McNAMEE, District Judge.
Defendants' motion for summary judgment is based upon the contention that this action is barred upon one or more of the following grounds: (1) the statute of limitations; (2) res judicata; and (3) collateral estoppel.
As indicated by the second and third grounds of the motion, this is the second action growing out of the same transaction. The first action was commenced in the Common Pleas Court of Lake County, Ohio, in November 1950 against the defendants George W. Balkwill and the GEN Corporation and resulted in a judgment for the defendants which upon a trial de novo was affirmed by the Court of Appeals of the 7th Ohio Appellate District. The Supreme Court of Ohio overruled a motion to certify the record. The action in this Court was commenced on April 8, 1955.
On July 20, 1950, and for several years prior thereto, the five plaintiffs, or the persons for whom they are acting in representative capacities, and the defendant George W. Balkwill were the owners of all of the shares of stock of The Cleveland Frog & Crossing Company, an Ohio corporation. At that time there were 5,000 shares outstanding. Plaintiff Connelly, trustee, was the owner of 2,800 shares, plaintiffs Ann McConnell and Stephen Ward Balkwill were the owners of 366 2/3 shares and 183 1/3 shares, respectively. Plaintiffs Ralph Restow and Irma Taylor, as co-guardians, represent the interest of the estate of Jessie Albracht, who owned 550 shares. Conrad Albracht, trustee, since deceased was the owner of 550 shares. Frank L. Taylor is the successor trustee of the interest formerly held by Conrad Albracht. Defendant George W. Balkwill was the owner of 550 shares.
This action is brought under favor of Section 10 of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j and Rule X 10b-5 of the Securities and Exchange Commission.
The complaint avers that during July 1950 defendants Balkwill, Pettibone-Mulliken and Brooks conspired to violate Section
Plaintiffs allege further that Balkwill's shares were returned to him; that plaintiffs' shares were retired as treasury shares of the company and that Balkwill, as the sole stockholder of The Cleveland Frog & Crossing Company, sold and leased certain of its assets to Pettibone-Mulliken and realized a large undisclosed profit. Plaintiffs pray for an accounting and other relief.
In their answers the defendants so charged deny the allegations of fraud, misrepresentation, concealment, non-disclosure of material facts and allegations of conspiracy. The answers of the defendants refer in detail to the findings, conclusions and proceedings in the prior state court action which constitute the bases of the defenses of res judicata and collateral estoppel and also assert that plaintiffs have failed to state a claim upon which relief may be granted. By way of further defense defendants assert that this action is barred by the statute of limitations. Except for the addition of parties defendant, the allegations of conspiracy, allegations relevant to this Court's jurisdiction and the applicability of Section 10(b) and Rule X 10b-5, this action is in all other respects essentially the same as the former action in the state court.
In support of their motion for summary judgment defendants submit a lengthy affidavit of Attorney Charles D. Johnson to which there is annexed numerous and extensive exhibits relating to the state court action in both the Common Pleas Court and the Court of Appeals. In opposition, plaintiffs submit the affidavit of Attorney Harold K. Bell, together with exhibits attached thereto. The record discloses that in the former action the Common Pleas judge wrote an opinion, filed extensive findings of fact and conclusions of law and in addition answered in writing numerous interrogatories propounded by plaintiffs. The Court of Appeals also made findings of fact and submitted conclusions of law but wrote no opinion. As indicated above, the Supreme Court of Ohio overruled plaintiffs' motion to certify the record.
The record on the motion discloses the following evidentiary facts. Early in 1950, at the instance of Balkwill and with the assent of plaintiffs, efforts were made to secure a purchaser for the shares of
As a result of the above transactions the GEN Corporation is the owner of the building of the old Frog Company upon which there is a mortgage of $400,000 but which is leased at an annual rental of $55,000. In addition GEN Corporation holds a noninterest-bearing note covering the balance due on the purchase price of the inventory which is payable in annual installments of $25,000. The amount of real estate taxes, federal income taxes and interest which GEN Corporation is required to pay annually is not shown.
