Appeal from a judgment entered in the United States District Court for the Southern District of New York, Richard Owen, Judge, against debenture-holder plaintiffs in a suit against the debenture holders during the course of the proceedings, including orders dismissing claims against the company's accountants and the indenture trustee and awarding attorneys' fees against the debenture holders. Affirmed except as to the award of attorneys' fees and remanded.
Lumbard, Mansfield and Gurfein, Circuit Judges.
MANSFIELD, Circuit Judge:
This suit by certain holders of 6% convertible subordinated debentures*fn1 issued by DASA Corporation (DASA) and due in 1987 is based on alleged false and misleading statements and breaches of fiduciary duty in connection with proxy statements used by DASA for its 1972 annual meeting and a solicitation letter dated March 9, 1972, sent by DASA to the debenture holders requesting permission to sell certain DASA assets pursuant to the indenture under which the debentures were issued. Plaintiffs, a committee consisting of three debenture holders plus two members suing individually and as class representatives, brought suit against DASA, its accountant, Arthur Andersen & Co. (Andersen), and the indenture trustee, Bank of New York (Bank), alleging numerous violations of the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, and the proxy rules. The United States District Court for the Southern District of New York, Thomas P. Griesa, Judge, dismissed two of plaintiffs' five claims in 1973, and we affirmed. 524 F.2d 811 (2d Cir. 1975). Prior to trial, the district court, Richard Owen, Judge, denied class certification, dismissed two more of the claims, and denied leave to add another. After a non-jury trial the court found for DASA (the only remaining defendant) and that the suit had been brought and conducted in bad faith. Attorneys' fees were awarded to DASA, Andersen and the Bank. Plaintiffs here appeal the various dispositions against them on the merits, the award of attorneys' fees, and other rulings of the district court during the course of the proceedings. We affirm on the merits, but reverse the award of attorneys' fees and remand for reconsideration of part of that award.
In 1967 a company known as Cyber-Tronics, Inc. (CTI), which was engaged in the business of leasing and servicing data processing equipment, issued some $6,000,000 worth of 6% convertible subordinated debentures due 1987. Appellants purchased a total of about 2% of the issue. Two years later, CTI was merged into DASA, a company engaged in manufacturing and distributing telephone dialers under the tradename "Magicall." The successor company, DASA, assumed all of CTI's debt obligations, including the 1987 debentures. On December 30, 1971, DASA entered into an agreement, contingent on the consent of two-thirds of the convertible debenture holders, for the sale of computer assets that had formed part of CTI's business.
On or about January 24, 1972, DASA sent its shareholders, including appellant Roy Brewer, notice of its annual meeting of shareholders to be held February 29, 1972. The business of the meeting was stated to be the fixing of the number of DASA directors at seven, the election of the seven directors, and the ratification of the selection of Andersen as accountant for the fiscal year ending October 31, 1972. Attached to the notice was a proxy statement, which set forth the management slate of nominees for director and supported ratification of the selection of Andersen as accountant. Also sent out in connection with the meeting was DASA's 1971 financial statement.
In early February 1972 appellants, unhappy with the direction their investments in the company were taking, denominated themselves the "Browning Debenture Holders Committee" and through negotiation convinced DASA to offer a reduction in the conversion price of the debentures from $42.42 to $21.00 in order to induce the debenture holders to agree to the computer sale. Not satisfied with this reduction, on February 26, three days before the annual meeting, Roy Brewer proffered his own proxy statement to DASA's management for transmittal to its shareholders in connection with the meeting. The statement favored the management slate nominees for director and ratification of Andersen as accountant, but also sought to increase the number of directors to nine, with two extra seats to be filled by the convertible debenture holders, and to establish the conversion price for the 6% convertible debentures at an amount between $6 and $12. His proposed letter further warned that if no agreement should be reached on the conversion price and representation, the Browning Committee would commence legal action on the ground that the management's proxy materials were false and misleading.
Because Brewer's statement was submitted only three days prior to the annual meeting, it was not circulated to DASA stockholders. The meeting was held as scheduled, the seven management slate directors were elected, and Andersen was ratified as accountant. On March 9, DASA sent a letter to the 6% convertible debenture holders soliciting their consent for amendments to the indenture that would permit the sale of the computer systems and reduce the conversion price from $42.42 to $21.
