Grace v. Rosenstock

• Decision Date: 01 August 1999
• Docket Number: Docket No. 98-9618
• Citation: 228 F.3d 40
• Parties: (2nd Cir. 2000) LORRAINE GRACE, Individually and as Executrix of the Estate of OLIVER R. GRACE, GERALD I. WHITE, As Executor of the Estate of MORGAN H. GRACE, and GERALD I. WHITE, Trustee of the John E. GRACE TRUST, individually, and as stockholders of BRIGGS LEASING CORPORATION, suing on behalf of themselves and for the benefit of said corporation and for the class of all other stockholders of said corporation similarly situated, Plaintiffs-Appellants, v. ROBERT ROSENSTOCK, EDWARD ROSENSTOCK, BRIGGS LEASING CORPORATION and BRIGGS ACQUISITION CORPORATION, Defendants, ROBERT GENSER, Defendant-Appellee, BANK LEUMI TRUST COMPANY OF NEW YORK, DAVID MACK, LEO V. BERGER, APEX MARINE CORPORATION and GARY HOLMAN, Proposed Defendants-Appellees
• Court: U.S. Court of Appeals — Second Circuit

Page 40

228 F.3d 40 (2nd Cir. 2000)

LORRAINE GRACE, Individually and as Executrix of the Estate of OLIVER R. GRACE, GERALD I. WHITE, As Executor of the Estate of MORGAN H. GRACE, and GERALD I. WHITE, Trustee of the John E. GRACE TRUST, individually, and as stockholders of BRIGGS LEASING CORPORATION, suing on behalf of themselves and for the benefit of said corporation and for the class of all other stockholders of said corporation similarly situated, Plaintiffs-Appellants, v. ROBERT ROSENSTOCK, EDWARD ROSENSTOCK, BRIGGS LEASING CORPORATION and BRIGGS ACQUISITION CORPORATION, Defendants, ROBERT GENSER, Defendant-Appellee, BANK LEUMI TRUST COMPANY OF NEW YORK, DAVID MACK, LEO V. BERGER, APEX MARINE CORPORATION and GARY HOLMAN, Proposed Defendants-Appellees.

Docket No. 98-9618

August Term, 1999

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued: November 19, 1999

Decided: August 25, 2000

Appeal from a judgment of the United States District Court for the Eastern District of New York, Robert M. Levy, Magistrate Judge, dismissing claims against defendant-appellee under Securities Exchange Act of 1934 and state law in connection with freeze-out merger, see 23 F.Supp.2d 326 (1998), and denying leave to file a supplemental complaint against persons not previously named as defendants.

Affirmed.

SIDNEY BENDER, New York, New York (Risa Bender, Leventritt Lewittes & Bender, New York, New York, on the brief), for Plaintiffs-Appellants.

HERBERT RUBIN, New York, New York (David B. Hamm, Miriam Skolnik, Herzfeld & Rubin, New York, New York, on the brief), for Defendant-Appellee.

ROBERT FRYD, New York, New York (Donald M. Levinsohn, Warshaw Burstein Cohen Schlesinger & Kuh, New York, New York, on the brief), for Proposed Defendant-Appellee Bank Leumi Trust Company.

ANDREW J. ENTWISTLE, New York, New York (William S. Gyves, Entwistle & Cappucci, New York, New York, on the brief), for Proposed Defendants-Appellees Berger, Mack, and Apex Marine Corporation.

DAVID K. BERGMAN, New York, New York (Fred M. Weiler, Siller Wilk, New York, New York, on the brief), for Proposed Defendant-Appellee Holman.

Before: KEARSE, PARKER, and POOLER, Circuit Judges.

KEARSE, Circuit Judge:

Plaintiffs Lorraine Grace et al., individually and representing former stockholders of defendant Briggs Leasing Corporation ("Briggs"), appeal from a judgment of the United States District Court for the Eastern District of New York, Robert M. Levy, Magistrate Judge, dismissing their amended complaint against defendant Robert Genser for alleged violations of §10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. §78j(b) (1994), Rule 10b 5 promulgated thereunder by the Securities and Exchange Commission ("SEC" or "Commission"), 17 C.F.R. §240.10b 5 (1999), and New York law, in connection with the 1985 freeze-out merger of Briggs and defendant Briggs Acquisition Corp. ("BAC"). The district court, following a bench trial, dismissed the §10(b) and Rule 10b 5 claims on the ground that plaintiffs had failed as a matter of law to prove causation; the court dismissed plaintiffs' state-law claims on the ground that appraisal under N.Y. Bus. Corp. L. §623 (McKinney 1986) was their exclusive remedy. See 23 F.Supp.2d 326 (1998). On appeal, plaintiffs contend principally that they were not required to prove causation, and that if required to do so they met their burden. Plaintiffs also challenge an interlocutory order denying their motion for leave to file a second-amended and supplemental complaint asserting new state-law claims against Genser and several proposed new defendants. For the reasons that follow, we affirm.

I. BACKGROUND

Prior to 1985, Briggs was a publicly-held auto-leasing company incorporated in New York. Defendants Robert Rosenstock ("Rosenstock"), his father Edward Rosenstock, and Genser were officers and directors of Briggs and owned, respectively, approximately 64%, 3%, and 5% of its outstanding stock. Plaintiffs Lorraine Grace and Gerald I. White, individually or as trustees or executors, are or represent former stockholders of Briggs who owned a total of 7,476 shares of Briggs, or approximately 1.25% of its outstanding stock.

