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In re Drexel Burnham Lambert Inc.

decided: November 15, 1988.

IN RE DREXEL BURNHAM LAMBERT INCORPORATED, DREXEL BURNHAM LAMBERT GROUP INCORPORATED, MICHAEL R. MILKEN, LOWELL J. MILKEN, CARY J. MAULTASCH, AND PAMELA R. MONZERT, PETITIONERS, IN RE IVAN F. BOESKY SECURITIES LITIGATION. SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
DREXEL BURNHAM LAMBERT INCORPORATED, DREXEL BURNHAM LAMBERT GROUP INCORPORATED, MICHAEL R. MILKEN, LOWELL J. MILKEN, CARY J. MAULTASCH, AND PAMELA MONZERT, DEFENDANTS



A petition for a writ of mandamus has been filed by Drexel Burnham Lambert Incorporated, et al. seeking the recusal under 28 U.S.C. § 455 of Senior United States District Court Judge Milton Pollack on the grounds that he is disqualified from presiding over pending civil fraud actions, which name petitioners as defendants. The underlying actions against petitioners were instituted by the Securities and Exchange Commission on September 7, 1988, and earlier by individual and class action plaintiffs. Plaintiffs filed opposition papers to the issuance of the writ. The petition for a writ of mandamus is denied. Judge Lumbard dissents and votes to grant the writ in a separate opinion.

Lumbard, Cardamone and Pierce, Circuit Judges.

Author: Cardamone

CARDAMONE, Circuit Judge.

A petition for a writ of mandamus has been presented seeking the disqualification of Senior United States District Court Judge Milton Pollack from presiding over certain civil fraud actions arising from claims of illegal insider trading. One action has been instituted by the plaintiff Securities and Exchange Commission (SEC or Commission) against the present petitioners, defendants Drexel Burnham Lambert Incorporated, Drexel Burnham Group Incorporated, Michael R. Milken, Lowell J. Milken, Cary J. Maultasch, and Pamela R. Monzert (Drexel). The other action is an amalgam of similar consolidated civil fraud actions instituted by individual plaintiffs that include the Drexel corporations as named defendants. Plaintiffs in both of these pending civil suits have appeared in opposition and have filed responses to Drexel's petition.

It is axiomatic that a judge may not preside over a case when his impartiality might reasonably be questioned. In deciding the sensitive question of whether to recuse a judge, the test of impartiality is what a reasonable person, knowing and understanding all the facts and circumstances, would believe. It is for that reason that we cannot adopt a per se rule holding that when someone claims to see smoke, we must find that there is fire. That which is seen is sometimes merely a smokescreen. Judicial inquiry may not therefore be defined by what appears in the press. If such were the case, those litigants fortunate enough to have easy access to the media could make charges against a judge's impartiality that would effectively veto the assignment of judges. Judge-shopping would then become an additional and potent tactical weapon in the skilled practitioner's arsenal. Instead, the sensitive issue of whether a judge should be disqualified requires a careful examination of those relevant facts and circumstances to determine whether the charges reasonably bring into question a judge's impartiality.

I FACTS

We trace the facts and circumstances chronologically. Nearly two years ago, in December 1986, 11 shareholders' class action suits alleging injury as a result of insider trading were brought against Ivan Boesky and others, including Drexel Burnham agents. These actions were filed in the Southern District of New York and in the Northern and Central Districts of California. The suits brought in the Southern District of New York were assigned to Judge Pollack. In March of 1987 an additional civil fraud action, in which Drexel was also a named defendant, styled Arden Way Associates, et al. v. Ivan F. Boesky, et al., (Arden Way), was begun in the Southern District. The two Drexel corporations were represented in these suits by Cahill Gordon & Reindel (Cahill Gordon) of New York City. As a result of the multiple claims asserted in these related class and individual actions, the Judicial Panel on Multidistrict Litigation, on July 24, 1987, brought together all the pending actions, including Arden Way, in the Southern District of New York for coordinated or consolidated pretrial proceedings pursuant to 28 U.S.C. § 1407 (1982). This request to transfer was addressed to Southern District Chief Judge Brieant with a suggestion that all of the class and non-class actions be assigned to Judge Pollack. An order consenting to the transfer was filed on August 5, 1987. The entire group of cases are referred to as "In re Ivan F. Boesky Securities Litigation" (Boesky Litigation) and charged Drexel, along with other defendants, with acting in concert with Boesky and his affiliated companies to violate the securities and civil anti-racketeering laws of the United States.

