McGuire v. Russell Miller, Inc.

• Decision Date: 13 July 1993
• Docket Number: Nos. 1478,1647,D,s. 1478
• Citation: 1 F.3d 1306
• Parties: , Fed. Sec. L. Rep. P 97,661 Richard A. McGUIRE, individually and derivatively on behalf of John P. Tilden, Ltd., Plaintiff-Appellee, Cross-Appellant, v. RUSSELL MILLER, INC. and Russell Miller, Inc. of New York, Defendants, J. Robert Wilson, Gerald I. Benson, John J. McGowan and John P. Tilden, Ltd., Defendants-Appellants, Cross-Appellees. RUSSELL MILLER, INC. OF NEW YORK, Counter-Claimant, v. RUSSELL MILLER, INC. and John P. Tilden, Ltd., Counter-Defendants. ockets 93-7011, 93-7031.
• Court: U.S. Court of Appeals — Second Circuit

Page 1306

1 F.3d 1306

62 USLW 2062, Fed. Sec. L. Rep. P 97,661

Richard A. McGUIRE, individually and derivatively on behalf

of John P. Tilden, Ltd., Plaintiff-Appellee, Cross-Appellant, v. RUSSELL MILLER, INC. and Russell Miller, Inc. of New York, Defendants,

J. Robert Wilson, Gerald I. Benson, John J. McGowan and John

P. Tilden, Ltd., Defendants-Appellants, Cross-Appellees.

RUSSELL MILLER, INC. OF NEW YORK, Counter-Claimant, v. RUSSELL MILLER, INC. and John P. Tilden, Ltd., Counter-Defendants.

Nos. 1478, 1647, Dockets 93-7011, 93-7031.

United States Court of Appeals, Second Circuit.

Argued May 18, 1993.

Decided July 13, 1993.

William D. Wall, Uniondale, NY (F. Judith Hepworth, Dina Talmor Miller, Farrell, Fritz, Caemmerer, Cleary, Barnosky & Armentano, P.C., of counsel), for defendants-appellants, cross-appellees.

Frank Ambrosino, Babylon, NY (Irving Like, Reilly, Like, Tenety & Ambrosino, of counsel), for plaintiff-appellee, cross-appellant.

Before: WINTER and JACOBS, Circuit Judges, and MUKASEY, District Judge. ¹

MUKASEY, District Judge:

Defendants appeal and plaintiff cross-appeals from a judgment of the United States District Court for the Southern District of New York (Sweet, J.) that awarded $313,807 to defendants on their counterclaims arising from misrepresentations by plaintiff during negotiation of a merger of two insurance companies--Richard A. McGuire Associates, Inc. ("McGuire"), owned by plaintiff Richard A. McGuire, and John P. Tilden, Ltd. ("Tilden"), one of the defendants. Defendants contend that the judgment does not accurately reflect, and is inconsistent with, the jury's responses on a special verdict form to questions about damages and attorneys' fees. For the reasons stated below, we find that the judgment is consistent with the jury's answers as to damages, but inconsistent with the jury's answer as to attorneys' fees. Therefore, the judgment is affirmed in part, reversed in part, and remanded.

I.

McGuire and Tilden merged on July 31, 1985. To effect the merger, plaintiff Richard A. McGuire received 30 shares--roughly 13 percent--of Tilden stock in return for his 100 percent interest in McGuire. The parties had agreed to this exchange rate based on each side's representations as to the companies' relative values.

After the merger, plaintiff worked at Tilden until he was fired on September 18, 1987. On November 16, 1987 plaintiff brought suit in the Southern District of New York, individually and derivatively on behalf of Tilden, to rescind the merger. He alleged that defendants had misrepresented the value of Tilden in violation of Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), as implemented by Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1992). Also, plaintiff asserted state law claims for breach of contract, securities fraud, common law fraud, negligence, and breach of fiduciary duty.

Defendants counterclaimed that plaintiff had misrepresented the value of McGuire in violation of Sec. 10(b), and asserted state law counterclaims for breach of warranty, common law fraud, negligent misrepresentation, and breach of indemnity agreement. Judge Sweet dismissed plaintiff's complaint by summary judgment, but reserved defendants' counterclaims for trial.

During a six-day trial defendants presented evidence that they had overpaid plaintiff in the merger. On July 8, 1992 the jury awarded $313,807 to defendants. The jury recorded its verdict on a 25-question special verdict form. In response to questions 1-24, the jury computed defendants' damages as follows: (1) no damages for breach of warranty; (2) $108,000 for violations of Rule 10b-5; (3) $51,034 for common law fraud; (4) $24,773 for negligent misrepresentation; and (5) $130,000 for breach of indemnity agreement. The jury reported, as Judge Sweet had instructed, that each award was for damages not included in any other award.

