Meckel v. Continental Resources Co.
| Decision Date | 01 April 1989 |
| Citation | 758 F.2d 811 |
| Parties | Fed. Sec. L. Rep. P 91,980 Wilfred J. MECKEL, II, Fred E. Brown, B.W. Robertson, William S. Hazen, John D. Lynch, David Watts, Theodorus V.W. Cushny, Ronald T. Schroeder, James H. Willis, as partners of J & W Seligman & Co., (on behalf of themselves and all former holders of the Florida Gas Company 5 3/4% Convertible Subordinated Debentures due |
| Court | U.S. Court of Appeals — Second Circuit |
Peter G. Eikenberry, New York City (Paul R. Levenson, Barthold & Eikenberry, New York City, of counsel), for plaintiffs-appellants.
Stephen Greiner, New York City (Jonathan P. Wolfert, Willkie Farr & Gallagher, New York City, of counsel), for defendants-appellees Continental Resources Co. and Fl. Exploration Co.
Nadine Strossen, New York City (Frederic M. Umane, Harvis & Zeichner, New York City, of counsel), for third-party defendant-appellee Citibank, N.A.
Before MANSFIELD, KEARSE and CARDAMONE, Circuit Judges.
The issue on this appeal is whether there was a genuine issue of disputed fact as to whether notice of redemption was mailed to debenture holders advising them of their option to convert their debentures into common stock by a certain date. Appellants, agents for several debenture holders, instituted an action alleging that the holders failed to take advantage of the favorable conversion option because the redemption notice was inadequate. The substance of their argument below was, in effect, that "a word to the wise is sufficient," and since some holders did not act timely in their own best interests, the "word" obviously must not have been sent. The district court found that the notice given fully satisfied the legal obligations of those whose duty it was to give notice and granted summary judgment dismissing the complaint. We affirm.
Plaintiffs-appellants are the nine general partners of J & W Seligman & Co. (Seligman or Seligman partners), a New York brokerage firm, who brought suit in the United States District Court for the Southern District of New York (Stewart, J.) against Florida Gas Company (Florida Gas) and its successor Continental Resources Company and Florida Exploration Company (jointly referred to as Continental) and against Citibank, N.A., defendants-appellees. The undisputed facts reveal that on April 1, 1969 Florida Gas issued $15,000,000 of 5 3/4% convertible, subordinated debentures, redeemable at any time, due 20 years later in 1989. The conversion price was $23.41 per share of common stock. Citibank agreed to act as trustee for the debenture holders and entered into an indenture agreement with Florida Gas dated April 1, 1969. Both the indenture agreement and the debentures themselves provided for notice to be given by a mailing. The debenture called for "notice by mail." Section 1105 of the indenture stated:
Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Debentures to be redeemed at his last address appearing in the Debentures Register.
In June 1979 Continental Resources Company and Florida Gas agreed to merge. Incident to the merger, Florida Gas voted to redeem all outstanding 1969 debentures. It thereupon instructed Citibank to prepare and mail a redemption notice to debenture holders. The notice gave debenture holders until August 20, 1979, to convert their debentures into common stock.
Citibank claims that on July 16, 1979 it sent the redemption notice by first-class mail to the approximately 190 debenture holders. The market price of Florida Gas common stock on the New York Stock Exchange at the end of July 1979 was $48 per share, more than double the $23.41 per share conversion price available for debenture holders. As of August 20, 1979 slightly over one-half million dollars in debentures remained unconverted and 54 holders of these instruments had not exercised their conversion option. The Seligman partners sought to recover for the failure of three of their customers, for whom they were acting as agents, to convert their $42,000 worth of debentures into common stock. Seligman's damages arose from its voluntarily crediting these three customers' accounts for any losses they may have sustained, and not from any direct loss Seligman incurred as a debenture holder. 1
The gravamen of the complaint is that defendants failed to provide adequate notice of redemption. The Seligman partners allege breach of fiduciary duty, unjust enrichment, breach of the indenture agreement and various violations of securities laws, including violation of Rule 10b-5. The partners also claim that the indenture, which provided that notice of a redemption need only be sent by first-class mail, is an unenforceable contract of adhesion. The complaint further asserts that Florida Gas breached certain rules of the New York Stock Exchange (NYSE or Exchange) by failing to issue a press release and provide general publicity concerning the redemption. Finally, the partners sought class certification on behalf of all those debenture holders who did not timely convert.
