Lewis v. S.L. & E., Inc.

• Decision Date: 08 October 1987
• Docket Number: D,1360,Nos. 1261,s. 1261
• Citation: 831 F.2d 37
• Parties: Donald E. LEWIS, Plaintiff-Appellant, Cross-Appellee, v. S.L. & E., INC., Alan E. Lewis, Leon E. Lewis and Richard E. Lewis, Defendants-Appellees, Cross-Appellants. ockets 87-7135, 87-7143.
• Court: U.S. Court of Appeals — Second Circuit

Page 37

831 F.2d 37

Donald E. LEWIS, Plaintiff-Appellant, Cross-Appellee, v. S.L. & E., INC., Alan E. Lewis, Leon E. Lewis and Richard E.

Lewis, Defendants-Appellees, Cross-Appellants.

Nos. 1261, 1360, Dockets 87-7135, 87-7143.

United States Court of Appeals, Second Circuit.

Submitted Aug. 12, 1987.

Decided Oct. 8, 1987.

James L. Hamilton, Cleveland, Ohio (Epp & Hamilton, Cleveland, Ohio, on briefs), for plaintiff-appellant, cross-appellee.

Charles B. Kenning, Rochester, N.Y. (Kaufman-Kenning, Rochester, N.Y., Kenning & Edelman, Rochester, N.Y., on briefs), for defendants-appellees, cross-appellants.

Before MESKILL, KEARSE, and ALTIMARI, Circuit Judges.

KEARSE, Circuit Judge:

In this appeal, their fourth trip to this Court in this stockholder derivative suit, the parties attack a final judgment of the United States District Court for the Western District of New York, John T. Curtin, Chief Judge, which, inter alia, (1) awarded the corporate defendant S.L. & E., Inc. ("SLE"), $129,919.88 against the individual defendants to remedy their waste from 1966 through 1972 of the assets of SLE; (2) out of this sum, awarded disbursements

to plaintiff Donald E. Lewis ("Donald") and fees to his attorneys; and (3) evaluated Donald's shares in SLE, after SLE's net recovery herein, at $19,531.74 and, in return for payment of that amount, ordered Donald to transfer his shares to a company related to SLE, pursuant to a 1962 shareholders' agreement. Donald has appealed, contending principally that the court erred in calculating SLE's injury, in failing to award prejudgment interest on the $129,919.88 actually awarded, and in determining the attorneys' fees to be awarded him. Defendants, including SLE, have cross-appealed, contending principally that the individual defendants did not waste the assets of SLE, that the court awarded Donald too much in disbursements and attorneys' fees, and that the court should have imposed sanctions on Donald pursuant to Fed.R.Civ.P. 11. We find merit only in the contention that the district court erred in not requiring the individual defendants to pay prejudgment interest to SLE on the amount awarded to remedy their waste of its assets.

BACKGROUND

This action was commenced in 1973. Its pertinent history through trial is set forth in Lewis v. S.L. & E., Inc., 629 F.2d 764 (2d Cir.1980) ("Lewis II "), familiarity with which is assumed. In Lewis II, we determined that the individual defendants, who were shareholders and directors of SLE, bore, and had failed to sustain, the burden of proving that the rent they caused their other corporation to pay SLE for use of the latter's building was fair and reasonable, and we remanded the matter to the district court

(a) for the entry of judgment in favor of SLE against [the individual defendants], jointly and severally, in such amount as the district court shall determine to be equal to the amounts by which the annual fair rental value of the [SLE] Property exceeded $14,400 in the period February 28, 1966--June 1, 1972, (b) for an accounting as to the value of Donald's SLE shares as of June 1, 1972, in light of such judgment, (c) for an order, following such accounting, of specific performance of the shareholders' agreement, and (d) for such other proceedings as are not inconsistent with this opinion.

