Champion Parts, Inc. v. Oppenheimer & Co.

• Decision Date: 07 July 1989
• Docket Number: No. 88-2768,88-2768
• Citation: 878 F.2d 1003
• Parties: Fed. Sec. L. Rep. P 94,524 CHAMPION PARTS, INC., Plaintiff-Appellant, v. OPPENHEIMER & CO.; Daniel J. O'Neill; and Peter A. Russ, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1003

878 F.2d 1003

Fed. Sec. L. Rep. P 94,524

CHAMPION PARTS, INC., Plaintiff-Appellant, v. OPPENHEIMER & CO.; Daniel J. O'Neill; and Peter A. Russ Defendants-Appellees.

No. 88-2768.

United States Court of Appeals Seventh Circuit.

Argued April 11, 1989.

Decided July 7, 1989.

Peter V. Baugher, Schopf & Weiss, Randall L. Mitchell, Paul E. Lehner, Adams, Fox, Adelstein, Rosen & Bell, and Philip Fertik, Beigel & Sandler, Chicago, Ill., for Champion Parts Rebuilders, Inc., an Illinois Corp., plaintiff-appellant.

David L. Carden, Shelley L. Rice, Lee A. Russo, Coffield, Ungaretti, Harris & Slavin, Chicago, Ill., Dennis J. Block, Joseph S. Allerhand, and Andrea J. Roth, Weil, Gotshal & Manges, New York City, for Oppenheimer & Co., Inc., a Delaware corp., defendant-appellee.

David L. Passman, Chicago, Ill., for Daniel J. O'Neil and Peter A. Russ, defendants-appellees.

Before BAUER, Chief Judge, FLAUM and EASTERBROOK, Circuit Judges.

FLAUM, Circuit Judge.

This case involves an attempt by Champion Parts, Inc. ("Champion") to recover from the defendants the money it expended in a successful attempt to obtain equitable relief against a group of investors. The basis of Champion's action against the investors was that the investors failed to file proper disclosures under 15 U.S.C. Sec. 78m(d) (1988) ("Sec. 13(d)") after they had accumulated greater than 5 percent of Champion's outstanding stock. The district court in the instant action held that Champion has no common law right to the recovery of its litigation expenses and therefore dismissed the action pursuant to Federal Rule of Civil Procedure 12(b)(6). We affirm.

I.

The facts surrounding the attempt to take control of Champion are set out in detail in Judge Shadur's two opinions in the underlying case, Champion Parts Rebuilders Inc. v. Cormier, 650 F.Supp. 87 (N.D.Ill.1986); Champion Parts Rebuilders Inc. v. Cormier, 661 F.Supp. 825 (N.D.Ill.1987), and we will only summarize them here. ^* Defendants Peter Russ and Daniel O'Neill, both registered brokers formerly employed by defendant Oppenheimer, first took interest in Champion when an inhouse analysis identified the company as a good takeover candidate. The company was considered a good takeover candidate because it was thought to own a significant amount of undervalued real estate; so much so that the breakup value of the company was believed to be greater than its market price. Russ and O'Neill discussed their interest in the company with their superiors at Oppenheimer, including Michael Metz, an Oppenheimer Senior Vice President, who apparently agreed with their assessment of Champion.

Russ and O'Neill developed a plan to take control of Champion. The plan called for Russ and O'Neill to contact their customers and persuade them to obtain sufficient shares of Champion to enable them to demand the resignation of Champion's board of directors. A new board would then be elected to carry out the other elements of Russ' and O'Neill's plan, which entailed: "cleaning up" Champion's balance sheet; eliminating excess capacity; and, within two years, selling the company to the highest bidder. Russ and O'Neill were successful in arousing interest among their clients and, without ever publicly disclosing their true intentions, began to purchase large amounts of Champion stock on behalf of various clients and groups of clients (collectively, the "group"). So as to avoid calling attention to themselves, and risk the possibility of an increase in Champion's stock price, the brokers used practices such as "side-by-side buying," where the brokers bid for shares seriatim rather than simultaneously in order to avoid bidding up the price, and "stock parking," where shares of stock are held by someone other than the true owner for the purpose of lowering the apparent amount of stock owned by that person, to effectuate their purchases.

By October 1987, the group, without ever filing an accurate disclosure pursuant to Sec. 13(d), had accumulated 42% of the outstanding shares of Champion stock. A meeting with Champion's Chief Executive Officer was then arranged at which time the group finally disclosed the extent of its control of Champion stock and requested that all current board members resign.

