In re Falstaff Brewing Corp. Antitrust Litigation, MDL No. 263. No. 76-639 C (2)

• Decision Date: 07 February 1978
• Docket Number: MDL No. 263. No. 76-639 C (2),77-742 C (2) to 77-744 C (2).
• Citation: 441 F. Supp. 62
• Parties: In re FALSTAFF BREWING CORPORATION ANTITRUST LITIGATION.
• Court: U.S. District Court — Eastern District of Missouri

441 F. Supp. 62

In re FALSTAFF BREWING CORPORATION ANTITRUST LITIGATION.

MDL No. 263. Nos. 76-639 C (2), 77-742 C (2) to 77-744 C (2).

United States District Court, E. D. Missouri, E. D.

October 11, 1977.

As Amended February 7, 1978.

COPYRIGHT MATERIAL OMITTED

Bruce B. Sousa, James F. Boccardo, Boccardo, Blum, Lull, Niland & Bell, San Jose, Cal., Joseph L. Alioto, San Francisco, Cal., Stuart Symington, Jr., Guilfoil, Symington, Petzall & Shoemake, St. Louis, Mo., for plaintiff.

Kathianne Knaup, Lewis, Rice, Tucker, Allen & Chubb, St. Louis, Mo., for Boatmen's Nat. Bank of St. Louis.

John F. Weeks, II, William P. Stahl, New Orleans, La., for First Nat. Bank of Commerce.

John H. Blish, Edwards & Angell, Providence, R. I., Kathianne Knaup, Lewis, Rice, Tucker, Allen & Chubb, St. Louis, Mo., for Industrial Nat. Bank of Rhode Island.

Edward Mullinix and Michael R. Gardner, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for First Pennsylvania Banking & Trust Co.

MEMORANDUM

WANGELIN, District Judge.

These actions arose out of the 1975 acquisition by plaintiff Paul Kalmanovitz of a substantial amount of Falstaff Brewing Corporation's stock. Plaintiff has filed antitrust and securities actions against four banks and two insurance companies. Several former officers and directors of Falstaff and the accounting firm of Haskins & Sells are also defendants. Eight separate actions were transferred by the Judicial Panel on Multi-district Litigation to this Court for consolidate pre-trial proceedings. Two actions which were pending in this district are also part of this litigation.

Defendants have moved to dismiss in several of these actions, referred to as the securities cases. Motions are pending in Cases No. 76-639 C (2), 77-742 C (2), 77-743 C (2) and 77-744 C (2). A motion has also been filed in 77-611 C (2), also a securities action, but has not yet been submitted.

The motions to dismiss are aimed at the sufficiency of the complaint. Thus, the allegations of the complaint set out below will be considered true. About fifteen years ago Falstaff began negotiating long-term, low interest loans with the two insurance company defendants. Some five years ago Falstaff received additional loans at higher rates of interest from the bank defendants.

Late in 1974 these debts totalled over thirty one million dollars ($31,000,000). In the two years preceding that time the financial position of Falstaff had slipped drastically. Falstaff was unable to comply with conditions in the loan agreements requiring, among other things, adequate working capital, a maximum debt, and a minimum equity. Thus, Falstaff was in default on the loans while continuing to make payments.

Kalmanovitz charges that during late 1974 the lenders become involved with the day to day operation of Falstaff in order to monitor its financial condition. These allegations are made on information and belief and specify that defendants required Falstaff to:

(1) replace acting officers and directors;

(2) implement certain policies;

(3) revise its debt structure;

(4) obtain an equity investor;

(5) give additional security; and

(6) obtain approval before acquiring or selling capital assets.

This control was exerted by the lenders' threat to declare a default and accelerate payment on the loans.

Early in 1975, Falstaff entered into a "collateral agency agreement" with the lenders. Plaintiff alleges that the lenders forced Falstaff to accept this agreement in return for a waiver of default. This agreement named one defendant as an agent for the other lenders. Payment were to be distributed pro rata to all lenders. This agreement had the effect of prohibiting Kalmanovitz, who later acquired Falstaff, from paying off high interest loans first.

The next occurrence in the alleged sequence of events was a conspiracy by all defendants to prepare and certify materially false and misleading financial statements. This allegation is also made on information and belief. Defendant lenders then forced Falstaff to give them security interests in all corporation property except accounts receivable and inventory. Both the collateral agency agreement and the security agreement were dated February 5, 1975.

Plaintiff charges that this entire course of dealing was intended to give the defendants enforceable security interests in Falstaff property and then force Falstaff to find an equity investor. Various meetings were held where Kalmanovitz and officers of Falstaff discussed a possible investment. During these negotiations certain misrepresentations were made by officers of Falstaff. Kalmanovitz was told, e. g., that the lenders had waived any default by Falstaff pending his investment.

