Telcom v. American Sharecom, Inc.
| Decision Date | 19 November 1999 |
| Docket Number | 98-3829,PLAINTIFFS-APPELLANTS,DEFENDANTS-APPELLEES,Nos. 98-3828,PLAINTIFF-APPELLANT,s. 98-3828 |
| Citation | 210 F.3d 928 |
| Parties | (8th Cir. 2000) POPP TELCOM, FORMERLY KNOWN AS LDB INTERNATIONAL CORPORATION, INC., PLAINTIFF, HUMBIRD SECURITIES, COMPANY; NORTHERN SECURITIES, COMPANY,, WASHINGTON SHARECOM, INC., PLAINTIFF, v. AMERICAN SHARECOM, INC.; STEVEN C. SIMON; JAMES J. WEINERT; WILLIAM J. KING, POPP TELCOM, FORMERLY KNOWN AS LDB INTERNATIONAL CORPORATION, INC.,, HUMBIRD SECURITIES, COMPANY; NORTHERN SECURITIES, COMPANY, PLAINTIFFS, WASHINGTON SHARECOM, INC.,, v. AMERICAN SHARECOM, INC.; STEVEN C. SIMON; JAMES J. WEINERT; WILLIAM J. KING, Submitted: |
| Court | U.S. Court of Appeals — Eighth Circuit |
Appeals from the United States District Court for the District of Minnesota. [Copyrighted Material Omitted] Before Wollman, Chief Judge, Lay, and Hansen, Circuit Judges.
Humbird Securities Co. ("Humbird"), Northern Securities Co. ("Northern"), Popp Telcom, Inc. ("Popp"), 1 and Washington Sharecom, Inc. ("Washington") (collectively and hereinafter "Dissenters") , appeal the district court's grant of a motion to dismiss and subsequent motion for summary judgment brought by American Sharecom, Inc. ("the Corporation"), Steven C. Simon ("Simon"), James J. Weinert ("Weinert"), and William J. King ("King") (collectively and hereinafter "ASI"). Because we disagree with the district court's analysis and dismissal of the Dissenters' fraud claims, we reverse and remand.
We recognize that this case has been before assorted state and federal courts since 1992 and the chronology of events is thus well-documented. Nonetheless, due to the complexity of this appeal, we feel it beneficial to give a somewhat detailed account of the events leading up to this proceeding.
The Dissenters are former stockholders in American Sharecom, Inc., a Minnesota corporation principally engaged in the business of purchasing telephone line access and reselling long-distance services to small and medium-sized businesses. Simon, Weinert, and King were the President, Vice-President and Chief Financial Officer of the Corporation, respectively. Each man also held a place on the Corporation's Board of Directors.
In April of 1992, the Board voted to approve a freeze-out2 merger of the Corporation with Sharecom Holdings, Inc., a Minnesota corporation owned exclusively by Simon and Weinert. As a result, every shareholder with the exception of Simon and Weinert would be cashed out, leaving them as the sole shareholders of the surviving corporation. The Board voted to pay each shareholder, save Simon and Weinert, $17,694.64 per share. 3 The Dissenters opposed the merger and exercised their Dissenters' rights under Minnesota Statute 302A.471(1)(c), thereby challenging the corporation's proffered payment per share. 4
The merger became effective on May 8, 1992. The Corporation paid off each shareholder with the exception of the Dissenters. In accordance with Minnesota Statute 302A.473(7), the Corporation thereafter filed a petition for determination of value with the state court. 5
Shortly after the Corporation filed its appraisal petition, 6 the Dissenters filed a counterclaim alleging that the merger was invalid due to the grant of fraudulent stock options and the dissemination of misleading proxy materials. The Corporation thereafter moved for dismissal of the counterclaim, which was granted on February 24, 1993. The court found that the counterclaim, which was not compulsory since it had no "logical relationship" to the appraisal action, was outside the limited scope of the valuation proceeding and dismissed it without prejudice. The court further noted that the fraud claim "may be filed again within the applicable statute of limitations period . . . ." The Dissenters did not appeal Judge Howard's dismissal of their counterclaims.
On June 28, 1994, Judge Howard found that the stock had been significantly undervalued. Each share was found to be worth $111,893, over six times the amount the Corporation had paid frozen-out shareholders. By court order, the Corporation paid Popp $4,050,514; Humbird and Northern received $376,792; and Washington was compensated in the amount of $191,193. 7 he Corporation appealed, and the Dissenters cross-appealed; the Minnesota Court of Appeals upheld the decision for the most part, remanding only for reconsideration of the accrual date for prejudgment interest. See American Sharecom, Inc. v. LDB Int'l Corp., No. C9-94-2419, 1995 WL 321540 (Sharecom I).
