Mendell v. Greenberg

• Citation: 715 F. Supp. 85
• Decision Date: 16 June 1989
• Docket Number: No. 81 Civ. 3483 (JES).,81 Civ. 3483 (JES).
• Parties: Ira L. MENDELL, on behalf of himself and others similarly situated, Plaintiff, v. George J. GREENBERG, Frederick R. Adler, James R. Swartz, Anita Loehmann Stafford, Donald H. Balleisen, Allan S. Gordon, Christopher D. Illick, Cecily C. Selby, Kenneth J. Thornhill, John D. Mack, AEA Investors Inc., LHI Inc., LH Investors Inc., Loehmann's Inc., and Drexel Burnham Lambert Incorporated, Defendants.
• Court: U.S. District Court — Southern District of New York

715 F. Supp. 85

Ira L. MENDELL, on behalf of himself and others similarly situated, Plaintiff, v. George J. GREENBERG, Frederick R. Adler, James R. Swartz, Anita Loehmann Stafford, Donald H. Balleisen, Allan S. Gordon, Christopher D. Illick, Cecily C. Selby, Kenneth J. Thornhill, John D. Mack, AEA Investors Inc., LHI Inc., LH Investors Inc., Loehmann's Inc., and Drexel Burnham Lambert Incorporated, Defendants.

No. 81 Civ. 3483 (JES).

United States District Court, S.D. New York.

June 16, 1989.

Kaufman Malchman Kaufmann & Kirby, New York City, for plaintiff; Irving Malchman, of counsel.

Fulbright Jaworski & Reavis McGrath, New York City, for defendants George J. Greenberg, Frederick R. Adler, James R. Swartz, Allan S. Gordon, Christopher D. Illick and Cecily C. Selby; David C. Birdoff, Neil G. Sparber, Maria Savio, of counsel.

Kelley Drye & Warren, New York City, for defendants AEA Investors Inc., LHI Inc., LH Investors Inc., LH Holdings Inc. and Loehmann's Inc.; Arnold S. Klein, Kimberly Unger, of counsel.

Hughes Hubbard & Reed, New York City, for defendants Anita Loehmann Stafford and John D. Mack; Robert W. Brundige, Jr., Stuart Hendel, of counsel.

OPINION AND ORDER

SPRIZZO, District Judge:

In this action, plaintiff Ira L. Mendell alleges that a proxy statement issued with respect to a merger between Loehmann's, Inc. ("Loehmann's") and a company organized and controlled by AEA Investors Inc. ("AEA") was false and misleading due to the misstatement or omission of material facts in violation of section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(a), and Rule 14a-9, 17 C.F.R. § 240.14a-9. Defendants move for summary judgment and sanctions pursuant to Fed.R.Civ.P. 11, and plaintiff moves to conditionally strike defendants' motion and cross-moves for partial summary judgment. For the reasons that follow, defendants' motion for summary judgment is granted and all other motions are denied.

The facts relevant to this case which were stated in the Court's prior opinions will not be restated here. See 612 F.Supp. 1543 (S.D.N.Y.1985) ("Mendell I"); 113 F.R.D. 680 (S.D.N.Y.1987) ("Mendell II"). Briefly, in Mendell I, the Court dismissed the complaint in part, but refused to dismiss plaintiff's claims that the proxy statement was materially misleading in failing to disclose (1) that the Loehmann family shareholders had an urgent need for cash to pay estate taxes and (2) that there were "handshake" agreements between the president of Loehmann's, George J. Greenberg, and AEA regarding an increase in his compensation and benefits after the merger. See Mendell I, supra, 612 F.Supp. at 1553-54. The defendants now contend that summary judgment must be granted as to those claims as well.¹

DISCUSSION

I. Urgent Need For Cash

Charles Loehmann, the founder of Loehmann's, died in 1977. His wife, Mrs. Anita T. Loehmann, elected to have his estate taxes paid over a fifteen year period pursuant to 26 U.S.C. § 6166. Under this election, only the interest on Mr. Loehmann's estate taxes was due for five years, with the principal payable in ten annual installments. Mrs. Loehmann died in March of 1980. At this point, the Loehmanns' daughter, Mrs. Anita Loehmann Stafford ("Mrs. Stafford"), became the fiduciary of her parents' estates. She also had the option of electing the section 6166 deferral for Mrs. Loehmann's estate, which would have enabled the estate to pay interest for five years and then pay the principal in ten annual installments.

