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Gibbons v. Morgan

United States District Court, S.D. New York

September 6, 2017


          OPINION & ORDER

          KATHERINE B. FORREST, District Judge:

         In this action, plaintiffs seek disgorgement of alleged “short-swing” profits realized by defendants in violation of Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b). (ECF No. 27.) Defendants have moved for summary judgment, arguing that plaintiffs' claim is precluded as a result of a related class and derivative settlement approved by the Delaware Court of Chancery in 2016. (ECF No. 89.) For the reasons stated below, defendants' motion for summary judgment is GRANTED.


         The following facts are taken from the parties' various submissions under Rule 56.1, and are undisputed unless otherwise noted.[1]

         a. The disputed transactions

         Erickson Incorporated (“Erickson”) is an aircraft manufacturing and operating company headquartered in Portland, Oregon. (The ZM Defs.' Rule 56.1 Statement in Supp. of Their Cross-Motion for Summ. J. and Resp. to Pls.' Rule 56.1 Statement of Material Facts (“Defs.' Statement”) (ECF No. 55) ¶ 1.) Evergreen Aviation, Inc. (“Evergreen Aviation”) was an aviation company also headquartered in Portland. (Pls.' Reply to Defs.' Rule 56.1 Statement (“Pls.' Reply”) (ECF No. 63) ¶ 88.) Prior to the events giving rise to this action, Evergreen Helicopters, Inc. (“Evergreen Helicopters”) was a wholly-owned subsidiary of Evergreen Aviation. (Id.)

         On March 18, 2013, Erickson acquired 100 percent of the stock of Evergreen Helicopters from Evergreen Aviation (the “Evergreen Transaction”) in exchange for a package including: (1) $185, 000, 000 cash; (2) 4, 008, 439 shares of Erickson Preferred Stock (“Preferred Stock”); (3) a note for $17, 500, 000; and (4) an additional earn-out amount. (Defs.' Statement ¶¶ 46, 50.) The Evergreen Transaction officially closed on May 2, 2013 (the “Closing Date”). (Id. ¶ 55.)

         Defendants ZM Private Equity Fund I, L.P. (“ZMPEF1”) and ZM Private Equity Fund II, L.P. (“ZMPEF2”) (collectively, the “ZM Funds”), together with affiliated entities including ZM EAC LLC (“ZMEAC”), owned a majority of Erickson's Common Stock (“Common Stock”) on the Closing Date. (Pls.' Reply to Defs.' Rule 56.1 Statement in Res Judicata Mot. (“Pls.' Res Judicata Reply”) (ECF No. 103) ¶ 3.) This action principally concerns a series of transactions (the “disputed transactions”) that the ZM Funds and ZMEAC executed in the weeks following the Evergreen Transaction. Although the parties dispute the exact nature and characterization of those transactions, there is no dispute regarding the precise amount of Preferred Stock acquired by the ZM Funds and the amount of Common Stock subsequently sold by ZMEAC. Specifically, ZMPEF1 acquired a total of 913, 732.61 shares of Preferred Stock, and ZMPEF2 acquired a total of 391, 559.70 shares on the Closing Date. (Defs.' Statement ¶ 64.) Subsequently, from May 16-30, 2013, ZMEAC sold a total of 250, 000 shares of Common Stock in ten separate transactions. (Id. ¶ 71.)

         b. Litigation

          On August 8, 2013, an Erickson stockholder (the “Delaware Plaintiff”) filed a derivative and class complaint (the “Delaware Action”) arising out of the Evergreen Transaction in the Delaware Court of Chancery (the “Delaware Court”). (Pls.' Res Judicata Reply ¶ 1.) The Delaware Action included both: (1) derivative claims brought on Erickson's behalf; and (2) direct claims brought on behalf of a class of similarly situated Erickson stockholders. (Id.) Relevant to the present action, Count IV of the Delaware Action was a derivative claim alleging insider trading and breach of fiduciary duty in violation of Delaware state law. (Id. ¶ 7); see also Verified Class Action and Derivative Compl. ¶¶ 111-116, Montgomery v. Erickson Air-Crane, Inc., No. 8784-VCL (Del. Ch. Aug. 8, 2013). The Delaware Plaintiff sought disgorgement and restitution of any profits that the defendants in that action realized as a result of the allegedly unlawful transactions. (Pls.' Res Judicata Reply ¶ 7.)

         On November 13, 2014, while the Delaware Action was pending, Michael Gibbons[2] filed the present action “in the name of and on behalf of Erickson.” (ECF No. 1.) The operative complaint, filed on May 15, 2015, alleges that the disputed transactions constitute “short-swing” trading in violation of Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) (“Section 16(b)”). (ECF No. 27.) Plaintiffs seek accounting and disgorgement of all profits that defendants realized as a result of the disputed transactions. (Id.)

         On January 15, 2016, the Delaware Plaintiff informed the Delaware Court that the parties to the Delaware Action had agreed on an initial settlement. (Pls.' Res Judicata Reply ¶ 23-4.) Shortly thereafter, defendants moved to stay this case pending final settlement of the Delaware Action. (ECF No. 64.) This Court granted defendants' motion by order dated February 9, 2016. (ECF No. 70.)

         On September 12, 2016, the Delaware Court held a settlement hearing and issued an “Order and Final Judgment” (the “Delaware Judgment”) approving the proposed settlement in full. (Pls.' Res Judicata Reply ¶ 44.) In approving the settlement, the Delaware Court released “any and all Claims that are based upon, arise out of, relate in any way to, or involve (in whole or in part) any of the facts alleged in the [Delaware] Action, including . . . the Evergreen Transaction [and] . . . sales of Erickson stock by entities affiliated with the ZM Defendants.” (Id. ¶ 42.) The order further defined “Claims” to include “any and all manner of claims . . . of any kind, nature or description whatsoever . . . (including, without limitation, any claims under federal or state securities law . . . [and] all claims within the exclusive jurisdiction of the federal courts, or any claims that could be asserted derivatively on behalf of [Erickson].” (Id. ¶ 43, 45.) (emphasis added).

         In light of the Delaware Judgment, defendants in this action moved for summary judgment based on res judicata on October 25, 2016; the Court may proceed at this point and rule on defendants' motion for summary judgment. (ECF No. 89.) The parties do not dispute the basic timeline recited above, nor do they dispute the literal terms of the Delaware Judgment. The only issue to be resolved by this Court is the legal effect of the Delaware Judgment on the present action.


         a. Sum ...

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