Financial General Bankshares, Inc. v. Metzger

• Decision Date: 18 May 1982
• Docket Number: Nos. 81-1968,81-1999,s. 81-1968
• Parties: , Fed. Sec. L. Rep. P 98,674 FINANCIAL GENERAL BANKSHARES, INC. v. Eugene J. METZGER, Appellant. FINANCIAL GENERAL BANKSHARES, INC., Cross-Appellant v. Eugene J. METZGER.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 768

680 F.2d 768

220 U.S.App.D.C. 219, Fed. Sec. L. Rep. P 98,674

FINANCIAL GENERAL BANKSHARES, INC. v. Eugene J. METZGER, Appellant.

FINANCIAL GENERAL BANKSHARES, INC., Cross-Appellant v. Eugene J. METZGER.

Nos. 81-1968, 81-1999.

United States Court of Appeals, District of Columbia Circuit.

Argued March 15, 1982.

Decided May 18, 1982.

Appeal and Cross-Appeal from the United States District Court for the District of Columbia (D.C. Civil Action No. 78-00276).

Robert L. Weinberg, Washington, D. C., with whom Robert C. Post, Washington, D. C., was on the brief, for Eugene J. Metzger, appellant in No. 81-1968 and cross-appellee in No. 81-1999.

Edwin E. McAmis, New York City, with whom Douglas M. Kraus and Erskine D. Henderson, New York City, were on the brief, for Financial General Bankshares, Inc., appellee in No. 81-1968 and cross-appellant in No. 81-1999.

Before WRIGHT, MacKINNON, and GINSBURG, Circuit Judges.

Opinion for the court filed by Circuit Judge J. SKELLY WRIGHT.

J. SKELLY WRIGHT, Circuit Judge:

When substantial federal questions are presented in the District Court, that court may in its discretion exercise pendent jurisdiction over state claims arising out of the same nucleus of operative fact. Considerations of economy, convenience, and fairness may favor the exercise of jurisdiction; on the other hand, principles of comity and the desirability of "a surer-footed reading of applicable law" ¹ support the determination of state claims in state court. If the federal claims in a case are resolved before trial, the District Court retains power to decide the state claims, but may exercise its discretion to dismiss them without prejudice.

In this case, after the federal securities law claims had been settled or dismissed as to all defendants, the District Court retained pendent jurisdiction over common law claims that one defendant, an attorney, had breached his fiduciary duty to the plaintiff, his client. The court held a three-day trial and issued a lengthy decision dealing with novel and difficult issues of local law. No court of the District of Columbia has provided any guidance regarding the standards defining an attorney's fiduciary duties, the construction of the conflict of interest provisions of the Code of Professional Responsibility, or the remedies for breach. Under these circumstances, we find that the District Court abused its discretion in exercising pendent jurisdiction over the local claims.

I. HISTORY OF THE LITIGATION

Financial General Bankshares, Inc. (FG) filed this lawsuit in the United States District Court for the District of Columbia after receiving information that a group of Middle Eastern investors had acquired twenty percent of FG's common shares and intended to obtain control of the company by acquiring additional stock. The complaint, filed February 17, 1978, sought relief against unnamed persons and entities believed to be purchasing FG's shares, and also against named individuals and corporations alleged to be participating in the takeover scheme. ² One of these defendants, appellant Eugene J. Metzger, is an attorney who had served as counsel to FG and who owned approximately 1.6 percent of FG's common stock.

The complaint alleged that Metzger and the other defendants had violated several provisions of the federal securities laws ³ and the Virginia Take-Over Bid Disclosure Act. FG sought preliminary and permanent injunctive relief barring the defendants from attempting to influence the management of FG and from acquiring any further shares of FG stock. It also asked the court to order the defendants to divest themselves of the FG stock they had previously purchased. In addition, the complaint asserted a pendent local claim against Metzger. Asserting that Metzger had breached his common law fiduciary and ethical obligations to FG and its shareholders, FG sought both compensatory and punitive damages. Joint Appendix (JA) 28-50.

On March 18, 1978 the Securities and Exchange Commission filed an action against the defendants named in the FG complaint, also asserting violations of the federal securities laws. On the same day the SEC's action was settled by entry of consent judgments and undertakings. The defendants filed disclosure statements pursuant to Section 13(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(d) (1976). They were permitted to make a tender offer for FG's stock provided they received all requisite banking and regulatory approvals, tendered for 100 percent of the shares at a specified minimum price, and compensated former FG shareholders who had sold shares to the defendants at a lower price.

