Bolton v. Gramlich
| Decision Date | 28 January 1982 |
| Docket Number | No. 81 CIV 2806 (LBS),80 CIV 7410 (LBS).,81 CIV 2806 (LBS) |
| Citation | 540 F. Supp. 822 |
| Parties | William BOLTON, Commonwealth Holding Co., and Oliver R. Grace, Jr., suing individually and derivatively in the right and for the benefit of Terrydale Realty Trust, and BCG Associates, Plaintiffs, v. John J. GRAMLICH, J. Russell Gramlich, Michael J. Gramlich, James A. Kostoryz, Terrydale Management Corporation, John D. O'Flaherty, J. Harlan Stamper, Thomas J. Murphy, Morris, Larson, King, Stamper and Bold, P. C., San Francisco Real Estate Investors, Lincoln Tower Building Co., and Subdale Corp., Defendants, and Terrydale Realty Trust, Nominal Defendant. William BOLTON, Commonwealth Holding Co., and Oliver R. Grace, Jr., suing individually and derivatively in the right and for the benefit of Terrydale Realty Trust, Plaintiffs, v. John J. GRAMLICH, Michael J. Gramlich, James A. Kostoryz, Terrydale Management Corporation, J. Russell Gramlich, Paul D. Ambrose, John D. O'Flaherty, J. Harlan Stamper, and Thomas J. Murphy, Defendants, and Terrydale Realty Trust, Defendant and Nominal Defendant. |
| Court | U.S. District Court — Southern District of New York |
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Leventritt, Lewittes & Bender, Sidney Bender, Aaron Lewittes, New York City, for plaintiffs in Bolton I and Bolton II.
Williams & Connolly, Steven M. Umin, Paul Martin Wolff, Donald E. Schwartz, F. Whitten Peters, Washington, D. C., and Windels, Marx, Davies & Ives, J. Daniel Mahoney, New York City, for defendant Trustees of Terrydale Realty Trust in Bolton I and Bolton II.
Turk, Marsh, Kelly & Hoare, John Anthony Smith, New York City; for nominal defendant Terrydale Realty Trust in Bolton I and Bolton II.
Polsinelli, White & Schulte, David A. Welte, Joseph R. Colantuono, Kansas City, Mo., and Hall, Dickler, Lawler, Kent & Howley, Norman L. Faber, New York City, for defendants Michael J. Gramlich, James A. Kostoryz and Terrydale Management Corp. in Bolton I and Bolton II.
Proskauer, Rose, Goetz & Mendelsohn, Marvin E. Frankel, Alexander Gigante, New York City, for defendants Lincoln Tower Bldg. Co. and Subdale Corp. in Bolton II.
D'Amato & Lynch, Robert E. Meshel, Andrew R. Simmonds, New York City, for defendant Morris, Larson, King, Stamper & Bold, P.C. in Bolton II.
Landels, Ripley & Diamond, Harvey L. Leiderman, San Francisco, Cal., and Rogers & Wells, Herbert C. Earnshaw, Rex W. Mixon, Jr., New York City, for defendant San Francisco Real Estate Investors in Bolton II.
In the two actions now before the Court on motions to dismiss, the plaintiffs are disappointed tender offerors who strain to find protection in federal law. The defendants, who perceive the plaintiffs' pleading as an invalid attempt to invoke a federal forum, allege that the plaintiffs have impermissibly grafted federal claims onto what are essentially state law claims for breach of fiduciary duty. The transactions giving rise to this litigation are complex but may be somewhat simplified for the purposes of this motion to dismiss in which the plaintiffs' allegations are taken as true. Cruz v. Beto, 405 U.S. 319, 322, 92 S.Ct. 1079, 1081, 31 L.Ed.2d 263 (1972).
The events in question involve the control of Terrydale Realty Trust ("the Trust"), a Missouri real estate investment trust. The extensive cast of characters will unfold in the following chronological account.
On December 18, 1980, prior to the annual meeting of its shareholders, the trustees issued a proxy statement proposing amendments to the Declaration of Trust which would impose the requirement of a super-majority two-thirds vote on transactions such as merger, consolidation, reorganization, liquidation, termination and dissolution. The proxy statement disclosed that management's desire to ward off takeover attempts motivated the proposal. On December 30, 1980, the plaintiffs, William Bolton, Commonwealth Holding Co. (a partnership consisting of Robert A. and Rosalind Posner), and Oliver R. Grace, Jr., whose collective holdings at that time constituted approximately 11.7% of the outstanding securities of the Trust, sued to enjoin the annual meeting, alleging that inadequacies in the proxy statement undermined the validity of the proxies solicited. This Court denied the preliminary injunction on January 9, 1981 on the ground of failure to prove likelihood of success on the merits. This action, 80 Civ. 7410 (LBS) ("Bolton I"), comprises a federal cause of action under § 14 of the Securities Exchange Act of 1934 ("1934 Act") and two state law claims raised derivatively on behalf of the Trust. This action survives despite the fact that the proposal failed, which was the result urged by the plaintiffs in their proxy statement. The labyrinth of events producing this ironic effect and leading to a second litigation, 81 Civ. 2806 (LBS) ("Bolton II"), grew out of a tender offer by the plaintiffs.
