Healey v. Catalyst Recovery of Pennsylvania, Inc.

• Decision Date: 29 January 1980
• Docket Number: No. 79-1370,79-1370
• Citation: 616 F.2d 641
• Court: U.S. Court of Appeals — Third Circuit
• Parties: Fed. Sec. L. Rep. P 97,268 Michael J. HEALEY, Jr., Individually and for himself and derivatively on behalf of all shareholders of Catalyst Regeneration Services, Inc., for the benefit of Catalyst Regeneration Services, Inc. v. CATALYST RECOVERY OF PENNSYLVANIA, INC., Catalyst Recovery of Louisiana, Inc., Catalyst Recovery, Inc., and Dennis J. Shaughnessy and Lawrence P. Naylor, III and P. Kenrick Maher and Wilbert H. Sirota and Joann Benedict and Carmen L. Porter and V. L. Schultz and Robert Levi and Mercantile Safe Deposit & Trust Co., Catalyst Recovery of Pennsylvania, Inc., Catalyst Recovery of Louisiana, Inc., Catalyst Recovery, Inc., Dennis J. Shaughnessy, Lawrence P. Naylor, III, P. K. Maher, Wilbert H. Sirota, and Robert Levi, Appellants.

Page 641

616 F.2d 641

Fed. Sec. L. Rep. P 97,268

Michael J. HEALEY, Jr., Individually and for himself and derivatively on behalf of all shareholders of Catalyst Regeneration Services, Inc for the benefit of Catalyst Regeneration Services, Inc. v. CATALYST RECOVERY OF PENNSYLVANIA, INC., Catalyst Recovery of Louisiana, Inc., Catalyst Recovery, Inc., and Dennis J Shaughnessy and Lawrence P. Naylor, III and P. Kenrick Maher and Wilbert H. Sirota and Joann Benedict and Carmen L Porter and V. L. Schultz and Robert Levi and Mercantile Safe Deposit & Trust Co. Catalyst Recovery of Pennsylvania, Inc., Catalyst Recovery of Louisiana, Inc., Catalyst Recovery, Inc., Dennis J. Shaughnessy, Lawrence P. Naylor, III, P. K. Maher, Wilbert H. Sirota, and Robert Levi, Appellants.

No. 79-1370.

United States Court of Appeals, Third Circuit.

Argued Nov. 13, 1979.

Decided Jan. 29, 1980.

Gilbert J. Helwig (argued), Joseph F. McDonough, Reed, Smith, Shaw & McClay, Pittsburgh, Pa., H. Vernon Eney (argued), Venable, Baetjer & Howard, Baltimore, Md., for appellants.

Albert G. Feczko (argued), Feczko & Seymour, Pittsburgh, Pa., Kenneth R. Long (argued), Pittsburgh, Pa., for appellee.

Before SEITZ, Chief Judge, ALDISERT, Circuit Judge, and HUYETT, District Judge. ^*

OPINION OF THE COURT

SEITZ, Chief Judge.

Five individual and three corporate defendants appeal from a judgment entered against them on a jury verdict awarding the plaintiff damages for violation of § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and rule 10b-5, 17 C.F.R. § 240.10b-5.

I. Factual Background

In the spring of 1972, the plaintiff became a 20% shareholder and president of Catalyst Regeneration Services, Inc. (CRS), a Texas corporation. CRS set up its only plant in Pennsylvania and began regenerating oil refining catalysts (a process by which the catalyst is cleaned for reuse).

In early 1975, defendant P. K. Maher, a research chemist in the field of petroleum catalysts, decided to acquire an existing company and enter the regeneration market. Maher began contacting people in the Baltimore area in his search for investors for his plan. The first investor to join him was defendant Robert H. Levi, vice chairman of the board of directors at Mercantile Safe Deposit & Trust Co. (Mercantile). Levi then introduced Maher to defendant Lawrence P. Naylor, III, who also invested.

At about the same time, Maher began soliciting legal and business help in setting up and running his company, which was incorporated in Maryland and became known as SCR, Inc. (SCR). ¹ He persuaded defendant Dennis J. Shaughnessy, a vice president at Mercantile, and defendant Wilbert H. Sirota, a partner in a Baltimore law firm, to assist him with planning the acquisition of an existing company. Eventually, Maher, Naylor, Shaughnessy, and Sirota became officers and/or directors of SCR and its subsidiary companies, all of which were made defendants.

In July of 1975, after studying the existing regeneration companies, Maher decided to purchase CRS, the plaintiff's company. Shaughnessy began negotiating a stock purchase with the major shareholder of CRS. The negotiations over the price to be paid for the stock continued for the next four months. In November of 1975, all the shareholders of CRS other than the plaintiff agreed in principle to sell their 80% at a price of $5.25 per share. The plaintiff knew of this agreement and the previous offers and counteroffers but did not join in the agreement.

Next, in December, Maher, Naylor, and Sirota discussed with the plaintiff on behalf of SCR a possible purchase from him of the remaining 20% of the CRS stock. Plaintiff testified that he requested certain information at these December meetings that he never received. This information included long and short range plans for SCR, the identity of SCR board members and shareholders, and other similar information. The defendants admit that some of the information was never given to the plaintiff. In the course of the negotiations, the plaintiff submitted a proposed purchase option and a request for an employment contract. Sirota replied by letter on December 24 that SCR would only buy the plaintiff's shares on the same terms as the other 80%.

