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Rand v. Anaconda-Ericsson Inc.

decided: July 9, 1986.

MICHAEL M. RAND, JOHN COSTELLO, STEVEN J. COSTELLO, GREGORY T. FRESE, EDWARD LAVIN, PETER A. MILANO AND VINCENT F. SERVELLO, PLAINTIFFS-APPELLANTS,
v.
ANACONDA-ERICSSON, INC., ERICSSON, INC., L.M. ERICSSON TELEPHONE COMPANY, NORDIC AMERICAN BANK, CITIBANK, N.A., PRICE-WATERHOUSE & CO., SULLIVAN & CROMWELL, RICHARD HOWE, RICHARD G. LYON, L. STANTON TOWNE, TELECOM EQUIPMENT CORP. AND STEPHEN R. COHEN, DEFENDANTS-APPELLEES



Appeal from a grant of summary judgment by the United States District Court for the Eastern District of New York (Edward R. Neaher, Judge), dismissing the complaint of shareholders of a bankrupt corporation who claim damage under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq., Section 1 of the Sherman Act, 15 U.S.C. § 1, Section 14(e) of the Williams Act, 15 U.S.C. § 78n(e), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1985). Affirmed.

Author: Winter

Before OAKES, NEWMAN and WINTER, Circuit Judges.

WINTER, Circuit Judge:

This case arises out of the relationship between Teltronics Services, Inc. ("Teltronics"), a now-bankrupt distributor of telephone equipment, and its principal creditor and supplier, L.M. Ericsson Telecommunications, Inc. ("Ericsson"). This action was brought by a number of Teltronics shareholders who allege that the company's collapse was caused by actions of the several defendants. These defendants include companies affiliated with Ericsson as well as other parties that are alleged to have aided Ericsson in its plan to force Teltronics into bankruptcy. The shareholders seek damages under a number of statutes: the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. (1982); Section 1 of the Sherman Act, 15 U.S.C. § 1 (1982); Section 14(e) of the Williams Act, 15 U.S.C. § 78n(e) (1982); and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1985). Judge Neaher granted summary judgment for defendants. Rand v. Anaconda-Ericsson, Inc., 623 F. Supp. 176 (E.D.N.Y. 1985). We affirm.

BACKGROUND

This action is only the latest in a series of cases arising out of the commercial demise of Teltronics. See Teltronics Services, Inc. v. Anaconda-Ericsson, Inc., 587 F. Supp. 724 (E.D.N.Y. 1984), aff'd, 762 F.2d 185 (2d Cir. 1985); L M Ericsson Telecommunications, Inc. v. Teltronics Services, Inc. (In re Teltronics Services, Inc.), 18 Bankr. 705 (E.D.N.Y. 1982); Teltronics Services, Inc. v. L M Ericsson Telecommunications, Inc., 486 F. Supp. 836 (S.D.N.Y.), on reargument, 491 F. Supp. 538 (S.D.N.Y. 1980), aff'd, 642 F.2d 31 (2d Cir.). cert. denied, 452 U.S. 960, 101 S. Ct. 3108, 69 L. Ed. 2d 971 (1981); Teltronics Services, Inc. v. L.M. Ericsson Telephone Co., No. 79 Civ. 1233, slip op. (S.D.N.Y. May 9, 1979).

According to the complaint, Ericsson was the chief supplier of telephone equipment to Teltronics and also its principal creditor. Friction between the two companies began in 1978, when the New York-based Teltronics opened an office to compete with an Ericsson subsidiary in New England. Teltronics' method of financing equipment purchases was through the issuance of notes to defendants Citibank, N.A. ("Citibank") and Nordic American Bank ("Nordic"), and Ericsson affiliate. Payment on these notes was guaranteed by Ericsson. In return for the guarantee, Ericsson held a security interest in the revenues generated by Teletronics' leases of equipment. The loan agreements contained an acceleration clause, under which the lenders could demand the outstanding balance on the notes in the event that Teltronics was late in making a monthly interest payment.

Plaintiffs' theory is that Ericsson led Teltronics to believe that it need not make an interest payment due to Nordic at the end of February, 1979. When Teltronics failed to make the payment, a default and acceleration was declared by Nordic, and Ericsson, as guarantor of the notes, paid the loans, Teltronics, unable to find alternative sources of financing, was forced into involuntary bankruptcy in September, 1979. The default and subsequent bankruptcy allegedly allowed Ericsson to receive the income from many of Teltronics' equipment leases under its security interest, and also to set up a New York subsidiary that eventually took a great many of Teltronics' customers for itself.

