARD

J. GRIESEDIECK, JR.; WILLIAM S.

LOWE; MONTE E. SHOMAKER; and

J. HOWARD WEMHOENER,

Respondents.

ae Ne See See Se See Sel et Sattl Stll Sl tl Sal atl all al ~

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

THEODORE F. SCHWARTZ

7701 Forsyth, Suite 560

Clayton, Missouri 63105

(314) 863-4654

Attorney for Petitioner

INDEX

Order - 8/5/81

Memorandum - 6/10/81

Order Granting Defendants'

Motion for Summary Judgment

2/21/80

Ww Ww - -

UNITED STATES DISTRICT COURT

FOR THE NINTH CIRCUIT

PAUL KALMANOVITZ,

No. 804106

Plaintiff-Appellant,

vs

ORDER

FERDINAND J. GUTTING,

et. al.,

Defendant-Appellee

ee ee ee ee ee ee ee

Before: PREGERSON, NELSON, and

REINHARDT, Circuit Judges

The panel as constituted above has

voted to deny the petition for rehearing

and to reject the suggestions for

rehearing en banc.

The full court has been advised of

the suggestion for rehearing en banc, and

no ‘udge of the court has requested a

vote on the suggestion for rehearing en

banc. Fed. R. App. P. 35 (b).

The petition for rehearing is denied

and the suggestion for rehearing en banc

is rejected.

Dat2d: August 5, 1981]

UNITED STATES DISTRICT COURT

FOR THE NINTH CIRCUIT

PAUL KALMANOVITZ, )

) No. 804106

Plaintiff-Appellant, )

) D.C. Nos.

vs ) 76-0106-CFP

) 77-0611-CFP

FERDINAND J. GUTTING, )

et. al., MEMORANDUM

De fendant-Appellee

Appeal from the United States District

Court for the Northern District of

California, Cecil F. Poole, District

Judge, Presiding, Argued and Submitted

on June 1, 1981

Before: PREGERSON, NELSON, and

REINHARDT, Circuit Judges

In this 10b-5 action, the district

court correctly concluded that a genuine

issue of material fact did not exist as

to the value of the stock on the date

appellant purchased it. The court did

not err in ruling, as a matter of law,

that appellant suffeced no damages since

he bought the stock and arranged to sell

it two months after the purchase at the

same price --$100.00 per share. See

Blackie v. Barrack, 524 F. 2d 891, 909

(9th Cir. 1975), cert. denied, 429 U.S.

816 (1976); Arrington v. Merrill Lynch,

Pierce, Fenner and Smith, Inc., No.

77-3911, slip op. 809, 815 (9th. Cir.

Nov. 3, 1980).

Therefore, we AFFIRM.

June 10, 1981

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

PAUL KALMANOVITZ,

Plaintiff,

vs

NEW YORK LIFE

INSURANCE COMPANY,

a New York Corporation,

THE MUTUAL LIFE INS-

URANCE COMPANY OF

NEW YORK, a New York

Corporation; HASKINS

& SELLS, a Partnership,

FERDINAND J. GUTTING,

aka FERD GUTTING;

HARVEY A.A. BEFFA, SR.;

JAMES C. McCLELLAN, Esq.;

ALVIN GRIESEDIECK, JR.;

JOSEPH GRIESEDIECK;

EDWARD J. GRIESEDIECK, JR.;

HARVEY A.A. BEFFA, JR.;

WILLIAM S. LOWE; MONTE

E. SHOMAKER; J. HOWARD

WEMHOENER; WILLIAM J.

HEALY; and JOHN C. CALHOUN,

Defendents.

in

ee ee ee ee ee a ee ee ee ee a

C 76-106

CFP

{Formerly

MDL No.