After a lengthy and vigorously contested trial in the Common Pleas Court the trial judge filed numerous findings of fact and conclusions of law as did the Court of Appeals upon a re-trial of the case in that court. The more significant findings of both courts are recited in abridged form in the following paragraph:
Both state courts found as facts that—Plaintiffs were not induced to enter into said transaction or sign said contract by any representations or statements of defendant Balkwill. Defendant Balkwill did not make any false representations to plaintiffs, or any of them, of any material fact relating to the company's affairs or the value of its property or business. Defendant Balkwill did not make any false representations to plaintiffs, or any of them, of any material fact relating to the transaction for the sale of their stock nor did he conceal from plaintiffs, or any of them, any material fact connected with the value of the stock which they were selling. Plaintiffs did not repose any confidence or trust in defendant Balkwill. Plaintiffs, neither jointly nor severally, authorized defendant Balkwill to act for them nor was there any express or implied agreement between plaintiffs and defendant Balkwill to make a joint sale of all of the stock. Plaintiffs relied on Connelly and upon counsel for the company in the transaction. Connelly had been president and general manager of the company for nine years and his knowledge of the company's affairs and the value of the stock was greater than that of defendant Balkwill. Plaintiffs, although offered the opportunity to sell their stock on a term basis at a higher price, rejected such proposal and in lieu thereof demanded and accepted cash in the amount of $232.14 per share for their stock. Plaintiffs as the owners of 89% of the stock were in complete control of the business and affairs of the corporation. Defendant Balkwill's stock was committed to escrow duly endorsed and placed beyond his control in the hands of an independent escrow agent subject only to the terms of the written agreement dated July 20, 1950. Plaintiffs knowingly entered into a written contract for the sale of their stock to an unknown and undisclosed purchaser. The identity of the purchaser of plaintiffs' stock was not a material fact in the transaction and plaintiffs by their own conduct showed that such fact was not material to them. Both courts submitted the following conclusions of law among others: No confidential or fiduciary relationship existed between plaintiffs, or any of them, and defendant Balkwill. Defendant Balkwill was not the agent of plaintiffs, or any of them. No "special circumstances" existed in this case warranting the imposition of any liability on defendant Balkwill. Defendant Balkwill was not guilty of any fraud, actual or constructive, or of any fraudulent misrepresentation or concealment
A word of explanation by way of preface to the discussion of the above captioned defense is in order. Plaintiffs have conceded that the doctrine of collateral estoppel applies and is effective to preclude the re-litigation of the ultimate facts decided in the previous action. Such concession limits substantially the area of the dispute in the present case. The extent of such limitation is evidenced by plaintiffs' statement that:
For the purpose of discussing the defense of res judicata the Court will accept the above quoted statement as correctly representing the basis of plaintiffs' claim in this action.
It is a well-established principle that where a valid and final personal judgment is rendered on the merits by a court of competent jurisdiction in favor of the defendant the plaintiff cannot thereafter maintain an action on the original cause of action. Restatement of Judgments, § 48, p. 191. Defendants claim that this principle has application here. Plaintiffs contend that the case at bar is based upon a different cause of action. Their contention rests upon two grounds: (1) that the state courts held in effect that the law of Ohio imposed no duty on defendant Balkwill to disclose the Pettibone-Mulliken negotiations to the other shareholders; (2) that this action is based upon the more stringent duty of disclosure implicit in Rule X 10b-5 and is an action of which the federal courts have exclusive jurisdiction. It is plaintiffs' position that for the foregoing reasons the doctrine of res judicata is inapplicable.
Section 10(b) of the Securities Exchange Act, § 78j, Title 15, reads in part:
Rule X 10b-5 reads:
Section 78aa, Title 15, vests exclusive jurisdiction in the District Courts of the United States of all actions to enforce any liability created by Section 10(b) or Rule X 10b-5 promulgated thereunder. This does not mean that the state courts were without jurisdiction to hear and determine the issues in the previous action which arose out of the same transaction. Sec. 78bb, Title 15, provides in part:
Thus, while the courts of the several states have jurisdiction to determine actions based on fraud connected with the purchase or sale of securities, they have no jurisdiction in cases involving violations of Rule X 10b-5 which include the direct or indirect use of interstate facilities, the mails or the facilities of national security exchanges. It does not follow, however, that an action in Federal Court under Rule X 10b-5 is necessarily a different cause of action than an action in the state court based upon the same facts. The use of interstate facilities, the mails or the facilities of national security exchanges is not per se a violation of Rule X 10b-5. Standing alone, the use of such facilities gives rise to no cause of action. The federal cause of action arises upon operative facts that disclose a violation of the provisions of the rule designed to insure fair dealing in connection with the sale and purchase of securities. While there has been no definitive determination of the boundaries of Rule X 10b-5, the better reasoned view is that—facts which would sustain a common-law action for fraud might also constitute a cause of action under Rule X 10b-5 but not all cases arising under the rule would constitute a common-law action for fraud. In Beury v. Beury, 127 F.Supp. 786, the District Court expressed the opinion that Section 10 of the Act conferred jurisdiction to entertain only those actions which involve a right of recovery which goes beyond common-law rights. Although the appeal in that case was not from a final order and for that reason was dismissed, the Court of Appeals gratuitously expressed its disagreement with the above view of the trial judge. Beury v. Beury, 4 Cir., 222 F.2d 464, at page 465. In Loss on Security Regulations, at 819, the author says: "The extent to which the Security Exchange Acts go beyond common law fraud depends upon the particular common law jurisdiction." Plaintiffs concur in this view and concede that in some jurisdictions the duty of disclosure under state law is no less strict than the duties imposed by Rule X 10b-5.
