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American High-Income Trust v. AlliedSignal

December 8, 2006

AMERICAN HIGH-INCOME TRUST, THE BOND FUND OF AMERICA, INC., THE INCOME FUND OF AMERICA, INC., AMERICAN FUNDS INSURANCE SERIES- BOND FUND, AMERICAN FUNDS INSURANCE: SERIES-HI YIELD BOND FUND, ANCHOR PATHWAY FUND-HIGH YIELD BOND SERIES, CAPITAL GUARDIAN U.S. FIXED-INCOME MASTER FUND, AND CAPITAL GUARDIAN GLOBAL HIGH-YIELD FIXED-INCOME FUND, PLAINTIFFS,
v.
ALLIEDSIGNAL INC., NATIONSBANC MONTGOMERY SECURITIES LLC, PRUDENTIAL SECURITIES, INC., JOHNNIE CORDELL BREED, CHARLES J. SPERANZELLA, JR. AND TERRY CORDELL AS CO-PERSONAL REPRESENTATIVES OF THE ESTATE OF ALLEN K. BREED, DECEASED, AND CHARLES J. SPERANZELLA, JR., INDIVIDUALLY, DEFENDANTS.



The opinion of the court was delivered by: James C. Francis IV United States Magistrate Judge

MEMORANDUM AND ORDER

On September 22, 2006, the plaintiffs in this case issued a subpoena ad testificandum to Peter M. Kreindler. Honeywell International Inc. ("Honeywell," formerly AlliedSignal Inc.) and Mr. Kreindler have moved pursuant to Rule 45(c)(3)(A)(iv) of the Federal Rules of Civil Procedure to quash the subpoena and pursuant to Rule 26(c) for a protective order precluding the parties from deposing Mr. Kreindler in this case. Neither Honeywell nor Mr. Kreindler is a party to this action.*fn1 For the reasons set forth below, the motion is denied.

Background

The facts underlying this case, as alleged in the Complaint, are set out in a decision by the Honorable Laura Taylor Swain on the defendants' motion to dismiss. American High Income Trust v. AlliedSignal, 329 F. Supp. 2d 534, 538-40 (S.D.N.Y. 2004). I will state them here only insofar as they are relevant to the motion to quash the subpoena.

In 1997, AlliedSignal Inc. ("AlliedSignal") sold the assets of its Safety Restraints Systems Division ("SRS") to Breed Technologies, Inc. ("Breed"). American High Income Trust, 329 F. Supp. 2d at 538. At the time of the SRS Acquisition, defendant Johnnie Cordell Breed was Breed's Chief Operating Officer, Charles J. Speranzella was Breed's Executive Vice President of Worldwide Operations and General Counsel, and Allen K. Breed was chair or co-chair of Breed's Board of Directors until March 1998, and subsequently was chair emeritus.*fn2 Id.

Having been informed that Breed intended to finance the acquisition of SRS through the sale of bonds, AlliedSignal agreed to provide Breed with financial information about SRS and to give Breed the right to conduct due diligence on SRS. Id. at 538. According to the plaintiffs, this due diligence revealed that AlliedSignal had engaged in "questionable accounting practices or made unsupportable assumptions." Id. at 539. Furthermore, the plaintiffs claim that AlliedSignal hindered the due diligence by withholding information and limiting access to certain operations and financial personnel. Id. at 538.

The SRS Acquisition closed on October 30, 1997, but the Director Defendants allowed AlliedSignal to keep the financial books and records for SRS until June 30, 1998. Id. at 539. "Breed issued press releases and Form 10-Q's in February and March of 1998 that reported earnings and included information on the SRS division, but did not disclose that the financial books and records of SRS were still being kept by AlliedSignal." Id.

Breed, with its underwriter, Nationsbanc, marketed the bond placement through a nationwide road show. On April 7, 1998, during the road show, Mr. Speranzella met with the plaintiffs' investment managers. He did not disclose "the existence of loss contracts" or the fact that AlliedSignal still maintained SRS's financial records. Id. After the road show, a Nationsbanc analyst provided the plaintiffs' investment managers with a financial model of Breed prepared using financial data taken from SRS financial statements given to Breed by AlliedSignal. Id. Nationsbanc did not disclose either the due dilligence difficulties encountered by Breed or the fact that the financial data underlying the model came from AlliedSignal. Id. The investment managers subsequently purchased bonds for the plaintiffs. Id.

According to the plaintiffs, the investment managers relied in part upon an Offering Memorandum dated April 20, 1998, which was created by Breed, the Director Defendants, Nationsbanc, and Prudential. Id. The Offering Memorandum contained financial data and projections regarding the SRS Acquisition and other transactions, including pro forma statements of earnings. Id. On March 9, 1999, Breed filed a registration statement (the "Registration Statement") with the Securities and Exchange Commission in connection with an offer to exchange the bonds for registered notes. The Registration Statement incorporated by reference previously filed financial statements prepared using data obtained from AlliedSignal. Id.

On August 2, 1999, Breed filed suit against AlliedSignal in Florida state court, claiming that it had been defrauded in connection with the SRS Acquisition. Id. After Breed petitioned for bankruptcy in December 2000, the AlliedSignal Recovery Trust, a litigation trust created by the bankruptcy court for the benefit of Breed's unsecured creditors, took over as plaintiff in the lawsuit. (Memorandum of Law in Support of Motion of Honeywell International Inc. and Peter M. Kreindler to Quash Plaintiffs' Subpoena Ad Testificandum and for a Protective Order ("Kreindler Memo") at 2). During the course of discovery in the Florida litigation, the AlliedSignal Recovery Trust took the deposition of Mr. Kreindler, who "represented AlliedSignal during the senior-level negotiations leading up to the SRS transaction, and [] executed the agreement for the sale of SRS to Breed Technologies on behalf of AlliedSignal." (Kreindler Memo at 6). Mr. Kreindler also testified at the trial, at which AlliedSignal ultimately prevailed. (Kreindler Memo at 2-3).

On July 31, 2000, while the Florida litigation was pending, the plaintiffs brought this lawsuit in the District of Delaware, and the case was subsequently transferred to this Court. On August 10, 2004, Judge Swain granted the defendants' motions to dismiss with respect to all of the plaintiffs' claims except the federal securities claims against the Director Defendants. On September 22, 2006, the plaintiffs served the subpoena ad testificandum on Mr. Kreindler, and on October 20, 2006, Mr. Kreindler and Honeywell International Inc. filed the instant motion to quash the subpoena and for a protective order.

Discussion

A. Legal Standard

Under Rule 26(c), the court has discretion to limit discovery even of relevant evidence by making "any order which justice requires to protect a party or person from annoyance, embarassment, oppression, or undue burden or expense." Fed. R. Civ. P. 26(c); see Jones v. Hirschfeld, 219 F.R.D. 71, 74 (S.D.N.Y. 2003). Rule 45(c) "provides additional protection for non-parties subject to a subpoena by mandating that a court 'quash or modify the subpoena if it . . . subjects [the] person to undue burden.'" Jones, 219 F.R.D. at 74 (quoting Fed. R. Civ. P. 45(c)(3)(A)(iv)) (alteration in original). However, "it is exceedingly difficult to demonstrate an appropriate basis for an order barring the taking of a deposition." Naftchi v. New York University Medical Center, 172 F.R.D. 130, 132 (S.D.N.Y. 1997); see also Investment Properties International, Ltd. v. IOS, Ltd., 459 F.2d 705, 708 (2d Cir. 1972) (noting that "an order to vacate a notice of taking [of ...


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