Meanwhile, litigation began. A first action, filed by Teltronics in the United States District Court for the Southern District of New York, alleged that the default was engineered by Ericsson in order to take over Teltronics' business. The complaint was dismissed under Fed. R. Civ. P. 12(b)(6), Teltronics Services, Inc. v. L.M. Ericsson Telephone Co., No. 79 Civ. 1233, slip op. (S.D.N.Y. May 9, 1979), and no appeal was taken. Teltronics filed a second action in the Southern District three months after judgment was entered, based on the same course of conduct alleged in the first. The District Court for the Southern District dismissed Teltronics' second action on res judicata grounds. This court affirmed. Teltronics Services, Inc. v L M Ericsson Telecommunications, Inc., 486 F. Supp. 836 (S.D.N.Y.), on reargument, 491 F. Supp. 538, 538 (S.D.N.Y. 1980), aff'd, 642 F.2d 31 (2d Cir.), cert. denied, 452 U.S. 960, 101 S. Ct. 3108, 69 L. Ed. 2d 971 (1981).

Meanwhile, on September 18, 1979, while the second action in the Southern District was pending, creditors initiated an involuntary bankruptcy proceeding against Teltronics in the Eastern District. On April 30, 1980, Teltronics was adjudicated a bankrupt. A trustee in bankruptcy was appointed and sought to assert a claim for equitable subordination of Ericsson's claims against the bankrupt. After a twenty-day trial, Bankruptcy Judge Parente held in a detailed opinion that Ericsson had not engaged in misconduct and that equitable subordination was not warranted. In particular, he found that Ericsson "never represented to Teltronics that Teltronics would not be required to make a timely payment of the interest due to Nordic on February 18, 1979." and that the Teltronics management knew that the company was obliged to pay the interest to Nordic on that date. Anaconda-Ericsson, Inc. v. Hessen (In re Teltronics Services, Inc.), 29 Bankr. 139, 157 (E.D.N.Y, 1983. The trustee appealed, but a settlement was reached between the trustee and Ericsson before the appeal was argued. Other Teltronics creditors, including Rand and Frese, shareholder plaintiffs in the present action, challenged the settlement, which was nevertheless upheld by the bankruptcy court, the district court, and ultimately this court. See In re Teltronics Services, Inc., 762 F.2d at 188.

Meanwhile, on April 12, 1983, Edward Beagan, Chairman of Teltronics' Board, brought an action on behalf of himself and Teltronics against Ericsson in the Eastern District on grounds similar to those pressed in the instant case. Judge Neaher held that only the bankruptcy trustee could represent Teltronics and granted summary judgment against Beagan on his individual claims. Teltronics Services, Inc. v. Anaconda-Ericsson, Inc., 587 F. Supp. 724, 729, 734. Beagan's case was consolidated on appeal with the challenge to the settlement and was also affirmed. In re Teltronics Services, Inc. 762 F.2d at 193.

The current action was filed in the Eastern District on September 23, 1983, by seven named plaintiffs who sought to represent a class of all those who on or after March 5, 1979, were shareholders of Teltronics. Although the present case involves new plaintiffs, the underlying events are exactly the same as those that spawned the earlier litigation. Plaintiffs' factual claims, moreover, were rejected by the bankruptcy court after a twenty-day trial. that court found that Ericsson and its agents never represented to Teltronics that Teltronics would not be required to make a timely payment of the interest due to Nordic on February 28, 1979, and that the Teltronics management knew that the company was obliged to pay the interest to Nordic on that date, Anaconda-Ericsson, Inc. v. Hessen (In re Teltronics Services, Inc.), 29 Bankr. at 157.

Defendants moved in November, 1983, to dismiss and for summary judgment. Before plaintiffs filed opposing papers, a conference was held at which the district court advised the parties that it was holding defendants' motion in abeyance pending the outcome of the appeal concerning the trustee's settlement and the Beagan action, eventually decided on March 22, 1985. in re Teltronics Services, Inc., 762 F.2d 185. On August 30, 1985, Judge Neaher granted defendants' motion for summary judgment in its entirety and dismissed the complaint. Rand v. Anaconda-Ericsson, inc., 623 F. Supp. 176, 184 (E.D.N.Y. 1985). Plaintiffs and their attorneys were enjoined from pursuing any new or pending litigation that concerns Teltronics. Id. at 185. The district court also held that ...


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