263 No.

77-611C

(2)]

SUMMARY

JUDGMENT

Plaintiff brings this suit

asserting causes of action for common

law fraud and for violation of §10(b)

of the Securities and Exchange Act of

1934, 15 U.S.C. §78j(b) and Rule 10b-5

17 C.F.R. §240.10b-5. He alleges that

he was defrauded in connection with his

purchase of 100,000 shares of Falstaff

Brewing Company. The only defendants

remaining in the case, former officers

and directors of Falstaff, have moved

for summary judgment, inter alia, on

the ground that plaintiff suffered no

damage as a result of the alleged

fraud.

BACKGROUND OF THIS MOTION

On or about March 10, 1975,

plaintiff Kalmanovitz and Falstaff

negotiated a written agreement under

which Falstaff was to issue 100,000

shares of a new class of preferred

stock for which plaintiff agreed to pay

$10 million. The transaction was

subject to ratification by Falstaff's

shareholders at their annual meeting on

April 28. On March 20, plaintiff

advanced $3 million of the agreed

price; he paid the remaining $7 million

on April 28 after the shareholders had

voted to ratify. t The final

payment consisted in part of a $5

million loan which plaintiff had

procured from City National Bank in

Beverly Hills, California.

I These transactions and others forming

the basis of this extended Litigation

have been the subject of numerous court

decisions and orders. See, for example,

the Court's Memorandum and Order in this

action, dated February 3, 1977, granting

and denying summary judgment, and the

Court's Opinion in Falstaff “Brewing Co.

v. New York Life Insurance Co., et. al.,

No. C 76-1560, March 3, 1978, granting

summary judgment.

The record in this case revealed

that plaintiff purchased the Falstaff

stock at a price of $100 per share in

April of 1975. A few months later, he

sold the stock at the same price per

share to two companies which he

controlled, General Brewing Corporation

(General) and S & P Corporation (S &

P). The transaction was not

accomplished instantaneously, but each

company eventually received 50,000

shares in return for a total investment

of $5 million.

Plaintiff's theory during the

course of this litigation had been that

in April 1975, Falstaff's assets were

over-valued by $5 million, and that the

preferred shares consequently were

worth something less than their stated

value when he bought them. By the time

he sold the shares to General and S & P

he asserts his personal efforts to

rescue Falstaff from its financial

doldrums had effected marked

improvement in that company's financial

condition and, as a result, the value

of the shares had increased. Thus, the

theory continued, the shares were

indeed actually worth the full $100

when plaintiff sold them to General and

S & P, but the crucial issue was their

true value at the time he purchased

them ‘from Falstaff. 2

Defendants, on the other hand,

contend that this effort to explain the

lack of any change in valuation of the

2 The record furnishes no support for

the position that the shares appreciated

in value during this period. It is

precisely this void which triggered

laintiff's change of position

ereinafter set forth.

stock is sheer speculation. Their

position is that since plaintiff got

the full amount of his purchase price,

and since he, himself, valued the

shares at $100 each within a few months

of his purchase, he suffered no damages

and thus has no cause of action.

A hearing on defendants’ motion

for summary judgment was held on August

24, 1979. The moving and responding

papers failed to set forth sufficient

details of the transactions between

plaintiff and his two companies whereby

the shares were transferred to them.

The record at the hearing disclosed

little more than that the first payment

on the loan at City National Bank was

made July 2, 1975, and that the shares

were formally transferred to General

and S & P in November, 1976. The facts

were unclear as to when and how, and by

-10-

what method of valuation, the resale

had been accomplished.

Plaintiff's counsel, Mr. Switzer,

argued that the mere evidence that the

price of the shares at the time

plaintiff purchased them was the same

as when he sold them to his two

corporations did not prove their value

at the first sale and, further, that

the lack of evidence as to the

circumstances surrounding the second

sale made the posture of the case not

ripe for summary judgment:

"Mr. Switzer: There is absolutely

no evidence before this court,

for purposes of this motion, as

to what date the stock was valued

by Mr. Kalmanovitz or anyone else

with respect to its ultimate sale

to General Brewing or S & P Corp-

oration.

