Papilsky v. Berndt, 759
| Decision Date | 01 August 1972 |
| Docket Number | Docket 72-1052.,No. 759,759 |
| Citation | 466 F.2d 251 |
| Parties | Paulette PAPILSKY, Plaintiff-Appellee, v. Alvin H. BERNDT et al., Defendants-Appellants, and Carl W. Knobloch et al., Defendants. |
| Court | U.S. Court of Appeals — Second Circuit |
Abraham L. Pomerantz, New York City (Mordecai Rosenfeld, William E. Haudek, Daniel W. Krasner and Pomerantz, Levy, Haudek & Block, New York City, on the brief), for plaintiff-appellee.
Judson A. Parsons, Jr., New York City (Hugh N. Fryer, Keith E. McClintock, Jr., Patricia A. Nelson and Dewey, Ballantine, Bushby, Palmer & Wood, New York City, on the brief), for defendants-appellants.
Before LEVENTHAL,* FEINBERG and TIMBERS, Circuit Judges.
Certiorari Denied December 18, 1972. See 93 S.Ct. 689.
The essential issue on this appeal is whether dismissal of a stockholder's derivative suit, without notice to nonparty stockholders, under Fed.R.Civ.P. 37(b) (2) (C), for failure to answer interrogatories, operates as a bar to an identical cause of action asserted by another stockholder in a subsequent derivative suit.
Plaintiff Paulette Papilsky is a shareholder of defendant Affiliated Fund, Inc. and brought this action derivatively on behalf of Affiliated, a diversified open-end investment company registered under the Investment Company Act of 1940. Defendant Lord, Abbett & Co. serves as Affiliated's investment adviser and as its principal underwriter. Defendants Driscoll and Berndt are partners in Lord, Abbett and officers and directors of Affiliated. Papilsky's complaint alleged that these defendants failed to recapture, and to credit Affiliated with, allegedly recapturable portions of brokerage commissions paid on portfolio transactions and asserted that this has resulted in the payment of higher management fees to Lord, Abbett, all in violation of the federal securities laws.1 Shortly after the complaint was served, defendants Driscoll, Berndt and Lord, Abbett served and filed a motion seeking summary judgment on the ground of res judicata. They alleged that the claims asserted by Papilsky were identical to those asserted in a previous derivative suit against Driscoll, Berndt, Lord, Abbett and other defendants entitled White and Bernstein v. Driscoll, et al., 67 Civ. 98 (S.D.N.Y., filed Dec. 9, 1968) (the "White action"), which had been dismissed for failure to answer interrogatories. Judge Wyatt on November 17, 1971 denied defendants' motion for summary judgment, 333 F. Supp. 1084, but granted the necessary certification to appeal pursuant to 28 U.S.C. § 1292(b) (1970), as did we on December 6, 1971. For the reasons stated below, we affirm the denial of the motion for summary judgment.
The White action was a consolidation of two separate stockholders' derivative actions, the first commenced in January of 1967 and the second in February of 1968. As the district court found, "it is undisputed that the claims in the White action are the same as those now asserted in the case at bar." 333 F. Supp. at 1085. There is no suggestion, however, that the White plaintiffs or their attorneys are in any way connected with the instant case.
On January 14, 1969, the district court entered orders directing the White plaintiffs to answer interrogatories on February 15, 1969, which date was extended to March 4, 1969. The interrogatories ordered to be answered requested the White plaintiffs to specify the claimed violations of law and sought details as to each claimed violation. On March 31, 1970, more than a year after the deadline for answering the interrogatories, the White plaintiffs filed their answers. The defendants considered these unsigned and unverified answers to be unacceptable and returned them to plaintiffs. Thereafter, on December 10, 1970, the White plaintiffs served by mail purported answers to the interrogatories. The defendants also found these responses to be inadequate.
On February 3, 1971, the White defendants brought on by order to show cause a motion pursuant to Fed.R.Civ. P. 37(b) (2) (C) seeking dismissal of the action on the ground of the plaintiffs' failure to answer the interrogatories as required by the district court's order of January 14, 1969.2 The White plaintiffs opposed the granting of this motion.
Judge Wyatt referred the motion to a Special Master. The Master concluded that plaintiffs' long delayed answers to the interrogatories were "totally inadequate" and that "the deficiency of the answers to interrogatories and the delay in serving them demonstrates that plaintiffs are not serious in prosecuting this action." Accordingly, the Master recommended that the White action be dismissed.
