Green v. Santa Fe Industries, Inc.

• Decision Date: 15 September 1987
• Citation: 70 N.Y.2d 244,519 N.Y.S.2d 793,514 N.E.2d 105
• Parties: , 514 N.E.2d 105, Blue Sky L. Rep. P 72,656 S. William GREEN et al., as Executors of the Estate of Louis A. Green, Deceased, et al., Plaintiffs, and Cecil R. Borg et al., as Trustees under the Will of Myron Borg, Jr., Deceased, et al., Appellants, v. SANTA FE INDUSTRIES, INC., et al., Respondents.
• Court: New York Court of Appeals Court of Appeals

Page 793

519 N.Y.S.2d 793

70 N.Y.2d 244, 514 N.E.2d 105, Blue Sky L.

Rep. P 72,656

S. William GREEN et al., as Executors of the Estate of Louis A. Green, Deceased, et al., Plaintiffs and Cecil R. Borg et al., as Trustees under the Will of Myron Borg, Jr., Deceased, et al., Appellants, v. SANTA FE INDUSTRIES, INC., et al., Respondents.

Court of Appeals of New York.

Sept. 15, 1987.

Sidney Bender, Aaron Lewittes, Janine L. Bender and Syma S. Levine, Garden City, for appellants.

William R. Glendon, Guy C. Quinlan and Diane Boenig Cavanaugh, New York City, for respondents.

OPINION OF THE COURT

HANCOCK, Judge.

Plaintiffs, ¹ formerly minority stockholders of Kirby Lumber Corp., have brought this action for damages against Santa Fe Industries and two of its subsidiaries--Santa Fe Resources and Kirby Lumber Corporation ²--arising out of a Delaware short-form, freeze-out merger (Delaware Corporation Law § 253) by which Kirby became a wholly owned subsidiary of Santa Fe Industries. Plaintiffs' appeal--from a dismissal of their complaint on a motion for summary judgment--presents the following questions: (1) whether the action is barred by the operation of res judicata or collateral estoppel because a similar action in Federal court resulted in dismissal on the merits (Green v. Santa Fe Indus., 576 F.Supp. 269, [S.D.N.Y.1983] (Duffy, J.), affd. 742 F.2d 1434, cert. denied 469 U.S. 917, 105 S.Ct. 296, 83 L.Ed.2d 231 [1984]); (2) assuming that the action is not so barred, whether the actions of defendants as shown in the complaint and supporting papers could constitu a basis for recovery either for violations of the antifraud provisions of New York's Martin Act (General Business Law § 352-c) or for breach of the majority stockholders' fiduciary obligations to the minority under Delaware law.

We hold that plaintiffs' action is not barred by the prior dismissal of the Greens' Federal court action and that the courts below erred in dismissing the complaint on that ground; we hold, however, that plaintiffs have shown no basis for recovery under the Martin Act or Delaware common law, and that summary judgment dismissing the complaint should, therefore, have been granted for that reason. Accordingly, the order of the Appellate Division, 118 A.D.2d 1054, 499 N.Y.S.2d 567, should be affirmed on that ground.

Procedural History and Facts as Shown In the Complaint and Supporting Papers

In 1974 Santa Fe Resources, Inc., a wholly owned subsidiary of Santa Fe Industries, Inc., owned 95% of the stock of Kirby. Pursuant to Delaware Corporation Law § 253, Santa Fe effected a short-form merger as a result of which Kirby became a wholly owned subsidiary of Santa Fe. ³ In compliance with the Delaware short-form merger statute, Santa Fe notified minority stockholders the day after the merger became effective, advised them of their right to an appraisal (Delaware Corporation Law §§ 253, 262), and offered them $150 per share in cash for their stock based on an appraisal performed by Morgan Stanley. Some minority stockholders, including the Borgs, although dissatisfied with the terms, accepted the offer. Others demanded appraisal. The findings of a court-appointed appraiser that the asset value of Kirby was $456 per share and the fair price per share was $254.40 at the time of the merger were upheld against subsequent challenges by the stockholders and the surviving corporation (Bell v. Kirby Lbr. Corp., 395 A.2d 730 [Del.Ch.1978], affd. 413 A.2d 137 [Del.1980] ).

The Greens (former stockholders in Kirby and nonappealing plaintiffs in this action) brought an action in Federal District Court, alleging that the freeze-out merger was violative of section 10(b) of the Securities and Exchange Act of 1934 (15 U.S.C. § 78j[b] ) and rule 10b-5 of the Securities and Exchange Commission (17 CFR 240.10b-5), and that Santa Fe, as the majority stockholder, breached its fiduciary obligation to the minority stockholders by offering them an unfairly low price for their shares, in violation of Delaware common law. District Court held that the complaint failed to state a cause of action under Federal securities law, and declined to exercise pendent jurisdiction to adjudicate the State law claim (391 F.Supp. 849 [S.D.N.Y.1975] ).