"The evidence that the defendants

have presented by way of affidavit

simply shows that, in July of 1975

a series of financial transactions

commenced in connection with Paul

Kalmanovitz borrowing some $5

-ll-

million for the purchase of the

stock; that ultimately, over a

period of time, culminating in

about November of 1976, it

resulted in the sale of stock to

S & P Corporation and General

Brewing."

"The Court: When did the sale

take place?"

"Mr. Switzer: There is no

evidence."

(Hearing Transcript at 17).

Presented with this situation, the

Court ordered discovery reopened "for

the limited issue of what the

circumstances were and when that stock

was sold by Mr. Kalmanovitz" to his two

companies. (Hearing Transcript at 35).

Pursuant to theCourt's order,

plaintiff's deposition was taken on

October 4, 1979. Under oath, and for

the first time in this litigation,

plaintiff Kalmanovitz claimed that in

buying the Falstaff Shares, he had not

12-

actually purchased for his own account,

but rather as an agent for Ceneral and

S & P pursuant to a "plenary" authority

vested in him by these controlled

entities.

Defendants have renewed their

motion for summary judgment, contending

that the record, and the only record,

is that Kalmanovitz bought the stock

for $100 per share; that within a few

months he sold it to the second

purchasers at the same price; that

nothing shows any fluctuation during

the interim; and that the

uncontradicted inference from this is

that the value which plaintiff himself

placed upon the stock was exactly that

which he had originally paid for it.

They urge the Court to disregard

plaintiff's reversal of his new

litigation position, and to ignore his

most recent testimony, because it

at%e

contradicts earlier sworn statements by

him and because it is unsupported by

any available documentation. In

response, plaintiff reiterates that

genuine issues of material fact remain

to be tried. Plaintiff's position

seems to be that the conflict within

his own testimony precludes summary

judgment.

THE TRANSFER OF FALSTAFF SHARES

The "conflict" in the evidence in

this case is self-generated, arising

out of plaintiff's various versions of

the transactions. However, some facts

of the transactions are documented and

are undisputed.

The contracts embodying the

details of the issuance of Falstaff

preferred shares, dated March 10, 1975,

and April 28, 1975, were signed solely

othe

by officers of Falstaff and plaintiff.

Plaintiff negotiated and contracted

only for himself, as a principal, not

as an agent. No mention of General or

S & P either direct or indirect,

appears in either contract.

On April 14, 1975, City National

Bank issued a $6 million demand note to

plaintiff. The note contains no

reference to General or S & P;

plaintiff's is the only signature. The

$5 million actually borrowed on the

note to be used in the Falstaff

purchase was deposited into plaintiff's

checking account. While stock holdings

of General and S & P, companies

dominated by plaintiff, were used as

collateral for the loan, nothing in the

record indicates that plaintiff acted

as agent or surrogate for the two

«tS.

companies in borrowing the money, or

that the companies were ultimately

liable for payments on the loan. The

loan was never listed as a liability in

the financial statements or on the

books of either coupany.

The 1975 financial statements of S

& P and General reflect gradually

increasing interests in Falstaff,

listed under "assets". General's

financial statement for March of that

year valued the "Falstaff Account" at

$1.5 million. The account increased to

$2.6 million in April, and to $4.897

million in November. In S & P's

financial statements, an asset labeled

"Falstaff Brewing Co."' was valued at $1

million in March 1975, and $2.1 million

in May 1975.

The ownership of record of the

«IG-

Falstaff preferred shares is indicated

in a document prepared and signed by

the secretary of Falstaff on October 4,

1979. Initial issue was to plaintiff

on April 28, 1975. On December 28,

1976, all 100,000 shares were trans-

ferred 3,200 shares back to Falstaff.

PLAINTIFF'S TESTIMONY

In his November 1, 1977,

deposition, plaintiff characterized his

share of the $10 million purchase price

as “temporary advance money," but

stated that the funds used for the

purchase were his, and that General and

S & P eventually paid him back in full.

