Manning v. Energy Conversion Devices, Inc., 469

• Decision Date: 20 November 1987
• Docket Number: No. 469,D,469
• Citation: 833 F.2d 1096
• Parties: William MANNING and Manning & Napier Advisors, Inc., Plaintiffs-Appellees, v. ENERGY CONVERSION DEVICES, INC. and Stanford R. Ovshinsky, Defendants-Appellants, and American Arbitration Association, Defendant. ocket 87-7799.
• Court: U.S. Court of Appeals — Second Circuit

Page 1096

833 F.2d 1096

William MANNING and Manning & Napier Advisors, Inc., Plaintiffs-Appellees, v. ENERGY CONVERSION DEVICES, INC. and Stanford R. Ovshinsky,

Defendants-Appellants,

and

American Arbitration Association, Defendant.

No. 469, Docket 87-7799.

United States Court of Appeals, Second Circuit.

Argued Oct. 30, 1987.

Decided Nov. 20, 1987.

Ronald L. Marmer, Chicago, Ill. (Chester T. Kamin, Jenner & Block, Chicago, Ill., David L. Hoffberg, Carolyn G. Nussbaum, Nixon, Hargrave, Devans & Doyle, Rochester, N.Y., on the brief), for defendants-appellants.

Theodore S. Steingut, New York City (Steven A. Berger, Howard A. Wintner, Berger & Steingut, New York City, on the brief), for plaintiffs-appellees.

Before NEWMAN, WINTER, and MINER, Circuit Judges.

JON O. NEWMAN, Circuit Judge:

This appeal from an order compelling arbitration illustrates the difficulties facing a district judge when parties are imprecise as to both the relief sought and the grounds of their opposition. The appeal is brought by defendants-appellants Energy Conversion Devices, Inc. ("ECD") and Stanford R. Ovshinsky from an order of the District Court for the Western District of New York (Michael A. Telesca, Judge) entered on August 18, 1987, and amended on September 16, 1987. The order compels appellants to arbitrate a dispute with plaintiffs-appellees William Manning and Manning & Napier Advisors, Inc. and provides ancillary relief pending the arbitration. Though we do not endorse the procedures that were followed as a model for the future, we conclude, under the circumstances of this case, that appellants have failed to present to the District Court an adequate basis for opposing or vacating the order that was entered, and we therefore affirm.

Facts

ECD is a publicly traded corporation engaged in the development of high technology products. According to the plaintiffs, ECD has lost money in each of the past ten years and has an accumulated deficit of more than $100 million. Manning and his company are investment advisors with more than $2 billion of assets under management. Manning, his company, and their clients have invested more than $28 million in ECD and its subsidiaries in the past three years. Though remaining optimistic about the potential success of ECD and its products, Manning became increasingly concerned about the quality of ECD management's business acumen and the degree to which Ovshinsky, ECD's founder and chief executive officer, exercised domination over the company. Through ownership of Class A stock entitled to 25 votes per share, Ovshinsky and his family effectively control more than 50 percent of the voting power of ECD's common stock.

Manning alleges that in order to obtain his continued support of ECD's efforts to attract investment capital, ECD entered into an agreement with him on November 25, 1986. That agreement, which underlies the current dispute, is contained in a letter to Manning written on the letterhead of ECD and signed by Ovshinsky as chief executive officer. Since the meaning of the agreement (hereinafter "the Letter Agreement") is part of the arbitrable dispute, we set forth Manning's claim as to the contents of the letter, without intimating any views as to the correctness of his interpretation. According to Manning, Ovshinsky agreed to grant an irrevocable proxy over his "loaded vote" (24 of the 25 votes of each share owned by Ovshinsky and his family) to a committee of five independent directors of ECD, to be chosen from ECD's board membership by Manning. The proxy agreement is to continue until ECD's financial situation improves to the point of meeting specified criteria. The Letter Agreement also includes various commitments by ECD concerning annual meetings of the corporation, future ECD plant locations, and budget reductions. Manning also contends that the Letter Agreement adopted by reference a press release in which ECD management announced its intention to seek shareholder approval of a proposal for cumulative voting for the board of directors.

Especially pertinent to this appeal is a paragraph in which Ovshinsky acknowledges "the importance of the pledges in this letter" and which further provides: "Any dispute over their interpretation will be subject to binding arbitration by the American Arbitration Association, and such arbitration shall be conducted in the City of Rochester, New York, and shall not be challenged later by either side."