Before dealing with the events surrounding the tender offer, however, in order to avoid confusion with the contentions in Bolton II, the plaintiffs' theories of recovery in Bolton I should be stated. First, the plaintiffs claim that various acts of the defendants violated state law fiduciary duties and misappropriated Trust opportunities. The defendants' motions do not contest the substance of these claims.1 They seek dismissal of these claims now for lack of personal jurisdiction. Both plaintiffs and defendants agree that the state claims are not pendent on the federal claims because they do not share a common nucleus of operative fact. See United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966). The defendants argue that the existence of a basis for personal jurisdiction over the federal claims will not provide jurisdiction over the state law claims where there is no pendent jurisdiction.2
The plaintiffs' federal claim cites disclosure failures in the proxy statement that preceded the annual shareholders meeting. The plaintiffs argue that the defendants failed to disclose that if the shareholders rejected the amendments, the defendant trustees would vote to terminate the Trust. In other words, if their attempt to thwart the plaintiffs' plans with supermajority provisions failed, they would in turn accomplish the same end by exercising the very power that the defeat of the amendments left in them. The plaintiffs claim that this omission was "highly material" because they, the plaintiffs, would have acted differently had they known; that is, they would not have mounted the takeover attempt described infra. Citing § 14(a) of the 1934 Act, 15 U.S.C. § 78n(a), they seek reimbursement of the $225,000 they spent opposing the defendants' proxy solicitation. Bolton I Complaint at ¶ 27.
The defendants' motions contest this claim on the ground of lack of standing to sue under § 14(a). They argue that case law plainly establishes that there is no private right of action under § 14(a) for a disappointed tender offeror. The plaintiffs contend that they sue not as tender offerors, but as proxy contestants.
With respect to both the federal and state law claims in Bolton I, the defendants contest the plaintiffs' failure to demand that the board institute the action on the Trust's behalf, as required by Fed.R.Civ.P. 23.1, a requirement the plaintiffs would excuse on the ground of futility.
The facts giving rise to Bolton II begin in the interim between the filing of the Bolton I complaint and the denial of the preliminary injunction. During this time, the plaintiffs took two actions. First, on January 3, 1981, they issued a proxy statement of their own, urging rejection of the amendments and disclosing their intention to make a tender offer for the Trust's stock conditioned on the rejection of the proposed amendments. And on January 8, 1981, through a limited partnership known as BCG Associates (consisting of William Bolton, Oliver R. Grace, Jr., and Robert A. Posner), the plaintiffs made their conditional tender offer. BCG offered to purchase at least 160,000 of the shares tendered before the February 10, 1981 deadline at $33.50 net per share.
The shareholders meeting took place on January 14, 1981 and, although affirmative votes (213,989) exceeded negative votes (204,989), the amendments failed to garner the needed votes of a majority of outstanding shares (or 230,533 votes).
On January 21, 1981, the trustees distributed a letter recommending rejection of the tender offer. This letter triggered the plaintiffs' second suit for a preliminary injunction, this time demanding corrections of alleged false or misleading statements or omissions in the recommendation letter. The defendants counterclaimed for a preliminary injunction of the tender offer. In BCG Associates v. Terrydale Realty Trust, 81 Civ. 0582 (RJW) (Feb. 9, 1981), Judge Ward refused to enjoin the tender offer, after he had supervised the process of correcting the inadequacies of both parties' letters to the shareholders.
Before the deadline for tender of shares and withdrawal of tendered shares, however, the trustees launched a drastic divestment program. On February 6, four days before the expiration date of the offer, the trustees disclosed that they had voted unanimously to terminate the Trust, contracted for and closed the sale of four of its Denver office buildings,3 and voted to declare the first liquidating distribution of $24.00 per share, using the proceeds of the sale. The distribution, payable on February 23, 1981, would go to the shareholders of record on February 19, 1981, a date subsequent to the expiration of the tender offer.
After this disclosure, the plaintiffs extended the tender offer nine days, to February 19, 1981. 65,000 of the shares that had been deposited pursuant to the offer were withdrawn. Ultimately, the plaintiffs acquired 80,884 shares through the tender offer, leaving them with the collective total of 208,629 shares and 37.98% of the...
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