Adam v. Jacobs

• Citation: 950 F.2d 89
• Decision Date: 22 November 1991
• Docket Number: No. 212,D,212
• Parties: Laszlo ADAM, Dennis W. Brush, Michael J. Connelly, Jack Weinstein, Marcel Fournier, William S. Kingson, Plaintiffs-Appellees, v. Eli S. JACOBS, Defendant-Appellant. ocket 91-7466.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 89

950 F.2d 89

21 Fed.R.Serv.3d 493

Laszlo ADAM, Dennis W. Brush, Michael J. Connelly, Jack

Weinstein, Marcel Fournier, William S. Kingson, Plaintiffs-Appellees, v. Eli S. JACOBS, Defendant-Appellant.

No. 212, Docket 91-7466.

United States Court of Appeals,

Second Circuit.

Argued Sept. 25, 1991.

Decided Nov. 22, 1991.

Gerson A. Zweifach, Washington, D.C. (Brendan V. Sullivan, Jr., Dennis M. Black, Williams & Connolly, Washington, D.C., J. Douglas Richards, O'Sullivan Graev & Karabell, New York City, of counsel), for defendant-appellant.

Allen S. Joslyn, New York City (Pamela G. Fisher, Cahill Gordon & Reindel, of counsel), for plaintiffs-appellees Adam, Brush, Connelly, Weinstein and Fournier.

Richard A. Rossman, Pepper, Hamilton & Scheetz, Detroit, Mich., Eleanor N. Ewing, Pepper, Hamilton & Scheetz, Philadelphia, Pa., Christopher Dee, Pepper, Hamilton & Scheetz, New York City, for plaintiff-appellee Kingson.

Before MESKILL, WINTER and ALTIMARI, Circuit Judges.

MESKILL, Circuit Judge:

This is an appeal from a judgment entered in the United States District Court for the Southern District of New York, Keenan, J., ordering defendant Eli S. Jacobs, the guarantor of payment on certain notes, to pay $4,744,285.23 to plaintiffs.

On appeal, Jacobs argues that the district court erred by addressing the merits of the plaintiffs' guarantee of payment argument without first addressing whether this action should have been brought as a compulsory counterclaim in a suit filed previously in a federal court in Michigan. Jacobs argues that the claim in the present action is a compulsory counterclaim and should have been dismissed or transferred to the district court in the Eastern District of Michigan.

We vacate the judgment and remand to the district court with instructions to dismiss.

BACKGROUND

Eli S. Jacobs, the defendant in this case, is a venture capitalist who runs the New York investment firm E.S. Jacobs & Company. His numerous holdings include a large stake in Flagship Express, Inc. (Flagship).

Rosenbalm Aviation services and maintains airplanes for air cargo carriers. It is incorporated in Nevada and maintains its principal place of business in Ypsilanti, Michigan. In November 1987, individual investment bankers known as the Adam Group, together with Fred K. Palone, a vice president of Rosenbalm Aviation, purchased the corporation. By December 1988, Palone and the Adam Group decided to sell the company.

In August 1989, the plaintiffs and Fred K. Palone entered into an Agreement and Plan of Reorganization to merge Rosenbalm The original agreement called for an all cash deal, but when this became unfeasible, the plaintiffs agreed to accept a combination of cash and bridge notes of Rosenbalm Aviation, Inc., the corporation that would result from the merger. To induce the plaintiffs to accept these notes, Jacobs executed unconditional personal guarantees. These guarantees were attached to the merger documents. The guarantees state, in pertinent part:

                Aviation into RA Acquisition Corporation (RA), a wholly owned subsidiary of Flagship's predecessor corporation.   By all accounts, Jacobs actively participated in every stage of the sale transaction
                

The Guarantor understands and acknowledges that this Guaranty was a major inducement for Shareholder to accept the Note rather than to require full cash payment for his stock.

Accordingly, the Guarantor hereby absolutely, unconditionally and irrevocably guarantees ... prompt and unconditional payment.

....

No setoffs or counterclaims that the Guarantor or the Corporation may have against Holder will impair or otherwise affect Holder's rights against the Guarantor, and the Guarantor waives the assertion of any such setoffs or counterclaims in any proceeding to enforce the Guarantor's obligations under this Guaranty.

The guarantees do not mention the waiver of any rights (1) to assert defenses, or (2) to seek a declaratory judgment.