Manning alleges that ECD and Ovshinsky have violated the Letter Agreement in two respects. First, he cites the proposal for cumulative voting that ECD planned to submit for shareholder approval at a special shareholders meeting originally scheduled for August 31, 1987. Under this proposal, cumulative voting for directors would be authorized subject to a proviso that no director elected solely because of cumulative voting could serve on a committee authorized to exercise proxy voting rights, i.e., the committee to be selected by Manning pursuant to the Letter Agreement. Second, Manning contends that the independent committee contemplated by the agreement is not independent because there are only five nonmanagement directors of ECD and these five are not in fact independent of ECD management.

On August 14, 1987, Manning submitted these two allegations to the American Arbitration Association (AAA) in a verified statement of claim for arbitration. On the same date, plaintiffs served upon defendants an order to show cause in the New York Supreme Court, Monroe County, why a temporary restraining order and preliminary injunction should not be issued in aid of the arbitration. N.Y.Civ.Prac.L. & R. 7502(c) (McKinney Supp.1987). The show cause order sought an injunction barring defendants from soliciting proxies in support of its cumulative voting proposal and from conducting a special meeting of shareholders for the purpose of voting on the proposal. Plaintiffs also sought an order requiring the AAA to expedite the arbitration. A hearing on the show cause order was scheduled for August 17. On that date defendants served upon the plaintiffs a complaint instituting an action in the District Court for the Western District of Michigan. That complaint accused Manning of securities laws violations and fraudulent inducement of the Letter Agreement. Later on August 17, defendants removed the New York suit to the District Court for the Western District of New York and moved to dismiss or, in the alternative, to transfer the action to Michigan. Upon their appearance in the District Court in Rochester still later on August 17, the parties were advised that all motions would be heard the following day.

At the hearing on August 18 before Judge Telesca, the plaintiffs submitted an affidavit and documentary evidence in support of their request for injunctive relief. Defendants submitted their unverified complaint in the Michigan action. Judge Telesca heard oral argument on the motions of all parties. Plaintiffs, pressing their claim for an order enjoining the solicitation of proxies and the holding of the shareholders meeting, characterized their demand at the outset of the hearing as a request "for a temporary restraining order in aid of arbitration." They did not in terms request an order compelling arbitration.

Defendants argued primarily in support of their motion to dismiss the action or transfer it to Michigan. This relief, not pursued on this appeal, was sought on the ground that plaintiffs' claims were compulsory counterclaims to the Michigan complaint. The defendants made only oblique references to matters that might defeat the plaintiffs' claims for injunctive relief in aid of the arbitration. At one point, counsel for defendants asserted, "I don't believe that consideration [for the Letter Agreement] passed." Later he qualified this statement by saying, "I don't believe, as a technical matter, there is consideration for the agreement, certainly not cash consideration." He retreated still further when specifically asked by Judge Telesca, "What did he [Manning] agree to?" Counsel replied, "He agreed to assist E.C.D. in supporting the Ovonic Imaging System [an ECD subsidiary] offering. He was going to attempt to encourage investors to participate in the offering."

Later, in characterizing the complaint in Michigan, counsel for ECD and Ovshinsky stated that "we have, in fact, challenged the validity and included within that the scope of the November, 1986 letter agreement between the Ovshinskys and Mr. Manning."

At the conclusion of oral argument, Judge Telesca announced that he would reserve decision but would issue a ruling before the end of the day, which he did. That ruling recited the history of the dispute, the existence of the arbitration provision of the Letter Agreement, and the plaintiffs' claim of an arbitrable issue arising out of the proposed cumulative voting plan. The ruling denied the defendants' motion to dismiss or transfer. Turning to the plaintiffs' requests, Judge Telesca observed that because he saw no need "to hold a further hearing" he would issue "a preliminary injunction rather than a temporary restraining order." He then issued a preliminary injunction barring the defendants, pending the arbitration, from holding the scheduled shareholders meeting and barring all parties from soliciting proxies until arbitration was completed. The District Judge denied the plaintiffs' request for an order expediting the arbitration.

On September 1, 1987, plaintiffs renewed their effort to obtain expedited arbitration by filing a motion to compel the defendants to submit to expedited arbitration. The next day, September 2, defendants moved the District Court to "stay arbitration pursuant to its August 18, 1987 Order" pending appeal to this Court. As grounds for the stay, defendants alleged that the District Court had ordered arbitration (1) before ECD and Ovshinsky had had an opportunity to file an answer, (2) without an evidentiary...