To determine whether this case and the previous one are based upon the same cause of action, it is necessary first to ascertain the principles that govern actions of fraud in Ohio. It has long been the rule in Ohio that while, generally speaking, mere silence does not amount to fraud, there are circumstances where it becomes the duty of a person to speak in order that a party with whom he deals may be placed on an equal footing. 24 Ohio Jur.2d 678, Sec. 76. This principle has been applied where a vendor of chattels failed to disclose a material latent defect known to him and not known to the vendee. Hadley v. Clinton County Importing Co., 13 Ohio St. 502. As the court there indicated, the diversity of circumstances in which such a question might arise are infinite. Ibid 509. Where the parties sustain a fiduciary or quasi fiduciary relationship towards each other "the duty to make full disclosure is imperative." Long v. Mulford, 17 Ohio St. 484. See also Berkmeyer v. Kellerman, 32 Ohio St. 239.
Nor does the law of Ohio countenance the speaking of half truths. In Long v. Mulford, supra, the court quoted the following statement with approval:
In Manley v. Carl, 20 Ohio Cir.Ct.R. 161, the conduct of a buyer of real estate who informed the seller of facts calculated to depreciate the value of the property but omitted to disclose other facts known to him which would have given correct information as to its value was held to be fraudulent. In Ziliox v. City Valleyview Apartment & Storage Co., 20 Ohio App. 156, 153 N.E. 183, a disclosure by means of a prospectus that a businessman was a subscriber for 100 shares of stock without revealing that by secret agreement he was required to take only 10 shares also was held to be fraudulent. Hey v. Cummer, 89 Ohio App. 104, 97 N.E.2d 702, 703, was an action to declare the defendant a trustee ex maleficio. In that case the Cuyahoga County Court of Appeals held inter alia that "fraud may be committed by the suppression of the truth by one whose duty requires him to make full disclosure of facts." Beck v. Fishel, 16 Ohio Cir.Ct.R.,N.S., 130, is factually similar in many respects to the case at bar. The syllabus of the case succinctly states the salient facts as follows:
In its opinion the court said, at page 136:
The judgment in the previous action marks no departure from the legal principles laid down in the Beck case. The distinction between Beck and the previous action in the state courts lies in the difference in the facts of the two cases. In the previous action it was found inter alia that—Balkwill did not induce the sale of the other shareholders' interests—that he did not sustain a relation of trust and confidence to the other shareholders —that the other shareholders relied upon Connelly and Speith—that the other shareholders fixed the price at which they would sell—and that the Pettibone-Mulliken transaction was immaterial. In the previous action it was held in effect that under the facts as there determined Balkwill was under no duty to disclose the Pettibone-Mulliken negotiations. However, such a determination is not tantamount to holding that a director who induces the shareholders to sell their interests at a time when he is negotiating the sale of the corporate assets upon terms that will yield a secret profit to himself is under no duty to disclose to the shareholders the material facts affecting the value of their shares. The force of the Beck case is not weakened by the judgment based upon the facts of the previous action.
The above review of the Ohio cases illustrates clearly that in this state one who sustains a fiduciary or quasi fiduciary relation towards another with whom he deals is bound to make a full disclosure of material facts known to him and not to the other party which affect the value of the property which is the subject of the transaction. The cases also demonstrate that the law of Ohio imposes a duty to make full disclosure in those circumstances where such disclosure is necessary to dispel misleading impressions that are or might have been created by a partial revelation of the facts.
It will serve to bring plaintiffs' claim into sharper focus by again reciting the provisions of Section (b) of Rule X 10b-5 upon which this action is based.
