Kidder, Peabody & Co., Inc. v. Maxus Energy Corp.
| Decision Date | 06 February 1991 |
| Docket Number | 524,Nos. 324,D,s. 324 |
| Citation | 925 F.2d 556 |
| Parties | Fed. Sec. L. Rep. P 95,777 KIDDER, PEABODY & COMPANY, INCORPORATED, Plaintiff-Appellee, v. MAXUS ENERGY CORPORATION and Maxus Corporate Company, Defendants-Appellants, Martin A. Siegel, Ivan F. Boesky and John Does 1-10, Defendants. ockets 90-7487, 90-7657. |
| Court | U.S. Court of Appeals — Second Circuit |
Chester J. Hinshaw, Dallas, Tex. (Frederick E. Sherman, New York City, Jones, Day, Reavis & Pogue, Dallas, Tex., and New York City, of counsel), for defendants-appellants Maxus Energy Corp. and Maxus Corporate Co.
Gary P. Naftalis, New York City (Ellen R. Nadler, Mark J. Headley, Kramer, Levin, Nessen, Kamin & Frankel, New York City, of counsel), for plaintiff-appellee Kidder, Peabody & Co., Inc.
Charles E. Davidow, New York City, for defendant-appellee Ivan F. Boesky.
Before CARDAMONE and MINER, Circuit Judges, and MUKASEY, District Judge. *
Defendants-appellants, Maxus Energy Corporation ("Maxus Energy") and Maxus Corporate Company ("Maxus Corporate"), appeal from a judgment entered in the United States District Court for the Southern District of New York (Pollack, J.), declaring that Maxus Energy and Maxus Corporate may not assert claims under sections 10(b) and 14(e) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. Secs. 78j(b), 78n(e) (1988), and that the exchange ratios of a stock for stock distribution between the two merging corporations are not subject to retroactive adjustment and, in any event, may not be challenged by Maxus Energy or Maxus Corporate because they suffered no cognizable injury. Appellants also appeal from an order enjoining them from asserting claims in a pending Texas court proceeding commenced on the same day that the declaratory judgment action was instituted. Appellants contend that the federal claims were mooted by their numerous representations to the court that they would not assert claims under the 1934 Act and that the pendent state law claims should have been dismissed after the 1934 Act claims were mooted. Finally, appellants assert that it was improper for the court to enjoin the state court proceedings. We hold that the judgment declaring that Maxus Energy and Maxus Corporate may not assert claims under the 1934 Act was proper but that the district court erred in exercising pendent jurisdiction over state law claims after declining to do so. We also hold that the injunction exceeded the scope of the declaratory judgment.
Early in 1983, Diamond Shamrock Corporation ("Diamond Shamrock") retained Kidder, Peabody & Company, Inc. ("Kidder") to provide financial advice regarding a possible acquisition of Natomas Company ("Natomas"). Martin A. Siegel, a vice president and director of Kidder, headed Kidder's team of investment advisers. Acting on Kidder's advice, in May of 1983 Diamond Shamrock began a hostile tender offer for 51% of Natomas' outstanding common stock at $23.00 per share. At that time, the market price of Natomas stock was $18.88 per share.
Friendly merger negotiations ensued, and Diamond Shamrock and Natomas agreed to a stock for stock merger, whereby both companies became wholly owned On February 13, 1987, the Securities and Exchange Commission ("SEC") filed a complaint against Siegel, alleging that, while advising Diamond Shamrock to acquire Natomas, he had illegally disclosed material non-public information about the proposed Natomas acquisition to Ivan F. Boesky. The complaint noted that, in February of 1983, Boesky had purchased Natomas stock on the basis of that information, earning about $4.8 million upon the sale of the stock after the merger. When Maxus Energy learned of these activities, it contacted Kidder to enter into settlement discussions pertaining to potential legal claims arising from the wrongdoing of Siegel and Boesky. The parties also entered into a "standstill" agreement; according to its terms, either party had to notify the other ten days prior to commencement of a lawsuit relating to the matters in dispute. After settlement discussions proved fruitless, Maxus Energy notified Kidder on November 13, 1987 that it intended to commence a lawsuit after the expiration of the ten day period.