The record before us demonstrates that on July 16, 1979 Florida Gas directed Citibank to call the entire outstanding series of debentures, and that August 20, 1979 was set as the Redemption Date. In response to this request, a Citibank employee sent a notice of redemption to each holder by first-class mail, postage prepaid. Seligman was included in the mailing. Proof of mailing of the notice is established by the affidavit of a Citibank employee who "caused" the notice to be mailed, and by the affidavit and deposition of a Citibank manager who testified about the regular procedures Citibank used to mail notices to debenture holders.
The manager's affidavit and deposition testimony described the procedures Citibank used to assure proper mailing. After obtaining a mailing list from a computer registry, Citibank used four methods to verify that the number of labels, envelopes, stuffed envelopes and stamped envelopes conformed to the count of holders as of the record date. First, under the regular office procedure a computer generates a complete set of mailing labels based upon Citibank's registry of debenture owners and nominees. These labels are reviewed and matched against a separate printout. Second, after the employees of the mail room label the envelopes by machine, the machine counts the number of envelopes labelled and that number is checked against the number of labels delivered to the mail room. Third, a different machine encloses a notice of redemption in each envelope, which is sealed and metered. The number of envelopes sealed and metered is then compared with the number generated by the labelling machine, the computer printout, and the number of labels generated. The final check is when the postage meter is read to verify the number of envelopes to be mailed. The notices are then delivered to the Post Office. Seligman does not contend that its name and address were not accurately reflected in the computer registry. Nor is there evidence that any of the notices were returned to Citibank from the Post Office. Out of approximately 190 debenture holders, 54, or almost 30%, failed to convert prior to the redemption date.
Appellants' counsel conducted an informal survey of the 53 other debenture holders (in addition to Seligman) who failed to convert. A copy of a class action complaint accompanied each questionnaire. The purpose of the survey was to determine how many, if any, holders failed to convert because they had not received the notice. Accepting the district court's characterization of the results of the survey, we find that Seligman presented "an unsigned list of fourteen individual debenture holders, half of whom are described as stating that they never received notice and half of whom are described as stating that they have no recollection of receiving notice." Meckel v. Continental Resources Co., 586 F.Supp. 407, 409 (S.D.N.Y.1984).
On April 16, 1984 Judge Stewart issued a decision granting summary judgment to Continental and Citibank. Id. at 411. He held that the indenture only required that the notice be sent by first-class mail, that there was no genuine dispute of the fact that Citibank had made a proper mailing, that there was no basis for imposing a duty higher than that imposed by the indenture, and that neither Florida Gas nor Citibank was required to give actual notice. Accordingly, the district judge dismissed all of plaintiffs' claims that were based on inadequate notice. Judge Stewart also dismissed the claims relating to alleged violations of the Rules of the NYSE. He found that the Rules did not apply to these debentures because they were neither listed for trading on the Exchange, nor the subject of a listing application, and held it unnecessary to consider whether a private right of action exists under the Exchange rules. The denial of class certification, which had occurred a year earlier on April 25, 1983, was based upon the district court's findings that the purported class did not fall within either of the subdivisions of Fed.R.Civ.P. 23(b)(1) or (b)(3) and that Seligman's claims lacked the typicality required by Fed.R.Civ.P. 23(a)(3). Seligman's appeal challenges the denial of class certification and the grant of summary judgment in favor of appellees Continental and Citibank and the resulting dismissal of Seligman's complaint.
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