Although he originally intended to

retain twenty percent of the shares, he

subsequently changed his mind and

transferred all the shares to his two

companies, fifty percent to each.

On April 3, 1978, plaintiff

017.

testified in deposition that he

borrowed the $5 million from City

National Bank on his own initiative,

and that he neither obtained nor

required authorization from General.

At his April 14, 1978 deposition,

plaintiff was even more emphatic: "Just

to keep the record straight, I borrowed

the money and I paid interest, not

General Brewing Company." (Plaintiff's

Deposition, 4/4/78, p. 301).

At his deposition on October 4,

1979, however, plaintiff cast his

activities in a new light. He stated

that although he signed for the loan

from City National, he did not consider

the loan a personal obligation. He

further testified that the obligation

belonged to General and S & P, but

admitted that the loan, therefore,

si Be

should have appeared as a liability on

the books of the two companies.

Contrary to his testimony of November

1, 1977, he stated in 1979 that he had

never had any intention of retaining

ownership of a portion of the Falstaff

shares. When made aware of this dis-

crepancy, he explained by saying that

he might hae been upset at the earlier

deposition.

Perhaps the clearest example of

the conflict in plaintiff's accounts of

his role in the purchase of Falstaff

stock is the contradiction in two

affidavits in opposition to summary

judgment submitted by him to this Court

for the August 24, 1979, and December

14, 1979, hearings.

The affidavit filed on July 30,

1979:

"14. Because of the financial

turn-around of Falstaff during

-19-

the period from the spring of

1975 until the summer of Fo

in November of 1976 when the

sale of my Falstaff preferred

stock ce Tesora: srewss Corpor-

ation and 5 & P Usesorat on was

effected, such shares had a value

substantially —. than a

value at the time I purchased them

on = 28, 1975."" (Emphas{s

added

The suggestion made at that time was

that plaintiff's efforts had accom-

plished an appreciation in the worth of

the acquired shares.

But on December 3, 1979, plaintiff

filed an affidavit swearing as

follows:

"S. After the initial acquisi-

tion of the stock, I continued

to hold it in my individual name

until such time as the two

companies were in a position to

have the stock transferred into

their respective company names.

"6. At no time did I have any

personal ownership rights in said

stock. My involvement was for

the sole purpose of facilitating

transfer of the stock pursuant

to the above mentioned agree-

ments."

CONCLUSION

Throughout this litigation, plai-

ntiff had consistently taken the posi-

tion that he sold his Falstaff shares

to General and S & P. He did not

institute this lawsuit on behalf of

these companies, nor does his

complaint, filed three years ago, make

any reference whatever to General or S

& P. Not a single document or

representation presented to this Court

until recently suggested that plaintiff

was acting on behalf of the two

companies, or other than on his own

account, in making the purchase of

Falstaff shares. Nevertheless, he now

contends that he was acting as an agent

all along and that no second "sale"

o21-

ever occurred, because he was merely

turning the stock over to the "true"

owners. As a consequence, plaintiff

asserts, it is immaterial whether the

listed value of the shares when

transferred to General and S & P was

the same as when purchased from Fal-

staf£; triable issues of fact remain as

to what was the true value of the

shares at the time of the original

purchase.

Thus, this Court is presented with

a situation in which a party attempts

to manipulate the judicial process for

his own self-interest by shifting his

position in mid-litigation when it

becomes apparent that some aspect of

that position may jeopardize his case.

A court has inherent authority to

prevent suh abuse of the process.

"Under the doctrine of judicial

-2?7-

estoppel a party and his privies who

have knowingly and deliberately assumed

a particular position are estopped from

assuming an inconsistent position to

the prejudice of the adverse party."

In re Johnson, 518 F. 2d 246, 254

(10th. Cir. 1975), cert. den. 423 U.S.

893 (1975). Accord, Scarano v. Central

Railroad Co. of New Jersey, 203 F. 2d

510, 513 (3rd Cir. 1953). More

important than reliance by defendants

herein on plaintiff's previous

characterizations of his transactions

is the necessity of protecting the

integrity of judicial proceedings.

