Beach v. KDI CORPORATION

• Decision Date: 11 January 1974
• Docket Number: No. 72-1856,72-1857.,72-1856
• Citation: 490 F.2d 1312
• Parties: Frederick BEACH and Vincent Di Rubbio, Appellants in No. 72-1857. v. KDI CORPORATION, Appellant in No. 72-1856, et al., OPI Corp. and Edward J. Eggart, Intervenors. KDI Corporation and Ordnance Products, Inc., [OPI Corp.] Appellants in No. 72-1856.
• Court: U.S. Court of Appeals — Third Circuit

490 F.2d 1312 (1974)

Frederick BEACH and Vincent Di Rubbio, Appellants in No. 72-1857. v. KDI CORPORATION, Appellant in No. 72-1856, et al. OPI Corp. and Edward J. Eggart, Intervenors KDI Corporation and Ordnance Products, Inc., OPI Corp. Appellants in No. 72-1856.

Nos. 72-1856, 72-1857.

United States Court of Appeals, Third Circuit.

Argued May 22, 1973.

Decided January 11, 1974.

COPYRIGHT MATERIAL OMITTED

E. N. Carpenter, II, Richard J. Abrams, Richards, Layton & Finger, Wilmington, Del., for appellants in No. 72-1856 and appellees in No. 72-1857.

Peter J. Walsh, Converse Murdoch, Murdoch, Longobardi, Schwartz & Walsh, Wilmington, Del., for appellees in No. 72-1856 and appellants in No. 72-1857.

Before KALODNER, ALDISERT and ADAMS, Circuit Judges.

OPINION OF THE COURT

KALODNER, Circuit Judge.

Did the district court err in holding that it had "pendent jurisdiction" with respect to intervening defendants' counterclaim, presenting state claims, in the instant action of Frederick Beach and Vincent Di Rubbio against KDI Corporation for rescission of a "Reorganization Agreement," grounded on alleged violations of the federal laws pertaining to securities transactions?

That is the primary question presented by these cross-appeals from the June 30, 1972 Final Judgment of the district court which granted in part, and denied in part, the various state claims asserted in the counterclaim of KDI, Ordnance Products, Inc. ("OPI") and Edward J. Eggart, chairman of the trustees of the OPI Employees' Profit-Sharing Plan ("Plan").

Although it has not been presented by the appellants, we raise, sua sponte, the critical primary question as to existence of "pendent jurisdiction." It is settled that "the issue whether pendent jurisdiction has been properly assumed is one which remains open throughout the litigation,"¹ and that we may raise it sua sponte.²

The relevant facts gleaned from the record may be highlighted as follows:

The plaintiffs Beach and Di Rubbio are citizens of North East, Maryland.

The defendant KDI Corporation ("KDI") is a Delaware corporation with principal offices in Cincinnati, Ohio.

The intervening defendant OPI is a Delaware corporation with principal offices in North East, Maryland.

The intervening defendant Edward J. Eggart is president of OPI and trustee of the Plan.

Under a Reorganization Agreement, effective May 20, 1969, Beach and Di Rubbio transferred to KDI the capital stock of OPI, which they owned in equal shares, in exchange for 92,407 shares of KDI, valued in the Agreement at $2,525,000.00. The Agreement provided that KDI would issue additional shares of KDI stock to plaintiffs on January 31, 1971, based on certain specified formulae. It also provided in Section 3A that plaintiffs would reimburse KDI with respect to any liability of OPI incurred by reason of "renegotiation or adjustment on government contracts . . . relating to the period from November 1, 1967 to the Transfer Date" (May 20, 1969).

The Agreement also specified that plaintiffs would be employed as officers of OPI for a two-year term expiring May 20, 1971 at a salary of $64,500.00 each, and that they could purchase at their cash surrender value policies which OPI had taken out on their lives, on delivery to OPI of their two-year 7½% promissory notes.

Plaintiffs filed an action against KDI on November 27, 1970, for rescission of the Agreement, return of their OPI stock, and damages. They alleged in their 6-count complaint that KDI had violated the Securities Act of 1933,³ and the Securities and Exchange Act of 1934,⁴ in effecting the Agreement. The complaint was later amended by adding as additional defendants some of the officers of KDI.

On December 30, 1970, KDI filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., in the United States District Court for the Southern District of Ohio, and in connection therewith obtained a general stay order which operated to halt further prosecution of plaintiffs' November 27, 1970 action in the court below.

On May 21, 1971, a day after plaintiffs' two-year employment contract expired, they were removed as officers and directors of OPI by a new board of directors elected by KDI as sole stockholder of OPI.

On May 24, 1971, plaintiffs filed a motion in the court below for a preliminary injunction to effect their reinstatement as officers, directors and employees of OPI.

On May 28, 1971, the Ohio bankruptcy court, on plaintiffs' application, entered an order modifying its general stay order of December 30, 1970 so as to permit plaintiffs to proceed in the court below with their May 24, 1971 motion for a preliminary injunction.

