Kahan v. Rosenstiel

• Decision Date: 10 June 1969
• Docket Number: Civ. A. No. 3509.
• Citation: 300 F. Supp. 447
• Parties: Alexander KAHAN, on behalf of himself and all others similarly situated, Plaintiff, v. Lewis ROSENSTIEL et al., Defendants.
• Court: U.S. District Court — District of Delaware

300 F. Supp. 447

Alexander KAHAN, on behalf of himself and all others similarly situated, Plaintiff, v. Lewis ROSENSTIEL et al., Defendants.

Civ. A. No. 3509.

United States District Court D. Delaware.

June 10, 1969.

William Prickett, Rodman Ward, Jr., and Roger Sanders, Prickett, Ward, Burt & Sanders, Wilmington, Del., Harold E. Kohn, Bruce W. Kauffman and David Pittinsky, Dilworth, Paxson, Kalish, Kohn & Levy, Philadelphia, Pa.; and Alexander Kahan, New York City, of counsel, for plaintiff.

S. Samuel Arsht, Walter K. Stapleton, and Lewis S. Black, Jr., Morris, Nichols, Arsht & Tunnell, Wilmington, Del. and Marc Cherno, New York City, of counsel, for defendants, Glen Alden Corp and Meshulam Riklis.

Richard F. Corroon and Michael D. Goldman, Potter, Anderson & Corroon, Wilmington, Del., for defendant, Dorothy H. and Lewis Rosenstiel Foundation, and defendants, R. G. Smith, E. R. Deutsche, Charles B. Buscher, H. S. Feldman, Sylvan Oestreicher, J. L. Morris, Theodore Gommi, D. A. Chernow, W. E. Devereaux, Bernard Goldberg, G. D. Kuhn, L. B. Nichols, John Mackie and Theodore C. Wiehe.

OPINION

WRIGHT, Chief Judge.

The Court has before it the petition of plaintiff, Alexander Kahan, for costs, expenses, and counsel fees arising out of plaintiff's individual and representative action for damages under § 10(b) of the Securities Exchange Act of 1934, 15 U. S.C. § 78j(b), and Rule 10b-5 promulgated thereunder. Plaintiff's petition assumes an unusual cast, however, because the underlying damage action which generated plaintiff's legal expenses has been rendered moot by unilateral action of certain defendants. Plaintiff is thus left without a judgment or a settlement but only with the claim that defendants' dispositive action was prompted solely by plaintiff's diligent prosecution of the lawsuit. It is on this basis that plaintiff seeks compensation for his efforts in bringing about a result satisfactory to his class. Notwithstanding the mootness of the original damage claim, plaintiff's petition will be treated as a cause of action ancillary to that claim, as to which the Court admittedly had jurisdiction.¹ See Globus, Inc. v. Jaroff, 279 F.Supp. 807, 809 (S.D.N. Y.1968).

The background of this litigation may be set forth briefly. The Amended Complaint asserts that plaintiff is a minority stockholder of Schenley Industries, Inc. (Schenley). In March, 1967, Schenley engaged in negotiations with P. Lorillard Co. (Lorillard) directed at developing a plan for merging the two companies. After some progress, negotiations were terminated when Lorillard refused to pay the premium allegedly demanded by Lewis Rosenstiel for his substantial ownership interest in Schenley. Subsequently, merger negotiations commenced between Schenley and Glen Alden Corporation (Glen Alden) and in March, 1968, Rosenstiel agreed to sell his interest in Schenley to Glen Alden for $80 per share. At the time the terms of this purchase were announced, Glen Alden stated publicly that an offer would be made to all Schenley common stockholders (including plaintiff) for the purchase of their shares. According to the statement, the proposed offer would consist of a package of cash, debentures, and warrants, a package which Glen Alden asserted was equivalent to the $80 per share paid to Rosenstiel.

On March 28, 1968, shortly after the proposed offer was announced but prior to any actual tender offer, plaintiff commenced an action in this Court² against Glen Alden and various individual defendants, most of whom were directors of Schenley, alleging, first, that defendants had misrepresented the true value of the proposed offer and, secondly, that defendants had acted to deprive Schenley stockholders of a more favorable merger with Lorillard. Plaintiff's action was brought on his own behalf and on behalf of the class alleged to consist of all holders of Schenley common stock. The Complaint contained two counts, the first a federal claim based on the violation of § 10(b) and Rule 10b-5, the second a pendent state claim based on breach of fiduciary obligations.

Not long after plaintiff brought his action in this Court, Glen Alden announced a revision of its proposed tender offer and again asserted that the new terms would be equivalent to Rosenstiel's $80 per share.³ The revision was made without consulting plaintiff and without plaintiff's approval. Plaintiff remained dissatisfied with the proposed terms and simply amended his complaint to take account of the new proposal.

