City Investing Co. v. Simcox

• Decision Date: 22 October 1980
• Docket Number: No. 79-1896,79-1896
• Citation: 633 F.2d 56
• Parties: Blue Sky L. Rep. P 71,588, Fed. Sec. L. Rep. P 97,661 CITY INVESTING COMPANY and GDV, Inc., Plaintiffs-Appellants, v. Edwin J. SIMCOX, Secretary of the State of Indiana, et al., Defendants- Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 56

633 F.2d 56

Blue Sky L. Rep. P 71,588, Fed. Sec. L. Rep. P 97,661

CITY INVESTING COMPANY and GDV, Inc., Plaintiffs-Appellants, v. Edwin J. SIMCOX, Secretary of the State of Indiana, et al.,

Defendants- Appellees.

No. 79-1896.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 9, 1979.

Decided Oct. 17, 1980.

As Amended Oct. 22, 1980.

Jerold S. Solovy, Jenner & Block, Chicago, Ill., for plaintiffs-appellants.

Ronald J. Semler, Asst. Atty. Gen., Indianapolis, Ind., John W. Castles, III, Lord Day & Lord, New York City, for defendants-appellees.

Before SPRECHER and CUDAHY, Circuit Judges, and DUMBAULD, Senior District Judge. ^*

CUDAHY, Circuit Judge.

Plaintiffs-appellants City Investing Co. ("City") and GDV, Inc. ("GDV") brought this action in federal district court seeking, inter alia, to have the Indiana Takeover Offers Act, Ind. Code § 23-2-3.1-1 et seq. (Cum.Supp.1980) (the "Takeover Act" or the "Act"), declared unconstitutional under the supremacy and commerce clauses of the United States Constitution and the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (1976), as amended by the Williams Act. ¹ The district court abstained from deciding the merits of appellants' constitutional claims in light of what it perceived to be a potentially dispositive question of state law, the resolution of which, it felt, would render a decision on the federal constitutional claims unnecessary. We hold that the district court did not abuse its discretion in concluding that abstention was warranted under the circumstances of this case, and affirm. ²

I.

City and GDV are publicly-held Delaware corporations. Both maintain their principal places of business in New York City and neither conducts business in Indiana. City owns approximately 2/3 of GDV's outstanding common stock. Defendant-appellee Stokely-Van Camp, Inc. ("Stokely") is an Indiana corporation with its principal place of business in Indianapolis, Indiana. Defendants-appellees Stephen M. Coons, the Indiana Securities Commissioner, Edwin J. Simcox, the Secretary of State of Indiana, and Theodore L. Sendak, the Attorney General of Indiana, are charged by statute with various responsibilities in the administration and enforcement of the Takeover Act.

Between October 2, 1978 and April 23, 1979, GDV purchased a total of 168,400 shares of Stokely common stock in ordinary open market transactions on the New York Stock Exchange. These shares constituted 5.1% of the Stokely common stock outstanding as of February 25, 1979. ³ On May 2, 1979, as required by Section 13(d) of the Williams Act and the SEC rules promulgated thereunder, appellants filed a Schedule 13D with the SEC to report their acquisition of over 5% of Stokely's common stock. The Schedule 13D disclosed that:

GDV currently intends to acquire from time to time such number of additional shares of Common Stock that will, together with the shares of Common Stock currently owned by it, result in the ownership by GDV of in excess of 15% and as much as 20% of the outstanding voting securities of the Company (Stokely)....

The purpose of the purchase of the 168,400 shares of Common Stock ... and the proposed purchase of additional shares of Common Stock ... is to provide GDV with an investment in the Company. The acquisition of such additional shares and the time of acquisition thereof are subject to market conditions.

While neither GDV nor City currently intends to seek representation on the Board of Directors of the Company or otherwise to seek to exercise control over the Company, they may, depending on circumstances existing in the future, seek to acquire sufficient additional shares of Common Stock so that they can exercise control over the Company.

GDV and City reserve the right to acquire shares of Common Stock, in addition to those currently proposed to be acquired, at such prices and on such terms as GDV or City may deem advisable, through open market or private purchases or otherwise. In addition, GDV and City reserve the right to dispose of shares of Common Stock heretofore or which may hereafter be acquired, in the open market or in private transactions or otherwise. GDV and City also reserve the right to elect not to purchase any of the additional shares of Common Stock presently proposed to be acquired.