The above section of the rule is designed to prevent false and misleading statements. Plaintiffs do not claim that defendants made untrue statements. They rely upon that portion of Section (b) which requires disclosure of material facts necessary to dissipate the misleading implications of statements made. In support of their contention that Rule X 10b-5 expands or enlarges the duty of disclosure beyond the duty defined by the law of Ohio, plaintiffs cite and rely upon expressions of the courts and commentators in Kardon v. National Gypsum Co., D.C., 73 F.Supp. 798; Speed v. Transamerica Corp., D.C., 71 F.Supp. 457; Fry v. Schumaker, D.C., 83 F.Supp. 476, 478; Speed v. Transamerica Corp., D.C., 99 F.Supp. 808, 831; Pennsylvania Company for Insurances, etc. v. Deckert, 3 Cir., 123 F.2d 979; 43 Yale Law Review 242; 59 Yale Law Review 1120 et seq.; 32 Texas Law Review 200-205. The generalities in the foregoing authorities to the effect that Rule X 10b-5 cannot be limited by common-law standards shed no light on the question whether Rule X 10b-5 is more exacting in its requirements of disclosure than the law of Ohio. However, there are suggestions that because section (b) does not in terms refer to fraud it contains no requirement of scienter, 32 Texas Law Review 205, nor any requirement of proof of wrongful intent,
The same equitable principles have been engrafted on the law of fraud in Ohio. I am unable to perceive wherein Rule X 10b-5 imposes any greater or higher duty to speak where to remain silent would constitute fraud, than the law of Ohio. Nor does it appear that section (b) of the rule imposes any different or more stringent duty to disclose material facts necessary to make the statements made not misleading, than the duty imposed in similar circumstances under Ohio law. Indeed a breach of the duty to disclose material facts necessary to make the statements made not misleading is indistinguishable from concealment as that term is understood in Ohio law. Long v. Mulford, supra.
In prosecuting the action in the state courts plaintiffs urged that the law of Ohio required Balkwill to make full disclosure of the Pettibone-Mulliken transaction. In their brief in the Common Pleas Court plaintiffs argued that "The principal question in this case is whether the defendant Balkwill was required to disclose to his fellow shareholders in The Cleveland Frog & Crossing Company the negotiations which he had on Monday, July 17th, with officials of the Pettibone-Mulliken Corporation."
The same argument was repeated in various forms both in plaintiffs' briefs and in their proposed findings submitted to the Common Pleas Court. In support of their motion to certify the record to
It is beyond the competence of this Court to review the judgment of the state court in the previous action. Without indicating any opinion on the correctness of that judgment, it is appropriate to remark that even if the final judgment in that action was erroneous it would nevertheless constitute a bar to the maintenance of this action against defendants Balkwill and GEN Corporation. Restatement of Judgments, § 48, Comment (a), p. 191.
For the foregoing reasons it is held that this case is based upon a cause of action no different from the cause of action upon which plaintiffs sought recovery in the previous action and that the final judgment in that action constitutes a bar to the maintenance of this action against defendants Balkwill and GEN Corporation who were defendants in the state court action.
Even if this case be considered as based upon a different cause of action against defendants Balkwill and GEN Corporation, I am of the opinion that plaintiffs are barred by the related doctrine of collateral estoppel from maintaining this action.
The doctrine of collateral estoppel, which is a narrowed version of res judicata, is based upon the principle that—
The distinction between res judicata and collateral estoppel is delineated clearly in United States v. International Building Co., 345 U.S. 502, at pages 504-505, 73 S.Ct. 807, 808, 97 L.Ed. 1182:
As noted above, plaintiffs concede that the doctrine of collateral estoppel is applicable here and is effective to foreclose the relitigation of those ultimate facts determined in the state court action. Plaintiffs contend, however, that the State court's finding that the negotiations for the sale of assets of Pettibone-Mulliken was not a material fact, was in effect a determination that under Ohio law there was no duty upon Balkwill to disclose the prior negotiations. However, the Ohio courts enunciated no rule of law decisive of that issue. Plaintiffs concede that they are precluded from litigating those ultimate facts found in the previous action which were necessary to a determination of that case. Such a concession includes inter alia the findings—that plaintiffs were not induced to sell their shares by any representation or statement of Balkwill—that plaintiffs did not repose any trust or confidence in Balkwill—that plaintiffs did not rely upon any statements made by Balkwill—as well as those findings which exonerated Balkwill of the charges of fraud, misrepresentation, concealment and most, if not all, of the other findings hereinabove set forth. As shown above, the Common Pleas Court held that the discussions relative to