Pin v. Texaco, Inc.

• Decision Date: 14 July 1986
• Docket Number: No. 85-1326,85-1326
• Parties: , Fed. Sec. L. Rep. P 92,823, 5 Fed.R.Serv.3d 1258 Mollie G. PIN, Plaintiff, v. TEXACO, INC., et al., Defendants-Appellees, v. Jamey HOLSTEIN, Movant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1448

793 F.2d 1448

55 USLW 2108, Fed. Sec. L. Rep. P 92,823,

5 Fed.R.Serv.3d 1258

Mollie G. PIN, Plaintiff, v. TEXACO, INC., et al., Defendants-Appellees, v. Jamey HOLSTEIN, Movant-Appellant.

No. 85-1326.

United States Court of Appeals, Fifth Circuit.

July 14, 1986.

Rehearing and Rehearing En Banc Denied Aug. 11, 1986.

W.D. Masterson, Kilgore & Kilgore, Christopher M. Hewitt, Robert M. Thornton, Dallas, Tex., for movant-appellant.

Dee J. Kelly, Kelly, Appleman, Hart & Hallman, Janice A. Schattman, Fort Worth, Tex., for Bass.

Eric M. Roth, Wachtell, Lipton, Rosen & Katz, New York City, for Texaco, Inc.

G.D. Gingold, Fort Worth, Tex., pro se.

Appeal from the United States District Court for the Northern District of Texas.

Before THORNBERRY, RANDALL and POLITZ, Circuit Judges.

RANDALL, Circuit Judge:

Jamey Holstein appeals from an order of the United States District Court for the Northern District of Texas denying his motion to intervene pursuant to Fed.R.Civ.P. 24. We affirm.

I.

This lawsuit arises out of a stock transaction that has come to be known as "greenmail." In short, Holstein alleges that a group of individuals and entities headed by Bass Brothers Enterprises, Inc. ("Bass group") bought a large number of shares in Texaco, Inc., on the open market. When the Bass group had accumulated a substantial block of shares--about 9.9% of the outstanding total--it purportedly threatened Texaco management with a tender offer for control of the company unless management policies were altered. In that event, the Bass group apparently would replace existing Texaco management. Ultimately, the incumbent Texaco management agreed for Texaco to buy out the Bass group's shares at a premium over market price.

Several shareholders of Texaco sought to challenge the transaction, most in derivative actions under principles of state corporations law relating to fiduciary duties, in various state and federal courts. Mollie Pin, the original plaintiff in this case, filed a complaint that set forth only state law causes of action. Pin, however, sold her shares of Texaco stock while the action was pending, and her counsel moved for her to be dismissed as plaintiff. However, rather than let the lawsuit expire, Pin's counsel moved to allow Holstein, another Texaco shareholder, to intervene. The proposed complaint in intervention at that time, like the original complaint, alleged only a violation of state law.

At about the same time, a Delaware state court, where numerous other derivative actions challenging this transaction were pending, certified a class action. A proposed settlement was reached by the parties and approved by the trial court regarding all state law causes of action; that action, unless reversed on appeal, ¹ effectively disposed of the state law claims asserted in Holstein's motion to intervene. However, the state court's order expressly declined to foreclose litigation of federal securities law claims. Shortly after the hearing on the proposed settlement, Holstein's counsel filed an amended motion to intervene on behalf of Holstein, which added to the state law cause of action one count under Sec. 10(b) of the Securities Exchange Act of 1934 ("Act"), 15 U.S.C. Sec. 78j(b), ² and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, and one count under Sec. 13(e) of the Act, 15 U.S.C. Sec. 78m(e), ³ and Rule 13e-4, 17 C.F.R. Sec. 240.13e-4.

The district judge denied the motion to intervene. He concluded that intervention was inappropriate because neither of Holstein's proposed federal claims stated a cause of action. Further, he sanctioned Holstein's counsel under Fed.R.Civ.P. 11 for filing the "decidedly frivolous" motion to intervene.

II.

The issue in this case, one of civil procedure, is whether the trial court's denial of Holstein's motion to intervene under Fed.R.Civ.P. 24 was proper. Holstein raises two objections to the district court's order. As a threshold matter, he complains that the district court's decision suffers "procedural infirmities" because the order was entered before discovery on the federal claims had been completed. However, the plain fact is that Rule 24(c) obligates a district judge to make an assessment of whether the proposed intervenor's complaint states a cause of action, at least when the motion to intervene is opposed, and where, as here, the complaint in intervention adds substantive claims that no other party asserted. Diehl v. United States, 438 F.2d 705, 711 (5th Cir.), cert. denied, 404 U.S. 830, 92 S.Ct. 67, 30 L.Ed.2d 59 (1971); 7A C. Wright & A. Miller, Federal Practice & Procedure Sec. 1914, at 569 (1972) ("proposed pleading must state a good claim for relief"); see also Rhode Island Federation of Teachers v. Norberg, 630 F.2d 850, 854-55 (1st Cir.1980) ("intervention under Rule 24 is conditioned by the Rule 24(c) requirement that the intervenor state a well-pleaded claim or defense to the action"); 3B J. Moore, Moore's Federal Practice p 24.14, at 24-162 (1982) (proposed complaint of intervenor "must state a well pleaded claim or defense").