In late February of 1976, the plaintiff travelled to Baltimore to meet with Maher to "see if I (could) get more information out of him." Meeting with both Maher and Sirota, he renewed his request for a five-year plan for SCR and asked whether selling expenses for other CRS shareholders would be paid. The defendants admit he was not given the information relating to either request.

On March 2, 1976, SCR purchased 80% of the CRS stock pursuant to the agreement the previous November. On March 15, a new board of directors for CRS was elected without the plaintiff being reelected. For the rest of March, the plaintiff and Maher continued discussions but could not agree on a price.

In early April, a decision was made by SCR to form a new company and effect a merger between it and CRS. Accordingly, Catalyst Recovery of Pennsylvania, Inc. (CRPa) was incorporated in Maryland as a wholly owned subsidiary of SCR. SCR then transferred its own preferred shares to CRPa.

On April 12, 1976, Maher gave the plaintiff a copy of the proposed merger between CRS and CRPa along with a notice of a CRS shareholders meeting to be held on May 3 to vote to approve the merger, a description of the SCR preferred stock, and an SCR balance sheet. Under the merger proposal, if the CRS shareholders voted to approve (which was inevitable under Texas law given SCR's 80% ownership of CRS), then the CRS shareholders would transfer their CRS shares to CRPa in return for the SCR preferred.

On April 27, the plaintiff's attorney sent a letter to Sirota requesting six categories of information, ² objecting to the merger, and threatening legal action. On April 28, the plaintiff sent a letter to Maher objecting to the merger and expressing his "intention to exercise his right to dissent."

On April 29, SCR did two things. First, Donovan M. Hamm, Jr., a member of Sirota's law firm, called one of the plaintiff's lawyers and stated a willingness to provide information and said the merger still would go through. Second, the same day Hamm sent a letter to the plaintiff's lawyer. Among other things, it answered some of the questions in the plaintiff's attorney's April 27 letter and confirmed the telephone offer to permit inspection of SCR documents and records by the plaintiff. ³ On May 3, 1976, SCR voted its 80% of the CRS stock to approve the CRS-CRPa merger. On May 11, the plaintiff's attorney again wrote a letter to Sirota asking for a chance to inspect the information as had been suggested in Hamm's April 29 letter. No such inspection ever occurred. See note 3 supra.

The merger became effective June 30, 1976, and the plaintiff filed this suit seeking an injunction and damages under § 10(b) and rule 10b-5. The plaintiff also filed an appraisal petition in Texas court in September 1976, which was dismissed without prejudice in August 1977. After a lengthy jury trial in federal court, the jury found for the plaintiff for $189,400 plus prejudgment interest. This appeal followed.

II. Existence of a Cause of Action

The major contention of the defendants concerns a recurring problem of recent years: the role of rule 10b-5 in the context of mergers effected under state law. At trial, the plaintiff argued that if he had been given the information he requested, he would have tried to enjoin the merger in state court. ⁴ He relied on Goldberg v. Meridor, 567 F.2d 209 (2d Cir. 1977), cert. denied, 434 U.S. 1069, 98 S.Ct. 1249, 55 L.Ed.2d 771 (1978), which held that such a theory states a basis for a cause of action under rule 10b-5. The defendants argue that under Goldberg, the plaintiff must prove that he would have obtained the injunction had he been given the information in question. Although Goldberg did not expressly consider this issue, the defendants' position was adopted in Kidwell ex rel. Penfold v. Meikle, 597 F.2d 1273 (9th Cir. 1979).

Initially, we must determine whether this circuit should adopt the reasoning of Goldberg. Some have argued that Goldberg is inconsistent with the Supreme Court's opinion in Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977). E. g., Note, Goldberg v. Meridor : The Second Circuit's Resurrection of Rule 10b-5 Liability for Breaches of Corporate Fiduciary Duties to Minority Shareholders, 64 Va.L.Rev. 765 (1978).

In Santa Fe, minority shareholders brought suit under rule 10b-5 challenging the fairness of the terms of a short form merger effectuated under Delaware law. The Court noted: "(T)he complaint failed to allege a material misrepresentation or material failure to disclose. The finding of the District Court . . . was that there was no 'omission' or 'misstatement' . . . ." 430 U.S. at 474, 97 S.Ct. at 1301. The Court therefore held that because the language of both § 10(b) and rule 10b-5 required some kind of improper flow of information, whether deception, misrepresentation, manipulation, or nondisclosure, the complaint failed to state a cause of action. Id. at 474-77, 97 S.Ct. 1292.

Although the statutory language in Santa Fe was " 'sufficiently clear in its context' to be dispositive here," id. at 477, 97 S.Ct. at 1303 (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 201, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)), the Court in Part IV of its opinion went on to examine other reasons for its refusal to find a cause of action under rule 10b-5. Noting that the essence of the complaint was a breach of fiduciary duty by the majority shareholders, the Court characterized this as "corporate conduct traditionally left to state regulation." Id. at 478, 97 S.Ct. at 1304. The Court concluded: "Absent a clear indication of congressional intent, we are reluctant to federalize the substantial portion of the law of...