Defendants admit that the Loehmann family faced a cash shortfall because the aggregate amount of taxes owed by the estates exceeded the amount of liquid assets available to them by over four million dollars, see Defendants' 3(g) Statement at ¶¶ 37, 48, 50, 53, and plaintiff asserts that the shortfall was even greater than that stated by defendants. However, the deferral election under section 6166 was available to Mrs. Stafford, so that the principal due would not have to be paid for five years, although interest would be due during that period. Given that circumstance, even assuming that at some point in the future the estate might have to sell stock or use some other means to pay the deferred taxes, since at the time of the merger the principal on the estate taxes could have been deferred, no reasonable jury could conclude that at that time the Loehmann family had an urgent need for cash to pay estate taxes.²

Plaintiff's arguments that a deferral was not feasible because the estate faced the danger of high interest rates in the upcoming years and because the estate would lose a tremendous tax saving obtainable by selling the shares in a block if the estate taxes were not paid immediately are not persuasive. Even assuming arguendo that it would have been more profitable for the estate to sell the shares in a block and that tax benefits could thereby have been obtained, that circumstance could not rationally support an inference that there was an urgent need for cash and that Mrs. Stafford was so advised.³

Moreover, regardless of whether or not in fact there was an urgent need for cash there is absolutely no evidence that Mrs. Stafford was ever told of such a need. Mrs. Stafford's advisors testified that they never advised her that there was an urgent need for cash, and there is no evidence to the contrary. See Affidavit of Jeffrey S. Maurer ("Maurer Aff.") at ¶ 10; Affidavit of James G. Pressly, Jr. ("Pressly Aff.") at ¶ 6; Deposition of James G. Pressly ("Pressly Dep."), Plaintiff's Exhibit ("PX") 16 at 1340-41. It follows that no rational jury could find that Mrs. Stafford was ever in fact told that the estate had an urgent need for cash. In the absence of such proof there can be no genuine issue of material fact with respect to Mrs. Stafford's liability for a false and misleading statement.

There is evidence, which on this motion for summary judgment must be accepted as true, that Greenberg told Dr. Walter J. Henry that the Loehmanns were supporting the merger because they needed the money for estate taxes. See Deposition of Walter J. Henry, M.D., PX 12 at 779, 790-92. This evidence, however, would be admissible, if at all, only against Greenberg, as an admission. See Fed.R.Evid. 801(d)(2). In any event, it could not support any rational jury finding in plaintiff's favor even against Greenberg in light of all the other evidence establishing that there was in fact no urgent need for cash. In sum, Greenberg's erroneous belief that there was such a need is legally insufficient to establish a claim against him, especially in the absence of any proof that this factor was even considered by the Board of Directors in approving the merger. See Berg v. First American Bankshares, Inc., 796 F.2d 489, 497 (D.C.Cir.1986). Therefore, summary judgment must be granted as to all defendants on the estate tax claim.

Plaintiff also cross-moves for partial summary judgment, asserting that the fact that the Loehmann estate would be receiving a tremendous tax benefit if their stock were sold in a block was in itself a material omission as a matter of law. The Court has already ruled that the law does not require proxy materials to state that particular shareholders may have differing tax consequences flowing from a financial transaction and what those consequences are. See Mendell I, supra, 612 F.Supp. at 1553 n. 13. The Court adheres to that ruling. See Lewis v. Oppenheimer & Co., 481 F.Supp. 1199, 1205 (S.D.N.Y.1979); Lewis v. Dansker, 357 F.Supp. 636, 642-43 (S.D.N.Y.1973), modified on other grounds, 68 F.R.D. 184 (S.D.N.Y.1975).

The cases relied on by plaintiff are legally and factually inapposite. These cases involved situations in which an insider was receiving a special benefit flowing from the merger itself or in which the merging corporation itself derived a tax benefit from the transaction. They were not cases in which the insider's tax benefit was obtained only because of that insider's particular financial situation. See Chris-Craft Indus., Inc. v. Piper Aircraft Corp., 480 F.2d 341, 365-66 (2d Cir.1973); Valente v. PepsiCo. Inc., 454 F.Supp. 1228, 1245 (D.Del.1978); see also TBK Partners v. Shaw, 689 F.Supp. 693, 700 (W.D.Ky.1988). Moreover, as stated in the Court's prior opinion, the proxy statement specifically advised shareholders to consider their own tax situation. See Mendell I, supra, 612 F.Supp. at 1553 n. 13. Therefore, plaintiff's cross-motion for summary judgment must be denied.

II. The "Handshake" Agreements

Plaintiff has also failed to come forth, as he must, with any evidence sufficient to support a rational jury finding that there were any so called "handshake" agreements between Greenberg and AEA with respect to Greenberg's benefits and compensation prior to the time that the proxy statement was issued. There is thus no evidence to support his claim that the proxy statement falsely stated that

Neither Mr. Greenberg nor any other present director or officer of the Company owns beneficially or will acquire an equity or debt interest in AEA, LHI, LH Holdings or LHI Investors.

See PX 101 at A2869. Plaintiff's claim of falsity rests entirely upon the fact that after the merger, Greenberg was permitted to purchase stock in LH Investors, Inc., see Defendants' 3(g) Statement at ¶ 80, which he asserts raises an issue of fact as to whether there was an agreement for this purchase prior to the merger.

However, the president of AEA testified that it was the policy of the company to offer stock incentives to management. See Deposition of Carl B. Hess, PX 1 at 35. In addition, internal documents from AEA indicate that the present management of Loehmann's would be offered certain benefits post-merger. See PX 82 at A2523; Plaintiff's Memorandum of Law dated June 3, 1988 at 31A-31B; see also Deposition of Ronald L. Kominski, PX 14 at 921-24.

While subsequent conduct may in some circumstances permit a rational inference of a prior agreement, that inference is...