391 F.2d 965 (2nd Cir. 1968), 278, Saylor v. Lindsley

Docket Nº:278, 31819.
Citation:391 F.2d 965
Party Name:J. Ralph SAYLOR, Plaintiff-Appellant, v. Thayer LINDSLEY, Gordon D. Stott, Paul W. Zeckhausen, Northfield Mines, Incorporated, Mines Incorporated, George W. Tower and Tonopah Mining Company of Nevada, Defendants-Appellees, and J. Wesley McWilliams, Louis H. Bregy, John T. McWhirter, William H. Wright, G. T. N. Woodruffe, La Luz Mines Limited, Falco
Case Date:March 18, 1968
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 965

391 F.2d 965 (2nd Cir. 1968)

J. Ralph SAYLOR, Plaintiff-Appellant,


Thayer LINDSLEY, Gordon D. Stott, Paul W. Zeckhausen, Northfield Mines, Incorporated, Mines Incorporated, George W. Tower and Tonopah Mining Company of Nevada, Defendants-Appellees, and J. Wesley McWilliams, Louis H. Bregy, John T. McWhirter, William H. Wright, G. T. N. Woodruffe, La Luz Mines Limited, Falconbridge Nickel Mines, Limited, Ventures Limited, Defendants.

No. 278, 31819.

United States Court of Appeals, Second Circuit.

March 18, 1968

Argued Jan. 23, 1968.

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Abraham I. Markowitz, New York City, for plaintiff-appellant.

Herbert J. Jacobi, New York City (Thomas F. O'Toole, Jerome M. LeWine, Wickes, Riddell, Bloomer, Jacobi & McGuire, New York City, on the brief), for defendants-appellees Thayer Lindsley, Gordon D. Stott, Paul W. Zeckhausen, Northfield Mines, Inc., Mines, Inc. and George W. Tower.

Daniel A. Pollack, New York City (Pollack, Greenspoon & Singer, New York City, on the brief), for defendant-appellee Tonopah Mining Co. of Nevada.

Before MEDINA, MOORE and ANDERSON, Circuit Judges.

ANDERSON, Circuit Judge:

The present derivative action was brought on behalf of the Tonopah Mining Co. of Nevada (Tonopah), in the District Court for the Southern District of New York on October 6, 1964 by J. Ralph Saylor, the plaintiff-appellant. Several of the directors of Tonopah and certain corporations, allegedly affiliated with Tonopah or under the control of its directors, are charged with violations of the federal securities laws and with breach of fiduciary duty under state law. Jurisdiction is based upon federal statute and the doctrine of pendent jurisdiction. Diversity of citizenship is not alleged.

The transactions in question are the sale and transfer by Tonopah to Mines Incorporated (Mines), in 1951 of 60%, and in 1953 of the remaining 40%, of the stock of a subsidiary, Tonopah Nicaragua Company (Tonopah Nicaragua), the principal asset of which was a copper mine located in Nicaragua (the Rosita Mine), and the subsequent transfer in 1955 of the Rosita Mine to a wholly-owned subsidiary of one of the defendant corporations, La Luz Mines Limited (La Luz). It is alleged that, at the time of these events the seller (Tonopah), the buyer (Mines), and the eventual transferee (La Luz), were all under the domination and control of the defendants; that the sale of the Tonopah Nicaragua stock to Mines was affected at less than a fair consideration; that the defendants conspired to invest ownership of the

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Rosita Mine in La Luz for the personal benefit of certain of the defendants; and that in furtherance of the conspiracy, information pertaining to the true extent of the copper reserves at the Rosita Mine, and to the value of those reserves, which was known to the defendants, was concealed from, and certain other facts were misrepresented to, the stockholders of Tonopah. These acts, it is alleged, constitute a breach of fiduciary duty on the part of the defendant directors of Tonopah, and, in addition, are violations of the Investment Company Act of 1940, 1 and of the anti-fraud provisions of the Securities Act of 1933 2 and the Securities Exchange Act of 1934. 3 By way of relief, the complaint demands that the sale of the Tonopah Nicaragua stock be declared null and void, that the transfer of the property and assets of Tonopah Nicaragua be rescinded and the property be reconveyed to Tonopah, and that the defendants be made to account for the profits made by them and the damages sustained by Tonopah.

By motion dated April 22, 1965, certain of the defendants moved for summary judgment on the ground that the claims asserted by the plaintiff Saylor were res judicata and, alternatively, on the ground that the suit was barred by the applicable statute of limitations.

The claim of res judicata was based upon the fact that an earlier derivative suit, brought on behalf of Tonopah in 1957 by a stockholder named Hawkins, Hawkins v. Lindsley, 2 Cir., 327 F.2d 356, and founded upon the same allegedly fraudulent transactions as the present action, was dismissed 'with prejudice' in 1961 due to Hawkins' failure to comply with an order of the court requiring that he post a security-for-costs bond. The motion was heard by the District Court which granted summary judgment in favor of the defendants-appellees on June 13, 1967. 4 It held that the complaint filed against the defendants in the present suit was substantially the same as the complaint in the Hawkins litigation, and that the dismissal 'with prejudice' in Hawkins was a judgment on the merits, and was binding on all the stockholders of Tonopah under the principle of res judicata. On this disposition, the court did not resolve the difficult questions raised by the defense of the statute of limitations, but suggested that, had the issues been reached, the case would have been inappropriate for summary disposition because of the presence of one or more material questions of fact, e.g. when did Saylor discover or when should he reasonably have discovered the facts allegedly amounting to fraudulent conduct so as to start the running of the limitations period. A judgment dismissing the complaint as to the moving defendants was entered on June 22, 1967 and, from it, the plaintiff-appellant has appealed.

In this court the appellant has advanced three arguments, any one of which, if accepted here, would require a reversal of the trial court's decision on res judicata. He claims that the dismissal in Hawkins is not res judicata as to the present action, first, because the two suits are not based upon the same cause of action because additional legal theories for recovery have been added to the instant complaint; second, because the dismissal in Hawkins for failure to post a security-for-costs bond is not a judgment 'on the merits' for the purposes of res judicata; and, third, because the dismissal in Hawkins, even if on the merits, is not binding on the plaintiff, Saylor, and the other stockholders of Tonopah who were not given actual notice and an opportunity to intervene before the action was ordered dismissed. Upon careful consideration of each of the arguments made by the appellant, and of the counter-arguments advanced by the appellees,

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we have concluded that, under all the circumstances of this case, the dismissal 'with prejudice' in the Hawkins action was not a disposition 'on the merits' for the purpose of res judicata, and is not a bar to the timely commencement of a new action by another stockholder of Tonopah. We concur, however, in the opinion of the trial court that the question of a limitations bar to the present action cannot be resolved on summary judgment due to the existence of unresolved issues of fact. The judgment of the district court is therefore reversed and the case is remanded to that...

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