Appeal from orders of the District Court for the Southern District of New York, Charles H. Tenney, Judge, 71 F.R.D. 380 (1976), 82 F.R.D. 440 (1979), in a derivative action by a stockholder of The Tonopah Mining Company of Nevada, now deceased, which (1) dismissed the action against three Canadian defendants for undue delay in the service of process, (2) denied a motion for substitution of plaintiff's executors as plaintiffs, and (3) in lieu of dismissing the action, sua sponte, for want of prosecution, ratified and approved a settlement of which this court had directed further examination, 456 F.2d 896 (2 Cir. 1972). The first order is affirmed, the second and third are reversed.
Before Friendly, Feinberg and Timbers, Circuit Judges.
In the principal order here under review, Judge Tenney, in the District Court for the Southern District of New York, sought to end this derivative action brought in 1965 by J. Ralph Saylor, a stockholder of The Tonopah Mining Company of Nevada (Tonopah). The judge's main tool for accomplishing this seemingly salutary result was to find, 82 F.R.D. 440 (1979), that the action was subject to dismissal sua sponte for want of prosecution. However, in lieu of dismissal he approved a $250,000 settlement, including a fee of $83,000 and expenses of $1,313.73 for Saylor's original attorney, Abraham I. Markowitz, which this court had previously remanded for further consideration, 456 F.2d 896 (2 Cir. 1972), in light of its possible inadequacy and for other reasons stated in our opinion a consideration which it has never received. Although sympathizing with the judge's frustration at the apparent interminability of this litigation, we believe that he failed to accord proper procedural opportunities to the plaintiff and placed on the plaintiff blame that should have been otherwise allotted. We therefore reverse his disposition in order that further expeditious proceedings may be had under his energetic supervision. In the course of our decision we must review two other rulings, of which more hereafter.
The history of the litigation until 1972 is recounted in our previous opinion with which familiarity is assumed, 456 F.2d at 897-99. We shall first summarize the holding and what led to it, and then set forth the subsequent developments in the district court.
As indicated, this derivative action was filed on February 18, 1965 by appellee Abraham I. Markowitz, an attorney, on behalf of J. Ralph Saylor, a stockholder of The Tonopah Mining Company of Nevada (Tonopah), a company registered under the Investment Company Act of 1940. The complaint alleged that controlling stockholders caused Tonopah to sell in two stages, effected in 1951 and 1953 respectively, its subsidiary Tonopah Nicaragua Company (Tonopah Nicaragua), owner of the Rosita copper mine in Nicaragua, for grossly inadequate consideration, $475,000,*fn1 to Mines Incorporated (Mines), an affiliate of Tonopah under § 2(a)(3) of the Act, and arranged the subsequent transfer of the Rosita mine to La Luz Mines Ltd. (La Luz), a Canadian corporation also an affiliate of Tonopah and the owner of the only available source of necessary hydroelectric power in the vicinity of the mine. This transaction was challenged on numerous grounds including an allegation that the now deceased defendant, Thayer Lindsley, who held substantial interests in the bevy of corporations involved in the transfers, had caused Tonopah to violate its obligations under the federal securities law by failing to disclose material facts in its applications to the SEC under § 17(b) of the Act for exemptions necessary to the sale, and the claim that Lindsley and his associates had breached their fiduciary obligations as officers and directors of Tonopah.
On September 24, 1970, Markowitz, without authorization from Saylor, entered a stipulation of settlement with the various defendants which, after a hearing, was approved by Judge Ryan over the protestations of Saylor, represented as objector by Lillian Eichman, as well as those of two objectors, Michael J. McLaughlin, represented by Gerard J. O'Brien, and his sister, Roseanne Horn, represented by Avrom S. Fischer, who was also of counsel to Ms. Eichman in representing Saylor. Saylor v. Lindsley, (1970-71 Transfer Binder) Fed.Sec.L.Rep. (CCH) P 92,222 at 90,410 (S.D.N.Y.1971). The settlement provided that after payment of $84,313.73 in counsel fees and expenses to Markowitz, Tonopah was to receive $165,686.27*fn2 for terminating claims with a face value of many millions of dollars and, in one instance at least, with sufficient support in the sparse record to prompt this court to observe that "plaintiff was not far from making a prima facie case," 456 F.2d at 904 n. 11. Without resolving on appeal all the disputes that attended the settlement negotiations, we noted certain indicia that the conflict of interest between attorney and client inherent in the "facts of class action life", 456 F.2d at 501, may have tempered Markowitz's enthusiasm for vigorous representation once early settlement, even for an unduly small amount, and the concomitant receipt of attorney's fees seemed feasible. Among these were the objection to the settlement by the stockholder-plaintiff, the flawed notice of the settlement terms to Tonopah shareholders, Markowitz's failure to advise his client formally of the settlement until after direction of a hearing and approval of notice by the district court, the apparently self-serving character of much of Markowitz's discovery, and his failure to serve two Canadian corporations which apparently were key defendants, La Luz and Falconbridge Nickel Mines, Ltd.*fn3 Id. at 899-901. On the basis of these factors and the apparent strength of plaintiff's case, we remanded to Judge Ryan with the instructions that
plaintiff, through his new counsel, and the other objectors should be allowed to delve somewhat more deeply into the merits of this action; whether this should be done by further discovery, or by taking evidence in open court, or by both, is for the district court to determine in the exercise of sound discretion. Id. at 904.