On June 4, 1971, OPI notified plaintiffs that they were removed as trustees of the Plan.

On June 7, 1971, KDI filed a motion in the court below for a restraining order and preliminary injunction prohibiting plaintiffs from continuing to act as two of the three authorized trustees of the Plan.

On June 9, 1971, the court below denied KDI's June 7, 1971 motion, and further ordered plaintiffs (1) to file a supplemental complaint relating to their May 24, 1971 motion for a preliminary injunction, and (2) to apply to the Ohio bankruptcy court for authorization to do so.

On June 24, 1971, an order was entered by the Ohio bankruptcy court authorizing the filing of a supplemental complaint relating to the plaintiffs' May 24, 1971 motion for a preliminary injunction.

On June 29, 1971, plaintiffs filed an Amended and Supplemental Complaint. It added to their original 6-count complaint, seeking rescission of their Reorganization Agreement with KDI, a Count VII which alleged events occurring after the filing of their original complaint. Count VII alleged in relevant part that KDI had ousted plaintiffs as directors of OPI as part of a scheme to compel them to withdraw their rescission action, and prayed for a preliminary injunction ordering KDI to reinstate the plaintiffs as directors of OPI and to further reconstitute the OPI board of directors as it existed on May 21, 1971.

On July 23, 1971, KDI and the individual defendants filed an Answer to the Amended and Supplemental Complaint which denied any wrongdoing and asserted certain affirmative defenses. KDI alone therein prayed for an order declaring as valid plaintiffs' removal as officers, directors and employees of OPI, and as trustees of the Plan; and for further orders requiring plaintiffs (1) to account to OPI and to the Plan for all distributions made to them; (2) to surrender to the trustees of the Plan all of the latter's assets, books and records; and (3) to restrain plaintiffs from acting as trustees of the Plan or as officers, directors or employees of OPI.

On August 2, 1971, plaintiffs filed an answer to the KDI counterclaim in which they challenged its allegations and asked for its dismissal.

On December 1, 1971, the district court granted leave to KDI to file an Amended and Supplemental Answer and Counterclaim, and further granted the motion of OPI and Eggart, as president of OPI and as trustee of the Plan, "for leave to intervene as parties defendant with respect to Count VII (only) of the plaintiffs' Amended and Supplemental Complaint, and with respect to the defendants' Amended and Supplemental Answer to plaintiffs' Amended and Supplemental Complaint and Counterclaim." The motion to intervene alleged as follows:

"The grounds for this motion are, that OPI is a party which would be directly affected by the relief sought by plaintiffs, and is a proper party to assert defenses against plaintiffs\' claims; that OPI is a proper party to seek the affirmative relief sought against plaintiffs by the defendants\' Amended and Supplemental Answer and Counterclaim; and that OPI and Eggart are parties directly affected by the relief sought by plaintiffs\' complaint in respect to the OPI Employees\' Profit Sharing Plan and sought by defendants\' Amended and Supplemental Answer and Counterclaim in respect to said Plan."

The defendants' Amended and Supplemental Answer and Counterclaim was filed December 6, 1971. The counterclaim, which ran only to OPI, was captioned "Counterclaim by KDI Corporation, OPI Corporation and Edward J. Eggart." It alleged in relevant part as follows:

"75. Plaintiffs are liable to OPI for the following items, recoverable against plaintiffs individually or as offsets from such amounts, if any, as may be attributable to them as terminated employees under the OPI Employees\' Profit Sharing Plan; emphasis supplied

"(a) Excessive salary payments in violation of the terms of the Reorganization Agreement with KDI and of agreements with third-party creditors of OPI;

"(b) Amounts recovered or recoverable by the Federal Government against OPI under renegotiation or sic defective pricing claims, for which plaintiffs are personally liable under the terms of the Reorganization Agreement with KDI;

"(c) Insurance notes due and payable to OPI in the aggregate amount of $36,264.07;

"(d) Personal advance and loan accounts with OPI aggregating $22,246.70;

"(e) Personal expenses improperly charged to OPI as business expenses;

"(f) Unauthorized and improper advance employer contributions to the OPI Employees\' Profit Sharing Plan in the amount of $32,525.23.

"76. The Answering Defendants have no adequate remedy at law.

"77. An accounting is necessary to determine the exact amount of plaintiffs\' personal liabilities to OPI and KDI as alleged in paragraph 75 hereinabove."

On December 8, 1971, plaintiffs filed an Answer to the Counterclaim of KDI, OPI and Eggart, in which they (1) asked for its dismissal; and (2) an order directing a distribution to plaintiffs of $295,099.00 from the Plan, plus punitive damages and attorneys' fees incurred in their defense of the Counterclaim.

On December 14, 1971, plaintiffs filed an Amended Answer to the KDI, OPI and Eggart Counterclaim in which they pleaded affirmative defenses of failure of consideration with...