Nottingham Partners v. Trans-Lux Corp.

• Decision Date: 07 January 1991
• Docket Number: No. 90-1859,TRANS-LUX,90-1859
• Citation: 925 F.2d 29
• Parties: Fed. Sec. L. Rep. P 95,923 NOTTINGHAM PARTNERS, et al., Plaintiffs, Appellants, v.CORPORATION, et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 29

925 F.2d 29

Fed. Sec. L. Rep. P 95,923

NOTTINGHAM PARTNERS, et al., Plaintiffs, Appellants, v. TRANS-LUX CORPORATION, et al., Defendants, Appellees.

No. 90-1859.

United States Court of Appeals, First Circuit Heard Jan. 7, 1991.

Decided Feb. 7, 1991.

Carolyn Grace, with whom Michelle H. Blauner, and Shapiro, Grace & Haber were on brief, Boston, Mass., for plaintiffs, appellants.

John B. Sherman, with whom Weisman, Celler, Spett & Modlin, New York City, Grover S. Parnell, Jr., and Davis, Malm & D'Agostine were on brief, Boston, Mass., for defendants, appellees.

Before SELYA, Circuit Judge, ALDRICH and BOWNES, Senior Circuit Judges.

SELYA, Circuit Judge.

Nottingham Partners and Deerfield Partners, plaintiffs below, invoking federal question jurisdiction, 28 U.S.C. Sec. 1331, brought suit for securities law violations allegedly committed by Trans-Lux Corporation and its directors. After a parade of intervening events, the United States District Court for the District of Massachusetts ruled that the defendants were entitled to summary judgment because the plaintiffs' claims were extinguished at the time a shareholders' class action was resolved in the Delaware courts. Sparing little in the way of impassioned rhetoric, plaintiffs appeal. We affirm.

I. STATEMENT OF THE CASE

In March 1986, Trans-Lux issued a proxy statement whereby it sought, amongst other things, to set the stage for a shareholder vote on a recapitalization plan and various amendments to its certificate of incorporation. The measures were of the genre known as "shark repellents," designed to make a hostile takeover more difficult. They were approved at the 1986 annual meeting. Shortly thereafter, Trans-Lux announced the sale of twenty-four movie theatres for $15,000,000.

Two years passed before plaintiffs filed the instant action. Their complaint sought money damages as well as equitable redress. In it, they charged that the defendants had violated the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78n, and Rule 14a-9 promulgated thereunder, as well as state statutory and common law, by not disclosing to shareholders, when the vote on the recapitalization plan and certificate amendments was in prospect, the ongoing negotiations for the cinema sale. The tally probably would have been reversed, appellants theorized, had the shareholders known of the negotiations and realized just how attractive a takeover target Trans-Lux might be, given the ready cash that could so easily be generated.

Within a few weeks, a Trans-Lux shareholder, George W. Dana, filed a class action in the Delaware Chancery Court. The suit asserted myriad violations of state law (including disclosure shortcomings in the March 1986 proxy statement) relating to the certificate amendments and recapitalization plan. In due season, an accord was reached. Notice of the proposed settlement was sent to all prospective class members, appellants included. At the ensuing hearing, held on August 4, 1988, appellants appeared and objected vehemently to the proposed settlement. The court nevertheless certified the class, ¹ approved the pact virtually in toto, overruled appellants' objections, refused to allow appellants to opt out of the class, and entered a comprehensive final decree. The court-approved settlement did not require the payment of damages to the shareholders. Rather, it provided for annulment of the certificate amendments and mandated other changes in the governance of the corporation. Part of the settlement, incorporated in the decree, purported to release all claims, by whomsoever brought, that "have been, could have been, or in the future might have been asserted" against Trans-Lux or its directors "in connection with or that arise now or hereafter out of" any matters or transactions referred to in the complaint or the settlement documentation.

Appellants prosecuted an appeal to the Delaware Supreme Court. In a long and erudite opinion, the court rebuffed each of appellants' asseverations. See Nottingham Partners v. Dana, 564 A.2d 1089 (Del.1989). The court held in substance that (1) inasmuch as Dana's action was primarily equitable in nature, class certification was available despite the "incidental" claim for monetary relief, id. at 1094-97; (2) the appellants were lawfully denied egress from the class, id. at 1097-1101; (3) the class settlement was, as the vice chancellor had found, fair, reasonable and adequate, id. at 1101-04; and (4) because appellants' federal law claims arose out of the same nucleus of operative fact as the claims prosecuted in Dana, the vice chancellor possessed, and appropriately exercised, the power to approve a release that included those claims within its ambit, id. at 1105-07. Lack of jurisdictional competency--the fact that a Delaware state court could not have gained subject matter jurisdiction over appellants' federal securities law claims--did not bar the inclusion of those claims within the sweep of the release. Id. at 1104-05.