The final question, number 25, asked the jury: "When the merger took place, how many shares of John P. Tilden stock was McGuire Associates worth?" The jury responded that McGuire was worth only 10 shares, not the value of 30 shares Tilden expected to receive. At the charging conference Judge Sweet had eliminated the second part of Question 25--"At the time, what was the dollar value of these shares of stock?"--and the jury therefore made no finding with respect to the value of the 10 shares. On July 27, 1992 the district court approved a judgment for $313,807 but refused to award 20 shares of Tilden stock, or the dollar value of those shares. The court found that the jury's award of $313,807 on four of the five counts constituted the entire verdict.

Question 22 of the special verdict form asked the jury:

"Did McGuire agree, in the Merger Agreement or in the surrounding facts and circumstances, to indemnify Tilden for: the breach of any warranty in connection with the merger agreement; any claim brought against Tilden relating to the Premium Trust Account; or all costs, including attorneys' fees, arising out of any claim arising out of the transaction?"

(emphasis added). The indemnification provision of the merger agreement between the parties had provided as follows:

8. Indemnification

8.1 Indemnification by McGuire and the McGuire Shareholder. The McGuire Shareholder hereby agrees to indemnify, defend, and hold Tilden harmless after the Closing Date from and against any all of the following:

A. The breach by McGuire of any warranty or representation made by McGuire pursuant to or in connection with this Agreement; ...

E. All costs, assessments, judgments and demands (including costs of defense, settlement, compromise, and reasonable attorney's fees) arising out of any claim, or the defense, settlement or compromise thereof, made with respect to paragraphs 8.1A through 8.1D.

The jury's affirmative answer to question 22 meant that, based on the indemnification provision, defendants should recover their attorneys' fees.

The verdict form did not include a question about the amount of such fees. Rather, question 24 asked: "For what amount, if any, exclusive of attorney's fees must McGuire indemnify Tilden?" (emphasis added). Accordingly, the jury did not compute the amount of fees defendants were entitled to recover. Based on the jury's findings, the district court refused to award attorneys' fees. It held that

[w]hile the indemnity provision [of the merger agreement] clearly contemplated inclusion of attorneys' fees, and the jury so held, no proof as to the amount of any fees was presented. No basis, therefore, for such an award was presented.

McGuire v. Wilson, No. 87 Civ. 8156, slip op. at 2, 1992 WL 380497 (S.D.N.Y. Dec. 8, 1992).

Defendants argue that, based on the jury's response to question 25, they should recover the value on the merger date of 20 shares of Tilden stock--approximately $730,000 based on a valuation admitted into evidence at trial. They argue that the $313,807 award was either part of that value or compensation for separate and distinct losses. Defendants argue further that, based on the jury's response to question 22, they should receive reasonable attorneys' fees. Plaintiff argues that defendants are entitled only to the judgment of $313,807.

II.

These facts and arguments present two questions: (1) should defendants recover more than the $313,807 judgment, so as to account for the value of the 20 shares of Tilden stock they overpaid for McGuire? and (2) should defendants receive attorneys' fees? The answers to those questions depend upon the meaning of the jury's answers to questions on the special verdict form. For the reasons stated below, we find that the district court correctly refused to award additional damages based on the jury's response to question 25, but erred in denying attorneys' fees.

Value of Shares of Tilden Stock

The parties agree that, according to the law of this Circuit, defendants should recover the difference between what they paid for McGuire and what McGuire was actually worth at the time of merger. See, e.g., Sharma v. Skaarup Ship Management Corp., 916 F.2d 820, 825-26 (2d Cir.1990), cert. denied, 499 U.S. 907, 111 S.Ct. 1109, 113 L.Ed.2d 218 (1991). That difference can be computed in one of two ways--directly, based on the misrepresented and actual values of McGuire measured in dollars, or indirectly, based on the misrepresented and actual values of McGuire measured in shares of Tilden stock.

The indirect method would have been appropriate if defendants had sought return of Tilden's shares rather than money damages; in that event defendants would have been entitled to the difference between 30 shares of Tilden and the number of shares of Tilden that McGuire was worth at the time of merger. However, defendants abandoned their rescission theory before trial and sought only money damages. The district court held that although "[t]he question of rescission recurred at various times during the trial, ... ultimately Tilden elected to receive damages," McGuire v. Wilson, at 2, and counsel for defendants admitted as much at oral argument.

Consequently, Judge Sweet attempted to free the jury from the difficulty of computing damages based solely on the value of shares of Tilden stock. First, he instructed the jury that for each of defendants' five claims the jury should compute the difference between the misrepresented and actual values of McGuire at the time of merger. Second, the special verdict form asked the jury to record that difference for each claim. Third, Judge Sweet cautioned the jury to consider each claim separately and not to award double recovery for any misrepresentation by plaintiff.

Moreover, the special verdict form specified an identical list of five misrepresentations for each of the claims for violations of Rule 10b-5, common law fraud, negligent misrepresentation, and breach of the indemnity agreement. For each of those claims, the form asked whether plaintiff had made any or all of the five...