Hausman v. Buckley

• Decision Date: 13 February 1962
• Docket Number: No. 174,Docket 27144.,174
• Citation: 299 F.2d 696
• Parties: Nathan HAUSMAN, in His Own Behalf as a Stockholder of Defendant Pantepec Oil Company, C. A., and in Behalf of All Other Such Stockholders Similarly Situated, Plaintiff-Appellant, and Joseph Applebaum, The Applebaum Foundation, Inc., Alfred N. Barnett, Julie A. Buckley, as remaining trustee u/w of Daniel Buckley, deceased, Peter Fundaro, Harold Maltz, Norvin H. Rieser, Fred Weibert and Regina Weibert and L. H. Luckett, Intervenor-Plaintiffs-Appellants, v. John W. BUCKLEY, The Catawba Corporation and Pantepec Oil Company, C. A., Defendants-Appellees, and John S. Bailey, Eduardo Lopez de Ceballos, George S. Montgomery, Jr., Jose Melich Orsini, Santiago Segovia, John T. Sinclair, Jr., Guy K. Stewart, R. Ramirez U., Cecilio Velasco, G. J. Van Wageningen, Phillips Petroleum Company, Defendants.
• Court: U.S. Court of Appeals — Second Circuit

299 F.2d 696 (1962)

Nathan HAUSMAN, in His Own Behalf as a Stockholder of Defendant Pantepec Oil Company, C. A., and in Behalf of All Other Such Stockholders Similarly Situated, Plaintiff-Appellant, and Joseph Applebaum, The Applebaum Foundation, Inc., Alfred N. Barnett, Julie A. Buckley, as remaining trustee u/w of Daniel Buckley, deceased, Peter Fundaro, Harold Maltz, Norvin H. Rieser, Fred Weibert and Regina Weibert and L. H. Luckett, Intervenor-Plaintiffs-Appellants, v. John W. BUCKLEY, The Catawba Corporation and Pantepec Oil Company, C. A., Defendants-Appellees, and John S. Bailey, Eduardo Lopez de Ceballos, George S. Montgomery, Jr., Jose Melich Orsini, Santiago Segovia, John T. Sinclair, Jr., Guy K. Stewart, R. Ramirez U., Cecilio Velasco, G. J. Van Wageningen, Phillips Petroleum Company, Defendants.

No. 174, Docket 27144.

United States Court of Appeals Second Circuit.

Argued January 3, 1962.

Decided February 13, 1962.

Certiorari Denied May 21, 1962.

Robert B. Block, New York City, of counsel (Heffner, Block & Block, Sonnenschein & Sherman, Murray W. Greif, New York City), for appellants.

Thomas W. Hill, Jr., New York City (Spear & Hill, New York City), for John W. Buckley and The Catawba Corporation.

Joseph A. McManus, New York City (Coudert Brothers, New York City), for Pantepec Oil Company, C. A.

Before WATERMAN, KAUFMAN and MARSHALL, Circuit Judges.

Certiorari Denied May 21, 1962. See 82 S.Ct. 1157.

KAUFMAN, Circuit Judge.

This is a stockholders' derivative action brought on behalf of the Pantepec Oil Company, C. A. (Pantepec), a corporation organized under the laws of Venezuela. Jurisdiction is based on diversity of citizenship, 28 U.S.C. § 1332.

In the stage of this protracted litigation¹ which concerns us on this appeal, the third amended complaint contained three counts:

(1) Count 1 alleged that a certain contract between Pantepec and defendant Phillips Petroleum Company (Phillips) constituted an unlawful sale of Pantepec's assets under Venezuelan law. It demanded rescission and damages;

(2) Count 2 charged the individual defendants, officers and directors of Pantepec,² with responsibility for the Phillips contract, and sought damages for a breach of fiduciary duty to the corporation;

(3) Count 3 alleged that individual defendant Buckley, and a company dominated by him, The Catawba Corporation (Catawba), caused Pantepec to enter into an unlawful management services contract with Catawba; it demanded cancellation of that agreement, and damages for corporate waste.

On November 24, 1959, Judge MacMahon³ denied a motion made by the plaintiffs pursuant to Rule 12(f), Fed. R.Civ.P., 28 U.S.C. to strike from the answers of Pantepec, Buckley, and Catawba, defenses alleging lack of jurisdiction over Pantepec's person. Subsequently, the defendants moved for a separate and prior trial⁴ of another defense which challenged the right of the plaintiffs, under Venezuelan law, to maintain an action on behalf of Pantepec. This motion was granted. Judge MacMahon agreed with the defendants' assertion that Venezuelan law, applicable under controlling New York conflict of laws principles, would determine the right of the plaintiffs to enforce a corporate claim; and that the content of this foreign law raised a question of "fact" which should be resolved before further proceedings on the merits of the issues raised by the complaint.

However, on April 17, 1961, the day set for the separate trial on the question of Venezuelan law, the plaintiffs moved, pursuant to Rules 12(f) and (h), Fed.R. Civ.P., to strike the defenses of Buckley, Catawba, and Phillips which contested their right to bring the action; and for the same purpose, moved to strike Pantepec's answer and an appearance entered on its behalf by certain attorneys. These motions were promptly denied, and the preliminary trial was held before Judge MacMahon, sitting without a jury.