Also, Kalmanovitz stated specifically that he intended to use his equity investment to pay off the short term, high interest loans. Falstaff's officers did not inform Kalmanovitz of the collateral agency agreement or the security agreements. The lender defendants are charged with knowledge of the misrepresentation to Kalmanovitz and a failure to inform him of these agreements.

Summarizing, the complaint charges Falstaff officers with making material misrepresentations and omissions in connection with the sale of preferred stock to plaintiff. Defendants prompted this wrong by demanding that Falstaff find an equity investor. They were aware of the wrong and took no steps to correct it. There is at least one allegation in the complaint, made on information and belief, that defendant lenders intended to defraud plaintiff Kalmanovitz.

This factual background forms the basis for plaintiff's conclusion that defendants have violated §§ 15 and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77o and 77q, and §§ 10(b) and 18(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j and 78r. Defendants are charged as conspirators, aiders and abettors and controlling persons under § 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78t. Counts II and III of the complaint, incorporating the facts set out above, charge defendants with negligent misrepresentation and common law fraud.

Various parts of this complaint have been considered previously. In Case No. 76-639 C (2), Judge John F. Nangle dismissed plaintiff's first complaint with leave to refile for failure to comply with Rule 9(b) of the Federal Rules of Civil Procedure. The complaint in Case No. 77-742 C (2) makes essentially the same allegations as that complaint. The complaint in No. 76-639 C (2) was amended and it is now nearly identical to those filed in 77-743 C (2) and 77-744 C (2). At this time the Court must consider defendants' renewed Rule 9(b) claim and the merits of plaintiff's case on the pleadings.

One additional problem is worth noting. On November 4, 1976, this Court granted partial summary judgment to defendant in No. 76-120 C (2). That suit is one of the antitrust actions, but also presented a common law fraud claim. After considering affidavits, the Court held that plaintiff Paul Kalmanovitz had the opportunity to discover the existence of outstanding security interests but made no reasonable investigation to do so. Also, plaintiff became aware of the security interests before shareholder approval of the transaction yet did not act to protect himself.¹ In addition to the arguments that the complaints state no cause of action or are insufficient under Rule 9(b) of the Federal Rules of Civil Procedure, defendant argues that this summary judgment must severely limit plaintiff's securities claims.

The effect of the summary judgment, if left undisturbed when the Court reconsiders the antitrust motions, will be to estop plaintiff from alleging or seeking to prove concealment of the security agreements, or from asserting that he was unable to discover their existence. Any estoppel is limited to the express findings essential to granting defendant's motion on the common law fraud count. It does not dispose of the federal securities' claims which involve several additional allegations.

The question has been raised as to whether collateral estoppel can arise from a summary judgment based upon pleadings and affidavits. This Court believes that it can. The granting of a motion for summary judgment is, in the sense requisite for raising an estoppel, a final judgment on the merits. Exhibitors Poster Exchange, Inc. v. National Screen Service Corp., 517 F.2d 110 (5th Cir. 1975), cert. denied, 423 U.S. 1054, 96 S.Ct. 784, 46 L.Ed.2d 643 (1976); Hubicki v. ACF Industries, Inc., 484 F.2d 519 (3rd Cir. 1973).

Where the facts so warrant, collateral estoppel as to these issues will be available to other defendants as against plaintiff Kalmanovitz upon timely amendment or motion. The doctrine of mutuality, which might prevent this effect, has recently been criticized by the Supreme Court in Blonder-Tongue Laboratories v. University of Illinois Foundation, 402 U.S. 313, 91 S.Ct. 1434, 28 L.Ed.2d 788 (1971), and is no longer recognized in a number of circuits. See Butler v. Stover Bros. Trucking Co., 546 F.2d 544 (7th Cir. 1977); Abramson v. Pennwood Investment Corp., 392 F.2d 759 (2d Cir. 1968); Rachal v. Hill, 435 F.2d 59 (5th Cir. 1970), cert. denied, 403 U.S. 904, 91 S.Ct. 2203, 29 L.Ed.2d 680 (1971).

This Circuit has not clearly abandoned the mutuality requirement. See United States v. Brown, 547 F.2d 438 (8th Cir. 1977), cert. denied, 430 U.S. 937, 97 S.Ct. 1566, 51 L.Ed.2d 784; St. Louis Typographical Union No. 8 v. Herald Company, 402 F.2d 553 (8th Cir. 1968). Nonetheless, the requirement warrants suspension in the context of these cases.

The several defendants have a strong identity of interests and would have been co-defendants were it not for the venue requirements of the National Bank Act. Moreover, there is no substantial unfairness to the plaintiff in allowing the several defendants to avail themselves of effects of a prior judgment where the factual issues are identical and grow out of the same transaction. Even...