On August 9, 1968, Glen Alden again revised the terms of its offer and finally made an actual tender offer to Schenley stockholders. The second revision, though executed once more without consulting plaintiff, met plaintiff's approval⁴ and plaintiff now concedes that the actual tender offer was made on terms equivalent to Rosenstiel's $80 per share.

Plaintiff no longer presses the damage claims before this Court, conceding that the actual tender offer has made them moot. However, plaintiff asserts by way of petition that, but for his diligence in prosecuting these claims, no revisions would have been made and Schenley stockholders would have suffered damage by virtue of defendants' allegedly fraudulent course of conduct. Thus, plaintiff argues, he has, by his action, created a fund of $20 per share of Schenley common or $83,000,000 out of which he is entitled to recover costs, expenses, and counsel fees. Accordingly, plaintiff now seeks from defendants the sum of $8,300,000 — 10% of the fund — for those items.

The law is well-settled that the success of a claim for attorney's fees⁵ depends, in the first instance, on the success or likelihood of success of the underlying lawsuit. Levine v. Bradlee, 378 F.2d 620, 623 (3rd Cir.1967); Globus, Inc. v. Jaroff, supra 279 F.Supp. at 809; Chrysler Corp. v. Dann, 223 A. 2d 384, 386 (Del.Sup.Ct.1966). While there is no requirement that one seeking counsel fees first win a judgment, Globus, Inc. v. Jaroff, supra 279 F.Supp. at 809, the law does require some demonstration of the "meritorious quality" of the underlying action. Levine v. Bradlee, supra 378 F.2d at 623. In situations like the instant case where the underlying suit has been settled or rendered moot, a demonstration that the basic action could have withstood a motion to dismiss on the pleadings at the time the action was filed is sufficient to establish its meritorious quality. Chrysler Corp. v. Dann, supra 223 A.2d at 387. And, conversely, failure to demonstrate that the underlying action could have survived such a motion to dismiss necessitates dismissal of the fee petition. Accordingly, unless it appears that plaintiff's damage action could have withstood a motion to dismiss on the pleadings at the time the action was filed, plaintiff's petition for legal fees must be dismissed.

After careful examination of the pleadings filed in plaintiff's damage action, the Court is of the opinion that neither plaintiff's original complaint nor his amended complaint could have survived an appropriate motion to dismiss. Even accepting as true every allegation of the complaints, both pleadings are colored by two fatal defects; namely, failure to allege that plaintiff or the members of his class were defrauded purchasers or sellers and failure to allege or indicate reliance on the deceptions charged to defendants.

The absence of an allegation that plaintiff or the members of his class were defrauded purchasers or sellers of stock goes to the very heart of § 10(b) and Rule 10b-5 upon which plaintiff's principal claims are based.⁶ While the language of Rule 10b-5 outlawing deceptive practices performed "in connection with the purchase or sale of any security" is general, the law has long been clear that:

"* * * §10(b) was directed solely at that type of misrepresentation or fraudulent practice usually associated with the sale or purchase of securities rather than at fraudulent mismanagement of corporate affairs, and * * Rule X-10B-5 extended protection only to the defrauded purchaser or seller." Birnbaum v. Newport Steel Corp., 193 F.2d 461, 464 (2d Cir. 1951), cert. den. 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952).

The Birnbaum rule requiring that the plaintiff in a Rule 10b-5 damage action be a defrauded seller or purchaser of stock still retains its vitality. See Greenstein v. Paul, 400 F.2d 580, 581 (2d Cir.1968); Christophides v. Porco, 289 F.Supp. 403, 406, 408 (S.D. N.Y.1968); Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540, 547 (2d Cir. 1967).⁷ Notwithstanding the vitality of the Birnbaum rule, plaintiff has provided in his pleadings no basis upon which the Court could conclude that plaintiff or the members of his class were sellers or purchasers within the meaning of the law. Since both complaints were drawn prior to Glen Alden's actual tender offer, it is clear that no Schenley stock was sold or purchased pursuant to that offer. And, plaintiff's definition of the class as "holders of the common stock of Schenley" gives fair indication that no class member had yet changed his position. Finally, allegations to the effect that plaintiff and the members of his class could have sold their stock to Lorillard are to no avail since "aborted sellers" are still not sellers within the purview of Rule 10b-5. Keers & Co. v. American Steel & Pump Corp., 234 F.Supp. 201, 203 (S.D.N.Y. 1964).

Plaintiff's pleadings suffer in addition from the absence of any allegations that would indicate reliance on the deceptions charged to defendants. It is well-established that reliance is a required element of a meritorious Rule 10b-5 claim. See Mutual Shares Corp. v. Genesco, Inc., supra 384 F.2d at 547; Rogen v. Ilikon Corp., 361 F.2d 260, 266-267 (1st Cir.1966); List v. Fashion Park Inc., 340 F.2d 457, 462, 463, 22 A. L.R.3d 782 (2d Cir.1965), cert. den. 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1965).⁸ However, the implication of the pleadings is that neither plaintiff nor any member of his class...