True to Roy Brewer's promise, on March 30, 1972, the Browning Committee filed this action. Count 1 alleged that the proxy materials sent out in connection with the 1972 annual meeting were false and misleading in violation of § 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9, principally because they failed to raise the issues regarding the terms of the computer sale that Roy Brewer had sought to raise in his own untimely and therefore uncirculated proxy materials. Count 2 alleged that the DASA annual report for the fiscal year ending October 31, 1971, sent out with the proxy materials, did not give a fair presentation of the company's financial situation. Count 3 charged that in numerous respects the solicitation letter was false and misleading in violation of the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, and the proxy rules, principally on the ground that DASA's directors breached their alleged fiduciary duty to the convertible debenture holders by failing in the solicitation letter to the debenture holders to reveal that the directors' interests as stockholders were opposed to those of the debenture holders and that the conversion price offered as part of the solicitation was unfair to the latter. Claim 4 alleged that the Bank had violated its fiduciary obligations to the debenture holders by failing to press for a lower conversion price in connection with the computer sale. The final count, a derivative claim against Andersen on behalf of DASA, alleged that Andersen had improperly certified the company's 1970 financial statements, despite the inclusion therein of a questionable $1,500,000 goodwill item, and had, in refusing to certify the goodwill item in the 1971 financial statement, failed to indicate why it had changed its mind in the interim.
On April 11, 1972, the Committee sought a preliminary injunction against the computer sale and the change in the conversion price, which was denied by Judge Motley. The necessary two-thirds of the debenture holders gave their consent, the amendments to the indenture became effective on May 15, and the sale of the computers was consummated on June 1, 1972. The Committee appealed the denial of the injunction and, on September 12, 1972, we dismissed the appeal as moot.
On May 19, after the district court's denial of a preliminary injunction, the Committee moved for certification of a class of stockholders and a class of convertible debenture holders, the first class relating to the proxy material claims (Counts 1 and 2) and the second relating to the solicitation letter and conversion price claims (Counts 3 and 4). On January 15, 1973, Judge Griesa, to whom the case had been transferred, deferred ruling "until further discovery proceedings have been completed and further pretrial hearings have been held to narrow or eliminate issues." Shortly thereafter, both plaintiffs and defendants moved for summary judgment on Counts 1 and 2, the disposition of which would largely determine the scope of any class certifications granted. The court granted summary judgment in favor of the defendants, obviating the need for a plaintiff stockholder class. To the extent that the Committee sought injunctive relief, the court held that the claims were moot, since the 1972 annual meeting had been held as scheduled and the proxies exercised. Any damages sought on these counts, the court reasoned, would be entirely speculative, since the proxy materials merely sought proxies in support of the management slate of directors and in favor of ratification of the selection of Andersen as accountant, both of which were supported by the Committee. Plaintiffs appealed under Rule 54(b), and we affirmed. 524 F.2d 811 (2d Cir. 1975).
Five and one-half months after the award of summary judgment to the defendants on Counts 1 and 2, the Committee moved for reargument. Judge Owen, to whom the case had been transferred, denied the motion. The Committee also renewed its motion for class certification, which was denied. Shortly before trial the Committee moved for summary judgment against DASA on a new theory - that the change in conversion price constituted an offering of a new security within the meaning of § 5 of the Securities Act of 1933, 15 U.S.C. § 77e, requiring registration which had not been effected. On April 16, 1975, the court held that this new claim was time-barred and in orders issued on April 21 and 25 dismissed all claims against Andersen. On April 21, 1975, the court, moreover, ordered the Committee to post a $25,000 bond for costs incurred by the Bank in defending claims against it, as provided by § 10.11 of the indenture and § 315(e) of the Trust Indenture Act of 1939, 15 U.S.C. § 77ooo(e). When the Committee failed to post such a bond the court, on May 13, 1975, dismissed Count 4 against the Bank.
Thus only the Committee's Count 3 claims against DASA actually went to trial. Midway through the trial, the court ruled that the directors had no fiduciary duties to the convertible debenture holders under federal law and thereafter excluded all evidence relating to the alleged lack of fairness of the conversion price offered. At the conclusion of the trial the court found for the defendant, denied the Committee's motion to amend its pleadings to conform to proof, and, after further hearings, ...