In early 1985, Rosenstock and Genser decided to take Briggs private in a freeze-out merger. Accordingly, they incorporated BAC, planning to merge BAC and Briggs, buy out Briggs's minority shareholders, and make Briggs the surviving corporation. Rosenstock and Genser contributed all of their Briggs shares to BAC; Rosenstock also purchased his father's shares and contributed those to BAC. As a result, BAC owned 72% of the stock of Briggs, with Rosenstock and Genser owning all of the stock of BAC. Under New York's Business Corporation Law ("BCL"), a merger may be authorized by the affirmative vote of two-thirds of the corporation's shares. See N.Y. Bus. Corp. L. §903(a)(2) (McKinney Supp. 1999).

In January 1985, Briggs sent its shareholders notice of, and a proxy statement for, a special meeting to vote on the proposed merger. The notice informed shareholders, inter alia, that (a) because BAC owned 72% of Briggs's shares and would vote those shares in favor of the merger, approval was assured irrespective of the votes of Briggs's other shareholders; (b) all minority shareholders would be forced to sell their shares to the surviving corporation for $1.50 per share; (c) after the merger, the BAC shares would be converted to shares of Briggs; and (d) Rosenstock and Genser, who owned all of the shares of BAC, would thus become the sole shareholders of Briggs. The proxy statement ("Briggs proxy statement" or "proxy statement") also stated that dissenting shareholders would have the right under New York law to obtain an appraisal of, and payment for, the fair value of their shares.

At the meeting, plaintiffs voted their shares against the merger, which was approved based on BAC's vote. The merger was consummated on February 26, 1985, and Rosenstock and Genser became the sole holders of Briggs shares, owning approximately 93% and 7%, respectively.

A. The Present Action: The First Twelve Years

Plaintiffs commenced the present action in June 1985 as an individual, derivative, and class action, requesting equitable and monetary relief against Briggs, BAC, Rosenstock, Edward Rosenstock, and Genser; the amended complaint was filed a month later. Contemporaneously, plaintiffs sued in New York state court, asserting appraisal rights under BCL §623; proceedings in that suit were stayed pending disposition of this action.

The amended complaint in the present action alleged principally that the Briggs proxy statement was false and misleading by reason of numerous material omissions and untrue statements, including vast understatements of the compensation paid by Briggs to Rosenstock, Edward Rosenstock, and Genser; false representations that the reason for the merger was to relieve Rosenstock and Genser of their roles as personal guarantors of Briggs's debt, when in fact the primary guarantor of such debt until January 1985 was Charlotte Rosenstock (Rosenstock's mother) and the entrance of Rosenstock and Genser as guarantors was spuriously devised to provide a facially valid reason for the merger; and the false valuation of Briggs's real estate at $883,503, when in fact its value exceeded $2 million.

The amended complaint also alleged that the Briggs proxy statement failed to disclose, inter alia, that Rosenstock and Genser pursued the merger as part of a scheme to divert the assets of Briggs to themselves; that they had plans to develop certain of Briggs's real estate into an office-building-supermarket complex for their own benefit; that a third party had offered in excess of $1.5 million for Briggs's real estate; that in January 1985 a third party had offered $3.00 per share for Briggs stock; and that Briggs assets had been diverted to defendants' personal use to fund the individual defendants' opulent lifestyles.

The amended complaint asserted that defendants' conduct violated §10(b) and Rule 10b 5, as well as various provisions of New York common law and statutory law dealing principally with securities fraud and shareholders meetings. Invoking BCL §623(k), which provides that generally an appraisal proceeding constitutes a dissenting shareholder's exclusive remedy but makes an exception where the corporate action at issue was unlawful or fraudulent as to that shareholder, the amended complaint requested rescission or reformation of the merger and an accounting for the injuries inflicted on Briggs. The action was certified as a class action in August 1986 by Mark A. Costantino, District Judge. According to the district court docket entries, the action then lay inactive for some seven years.

In 1993, pursuant to Fed. R. Civ. P. 55, defaults were entered against Briggs and BAC, neither corporation being represented by counsel. In 1994, the court, Sterling Johnson, Jr., District Judge, entered a default judgment against those defendants on the issue of liability and ordered an inquest on damages. Also in 1994, the death of Edward Rosenstock was noted on the record. No executor or administrator was substituted for him, and the claims against him were abandoned.

In August 1997, pursuant to a stipulation among plaintiffs, Rosenstock, and Briggs (into which BAC had been merged), the claims against Briggs and Rosenstock were resolved in a partial final judgment ("1997 Judgment"), David G. Trager, District Judge. The 1997 Judgment awarded the plaintiff class approximately $4 million against Briggs and approximately $6.9 million against Rosenstock. Pursuant to the stipulation, the 1997 Judgment also declared moot plaintiffs' state-court appraisal action.

In the meantime, in 1996, as discussed in Part II.C. below, plaintiffs had sought leave to file a second-amended and supplemental complaint, alleging new state-law claims against Rosenstock, Genser, and several new proposed defendants. That motion was...