Saylor v. Lindsley, 474

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Citation456 F.2d 896
Docket NumberDockets 71-1332,475,71-1380.,No. 474,474
PartiesJ. Ralph SAYLOR, Plaintiff-Appellant, v. Thayer LINDSLEY et al., Defendants-Appellees, and Roseanne Horn, Michael J. McLaughlin, Objectors-Appellants, and Abraham I. Markowitz, Appellee.
Decision Date07 March 1972

Lillian Eichman, New York City, for appellant Saylor.

Avrom S. Fischer, Brooklyn, N. Y., for appellant Horn.

Reeves & O'Brien, New York City, for appellant McLaughlin.

Herbert Jacobi, New York City (Wickes, Riddell, Bloomer, Jacobi & McGuire, New York City, of counsel), for appellees Lindsley, Stott, Zeckhausen, Northfield Mines, Inc. and Mines Inc.

Abraham I. Markowitz, pro se.

Before FRIENDLY, Chief Judge, and ANDERSON and MANSFIELD, Circuit Judges.

FRIENDLY, Chief Judge:

This appeal raises questions about the settlement of a stockholder's derivative action over the objection of the plaintiff. While we decline to lay down a rule that this may never be done, we hold that the procedures here followed did not adequately protect the right of plaintiff, and of other objecting stockholders, to develop a record which might show that the settlement was improvident.

The transaction here at issue, the two-step sale to Mines Incorporated, in 1951 and 1953, by the Tonopah Mining Company of Nevada (Tonopah) of the stock of Tonopah Nicaragua Company (Tonopah Nicaragua), owner of the Rosita copper mine, is no stranger to the courts of this circuit. The history of an earlier action attacking the sale, Hawkins v. Lindsley, brought in 1957, in the District Court for the Southern District of New York, is recounted in Judge Swan's opinion for this court, 327 F.2d 356 (2 Cir. 1964). It suffices here to say that a second amended complaint in that action charged that the sale violated both state law of fiduciary obligations and the Investment Company Act of 1940; that in September, 1958, Judge Noonan dismissed the claim under the Investment Company Act and required the furnishing of $50,000 of security pursuant to § 61-b of the New York General Corporation Law (McKinney's Consol.Laws, c. 23 Supp. 1971-72); and that when plaintiff failed to post security, Judge Ryan, on July 27, 1961, ordered dismissal with prejudice. Plaintiff failed to take a timely appeal, and other efforts to vacate Judge Ryan's order of dismissal were rejected in the opinion cited.

In February, 1965, plaintiff Saylor began this action, also in the District Court for the Southern District of New York. Federal jurisdiction was based on violations of the federal securities laws, and state claims were alleged merely as pendent. Defendants responded by way of a motion for summary judgment on the basis that this new action was barred by res judicata and by the applicable statute of limitations. Judge Cooper granted the motion and dismissed the complaint on the ground of res judicata; in addition, while not purporting to decide the defense of limitations, he suggested that this presented a question which, if plaintiff appropriately amended his complaint, would create a triable issue of fact, 274 F.Supp. 253 (S.D.N.Y.1967). We reversed on the ground that the dismissal of the Hawkins action for failure to post security was not "on the merits" for purposes of res judicata; we indicated agreement with Judge Cooper's statement as to the defense of limitations and remanded for further proceedings with respect to that issue. 391 F.2d 965 (2 Cir. 1968).1 In an opinion on remand, Judge Cooper determined that with respect to the federal claims there were, indeed factual questions whether the applicable statute of limitations had run, and therefore denied summary judgment on that ground; however, with regard to the pendent state claims, he granted summary judgment on the basis of the running of the applicable limitations period unless within thirty days of the court's order plaintiff amended his complaint in certain material respects, 302 F.Supp. 1174 (S.D.N.Y.1969).2 The defendants filed their answer on January 9, 1970, denying most of the allegations in the complaint and setting up a number of affirmative defenses.

On September 24, 1970, Mr. Markowitz, "attorney for plaintiff," entered into a stipulation of settlement with the attorneys for the various individual and corporate defendants and the attorneys for Tonopah, which had previously been dissolved. This provided for the payment to Wilmington Trust Company, which a Delaware court had appointed to receive and distribute any assets of Tonopah that could not be distributed in liquidation before March 31, 1965, of $250,000 less the costs of notice of the settlement hearing and the fees and disbursements of plaintiff's counsel. Although there is a dispute when agreement on the settlement was actually reached, it is not asserted that plaintiff Saylor at any time authorized it or that Markowitz or anyone else advised him of its terms until November 4, 1970.