Approximately five months after Judge Howard handed down his decision, Rochester Telephone Corporation, a telecommunications firm based in New York, announced that it was purchasing American Sharecom, Inc. for approximately $190 million in Rochester Telephone stock. 8 The Dissenters claim this sale aroused their suspicions, and after some investigation, they concluded that ASI had allegedly defrauded the court during the appraisal proceeding. As a result, on December 16, 1994, the Dissenters moved the Minnesota Court of Appeals to remand the appraisal action to the state court for reconsideration on account of the discovery of new evidence. In the year following the motion to reopen, the Dissenters allegedly found even more evidence of fraud both during the years leading up to the merger and during the valuation proceeding. Meanwhile, on August 23, 1995, a Satisfaction of Judgment was entered in the amount of $5,013,327.84 (plus interest) on the valuation proceeding.
On February 6, 1996, Judge Howard agreed to reopen the valuation proceeding to hear the Dissenters' allegations of fraud occurring during the proceeding itself. However, six months later, the Minnesota Court of Appeals held in American Sharecom, Inc. v. LDB Int'l Corp., 553 N.W.2d 433 (Minn. Ct. App. 1996) (Sharecom II), that Judge Howard had no jurisdiction to vacate the satisfied judgment on the basis of fraud and newly discovered evidence. The court explicitly noted, however, that the Dissenters had another available remedy in the form of a separate common law fraud action. See Sharecom II, 553 N.W.2d at 434.
In May of 1994, prior to Judge Howard's determination in the valuation proceedings and well before the satisfaction of that judgment, the Dissenters served ASI with a complaint alleging common law fraud. In the accompanying cover letter, however, the Dissenters stated they "hereby agree[d]" that ASI "may have an indefinite extension in which to answer or otherwise respond to the complaint . . . ." It was not until November 8, 1996, that the Dissenters filed their fraud claims in state court. At that time, the Dissenters filed an Amended Complaint bringing forth additional factual complaints and a civil claim under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. 1961 et seq. On December 2, 1996, ASI removed the case to federal court on the basis of federal question jurisdiction under 28 U.S.C. 1331. The Dissenters filed their Second Amended Complaint shortly thereafter.
The crux of the Dissenters' fraud allegations, broadly stated, is that Simon and Weinert "stole control" of the Corporation through a series of fraudulent schemes. Among these allegedly unlawful activities were strawman purchases, misleading tender offers, underpriced stock options, a fraudulent stock split, the freeze-out merger, and material omissions and fraudulent misrepresentations during the valuation proceeding. The Dissenters argue that, through these assorted scams, Simon and Weinert were able to eliminate every other shareholder and reap a huge profit after selling off the Corporation.
On July 11, 1997, the federal district court granted in part ASI's motion to dismiss the fraud action, dismissing only those claims seeking damages related to stock value. Claims unrelated to the value of ASI stock, should any exist, were not subject to the court's dismissal order. In dismissing the allegedly value-related fraud claims, the district court noted that the doctrine of election of remedies prevented the Dissenters from bringing an action for fraud after a determinative conclusion on the appraisal issue. In order to pursue the fraud claims, the court found that the Dissenters should have stayed the appraisal proceeding. Further, the court felt the fraud claims acted as an impermissible collateral attack on the valuation proceeding judgment, as the court would be required to overrule the state court's determination of the fair value of the stock in order to provide the Dissenters with the sought-after "fair compensation for their interests in ASI." The court also found that the action was barred by collateral estoppel because the issue in the two proceedings was identical, the appraisal proceeding was a final judgment on the merits, the Dissenters were parties to the valuation proceeding, and the Dissenters received a "full and fair opportunity" to litigate their claim in the prior proceeding. That opportunity, according to the court, was the option to stay the valuation proceeding and litigate the fraud claims.
After the partial dismissal, the Dissenters moved for leave to file a Third Amended Complaint to add two state statutory causes of action. The magistrate judge, on referral of the issue from the district court, denied the motion to amend on the same grounds as the district court's earlier dismissal of the complaint alleging fraud. ASI thereafter moved for summary judgment, and that motion was granted by the district court on September 16, 1998. The court rejected the Dissenters' fraud claims based on pre-merger conduct on the theory that the sought-after rescissionary damages were inconsistent with the out-of-pocket damages awarded in the...
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