UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK
January 8, 1976
Browning Debenture Holders' Committee, et al., Plaintiffs
DASA Corporation, et al., Defendants
Owen, District Judge.
The opinion of the court was delivered by: OWEN
OWEN, District Judge:
This case was tried before me without a jury over six days in June 1975. The complaint, filed in 1972, originally had five causes of action arising out of the DASA Corporation's
proposal to sell and the eventual sale of certain of its computer equipment to raise needed cash. The sale required the approval of its debenture holders, which included the two individual plaintiffs, Sims R. Browning and Roy E. Brewer, together with Bradley R. Brewer,
plaintiffs' counsel herein, who denominated themselves as plaintiff "Browning Debenture Holders Committee." As part of the proposal to the debenture holders, DASA proposed to reduce the conversion price of the debentures into common stock from $42.42 to $21.00.
Five causes of action alleging various wrongs were asserted against various defendants including DASA Corporation; The Bank of New York, trustee under a Trust Indenture covering plaintiffs' debentures; Arthur Andersen & Co., the then auditor of the corporation; and various individual defendants, officers and directors of DASA. At the outset, only DASA, the Bank and Andersen were served.
Of the five causes of action, the first two alleged that the proxy materials and shareholders reports in connection with the DASA annual meeting in 1972, and the DASA financial statements for 1971, were misleading. The implication flowing from these allegations was that the scheduled 1972 DASA stockholders' meeting was illegal since the proxies to be used therein were fraudulently solicited. Judge Motley denied a preliminary injunction, permitted the meeting and allowed the sale of the equipment that was there duly voted. Judge Greisa thereafter dismissed the first two causes of action as moot.
This ruling left causes of action 3, 4 and 5.
The 5th, purporting to be a derivative claim against Andersen, alleged that the auditors (1) omitted a material fact in the annual report of 1970; (2) that this omission was corrected in the 1971 report; and (3) that the 1971 report failed to state that the omission had been made in the prior (1970) report. Plaintiffs then claimed that Andersen, knowing that its opinions would be sent with the proxy materials to the shareholders in 1971 and 1972, breached its duty of care to the corporation by the said actions. On this basis, plaintiff demanded up to $3,000,000 in damages running to the corporation, without any allegation as to how these damages were occasioned by the claimed omissions. The 5th cause of action, on motion by Andersen, was dismissed by me in an opinion dated April 18, 1975
for failure to allege damage or comply with Fed. R. Civ. P. 23.1.
This ruling left only the 3rd and 4th causes of action.
The 4th cause of action was solely against The Bank of New York, the trustee under the Trust Indenture covering the plaintiffs' debentures. Plaintiffs' claim was that the Bank, as trustee, had a duty to form a judgment as to the fairness and propriety of the reduction of the conversion price of the debentures proposed by management and communicate that opinion to the debenture holders prior to their vote.
The demise of that cause of action (the 4th) came about as follows. In January 1975, a trial date had been set for May. In March and April plaintiffs belatedly commenced a whirlwind of activity with the obvious design of delaying the trial.
This included numerous notices to depose Bank employees, a motion for partial summary judgment against the Bank, and a motion to add DASA's lawyers as defendants, together with a request for a six months' adjournment on the ground that DASA had coercively subverted the Bank and made an alleged pay-off to it.
From the moving papers, this latter motion seeking to add attorneys as defendants and raising charges of illegality, initially appeared to have some substance being apparently based on the contents of a "one page" letter of DASA's counsel to the Bank, a "copy" of which was annexed to plaintiff's moving papers. DASA's answering papers, however, disclosed that the alleged "letter" was but the last page of a three page letter, the first two pages revealing the context and therefore the propriety of the entire matter. That motion was summarily denied.
At the same time, upon the argument of plaintiffs' motion for partial summary judgment against the Bank on the ground of the Bank's alleged duty to investigate the proposal and give its opinion to the debenture holders, plaintiffs' counsel orally acknowledged that there was no existing legal support for the relief requested.
I denied this motion as well, observing that both the motion and the complaint sought the identical relief against the Bank. Given the lack of legal support for the allegations against the Bank, and plaintiffs' misuse of the "one page" letter in the companion motion, I directed that the plaintiffs furnish an undertaking to the Bank in the amount of $25,000 for costs and attorneys' fees in the event I later determined that such payment was justified, the risk of which was becoming apparent. The plaintiffs, alleging financial inability, declined to furnish the said undertaking and I dismissed the 4th cause of action upon being authoritatively so informed.
