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PERELMAN v. PENNSYLVANIA REAL ESTATE INV. TRUST

June 15, 1977

RAYMOND G. PERELMAN
v.
THE PENNSYLVANIA REAL ESTATE INVESTMENT TRUST, et al.



The opinion of the court was delivered by: GORBEY

 In this derivative action filed by plaintiff on June 6, 1974, on behalf of The Pennsylvania Real Estate Investment Trust ("PREIT") and its holders of Certificates of Beneficial Interest, plaintiff contends that defendants violated the federal securities laws and state law with respect to two transactions. The corporate defendants are FPA Corporation, of which the defendant Marvin Orleans is Chairman of the Board and President who "bought control of the company in July of 1965"; Mid-Island Properties, Inc. ("Mid-Island"), a corporation all of whose stocks are owned by the defendant Morris Kravitz and his family. (Exhibit 1, plaintiff's reply memorandum in support of his motion for partial summary judgment.) Defendant Marvin Orleans is a Trustee of PREIT as is the defendant Morris Kravitz. The remaining individual defendants are Trustees of PREIT but own no stock in either of the corporate defendants. The defendant Sylvan Cohen, a Trustee of PREIT, is also a Director of the FPA Corporation.

 The plaintiff, a holder of 2% of the shares of PREIT, served as a Trustee until 1973.

 The plaintiff contends and defendants deny that they violated § 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder with respect to the proxy statement disclosures pertaining to a PREIT-FPA Corporation transaction in Plantation City, Florida, and a PREIT-Mid-Island Properties, Inc. project involving the Cambridge Apartments in West Goshen Township, Pennsylvania.

 Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a) provides:

 
"It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national securities exchange or otherwise, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered pursuant to section 78l of this title." (Emphasis added)

 Rule 14a-9(a) promulgated thereunder provides:

 
"No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading."

 Before getting into specifics, it is pertinent to note that Section 14(a) of the Exchange Act was intended to promote the free exercise of the voting rights of stockholders by insuring their proxies would be solicited with explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought. MILLS v. ELECTRIC AUTO-LITE CO., 396 U.S. 375, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970). In the MILLS case the Court held that there was no need to demonstrate that the alleged defect in the proxy statement actually had a decisive effect on the voting. So long as the misstatement or omission was material, the causal relation between violation and injury is sufficiently established if "the proxy solicitation itself . . . was an essential link in the accomplishment of the transaction". 396 U.S., at 385, 90 S. Ct., at 622. Later in TSC INDUSTRIES, INC. v. NORTHWAY, INC., 426 U.S. 438, 449, 96 S. Ct. 2126, 48 L. Ed. 2d 757 (1976), the Court determined that:

 
"[The] general standard of materiality that we think best comports with the policies of Rule 14a-9 is as follows: an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. This standard is fully consistent with Mills general description of materiality as a requirement that 'the defect have a significant propensity to affect the voting process.' It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." 96 S. Ct. at 2133.

 The 1973 proxy involved solicited votes to elect two trustees for a term of three years and until their successor shall have been elected and shall have qualified, the nominees being defendants Lloyd R. Bechtel and Jack Farber. With respect to the Pennsylvania transaction, the proxy statement says:

 
"The Trust's 50% partner in the partnership owning the Cambridge Apartments, West Goshen Township, Pennsylvania, is Mid-Island Properties, Inc. ("Mid-Island"), of which Morris A. Kravitz, a Trustee, is President. The Trust for its 50% interest invested $275,000 in the development of this property for which it receives 10% per annum of its original capital investment as a guaranteed payment. The Partnership Agreement as amended provides among other things that after the Trust receives its guaranteed payment each year, Mid-Island is to receive an amount equal to the Trust's distribution plus any amount it was required to pay to the Managing Agent, with the balance of the cash flow being distributed 70% to the Mid-Island and 30% to the Trust and that upon the sale or other distribution of the property, the Trust is to receive its capital investment of $275,000, Mid-Island is to receive its capital investment in the project, and any excess to be equally divided between the parties."

 The plaintiff contends that the aforementioned statement violates Rule 14a-9(a) because it "fails to disclose the change in the cash flow distribution which had been orchestrated after Morris Kravitz' company, Mid-Island Properties, Inc., emerged as PREIT's partner". It appears that originally a deal involving the Cambridge Apartments was covered by an agreement dated June 13, 1967, in which PREIT and one Murray Eisman, the son-in-law of Morris Kravitz, were parties. That agreement gave PREIT preferential distribution of $27,500 per year until the apartments were complete. Eisman received the next $27,500 and the remaining cash flow was to be distributed on a fifty-fifty basis. (Exhibit D, plaintiff's memorandum.) Pursuant to the partnership agreement, PREIT had advanced the sum of $275,000.

 
"[It] became clear that the development seemed doomed to failure under Eisman's leadership. As a result, the Trust stood to lose its $275,000 investment. In order to save the deal, Morris Kravitz infused a substantial amount of money (at least $675,000) to see to the completion of the apartments and arranged to substitute Mid-Island Properties, Inc., a solid financial partner, in place of the failing Eisman. As a result of Kravitz' action, the deal was saved from disaster. In consideration for Kravitz' substantial infusion of money into the deal and the substitution of Mid-Island for Eisman, the cash flow distribution in question was amended. As is evident, Kravitz' action conferred substantial benefits upon the Trust."
 
(Defendants' Memorandum in Opposition to Plaintiff's Motion, pp. 11, 12, Docket Entry 152.)

 Plaintiff points out that by virtue of a surety agreement made in connection with the original partnership agreement defendant, Morris A. Kravitz, became surety for Eisman for the prompt and faithful performance of all of the obligations required to be performed by Eisman for final completion of all the apartment units (both First Phase and Second Phase) within the times and in the manner set forth in Article 5 of the partnership agreement.

 The surety agreement further provides specifically:

 
"A. Surety and Eisman do hereby assume and agree to pay to
 
(i) Partnership all capital required to be contributed to the Partnership by Eisman pursuant to § 403 of the Partnership Agreement;
 
(ii) PREIT all sums advanced by PREIT upon the failure of Eisman so to do under § 403 of the Partnership Agreement;
 
(iii) PREIT all sums required to be paid to PREIT by the partnership pursuant to Article VI of the Partnership Agreement;
 
(iv) PREIT all of the capital withdrawal to which PREIT is entitled pursuant to § 701 of the ...

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