The opinion of the court was delivered by: KNOX
Plaintiffs, Thomas Kobil and George Kobil, brought this securities action against Bio-Med Computer Services, Inc. (formerly National Pollution and Computer Corporation), the brokerage house of Moore, Leonard & Lynch, Inc. and several individual defendants. The plaintiffs claim that the defendants are liable for alleged violations of the Securities Act of 1933, 15 U.S.C. § 77 a et seq., stemming from the issuance by National Pollution and Computer Corporation of 32,000 shares of its common stock to the plaintiffs and from a subsequent rescission offer by Bio-Med Computer Services, Inc., the issuer's successor corporation. Jurisdiction is based on 15 U.S.C. § 77 v.
Individual defendant Donald Cohen now moves this court for summary judgment against the plaintiffs pursuant to Rule 56 of the Federal Rules of Civil Procedure.
The court must grant defendant Cohen's motion for summary judgment because there are no genuine issues of material fact, and Cohen is entitled to a judgment as a matter of law for reasons stated below.
Plaintiffs ' complaint, as amended, is somewhat confusing as to which sections of the Securities Act of 1933 provide the basis for defendant Cohen's civil liability. A fair reading of the complaint, as amended, indicates that plaintiffs seek to recover under Section 21(1) of the Act, 15 U.S.C. § 77l (1), for Cohen's alleged involvement in the sale of unregistered securities in violation of Section 5 of the Act, 15 U.S.C. § 77 e, as well as under Sections 12(2) and 17(a) of the Act, 15 U.S.C. § 77l(2), § 77q (a), for alleged fraud in the issuance of 32,000 shares of National Pollution and Computer Corporation common stock and in the subsequent rescission offer by the issuer's successor corporation. There is also some mention in the complaint, as amended, of an alleged violation of the registration provisions of the Pennsylvania Securities Act of 1939, 70 P.S. § 31 et seq., which the court does not treat as a pendent state claim because that Act contains no provision for civil liability.
The court understands this alleged violation of Pennsylvania security law to relate to the plaintiffs' claim of fraud through non-disclosure under Sections 12(2) and 17(a) of the Securities Act of 1933. Finally, the plaintiffs have alleged no violations of the Securities Exchange Act of 1934, 15 U.S.C. § 78 a, et seq., or SEC Rule 10b-5, 17 CFR 240. 10b-5 (1974).
The court finds there is no dispute as to the following facts regarding this motion for summary judgment. National Pollution and Computer Corporation, the predecessor corporation to defendant Bio-Med Computer Services, Inc., issued 32,000 shares of its common stock to the plaintiffs for the price of $1.00 per share. These shares were delivered by United States mail to the plaintiff on or about April 24, 1969 and were not registered as required by Section 5 of the Securities Act of 1933. Likewise, the issuer corporation failed to register as a dealer as required by Section 3 of the Pennsylvania Securities Act of 1939, 70 P.S. § 33, and failed to secure an exemption as provided by Section 2(f)(8) of that Act, 70 P.S. § 32(f)(8), in order to sell its own securities. The plaintiffs are brothers who jointly purchased these shares on an equal basis. George Kobil's only connection with the securities transaction was putting up half of the purchase price. He had no knowledge of the affairs of the issuer corporation, and at all times his brother Thomas Kobil acted as his agent with full authority regarding acceptances and refusals of all offers. (See September 14, 1972 , deposition of George Kobil, pp. 4-7. ) Thomas Kobil, however, played a more active role in the issuer corporation, serving as a director from about November, 1969 to September or October, 1970. See September 14, 1972, deposition of Thomas Kobil, p. 72. In addition, Thomas Kobil stated that he had knowledge in 1969 that the securities had not been registered under the Securities Act of 1933 and that he saw monthly corporate financial statements from between January 31, 1970, and September 30, 1970 as well as the February 28, 1971 statement and 1971 annual statement. See September 14, 1972 deposition of Thomas Kobil, pp. 18-32; Plaintiffs' Answers to Defendant Cohen's Request for Admissions 2(e).