For well over a year substantial pretrial activity has occurred in the class and non-class actions. Judge Pollack has issued three published decisions in the multi-district cases--one of which involved Drexel's motion to dismiss the Arden Way complaint. He also has issued 36 management orders resolving discovery disputes and establishing discovery schedules. Drexel has, in addition, litigated a number of substantive, procedural, and discovery matters before Judge Pollack.

In June 1988 while the Boesky Litigation against Drexel was in full swing, Palais Royal, Inc., a closely held corporation operating a retail chain in Texas entered into negotiations to sell its business in a leveraged buyout (LBO) transaction. The stockholders include Mrs. Moselle Pollack and members of her family. Mrs. Pollack, who is Judge Pollack's wife, is a controlling stockholder. The purchaser is Bain Venture Capital (Bain), which plans to carry-out the transaction through Specialty Holdings, Inc. (SHI), a corporation formed for the purpose of effectuating the acquisition. On June 29, 1988 the stockholders of Palais Royal entered into a contract--called an "Agreement and Plan of Merger"--to sell all of their shares to Bain in exchange for cash. Drexel is not a party to that agreement. The agreement is contingent on Bain's obtaining the necessary financing for the LBO. Bain agreed to use its best efforts to obtain financing on "terms reasonably satisfactory to [Bain]." The financing was Bain's exclusive responsibility, and, at Bain's request, none of the selling stockholders has had any contact with potential lenders. Reliable expert testimony in the form of an affidavit executed by Lewis L. Glucksman, former Chairman and Chief Executive Officer of Lehman Brothers Kuhn Loeb, which the district court credited, stated that the acquisition was not a difficult LBO to finance and that a number of investment banking firms could provide the financing on terms comparable to those offered by Drexel. This opinion was based on the fact that Palais Royal's current management has agreed to continue to operate the company after the consummation of the transaction, and that these same managers have, in recent years, operated the business profitably despite Houston's adverse economic climate. Glucksman concluded that the sale could be successfully financed with or without Drexel's participation.

When the sale occurs, no member of the now-controlling family will have any interest in Palais Royal. Further, Drexel will have no equity interest in the business. As the deal is now structured, Drexel will have no dealings with Palais Royal or with Mrs. Pollack. Its role is to act as a "best efforts" underwriter or "placement agent" of the debt to be issued by Bain. The dissenting opinion refers frequently to Drexel's role in financing the deal. Yet, even at the time of oral argument before us, Drexel stated that, though it was still exploring the matter and expected to participate, it still had no binding contractual obligation to act for Bain, i.e., to obtain the financing to enable Bain to conclude the transaction. Although Drexel may acquire an option to purchase 15 percent of the new company formed by Bain, it is not obligated to do so, and even if it were to purchase an equity interest in the acquisition vehicle, it would do so only after the Bain/Palais Royal deal had been fully consummated. Thus, Drexel's option to purchase equity securities in the new corporation created by Bain will only arise after Mrs. Pollack is completely disassociated from Palais Royal.