the Pettibone-Mulliken transaction were not material. Plaintiffs contend that such finding of immateriality is a conclusion of law and not a finding of an ultimate fact such as would estop them from relitigating the issue of non-disclosure of the Pettibone-Mulliken transaction. There is support for the view that the doctrine of collateral estoppel operates to preclude the relitigation of ultimate facts rather than questions of law decided in the previous action. See Restatement of Judgments, § 68, supra. The Supreme Court of the United States, however, takes a broader view of the effectiveness of estoppels by judgment. In United States v. International Bldg. Co., supra, collateral estoppel was defined as being applicable "to * * * matters in issue or points controverted, upon which the finding or verdict was rendered." In the later case of Partmar Corp. v. Paramount Pictures Theatres Corp., 347 U.S. 89, 103, 74 S.Ct. 414, 98 L.Ed. 532, which involved the application of the doctrine of collateral estoppel, the court answered an argument similar to that advanced by plaintiffs here as follows:
The question whether plaintiffs are barred under either of the above doctrines from maintaining the action against defendants Brooks and Pettibone-Mulliken turns in large part upon the determination whether the rule of mutuality of estoppel applies. As a general rule the doctrine of res judicata affects only the rights of those who were parties to the judgment or in privity with a party thereto. 30 Am.Jur. 441, § 393. The rule of mutuality, however, is not absolute. Ibid. In an ever increasing number of cases involving a great variety of factual situations it has been held that a prior judgment may operate as a bar against a person who was a party in the former action to prevent his relitigating the same issues with a person who was not a party to the action in which the judgment was rendered. Cohen v. Superior Oil Corp., D.C., 16 F.Supp. 221; Bruszewski v. United States, 3 Cir., 181 F.2d 419; Laffoon v. Waterman S.S. Corp., D.C., 111 F.Supp. 923. In Coca-Cola Co. v. Pepsi-Cola Co., 1934, 6 W.W.Harr., Del., 124, 172 A. 260, 263, the court said:
See also: Adriaanse v. United States, 2 Cir., 184 F.2d 968; United States v. Willard Tablet Co., 7 Cir., 141 F.2d 141, 152 A.L.R. 1194; Caterpillar Tractor Co. v. International Harvester Co., 3 Cir., 120 F.2d 82; Brailas v. United States, D.C., 79 F.Supp. 963.
The defendants Brooks and Pettibone-Mulliken were not parties in the previous action although Seifert and Cummings, officers of Pettibone-Mulliken, as well as Brooks testified in that action and were referred to in plaintiffs' argument as conspirators with Balkwill. That plaintiffs are not persuaded that the rule of mutuality should be applied here is indicated by the following statement in their main brief:
Plaintiffs assert that their cause of action is based upon the respective roles of Brooks and Pettibone-Mulliken in the conspiracy. The charge of conspiracy, however, is not a cause of action. The gist of the civil action for conspiracy is the act or acts committed in the furtherance of the unlawful combination. 11 Am.Jur. 577, § 45. As was said in De Boboula v. Goss, 90 U.S.App.D.C. 28, 193 F.2d 35, 36:
I hold that plaintiffs are estopped and barred from maintaining this action against defendants Brooks and Pettibone-Mulliken as well as against defendant Balkwill.
Statute of Limitations
Although the Securities Exchange Act fixes periods of limitation within which civil actions for violations of certain sections of the Act must be commenced, the Act specifies no period of limitation for actions brought under Section 10(b) nor is there any general federal statute of limitations applicable to the case at bar. In all such cases the Federal courts adopt and apply the local state law of limitation. Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743. State statutes of limitations have been applied in other actions arising under Section 10(b) of the Securities Exchange Act of 1934. Northern Trust Co. v. Essaness Theaters Corp., D.C., 103 F.Supp. 954; Osborne v. Mallory, D.C., 86 F.Supp. 869; Fischman v. Raytheon Mfg. Co., 2 Cir., 188 F.2d 783. The question here presented is whether Section 2305.07 Rev.Code of Ohio governs as to the period of limitation or whether Section 2305.09 applies. The former section is applicable in actions based upon a liability created by statute. Section 2305.09 applies where the relief sought is on the ground of fraud. Plaintiffs' action in the state court was filed in November 1950 and it was specifically alleged therein that the fraud was discovered in October 1950. This action was filed April 8, 1955, which, of course, is more than four but less than six years after the cause of action accrued.
A liability created by statute is a liability which would not exist but for the statute. Hawkins v. Iron Val. Furnace Co., 40 Ohio St. 507; Hocking Valley R. Co. v. New York Coal Co., 6 Cir., 217 F. 727; Thomas v. Pick Hotels Co., 10 Cir., 224 F.2d 664. However, the incorporation of a common-law right of action into
The pleadings, affidavits, exhibits and admissions in the record show there is no genuine issue as to a material fact. Therefore, and for the reasons hereinabove stated, defendants' motion for summary judgment is granted.