subsidiaries of a newly created parent, Maxus Energy. 1 The $18.88 price per share served as the basis for the week-long friendly merger negotiations. On August 31, 1983, at the completion of the transaction, Diamond Shamrock's former shareholders owned 54% of Maxus Energy stock and Natomas' former shareholders owned the remaining 46%. The Natomas shareholders received 1.05 shares of Maxus Energy stock for each Natomas share and the "old" Diamond Shamrock shareholders received 1.00 shares of Maxus Energy stock for each "old" Diamond Shamrock Corporation share
At 7:03 a.m. on November 23, 1987, Maxus Corporate, claiming to be successor in interest to both Diamond Shamrock and Maxus Energy, brought a suit in Texas state court against Kidder, Siegel and Boesky, alleging state law claims of breach of contract and negligence against Kidder, and breach of fiduciary duty, fraud, conversion and violations of section 27.01 of the Texas Business and Commerce Code against all defendants. Maxus Corporate sought actual and consequential damages for (1) the more than $4 million in fees and expenses paid to Kidder under financial adviser and dealer manager agreements; (2) the more than $56 million in out-of-pocket costs incurred in the Natomas acquisition; (3) the losses it incurred in having been fraudulently induced to acquire Natomas; (4) the inflated amount it was required to pay to acquire Natomas because of the illegal conduct of Kidder, Siegel and Boesky; and (5) punitive damages.
At approximately 9:00 a.m. that same day, Kidder initiated a declaratory judgment action in the Southern District of New York against Maxus Energy, Siegel and Boesky. It sought a declaration that it was not liable to Maxus Energy under sections 10(b) and 14(e) of the 1934 Act and a declaration of non-liability for state law claims of breach of contract, breach of fiduciary duty, negligence and fraud. Kidder also sought a declaration that if it were found liable to Maxus Energy, it was entitled to indemnification or contribution from Siegel and Boesky. Jurisdiction was asserted under section 27 of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78aa (1988) and 28 U.S.C. Sec. 1331 (1988). No diversity jurisdiction was alleged because both Kidder and Maxus Energy are Delaware Corporations.
Also on that day, Kidder filed, in the Delaware Court of Chancery, a second declaratory judgment action against Maxus Energy seeking a declaration under the holding in Bangor Punta Operations, Inc. v. Bangor & Aroostock R.R., 417 U.S. 703, 94 S.Ct. 2578, 41 L.Ed.2d 418 (1974) () that Maxus Energy lacked standing to sue for damages for the inflated On February 10, 1988, Maxus Energy moved to dismiss the declaratory judgment action before Judge Pollack on the grounds of lack of subject matter jurisdiction, improper service of process, and inappropriate use of the federal Declaratory Judgment Act, 28 U.S.C. Sec. 2201 (1988). During the proceedings on its motion to dismiss, Maxus Energy represented on several occasions to the court that neither it nor Maxus Corporate ever would assert any claims under sections 10(b) or 14(e) of the Act against Kidder regarding the Natomas transaction. Notwithstanding these representations, Judge Pollack denied Maxus Energy's motion to dismiss, without prejudice to renewal of the motion at the completion of pre-trial proceedings.
exchange ratio. The Delaware court ultimately dismissed the action without prejudice because of the pending declaratory judgment action before Judge Pollack and the pending Texas action.
Soon after, Boesky moved for judgment on the pleadings, asserting that Maxus Energy was not injured by his purchases of Natomas stock and that, in any event, Maxus Energy was barred from recovering under the Bangor Punta holding. On December 15, 1989, Maxus Energy renewed its motion to dismiss, once again renouncing any intent to pursue federal securities claims against Kidder on behalf of itself or its wholly-owned subsidiary, Maxus Corporate. On January 26, 1990, Kidder moved for summary judgment declaring that neither Maxus Energy nor Maxus Corporate could state claims for relief against Kidder arising from the merger. Shortly thereafter, Kidder amended its complaint to add Maxus Corporate as a defendant.
In response to Kidder's amended complaint, Maxus Energy moved to dismiss Kidder's section 10(b) and section 14(e) claims as moot on the basis of the numerous representations it had made to the court renouncing any intent to assert these claims. Maxus Corporate moved to dismiss for lack of subject matter jurisdiction, lack of personal jurisdiction and on the ground that the claims were barred by, inter alia, the federal Anti-Injunction Act, 28 U.S.C. Sec. 2283 (1988).
On March 26, 1990, Judge Pollack issued an order, which was followed on April 13, 1990 by the entry of a judgment, denying the motions of Maxus Energy and Maxus Corporate to dismiss and declaring that Kidder was not liable to either Maxus Energy or Maxus Corporate under sections 10(b) and 14(e) of the 1934 Act. Judge Pollack found that the court had jurisdiction over Maxus Corporate because it was the "alter ego" of Maxus Energy and had waived service of process by participating in the case. In the fifth paragraph of the judgment, Judge Pollack 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 ... and (Old) Diamond Shamrock ... are not subject to...
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