Katz v. Gerardi
| Decision Date | 25 August 2011 |
| Docket Number | No. 10–1407.,10–1407. |
| Citation | 655 F.3d 1212 |
| Parties | Jack P. KATZ and Infinity Clark Street Operating, on behalf of themselves and all others similarly situated, Plaintiffs–Appellants,v.Ernest A. GERARDI, Jr.; Ruth Ann M. Gillis; Ned S. Holmes; Robert P. Kogod; James H. Polk III; John C. Schweitzer; R. Scot Sellers; Robert H. Smith; Stephen R. Demeritt; Charles Mueller, Jr.; Caroline Brower; Mark Schumacher; Alfred G. Neely; Archstone–Smith Operating Trust; Archstone–Smith Trust; and Tishman Speyer Development Corporation, Defendants–Appellees. |
| Court | U.S. Court of Appeals — Tenth Circuit |
OPINION TEXT STARTS HERE
Kenneth A. Wexler, Wexler Wallace LLP, Chicago, IL (Olimpio Lee Squitieri, Squitieri & Fearon LLP, New York, NY, with him on the briefs), for Appellants.Jonathan D. Polkes, Weil Gotshal & Manges LLP, New York, NY (Ashish D. Gandhi, Weil, Gotshal & Manges LLP, New York, NY, and Frederick J. Bauman and Alex C. Myers, Rothgerber Johnson & Lyons LLP, Denver, CO, with him on the brief), for Appellees.Before TYMKOVICH, BRORBY, and MATHESON, Circuit Judges.TYMKOVICH, Circuit Judge.
This case requires us to consider whether a plaintiff can split potential legal claims against a defendant by bringing them in two different lawsuits. We conclude that related claims must be brought in a single cause of action, and the district court properly dismissed the claim-splitting plaintiffs here. We also consider whether an investor who was forced to sell his shares as the result of a merger has standing to sue as a purchaser of securities under the 1933 Act. We find the Act applies only to purchasers of securities and not to forced sales resulting from a merger.
Jack P. Katz and Infinity Clark Street Operating were minority shareholders in a real estate investment trust owned by Archstone Smith Trust, a public company. Archstone entered into a merger agreement in which two investors acquired all of Archstone's outstanding public shares. As part of the merger, Katz and Infinity were squeezed out of the REIT and had the option of receiving either cash or stock in the newly formed entity in exchange for their shares. Katz opted for cash; Infinity chose stock. Claiming the offering documents associated with the merger contained false and misleading statements or omissions, Katz and Infinity separately sued.
In Colorado, Infinity filed a federal class action lawsuit alleging breaches of contract and fiduciary duty relating to the merger. The district court dismissed the complaint with prejudice except as to one claim, and the case was stayed pending arbitration of the surviving claim.
Meanwhile, Katz filed a class action lawsuit in Illinois state court asserting securities law claims arising from the merger. The case was removed to federal court and eventually transferred to Colorado. Katz then filed an amended complaint joining Infinity as a party plaintiff, even though Infinity's case was still waiting the outcome of arbitration. The district court dismissed Katz's complaint, ruling that by joining the case, Infinity was improperly splitting claims that should have been alleged in its earlier action. The court also found Katz lacked standing to bring his securities law claims since he was not a purchaser when he opted to sell his shares. Katz and Infinity challenge the district court's decision on appeal.
We find the district court did not err, and we therefore AFFIRM the district court's judgment.
Katz and Infinity, with others, owned 11% of the Class A Common Units of a real estate investment trust (REIT), the Archstone Smith Operating Trust (Archstone REIT). Archstone Smith Trust (Archstone), a publicly traded corporation, owned the remaining 89% of the Archstone REIT. Archstone was the Archstone REIT's sole trustee, controlling the management and administration of its properties.
Infinity and Katz had previously contributed properties to a different REIT—later acquired by Archstone—so as to gain certain tax and financial benefits. Katz and Infinity held their interest in the Archstone REIT in the form of “A–1 Units.” The A–1 Units had special advantages—liquidity rights, dividend rights, and tax indemnification—that made them particularly valuable to Katz and Infinity. Archstone agreed not to sell, exchange, or dispose of any properties in the Archstone REIT before 2022 that would cause any tax liability for the A–1 Unitholders. If Archstone did dispose of properties that created a tax liability, it was required to indemnify the unitholders in the amount of the liability. Also, the unitholders had a liquidity option through which they could redeem their A–1 Units for the market price of Archstone's common shares. Archstone could provide either shares, or their cash equivalent, when an A–1 Unitholder elected to redeem their units. Finally, the unitholders were entitled by law to receive dividends of any profits from the Archstone REIT's operations.