FG then, on March 21, 1978, amended its complaint to allege that the defendants' disclosure statements were false and misleading in violation of Section 13(d). JA 72-74. On April 27, 1978, finding that FG had shown a likelihood of prevailing on its Section 13(d) claim, the District Court entered a preliminary injunction. The defendants were ordered not to acquire any further interest in FG common stock until they had offered rescission to the shareholders from whom they had purchased shares during December 1977 and January 1978. At the same time the court dismissed FG's causes of action against all defendants under other federal securities law provisions and the Virginia takeover statute. JA 1264. ⁴

Extensive discovery took place during the following two years. See Docket Entries, JA 14-25. On May 16, 1980 the court granted FG leave to file an amended complaint realleging the Section 13(d) claims against the defendants, adding new Section 13(d) defendants, and realleging the common law fiduciary claims against Metzger. JA 256-291. On May 21, 1980 all defendants except Metzger reached a settlement agreement with FG; they were subsequently dismissed voluntarily by a stipulation and order signed on July 25, 1980. JA 358-359. Under the terms of the settlement FG agreed not to oppose the defendants' takeover attempt; the defendants agreed to offer a premium price for FG's shares. JA 311-320. ⁵

Metzger was left as the sole defendant in the case. He moved to dismiss the federal securities law claims against him and argued that, if FG's federal claims against him were dismissed, its pendent local law claims against him for breach of fiduciary duties should also be dismissed. JA 293-302. On August 2, 1980 the District Court entered summary judgment for Metzger on the federal claims on the ground that FG was no longer entitled to any injunctive relief. However, the court retained pendent jurisdiction over the common law claims. JA 360-362.

After a three-day trial, from November 19 to 21, 1980, the court held in favor of plaintiff FG. The District Court's 54-page memorandum opinion was filed on July 31, 1981. JA 1263-1316, reported at 523 F.Supp. 744 (D.D.C.1981). In addition to making detailed findings of fact, the court resolved novel and unsettled issues of District of Columbia law in order to decide the case.

First, to determine whether Metzger had violated his common law fiduciary duties, the court relied on the standards set forth in the Disciplinary Rules of the American Bar Association Code of Professional Responsibility. 523 F.Supp. at 762-763. The Code specifies that the Disciplinary Rules are "mandatory in character," but expressly states that it "makes no attempt to prescribe either disciplinary procedures or penalties for violation of a Disciplinary Rule, nor does it undertake to define standards for civil liability of lawyers for professional conduct." District of Columbia Bar, Code of Professional Responsibility and Opinions of the D.C. Bar Legal Ethics Committee 1 (1980) (footnotes omitted). These matters were left to the discretion of local courts. The courts of the District of Columbia have not had the opportunity to define the relationship between the Code and the common law fiduciary obligations imposed upon attorneys.

Second, the District Court applied several provisions of the Disciplinary Rules to Metzger's conduct, a task raising difficult questions of interpretation. The Code proscribes conflicts of interest and condemns divided loyalties, but it does not resolve the subtle problems arising when outside counsel represents a corporate client whose shareholders, directors, and management are in disagreement. See Developments in the Law-Conflicts of Interest in the Legal Profession, 94 Harv.L.Rev. 1244, 1334-1352 (1981). The court found that three of Metzger's activities had violated specific Disciplinary Rules. First, the court concluded that Metzger had violated the attorney's duty of neutrality (DR 5-105) by participating actively in a dissident group of shareholders without disclosure to management. 523 F.Supp. at 765-767. Second, the court found that Metzger had sent a letter to another of his clients, proposing a scheme to sell a controlling block of FG stock-including his own shares-to a foreign bank at a premium price. This action, the court held, violated the duty to preserve client confidences (DR 4-101(B)) and the duty to refrain from undisclosed personal dealings involving potential conflicts with the client's interests (DR 5-101(A) and DR 5-105(B)). Id. at 767-769. Third, the court found that Metzger had simultaneously represented FG and the Middle Eastern investors attempting to secure control over FG. In the court's view, Metzger's undisclosed dual representation violated DR 5-105, the duty of undivided loyalty to the client. Id. at 769-771. In addition, the court held that Metzger's use of a list of FG shareholders to solicit sales of FG stock violated DR 4-101(B)(3), which forbids use of a client's confidences or secrets for the advantage of the attorney or a third person. Id. at 771-772.

The District Court concluded:

From the outset of his representation, Metzger's attitude toward FG was marked by bad faith, secrecy, and self-dealing. He persistently placed his prerogatives as a shareholder above his...