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Ruskay v. Waddell

decided: February 17, 1977.

SOPHIE RUSKAY, LOUIS FELDMAN, TRUSTEE, ETC., WEBSTER FACTORS, INC., AND IRWIN L. FEINBERG, AS TRUSTEE, ETC., PLAINTIFFS-APPELLANTS,
v.
CHAUNCEY L. WADDELL, JOE JACK MERRIMAN, CORNELIUS ROACH, MITCHEL J. VALICENTI, WADDELL & REED, INC. (A NEW YORK CORPORATION), WADDELL & REED INC. (A MASSACHUSETTS CORPORATION), AND UNITED FUNDS, INC., DEFENDANTS-APPELLEES



Plaintiffs brought an action in the United States District Court for the Southern District of New York alleging a sale of fiduciary office arising out of a transfer of the stock of the investment adviser to a mutual fund. The district court, Metzner, J., granted defendants' motion for summary judgment on grounds of release and res judicata, and plaintiffs appealed. Affirmed.

Mansfield, Van Graafeiland and Meskill, Circuit Judges. Mansfield, Circuit Judge

Author: Meskill

MESKILL, Circuit Judge:

This case arises out of the sale of the stock of an investment advisory company, a class of transaction that has spawned more than its share of unusually complex litigation. The instant appeal, the latest chapter in a series of class and stockholder actions concerning a large mutual fund, is no exception.

The mutual fund in question is United Funds, Inc. ("United"). Prior to 1969, the investment advisor of United was Waddell & Reed, Inc. ("W&R"). In that year, W&R sold 97 percent of its outstanding shares to Continental Investment Corporation ("CIC"). CIC then merged W&R into one of its wholly-owned subsidiaries, CWR Corporation, whose name was changed to Waddell & Reed ("New W&R").

The investment advisory contract was terminated by operation of law when the sale was made.15 U.S.C. ยง 80a-15(a)(4). The sale was thus made conditional upon the reinstatement, by United's shareholders, of the contract with New W&R. In June, 1969, this approval was duly given.

Prior to this reorganization, two shareholder actions (the "Horenstein-Ruskay actions") were begun in federal court, one brought by Mrs. Ruskay, who is the plaintiff in the instant action as well.*fn1 In substance, these actions alleged that W&R had illegally diverted the brokerage business of United to a wholly-owned subsidiary of W&R, Kansas City Securities Corporation ("KCSC"). They also alleged that United's account had been "churned" and that W&R had appropriated "give-ups"*fn2 which properly belonged to United. The return of all these profits, allegedly amounting to several million dollars, was demanded. While this action was pending, the sale to CIC was announced. With that development, the theory of the action was changed by amending the complaint to allege that the price paid by CIC for W&R stock represented, in part, the profits realized from the breaches of fiduciary obligations set forth in the original complaints. The actions now sought recovery from W&R on a theory of constructive trust. In December, 1969, both of these actions were settled for $650,000. A release was executed in October, 1970.

The law governing the sale of an investment advisor's stock at that time was expressed in Rosenfeld v. Black, 319 F. Supp. 891 (S.D.N.Y. 1970). In that case, it was held that the sale of such stock for whatever the market would pay, absent any specific wrongdoing by the advisor, was entirely proper, and did not render the selling stockholder accountable to the fund. See also SEC v. Insurance Securities, 254 F.2d 642 (9th Cir.), cert. denied, 358 U.S. 823, 3 L. Ed. 2d 64, 79 S. Ct. 38 (1958).

The following year, the decision of the district court was reversed, Rosenfeld v. Black, 445 F.2d 1337 (2d Cir. 1971) (Friendly, J.), cert. dismissed under Rule 60, 409 U.S. 802, 93 S. Ct. 24, 34 L. Ed. 2d 62 (1972). Shortly thereafter, Mrs. Ruskay brought a second derivative action. This time, the complaint alleged, in keeping with Rosenfeld, that the excess of the price paid for W&R over its net asset value, approximately $62,000,000, represented a sale of W&R's fiduciary position. The defendants moved for summary judgment on the grounds that the settlement of the prior actions barred these suits on grounds of res judicata and release. The district court, Metzner, J., granted the motion, 342 F. Supp. 264 (S.D.N.Y. 1972), and this appeal followed. We affirm.

As part of the settlement of the 1969 actions approved by Judge Lasker pursuant to the requirements of Rule 23.1,*fn3 a release was executed in favor of W&R and the individual defendants. In relevant part, it read:

UNITED FUNDS, INC., a Delaware corporation having its principal office and place of business at 20 West 9th Street, Kansas City, Missouri, for good and sufficient consideration, the receipt and adequacy of which is hereby acknowledged, does hereby release and forever discharge Waddell & Reed, Inc., a New York corporation having its principal office and place of business at 20 West 9th Street, Kansas City, Missouri, and Kansas City Securities Corporation, a Missouri corporation having its principal office and place of business at 20 West 9th Street, Kansas City, Missouri, their respective directors, officers, agents and employees and all individual defendants in the above entitled actions, including Chauncey L. Waddell, Cornelius Roach, Joe Jack Merriman and Robert W. Wagner and their respective heirs, executors, administrators and assigns of and from any and all claims, demands or causes of action arising at any time from the beginning of the world to the date of these presents the undersigned, its successors or assigns, had, now has or may hereafter have against the aforementioned released parties, or any one or more of them, for or by reason of any of the matters or transactions recited or described in the complaints, supplemental complaints and/or other pleadings filed by the plaintiffs in the above entitled actions saving and reserving, however, the obligations of the defendants as set forth in the Stipulation of Settlement in these actions. (emphasis added)

Appellants vigorously urge that, despite the clear language of this release, it is operative only as to the specific claims they were pressing at the time of settlement. This contention is devoid of merit.*fn4

In executing this release and paying out a substantial amount of money, the appellees sought more than relief from the particular allegations involving KCSC which were the focus of the lawsuit. The affairs of W&R and CIC had already given rise to a flood of litigation in the Southern District and the state courts of Delaware and New York. It was certainly reasonable and businesslike to seek finally to settle any allegations of wrongdoing arising out of the sale of W&R, in order that there would no longer be a cloud over the transaction. As the district court found, this was the precise intent of the settling parties. 342 F. Supp. at 271. This is the clear import of the language "any and all claims, demands or causes of action . . . for or by reason of any of the matters or transactions recited or described in the complaints, supplemental complaints, and/or other pleadings . . . ." Appellants have not advanced any reason for a narrow construction of this broad language.*fn5

Advised by highly competent counsel, the plaintiffs made an informed decision to grant repose to the defendants in return for a substantial sum.*fn6 In hindsight, the bargain appears to have been a bad one for the plaintiffs. Had they known then what they know now, it is likely that more money would have been demanded before a compromise was reached. However, the understandable desire of the plaintiffs for a larger recovery in no way limits the scope of the release they gave in ...


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