Bernard Fuchs, President and Chief Executive of Palais Royal, stated that, as management's representative (he is not a stockholder), he informed potential lenders with whom he met, including Drexel, that Moselle Pollack is the widow of the company's founder and the wife of Judge Pollack of New York. In addition, in late July or early August, 1988 Bain gave Drexel, as a would-be best efforts underwriter, a copy of the June 29, 1988 agreement, that listed Mrs. Moselle Pollack as a selling stockholder. Drexel's papers reveal that, in July 1988, it engaged in a substantial "due diligence" inquiry of Palais Royal, focusing on its closely-held ownership and control. In its negotiations with Bain, Drexel was represented by Cahill Gordon, its counsel of record. A Cahill Gordon partner acknowledged having received the June 29th Agreement and Plan of Merger on August 19, 1988.

Earlier, in the spring of 1988, George and Phyllis Asch, stockholders in Palais Royal, met with attorneys at Paul, Weiss, Rifkind, Wharton & Garrison of New York City (Paul Weiss). This law firm represents petitioner Michael R. Milken, a top Drexel official. George Asch claims that, at a meeting in the Paul Weiss law offices on June 2, 1988, the sale of Palais Royal was discussed, particularly with respect to the tax implications for the Aschs as New York resident stockholders. Asch further states that Moselle Pollack's relationship to Judge Pollack and her status as a stockholder in Palais Royal was fully known to Paul Weiss, as reflected in correspondence from a Paul Weiss partner who sent a copy of a letter concerning Palais Royal dated April 6, 1987 to "Mrs. Milton Pollack."

The present proceeding was precipitated on September 7, 1988 when the Securities and Exchange Commission, as plaintiff in the underlying civil enforcement action, filed an 184-page complaint against Drexel and others in the Southern District of New York in an action styled Securities & Exchange Commission v. Drexel Burnham Lambert Incorporated, et al., (Drexel Litigation). The complaint, which has nothing to do with Palais Royal, alleges that Drexel and others had devised and carried out fraudulent insider trading schemes, manipulated stocks, and committed other violations of the federal securities laws. Counsel for Drexel maintains that two days later--on September 9--they first became aware that Judge Pollack's wife had a $30 million interest in the Palais Royal sale. After having been notified of the potential conflict by means of an ex parte telephone call placed by Drexel's attorneys on Saturday, September 10, the judge set a hearing in his chambers for September 13, where the situation was explored by the court and by counsel for the SEC and Drexel. The topic of recusal was broached by Drexel's counsel and was rejected by Judge Pollack.

On September 20th a formal motion to recuse was made. At two subsequent hearings--held on September 22 and 27--the district judge did not decide the motion and instead established discovery procedures. Arguments on the recusal motion were scheduled for October 11. Petitioners filed a mandamus application on September 30 in this Court, asking that Judge Pollack be recused in the Drexel Litigation, but they did not make the same application with respect to the Boesky Litigation. We denied the mandamus application as premature, noting that Judge Pollack had not yet ruled and that a hearing had been scheduled for October 11. Following the hearing, Judge Pollack handed down a written decision in which he denied the motion that he disqualify himself in either the Drexel Litigation or the Boesky Litigation.

On October 19 the instant mandamus petition was filed. We stayed the district court from conducting any further proceedings, set October 28 as the time for opposition papers to be filed and heard oral argument on the petition for the writ on October 31.

II DISCUSSION

Petitioners urge that the district court judge be recused in this proceeding on three separate bases: (1) under 28 U.S.C. § 455(a) because his "impartiality might reasonably be questioned" by reason of his wife's substantial interest in the Palais Royal transaction; (2) because his personal attacks on defense counsel's integrity purportedly reflect bias and accentuate the alleged appearance of existing impartiality; and (3) under § 455(b)(4) because his wife has a "financial" or "other interest that could be substantially effected" by the outcome of the proceedings.

