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Gardner and Florence Call Cowles Foundation v. Empire Inc.

February 12, 1985

GARDNER AND FLORENCE CALL COWLES FOUNDATION, MINNEAPOLIS STAR & TRIBUNE PENSION TRUST, PRINCETON DAY SCHOOL, DAVID SCHWARTZ FOUNDATION, SCRIPPS CLINIC, AND SIMPSON COLLEGE, PLAINTIFFS-APPELLANTS,
v.
EMPIRE INCORPORATED, ALLEN & COMPANY, INCOPORATED, RELIANCE INSURANCE COMPANY, S.A. SPENCER, H.N. FORMAN, HAROLD M. WIT, AND ROBERT W. PLASTER, DEFENDANTS-APPELLEES



Appeal from a decision of the United States District Court for the Southern District of New York (Whitman Knapp, Judge), 589 F. Supp. 669 (S.D.N.Y. 1984), dismissing plaintiff debentureholder's suit for loss of value of their conversion rights. Because there is no federal jurisdiction over their claims, we vacate and remand to the district court with instructions to remand to the New York state courts.

Author: Winter

Before: FRIENDLY, WINTER AND PRATT, Circuit Judges.

WINTER, Circuit Judge

This appeal is from Judge Knapp's order dismissing the complaint after the instant action had been removed from the New York state courts. The district court held that plaintiffs, holders of convertible debentures issued by a company that had recently gone private in a leveraged buy-out, had failed to state a claim for relief with regard to losses in the value of their conversion rights. Gardner and Florence Call Cowles Foundation v. Empire, Inc., 589 F. Supp. 669 (S.D.N.Y. 1984). We are obliged to vacate the judgment and remand to the district court with instructions to remand to the New York state courts because of a lack of subject matter jurisdiction. The complaint does not allege complete diversity between all plaintiffs and all defendants, includes as defendants citizens of New York, see 28 U.S.C. § 1441(b) (1982), and does not state a separate and independent claim for relief as to diverse parties under 28 U.S.C. § 1441(c) (1982). The action was therefore improperly removed.

BACKGROUND

Empire Incorporated is a Missouri corporation with an office in New York City. In June, 1983, an action similar to the present one was brought against Empire in a supreme court of the State of New York by Martin Shubik, a Connecticut resident who owned 140 of Empire's convertible debentures. Also named as defendants were Allen & Co., Inc., Reliance Insurance Co., S.A. Spencer, H.N. Forman, Harold M. Wit, and Robert W. Plaster. We shall hereafter refer to these latter six defendants as the "takeover defendants." The takeover defendants, all of whom were also named in the present action, were the owners of the outstanding stock of Exco Acquisition Corporation, a Delaware corporation that had recently merged into Empire. Robert W. Plaster is the President, Chairman of the Board, and CEO of Empire and a Missouri citizen. Allen & Co. is a New York corporation, Reliance Insurance, a Pennsylvania corporation, and H.N. Forman and Harold M. Wit are citizens of New York.*fn1

The facts giving rise to this litigation are alleged to be as follows. In January, 1981, Empire issued approximately $25,000,000 in convertible debentures. Because they included a right of conversion, Empire was able to sell the debentures at the then low interest rate of 9%. Under the trust indenture, debentureholders were entitled to exchange $48.75 in the principal amount of debentures for a share of Empire common stock. In January of 1981, prior to the sale of the debentures, there were approximately three million shares of common stock outstanding, which traded as high as $49 per share.

In 1983, Exco Acquisition Corporation was formed and issued approximately three million shares of stock which were sold to the takeover defendants for $.01 per share, or $30,000 total. On June 7, 1983, the takeover defendants caused Empire to borrow $100,000,000, secured by Empire's assets. Thereafter, $66,000,000 of the proceeds of the loan were distributed to Empire's common stockholders, who received $22 per share in cash. In addition, Empire created new debentures in the principal amount of $27,000,000 which were also distributed to Empire's common stockholders. Empire's common shares were then cancelled.

By merging Exco into Empire, the approximately three million shares of Exco common stock were converted into the sole outstanding common stock of Empire. Notwithstanding the distribution of cash and debt securities to its shareholders and the drastic reduction of the value of the common stock, Empire refused to make any adjustment in the debentures' conversion rate.

Empire removed the Shubik action to the District Court for the Southern District of New York. Plaintiff thereupon moved to remand to the state court on the grounds that the action was not removable under § 1441(b) because some of the defendants were citizens of New York, the state in which the action was brought. Judge Pollack denied the motion on the grounds that the complaint stated a separate and independent claim under § 1441(c) by Shubik, the Connecticut citizen, against Empire, the Missouri corporation, for breach of contract. Judge Pollack also dismissed the claims against the takeover defendants because the action was based on a breach of the indenture to which the takeover defendants were not a party and because the terms of the indenture barred recourse against Empire stockholders.

Shortly before Judge Pollack's decision, Shubik's counsel filed the instant action in a New York supreme court. Plaintiffs were the Cowles Foundation, the Minneapolis Star & Tribune Pension Trust, the Princeton Day School, the Scripps Clinic, Simpson College, and the David Schwartz Foundation.*fn2 This complaint, although similar to the complaint filed in the Shubik action, contained more elaborate and detailed allegations that the takeover defendants induced Empire's breach of the trust indenture. The defendants were the takeover defendants and Empire, as in Shubik. Empire again removed the case to the Southern District of New York. Plaintiffs did not move to remand, presumably because Judge Pollack's decision in Shubik, which was rendered one week before Empire filed its petition to remove, was on point with regard to the instant action in which there is apparently diversity between the plaintiffs and Empire. Plaintiffs retained new counsel, who also failed to move for remand. An amended complaint was filed on December 21, 1983.

The amended complaint alleges as legal theories: first, that Empire breached its obligation under the trust indenture by refusing to adjust the conversion ratio; second, that Empire breached an implied covenant of good faith under the trust indenture that it would not do anything which would have the effect of destroying or injuring the rights of the debentureholders; third, that the takeover defendants conspired to induce and knowingly and willfully induced Empire's breach of its obligations to the debentureholders, including the implied covenant; fourth, as a result, the defendants hold the Empire stock which they acquired in the merger as constructive trustees for the debentureholders; and fifth, the actions by Empire constitute a default under the Trust Indenture, making the principal of the Debentures due and payable. Plaintiffs individually and as a class sought declaratory relief, an accounting, and punitive damages.

Defendants moved to dismiss under Fed. R. Civ. P. 12(b) (6) and, alternatively, for summary judgment. On July 5, 1984, the district court dismissed the complaint on the merits in its entirety. Plaintiffs appealed from the dismissal and from the district court's failure to grant summary judgment in their favor as to Count I. After the parties had filed briefs on the ...


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