Fleck v. Cablevision VII, Inc., Civ. A. No. 90-1041 SSH.

• Citation: 763 F. Supp. 622
• Decision Date: 10 April 1991
• Docket Number: Civ. A. No. 90-1041 SSH.
• Parties: David H. FLECK and Carol L. Couchenour, Plaintiffs, v. CABLEVISION VII, INC., Heritage Communications, Inc., and Tele-Communications, Inc., Defendants.
• Court: U.S. District Court — District of Columbia

763 F. Supp. 622

David H. FLECK and Carol L. Couchenour, Plaintiffs, v. CABLEVISION VII, INC., Heritage Communications, Inc., and Tele-Communications, Inc., Defendants.

Civ. A. No. 90-1041 SSH.

United States District Court, District of Columbia.

April 10, 1991.

Douglas V. Rigler, Bruno A. Ristau, Joel E. Leising, Herbert E. Milstein, Andrew N. Friedman, Gary E. Mason, Washington, D.C., for plaintiffs.

Carter G. Phillips, Mark D. Hopson, Nancy A. Temple, Sidley & Austin, Washington, D.C., for defendants.

OPINION

STANLEY S. HARRIS, District Judge.

This matter is before the Court on three motions: plaintiffs' motion for class certification, defendants' motion to dismiss counts II and III of the amended complaint, and defendants' motion for an extension of time in which to respond to count I. Upon consideration of the motions, the parties' oppositions and replies, and the entire record herein, the Court denies plaintiffs' motion for class certification, denies defendants' motion to dismiss, and grants defendants' motion for an extension of time.

Background

This action arises out of the purchase of a limited partnership's assets by the general partner. Defendant Cablevision VII, Inc. (Cablevision or the General Partner), was the general partner in Cablevision Associates VII (the Partnership), an Iowa limited partnership that acquired and operated cable television systems. Cablevision VII is a wholly-owned subsidiary of defendant Heritage Communications (Heritage) which, in turn, is a wholly-owned subsidiary of defendant Tele-Communications, Inc. (TCI).

Plaintiffs David H. Fleck and Carol L. Couchenour jointly owned five interests in the Partnership which they inherited from their father, Harold J. Fleck. Harold Fleck purchased the interests during the initial limited partnership offering in 1983. The interests were offered through a prospectus for $1,000.00 each with a five-interest minimum per investor.¹ The prospectus indicated that the Partnership was established to "acquire, construct or improve, develop and operate cable television systems." The status of limited partner offered investors the opportunity to share in the Partnership's profits without participating in its management and with limited liability. The investment also offered potential tax advantages through passive activity losses. To ensure that the limited partners would qualify for the tax advantages, the Partnership required investors to warrant that they had sufficient income and net worth to make the investment appropriate.

The prospectus highlighted several aspects of the Partnership Agreement (Agreement) and included a copy of the Agreement as an attachment. The Agreement detailed the rights and obligations of the parties and authorized the General Partner to "exercise any and all other rights and powers of general partners of limited partnerships organized under the laws of the state of Iowa." The Agreement also included a general choice of law provision specifying Iowa law to govern the relationship of the parties.

Section 9.5 of the Agreement provided two procedures by which the Partnership could sell its assets to the General Partner.² The first procedure required the approval of "the limited partners holding at least a majority of the Interests then outstanding." The second procedure did not require the limited partners' approval if the General Partner provided consideration "not less than the greater of (i) the highest acceptable bid in a public bidding process ... and (ii) the average of three separate independent appraisals of such Systems and Franchises." The Agreement did not provide a direct mechanism for the General Partner to purchase the limited partners' interests rather than the Partnership's assets. However, the Agreement did allow amendment "to the extent permissible under applicable partnership law" by the affirmative vote of the limited partners owning a majority of the interests. The amendment provision specifically anticipated amendment in the context of a sale of the Partnership's assets and reiterated that the limited partners' approval was necessary for such a transaction.

