Ivan F. Boesky Securities Litigation, In re, 517

• Decision Date: 25 February 1992
• Docket Number: No. 517,D,517
• Citation: 957 F.2d 65
• Parties: Fed. Sec. L. Rep. P 96,608 In re IVAN F. BOESKY SECURITIES LITIGATION. KIDDER, PEABODY & COMPANY, INCORPORATED, Plaintiff-Appellee, v. MAXUS ENERGY CORPORATION; Maxus Corporate Company, Defendants-Appellants, Ivan F. Boesky; John Does 1-10, Defendants, Ivan F. Boesky, Defendant-Appellee. ocket 91-7677.
• Court: U.S. Court of Appeals — Second Circuit

Page 65

957 F.2d 65

Fed. Sec. L. Rep. P 96,608

In re IVAN F. BOESKY SECURITIES LITIGATION.

KIDDER, PEABODY & COMPANY, INCORPORATED, Plaintiff-Appellee, v. MAXUS ENERGY CORPORATION; Maxus Corporate Company,

Defendants-Appellants,

Ivan F. Boesky; John Does 1-10, Defendants,

Ivan F. Boesky, Defendant-Appellee.

No. 517, Docket 91-7677.

United States Court of Appeals, Second Circuit.

Argued Dec. 6, 1991.

Decided Feb. 25, 1992.

Gary F. Naftalis, New York City (Ellen P. Nadler, Kramer, Levin, Nessen, Kamin & Frankel, of counsel), for plaintiff-appellee.

Chester J. Hinshaw, Dallas, Tex. (Frederick E. Sherman, Jones, Day, Reavis & Pogue, New York City, of counsel), for defendants-appellants Maxus Energy Corp. and Maxus Corporate Co.

Charles E. Davidow, Washington, D.C. (Wilmer, Cutler & Pickering, of counsel), for defendant-appellee Ivan F. Boesky.

Before MINER and ALTIMARI, Circuit Judges. ^*

MINER, Circuit Judge:

Defendants-appellants Maxus Energy Corporation ("Maxus Energy") and Maxus Corporate Company ("Maxus Corporate"), each a Delaware corporation, appeal from a modified declaratory judgment and injunction order entered in the United States District Court for the Southern District of New York (Pollack, J.). The modified judgment and injunction were entered by the district court after our decision in Kidder, Peabody & Co. v. Maxus Energy Corp., 925 F.2d 556 (2d Cir.), cert. denied, --- U.S. ----, 111 S.Ct. 2829, 115 L.Ed.2d 998 (1991), in which we remanded the case after partially affirming and partially reversing the district court's original declaratory judgment and injunction order. The declaratory judgments and injunctions entered in this case all involved claims arising out of merger transactions to which the predecessors of appellants were parties. The modified judgment declared, among other Appellants contend that the district court's modified declaratory judgment and injunction order "squarely violate" and "circumvent" the mandate of our Kidder decision. We do not endorse these specific descriptions of the actions taken on remand by the learned district judge. However, we are concerned, for the reasons that follow, that the terms of the modified judgment and injunction reasonably could be interpreted in a manner that might conflict with the mandate of Kidder. Accordingly, the modified declaratory judgment and injunction order are further modified to conform to the requirements of this opinion. The case is remanded to the district court for entry of a judgment and injunction incorporating the additional modifications.

                things, that (i) the exchange ratios relating to the distribution of stock in the merger of a new holding company, Maxus Energy's predecessor, were "not subject to retroactive adjustment," and (ii) appellants "suffered no cognizable injury" in connection with the merger transactions.   The modified injunction order enjoined relitigation by appellants of any federal claims, and any claims "embraced by" federal claims, arising from the merger transactions
                

BACKGROUND

The facts of this case are set forth fully in our Kidder opinion, and are reviewed only as pertinent here. In 1983, Diamond Shamrock Corporation ("Diamond Shamrock"), a Delaware corporation, retained plaintiff-appellee Kidder, Peabody & Co., Inc. ("Kidder"), a Delaware corporation, to provide advice about an acquisition. Kidder recommended that Diamond Shamrock acquire Natomas Company ("Natomas"), a California corporation. In the ensuing "friendly" merger transaction, consummated in July and August of 1983, Diamond Shamrock and Natomas became wholly owned subsidiaries of a newly created holding company, the predecessor of Maxus Energy. The consideration paid to Diamond Shamrock and Natomas shareholders was the stock of the new holding company: one share of new stock was exchanged for each Diamond Shamrock share, and 1.05 shares of new stock were exchanged for each Natomas share. At the completion of the transactions, former Diamond Shamrock shareholders owned 54% of the new holding company, and former Natomas shareholders owned 46% of the new holding company.