While recognizing that our remand might result in renewed approval of the settlement, we noted that "this should come only after thorough consideration of what the parties present," id. at 905, since in passing on the settlement of a derivative suit,
the judge must have "apprised himself of all facts necessary for an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated." Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424-425, 88 S. Ct. 1157, 1163, 20 L. Ed. 2d 1 (1968). Id. at 904.
On June 14, 1972, promptly after the remand, Judge Ryan scheduled a conference to consider motions by Saylor and Horn for leave to serve process on the Canadian defendants, La Luz and Falconbridge, which attorney Markowitz had not served during the seven years of litigation, and to take discovery against all defendants, Canadian and American. At the conference, Markowitz announced for the first time that he had recently served La Luz and Falconbridge,*fn4 and the court postponed consideration of discovery against these parties pending their response. As against the American defendants, however, the court granted permission to inspect numerous documents then in the possession of defendants' counsel and to serve interrogatories if these should prove incomplete. At the same conference, defendants announced plans to recall previously deposed witnesses in order to amplify their earlier testimony a proposal to which the judge responded with a request that all parties first complete discovery on new matters. The court-sanctioned document inspection must have been close to completion by July 14, 1972, since on that date plaintiff's counsel served interrogatories on both Canadian and American defendants requesting an inventory of documents relating to various aspects of the Rosita mine transaction.
Despite this energetic beginning, discovery soon stalled. In July 1972, the two recently-served Canadian defendants, La Luz and Falconbridge, moved for dismissal of the complaint as against them, inter alia, for failure to prosecute during the preceding seven years. In August 1972, they requested permission to postpone answering interrogatories until after disposition of their dismissal motion. The remaining Canadian defendant, Ventures, moved for dismissal as against it during the following year. In addition, during September or early October 1972, objector McLaughlin, who has served as a gadfly to defendants, judges, and plaintiff's attorneys alike,*fn5 precipitated a crisis in the litigation by attempting to exercise the power of attorney which he held for plaintiff Saylor and objector Horn in order to substitute a new law firm for all four counsel who then served on the plaintiff's side of the bar: Markowitz, Fischer, Eichman, and McLaughlin's own attorney, Gerard J. O'Brien. Without detailing the history of McLaughlin's motion, it suffices to note that at a hearing on October 26, 1972, Judge Ryan strongly urged the new firm to withdraw, which it did. Internecine struggle between McLaughlin and the lawyers continued throughout the following year and led in short order to the appearance and withdrawal of two additional law firms on behalf of Saylor at McLaughlin's behest. It was not until November 23, 1973, a year and a half after our remand, that the configuration of counsel and clients finally stabilized. Fischer became attorney of record for objector Horn as well as for Saylor both as objector and as plaintiff; O'Brien continued as McLaughlin's counsel; but Markowitz retained a foothold in the litigation through his appointment by Judge Ryan as attorney for the "class" of Tonopah shareholders.
During this year of wrangling on the objector's side, and indeed for several years thereafter, all parties appear to have abandoned discovery relating to the settlement itself and focused on the Canadian defendants' motion for dismissal. Appellants' explanation for this is that Judge Ryan orally stayed all discovery on the settlement until disposition of the dismissal motion. In support of this claim, Saylor's executors or, more realistically, attorney Fischer, point to a 1979 affidavit to that effect filed by McLaughlin's attorney and to the failure of the American defendants to answer plaintiff's 1972 interrogatories until 1977. Defendants counter that on November 8, 1973, Judge Ryan did indeed adjourn discovery as against the Canadian defendants, but that a stay was neither requested by nor granted to the American defendants. Plaintiff fails to explain why the district court would have wished to stay all discovery when the only motion on the record concerned the Canadian defendants. On the other hand, defendants proffer no explanation, why on their version, the 1972 interrogatories to the American defendants were not answered for five years. Absent any transcript of the proceedings we cannot determine where the truth lies.
Skirmishing over the motions to dismiss on the part of the Canadian defendants continued through the late fall of 1973, when the court, acting pursuant to a stipulation between Markowitz and the defendants, adjourned the dismissal motions themselves in order to permit discovery on the issues that they raised. Two sets of interrogatories relating to these motions were filed by Markowitz and Fischer during October and November of 1973, which the Canadian defendants answered during April and May, 1974.
Beginning on January 18, 1974, presumably because Judge Ryan had ceased to conduct an active calendar, the case was reassigned three times within fourteen months, moving to two other judges before assignment to Judge Tenney on March 6, 1975. During this peripatetic phase, little progress was achieved other than the return of the interrogatories bearing on the motion to dismiss, a further exchange of memoranda on that motion, and the ...