RA initially made the interest payments on these notes but on October 31, 1990, the day before full payment of the principal was due, Jacobs, Flagship, RAI, Inc. (a corporate conduit formed to effect the acquisition) and Rosenbalm Aviation Inc. (the post-acquisition entity) filed suit in the United States District Court for the Eastern District of Michigan (Michigan action). The ten count complaint pleaded six causes of action and sought rescission of the entire transaction on the ground that it was induced by fraud. Substantively, the plaintiffs in the Michigan action contend that fraudulent misrepresentations were made concerning (1) the status of Rosenbalm Aviation's contracts with its most important customer, (2) the size of Rosenbalm Aviation's inventory of rotable parts, and (3) the status of Rosenbalm Aviation's books. They assert that fraud permeated the transaction and induced acquisition of the company. Technically, rescission is sought based on section 12(2) of the Securities and Exchange Act of 1933, 15 U.S.C. § 77l (2), and section 29(b) of the 1934 Act, 15 U.S.C. § 78cc(b), common law fraud and the Declaratory Judgment Act, 28 U.S.C. § 2201. The Michigan action remains pending. Palone and the Adam Group challenged the complaint, asserting that Jacobs and the other plaintiffs in that action lacked standing to assert the federal securities claims.

When the sums due on November 1 were not received, the Adam Group demanded payment of the notes and gave formal notice to Jacobs of the default. Subsequently, the Adam Group filed a motion for summary judgment in lieu of complaint in New York Supreme Court on January 2, 1991. On February 1, 1991, Jacobs removed the action to the United States District Court for the Southern District of New York on grounds of diversity jurisdiction.

In the Southern District, on February 8, Jacobs moved the district court to dismiss the Adam Group's complaint. Then, on February 11, the Adam Group moved for summary judgment. On February 19, Jacobs cross-moved for leave to take certain discovery to respond to the summary judgment motion. The parties then briefed the court on all three motions. Plaintiffs argued that, based on New York law, Jacobs' guarantees were absolute and that Jacobs was not entitled to raise any defenses. In response, Jacobs asserted that (1) the New York court should have stayed its action pending resolution of the Michigan action, (2) summary judgment was improper because federal law provided him with a defense, and (3) he was entitled to discovery under Fed.R.Civ.P. 56(f).

Granting the Adam Group's motion for summary judgment, the district court discussed-

                --to the exclusion of all other issues--the availability of defenses under New York law to those who have executed guarantees.   Apparently the district court felt that plaintiffs' possession of a clear right eliminated the need for it first to determine whether the Southern District of New York was a proper forum.   The district judge in fact commented that "[b]ecause the Court's decision concerning plaintiffs' motion for summary judgment is dispositive, the Court need not address the other motions before it."   Jacobs argues that the merits of the summary judgment motion never should have been reached and argues that we should dismiss the present action.   We agree
                

DISCUSSION

" '[W]here there are two competing lawsuits, the first suit should have priority, absent the showing of balance of convenience ... or ... special circumstances ... giving priority to the second.' " First City Nat'l Bank and Trust Co. v. Simmons, 878 F.2d 76, 79 (2d Cir.1989) (citations omitted). Deference to the first filing "embodies considerations of judicial administration and conservation of resources." Id. at 80 (citations omitted). The decision whether or not to stay or dismiss a proceeding rests within a district judge's discretion. See Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, 183-84, 72 S.Ct. 219, 221, 96 L.Ed. 200 (1952). As Judge Friendly noted in Semmes Motors, Inc. v. Ford Motor Co., 429 F.2d 1197, 1204 (2d Cir.1970), however, a district court can go "beyond the allowable bounds of discretion" when it refuses to stay or dismiss a duplicative suit. We consider the propriety of the forum a threshold issue that must be considered before addressing the merits. Because the record is clear we consider the issue de novo.

I. Compulsory Counterclaims and Stays

Jacobs argues that this action involves a compulsory counterclaim that the Michigan action should resolve. Succinctly stated, he contends that actions for enforcement and rescission of the same transaction are logically interdependent. Under Fed.R.Civ.P. 13(a), a pleading must state as a counterclaim any claim that arises out of the "transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction." The test for determining whether a counterclaim is compulsory is whether a logical relationship exists between the claim and the counterclaim and whether the essential facts of the claims are " 'so logically connected that considerations of judicial economy and fairness dictate that all the issues be resolved in one lawsuit.' " United States v. Aquavella, 615 F.2d 12, 22 (2d Cir.1980) (citations omitted).

The plaintiffs, for their part, assert that the guarantees and the merger constitute separate transactions, which different courts properly may untangle. We disagree. The guarantees and the merger agreement were executed together and, by plaintiffs' own argument, the parties would not have signed one without the other. If actionable fraud occurred, it clearly induced and was related to the guarantees. Moreover, under Second Circuit case law, claims for rescission and enforcement arise out of the same transaction or occurrence. See, e.g., National Equipment Rental, Ltd. v. Fowler, 287 F.2d 43, 45-46 (2d Cir.1961). We thus...