After the state supreme court ruled, Trans-Lux and its directors moved for summary judgment in the federal district court. They argued that the Dana release, incorporated in the Delaware decree, barred further proceedings below. The district court agreed, spurning appellants' contention that a state court settlement was, almost by definition, impuissant to work a release of exclusively federal claims. Finding that the challenged release validly encompassed the federal claims, and that the latter were rooted in the same transaction as the claims settled and released in Dana, the court allowed defendants' motion. This appeal ensued.

The jurisprudence of Rule 56 requires that we afford the judgment below plenary review. See, e.g., Garside v. Osco Drug, Inc., 895 F.2d 46, 48 (1st Cir.1990); Mack v. Great Atlantic and Pacific Tea Co., 871 F.2d 179, 181 (1st Cir.1989). At this stage of the case, however, the parties are in rather close agreement as to the pertinent facts. Hence, we need not comb through the usual haystack in search of a factual needle which is arguably "genuine" and "material." See, e.g., Garside, 895 F.2d at 48 (discussing summary judgment standard). The current dispute centers primarily on matters of law, to which we turn without further ado.

II. ANALYSIS

A.

It is beyond cavil that a suit can be barred by the earlier settlement of another suit in either of two ways: res judicata or release. See Seagoing Uniform Corp. v. Texaco, Inc., 705 F.Supp. 918, 920-24 (S.D.N.Y.1989). The defenses are separate and distinct. Cf., e.g., Fed.R.Civ.P. 8(c) (enumerating affirmative defenses). Unhappy with the district court's map of the case's topography, appellants strive mightily to transmogrify this appeal into an exploration of res judicata (claim preclusion) rather than release and issue preclusion. Their expedition, we suggest, is misguided: the body of claim preclusion law lies well beyond the case's proper compass. The release contained in the Dana settlement, by its terms, met all the criteria necessary to engage the gears of the release defense for purposes of this suit: it (1) applied to appellants, (2) encompassed the claims asserted below, and (3) was legally enforceable. Since further prosecution of appellants' federal suit is foreclosed by the release defense, see infra, it would be pointless to discuss at any length whether their action is also claim-precluded.

Notwithstanding the foregoing, we feel some compulsion to address appellants' somewhat startling attempt to merge the doctrines of res judicata and release by asserting, without meaningful citation to authority, that since Nottingham and Deerfield were not named representatives in the class action, and did not consent to the release, then the release cannot have an effect against them which is greater than the res judicata effect of the judgment in which the release was embedded. This argument misconceives the very nature of a Rule 23(b)(2) class action. Once the class action court, affording the process that is due, determines that an objecting party will not be allowed to opt out of a Rule 23(b)(2) class, the objector becomes subject to a resulting settlement, including any release granted therein, to the same extent as any designated class representative or consenting class member.

B.

Appellants do not dispute that the Delaware courts lawfully defined a class within whose definitional parameters they fall. The rest follows inexorably. Appellants received notice of the Delaware proceedings. They were given, and vigorously exercised, a constitutionally adequate opportunity to be heard. They litigated, and lost on, the issues which we have mentioned: that the settlement would extend class-wide; that it was fair; and that appellants could not opt out of it. See Dana, 564 A.2d at 1094-1104. The appellants thus became collaterally estopped from relitigating these issues in the federal courts. The defense of release was, therefore, fully applicable.

The legal principle is straightforward. It is black letter law that collateral estoppel can apply to preclude the relitigation in federal court of issues previously determined in state court. See Allen v. McCurry, 449 U.S. 90, 95, 101 S.Ct. 411, 415, 66 L.Ed.2d 308 (1980). In ascertaining whether issue preclusion flows as a consequence of previous state court litigation, a federal court must look to state law. See id. at 96, 101 S.Ct. at 415; Roy v. City of Augusta, 712 F.2d 1517, 1520 (1st Cir.1983); General Foods Corp. v. Massachusetts Dept. of Public Health, 648 F.2d 784, 786-87 (1st Cir.1981). Delaware follows the usual praxis: under Delaware law a judgment in one case is conclusive in a subsequent (and different) case as to a question of fact actually litigated by the parties and determined in the first action. See E.B.R. Corp. v. PSL Air Lease Corp., 313 A.2d 893, 894 (Del.1973); see also Winkler v. Balentine, 254 A.2d 849, 851 (Del.1969). Thus, appellants are collaterally...