Appeal from a judgment of the United States District Court for the Southern District of New York (Whitman Knapp, Judge), dismissing a complaint alleging violations of federal securities laws and state laws in connection with the sale of a business. Affirmed.
Before: FEINBERG, Chief Judge, WINTER, Circuit Judge, and LASKER, District Judge.*fn*
Joseph and Sylvia Barrows appeal from the dismissal of their complaint alleging violations of federal securities laws and New York statutory and common law by Forest Laboratories, Inc. ("Forest"), Forest-Barrows, Inc., M.D. Oppenheim & Co., and various Forest officers, directors, and employees, in connection with Forest's purchase of the Barrows' pharmaceutical business in 1969. Following the denial of a motion for leave to amend the complaint, the court granted summary judgment dismissing the complaint on the ground that the Barrows concededly had sustained no loss under the measure of damages held applicable to their claims by the district court. We conclude that the district court neither abused its discretion nor erred as a matter of law in denying leave to amend, and accordingly affirm.
In 1969, appellants sold their pharmaceutical manufacturing business to Forest in exchange for 22,000 shares of Forest common stock, which was then being traded at $25 per share. Under the sale agreement, dated April 1, 1969 (the "Agreement"), appellants' pharmaceutical business was valued at $550,000. The Agreement contained a somewhat complicated mechanism under which the number of shares received by the appellants could be adjusted based on a rise or fall in the market value of the stock within two years after the date of the Agreement. As a result of this clause, appellants eventually received between 9,000 and 13,000 additional shares.*fn1
In 1977, Forest publicly disclosed that, from about 1963 to 1974, Forest officers had engaged in a scheme to misstate Forest's financial condition and earnings. The Barrows, who had continued to hold most of their Forest stock, filed this action in 1978, alleging that as a result of the admitted misstatement the stock they received for the sale of their business was worth substantially less than its represented value. They alleged violations by the appellees of Section 17(a) of the Securities Act of 1933 ("1933 Act")(15 U.S.C. § 77q(a)(1982)), Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)(1982)("1934 Act") and Rule 10b-5 promulgated thereunder, and various provisions of New York law. Appellants sought recission of the 1969 Agreement or, in the alternative, $550,000 plus interest. They also claimed $10,0000,000 in punitive damages.*fn2
Beginning in 1980, Forest, then under new management, began showing substantial earnings improvements, and the price of Forest stock rose sharply. Between January and August 1980, appellants sold all of their remaining shares, receiving a total of $748,229.30.*fn3 As appellants concede, the proceeds from the sale of the stock exceed the amount claimed as compensatory damages in their original complaint.
Following the sale of their stock, and two and one-half years after the filing of the original complaint, the Barrows moved to amend their complaint to add new theories of relief. The first of these claims (proposed fifth cause of action) asserted that, at the time the Barrows sold their business, the market price of Forest stock was grossly inflated as a result of the fraud perpetrated by appellees; that the stock was then actually worth no more than $1.50 per share, instead of the $25 per share at which it was being traded; and that the Barrows were therefore entitled to 335,355 additional shares -- that is the number of shares that would have been necessary to pay the Barrows $550,000 if the stock, at the time of the sale of their business, had been valued at its "true" value of $1.50 per share.
The second new claim for relief (proposed sixth cause of action) asserted that because the Barrows were fraudulently induced to accept stock having a value of no more than $46,966.50, appellees had been unjustly enriched in the sum of $503,034.50 (plus interest from the date of the Agreement).
The district court denied appellants' motion to amend the complaint.*fn4 It ruled that the two new claims would significantly expand the scope of discovery and result in an unwarranted windfall for appellants should they prevail. The court noted that in the proposed fifth cause of action the Barrows were seeking to be awarded nearly 30 percent of Forest's stock, which would have made them, together, the company's single largest stockholder. Under the Agreement, by contrast, the Barrows were to have received what amounted to no more than 4.43 percent of Forest's stock in return for the sale of their business. The court concluded that a determination whether the parties would have entered into any agreement if the stock's alleged true value of $1.50 had been publicly disclosed at the time of the sale would require undue speculation. As to the proposed sixth cause of action, the court held that because the Barrows "could have sold the Forest laboratories stock they received at the closing for precisely the value assigned to it in the Agreement,"*fn5 they had no basis for claiming that the appellees had been unjustly enriched.
Six weeks after the district court's decision, the Barrows moved for reargument. The court then determined that, rather than attempting to "clarify" its decision, the court would "rescind" it and instead declare the measure of compensatory damages it would allow if appellants were to prevail:
"they will receive (in addition to any punitive damages that may be allowed) any difference between the value at the time of the business they sold (plus interest at legal rates to and including the date on which they sold their stock) less the proceeds of such sale. They will further be entitled to prejudgment interest from the date of the sale on such difference, if any."*fn6
Following this decision, the parties attempted to proceed with discovery. Because the Barrows refused to cooperate fully, the district court entered a partial preclusion order against them as to the tax basis for the Forest shares they received under the Agreement. As a result of the preclusion order and the court's earlier decision specifying the measure of damages that would be allowed, appellees moved for summary judgment on the ground that the Barrows had ...