The second Circuit Court of Appeals reversed and reinstated the complaint (533 F.2d 1283 [2d Cir.1976] ), holding that where a complaint alleges, "in connection with a Delaware short-form merger, that the majority has committed a breach of its fiduciary duty to deal fairly with minority shareholders by effecting the merger without any justifiable business purpose", plaintiffs state a cause of action "under Rule 10b-5" (id., at 1291). The Supreme Court reversed (430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 [1977] ) on the ground that "the transaction, if carried out as alleged in the complaint, was neither deceptive nor manipulative and, therefore, did not violate § 10(b) of the Act or Rule 10b-5." (Id., 430 U.S. at 474, 97 S.Ct. at 1301.)

Following the Supreme Court's decision, the Greens amended their complaint, keeping the Delaware common-law claim and replacing the Federal cause of action with allegations that acts done in furtherance of the merger violated section 352-c of the Martin Act (General Business Law § 352-c). The Borgs, who had been aware of the Greens' efforts at least from the 1976 decision of the Second Circuit, made no motion to intervene but did move, in 1979 and in 1980, for class certification. Both motions were denied (82 F.R.D. 688 [S.D.N.Y.1979]; 88 F.R.D. 575 [S.D.N.Y.1980] ). On defendants' motion for summary judgment dismissing the amended complaint, District Court held that plaintiffs failed to state a cause of action for breach of fiduciary obligations under Delaware law and found it unnecessary to address the Martin Act claims (576 F.Supp. 269 [S.D.N.Y.], supra). The Second Circuit affirmed, without opinion (742 F.2d 1434 [2d Cir.1984], reh. denied No. 83-9072 [May 25, 1984], supra), and the Supreme Court denied certiorari (469 U.S. 917, 105 S.Ct. 296, 83 L.Ed.2d 231 [1984] ). The Second Circuit subsequently denied a motion for recall of the mandate (No. 83-9072 [Nov. 1, 1984] supra).

Plaintiffs--then both the Greens and the Borgs--brought this action in Supreme Court in 1977, alleging that the sole purpose of the merger was to freeze out public stockholders in Kirby at $150 per share, "a deliberately undervalued price, unilaterally determined by Santa Fe * * * which knew from their own appraisals that the fair market value of the net assets and the stock was at least $772 per share" and that defendants, in an attempt to deter the minority stockholders from exercising their appraisal rights, mailed an informational package which contained, among other things, an appraisal by Morgan Stanley valuing the stock at $125 per share, but omitted certain material facts. This conduct, plaintiffs contend, was fraudulent, and in violation of General Business Law §§ 339-a and 352-c. As a second cause of action plaintiffs assert that by freezing out the minority "at an unconscionably low price" of $150 per share, "as against a fair value of at least $772, thereby misappropriating their beneficiaries' property", defendants "breached their fiduciary obligation to the minority stockholders" under Delaware common law.

This State action lay dormant until the unsuccessful termination of the Green litigation when the Second Circuit, in 1983, affirmed the dismissal of the amended complaint which had been filed in Federal court after the reversal by the Supreme Court. Plaintiffs then moved, and defendants cross-moved, for summary judgment. Special Term denied plaintiffs' motion and granted defendants' cross motion for summary judgment and dismissed the complaint, finding that the Borgs were in privity with the Greens during the Greens' unsuccessful action in Federal court, and that because the Green and Borg claims were identical, the dismissal of the Greens' action operated as a complete bar. The Appellate Division affirmed, without opinion (118 A.D.2d 1054, 499 N.Y.S.2d 567 [1986] ), and leave to appeal was granted by our court (68 N.Y.2d 612, 510 N.Y.S.2d 1026, 503 N.E.2d 123 [1986] ).

I

We first address defendants' contention that plaintiffs' claim was properly dismissed as barred by res judicata or collateral estoppel. Defendants rely on the final dismissal of the Greens' Federal court action in which the Greens, as minority shareholders in Kirby, made claims identical in legal theory to those plaintiffs assert here. Since the Borgs were not parties to the Federal litigation, the question of whether they should be precluded by its unsuccessful outcome turns on whether they can be said to have been in privity with the Greens. We think it is clear that the Borgs were not in privity.

Preliminarily, we observe that the District Court granted summary judgment to defendants and dismissed the Greens' Federal court action holding, as a matter of Delaware law, that the Greens had no claim for a breach of fiduciary duty on the part of the majority stockholders (Green v. Santa Fe Indus., 576 F.Supp. 269 [S.D.N.Y., Duffy, J.], supra). Without a showing of such breach of duty, the court held that there could be no claim under the Martin Act and declined to discuss that issue further (id., at 270). Thus, the dismissal of the Greens' action involved the resolution of no factual issues, and it cannot be claimed that the Borgs are barred in their New York action under the principles of collateral estoppel from relitigating specific factual issues. If the Borgs are to be precluded at all, it can only be because their claim is barred under the principles of res judicata based on the dismissal on the law of the Greens' action.

It is fundamental that a judgment in a prior action is binding not only on the parties to that action, but on those in privity with them (see, Commissioners of State Ins. Fund v. Low, 3 N.Y.2d 590,...