All the foregoing left but one cause of action, the 3rd. This was solely against defendant DASA, involving the March 9, 1972 solicitation letter seeking the debenture holders' consent to the release for sale of the computer equipment and providing for a reduction from $42.42 to $21.00 of the conversion price of the debentures. Plaintiffs claimed that the March 9 letter contained some false statements as to material facts and omitted other alleged material facts. Those alleged material misstatements and omissions were set forth in 21 assorted paragraphs. In a conference with all counsel the day before the trial, plaintiffs' counsel withdrew the allegations of paragraph (h) (i)-(vii).
Thereafter the trial commenced. One of the allegations pleaded in various ways and places in the 3rd cause of action was that the Board of Directors owed a duty to consider the debenture holders interests in setting the proposed new lower conversion price. Concluding that there was no such duty as long as all the facts were fairly set forth from which the debenture holders could reach an intelligent, well-informed conclusion as to whether or not to accept the proposal,
I dismissed paragraphs (a), (c), (d), (l), (m) and (n). Further, having concluded that the Bank of New York had no duty either to form an opinion as to the "fairness" of the proposal, or to communicate any such opinion to the debenture holders (see supra), it necessarily followed that DASA had no duty to advise the debenture holders that the Trustees had taken no position in that regard. I therefore dismissed paragraph (e). Also, during the trial, plaintiffs' counsel, upon questioning, withdrew the allegations of paragraphs (f) and (s), and, it appearing that (g) had been alleged by plaintiffs in error, that claim, too, was withdrawn.
This left for resolution at the close of the trial the allegations of the following paragraphs: (b), (i), (j), (k), (n), (o), (p), (q), (r), (t) and (u).
After six days of trial, I conclude that no substantial evidence was offered by plaintiffs in support of any of the said allegations.
As to any possible "conflict of interest" of DASA's officers and directors alleged in paragraph (b), the holdings of the various members of DASA Management are extensively set forth in the March 9th letter and no evidence was adduced before me on the subject of any error or omission in the information presented. Paragraph (b) is dismissed.
No proof was offered whatsoever as to anything remotely connected with Massachusetts law as bearing upon the allegations of paragraphs (i) and (j) and they are therefore dismissed.
The contention in (k) was that the solicitation letter was allegedly incomprehensible to an unsophisticated reader in its treatment of the right of DASA to dispose of the equipment and leases. I find this, upon reading the allegedly offending section, to be without merit. I conclude that a reasonable reader would have no confusion as to the scope of the authorization to sell the equipment and leases to which he was asked to consent. Paragraph (k) is therefore dismissed.
The allegations of Paragraph (n) do not seem to delineate facts which constitute a wrong, and I do not, upon study of the two instruments, find anything in the shareholders' proxy statement at page 7 which "appears to be in direct conflict" with anything on page 3 of the March 9 letter. Paragraph (n) is dismissed.
Paragraph (o) alleges that a reader must make a cross reference from page 5 to make sense of certain of the material on page 12 of the March 9 letter. I fail to see that is necessary in order to be able to understand what is stated in either place and no evidence was presented to me of any false or misleading statements concerning the "Magicall Business." Paragraph (o) is dismissed.
Paragraph (p) alleges that certain language has the effect of creating confusion. From a reading of the March 9 letter, I consider the allegations are frivolous and dismiss Paragraph (p).
Paragraph (q) alleges an implication in the March 9 letter that if the debenture holders do not consent to the requested amendment to the Indenture there will be a forced liquidation of DASA, and the debenture holders will receive nothing. The text does not support the allegation.
Paragraph (q) is dismissed.
Paragraph (r) alleges, in essence, that the use of the proceeds of the sale of the equipment and lease and the benefit to DASA from this sale is in no way clearly stated. However, I find at page 17 of the March 9th letter a sufficiently clear statement that the proceeds of the sale would be used first to eliminate "senior indebtedness of approximately $833,000 and the balance applied to reducing the principal of DASA's revolving short-term bank credit line approximating $1,228,000, and remaining funds, if any, thereafter to be added to the general funds of DASA." Paragraph (r) is dismissed.
Paragraph (t) alleges a failure to advise the debenture holders of the income tax consequences of the proposal. However, since the transaction did not involve either a "granting or extension of any options, warranties or rights to purchase 'securities' or the issuance or exercise of any options" there were no tax consequences to discuss. Paragraph (t) is dismissed.