On that date Judge Ryan had signed an order setting a hearing on the settlement for December 1, 1970. The notice approved for transmission to stockholders contained no intelligible reference to the most important allegation of the complaint, namely, that defendants had intended the sales to Mines Incorporated to constitute only a step in an ultimate transfer to defendant La Luz Mines, Limited.3 The notice informed stockholders that transcripts of depositions could be read at the office of the clerk of the district court, and that exhibits could be inspected at the offices of the attorneys. The notice indicated that Mr. Markowitz would apply for an allowance of $83,000 and expenses of $1,313.73. After deduction of these sums, which were subsequently allowed, distribution to Tonopah stockholders would be something less than $166,000, or about 19 cents a share, as against the many millions of dollars in damages alleged to have been suffered. Of this amount, over $109,000 would be paid to the unserved defendant, Falconbridge Nickel Mines, Limited, which held some 74% of Tonopah's shares at the time of the latter's dissolution; the balance, some $57,000, would go to the independent stockholders.

At the hearing on December 1, 1970, Mr. Markowitz announced that he appeared "on behalf of the plaintiff." This elicited a response by Lillian Eichman, who had been of counsel in the Hawkins action, that she appeared on behalf of Mr. Saylor in opposition to the settlement. Avrom S. Fischer announced he represented another opposing stockholder, Roseanne Horn, and was of counsel to Mrs. Eichman. Gerard J. O'Brien appeared on behalf of another objecting stockholder, Michael J. McLaughlin. McLaughlin, Saylor, and Fischer, on Miss Horn's behalf, filed affidavits in opposition. Mr. Markowitz made an extended statement in support of the settlement, which was seconded by Mr. Jacobi, counsel for the defendants, and Mr. Singer, counsel for Tonopah, who reported approval of the settlement by Wilmington Trust Company. After briefly hearing Mr. Fischer and Mr. O'Brien, the judge gave them two weeks in which to submit further papers. McLaughlin and Fischer filed extensive affidavits; Markowitz submitted a reply affidavit. On January 14, 1971, the court issued an opinion approving the settlement, 1970-71 Transfer Binder CCH Fed.Sec.L.Rep. ¶92,222, at 90,410 (S.D.N.Y.1971); this was followed by the order here under appeal.

As earlier stated, there is a dispute about the time when the settlement was actually reached. McLaughlin's second affidavit stated that Markowitz informed him on June 4, 1969, of a meeting to be held the next day to discuss settlement; that "on Aug. 20, 1969, Markowitz informed me of the present offer, which I refused. Mr. Saylor soon thereafter advised me that he had similarly told Mr. Markowitz that he does not agree to any settlement, such as the present proposal." Fischer's second affidavit pointed to a letter to Miss Horn, dated October 29, 1969, from a member of the firm representing defendants, which states in part:

Without going into details as to all the procedural matters that have taken place in the meantime, I can tell you that we have been in active negotiations with counsel for the plaintiff and today agreed on a settlement of the case. It will be necessary to have examinations of several people because the entire settlement will be subject to approval of the court and the court will have to be convinced that it is in the best interest of the stockholders.

Fischer also relied on the nature of the three depositions taken by Markowitz and filed with the District Court, which, we must say, impress us as designed to justify a settlement rather than as an aggressive effort to ferret out facts helpful to prosecution of the suit, as evidence that a settlement had been agreed upon by the time they were taken. In contrast, Markowitz asserted in his reply affidavit that on August 20, 1969, he did not inform McLaughlin of defendants' offer but essentially of the prospects of negotiations; that on September 27, 1969, he called Saylor to advise him of the negotiations and the weakness of plaintiff's case; that he and counsel for Lindsley did believe on October 28, 1969, they had agreed on a settlement, but this subsequently fell through because there was in fact no agreement on the extent to which Falconbridge as a stockholder of Tonopah should share in the proceeds; that subsequent negotiations foundered; and that on January 15, 1970, he sent McLaughlin a letter which he claims informed McLaughlin that settlement negotiations were halted.4 We find it unnecessary to resolve this dispute or to direct the district court to do so, for even on the basis of Markowitz' version of the relevant events we cannot conclude that enough was done here to protect the rights of the stockholder plaintiff.

We are willing to go along with appellees and hold, despite the seeming incongruity, that the assent of the plaintiff (or plaintiffs)...

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