Champion responded to the group's demand with the underlying litigation before Judge Shadur. In that litigation Champion successfully argued for a temporary injunction and other equitable relief against the group on the grounds that the group had violated Sec. 13(d) by failing to disclose its actual intentions with regard to Champion after it had accumulated greater than 5% of Champion's outstanding shares. The litigation was eventually concluded pursuant to the entry of an Agreed Final Judgment Order. Champion claims that it expended in excess of one million dollars in pursuing the litigation and has brought this suit in an attempt to recover those expenditures from the defendants.

Champion's complaint sets out five separate theories under which it claims it is entitled to recover damages, in the form of its litigation expenses, from the defendants: tortious inducement of illegal conduct (Count I); tortious interference with Champion's protectible interest in an informed market for its shares of stock (Count II); tortious conspiracy (Count III); negligent failure to supervise and respondeat superior (Count IV); and, finally, violations of both the Illinois Consumer Fraud and Deceptive Business Practices Act and the New York Consumer Protection from Deceptive Acts and Practices Act (Count V).

The district court granted the defendants' motion to dismiss for failure to state a claim upon which relief could be granted on all of these claims. The court held that because money damages are unavailable in an action under Sec. 13(d), Champion, by obtaining the injunction and other equitable relief it sought, had "received all that it was entitled to in the Sec. 13(d) litigation." The court thus dismissed the instant action as an effort by Champion to "enlarge its Section 13(d) relief ... under the guise of" various common law torts.

The district court, although it did not state its decision in these terms, apparently reasoned that a damages award to Champion in this situation would alter the balance struck by the Williams Act between incumbent management and bidders in their pursuit of shareholder support and would thus be pre-empted as violating the Supremacy Clause. An argument, although not one forwarded by Oppenheimer, can be fashioned to support that reasoning. The argument would start with the proposition, accepted by a plurality of the Supreme Court in Edgar v. Mite, 457 U.S. 624, 634, 102 S.Ct. 2629, 2636, 73 L.Ed.2d 269 (1982), that the Williams Act was intended solely to provide information to investors and was not meant to alter the balance between incumbent management and bidders. The argument would then state that the unavailability of damages to an issuer in an action brought under Sec. 13(d) was part of the delicate balance struck by the Williams Act. To allow an issuer to receive damages under state law based on the violation of Sec. 13(d), the argument would conclude, would tip the balance in favor of target corporations and would thus violate the Supremacy Clause.

We can perceive several potential problems with this argument. Initially, it is unclear whether adding to the costs of a tender offer will always alter the balance between targets and bidders in a way that will create a conflict with the Williams Act. See CTS v. Dynamics Corp. of America, 481 U.S. 69, 107 S.Ct. 1637, 1646 n. 7, 95 L.Ed.2d 67 (1987). Second, it may be difficult to reconcile this argument with Sec. 28(a) of the Securities Exchange Act (the "Act") which states, in part, that the rights and remedies of the Act "shall be in addition to any and all other rights and remedies that may exist at law or in equity." 15 U.S.C. Sec. 78bb(a) (1982). For an extended discussion of these and other problems with pre-emption arguments based on the Williams Act, see Amanda Acquisition Corporation v. Universal Foods Corporation, 877 F.2d 496, 502-505 (7th Cir.1989).

Fortunately, we need not resolve the question of whether this state law damages action is pre-empted by the Williams Act. For even if Champion's damages claim is not pre-empted by the Williams Act, the district court was still correct to dismiss the action.

II.

Champion alleges that it is entitled to recover from the defendants (collectively "Oppenheimer") the attorney's fees it expended in prosecuting the Sec. 13(d) action in federal court. As jurisdiction of this action is based on diversity of citizenship, we must look to Illinois state law to evaluate this claim. Illinois generally recognizes the American Rule in distributing the burden of attorney's fees. That rule holds that absent a statute or contractual provision, a successful litigant must bear the burden of his or her own attorney's fees. Ritter v. Ritter, 381 Ill. 549, 46 N.E.2d 41, 43 (1943); Kerns v. Engelke, 76 Ill.2d 154, 28 Ill.Dec. 500, 506, 390 N.E.2d 859, 865 (1979). Were that rule without exception this case would be over since everyone agrees that no contract exists between the parties and no statute provides for fee shifting in this situation and thus Champion, even as a successful litigant, would have to bear its own litigation expenses.

Illinois does recognize an exception to the rule, however, and Champion claims this case fits within that exception. In Illinois:

where the wrongful acts of a defendant involve the plaintiff in litigation with third parties or place him in such relation with others as to make it necessary to incur expenses to protect his interest, the plaintiff can then recover damages against such wrongdoer, measured by the reasonable expenses of such litigation, including attorney fees.

Ritter, 46 N.E.2d at 44. The theory behind the exception is that a tortfeasor should be held responsible for...