Paragraph (u) alleges a failure to disclose that DASA is giving or has given serious consideration to the "possibility of making at some time in the near or foreseeable future" another proposed reduction in the proposed conversion price. No evidence was offered on this subject and no amendment of this type has apparently ever been proposed. Paragraph (u) is dismissed.
The foregoing determinations dispose of the balance of the 3rd and last of the causes of action, leaving nothing behind but the large and disturbing question of the plaintiffs' good faith in instituting and maintaining the action.
Turning to that subject, during the trial itself, Sims Browning, one of the named plaintiffs and a member of plaintiff Browning Debenture Holders Committee, and himself a professional securities analyst, was asked:
Q. If DASA had reduced the conversion price, the suit would not have been commenced?
Also, Bradley Brewer, attorney for plaintiffs and a member of the plaintiff "Committee" as well, acknowledged upon the trial the following critical facts: (1) that DASA desperately needed the money that was to be raised by this proposed sale of computer equipment; (2) that he (attorney Brewer) was possessed of no evidence that the proposed sales price was unfair; and (3) that the monies were used as the proposed agreement had stated that they would be used.
Also received in evidence on the trial was a certain letter dated March 16, 1972, written by plaintiffs' attorney stating that the then existing stalemate in arriving at what plaintiffs demanded as a conversion price would cause litigation by said plaintiffs which
might seriously delay (or prevent altogether) the proposed sale of computer assets and otherwise work in ways damaging to the operation of the Corporation and the interests of the Corporation's shareholders and creditors alike.
The coercive intent of this letter is clear and inescapable. Plaintiffs' attorney, at the same time, demanded that DASA include a letter to be sent to debenture holders the statement
that the debenture holders as a group withhold their consent to the proposed sale of assets until the Corporation's Management agrees to reduce the new conversion price of the debentures to a number not more than $12.00 and not less than $6.00.
From the above coercive 1972 letter at the outset to plaintiff Browning's 1975 trial testimony at the close, coupled with a lack of merit in any corner of the case, it is now clear that Judge Motley was correct in May 1972 when she wrote
In fact, we suspect that much of the litigation for the within suit is plaintiffs' desire to bargain defendants to a lower conversion price,
and that Judge Greisa was right in October 1973 when he observed
the real "injury" which plaintiffs are seeking to cure is their failure to achieve the low conversion price for the debentures . . . .
This is further confirmed by one of plaintiffs' demands for relief in their post-trial submission, which seeks a present reduction of "the debenture conversion price to a point equal to the current market price of the common stock."
Consequently, at this time, having the entire picture before me, I conclude that this action was instituted and maintained to use the court as a negotiating tool, without any factual or legal basis for the myriad allegations pleaded against so many parties in the 53 page amended complaint.
In support of this conclusion, a review of some of the many details of thess proceedings is appropriate. The action was commenced on March 30, 1972. In May 1972 Judge Motley denied the plaintiffs' motion for a preliminary injunction to prevent DASA from disposing of the assets which were the subject of the action. Thereafter, although the sale sought to be enjoined had already been consummated, plaintiffs took an appeal to the Second Circuit, which appeal was dismissed as moot. On the oral argument of DASA's motion to dismiss, the Court of Appeals suggested that it might direct the District Court to set the action down for immediate trial. Plaintiffs' counsel declined this offer, asserting that extensive discovery was required. Almost a year later, in May of 1973, plaintiffs moved for class action determination. Judge Greisa deferred ruling on that motion until after discovery in order to define the issues that were allegedly being pursued on behalf of the class. Plaintiffs never took discovery. Instead, shortly thereafter, they moved for summary judgment on claims 1 and 2 and DASA also moved for summary judgment dismissing the same claims. Defendant Arthur Andersen, pointing out that no relief was sought against it on those claims, joined DASA's motion.