On February 13, 1987, the Securities and Exchange Commission brought a complaint against Martin A. Siegel, a vice president and director of Kidder, who had headed Kidder's team of investment advisors in the Diamond Shamrock merger transaction. The complaint charged Siegel with leaking information on the Natomas acquisition to Ivan Boesky. Based on the inside information, Boesky then purchased large quantities of Natomas stock. Maxus Energy alleges that, in effect, it overpaid for Natomas, because the Boesky purchases drove up the price of Natomas stock during merger negotiations and led to the offer of a higher price (i.e., a larger exchange ratio) than otherwise would have been the case.

On November 23, 1987, Maxus Corporate, claiming to be the successor to Diamond Shamrock after a post-merger corporate reorganization, filed suit against Kidder in Texas state court. Maxus Corporate asserted Texas state law claims for breach of contract, breach of fiduciary duty, fraud, conversion, negligence and violations of the Texas Business and Commerce Code. Maxus Corporate sought to recover (i) more than $4 million in fees and expenses paid to Kidder under financial adviser and dealer-manager agreements, (ii) more than $56 million in out-of-pocket costs incurred in the Natomas acquisition, (iii) losses allegedly incurred in having been fraudulently induced to acquire Natomas, (iv) the inflated amount allegedly paid to acquire Natomas because of the unlawful conduct of Kidder, Siegel and Boesky, and (v) punitive damages. The same day, Kidder initiated a declaratory judgment action in the Southern District of New York against Maxus Energy, Siegel and Boesky. Kidder's complaint later was amended to add Maxus Corporate as a party. Kidder sought a declaration that it was not liable to the Maxus entities under sections 10(b) or 14(e) of the Securities Exchange Act of 1934, or On March 26, 1990, the district court issued an order, which was followed on April 13, 1990, by entry of a judgment, denying the motions of Maxus Energy and Maxus Corporate to dismiss the declaratory judgment action, and declaring that Kidder was not liable to either of the Maxus entities under sections 10(b) and 14(e) of the 1934 Act. In the fifth paragraph of the declaratory judgment, the district court stated that "[t]he exchange ratios of the negotiated, stock for stock, distribution of the equity stock of the new holding company to the stockholders of Natomas Company and (Old) Diamond Shamrock Corporation are not subject to retroactive adjustment on claims by Diamond Shamrock," and that Maxus Energy and Maxus Corporate, because they were created after the alleged insider trading, "suffered no cognizable injury" in connection with the transactions. In the seventh paragraph of the declaratory judgment, the district court concluded that "[t]he balance of [Kidder's] claims to declaratory relief, essentially based on its fee controversy with Diamond Shamrock, are pendent state claims over which this Court declines to exercise jurisdiction."

on the Texas state law claims; and that if Kidder were liable, it was entitled to indemnification or contribution from Siegel and Boesky.

Kidder subsequently moved in the Texas state court for summary judgment on the grounds that Maxus Corporate's state law claims were barred by the doctrine of res judicata. Kidder based its motion principally on paragraph five of the district court's judgment. The Texas court denied the motion. Thereafter, in the third paragraph of an injunction order dated June 23, 1990, the district court enjoined the Maxus entities from asserting or pursuing in any court any claim, however denominated or characterized, "arising from the merger exchange formula, as well as what led up to it, in the stock-for-stock merger."

Maxus Energy and Maxus Corporate appealed both the declaratory judgment and the injunction order to this Court, and we affirmed in part and reversed in part. See Kidder, 925 F.2d at 558. We held that it was appropriate for the district court to have resolved the federal securities claims, and to have enjoined relitigation of those claims "no matter how denominated." See id. at 562-63, 565. However, we also held that in paragraph five of the judgment, the district court had erred insofar as it had retained jurisdiction over, and disposed of on the merits, the Texas state law claims. See id. at 563-64. Accordingly, we concluded that the injunction exceeded the bounds of a proper declaratory judgment, and reversed the injunction "to the extent that it precludes litigation of the claims for damages under Texas law." See id. at 565.

On June 14, 1991, the district court modified its declaratory judgment and injunction order in light of our decision in Kidder. Paragraph five of the original judgment was retained in its entirety, although the phrase "and Maxus is enjoined from relitigating the said federal matters and claims presented to and decided by this Court no matter how denominated" was added at the end of the paragraph. Paragraph seven of the original judgment was deleted in its entirety. A new paragraph seven provided that (i) Kidder's "claims to declaratory relief based on any state-created claims and for damages thereon are pendent state claims over which this Court declines to exercise jurisdiction"; (ii) the "federal claims of liability or causes of action or forms of relief, no matter how denominated, presented to and decided by this Court in favor of [Kidder] on the ground of no liability to Maxus thereon and, consequently, of no damage to Maxus, may not be relitigated in state court, including, without limitation, the federal claims arising from" the Boesky insider trading and the merger exchange formula; and (iii) "[t]his injunction does not refer to or include litigation in state court of any liability on any...