The Partnership began acquiring cable television systems in May 1984 and eventually owned and operated six cable systems in Iowa and one in Colorado. In 1987, Cablevision's parent corporation, Heritage, merged with TCI and became a wholly-owned subsidiary. Heritage then divested most of its non-cable television operations and began to explore ways to increase its ownership interest in the cable systems owned by its subsidiary limited partnerships. In the case of the Cablevision VII partnership, Heritage concluded that an offer to purchase the limited partners' interests would suit its objectives.³ Accordingly, the General Partner sent the limited partners a consent statement on November 21, 1988, announcing a special meeting 21 days later on December 12, 1988. The consent statement proposed amending the Partnership Agreement to allow the General Partner to purchase the limited partners' interests. If a majority of the interests not affiliated with Heritage approved the amendment, the limited partners would then vote on the proposed terms of the sale.

The consent statement detailed the terms of the proposed sale and included 11 attachments: the Partnership Agreement, an appraisal of the value of the systems by Malarkey-Taylor Associates, a fairness opinion letter from Shearson Lehman Hutton, Inc., opinions of legal counsel, and the Partnership's most recent annual and quarterly reports. The General Partner estimated the cable systems to be worth $61,244,200.00. The proposal deducted from that amount the Partnership debts, adjustments to working capital, and the expenses of the sale, to reach the sale price for the limited partners' interests. In addition, the consent statement included disclosure provisions regarding the General Partner's fiduciary relationship to the limited partners, the conflicts of interest inherent in the sale, and the consequences of the sale to the limited partners and the General Partner. Finally, the General Partner specifically disclosed that it had not solicited offers to purchase the systems and that structuring the transaction as a tender offer might have produced a higher sale price for the limited partners.

At the meeting on December 12, 1988, 3,757 of the 5,078 non-Heritage limited partner interests voted on the proposed amendment. Approximately 97% of the interests that voted approved both the amendment and the transaction. Plaintiffs did not vote. The sale was consummated and the limited partners were paid $4,232.47 per interest, a return in excess of 400% in five years on their original investment of $1,000.00 per interest.

Plaintiffs filed this action seeking a declaratory judgment that the General Partner violated the Securities Exchange Act and breached its fiduciary duty in connection with the sale. Count I of the complaint alleges violations of sections 10(b), 14(a), 14(e) and 20(a) of the Securities Exchange Act and Rules 10b-5 and 14a-9 thereunder. Counts II and III assert pendent state law claims for breach of fiduciary duty. In count II, plaintiffs claim that the General Partner breached its fiduciary obligation to obtain "the highest possible price a purchaser would pay" for the limited partners' interests. In Count III, plaintiffs claim that deducting the costs of the transaction from the purchase price constituted a breach of fiduciary duty. Defendants filed a motion to dismiss counts II and III for failure to state a claim and filed a motion to extend the time to respond to count I until the Court rules on the motion to dismiss.

Discussion

A. Plaintiffs' Motion for Class Certification

Plaintiffs have moved for an order under Fed.R.Civ.P. 23 certifying their claim as a class action on behalf of all the limited partners of Cablevision Associates VII as of November 21, 1988. A trial court may certify a class action only if it is satisfied "after a rigorous analysis, that the prerequisites of Rule 23(a) have been met." General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 102 S.Ct. 2364, 2372, 72 L.Ed.2d 740 (1982). Rule 23(a) establishes four prerequisites: "(1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class." Fed.R.Civ.P. 23(a). In addition, the claim must fall within one of three categories under Rule 23(b). Plaintiffs rely on Rule 23(b)(3), which provides that an action is appropriate for class certification if "the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy."

Defendants do not contest that plaintiffs' claim meets the numerousness requirement of Rule 23(a). Defendants argue that plaintiffs have failed to show that their claims are typical of the class and that common questions of law or fact predominate.⁴ The typicality requirement "screens out class actions when the legal or factual position of the representatives is markedly different from that of other members, even though common issues of law or fact are raised." Kas v. Financial General Bankshares, Inc., 105 F.R.D. 453 (D.D.C.1984), aff'd, 796 F.2d 508 (D.C.Cir. 1986);⁵see Pendleton v. Schlesinger, 73 F.R.D. 506 (D.D.C.1977), aff'd, Pendleton v. Rumsfeld, 628 F.2d 102 (D.C.Cir.1980). The requirement ensures that "the interests of the class members will be fairly and adequately protected in their absence."⁶General Telephone, 102 S.Ct. at 2370 n. 13. A claim is not typical when "the representative parties are...