Interlocutory appeal by plaintiff pursuant to 28 U.S.C. § 1292(b) from an order of the Southern District of New York, Inzer B. Wyatt, Judge, in a stockholders' class action for damages against corporate officers and directors alleging issuance of false proxy statement in violation of § 14(a) of the Securities Exchange Act of 1934, which denied plaintiff's motion for summary judgment against two defendants (Parklane Hosiery Company, Inc. and Herbert N. Somekh) based on the ground that they were collaterally estopped from denying adverse findings made by the district court in a prior action against them that had been affirmed on appeal, see SEC v. Parklane Hosiery Co., Inc. and Herbert N. Somekh,
Mansfield and Timbers, Circuit Judges, and Dooling, District Judge.*fn*
MANSFIELD, Circuit Judge:
This appeal raises the important question of whether a party who has had issues of fact determined against it after a full and fair opportunity to litigate them in a nonjury trial of an action against it may, in a different suit against it by another person, obtain a jury trial of the same issues of fact arising out of the same transaction. We hold that it is collaterally estopped from doing so.
In November 1974 the present class action was commenced on behalf of stockholders of Parklane Hosiery Company, Inc. ("Parklane") against Parklane and 12 of its officers, directors and stockholders, alleging that a proxy statement issued by them on September 24, 1974, contained materially false and misleading statements in violation of §§ 10(b), 13(a), 14(a) and 20(a) of the Securities Exchange Act of 1934 as amended, and rules and regulations promulgated thereunder. Parklane had been a publicly-held company engaged in the retail sale of women's apparel, 71.68% of whose outstanding shares were controlled by the defendants. In furtherance of a proposed merger whose purpose was to convert Parklane into a privately-owned company controlled entirely by defendants, they caused a proxy statement to be sent to Parklane's stockholders in September advising that on October 14, 1974, there would be a meeting to consider the proposal. Following the meeting the plan was consummated. Parklane merged with New PLHC Corp., a private company controlled by defendants, and each of the minority stockholders, including plaintiff, was paid $2 per share for his holdings, subject to the right of any dissenting stockholder to obtain an appraisal pursuant to the New York Business Corporation Law.
The Amended Complaint alleges that the proxy statement
(1) failed to disclose that the purpose of the merger was to help defendant Herbert N. Somekh, Parklane's president, to meet his personal obligations rather than to further any valid corporate objective;
(2) failed, in referring to Parklane's termination of negotiations with respect to its lease of certain property from the Federal Reserve Board of New York, to reveal that continuation of the negotiations could result in substantial financial benefits to Parklane; and
(3) failed to disclose, in advising that two appraisers had been employed by Parklane to determine the fair value of its stock, that the appraisers had not been furnished with sufficient information to prepare a true and complete valuation.
It further alleges that the distribution of the proxy statement was part of a fraudulent scheme giving rise to liability to the plaintiff and other members of the class pursuant to Rule 10b-5 of the Securities Exchange Act of 1934. The complaint seeks damages, a rescission of the merger, costs and such other relief as might be granted by the court.
In May 1976, about a year and a half after commencement of the present action, the Securities and Exchange Commission ("SEC") brought suit in the Southern District of New York against Parklane and Somekh, alleging that their issuance of the September, 1974, proxy statement violated § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), and §§ 10(b), 13(a), and 14(a) of the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78m(a) and 78n(a), and rules promulgated thereunder. The SEC charged that the proxy statement was materially false and misleading in essentially the same respects as those that had been alleged by the plaintiff in this action. The SEC sought equitable relief, including the appointment of a special counsel to determine the fair value of the Parklane shares held by the minority stockholders eliminated by the merger and an injunction against further violations by the defendants of the antifraud, proxy and reporting provisions of the federal securities laws. After a trial in which the SEC's application for preliminary injunctive relief was consolidated with trial of the action on the merits pursuant to Rule 65(a), F.R.Civ.P., and both Parklane and Somekh were accorded a full and fair opportunity to adduce evidence and cross-examine witnesses produced by the SEC, Judge Kevin T. Duffy of the Southern District of New York on November 9, 1976, filed a 26-page opinion which constituted his findings of fact, conclusions of law and final order in the case.
In his decision Judge Duffy, after noting the pendency of the present action and analyzing the evidence before him, found (1) that the September 24, 1974, proxy statement failed to disclose that the "overriding purpose for the merger was to enable Somekh to repay his personal indebtedness," (2) that the proxy statement was also false in stating that there were "no negotiations at present" with the Federal Reserve Board of New York with respect to cancellation of Parklane's lease of property from the Board when in fact negotiations were continuing in early October 1974 and the Federal Reserve Board's representative had agreed to recommend payment of $1,200,000 to compensate for the loss caused by the cancellation, of which $300,000 would be payable to Parklane as its share, and (3) that the proxy statement was misleading in that it failed to disclose that the appraisers, Thomson & McKinnon, Auchincloss & Kohlmeyer, Inc., had not been informed of certain facts pertinent to their evaluation of Parklane shares, including Somekh's plans to use $1 million of corporate assets to reduce his personal indebtedness, his intentions to sell certain real property to Parklane and of the negotiations with the Federal Reserve Board with respect to cancellation of the leasehold. Judge Duffy further found, on the basis of his detailed discussion of the evidence before him, that each of these three false statements or non-disclosures was material under the standard established by the Supreme Court in TSC Industries, Inc. v. Northway, 426 U.S. 438, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976). See also SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968), cert. denied, 394 U.S. 976, 89 S. Ct. 1454, 22 L. Ed. 2d 756 (1969).
Although the district court concluded in the SEC case that the defendants had violated § 14(a) of the Exchange Act of 1934, it decided that the requested relief - an injunction and appointment of a special counsel to determine the fair value of the Parklane shares - would not be appropriate and limited relief to a direction that Parklane amend its prior filings with the SEC to correct the misstatements and non-disclosures and file a Form 10K for 1975, if one had not been filed. Judge Duffy's decision was affirmed by us on July 8, 1977, see 558 F.2d 1083, in an opinion specifically upholding each of his findings and his determination that each of the misstatements or omissions was material.
On the basis of the district court's November 9, 1976, decision plaintiff in the present action moved on November 24, 1976, for summary judgment against Parklane and Somekh, contending that by reason of Judge Duffy's detailed findings of fact, those two defendants were collaterally estopped from asserting that any genuine issues of material fact regarding liability remained for trial. The motion was denied by Judge Inzer B. Wyatt in a cryptic opinion as follows: "The within motion is denied. Rachal v. Hill, 435 F.2d 59 (5th Cir. 1970). So ordered."
In Rachal the Fifth Circuit was faced with the question before us - whether corporate officers who have had issues of fact determined against them in a non-jury trial of an SEC suit for injunctive relief are collaterally estopped from relitigating those issues before a jury in a subsequent class and derivative action for damages brought by stockholders. The court, conceding that mutuality of parties was no longer a prerequisite for collateral estoppel, nevertheless held that the Seventh Amendment right to a jury trial of contested issues of fact survived any prior nonjury ...