Robinson v. First Nat. City Bank

• Decision Date: 04 October 1979
• Docket Number: No. 72 Civ. 1854 (WCC).,72 Civ. 1854 (WCC).
• Parties: Richard S. ROBINSON, Ann Nemser, Philip Baron, Rebecca Lowey, Jacob Schoenbach, and Louis Goodkind, Plaintiffs, v. FIRST NATIONAL CITY BANK et al., Defendants.
• Court: U.S. District Court — Southern District of New York

482 F. Supp. 92

Richard S. ROBINSON, Ann Nemser, Philip Baron, Rebecca Lowey, Jacob Schoenbach, and Louis Goodkind, Plaintiffs, v. FIRST NATIONAL CITY BANK et al., Defendants.

No. 72 Civ. 1854 (WCC).

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

October 4, 1979.

COPYRIGHT MATERIAL OMITTED

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Nemser & Nemser, New York City, for plaintiffs Ann Nemser and Philip Baron; Stanley Nemser, New York City, of counsel.

David Berger, P. A., Philadelphia, Pa., for plaintiff Richard S. Robinson.

Lowey, Dannenberg & Knapp, P. C., New York City, for plaintiffs Rebecca Lowey and Jacob Schoenbach; Richard B. Dannenberg, New York City, of counsel.

Kass, Goodkind, Wechsler & Labaton, New York City, for plaintiff Louis W. Goodkind.

Shearman & Sterling, New York City, for defendant Citibank, N. A.; Kenneth M. Kramer, New York City, of counsel.

OPINION AND ORDER

CONNER, District Judge:

Defendants have moved to dismiss this class action on grounds of res judicata. Named plaintiffs have not opposed the motion. For reasons stated below, the motion will be granted under Rule 56, F.R.Civ.P., with prejudice as to named plaintiffs, and without prejudice as to other members of the class.

Background

On May 4, 1972, plaintiffs filed this class action in the Southern District of New York on behalf of those Penn Central railroad shareholders¹ who participated in the 1969 merger and restructuring of the railroad into a holding company, the Penn Central Company (hereafter "PCC") and a railroad subsidiary, the Penn Central Transportation Company (hereafter "PCTC"). As a result of the merger, former Penn Central shareholders became shareholders of PCC, and PCC became the sole shareholder of PCTC. The complaint alleges that defendant banks ("banks"),² as members of a consortium providing financing to the railroad, aided and abetted railroad management in misleading shareholders as to the terms of the financing³ to be provided after the 1969 restructuring, in violation of §§ 10(b), 13(a) and 14(a) of the Securities Exchange Act of 1934⁴ and of the principles of common law fraud.

On the same date that they filed this complaint, the named plaintiffs filed a petition ("Robinson petition") in the Eastern District of Pennsylvania bankruptcy proceedings of the PCTC, the railroad subsidiary formed in the 1969 restructuring of the Penn Central.⁵ The petition challenged the banks' claims to those PCTC assets⁶ pledged under the 1969 financing arrangements, and asserted PCC shareholder claims for damages against the PCTC estate, by raising the same securities law and fraud claims alleged in the Southern District of New York complaint. This Court stayed the present action before any motions were filed for certification of the plaintiff class, pending completion of the Eastern District of Pennsylvania bankruptcy proceeding.

On March 17, 1978, the Eastern District bankruptcy court approved a final reorganization plan for the PCTC. In the Matter of Penn Central Transportation Company, 458 F.Supp. 1234 (E.D.Pa.1978). This final plan was developed after an initial settlement of the banks' claims had been rejected by the bankruptcy court, In the Matter of Penn Central Transportation Company, 358 F.Supp. 154 (E.D.Pa.1973); after the issues raised by the Robinson petition had been fully litigated before the reorganization court, 358 F.Supp. at 184, although the reorganization court withheld its decision on the merits of the Robinson petition claims at the request of the parties in order to further settlement negotiations, 458 F.Supp. at 1266;⁷ and after lengthy final negotiations had been carried out among the interested parties, including banks and the named plaintiffs in this action. The reorganization court did not specifically review the securities law claims raised in the Robinson petition in its approval of the final reorganization plan, see 458 F.Supp. at 1266-69; but defendant banks and the named plaintiffs agree that all the claims raised in the Robinson petition were compromised and settled by the reorganization court's order.

The defendant banks have now moved to dismiss this action on res judicata grounds, arguing that this action raises issues which were before the reorganization court and that the resolution of those issues by settlement in the formulation of the reorganization plan bars their relitigation in this proceeding.⁸ The named plaintiffs have filed an affidavit in support of defendants' motion.