On March 16, 1971, Judge Wyatt entered an order granting defendants' motion and dismissing the action as to all defendants served other than the nominal defendant, Affiliated. Notice of the dismissal was not given to nonparty stockholders. On March 22, 1971, a judgment was entered dismissing the action as to the moving defendants, which judgment was amended by endorsement on March 30, 1971 to include both plaintiffs. Neither the judgment nor the orders provided that the dismissal was without prejudice.
As a result of the judgment, there continued pending on the district court's docket a derivative action in which Affiliated, the nominal defendant, was the only remaining defendant which had been served. On June 12, 1971, Chief Judge Sugarman entered a routine calendar order of dismissal, stated to be without prejudice.
Plaintiff Papilsky filed her complaint in the instant action on June 7, 1971.3
It is now well established that Fed.R.Civ.P. 41(b) states the effect to be accorded a dismissal under Fed.R. Civ.P. 37.4 Stebbins v. State Farm Mutual Automobile Insurance Co., 413 F.2d 1100, 1102 (D.C.Cir.), cert. denied, 396 U.S. 895 (1969); Nasser v. Isthmian Lines, 331 F.2d 124, 127 (2 Cir. 1964). Rule 41(b) provides in relevant part:
"Unless the court in its order for dismissal otherwise specifies, a dismissal under this subdivision and any dismissal not provided for in this rule, other than a dismissal for lack of jurisdiction, for improper venue, or for failure to join a party under Rule 19, operates as an adjudication upon the merits."
The order and judgment dismissing the White action were not stated to be without prejudice. A strict application of Rule 41(b) would seem to require a holding that the dismissal of the White action operated as an adjudication upon the merits and hence as a bar to the present derivative suit. Indeed, the Supreme Court has made it more than clear in dicta that dismissals coming within the literal terms of Rule 41(b) generally do have res judicata effect. Costello v. United States, 365 U.S. 265, 286 (1961). Moreover, we have held that a dismissal pursuant to Rule 37 for failure to answer interrogatories is an adjudication upon the merits and bars an identical cause of action asserted in a subsequent suit. Nasser v. Isthmian Lines, supra, 331 F.2d at 128. Nasser, however, was neither a class action nor a stockholder's derivative action. Rather, Nasser involved a plaintiff asserting a cause of action which belonged solely to him as an individual. Papilsky strongly urges that a different result is required where the plaintiff is a stockholder suing on behalf of a corporation.
The district court agreed with Papilsky and refused to accord res judicata effect to the judgment dismissing the White action. The court stated:
"The derivative suit contains two claims: (1) a claim by the corporation in which plaintiff is a stockholder and (2) a claim by the stockholder against his corporation for its failure to enforce the claim belonging to it ((1) above)." 333 F.Supp. at 1087.
While conceding that Rule 41(b) applies to dismissals under Rule 37, the court concluded that the dismissal of the White action barred only the claim of the White plaintiffs against Affiliated, and not Affiliated's cause of action against the defendants.
While we agree with the district court's holding that the judgment in the White action is not binding on nonparty stockholders, we do so without accepting the court's analysis of the nature of a stockholder's derivative action.
A stockholder's derivative action is a suit to enforce a corporate cause of action against officers, directors or third parties. Such an action consists of only one claim—the corporate claim against the alleged wrongdoers. The alleged injury inflicted upon the corporation is regarded as affecting only the corporation. The fact that the injury may indirectly harm a stockholder by diminishing the value of his corporate shares does not bestow upon him a right to sue on his own behalf to recover damages. Kauffman v. Dreyfus Fund, Inc., 434 F.2d 727, 732 (3 Cir. 1970), cert. denied, 401 U.S. 974 (1971); Hodge v. Meyer, 252 Fed. 479, 483 (2 Cir.), cert. denied, 248 U.S. 565 (1918). See also McLaughlin, Capacity of Plaintiff-Stockholder to Terminate a Stockholder's Suit, 46 Yale L.J. 421 n. 2 (1936). Rather, assuming that a stockholder has satisfied the prerequisites of Fed.R.Civ. P. 23.1, he merely has a right to bring a derivative action on behalf of the corporation. As Justice Frankfurter stated in his dissenting opinion in Smith v. Sperling, 354 U.S. 91, 99 (1957):
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