Shortly after the filing of the Schedule 13D, Stokely representatives contacted Commissioner Coons, claiming that GDV's real purpose was the acquisition of control of Stokely rather than mere investment. Coons requested that Stokely submit affidavits to support its claim, and primarily upon the basis of affidavits submitted by two Stokely officers, he issued a cease and desist order on May 22, 1979. The order was purportedly issued pursuant to Section 10(a) of the Takeover Act, ⁴ and, despite the Takeover Act's explicit prohibition against such action, it was issued without a hearing. ⁵ The order concluded, inter alia, that appellants had made a "takeover offer" in violation of the Takeover Act, and City and GDV were therefore directed to refrain from making any further purchases of Stokely stock.

On the same day on which he issued his cease and desist order, Coons also initiated an action in the Indiana Superior Court seeking to preliminarily and permanently enjoin appellants from acquiring any additional Stokely stock. The complaint filed in that action repeated the conclusion of the cease and desist order that appellants' purchases and Schedule 13D statements, together with the accompanying publicity, constituted a "takeover offer" within the meaning of the Act. Coons thereupon obtained an ex parte temporary restraining order from the Superior Court.

A hearing on Coons' request for a preliminary injunction was held on June 4, 1979. Coons appeared as a witness and testified as to his belief that GDV's purchases violated the Takeover Act. At the conclusion of the hearing, Coons' request for further injunctive relief was denied, and appellants' motion to dissolve the temporary restraining order was granted. The Superior Court ruled that Coons had failed to establish a prima facie case that GDV had made a takeover offer or that it had violated the Takeover Act. At the same time, however, the court also denied appellants' cross-motion to dismiss the complaint and refused to dissolve the May 22 cease and desist order.

On June 7, 1979, Coons issued an Order for Hearing, requiring appellants to show cause on June 15, 1979, why the cease and desist order of May 22 should not be continued in effect. On June 11, 1979, City and GDV filed their answer and counterclaim in the Superior Court action. The counterclaim put in issue each of the constitutional claims appellants assert on this appeal. That action is still pending.

Pursuant to their counterclaim, appellants also moved to dissolve the cease and desist order and to prohibit Coons from proceeding with the June 15 hearing. The Superior Court set aside the cease and desist order, on the sole ground that a hearing should have been held prior to its issuance, ⁶ but the court refused to prohibit the June 15 hearing.

Coons then held an administrative hearing on June 15, 1979. All parties were present and represented by counsel. At the conclusion of the hearing, Coons issued a second cease and desist order, again concluding, inter alia, that appellants were engaged in a "takeover offer" in violation of the Takeover Act. The second cease and desist order, enjoining appellants from making further purchases of Stokely stock until they comply with the requirements of the Takeover Act, remains presently in effect.

On July 6, 1979, City and GDV filed a notice of appeal with the Indiana Court of Appeals from the second cease and desist order. The notice of appeal asserts the constitutional claims appellants present here, and also explicitly raises a number of questions concerning the applicability of the Takeover Act to appellants' conduct.

The complaint in the instant action was filed in the district court on June 1, 1979. Appellants alleged, inter alia, that the Takeover Act was preempted by the Williams Act, that it imposed an unjustifiable burden on interstate commerce in violation of the Commerce Clause, and that the use of a biased and prejudiced decision maker in the state's administrative proceedings violated their fourteenth amendment right to due process. The prayer was for both declaratory and injunctive relief. ⁷

After a hearing on July 20 and 23, 1979, the district court entered a final judgment denying appellants any relief. As indicated, the district court abstained from deciding appellants' constitutional claims. In the alternative, it found those claims to be without merit.

II.

Abstention is a doctrine of judicial origin, seminally articulated by the Supreme Court, through Justice Frankfurter, in Railroad Comm'n of Texas v. Pullman Co., 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941). In Pullman,

the Court observed that the dispute before it implicated "a sensitive area of social policy upon which the federal courts ought not to enter unless no alternative to its adjudication is open." The Court found the "resources of equity" sufficient to accommodate an adjustment which would avoid "the friction of a premature constitutional adjudication" and obviate the need for a federal court to interpret state law without the benefit of an authoritative interpretation by a state court.... Thus evolved the doctrine of Pullman abstention: that a federal action should be stayed pending determination in state court of state-law issues central to the constitutional dispute.

Moore v. Sims, 442 U.S. 415, 427-28, 99 S.Ct. 2371, 2379-80, 60 L.Ed.2d 994 (1979).

Subsequent to the Pullman decision, two additional species of abstention have been recognized by the Supreme Court: Burford-type abstention ⁸ and Younger-type abstention. ⁹ See Colorado River Water Conservation District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47...