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BEKOFF v. CLINTON

June 8, 1972;

Oscar BEKOFF et al., Plaintiffs,
v.
R. P. CLINTON et al., Defendants


Frankel, District Judge.


The opinion of the court was delivered by: FRANKEL

FRANKEL, District Judge.

On April 18, 1972, Mr. R. P. Clinton brought suit in the District Court of Butler County, Kansas, against Clinton Oil Company (of which R. P. Clinton appears to be chief executive officer) seeking a declaratory judgment as to the legal force and effect of certain pledge arrangements under which R. P. Clinton and others had put up stock as security for loans. The action was instituted with a view to avoiding publicity to the fullest extent possible. In a letter to the directors of the Company, R. P. Clinton wrote:

 
"My counsel recommended that the action be filed in Butler County rather than in Wichita [the Company's principal place of business] to avoid any publicity concerning litigation involving Clinton Oil Company. In that connection, the court has ruled that the court file itself shall be held on a confidential basis for the parties. Counsel also feel that the case can be expedited in that court. Rest assured that I will not give any information concerning this litigation or the fact that an action has been filed to the news media. My purpose is to avoid publicity that might be unfavorable to the company. If news of this action is released, it will come from some other quarter."

 On the day of the filing of that action the Butler County Court signed an order restraining the Company, its directors, agents and employees, "from commencing any suit or action in any other court to obtain any judgment upon or to foreclose upon any collateral instrument, security instrument or account or debt which is the subject of or similarly situated to those set out in the plaintiff's action, and from doing any other act to interfere with the jurisdiction of this Court or the orderly determination of the rights of the parties and the matters in controversy in this action."

 On May 5, 1972, the instant suit was filed. Plaintiffs allege that they are shareholders of Clinton Oil Company, having acquired their Clinton shares as a result of the merger of Real Petroleum Company, in which they formerly held stock, into Clinton. Some of the plaintiffs are also directors of Clinton. Clinton Oil Company, R. P. Clinton, other officers and directors of Clinton Oil Company, and an accounting firm are named as defendants. In its first count, the complaint invokes this court's exclusive jurisdiction under Sections 10, 14 and 27 of the Securities Exchange Act of 1934. It charges that proxy statements to the shareholders of Real and Clinton, issued to achieve approval of the merger, were false and misleading in that they told of R. P. Clinton's indebtedess to the Clinton Oil Company and the collateralization thereof without reporting the denial or serious doubt as to such liabilities now reflected by the Butler County suit. Other charges of false and misleading statements are also made, but they are not important here.

 A second count, invoking this court's pendent jurisdiction, takes an alternative, possibly contradictory line. It alleges R. P. Clinton's indebtedness to Clinton Oil Company and the collateralization. It charges that those controlling the Company are failing and refusing to enforce R. P. Clinton's obligations. It seeks judgment against him derivatively on behalf of the corporation.

 A third count, against Clinton Oil Company, charges that loans to the Company's officers, extended for purchases of its shares, are secured by the very same shares (and other securities similarly affected). It charges that the Company's failure to enforce these obligations results in a number of its shares not being fully paid in accordance with law.

 The action here is brought as a class suit. Various forms of specific and compensatory relief are sought.

 On May 10, 1972, R. P. Clinton obtained from the Butler County Court an order requiring plaintiffs herein to show cause why they should not be held in contempt of that Court's order of April 18. The "Accusation in Contempt" upon which that order was made charged that the bringing of the instant suit was "in contemptuous disregard of [the Kansas Court's] Order of April 18, 1972, [and] in disrespect of [that] Court and its process * * *."

 The next round in the artillery exchange was fired here. Plaintiffs herein moved by order to show cause to stay R. P. Clinton "from prosecuting [said] motion to punish the plaintiffs [herein] * * * for contempt in * * * Kansas and further staying said R. P. Clinton from taking any other actions in said proceeding to inhibit the prosecution of this action * * *." The papers supporting this motion contain some fierce language; they label the Kansas suit a "complete charade," refer to R. P. Clinton's expressions indicating a favorable disposition toward him of that tribunal, and charge that the proceeding there is not genuinely adversary.

 Expanding upon the quoted language of their order to show cause, plaintiffs here seek ultimately to stay altogether the Kansas suit -- at least to the extent that "any further steps [there] * * * would inhibit the prosecution of this action." The full reach of their effort is expressed in the proposition that this court should stop proceedings in Kansas that might "have a substantial collateral estoppel effect on the very issues which are presented in the plaintiffs' Exchange Act claims." If that were the whole story, the motion here would be swiftly denied, and the Kansas plaintiffs allowed to proceed in entire freedom, under the command of 28 U.S.C. ยง 2283 as lately construed and applied in Vernitron Corporation v. Benjamin, 440 F.2d 105 (2d Cir.), cert. denied, 402 U.S. 987, 91 S. Ct. 1664, 29 L. Ed. 2d 154 (1971).

 But the efforts of R. P. Clinton in Kansas to use a state court restraint and contempt as deterrents against resort to the federal court present another and still developing story.

 On May 22, 1972, the Kansas State Court held a hearing, the exact dimensions of which are not certain from the materials here, and found that the plaintiffs herein had "failed to show cause why they they should not be charged with indirect civil and criminal contempt." It found that these persons "may have acted in willful disobedience" of the April 18 order "and may have performed acts and uttered statements disparaging of the Kansas Court, its proceedings and orders, including declarations that [such] proceedings * * * are a 'complete charade' and that the District Court of Butler County is a 'kangaroo court', and litigants [in the case there] * * * can, in effect, manipulate the Court and the outcome of that litigation." *fn1" Continuing, the Kansas Court found:

 
"Portions of the evidence suggest that other directors, officers or employees of Clinton Oil Company, not presently identified, may have cooperated ...

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