In October of 1973, Judge Greisa dismissed claims 1 and 2 against all parties on the ground that they were moot and stated no valid claim for damages. Although manifestly untimely,
approximately five and one-half months later, plaintiffs moved for a reargument. The action in the interim had been reassigned to me and the motion for reargument was denied in July 1974. At the same time plaintiffs again moved for class action determination although no discovery had been taken in the period of over a year since Judge Greisa had made discovery a condition precedent to the renewal of the class action application. I denied the class action motion, holding that there was no class to be represented. Plaintiffs then moved for an order (1) directing that depositions be taken by a tape recording device, and (2) directing DASA to submit and serve proposed findings of fact with respect to the third cause of action. This motion was denied in October of 1974. Plaintiffs then took an appeal from the order denying the use of a tape recording and denying the demand of DASA to submit proposed findings. This was consolidated with the earlier appeal taken by plaintiffs from the denial of the motion to reargue the dismissal of Counts 1 and 2.
On January 30, 1975, I set the trial for May 5, 1975. Thereupon plaintiffs' counsel moved for summary judgment against the Bank of New York on the 4th cause of action. That was denied from the Bench on March 28, 1975. Plaintiff also moved for partial summary judgment against DASA on claim 3. That was denied in an opinion dated April 12. Plaintiffs also moved in the Court of Appeals by way of mandamus to adjourn the trial until the appeal was heard on the already dismissed claims declared moot by the Court of Appeals. The mandamus was denied from the Bench on April 1. Starting April 7 plaintiff moved for reargument of the denial of summary judgment against the Bank on count 4, made a new motion for partial summary judgment against the Bank and DASA on Count 4 on alleged new grounds.
Plaintiffs also moved to add new parties and assert a new claim, and demanded a 105 day adjournment in the trial to prepare on the new claim. Upon it being revealed that the plaintiffs had submitted a misleading instrument to the Court, the new motion for partial summary judgment and the motion for leave to add new parties and claims were denied as well from the Bench on April 25.
The new motion against DASA for partial summary judgment also asserted the claim that a proposal to reduce the conversion price of a debenture constituted a "sale" under Sec. 5 of the Securities and Exchange Act of 1933 requiring registration. This claim was nowhere pleaded and was barred by the statute of limitations. In addition, as I concluded in an opinion filed on April 14, it was without merit.
Thereafter, the plaintiff decided to serve five of those named as individual defendants to commence the action against them. When the first of said defendants moved for a dismissal for failure to prosecute, plaintiffs argued in opposition that the defendant had ". . . no obligation to participate as a defendant in the trial if it is held on May 12, 1975 (as presently scheduled) or at any time in the near future. He would not be bound by the results of the trial. . . ." I granted the motion to dismiss the five newly served individual defendants for failure to prosecute. Thereafter, the plaintiffs served a blunderbuss subpoena upon Arthur Andersen, which I quashed upon argument with leave to renew upon the trial upon a showing of specific items deemed necessary. Such subsequent leave was never sought.
Plaintiffs also moved to reargue the denial of the summary judgment against the Bank. This motion to reargue was made notwithstanding the fact that the plaintiffs had acknowledged upon the argument that their theory of liability against the Bank was without support in the law.
It was denied. Plaintiffs also served a number of notices to depose Bank officers. These were stayed pending plaintiffs undertaking to the Bank, and were not thereafter pressed.
There is more, (see Civil Docket entries, Appendix A hereto), but the foregoing, I believe, demonstrates the making of "unnecessary, groundless, vexatious and oppressive petitions and motions which various courts have held constitute appropriate reason for the exercise of the court's equitable power to award attorneys' fees against an offending party."
In Alland v. Consumers Credit Corp., 476 F.2d 951 (2d Cir. 1973), the defendant credit company had, with no apparent justification in law or fact, defaulted on certain promissory notes, and thereafter compelled protracted litigation. The court found that
Appellee's course of conduct in this action manifests an intention to use our already overcrowded court dockets and the time-consuming judicial process as means to securing financial advantage. Such conduct bespeaks a willingness, therefore, to abuse the processes of the federal court system. This alone might well provide adequate grounds for awarding reasonable attorney's fees to one in appellant's position. Id. at 958.
This court is to be used as a forum for the resolution of disputes between parties. It may not be used as a weapon, as it has been here.
Therefore, I conclude that DASA Corporation and the Bank of New York should be reimbursed for attorneys' fees occasioned by the improper conduct of plaintiffs in this action.
DASA and the Bank of New York are, therefore, to submit to me within 45 days in affidavit form an appropriate statement of services rendered, to which plaintiffs may respond, so that I may reach a suitable conclusion on this issue.
Given all the foregoing, the 3rd cause of action is dismissed. The determination as to attorneys' fees shall await the requested submissions.
The foregoing is so ordered. Submit judgment on notice.