In May 2007, Archstone announced a merger agreement in which Lehman Brothers and Tishman Speyer would acquire Archstone for approximately $22.2 billion. Lehman and Tishman would take Archstone private by acquiring all of its outstanding common stock for $60.75 per share, which represented a 22% premium over the common stock's pre-announcement price. There were several steps to the merger, but as it relates to the Archstone REIT, only Archstone's approval was needed for the merger because it owned a majority of the A–1 Units. The minority A–1 Unitholders (i.e., Katz and Infinity) had no voting rights and were not entitled to vote on the merger. The merger was approved and closed in October 2007.
In the merger, the minority A–1 Unitholders had the right to elect the form of consideration they would receive in exchange for their A–1 Units. They could receive either: (1) $60.75 per unit, as paid to Archstone's public shareholders, (2) new units in the private entity with the stated value of $60.75 per unit, or (3) a combination of cash and new units. In the Prospectus and Registration Statement for the merger, Archstone explained that the new units would be materially different, and possibly less favorable, than the now superceded A–1 Units.
Katz and Infinity found the options unappealing because they contend the cash-out price did not reflect the tax indemnification and liquidity benefits of the A–1 Units, and the new units had none of these features. Nonetheless, Katz elected to receive the $60.75 cash offer, and Infinity elected to receive the new units in the post-merger entity.
Katz and Infinity filed separate class actions alleging the Prospectus, Registration Statement, and other offering documents associated with the merger contained false and misleading statements and omissions. They claimed various aspects of the merger, including an analysis of its risks, were not disclosed. Katz represented the cash-out subclass of A–1 Unitholders who sold their A–1 Units for cash. Infinity represented the class of investors who exchanged their A–1 Units for new units.
Because it bears on our analysis below, a review of the procedural history of the two class actions is necessary to understand the reasons for the district court's dismissal of Infinity from this case.
In November 2007, Infinity and an individual investor, Steven A. Stender, 1 filed a class action in Colorado, naming the appellees here. They asserted various breach of contract and fiduciary duty claims arising out of the merger. The district court eventually dismissed the complaint with prejudice except for one breach of contract claim. The case was stayed pending arbitration of the contract claim and administratively closed.
With the case still closed, Infinity sought leave to amend the complaint with additional claims of breach of contract and fiduciary duty, nearly identical to the previously dismissed claims. While Infinity had earlier informed the court it intended to add securities claims, it did not do so.
After this filing, the district court reopened the case. It modified its previous order, dismissing some of the breach of contract and fiduciary duty claims without prejudice, but affirming the dismissal with prejudice of the other claims. The court granted the motion to amend the complaint. It then stayed the case pending the completion of arbitration, at which point plaintiffs could file an amended complaint in compliance with the court's order. The court again administratively closed the case.
After these events, Infinity filed several additional motions asking the court to revisit its rulings. These were all denied and in May 2010, the court again administratively closed the case pending completion of arbitration.
In May 2008, Katz filed a class action in Cook County, Illinois state court asserting securities fraud claims in connection with the merger. That case was removed to federal court, where the defendants requested it be transferred to the District of Colorado. Katz opposed removal and the transfer. The district court remanded the case to state court, which defendants challenged.
On appeal, the Seventh Circuit vacated the district court's decision and remanded for a hearing on issues regarding removal. See Katz v. Gerardi, 552 F.3d 558 (7th Cir.2009). On remand to the district court, both parties sought to transfer the case to Colorado. The case was transferred in June 2009.
In August 2009, while Infinity's federal case was administratively closed, Katz filed an amended complaint which joined Infinity and Stender in his case as plaintiffs and asserted claims under the Securities Act of 1933 (1933 Act) (§§ 11, 12(a)(2) & 15), and the Securities Exchange Act of 1934 (1934 Act) (§§ 10(b), 20(a); Rule 10b–5).
In August 2010, the district court dismissed the amended complaint. It dismissed Infinity from the case because it asserted claims that could have been brought in its other, previously filed...
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