On June 8, 1961, Judge MacMahon filed his findings of fact and conclusions of law. He held: (a) that Venezuelan law governed the merits of plaintiffs' claims; (b) that under Venezuelan law the complaint failed to state a claim entitling plaintiffs to relief on the first count (against Phillips); and (c) that under this law plaintiffs had no right to maintain an action in behalf of Pantepec on the remaining counts.⁵ Judgment for defendants was entered accordingly on June 29, 1961.

Plaintiffs appeal from so much of this judgment dismissing counts 2 and 3 of their complaint on the grounds that they had no right to maintain an action on behalf of Pantepec, and also ask review of interlocutory orders entered November 24, 1959 and April 17, 1961, denying their motions to strike certain defenses in Pantepec's answer and the appearance of certain attorneys on its behalf.

We hold that no error was committed by the trial court below, and that the judgment for defendants must be affirmed.

A.

Appellants' first contention is that their various motions were improperly denied. However, insofar as the denial of the motion made on November 24, 1959 is concerned, it is unnecessary to determine if there was any error. Although the motion was unsuccessful in its attempt to strike defenses which contested the court's jurisdiction over the person of Pantepec, Judge MacMahon subsequently held that the court had jurisdiction over all the parties. Thus, the question raised by his denial of the motion is rendered moot.

On the other hand, the trial court's denial of appellants' motions to strike (a) Pantepec's answer, (b) the appearance on its behalf of certain attorneys, and (c) defenses raised by Buckley, Catawba, and Phillips, requires discussion. By these motions appellants sought to prevent the defendants from contesting their right to bring the instant action on behalf of Pantepec.

The first two motions, (a) and (b), are based on the allegation that Pantepec was deprived of the benefit of independent counsel because its attorneys, until September 29, 1960, also represented the adversary defendant Buckley. Appellants contend that as a consequence, the answer to the third amended complaint (filed on September 18, 1959) which raises the defense challenging their right to bring this action, does not necessarily represent the position which Pantepec might have taken on this issue if it had availed itself of other legal counsel. In support of their argument that Pantepec may have suffered from the "conflicting" interests of counsel, appellants bring to our attention Opinion No. 842, Committee on Professional Ethics, of the Association of the Bar of the City of New York (January 4, 1960). In that Opinion, a majority of the Committee decided that an attorney's representation of both the corporation and adversary defendants in stockholders' derivative actions may be unethical. Putting aside the question as to whether such a ruling by a Committee of a Bar Association would warrant striking an answer and defenses for a violation of ethical standards, we believe that the trial court did not commit error in denying the motion to strike Pantepec's answer and the appearance of its attorneys. Appellants' reliance on Opinion 842, supra, is misplaced. That Opinion, as we read it, did not proscribe dual representation in all cases, but stated that the propriety of such conduct "must be determined in the light of the particular facts attending each such case."

Here the corporation was represented by the same attorneys who represented its directors during part of the preliminary stages of the litigation. It was during this period that Pantepec raised the defense which challenged the right of stockholders to sue on its behalf. Was this defense necessarily in the best interest only of the directors, as appellants seem to suggest? We think not. Assuming that the allegations of the complaint may have had some merit, the corporation nevertheless, had a legitimate interest in protecting the right of the stockholders' meeting to bring an action on its behalf, if it were to be brought at all. As we will discuss at greater length in connection with other issues raised by the appeal,⁶ under Venezuelan law, enforcement of a corporation's claims depends not merely upon their merit but upon a decision of the stockholders' meeting that they ought to be enforced.

This legitimate interest in bringing the action to a halt before the merits of the allegations are considered exist even though we may assume that an adversary defendant, represented by the same counsel, would have a different interest in seeing the litigation ended. Therefore, it is not necessarily true that Pantepec was deprived of the advice of disinterested counsel, and that it would have conducted itself differently if it were represented by another attorney. Under these circumstances, viewing the matter after a judgment has been rendered as we must, we are unable to conclude that denial of the motion to strike the defense was error. Cf. Otis & Co. v. Penn. R. R. Co., 57 F.Supp. 680 (E.D.Pa. 1944) (Kalodner, J.); Kelley v. 74 & 76 West Tremont Avenue Corp., 24 Misc.2d 370, 198 N.Y.S.2d 721 (Sup.Ct.1960); Garlen v. Green Mansions, Inc., 9 A.D.2d 760, 193 N.Y.S.2d 116 (1st Dept. 1959).

We note, however, that this decision is limited to the facts before us, and should not be construed as voicing disagreement with Opinion 842.

Inasmuch as we conclude that the denial of the motion directed to Pantepec's answer was correct, it would serve no purpose to consider whether the other defendants were also entitled to raise the same defense; and we shall proceed to examine the principal issue raised by this appeal, the applicability of Venezuelan law.

B.

Since this is a diversity action, we must apply the conflict of laws principles of New York (the forum state) in order to determine whether Judge MacMahon's reference to Venezuelan law was correct. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Erie R. Co. v....