The SEC, plaintiff in the Drexel Litigation, and the class and individual action plaintiffs in the Boesky Litigation oppose the application for the writ. They argue, in substance, that Drexel's role is too remote from Mrs. Pollack's sale of stock to bring into reasonable question the judge's impartiality under § 455(a); that there is no basis to conclude that the outcome of the litigation pending in the district court could affect Mrs. Pollack's interest in the Palais Royal transaction; and that the district judge's comments to counsel were an appropriate response in the circumstances. The Arden Way plaintiffs also argue that Drexel's untimely use of § 455 was a part of its litigation strategy to manipulate the judicial process. Before we consider the statute, its legislative history, and its construction by this and other courts, we discuss briefly the scope of our review.

A. Issuance of a Writ of Mandamus and Scope of Review of District Court's Determination

An appellate court's power to issue a writ of mandamus upon a claim of wrongful refusal to recuse is inextricably related to the scope of review over the district court's determination. Hence, we discuss these subjects together. Although a court of appeals has authority to "issue all writs . . . agreeable to the usages and principles of law," 28 U.S.C. § 1651(a)(1982), "[t]he remedy of mandamus is a drastic one, to be invoked only in extraordinary situations." Kerr v. United States District Court, 426 U.S. 394, 402, 96 S. Ct. 2119, 48 L. Ed. 2d 725 (1976); see also Allied Chem. Corp. v. Daiflon, Inc., 449 U.S. 33, 34, 101 S. Ct. 188, 66 L. Ed. 2d 193 (1980)(per curiam). Further, it is well-settled that the exceptional remedy of mandamus will only be invoked where the petitioner has demonstrated that its right to such relief is "clear and indisputable." See Moses H. Cohen Memorial Hosp. v. Mercury Constr. Co., 460 U.S. 1, 18, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983) (emphasis added); Allied Chem. Corp., 449 U.S. at 35; In re International Business Machines Corp., 618 F.2d 923, 927 (2d Cir. 1980). Were this not so, mandamus applications to review a judge's refusal to recuse would become an effective tactic for harassment and delay.

Discretion is confided in the district judge in the first instance to determine whether to disqualify himself, see Apple v. Jewish Hospital & Medical Center, 829 F.2d 326, 333 (2d Cir. 1987). The reasons for this are plain. The judge presiding over a case is in the best position to appreciate the implications of those matters alleged in a recusal motion. In deciding whether to recuse himself, the trial judge must carefully weigh the policy of promoting public confidence in the judiciary against the possibility that those questioning his impartiality might be seeking to avoid the adverse consequences of his presiding over their case. See In re United States, 666 F.2d 690, 695 (1st Cir. 1981). Litigants are entitled to an unbiased judge; not to a judge of their choosing.

A judge is as much obliged not to recuse himself when it is not called for as he is obliged to when it is. See In re Union Leader Corp., 292 F.2d 381, 391 (1st Cir.), cert. denied, 368 U.S. 927, 7 L. Ed. 2d 190, 82 S. Ct. 361 (1961). Thus, upon reviewing this petition we must determine whether Judge Pollack can "indisputably" be said to have abused his discretion in denying the motion to recuse himself. In re United States, 666 F.2d at 697. As an appellate court, we do not ask ourselves whether we would have ruled in the same manner as did the trial court, but rather whether the district judge's decision is a rational one finding support in the record. See In re United States, 666 F.2d at 695. Further, in adopting the 1974 amendments to § 455, Congress noted that the revised statute was "not designed to alter the standard of appellate review on disqualification issues." H.R. Rep. No. 1453, 93rd Cong., 2d Sess., reprinted in 1974 U.S. Code Cong. & Ad. News 6351, 6355 (House Report).

Thus, in reviewing the instant petition, we must bear in mind not only the standards governing recusal, but we must also consider the extraordinary showing required to obtain the issuance of a writ of mandamus. In other words, petitioners must "clearly and indisputably" demonstrate that the district court abused its discretion. Absent such a showing, mandamus will not lie.

B. Statute and Cases

The pertinent provisions of 28 U.S.C. § 455 provide as follows:

§ 455. Disqualification of justice, judge, or magistrate

(a) Any justice, judge, or magistrate of the United States shall disqualify himself in any proceeding in which his ...


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