1. Res judicata issues

The doctrine of res judicata bars relitigation of a cause of action if the same parties have previously raised the same claim in a proceeding which rendered a final judgment on the merits of that claim. 1B Moore's Federal Practice ¶ 0.4051 (1974). This doctrine balances a concern for judicial economy — that matters finally resolved not be the subject of repeated litigation — with a concern for due process — that parties not be bound by prior judgments as to which they had no notice or opportunity to intervene. Heiser v. Woodruff, 327 U.S. 726, 733, 66 S.Ct. 853, 90 L.Ed. 970 (1946).

Defendants' res judicata motion raises the issue of which parties may be bound by the prior reorganization proceeding: that is, whether the named plaintiffs' compromise of shareholder claims in the reorganization negotiations can bar all members of the alleged shareholder class from litigating the securities claims in this court. The Court concludes that the prior compromise is binding only upon those shareholders who actually appeared in the reorganization court, i. e., upon named plaintiffs only.

a. Named plaintiffs' claims

The requirements of res judicata outlined above are fulfilled as to named plaintiffs. Defendants and the named plaintiffs were both parties to the Eastern District of Pennsylvania reorganization proceedings. Defendants contend and plaintiffs do not dispute that the securities laws and fraud claims alleged in plaintiffs' complaint in this action are identical to the claims against the banks which the named plaintiffs raised and settled in the Eastern District; after review of the complaint and the Robinson petition, the Court agrees. Since neither named plaintiffs nor defendants appealed the reorganization court's approval of the compromise of the securities law and fraud claims, the bankruptcy adjudication is a final judgment on the merits of those claims. Stoll v. Gottlieb, 305 U.S. 165, 59 S.Ct. 134, 83 L.Ed. 104 (1938); see Chicot County Drainage Dist. v. Baxter State Bank, 308 U.S. 371, 60 S.Ct. 317, 84 L.Ed. 329 (1940).⁹ Thus, named plaintiffs' settlement in the reorganization proceeding bars relitigation of those claims in this court.

b. Absent class members' claims

Defendants assume and the named plaintiffs do not dispute that the res judicata bar extends as well to unnamed members of the alleged class. This assumption is not supported by the record here. While class members who did not appear in the reorganization proceeding could have been "parties" to that proceeding under either of two theories — the in rem nature of the reorganization court's order, or the named plaintiffs' representative authority to bind absent class members personally — the nature of the shareholder claims in question, and the named plaintiffs' failure to meet the requirements of either Rule 23, F.R.Civ.P., or § 77 of the Bankruptcy Act¹⁰ for representative status in the reorganization proceeding, preclude the application of either theory to this case.

i. In rem effect

Under § 77 of the Bankruptcy Act, a railroad reorganization court has jurisdiction over the estate of the debtor railroad. Since one of the goals of the reorganization proceeding is to settle all outstanding claims against the debtor railroad's estate, see New Haven Inclusion Cases, 399 U.S. 392, 431, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970), a reorganization court's approval of a final reorganization plan has in rem effect with respect to claims against the debtor's estate; for purposes of res judicata, the plan is binding on claimants not actually before the court if those parties receive the notice of the adjudication of their claims as required by statute.¹¹ City of New York v. New York, New Haven & Hartford R. R. Co., 344 U.S. 293, 73 S.Ct. 299, 97 L.Ed. 333 (1953); see In the Matter of Tennessee Central Ry. Co., 498 F.2d 904, 905 (6th Cir. 1974); 1B Moore's Federal Practice ¶ 0.419.3-3 (1974). The in rem effect does not extend, however, to those issues resolved by the reorganization court which do not directly affect the debtor's estate. Resolution of such subsidiary issues is binding only on those parties who appear personally before the court, 1B Moore's Federal Practice ¶ 0.419.3-3.

The issues raised by the named plaintiffs in this complaint were, in fact, subsidiary issues in the reorganization proceeding. The claims compromised by the named plaintiffs in the reorganization were claims against the banks—co-claimants competing with named plaintiffs in that proceeding for a share of the PCTC assets—rather than claims against the res in the reorganization, the PCTC estate. Thus, the reorganization court's approval of the named plaintiffs' compromise of these issues has no in rem effect, and cannot be binding upon PCC shareholders who did not appear in the prior proceeding unless named plaintiffs were authorized in some way to appear on behalf of those shareholders.

ii. Representative status

The named plaintiffs here cannot be said, however, to have personally appeared on behalf of absent PCC shareholders in the reorganization proceeding in any way that could be binding on those absent parties. The Robinson petitioners — named plaintiffs here — did not represent any other shareholders under § 77(p), the section of the bankruptcy law which permits one party to represent and bind others in a railroad reorganization.¹² Furthermore, although the Robinson petition asserted class-type claims in the reorganization proceeding, the named ...