"[Judicial estoppel] is, more properly,

a rule which estops a party from

‘'playing fast and loose’ with the

courts."" Selected Risks Insurance Co.

v. Kobelinski, 421 F. Supp. 431, 434

(E.D. Pa. 1976).

Nor does plaintiff's contention

that triable and disputed issues of

=23-

fact remain preclude judgment against

him. This Court looks to the example

of the Ninth Circuit in Radobenko v.

Automated Equipment Corp., 521 F. 2d

540 (9th. Cir. 1975), where summary

judgment for defendant was affirmed

despite unresolved questions as to

factual matters:

"Thus, we are presented with

the question of whether contra-

dictory testimony of a plaintiff

alone can be used by him to

defeat a defendant's summary

judgment motion where the only

issue of fact results from the

necessity of choosing between the

plaintiff's two conflicting

versions." Id. at 544. Accord,

Perma Research and Development

Co. v. Singer Co., 410 F. 2d 572

n 7 re .

In the instant case, plaintiff's

conflicting descriptions of his role in

the purchase and transfer of the

Falstaff shares do not present genuine

issues of fact. Until the question of

o2b-

the absence of loss or damage became

prominent at the August 24, 1979

hearing, plaintiff had consistently

maintained during three years of

litigation that he purchased the

shares from Falstaff and later resold

them to his two companies. A party

will be bound by the case he has sought

to make; he will not be permitted

loosely to abuse the judicial process

he has invoked by shift of position

when his strategical advantage appears

better served thereby. To sanction

such contrivance would invite

deliberate fraud on the judicial forum.

The Court simply will not hear a party

who seeks thus to delay and divert.

Therefore, the Court deems the

evidence to establish, without a

countervailing genuine issue of

material fact, that plaintiff purchased

the Falstaff shares for $100 per share,

at a total cost of $10 million, and

subsequently sold them to General and S

& P for the identical amount, and that

the value of the shares was at all

times the same. Plaintiff thus

suffered no loss, damage or economic

injury in fact and has no cause of

action, either for common law fraud,

Vasquez v. Superior Court, 4 Cal. 3d

800, 94 Cal. Rptr. 796 (1971), or for a

private suit under Section 10b of the

1934 Act. See Frigitemp Corporation v.

Financial Dynamics Fund, 524 F. 2d 275,

281 (2d Cir. 1975); Herpich v. Wallace,

430 F. 2d 792, 810 (Sth. Cir. 1970).

Accordingly, IT IS ORDERED that

defendants’ motion for summary judgment

be, and the same hereby is, granted.

IT IS FURTHER ORDERED that

plaintiff take nothing and that

defendants recover their costs in this

~26-

action.

DATED: February 21, 1980.

CECIL F. POOLE

-2?7-

15 U.S.C.

STATUTES

§78J(b)

It shall be unlawful for any person,

directly

means or

commerce

facility

Exchange

(b)

with the

or indirectly, by the use of any

instrumentality of interstate

or of the mails, or of any

of any National Securities

to use or employ, in connection

purchase or sale of any security

registered on the National Securities

Exchange

or any security not so

registered, any manipulative or deceptive

device or contrivance in contravention of

such rules and regulations as the

Commission may prescribe as necessary or

appropriate in the public interest of for

the protection of investors.

-28-

17 C.F.R. 240.10b-5(b)

It shall be unlawful for any person,

directly or indirectly, by the use of any

means or instrumentality of interstate

commerce or of the mails or of any

facility of any National Securities

Exchange.

(a) to employ any device, scheme, or

artifice to defraud,

(b) to make any untrue statement of

a material fact or to omit to state a

material fact necessary in order to make

the statements made, in light of the

circumstances under which they were made

not misleading, or

(c) to engage in any act, practice

or course of business which operates or

would operate as a fraud or deceit upon

any person in connection with the

purchase or sale of any security.

February 21, 1980