629 F.2d at 773.

Following the remand, the district court conducted further proceedings and entered a nonfinal judgment dated January 9, 1984 ("1984 Judgment"), which, inter alia, ruled that the total amount by which the fair rental value of SLE's property exceeded the rental set by the individual defendants was $129,919.88. The 1984 Judgment was not final because (a) it did not determine how much should be deducted from that amount for an award to Donald as attorneys' fees for the successful prosecution of the derivative suit, and (b) it did not, therefore, finally determine the value of Donald's shares. Notwithstanding the lack of finality, both sides immediately appealed, with Donald contending that the district court's monetary awards were too low, and defendants contending that there had been no waste of SLE's assets and that the district court's monetary awards were too high. We dismissed that appeal for lack of appellate jurisdiction. In so doing, we pointed out one aspect of the 1984 Judgment that was plainly flawed, and we stated that the parties' other contentions appeared to have no merit. Lewis v. S.L. & E., Inc., 746 F.2d 141 (2d Cir.1984) ("Lewis III ").

Following that dismissal, the district court conducted proceedings with regard to attorneys' fees and entered a judgment dated January 8, 1987 ("1987 Judgment"), which finally concluded the litigation (and corrected the flaw pointed out in Lewis III ). These appeals followed.

DISCUSSION

In their present appeals, both sides have revived the arguments they made in Lewis III and have attacked the court's rulings on attorneys' fees. We have reviewed all of their arguments and find no merit in any of their challenges other than Donald's challenge to the failure of the 1987 Judgment to include an award to SLE of prejudgment interest on the $129,919.88 by which the Section 5001(a) of the New York Civil Practice Law and Rules ("CPLR"), which governs in this diversity action, see Spector v. Mermelstein, 485 F.2d 474, 481 (2d Cir.1973), provides that prejudgment interest

individuals had caused SLE to be underpaid rent for the period 1966-1972.

shall be recovered upon a sum awarded because of a breach of performance of a contract, or because of an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property, except that in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court's discretion.

CPLR Sec. 5001(a) (McKinney 1963). The purpose of Sec. 5001(a)'s award of prejudgment interest in property actions is "to assure complete indemnification to plaintiffs whose property ha[s] been damaged by the wrongful act of another." 5 J. Weinstein, H. Korn & A. Miller, New York Civil Practice p 5001.05, at 50-18 to 50-19 (1987). In such actions, a successful plaintiff is entitled to prejudgment interest as of right. Defendants argue, however, that the present action, as a stockholder derivative action, is equitable in nature and thus we should affirm the failure to award SLE prejudgment interest as a decision that was within the proper bounds of the district court's discretion. We disagree because (A) the action is more properly categorized as one asserting a claim in law for the loss of enjoyment of property, and an award of prejudgment interest was thus mandatory, and (B) even if the action be viewed as one in equity, the record reveals that interest would have been granted as a matter of discretion were it not for the district court's misconstruction of our decision in Lewis II.

We do not believe that Donald's claim that the individual defendants wasted SLE's assets is properly viewed, under CPLR Sec. 5001(a), as a claim that is equitable in nature. A derivative action has a dual nature. The derivative mechanism invokes the equitable powers of the court in that a stockholder is allowed to pursue a claim on behalf of his corporation; but to the extent that the claim itself would be viewed as one in law rather than in equity if asserted by the corporation itself, the action may properly be viewed as one of a legal nature. Thus, in Ross v. Bernhard, 396 U.S. 531, 532-33, 538, 90 S.Ct. 733, 734-35, 738, 24 L.Ed.2d 729 (1970), the Supreme Court ruled that a derivative suit plaintiff was entitled to a jury trial with respect to claims that were legal in nature: "legal claims are not magically converted into equitable issues by their presentation to a court of equity in a derivative suit." This analysis has been adopted by at least one New York court. See Fedoryszyn v. Weiss, 62 Misc.2d 889, 889-91, 310 N.Y.S.2d 55, 56-57 (Sup.Ct.Nas.County 1970).

In granting a jury trial to a derivative suit defendant sued for misappropriation of corporate funds, the Fedoryszyn court reasoned that the plaintiff's claim was essentially legal in nature since, if upheld, it would result in a judgment for money damages, as contrasted with equitable relief such as rescission or an accounting. Id. at 892, 310 N.Y.S.2d at 59 (where "plaintiff seeks a judgment for a sum of money only ... it is an action at law which is not converted 'magically' into equity"). This Court similarly has looked to the nature of the relief demanded in fathoming the legal or equitable nature of a claim, and has done so in the course of analyzing whether an award of prejudgment interest was mandatory or discretionary under CPLR Sec. 5001(a). In Spector v. Mermelstein, 485 F.2d at 481-82 & n. 8, we noted obiter that even on a...