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KRAUTH v. TELECARD

December 13, 1994

WALTER K. KRAUTH, JR., THEODORE J. MAYER, WILLIAM MILLER, DAVID E. LEGERE, Plaintiffs, against EXECUTIVE TELECARD, LTD., Defendant.

ROBERT W. SWEET, U.S.D.J.


The opinion of the court was delivered by: ROBERT W. SWEET

Sweet, D.J.

 Plaintiffs, Walter K. Krauth, Jr. ("Krauth"), William Miller ("Miller") and David E. Legere ("Legere") (collectively, the "Committee") move: (1) to dismiss the amended counterclaim and third party complaint; (2) to hold the Defendant in contempt; (3) for sanctions against Defendant and its attorneys; and (4) to compel discovery. Plaintiff Theodore J. Mayer ("Mayer") moves to dismiss the amended counterclaims and third-party claims and to stay discovery which is predicated on these claims.

 Plaintiffs' motions are granted in part and denied in part, as discussed below.

 Parties

 Krauth is a resident of Jonesboro, Georgia and the single largest individual owner of EXTL stock. He and Miller, a resident of Bayside, New York, and Legere, a resident of Williamsburg, Virginia, formed the EXTL Shareholders Protective Committee, (the "Committee"), in September 1994 for the purpose of soliciting proxies for the election of a slate of directors opposed to those being proposed by management of EXTL. Mayer is a resident of Summit, New Jersey and until September 30 was the Treasurer of EXTL at which time he was discharged.

 Prior Proceedings

 The facts and prior proceedings in this action are fully set forth in the opinion of October 21, familiarity with which is assumed. A review of the prior proceedings relevant to this motion follows:

 On October 12, 1994 the Committee filed an action seeking injunctive relief and expedited discovery following the withdrawal of a prior action initiated by EXTL. The Committee's action sought to enjoin EXTL from soliciting proxies in violation of § 14(a) of the Securities and Exchange Act of 1934 (the "Exchange Act)", 15 U.S.C. §§ 78m (d) and 78n(a) and the rules and regulations of the Securities and Exchange Commission ("SEC"). EXTL sought similar relief with respect to the Committee's proposed proxies by way of counterclaim, mirroring its initial complaint.

 The Answer and Counterclaims were served on October 14, 1994. The parties were advised that the court would consider the consolidation of a trial on the merits with the hearing on the preliminary injunctions. Expedited discovery proceeded.

 From the outset, the Committee sought to obtain copies of Postal Telegraph and Telephone Agreements ("PTTs") held by Residual Corporation ("Residual") which represent collateral for an account receivable due to EXTL by Residual. These PTTs were the subject of a request for expedited discovery approved by this Court on October 12 and again on October 13, 1994.

 On October 18, 1994 an evidentiary hearing consolidated with the trial was held. The state law counterclaims against counterclaim defendant Mayer, aligned as a plaintiff, were severed.

 In an opinion dated October 21, 1994, the prayers for permanent injunction by both parties were denied in part and granted in part. Specifically, EXTL was "enjoined from soliciting proxies without disclosing the consultation by certain officers and directors with Bertoli concerning confidential and pending corporate matters [and] ... the Committee [was] enjoined from soliciting proxies without clarifying the jurisdictional effect of [a certain] proposed spin-off [of EXTL]." Order, October 21, 1994. Leave was granted to make any further applications to obtain relief consistent with the findings and conclusions. No appeals or motions for reconsideration have been filed. Judgment was entered on December 12, 1994.

 On November 2, 1994 there was a hearing on a letter motion requesting that the Court order defendants to set a date for the next Annual Shareholders meeting. Prior to that hearing, Defendants set a meeting date of January 5, 1995. The motion was "denied as moot in view of the action taken by the defendants." Memo Endorsed Order, November 2, 1994.

 On November 22, EXTL filed a pleading titled "Answer with Amended Counterclaims and Third Party Claims." ("Amended Answer"). In its Amended Answer, EXTL realleged its factual allegations against the Committee, added John Does I through XX as third party defendants, added a third state law claim for breach of contract against Mayer and a third party claim against John Does I through XX.

 On December 7, pursuant to an order to show cause secured by the Committee, a hearing was held on the present motions.

 On December 9, EXTL filed a complaint alleging security act violations by the Committee and moved by order to show cause for a preliminary injunction to bar the Committee from solicitation based on the alleged omission of material facts. Executive Telecard, Ltd. v. Krauth, 94 Civ. 8911 (RWS). A hearing on this application is scheduled for December 15 with expedited discovery granted.

 The Facts

 In November, EXTL sent a Newsletter to its Shareholders. With reference to the Annual Meeting of Shareholders, it read:

 
Executive Telecard's Annual Meeting of Shareholders has been rescheduled to January 5, 1995. If you have received proxy materials in connection with this meeting from a dissident shareholder group, your company's Board of Directors strongly urges that you do not make any action until you receive the company's proxy materials. These materials will be mailed to you shortly.

 The newsletter is signed by William V. Moore, Chairman of EXTL. Below his signature the Newsletter reads:

 
Please Do Not Vote until you receive your company's proxy material. If you have any questions, please call our solicitor...

 To date, EXTL's management has not submitted new proxy materials to the Securities ...


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