Thus, as a threshold matter, the district judge must determine whether the intervenor's complaint states a cause of action before he turns to a consideration of the factors listed in Rule 24(a) and (b) governing whether intervention is appropriate. The determination of whether the proposed intervenor's complaint states a cause of action is controlled by the "general rules on testing a pleading"; the factual allegations of the complaint are assumed to be true, Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984), and the pleading is construed liberally in support of the pleader. 7 C. Wright & A. Miller, supra, Sec. 1914, at 569-70; see Mendenhall v. M/V Toyota Maru No. 11, 551 F.2d 55, 56 (5th Cir.1977). But "[i]t is a problem of substantive law, of course, as to whether a good claim or defense is stated." 3B J. Moore, supra, p 24.14, at 24-163. Thus, Holstein's contention that the district judge should have allowed discovery on his claims before ruling on the motion to intervene is as irrelevant as it would be if made in the context of a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6).

Holstein further challenges the district court's determination that his proposed complaint failed to state a cause of action. Holstein's complaint alleges the following facts, which we must assume to be true. ⁴ On January 19, 1984, the separate members of the Bass group filed Schedule 13D's with the Securities and Exchange Commission ("SEC"), indicating that they had acquired over five percent of Texaco's outstanding common stock. On February 28, 1984, the Bass group stated in another 13D filing that it had increased its stock in Texaco to 9.9 percent. Although "none of the Bass group had caused or threatened to cause any harm to Texaco," after learning of the Bass group's acquisition of Texaco shares "Texaco management negotiated, approved and consummated a scheme and agreement with the Bass [group] to use Texaco cash and securities ... to repurchase the stock held by the Bass group, at an inflated price." Complaint paragraphs 12-13. Texaco management acted "in order to eliminate the voting power of the 9.9 percent block of common stock that had been accumulated by the Bass group," and "in order to create a large block of voting preferred stock subject to the sole control of Texaco management for the primary purpose of perpetuating Texaco management in office." Id. p 13. These acts are said to have constituted "fraud and deceit upon the remaining shareholders," in violation of Sec. 10(b) and Rule 10b-5: the Bass group, by "threatening to challenge the positions and policies of Texaco management, extorted substantial amounts of corporate money and other assets of Texaco through manipulation and 'greenmail....' " Id. p 22. It is further alleged that Texaco's purchase of the Bass group's holdings was a tender offer that did not comply with the requirements of Sec. 13(e) and Rule 13e-4.

It may be, as Holstein states in his brief, that "[c]ommentators have virtually unanimously condemned the practice of greenmail and decried its harmful effects upon both corporate health and public investor wealth." It may be that greenmail is a "disgrace," and "an extremely serious wrong looking for a remedy." We express no views on those assertions, as the issue before us is simply whether, under the facts Holstein alleges in his amended complaint, Sec. 10(b) and Sec. 13(e) of the Act were intended by Congress to provide a remedy.

A. Sec. 10(b) Claim.

Holstein's theory of recovery under Sec. 10(b) is elusive, but must be pinned down in order to determine whether the complaint states a cause of action. In short, Holstein contends that the Bass group, "by threatening to challenge the positions and policies of Texaco management, extorted substantial amounts of corporate money and other assets of Texaco through manipulation and 'greenmail' (blackmail of corporate management for substantial amounts of corporate money or other assets by obtaining a block of securities)" in violation of Sec. 10(b). Complaint p 23. The complaint also states that Texaco itself violated Sec. 10(b) when it repurchased the Bass group's holdings. Complaint p 22. These allegations fall short of the types of wrongful conduct that Sec. 10(b) and Rule 10b-5 were intended to remedy. In order to state a cause of action under Sec. 10(b), a plaintiff must plead facts that would amount to manipulation or deceptive conduct proscribed by that section and Rule 10b-5. Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 472-75, 97 S.Ct. 1292, 1300-01, 51 L.Ed.2d 480 (1977); see Segal v. Gordon, 467 F.2d 602, 607 (2d Cir.1972). "Manipulation" as used in Sec. 10(b) is "virtually a term of art when used in connection with securities markets." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 1383, 47 L.Ed.2d 668 (1976). "The term refers generally to practices,...