Defendant Cohen is a medical doctor whose services on the Bio-Med Computer Services, Inc. Board of Directors were for the purpose of advising on medical matters concerning the E.K.G. - computer program and ethical procedures of salesmanship to the medical community. See Cohen Affidavit, 5, 13. At the time plaintiffs purchased their shares, defendant Cohen was not a stockholder, director or officer in National Pollution and Computer Corporation or its successor, Bio-Med Computer Services, Inc. In fact, the plaintiffs admit that Cohen was unknown to them at the time, did not induce them to purchase their shares, did not participate directly or indirectly in the issuance of the shares, and was not making a market in the stock. Plaintiffs' only claims against defendant Cohen are based on his service as director of Bio-Med Computer Services, Inc. at the time of the corporation's rescission offer in January, 1971. See September 14, 1972 deposition of Thomas Kobil, p. 71.
Pursuant to an Order of the Pennsylvania Securities Commission, Bio-Med Computer Services, Inc. sent a letter dated January 8, 1971 to all stockholders, including the plaintiffs, offering to repurchase their shares for the same price paid at the time of purchase. For the plaintiffs this would have amounted to $1.00 per share. The letter informed the stockholders that they could choose to keep their shares, but should notify the corporation in writing on or before January 20, 1971 of their decision either to tender or retain their shares. The plaintiffs did not accept the rescission offer; rather, by letter of January 18, 1971, they extended a counter offer whereby the corporation either could re-purchase their 32,000 shares at $3.00 per share or make a downpayment of $32,000 with the possibility of additional payments or issuance of shares to the plaintiffs in the event the corporation sold shares publicly during the next five-year period. Bio-Med Computer Services, Inc. did not accept the plaintiffs' counter offer, and the plaintiffs filed this securities action on July 7, 1972.
Claims Under Sections 5 and 12(1)
The plaintiffs claim that defendant Cohen is liable under Section 12(1) of the Securities Act of 1933 for aiding and abetting in the issuance of 32,000 shares of unregistered common stock in violation of Section 5 of the Act. Section 12(1) provides the basis for civil liability by stating that any person who offers or sells a security in violation of Section 5 is liable to the person purchasing the security who may sue to recover the consideration paid for the security with interest thereon, less the amount of any income received thereon.
The plaintiffs admit that at the time they purchased and received the 32,000 shares of unregistered common stock, defendant Cohen was not a stockholder, director, or officer of the issuer corporation. In fact, Cohen was unknown to them at the time and had nothing to do with the issuance of these shares. The plaintiffs, however, present the somewhat novel contention that Cohen became liable with the other defendants for the issuance of the unregistered stock by engaging in an alleged cover-up rescission offer. According to the plaintiffs, by acting as a director of Bio-Med Computer Services, Inc. at the time of the January 8, 1971 recission letter Cohen aided and abetted the original issuance of the shares.
The court finds that whether or not the January 8, 1971 rescission letter was fraudulent, defendant Cohen is not liable to the plaintiffs under Section 12(1) of the Securities Act of 1933. It is clear that any unlawful act under section 5(a) would have occurred at the time the unregistered securities were sold or delivered to the plaintiffs, not at the time the corporation made its rescission offer. As noted by Judge Friendly in Katz v. Amos Treat & Co., 411 F.2d 1046, (2d Cir. 1969), Section 12(1) was not intended to embrace an individual who had nothing to do with the issuance of the unregistered shares. By merely serving as a director at the time of the rescission offer, Cohen could not have aided and abetted in a sale and delivery of unregistered stock which had occurred some twenty-one months earlier.
In addition, plaintiffs' claim under Section 12(1) is barred by the applicable statute of limitations. Section 13 of the Securities Act of 1933 provides that if an action is brought to enforce a liability created under Section 12(1) of the Act, such action must be brought within one year after the violation upon which it is based. The undisputed facts show that the 32,000 shares of unregistered stock were delivered to the plaintiffs on or about April 24, 1969. Plaintiff Thomas Kobil admits in his September 14, 1972 deposition that he had knowledge in 1969 that the stock had not been registered in accordance with the Securities Act of 1933. Despite this ...